<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
__________________
For the quarter ended September 30, 2000 Commission file number 1-10360
CRIIMI MAE INC.
(Exact name of registrant as specified in its charter)
Maryland 52-1622022
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
11200 Rockville Pike
Rockville, Maryland 20852
(301) 816-2300
(Address, including zip code, and telephone number,
Including area code, of registrant's principal executive offices)
___________________
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- -----------------------------
Common Stock New York Stock Exchange, Inc.
Series B Cumulative Convertible New York Stock Exchange, Inc.
Preferred Stock
Series F Redeemable Cumulative Dividend New York Stock Exchange, Inc.
Preferred Stock
Series G Redeemable Cumulative Dividend New York Stock Exchange, Inc.
Preferred Stock
Securities Registered Pursuant to Section 12(g) of the Act:
None
_________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding as of November 10, 2000
----- -----------------------------------
Common Stock, $0.01 par value 62,353,170
<PAGE>
CRIIMI MAE INC.
Quarterly Report on Form 10-Q
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - as of September 30, 2000 (unaudited)
and December 31, 1999....................................................... 3
Consolidated Statements of Income and Comprehensive Income -
for the three and nine months ended September 30, 2000 and 1999
(unaudited)................................................................ 4
Consolidated Statements of Changes in Shareholders' Equity - for the nine
months ended September 30, 2000 (unaudited)................................ 5
Consolidated Statements of Cash Flows - for the nine months ended
September 30, 2000 and 1999 (unaudited).................................... 6
Notes to Consolidated Financial Statements (unaudited)...................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................ 67
Item 2A. Quantitative and Qualitative Disclosures about Market Risk.................. 82
PART II. Other Information
Item 1. Legal Proceedings........................................................... 84
Item 2. Changes in Securities....................................................... 84
Item 3. Defaults Upon Senior Securities............................................. 84
Item 4. Submission of Matters to a Vote of Security Holders......................... 84
Item 5. Other Information........................................................... 84
Item 6. Exhibits and Reports on Form 8-K............................................ 84
Signature.................................................................................... 89
</TABLE>
2
<PAGE>
PART I. Item 1.
FINANCIAL STATEMENTS
CRIIMI MAE INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------------ -----------------
<S> <C> <C>
(Unaudited)
Assets:
Mortgage assets:
Subordinated CMBS and other MBS, at fair value $ 983,110,429 $ 1,179,363,099
Insured mortgage security, at fair value 384,415,598 394,857,239
Investment in originated loans, at amortized cost,
less a $45.8 million and $0 valuation allowance
at 9/30/00 and 12/31/99, respectively 411,314,284 470,204,780
Equity investments 34,215,576 34,929,523
Receivables 43,742,634 69,483,337
Other assets 42,175,270 53,276,333
Restricted cash and cash equivalents 77,612,188 38,036,624
Other cash and cash equivalents 85,915,077 53,510,311
------------------ -----------------
Total assets $ 2,062,501,056 $ 2,293,661,246
================== =================
Liabilities:
Liabilities not subject to Chapter 11 proceedings:
Securitized mortgage obligations:
--------------------------------
Collateralized bond obligations-CMBS $ 279,947,367 $ 278,165,968
Collateralized mortgage obligations-
insured mortgage securities 368,207,402 378,711,602
Collateralized mortgage obligations-
originated loans 388,657,365 399,768,513
Payables and accrued expenses 38,273,480 29,886,888
Liabilities subject to Chapter 11 proceedings:
Secured
-------
Variable-rate secured borrowings-CMBS 525,702,058 732,904,775
Other financing facilities 1,300,000 3,050,000
Payables and accrued expenses 2,268,897 26,455,952
Unsecured:
---------
Senior unsecured notes 100,000,000 100,000,000
Other financing facilities 89,749,522 89,749,522
Payables and accrued expenses 45,881,299 35,619,440
------------------ -----------------
Total liabilities 1,839,987,390 2,074,312,660
------------------ -----------------
Shareholders' equity:
Convertible preferred stock, $0.01 par;
25,000,000 shares authorized; 2,383,336
and 2,647,124 shares issued and
outstanding; respectively 23,833 26,471
Common stock, $0.01 par; 120,000,000 shares
authorized; 62,353,170 and 59,954,604 shares
issued and outstanding, respectively 623,532 599,546
Accumulated other comprehensive income (167,578,865) (207,421,788)
Additional paid-in capital 537,153,147 574,579,272
Accumulated deficit (185,119,883) (148,434,915)
Preferred stock dividend to be distributed 37,411,902 --
------------------ -----------------
Total shareholders' equity 222,513,666 219,348,586
------------------ -----------------
Total liabilities and shareholders' equity $ 2,062,501,056 $ 2,293,661,246
================== =================
</TABLE>
The accompanying note is an integral part of these financial statements.
3
<PAGE>
CRIIMI MAE INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
AND COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended September 30, For the nine months ended September 30,
2000 1999 2000 1999
----------------- ----------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Interest income:
Subordinated CMBS $33,255,157 $38,786,620 $107,817,791 $115,690,376
Insured mortgage securities 7,618,704 8,034,760 23,086,633 25,424,098
Originated loans 8,192,720 8,615,000 24,891,137 26,103,642
---------------- ---------------- ------------------ ----------------
Total interest income 49,066,581 55,436,380 155,795,561 167,218,116
---------------- ---------------- ------------------ ----------------
Interest and related expenses:
Fixed-rate collateralized bond
obligations-CMBS 6,346,239 6,301,697 19,024,814 15,750,983
Fixed-rate collateralized mortgage
obligations-insured securities 6,973,759 7,813,936 23,329,489 24,523,097
Fixed-rate collateralized mortgage
originated loans 6,857,665 7,059,676 20,399,527 20,309,804
Fixed-rate senior unsecured notes 2,281,251 2,281,251 6,843,753 6,843,753
Variable-rate secured borrowings-CMBS 11,039,045 12,659,064 35,054,655 39,026,518
Other financing facilities 2,108,135 1,767,577 6,060,735 5,166,265
---------------- --------------- ------------------ ----------------
Total interest expense 35,606,094 37,883,201 110,712,973 111,620,420
---------------- --------------- ------------------ ----------------
Net interest margin 13,460,487 17,553,179 45,082,588 55,597,696
---------------- --------------- ------------------ ----------------
Equity in (losses from) investments 722,695 260,199 684,509 (1,225,417)
Other income 1,100,489 448,941 2,419,035 1,872,481
Net gains on mortgage security
dispositions -- 265,789 241,312 1,851,601
Gain on originated loan dispositions 206,696 74,616 244,581 234,826
General and administrative expenses (2,778,230) (2,702,353) (8,582,218) (8,953,507)
Amortization of assets acquired in
the Merger (719,394) (719,394) (2,158,182) (2,158,182)
Unrealized loss on warehouse obligation -- (1,074,505) -- (8,000,000)
Litigation expense (2,500,000) -- (2,500,000) --
Reorganizations items
Other 2,807,075 (4,606,002) (4,164,489) (15,552,783)
Impairment on CMBS (10,579,996) -- (15,832,817) --
Impairment on REO -- -- (924,283) --
Gain (loss) on sale of CMBS 1,367,601 -- (343,613) --
Loss on originated loans (45,845,712) -- (45,845,712) --
----------------- -------------- ------------------ ----------------
(56,218,776) (8,052,709) (76,761,877) (31,930,981)
----------------- -------------- ------------------ ----------------
Net income (loss) before dividends
accrued on preferred shares (42,758,289) 9,500,470 (31,679,289) 23,666,715
Dividends accrued on preferred shares (1,704,774) (1,400,297) (5,005,679) (4,182,792)
---------------- -------------- ------------------ ----------------
Net income (loss) available to common
shareholders (44,463,063) $8,100,173 ($36,684,968) $19,483,923
================ ============== ================== ================
Net income (loss) available to common
shareholders per common share:
Basic ($0.71) $0.15 ($0.59) $0.37
================ ============== ================== ================
Diluted ($0.71) $0.14 ($0.59) $0.33
================ ============== ================== ================
Shares used in computing basic
earnings per share 62,353,170 53,553,161 62,074,820 53,373,719
Comprehensive Income:
Net income (loss) before dividends
accrued on preferred shares ($42,758,289) $9,500,470 ($31,679,289) $23,666,715
Other comprehensive Income (loss) 16,938,086) (30,533,704) 39,842,923 (68,819,689)
---------------- -------------- ------------------ ----------------
Comprehensive Income (loss) ($25,820,203) ($21,033,234) $8,163,634 ($45,152,974)
================= =============== ================== ================
</TABLE>
4
<PAGE>
CRIIMI MAE INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the nine months ended September 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Preferred Common Other Preferred Stock Total
Stock Par Stock Par Comprehensive Additional Paid- Accumulated Dividend to be Shareholders'
Value Value Income in Capital Deficit Distributed Equity
----------- ---------- ------------- ---------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 $26,471 $599,546 ($207,421,788) $574,579,272 ($148,434,915) $0 $219,348,586
Net income -- -- -- -- (31,679,289) (31,679,289)
Dividends accrued on preferred
shares -- -- -- -- (5,005,679) (5,005,679)
Conversion of preferred shares
into common shares (2,638) 23,966 -- (21,328) -- --
Common shares issued -- 20 -- 7,105 -- 7,125
Adjustment to unrealized losses
on investments -- -- 39,842,923 -- -- 39,842,923
Preferred stock dividend to
be distributed -- -- (37,411,902) -- 37,411,902 --
----------- ---------- -------------- -------------- ------------- ----------- ------------
Balance at September 30, 2000 $23,833 $623,532 $(167,578,865) $537,153,147 $(185,119,883) $37,411,902 $222,513,666
=========== ========== ============== ============== ============= =========== ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
5
<PAGE>
CRIIMI MAE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended September 30
2000 1999
------------------ -----------------
<S> <C> <C>
Cash flows from operating activities
Net income/loss ($31,679,289) $23,666,715
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of discount and deferred
financing costs on debt 7,566,389 6,677,758
Amortization of assets acquired in the Merger 2,158,182 2,158,182
Depreciation and other amortization 1,571,502 1,002,218
Discount amortization on mortgage assets (9,435,754) (629,716)
Net gains on mortgage security dispositions (241,312) (1,851,601)
Gain on originated loan dispositions (244,581) (234,826)
Equity in losses from investments (684,509) 1,225,417
Unrealized loss on warehouse obligation -- 8,000,000
Change in reorganization items accrual (779,580) 13,913,036
Impairment on CMBS 15,832,817 --
Impairment on REO 924,283 --
Loss on sale of CMBS 343,613 --
Loss on sale of originated loans 45,845,712
Changes in assets and liabilities:
Increase in restricted cash and
cash equivalents (39,575,564) (27,309,575)
Increase in receivables and other assets (4,405,297) (17,509,076)
Increase in payables and accrued expenses 15,882,757 20,831,678
------------------ -----------------
Net cash provided by operating activities 3,079,369 29,940,211
================== =================
Cash flows from investing activities:
Proceeds from mortgage securities dispositions 9,826,537 66,414,460
Proceeds from the sale of CMBS, net 42,461,587 --
Distributions received from AIM Investments 1,136,144 4,224,086
Receipt of principal payments 9,708,645 9,598,489
Purchase of other MBS, net (3,082,637) --
Proceeds from originated loan dispositions 5,970,384 10,631,987
------------------ -----------------
Net cash provided by investing activities 66,020,660 90,869,022
Cash flows from financing activities:
Principal payments on debt obligations, net (36,695,263) (84,805,044)
------------------ -----------------
Net cash used in financing activities (36,695,263) (84,805,044)
------------------ -----------------
Net increase in other cash and cash equivalents 32,404,766 36,004,189
Other cash and cash equivalents, beginning of period 53,510,311 24,180,072
Other cash and cash equivalents, end of period $85,915,077 $60,184,261
=================== =================
</TABLE>
The accompanying note is an integral part of these financial statements.
6
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
General
CRIIMI MAE Inc. (together with its consolidated subsidiaries, unless
the context otherwise indicates, "CRIIMI MAE" or the "Company") is a fully
integrated commercial mortgage company structured as a self-administered real
estate investment trust ("REIT"). Prior to the filing by CRIIMI MAE Inc.
(unconsolidated) and two of its operating subsidiaries, CRIIMI MAE Management,
Inc. ("CM Management"), and CRIIMI MAE Holdings II, L.P. ("Holdings II" and,
together with CRIIMI MAE and CM Management, the "Debtors"), for relief under
Chapter 11 of the U.S. Bankruptcy Code on October 5, 1998 (the "Petition Date")
as described below, CRIIMI MAE's primary activities included (i) acquiring non-
investment grade securities (rated below BBB- or unrated) backed by pools of
commercial mortgage loans on multifamily, retail and other commercial real
estate ("Subordinated CMBS"), (ii) originating and underwriting commercial
mortgage loans, (iii) securitizing pools of commercial mortgage loans and
resecuritizing pools of Subordinated CMBS, and (iv) through the Company's
servicing affiliate, CRIIMI MAE Services Limited Partnership ("CMSLP"),
performing servicing functions with respect to the mortgage loans underlying the
Company's Subordinated CMBS.
Since filing for Chapter 11 protection, CRIIMI MAE has suspended its
Subordinated CMBS acquisition, origination and securitization programs. The
Company continues to hold a substantial portfolio of Subordinated CMBS,
originated loans and mortgage securities and, through CMSLP, acts as a servicer
of mortgage loans.
The Company's business is subject to a number of risks and uncertainties
including, but not limited to: (1) the effect of the Chapter 11 filing and
substantial doubt as to the Company's ability to continue as a going concern;
(2) risks related to the Recapitalization Financing (defined below) under the
Company's Third Amended Joint Plan of Reorganization; (3) risk of loss of REIT
status; (4) taxable mortgage pool risk; (5) risk of phantom income resulting in
additional tax liability; (6) the effect of rate compression on the market price
of the Company's stock; (7) substantial leverage; (8) inherent risks in owning
Subordinated CMBS; (9) the limited protection provided by hedging transactions;
(10) risk of foreclosure on CMBS assets; (11) the limited liquidity of the CMBS
market; (12) pending litigation; (13) risk of becoming subject to the
requirements of the Investment Company Act of 1940; (14) possible effects of an
economic recession on losses and defaults; (15) borrowing risks; (16) the effect
of the yield curve on income; and (17) risks associated with the trader election
including those referenced in "2000 Taxable Income (Loss)/ Taxable Distribution
Requirements" below.
In addition to the two operating subsidiaries which filed for Chapter 11
protection with the Company, the Company owns 100% of multiple financing and
operating subsidiaries as well as various interests in other entities (including
CMSLP) which either own or service mortgage and mortgage-related assets (the
"Non-Debtor Affiliates"). See Note 3. None of the Non-Debtor Affiliates has
filed for bankruptcy protection.
The Company was incorporated in Delaware in 1989 under the name CRI
Insured Mortgage Association, Inc. ("CRI Insured"). In July 1993, CRI Insured
changed its name to CRIIMI MAE Inc. and reincorporated in Maryland. In June
1995, certain mortgage businesses affiliated with C.R.I., Inc. were merged into
CRIIMI MAE (the "Merger"). The Company is not a government sponsored entity or
in any way affiliated with the United States government or any United States
government agency.
Chapter 11 Filing
Prior to the Petition Date, CRIIMI MAE financed a substantial portion of
its Subordinated CMBS acquisitions with short-term, variable-rate financing
facilities secured by the Company's CMBS. The agreements governing these
financing arrangements typically required the Company to maintain collateral
with a market value not less than a specified percentage of the outstanding
indebtedness ("loan-to-value ratio"). The agreements further provided that the
creditors could require the Company to provide cash or additional collateral if
the market value of the existing collateral fell below this minimum amount.
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.
7
<PAGE>
Due to this widening of CMBS spreads, the market value of the CMBS securing the
Company's short-term, variable-rate financing facilities declined. CRIIMI MAE's
short-term secured creditors perceived that the value of the CMBS securing their
facilities with the Company had fallen, creating a value deficiency as measured
by the loan-to-value ratio described above and, consequently, made demand upon
the Company to provide cash or additional collateral with sufficient value to
cure the perceived value deficiency. In August and September of 1998, the
Company received and met collateral calls from its secured creditors. At the
same time, CRIIMI MAE was in negotiations with various third parties in an
effort to obtain additional debt and equity financing that would provide the
Company with additional liquidity.
On Friday afternoon, October 2, 1998, the Company was in the closing
negotiations of a refinancing with one of its unsecured creditors that would
have provided the Company with additional borrowings when it received a
significant collateral call from Merrill Lynch Mortgage Capital, Inc. ("Merrill
Lynch"). The basis for this collateral call, in the Company's view, was
unreasonable. After giving consideration to, among other things, this collateral
call and the Company's concern that its failure to satisfy this collateral call
would cause the Company to be in default under a substantial portion of its
financing arrangements, the Company reluctantly concluded on Sunday, October 4,
1998 that it was in the best interests of creditors, equity holders and other
parties in interest to seek Chapter 11 protection.
On October 5, 1998, the Debtors filed for relief under Chapter 11 of the
U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of
Maryland, Southern Division, in Greenbelt, Maryland (the "Bankruptcy Court").
These related cases are being jointly administered under the caption "In re
CRIIMI MAE Inc., et al.," Ch. 11 Case No. 98-2-3115-DK.
While in Chapter 11, CRIIMI MAE has streamlined its operations. The
Company has significantly reduced the number of employees in its origination and
underwriting operations. In connection with these reductions, the Company closed
its five regional loan origination offices.
Although the Company has significantly reduced its work force, the Company
recognizes that retention of its executives and other remaining employees is
essential to the efficient operation of its business and to its reorganization
efforts. Accordingly, the Company has, with Bankruptcy Court approval, adopted
an employee retention plan.
The Company's independent public accountants have issued a report on the
Company's 1999 financial statements expressing substantial doubt about the
Company's ability to continue as a going concern. In addition, the Company has
been advised by its independent public accountants that, if the Company's plan
of reorganization is not approved by the Bankruptcy Court prior to the
completion of their audit of the Company's financial statements for the year
ended December 31, 2000, the auditors' report on those financial statements will
continue to be modified to express substantial doubt about the Company's ability
to continue as a going concern.
CRIIMI MAE is working diligently toward emerging from bankruptcy as a
successfully reorganized company. In furtherance of such effort, the Debtors
filed their Third Amended Joint Plan of Reorganization (as amended and
supplemented by praecipes filed with the Bankruptcy Court on July 13, 14 and 21,
2000, the "Plan") and proposed Second Amended Joint Disclosure Statement (as
amended and supplemented by praecipes filed with the Bankruptcy Court on July
13, 21, and August 18, 2000, the "Proposed Disclosure Statement") on April 25,
2000. The Plan was filed with the support of the Official Committee of Equity
Security Holders of CRIIMI MAE (the "CMI Equity Committee"), which is a co-
proponent of the Plan. Subject to the completion of mutually acceptable
documentation, evidencing the secured financing to be provided by the unsecured
creditors (the "Unsecured Creditor Debt Documentation"), the Official Committee
of Unsecured Creditors of CRIIMI MAE (the "Unsecured Creditors' Committee") has
agreed to support confirmation of the Plan. The Company, the CMI Equity
Committee and the Unsecured Creditors' Committee are now all proceeding toward
confirmation of the Plan. Under the Plan, Merrill Lynch and German American
Capital Corporation ("GACC"), two of the Company's largest secured creditors,
would provide a significant portion of the recapitalization financing
contemplated by the Plan.
The Bankruptcy Court held a hearing on April 25, 2000 on approval of the
Proposed Disclosure Statement. During that hearing, the Bankruptcy Court
requested the filing of additional legal briefs by May 9, 2000 on two issues
raised at the hearing. The issues raised related to an objection to the
Company's Proposed Disclosure Statement filed by Salomon Smith Barney
Inc./Citicorp Securities, Inc. and Citicorp Real Estate, Inc. (together
"Citigroup"). On July 12, 2000, the Bankruptcy Court entered an order overruling
the objections raised by Citigroup as set forth in the Memorandum Opinion and
Order filed and entered on that date by the Bankruptcy
8
<PAGE>
Court. On July 21, 2000, the Company and Citigroup reached a settlement
regarding the treatment of Citigroup's claims under the Plan. The settlement
resolved Citigroup's objections to the Proposed Disclosure Statement. The
Citigroup objections were the only objections to the Proposed Disclosure
Statement pending before the Bankruptcy Court. See Note 16 for a summary of
certain material terms of the settlement between the Company and Citigroup.
The Bankruptcy Court held a hearing on August 23, 2000 with respect to the
proposed ballots submitted to the Bankruptcy Court to be sent to members of all
classes of impaired creditors and equity security holders in connection with the
Plan. On August 24, 2000, the Bankruptcy Court entered an order approving the
Proposed Disclosure Statement (the "Disclosure Statement") and other proposed
solicitation materials. The Bankruptcy Court scheduled a confirmation hearing on
the Plan for November 15, 2000 and set September 5, 2000 as the voting record
date for determining the holders of common stock, preferred stock, 9 1/8% senior
notes and general unsecured creditors entitled to vote to accept or reject the
Plan. The Company distributed copies of the Plan, the Disclosure Statement and
other solicitation materials, including ballots during the week of September 10,
2000 to members of all classes of impaired creditors and all equity security
holders for acceptance or rejection.
The votes by impaired classes of creditors and shareholders on CRIIMI
MAE's Third Amended Joint Plan of Reorganization have been tabulated. All
impaired classes which voted on the Plan voted overwhelmingly to accept the
Plan. An affidavit certifying the voting results was filed with the Bankruptcy
Court on November 3, 2000. On November 3, 2000, Merrill Lynch, GACC and a
shareholder filed objections to confirmation of the Plan. Discussions are
continuing in an effort to resolve those objections before the November 15, 2000
confirmation hearing date. There can be no assurance that the Company will reach
a mutually acceptable agreement with Merrill Lynch, GACC and the shareholder
prior to the confirmation date.
The Unsecured Creditors' Committee filed its own plan of reorganization
and proposed disclosure statement, and various amendments to each of the
foregoing, with the Bankruptcy Court which, in general, provided for the
liquidation of the assets of the Debtors. However, as a result of successful
negotiations between the Debtors and the Unsecured Creditors' Committee, the
Unsecured Creditors' Committee has agreed to the treatment of unsecured claims
under the Plan, subject to completion of mutually acceptable Unsecured Creditor
Debt Documentation, and has asked the Bankruptcy Court to defer consideration of
its plan of reorganization and proposed disclosure statement.
On September 21, 2000, CRIIMI MAE, Salomon Smith Barney Inc. (as successor
to Citicorp Securities, Inc. ("SSB")), GACC, ORIX Real Estate Capital Markets,
LLC ("ORIX"), the CMI Equity Committee and the Unsecured Creditors Committee
filed a Stipulation and Consent Order (the "Stipulation and Consent") with the
Bankruptcy Court providing for, among other matters, the terms of an agreement
with respect to the sale of the Company's interest in CMO-IV and certain other
CMBS to ORIX. On October 12, 2000, an order was entered by the Bankruptcy Court
approving the Stipulation and Consent. On October 30, 2000, the Court entered an
amendment to the Stipulation and Consent with respect to the agreed proceeds in
connection with the sale to ORIX (the "Order"). Pursuant to the Stipulation and
Consent as amended by the Order, the Company sold its interest in CMO-IV and
certain other CMBS to ORIX. The CMI Equity Committee and Unsecured Creditors'
Committee are deemed to have agreed to such sale. The sale was completed on
November 6, 2000 resulting in total proceeds of approximately $189 million. The
proceeds were used to pay off $141 million of financing owed to SSB and $4
million to Citicorp Real Estate, Inc. in full satisfaction of all asserted and
unasserted claims of such claimants. Additionally, approximately $14.2 million
of the proceeds were used to pay down secured financing provided by GACC. The
Company will use the net proceeds of approximately $30 million to help fund the
Company's emergence from Chapter 11.
The Plan of Reorganization
The Plan contemplates the payment in full of all of the allowed claims of
the Debtors primarily through recapitalization financing (including proceeds
from certain asset sales) aggregating at least $847 million (the
"Recapitalization Financing"). Approximately $267 million of the
Recapitalization Financing would be provided by Merrill Lynch and GACC through a
secured financing facility (which is expected to be structured as a repurchase
agreement), and approximately $161 million would be provided through new secured
notes issued to the Company's major unsecured creditors (collectively, the "New
Debt"). The sales of select CMBS (the "CMBS Sale") and the Company's interest in
CMO-IV (as defined in Note 6) (the "CMO-IV Sale") provided the balance of the
Recapitalization Financing. The completed CMBS Sale and CMO-IV Sale generated
aggregate proceeds of approximately $418.7 million, of which approximately
$342.3 million was used to pay related borrowings and approximately $76.4
million is available to help fund the Plan.
9
<PAGE>
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 approximate $267 million secured financing would provide for (i) interest at
a rate of one month LIBOR plus 3.25%, (ii) principal prepayment/amortization
obligations, (iii) extension fees after two years and (iv) maturity on the
fourth anniversary of the effective date of the Plan. The approximate $161
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 $56 million, would provide for (i) interest at a rate of 13% per
annum with additional interest at the rate of 7% per annum accreting over the
debt term, (ii) extension fees after four years and (iii) maturity on the sixth
anniversary of the effective date of the Plan. The New Debt described above will
be secured by substantially all of the assets of the Company. It is contemplated
that there will be restrictive covenants, including financial covenants, in
connection with the New Debt.
The Plan also contemplates that the holders of the Company's common stock
will retain their stock. Under the Plan, no cash dividends, other than a maximum
of $4.1 million to preferred shareholders, can be paid to existing shareholders.
Subject to the respective acceptances of the Plan by the holders of the
Company's Series B Cumulative Convertible Preferred Stock (the "Series B
Preferred Stock") and the Series F Redeemable Cumulative Dividend Preferred
Stock (the "Series F Preferred Stock" or "junior preferred stock"), the Plan
contemplates an amendment to their respective relative rights and preferences to
permit the payment of accrued and unpaid dividends in cash or common stock (or a
combination thereof), at the Company's election. The Plan further contemplates
amendments to the relative rights and preferences of the Series E Cumulative
Convertible Preferred Stock (the "Series E Preferred Stock"), relating
principally to dividend and conversion rights.
Reference is made to the Plan and Disclosure Statement, previously filed
with the Bankruptcy Court (and with the Securities and Exchange Commission (the
"SEC") as exhibits to a Current Report on Form 8-K filed on September 22, 2000),
for a more detailed description of the financing contemplated to be obtained
under the Plan from the respective existing creditors including, without
limitation, payment terms, restrictive covenants and collateral, and a more
detailed description of the treatment of preferred stockholders. Although the
Company has commitments for substantially all of the New Debt and has completed
both the CMBS Sale and the CMO-IV Sale, there can be no assurance that the
Company will obtain the Recapitalization Financing, that the Plan will be
confirmed by the Bankruptcy Court, or that the Plan, if confirmed, will be
consummated. The Plan also contemplates certain amendments to the Company's
articles of incorporation, including an increase in authorized shares from 120
million to 375 million (consisting of 300 million of common shares and 75
million of preferred shares).
Effect of Chapter 11 Filing on REIT Status and Other Tax Matters
REIT Status. CRIIMI MAE is required to meet income, asset, ownership and
distribution tests to maintain its REIT status. The Company believes that it has
satisfied the REIT requirements for all years through, and including, 1999.
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 2000 or
subsequent years. If the Company fails to retain its REIT status for any taxable
year, it will be taxed as a regular domestic corporation subject to federal and
state income tax in the year of disqualification and for at least the four
subsequent years. Depending on the amount of any such federal and state income
tax, the Company may have insufficient funds to pay such tax and also may be
unable to comply with its obligations under the New Debt.
2000 Taxable Income (Loss)/Taxable Distribution Requirements
During late 1999, the Company began to trade mortgage-backed securities
(the "Trading Assets"). The Company seeks maximum total return through short
term trading, consistent with prudent investment management. Returns from such
activities consist primarily of capital appreciation/depreciation resulting from
changes in interest rates and spreads, if any, and other arbitrage opportunities
as well as discount amortization and coupon interest income. For the nine months
ended September 30, 2000, trading gains and losses on other mortgage-backed
securities were immaterial and net trading losses on CMBS were approximately
$3.3 million.
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Internal Revenue Service Revenue procedure 99-17 provides securities and
commodities traders with the ability to elect mark-to-market treatment for the
2000 tax year and for all future tax years, unless the election is revoked with
the consent of the Internal Revenue Service. On March 15, 2000, CRIIMI MAE
elected for tax purposes to be classified as a trader in securities effective
January 1, 2000.
As a result of its trader election, CRIIMI MAE recognized a mark-to market
tax loss on its Trading Assets on January 1, 2000 of approximately $478 million
(the "January 2000 Loss"). Such loss is expected to be recognized evenly over
four years beginning with the year 2000. The Company expects such loss to be
ordinary.
Additionally, as a result of its trader election, the Company will be
required to mark-to-market its Trading Assets on a tax basis at the end of each
tax year, including the year 2000. Any increase or decrease in the value of the
Trading Assets as a result of the year-end mark-to-market requirement will
generally result in either a tax gain (if an increase in value) or a tax loss
(if a decrease in value). Such tax gain or loss, as well as any realized gains
or losses from the disposition of Trading Assets during each year, are also
expected to be ordinary gains or losses.
Since gains and losses associated with trading activities are expected to
be ordinary, any gains will generally increase taxable income and any losses
will generally decrease taxable income. Since the Company is a REIT which is
generally required to distribute 95% of its taxable income to shareholders, any
increases in taxable income from trading activities will generally result in an
increase in REIT distribution requirements and any decreases in taxable income
from trading activities will generally result in a decrease in REIT distribution
requirements (or, if the taxable income is reduced to zero, eliminate REIT
distribution requirements).
Gains and losses from the mark-to-market requirement (including the
January 2000 Loss) are unrealized. This creates a mismatch between REIT
distribution requirements and cash flow since the REIT distribution requirements
will generally fluctuate due to the mark-to-market adjustments, but the cash
flow from the Company's Trading Assets will not fluctuate as a result of the
mark-to-market adjustments.
Any accumulated and unused net operating losses, subject to certain
limitations, generally may be carried forward for up to 20 years to offset
taxable income until fully utilized. Accumulated and unused net operating losses
can not be carried back. If a security is marked down because of an increase in
interest rates, rather than from credit losses, such mark-to-market losses may
be recovered over time. Any recovered mark-to-market losses will generally be
recognized as taxable income, although there is expected to be no corresponding
increase in cash flow.
There is no assurance that the Company's position with respect to its
election as a trader in securities will not be challenged by the IRS, and, if
challenged, will be defended successfully by the Company. As such, there is a
risk that the January 2000 Loss will be limited or disallowed, resulting in
higher tax basis income and a corresponding increase in REIT distribution
requirements.
As a REIT, CRIIMI MAE is generally required to distribute at least 95% of
its "REIT taxable income" to its shareholders each tax year. If CRIIMI MAE is
required to make taxable income distributions to its shareholders to satisfy
required REIT distributions, all or a substantial portion of these distributions
are expected to be in the form of non-cash dividends. There is no assurance that
such non-cash dividends would satisfy the REIT distribution requirements.
See Note 8 for a discussion of differences between financial statement net
income (loss) and the taxable loss for the nine months ended September 30, 2000.
It is possible that the Company could experience an "ownership change"
within the meaning of Section 382 of the Tax Code. Consequently, its use of net
operating losses generated before the ownership change to reduce taxable income
after the ownership change may be subject to limitation under Section 382.
Generally, the use of net operating losses in any year is limited to the value
of the Company's stock on the date of the ownership change multiplied by the
long-term tax exempt rate (published by the IRS) with respect to that date.
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"
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<PAGE>
that normally occurs when a corporation earns income and distributes that income
to shareholders in the form of dividends. The Company, however, still must pay
corporate level tax on any 1999 taxable income not distributed to shareholders.
Unlike the 95% distribution requirement, the calculation of the Company's
federal income tax liability does not exclude excess noncash income such as OID.
In determining the Company's taxable income for 1999, distributions
declared by the Company on or before September 15, 2000 and actually paid by the
Company on or before December 31, 2000 will be considered as dividends paid for
the year ended December 31, 1999. On September 11, 2000, the Company declared a
dividend payable to common shareholders of approximately 3.75 million shares of
a new series of preferred stock with a face value of $10 per share (see Note
12). The purpose of the dividend was to distribute approximately $37.5 million
in undistributed 1999 taxable income. To the extent that it is determined that
such amount is not distributed, the Company would bear a corporate level income
tax on the undistributed amount. There can be no assurance that the Company's
REIT status will be preserved or that all of the Company's tax liability will be
eliminated by payment of such preferred stock dividend. The preferred stock
dividend was paid on November 13, 2000 to common shareholders of record as of
October 27, 2000. The preferred stock dividend will be taxable to common
shareholder recipients.
The Company's 1998 Taxable Income. On September 14, 1999, the Company
declared a dividend payable to common shareholders of approximately 1.61 million
shares of a new series of junior preferred stock with a face value of $10 per
share. The purpose of the dividend was to distribute approximately $15.7 million
in undistributed 1998 taxable income. To the extent that it is determined that
such amount was not distributed, the Company would bear a corporate level income
tax on the undistributed amount. There can be no assurance that all of the
Company's tax liability was eliminated by payment of such junior preferred stock
dividend. The Company paid the junior preferred stock dividend on November 5,
1999. The junior preferred stock dividend was taxable to common shareholder
recipients. Junior preferred shareholders were permitted to convert their shares
of junior preferred stock into common shares during two separate conversion
periods. During these conversion periods, an aggregate 1,020,241 shares of
junior preferred stock were converted into 8,798,009 shares of common stock.
Taxable Mortgage Pool Risks. An entity that constitutes a "taxable
mortgage pool" as defined in the Tax Code ("TMP") is treated as a separate
corporate level taxpayer for federal income tax purposes. In general, for an
entity to be treated as a TMP (i) substantially all of the assets must consist
of debt obligations and a majority of those debt obligations must consist of
mortgages; (ii) the entity must have more than one class of debt securities
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 two trusts that
constitute TMPs (CBO-1 and CBO-2, collectively the "Trusts"). See Note 5 for
descriptions of CBO-1 and CBO-2. 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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<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 excluded from the
requirements of the Investment Company Act.
To qualify for the Investment Company Act exclusion, CRIIMI MAE, among
other things, must maintain at least 55% of its assets in Qualifying Interests
(the "55% Requirement") and is also required to maintain an additional 25% in
Qualifying Interests or other real estate-related assets ("Other Real Estate
Interests" and such requirement, the "25% Requirement"). According to current
SEC staff interpretations, CRIIMI MAE believes that its government insured
mortgage securities and originated loans constitute Qualifying Interests. In
accordance with current SEC staff interpretations, the Company believes that all
of its Subordinated CMBS constitute Other Real Estate Interests and that certain
of its Subordinated CMBS also constitute Qualifying Interests. On certain of the
Company's Subordinated CMBS, the Company, along with other rights, has the
unilateral right to direct foreclosure with respect to the underlying mortgage
loans. Based on such rights and its economic interest in the underlying mortgage
loans, the Company believes that the related Subordinated CMBS constitute
Qualifying Interests. As of September 30, 2000, the Company believes that it was
in compliance with both the 55% Requirement and the 25% Requirement.
If the SEC or its staff were to take a different position with respect to
whether such Subordinated CMBS constitute Qualifying Interests, the Company
could, among other things, be required either (i) to change the manner in which
it conducts its operations to avoid being required to register as an investment
company or (ii) to register as an investment company, either of which could have
a material adverse effect on the Company. If the Company were required to change
the manner in which it conducts its business, it would likely have to dispose of
a significant portion of its Subordinated CMBS or acquire significant additional
assets that are Qualifying Interests. Alternatively, if the Company were
required to register as an investment company, it expects that its operating
expenses would significantly increase and that the Company would have to reduce
significantly its indebtedness, which could also require it to sell a
significant portion of its assets. No assurances can be given that any such
dispositions or acquisitions of assets, or deleveraging, could be accomplished
on favorable terms.
Further, if the Company were deemed an unregistered investment company,
the Company could be subject to monetary penalties and injunctive relief. The
Company would be unable to enforce contracts with third parties and third
parties could seek to obtain rescission of transactions undertaken during the
period the Company was deemed an unregistered investment company. In addition,
as a result of the Company's Chapter 11 filing, the Company is limited in
possible actions it may take in response to any need to modify its business plan
in order to register as an investment company, or avoid the need to register.
Certain dispositions or acquisitions of assets would require Bankruptcy Court
approval. Also, any forced sale of assets that occurs after the bankruptcy stay
is lifted would change the Company's asset mix, potentially resulting in the
need to register as an investment company under the Investment Company Act or
take further steps to change the asset mix. Any such results would be likely to
have a material adverse effect on the Company.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
In management's opinion, the accompanying unaudited consolidated financial
statements of CRIIMI MAE, CM Management, Holdings II, CRIIMI MAE Financial
Corporation, CRIIMI MAE Financial Corporation II, CRIIMI MAE Financial
Corporation III, CRIIMI MAE QRS 1, Inc., CRIIMI MAE CMBS Corp., CRIIMI MAE
Holding Inc., CRIIMI MAE Holdings L.P., and CRIIMI, Inc., contain all
adjustments (consisting of only normal recurring adjustments and consolidating
adjustments) necessary to present fairly the consolidated balance sheets as of
September 30, 2000 and December 31, 1999, the consolidated results of its
operations for the three and nine months ended September 30, 2000 and 1999 and
its cash flows for the nine months ended September 30, 2000 and 1999.
These consolidated financial statements have been prepared pursuant to the
rules and regulations SEC. Certain information and note disclosures normally
included in annual financial statements prepared in
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<PAGE>
accordance with generally accepted accounting principles have been condensed or
omitted. While management believes that the disclosures presented are adequate
to make the information not misleading, it is recommended that these
consolidated financial statements be read in conjunction with the consolidated
financial statements and the notes included in CRIIMI MAE's Annual ReporT filed
on Form 10-K for the year ended December 31, 1999 (audited).
Method of Accounting
The consolidated financial statements of CRIIMI MAE are prepared on the
accrual basis of accounting in accordance with generally accepted accounting
principles ("GAAP"). The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain amounts in the consolidated financial statements for the year
ended December 31, 1999 and the three and nine months ended September 30, 1999
have been reclassified to conform to the 2000 presentation.
Bankruptcy Accounting
Entering a reorganization, although a significant event, does not
ordinarily affect or change the application of GAAP followed by a company. The
accompanying financial statements have been prepared assuming that CRIIMI MAE
will continue as a going concern in accordance with SOP 90-7, "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7").
As such, asset and liability carrying amounts do not purport to represent
realizable or settlement values as contemplated by the Bankruptcy Code.
Liabilities Subject to Chapter 11 Proceedings
Liabilities subject to Chapter 11 proceedings, including claims that
become known after the Petition Date, are reported at their expected allowed
claim amount in accordance with SFAS No. 5, "Accounting for Contingencies". To
the extent that the amounts of claims change as a result of actions in the
bankruptcy case or other factors, the recorded amount of liabilities subject to
Chapter 11 proceeding will be adjusted. The gain or loss resulting from the
entries to record the adjustment will be recorded as a reorganization item. In
1998, the Company wrote-off all $2.8 million of debt discounts and deferred debt
costs related to liabilities subject to Chapter 11 proceedings which resulted in
these liabilities being carried at their face amount.
Reorganization Items
Reorganization items are items of income and expense that are realized or
incurred by CRIIMI MAE because it is in reorganization. These include, but are
not limited to the following:
. Short-term interest income that would not have been earned but for the
Bankruptcy.
. Professional fees and similar types of expenditures directly relating to
the Chapter 11 proceeding.
. Employee Retention Program costs and severance payments.
. Loss accruals or realized gains or losses resulting from activities of the
reorganization process such as the sale of certain assets, rejection of
certain executory contracts and the write-off of debt issuance costs and
debt discounts. See Notes 5 and 6 for further discussion of other than
temporary impairment and losses (gains) recognized on sales of CMBS and
originated loans.
During the three and nine months ended September 30, 2000 and 1999, the
Company recorded reorganization items, as summarized below, due to the Chapter
11 filings of CRIIMI MAE, CM Management and Holdings II.
<TABLE>
<CAPTION>
Three months Three months Nine months Nine months
ended ended ended Ended
September 30, September 30, September 30, September 30,
Reorganization Items 2000 1999 2000 1999
-------------------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Short-term interest income $ (2,268,168) $ (852,600) $ (4,706,840) $ (1,322,000)
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Three months Three months Nine months Nine months
ended ended ended Ended
September 30, September 30, September 30, September 30,
Reorganization Items 2000 1999 2000 1999
-------------------- --------------- --------------- --------------- ------------------
<S> <C> <C> <C> <C>
Professional fees (5) (820,503) 2,896,771 6,608,081 13,010,926
Employee Retention Program accrued costs 315,898 426,353 851,948 1,171,855
Other (34,302) 2,135,478 1,411,300 2,692,002
------------ ------------ ------------ ------------
Subtotal (2,807,075) 4,606,002 4,164,489 15,552,783
Impairment on CMBS (4) 10,579,996 -- 15,832,817 --
Impairment on REO (1) -- -- 924,283 --
(Gain) loss on sale of CMBS (2) (1,367,601) -- 343,613 --
Loss on originated loans (3) 45,845,712 -- 45,845,712 --
------------ ------------ ------------ ------------
Total $ 52,251,032 $ 4,606,002 $ 67,110,914 $ 15,552,783
============ ============ ============ ============
</TABLE>
(1) The Company recognized impairment on its investment in REO in June
2000. This asset was sold in July 2000 as discussed in Note 3 and Note
9.
(2) The Company recognized a loss of approximately $1.35 million on the
sale of Morgan Stanley Capital I, Series 1998-WF2 (the "Morgan Bonds")
in February 2000, a loss of approximately $360,000 on the sale of
First Union-Lehman Brothers-Bank of America Commercial Mortgage Trust
Series 1998-C2 (the "First Union Bonds") in April 2000, and a gain of
approximately $1.37 million on the sale of Chase Commercial Mortgage
Securities Corp., Series 1998-1 (the "Chase Bonds") in August 2000.
(3) The Company recognized a loss of approximately $45.8 million on its
investment in originated See loans. Note 6 for further discussion.
(4) The Company recognized additional impairment on the remaining CMBS
subject to the CMBS Sale as of September 30, 2000. The CMBS were sold
in November 2000 as discussed in Note 5.
(5) During the three months ended September 30, 2000, the Company reduced
the amount of previously accrued professional fees to reflect the
results of the settlement with SSB in July 2000.
Condensed Financial Statements
In accordance with SOP 90-7, the three debtor entities, CRIIMI MAE, CM
Management and Holdings II, are required to present condensed financial
statements for the three and nine months ended September 30, 2000. (See Note
18).
Other Cash and Cash Equivalents
Cash and cash equivalents consist of U.S. Government and agency
securities, certificates of deposit, time deposits and commercial paper with
original maturities of three months or less.
Restricted Cash and Cash Equivalents
Restricted cash and cash equivalents consist of cash, certificates of
deposit and interest bearing securities maturing within three months from the
date of purchase that have been legally restricted pursuant to various
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 sale proceeds to be held in segregated accounts. In addition,
restricted cash and cash equivalents include balances held in separate trusts
controlled by a trustee for the benefit of employees. See Note 16 "Litigation-
Bankruptcy Related Litigation" for further discussion of these arrangements.
Transfer of Financial Assets
The Company transfers assets (mortgages and mortgage securities) in
securitization transactions where the transferred assets become the sole source
of repayment for newly issued debt. These transfers of financial assets are
accounted for in accordance with SFAS 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities" ("FAS 125").
When both legal and control rights to a financial asset are transferred, the
transfer is treated as a sale. Transfers are assessed on an individual component
basis. In a securitization, the cost basis of the original assets transferred is
allocated to each of the new financial components based upon the
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<PAGE>
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 and Other Mortgage-Backed Securities
CRIIMI MAE recognizes income from Subordinated CMBS using the effective
interest method, using the anticipated yield over the projected life of the
investment. Changes in anticipated yields are generally calculated due to
revisions in estimates of future credit losses, actual losses incurred,
revisions in estimates of future prepayments and actual prepayments received.
Changes in anticipated yield resulting from prepayments are recognized through a
cumulative catch-up adjustment at the date of the change which reflects the
change in income of the security from the date of purchase through the date of
change in anticipated yield. The new yield is then used for income recognition
for the remaining life of the investment. Changes in anticipated yield resulting
from reduced estimates of losses are recognized on a prospective basis. When
other than temporary impairment is recognized, a new yield is calculated on the
CMBS based on its new cost basis (fair value at date of impairment) and expected
future cash flows. This revised yield is employed prospectively. See Note 5 for
a discussion of a revision in yields during the second quarter of 2000.
On May 8, 1998, CRIIMI MAE consummated CBO-2 which resulted in the sale of
a portion of its Subordinated CMBS portfolio. See Note 5. As a result of this
transaction and in accordance with GAAP, effective in the second quarter of
1998, the Company no longer classifies CMBS securities as Held to Maturity, but
instead classifies CMBS as Available for Sale. CRIIMI MAE carries its
Subordinated CMBS at fair market value where changes in fair value are recorded
as a component of shareholders' equity. See Note 5. Prior to this time, such
securities were carried at their amortized cost basis as the Company had the
ability and intent to hold these securities to maturity. Also see further
discussion below in Other Mortgage-Backed Securities with respect to trading
activities related to Subordinated CMBS.
Other Mortgage-Backed Securities
Investment income consists of amortization of the discount or premiums on
primarily investment-grade securities, plus the stated investment interest
payments received or accrued on other mortgage-backed securities. The difference
between the cost and the unpaid principal balance at the time of purchase is
carried as a discount or premium and amortized over the remaining contractual
life of the investment using the effective interest method. The effective
interest method provides a constant yield of income over the term of the
investment.
The Company's other mortgage-backed securities are classified as Available
for Sale. As a result, the Company carries these securities at fair
value where changes in fair value are recorded as a component of shareholders'
equity. Upon the sale of such securities, any gain or loss is recognized in the
income statement.
During late 1999, the Company began to trade mortgage-backed securities.
The Company seeks maximum total return through short term trading, consistent
with prudent investment management. Returns from such activities consist
primarily of capital appreciation/depreciation resulting from changes in
interest rates and spreads, if any, and other arbitrage opportunities as well as
discount amortization and coupon interest income. The Company is conducting
trading activities in both short and longer duration fixed income instruments,
primarily subordinated and investment grade CMBS and investment grade
residential mortgage backed securities. The Company's Subordinated CMBS assets
existing as of late 1999 constitute the non-investment grade longer duration
Trading Assets, and a new portfolio created in late 1999, consisting primarily
of CMBS and residential MBS, constitute the investment grade, short duration
Trading Assets. For the nine months ended September 30, 2000, trading losses on
other mortgage-backed securities were immaterial and net trading losses on CMBS
were approximately $3.3 million.
As of September 30, 2000, the combined pool of trading assets approximated
$1.35 billion for tax purposes.
Insured Mortgage Securities
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<PAGE>
Mortgage income consists of amortization of the discount or premiums plus
the stated mortgage interest payments received or accrued. The difference
between the cost and the unpaid principal balance at the time of purchase is
carried as a discount or premium and amortized over the remaining contractual
life of the mortgage using the effective interest method. The effective interest
method provides a constant yield of income over the term of the mortgage.
Changes in anticipated yields are generally calculated due to revisions in
estimates of future prepayments and actual payments received.
As discussed in Note 7, as a result of the CBO-2 transaction involving the
sale of a portion of its Subordinated CMBS portfolio, the Company, in accordance
with GAAP, no longer classifies its insured mortgage securities as Held to
Maturity. The Company's mortgage securities are now classified as Available for
Sale. As a result, the Company now carries its mortgage securities at fair value
where changes in fair value are recorded as a component of shareholders' equity.
Prior to this time, the securities were carried at their amortized cost basis as
the Company had the ability and intent to hold these securities to maturity.
CRIIMI MAE's consolidated investment in mortgage securities consists of
participation certificates evidencing a 100% undivided beneficial interest in
Government Insured Multifamily Mortgages issued or sold pursuant to programs of
the Federal Housing Administration ("FHA") ("FHA-Insured Certificates") and
mortgage-backed securities guaranteed by the Government National Mortgage
Association ("GNMA") ("GNMA Mortgage-Backed Securities"). Payment of principal
and interest on FHA-Insured Loans is insured by the U.S. Department of Housing
and Urban Development (HUD) pursuant to Title 2 of the National Housing Act.
Payment of principal and interest on GNMA Mortgage-Backed Securities is
guaranteed by GNMA pursuant to Title 3 of the National Housing Act.
Investment in Originated Loans
This portfolio consists of commercial loans originated and securitized by
CRIIMI MAE in CMO-IV. The origination fee income, application fee income and
costs associated with originating the loans were deferred ("deferred loan
costs") and the net amount was added to the basis of the loans on the balance
sheet upon acquisition. Income is recognized using the effective interest method
and consists of mortgage income from the loans and amortization of deferred loan
costs. Prior to the third quarter of 2000, the Company carried these loans at
amortized cost as the Company intended to hold the loans for the long term.
During the third quarter of 2000, the Company decided to sell the loans as part
of its Plan. As a result, these loans are carried at the lower of cost or market
as of September 30, 2000. See Note 6 for further discussion related to the sale
of the Company's interest in CMO-IV.
Equity Investments
CRIIMI, Inc., a wholly owned subsidiary of CRIIMI MAE, owns all of the
general partnership interests in American Insured Mortgage Investors, American
Insured Mortgage Investors - Series 85, L.P., American Insured Mortgage
Investors L.P. - Series 86 and American Insured Mortgage Investors L.P. - Series
88 (collectively, the "AIM Funds"). The AIM Funds own mortgage assets which are
substantially similar to the insured mortgage securities owned by CRIIMI MAE.
CRIIMI, Inc. receives the general partner's share of income, loss and
distributions (which ranges among the AIM Funds from 2.9% to 4.9%) from each of
the AIM Funds. In addition, CRIIMI MAE and CM Management each own 50% of the
limited partnership that owns a 20% limited partnership interest in the adviser
to the AIM Funds. CRIIMI MAE is utilizing the equity method of accounting for
its investment in the AIM Funds and advisory partnership, which provides for
recording CRIIMI MAE's share of net earnings or losses in the AIM Funds and
advisory partnership reduced by distributions from the limited partnerships and
adjusted for purchase accounting amortization.
CRIIMI MAE accounts for its investment in CRIIMI MAE Services, Inc.
("Services, Inc.") under the equity method because it does not own the voting
common stock of Services, Inc. As of September 30, 2000, Services Inc. holds a
27% general partner interest in CMSLP.
As of September 30, 2000, CRIIMI MAE, through CM Management, held a 73%
limited partnership interest in CMSLP. CRIIMI MAE's limited partner investment
in CMSLP is accounted for under the equity method as CRIIMI MAE does not control
CMSLP. However, because it owns 73% of the partnership and because it has
certain rights described below, it follows the equity method of accounting. As a
limited partner, CRIIMI MAE is entitled to all of the rights and benefits of
being a limited partner including the right to receive income and cash
distributions in accordance with its limited partner interest. In addition,
CRIIMI MAE has the right to approve the sale of the principal assets of CMSLP.
Services Inc. is the general partner of CMSLP and manages the day to day affairs
of CMSLP.
17
<PAGE>
Impairment
Subordinated CMBS
CRIIMI MAE assesses each Subordinated CMBS for other than temporary
impairment when the fair market value of the asset declines below amortized cost
and when one of the following conditions also exists: 1) fair value has been
below amortized cost for a significant period of time and CRIIMI MAE concludes
that it no longer has the ability or intent to hold the security for the period
that fair value is expected to be below amortized cost through the period of
time CRIIMI MAE expects the value to recover to amortized cost or 2) the credit
quality of its Subordinated CMBS is declining and the Company determines that
the current estimate of expected future credit losses exceeds credit losses as
originally projected. The amount of impairment loss is measured by comparing the
fair value, based on available market information, of a Subordinated CMBS to its
current amortized cost basis, the difference is recognized as a loss in the
income statement.
The Company assesses current economic events and conditions that impact
the value of its Subordinated CMBS and the underlying real estate in making
judgments as to whether or not other than temporary impairment has occurred. See
Note 5 for a discussion of impairment losses recognized in 2000 and 1999.
Other Mortgage-Backed Securities
CRIIMI MAE assesses its other mortgage-backed securities for other than
temporary impairment when the fair market value of the security declines below
amortized cost and CRIIMI MAE concludes that it no longer has the ability to
hold the security through the market downturn. The amount of impairment loss is
measured by comparing the fair value of the security to its current cost basis,
the difference is recognized as a loss in the income statement. The Company did
not recognize any impairment on its other mortgage-backed securities for the
three and nine months ended September 30, 2000 and 1999.
Insured Mortgage Securities
CRIIMI MAE assesses each insured mortgage security for other than
temporary impairment when the fair market value of the asset declines below
amortized cost for a significant period of time and CRIIMI MAE concludes that it
no longer has the ability to hold the security through the market downturn. The
amount of impairment loss is measured by comparing the fair value of an insured
mortgage security to its current amortized cost basis, the difference is
recognized as a loss in the income statement. The Company did not recognize any
impairment on its insured mortgage securities for the three and nine months
ended September 30, 2000 and 1999.
Investment in Originated Loans
CRIIMI MAE recognizes impairment on the originated loans when it is
probable that CRIIMI MAE will not be able to collect all amounts due according
to the contractual terms of the loan agreement. CRIIMI MAE measures impairment
based on the present value of expected future cash flows discounted at the
loan's effective interest rate or the fair value of the collateral if the loan
is collateral dependent. See Note 6 for further discussion.
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 losses on its equity
investments for the three and nine months ended September 30, 2000 and 1999.
Receivables
Receivables primarily consist of interest and principal receivables on the
Company's Subordinated CMBS, insured mortgage securities and originated loan
portfolios. In addition, prepayments in the insured mortgage securities
portfolio, if any, that have not yet been received by CRIIMI MAE are included.
Other Assets
18
<PAGE>
Other assets primarily include Merger assets and related costs, deferred
financing costs, deferred costs and investment in mezzanine loans, as further
discussed below. Additionally included in other assets is Real Estate Owned
("REO") property acquired through foreclosure that is held for sale. In June
1997, CRIIMI MAE acquired this real estate property in a foreclosure sale from a
CMBS trust which it subsequently sold to a third party in July 2000. Prior to
the sale, CRIIMI MAE's investment in REO property totaled approximately $3.4
million. A loss of approximately $900,000 was recorded during the nine months
ended September 30, 2000 related to this sale. REO property acquired through
foreclosure is recorded at fair value on the date of foreclosure. REO property
held for sale is accounted for at the lower of its cost basis or fair value less
costs to sell. REO property held for the long term will be evaluated for
impairment by the Company when events or changes in circumstances indicate that
the carrying amount of the asset may not be recoverable. At such time, if the
expected future undiscounted cash flows from the property are less than the cost
basis, the assets will be marked down to fair value. Costs relating to
development and improvement of property are capitalized, provided that the
resulting carrying value does not exceed fair value. Costs relating to holding
the assets are expensed.
The Merger assets acquired and costs incurred in connection with the
Merger were recorded using the purchase method of accounting. The amounts
allocated to the assets acquired were based on management's estimate of their
fair values, with the excess of purchase price over fair value allocated to
goodwill. The AIM Funds' subadvisory contracts and the mortgage servicing
contracts transferred to CMSLP are amortized using the effective interest method
over 10 years through 2005. This amortization is reflected through CRIIMI MAE's
equity in earnings from investments. The remaining assets acquired by CRIIMI
MAE, including goodwill, are amortized using the straight-line method over 10
years through 2005.
Deferred costs are costs incurred in connection with the establishment of
CRIIMI MAE's financing facilities and are amortized using the effective interest
method over the terms of the borrowings. Also included in deferred costs are
mortgage selection fees, which were paid to the adviser or were paid to the
former general partners or adviser to the predecessor entities of CRI
Liquidating (collectively, the "CRIIMI Funds"). These deferred costs are being
amortized using the effective interest method on a specific mortgage basis from
the date of the acquisition of the related mortgage over the term of the
mortgage from CRIIMI MAE. Upon disposition of a mortgage, the related
unamortized fee is treated as part of the mortgage asset carrying value in order
to measure the gain or loss on the disposition. As a result of the Chapter 11
filing in December 1998, CRIIMI MAE wrote off all deferred costs in connection
with its financing facilities that are subject to the Chapter 11 filing.
Costs incurred in connection with the loan origination programs are netted
against any origination fees received and the net amount is deferred and will be
recognized using the effective interest method over the life of the intended
securitization of the loans. These costs include a one-time fee to the financial
institution and direct costs of originating the loans for the program. All net
deferred costs are written off if the Company and the financial institution
decide to sell the loans in the warehouse program. In addition, the Company is
required to fund the estimated subordinated levels for the securitization of the
loans originated through its loan origination programs. This subordinated level
is held as a deposit at the financing institution and is reflected in other
assets. Due to the financial institution taking title to the loans during the
warehousing period and bearing substantive risk for the investment portion of
each loan, the originated loans are not recorded on the Company's balance sheet
during the warehouse period. As a result of the Chapter 11 filing, CRIIMI MAE
wrote off all capitalized costs in connection with its warehouse programs in
December 1998. As of September 30, 2000, there were no reserve account balances
with respect to either the Citibank or Prudential Programs. (See Note 6 for
further discussion including the sale of the Company's interest in CMO-IV.)
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
are terminated, the associated gain or loss is defferred over the remainding
terms of the agreement,
19
<PAGE>
provided that the underlying hedged asset or liability still exists. Amounts to
be paid or received under interest rate protection agreements are accrued
currently and are netted with interest expense for financial statement
presentation purposes. Additionally, in the event that interest rate protection
agreements do not qualify as hedges, such agreements are reclassified to be
investments accounted for at fair value, with any gain or loss included as a
component of income.
Per Share Amounts
Basic earnings per share amounts for the three and nine months ended
September 30, 2000 and 1999 represent net income available to common
shareholders divided by the weighted average common shares outstanding during
each quarter. Diluted earnings per share amounts for the three and nine months
ended September 30, 1999 represent basic earnings per share adjusted for
dilutive common stock equivalents, which for CRIIMI MAE could include stock
options and certain series of preferred stock. For the three and nine months
ended September 30, 2000, 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
2000, based upon a stipulation agreement with certain of the Company's lenders,
the Company reflected the receipt of interest on certain of its CMBS ($33.4
million), along with the corresponding pay down of interest payable ($25.6
million). The net amount of $7.8 million was used to pay down debt related to
the respective variable rate financing facilities of those lenders. No cash was
remitted to the Company, and as such, this activity is not reflected in the
consolidated statements of cash flows.
Cash payments made for interest for the nine months ended September 30,
2000 and 1999, were $112,258,045, and $85,788,961, 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 Other MBS and Insured Mortgage Securities accounted for as available
for sale with changes in fair value recorded through equity.
New Accounting Statements
During 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133 "Accounting for Derivative Instruments and for Hedging Activities"
("FAS 133"). In June 1999, the FASB issued Statement No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No. 133". In June 2000, the FASB issued Statement 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities",
an amendment of FASB Statement No. 133. FAS 133, as amended, establishes
accounting and reporting standards for derivative investments and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as a hedge. The accounting for the changes in the fair
value of a derivative depends on the intended use of the derivative and the
resulting designation. FAS 133 is effective for the Company beginning January 1,
2001. The Company believes the effect of adopting FAS 133 will not be material.
In October 2000, the FASB issued SFAS No. 140 ("FAS 140"), "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities--a Replacement of FASB Statement No. 125". This statement consists
of two main components: (1) Requirements regarding new disclosures about
securitizations, retained interests in securitized financial assets and
financial assets pledged as collateral. These new disclosure requirements are to
be provided for fiscal years ending after December 15, 2000, and (2) Revises
criteria for accounting for securitizations, other financial-asset transfers,
and collateral. The most significant revisions relate to the criteria involving
a qualifying special purpose entity. These revisions regarding the accounting
under FAS 140 are to be applied prospectively to transfers of financial assets
and extinguishments of liabilities occurring after March 31, 2001.
In July 2000, FASB issued EITF 99-20 "Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets". This statement requires that all changes in assumptions
regarding expected future cash flows related to such assets that are used to
calculate income yields be recognized prospectively through revised income
yields unless impairment is required to be recognized, at which time an
investment is written down to fair value. EITF 99-20 impacts the Company's
income recognition for its CMBS portfolio. Currently the Company recognizes
changes in income yields due to changes in expected prepayment speeds as a
cumulative catch-up in the period of change. In addition the Company recognizes
changes related to expected future cash flows due to credit losses prospectively
if the change results in less credit losses and
20
<PAGE>
as a cumulative catch-up if the change results in more credit losses, unless
impairment is required to be recognized at which time the CMBS is written down
to fair value. The Company does not believe EITF 99-20 will have a material
impact on its results of operations as the Company has not historically recorded
significant cumulative catch-ups due to changes in expected future cash flows.
EITF 99-20 is effective on January 1, 2001.
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 September 30, 2000 As of December 31, 1999
Amortized Cost Fair Value Amortized Cost Fair Value
-------------- ---------- -------------- -----------
<S> <C> <C> <C> <C>
ASSETS:
Subordinated CMBS and Other MBS (1) $1,140,453,666 $983,110,429 $1,374,173,019 $1,179,363,099
Insured Mortgage Securities 394,651,226 384,415,598 407,469,108 394,857,239
Investment in originated loans 457,159,996 411,314,284 470,204,780 422,643,902
Restricted cash and cash equivalents 77,612,188 77,612,188 38,036,624 38,036,624
Other cash and cash equivalents 85,915,077 85,915,077 53,510,311 53,510,311
Accrued interest and principal receivable 43,742,634 43,742,634 69,483,337 69,483,337
Interest rate protection agreements 395,460 259,221 1,119,280 1,465,496
LIABILITIES:
Liabilities not Subject to Chapter 11 proceedings:
Securitized mortgage obligations:
Collateralized bond obligations-CMBS 279,947,367 268,501,515 278,165,968 253,084,864
Collateralized insured mortgage securities obligations 368,207,402 373,089,745 378,711,602 381,129,836
Collateralized mortgage obligations-
originated loans 388,657,365 369,615,755 399,768,513 373,634,008
Liabilities Subject to Chapter 11 proceedings:
Variable rate secured borrowings-CMBS 525,702,058 N/A 732,904,775 N/A
Senior unsecured notes 100,000,000 86,750,000 100,000,000 86,000,000
Other financing facilities 91,049,522 N/A 92,799,522 N/A
</TABLE>
(1) This amount includes approximately $3.1 million of amortized cost and fair
value related to Other MBS as of September 30, 2000 and approximately
$92,000 as of December 31, 1999.
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 September 30, 2000 and December 31, 1999. As a result, the
Company calculated the estimated fair market value of its Subordinated CMBS
portfolio as of September 30, 2000 and December 31, 1999. The Company used a
discounted cash flow methodology to estimate the fair value of its Subordinated
CMBS portfolio. The projected cash flows used by the Company were the same
collateral cash flows used to calculate the anticipated weighted average
unleveraged yield to maturity. See Note 5 for additional discussion. The cash
flows were then discounted using a discount rate that, in the Company's view,
was commensurate with the market's perception of risk and value. The Company
used a variety of sources to determine its discount rate including;
institutionally available research reports, a relative comparison of dealer
provided discount rates from the previous quarter to those disclosed in recent
research reports and communications with dealers and active Subordinated CMBS
investors regarding the valuation of comparable securities. Since the Company
calculated the estimated fair market value of its Subordinated CMBS portfolio as
of September 30, 2000 and December 31, 1999, it has disclosed the range of
discount rates by rating category used in determining these fair market values
in Note 5. In cases where the Company sells Subordinated CMBS as part of its
Plan, the price of the Subordinated CMBS provided in the related stipulation and
consent order is used as the fair market value.
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<PAGE>
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 current transaction between a willing buyer and a willing seller in other than
a forced sale or liquidation.
Other Mortgage-Backed Securities
The fair value of the other mortgage-backed securities is an estimate
based on the indicative market price from publicly available pricing services.
The Company normally applies a slight discount to such prices as the Company
believes it better reflects fair value between willing buyers and sellers due to
the relatively smaller sizes of this component of the Trading Assets.
Insured Mortgage Securities
The fair market value of the Company's portfolio of insured mortgage
securities as of December 31, 1999 was based upon quotes obtained from an
investment banking institution, which trades these investments on a daily basis.
Due to the Chapter 11 filing and a change in staff at the investment banking
institution, the Company was unable to find an investment banking institution
willing to provide fair value quotes for the insured mortgage securities
portfolio as of September 30, 2000. As a result, the Company calculated the
estimated fair market value of its insured mortgage securities portfolio as of
September 30, 2000. The Company used a discounted cash flow methodology to
estimate the fair value of its insured mortgage securities portfolio. The cash
flows were discounted using a discount rate that, in the Company's view, was
commensurate with the market's perception of risk and value. The Company used a
variety of sources to determine its discount rate including: (i)
institutionally-available research reports, (ii) a relative comparison of dealer
provided quotes from the previous year to those disclosed in recent research
reports and incorporating adjustments to reflect changes in the market, and
(iii) communications with dealers and active insured mortgage security investors
regarding the valuation of comparable securities.
Originated Loans
Due to the Chapter 11 filing, the Company's lenders were not willing to
provide fair value quotes for the portfolio. As a result, the Company calculated
the estimated fair market value of its originated loan portfolio as of September
30, 2000 and December 31, 1999. The Company used the same discounted cash flow
methodology used in determining the fair value of its Subordinated CMBS
portfolio and further used cash flows projected at a prepayment speed of 0% to
14% depending upon the call protection of the loan. These cash flows were then
discounted using a weighted average discount rate of approximately 9.9% and 9.1%
for September 30, 2000 and December 31, 1999, respectively, which the Company
believes was commensurate with the market's perception of the risk and value of
the Company's interest in CMO-IV ($53 million face amount) that the Company sold
in November 2000 as part of its Plan. The fair market value at September 30,
2000 equaled the agreed upon sale price per the Stipulation and Consent order.
(See Note 6 for further discussion regarding the sale of the Company's interest
in CMO-IV.)
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 September 30,
2000 and December 31, 1999 is calculated using a discounted cash flow
methodology similar to the discussion on Subordinated CMBS above. The fair value
of the senior unsecured notes was calculated using a quoted market price from
Bloomberg. Management
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<PAGE>
has determined that fair value of the variable rate secured borrowings-CMBS and
other financing facilities is not practicable to measure because there is no
quoted market price available and the facilities are in default and have been
the subject of dispute as discussed in Note 9. Also see Note 9 for a detailed
discussion of these facilities and the terms of the facilities.
Interest Rate Protection Agreements
The fair value of interest rate protection agreements (used to hedge
CRIIMI MAE's variable-rate debt) is the estimated amount that CRIIMI MAE would
receive to terminate the agreements as of September 30, 2000 and December 31,
1999, taking into account current interest rates and the current
creditworthiness of the counterparties. The amount was determined based on a
quote received from the counterparty to each agreement.
5. SUBORDINATED CMBS
During 1997, FAS 125 "Accounting for Transfers and Servicing of
Financial Assets" became effective. This statement significantly changed the
accounting treatment for transfers of financial assets. FAS 125 changed
accounting standards to require transfers of assets to be accounted for on a
component basis instead of as an entire unit. Accordingly, in a securitization
or resecuritization, components (securities) are treated as sales or retained
interests based upon CRIIMI MAE's ability to control the component. Components
where control is not retained are treated as sales and those where control is
retained are treated as retained interests.
In May 1998, CRIIMI MAE completed its second resecuritization of CMBS
assets ("CBO-2"), with a combined face value of approximately $1.8 billion
involving 75 individual securities collateralized by 19 mortgage pools and three
of the retained securities from CBO-1. In CBO-2, the Company sold in a private
placement, securities with a face amount of $468 million and retained securities
with a face amount of approximately $1.3 billion. Certain securities included
call provisions to enable CRIIMI MAE to: 1) call bonds if market conditions
warrant, and 2) call bonds when it is no longer cost effective to service them.
As a result, CBO-2 resulted in a sale of certain securities and the retention of
new securities. In accordance with FAS 125, the assets collateralizing the
resecuritization are "derecognized" and the combined amortized cost basis of the
collateralizing assets was allocated to the new securities issued. CRIIMI MAE
received $335 million for the $345 million face amount of investment grade
securities sold without call provisions which had an allocated cost basis of
$306 million, resulting in a gain of approximately $28.8 million. CRIIMI MAE
recorded retained assets totaling $926 million representing the allocated
amortized cost basis for the $123 million face amount of investment grade
securities issued with call provisions and the $1.3 billion face amount of
non-investment grade retained securities in CBO-2. CBO-2 generated $160 million
of net borrowing capacity primarily as a result of a higher overall weighted
average credit rating for its new securities as compared to the weighted average
credit rating on the related CMBS collateral. The net excess borrowing capacity
was used to obtain short-term, variable rate secured borrowings which were used
to acquire additional Subordinated CMBS during the second quarter of 1998.
The CBO-2 transaction requires reclassification of CRIIMI MAE's entire
portfolio of mortgage securities (consisting of mortgage security collateral and
CMBS) from Held to Maturity to Available for Sale. Therefore, CRIIMI MAE's
securities, effective the second quarter of 1998, are reflected on the balance
sheet at fair market value. At September 30, 2000, the amortized cost of the
CMBS exceeded the fair market value by approximately $157 million (after taking
into account the impairment write down of certain CMBS subject to the CMBS Sale,
which resulted in amortized cost being written down to fair value) as compared
to $194.8 million as of December 31, 1999 and is reflected as a decrease in
shareholders' equity.
At September 30, 2000, CRIIMI MAE held the following securities with respect to
its CMBS portfolio:
<TABLE>
<CAPTION>
Original 04/01/00 Current
Anticipated Anticipated Anticipated
Yield to Yield to Yield to
Pool (1) Maturity (2) Maturity (2) (5) Maturity (2)
-------- ------------ ---------------- ------------
<S> <C> <C> <C>
Retained Securities from
CRIIMI 1996 C1 (CBO-1)(4) 19.5% 20.7% 22.3%(3)
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Original 04/01/00 Current
Anticipated Anticipated Anticipated
Yield to Yield to Yield to
Pool (1) Maturity (2) Maturity (2) (5) Maturity (2)
-------- ------------ ---------------- ------------
<S> <C> <C> <C>
DLJ Mortgage Acceptance Corp.
Series 1997 CF2 Tranche B-30C (5) (6) 8.2% 11.9% 12.0%(3)
Nomura Asset Securities Corp.
Series 1998-D6 Tranche B7 12.0% 12.0% 14.2%(3)
Retained Securities from
CRIIMI 1998 C1 (CBO-2) (4) 10.3% 10.2% 10.5%(3)
Mortgage Capital Funding, Inc.
Series 1998-MC1 (5) (6) 8.9% 13.5% 13.8%(3)
Mortgage Capital Funding, Inc.
Series 1998-MC2 (5) (6) 8.7% 13.7% 13.9%(3)
Weighted Average 10.2% 11.1% 11.4%(3)
</TABLE>
______________
(1) CRIIMI MAE, through CMSLP, performs servicing functions on a total CMBS
pool of approximately $23.6 billion as of September 30, 2000. Certain
servicing rights are being sold in conjunction with CRIIMI MAE's sale of
CMBS, with CMSLP's related book value of approximately $1.3 million. In
addition, the total CMBS pool will be reduced by approximately $2.1
billion as a result of the sale of certain CMBS subject to the CMBS sale
in November 2000. Of the $23.6 billion of mortgage loans, approximately
$316 million are being specially serviced, of which approximately $271
million are being specially serviced due to payment default (including $43
million of real estate owned by the underlying trusts) and the remainder
is being specially serviced due to non-financial covenant default. Through
September 30, 2000, CMSLP has resolved and transferred out of special
servicing approximately $606 million of the approximately $922 million
that has been transferred into special servicing from inception as
discussed below. As discussed below, through September 30, 2000, actual
losses on mortgage loans underlying the CMBS transactions are lower than
the Company's loss estimates.
(2) Represents the anticipated weighted average yield over the expected
average life of the Company's Subordinated CMBS portfolio as of the date
of acquisition, March 31, 2000, and September 30, 2000 respectively, based
on management's estimate of the timing and amount of future credit losses
and prepayments. (See also (3) below, for additional discussion.)
(3) The increases in anticipated yields to maturity for September 30, 2000, as
compared to April 1, 2000, are primarily due to a change in the allocation
and timing of the estimated future credit losses related to the mortgage
loans underlying the CMBS. Due to better than anticipated performance of
the mortgage loans underlying the CMBS, which has resulted in lower credit
losses than originally estimated, the Company has revised its estimated
credit losses to occur later in the weighted average life of the CMBS than
originally projected. However, the Company has not lowered the total
amount of estimated future credit losses related to the mortgage loans
underlying the CMBS. The change in allocation and timing of estimated
future credit losses to reflect a later occurrence of such losses results
in increases in projected cash flow (primarily in the form of interest
income) as of September 30, 2000, which in turn results in increases in
anticipated yields to maturity as of September 30, 2000. As a result of
the present value benefit of a revised later projected occurrence of
credit losses, the yields used to determine CMBS income have increased.
This revised methodology was applied on April 1, 2000. On April 1, 2000,
the overall impact of this allocation and timing revision resulted in a 29
basis point increase in total CMBS anticipated yields to maturity (24
basis point increase related to the remaining CMBS subject to the CMBS
Sale and 30 basis point increase related to the Company's retained
portfolio). These yield increases have resulted in approximately $700,000
in additional CMBS income during the third quarter compared to income that
would have been recognized using prior unrevised yields. The Company
estimates that total CMBS income related to the Company's retained
portfolio will be higher by approximately $2 million for the period April
1 through December 31, 2000 than if the prior unrevised yields were used.
These CMBS yield increases have been applied prospectively as of April 1,
2000, the first day of the second quarter.
(4) While it had no impact on the anticipated yield, the unrated bond from
CBO-1 experienced an approximate $738,000 principal write-down in 1999 and
an approximate $2.2 million principal write-down in 2000 due to losses on
the foreclosure of two underlying loans. Further, the unrated bond from
CBO-2 experienced an approximate $879,000 principal write-down in 1999 and
an approximate $374,000 principal write-down in 2000 due to losses on the
foreclosure of two underlying loans.
(5) As discussed further below, under the Plan, the Company intends to sell
these CMBS pools and as such, impairment was recognized as of December 31,
1999, and during the nine months ended September 30, 2000 related to these
CMBS. The impairment losses resulted in the cost basis being written down
to fair value as of each respective reporting period. The increase in
yields between those originally projected and those projected as of March
31, 2000 is primarily a result of this new lower basis.
(6) The following table summarizes the sales of the CMBS subject to CMBS Sale
(and includes the CMO-IV Sale in the sale of the "Citicorp Bonds")
completed in connection with the Company's Plan and included as part of
the Recapitalization Financing. The sale of all CMBS contemplated by the
CMBS Sale was completed in November 2000.
24
<PAGE>
<TABLE>
<CAPTION>
Net Proceeds
Face Debt to CRIIMI
Sale Date Portfolio Classes Amount Sale Proceeds Paydown MAE Gain (Loss) (a)
--------- --------- ------- ------ ------------- ------- --- ---------------
in millions in millions in millions in millions in millions
<S> <C> <C> <C> <C> <C> <C> <C>
02/29/00 Morgan Bonds 8 classes $ 87 $ 45.9 $ 37.5 $ 8.4 ($1.35)
04/24/00 First Union Bonds 7 classes $ 290 $ 140 $ 113 $ 27 ($0.36)
08/07/00 Chase Bonds 5 classes $ 81.8 $ 43.8 $ 36.6 $ 7.2 $1.37
11/01/00 DLJMAC 1997- 1 class $ 36.4 $ 14.2 $ 14.2 -0- (c)
CF2
("DLJ Bond")
11/06/00 MCFI 1998-MC1, 21 $ 291 $174.8 $141.0 $33.8 (c)
------ ------ ------ -----
MCFI 1998-MC2, classes
CMM 1998-1 (b)
("Citicorp Bonds")
Total Sales $ 786.2 $418.7 $342.3 $76.4
======= ====== ====== =====
</TABLE>
(a) Represents actual loss recognized when sold. Losses had been recognized
through impairment in previous periods.
(b) Included in the sale of the Citicorp Bonds is the Company's interest in
CMO-IV. These certificates are not accounted for as CMBS but rather
Originated Loans as discussed further in Note 3 (Originated Loans) and
Note 6.
(c) To be recorded in fourth quarter.
25
<PAGE>
The aggregate investment by the underlying rating of the Subordinated CMBS is as
follows:
<TABLE>
<CAPTION>
Range of Discount Amortized Cost Amortized Cost
Face Amount Weighted Average Weighted Fair Value Rates Used to as of as of
as of 9/30/00 Pass- Average As of 9/30/00 Calculate Fair 9/30/00 12/31/99
Security Rating (in millions) Through Rate Life (1) (in millions)(2) Value (2) (in millions) (in millions)
--------------- ------------ ------------ -------- ---------------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
A (3) $ 62.6 7% 6 years $ 56.5 9.2% $ 57.9 $ 57.4
BBB (3) 150.6 7% 11 years 124.3 9.7% 129.8 127.7
BBB-(3) 115.2 7% 12 years 87.7 10.7% 94.8 93.5
BB+ 373.4 7.1% 11 years 255.9 11.4% -12.5% 293.7 305.5
BB 118.5 6.8% 11 years 86.1 11.8% -15.9% 96.3 206.1
BB- 56.0 6.7% 11 years 34.1 13.2% -14.2% 40.1 58.6
B+ 88.6 7% 14 years 46.7 15.5% 63.5 82.1
B 224.7 6.5% 13 years 112.5 15.9% -16.5% 145.8 178.2
B- 148.6 6.8% 13 years 65.2 16.9% -21% 77.2 98.1
CCC 70.9 7% 17 years 17.6 30% 27.3 32.5
Unrated (4) 420.9 6.7% 16 years 93.4 29% -58.8% (9) 110.9 134.4
----- --- -------- ------- -------- --------
Total (5)(6) $1,830.0 6.9% 12 years $ 980.0 $1,137.3(7)(8) $1,374.1
======== === ======== ======= ======== ========
</TABLE>
________________________________
(1) Weighted average life represents the weighted average expected life of the
Subordinated CMBS prior to consideration of losses, extensions or
prepayments.
(2) The estimated fair values of Subordinated CMBS represent the carrying
value of these assets. Due to the Chapter 11 filing, the Company's lenders
were not willing to provide fair value quotes for the portfolio as of
September 30, 2000 and December 31, 1999. As a result, the Company
calculated the estimated fair market value of its Subordinated CMBS
portfolio as of September 30, 2000 and December 31, 1999. The Company used
a discounted cash flow methodology to estimate the fair value of its
Subordinated CMBS portfolio. The cash flows for each bond were projected
assuming no prepayments and no losses as is the market convention. The
cash flows were then discounted using a discount rate that, in the
Company's view, was commensurate with the market's perception of risk and
value. The Company used a variety of sources to determine its discount
rate including institutionally available research reports and
communications with dealers and active Subordinated CMBS investors
regarding the valuation of comparable securities. Since the Company
calculated the estimated fair market value of its Subordinated CMBS
portfolio as of September 30, 2000 and December 31, 1999, it has disclosed
in the table the range of discount rates by rating category used in
determining these fair market values. See Note 4 for a discussion on the
CMBS market. In cases where the Company is selling Subordinated CMBS as
part of its Plan, the price of the Subordinated CMBS per the stipulation
and consent order is used as the fair market value. Also in these cases,
the corresponding discount rate disclosed reflects the fair market value
per the stipulation and consent order.
(3) In connection with CBO-2, $62.6 million (A rated) and $60.0 million (BBB
rated) face amount of investment grade securities were sold with call
options and $345 million (A rated) face amount were sold without call
options. In connection with CBO-2, in May 1998, the Company initially
retained $90.6 million (BBB rated) and $115.2 million (BBB- rated) face
amount of securities, both with call options, with the intention to sell
the securities at a later date. Such sale occurred March 5, 1999. See also
Note 16. Since the Company retained call options on certain sold bonds,
the Company did not surrender control of these assets pursuant to the
requirements of FAS 125 and thus these securities are accounted for as a
financing and not a sale. Since the transaction is recorded as a partial
financing and a partial sale, CRIIMI MAE has retained the securities with
call options in its Subordinated CMBS portfolio reflected on its balance
sheet.
(4) The unrated bond from CBO-1 experienced an approximate $738,000 principal
write-down in 1999 and an approximate $2.2 million principal write-down in
2000 due to losses on the foreclosure of two underlying loans. Further,
the unrated bond from CBO-2 experienced an approximate $879,000 principal
write-down in 1999 and an approximate $374,000 principal write-down in
2000 due to losses on the foreclosure of two underlying loans.
(5) Refer to Note 8 for additional information regarding the Subordinated CMBS
for tax purposes.
(6) Similar to the Company's other sponsored CMOs, CMO-IV resulted in the
creation of CMBS, in which the Company sold certain tranches. Since the
Company retained call options on the sold bonds, the Company did not
surrender control of the assets for purposes of FAS 125 and thus the
entire transaction is accounted for as a financing and not a sale. Since
the transaction is recorded as a financing, the Subordinated CMBS are not
reflected in the Company's Subordinated CMBS portfolio. Instead, the
underlying loans contributed to CMO-IV are reflected in Investment in
Originated Loans on the balance sheet. See Note 6 regarding the sale in
November 2000 of the Company's interest in CMO-IV.
(7) Amortized cost reflects the cumulative $67 million impairment loss
write-down as of September 30, 2000, related to the remaining CMBS subject
to the CMBS Sale. See below for further discussion.
26
<PAGE>
(8) As previously discussed, in February 2000, the Morgan Bonds were sold for
proceeds of approximately $45.9 million. In April 2000, the First Union
Bonds were sold for proceeds of $140 million. In August 2000, the Chase
Bonds were sold for proceeds of $43.8 million. Additionally, in November
2000, the Citicorp Bonds and the DLJ Bond, the remaining CMBS subject to
the CMBS Sale, were sold for gross proceeds aggregating $189 million.
(9) The 58.8% discount rate related to the NR tranche in one of the Citicorp
Bonds. The discount rate reflects the sales price per the related
stipulation to sell this bond. This bond was subsequently sold on
November 6, 2000. The remaining NR tranches had discount rates ranging
from 29% to 32% used to calculate fair value.
As of September 30, 2000 and December 31, 1999, the mortgage loans
underlying CRIIMI MAE's Subordinated CMBS portfolio were secured by properties
of the types and at the locations identified below:
<TABLE>
<CAPTION>
9/30/00 12/31/99 9/30/00 12/31/99
Property Type Percentage/(1)/ Percentage/(1)/ Geographic Location/(2)/ Percentage/(1)/ Percentage/(1)/
------------- --------------- --------------- ------------------------ --------------- ---------------
<S> <C> <C> <C> <C> <C>
Multifamily...... 31% 32% California............... 16% 17%
Retail........... 29% 29% Texas.................... 13% 13%
Office........... 14% 13% Florida.................. 8% 8%
Hotel............ 14% 14% New York................. 5% 5%
Other............ 12% 12% Other(3)................. 58% 57%
--- --- --- ---
Total......... 100% 100% Total................... 100% 100%
=== === === ===
</TABLE>
(1) Based on a percentage of the total unpaid principal balance of the
underlying loans.
(2) No significant concentration by region.
(3) No other individual state makes up more than 5% of the total.
The Subordinated CMBS tranches owned by CRIIMI MAE provide credit
support to the more senior tranches of the related commercial securitization.
Cash flow from the underlying mortgages generally is allocated first to the
senior tranches, with the most senior tranche having a priority right to cash
flow. Then, any remaining cash flow is generally allocated among the other
tranches in order of their relative seniority. To the extent there are defaults
and unrecoverable losses on the underlying mortgages, resulting in reduced cash
flows, the subordinate tranche will bear this loss first. To the extent there
are losses in excess of the most subordinate tranche's stated right to principal
and interest, then the remaining tranches will bear such losses in order of
their relative subordination.
The accounting treatment under GAAP requires that the income on
Subordinated CMBS be recorded based on the effective interest method using the
anticipated yield over the expected life of these mortgage assets. This method
can result in GAAP income recognition which is greater than or less than cash
received. For the three and nine months ended September 30, 2000, the amount of
income recognized in excess of cash received due to the effective interest rate
method was approximately $2.6 million and $7.9 million, respectively. For the
three and nine months ended September 30, 1999, the amount of income recognized
in excess of cash received due to the effective interest rate method was
approximately $393,000 and $728,000, respectively.
Since the Petition Date, CRIIMI MAE and certain secured creditors have
disagreed about the effect of the stay provisions of the Bankruptcy Code on such
secured lenders and the subject assets. A summary of material litigation, and
agreements that have been reached with certain creditors, is disclosed in Note
16 Litigation -Bankruptcy Related Litigation. In addition, the Company has been
in discussions with certain other creditors not in litigation with the Company.
See Note 16 Litigation - Arrangements with Other Creditors.
As discussed in Note 1, under CRIIMI MAE's Plan, a portion of the
Recapitalization Financing is expected to result from the CMBS Sale. As of
September 30, 2000, the remaining CMBS subject to the CMBS Sale had a fair value
and amortized cost of $146 million and $145 million, respectively. 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, April and
August 2000, and in November 2000, completed the sale of the remaining CMBS
subject to the CMBS Sale. The Company also sold its interest in CMO-IV in
November 2000 as part of the Plan. (See Note 6 for further discussion of the
CMO-IV Sale.)
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
27
<PAGE>
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 recognized approximately $157
million of other than temporary impairment related to these CMBS through
earnings in the fourth quarter of 1999. The Company recognized an additional
$15.8 million of other than temporary impairment during the first nine months of
2000 related to these same bonds. Unrealized losses related to these CMBS were
previously recognized through other comprehensive income in the equity section
of the balance sheet. The other than temporary impairment loss is a part of the
reorganization items on the income statement as the impairment was recognized as
part of the reorganization.
CMSLP did not file for protection under Chapter 11. However, because of
the related party nature of its relationship with CRIIMI MAE, CMSLP has been
under a high degree of scrutiny from servicing rating agencies. As a result of
CRIIMI MAE's Chapter 11 filing, CMSLP was declared in default under certain
credit agreements with First Union National Bank ("First Union"). In order to
repay all such credit agreement obligations and to increase its liquidity, CMSLP
arranged for ORIX, formerly known as Banc One Mortgage Capital Markets, LLC to
succeed it as master servicer on two commercial mortgage pools on October 30,
1998. In addition, in order to allay rating agency concerns stemming from CRIIMI
MAE's Chapter 11 filing, in November 1998, CRIIMI MAE designated ORIX as special
servicer on 33 separate CMBS securitizations totaling approximately $29 billion,
subject to certain requirements contained in the respective servicing
agreements. CMSLP continues to perform special servicing as sub-servicer for
ORIX on all but five of these securitizations. CRIIMI MAE remains the owner of
the lowest rated tranche of the related Subordinated CMBS and, as such, retains
rights pertaining to ownership, including the right to replace the special
servicer. CMSLP lost the right to specially service the DLJ MAC 95 CF-2
securitization when the majority holder of the lowest rated tranches replaced
CMSLP as special servicer. As part of the Plan, substantially all of the
Company's non-resecuritized CMBS and its interest in CMO-IV were sold. As a
result of these sales, CMSLP will no longer perform the special servicing duties
related to these securities. In 1999, CMSLP generated gross revenues of
approximately $1.1 million in fees on these CMBS. In addition, certain master
servicing rights on certain of the Company's CMBS are pending sale. (See Note 1
for further discussion of the sale of certain assets, including the Company's
interest in CMO-IV, to ORIX.)
6. LOAN ORIGINATION PROGRAM
Prior to the Petition Date, the Company originated mortgage loans
principally through mortgage loan conduit programs with major financial
institutions for the primary purpose of pooling such loans for securitization.
The Company viewed a securitization as a means of extracting the maximum value
from the mortgage loans originated. A portion of the mortgage loans originated
was financed through the creation and sale of investment grade CMBS to third
parties in connection with the securitization. The Company received net cash
flow on the CMBS not sold to third parties after payment of amounts due to
secured creditors who had provided acquisition financing. Additionally, the
Company received origination and servicing fees related to the mortgage loan
conduit programs.
A majority of the mortgage loans originated under the Company's loan
conduit programs were "No Lock" mortgage loans. Unlike most commercial mortgage
loans originated for the CMBS market which contain "lock-out" clauses (that is,
provisions which prohibit the prepayment of a loan for a specified period after
the loan is originated or impose costly yield maintenance provisions), the
Company's No Lock loans allowed borrowers the ability to prepay loans at any
time by paying a prepayment penalty.
Prior to the Petition Date, the Company had originated over $900
million in aggregate principal amount of loans. In June 1998, the Company
securitized approximately $496 million of the commercial mortgage loans
originated or acquired through a mortgage loan conduit program with Citicorp
Real Estate, Inc. ("Citibank") and, through CRIIMI MAE CMBS Corp., issued
Commercial Mortgage Loan Trust Certificates, Series 1998-1 ("CMO-IV"). A
majority of these mortgage loans were "No Lock" loans. In CMO-IV, CRIIMI MAE
sold $397 million face amount of fixed-rate, investment grade CMBS. CRIIMI MAE
has call rights on each of the issued securities and therefore has not
surrendered control of the bonds, thus requiring the transaction to be accounted
for as a financing of the mortgage loans collateralizing the investment grade
CMBS sold in the securitization. Therefore, the mortgage loans remained on the
Company's balance sheet. The Company originally intended to sell all of the
investment grade tranches of CMO-IV; however, two investment grade tranches were
not sold until 1999. As discussed further below, as part of the Plan, the
Company sold its interest in CMO-IV in November, 2000. Accordingly, during the
fourth quarter 2000, the mortgage loans, and related other assets and
liabilities will be removed from the balance sheet.
28
<PAGE>
On April 5, 1999, the Company finalized an agreement by which SSB, 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 fixed-rate debt for these bonds in the amount of the
gross proceeds received. In addition, CRIIMI MAE received past due CMBS payments
on these two classes.
In July 2000, the Company decided that, as part of the Plan, it would
sell the remaining $53 million face amount of assets from CMO-IV that it then
owned. The proceeds from the CMO-IV Sale, together with certain of the proceeds
from the sale of the remaining CMBS subject to the CMBS Sale, would be used to
pay down the related variable rate debt secured by certain of such assets, and
to satisfy all remaining Citigroup claims, with any remaining proceeds retained
by the Company. Upon the sale of the CMO-IV assets, CRIIMI MAE would no longer
have any economic interest in CMO-IV (See also Note 1 for more information
regarding the CMO-IV Sale). The Company, as the owner of the issuer's equity of
CMO-IV, held the call options related to the $442.5 million (original face
amount) of previously issued securities that are currently classified as
securitized debt on the Company's balance sheet. Upon the sale of the issuer's
equity, CRIIMI MAE would no longer own these call options and, as a result, the
securitization would no longer qualify as a financing under SFAS 125. As a
result, all assets (Investment in Originated Loans and related deferred
financing costs) and liabilities (Collateralized mortgage obligations -
Originated Loans and a portion of variable rate secured borrowings - CMBS)
related to the securitization would be removed from CRIIMI MAE's balance sheet
upon the sale of the issuer's equity. The CMO-IV Sale was completed on November
6, 2000. In accordance with EITF 96-19, the net loss on the sale of the
Company's interest in CMO-IV is required to be presented as two components
consisting of the loss on the sale of the originated loans and the subsequent
gain related to the extinguishment of debt. Because the Company decided in the
third quarter of 2000 to sell all of its interest in CMO-IV, the investment in
originated loans was adjusted from amortized cost to fair value resulting in a
$45.8 million loss in the third quarter which is classified as a reorganization
item. Gains related to the extinguishment of debt cannot be recognized until the
debt is actually extinguished which occurred on November 6, 2000. The estimated
gain related to the extinguishment of debt is approximately $16 million and will
be recognized in the fourth quarter of 2000 as an extraordinary item. The net
loss related to the sale of the Company's interest in CMO-IV is estimated to be
$30 million. For tax purposes, the net loss is estimated to be $29 million and
will be recorded in the fourth quarter as an ordinary loss.
Although CMO-IV was accounted for as a financing, as described above,
economically, the Subordinated CMBS tranches created in this transaction which
CRIIMI MAE owned, generated monthly net cash flows of approximately $700,000. As
of September 30, 2000, interest payments of approximately $15.1 million were
withheld with respect to certain tranches of CMO-IV. As part of the sale of the
Company's interest in CMO-IV, the cumulative interest payments withheld will be
released to the Company to help fund the Plan.
As of September 30, 2000 and December 31, 1999, the originated loans
were secured by properties of the types and at the locations identified below:
<TABLE>
<CAPTION>
September 30, December 31, September 30, December 31,
Property Type 2000(1) 1999(1) Geographic Location(2) 2000(1) 1999(1)
------------- ------- ------- ---------------------- ------- -------
<S> <C> <C> <C> <C> <C>
Multifamily............... 38% 37% Michigan......................... 21% 20%
Hotel..................... 25% 26% Texas............................ 7% 7%
Retail.................... 20% 20% Illinois......................... 7% 7%
Office.................... 11% 11% Maryland......................... 5% 6%
Other..................... 6% 6% Connecticut...................... 7% 6%
---- ---- California....................... 6% 6%
Total.................. 100% 100% Florida.......................... 5% 5%
==== ==== Other(3)......................... 42% 43%
---- ----
Total......................... 100% 100%
==== ====
</TABLE>
____________________________
(1) Based on a percentage of the total unpaid principal balance of the
underlying loans.
29
<PAGE>
(2) No significant concentration by region.
(3) No other individual state makes up more than 5% of the total.
Descriptions of the originated loans categorized by unpaid principal
balances as of September 30, 2000, are as follows:
<TABLE>
<CAPTION>
As of September 30, 2000
------------------------
Weighted
Average
Number of Face Effective Weighted Average
Unpaid Principal Balance (1) Loans(2) Value(3)(4) Interest Rate Remaining Term
---------------------------- -------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
$ 0 - $4.99 million 90 $ 207,397,709 7.48% 7.9 years
$ 5 - $9.99 million 21 152,495,126 7.36% 8.2 years
$ 10- $14.99 million 6 74,654,334 7.15% 8.1 years
$ 15- $20 million 1 16,944,224 7.15% 9.2 years
--- -------------- ---- ---
118 $ 451,491,393 7.38% 8.3 years
=== ============== ==== ===
</TABLE>
(1) The carrying amount of the originated loans of $411,314,284 is comprised of
$451,491,393 face amount of loans plus $5,668,603 of deferred loan costs,
net of a $45,845,712 loan loss allowance.
(2) Several loans in CMO-IV are collateralized by multiple properties. The table
reflects the actual number of loans.
(3) During the nine months ended September 30, 2000, there was two loan
prepayments in CMO-IV. These prepayments generated net proceeds of
approximately $6 million and resulted in a financial statement gain of
approximately $245,000, which is included in Gain on Originated Loan
Dispositions on the accompanying consolidated statement of income for the
nine months ended September 30, 2000.
(4) All originated loans are collateralized by first or second liens on
multifamily, hotel, retail, office or other commercial properties.
Approximately 77% of the unpaid principal balance of the loans in the
securitization are No-Lock loans.
Descriptions of the originated loans categorized by unpaid principal
balances as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
As of December 31, 1999
-----------------------
Weighted
Average
Number of Face Effective Weighted Average
Unpaid Principal Balance Loans Value(1) Interest Rate Remaining Term
------------------------ ----- -------- ------------- --------------
<S> <C> <C> <C> <C>
$ 0 - $4.99 million 92 $216,386,540 7.48% 8.6 years
$ 5 - $9.99 million 21 154,467,547 7.36% 8.9 years
$10- $14.99 million 6 75,822,080 7.15% 8.9 years
$15- $20 million 1 17,076,246 7.15% 9.9 years
--- ------------ ---- ---------
120 $463,752,413 7.37% 9.1 years
=== ============ ==== =========
</TABLE>
(1) The fair value of the originated loans at December 31, 1999 was
$422,643,902.
At the time it filed for protection under Chapter 11, the Company had a
second mortgage loan conduit program with Citicorp Real Estate, Inc. (the
"Citibank Program") and a loan conduit program with Prudential Securities
Incorporated and Prudential Securities Credit Corporation (collectively,
"Prudential") (the "Prudential Program").
The Citibank Program provided for CRIIMI MAE to pay to Citibank the
face value of the loans originated through the Program, which were funded by
Citibank and not otherwise securitized, plus or minus any hedging loss or gain
on December 31, 1998. To secure this obligation, CRIIMI MAE was required to
deposit a portion of the principal amount of each originated loan in a reserve
account.
On April 5, 1999, the Bankruptcy Court entered a Stipulation and
Consent Order (the "Order"), negotiated by the Company and Citibank. The
negotiations were in response to a letter Citibank sent to the Company on
October 5, 1998 alleging that the Company was in default under the Citibank
Program and that it was terminating the Citibank Program. The Order provided
that Citibank would, with CRIIMI MAE's cooperation, sell the loans
30
<PAGE>
originated under the Citibank Program provided that the sale resulted in CRIIMI
MAE receiving minimum net proceeds of not less than $3.5 million, after
satisfying certain amounts due to Citibank under the Citibank Program from the
amount held in the reserve account. The minimum net proceeds provision could be
waived by written agreement of the Company, the Unsecured Creditors' Committee
and the Equity Committee.
On August 5, 1999, all but three of the commercial loans originated
under the Citibank Program in 1998 were sold for gross proceeds of approximately
$308 million. The loans sold had an aggregate unpaid principal balance of $339
million. On September 16, 1999, the remaining three loans were sold for gross
proceeds of approximately $27.2 million. The loans sold had an aggregate
principal balance of $32.7 million. Prior to the actual sale of these loans, the
Company had recorded its unrealized losses based on pricing data received from
Citibank. In the case of each sale of the commercial loans, the minimum net
proceeds provision was waived by agreement of the Company, the Unsecured
Creditors' Committee and the CMI Equity Committee. For GAAP purposes, the
Company realized $36.3 million of losses from the third quarter of 1998 through
the third quarter of 1999. For income tax purposes, the entire loss of $36.3
million was recorded as a realized loss on the loan sale dates in the third
quarter of 1999.
Under the Prudential Program, the Company had an option to pay to
Prudential the face value of the loan plus or minus any hedging loss or gain, at
the earlier of June 30, 1999, or the date by which a stated quantity of loans
for securitization had been made. Under the Prudential Program, the Company was
required to fund a reserve account of approximately $2 million for the sole loan
originated under this Program. Since CRIIMI MAE was unable to exercise its
option under the Prudential Program, the Company forfeited the amount of the
reserve account.
7. INSURED MORTGAGE SECURITIES
CRIIMI MAE's consolidated portfolio of mortgage securities is comprised
of FHA-Insured Certificates and GNMA Mortgage-Backed Securities. Additionally,
mortgage securities include Federal Home Loan Mortgage Corporation (Freddie Mac)
participation certificates which are collateralized by GNMA Mortgage-Backed
Securities, as discussed below. As of September 30, 2000, approximately 16% of
CRIIMI MAE's investment in mortgage securities were FHA-Insured Certificates and
84% were GNMA Mortgage-Backed Securities (including certificates which
collateralized Freddie Mac participation certificates). FHA-Insured Certificates
and GNMA Mortgage-Backed Securities are collectively referred to herein as
"mortgage securities."
31
<PAGE>
CRIIMI MAE owns the following mortgages directly or indirectly through its
wholly-owned subsidiaries:
<TABLE>
<CAPTION>
As of September 30, 2000
------------------------
Weighted
Number of Average
Mortgage Effective Interest Weighted Average
Securities Fair Value (1) Amortized Cost Rate Remaining Term
<S> <C> <C> <C> <C> <C>
CRIIMI MAE 1 5,281,818 5,409,304 8.00% 34 years
CRIIMI MAE Financial Corporation (2) 35 122,556,132 125,084,940 8.39% 28 years
CRIIMI MAE Financial Corporation II (2) 46 197,769,975 204,281,166 7.20% 26 years
CRIIMI MAE Financial Corporation III (2) 22 58,807,674 59,875,818 7.33% 28 years
------- ------------ ------------ ---- --------
104 384,415,598 394,651,228 7.68% 27 years
======= ============ ============ ==== ========
<CAPTION>
As of December 31, 1999
-----------------------
Weighted
Number of Average
Mortgage Effective Interest Weighted Average
Securities Fair Value (1) Amortized Cost Rate Remaining Term
<S> <C> <C> <C> <C> <C>
CRIIMI MAE 1 $ 5,268,982 $ 5,429,746 8.00% 35 years
CRIIMI MAE Financial Corporation 36 123,757,775 126,621,745 8.40% 29 years
CRIIMI MAE Financial Corporation II 49 204,437,012 212,474,158 7.24% 27 years
CRIIMI MAE Financial Corporation III 23 61,393,470 62,943,459 7.84% 29 years
------- ------------ ------------ ---- --------
109 $394,857,239 $407,469,108 7.68% (3) 28 years (3)
======= ============ ============ ==== ========
</TABLE>
________________
(1) The fair value of the mortgage securities was based on the estimated
discounted future cash flows. As of September 30, 2000 and December 31,
1999, all mortgage securities were classified as Available for Sale and
carried at fair value on the balance sheet. See fair market value discussion
in Note 4.
(2) During the nine months ended September 30, 2000, there were five prepayments
of mortgage loans underlying mortgage securities held by CRIIMI MAE's
financing subsidiaries. These prepayments generated net proceeds of
approximately $9.7 million and resulted in net financial statement gains of
approximately $241,300, which are included in gains on mortgage securities
dispositions on the accompanying consolidated statement of income for the
nine months ended September 30, 2000.
(3) Weighted averages were computed using total face value of the mortgage
securities.
As a result of the CBO-2 transaction (see Note 5), the Company, in
accordance with GAAP, no longer classifies its mortgage securities as Held to
Maturity. The Company's mortgage securities are now classified as Available for
Sale. As a result, the Company now carries its mortgage securities at fair
value. The difference between the amortized cost and the fair value of mortgage
assets recorded at fair value represents the net unrealized gains or losses on
those mortgage securities, which is reported as a separate component of
shareholders' equity as of September 30, 2000 and December 31, 1999.
8. DIFFERENCES BETWEEN FINANCIAL STATEMENT NET INCOME (LOSS) AND TAXABLE
LOSS
The differences between financial statement (GAAP) net income (loss)
and taxable income (loss) are principally attributable to differing treatment of
unrealized/realized gains and losses associated with certain assets; the
impairment of certain assets; the bases, income, and/or credit loss recognition
related to certain assets; a portion of reorganization costs not deductible for
tax purposes; and amortization of certain costs.
As previously discussed in Note 1, as a result of its trader election
in early 2000, CRIIMI MAE recognized a mark-to-market tax loss of approximately
$478 million on certain Trading Assets on January 1, 2000 (the "January 2000
Loss"). The January 2000 Loss is expected to be recognized evenly over four
years for tax purposes (i.e., approximately $120 million per year) beginning
with the year 2000. The Company recognized one-fourth (i.e., approximately $30
million) of this year's portion of the January 2000 Loss during each of the
first three quarters of 2000. The Company expects to continue to recognize
approximately $30 million of loss related to the January 2000 Loss in each
quarter for the fiscal years 2000-2003. (See Note 1 "2000 Taxable Income (Loss)/
Taxable
32
<PAGE>
Distribution Requirements" for a more complete discussion).
A summary of the estimated first nine months of 2000 net operating loss
is as follows:
<TABLE>
<S> <C>
January 2000 Loss $ 478 million
LESS: Portion recognized in First Quarter 2000 (30) million
LESS: Portion recognized in Second Quarter 2000 (30) million
LESS: Portion recognized in Third Quarter 2000 (30) million
--------------
Balance Remaining of January 2000 Loss to be Recognized $ 388 million
==============
Taxable Income for the nine months ended September 30, 2000 Before Recognition
of January 2000 Loss $ 45 million
LESS: January 2000 Loss Recognized in first three quarters of 2000 (90) million
Net Operating Loss for the nine months ended September 30, 2000 ($45) million
==============
Net Operating Loss through September 30, 2000 ($45) million
Net Operating Loss Utilization 0.0 million
--------------
Net Operating Loss Carried Forward for Use in Future Periods ($45) million
==============
</TABLE>
The distinction between taxable income (loss) and GAAP income (loss) is
important to the Company's shareholders because dividends or distributions are
declared and paid on the basis of taxable income. The Company does not pay taxes
so long as it satisfies the requirements for exemption from taxation pursuant to
the REIT requirements of the Code. The Company calculates its taxable income as
if the Company were a regular domestic corporation. This taxable income level
determines the amount of dividends the Company is required to pay out over time
in order to eliminate its tax liability.
9. OBLIGATIONS UNDER FINANCING FACILITIES
Default Declarations
As a result of the Chapter 11 petition filed on October 5, 1998,
certain lenders have declared defaults or otherwise taken action against the
Company with respect to a number of CRIIMI MAE's financing facilities. See Note
16 for a discussion of material litigation between the Company and various
creditors and agreements the Company has reached with certain of these
creditors. See Note 1 "Organization - The Plan of Reorganization" for a
discussion of the New Debt contemplated by the Company's Plan and the treatment
of existing debt under the Plan.
The following table summarizes CRIIMI MAE's debt outstanding as of September 30,
2000 and December 31, 1999:
33
<PAGE>
<TABLE>
<CAPTION>
Nine months ended September 30, 2000
-----------------------------------------------------------------------------------------
Effective Rate Average
at Quarter Effective
Ending Balance End Average Balance Rate Stated Maturity Date
------------------ ------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C>
Securitized mortgage obligations:
Subordinated CMBS (1) $ 279,947,367 8.9% $ 279,400,225 8.9% Nov 2006-Nov 2011
Freddie Mac Funding Note (2) 195,362,752 7.5% 197,258,831 7.5% Sept 2031
Fannie Mae Funding Note (3) 57,895,406 7.4% 59,374,342 7.4% March 2035
CMO (4) 114,949,244 7.5% 115,280,922 7.5% Jan 2033
CMO-loan originations (5) 388,657,365 6.6% 395,818,562 6.6% Oct 2001-May 2008
Variable-rate secured borrowings -
Subordinated CMBS (a) 525,702,058 7.7% 620,856,670 7.5% Various
Bank term loans 1,300,000 7.9% 2,466,667 7.7% Dec 1998
Working capital line of credit 40,000,000 8.4% 40,000,000 8.2% Dec 1998
Bridge loan 49,749,522 8.9% 49,749,522 8.7% Feb 1999
Senior unsecured notes 100,000,000 9.1% 100,000,000 9.1% Dec 2002
---------------
Total $ 1,753,563,714
===============
</TABLE>
(a) Certain debt balances have been reduced to reflect application of net cash
flow received during Chapter 11 pursuant to agreements with certain
creditors. See also Note 5 for a summary of year to date sales of CMBS
subject to the CMBS Sale and the related debt paid off.
<TABLE>
<CAPTION>
Year ended December 31, 1999
-----------------------------------------------------------------------------------------
Average
Effective Rate Effective
Ending Balance at Year End Average Balance Rate Stated Maturity Date
------------------ ------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C>
Securitized mortgage obligations:
Subordinated CMBS (1) $ 278,165,968 8.9% $ 217,285,484 8.9% Nov 2006-Nov 2011
Freddie Mac Funding Note (2) 201,784,575 7.4% 211,889,272 7.4% Sept 2031
Fannie Mae Funding Note (3) 60,853,118 7.4% 66,918,215 7.4% March 2035
CMO (4) 116,073,909 7.4% 129,616,228 7.4% Jan 2033
CMO-loan originations (5) 399,768,513 6.6% 388,431,011 6.5% Oct 2001-May 2008
Variable-rate secured borrowings -
Subordinated CMBS 732,904,775 7.7% 794,212,980 6.2% Various
Bank term loans 3,050,000 7.8% 3,050,000 7.1% Dec 1998
Working capital line of credit 40,000,000 8.2% 40,000,000 7.0% Dec 1998
Bridge loan 49,749,522 8.7% 49,749,522 7.5% Feb 1999
Senior unsecured notes 100,000,000 9.1% 100,000,000 9.1% Dec 2002
---------------
Total $ 1,982,350,380
===============
</TABLE>
34
<PAGE>
(1) As of September 30, 2000 and December 31, 1999, the face amount of the
debt was $328,446,000 and $328,446,000 with unamortized discount of
$48,498,633 and $50,280,032, respectively. During the nine months ended
September 30, 2000 and 1999, discount amortization of $1,781,399 and
$1,269,175, respectively, was recorded as interest expense.
(2) As of September 30, 2000 and December 31, 1999, the face amount of the
note was $201,378,037 and $209,506,965, respectively, with unamortized
discount of $6,015,285 and $7,722,390, respectively. During the nine
months ended September 30, 2000 and 1999, discount amortization of
$1,707,105 and $354,593, respectively, was recorded as interest expense.
(3) As of September 30, 2000 and December 31, 1999, the face amount of the
note was $59,268,430 and $62,359,630, respectively, with unamortized
discount of $1,373,024 and $1,506,512, respectively. During the nine
months ended September 30, 2000 and 1999, discount amortization of
$133,488 and $290,202, respectively, was recorded as interest expense.
(4) As of September 30, 2000 and December 31, 1999, the face amount of the
note was $118,018,485 and $119,563,094, respectively, with unamortized
discount of $3,069,241 and $3,489,185, respectively. During the nine
months ended September 30, 2000 and 1999, discount amortization of
$419,945 and $641,971, respectively, was recorded as interest expense.
(5) As of September 30, 2000 and December 31, 1999, the face amount of the
debt was $398,961,444 and $411,110,641 with unamortized discount of
$10,304,079 and $11,342,128, respectively. During the nine months ended
September 30, 2000 and 1999, discount amortization of $1,038,050 and
$1,060,484, respectively, was recorded as interest expense.
Collateralized Bond Obligations - CMBS
In the May 1998 CBO-2 transaction, CRIIMI MAE, through its wholly-owned
subsidiary CRIIMI MAE CMBS Corp., issued an aggregate of $468 million of
longer-term, fixed-rate investment grade debt securities to reduce an equivalent
amount of short-term, variable-rate secured borrowings used to initially fund
CMBS acquisitions. Of the $468 million in investment grade securities, $345
million were non-callable securities and $123 million were callable securities.
On March 5, 1999, $205.8 million face amount of callable CBO-2 BBB
Bonds with a coupon rate of 7% were sold. Of the $159 million of net sale
proceeds, $141.2 million was used to repay variable-rate secured borrowings
under the agreement with Morgan Stanley and $17.8 million was remitted to CRIIMI
MAE.
FAS 125 provides guidance as to whether a transfer of financial assets,
such as in a securitization, will qualify for sale treatment or secured
borrowing treatment. This distinction is made by determining whether a
transferor relinquishes control over the transferred assets. If the transferor
is considered to no longer control the assets, the securities receive sale
treatment which calls for the de-recognition of all assets surrendered and
liabilities settled, the recognition of all assets received and liabilities
incurred and the recognition of a gain or loss through earnings. If the
transferor maintains control over the transferred assets, the assets remain on
the balance sheet and a corresponding amount of debt is recognized for all
securities not held by the transferor. The determination of control is made on a
security by security basis.
As a result of CBO-2, control was retained over $123 million of the
securities because CRIIMI MAE has the right to call the securities. The $345
million of non-callable investment grade securities were treated as a sale, the
corresponding assets and debt were de-recognized from the balance sheet and a
gain of $28.8 million was recognized through earnings. The $123 million of
callable investment grade securities and the corresponding amount of debt are
recorded on the balance sheet. The March 5, 1999 transaction was accounted for
as a financing by the Company rather than a sale. This resulted in CRIIMI MAE
recognizing a fixed-rate liability for these bonds in the amount of gross
proceeds.
35
<PAGE>
Collateralized Mortgage Obligations - Insured Mortgage Securities
During late 1995, CRIIMI MAE, through three wholly owned financing
subsidiaries, issued approximately $664 million (face amount) of long-term,
fixed-rate debt in order to refinance short-term, variable-rate debt. Changes in
interest rates will have no impact on the cost of funds or the collateral
requirements on this debt. Proceeds from the issuance of this long-term debt,
net of original issue discount, were originally applied as follows:
approximately $557 million was used to pay down short-term, variable-rate debt
facilities, approximately $8 million was used to pay transaction costs and
approximately $80 million was used to purchase Subordinated CMBS.
The refinancings were completed through three separate transactions.
GNMA Mortgage-Backed Securities with a fair value of approximately $233 million
as of December 31, 1998, were pledged as security for a funding note payable to
Freddie Mac (the "Freddie Mac Funding Note"). The Collateralized Mortgage
Obligations (CMOs) were collateralized by FHA-Insured Certificates and GNMA
Mortgage-Backed Securities with a fair value of approximately $161 million as of
December 31, 1998. GNMA Mortgage-Backed Securities with a fair value of
approximately $89 million as of December 31, 1998, were pledged as security for
a funding note payable to Fannie Mae (the "Fannie Mae Funding Note").
Each of the above-mentioned transactions has been accounted for as a
financing in accordance with FASB Technical Bulletin 85-2. The discount on the
CMOs and the Funding Notes is being amortized on a level yield basis.
In the second quarter of 2000, the Company increased the estimate of
future prepayment speeds used to recognize interest expense related to these
obligations. This increase in the estimate of future prepayment speeds is a
result of these obligations paying down faster than originally projected. This
resulted in an additional $1.5 million of discount amortization in the second
quarter of 2000 which is reflected in interest expense.
Collateralized Mortgage Obligations - Originated Loans
In the June 1998 CMO-IV transaction, $496 million of originated or
acquired commercial mortgage loans were securitized, and CRIIMI MAE sold $397
million face amount of fixed-rate investment-grade debt securities. CRIIMI MAE
retained call options on all of the securities such that control was not
relinquished. Therefore, the mortgage loans remain on CRIIMI MAE's balance sheet
as assets for accounting purposes (along with the collateralized mortgage
obligations) for all securities sold by CRIIMI MAE.
The securities were issued at a discount of approximately $6.6 million.
Such discount, as well as approximately $6.7 million of deferred costs and
securitization transaction costs, are amortized on a level yield basis over the
expected life of the related security. The securities not sold to third parties
were partially financed with secured borrowings.
On April 5, 1999, the Company finalized an agreement by which Salomon
Smith Barney, in cooperation with CRIIMI MAE, agreed to sell the remaining two
classes of investment grade CMBS from CMO-IV with a face amount of $45.9 million
and an average coupon rate of 6.96% constituting a portion of the collateral
security advances under financing agreements with Citicorp. CRIIMI MAE sold
these two classes of CMBS in May and October 1999. CRIIMI MAE retains the right
to call each CMBS when the principal balance amortizes to 15% of its original
face balance. The 15% call option prevents CRIIMI MAE from surrendering control
of the assets pursuant to the requirements of FAS 125 and thus the transaction
has been accounted for as a financing and not a sale. Gross proceeds from the
sale were used to pay off $39.6 million of secured debt and certain costs, and
the remainder of approximately $315,000 was remitted to CRIIMI MAE. This
resulted in CRIIMI MAE recognizing fixed-rate debt for these bonds in the amount
of the gross proceeds received.
See Note 6 regarding the extinguishment of this debt during the fourth quarter
of 2000 in connection with the sale of the Company's interest in CMO-IV.
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
36
<PAGE>
borrowing agreements, as discussed below. As of September 30, 2000, the secured
borrowings on Subordinated CMBS have interest rates that are generally based on
the one-month London Interbank Offered Rate (LIBOR), plus a spread ranging from
0.5% to 1.5%. Due to the Chapter 11 filing and the automatic stay provisions
granted under the Bankruptcy Code, the actual maturity date is undeterminable
for facilities that have expired or will expire in 2000 per the stated
maturities.
As discussed in Note 5, during the nine months ended September 30, 2000,
the Company paid down variable rate debt aggregating approximately $187.1
million as a result of the sale of certain CMBS subject to the CMBS Sale.
Additionally in November 2000, the Company paid down variable rate debt
aggregating approximately $155.2 million upon the sale of the remaining CMBS
subject to the CMBS Sale and the Company's interest in CMO-IV. During 1999, the
Company repaid variable rate secured debt of approximating $141.2 million in
connection with the sale of the CBO-2 BBB bonds and $39.6 million in connection
with the sale of the BBB bonds issued in CMO-IV.
The secured borrowing agreements are secured by certain rated CMBS security
tranches with an aggregate fair value of approximately $633 million as of
September 30, 2000 and $827 million as of December 31, 1999. CRIIMI MAE's short-
term variable-rate financing facilities require that the value of the collateral
securing the facilities meet a minimum loan-to-value ratio. If the value of the
collateral is perceived such that the maximum loan-to-value ratio is exceeded,
then the lender may require the Company to post cash or additional collateral
with sufficient value to cure the perceived value deficiency. At November 7,
2000, CRIIMI MAE had secured borrowing agreements with respect to its CMBS with
GACC and Merrill Lynch. These secured borrowing agreements qualify as financings
under FAS 125 because CRIIMI MAE is required to purchase the same securities
collateralizing the borrowing before their maturity.
Senior Unsecured Notes
In November 1997, CRIIMI MAE issued senior unsecured notes ("Notes") due on
December 1, 2002 in an aggregate principal amount of $100 million. The Notes are
effectively subordinated to the claims of any secured lender to the extent of
the value of the collateral securing such indebtedness. Interest on the Notes is
payable semi-annually in arrears on June 1 and December 1, commencing June 1,
1998 at a fixed annual rate of 9.125%. The Notes are redeemable at any time, in
whole or in part, at the option of CRIIMI MAE.
The Indenture contains certain covenants which, among other things,
restricts the ability of the Company and its subsidiaries to incur additional
indebtedness, pay dividends, or make distributions in respect of the Company's
or such subsidiaries' capital stock, make other restricted payments, enter into
transactions with affiliates or related persons, or consolidate, merge or sell
all or substantially all of their assets. These covenants are subject to
exceptions and qualifications.
Under the terms of the Indenture, the Company cannot incur additional
indebtedness (except for Permitted Debt, which includes secured borrowings,
working capital lines of credit, borrowings under facilities in place as of
November 21, 1997), unless at the time of such incurrence either (a) the ratio
of Adjusted Earnings Available for Fixed Charges to Adjusted Fixed Charges
giving proforma effect for the new borrowings is greater than 1.75 to 1.0 or (b)
the Adjusted Debt to Capital Ratio on a proforma basis after giving effect to
the incurrence of the new debt is less than 2.0 to 1.0.
See Note 1 for information regarding the Plan treatment of the related
allowed claims.
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 was scheduled to mature on December 31, 1998. The
amount outstanding as of September 30, 2000 and December 31, 1999 was $1.3
million. Interest on the loan is based on LIBOR, plus a spread of 1.25%. See
Note 1 for information regarding the Plan treatment of the related allowed
claims.
In addition, a wholly owned subsidiary had a loan secured by certain Real
Estate Owned Property and guaranteed by CRIIMI MAE. The loan required 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
37
<PAGE>
notice on August 3, 1999 from Citicorp. The amount outstanding as of September
30, 2000 and December 31, 1999 was $0 and $1.75 million, respectively. Interest
on the loan is based on LIBOR plus a spread of 1.5%. The property was sold to a
third party in July 2000 and a portion of the proceeds from the sale were used
to pay off the outstanding loan balance, and other related costs.
Working Capital Line of Credit
In 1996, CRIIMI MAE entered into an unsecured working capital line of
credit provided by two lenders which provided for up to $40 million in
borrowings. The credit facility matured on December 31, 1998. Outstanding
borrowings under this line of credit are based on interest at one-month LIBOR
plus a spread of 1.75%. As of September 30, 2000 and December 31, 1999, $40
million in borrowings were outstanding under this facility.
See Note 1 for information regarding the Plan treatment of the related
allowed claims.
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 September 30, 2000
and December 31, 1999, approximately $50 million in borrowings was outstanding
under this loan.
See Note 1 for information regarding the Plan treatment of the related
allowed claim.
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 65%
of CRIIMI MAE's consolidated debt as of September 30, 2000. Fluctuations in
interest rates will continue to impact the value of that portion of CRIIMI MAE's
mortgage assets which are not match-funded and could impact the net interest
margin through increased cost of funds on the variable-rate debt in place.
CRIIMI MAE has a series of interest rate cap agreements in place in order to
partially limit the adverse effects of rising interest rates on the remaining
variable-rate debt. When CRIIMI MAE's cap agreements expire, CRIIMI MAE will
have interest rate risk to the extent interest rates increase on any variable-
rate borrowings unless the caps are replaced or other steps are taken to
mitigate this risk. Furthermore, CRIIMI MAE has interest rate risk to the extent
that the LIBOR interest rate increases between the current rate and the cap
rate. However, CRIIMI MAE's investment policy contemplates that at least 75% of
variable-rate debt be hedged. As of September 30, 2000 and December 31, 1999,
93% and 94%, respectively, of CRIIMI MAE's variable-rate debt was hedged.
For the nine months ended September 30, 2000, CRIIMI MAE's weighted average
cost of borrowing, including amortization of discounts and deferred financing
fees of approximately $7.6 million, was approximately 7.8%. As of September 30,
2000, CRIIMI MAE's debt-to-equity ratio was approximately 7.9 to 1 and CRIIMI
MAE's non-match-funded debt-to-equity ratio was approximately 3.2 to 1. Under
certain of CRIIMI MAE's existing debt facilities, CRIIMI MAE's debt-to-equity
ratio, as defined, may not exceed 5.0 to 1.0, among other requirements.
10. INTEREST RATE PROTECTION AGREEMENTS
CRIIMI MAE has entered into interest rate protection agreements to
partially limit the adverse effects of rising interest rates on its variable-
rate borrowings. Interest rate caps ("caps"), as shown below, provide protection
to CRIIMI MAE to the extent interest rates, based on a readily determinable
interest rate index, increase above the stated interest rate cap, in which case,
CRIIMI MAE will receive payments based on the difference between the index and
the cap. If the cap qualifies for hedge accounting treatment, the related cost,
as well as gains or losses on terminated positions, have been deferred and
recognized into income over the life of the related debt. However, with the sale
of certain securities and subsequent pay down of the related variable rate debt
contemplated by the Plan, certain of the Company's interest rate caps will no
longer qualify for hedge accounting. The portion of such caps will be marked-to-
market with the adjustment recorded through earnings. At September 30, 2000,
CRIIMI MAE held caps with a notional amount of $575 million of which the total
amount was used to hedge the Company's variable rate debt.
38
<PAGE>
<TABLE>
<CAPTION>
Notional
Amount Effective Date Maturity Date (2) Cap (2) Index (3)
----------- --------------- ---------------- ------- ----------
<S> <C> <C> <C> <C>
$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
------------
$575,000,000(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 six months.
(3) The one month LIBOR rate was 6.6175% at September 30, 2000.
CRIIMI MAE is exposed to credit loss in the event of non-performance by the
counterparties to the interest rate protection agreements should interest rates
exceed the caps. However, management does not anticipate non-performance by any
of the counterparties. All of the counterparties have long-term debt ratings of
A+ or above by Standard and Poor's and A1 or above by Moody's. Although none of
CRIIMI MAE's caps are exchange-traded, there are a number of financial
institutions which enter into these types of transactions as part of their day-
to-day activities.
11. COMMON STOCK
CRIIMI MAE had 62,353,170 and 59,954,604 common shares issued and
outstanding as of September 30, 2000 and December 31, 1999, respectively. See
also Note 1 "Organization - The Plan of Reorganization" and "The Company's 1999
Taxable Income".
Stock Purchase Plan
In December 1997, CRIIMI MAE registered with the Securities and Exchange
Commission up to 3 million shares of CRIIMI MAE common stock ("Common Shares")
in connection with a Dividend Reinvestment and Stock Purchase Plan (the "DRIP
Plan"). Subsequently, in May 1998, the shareholders approved the issuance of up
to 4.7 million common shares in connection with the DRIP Plan. Subject to the
suspension referenced below, the DRIP Plan allows investors the opportunity to
purchase additional CRIIMI MAE Common Shares through the reinvestment of CRIIMI
MAE's dividends, optional cash payments and initial cash investments.
In October 1998, due to the filing under Chapter 11, the Company suspended
the initial cash investment and optional cash payment portion of the DRIP Plan
until further notice.
Dividends
During the pendency of the Chapter 11 proceedings, the Company is
prohibited from paying cash dividends without first obtaining Bankruptcy Court
approval (and subject to there being funds legally available for any such
dividend under state corporate law). (See Note 1-Effect of Chapter 11 Filing on
REIT Status and other Tax Matters.)
In September 1999, the Company declared a dividend to common shareholders
payable in shares of a new series of preferred stock designated as Series G
Redeemable Cumulative Dividend Preferred Stock with a face value of $10 per
share. The Series G 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.
In September 2000, the Company declared a dividend to common shareholders
payable in shares of a new series of preferred stock designated as Series G
Redeemable Cumulative Dividend Preferred Stock with a face value
39
<PAGE>
of $10 per share. The Series G Preferred Stock will be convertible into shares
of common stock during a period of 10 consecutive trading days commencing on
February 21, 2001 and ending on March 6, 2001. See Note 12 for further
discussion.
12. PREFERRED STOCK
CRIIMI MAE's charter authorizes the issuance of up to 25,000,000 shares of
preferred stock, of which 3,000,000 shares have been designated as Series B
Cumulative Convertible Preferred Stock, 300,000 shares have been designated as
Series C Cumulative Convertible Preferred Stock, 300,000 shares have been
designated as Series D Cumulative Convertible Preferred Stock, 203,000 shares
have been designated as Series E Cumulative Convertible Preferred Stock
1,610,000 shares have been designated as Series F Redeemable Cumulative Dividend
Preferred Stock, and 3,760,000 shares have been designated as Series G
Redeemable Cumulative Convertible Preferred Stock as of September 30, 2000. See
also Note 1 "Organization - The Plan of Reorganization" and "The Company's 1999
Taxable Income".
Series B Cumulative Convertible Preferred Stock
In August 1996, CRIIMI MAE completed a public offering of 2,415,000 shares
of Series B Cumulative Convertible Preferred Stock, with a par value of $0.01
per share (the "Series B Preferred Stock"), at an aggregate offering price of
$60,375,000. The Series B Preferred Stock pays a dividend in an amount equal to
the sum of (i) $0.68 per share per quarter plus (ii) the product of the excess
over $0.30, if any, of the quarterly cash dividend declared and paid with
respect to each share of common stock times a conversion ratio of 2.2844 times
one plus a conversion premium of 3%, subject to adjustment upon the occurrence
of certain events. If the Series B Preferred Stock votes to accept the Plan, the
relative rights and preferences of the Series B Preferred Stock would be amended
to permit the payment of dividends in cash or common stock (or a combination
thereof) at the Company's election. The Series B Preferred Stock is (i)
convertible at the option of the holders and (ii) subject to redemption at
CRIIMI MAE's sole discretion after the tenth anniversary of issuance. Each share
of Series B Preferred Stock 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 and unpaid
dividends. There were 1,593,982 shares of Series B Preferred Stock outstanding
as of September 30, 2000. Dividends accrued on the Series B Preferred Stock
totaled $8,671,262 as of September 30, 2000 (of which, $3,251,723 was accrued
for the first nine months of 2000, $4,335,631 was accrued during 1999 and
$1,083,908 was accrued for the fourth quarter of 1998, but not paid to date as a
result of the Chapter 11 filing).
Series C Cumulative Convertible Preferred Stock
In March 1997, CRIIMI MAE entered into an agreement with an institutional
investor pursuant to which the Company had the right to sell, and such investor
was obligated to purchase, up to 300,000 shares of Series C Cumulative
Convertible Preferred Stock, par value $.01 per share (the "Series C Preferred
Stock"), through June 1998 at a price of $100 per share. The Series C Preferred
Stock paid a dividend at an annual rate equal to the sum of (i) 75 basis points
plus (ii) LIBOR as of the second LIBOR Market Day preceding the commencement of
the calendar quarter which includes such quarterly dividend payment. The Series
C Preferred Stock was convertible into shares of common stock at the option of
the holder and was subject to redemption by CRIIMI MAE. The outstanding shares
of Series C Preferred Stock were subject to mandatory conversion into common
shares on February 23, 2000. Each share of Series C Preferred Stock was
convertible into common shares based on a formula, the numerator of which was
$100 and the denominator of which was a closing trade price of the common stock
within the conversion period or the average of the closing trade prices of the
common stock over the applicable twenty-one (or such fewer number as was
mutually acceptable) day period immediately preceding the date of delivery. The
liquidation preference and redemption price on the Series C Preferred Stock were
$100 and $106, respectively, per share plus an amount equal to all dividends
accrued and unpaid thereon. On September 23, 1997, 150,000 shares were issued
under this agreement, resulting in net proceeds of approximately $15 million. On
February 23, 1998, another 150,000 shares of Series C Preferred Stock were
issued under this agreement, resulting in net proceeds of approximately $15
million. These proceeds were used to fund purchases of Subordinated CMBS. During
1999, 20,000 shares of Series C Preferred Stock were converted into 653,061
common shares, resulting in 103,000 shares of Series C Preferred Stock
outstanding at December 31, 1999. Dividends accrued on the Series C Preferred
Stock as of September 30, 2000 totaled $1,116,143 (of which $159,832 was accrued
for the first nine months of 2000, $697,172 for 1999 and $259,139 for the fourth
quarter of 1998, but not paid to date as a result of
40
<PAGE>
the Chapter 11 filing). As of February 22, 2000, all of the outstanding shares
of Series C Preferred Stock were exchanged for Series E Preferred Stock. See
below for further discussion.
Series D Cumulative Convertible Preferred Stock
In July 1998, CRIIMI MAE entered into an agreement with an institutional
investor pursuant to which the Company had the right to sell, and such investor
was obligated to purchase, up to 300,000 shares of Series D Cumulative
Convertible Preferred Stock par value $.01 per share (the "Series D Preferred
Stock") at price of $100 per share. The Series D Preferred Stock paid a dividend
at an annual rate equal to the sum of (i) 75 basis points plus (ii) LIBOR as of
the second LIBOR Market Day preceding the commencement of the calendar quarter
which includes such quarterly dividend payment. The Series D Preferred Stock was
convertible into shares of common stock at the option of the holder and was
subject to redemption by CRIIMI MAE. The outstanding Series D Preferred Stock
was subject to mandatory conversion into common shares on July 31, 2000. Each
share of Series D Preferred Stock was convertible into common shares based on a
formula, the numerator of which is $100 and the denominator of which was a
closing trade price of the common stock within the conversion period or the
average of the closing trade prices of the common stock over the applicable
twenty-one (or such fewer number as was mutually acceptable) day period
immediately preceding the date of delivery. The liquidation preference and
redemption price on the Series D Preferred Stock were $100 and $106,
respectively, per share plus an amount equal to all dividends accrued and unpaid
thereon. On July 31, 1998, 100,000 shares of Series D Preferred Stock were
issued under this agreement, resulting in net proceeds of approximately $10
million. There were no Series D Preferred Stock converted into common shares
during 1999, resulting in 100,000 shares outstanding at December 31, 1999.
Dividends accrued on the Series D Preferred Stock totaled $1,259,353 as of
September 30, 2000 (of which, $458,600 was accrued for the first nine months of
2000, $645,822 was accrued for 1999 and $154,931 was accrued for the fourth
quarter of 1998, but not paid to date as a result of the Chapter 11 filing). As
of July 26, 2000, all of the outstanding shares of Series D Preferred Stock were
exchanged for Series E Preferred Stock. See below for further discussion.
Series E Cumulative Convertible Preferred Stock
On February 22, 2000, CRIIMI MAE and the holder of its Series C Preferred
Stock entered into a Preferred Stock Exchange Agreement (the "Series C Exchange
Agreement") pursuant to which 103,000 shares of Series C Preferred Stock were
exchanged (the "Series C Exchange") for 103,000 shares of a new series of
preferred stock designated as "Series E Cumulative Convertible Preferred Stock",
par value $0.01 per share (the "Series E Preferred Stock"). On July 26, 2000,
CRIIMI MAE and the holder of its Series D Preferred Stock entered into a
Preferred Stock Exchange agreement (the "Series D Exchange Agreement") pursuant
to which 100,000 shares of Series D Preferred Stock were exchanged (the "Series
D Exchange" and together with the Series C Exchange, the "Exchanges") for
100,000 shares of Series E Preferred Stock. The principal purpose of the
Exchanges was to effect an extension of the mandatory conversion dates, upon
which the Series C Preferred Stock and Series D Preferred Stock would have
converted into common stock. Pursuant to the Series C Exchange Agreement and
Series D Exchange Agreement, the Company has amended its Plan to provide for a
new mandatory conversion date and certain additional terms and conditions with
respect to the Series E Preferred Stock. The additional terms principally
address dividend and additional conversion matters.
Until the Company's Plan is effective, the principal terms of the Series E
Preferred Stock are as set forth below. The Series E Preferred Stock pays a
dividend at an annual rate equal to the sum of (i) 75 basis points plus (ii)
LIBOR as of the second LIBOR Market Day preceding commencement of the calendar
quarter which includes such quarterly dividend payment. Quarterly dividends
payable with respect to calendar quarters and any partial quarter will be
payable in common stock. Dividends accrued on Series E Preferred Stock totaled
$599,987 as of September 30, 2000, (representing dividends from February 23,
2000 through September 30, 2000). The Series E Preferred Stock is not
convertible into shares of common stock at the option of the holder unless the
effective date of the Plan does not occur on or before December 31, 2000. In
such event, 10,000 shares of Series E Preferred Stock shall become convertible
at the option of the holder into common stock in January 2001 and in each month
thereafter until the effective date of the Plan. If the Series E Preferred Stock
becomes convertible into common stock, then each share of Series E Preferred
Stock shall be convertible into common stock based on a formula, the numerator
of which will be $100 and the denominator of which will be a closing trade price
of the common stock within the conversion pricing period that is mutually
acceptable or the average of the closing trade prices of the common stock over
the applicable twenty-one (or such fewer number as is mutually acceptable) day
period immediately preceding the date of delivery. The Series E Preferred Stock
is subject to redemption by CRIIMI
41
<PAGE>
MAE. The liquidation preference and the redemption price on the Series E
Preferred Stock are $100 and $106, respectively, per share plus an amount equal
to all dividends accrued and unpaid thereon.
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 and Disclosure Statement,
previously filed with the SEC as exhibits to a Current Report on Form 8-K filed
on September 22, 2000, for a complete description of such amendments to the
relative rights and preferences of the Series E Preferred Stock, as contemplated
by the Plan.
Series F Redeemable Cumulative Dividend Preferred Stock
On September 14, 1999, the Company declared a dividend on its common stock
for the purpose of distributing approximately $15.7 million in undistributed
1998 taxable income. The dividend was payable to common shareholders of record
on October 20, 1999, provided that the shareholders maintained ownership of
their common stock through the payment date. The dividend was paid on November
5, 1999 in shares of Series F Redeemable Cumulative Preferred Dividend Preferred
Stock (the "Series F Preferred Stock"). The 1,606,595 shares of Series F
Preferred Stock issued were approved for listing on the New York Stock Exchange
and trade with the symbol CMM-PrF, with a par value of $0.01 and a face value of
$10.
Holders of record of each share of CRIIMI MAE common stock who maintained
ownership of their common stock through November 5, 1999, received 3/100ths of a
share of Series F Preferred Stock (i.e., three shares of Series F Preferred
Stock for every 100 shares of common stock held). The Series F Preferred Stock
was convertible into shares of common stock during two 10-business day
conversion periods. The first conversion period was from November 15, 1999
through November 30, 1999 and the second conversion period was from January 21,
2000 through February 3, 2000. Conversions were based on the volume-weighted
average of the sale prices of the common stock for the 10-trading days prior to
the date converted, subject to a floor of 50% of the volume-weighted average of
the sale prices of the common stock on November 5, 1999. Holders of Series F
Preferred Stock have no right to convert their Series F Preferred Stock into
common stock after February 3, 2000.
The Series F Preferred Stock provides for cash dividends at an annual fixed
rate of 12%. The first dividend will be paid no earlier than the end of the
calendar quarter in which a plan of reorganization for the Company becomes
effective, and no more than quarterly thereafter. If the Series F Preferred
Stock votes to accept the Plan, then the relative rights and preferences of the
Series F Preferred Stock would be amended to permit the payment of dividends in
cash or common stock (or a combination thereof) at the Company's election. The
Series F Preferred Stock is redeemable at the Company's option after November 5,
2000 at a price of $10.00 per share plus accrued and unpaid dividends through
the dividend declaration date next preceding the redemption date. The
liquidation value of the Series F Preferred Stock is $10.00 per share plus
accrued and unpaid dividends.
During the first conversion period, 756,453 shares of Series F Preferred
Stock were converted, resulting in the issuance of 6,401,443 shares of common
stock. During the second and final conversion period (January 21 through
February 3, 2000) for the Series F Preferred Stock, 263,788 additional shares
were converted, resulting in the issuance of 2,396,566 shares of common stock.
There were 586,354 shares of Series F outstanding at September 30, 2000.
Dividends accrued on Series F Preferred Stock totaled $697,064 as of September
30, 2000 (of which $535,537 was accrued for the first nine months of 2000 and
$161,527 for 1999).
Series G Redeemable Cumulative Dividend Preferred Stock
On September 11, 2000, the Company declared a dividend on its common stock
for the purpose of distributing approximately $37.5 million in undistributed
1999 taxable income. The dividend is payable on November 13, 2000, to common
shareholders of record as of October 27, 2000 who maintain ownership of their
common stock through the payment date, in shares of Series G Redeemable
Cumulative Dividend Preferred Stock (convertible during the period of ten (10)
trading days commencing one-hundred calendar days after the initial issue date
or, if such commencement date is not a trading day, the first trading day
thereafter) (the "Series G Preferred Stock"). The shares of Series G Preferred
Stock to be issued have been approved for listing on the New York Stock Exchange
and will trade with the symbol CMM-Pr G, with a par value of $0.01 and a face
value of $10 per share. Holders of record of CRIIMI MAE common stock who
maintain ownership of their common stock through November 13, 2000, will receive
for each share held 6/100ths of a share of Series G Preferred Stock (i.e., six
shares of Series G Preferred Stock for every 100 shares of common stock held).
The Series G Preferred Stock will be
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<PAGE>
issued in whole shares, with shareholders receiving cash from the Company's
transfer agent for their fractional share interests at a price equal to the
average sales price of all aggregated fractional shares sold by the Company's
transfer agent, less transaction costs. The Series G Preferred Stock will be
convertible into shares of common stock during a period of 10 consecutive
trading days commencing on February 21, 2001 and ending on March 6, 2001.
Conversions will be 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 13, 2000. Accrued and unpaid dividends will not be paid on
shares of Series G Preferred Stock converted into common stock during the
conversion period. At the end of the conversion period, March 6, 2001, all
conversion rights of the holders of Series G Preferred Stock will expire.
Holders of Series G Preferred Stock will be entitled to receive, when
declared by the Board of Directors, cumulative dividends, payable in cash or
common stock (or a combination thereof) at the Company's option, at an annual
rate of 15%. 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. Notwithstanding the preceding,
all or any portion of the accrued and unpaid dividends as of the effective date
of the Company's plan of reorganization may be paid in cash or common stock (or
a combination thereof), at the Company's option, as early as the effective date
of the plan of reorganization. The Company has no present intent to pay any
accrued and unpaid dividends on the Series G Preferred Stock on the effective
date of the Company's plan of reorganization. The Series G Preferred Stock is
redeemable, at the Company's option, in whole or in part, at any time after
issuance in cash or shares of parity capital stock, at the election of the
Company at a price of $10.00 per share together with an amount (in cash and/or
common stock, as applicable) equal to any accrued and unpaid dividends through
the dividend declaration date next preceding the redemption date. The
liquidation value of the Series G Preferred Stock is $10 per share plus accrued
and unpaid dividends. This declared dividend is reflected as a reclassification
in the equity section of the September 30, 2000 balance sheet from Additional
Paid in Capital to Stock Dividend to be Distributed. On November 13, 2000, the
date of payment, the issued shares of Series G Preferred Stock will be reflected
as contributed capital on the balance sheet.
13. EARNINGS PER SHARE
The following table reconciles basic and diluted earnings per share under
FAS 128 for the three and nine months ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
For the three months ended September 30, 2000 For the three months ended September 30, 1999
--------------------------------------------- ---------------------------------------------
Income (Loss) Income (loss)
Per Share Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income (loss)
Available to Common Shareholders $ (44,463,063) 62,353,170 $ (0.71) $ 8,100,173 53,553,161 $ 0.15
Effect of Dilutive
Securities (1)
----------
Net effect of assumed exercise
of stock options -- -- --
Convertible Preferred Stock -- -- $ 316,390 8,206,649
------------- ---------- ------------ ----------
Diluted EPS
-----------
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
For the three months ended September 30, 2000 For the three months ended September 30, 1999
-------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) available to
Common Shareholders and
assumed conversions $(44,463,063) 62,353,170 $(0.71) $8,416,563 61,759,810 $0.14
============ ========== ====== ========== ========== =====
</TABLE>
<TABLE>
<CAPTION>
For the nine months ended September 30, 2000 For the nine months ended September 30, 1999
-------------------------------------------- --------------------------------------------
Income Income
Per Share Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
---------
Net Income Available to
Common Shareholders $(36,684,968) 62,074,820 $(0.59) $19,483,923 53,373,719 $0.37
Effect of Dilutive
Securities (1)
--------------
Net effect of assumed
exercise of stock options -- -- --
Convertible Preferred
Stock (1) $ -- -- 931,070 7,797,570
------------ ---------- ----------- ----------
Diluted EPS
-----------
Income available to
Common Shareholders and
assumed conversions $(36,684,968) 62,074,820 $(0.59) $20,414,993 61,171,289 $0.33
============ ========== ====== =========== ========== =====
</TABLE>
________________________
(1) As of September 30, 2000 and 1999, respectively, the following shares of
preferred stock were outstanding: 1,593,982 shares of Series B Preferred
Stock , -0- and 103,000 shares of Series C Preferred Stock, -0- and 100,000
shares of Series D Preferred Stock, 203,000 and -0- shares of Series E
Preferred Stock, and 586,354 and -0- shares of Series F Preferred Stock.
The common stock equivalents for these shares are not included in the
calculation of diluted EPS because the effect would be anti-dilutive.
14. EMPLOYEE RETENTION PLAN
Upon commencement of the Chapter 11 cases, the Company believed it was
essential to both the efficient operation of the Company's business and the
reorganization effort that the Company maintain the support, cooperation and
morale of its employees. The Company obtained Bankruptcy Court approval to pay
certain pre-petition employee obligations in the nature of wages, salaries and
other compensation and to continue to honor and pay all employee benefit plans
and policies.
In addition, to ensure the Company's continued retention of its
executives and other employees and to provide meaningful incentives for these
employees to work toward the Company's financial recovery and reorganization,
the Company's management and Board of Directors developed a comprehensive and
integrated program to retain its executives and other employees throughout the
reorganization. On December 18, 1998, the
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<PAGE>
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 was paid on April 14, 2000. The fourth retention payment of
approximately $639,000 vested on October 5, 2000, $367,000 of which was paid on
October 16, 2000. Any unpaid portion of the retention payments will become due
and payable (i) upon the effective date of a plan of reorganization of the
Company or, with respect to certain key executives, court approval or (ii) upon
termination without cause. William B. Dockser, Chairman of the Board of
Directors, and H. William Willoughby, President, are not currently entitled to
receive any retention payments. Subject to the terms of their respective
employment agreements, certain key executives will be entitled to severance
benefits if they resign or their employment is terminated following a change of
control. The other employees will be entitled to severance benefits if they are
terminated without cause subsequent to a change of control of the Company and
CMM. In addition, options granted by the Company after October 5, 1998 will,
subject to Bankruptcy Court approval, become exercisable upon a change of
control.
15. TRANSACTIONS WITH RELATED PARTIES
Below is a summary of the related party transactions which occurred during
the three and nine months ended September 30, 2000 and 1999. These items are
described further in the text which follows:
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September September
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Amounts received or accrued from related parties:
-------------------------------------------------
CRIIMI Inc.
-----------
Income(1) $ 182,117 $ 230,284 $ 557,601 $ 712,576
Return of Capital(2) 26,091 -- 578,543 3,165,772
--------- --------- ---------- ----------
Total $ 208,208 $ 230,284 $1,136,144 $3,878,348
========= ========= ========== ==========
CRI/AIM Investment Limited Partnership (1) $ 84,080 $ 110,068 $ 262,312 $ 345,737
========= ========= ========== ==========
Expense reimbursements to CRIIMI Management:
--------------------------------------------
AIM Funds and CRI Liquidating (3)(4) $ 42,570 $ 11,173 $ 142,203 $ 133,519
CMSLP (2)(3) 0 126,564 39,602 669,844
--------- --------- ---------- ----------
Total $ 42,570 $ 137,737 $ 181,805 $ 803,363
========= ========= ========== ==========
Payments to CRI:
----------------
Expense reimbursement - CRIIMI MAE(3)(5) $ 35,698 $ 42,323 $ 108,442 $ 139,699
========= ========= ========== ==========
Payments to Capital Hotel Group(5)
----------------------------------
Management Fee (6) $ -- $ 18,173 $ 34,698 $ 47,072
========= ========= ========== ==========
</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.
45
<PAGE>
(3) Included in general and administrative expenses on the accompanying
consolidated statements of income.
(4) Prior to CRIIMI MAE becoming a self-administered REIT, amounts were paid
to C.R.I., Inc. as reimbursement for expenses incurred by the adviser on
behalf of CRI Liquidating and the AIM Funds. The transaction in which
CRIIMI MAE became a self-administered REIT had no impact on CRI
Liquidating's or the AIM Funds' financial statements except that the
expense reimbursements previously paid to C.R.I., Inc. are, effective June
30, 1995, paid to CM Management.
(5) Prior to CRIIMI MAE becoming a self-administered REIT, amounts were paid
to C.R.I., Inc. as reimbursement for expenses incurred by the adviser on
behalf of CRIIMI MAE. In connection with the Merger, on June 30, 1995,
CRIIMI MAE was no longer required to reimburse the adviser, as these
expenses are now directly incurred by CRIIMI MAE. However, pursuant to an
agreement between CRIIMI MAE and C.R.I., Inc. (the "CRI Administrative
Services Agreement"), C.R.I., Inc. provides CRIIMI MAE with certain
administrative and office facility services and other services, at cost,
with respect to certain aspects of CRIIMI MAE's business. CRIIMI MAE uses
the services provided under the C.R.I., Inc. Administrative Services
Agreement to the extent such services are not performed by CM Management
or provided by another service provider. The CRI Administrative Services
Agreement is terminable on 30 days notice at any time by CRIIMI MAE.
(6) Included as a reduction of net income earned from Real Estate Owned
property which is included in other investment income on the accompanying
consolidated statements of income. See Note 9 for discussion of
disposition of Real Estate Owned property.
16. LITIGATION
Bankruptcy Proceedings
On the Petition Date, the Debtors each filed voluntary petitions for
relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. These
cases are being jointly administered for procedural purposes. None of the cases
has been substantively consolidated. Under the Bankruptcy Code, the Debtors are
authorized to manage their respective affairs and operate their businesses as
debtors-in-possession while they attempt to confirm and consummate their plan of
reorganization that will restructure their financial affairs and allow them to
emerge from bankruptcy. As a debtor-in-possession under the Bankruptcy Code, no
Debtor may engage in any transaction outside the ordinary course of business
without the approval of the Bankruptcy Court. The following discussion describes
certain aspects of the Chapter 11 cases of the Debtors (the "Chapter 11 Cases"),
but it is not intended to be a complete summary.
Pursuant to the Bankruptcy Code, the commencement of the Chapter 11
Cases created an automatic stay, applicable generally to creditors and other
parties in interest, but subject to certain limited exceptions, of: (i) the
commencement or continuation of judicial, administrative or other actions or
proceedings against the Debtors that were or could have been commenced prior to
the commencement of the Chapter 11 Cases; (ii) the enforcement against the
Debtors or their property of any judgments obtained prior to the commencement of
the Chapter 11 Cases; (iii) the taking of any action to obtain possession of
property of the Debtors or to exercise control over such property; (iv) the
creation, perfection or enforcement of any lien against the property of the
bankruptcy estates of the Debtors; (v) any act to create, perfect or enforce
against the property of the Debtors any lien that secures a claim that arose
prior to the commencement of the Chapter 11 Cases; (vi) the taking of any action
to collect, assess or recover claims against the Debtors that arose before the
commencement of the Chapter 11 Cases; (vii) the set-off of any debt owing to the
Debtors that arose prior to the commencement of the Chapter 11 Cases against any
claim against the Debtors; or (viii) the commencement or continuation of a
proceeding before the United States Tax Court concerning the Debtors. Any entity
may apply to the Bankruptcy Court, upon appropriate showing of cause, for relief
from the automatic stay.
As noted above, the Debtors are authorized to manage their respective
properties and operate their respective businesses pursuant to the Bankruptcy
Code. During the course of the Chapter 11 Cases, the Debtors will be subject to
the jurisdiction and supervision of the Bankruptcy Court. The United States
Trustee has appointed (i) the Unsecured Creditors' Committee, (ii) the Official
Committee of Unsecured Creditors in the CM Management Chapter 11 Case (the "CMM
Creditors' Committee") and (iii) the CMI Equity Committee (collectively, the
"Committees"). The Committees are expected to participate in the formulation of
the plans of reorganization for the respective Debtors. The Debtors are required
to pay certain expenses of the Committees, including professional fees, to the
extent allowed by the Bankruptcy Court.
Under the Bankruptcy Code, for 120 days following the Petition Date,
only the debtor-in-possession has the right to propose and file a plan of
reorganization with the Bankruptcy Court. If a debtor-in-possession files a plan
of reorganization during this exclusivity period, no other party may file a plan
of reorganization until 180 days following the Petition Date, during which
period the debtor-in-possession has the exclusive right to solicit acceptances
of the plan. If a debtor-in-possession fails to file a plan during the
exclusivity period or such additional exclusivity period as may be ordered by
the Bankruptcy Court or, after such plan has been filed, fails to obtain
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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 CMI Equity Committee the
right to jointly file a plan of reorganization through October 16, 1999 and
(iii) providing that any party in interest may file a plan of reorganization
after October 16, 1999. The Debtors filed (i) a Joint Plan of Reorganization on
September 22, 1999, (ii) an Amended Joint Plan of Reorganization and proposed
Joint Disclosure Statement on December 23, 1999, (iii) a Second Amended Joint
Plan of Reorganization and proposed Amended Joint Disclosure Statement on March
31, 2000, and (iv) a Third Amended Joint Plan of Reorganization and proposed
Second Amended Joint Disclosure Statement with respect thereto on April 25,
2000, which plan and disclosure statement were amended and supplemented by
praecipes filed with the Bankruptcy Court on July 13, 14, 21 and August 18,
2000. The Debtors' Third Amended Joint Plan of Reorganization is fully supported
by the CMI Equity Committee, which is a co-proponent of the Plan. Subject to the
completion of mutually acceptable Unsecured Creditor Debt Documentation, the
Unsecured Creditors' Committee has agreed to support confirmation of the
Debtors' Plan.
On December 20, 1999, the Unsecured Creditors' Committee filed its own
plan of reorganization and proposed disclosure statement with the Bankruptcy
Court. On January 11, 2000 and on February 11, 2000, the Unsecured Creditors'
Committee filed its first and second amended plans of reorganization,
respectively, with the Bankruptcy Court and its amended proposed disclosure
statements with respect thereto. However, as a result of the successful
negotiations, the Unsecured Creditors' Committee is now supporting confirmation
of the Debtors' Plan and has asked the Bankruptcy Court to defer consideration
of its plan pending approval of the Debtors' Plan and the completion of mutually
acceptable Unsecured Creditor Debt Documentation. Accordingly, the Debtors, the
CMI Equity Committee and the Unsecured Creditors' Committee are together
presenting the Debtors' Plan for approval by all holders of claims and interests
in impaired classes.
The Bankruptcy Court held a hearing on April 25, 2000 on the Proposed
Disclosure Statement. During that hearing, the bankruptcy judge requested the
filing of additional legal briefs by May 9, 2000 on two issues raised at the
hearing. The issues raised related to an objection to the Proposed Disclosure
Statement filed by Salomon Smith Barney Inc./Citicorp Securities, Inc. and
Citicorp Real Estate, Inc. (together "Citigroup"). On July 12, 2000, the
Bankruptcy Court entered an order overruling the objections raised by Citigroup
as set forth in the Memorandum Opinion and Order filed and entered on that date
by the Bankruptcy Court. The Citigroup objections were the only objections to
the Proposed Disclosure Statement pending before the Bankruptcy Court. On July
21, 2000, CRIIMI MAE and Citigroup reached a settlement regarding the treatment
of Citigroup's claims under the Plan. This accord resolved Citigroup's
objections to the Proposed Disclosure Statement and contemplates the dismissal
of all outstanding litigation between the parties.
The Bankruptcy Court scheduled a hearing on August 23, 2000 with
respect to the proposed ballots submitted to the Bankruptcy Court to be sent to
members of all classes of impaired creditors and equity security holders in
connection with the Plan. On August 24, 2000, the Bankruptcy Court entered an
order approving the Proposed Disclosure Statement (the "Disclosure Statement")
and other proposed solicitation materials. The Bankruptcy Court scheduled a
confirmation hearing on the Plan for November 15, 2000 and set September 5, 2000
as the voting record date for determining the holders of common stock, preferred
stock, 9 1/8% senior notes and general unsecured creditors entitled to vote to
accept or reject the Plan. The Company distributed copies of the Plan, the
Disclosure Statement and other solicitation materials, including ballots during
the week of September 10, 2000 to members of all classes of impaired creditors
and all equity security holders for acceptance or rejection.
At the confirmation hearing, the Bankruptcy Court will consider whether
to confirm the Plan before it. To confirm a plan, the Bankruptcy Court is
required to find among other things: (i) with respect to each class of impaired
creditors and equity security holders, that each holder of a claim or interest
of such class either (a) will, pursuant to the plan, receive or retain property
of a value as of the effective date of the plan, that is at least as much as
such holder would have received in a liquidation on such date of the Debtors or
(b) has accepted the plan, (ii) with respect to each class of claims or equity
security holders, that such class has accepted the plan or is not impaired under
the plan, and (iii) confirmation of the plan is not likely to be followed by the
liquidation or need for further
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financial reorganization of the Debtors or any successor unless such liquidation
or reorganization is proposed in the plan.
If any impaired class of creditors or equity security holders does not
accept a plan, the proponent of the plan may invoke the so-called "cramdown"
provisions of the Bankruptcy Code. Under these provisions, the Bankruptcy Court
may confirm a plan, notwithstanding the non-acceptance of the plan by an
impaired class of creditors or equity security holders, if certain requirements
of the Bankruptcy Code are met. These requirements include: (i) the plan does
not discriminate unfairly and (ii) the plan is fair and equitable, with respect
to each class of claims or interests that is impaired under, and has not
accepted, the plan. As used in the Bankruptcy Code, the phrases "discriminate"
and "fair and equitable" have narrow and specific meanings and their use herein
is qualified in its entirety by reference to the Bankruptcy Code.
Bankruptcy Related Litigation
The following is a summary of material litigation matters between the
Company and certain of its secured creditors since the Petition Date. The
Company has reached agreement with certain of these creditors, as set forth in
greater specificity below.
Merrill Lynch
As of the Petition Date, the Company owed Merrill Lynch approximately
$274.8 million with respect to advances to the Company under an assignment
agreement pursuant to which the Company pledged Subordinated CMBS. Borrowings
under this assignment agreement are secured by a first priority security
interest in certain CMBS issued in connection with CBO-2, together with all
proceeds, distributions and amounts realized therefrom (the "Distributions")
(the CMBS pledged to Merrill Lynch and the Distributions are hereafter referred
to collectively as the "Merrill Collateral").
On October 16, 1998, Merrill Lynch filed a motion with the Bankruptcy
Court for relief from the automatic stay or, in the alternative, for entry of an
order directing the Company to provide adequate protection for its interest in
the Merrill Collateral. On October 21, 1998, the Company filed a complaint
against Merrill Lynch for turnover of Distributions remitted to Merrill Lynch on
October 2, 1998 by LaSalle National Bank, as well as other relief.
On December 4, 1998, the Bankruptcy Court approved a consent order
entered into between the Company and Merrill Lynch. Among other things, pursuant
to the consent order, the pending litigation with Merrill Lynch was dismissed
without prejudice. The consent order also preserved the portfolio of CMBS
pledged as collateral to Merrill Lynch and provided for the Company to receive
distributions of 50 percent of the monthly cash flow from those CMBS net of
interest payable to Merrill Lynch (the "Company's Distribution Share"). The 50
percent of distributions received by Merrill Lynch is to be applied to reduce
principal. Such arrangement will remain in effect until the earlier of a further
order of the Bankruptcy Court affecting the arrangement or the effective date of
a plan of reorganization of the Company.
On September 7, 1999, the Company filed a Motion to Approve Stipulation
and Consent Order Providing for Adequate Protection. On or about September 27,
1999, the Unsecured Creditors' Committee and the CMI Equity Committee filed a
joint objection to the Motion. On December 3, 1999, the Bankruptcy Court entered
the Stipulation and Consent Order Providing For Adequate Protection (the
"Adequate Protection Order"), certain provisions of which were effective
retroactively. Pursuant to the Adequate Protection Order, a segregated interest
bearing debtor-in-possession account was created (the "Cash Collateral Account")
into which the Company's Distribution Share was deposited during the months of
August through December 1999. An additional fifty percent (50%) of the Company's
Distribution Share has been deposited into such account since January and absent
a further ruling by the Bankruptcy Court, or the occurrence of certain market
events detailed in the Adequate Protection Order, will continue to be deposited
into such account through the effective date of the Plan. The Adequate
Protection Order provides Merrill Lynch with a first priority lien on the Cash
Collateral Account. (See Note 1 for information with respect to the New Debt to
be issued pursuant to the Plan.)
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.
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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
On October 15, 1998, the Company filed an emergency motion to enforce
the automatic stay against Norwest and Citicorp. Pursuant to an Order dated
October 23, 1998, the Bankruptcy Court prohibited Citicorp from selling the
Retained Bonds without further order of the Bankruptcy Court. On October 23,
1998, Citicorp requested an emergency hearing regarding the October 23 Order,
and on November 2, 1998, the Company filed a complaint against Citicorp seeking,
among other things, a declaratory judgment as to whether the automatic stay
applies to actions taken by Citicorp with respect to the Retained Bonds.
On March 11, 1999, the Company finalized agreements with Citicorp and
Citibank, pursuant to which the parties agreed to adjourn the pending litigation
for a four-month period. The Bankruptcy Court agreed to a request by CRIIMI MAE,
Citibank, and the Unsecured Creditors' Committee to further postpone the pending
litigation on July 7, 1999 and again on September 10, 1999. The trial has not
yet been rescheduled.
The agreements reached by the Company with Citicorp and Citibank on
March 11, 1999 were approved by the Bankruptcy Court through stipulations and
consent orders entered on April 5, 1999. One of the agreements also provided
that Salomon Smith Barney, in cooperation with CRIIMI MAE, agreed to sell two
classes of investment-grade CMBS from CMO-IV constituting a portion of the
collateral securing advances under the Citicorp financing arrangement. In May
1999, Salomon Smith Barney sold $20 million of the CMO-IV securities held by
Holdings II. This sale reduced the amounts owed from Holdings II to Citicorp by
approximately $17 million. On October 8, 1999, the remaining CMO-IV securities
held by Holdings II were sold. This sale reduced the amounts owed from Holdings
II to Citicorp by approximately $22 million and Holdings II received net
proceeds of approximately $315,000. In addition, Citibank, in cooperation with
CRIIMI MAE, agreed to sell commercial mortgages originated in 1998 under the
Citibank Program, provided that the sale resulted in CRIIMI MAE receiving
minimum net proceeds of not less than $3.5 million, after satisfying certain
amounts due to Citibank, from the amount held in the reserve account. On August
5, 1999, all but three of the commercial loans originated under the Citibank
Program in 1998, with an aggregate unpaid principal balance of approximately
$339 million, were sold for gross proceeds of approximately $308 million. On
September 16, 1999, Citibank sold the remaining three loans, with an aggregate
unpaid principal balance of approximately $32.7 million, for gross proceeds of
approximately $27.2 million. In the case of each sale of the commercial loans,
the minimum net proceeds provision was waived by agreement of the Company, the
Unsecured Creditors' Committee and the CMI Equity Committee.
A related interpleader action between Norwest, the Company and
Citicorp, which was initiated on October 20, 1998 by Norwest to determine
whether the Company or Citicorp is the rightful owner of funds that were to have
been paid by Norwest, as indenture trustee, remains pending before the
Bankruptcy Court. During the pendency of this matter, certain payments on the
Retained Bonds are held in an account controlled by the Bankruptcy Court.
A settlement was reached on July 21, 2000, among the Company and
Citigroup. The terms of the settlement agreement with Citigroup are incorporated
into the Debtors' Plan and provide for the satisfaction of all Citigroup claims
(including dismissal of all litigation) through the payment of: (a) principal
and interest due in connection with certain financings provided by Salomon Smith
Barney, Inc./Citicorp Securities, Inc. relating to the bonds designated CMCMBS
1998-1 (CMO-IV) (Classes F through J and IO), MCFI 1998-MC1 (Classes H through
M) and MCFI 1998-MC2 (Classes F through K); (b) outstanding principal, interest
and expenses due in connection with a loan provided by Citicorp Real Estate,
Inc. to a Company subsidiary; and (c) $4,000,000 in cash for all remaining
claims of Citigroup, which has been accrued on the balance sheet as of September
30, 2000.
On September 21, 2000, CRIIMI MAE, SSB, GACC, ORIX, the CMI Equity
Committee and the Unsecured Creditors Committee filed a Stipulation and Consent
Order (the "Stipulation and Consent") with the Bankruptcy Court providing for,
among other matters, the terms of an agreement with respect to the sale of the
Company's interest in CMO-IV and certain other CMBS to ORIX. On October 12,
2000, an order was entered by the Bankruptcy Court approving the Stipulation and
Consent. On October 30, 2000, the Court entered an amendment to the Stipulation
and Consent with respect to the agreed proceeds in connection with the sale to
ORIX (the "Order"). Pursuant to the Stipulation and Consent as amended by the
Order, the Company sold its interest in CMO-IV and certain other CMBS to ORIX.
The CMI Equity Committee and Unsecured Creditors' Committee are deemed to have
agreed to such sale. The sale was completed on November 6, 2000 resulting in
total proceeds of approximately $189 million. The proceeds were used to pay off
$141 million of financing owed to SSB and $4
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million to Citicorp Real Estate, Inc. in full satisfaction of all asserted and
unasserted claims of such claimants. Additionally, approximately $14.2 million
of the proceeds were used to pay down secured financing provided by GACC. The
Company will use the net proceeds of approximately $30 million to help fund the
Company's emergence from Chapter 11.
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 CMI Equity Committee or
First Union shall seek modification of the adequate protection
arrangements set forth in the agreement for a period commencing
upon the date which the Bankruptcy Court approves the agreement
and terminating on December 31, 1999, subject to certain
exceptions.
The agreement was approved and entered by the Bankruptcy Court on
August 5, 1999. The Company's Unsecured Creditors' Committee has consented to
the agreement with First Union.
In addition, on or about July 1, 1999, CM Management and First Union
entered into an agreement resolving its motion for relief from the automatic
stay. On July 1, 1999, CM Management filed a motion for approval of the
agreement resolving First Union's motion for relief from the automatic stay. On
October 22, 1999, to provide the parties with more time to negotiate a
modification to the agreement, CM Management, with the consent of First Union
and the CMM Creditors' Committee, advised the Bankruptcy Court that it would be
withdrawing the motion for approval of the agreement, without prejudice to CM
Management's right to re-file once an agreement has been reached with First
Union and the CMM Creditors' Committee. The motion was subsequently withdrawn.
On or about February 18, 2000, the Company, the Unsecured Creditors'
Committee and First Union entered into a Second Stipulation and Agreed Order:
(i) Authorizing Use of Cash Collateral and (ii) Granting Other Relief (the
"Second Stipulation"). The Second Stipulation provides for, among other things,
the following:
(i) the reaffirmation of all of the terms contained in the July 1,
1999 agreement except as expressly provided in the Second
Stipulation;
(ii) the extension from January 1, 2000 through March 31, 2000 of the
provisions in the July 1, 1999 agreement relating to use of the
assignment securities income;
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(iii) the extension from December 31, 1999 to March 31, 2000 of the
provisions in the July 1, 1999 agreement relating to (i) First
Union's agreement not to seek relief from the automatic stay to
foreclose on the assignment securities or the assignment
securities income and (ii) the agreement by First Union, the
Company and the Unsecured Creditors' Committee not to seek
modification of the adequate protection arrangements contained in
the July 1, 1999 agreement; and
(iv) the consummation of the Stipulation and Consent Order Selling the
Wells Fargo Bonds to Morgan Stanley, which occurred in February
2000. See "Bankruptcy Related Litigation-Morgan Stanley" for
further discussion.
On February 22, 2000, the Company filed a motion with the Bankruptcy
Court for approval of the Second Stipulation. CRIIMI MAE, First Union and Lehman
also reached an agreement that called for the sale of seven classes of
Subordinated CMBS from First Union Lehman Brothers Series 98 C-2 the ("First
Union Lehman Bonds"). The agreement was filed with the Bankruptcy Court on March
21, 2000 for approval. On March 28, 2000, the Bankruptcy Court approved the
Second Stipulation. On April 24, 2000, the First Union Lehman Bonds were sold.
The transaction generated proceeds of $140 million, of which approximately $113
million was used to pay the related debt owed to Lehman and First Union. The
approximate $27 million of remaining proceeds will be used primarily to help
fund the Plan.
First Union has asserted a first priority security interest in certain
bonds that are or were in its possession, and the distributions made on those
bonds since the Petition Date, pursuant to a custodian agreement dated as of
October 10, 1997 by and between the Company and First Union. The Company
disputes First Union's claim to a security interest in those bonds and the
distributions made thereon. The bonds in issue are (i) the Morgan Stanley
Capital, Series 1998-WF2 Class N bond (the "Morgan N Bond"), (ii) the Chase
Commercial Mortgage, Series 1998-1 Class J bond (the "Chase J Bond"), and (iii)
the Nomura Asset Securitization Corporation, Series 1998-B7 Class N bond (the
"Nomura N Bond", collectively with the Morgan N Bond and the Chase J Bond, the
"Bonds"). The Morgan N Bond has been sold, and certain proceeds from the sale
thereof are being held in a segregated account in the name of First Union
pending further order of the Bankruptcy Court and resolution of the claim of
First Union thereto. On August 7, 2000, the Company sold certain CMBS to GACC
for approximately $43.8 million. The Chase J Bond composed part of the CMBS sold
to GACC. The proceeds received from the sale related to the Chase J Bond were
deposited in a segregated account in the name of First Union pending resolution
of First Union's claim of a security interest in the bonds. See "Bankruptcy
Litigation-Arrangements with other Creditors" for further discussion of the sale
of certain CMBS to GACC. First Union retains possession of the Nomura N Bond.
Because the issues between First Union and the Company could not be
resolved consensually, First Union commenced an adversary proceeding against the
Company on September 6, 2000 by filing a complaint in the United States
Bankruptcy Court for the District of Maryland seeking a declaration that it has
first priority perfected security interest in the Bonds and the distributions
made on the Bonds. On October 6, 2000, the Company answered First Union's
complaint and asserted counterclaims against First Union, seeking turnover of
the Bonds and damages for conversion, breach of contract, and breach of
fiduciary duty. On October 25, 2000, First Union filed an answer to the
Company's counterclaims. Thereafter, on November 1, 2000, First Union filed a
motion for summary judgment. Pursuant to a scheduling order entered by the Court
on or around November 2, 2000, the Company will have until November 17, 2000 to
file a cross-motion for summary judgment. Thereafter, the parties will conduct
discovery on the motion and cross-motion until January 31, 2001. The Court has
not given a trial date for either the motion and cross-motion for summary
judgment or for the complaint and counterclaim.
If First Union's claim with respect to the Bonds and/or the
distributions made on the Bonds is determined to be an Allowed Secured Claim,
such Claim will be treated as part of Class A2 under the Plan. If First Union's
Claim is determined to be an unsecured claim, it will be included in the Claims
subject to Class A10 under the Plan. However, until the Court allows First
Union's claim as either a secured or unsecured claim, First Union will not be
entitled to any distribution on its claim.
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").
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On October 6, 1998, Morgan Stanley advised the Company that it was
exercising alleged ownership rights over the Morgan Collateral. On October 20,
1998, the Company filed an adversary proceeding against Morgan Stanley alleging,
among other things, that Morgan Stanley violated the automatic stay, and seeking
turnover of the Morgan Collateral.
On March 5, 1999, the CBO-2 BBB Bonds were sold. Of the $159 million in
net sale proceeds, $141.2 million was used to repay the Company's borrowings
under the agreement with Morgan Stanley, and $17.8 million was remitted to
CRIIMI MAE. As a result of the transaction, CRIIMI MAE's litigation against
Morgan Stanley has been resolved with respect to the CBO-2 BBB Bonds to the
satisfaction of both parties.
The Company and Morgan Stanley reached an agreement to sell the Wells
Fargo Bonds (the "Morgan Stanley Agreement"). On February 29, 2000, the Wells
Fargo Bonds were sold. Of the approximately $45.9 million in net sales proceeds,
$37.5 million was used to pay off all outstanding borrowings owed to Morgan
Stanley and the remaining proceeds of approximately $8.4 million will be used
primarily to help fund the Plan. Pursuant to the terms of the Morgan Stanley
Agreement, the Company and Morgan Stanley mutually released any claims that they
may have against each other and filed a stipulation of dismissal with prejudice
of the October 20, 1998 adversary proceeding.
Arrangements with Other Creditors
In addition to the foregoing, the Company has had discussions with
other secured creditors against whom the Company was not engaged in litigation.
One such creditor is GACC. On February 3, 1999, the Bankruptcy Court approved an
Amended Consent Order between the Company and GACC that provides for the
following: (i) acknowledgement that GACC has a valid perfected security interest
in its collateral; (ii) authority for GACC to hedge its loan, subject to a hedge
cost cap; and (iii) as adequate protection, the sharing of cash collateral on a
50/50 basis, after payment of interest expense, with the percentage received by
GACC to be applied to reduce principal and pay certain hedge costs, if any. In
addition, the Company is prohibited from using GACC's cash collateral for
certain purposes, including loan originations and Subordinated CMBS
acquisitions. The Amended Consent Order expired April 28, 1999. The Company and
GACC agreed to extend the Amended Consent Order until August 2, 1999 and a
stipulation to that effect was signed by the Company and GACC and approved by
the Bankruptcy Court on May 11, 1999. The Company and GACC had negotiated a
further extension of the stipulation through September 10, 1999, which has now
expired. On June 16, 2000, the Company and GACC signed a stipulation and agreed
order selling certain CMBS to GACC free and clear of liens, claims and
encumbrances (the "GACC Sale Stipulation"), and for the sharing of cash
collateral through the sale date. On July 7, 2000, the Bankruptcy Court approved
the GACC Sale Stipulation and subsequently amended its order and on August 3,
2000 authorized the Company to sell its interest in the Chase J Bond and the
Chase Commercial Mortgage Securities Corporation Series 1998-1, Classes F, G, H
and I bonds (the "Chase Bond Portfolio") to GACC for an aggregate sale price of
approximately $43.8 million. On August 7, 2000, the Company sold the Chase Bond
Portfolio at the stated aggregate sales price and the related variable rate
secured debt of $36.6 million was paid off. Remaining net proceeds of
approximately $7.2 million will be used primarily to help fund the Company's
Plan. CRIIMI MAE also received approximately $3.8 million from GACC from cash
distributions that GACC had received through the sale date. Additionally, in
November 2000, the Company completed the sale of the remaining CMBS subject to
the CMBS Sale, including the DLJ Bond financed by GACC, to ORIX. (See Note 1 and
Note 5 for further discussion). (See also Note 1 regarding the Plan terms with
respect to GACC.)
Shareholder Litigation
Between October 7, 1998 and November 30, 1998, certain plaintiffs filed
20 separate class action civil lawsuits (the "Complaints") in the United States
District Court for the District of Maryland (the "District Court" or the
"Court") against certain officers and directors of the Company. On March 9,
1999, the District Court ordered the consolidation of the Complaints into a
single action entitled "In Re CRIIMI MAE Inc. Securities Litigation", which
Complaints have since been dismissed, as discussed below.
On April 23, 1999, a group of thirteen putative members of the class of
individuals who allegedly suffered damages during the class period between
February 20, 1998 and October 5, 1998 (collectively, the "Plaintiffs") filed an
Amended and Consolidated class action Complaint alleging violations of federal
securities laws (the "Consolidated Amended Complaint").
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The Consolidated Amended Complaint alleged generally that the
defendants violated Section 10(b) of the Securities and Exchange Act of 1934 as
amended (the "Exchange Act") by, among other things, making false statements of
material fact and failing to disclose certain material facts. The Consolidated
Amended Complaint also generally alleges that the defendants violated Section
20(a) of the Exchange Act because each defendant was allegedly a "controlling
person" as that term is defined under Section 20(a).
On July 9, 1999, the defendants filed a Motion to Dismiss, with
prejudice, the Consolidated Amended Complaint. The defendants filed the motion
under Rule 12(b)(6) of the Federal Rules of Civil Procedure on the grounds that
the Plaintiffs failed to plead sufficient facts with the requisite particularity
to establish a claim for securities fraud under the Reform Act. The Plaintiffs
filed their Opposition to defendants' Motion to Dismiss on September 24, 1999.
On March 30, 2000, the Court granted the Defendants' Motion to Dismiss
the Consolidated Amended Complaint and as a result entered an Order and
Memorandum Opinion dismissing the Consolidated Amended Complaint. The Court
concluded that the Plaintiffs did not substantiate their claims that specific
CRIIMI MAE officers and directors violated Section 10(b) of the Exchange Act.
The Court concluded that because the Plaintiffs failed to substantiate their
claims of a "primary violation" of Section 10(b) of the Exchange Act, they
likewise failed to substantiate a claim against the individual Defendants as
controlling persons under Section 20(a) of the Exchange Act.
On May 1, 2000, the Plaintiffs filed a Notice of Appeal from the
Court's Memorandum Opinion and Order dated March 30, 2000. On July 10, 2000, the
United States Court of Appeals for the Fourth Circuit dismissed the appeal by
agreement of the parties.
The dismissal of this lawsuit does not dispose of other pending
lawsuits and/or claims in bankruptcy which may affect the Company, as more fully
described under other subheadings of this Note 16.
Edge Partners Settlement
In February 1996, Edge Partners, L.P. ("Edge Partners"), on behalf of
CRIIMI MAE, filed a First Amended Class and Derivative Complaint (the
"Derivative Complaint") in the Bankruptcy Court. The Derivative Complaint named
as defendants each of the individuals who served on the Board of Directors at
the time of the Merger and CRIIMI MAE as a nominal defendant. The Company was
subject to indemnity obligations to the directors under provisions of its
constituent documents. In addition, the Company had directors and officers
liability insurance policies with a combined coverage limit of $5 million.
Count I of the Derivative Complaint alleged violations of Section 14(a)
of the Exchange Act for issuing a materially false and misleading proxy in
connection with the Merger and alleged derivatively on behalf of CRIIMI MAE a
breach of fiduciary duty owed to CRIIMI MAE and its shareholders. Edge Partners
sought, among other relief, that unspecified damages be accounted to CRIIMI MAE,
that the shareholder vote in connection with the Merger be null and void and
that certain salaries and other remuneration paid to the directors be returned
to the Company.
On June 16, 1998, the District Court approved a settlement agreement
(the "Settlement Agreement"). Under the terms of the Settlement Agreement, the
Company agreed to make certain disclosures relating to alleged conflicts between
two directors and the Company in connection with the Merger transaction and
adopted a non-binding policy relating generally to the approval of certain
interested transactions. Among other things, the non-binding policy adopted by
the Board of Directors imposes certain conditions on the Board's approval of
transactions between the Company and any director, officer or employee who owns
greater than 1% of the outstanding common shares of the Company. Such conditions
generally include: (1) approval by written resolution of any transaction
involving an amount in excess of $5 million in any year adopted by a majority of
the members of the Board having no personal stake in the transaction; and (2) in
the case of any such transaction in excess of $15 million in any year,
consideration by the Board as to the formation of a special committee of the
Board, to be comprised of at least two directors having no personal stake in
such transaction.
Other Litigation
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
53
<PAGE>
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. On August
17, 2000, the District Court dismissed the Recupito Complaint with prejudice.
The dismissal was not appealed by the plaintiff prior to the expiration of the
period allowed to file an appeal.
The Recupito Complaint alleged 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.
Claims
Over 850 claims with a face amount of nearly $2.53 billion have been
filed in the Chapter 11 cases, including approximately $355 million in unsecured
claims and approximately $2.2 billion in secured claims. Many of these claims
are duplicate claims filed by the same creditor in each of the three cases. This
amount is far in excess of the approximately $1.18 billion in liabilities
identified by the Debtors in their schedules, which were filed with the
Bankruptcy Court on November 20, 1998. The Debtors have undertaken extensive
efforts to reduce the claims pool. In addition to analyzing the claims, the
Debtors have opened discussions with various creditors regarding the withdrawal
of certain claims and in some cases, have objected to claims. The Debtors'
efforts have resulted in the reduction of approximately $1.8 billion from the
claims pool by means of objections, negotiated settlements and withdrawal of
claims.
Three large claims are summarized as follows: (i) the claim of Andrew
N. Friedman on behalf of a class of shareholders in the amount of $100 million
(the "Claim Number 330"); (ii) the claim of the Capital Company of America, LLC
("CCA") for approximately $18 million (the "CCA Claim") and (iii) the claim of
GP Properties Group, Inc., for approximately $882,000 (the "GP Properties
Claim").
Claim Number 330 related to shareholder litigation against CRIIMI MAE's
officers and directors, which has already been discussed in "Legal
Proceedings-Shareholder Litigation." On March 20, 2000, the Company moved to
withdraw reference of the litigation relating to Claim Number 330 to the United
States District Court for the District of Maryland, and on March 30, 2000,
CRIIMI MAE filed an objection to Claim Number 330. On April 27, 2000, the United
States District Court for the District of Maryland withdrew the reference of the
contested matter relating to Claim Number 330. On May 26, 2000, the claimant
filed a statement with the District Court seeking to withdraw Claim Number 330
on grounds that it was mooted by the disposition of the Shareholder Litigation.
On July 19, 2000, the District Court entered a consent order disallowing Claim
Number 330 with prejudice.
The CCA Claim relates to an August 14, 1998 letter of intent between
CRIIMI MAE and CCA for the purchase of subordinated CMBS. The letter of intent
included financing and due diligence contingencies. The Company's position is
that neither of these contingencies was fulfilled. After preliminary due
diligence, the Company expressed concern regarding the quality of the mortgage
loans underlying the CMBS. The Company's further due diligence confirmed this
preliminary view, and the Company exercised its right not to proceed with the
purchase because of its due diligence concerns. CCA refused to withdraw its
claim, and on August 31, 1999, CRIIMI MAE filed an objection to the CCA Claim.
The CCA Claim was filed for an amount in excess of $17,000,000 on February 11,
1999. On October 9, 1999, CCA responded to the objection. By letter dated
January 7, 2000, CCA indicated that the amount of its claim was $18.8 million.
On March 27, 2000, CCA filed a motion with the Bankruptcy Court revising the
amount of its claim to $18.2 million. On July 26, 2000, the Bankruptcy Court
entered an Order temporarily allowing CCA's claim in the amount of $11,390,548
for purposes of voting on the Plan. This Order did not determine the allowed
amount of CCA's claim, if any, for purposes of treatment and distributions under
the Plan.
In October 2000, CRIIMI MAE, the CMI Equity Committee, and CCA reached
an agreement with respect to the CCA claim (the "CCA Agreement"). On October 30,
2000, a Stipulation and Consent order regarding Proof of Claim No. 254 was
submitted to the Court for approval (the "CCA Stipulation"). The Court has not
yet approved the CCA Stipulation. Pursuant to the CCA Agreement, CCA will be
granted an allowed general unsecured claim in the amount of $11.39 million (the
"CCA Allowed Claim"). In full and final satisfaction of the CCA Allowed Claim,
CCA agreed to accept $2.5 million in cash (which is recorded as litigation
expense in the accompanying consolidated statements of income) or a combination
of cash, notes or other consideration. The amount of cash payable to CCA shall
be equivalent to CCA's pro rata portion of cash payments made to other general
unsecured
54
<PAGE>
creditors of CRIIMI MAE as determined by the amount of CCA's allowed claim (up
to a cap of $2.5 million). The CCA Agreement will resolve all claims CCA and its
affiliates have asserted or may assert against the Company.
The GP Properties Claim related to the Company's loan origination
program. In August and September 1998, the Company and GP Properties were
involved in a preliminary loan application process. These preliminary processes
did not give rise to a loan commitment. On October 7, 1998, GP Properties
advised the Company that it closed on alternative lending. GP Properties refused
the Company's request that it withdraw its claim, and on October 26, 1999 CRIIMI
MAE objected to the GP Properties Claim. GP Properties did not respond to the
objection on or prior to the objection deadline. On May 9, 2000, the Bankruptcy
Court entered an order disallowing and expunging the GP Properties Claim.
The remaining claims of approximately $730 million, excluding accrued
interest, are carried on the balance sheet as of September 30, 2000. The Debtors
believe they have substantial defenses to each of the disputed claims and that
the ultimate allowed amount of these claims, if any, will be insignificant,
although there can be no assurance.
17. SEGMENT REPORTING
During 1997, FASB issued SFAS 131 "Disclosures about Segments of an
Enterprise and Related Information" ("FAS 131"). FAS 131 establishes standards
for the way that public business enterprises report information about operating
segments and related disclosures about products and services, geographical areas
and major customers.
Management assesses Company performance and allocates capital
principally on the basis of two lines of business: portfolio investment and
mortgage servicing. These two lines of business are managed separately as they
provide different sources and types of revenues for the Company.
Portfolio investment primarily includes (i) acquiring non-investment
grade subordinated securities backed by pools of mortgage loans on multifamily,
retail and other commercial real estate and by pools of mortgage-backed
securities, backed, in turn, by loans on such properties ("Subordinated CMBS"),
(ii) originating and underwriting mortgage loans, (iii) securitizing pools of
mortgage loans and pools of commercial mortgage-backed securities ("CMBS") and
to a lesser degree, (iv) direct investments in government insured securities and
entities that own government insured securities and (v) securities trading
activities. The Company's income is primarily generated from these investments.
Mortgage servicing, which consists of all the operations of CMSLP,
includes performing servicing functions with respect to the Company's mortgage
loans and the mortgage loans underlying the Company's Subordinated CMBS. CMSLP
performs a variety of servicing including special, master, direct and loan
management as well as advisory services. For these services, CMSLP earns a
servicing fee which is calculated as a percentage of the principal amount of the
servicing portfolio typically paid when the related service is rendered. These
services may include either routine monthly services, non-monthly periodic
services or event-triggered services. In acting as a servicer, CMSLP also earns
interest income on the investment of escrows held on behalf of borrowers and
other income which includes, among other things, assumption fees and
modification fees. CMSLP is an unconsolidated affiliate of CRIIMI MAE. The
results of its operations are reported in the Company's income statement in
equity in earnings from investments.
Revenues, expenses and assets are accounted for in accordance with the
accounting policies set forth in Note 3, "Summary of Significant Accounting
Policies." Overhead expenses, such as administrative expenses, are allocated
either directly to each business line or through estimates based on factors such
as number of personnel or square footage of office space.
The following table details the Company's financial performance by
these two lines of business for the three and nine months ended September 30,
2000, and 1999. The basis of accounting used in the table is GAAP.
55
<PAGE>
<TABLE>
<CAPTION>
For the three months ended September 30,
2000
---------------------------------------------------------------------
Portfolio Mortgage
Investment Servicing Elimination (1) Consolidated
--------------- ------------ --------------- ---------------
<S> <C> <C> <C> <C>
Interest income:
Subordinated CMBS $ 33,255,157 $ 61,013 $ (61,013) $ 33,255,157
Insured mortgage securities 7,618,704 - - 7,618,704
Originated loans 8,192,720 - - 8,192,720
Other - 1,362,450 (1,362,450) -
Servicing income - 1,446,650 (1,446,650) -
Net gain on mortgage security dispositions - - - -
Gain on originated loan dispositions 206,696 - - 206,696
Other income 1,579,793 883,999 (640,608) 1,823,184
--------------- ------------ --------------- ---------------
Total revenue 50,853,070 3,754,112 (3,510,721) 51,096,461
--------------- ------------ --------------- ---------------
General and administrative expenses (2,778,230) (2,718,343) 2,718,343 (2,778,230)
Interest expense (35,606,094) - - (35,606,094)
Losses on warehouse obligations - - - -
Reorganization items (52,251,032) - - (52,251,032)
Other expenses (3,219,394) (732,700) 732,700 (3,219,394)
--------------- ------------ --------------- ---------------
Total expenses (93,854,750) (3,451,043) 3,451,043 (93,854,750)
--------------- ------------ --------------- ---------------
Net income (43,001,680) 303,069 (59,678) (42,758,289)
Preferred dividends accrued (1,704,774) - - (1,704,774)
--------------- ------------ --------------- ---------------
Net (loss) income available to common
shareholders ($44,706,454) $ 303,069 ($59,678) ($44,463,063)
=============== ============ ================ ===============
Total assets $ 2,084,216,472 $ 25,865,191 $ (47,580,607) $ 2,062,501,056
=============== ============ =============== ===============
<CAPTION>
For the three months ended September 30,
1999
---------------------------------------------------------------------
Portfolio Mortgage
Investment Servicing Elimination (1) Consolidated
--------------- ------------ --------------- ---------------
<S> <C> <C> <C> <C>
Interest income:
Subordinated CMBS $ 38,786,620 $ - $ - $ 38,786,620
Insured mortgage securities 8,034,760 - - 8,034,760
Originated loans 8,615,000 - - 8,615,000
Other - 1,111,227 (1,111,227) -
Servicing income - 1,579,832 (1,579,832) -
Net gain on mortgage security dispositions 265,789 - - 265,789
Gain on originated loan dispositions 74,616 - - 74,616
Other income 688,648 941,732 (921,240) 709,140
--------------- ------------ --------------- ---------------
Total revenue 56,465,433 3,632,791 (3,612,299) 56,485,925
--------------- ------------ --------------- ---------------
General and administrative expenses (2,702,353) (2,996,223) 2,996,223 (2,702,353)
Interest expense (37,883,201) (54,952) 54,952 (37,883,201)
Unrealized loss on warehouse obligation (719,394) (602,528) 602,528 (719,394)
Reorganization items (1,074,505) - - (1,074,505
Other expenses (4,606,002) - - (4,606,002)
--------------- ------------ --------------- ---------------
Total expenses (46,985,455) (3,653,703) 3,653,703 (46,985,455)
--------------- ------------ --------------- ---------------
Net (loss) income 9,479,978 (20,912) 41,404 9,500,470
Preferred dividends accrued (1,400,297) - - (1,400,297)
--------------- ------------ --------------- ---------------
Net (loss) income available to common
shareholders $ 8,079,681 ($20,912) $ 41,404 $ 8,100,173
=============== ============ =============== ===============
Total assets $ 2,325,312,299 $ 24,622,189 $ (2,785,958) $ 2,347,148,530
=============== ============ =============== ===============
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
For the nine months ended September 30,
2000
---------------------------------------------------------------------
Portfolio Mortgage
Investment Servicing Elimination (1) Consolidated
--------------- ------------ --------------- ---------------
<S> <C> <C> <C> <C>
Interest income:
Subordinated CMBS $ 107,817,791 $ 200,012 $ (200,012) $ 107,817,791
Insured mortgage securities 23,086,633 - - 23,086,633
Originated loans 24,891,137 - - 24,891,137
Other - 2,913,856 (2,913,856) -
Servicing income - 4,365,089 (4,365,089) -
Net gain on mortgage security dispositions 241,312 - - 241,312
Gain on originated loan dispositions 244,581 - - 244,581
Other income 3,258,489 3,011,655 (3,166,600) 3,103,544
--------------- ------------ --------------- ---------------
Total revenue 159,539,943 10,490,612 (10,645,557) 159,384,998
--------------- ------------ --------------- ---------------
General and administrative expenses (8,582,218) (8,867,586) 8,867,586 (8,582,218)
Interest expense (110,712,973) - 0 (110,712,973)
Losses on warehouse obligations - - 0 -
Reorganization items (67,110,914) - 0 (67,110,914)
Other expenses (4,658,182) (1,761,780) 1,761,780 (4,658,182)
--------------- ------------ --------------- ---------------
Total expenses (191,064,287) (10,629,366) 10,629,366 (191,064,287)
--------------- ------------ --------------- ---------------
Net income (31,524,344) (138,754) (16,191) (31,679,289)
Preferred dividends accrued (5,005,679) - - (5,005,679)
--------------- ------------ --------------- ---------------
Net (loss) income available to common
shareholders (36,530,023) $ (138,754) ($16,191) ($36,684,968)
=============== ============ ================ ===============
Total assets $ 2,084,216,472 $ 25,865,191 $ (47,580,607) $ 2,062,501,056
=============== ============ =============== ===============
<CAPTION>
For the nine months ended September 30,
1999
---------------------------------------------------------------------
Portfolio Mortgage
Investment Servicing Elimination (1) Consolidated
--------------- ------------ --------------- ---------------
<S> <C> <C> <C> <C>
Interest income:
Subordinated CMBS $ 115,690,376 $ - $ - $ 115,690,376
Insured mortgage securities 25,424,098 - - 25,424,098
Originated loans 26,103,642 - - 26,103,642
Other - 2,663,281 (2,663,281) -
Servicing income - 5,100,356 (5,100,356) -
Net gain on mortgage security dispositions 1,851,601 - - 1,851,601
Gain on originated loan dispositions 234,826 - - 234,826
Other income 2,628,859 2,965,356 (4,947,151) 647,064
--------------- ------------ --------------- ---------------
Total revenue 171,933,402 10,728,993 (12,710,788) 169,951,607
--------------- ------------ --------------- ---------------
General and administrative expenses (8,953,507) (10,537,013) 10,537,013 (8,953,507
Interest expense (111,620,420) (236,183) 236,183 (111,620,420)
Unrealized loss on warehouse obligation (2,158,182) (2,105,734) 2,105,734 (2,158,182)
Reorganization items (8,000,000) - - (8,000,000
Other expenses (15,552,783) - - (15,552,783)
--------------- ------------ --------------- ---------------
Total expenses (146,284,892) (12,878,930) 12,878,930 (146,284,892)
--------------- ------------ --------------- ---------------
Net (loss) income 25,648,510 (2,149,937) 168,142 23,666,715
Preferred dividends accrued (4,182,792) - - (4,182,792)
--------------- ------------ --------------- ---------------
Net (loss) income available to common
shareholders $ 21,465,718 ($2,149,937) $ 168,142 $ 19,483,923
=============== ============ =============== ===============
Total assets $ 2,325,312,299 $ 24,622,189 $ (2,785,958) $ 2,347,148,530
=============== ============ =============== ===============
</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.
57
<PAGE>
18. FINANCIAL STATEMENTS FOR THE DEBTOR ENTITIES
The following are unconsolidated financial statements for CRIIMI MAE, CM
Management and Holdings II:
CRIIMI MAE INC.
BALANCE SHEETS
(Unconsolidated)
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Assets:
Subordinated CMBS and other MBS, at fair value $ 612,947,358 $ 826,897,948
Insured mortgage security, at fair value 5,281,818 5,268,982
Receivables and other assets 41,330,449 83,133,075
Restricted cash and cash equivalents 76,983,441 37,774,894
Cash and cash equivalents 79,142,090 52,114,880
Investment in subsidiaries 185,160,970 210,030,947
--------------- ---------------
Total assets $ 1,000,846,126 $ 1,215,220,726
=============== ===============
Liabilities:
Accounts payable and other accrued expenses $ 16,486,275 $ 21,580,384
Liabilities subject to Chapter 11 proceedings 761,846,185 974,291,756
--------------- ---------------
Total liabilities 778,332,460 995,872,140
--------------- ---------------
Shareholders' equity:
Convertible preferred stock 23,833 26,471
Common stock 623,532 599,546
Accumulated other comprehensive income (167,578,865) (207,421,788)
Accumulated deficit (185,119,883) (148,434,915)
Additional paid-in capital 537,153,147 574,579,272
Preferred stock dividend to be distributed 37,411,902 --
--------------- ---------------
Total shareholders' equity 222,513,666 219,348,586
--------------- ---------------
Total liabilities and shareholders' equity $ 1,000,846,126 $ 1,215,220,726
=============== ===============
</TABLE>
The accompanying note is an integral part of these financial statements
58
<PAGE>
CRIIMI MAE INC.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unconsolidated)
<TABLE>
<CAPTION>
For the three months ended September 30, For the nine months ended September 30,
2000 1999 2000 1999
------------------ ---------------- -------------------- ----------------
<S> <C> <C> <C> <C>
Interest income $ 21,888,420 $ 28,026,949 $ 73,398,655 $ 83,013,923
Interest expense 14,561,271 15,862,034 46,174,806 47,954,642
------------------ --------------- -------------------- ----------------
Net interest margin 7,327,149 12,164,915 27,223,849 35,059,281
------------------ --------------- -------------------- ----------------
Equity in earnings from investments (41,422,820) 2,780,703 (36,290,838) 11,349,143
Other income 651,554 388,261 1,821,244 1,419,217
General and administrative expenses (259,485) (171,234) (710,230) (596,109)
Amortization of assets acquired in the Merger (719,394) (719,394) (2,158,182) (2,158,182)
Realized loss on reverse repurchase obligation -- -- -- --
Losses on warehouse obligations -- (1,074,505) -- (8,000,000)
Other expense (2,500,000) -- (2,500,000)
Reorganization items:
Impairment on CMBS (10,579,996) -- (15,832,817) --
Loss on Sale of CMBS 1,367,601 -- (343,613) --
Impairment on REO -- -- (924,283) --
Other 3,377,102 (3,868,276) (1,964,419) (13,406,635)
------------------ --------------- -------------------- ----------------
Subtotal (50,085,438) (2,664,445) (58,903,138) (11,392,566)
------------------ --------------- -------------------- ----------------
Net (loss) income before dividends accrued or paid
on preferred shares (42,758,289) 9,500,470 (31,679,289) 23,666,715
Dividends accrued or paid on preferred shares (1,704,774) (1,400,297) (5,005,679) (4,182,792)
------------------ --------------- -------------------- ----------------
Net (loss) income available to common
shareholders $ (44,463,063) $ 8,100,173 (36,684,968) 19,483,923
================== =============== ==================== =================
Comprehensive (loss) income:
Net (loss) income before dividends paid or accrued
on preferred shares (42,758,289) 9,500,470 (31,679,289) 23,666,715
Other comprehensive income (loss) 16,938,086 (30,533,704) 39,842,923 (68,819,689)
------------------ --------------- -------------------- ----------------
Comprehensive (loss) income $ (25,820,203) $ (21,033,234) 8,163,634 (45,152,974)
================== =============== ==================== =================
</TABLE>
The accompanying note is an integral part of these financial statements
59
<PAGE>
CRIIMI MAE Inc.
Note to Financial Statements
As of September 30, 2000 and 1999
(Unconsolidated)
1. BASIS OF PRESENTATION
GAAP requires that certain entities that meet specific criteria be
consolidated with CRIIMI MAE including: CM Management (Debtor), and Holdings II
(Debtor), CRIIMI MAE Financial Corporation III, CRIIMI MAE QRS 1, Inc., CRIIMI
MAE Holdings Inc. (currently inactive), CRIIMI MAE Holdings L.P. (currently
inactive), CRIIMI, Inc., and CRIIMI MAE CMBS Corporation. For purposes of this
presentation CRIIMI MAE accounts for all subsidiaries (those consolidated under
GAAP and those accounted for under the equity method under GAAP) using the
equity method of accounting.
All entities that CRIIMI MAE would normally consolidate for GAAP
purposes are being accounted for under the equity method of accounting. The
equity method of accounting consists of recording an original investment in an
investee as the amount originally contributed. Subsequently this investment is
increased/(decreased) for CRIIMI MAE's share of the investee's income/(losses)
and increased for additional contributions and decreased for distributions
received from the investee. CRIIMI MAE's share of the investee's income is
recognized as "Equity in earnings from subsidiaries" on the income statement.
In management's opinion, with the exception of the matter discussed
above, the financial statements of CRIIMI MAE contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the financial position of CRIIMI MAE as of September 30, 2000 and December 31,
1999, and the unconsolidated results of its operations for the three and nine
months ended September 30, 2000 and 1999.
60
<PAGE>
CRIIMI MAE Management Inc.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
-------------- ----------------
2000 1999
-------------- ----------------
<S> <C> <C>
Assets:
Note receivable $ 3,376,468 $ 3,376,468
Restricted cash and cash equivalents 628,747 261,729
Cash and cash equivalents 661,033 926,122
Other assets 2,721,061 2,969,939
Equity investments 12,681,547 12,794,963
-------------- ---------------
Total assets $ 20,068,856 $ 20,329,221
============== ===============
Liabilities:
Accounts payable and other accrued expenses $ 3,539,451 $ 2,585,812
Liabilities subject to Chapter 11 proceedings 7,055,314 6,529,634
-------------- ---------------
Total liabilities 10,594,765 9,115,446
-------------- ---------------
Shareholders' equity 9,474,091 11,213,775
-------------- ---------------
Total liabilities and shareholders' equity $ 20,068,856 $ 20,329,221
============== ===============
</TABLE>
The accompanying note is an integral part of these financial statements.
61
<PAGE>
CRIIMI MAE Management Inc.
STATEMENTS OF NET LOSS
<TABLE>
<CAPTION>
For the three months ended September 30, For the nine months ended September 30,
2000 1999 2000 1999
-------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Interest income - note receivable and short-term
interest income $ 90,743 $ 84,412 $ 278,560 $ 249,014
Equity in losses from investments 359,685 (10,533) 29,487 (1,547,553)
-------------- ------------ ------------- ------------
Total revenue 450,428 73,879 308,047 (1,298,539)
-------------- ------------ ------------- ------------
Interest expense 117,981 105,511 354,897 310,835
Depreciation and amortization 152,442 130,320 428,937 394,765
General and administrative expenses 2,161,395 2,190,243 6,725,787 7,279,110
Reorganization items 507,688 605,329 2,002,314 1,579,129
-------------- ------------ ------------- ------------
Total expenses 2,939,506 3,031,403 9,511,935 9,563,839
-------------- ------------ ------------- ------------
Net loss $ (2,489,078) $ (2,957,524) $ (9,203,888) $(10,862,378)
============== ============ ============= ============
</TABLE>
The accompanying note is an integral part of these financial statements.
62
<PAGE>
CRIIMI MAE Management, Inc.
Note to Financial Statements
As of September 30, 2000 and 1999
1. BASIS OF PRESENTATION
In management's opinion, the accompanying unaudited financial
statements of CM Management contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position of CM
Management on a stand-alone basis as of September 30, 2000 and December 31, 1999
and the results of its operations for the three and nine months ended September
30, 2000 and 1999, in accordance with GAAP.
63
<PAGE>
CRIIMI MAE Holdings II, L.P.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Assets:
Subordinated CMBS, at fair value $ 40,526,538 $ 38,211,075
Interest receivable 460,343 377,936
Cash 227,493 100
------------ ------------
Total assets $ 41,214,374 $ 38,589,111
============= ============
Liabilities:
Liabilities not subject to Chapter 11 proceedings:
Collateralized mortgage obligations $ 39,609,166 $ 39,256,952
Payables and accrued expenses 614,708 541,360
Liabilities subject to Chapter 11 proceedings:
Variable-rate secured borrowings -- --
------------ ------------
Total liabilities 40,223,874 39,798,312
------------ ------------
Partners' equity:
Contributed capital 4,512,988 4,856,143
Accumulated other comprehensive income (3,522,488) (6,065,344)
------------ ------------
Total partners' equity 990,500 (1,209,201)
------------ ------------
Total liabilities and partners' equity $ 41,214,374 $ 38,589,111
============ ============
</TABLE>
The accompanying note is an integral part of these financial statements.
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<PAGE>
CRIIMI MAE Holdings II, L.P.
STATEMENTS OF NET LOSS AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
For the three months ended September 30, For the nine months ended September 30,
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Interest income:
Subordinated CMBS $ 796,469 $ 796,591 $ 2,389,489 $ 2,389,890
Interest expense:
Collateralized bond obligations-CMBS 906,415 375,430 2,749,317 521,268
Variable-rate secured borrowings-CMBS -- 236,631 -- 1,339,348
--------------- -------------- --------------- --------------
Total interest expense 906,415 612,061 2,749,317 1,860,616
--------------- -------------- --------------- --------------
Net interest margin (109,946) 184,530 (359,828) 529,274
--------------- -------------- --------------- --------------
Other investment income -- -- -- --
General and administrative expenses -- -- -- --
Reorganization items:
Impairment on Subordinated CMBS (4,427,193) -- (4,427,193) --
Other (41,713) (121,411) (144,964) (537,783)
--------------- -------------- --------------- --------------
Subtotal (4,468,906) (121,411) (4,572,157) (537,783)
--------------- -------------- --------------- --------------
Net income (loss) $ (4,578,852) $ 63,119 $ (4,931,985) $ (8,509)
=============== ============== =============== ==============
Other comprehensive income (loss) 1,913,512 (693,306) 2,542,856 (3,701,376)
--------------- -------------- --------------- --------------
Comprehensive income (loss) $ (2,665,340) $ (630,187) $ (2,389,129) $ (3,709,885)
=============== ============== =============== ==============
</TABLE>
The accompanying note is an integral part of these financial statements.
65
<PAGE>
Holdings II, L.P.
Note to Financial Statements
As of September 30, 2000 and 1999
1. BASIS OF PRESENTATION
Holdings II's CMBS (2 tranches from CMO-IV) are carried as investments
in loans at amortized cost basis in CRIIMI MAE's third quarter Form 10-Q's
consolidated financial statements. (See Notes 3 and 6 for discussion of this
accounting.) On a stand-alone basis, GAAP requires that Holdings II's investment
in CMBS be carried as securities (as opposed to loans) at fair value.
In management's opinion, the accompanying unaudited financial
statements of Holdings II contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position of
Holdings II on a stand-alone basis as of September 30, 2000 and December 31,
1999 and the results of its operations for the three and nine months ended
September 30, 2000 and 1999.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS. When used in this Quarterly Report on Form 10-Q, the
words "believes," "anticipates," "expects" and similar expressions are intended
to identify forward-looking statements. Statements looking forward in time are
included in this Quarterly Report on Form 10-Q pursuant to the "safe harbor"
provision of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties, which could cause
actual results to differ materially, including, but not limited to, the risk
factors contained below, in the Company's Disclosure Statement (as defined
below) filed with the Bankruptcy Court (and with the Securities and Exchange
Commission ("SEC") as an exhibit to a Current Report on Form 8-K filed on
September 22, 2000) and in the Company's reports filed with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934, including
its Annual Report on Form 10-K for the year ended December 31, 1999. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. The Company undertakes no obligation to
publicly revise these forward-looking statements to reflect events or
circumstances occurring after the date hereof or to reflect the occurrence of
unanticipated events.
General
CRIIMI MAE Inc. (together with its consolidated subsidiaries, unless the
context otherwise indicates, "CRIIMI MAE" or the "Company") is a fully
integrated commercial mortgage company structured as a self-administered real
estate investment trust ("REIT"). Prior to the filing by CRIIMI MAE Inc.
(unconsolidated) and two of its operating subsidiaries, CRIIMI MAE Management,
Inc. ("CM Management"), and CRIIMI MAE Holdings II, L.P. ("Holdings II" and,
together with CRIIMI MAE and CM Management, the "Debtors"), for relief under
Chapter 11 of the U.S. Bankruptcy Code on October 5, 1998 (the "Petition Date")
as described below, CRIIMI MAE's primary activities included (i) acquiring non-
investment grade securities (rated below BBB- or unrated) backed by pools of
commercial mortgage loans on multifamily, retail and other commercial real
estate ("Subordinated CMBS"), (ii) originating and underwriting commercial
mortgage loans, (iii) securitizing pools of commercial mortgage loans and
resecuritizing pools of Subordinated CMBS, and (iv) through the Company's
servicing affiliate, CRIIMI MAE Services Limited Partnership ("CMSLP"),
performing servicing functions with respect to the mortgage loans underlying the
Company's Subordinated CMBS.
Since filing for Chapter 11 protection, CRIIMI MAE has suspended its
Subordinated CMBS acquisition, origination and securitization programs. The
Company continues to hold a substantial portfolio of Subordinated CMBS,
originated loans and mortgage securities and, through CMSLP, acts as a servicer
of commercial mortgage loans.
The Company's business is subject to a number of risks and uncertainties
including, but not limited to: (1) the effect of the Chapter 11 filing and
substantial doubt as to the Company's ability to continue as a going concern;
(2) risks related to the Recapitalization Financing under the Company's Third
Amended Joint Plan of Reorganization; (3) risk of loss of REIT status; (4)
taxable mortgage pool risk; (5) risk of phantom income resulting in additional
tax liability; (6) the effect of rate compression on the market price of the
Company's stock; (7) substantial leverage; (8) inherent risks in owning
Subordinated CMBS; (9) the limited protection provided by hedging transactions;
(10) risk of foreclosure on CMBS assets; (11) the limited liquidity of the CMBS
market; (12) pending litigation; (13) risk of becoming subject to the
requirements of the Investment Company Act of 1940; (14) possible effects of an
economic recession on losses and defaults; (15) borrowing risks; (16) the effect
of the yield curve on income; and (17) risks associated with the trader election
including those referenced in "2000 Taxable Income (Loss)/ Taxable Distribution
Requirements" below.
In addition to the two operating subsidiaries which filed for Chapter 11
protection along with the Company, the Company owns 100% of multiple financing
and operating subsidiaries as well as various interests in other entities
(including CMSLP) which either own or service mortgage and mortgage-related
assets (the "Non-Debtor Affiliates"). See Note 3 of the Notes to Consolidated
Financial Statements. None of the Non-Debtor Affiliates has filed for bankruptcy
protection.
The Company was incorporated in Delaware in 1989 under the name CRI Insured
Mortgage Association, Inc. ("CRI Insured"). In July 1993, CRI Insured changed
its name to CRIIMI MAE Inc. and reincorporated in Maryland. In June 1995,
certain mortgage businesses affiliated with C.R.I., Inc. were merged into CRIIMI
MAE
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(the "Merger"). The Company is not a government sponsored entity or in any way
affiliated with the United States government or any United States government
agency.
Chapter 11 Filing
Prior to the Petition Date, CRIIMI MAE financed a substantial portion of
its Subordinated CMBS acquisitions with short-term, variable-rate financing
facilities secured by the Company's CMBS. The agreements governing these
financing arrangements typically required the Company to maintain collateral
with a market value not less than a specified percentage of the outstanding
indebtedness ("loan-to-value ratio"). The agreements further provided that the
creditors could require the Company to provide cash or additional collateral if
the market value of the existing collateral fell below this minimum amount.
As a result of the turmoil in the capital markets commencing in late summer
of 1998, the spreads between CMBS yields and yields on Treasury securities with
comparable maturities began to widen substantially and rapidly. Due to this
widening of CMBS spreads, the market value of the CMBS securing the Company's
short-term, variable-rate financing facilities declined. CRIIMI MAE's short-term
secured creditors perceived that the value of the CMBS securing their facilities
with the Company had fallen, creating a value deficiency as measured by the
loan-to-value ratio described above and, consequently, made demand upon the
Company to provide cash or additional collateral with sufficient value to cure
the perceived value deficiency. In August and September of 1998, the Company
received and met collateral calls from its secured creditors. At the same time,
CRIIMI MAE was in negotiations with various third parties in an effort to obtain
additional debt and equity financing that would provide the Company with
additional liquidity.
On Friday afternoon, October 2, 1998, the Company was in the closing
negotiations of a refinancing with one of its unsecured creditors that would
have provided the Company with additional borrowings when it received a
significant collateral call from Merrill Lynch Mortgage Capital, Inc. ("Merrill
Lynch"). The basis for this collateral call, in the Company's view, was
unreasonable. After giving consideration to, among other things, this collateral
call and the Company's concern that its failure to satisfy this collateral call
would cause the Company to be in default under a substantial portion of its
financing arrangements, the Company reluctantly concluded on Sunday, October 4,
1998 that it was in the best interests of creditors, equity holders and other
parties in interest to seek Chapter 11 protection.
On October 5, 1998, the Debtors filed for relief under Chapter 11 of the
U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of
Maryland, Southern Division, in Greenbelt, Maryland (the "Bankruptcy Court").
These related cases are being jointly administered under the caption "In re
CRIIMI MAE Inc., et al.," Ch. 11 Case No. 98-2-3115-DK.
While in bankruptcy, CRIIMI MAE has streamlined its operations. The Company
has significantly reduced the number of employees in its origination and
underwriting operations. In connection with these reductions, the Company closed
its five regional loan origination offices.
Although the Company has significantly reduced its work force, the Company
recognizes that retention of its executives and other remaining employees is
essential to the efficient operation of its business and to its reorganization
efforts. Accordingly, the Company has, with Bankruptcy Court approval, adopted
an employee retention plan.
The Company's independent public accountants have issued a report on the
Company's 1999 financial statements expressing substantial doubt about the
Company's ability to continue as a going concern. In addition, the Company has
been advised by its independent public accountants that, if the Company's Plan
of reorganization is not approved by the Bankruptcy Court prior to the
completion of their audit of the Company's financial statements for the year
ended December 31, 2000, the auditors' report on those financial statements will
continue to be modified to express substantial doubt about the Company's ability
to continue as a going concern.
CRIIMI MAE is working diligently toward emerging from bankruptcy as a
successfully reorganized company. On April 25, 2000, the Debtors filed their
Third Amended Joint Plan of Reorganization (as amended and supplemented by
praecipes filed with the Bankruptcy Court on July 13, 14 and 21, 2000, the
"Plan") and proposed Second Amended Joint Disclosure Statement (as amended and
supplemented by praecipes filed with the Bankruptcy Court on July 13, 21, and
August 18, 2000, the "Proposed Disclosure Statement"). The Plan was filed with
the support of the Official Committee of Equity Security Holders of CRIIMI MAE
(the "CMI Equity Committee"),
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<PAGE>
which is a co-proponent of the Plan. Subject to the completion of mutually
acceptable documentation evidencing the secured financing to be provided by the
unsecured creditors (the "Unsecured Creditor Debt Documentation"), the Official
Committee of Unsecured Creditors of CRIIMI MAE (the "Unsecured Creditors'
Committee") has agreed to support confirmation of the Plan. The Company, the CMI
Equity Committee and the Unsecured Creditors' Committee are now all proceeding
toward confirmation of the Plan. Under the Plan, Merrill Lynch and German
American Capital Corporation ("GACC"), two of the Company's largest secured
creditors, would provide a significant portion of the recapitalization financing
contemplated by the Plan.
The Bankruptcy Court held a hearing on April 25, 2000 on approval of the
Proposed Disclosure Statement. During that hearing, the bankruptcy judge
requested the filing of additional legal briefs by May 9, 2000 on two issues
raised at the hearing. The issues raised related to an objection to the
Company's Proposed Disclosure Statement filed by Salomon Smith Barney
Inc./Citicorp Securities, Inc. and Citicorp Real Estate, Inc. (together
"Citigroup"). On July 12, 2000, the Bankruptcy Court entered an order overruling
the objections raised by Citigroup as set forth in the Memorandum Opinion and
Order filed and entered on that date by the Bankruptcy Court. Also on July 21,
2000, the Company and Citigroup reached a settlement regarding the treatment of
Citigroup's claims under the Plan. (See Note 16 for a summary of certain
material terms of the settlement between the Company and Citigroup.) The
settlement resolved Citigroup's objections to the Proposed Disclosure Statement.
The Citigroup objections were the only objections to the Proposed Disclosure
Statement pending before the Bankruptcy Court.
The Bankruptcy Court held a hearing on August 23, 2000 with respect to the
proposed ballots submitted to the Bankruptcy Court to be sent to members of all
classes of impaired creditors and equity security holders in connection with the
Plan. On August 24, 2000, the Bankruptcy Court entered an order approving the
Proposed Disclosure Statement (the "Disclosure Statement") and other proposed
solicitation materials. The Bankruptcy Court scheduled a confirmation hearing on
the Plan for November 15, 2000 and set September 5, 2000 as the voting record
date for determining the holders of common stock, preferred stock, 9 1/8% senior
notes and general unsecured creditors entitled to vote to accept or reject the
Plan. The Company distributed copies of the Plan, the Disclosure Statement and
other solicitation materials, including ballots during the week of September 10,
2000 to members of all classes of impaired creditors and all equity security
holders for acceptance or rejection.
The Unsecured Creditors' Committee filed its own plan of reorganization,
and proposed disclosure statement, and various amendments to each of the
foregoing, with the Bankruptcy Court which, in general, provided for the
liquidation of the assets of the Debtors. However, as a result of successful
negotiations between the Debtors and the Unsecured Creditors' Committee, the
Unsecured Creditors' Committee has agreed to the treatment of unsecured claims
under the Plan, subject to completion of mutually acceptable Unsecured Creditor
Debt Documentation, and has asked the Bankruptcy Court to defer consideration of
its plan of reorganization and second amended proposed disclosure statement.
On September 21, 2000, CRIIMI MAE, SSB, GACC, ORIX, the CMI Equity
Committee and the Unsecured Creditors Committee filed a Stipulation and Consent
Order (the "Stipulation and Consent") with the Bankruptcy Court providing for,
among other matters, the terms of an agreement with respect to the sale of the
Company's interest in CMO-IV and certain other CMBS to ORIX. On October 12,
2000, an order was entered by the Bankruptcy Court approving the Stipulation and
Consent. On October 30, 2000, the Court entered an amendment to the Stipulation
and Consent with respect to the agreed proceeds in connection with the sale to
ORIX (the "Order"). Pursuant to the Stipulation and Consent as amended by the
Order, the Company sold its interest in CMO-IV and certain other CMBS to ORIX.
The CMI Equity Committee and Unsecured Creditors' Committee are deemed to have
agreed to such sale. The sale was completed on November 6, 2000, resulting in
total proceeds of approximately $189 million. The proceeds were used to payoff
$141 million of financing owed to SSB and $4 million to Citicorp Real Estate,
Inc. in full satisfaction of all asserted and unasserted claims of such
claimants. Additionally, approximately $14.2 million of the proceeds were used
to pay down secured financing provided by GACC. The Company will use the net
proceeds of approximately $30 million to help fund the Company's emergence from
Chapter 11.
The Plan of Reorganization
The Plan contemplates the payment in full of all of the allowed claims of
the Debtors primarily through recapitalization financing (including proceeds
from certain asset sales) aggregating at least $847 million (the
"Recapitalization Financing"). Approximately $267 million of the
Recapitalization Financing would be provided by Merrill Lynch and GACC through a
secured financing facility, and approximately $161 million would be provided
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<PAGE>
through new secured notes issued to the Company's major unsecured creditors
(collectively, the "New Debt"). The sales of select CMBS (the "CMBS Sale") and
the Company's interest in CMO-IV (as defined in Note 6) (the "CMO-IV Sale")
provided the balance of the Recapitalization Financing. The completed CMBS Sale
and CMO-IV Sale generated aggregate proceeds of approximately $418.7 million,
of which approximately $342.3 million was used to pay related borrowings and
approximately $76.4 million is available to help 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 approximate $267 million secured financing would provide for (i) interest at
a rate of one month LIBOR plus 3.25%, (ii) principal prepayment/amortization
obligations, (iii) extension fees after two years and (iv) maturity on the
fourth anniversary of the effective date of the Plan. The approximate $161
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 $56 million, would provide for (i) interest at a rate of 13% per
annum with additional interest at the rate of 7% per annum accreting over the
debt term, (ii) extension fees after four years and (iii) maturity on the sixth
anniversary of the effective date of the Plan. The New Debt described above will
be secured by substantially all of the assets of the Company. It is contemplated
that there will be restrictive covenants, including financial covenants, in
connection with the New Debt.
The Plan also contemplates that the holders of the Company's common stock
will retain their stock. Under the Plan, no cash dividends, other than a maximum
of $4.1 million to preferred shareholders, can be paid to existing shareholders.
See "Effect of Chapter 11 on REIT Status and Other Tax Matters" for further
discussion. Subject to the respective acceptances of the Plan by the holders of
the Company's Series B Cumulative Convertible Preferred Stock (the "Series B
Preferred Stock") and the Series F Redeemable Cumulative Dividend Preferred
Stock (the "Series F Preferred Stock" or "junior preferred stock"), the Plan
contemplates an amendment to their respective relative rights and preferences to
permit the payment of accrued and unpaid dividends in cash or common stock, or a
combination thereof, at the Company's election. The Plan further contemplates
amendments to the relative rights and preferences of the Series E Preferred
Stock, relating principally to dividend and conversion rights.
Reference is made to the Plan and Proposed Disclosure Statement, previously
filed with the Bankruptcy Court (and with the SEC as exhibits to a Current
Report on Form 8-K filed on September 22, 2000), for a more detailed description
of the financing contemplated to be obtained under the Plan from the respective
existing creditors including, without limitation, payment terms, restrictive
covenants and collateral, and a more detailed description of the treatment of
preferred stockholders. Although the Company has commitments for substantially
all of the New Debt and has completed both the CMBS Sale and the CMO-IV Sale,
there can be no assurance that the Company will obtain the Recapitalization
Financing, that the Plan will be confirmed by the Bankruptcy Court, or that the
Plan, if confirmed, will be consummated. The Plan also contemplates certain
amendments to the Company's articles of incorporation, including an increase in
authorized shares from 120 million to 375 million (consisting of 300 million of
common shares and 75 million of preferred shares).
Effect of Chapter 11 Filing on REIT Status and Other Tax Matters
REIT Status
CRIIMI MAE is required to meet income, asset, ownership and distribution
tests to maintain its REIT status. The Company believes that it has satisfied
the REIT requirements for all years through, and including, 1999. 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 2000 or subsequent
years. If the Company fails to retain its REIT status for any taxable year, it
will be taxed as a regular domestic corporation subject to federal and state
income tax in the year of disqualification and for at least the four subsequent
years. Depending on the amount of any such federal and state income tax, the
Company may have insufficient funds to pay such tax and also may be unable to
comply with its obligations under the New Debt.
2000 Taxable Income (Loss)/Taxable Distribution Requirements
During late 1999, the Company began to trade mortgage-backed securities
(the "Trading Assets"). The Company seeks maximum total return through short
term trading, consistent with prudent investment management. Returns from such
activities consist primarily of capital
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<PAGE>
appreciation/depreciation resulting from changes in interest rates and spreads,
if any, and other arbitrage opportunities as well as discount amortization and
coupon interest income. For the nine months ended September 30, 2000, trading
gains and losses on other mortgage-backed securities were immaterial and net
trading losses on CMBS were approximately $3.3 million.
Internal Revenue Service Revenue procedure 99-17 provides securities and
commodities traders with the ability to elect mark-to-market treatment for the
2000 tax year and for all future tax years, unless the election is revoked with
the consent of the Internal Revenue Service. On March 15, 2000, CRIIMI MAE
elected for tax purposes to be classified as a trader in securities effective
January 1, 2000.
As a result of its trader election, CRIIMI MAE recognized a mark-to market
tax loss on its Trading Assets on January 1, 2000 of approximately $478 million
(the "January 2000 Loss"). Such loss is expected to be recognized evenly over
four years beginning with the year 2000. The Company expects such loss to be
ordinary.
Additionally, as a result of its trader election, the Company will be
required to mark-to-market its Trading Assets at the end of each tax year,
including the year 2000. Any increase or decrease in the value of the Trading
Assets as a result of the year-end mark-to-market requirement will generally
result in either a tax gain (if an increase in value) or a tax loss (if a
decrease in value). Such tax gain or loss, as well as any realized gains or
losses from the disposition of Trading Assets during each year, are also
expected to be ordinary gains or losses.
Since gains and losses associated with trading activities are expected to
be ordinary, any gains will generally increase taxable income and any losses
will generally decrease taxable income. Since the Company is a REIT which is
generally required to distribute 95% of its taxable income to shareholders, any
increases in taxable income from trading activities will generally result in an
increase in REIT distribution requirements and any decreases in taxable income
from trading activities will generally result in a decrease in REIT distribution
requirements (or, if the taxable income is reduced to zero, eliminate REIT
distribution requirements).
Gains and losses from the mark-to-market requirement (including the January
2000 Loss) are unrealized. This creates a mismatch between REIT distribution
requirements and cash flow since the REIT distribution requirements will
generally fluctuate due to the mark-to-market adjustments, but the cash flow
from the Company's Trading Assets will not fluctuate as a result of the mark-to-
market adjustments.
Any accumulated and unused net operating losses, subject to certain
limitations, generally may be carried forward for up to 20 years to offset
taxable income until fully utilized. Accumulated and unused net operating losses
can not be carried back. If a security is marked down because of an increase in
interest rates, rather than from credit losses, such mark-to-market losses may
be recovered over time. Any recovered mark-to-market losses will generally be
recognized as taxable income, although there is expected to be no corresponding
increase in cash flow.
There is no assurance that the Company's position with respect to its
election as a trader in securities will not be challenged by the IRS, and, if
challenged, will be defended successfully by the Company. As such, there is a
risk that the January 2000 Loss will be limited or disallowed, resulting in
higher tax basis income and a corresponding increase in REIT distribution
requirements.
As a REIT, CRIIMI MAE is generally required to distribute at least 95% of
its "REIT taxable income" to its shareholders each tax year. If CRIIMI MAE is
required to make taxable income distributions to its shareholders to satisfy
required REIT distributions, all or a substantial portion of these distributions
are expected to be in the form of non-cash dividends. There is no assurance that
such non-cash dividends would satisfy the REIT distribution requirements.
It is possible that the Company could experience an "ownership change"
within the meaning of Section 382 of the Code. Consequently, its use of net
operating losses generated before the ownership change to reduce taxable income
after the ownership change may be subject to limitation under Section 382.
Generally, the use of net operating losses in any year is limited to the value
of the Company's stock on the date of the ownership change multiplied by the
long-term tax exempt rate (published by the IRS) with respect to that date.
See Taxable Income (Loss) below, and Notes 1 and 8 to Notes to Consolidated
Financial Statements for additional information related to the foregoing
matters.
Dividends During Bankruptcy
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During the pendency of the Chapter 11 proceedings, the Company is
prohibited from paying cash dividends without first obtaining Bankruptcy Court
approval (and subject to their being funds legally available for any such
dividend under state corporate law). See "Effect of Chapter 11 Filing on REIT
Status and Other Tax Matters" regarding the declaration of a junior preferred
dividend with respect to 1998 taxable income and the anticipated distribution of
all or a substantial portion of its 1999 taxable income in the form of non-cash
taxable dividends. Dividends may be paid pursuant to and consistent with the
terms of the Plan, a copy of which has been filed with the SEC as an exhibit to
a Current Report on Form 8-K filed on September 22, 2000.
Due to the Chapter 11 filing on October 5, 1998, cash dividends have
not been paid on common or preferred shares. However, since dividends on the
Company's Series B, C, D, E and F Preferred Stock are cumulative, the dividends
payable at September 30, 2000 were accrued in the financial statements.
Dividends paid or accrued per share on the Company's common stock,
Series B Preferred Stock, Series F Preferred Stock and Series G Preferred Stock
are summarized below:
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
2000 1999(1) 2000 1999(1)
<S> <C> <C> <C> <C>
Common shares $ -- $ -- $ -- $ --
Series B Preferred Stock 0.68 0.68 2.04 1.36
Series F Preferred Stock 0.30 -- 0.90 --
Series G Preferred Stock -- -- -- --
</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. The Company also
declared a dividend on September 11, 2000 to common shareholders of record
as of October 27, 2000, for the purpose of distributing approximately $37.5
million in undistributed 1999 taxable income intended to satisfy the
Company's REIT distribution requirements and to eliminate any federal
income tax obligations for 1999. See "Effect of Chapter 11 Filing on REIT
Status and Other Tax Matters" regarding these dividends. However, since
dividends on the Company's preferred shares are cumulative, the dividends
payable at September 30, 2000 and September 30, 1999 were accrued in the
financial statements.
In addition to the per share amounts described above, dividends were
accrued on the Company's Series C Preferred Stock, Series D Preferred Stock, and
Series E Preferred Stock. Amounts payable to Series C Preferred Stock for the
nine months ended September 30, 2000 were $159,832 as dividends accrued for only
a portion of this period due to the exchange of Series C Preferred Stock for
Series E Preferred Stock referenced below. This compares to amounts paid or
payable to Series C Preferred Stock for the nine months ended September 30, 1999
of $484,214. Amounts payable to Series D Preferred Stock for the nine months
ended September 30, 2000 were $458,600. This compares to amounts paid or payable
to Series D Preferred Stock for the nine months ended September 30, 1999 of
$446,856. Amounts paid or payable to the Series E Preferred Stock for the nine
months ended September 30, 2000 were $599,987. Nothing was payable to the Series
E Preferred Stock for the nine months ended September 30, 1999. Amounts payable
to the Series F Preferred Stock for the nine months ended September 30, 2000
were $535,537. Nothing was payable to the Series F Preferred Stock for the nine
months ended September 30, 1999.
On February 22, 2000, CRIIMI MAE and the holder of its Series C
Preferred Stock entered into a Preferred Stock Exchange Agreement pursuant to
which 103,000 shares of Series C Preferred Stock were exchanged for 103,000
shares of a new series of preferred stock designated as Series E Preferred
Stock. On July 26, 2000, CRIIMI MAE and the holder of its Series D Preferred
Stock entered into a Preferred Stock Exchange Agreement pursuant to which
100,000 shares of Series D Preferred Stock were exchanged for 100,000 shares of
Series E Preferred Stock. See Note 12 of Notes to Consolidated Financial
Statements for a further discussion of the exchange of Series C Preferred Stock
for Series E Preferred Stock, and the exchange of the Series D Preferred Stock
for Series E Preferred Stock.
The Company's 1999 Taxable Income
As a REIT, CRIIMI MAE is generally required to distribute at least 95%
of its "REIT taxable income" to its shareholders each tax year. For purposes of
this requirement, REIT taxable income excludes certain excess
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<PAGE>
noncash income such as original issue discount ("OID"). In determining its
federal income tax liability, CRIIMI MAE, as a result of its REIT status, is
entitled to deduct from its taxable income dividends paid to its shareholders.
Accordingly, to the extent the Company distributes its net income to
shareholders, it effectively reduces taxable income, on a dollar-for-dollar
basis, and eliminates the "double taxation" that normally occurs when a
corporation earns income and distributes that income to shareholders in the form
of dividends. The Company, however, still must pay corporate level tax on any
1999 taxable income not distributed to shareholders. Unlike the 95% distribution
requirement, the calculation of the Company's federal income tax liability does
not exclude excess noncash income such as OID.
In determining the Company's taxable income for 1999, distributions
declared by the Company on or before September 15, 2000 and actually paid by the
Company on or before December 31, 2000 will be considered as dividends paid for
the year ended December 31, 1999. On September 11, 2000, the Company declared a
dividend payable to common shareholders of approximately 3.75 million shares of
a new series of preferred stock with a face value of $10 per share (see Note
12). The purpose of the dividend was to distribute approximately $37.5 million
in undistributed 1999 taxable income. To the extent that it is determined that
such amount is not distributed, the Company would bear a corporate level income
tax on the undistributed amount. There can be no assurance that the Company's
REIT status will be preserved or that all of the Company's tax liability will be
eliminated by payment of such preferred stock dividend. The preferred stock
dividend was paid on November 13, 2000 to common shareholders of record as of
October 27, 2000. The preferred stock dividend will be taxable to common
shareholder recipients.
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 shareholders were permitted to convert their shares of junior
preferred stock into common shares during two separate conversion periods.
During these conversion periods, an aggregate 1,020,241 shares of junior
preferred stock were converted into 8,798,009 shares of common stock.
Taxable Mortgage Pool Risks
An entity that constitutes a "taxable mortgage pool" as defined in the Tax
Code ("TMP") is treated as a separate corporate level taxpayer for federal
income tax purposes. In general, for an entity to be treated as a TMP (i)
substantially all of the assets must consist of debt obligations and a majority
of those debt obligations must consist of mortgages; (ii) the entity must have
more than one class of debt securities outstanding with separate maturities and
(iii) the payments on the debt securities must bear a relationship to the
payments received from the mortgages. The Company currently owns all of the
equity interests in two trusts that constitute TMPs (CBO-1 and CBO-2,
collectively the "Trusts"). See Note 5 of the Notes to Consolidated Financial
Statements for descriptions of CBO-1 and CBO-2. 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
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have a material adverse effect on their value and the payments received thereon.
In addition to causing the loss of the exemption under the TMP Rules, a
seizure or sale of the Pledged Bonds and a characterization of them as equity
for tax purposes could also jeopardize the Company's REIT status if the value of
the remaining ownership interests in any Trust held by the Company (i) exceeded
5% of the total value of the Company's assets or (ii) constituted more than 10%
of the Trust's voting interests. Although it is possible that the election by
the TMPs to be treated as taxable REIT subsidiaries could prevent the loss of
CRIIMI MAE's REIT status, there can be no assurance that a valid election could
be made given the timing of a seizure or sale of the Pledged Bonds.
Investment Company Act Risk
Under the Investment Company Act of 1940, as amended (the "Investment
Company Act"), an investment company is required to register with the SEC and is
subject to extensive restrictive and potentially adverse regulation relating to,
among other things, operating methods, management, capital structure, dividends
and transactions with affiliates. However, as described below, companies that
are primarily engaged in the business of acquiring mortgages and other liens on
and interests in real estate ("Qualifying Interests") are excluded from the
requirements of the Investment Company Act.
To qualify for the Investment Company Act exclusion, CRIIMI MAE, among
other things, must maintain at least 55% of its assets in Qualifying Interests
(the "55% Requirement") and is also required to maintain an additional 25% in
Qualifying Interests or other real estate-related assets ("Other Real Estate
Interests" and such requirement, the "25% Requirement"). According to current
SEC staff interpretations, CRIIMI MAE believes that its government insured
mortgage securities and originated loans constitute Qualifying Interests. In
accordance with current SEC staff interpretations, the Company believes that all
of its Subordinated CMBS constitute Other Real Estate Interests and that certain
of its Subordinated CMBS also constitute Qualifying Interests. On certain of the
Company's Subordinated CMBS, the Company, along with other rights, has the
unilateral right to direct foreclosure with respect to the underlying mortgage
loans. Based on such rights and its economic interest in the underlying mortgage
loans, the Company believes that the related Subordinated CMBS constitute
Qualifying Interests. As of September 30, 2000, the Company believes that it was
in compliance with both the 55% Requirement and the 25% Requirement.
If the SEC or its staff were to take a different position with respect to
whether such Subordinated CMBS constitute Qualifying Interests, the Company
could, among other things, be required either (i) to change the manner in which
it conducts its operations to avoid being required to register as an investment
company or (ii) to register as an investment company, either of which could have
a material adverse effect on the Company. If the Company were required to change
the manner in which it conducts its business, it would likely have to dispose of
a significant portion of its Subordinated CMBS or acquire significant additional
assets that are Qualifying Interests. Alternatively, if the Company were
required to register as an investment company, it expects that its operating
expenses would significantly increase and that the Company would have to reduce
significantly its indebtedness, which could also require it to sell a
significant portion of its assets. No assurances can be given that any such
dispositions or acquisitions of assets, or deleveraging, could be accomplished
on favorable terms.
Further, if the Company were deemed an unregistered investment company, the
Company could be subject to monetary penalties and injunctive relief. The
Company would be unable to enforce contracts with third parties and third
parties could seek to obtain rescission of transactions undertaken during the
period the Company was deemed an unregistered investment company. In addition,
as a result of the Company's Chapter 11 filing, the Company is limited in
possible actions it may take in response to any need to modify its business plan
in order to register as an investment company, or avoid the need to register.
Certain dispositions or acquisitions of assets would require Bankruptcy Court
approval. Also, any forced sale of assets that occurs after the bankruptcy stay
is lifted would change the Company's asset mix, potentially resulting in the
need to register as an investment company under the Investment Company Act or
take further steps to change the asset mix. Any such results would be likely to
have a material adverse effect on the Company.
Results of Operations
2000 versus 1999
Financial Statement Net Income
------------------------------
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Financial statement net loss to common shareholders for the three and nine
months ended September 30, 2000 was approximately ($44.5) million and ($36.7)
million, respectively, as compared to net income available to common
shareholders of approximately $8.1 million and $19.5 million for the same
periods in 1999. The primary reasons for the changes in net earnings during
these periods are described below.
Interest Income - Subordinated CMBS
Interest income from Subordinated CMBS decreased by approximately $5.5
million, or 14%, to $33.3 million during the three months ended September 30,
2000 as compared to $38.8 million during the three months ended September 30,
1999. Interest income from Subordinated CMBS decreased by approximately $7.9
million or 7% to approximately $107.8 million for the nine months ended
September 30, 2000 as compared to $115.7 million for the corresponding period in
1999. This overall decrease in interest income was primarily the result of the
sale of certain CMBS: the Morgan bonds in February 2000; the Lehman bonds in
April 2000; and, the Chase bonds in August 2000. (Interest income, beginning
with the quarter ended December 31, 2000, will be reduced further as a result of
the sale in November 2000 of the remaining CMBS subject to the CMBS Sale and the
Company's interest in CMO-IV originated loans.) This net decrease in interest
income was partially offset by the following factors: 1) the impairment on
certain CMBS resulting in an increase in the subsequent income yields due to a
lower cost basis, and 2) an increase in income yields on CMBS due to a change in
methodology in determining such yields. Other than temporary impairment was
recognized as of December 31, 1999 on the Subordinated CMBS that have been sold
in 2000 as part of the CMBS Sale under the Plan. The impairment resulted in the
CMBS cost basis being written down to fair value as of December 31, 1999. As a
result of this new basis, these CMBS have revised higher yields effective the
first quarter of 2000. These higher yields resulted in more income being
recognized for financial statement purposes. Further, yields on CMBS increased
effective April 1, 2000 due to a change in the allocation and timing of loss
estimates (as discussed further below), which resulted in additional income
recognized. See Note 5 to Notes to Consolidated Financial Statements for further
discussion of the CMBS sold as part of the CMBS Sale and for further discussion
of changes in income yields.
Generally accepted accounting principles ("GAAP") require that interest
income earned on Subordinated CMBS be recorded based on the effective interest
method using the anticipated yield over the expected life of the Subordinated
CMBS. Based upon the timing and amount of future credit losses and certain other
assumptions estimated by management, as discussed below, the estimated weighted
average anticipated unleveraged yield for CRIIMI MAE's Subordinated CMBS for
financial statement purposes as of September 30, 2000 was approximately 11.4% as
compared to the anticipated weighted average yield as of December 31, 1999 of
10.1%. These yields were determined based on the anticipated yield over the
expected weighted average life of the Subordinated CMBS, which considers, among
other things, anticipated losses and any other than temporary impairment.
Effective April 1, 2000, the Company changed the allocation and timing of the
estimated future credit losses related to the mortgage loans underlying the
CMBS. Due to the better than anticipated performance of the mortgage loans
underlying the CMBS, which has resulted in lower credit losses than originally
estimated, the Company has revised its estimated credit losses to occur later in
the weighted average life of the CMBS than originally projected. However, the
Company has not lowered the total amount of estimated future credit losses
related to the mortgage loans underlying the CMBS. The change in allocation and
timing of estimated future credit losses to reflect a later occurrence of such
losses results in increases in projected cash flow (primarily in the form of
interest income) as of April 1, 2000, which in turn results in increases in
anticipated yields to maturity as of September 30, 2000. As a result of the
present value benefit of a revised later projected occurrence of credit losses,
the yields used to determine CMBS income have increased. As of September 30,
2000, the overall impact of this allocation and timing revision resulted in a 29
basis point increase in total CMBS anticipated yields to maturity (24 basis
point increase related to the then remaining CMBS subject to the CMBS Sale and
30 basis point increase related to the Company's retained portfolio). These
yield increases have resulted in approximately $700,000 and $1.4 million in
additional CMBS income during the three and nine months ended September 30,
2000, respectively, compared to income that would have been recognized using
prior unrevised yields related to the retained CMBS portfolio. The Company
estimates that total CMBS income related to the Company's retained CMBS
portfolio will be higher by approximately $2 million for the period April 1
through December 31, 2000 than if the unrevised yields were used.
Interest Income-Insured Mortgage Securities
Interest income from insured mortgage securities decreased by approximately
$416,000 or 5% to $7.6 million for the three months ended September 30, 2000
from $8.0 million for the three months ended September 30, 1999. Interest income
from insured mortgage securities decreased by approximately $2.3 million or 9%
to approximately $23.1 million for the nine months ended September 30, 2000 from
approximately $25.4 million for
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the corresponding period in 1999. These decreases were primarily due to the
reduced asset base as a result of prepayments aggregating $83.8 million since
January 1999.
Interest Income-Originated Loans
Interest income from originated loans decreased by approximately $422,000
or 5% to $8.2 million for the three months ended September 30, 2000 from $8.6
million for the three months ended September 30, 1999. Interest income from
originated loans decreased by approximately $1.2 million or 5% to approximately
$24.9 million for the nine months ended September 30, 2000 from approximately
$26.1 million for the corresponding period in 1999. These decreases were
primarily due to the prepayment of originated loans aggregating $25.6 million
since January 1999. These loans were subsequently sold on November 6, 2000. See
Note 1 regarding the sale in November 2000 of the Company's interest in CMO-IV.
Interest Expense
Total interest expense decreased by approximately $2.3 million to
approximately $35.6 million or 6% for the three months ended September 30, 2000
from approximately $37.9 million for the corresponding period in 1999. Total
interest expense decreased by approximately $900,000 or 1% to approximately
$110.7 million for the nine months ended September 30, 2000 compared to
approximately $111.6 million for the corresponding period in 1999. These
decreases were primarily attributable to decreases in interest expense on
variable-rate secured borrowings, reflecting the sale of certain CMBS during
2000 which reduced the Company's CMBS holdings. (Interest expense, beginning
with the quarter ended December 31, 2000, will be reduced further as a result of
the sale, and the payoff of the related debt, in November 2000 of the remaining
CMBS subject to the CMBS Sale and the Company's interest in CMO-IV.) These
decreases were partially offset by the following: (1) a discount amortization
adjustment of approximately $1.5 million related to the insured securities
fixed-rate obligation debt due to an increase in the estimate of future
prepayment speeds during the second quarter of 2000. (This increase in the
estimate of future prepayment speeds is a result of these obligations paying
down faster than originally anticipated.); (2) the replacement during 1999 of a
portion of the Company's variable rate debt with higher fixed rate debt;
and (3) an increase in variable rate borrowing costs due to higher interest
rates in 2000 than in 1999. The sales of these securities were treated as a
financing for accounting purposes. As such, the Company records the securities
as liabilities and recognizes the related interest expense on an ongoing basis.
The fixed rate obligations sold typically carry a higher cost than does the
variable-rate secured borrowing that it replaces.
Equity in Earnings (Losses) from Investments
Equity in earnings increased by approximately $463,000 during the three
months ended September 30, 2000 due to equity in earnings of approximately
$723,000 as compared to equity in earnings of approximately $260,000 for the
third quarter of 1999. Equity in earnings increased by approximately $1.9
million during the nine months ended September 30, 2000 due to equity in
earnings of approximately $685,000 as compared to equity in losses of
approximately $1.2 million for the corresponding period in 1999.
Equity in earnings increased during the quarter ended September 30, 2000
versus the same period in 1999 primarily due to an increase in float income, a
decrease in general and administrative expenses, and a decrease in amortization
related to certain servicing rights of CMSLP. Such net increase was partially
offset by a small net decrease in servicing fee revenues as CMSLP's servicing
portfolio declined primarily from the sale of certain CMBS subject to the CMBS
Sale.
Equity in earnings increased during the nine months ended September 30,
2000 as compared to equity in losses during the same period in 1999 primarily
due to an $800,000 prepayment penalty shortfall which occurred in 1999.
Additionally, a reduction in general and administrative expenses and
amortization in certain servicing rights contributed to the overall increase in
equity in investments during the nine months ended September 30, 2000. However,
this increase was partially offset by a net decrease in servicing and other fee
revenues as CMSLP's servicing portfolio declined due primarily to the sale of
certain CMBS subject to the CMBS Sale.
Other Income
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Other income increased by approximately $652,000 or 145% to
approximately $1.1 million during the third quarter of 2000 as compared to
approximately $449,000 during the corresponding period in 1999. Other income
increased by approximately $547,000 or 29% to approximately $2.4 million during
the nine months ended September 30, 2000. The increase for the three and nine
months ended September 30, 2000 was primarily attributable to the timing of
temporary investments.
Net Gains on Mortgage Securities Dispositions
During the third quarter of 2000 and 1999, net gains on mortgage
dispositions were approximately $-0- and $266,000, respectively. For the nine
months ended September 30, 2000 and 1999, net gains on mortgage dispositions
were approximately $241,000 and $1.9 million, respectively. For the nine months
ended September 30, 2000, the prepayments of mortgage securities represented
approximately 2% of CRIIMI MAE's beginning of the year portfolio balance. For
any quarter, gains or losses on mortgage dispositions are based on the number,
carrying amounts and proceeds of mortgages disposed of during the period.
Gains on Originated Loan Dispositions
During the third quarter of 2000, there was one originated loan
disposition resulting in a gain of approximately $207,000. For the same quarter
of 1999, there were two mortgage prepayments in the originated loan portfolio
resulting in a gain of approximately $75,000. During the nine months ended
September 30, 2000, net gain on originated loan dispositions were approximately
$245,000 versus approximately $235,000 for the nine months ended September 30,
1999. The decreases were due to one disposition and two dispositions,
respectively, in the corresponding periods.
General and Administrative Expenses
General and administrative expenses increased by approximately $75,000
or 3% to approximately $2.78 million during the third quarter of 2000 as
compared to $2.7 million for the corresponding period in 1999. General and
administrative expenses decreased by approximately $372,000 or 4% to
approximately $8.6 million for the nine months ended September 30, 2000 as
compared to approximately $9.0 million for the corresponding period in 1999. The
decrease for the nine months ended was primarily attributable to a decrease in
employment costs from a reduced work force during this period along with a
reduction in certain professional costs.
Unrealized Loss on Warehouse Obligation
During the three and nine months ended September 30, 2000, the Company
recorded no loss on warehouse obligations as all of the loans under the Citibank
Program were sold in 1999. This compares to the nine months ended September 30,
1999, when the Company recorded unrealized losses of approximately $8.0 million,
in connection with the Citibank Program.
Litigation Expense
During the three and nine months ended September 30, 2000, the Company
recorded a $2.5 million expense based on the settlement of the CCA claim for
$2.5 million. See Note 16 for further discussion of this claim. Nothing was
recorded for the same periods last year.
Reorganization Items
Impairment on CMBS. As discussed in Note 1 of the Notes to Consolidated
Financial Statements, under the Plan, a portion of the Recapitalization
Financing was expected to result from the CMBS Sale. As of September 30, 2000,
the remaining CMBS subject to the CMBS Sale had a fair value and amortized cost
of $146 million and $145 million, respectively. 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, April 2000, August
2000, and in November 2000, completed the sale of the remaining CMBS subject to
the CMBS Sale. The Company also sold its interest in CMO-IV in November 2000 as
part of the Plan. (See Note 1 for further discussion of the CMO-IV Sale.)
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
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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 $173 million of other than temporary
impairment related to these CMBS, cumulatively, through earnings through the
third quarter of 2000. Unrealized losses related to the CMBS subject to the CMBS
Sale were previously recognized through other comprehensive income in the equity
section of the balance sheet. The other than temporary impairment loss on CMBS
is a part of the reorganization items on the income statement as the impairment
was recognized as part of the reorganization.
Other Reorganization Items. During the three and nine months ended
September 30, 2000 and 1999, the Company recorded reorganization items, as
summarized below, due to the Chapter 11 filings of CRIIMI MAE, CM Management and
Holdings II.
<TABLE>
<CAPTION>
Reorganization Items Three months Three months Nine months Nine months
--------------------
ended ended ended ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
----------------- ------------------ ----------------- ----------------
<S> <C> <C> <C> <C>
Short-term interest income $ (2,268,168) $ (852,600) $ (4,706,840) $ (1,322,000)
Professional fees (5) (820,503) 2,896,771 6,608,081 13,010,926
Employee Retention Program accrued costs 315,898 426,353 851,948 1,171,855
Other (34,302) 2,135,478 1,411,300 2,692,002
------------ ------------ ------------ ------------
Subtotal (2,807,075) 4,606,002 4,164,489 15,552,783
Impairment on CMBS (4) 10,579,996 -- 15,832,817 --
Impairment on REO (1) -- -- 924,283 --
(Gain) loss on sale of CMBS (2) (1,367,601) -- 343,613 --
Loss on originated loans (3) 45,845,712 -- 45,845,712 --
------------ ------------ ------------ ------------
Total $ 52,251,032 $ 4,606,002 $ 67,110,914 $ 15,552,783
============ ============ ============ ============
</TABLE>
(1) The Company recognized impairment on its investment in REO in June
2000. This asset was sold in July 2000 as discussed in Note 3 and Note
9.
(2) The Company recognized a loss of approximately $1.35 million on the
sale of the Morgan Bonds in February 2000, a loss of approximately
$360,000 on the sale of the First Union Bonds in April 2000, and a
gain of approximately $1.37 million on the sale of the Chase Bonds in
August 2000.
(3) In July 2000, the Company decided that, as part of the Plan, it would
sell the remaining $53 million face amount of assets from CMO-IV that
it then owned. The sale of the Company's interest in CMO-IV closed on
November 6, 2000. In accordance with EITF 96-16, the net loss on the
sale of CMO-IV is required to be presented as two components
consisting of the loss on the sale of the originated loans and the
subsequent gain related to the extinguishment of debt. Because the
Company decided in the third quarter of 2000 to sell all of its
interest in CMO-IV, investment in originated loans was adjusted from
amortized cost to fair value resulting in a $45.8 million loss in the
third quarter which is classified as a reorganization item. Gains
related to the extinguishment of debt cannot be recognized until the
debt is actually extinguished. The estimated gain related to the
extinguishment of debt is approximately $16 million and will be
recognized in the fourth quarter of 2000 as an extraordinary item. The
net loss related to the sale of the Company's interest in CMO- IV is
estimated to be $30 million. For tax purposes, the net loss is
estimated to be $29 million and will be recorded in the fourth quarter
as ordinary loss (see Note 6 for further discussion).
(4) The Company recognized impairment on its remaining CMBS subject to the
CMBS Sale as of September 30, 2000. The CMBS were sold in November
2000 as discussed in Note 5.
(5) During the three months ended September 30, 2000, the Company reduced
the amount of previously accrued professional fees to reflect the
results of the settlement with SSB in July 2000.
Taxable Income (Loss)
CRIIMI MAE realized net operating losses of approximately $(12) million
and $(45) million during the three and nine months ended September 30, 2000,
respectively, compared to a tax basis loss of approximately $(16.4) million and
tax basis income of $17.8 million during the corresponding periods in 1999.
Included in the net operating loss during the three and nine months ended
September 30, 2000, was a realized loss on the sale of CMBS
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of $627,000 and $3.3 million, respectively. As previously discussed, on March
15, 2000, CRIIMI MAE elected to be classified as a trader in securities for tax
purposes effective January 1, 2000. As a result of its trader election, CRIIMI
MAE recognized a mark-to-market tax loss of approximately $478 million on its
Trading Assets on January 1, 2000 (the "January 2000 Loss"). The January 2000
Loss is expected to be recognized evenly over four years (i.e., approximately
$120 million per year) beginning with the year 2000. The Company recognized one-
fourth (i.e., approximately $30 million) of this year's portion of the January
2000 Loss during the first, second and third quarters of 2000. The Company
expects to continue to recognize approximately $30 million of loss related to
the January 2000 Loss in each quarter for the next four years. (See also "2000
Taxable Income (Loss)/Taxable Distribution Requirements" for a more complete
discussion and Note 8 for a discussion of differences between financial
statement net income (loss) and taxable income (loss)).
A summary of the estimated first nine months of 2000 net operating loss is
as follows:
<TABLE>
<S> <C>
January 2000 Loss $ 478 million
LESS: Portion recognized in First Quarter 2000 (30) million
LESS: Portion recognized in Second Quarter 2000 (30) million
LESS: Portion recognized in Third Quarter 2000 (30) million
-------------------
Balance Remaining of January 2000 Loss to be Recognized $ 388 million
===================
Taxable Income for the nine months ended September 30, 2000 Before Recognition $ 45 million
of January 2000 Loss
LESS: January 2000 Loss Recognized in first three quarters of 2000 (90) million
Net Operating Losses for the nine months ended September 30, 2000 ($45) million
===================
Net Operating Loss through September 30, 2000 ($45) million
Net Operating Loss Utilization 0.0 million
-------------------
Net Operating Loss Carried Forward for Use in Future Periods ($45) million
===================
</TABLE>
(1) So long as available, net operating losses, including the allocable portion
of the January 2000 Loss, are expected to offset taxable income on an
annual basis.
The distinction between taxable income (loss) and GAAP income (loss) is
important to the Company's shareholders because dividends or distributions are
declared and paid on the basis of taxable income. The Company does not pay taxes
so long as it satisfies the requirements for exemption from taxation pursuant to
the REIT requirements of the Code. The Company calculates its taxable income as
if the Company were a regular domestic corporation. This taxable income level
determines the amount of dividends the Company is required to pay out over time
in order to eliminate its tax liability.
Trading Activities
During late 1999, the Company began to trade mortgage-backed securities.
The Company seeks maximum total return through short term trading, consistent
with prudent investment management. Returns from such activities consist
primarily of capital appreciation/depreciation resulting from changes in
interest rates and spreads, if any, and other arbitrage opportunities as well as
discount amortization and coupon interest income. The Company is conducting
trading activities in both short and longer duration fixed income instruments,
primarily subordinated and investment grade CMBS and investment grade
residential mortgage backed securities. The Company's Subordinated CMBS assets
existing as of late 1999 constitute the non-investment grade, longer duration
Trading Assets, and a new portfolio created in late 1999, consisting primarily
of CMBS and residential MBS, constitute, the investment grade, short duration
Trading Assets. For the nine months ended September 30, 2000, trading losses on
other mortgage-backed securities were immaterial and net trading losses on CMBS
were approximately $3.3 million.
As of September 30, 2000, the combined Trading Assets approximated
$1.35 billion for tax purposes.
Cash Flow
2000 versus 1999
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Net cash provided by operating activities decreased for the nine months
ended September 30, 2000 as compared to the nine months ended September 30,
1999. The decrease was primarily due to an increase in restricted cash as
compared to the same period last year. The increase in restricted cash was
partially offset by a decrease in receivables and other assets.
Net cash provided by investing activities decreased for the nine months
ended September 30, 2000 as compared to the nine months ended September 30, 1999
primarily due to a decrease in proceeds from mortgage securities dispositions
and originated loan dispositions compared to the same period last year. These
decreases were partially offset by an increase in proceeds from the sale of
CMBS, net of associated debt. See Note 5 for further discussion of those sales.
Net cash used in financing activities decreased for the nine months
ended September 30, 2000 as compared to the nine months ended September 30, 1999
due to a decrease in principal payments on debt obligations, partially offset by
a decrease in proceeds from debt issuances as compared to the same period last
year.
Liquidity and Capital Resources
Prior to the Petition Date, CRIIMI MAE used proceeds from long-term,
fixed-rate match-funded debt refinancings, short-term, variable-rate secured
borrowings, unsecured and other borrowings, securitizations and issuances of
common and preferred shares to meet the capital requirements of its business
plan. Since the Chapter 11 filing, the Company has suspended its Subordinated
CMBS acquisition, origination and securitization operations, but continues to
service mortgage loans through CMSLP.
Prior to the Petition Date, CRIIMI MAE financed a substantial portion
of its Subordinated CMBS acquisitions with short-term, variable-rate borrowings
secured by the Company's Subordinated CMBS. The agreements governing these
financing arrangements typically required the Company to maintain loan-to-value
ratios. The agreements further provided that the lenders could require the
Company to post cash or additional collateral if the value of the existing
collateral fell below the minimum amount required.
In order to refinance a portion of its short-term, variable-rate
secured borrowings with long-term, fixed-rate debt, the Company entered into
resecuritization transactions. In May 1998, CRIIMI MAE completed CBO-2, its
second resecuritization of its Subordinated CMBS portfolio, which under FAS 125,
qualified for both sale and financing accounting. Through CBO-2, CRIIMI MAE
refinanced $468 million of its variable-rate debt with fixed-rate, match-funded
debt. The debt is considered match-funded because the maturities and principal
requirements of the debt closely match those of the related collateral. The
transaction also generated additional borrowing capacity of approximately $160
million, which was used primarily to fund additional Subordinated CMBS
purchases. In June 1998, CRIIMI MAE securitized $496 million of originated and
acquired commercial mortgage loans by selling $397 million face amount of
fixed-rate investment grade securities. The tranches not sold to the public were
partially financed with variable-rate secured financing agreements.
After the above structured finance transactions, the Company continued
to have a substantial amount of short-term, variable-rate secured financing
facilities which were subject to the previously discussed collateral
requirements based on CMBS security values. As a result of the turmoil in the
capital markets commencing in late summer of 1998, the spreads between CMBS
yields and the yields on Treasury securities with comparable maturities began to
increase substantially and rapidly. CRIIMI MAE's short-term secured creditors
perceived that the value of the Subordinated CMBS securing their facilities with
the Company had fallen, creating a value deficiency as measured by the
loan-to-value ratio and, consequently, made demand upon the Company to provide
cash or additional collateral with sufficient value to cure the perceived value
deficiency. In August and September 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.
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<PAGE>
As of November 10, 2000, CRIIMI MAE had secured financing agreements
with GACC and Merrill Lynch with respect to certain of its CMBS. Certain of
these lenders have registered the pledged securities in their own names. As a
result, the trustee makes payments on such securities to the registered holder.
Since the Chapter 11 filing occurred, certain registered holders withheld
payments related to securities not registered to CRIIMI MAE. As previously
discussed, the Company has entered into various agreements with these creditors.
CRIIMI MAE Inc.'s restricted cash position has increased from approximately $7
million on October 5, 1998 to approximately $77.6 million as of September 30,
2000. Due to the uncertainty of the effects of the Chapter 11 filing on the
business of the Company, pending litigation, material reorganization items to be
incurred during the pendency of the bankruptcy and numerous other factors beyond
the Company's control, no assurance can be given that the Company's cash flow
will be sufficient to fund operations for any specified period while the Company
is in bankruptcy.
Under CRIIMI MAE's Plan, a portion of the Recapitalization Financing
was expected to result from the CMBS Sale. As of September 30, 2000, the
remaining CMBS subject to the CMBS Sale had a fair value and amortized cost of
approximately $146 million and $145 million. 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, April and August 2000; and in
November 2000, completed the sale of the remaining CMBS subject to the CMBS
Sale. 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 $173 million of other than temporary impairment related to these
CMBS, cumulatively, through earnings from the decision date through the first
nine months of 2000. The Company also sold its interest in CMO-IV in November
2000 as part of the Plan. The table below provides a summary of the sales of
the CMBS subject to the CMBS Sale (and includes the CMO-IV Sale in the sale of
the Citicorp Bonds) completed in connection with the Company's Plan and included
as part of the Recapitalization Financing. The sales of the remaining CMBS
subject to the CMBS Sale were completed in November 2000.
<TABLE>
<CAPTION>
Net Proceeds
Face Sale Proceeds Debt to CRIIMI
-------------
Sale Date Portfolio Classes Amount (b) Paydown MAE Loss (a)
--------- --------- ------- ------ --- ------- --- --------
in millions in millions in millions in millions in millions
<S> <C> <C> <C> <C> <C> <C> <C>
02/29/00 Morgan Stanley Capital 8 classes $ 87 $ 45.9 $ 37.5 $ 8.4 ($1.35)
I, Series 1998-WF2
("Wells Fargo Bonds")
04/24/00 First Union-Lehman 7 classes $ 290 $ 140 $ 113 $ 27 ($0.36)
Brothers-Bank of
America Commercial
Mortgage Trust Series
1998-C2
("First Union Bonds")
08/07/00 Chase Commercial 5 classes $ 81.8 $ 43.8 $ 36.6 $ 7.2 $1.37
Mortgage Securities
Corp., Series 1998-1
("Chase Bonds")
11/01/00 DLJMAC 1997-CF2 1 class $ 36.4 $ 14.2 $ 14.2 -0- (c)
("DLJ Bond")
11/06/00 MCFI 1998-MC1, 21 classes $ 291 $ 174.8 $ 141.0 $ 33.8 N/A
------- --------- ------- -------
MCFI 1998-MC2,
CMM 1998-1 (b)
("Citicorp Bonds")
Total Sales $786.2 $ 418.7 $ 342.3 $ 76.4
====== ======== ======= =======
</TABLE>
(a) Represents actual loss recognized when sold. Losses had been recognized
through impairment in previous periods.
81
<PAGE>
(b) Included in the sale of the Citicorp Bonds is the Company's interest in CMO-
IV, as discussed below.
(c) To be recorded in the fourth quarter.
In July 2000, the Company decided that, as part of the Plan, it would sell
the remaining $53 million face amount of assets from CMO-IV that it then owned.
The proceeds from the sale of CMO-IV (which occurred in November 2000), along
with certain other proceeds from the sale of the remaining CMBS subject to the
CMBS Sale, were to pay down the variable rate debt secured by certain of such
assets, and to satisfy all remaining Citigroup claims, with the remaining
proceeds retained by the Company. As a result of the sale of the CMO-IV assets,
CRIIMI MAE no longer has any economic interest in CMO-IV (See also Note 1 for
more information regarding the CMO-IV Sale). The Company, as the owner of the
issuer's equity of CMO-IV, held the call options related to the $442.5 million
(original face amount) of previously issued securities that are classified as
securitized debt on the Company's balance sheet. As a result of the sale of the
issuer's equity, CRIIMI MAE no longer owns these call options and, as a result,
the securitization no longer qualifies as a financing under SFAS 125. As a
result, all assets (Investment in Originated Loans and related deferred
financing costs) and liabilities (Collateralized mortgage obligations -
Originated Loans and a portion of variable rate secured borrowings - CMBS)
related to the securitization will be removed from CRIIMI MAE's balance sheet
for the fourth quarter. The sale of the Company's interest in CMO-IV closed on
November 6, 2000. In accordance with EITF 96-16, the net loss on the sale of the
Company's interest in CMO-IV is required to be presented as two components
consisting of the loss on the sale of the originated loans and the subsequent
gain related to the extinguishment of debt. Because the Company decided the
third quarter of 2000 to sell all of its interest in CMO-IV, the investment in
originated loans was adjusted from amortized cost to fair value through a
valuation allowance resulting in a $45.8 million loss in the third quarter which
is classified as a reorganization item. Gains related to the extinguishment of
debt cannot be recognized until the debt is actually extinguished which occurred
on November 6, 2000. The estimated gain related to the extinguishment of debt is
$16 million and will be recognized in the fourth quarter of 2000 as an
extraordinary item. The net loss related to the sale of the Company's interest
in CMO-IV is estimated to be $30 million. For tax purposes, the net loss is
estimated to be $29 million and will be recorded in the fourth quarter as an
ordinary loss.
Although CMO-IV was accounted for as a financing, as described above,
economically, the Subordinated CMBS tranches created in this transaction which
CRIIMI MAE owned, generated monthly cash flows of approximately $700,000. As of
September 30, 2000, interest payments of approximately $15.1 million were
withheld with respect to certain tranches of CMO-IV. As part of the sale of the
Company's interest in CMO-IV, the cumulative interest payments withheld will be
released to the Company to help fund the Plan.
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 a purchase
transaction. During the nine months ended September 30, 2000, the required
spreads above treasury rates were relatively unchanged on a total portfolio
basis. However, treasury rates decreased, generally, from December 31, 1999
which, when combined with the required spreads, resulted in an aggregate $25.5
million net increase in the value of the Company's portfolio of CMBS and FHAs
and GNMAs from December 31, 1999 to September 30, 2000.
The Company's ability to resume the acquisition of Subordinated CMBS,
as well as its securitization programs (if it is determined to do so), depends
first on its ability to obtain the requisite recapitalization proceeds, obtain
confirmation and approval of a plan reorganization and emerge from bankruptcy as
a successfully reorganized company, and second, on its ability to access
additional capital once it has successfully emerged from bankruptcy. Factors
which could affect the Company's ability to access additional capital include,
among other things, the cost and availability of such capital, changes in
interest rates and interest rate spreads, changes in the commercial mortgage
industry and the commercial real estate market, general economic conditions,
perceptions in the capital markets of the Company's business, covenants under
the Company's debt securities and credit facilities, results of operations,
leverage, financial condition, and business prospects. The Company can give no
assurance as to whether it will be able to obtain additional capital or the
terms of any such capital. See Note 1 to Notes to Consolidated Financial
Statements for a discussion of the New Debt contemplated under the Plan.
ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal market risk is exposure to changes in interest
rates related to the U.S. Treasury market as well as the LIBOR market. The
Company will have an increase in the amount of interest expense paid 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
increases in the spread between U.S. Treasury bonds and CMBS.
82
<PAGE>
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.
83
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Note 16 of Notes to Consolidated Financial Statements
of CRIIMI MAE Inc. which incorporated herein by reference.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Reference is made to Notes 1, 5, 6, 9, 12 and 16 to Notes to Consolidated
Financial Statements of CRIIMI MAE which are incorporated herein by reference.
Such Notes contain a description of alleged defaults asserted by certain of the
Company's lenders.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS (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. Third Amended Joint Plan of Reorganization of CRIIMI MAE
Inc. and its affiliates CRIIMI MAE Holdings II, L.P. and
CRIIMI MAE Management, Inc. (collectively the "Debtors")
(as supplemented and amended by praecipes filed with the
United States Bankruptcy Court for the District of
Maryland, Greenbelt (the "Bankruptcy Court") on July 13,
14 and 21, 2000 (the "Plan") (incorporated by reference
from Exhibit 2 to the Form 8-K filed with the Securities
and Exchange Commission on September 22, 2000).
Exhibit No. 3 - Articles of Incorporation and Bylaws.
a. Certificate of Correction of Articles Supplementary to
the Articles of Incorporation of CRIIMI MAE Inc. in
respect of Series F Redeemable Cumulative Dividend
Preferred Stock (incorporated by reference from Exhibit
3.1 to the Form 8-K filed with the Securities and
Exchange Commission on September 14, 2000).
b. Articles of Amendment to Articles Supplementary to the
Articles of Incorporation of CRIIMI MAE Inc. in respect
of the Series E Cumulative Convertible Preferred Stock
(incorporated by reference from Exhibit 3.2 to the Form
8-K filed with the Securities and Exchange Commission on
September 14, 2000).
c. Articles Supplementary to the Articles of Incorporation
of CRIIMI MAE Inc. for the issuance of a new series of
$10 face value Series G Redeemable Cumulative Dividend
Preferred Stock (incorporated by reference from Exhibit
3.3 to the Form 8-K filed with the Securities and
Exchange Commission on September 14, 2000).
84
<PAGE>
Exhibit No. 10 - Material contracts
a. Preferred Stock Exchange Agreement entered into July
26, 2000 by CRIIMI MAE Inc. and the holder of its
Series D Cumulative Convertible Preferred Stock
(incorporated by reference from Exhibit 99.8 to the
Form 8-K filed with the Securities and Exchange
Commission on September 22, 2000).
Exhibit No. 27 - Financial Data Schedule.
a. Financial Data Schedule (filed herewith).
Exhibit No. 99 - Additional Exhibits
99(a) Notice of Motion to Approve
Stipulation and Consent Order
Selling Certain Commercial
Mortgage-Backed Securities to
Lehman Ali, Inc. Free and
Clear of Liens, Claims and
Encumbrances entered March 21,
2000 (filed herewith).
99(b) Notice of Motion to Approve
Stipulation and Consent Order
Selling Certain Commercial
Mortgage-Backed Securities to
ORIX Real Estate Capital
Markets, LLC Free and Clear of
Liens, Claims and Encumbrances
and Compromising and Settling
Claims entered on September
21, 2000 (filed herewith).
99(c) Notice of Motion to Approve
Stipulation and Consent Order
Regarding Application of MCFI
Bond Proceeds entered on
September 22, 2000 (filed
herewith).
99(d) Order and Ruling Upon
Objection to Debtors' Proposed
Second Amended Joint
Disclosure Statement entered
on July 12, 2000 and a
Memorandum Opinion pertaining
to such objection entered by
the Bankruptcy Court on July
12, 2000 (incorporated by
reference from Exhibit 99.1 to
the Form 8-K filed with the
Securities and Exchange
Commission on July 20, 2000).
99(e) The Debtors' Second Amended
Joint Disclosure Statement (as
supplemented and amended by
praecipes filed with the
Bankruptcy Court on July 13
and 21 and August 18, 2000
"Disclosure Statement")
(incorporated by reference
from Exhibit 99.6 to the Form
8-K filed with the Securities
and Exchange Commission on
September 22, 2000).
99(f) Order entered by the
Bankruptcy Court on August 24,
2000 (i) approving the
disclosure statement; (ii)
fixing the time within which
creditors and equity interest
holders may vote to accept or
reject the plan; (iii) fixing
date, time and place for
hearing on confirmation of the
plan; (iv) approving form of
ballots and voting procedures;
and (v) approving manner of
notice (incorporated by
reference from Exhibit 99.2 to
the Form 8-K filed with the
Securities and Exchange
Commission on September 22,
2000).
85
<PAGE>
99(g) Stipulation and Consent Order selling certain
Commercial Mortgage-Backed Securities to ORIX
Real Estate Capital Markets, LLC Free and
Clear of Liens, Claims and Encumbrances and
Compromising and Settling claims entered by
the Bankruptcy Court on October 12, 2000
(filed herewith).
99(h) Amendment to Agreed Proceeds in Connection
with Stipulation and Consent Order selling
certain Commercial Mortgage-Backed Securities
to ORIX Real Estate Capital Markets, LLC Free
and Clear of Liens, Claims and Encumbrances
and Compromising and Settling Claims entered
by the Bankruptcy Court on October 30, 2000
(filed herewith).
99(i) Tally of Ballots Voting on the Debtors' Plan
filed on November 9, 2000 (filed herewith).
(b) REPORTS ON FORM 8-K
Date Purpose
---- -------
July 20, 2000 To report (1) the Order, and
Ruling Upon Objection to
Debtors' Proposed Second
Amended Joint Disclosure
Statement entered by the
Bankruptcy Court on July 12,
2000 and (2) Memorandum
Opinion pertaining to such
objection entered by the
Bankruptcy Court on July 12,
2000 and (c) a press release
advising that the Court has
overruled objections to CRIIMI
MAE's disclosure statement
that was issued by CRIIMI MAE
Inc. on July 14, 2000.
August 11, 2000 To report twelve (12)
praecipes amending and
supplementing the Third
Amended Joint Plan of
Reorganization and proposed
Second Amended Joint
Disclosure Statement including
(1) Praecipe Filing
Substituted Pages to the
Debtors' Third Amended Joint
Plan of Reorganization filed
with the Bankruptcy Court on
July 13, 2000; (2) Praecipe
Filing Amended Exhibit 3 to
the Debtors' Third Amended
Joint Plan of Reorganization
filed with the Bankruptcy
Court on July 13, 2000; (3)
Praecipe Filing Amended
Exhibit 2 to the Debtors'
Third Amended Joint Plan of
Reorganization filed with the
Bankruptcy Court on July 14,
2000; (4) Praecipe Filing
Further Substituted Pages to
the Debtors' Third Amended
Joint Plan of Reorganization
filed with the Bankruptcy
Court on July 21, 2000; (5)
Praecipe Filing Exhibit 4 to
the Debtors' Third Amended
Joint Plan of Reorganization
filed with the Bankruptcy
Court on July 21, 2000; (6)
Praecipe Filing Substituted
Pages to the Debtors' Second
86
<PAGE>
Amended Joint Disclosure Statement
filed with the Bankruptcy Court on
July 13, 2000; (7) Praecipe Filing
Amended Exhibit E (Including
Exhibits Thereto) to the Debtors'
Second Amended Joint Disclosure
Statement filed with the Bankruptcy
Court on July 13, 2000; (8)
Praecipe Filing Exhibit H to the
Debtors' Second Amended Joint
Disclosure Statement filed with the
Bankruptcy Court on July 21, 2000;
(9) Praecipe Filing Further
Substituted Pages to the Debtors'
Second Amended Joint Disclosure
Statement filed with the Bankruptcy
Court on July 21, 2000; (10)
Praecipe Filing Amended Exhibit B
to the Debtors' Second Amended
Joint Disclosure Statement filed
with the Bankruptcy Court on July
21, 2000; (11) Praecipe Filing
Substituted Page in Exhibit C to
Exhibit E to the Debtors' Second
Amended Joint Disclosure Statement
filed with the Bankruptcy Court on
July 21, 2000; and (12) Praecipe
Filing Amended Page to Exhibit G to
the Debtors' Second Amended Joint
Disclosure Statement filed with the
Bankruptcy Court on July 21, 2000.
September 14, 2000 To report (a) Certificate of
Correction to Article Supplementary
to the Articles of Incorporation of
CRIIMI MAE Inc. in respect of
Series F Redeemable Cumulative
Dividend Preferred Stock on July
21, 2000; (b) Articles of Amendment
to Articles Supplementary to the
Articles of Incorporation of CRIIMI
MAE Inc. in respect of the Series E
Cumulative Convertible Preferred
Stock on July 26, 2000; (c)
Articles Supplementary to the
Articles of Incorporation of CRIIMI
MAE Inc. for the issuance of a new
Series of Series G Redeemable
Cumulative Dividend Preferred Stock
on September 11, 2000; and (d) a
press release issued by CRIIMI MAE
Inc. declaring that a dividend on
common shares was to be paid in new
series of preferred stock on
September 9, 1999.
September 22, 2000 To report (a) the Third Amended
Joint Plan of Reorganization filed
by the Debtors (as supplemented and
amended by praecipes filed with the
Bankruptcy Court on July 13, 14 and
21, 2000); (b) the Order entered by
the Bankruptcy Court on August 24,
2000: (i) approving the Debtors'
Second Amended Joint Disclosure
Statement (as supplemented and
amended by praecipes filed with the
Bankruptcy Court on July 13 and 21
and August 18, 2000), (ii) fixing
the time within which creditors and
equity interest holders may vote to
accept or reject the Debtors'
87
<PAGE>
Plan (iii) fixing the date, time
and place for the hearing on the
confirmation of the Plan, (iv)
approving the form of ballots and
voting procedures, and (v)
approving the manner of notice; (c)
the Notice of the (i) approval of
the Debtors' Disclosure Statement,
(ii) hearing to consider
confirmation of the Debtors' Plan,
(iii) voting record date, and (iv)
deadline for filing objections to
confirmation; (d) letter from
counsel to the Official Committee
of Unsecured Creditors of CRIIMI
MAE Management, Inc. recommending
that the unsecured creditors of
CRIIMI MAE Management, Inc. vote to
accept the Plan; (e) letter from
the co-chairs of the Official
Committee of Equity Security
Holders of CRIIMI MAE Inc.
recommending that equity security
holders of CRIIMI MAE Inc. vote to
accept the Plan; (f) letter from
the Chairman of the Official
Committee of Unsecured Creditors of
CRIIMI MAE Inc. recommending the
unsecured creditors of CRIIMI MAE
Inc. vote to accept the Debtors'
Plan; (g) the Debtors' Disclosure
Statement; (h) a press release
issued by CRIIMI MAE Inc. on August
24, 2000 reporting the Bankruptcy
Court's approval of the Disclosure
Statement and setting of a date for
the confirmation hearing of the
Debtors' Plan; (i) a Preferred
Stock Exchange Agreement entered
into July 26, 2000 by CRIIMI MAE
Inc. and the holder of its Series D
Cumulative Convertible Preferred
Stock to exchange 100,000
outstanding shares of Series D
Preferred Stock for 100,000 shares
of Series E Cumulative Convertible
Preferred Stock; and (j) a press
release issued by CRIIMI MAE Inc.
on July 27, 2000 announcing
execution of the exchange of CRIIMI
MAE Inc.'s Series D Preferred Stock
for Series E Preferred Stock.
88
<PAGE>
Signature
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-Q to
be signed on its behalf by the undersigned, thereunto duly authorized.
CRIIMI MAE INC.
/s/ November 14, 2000 /s/ Cynthia O. Azzara
--------------------------- --------------------------------
DATE Cynthia O. Azzara
Senior Vice President,
Principal Accounting Officer
and Chief Financial Officer
89
<PAGE>
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
(Greenbelt Division)
___________________________________________
)
)
In re )
)
CRIIMI MAE Inc., et al., ) Chapter 11
) Case Nos. 98-2-3115(DK)
Debtors. ) through 98-2-3117(DK)
) (Jointly Administered)
___________________________________________)
NOTICE OF MOTION TO APPROVE STIPULATION AND
CONSENT ORDER SELLING CERTAIN COMMERCIAL
MORTGAGE-BACKED SECURITIES TO LEHMAN ALI INC.
FREE AND CLEAR OF LIENS, CLAIMS AND ENCUMBRANCES
NOTICE IS HEREBY GIVEN pursuant to Fed. R. Bankr. P. 2002 and 9019(a)
that CRIIMI Mae Inc., Debtor and Debtor-in-Possession herein ("CMI"), has filed
a Motion to Approve Stipulation and Consent Order Selling Certain Commercial-
Mortgage Backed Securities to Lehman ALI Inc. Free and Clear of Liens, Claims
and Encumbrances (the "Motion"), pursuant to Sections 105(a) and 363(b) of Title
11 of the United States Code (the "Bankruptcy Code") and Fed. R. Bankr. P. 6004.
As set forth in the Motion, CMI, Lehman ALI Inc. ("Lehman ALI"),
Lehman Brothers, Inc. ("LBI"), First Union National Bank ("FUNB") and the
Official Committee of Equity Security Holders of CMI (the "Equity Committee"),
have filed a Stipulation and Consent Order with respect to the sale of certain
Commercial Mortgage-Backed Securities ("CMBS"). The Stipulation and Consent
Order is attached to this Notice as Exhibit 1.
As further set forth in the Motion, CMI, Lehman ALI and LBI have
agreed to settle their differences over certain "Lehman Bonds" as defined in the
Stipulation and Consent Order. CMI proposes to sell to Lehman ALI the Lehman
Bonds free and clear of any liens, claims and encumbrances. CMI also proposes to
sell to Lehman ALI its interest in certain securities pledged to FUNB to secure
loans made by FUNB to CMI (the "FUNB Bonds," as defined in the Stipulation and
Consent Order) free and clear of any liens, claims and encumbrances. CMI also
proposes to sell to Lehman ALI certain "Unpledged Bonds" as defined in the
Stipulation and Consent Order free and clear of any liens, claims and
encumbrances. The
<PAGE>
Lehman Bonds, the FUNB Bonds and the Unpledged Bonds are collectively referred
to as the "Bond Portfolio." The sale of the Bond Portfolio to Lehman ALI shall
be in accordance with the terms set forth in the Stipulation and Consent Order,
as summarized in the Motion.
CMI acknowledges that Lehman (or its designees) is currently
conducting due diligence in connection with the Bond Portfolio," and has agreed
that Lehman may in its sole discretion, under certain circumstances, elect to
terminate its purchase of the Bond Portfolio. Moreover, Lehman may also elect to
terminate the Motion by delivering written notice of such termination to CMI if
an order approving the Motion is not entered on or before April 30, 2000.
CMI believes that the proposed sale of the Bond Portfolio is necessary
and appropriate and a sound exercise of business judgment by CMI. CMI believes
that good cause and sound business reasons exist for proceeding promptly with
the sale of the Bond Portfolio and that the proposed sale is in the best
interest of the estates and all parties in interest.
THE MOTION IS AVAILABLE FOR REVIEW IN THE OFFICE OF THE CLERK OF THE
COURT AT THE ADDRESS SET FORTH HEREINAFTER. ANY CREDITOR OR PARTY IN INTEREST
WHO OBJECTS TO APPROVAL OF THE MOTION MUST FILE AN OBJECTION IN WRITING,
SPECIFICALLY STATING THE LEGAL AND FACTUAL GROUNDS ON WHICH THE OBJECTION IS
BASED, WITH THE UNITED STATES BANKRUPTCY COURT, 6500 CHERRYWOOD LANE, SUITE 300,
GREENBELT, MARYLAND 20770 AND ALSO SERVE ANY SUCH OBJECTION BY U.S. MAIL AND
TELECOPY ON THE FOLLOWING COUNSEL WITHIN TWENTY (20) DAYS OF THE DATE OF THIS
NOTICE: (i) GREGORY A. CROSS, ESQUIRE, VENABLE, BAETJER AND HOWARD, LLP, 1800
MERCANTILE BANK & TRUST BUILDING, 2 HOPKINS PLAZA, BALTIMORE, MARYLAND 21201
(TELECOPY NO. 410-528-2868), (ii) MICHAEL ST. PATRICK BAXTER, ESQUIRE, COVINGTON
& BURLING, 1201 PENNSYLVANIA AVENUE, N.W., WASHINGTON, D.C. 20004 (TELECOPY NO.
202-662-6291), and (iii) JOHN F. HORSTMANN, ESQUIRE, DUANE, MORRIS & HECKSCHER,
1 LIBERTY PLACE, PHILADELPHIA, PENNSYLVANIA 19103 (TELECOPY NO. 215-979-1020).
THE COURT MAY CONDUCT A HEARING OR RULE ON THE MOTION WITHOUT A
HEARING, IN ITS DISCRETION, REGARDLESS OF WHETHER ANY OBJECTIONS ARE FILED. IF
NO OBJECTIONS ARE FILED, THE MOTION MAY BE APPROVED WITHOUT FURTHER NOTICE.
SHOULD THE COURT DECIDE TO HOLD A HEARING ON THE MOTION AND
OBJECTIONS, IF ANY, IT WILL BE HELD ON APRIL 21, 2000, AT 11:30 A.M., IN
COURTROOM 3C, AT THE UNITED STATES
2
<PAGE>
BANKRUPTCY COURT, 6500 CHERRYWOOD LANE, GREENBELT, MARYLAND 20770.
Any party in interest with questions about the foregoing may contact
the undersigned.
Dated: March _____, 2000.
_________________________________
Richard L. Wasserman
Federal Bar No. 02784
Gregory A. Cross
Federal Bar No. 04571-G
Venable, Baetjer and Howard, LLP
1800 Mercantile Bank & Trust Bldg.
2 Hopkins Plaza
Baltimore, Maryland 21201
(410) 244-7400
Counsel for CRIIMI MAE Inc.,
Debtor-in-Possession
3
<PAGE>
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
(Greenbelt Division)
_____________________________________
)
)
In re )
)
CRIIMI MAE Inc., et al., ) Chapter 11
) Case Nos. 98-2-3115(DK)
Debtors. ) through 98-2-3117(DK)
) (Jointly Administered)
_____________________________________)
CERTIFICATE OF SERVICE OF NOTICE OF MOTION TO APPROVE
STIPULATION AND CONSENT ORDER SELLING CERTAIN COMMERCIAL
MORTGAGE-BACKED SECURITIES TO LEHMAN ALI INC. FREE AND
-------------
CLEAR OF LIENS, CLAIMS AND ENCUMBRANCES
---------------------------------------
I HEREBY CERTIFY that a copy of the Notice of Motion to Approve
Stipulation and Consent Order Selling Certain Commercial Mortgage-Backed
Securities to Lehman Ali Inc. Free and Clear of Liens, Claims and Encumbrances
(the "Motion") attached hereto as Exhibit A was mailed, first-class, postage
pre-paid, on the _____ day of March, 2000, to the parties on the Service List
attached hereto as Exhibit B.
Dated: March ____, 2000. _________________________________
Carrie B. Weinfeld
Federal Bar No. 25365
Venable, Baetjer and Howard, LLP
1800 Mercantile Bank & Trust Building
Two Hopkins Plaza
Baltimore, Maryland 21201
(410) 244-7400
Counsel for the CRIIMI MAE Inc.
Debtor-in-Possession
<PAGE>
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
(Greenbelt Division)
______________________________________________
)
)
In re )
)
CRIIMI MAE Inc., et al., ) Chapter 11
) Case Nos. 98-2-3115(DK)
Debtors. ) through 98-2-3117(DK)
) (Jointly Administered)
______________________________________________)
MOTION TO APPROVE STIPULATION AND CONSENT ORDER
SELLING CERTAIN COMMERCIAL MORTGAGE-BACKED SECURITIES
TO ORIX REAL ESTATE CAPITAL MARKETS, LLC FREE AND CLEAR
OF LIENS, CLAIMS AND ENCUMBRANCES
AND COMPROMISING AND SETTLING CLAIMS
------------------------------------
CRIIMI MAE Inc., Debtor and Debtor-in-Possession herein ("CMI"), by
and through its respective undersigned counsel, hereby files this Motion to
Approve Stipulation and Consent Order Selling Certain Commercial-Mortgage Backed
Securities to ORIX Real Estate Capital Markets, LLC Free and Clear of Liens,
Claims and Encumbrances and Compromising and Settling Claims (the "Motion"),
pursuant to Sections 105(a) and 363(b) of Title 11 of the United States Code
(the "Bankruptcy Code") and Fed. R. Bankr. P. 6004 and 9019, and in support
thereof states as follows:
<PAGE>
This Court has jurisdiction over this Motion pursuant to 28
U.S.C.ss.ss.157 and 1334. Venue is proper pursuant to 28 U.S.C.ss.1409. This is
a core proceeding pursuant to 28 U.S.C.ss.157(b)(2).
BACKGROUND
----------
1. Citicorp Securities, Inc. ("CSI"), predecessor in interest to
Salomon Smith Barney Inc. (collectively, "SSB"), and CMI are parties to a Master
Repurchase Agreement ("MRA") dated as of August 1, 1997 (with certain Annexes
dated May 11, 1998, May 26, 1998, June 4, 1998 and August 7, 1998 attached
thereto), regarding certain Citicorp Bonds as that term is more particularly
defined in the Stipulation and Consent Order Selling Certain Commercial
Mortgage-Backed Securities to ORIX Real Estate Capital Markets, LLC Free and
Clear of Liens, Claims and Encumbrances and Compromising and Settling Claims
(the "Stipulation and Consent Order"). A copy of the Stipulation and Consent
Order is attached hereto as Exhibit 1.
2. As set forth in the Stipulation and Consent Order, CMI and SSB
agree that CMI is obligated to SSB in the total amount of $141,024,756.52 in
respect of the Citicorp Bonds pursuant to the MRA (the "Existing SSB Debt"). SSB
and Citicorp Real Estate, Inc. ("CREI") assert additional claims in excess of
$7,000,00, arising, among other things, out of that certain Amended and Restated
Mortgage Loan Origination and Disposition Program Agreement, and pursuant to the
Stipulation and Consent Order Regarding Mortgage Loan Origination
2
<PAGE>
Agreement with CREI. Pursuant to the terms of the Chapter 11 Treatment of Claims
of Salomon Smith Barney, Inc., Citicorp Real Estate, Inc. and Citicorp
Securities, Inc. attached as Exhibit 4 to the Debtors' Third Amended Joint Plan
of Reorganization (the "Debtors' Plan"), CREI has agreed to accept $4,000,000 in
cash on the Effective Date of the Debtors' Plan in full and final satisfaction
of the aforementioned claims and all other remaining claims of SSB and CREI.
3. CMI and German American Capital Corporation ("GACC") are parties
to a Master Loan and Security Agreement dated as of March 31, 1998 (as amended,
the "GACC Loan Agreement") pursuant to which GACC made loans to CMI
(collectively, the "GACC Loan").
4. CMI has pledged its interest in certain GACC Bonds, as that term
is more particularly defined in the Stipulation and Consent Order in order to
secure the GACC Loan.
5. For purposes of the Stipulation and Consent Order, the parties
agree that through and including September 7, 2000, GACC was owed, in respect of
the GACC Loan, $131,192,588.20 in principal and $-0- in interest which has
accrued at the (non-default) contract rate (the "Existing GACC Debt").
SALE OF CMBS TO ORIX
--------------------
6. CMI proposes to sell to ORIX Real Estate Capital Markets, LLC
("ORIX") or its designee the Citicorp Bonds and the GACC Bonds (the "Bond
Portfolio") (or alternatively, the MCFI Bonds, the DLJ
3
<PAGE>
Bond and the stock of a CMI subsidiary that will hold the CMO IV Bonds, as those
terms are more particularly defined in the Stipulation and Consent Order) on the
terms set forth in the Stipulation and Consent Order.
7. The terms of the Stipulation and Consent Order are summarized as
follows:
a. Upon entry of an Order approving the Stipulation and Consent
Order (an "Approval Order"), (a) CMI shall be obligated to sell the Bond
Portfolio to ORIX subject to and in accordance with the terms of the Stipulation
and Consent Order, and (b) the Equity Committee and the Unsecured Committee
shall be deemed to have agreed and consented to the sale of the Bond Portfolio
to ORIX in accordance with the Stipulation and Consent Order, and (c) all
parties hereto shall use their reasonable best efforts to ensure that the sale
to ORIX closes in accordance with the Stipulation and Consent Order.
b. ORIX or its designee (collectively "ORIX") shall purchase,
and CMI shall sell, the Bond Portfolio not later than five business days after
the date an Approval Order becomes final, not subject to any stay or reargument
motion and non-appealable (a "Final Order") by ORIX paying the Agreed Proceeds
as set forth in the Stipulation and Consent Order; provided, however, that such
period may be extended by agreement of all parties to the Stipulation and
Consent Order.
4
<PAGE>
c. The Agreed Proceeds shall be paid by ORIX to SSB, GACC, CREI
and CMI in the manner and order set forth in the Stipulation and Consent Order.
d. The amounts paid to SSB shall be in full and final
satisfaction of all asserted and unasserted claims of SSB and CREI in the
bankruptcy cases of CMI, CRIIMI MAE Holdings II, L.P. ("Holdings II") and CRIIMI
MAE Management Inc. ("Management").
e. It is understood and agreed that no sale of the Citicorp
Bonds shall be permitted if SSB and CREI are not paid the amounts set forth in
the Stipulation and Consent Order and that no sale of the GACC Bonds shall be
permitted if GACC is not paid the amounts set forth in the Stipulation and
Consent Order.
f. CMI, SSB and GACC (to the extent applicable) shall take such
steps as may be reasonably necessary and shall provide ORIX with such documents
as it may reasonably request to fully effectuate the transactions contemplated
by the Stipulation and Consent Order.
g. To the extent any of CMI, ORIX, SSB or GACC has, from time
to time, entered into interest rate or other hedge agreements with third parties
with respect to the Bond Portfolio, each of CMI, ORIX, SSB and GACC (as
applicable) shall be responsible for all of its own losses, and shall have the
right to retain any of its own profits, arising out of any such agreements to
which it is a party.
5
<PAGE>
h. Until the Stipulation and Consent Order is approved by the
Court, withdrawn or terminated pursuant to the terms set forth therein, none of
the parties hereto will sell, transfer or otherwise dispose of the Bond
Portfolio, except as specifically set forth in the Stipulation and Consent
Order.
i. On and as of the date ORIX purchases the Bond Portfolio and
the proceeds are paid in accordance with the Stipulation and Consent Order, CMI,
Holdings II, Management, SSB, CREI and GACC (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 any adversary proceeding or otherwise in connection with the
Bond Portfolio. Such release shall not be applicable to any claims of ORIX that
may arise for any alleged breaches of the Stipulation and Consent Order by the
foregoing parties.
j. After SSB is paid the amounts provided in the Stipulation
and Consent Order, the adversary proceeding between CMI and CSI in connection
with the CMO IV Bonds, styled CRIIMI MAE Inc. v. Citicorp Securities, Inc., Adv.
---------------------------------------------
No. 98-1637(DK) will be dismissed and SSB will release all claims to the funds
(including interest accrued thereon) interpleaded with the Bankruptcy Court in
Adversary Proceeding No. 98-1605(DK) and will cooperate with CMI to obtain the
dismissal of the action.
6
<PAGE>
k. Under certain circumstances as set forth in the Stipulation
and Consent Order, ORIX may, at any time prior to October 13, 2000 (which period
may be extended by mutual agreement of ORIX, CMI, the Equity Committee and the
Unsecured Committee), in its sole discretion, elect to terminate its purchase of
the Bond Portfolio. The parties further agree that ORIX may waive its right to
terminate the agreement at any time by sending CMI a written confirmation of
such waiver. Further, if an Approval Order is not entered before November 1,
2000, or if an appeal from such order is filed and a stay pending appeal is
granted, ORIX, CMI, GACC, CREI and/or SSB may at any time thereafter and in
their respective sole discretion, elect to terminate the Stipulation and Consent
Order as set forth therein.
l. It is understood and agreed that, unless a proposed sale is
otherwise approved in writing by CMI, the Unsecured Committee and the Equity
Committee, no sale of any of the Bond Portfolio shall be permitted if the amount
proposed to be paid by ORIX is less than the Agreed Proceeds set forth in the
Stipulation and Consent Order.
m. In the event the Stipulation and Consent 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 signing of
the Stipulation and Consent Order, and CMI, SSB, CREI, GACC, the Equity
Committee and the Unsecured Committee shall be
7
<PAGE>
entitled to proceed in all respects as if the Stipulation and Consent Order had
not been executed and without prejudice in any way as a result of the
negotiation or terms therein (none of which shall be admissible in any
subsequent legal proceeding).
n. CMI and/or any of its affiliates are authorized to exercise
all corporate formalities and execute all documents necessary to transfer the
Bond Portfolio to ORIX, as set forth in the Stipulation and Consent Order, but
CMI will not exercise any corporate action affecting certain Commercial Mortgage
Trust Series 1998-C1 Bonds (the "CBO-2 Bonds").
8. In accordance with (S) 363(b)(1) of the Bankruptcy Code and Fed.
R. Bankr. P. 6004(a), notice of the sale of the Bond Portfolio has been sent to
all necessary parties as required by Fed. R. Bankr. P. 2002(a). A copy of the
form of notice is attached hereto as Exhibit 2 to this Motion.
9. CMI respectfully submits that the proposed sale of the Bond
Portfolio is necessary and appropriate and a sound exercise of business judgment
by CMI, and that ORIX has acted in good faith, and will therefore be entitled to
the protections of 11 U.S.C. (S)363(m) upon any sale of the Bond Portfolio to
ORIX. CMI believes that good cause and sound business reasons exist for
proceeding promptly with the sale of the Bond Portfolio and that the proposed
sale is in the best interest of the estates and all parties in interest.
8
<PAGE>
10. Pursuant to (S) 363(f) of the Bankruptcy Code, CMI seeks
authority to sell the Bond Portfolio free and clear of any liens, claims or
interests in such property because (a) applicable non-bankruptcy law permits the
sale of such property free and clear of interests therein; (b) entities claiming
an interest will consent to the sale; (c) the purchase price will exceed the
aggregate allowable amount of any liens or security interests; or (d) the
entities claiming an interest could be compelled in a legal or equitable
proceeding to accept a money satisfaction for such interest.
WHEREFORE, CMI respectfully requests that this Court enter an Order
(i) approving the proposed sale of the Bond Portfolio free and clear of any
liens, claims and encumbrances; and (ii) granting such other and further relief
as is just and proper.
Dated: September _____, 2000
______________________________
Richard L. Wasserman
Federal Bar No. 02784
Gregory A. Cross
Federal Bar No. 04571-G
Venable, Baetjer and Howard, LLP
1800 Mercantile Bank & Trust Bldg.
Two Hopkins Plaza
Baltimore, Maryland 21201
(410) 244-7400
Co-Counsel for CRIIMI MAE Inc.,
Debtor-in-Possession
9
<PAGE>
CERTIFICATE OF SERVICE
----------------------
I hereby certify that on this _____ day of September, 2000, a copy of
the foregoing Motion to Approve Stipulation and Consent Order Selling Certain
Commercial Mortgage-Backed Securities to ORIX Real Estate Capital Markets, LLC
Free and Clear of Liens, Claims and Encumbrances and Compromising and Settling
Claims was mailed first class to the following parties:
Michael St. Patrick Baxter, Esq.
Covington & Burling
1201 Pennsylvanie Avenue, N.W.
Washington, D.C. 20004
Daniel M. Lewis, Esq.
Arnold and Porter
555 Twelfth Strett, N.W.
Washington, D.C. 20004
Michael B. Benner, Esq.
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Judy G.Z. Liu, Esq.
Weil, Gotshal & Manges, LLP
767 Fifth Avenue
New York, New York 10153
Edward H. Tillinghast, III, Esq.
Coudert Brothers
1114 Avenue of the Americas
New York, New York 10036
Clifford J. White, Esq.
Office of the U.S. Trustee
6305 Ivy Lane, Suite 600
Greenbelt, Maryland 20770
_____________________________
<PAGE>
Carrie B. Weinfeld
-11-
<PAGE>
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
(Greenbelt Division)
________________________________________________
)
)
In re )
)
CRIIMI MAE Inc., et al., ) Chapter 11
) Case Nos. 98-2-3115(DK)
Debtors. ) through 98-2-3117(DK)
) (Jointly Administered)
________________________________________________)
NOTICE OF MOTION TO APPROVE STIPULATION AND CONSENT
ORDER SELLING CERTAIN COMMERCIAL MORTGAGE-BACKED
SECURITIES TO ORIX REAL ESTATE CAPITAL MARKETS,
LLC FREE AND CLEAR OF LIENS, CLAIMS AND
ENCUMBRANCES AND COMPROMISING AND SETTLING CLAIMS
-------------------------------------------------
NOTICE IS HEREBY GIVEN pursuant to Fed. R. Bankr. P. 2002 and 9019(a)
that CRIIMI MAE Inc., Debtor and Debtor-in-Possession herein ("CMI"), has filed
a Motion to Approve Stipulation and Agreed Order Selling Certain Commercial-
Mortgage Backed Securities to ORIX Real Estate Capital Markets, LLC Free and
Clear of Liens, Claims and Encumbrances and Compromising and Settling Claims
(the "Motion"), pursuant to Sections 105(a) and 363(b) of Title 11 of the United
States Code (the "Bankruptcy Code") and Fed. R. Bankr. P. 6004 and 9019.
As set forth in the Motion, CMI, Salomon Smith Barney Inc. ("SSB"),
German American Capital Corporation ("GACC"), ORIX Real Estate Capital Markets,
LLC ("ORIX"), the Official Committee of Equity Security Holders of CMI (the
"Equity Committee") and the Official Committee of Unsecured Creditors of CMI
(the "Unsecured Committee"), have filed a Stipulation and Consent Order (the
"Stipulation and Consent Order") with respect to the sale of certain Commercial
Mortgage-Backed Securities ("CMBS"). The Stipulation and Consent Order is
attached to this Notice as Exhibit 1.
As further set forth in the Stipulation and Order, CMI proposes to
sell to ORIX the Bond Portfolio, as defined in the Stipulation and Consent Order
free and clear of any liens, claims and encumbrances. The sale of the Bond
Portfolio to ORIX shall be in
<PAGE>
accordance with the terms set forth in the Stipulation and Consent Order.
CMI acknowledges that ORIX (or its designees) is currently conducting
due diligence in connection with the Bond Portfolio, and has agreed that ORIX
may in its sole discretion, under certain circumstances, elect to terminate its
purchase of the Bond Portfolio. The parties have also agreed that ORIX may waive
its right to terminate the agreement at any time by sending CMI a written
confirmation of such waiver. The parties have further agreed that if an order
approving the Stipulation and Consent Order is not entered before November 1,
2000, or if an appeal from such order is filed and a stay pending appeal is
granted, the parties may elect to terminate the Stipulation and Consent Order as
set forth therein.
The amounts paid to SSB shall be in full and final satisfaction of
all asserted and unasserted claims of SSB and Citicorp Real Estate, Inc. in the
bankruptcy cases of CMI, CRIIMI MAE Holdings II, L.P. and CRIIMI MAE Management
Inc.
CMI believes that the proposed sale of the Bond Portfolio is
necessary and appropriate and a sound exercise of business judgment by CMI, and
that ORIX has acted in good faith. CMI believes that good cause and sound
business reasons exist for proceeding promptly with the sale of the Bond
Portfolio and that the proposed sale is in the best interest of the estates and
all parties in interest.
THE MOTION IS AVAILABLE FOR REVIEW IN THE OFFICE OF THE CLERK OF THE
COURT AT THE ADDRESS SET FORTH HEREINAFTER. ANY CREDITOR OR PARTY IN INTEREST
WHO OBJECTS TO APPROVAL OF THE MOTION MUST FILE AN OBJECTION IN WRITING,
SPECIFICALLY STATING THE LEGAL AND FACTUAL GROUNDS ON WHICH THE OBJECTION IS
BASED, WITH THE UNITED STATES BANKRUPTCY COURT, 6500 CHERRYWOOD LANE, SUITE 300,
GREENBELT, MARYLAND 20770 AND ALSO SERVE ANY SUCH OBJECTION BY U.S. MAIL AND
TELECOPY ON THE FOLLOWING COUNSEL WITHIN TWENTY (20) DAYS OF THE DATE OF THIS
NOTICE: (i) GREGORY A. CROSS, ESQUIRE, VENABLE, BAETJER AND HOWARD, LLP, 1800
MERCANTILE BANK & TRUST BUILDING, 2 HOPKINS PLAZA, BALTIMORE, MARYLAND 21201
(TELECOPY NO. 410-244-7742), (ii) MICHAEL ST. PATRICK BAXTER, ESQUIRE, COVINGTON
& BURLING, 1201 PENNSYLVANIA AVENUE, N.W., WASHINGTON, D.C. 20004 (TELECOPY NO.
202-662-6291), (iii) DANIEL M. LEWIS, ESQUIRE, ARNOLD AND PORTER, .555 TWELFTH
STREET, N.W., WASHINGTON, D.C. 20004 (TELECOPY NO. 202-942-5999), and (iv)
MICHAEL B. BENNER, ESQUIRE, WACHTELL, LIPTON, ROSEN & KATZ, 51 WEST
2
<PAGE>
52ND STREET, NEW YORK, NEW YORK 10019 (TELECOPY NO. 212-403-2000); (v) JUDY G.Z.
LIU, ESQUIRE, WEIL, GOTSHAL & MANGES, LLP, 767 FIFTH AVENUE, NEW YORK, NEW YORK
10153 (TELECOPY NO. 212-310-8007); and (vi) EDWARD H. TILLINGHAST, III, ESQUIRE,
COUDERT BROTHERS, 1114 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK, 10036
(TELECOPY NO. 212-626-4120).
THE COURT MAY CONDUCT A HEARING OR RULE ON THE MOTION WITHOUT A
HEARING, IN ITS DISCRETION, REGARDLESS OF WHETHER ANY OBJECTIONS ARE FILED. IF
NO OBJECTIONS ARE FILED, THE MOTION MAY BE APPROVED WITHOUT FURTHER NOTICE.
SHOULD THE COURT DECIDE TO HOLD A HEARING ON THE MOTION AND
OBJECTIONS, IF ANY, IT WILL BE HELD ON FRIDAY, OCTOBER 27, 2000, AT 11:30 A.M.,
IN COURTROOM 3C, AT THE UNITED STATES BANKRUPTCY COURT, 6500 CHERRYWOOD LANE,
GREENBELT, MARYLAND 20770.
Any party in interest with questions about the foregoing may contact
the undersigned.
Dated: September ___, 2000. __________________________________
Richard L. Wasserman
Federal Bar No. 02784
Gregory A. Cross
Federal Bar No. 04571-G
Venable, Baetjer and Howard, LLP
1800 Mercantile Bank & Trust Bldg.
2 Hopkins Plaza
Baltimore, Maryland 21201
(410) 244-7400
Counsel for CRIIMI MAE Inc.,
Debtor-in-Possession
3
<PAGE>
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
(Greenbelt Division)
________________________________________________
)
)
In re )
)
CRIIMI MAE Inc., et al., ) Chapter 11
) Case Nos. 98-2-3115(DK)
Debtors. ) through 98-2-3117(DK)
) (Jointly Administered)
________________________________________________)
CERTIFICATE OF SERVICE OF NOTICE OF MOTION TO APPROVE
STIPULATION AND AGREED ORDER SELLING CERTAIN
COMMERCIAL MORTGAGE-BACKED SECURITIES TO
ORIX REAL ESTATE CAPITAL MARKETS, LLC FREE AND
CLEAR OF LIENS, CLAIMS AND ENCUMBRANCES
AND COMPROMISING AND SETTLING CLAIMS
------------------------------------
I HEREBY CERTIFY that a copy of the Notice of Motion to Approve
Stipulation and Agreed Order Selling Certain Commercial Mortgage-Backed
Securities to ORIX Real Estate Capital Markets, LLC Free and Clear of Liens,
Claims and Encumbrances and Compromising and Settling Claims (the "Motion")
attached hereto as Exhibit A was mailed, first-class, postage pre-paid, on the
____ day of September, 2000, to the parties on the Service List attached hereto
as Exhibit B.
Dated: September ____, 2000. _________________________________
Carrie B. Weinfeld
Federal Bar No. 25365
Venable, Baetjer and Howard, LLP
1800 Mercantile Bank & Trust Building
Two Hopkins Plaza
Baltimore, Maryland 21201
(410) 244-7400
Counsel for the CRIIMI MAE Inc.
Debtor-in-Possession
<PAGE>
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
(Greenbelt Division)
------------------------------------------
)
)
In re )
)
CRIIMI MAE Inc., et al., ) Chapter 11
) Case Nos. 98-2-3115(DK)
Debtors. ) through 98-2-3117(DK)
) (Jointly Administered)
------------------------------------------)
MOTION TO APPROVE STIPULATION AND CONSENT ORDER
REGARDING APPLICATION OF MCFI BOND PROCEEDS
-------------------------------------------
CRIIMI MAE Inc., Debtor and Debtor-in-Possession herein ("CMI"), by
and through its respective undersigned counsel, hereby files this Motion to
Approve Stipulation and Consent Order Regarding Application of MCFI Bond
Proceeds (the "Motion"), pursuant to Sections 105(a) of Title 11 of the United
States Code (the "Bankruptcy Code") and Fed. R. Bankr. P. 6004 and 9019, and in
support thereof states as follows:
This Court has jurisdiction over this Motion pursuant to 28
U.S.C.(S)(S).157 and 1334. Venue is proper pursuant to 28 U.S.C.(S) 1409. This
is a core proceeding pursuant to 28 U.S.C.(S).157(b)(2).
<PAGE>
BACKGROUND
----------
1 Citicorp Securities, Inc. ("CSI"), predecessor in interest to
Salomon Smith Barney Inc. (collectively, "SSB") and CMI entered into a Master
Repurchase Agreement dated August 1, 1997 and certain Annexes (collectively the
"MRA") regarding certain bonds referenced as MFCI 1998-MC1 Classes H Through M
and MCFI 1998-MC2 Classes F Through K (collectively the "MCFI Bonds") and CMM
1998-1 Classes F through J and IO Bonds (collectively the "CMO-IV Bonds") (the
CMO-IV Bonds and the MCFI Bonds are referred to herein collectively as the
"Citicorp Bonds"). The Citicorp Bonds have been in SSB's possession since
October 5, 1998 when these bankruptcy cases were filed (the "Petition Date").
All Income (as defined in the MRA) distributed in respect of the CMO-IV Bonds
has, since the Petition Date, been interpleaded with the above-captioned
Bankruptcy Court in Adversary Proceeding No. 98-1605(DK) (the "Interpleaded
Funds").
2. Since the Petition Date through August 31, 2000, SSB has received
$23,802,416.81 in Income (as defined in the MRA) on the MCFI Bonds (the "Cash
Proceeds"). In addition, between October 5, 1998 and December 31, 1998, SSB also
collected $176,660.70 in proceeds from the MCFI 1998-MC2 Class L Bond. The
calculation of the amount reflected in the Cash Proceeds includes the
application of these proceeds.
2
<PAGE>
3. On September 21, 2000, CMI filed a Motion to Approve Stipulation
and Consent Order Selling Certain Commercial-Mortgage Backed Securities to ORIX
Real Estate Capital Markets, LLC Free and Clear of Liens, Claims and
Encumbrances and Compromising and Settling Claims. Related to that Motion, CMI
and SSB have entered into a Stipulation and Consent Order Regarding Application
of the MCFI Bond Proceeds (the "Proceeds Stipulation"). A copy of the Proceeds
Stipulation is attached hereto as Exhibit 1.
TERMS OF THE PROCEEDS STIPULATION
---------------------------------
4. The terms of the Proceeds Stipulation may be summarized as
follows:
a. Within five days following the entry of the Proceeds
Stipulation, the Cash Proceeds shall be applied to reduce the Price Differential
and the Purchase Price (each as defined in the MRA) outstanding under the MRA
with respect to the Citicorp Bonds as set forth in the Proceeds Stipulation such
that applying the proceeds would result in an aggregate amount of
$141,024,756.52 outstanding in respect of the Citicorp Bonds pursuant to the
MRA;
b. Following the entry of the Proceeds Stipulation, until such
time as the MCFI Bonds have been sold, SSB will apply any future Income received
in respect of the MCFI Bonds in accordance with and in the manner set forth in
the Proceeds Stipulation;
3
<PAGE>
c. Following entry of the Proceeds Stipulation, SSB will
provide CMI with a monthly written report (within ten days after the end of each
month) reflecting all Income received and reductions made by SSB to the Price
Differential and the Purchase Price under the MRA in respect of the Citicorp
Bonds until all of the Citicorp Bonds have been sold.
5. CMI respectfully submits that the Proceeds Stipulation is
necessary and appropriate and a sound exercise of business judgment by CMI. CMI
believes that good cause and sound business reasons exist for entering into the
Proceeds Stipulation and that it is in the best interest of the estates and all
parties in interest.
6. Notice of the Proceeds Stipulation has been sent to all necessary
parties pursuant to Fed. R. Bankr. P. 2002. The Official Committee of Unsecured
Creditors of CMI and the Official Committee of Equity Security Holders of CMI
have reviewed this Stipulation and Order and have consented to the terms herein.
Dated: September ____, 2000. _________________________________
Gregory A. Cross
(Federal Bar No. 04571-G)
Venable, Baetjer and Howards, LLP
1800 Mercantile Bank and Trust Bldg.
Two Hopkins Plaza
Baltimore, Maryland 21201
(410) 244-7400
Counsel for CRIIMI MAE Inc.
Debtor-in-Possession
4
<PAGE>
CERTIFICATE OF SERVICE
----------------------
I hereby certify that on this _____ day of September, 2000, a copy of
the foregoing Motion to Approve Stipulation and Consent Order Regarding
Application of MCFI Bond Proceeds was mailed first class to the following
parties:
Michael St. Patrick Baxter, Esq.
Covington & Burling
1201 Pennsylvanie Avenue, N.W.
Washington, D.C. 20004
Daniel M. Lewis, Esq.
Arnold and Porter
555 Twelfth Strett, N.W.
Washington, D.C. 20004
Judy G.Z. Liu, Esq.
Weil, Gotshal & Manges, LLP
767 Fifth Avenue
New York, New York 10153
Clifford J. White, Esq.
Office of the U.S. Trustee
6305 Ivy Lane, Suite 600
Greenbelt, Maryland 20770
---------------------------
Carrie B. Weinfeld
<PAGE>
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
(Greenbelt Division)
------------------------------------------
)
)
In re )
)
CRIIMI MAE Inc., et al., ) Chapter 11
) Case Nos. 98-2-3115(DK)
Debtors. ) through 98-2-3117(DK)
) (Jointly Administered)
------------------------------------------)
NOTICE OF MOTION TO APPROVE STIPULATION AND CONSENT
ORDER REGARDING APPLICATION OF MCFI BOND PROCEEDS
-------------------------------------------------
NOTICE IS HEREBY GIVEN pursuant to Fed. R. Bankr. P. 2002 and 9019(a)
that CRIIMI MAE Inc., Debtor and Debtor-in-Possession herein ("CMI"), has filed
a Motion to Approve Stipulation and Consent Order Regarding Application of MCFI
Bond Proceeds (the "Motion"), pursuant to Sections 105(a) of Title 11 of the
United States Code (the "Bankruptcy Code") and Fed. R. Bankr. P. 6004 and 9019.
As set forth in the Motion, CMI, Salomon Smith Barney Inc. ("SSB"),
the Official Committee of Equity Security Holders of CMI (the "Equity
Committee") and the Official Committee of Unsecured Creditors of CMI (the
"Unsecured Committee"), have filed a Stipulation and Consent Order (the
"Proceeds Stipulation") with respect to proceeds from the sale of certain
Commercial Mortgage-Backed Securities ("CMBS") to ORIX Real Estate Capital
Markets, LLC ("ORIX"). The Proceeds Stipulation is attached to this Notice as
Exhibit 1.
As further set forth in the Proceeds Stipulation, CMI and SSB have
come to an agreement regarding the timing and manner in which proceeds from the
sale of the CMBS to ORIX will be applied. The proceeds shall be applied in
accordance with the terms set forth in the Proceeds Stipulation.
CMI believes that the Proceeds Stipulation is necessary and
appropriate and a sound exercise of business judgment by CMI. CMI believes that
good cause and sound business reasons exist for the
<PAGE>
Proceeds Stipulation and that it is in the best interest of the estates and all
parties in interest.
THE MOTION IS AVAILABLE FOR REVIEW IN THE OFFICE OF THE CLERK OF THE
COURT AT THE ADDRESS SET FORTH HEREINAFTER. ANY CREDITOR OR PARTY IN INTEREST
WHO OBJECTS TO APPROVAL OF THE MOTION MUST FILE AN OBJECTION IN WRITING,
SPECIFICALLY STATING THE LEGAL AND FACTUAL GROUNDS ON WHICH THE OBJECTION IS
BASED, WITH THE UNITED STATES BANKRUPTCY COURT, 6500 CHERRYWOOD LANE, SUITE 300,
GREENBELT, MARYLAND 20770 AND ALSO SERVE ANY SUCH OBJECTION BY U.S. MAIL AND
TELECOPY ON THE FOLLOWING COUNSEL WITHIN TWENTY (20) DAYS OF THE DATE OF THIS
NOTICE: (i) GREGORY A. CROSS, ESQUIRE, VENABLE, BAETJER AND HOWARD, LLP, 1800
MERCANTILE BANK & TRUST BUILDING, 2 HOPKINS PLAZA, BALTIMORE, MARYLAND 21201
(TELECOPY NO. 410-244-7742), (ii) MICHAEL ST. PATRICK BAXTER, ESQUIRE, COVINGTON
& BURLING, 1201 PENNSYLVANIA AVENUE, N.W., WASHINGTON, D.C. 20004 (TELECOPY NO.
202-662-6291), (iii) DANIEL M. LEWIS, ESQUIRE, ARNOLD AND PORTER, 55 TWELFTH
STREET, N.W., WASHINGTON, D.C. 20004 (TELECOPY NO. 202-942-5999), and (iv) JUDY
G.Z. LIU, ESQUIRE, WEIL, GOTSHAL & MANGES, LLP, 767 FIFTH AVENUE, NEW YORK, NEW
YORK 10153 (TELECOPY NO. 212-310-8007).
THE COURT MAY CONDUCT A HEARING OR RULE ON THE MOTION WITHOUT A
HEARING, IN ITS DISCRETION, REGARDLESS OF WHETHER ANY OBJECTIONS ARE FILED. IF
NO OBJECTIONS ARE FILED, THE MOTION MAY BE APPROVED WITHOUT FURTHER NOTICE.
SHOULD THE COURT DECIDE TO HOLD A HEARING ON THE MOTION AND
OBJECTIONS, IF ANY, IT WILL BE HELD ON FRIDAY, OCTOBER 27, 2000, AT 11:30 A.M.,
IN COURTROOM 3C, AT THE UNITED STATES BANKRUPTCY COURT, 6500 CHERRYWOOD LANE,
GREENBELT, MARYLAND 20770.
2
<PAGE>
Any party in interest with questions about the foregoing may contact
the undersigned.
Dated: September ___, 2000. __________________________________
Richard L. Wasserman
Federal Bar No. 02784
Gregory A. Cross
Federal Bar No. 04571-G
Venable, Baetjer and Howard, LLP
1800 Mercantile Bank & Trust Bldg.
2 Hopkins Plaza
Baltimore, Maryland 21201
(410) 244-7400
Counsel for CRIIMI MAE Inc.,
Debtor-in-Possession
3
<PAGE>
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
(Greenbelt Division)
------------------------------------------
)
)
In re )
)
CRIIMI MAE Inc., et al., ) Chapter 11
) Case Nos. 98-2-3115(DK)
Debtors. ) through 98-2-3117(DK)
) (Jointly Administered)
------------------------------------------)
CERTIFICATE OF SERVICE OF NOTICE OF MOTION TO
APPROVE STIPULATION AND CONSENT ORDER
REGARDING APPLICATION OF MCFI BOND PROCEEDS
-------------------------------------------
I HEREBY CERTIFY that a copy of the Notice of Motion to Approve
Stipulation and Consent Order Regarding Application of MCFI Proceeds (the
"Motion") attached hereto as Exhibit A was mailed, first-class, postage pre-
paid, on the ____ day of September, 2000, to the parties on the Service List
attached hereto as Exhibit B.
Dated: September ____, 2000. _________________________________
Carrie B. Weinfeld
Federal Bar No. 25365
Venable, Baetjer and Howard, LLP
1800 Mercantile Bank & Trust Building
Two Hopkins Plaza
Baltimore, Maryland 21201
(410) 244-7400
Counsel for the CRIIMI MAE Inc.
Debtor-in-Possession
<PAGE>
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
(Greenbelt Division)
___________________________________________
)
)
In re )
)
CRIIMI MAE Inc., et al., ) Chapter 11
) Case Nos. 98-2-
3115(DK)
Debtors. ) through 98-2-3117(DK)
) (Jointly Administered)
)
___________________________________________
STIPULATION AND CONSENT ORDER SELLING
CERTAIN COMMERCIAL MORTGAGE-BACKED SECURITIES
TO ORIX REAL ESTATE CAPITAL MARKETS, LLC FREE AND
CLEAR OF LIENS, CLAIMS AND ENCUMBRANCES
AND COMPROMISING AND SETTLING CLAIMS
------------------------------------
CRIIMI MAE Inc., Debtor and Debtor-in-Possession herein ("CMI"),
Salomon Smith Barney Inc. ("SSB"), German American Capital Corporation ("GACC"),
ORIX Real Estate Capital Markets, LLC ("ORIX"), the Official Committee of Equity
Security Holders of CMI (the "Equity Committee") and the Official Committee of
Unsecured Creditors of CMI (the "Unsecured Committee"), by and through their
respective undersigned counsel, hereby agree and consent to this Stipulation and
Consent Order by signing it, and hereby file this Stipulation and Consent Order
Selling Certain Commercial-Mortgage Backed Securities to ORIX Real Estate
Capital Markets LLC Free and Clear of Liens, Claims and Encumbrances and
Compromising and Settling Claims (the "Stipulation and Consent Order"), pursuant
to Sections 105(a) and 363(b) of Title 11
<PAGE>
of the United States Code (the "Bankruptcy Code") and Fed. R. Bankr. P. 6004 and
9019, and in support thereof state as follows:
This Court has jurisdiction over this Stipulation and Consent Order
pursuant to 28 U.S.C. (S)(S)157 and 1334. Venue is proper pursuant to 28
U.S.C.(S)1409. This is a core proceeding pursuant to 28 U.S.C. (S)157(b)(2).
SSB BACKGROUND
--------------
1. Citicorp Securities, Inc. ("CSI"), predecessor in interest to
Salomon Smith Barney Inc. (collectively, "SSB"), and CMI are parties to a Master
Repurchase Agreement ("MRA") dated as of August 1, 1997 (with certain Annexes
dated May 11, 1998, May 26, 1998, June 4, 1998 and August 7, 1998 attached
thereto), regarding certain bonds referenced as MCFI 1998-MC1 Classes H through
M, MCFI 1998-MC2 Classes F Through K (collectively the "MCFI Bonds") and bonds
referenced as CMM 1998-1, Classes X/I0, F, G, H and J (the "CMO IV Bonds"). The
MCFI Bonds and the CMO-IV Bonds are collectively referred to herein as the
"Citicorp Bonds."
2. From the Petition Date through August 31, 2000 SSB received
$23,802,416.81 in cash proceeds from distributions on the MCFI Bonds and
pursuant to the Stipulation and Consent Order Regarding Application of MCFI Bond
Proceeds (the "SSB Proceeds Stipulation") has applied these cash proceeds to
reduce the Price Differential and Purchase Price (as each such term is defined
in the MRA)
-2-
<PAGE>
owed by CMI under the MRA./1/ In accordance with the SSB Proceeds Stipulation,
SSB will continue to apply future proceeds received from the MCFI Bonds to
reduce the Price Differential and Purchase Price owed by CMI under the MRA.
3. For purposes of this Stipulation and Consent Order, CMI and SSB
agree that after applying all proceeds in accordance with the SSB Proceeds
Stipulation, CMI is obligated to SSB in the total amount of $141,024,756.52 in
respect of the Citicorp Bonds pursuant to the MRA (the "Existing SSB Debt).
4. In addition, Citicorp Real Estate, Inc. ("CREI") and SSB assert
claims in excess of $7,000,000, arising, among other things, out of that certain
Amended and Restated Mortgage Loan Origination and Disposition Program
Agreement, and pursuant to the Stipulation and Consent Order Regarding Mortgage
Loan Origination Agreement with CREI. Pursuant to the terms of the Chapter 11
Treatment of Claims of Salomon Smith Barney, Inc., Citicorp Real Estate, Inc.
and Citicorp Securities, Inc. attached as Exhibit 4 to the Debtors' Third
Amended Joint Plan of Reorganization (the "Debtors' Plan"), CREI has agreed to
accept $4,000,000 in cash on the Effective Date of the Debtors' Plan in full and
final satisfaction of the aforementioned claims and all other remaining claims
of SSB and CREI.
_______________
1 Between October 5, 1998 and December 31, 1998, SSB also collected
$176,660.70 in proceeds from the MCFI 1998-MC2 Class L Bond which was
not governed by the MRA. The calculation of the Existing SSB Debt (as
that term is defined in paragraph 3 herein) as of August 31, 2000
includes the application of these proceeds.
-3-
<PAGE>
GACC BACKGROUND
---------------
5. CMI and German American Capital Corporation ("GACC") are parties
to a Master Loan and Security Agreement dated as of March 31, 1998 (as amended,
the "GACC Loan Agreement") pursuant to which GACC made loans to CMI
(collectively, the "GACC Loan").
6. CMI has pledged its interest in the securities identified in
Exhibit A to this Stipulation and Order (collectively, the "GACC Bonds") to
secure the GACC Loan.
7. The GACC Bonds pay interest monthly and generate proceeds,
dividends, and distributions periodically (collectively, the "Monthly
Payments"). On or about December 29, 1998, CMI and GACC entered into a
Stipulation and Agreed Order Authorizing Use of Cash Collateral (the "Cash
Collateral Stipulation") providing for payment/allocation of the Monthly
Payments on the GACC Bonds. The Cash Collateral Stipulation was entered by this
Court on February 2, 1999. The term of the Cash Collateral Stipulation was
extended on or about May 12, 1999 and GACC continued to distribute and apply
Monthly Payments in accordance with the Cash Collateral Stipulation through
September 1999.
8. Since October 5, 1999, GACC has applied Monthly Payments
received on the GACC Bonds to interest accruing at the contract (non-default)
rate on the GACC Loan, with one-half of the balance being applied to reduce
principal monthly and the remainder
-4-
<PAGE>
being deposited in a segregated account (the "Segregated Account") held by GACC.
Through and including, September 7, 2000, the balance in the Segregated Account
was $0.
9. Through and including September 7, 2000, GACC was owed, in
respect of the GACC Loan, $131,192,588.20 in principal and $-0- in interest
which has accrued at the (non-default) contract rate.
SALE OF CMBS TO ORIX
--------------------
10. CMI proposes to sell to ORIX or its designee the Bond Portfolio
(or alternatively, the MCFI Bonds, the DLJMAC 1997 (CF2) Bond and the stock of a
CMI subsidiary that will hold the CMO IV Bonds) as set forth on Exhibit B to
this Stipulation and Consent Order free and clear of any liens, claims and
encumbrances (collectively, the "Bond Portfolio").
11. Upon entry of an Order (an "Approval Order") approving this
Stipulation and Consent Order, (a) CMI shall be obligated to sell the Bond
Portfolio to ORIX subject to and in accordance with the terms of this
Stipulation and Consent Order, including paragraph 10 herein, and (b) the Equity
Committee and the Unsecured Committee shall be deemed to have agreed and
consented to the sale of the Bond Portfolio to ORIX in accordance herewith, and
(c) all parties hereto shall use their reasonable best efforts to ensure that
the sale to ORIX closes in accordance with this Stipulation and Consent Order.
Upon signing this Stipulation and Consent Order and pending entry of an Approval
Order,
-5-
<PAGE>
CMI will use its reasonable best efforts to present this Stipulation and Consent
Order to the Court for prompt approval.
12. ORIX or its designee (collectively "ORIX") shall purchase, and
CMI shall sell, the Bond Portfolio not later than five business days after the
date an Approval Order becomes final, not subject to any stay or reargument
motion and non-appealable (a "Final Order") by ORIX paying the Agreed Proceeds
as set forth in Exhibit C to this Stipulation and Consent Order; provided,
however, that such period may be extended after entry of an Approval Order by
agreement of all parties to the Stipulation and Consent Order.
13. The MCFI/CMO IV Bonds Agreed Proceeds as set forth in Exhibit C
to the Stipulation and Consent Order shall be paid by ORIX as follows:
(a) first,
(i) to SSB in the amount of the Existing SSB Debt
Less any additional amounts SSB receives (or is entitled to receive as the
registered holder of the MCFI Bonds after August 31, 2000) and applies in
reduction of the Purchase Price owed in respect of the Citicorp Bonds, in
accordance with paragraph 6 of the SSB Proceeds Stipulation (the Price
Differential owing on the Existing SSB Debt shall also be paid to SSB in
accordance with paragraph 6 of the SSB Proceeds Stipulation);
(ii) to CREI in the amount of $4,000,000 in cash,
which payment shall be in full and final satisfaction of all asserted and
unasserted claims of SSB and Citicorp Real Estate, Inc. in the
-6-
<PAGE>
bankruptcy cases of CMI, CRIIMI MAE Holdings, II, L.P. ("Holdings II") and
CRIIMI MAE Management Inc. ("Management"); and
(b) second, to CMI.
14. The DLJ Agreed Proceeds as set forth in Exhibit C to this
Stipulation and Consent Order shall be paid by ORIX as follows:
(a) first, toGACC in an amount not to exceed $15,113,782.22;
(i) less any additional payments GACC receives or
will receive after September 7, 2000 on account of the DLJ MAC 1997 CF2 Bond
(the "DLJ Bond") and applied toward the payment of principal of the GACC loan;
(ii) plus any additional unpaid monthly interest that
has accrued on account of that portion of the GACC loan (i.e., $15,113,782.22 )
which, solely for purposes of this Stipulation and Consent Order, shall be
deemed allocable to the DLJ Bond since September 7, 2000 at the contract
(non-default) rate of interest.
(b) second, to CMI.
15. It is understood and agreed that no sale of the Citicorp Bonds
shall be permitted if SSB and CREI are not paid the amounts set forth in
paragraph 13(a) herein and that no sale of the DLJ Bond shall be permitted if
GACC is not paid the amounts set forth in paragraph 14(a) herein.
16. CMI, SSB and GACC (to the extent applicable) shall take such
steps as may be reasonably necessary and shall provide ORIX
-7-
<PAGE>
with such documents as it may reasonably request to fully effectuate the
transactions contemplated by this Stipulation and Consent Order.
17. To the extent any of CMI, ORIX, SSB or GACC has, from time to
time, entered into interest rate or other hedge agreements with third parties
with respect to the Bond Portfolio, each of CMI, ORIX, SSB and GACC (as
applicable) shall be responsible for all of its own losses, and shall have the
right to retain any of its own profits, arising out of any such agreements to
which it is a party.
18. Until this Stipulation and Consent Order is approved by the
Court, or withdrawn or terminated pursuant to the terms of this Stipulation and
Consent Order, none of the parties hereto will sell, transfer or otherwise
dispose of the Bond Portfolio, except as specifically set forth herein.
19. On and as of the date ORIX purchases the Bond Portfolio and the
proceeds are paid in accordance with paragraph 13 and 14 herein, CMI, Holdings
II, Management, SSB, CREI and GACC (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 any adversary proceeding or otherwise in connection with the
Bond Portfolio. Such release shall not be applicable to any claims of ORIX that
may arise for any alleged breaches of this Stipulation and Consent Order by the
foregoing parties.
-8-
<PAGE>
20. After SSB is paid the amounts provided in paragraph 13(a), the
adversary proceeding between CMI and CSI in connection with the CMO IV Bonds,
styled CRIIMI MAE Inc. v. Citicorp Securities, Inc., Adv. No. 98-1637(DK) will
--------------------------------------
be dismissed and SSB will release all claims to the funds (including interest
accrued thereon) interpleaded with the Bankruptcy Court in Adversary Proceeding
No. 98-1605(DK) and will cooperate with CMI, to obtain the dismissal of the
action.
21. The parties hereto acknowledge that ORIX (or its designees) is
currently conducting due diligence in connection with the Bond Portfolio and
therefore agree that, at any time prior to October 13, 2000 (which period may be
extended by mutual agreement of ORIX, CMI, the Equity Committee and the
Unsecured Committee), ORIX may, in its sole discretion, elect to terminate its
purchase of the Bond Portfolio by delivering written notice of such termination
to CMI, whereupon (a) this Stipulation and Consent Order shall be withdrawn and
automatically rendered void and of no further force and effect and (b) CMI will
promptly notify the Bankruptcy Court that, in light of such termination, a
hearing will not be proceeding. The parties further agree that ORIX may waive
its right to terminate the agreement at any time by sending CMI a written
confirmation of such waiver. If an order approving the Stipulation and Consent
Order is not entered before November 1, 2000 or if an appeal from such an order
is filed and a stay pending appeal is granted, ORIX, CMI, CREI, GACC and/or SSB
may, at any time thereafter and in their respective sole discretion, elect to
terminate this Stipulation and Consent
-9-
<PAGE>
Order by delivering a written notice of such termination to the other parties to
this Stipulation and Consent Order, whereupon this Stipulation and Consent Order
shall terminate and be void and of no further force and effect.
22. It is further understood and agreed that, unless a proposed sale
is otherwise approved in writing by CMI, the Unsecured Committee and the Equity
Committee, no sale of any of the Bond Portfolio shall be permitted if the amount
proposed to be paid by ORIX is less than the Agreed Proceeds set forth in
Exhibit C to this Stipulation and Consent Order.
23. In the event this Stipulation and Consent 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 signing of this
Stipulation and Consent Order, and CMI, SSB, GACC, the Equity Committee and the
Unsecured Committee shall be entitled to proceed in all respects as if this
Stipulation and Consent Order had not been executed and without prejudice in any
way as a result of the negotiation or terms of this Stipulation and Consent
Order (none of which shall be admissible in any subsequent legal proceeding).
24. CMI respectfully submits that the proposed sale of the Bond
Portfolio described herein is necessary and appropriate and a sound exercise of
business judgment by CMI, and that ORIX has acted in good faith, and will
therefore be entitled to the protections under 11 U.S.C. (S).363(m) upon any
sale of the Bond Portfolio to ORIX. CMI
-10-
<PAGE>
believes that good cause and sound business reasons exist for proceeding
promptly with the sale of the Bond Portfolio described herein and that the
proposed sale is in the best interest of the estates and all parties in
interest.
25. Except with respect to this Stipulation, GACC reserves its
rights to contest jurisdiction and any other matter arising in the Bankruptcy
Court and CMI, the Unsecured Committee and the Equity Committee reserve all of
their respective rights with respect thereto.
26. CMI and/or any of its affiliates are authorized to exercise all
corporate formalities and execute all documents necessary to transfer the Bond
Portfolio to ORIX including electing REMIC status for the mortgage pool relating
to the CMO IV Bonds, but CMI will not exercise any corporate action affecting
certain Commercial Mortgage Trust Series 1998-C1 Bonds (the "CBO-2 Bonds").
27. ORIX's signature on this Stipulation and Consent Order is only
as to the obligations and agreements of ORIX.
WHEREFORE, CMI respectfully requests that this Court enter an Order
(i) approving the proposed sale of the Bond Portfolio free and clear of any
liens, claims and encumbrances to ORIX in accordance with this
-11-
<PAGE>
Stipulation and Consent Order; and (ii) granting such other and further relief
as is just and proper.
SO ORDERED AND APPROVED this ____ day of September, 2000.
------------------------------------
DUNCAN W. KEIR
United States Bankruptcy Judge
Dated: September ____, 2000 ____________________________________
Richard L. Wasserman
Federal Bar No. 02784
Gregory A. Cross
______________________________ Federal Bar No. 04571-G
Michael St. Patrick Baxter Venable, Baetjer and Howard, LLP
Covington & Burling 1800 Mercantile Bank & Trust Bldg.
1201 Pennsylvania Avenue, N.W. Two Hopkins Plaza
Washington, D.C. 20044 Baltimore, Maryland 21201
(410) 244-7400
Counsel for the Official Committee
of Equity Security Holders of Co-Counsel for CRIIMI MAE Inc.
CRIIMI MAE Inc. Debtor-in-Possession
------------------------------ ------------------------------------
Daniel M Lewis Judy G.Z. Liu (JL 6449)
Michael L. Bernstein Paul M. Basta (PB 4434)
Arnold & Porter Weil, Gotshal & Manges, LLP
555 Twelfth Street, N.W. 767 Fifth Avenue
Washington, D.C. 20004 New York, New York 10153
Counsel for the CMI Counsel for Salomon Smith
Unsecured Committee Barney Inc.
-12-
<PAGE>
----------------------------- ------------------------------------
Michael B. Benner Edward H. Tillinghast, III
Wachtell, Lipton, Rosen & Katz Coudert Brothers
51 West 52nd Street 1114 Avenue of the Americas
New York, New York 10019 New York, New York 10036
Counsel for German American Counsel for ORIX Real Estate
Capital Corporation Capital Markets, LLC
-13-
<PAGE>
THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
Greenbelt Division
_______________________________________________
)
)
In re )
)
CRIIMI MAE Inc., et al., ) Chapter 11
) Case Nos. 98-2-3115(DK)
Debtors. ) through 98-2-3117(DK)
) (Jointly Administered)
)
_______________________________________________
AMENDMENT WITH RESPECT TO AGREED PROCEEDS IN CONNECTION
WITH STIPULATION AND CONSENT ORDER SELLING CERTAIN
COMMERCIAL MORTGAGE-BACKED SECURITIES TO ORIX
REAL ESTATE CAPITAL MARKETS, LLC FREE AND
CLEAR OF LIENS, CLAIMS AND ENCUMBRANCES
AND COMPROMISING AND SETTLING CLAIMS
------------------------------------
CRIIMI MAE Inc., Debtor and Debtor-in-Possession herein ("CMI"),
German American Capital Corporation ("GACC"), ORIX Real Estate Capital Markets,
LLC ("ORIX"), the Official Committee of Equity Security Holders of CMI (the
"Equity Committee") and the Official Committee of Unsecured Creditors of CMI
(the "Unsecured Committee") by and through their respective undersigned counsel,
file this Amendment with Respect to Agreed Proceeds in Connection with the
Stipulation and Consent Order Selling Certain Commercial-Mortgage Backed
Securities to ORIX Real Estate Capital Markets, LLC Free and Clear of Liens,
Claims and Encumbrances and Compromising and Settling Claims (the "Agreed
Proceeds Amendment"), and hereby state as follows:
1. This Court has jurisdiction over this Agreed Proceeds Amendment
pursuant to 28 U.S.C.(S)(S).157 and 1334. Venue is proper pursuant to 28
U.S.C.(S).1409. This is a core proceeding pursuant to 28 U.S.C.(S).157(b)(2).
<PAGE>
2. On October 12, 2000, this Court entered the Stipulation and
Consent Order Selling Certain Commercial Mortgage-Backed Securities to ORIX Real
Estate Capital Markets, LLC Free and Clear of Liens, Claims and Encumbrances and
Compromising and Settling Claims (the "Stipulation and Consent Order").
3. Paragraph 22 of the Stipulation and Consent Order provided that
upon the consent of CMI, the Unsecured Committee and the Equity Committee, the
Bond Portfolio, as that term is defined in the Stipulation and Consent Order,
could be sold to ORIX for an amount that is less than the Agreed Proceeds set
forth in the Stipulation and Consent Order.
4. As a result of due diligence concerns raised by ORIX, ORIX has
requested an adjustment to the Agreed Proceeds amount (the "Agreed Proceeds
Adjustment"). Pursuant to the terms of Paragraph 22 of the Stipulation and
Consent Order, CMI, the Unsecured Committee and the Equity Committee have agreed
to the adjustment requested by ORIX. As a result of the Agreed Proceeds
Adjustment, the amount of the Agreed Proceeds as set forth in Exhibit C to the
Stipulation and Consent Order is amended and restated as follows:
a. The MCFI/CMO IV Bonds Agreed Proceeds shall be $174.75
---------------------------------
million (a) minus $94,600 for each basis point by which the yield on the 10-year
U.S. Constant Maturity Treasury exceeds 5.762, or (b) plus $94,600 for each
basis point by which 5.762 exceeds the yield on the 10-year U.S. Constant
Maturity Treasury; and
b. The DLJ Bond Agreed Proceeds shall be $14.196 million.
------------------------
5. As a result of the Agreed Proceeds Adjustment, the proceeds to
be paid to GACC, pursuant to paragraph 14 of the Stipulation and Consent Order
will be $14,196,000.00 rather than up to $15,113,782.22. GACC has also agreed to
this
2
<PAGE>
reduction and has acknowledged its agreement by signing this Agreed Proceeds
Amendment.
6. If the DLJ Bond, as that term is defined in the Stipulation and
Consent Order, is not transferred to ORIX before November 1, 2000, ORIX may
elect to terminate its purchase of the DLJ Bond.
SO ORDERED AND APPROVED.
DATED: October _______, 2000. ____________________________
DUNCAN W. KEIR
United States Bankruptcy Judge
FOR CRIIMI MAE INC.: FOR THE OFFICIAL COMMITTEE
OF EQUITY SECURITY HOLDERS
OF CRIIMI MAE INC.:
---------------------------- ------------------------------
Richard L. Wasserman Michael St. Patrick Baxter
Gregory A. Cross Covington & Burling
Venable, Baetjer and Howard, LLP 1201 Pennsylvania Avenue, N.W.
1800 Mercantile Bank & Trust Washington, D.C. 20044
Building
Two Hopkins Plaza
Baltimore, Maryland 21201
FOR THE OFFICIAL COMMITTEE FOR ORIX REAL ESTATE
OF UNSECURED CREDITORS OF CAPITAL MARKETS, LLC:
CRIIMI MAE INC.:
--------------------------- ------------------------------
Daniel M Lewis Edward H. Tillinghast, III
Michael L. Bernstein Coudert Brothers
Arnold & Porter 1114 Avenue of the Americas
555 Twelfth Street, N.W. New York, New York 10036
Washington, D.C. 20004
3
<PAGE>
FOR GERMAN AMERICAN
CAPITAL CORPORATION:
-----------------------------
Michael B. Benner
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
4
<PAGE>
CERTIFICATE OF SERVICE
----------------------
I HEREBY CERTIFY on this ____ day of October 2000, that I served the
foregoing Amendment with Respect to Agreed Proceeds in Connection with
Stipulation and Consent Order Selling Certain Commercial Mortgage-Backed
Securities to ORIX Real Estate Capital Markets, LLC Free and Clear of Liens,
Claims and Encumbrances and Compromising and Settling Claims, via first class
mail, postage prepaid, to the following:
Michael St. Patrick Baxter, Esq.
Covington & Burling
1201 Pennsylvania Avenue, N.W.
Washington, D.C. 20044
Daniel M Lewis, Esq.
Arnold & Porter
555 Twelfth Street, N.W.
Washington, D.C. 20004
Edward H. Tillinghast, III, Esq.
Coudert Brothers
1114 Avenue of the Americas
New York, New York 10036
Michael B. Benner, Esq.
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Clifford J. White, Esq.
Office of the U.S. Trustee
6305 Ivy Lane, Suite 600
Greenbelt, Maryland 20770
--------------------------------
Carrie B. Weinfeld
<PAGE>
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
(Greenbelt Division)
In re: CRIIMI MAE Inc. et al., Case Nos.: 98-2-3115 through 98-2-3117 (DK)
Debtors.
CHAPTER 11 CONFIRMATION HEARING - TALLY OF BALLOTS VOTING ON THE DEBTORS' PLAN
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Creditor/ No. of $ Value of Claims $ Value of $ Value of
Shareholder Members Voting/Amount Acceptances/ % of No. Rejections/ % of Indicate if
Class of Class of Shares No. % Acptg. Amount of Value Rjtg. Amount of Value Class is
(Descrip.) Casting Voting Acptg. Shares Acptg. Acptg % Rjtg. Shares Rjtg. Rjtg. Unimpaired
Ballots
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A1
(Citicorp 4 375,123,980.30 4 100% 375,123,980.30 100% 0 0 0 0 Impaired
Secured Claims)
------------------------------------------------------------------------------------------------------------------------------------
Class A2
(First Union 2 58,803.03 2 100% 58,803.03 100% 0 0 0 0 Impaired
Secured Claim)
------------------------------------------------------------------------------------------------------------------------------------
Class A3
(GACC Secured 1 177,508,216.70 1 100% 177,508,216.70 100% 0 0 0 0 Impaired
Claim)
------------------------------------------------------------------------------------------------------------------------------------
Class A4
(Lehman Secured ** Impaired
Claim)
------------------------------------------------------------------------------------------------------------------------------------
Class A5
(Merrill 1 276,325,190.60 1 100% 276,325,190.60 100% 0 0 0 0 Impaired
Secured Claim)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
** Debtors do not believe that there are any Claims in this Class.
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Creditor/ No. of $ Value of Claims $ Value of $ Value of
Shareholder Members Voting/Amount Acceptances/ % of No. Rejections/ % of Indicate if
Class of Class of Shares No. % Acptg. Amount of Value Rjtg. Amount of Value Class is
(Descrip.) Casting Voting Acptg. Shares Acptg. Acptg % Rjtg. Shares Rjtg. Rjtg. Unimpaired
Ballots
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A6
(Morgan Stanley ** Impaired
Secured Claim)
------------------------------------------------------------------------------------------------------------------------------------
Class A7
(Other Secured ** Impaired
Claims)
------------------------------------------------------------------------------------------------------------------------------------
Class A8
(Priority Unimpaired
Claims)
------------------------------------------------------------------------------------------------------------------------------------
Class A9
(Old Senior 8 44,250,000.00 7 87.50% 42,250,000.00 95.48% 1 12.50% 2,000,000.00 4.52% Impaired
Note Claims)
------------------------------------------------------------------------------------------------------------------------------------
Class A10 (CMI
General 36 89,031,189.99 35 97.22% 77,640,641.99 87.21% 1 2.78% 11,390,548.00 12.79% Impaired
Unsecured
Claims)
------------------------------------------------------------------------------------------------------------------------------------
Class A11
(Guarantee ** Impaired
Claims)
------------------------------------------------------------------------------------------------------------------------------------
Class A12
(Freddie Mac Unimpaired
Claims)
------------------------------------------------------------------------------------------------------------------------------------
Class A13
(Intercompany 2 NA 2 100% NA NA 0 0 0 0 Impaired
Claims)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
** Debtors do not believe that there are any Claims in this Class.
-2-
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Creditor/ No. of $ Value of Claims $ Value of $ Value of
Shareholder Members Voting/Amount Acceptances/ % of No. Rejections/ % of Indicate if
Class of Class of Shares No. % Acptg. Amount of Value Rjtg. Amount of Value Class is
(Descrip.) Casting Voting Acptg. Shares Acptg. Acptg % Rjtg. Shares Rjtg. Rjtg. Unimpaired
Ballots
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A14
(Series B 363 896,381.00 361 99.45% 896,081.00 99.97% 2 0.55% 300.00 0.03% Impaired
Preferred
Stock)
------------------------------------------------------------------------------------------------------------------------------------
Class A15
(Series B
Preferred Stock Unimpaired
Securities
Claims)
------------------------------------------------------------------------------------------------------------------------------------
Class A16
(Former Series 1 103,000.00 1 100% 103,000.00 100% 0 0 0 0 Impaired
C Preferred
Stock)
------------------------------------------------------------------------------------------------------------------------------------
Class A17
(Former Series
C Preferred
Stock Unimpaired
Securities
Claims)
------------------------------------------------------------------------------------------------------------------------------------
Class A18 (Old
Series D 1 100,000.00 1 100% 100,000.00 100% 0 0 0 0 Impaired
Preferred Stock)
------------------------------------------------------------------------------------------------------------------------------------
Class A19 (Old
Series D
Preferred Stock Unimpaired
Securities
Claims)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Creditor/ No. of $ Value of Claims $ Value of $ Value of
Shareholder Members Voting/Amount Acceptances/ % of No. Rejections/ % of Indicate if
Class of Class of Shares No. % Acptg. Amount of Value Rjtg. Amount of Value Class is
(Descrip.) Casting Voting Acptg. Shares Acptg. Acptg % Rjtg. Shares Rjtg. Rjtg. Unimpaired
Ballots
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A20
(Series F 3,701 165,716.00 3,667 99.08% 164,110.00 99.03% 34 0.92% 1,606.00 0.97% Impaired
Dividend
Preferred
Stock)
------------------------------------------------------------------------------------------------------------------------------------
Class A21 (CMI
Common Stock) 6,421 28,987,068.63 6,369 99.19% 28,886,437.46 99.65% 52 0.81% 100,631.17 0.35% Impaired
------------------------------------------------------------------------------------------------------------------------------------
Class A22
(Stock Options) Unimpaired
------------------------------------------------------------------------------------------------------------------------------------
Class A23 (CMI
Common Stock Unimpaired
Securities
Claims)
------------------------------------------------------------------------------------------------------------------------------------
Class B1 (First
Union Secured 1 1,307,944.44 1 100% 1,307,944.44 100% 0 0 0 0 Impaired
Claims)
------------------------------------------------------------------------------------------------------------------------------------
Class B2 (Other
Secured Claims) ** Impaired
------------------------------------------------------------------------------------------------------------------------------------
Class B3
(Priority Unimpaired
Claims)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
** Debtors do not believe that there are any Claims in this Class.
-4-
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Creditor/ No. of $ Value of Claims $ Value of $ Value of
Shareholder Members Voting/Amount Acceptances/ % of No. Rejections/ % of Indicate if
Class of Class of Shares No. % Acptg. Amount of Value Rjtg. Amount of Value Class is
(Descrip.) Casting Voting Acptg. Shares Acptg. Acptg % Rjtg. Shares Rjtg. Rjtg. Unimpaired
Ballots
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class B4
(Guarantee Unimpaired
Claims)
------------------------------------------------------------------------------------------------------------------------------------
Class B5 (CMM
General 49 810,884.10 48 97.96% 745,066.14 91.88% 1 2.04% 65,817.96 8.12% Impaired
Unsecured
Claims)
------------------------------------------------------------------------------------------------------------------------------------
Class B6
(Intercompany 2 NA 2 100% NA NA 0 0 0 0 Impaired
Claims)
------------------------------------------------------------------------------------------------------------------------------------
Class B7 (CMI's
Interests in Unimpaired
CMM)
------------------------------------------------------------------------------------------------------------------------------------
Class C1
(Citicorp ** Impaired
Secured Claims)
------------------------------------------------------------------------------------------------------------------------------------
Class C2 (Other
Secured Claims) ** Impaired
------------------------------------------------------------------------------------------------------------------------------------
Class C3
(Priority Unimpaired
Claims)
------------------------------------------------------------------------------------------------------------------------------------
Class C4
(Guarantee Unimpaired
Claims)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
** Debtors do not believe that there are any Claims in this Class.
-5-
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Creditor/ No. of $ Value of Claims $ Value of $ Value of
Shareholder Members Voting/Amount Acceptances/ % of No. Rejections/ % of Indicate if
Class of Class of Shares No. % Acptg. Amount of Value Rjtg. Amount of Value Class is
(Descrip.) Casting Voting Acptg. Shares Acptg. Acptg % Rjtg. Shares Rjtg. Rjtg. Unimpaired
Ballots
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class C5
(Holdings ** Impaired
General
Unsecured
Claims)
------------------------------------------------------------------------------------------------------------------------------------
Class C6
(Intercompany 2 NA 2 100% NA NA 0 0 0 0 Impaired
Claims)
------------------------------------------------------------------------------------------------------------------------------------
Class C7
(Interests in Unimpaired
Holdings)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
** Debtors do not believe that there are any Claims in this Class.
This Tally does not include the ADP Supplemental Master Ballots received
approximately one hour after the voting deadline. See the Affidavit of Diane
Rocano Certifying the Ballots Accepting or Rejecting Third Amended Joint Plan of
Reorganization of CRIIMI MAE Inc.,et al., filed herein on November 3, 2000
(Docket No. 1282) for further information regarding the ADP Supplemental Master
Ballots.
-6-
<PAGE>
CERTIFICATION OF TALLY
----------------------
I HEREBY CERTIFY that the foregoing Tally is an accurate tabulation
of ballots cast by parties in interest which have been received by Bankruptcy
Services LLC ("BSI"), the official Balloting Agent for the Debtors, as of
October 20, 2000, the voting deadline established by this Court. This Tally
incorporates by reference the voting results certified in the Affidavit of Diane
Rocano of BSI, the official Balloting Agent, filed herein on November 3, 2000
(Docket No. 1282).
Dated: November 8, 2000. _______________________
Richard L. Wasserman
Federal Bar No. 02784
Carrie B. Weinfeld
Federal Bar No. 25365
Venable, Baetjer and Howard, LLP
1800 Mercantile Bank and
Trust Building
Two Hopkins Plaza
Baltimore, Maryland 21201
(410) 244-7400
Co-Counsel for CRIIMI MAE Inc.
Debtor-in-Possession
-7-
