<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 March 31, 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
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 May 9, 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 March 31, 2000
(unaudited) and December 31, 1999............................................ 3
Consolidated Statements of Income and Comprehensive Income - for the three
months ended March 31, 2000 and 1999 (unaudited)............................. 4
Consolidated Statements of Changes in Shareholders' Equity - for the three
months ended March 31, 2000 (unaudited)...................................... 5
Consolidated Statements of Cash Flows - for the three months ended
March 31, 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.......................................... 61
Item 2A. Quantitative and Qualitative Disclosures about Market Risk.................... 73
PART II. Other Information
Item 1. Legal Proceedings............................................................. 74
Item 2. Changes in Securities......................................................... 74
Item 3. Defaults Upon Senior Securities............................................... 74
Item 4. Submission of Matters to a Vote of
Security Holders............................................................. 74
Item 5. Other Information............................................................. 74
Item 6. Exhibits and Reports on Form 8-K.............................................. 74
Signatures.............................................................................. 75
</TABLE>
2
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
CRIIMI MAE INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------------- ----------------
(Unaudited)
<S> <C> <C>
Assets:
Mortgage assets:
Subordinated CMBS, at fair value $ 1,153,691,004 $ 1,179,270,306
Insured mortgage securities, at fair value 389,998,612 394,857,239
Investment in originated loans, at amortized cost 467,951,614 470,204,780
Equity investments 34,375,814 34,929,523
Receivables 74,921,239 69,483,337
Other assets 49,136,974 53,276,333
Short term investments, at fair value 1,233,216 -
Restricted cash and cash equivalents 53,280,436 38,036,624
Other cash and cash equivalents 56,520,588 53,603,104
---------------- ----------------
Total assets $ 2,281,109,497 $ 2,293,661,246
================ ================
Liabilities:
Liabilities not subject to Chapter 11 proceedings:
Securitized mortgage obligations:
---------------------------------
Collateralized bond obligations-CMBS $ 278,904,376 $ 278,165,968
Collateralized mortgage obligations-
insured mortgage securities 373,258,851 378,711,602
Collateralized mortgage obligations-
originated loans 397,980,878 399,768,513
Payables and accrued expenses 33,048,099 29,886,888
Liabilities subject to Chapter 11 proceedings:
Secured:
- --------
Variable-rate secured borrowings-CMBS 688,859,967 732,904,775
Other financing facilities 3,050,000 3,050,000
Payables and accrued expenses 29,900,465 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 39,677,876 35,619,440
---------------- ----------------
Total liabilities 2,034,430,034 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 23,833 26,471
issued and outstanding, respectively
Common stock, $0.01 par; 120,000,000 shares
authorized; 62,353,170 and 59,954,604 shares 623,532 599,546
issued and outstanding, respectively
Accumulated other comprehensive income (184,133,647) (207,421,788)
Accumulated deficit (144,399,304) (148,434,915)
Additional paid-in capital 574,565,049 574,579,272
---------------- ----------------
Total shareholders' equity 246,679,463 219,348,586
---------------- ----------------
Total liabilities and shareholders' equity $ 2,281,109,497 $ 2,293,661,246
================ ================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
3
<PAGE>
CRIIMI MAE INC.
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended March 31,
2000 1999
--------------- ---------------
<S> <C> <C>
Interest income:
Subordinated CMBS $ 39,169,771 $ 38,485,145
Insured mortgage securities 7,797,201 8,900,308
Originated loans 8,487,626 8,840,827
--------------- ---------------
Total interest income 55,454,598 56,226,280
--------------- ---------------
Interest and related expenses:
Fixed-rate collateralized bond obligations-CMBS 6,486,212 3,500,520
Fixed-rate collateralized mortgage obligations-
insured 7,046,932 8,404,272
Fixed-rate collateralized mortgage obligations-
originated loans 6,758,121 6,562,908
Fixed-rate senior unsecured notes 2,281,251 2,281,251
Variable-rate secured borrowings-CMBS 12,721,095 13,970,373
Other financing facilities 1,921,341 1,709,606
--------------- ---------------
Total interest expense 37,214,952 36,428,930
--------------- ---------------
Net interest margin 18,239,646 19,797,350
--------------- ---------------
Equity in (losses) from investments (11,916) (1,606,632)
Other income 336,685 636,032
Net gain on mortgage security dispositions 15,477 807,204
Gain on originated loan dispositions - 101,400
General and administrative expenses (3,138,757) (2,634,114)
Amortization of assets acquired in the Merger (719,394) (719,394)
Unrealized gain on warehouse obligation - 3,946,475
Reorganization items
Other (4,248,455) (5,507,838)
Impairment on CMBS (3,443,759) -
Loss on Sale of CMBS (1,354,026) -
--------------- ---------------
(12,564,145) (4,976,867)
--------------- ---------------
Net income before dividends accrued
on preferred shares 5,675,501 14,820,483
Dividends accrued on preferred shares (1,639,890) (1,403,534)
--------------- ---------------
Net income available to common shareholders $ 4,035,611 $ 13,416,949
=============== ===============
Net income available to common shareholders per common share:
Basic $ 0.07 $ 0.25
=============== ===============
Diluted $ 0.06 $ 0.23
=============== ===============
Shares used in computing basic earnings per share 61,515,061 53,008,855
Comprehensive Income:
Net Income before dividends paid or accrued on preferred shares $ 5,675,501 $ 14,820,483
Other comprehensive Income (Loss) 23,288,141 (8,672,410)
--------------- ---------------
Comprehensive Income $ 28,963,642 $ 6,148,073
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
CRIIMI MAE INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the three months ended March 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Preferred Common Other Total
Stock Par Stock Par Comprehensive Additional paid- Accumulated Treasury Shareholders'
Value Value Income in Capital Deficit Stock 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) $ - $219,348,586
Net income - - - - 5,675,501 - 5,675,501
Dividends accrued on preferred
shares - - - - (1,639,890) - (1,639,890)
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 - - 23,288,141 - - - 23,288,141
----------- ---------- ------------- --------------- ------------- ----- ------------
Balance at March 31, 2000 $ 23,833 $ 623,532 $(184,133,647) $ 574,565,049 $(144,399,304) $ - $246,679,463
=========== ========== ============= =============== ============= ===== ============
</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 three months ended March 31,
2000 1999
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,675,501 $ 14,820,483
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of discount and deferred financing
costs on debt 2,050,200 1,506,528
Amortization of assets acquired in the Merger 719,394 719,394
Depreciation and other amortization 340,003 856,990
Discount amortization on mortgage assets (2,597,373) (64,874)
Net gains on mortgage security dispositions (15,477) (807,204)
Gain on originated loan dispositions - (101,400)
Equity in losses from investments 11,916 3,408,138
Unrealized gain on warehouse obligation - (3,946,475)
Change in reorganization items accrual 1,853,557 1,464,221
Impairment on CMBS 3,443,759 -
Loss on sale of CMBS 1,354,026 -
Changes in assets and liabilities:
Increase in restricted cash and cash equivalents (15,243,812) (19,913,914)
Increase in receivables and other assets (2,886,775) (2,867,706)
Increase in payables and accrued expenses 7,170,713 3,351,458
------------ -------------
Net cash provided by (used in) operating activities 1,875,632 $ (1,574,361)
------------ -------------
Cash flows from investing activities:
Proceeds from mortgage securities dispositions 4,623,106 35,958,198
Proceeds from the sale of CMBS, net 8,434,640 17,309,207
Distributions received from AIM Investments 447,680 -
Receipt of principal payments 3,222,887 3,233,261
Purchase of short term investments, net (1,233,216) -
------------ -------------
Net cash provided by investing activities 15,495,097 56,500,666
------------ -------------
Cash flows from financing activities:
Principal payments on debt obligations (14,453,245) (46,036,504)
Proceeds from issuance of common stock - 7,125
------------ -------------
Net cash used in financing activities (14,453,245) (46,029,379)
------------ -------------
Net increase in other cash and cash equivalents 2,917,484 8,896,926
Other cash and cash equivalents, beginning of period 53,603,104 24,180,072
------------ -------------
Other cash and cash equivalents, end of period $ 56,520,588 $ 33,076,998
============ =============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
6
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
General
CRIIMI MAE Inc. (together with its consolidated subsidiaries, unless
the context otherwise indicates, "CRIIMI MAE" or the "Company") is a fully
integrated commercial mortgage company structured as a self-administered real
estate investment trust ("REIT"). Prior to the filing by CRIIMI MAE Inc.
(unconsolidated) and two of its operating subsidiaries, CRIIMI MAE Management,
Inc. ("CM Management"), and CRIIMI MAE Holdings II, L.P. ("Holdings II" and,
together with CRIIMI MAE and CM Management, the "Debtors"), for relief under
Chapter 11 of the U.S. Bankruptcy Code on October 5, 1998 (the "Petition Date")
as described below, CRIIMI MAE's primary activities included (i) acquiring non-
investment grade securities (rated below BBB- or unrated) backed by pools of
commercial mortgage loans on multifamily, retail and other commercial real
estate ("Subordinated CMBS"), (ii) originating and underwriting commercial
mortgage loans, (iii) securitizing pools of commercial mortgage loans and
resecuritizing pools of Subordinated CMBS, and (iv) through the Company's
servicing affiliate, CRIIMI MAE Services Limited Partnership ("CMSLP"),
performing servicing functions with respect to the mortgage loans underlying the
Company's Subordinated CMBS.
Since filing for Chapter 11 protection, CRIIMI MAE has suspended its
Subordinated CMBS acquisition, origination and securitization programs. The
Company continues to hold a substantial portfolio of Subordinated CMBS,
originated loans and mortgage securities and, through CMSLP, acts as a servicer
for its own as well as third party securitized mortgage loan pools.
The Company's business is subject to a number of risks and uncertainties
including, but not limited to: (1) the effect of the Chapter 11 filing and
substantial doubt as to the Company's ability to continue as a going concern;
(2) risks related to the 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 being considered an investment
company; (14) possible effects of an economic recession on losses and defaults;
(15) borrowing risks; (16) the effect of the yield curve on income; and (17)
risks associated with the trader election including those referenced in "2000
Taxable Income (Loss)/ Taxable Distribution Requirements" below.
In addition to the two operating subsidiaries which filed for Chapter 11
protection with the Company, the Company owns 100% of multiple financing and
operating subsidiaries as well as various interests in other entities (including
CMSLP) which either own or service mortgage and mortgage-related assets (the
"Non-Debtor Affiliates"). See Note 3. None of the Non-Debtor Affiliates has
filed for bankruptcy protection.
The Company was incorporated in Delaware in 1989 under the name CRI Insured
Mortgage Association, Inc. ("CRI Insured"). In July 1993, CRI Insured changed
its name to CRIIMI MAE Inc. and reincorporated in Maryland. In June 1995,
certain mortgage businesses affiliated with C.R.I., Inc. were merged into CRIIMI
MAE (the "Merger"). The Company is not a government sponsored entity or in any
way affiliated with the United States government or any United States government
agency.
Chapter 11 Filing
Prior to the Petition Date, CRIIMI MAE financed a substantial portion of
its Subordinated CMBS acquisitions with short-term, variable-rate financing
facilities secured by the Company's CMBS. The agreements governing these
financing arrangements typically required the Company to maintain collateral
with a market value not less than a specified percentage of the outstanding
indebtedness ("loan-to-value ratio"). The agreements further provided that the
creditors could require the Company to provide cash or additional collateral if
the market value of the existing collateral fell below this minimum amount.
7
<PAGE>
As a result of the turmoil in the capital markets commencing in late summer
of 1998, the spreads between CMBS yields and yields on Treasury securities with
comparable maturities began to widen substantially and rapidly. Due to this
widening of CMBS spreads, the market value of the CMBS securing the Company's
short-term, variable-rate financing facilities declined. CRIIMI MAE's short-
term secured creditors perceived that the value of the CMBS securing their
facilities with the Company had fallen, creating a value deficiency as measured
by the loan-to-value ratio described above and, consequently, made demand upon
the Company to provide cash or additional collateral with sufficient value to
cure the perceived value deficiency. In August and September of 1998, the
Company received and met collateral calls from its secured creditors. At the
same time, CRIIMI MAE was in negotiations with various third parties in an
effort to obtain additional debt and equity financing that would provide the
Company with additional liquidity.
On Friday afternoon, October 2, 1998, the Company was in the closing
negotiations of a refinancing with one of its unsecured creditors that would
have provided the Company with additional borrowings when it received a
significant collateral call from Merrill Lynch Mortgage Capital, Inc. ("Merrill
Lynch"). The basis for this collateral call, in the Company's view, was
unreasonable. After giving consideration to, among other things, this
collateral call and the Company's concern that its failure to satisfy this
collateral call would cause the Company to be in default under a substantial
portion of its financing arrangements, the Company reluctantly concluded on
Sunday, October 4, 1998 that it was in the best interests of creditors, equity
holders and other parties in interest to seek Chapter 11 protection.
On October 5, 1998, the Debtors filed for relief under Chapter 11 of the
U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of
Maryland, Southern Division, in Greenbelt, Maryland (the "Bankruptcy Court").
These related cases are being jointly administered under the caption "In re
CRIIMI MAE Inc., et al.," Ch. 11 Case No. 98-2-3115-DK.
While in 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 plan is not approved by the Bankruptcy Court prior to the
completion of their audit of the Company's financial statements for the year
ended December 31, 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 (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 a Third Amended Joint
Plan of Reorganization (the "Plan") and proposed Second Amended Joint Disclosure
Statement (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 "Equity Committee"), which is a co-proponent of the Plan.
Subject to the completion of mutually acceptable documentation evidencing the
secured financing to be provided by the unsecured creditors (the "Unsecured
Creditor Debt Documentation"), the Official Committee of Unsecured Creditors of
CRIIMI MAE (the "Unsecured Creditors' Committee") has agreed to support
confirmation of the Debtors' Plan. The Company, the Equity Committee and the
Unsecured Creditors' Committee are now all proceeding toward confirmation of the
Plan. Under the Plan, Merrill Lynch and German American Capital Corporation
("GACC"), two of the Company's largest secured creditors, would provide a
significant portion of the recapitalization financing contemplated by the Plan.
The Bankruptcy Court scheduled a hearing for April 25 and 26, 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 relate to an objection to the
Company's disclosure statement filed by Salomon Smith Barney Inc. and Citicorp
Real Estate, Inc.
8
<PAGE>
(together "SSB"). On May 9, 2000, CRIIMI MAE filed its legal brief with the
court, as did SSB. In addition, the Equity Committee filed a brief in support
of CRIIMI MAE's position and the Unsecured Creditors Committee filed two briefs
also in support of CRIIMI MAE's position. The SSB objection is the only
objection to CRIIMI MAE's disclosure statement pending before the Bankruptcy
Court. Once the Disclosure Statement has been approved by the Bankruptcy Court,
the Plan, together with the Disclosure Statement and ballots, will be sent to
all impaired creditors and equity holders for acceptance or rejection.
On December 20, 1999, the Unsecured Creditors' Committee filed its own plan
of reorganization and proposed disclosure statement with the Bankruptcy Court
which, in general, provided for the liquidation of the assets of the Debtors.
On January 11, 2000 and February 11, 2000, the Unsecured Creditors' Committee
filed its first and second amended plans of reorganization, respectively, with
the Bankruptcy Court and amended proposed disclosure statements with respect
thereto. However, as a result of successful negotiations between the Debtors
and the Unsecured Creditors' Committee, the Unsecured Creditors' Committee has
agreed to the treatment of unsecured claims under the Debtors' Plan, subject to
completion of mutually acceptable Unsecured Creditor debt documentation, and has
asked the Bankruptcy Court to defer consideration of its second amended plan of
reorganization and second amended proposed disclosure statement.
The Plan of Reorganization
The Plan contemplates the payment in full of all of the allowed claims of
the Debtors primarily through recapitalization financing (including proceeds
from CMBS sales) aggregating at least $856 million (the "Recapitalization
Financing"). Approximately $275 million of the Recapitalization Financing would
be provided by Merrill Lynch and GACC through a secured financing facility,
approximately $155 million would be provided through new secured notes issued to
some of the Company's major unsecured creditors, and another $35 million would
be obtained from another existing creditor in the form of an additional secured
financing facility (collectively, the "New Debt"). The sale of select CMBS (the
"CMBS Sale"), the proceeds of which are expected to be used to pay down existing
debt, is contemplated to provide the balance of the Recapitalization Financing.
The Company may seek new equity capital from one or more investors to partially
fund the Plan, although new equity is not required to fund the Plan.
In connection with the Plan, substantially all cash flows are expected to
be used to satisfy principal, interest and fee obligations under the New Debt.
The $275 million secured financing would provide for (i) interest at a rate of
one month LIBOR plus 3.25%, (ii) principal prepayment/amortization obligations,
(iii) extension fees after two years and (iv) maturity on the fourth anniversary
of the effective date of the Plan. The Plan contemplates that the $35 million
secured financing would provide for terms similar to those referenced in the
preceding sentence; however, the proposed lender has not agreed to any terms of
the $35 million secured financing and there can be no assurance that an
agreement for this financing will be obtained or that, if obtained, the terms
will be as referenced above. The approximate $155 million secured financing
would be effected through the issuance of two series of secured notes under two
separate indentures. The first series of secured notes, representing an
aggregate principal amount of approximately $105 million, would provide for (i)
interest at a rate of 11.75% per annum, (ii) principal prepayment/amortization
obligations, (iii) extension fees after four years and (iv) maturity on the
fifth anniversary of the effective date of the Plan. The second series of
secured notes, representing an aggregate principal amount of approximately $50
million, would provide for (i) interest at a rate of 13% per annum with
additional interest at the rate of 7% per annum accreting over the debt term,
(ii) extension fees after four years and (iii) maturity on the sixth anniversary
of the effective date of the Plan. 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, at
the Company's election. The Plan further contemplates amendments to the relative
rights and preferences of the Series D Cumulative Convertible Preferred Stock
(the "Series D Preferred Stock"), through an exchange of Series D Preferred
Stock for Series E Cumulative Convertible Preferred Stock (the "Series E
Preferred Stock"), similar to those amendments effected in connection with the
recent exchange of the former Series C Cumulative Convertible Preferred Stock
(the "Series C Preferred Stock") for Series E Preferred Stock.
Reference is made to the Plan and Proposed Disclosure Statement, previously
filed with the Securities and Exchange Commission (the "SEC") as exhibits to a
Form 8-K, for a complete description of the financing contemplated to be
obtained under the Plan from the respective existing creditors including,
without limitation,
9
<PAGE>
payment terms, restrictive covenants and collateral, and a complete description
of the treatment of preferred stockholders. Although the Company has commitments
for substantially all of the New Debt and has sold certain of the CMBS
contemplated to be sold in connection with the CMBS Sale, there can be no
assurance that the Company will obtain the Recapitalization Financing, that the
Plan will be confirmed by the Bankruptcy Court, or that the Plan, if confirmed,
will be consummated. The Plan also contemplates certain amendments to the
Company's articles of incorporation, including an increase in authorized shares
from 120 million to 375 million (consisting of 300 million of common shares and
75 million of preferred shares).
Effect of Chapter 11 Filing on REIT Status and Other Tax Matters
REIT Status.
CRIIMI MAE is required to meet income, asset, ownership and distribution
tests to maintain its REIT status. The Company believes that it has satisfied
the REIT requirements for all years through, and including, 1998. However, due
to the uncertainty resulting from its Chapter 11 filing, there can be no
assurance that CRIIMI MAE will retain its REIT status for 1999 or subsequent
years. If the Company fails to retain its REIT status for any taxable year, it
will be taxed as a regular domestic corporation subject to federal and state
income tax in the year of disqualification and for at least the four subsequent
years. Depending on the amount of any such federal and state income tax, the
Company may have insufficient funds to pay such tax and also may be unable to
comply with its obligations under the New Debt.
2000 Taxable Income (Loss)/Taxable Distribution Requirements
Internal Revenue Service Revenue procedure 99-17 provides securities and
commodities traders with the ability to elect mark-to-market treatment for the
2000 tax year and for all future tax years, unless the election is revoked with
the consent of the Internal Revenue Service. On March 15, 2000, CRIIMI MAE
elected for tax purposes to be classified as a trader in securities effective
January 1, 2000. Such trading activity is, or is expected to be, in certain
types of mortgage-backed securities, including Subordinated CMBS (the "Trading
Assets").
As a result of its trader election, CRIIMI MAE recognized a mark-to-market
tax loss on its Trading Assets on January 1, 2000 of approximately $478 million
(the "January 2000 Loss"). Such loss is expected to be recognized evenly over
four years beginning with the year 2000. The Company expects such loss to be
ordinary.
Additionally, as a result of its trader election, the Company will be
required to mark-to-market its Trading Assets at the end of each tax year,
including the year 2000. Any increase or decrease in the value of the Trading
Assets as a result of the year-end mark-to-market requirement will generally
result in either a tax gain (if an increase in value) or a tax loss (if a
decrease in value). Such tax gain or loss, as well as any realized gains or
losses from the disposition of Trading Assets during each year, are also
expected to be ordinary gains or losses.
Since gains and losses associated with trading activities are expected to
be ordinary, any gains will generally increase taxable income and any losses
will generally decrease taxable income (or, if the loss is large enough,
eliminate 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 cash flow from
the Company's Trading Assets will not fluctuate as a result of 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, but can not be carried back. If a security
is marked down because of an increase in interest rates, rather than from credit
losses, such mark-to-market losses may be recovered over time. Any recovered
mark-to market losses will generally be recognized as taxable income, although
there is expected to be no corresponding increase in cash flow.
There is no assurance that the Company's position with respect to its
election as a trader in securities will not be challenged by the IRS, and, if
challenged, will be defended successfully by the Company. As such, there is a
risk that the January 2000 Loss will be limited or disallowed, resulting in
higher tax basis income and a corresponding increase in REIT distribution
requirements.
As a REIT, CRIIMI MAE is generally required to distribute at least 95% of
its "REIT taxable income" to its shareholders each year. If CRIIMI MAE is
required to make taxable income distributions to its shareholders to satisfy
required REIT distributions, all or a substantial portion of these distributions
are expected to be in the form of non-cash dividends. There is no assurance that
such non-cash dividends would satisfy the REIT distribution requirements.
It is possible that the Company could experience an "ownership change"
within the meaning of Section 382 of the Code. Consequently, its use of net
operating losses generated before the ownership change to reduce taxable income
after the ownership change may be subject to limitation under Section 382.
Generally, the use of net operating losses in any year is limited to the value
of the Company's stock on the date of the ownership change multiplied by the
long-term tax exempt rate (published by the IRS) with respect to that date.
See Note 8 for a discussion of differences between financial statement net
income (loss) and taxable income (loss).
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The Company's 1999 Taxable Income.
As a REIT, CRIIMI MAE is generally required to distribute at least 95% of
its "REIT taxable income" to its shareholders each tax year. For purposes of
this requirement, REIT taxable income excludes certain excess noncash income
such as original issue discount ("OID"). In determining its federal income tax
liability, CRIIMI MAE, as a result of its REIT status, is entitled to deduct
from its taxable income dividends paid to its shareholders. Accordingly, to the
extent the Company distributes its net income to shareholders, it effectively
reduces taxable income, on a dollar-for-dollar basis, and eliminates the "double
taxation" that normally occurs when a corporation earns income and distributes
that income to shareholders in the form of dividends. The Company, however,
still must pay corporate level tax on any 1999 taxable income not distributed to
shareholders. Unlike the 95% distribution requirement, the calculation of the
Company's federal income tax liability does not exclude excess noncash income
such as OID.
In determining the Company's taxable income for 1999, distributions
declared by the Company on or before September 15, 2000 and actually paid by the
Company on or before December 31, 2000 will be considered as dividends paid for
the year ended December 31, 1999. The Company anticipates distributing all, or
a substantial portion, of its 1999 taxable income in the form of non-cash
taxable dividends. There can be no assurance that the Company will be able to
make such distributions with respect to its 1999 taxable income. Should CRIIMI
MAE terminate or fail to maintain its REIT status during the year ended December
31, 1999, the taxable income for the year ended December 31, 1999 of up to
approximately $37.5 million would generate a tax liability of up to $15.0
million.
The Company's 1998 Taxable Income.
On September 14, 1999, the Company declared a dividend payable to common
shareholders of approximately 1.61 million shares of a new series of junior
preferred stock with a face value of $10 per share. The purpose of the dividend
was to distribute approximately $15.7 million in undistributed 1998 taxable
income. To the extent that it is determined that such amount was not
distributed, the Company would bear a corporate level income tax on the
undistributed amount. There can be no assurance that all of the Company's tax
liability was eliminated by payment of such junior preferred stock dividend. The
Company paid the junior preferred stock dividend on November 5, 1999. The junior
preferred stock dividend was taxable to common shareholder recipients. Junior
preferred shareholders were permitted to convert their shares of junior
preferred stock into common shares during two separate conversion periods.
During these conversion periods, an aggregate 1,020,241 shares of junior
preferred stock were converted into 8,798,009 shares of common stock.
Taxable Mortgage Pool Risks.
An entity that constitutes a "taxable mortgage pool" as defined in the Tax
Code ("TMP") is treated as a separate corporate level taxpayer for federal
income tax purposes. In general, for an entity to be treated as a TMP (i)
substantially all of the assets must consist of debt obligations and a majority
of those debt obligations must consist of mortgages; (ii) the entity must have
more than one class of debt securities outstanding with separate maturities and
(iii) the payments on the debt securities must bear a relationship to the
payments received from the mortgages. The Company currently owns all of the
equity interests in three trusts that constitute TMPs (CBO-1, CBO-2 and CMO-IV,
collectively the "Trusts"). See Notes 5 and 6 for descriptions of CBO-1, CBO-2
and CMO-IV. The statutory provisions and regulations governing the tax treatment
of TMPs (the "TMP Rules") provide an exemption for TMPs that constitute
"qualified REIT subsidiaries" (that is, entities whose equity interests are
wholly owned by a REIT). As a result of this exemption and the fact that the
Company owns all of the equity interests in each Trust, the Trusts currently are
not required to pay a separate corporate level tax on income they derive from
their underlying mortgage assets.
The Company also owns certain securities structured as bonds (the "Bonds")
issued by each of the Trusts. Certain of the Bonds owned by the Company serve as
collateral (the "Pledged Bonds") for short-term, variable-rate borrowings used
by the Company to finance their initial purchase. If the creditors holding the
Pledged Bonds were to seize or sell this collateral and the Pledged Bonds were
deemed to constitute equity interests (rather than debt) in the Trusts, then the
Trusts would no longer qualify for the exemption under the TMP Rules provided
for qualified REIT subsidiaries. The Trusts would then be required to pay a
corporate level federal income tax. As a result, available funds from the
underlying mortgage assets that would ordinarily be used by the Trusts to make
payments on certain securities issued by the Trust (including the equity
interests and the Pledged Bonds) would instead be applied to tax payments. Since
the equity interests and Bonds owned by the Company are the most subordinated
securities and, therefore, would absorb payment shortfalls first, the loss of
the exemption under the TMP rules could have a material adverse effect on their
value and the payments received thereon.
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In addition to causing the loss of the exemption under the TMP Rules, a
seizure or sale of the Pledged Bonds and a characterization of them as equity
for tax purposes could also jeopardize the Company's REIT status if the value of
the remaining ownership interests in any Trust held by the Company (i) exceeded
5% of the total value of the Company's assets or (ii) constituted more than 10%
of the Trust's voting interests. Although it is possible that the election by
the TMPs to be treated as taxable REIT subsidiaries could prevent the loss of
CRIIMI MAE's REIT status, there can be no assurance that a valid election could
be made given the timing of a seizure or sale of the Pledged Bonds.
2. INVESTMENT COMPANY ACT OF 1940
Under the Investment Company Act of 1940, as amended (the "Investment
Company Act"), an investment company is required to register with the SEC and is
subject to extensive restrictive and potentially adverse regulation relating to,
among other things, operating methods, management, capital structure, dividends
and transactions with affiliates. However, as described below, companies that
are primarily engaged in the business of acquiring mortgages and other liens on
and interests in real estate ("Qualifying Interests") are excluded from the
requirements 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 March 31, 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 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., and CRIIMI MAE CMBS Corp. contain all adjustments
(consisting of only normal recurring adjustments and consolidating adjustments)
necessary to present fairly the
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consolidated balance sheets as of March 31, 2000 and December 31, 1999
(audited), the consolidated results of its operations for the three months ended
March 31, 2000 and 1999 and its cash flows for the three months ended March 31,
2000 and 1999.
These consolidated financial statements have been prepared pursuant to the
rules and regulations of the SEC. Certain information and note disclosures
normally included in annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted. While
management believes that the disclosures presented are adequate to make the
information not misleading, it is recommended that these consolidated financial
statements be read in conjunction with the consolidated financial statements and
the notes included in CRIIMI MAE's Annual Report filed on Form 10-K for the year
ended December 31, 1999 (audited).
Method of Accounting
The consolidated financial statements of CRIIMI MAE are prepared on the
accrual basis of accounting in accordance with generally accepted accounting
principles ("GAAP"). The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain amounts in the consolidated financial statements for the year ended
December 31, 1999 and the three months ended March 31, 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 investments, rejection
of certain executory contracts and the write-off of debt issuance costs and
debt discounts. See Note 5 for further discussion of other than temporary
impairment and losses recognized on sales of CMBS.
For the three months ended March 31, 2000 and 1999, reorganization items
were approximately $9.0 million and $5.5 million, respectively. The components
of this total are as follows:
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<TABLE>
<CAPTION>
Reorganization Items Three months ended Three months ended
- -------------------- March 31, 2000 March 31, 1999
--------------------- ---------------------
<S> <C> <C>
Short-term interest income $(1,004,660) $ (232,400)
Professional fees 4,373,268 5,140,000
Employee Retention Program accrued costs 279,349 542,897
Other 600,498 57,341
----------- ----------
Subtotal 4,248,455 5,507,838
Impairment on CMBS 3,443,759 --
Loss on sale of CMBS 1,354,026 --
----------- ----------
Total $ 9,046,240 $5,507,838
=========== ==========
</TABLE>
Condensed Financial Statements
In accordance with SOP 90-7, the three debtor entities, CRIIMI MAE, CM
Management and Holdings II, are required to present condensed financial
statements for the period January 1, 2000 through March 31, 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 sales proceeds to be held in segregated accounts. In
addition, restricted cash and cash equivalents include balances held in separate
trusts controlled by a trustee for the benefit of employees. See Note 16
"Litigation-Bankruptcy Related Litigation" for further discussion of these
arrangements.
Transfer of Financial Assets
The Company transfers assets (mortgages and mortgage securities) in
securitization transactions where the transferred assets become the sole source
of repayment for newly issued debt. These transfers of financial assets are
accounted for in accordance with SFAS 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities" ("FAS 125").
When both legal and control rights to a financial asset are transferred, the
transfer is treated as a sale. Transfers are assessed on an individual component
basis. In a securitization, the cost basis of the original assets transferred is
allocated to each of the new financial components based upon the relative fair
value of the new financial components. For components where sale treatment is
achieved, a gain or loss is recognized for the difference between that
component's allocated cost basis and fair value. For components where sale
treatment is not achieved, an asset is recorded representing the allocated cost
basis of the new financial components retained and the related incurrence of
debt is also recorded. In transactions where none of the components are sold,
the Company recognizes the incurrence of debt and the character of the
collateralizing assets remains unchanged.
Income Recognition and Carrying Basis
Subordinated CMBS
CRIIMI MAE recognizes income from Subordinated CMBS using the effective
interest method, using the anticipated yield over the projected life of the
investment. Changes in anticipated yields are generally calculated due to
revisions in estimates of future credit losses, actual losses incurred,
revisions in estimates of future prepayments and actual prepayments received.
Changes in anticipated yield resulting from prepayments are recognized through a
cumulative catch-up adjustment at the date of the change which reflects the
change in income of the security from the date of purchase through the date of
change in anticipated yield. The new yield is then used for income recognition
for the remaining life of the investment. Changes in anticipated yield resulting
from reduced estimates of losses are recognized on a prospective basis. When
other than temporary impairment is recognized, a
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new yield is calculated on the CMBS based on its new cost basis and expected
future cash flows. This revised yield is employed prospectively.
On May 8, 1998, CRIIMI MAE consummated CBO-2 which resulted in the sale of
a portion of its Subordinated CMBS portfolio. See Note 5. As a result of this
transaction and in accordance with GAAP, effective in the second quarter of
1998, the Company no longer classifies CMBS securities as Held to Maturity, but
instead classifies CMBS as Available for Sale. CRIIMI MAE carries its
Subordinated CMBS at fair market value where changes in fair value are recorded
as a component of shareholders' equity. See Note 5. Prior to this time, such
securities were carried at their amortized cost basis as the Company had the
ability and intent to hold these securities to maturity.
Insured Mortgage Securities
Mortgage income consists of amortization of the discount or premiums plus
the stated mortgage interest payments received or accrued. The difference
between the cost and the unpaid principal balance at the time of purchase is
carried as a discount or premium and amortized over the remaining contractual
life of the mortgage using the effective interest method. The effective
interest method provides a constant yield of income over the term of the
mortgage.
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. CRIIMI MAE has the intent to hold these loans for the foreseeable future
and therefore the originated loans are classified as Held for Investment and
recorded at amortized cost on the balance sheet.
Short Term Investments
Short term investment income, generated primarily from investment-grade
securities, consists of amortization of the discount or premiums plus the stated
investment 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
investment using the effective interest method. The effective interest method
provides a constant yield of income over the term of the investment.
The Company's short term investments are classified as Available for Sale.
As a result, the Company carries its short term investments at fair value where
changes in fair value are recorded as a component of shareholders' equity.
Upon the sale of such short term investments any gain or loss is recognized in
the income statement.
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.
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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 March 31, 2000, Services Inc. holds a 27%
general partner interest in CMSLP.
As of March 31, 2000, CRIIMI MAE, through CM Management, held a 73% limited
partnership interest in CMSLP. CRIIMI MAE's limited partner investment in CMSLP
is accounted for under the equity method as CRIIMI MAE does not control CMSLP.
However, because it owns 73% of the partnership and because it has certain
rights described below, it follows the equity method of accounting. As a limited
partner, CRIIMI MAE is entitled to all of the rights and benefits of being a
limited partner including the right to receive income and cash distributions in
accordance with its limited partner interest. In addition, CRIIMI MAE has the
right to approve the sale of the principal assets of CMSLP. Services Inc. is the
general partner of CMSLP and manages the day to day affairs of CMSLP.
Impairment
Subordinated CMBS
CRIIMI MAE assesses each Subordinated CMBS for other than temporary
impairment when the fair market value of the asset declines below amortized cost
and when one of the following conditions also exists: 1) fair value has been
below amortized cost for a significant period of time and CRIIMI MAE concludes
that it no longer has the ability or intent to hold the security for the period
that fair value is expected to be below amortized cost through the period of
time CRIIMI MAE expects the value to recover to amortized cost or 2) the credit
quality of its Subordinated CMBS is declining and the Company determines that
the current estimate of expected future credit losses exceeds credit losses as
originally projected. The amount of impairment loss is measured by comparing
the fair value, based on available market information, of a Subordinated CMBS to
its current amortized cost basis, the difference is recognized as a loss in the
income statement.
The Company assesses current economic events and conditions that impact the
value of its Subordinated CMBS and the underlying real estate in making
judgments as to whether or not other than temporary impairment has occurred.
See Note 5 for a discussion of impairment losses recognized in 2000 and 1999.
Insured Mortgage Securities
CRIIMI MAE assesses each insured mortgage security for other than temporary
impairment when the fair market value of the asset declines below amortized cost
for a significant period of time and CRIIMI MAE concludes that it no longer has
the ability to hold the security through the market downturn. The amount of
impairment loss is measured by comparing the fair value of an insured mortgage
security to its current amortized cost basis, the difference is recognized as a
loss in the income statement. The Company did not recognize any impairment on
its insured mortgage securities for the three months ended March 31, 2000 and
1999.
Investment in Originated Loans
CRIIMI MAE recognizes impairment on the originated loans when it is
probable that CRIIMI MAE will not be able to collect all amounts due according
to the contractual terms of the loan agreement. CRIIMI MAE measures impairment
based on the present value of expected future cash flows discounted at the
loan's effective interest rate or the fair value of the collateral if the loan
is collateral dependent. The Company did not recognize impairment losses on its
originated loans for the three months ended March 31, 2000 and 1999.
Short Term Investments
CRIIMI MAE assesses each short term investment for other than temporary
impairment when the fair market value of the asset declines below amortized cost
and CRIIMI MAE concludes that it no longer has the ability to hold the security
through the market downturn. The amount of impairment loss is measured by
comparing the fair value of the short term investment to its current cost basis,
the difference is recognized as a loss in the income statement. The Company did
not recognize any impairment on its short term investments for the three months
ended March 31, 2000 and 1999.
Equity Investments
Impairment is recognized on CRIIMI MAE's investments accounted for under
the equity method if a decline in the market value of the investment below its
carrying basis is judged to be "other than temporary". In this case, an
unrealized loss is recognized as the difference between the fair value and
carrying amount. The Company did not recognize impairment losses on its equity
investments for the three months ended March 31, 2000 and 1999.
Receivables
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Receivables primarily consist of interest and principal receivables on the
Company's Subordinated CMBS, insured mortgage securities and originated loan
portfolios. In addition, prepayments in the insured mortgage securities
portfolio that have not yet been received by CRIIMI MAE are included.
Other Assets
Other assets primarily include Merger assets and related costs, deferred
financing costs, deferred costs and investment in mezzanine loans, as further
discussed below. Additionally included in other assets is Real Estate Owned
("REO") property acquired through foreclosure that will be held for sale. In
June 1997, CRIIMI MAE acquired a real estate property in a foreclosure sale from
a CMBS trust. CRIIMI MAE also serves as the special servicer and owns a portion
of the subordinated tranches in the same trust. As of March 31, 2000, CRIIMI
MAE's investment in REO property totaled approximately $3.5 million. 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 March 31, 2000, there were no reserve account balances with
respect to either the Citibank or Prudential Programs. (See Note 6 for further
discussion.)
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
17
<PAGE>
CRIIMI MAE acquires interest rate protection agreements to reduce its
exposure to interest rate risk. The costs of such agreements which qualify for
hedge accounting are included in other assets and are amortized over the
interest rate agreement term. To qualify for hedge accounting, the interest rate
protection agreement must meet two criteria: (i) the debt to be hedged exposes
CRIIMI MAE to interest rate risk and (ii) the interest rate protection agreement
reduces CRIIMI MAE's exposure to interest rate risk. In the event that interest
rate protection agreements are terminated, the associated gain or loss is
deferred over the remaining term of the agreement, provided that the underlying
hedged asset or liability still exists. Amounts to be paid or received under
interest rate protection agreements are accrued currently and are netted with
interest expense for financial statement presentation purposes. Additionally, in
the event that interest rate protection agreements do not qualify as hedges,
such agreements are reclassified to be investments accounted for at fair value,
with any gain or loss included as a component of income.
Per Share Amounts
Basic earnings per share amounts for the three months ended March 31, 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 months ended March 31, 2000 and 1999 represent
basic earnings per share adjusted for dilutive common stock equivalents, which
for CRIIMI MAE could include stock options and certain series of preferred
stock. See Note 13 for a reconciliation of basic earnings per share to diluted
earnings per share.
Consolidated Statements of Cash Flows
Cash payments made for interest for the three months ended March 31, 2000
and 1999, were $24,483,139 and $29,960,056, respectively.
Comprehensive Income
Comprehensive income includes net earnings as currently reported by the
Company adjusted for other comprehensive income. Other comprehensive income for
the Company is changes in unrealized gains and losses related to the Company's
CMBS and mortgages accounted for as available for sale.
New Accounting Statements
During 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133 "Accounting for Derivative Instruments and for Hedging Activities" ("FAS
133"). FAS 133 establishes accounting and reporting standards for derivative
investments and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as a hedge. The accounting for
the changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. FAS 133 is effective for the Company
beginning January 1, 2001.
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.
18
<PAGE>
<TABLE>
<CAPTION>
As of March 31, 2000 As of December 31, 1999
Amortized Cost Fair Value Amortized Cost Fair Value
----------------- ----------------- ----------------- -----------------
Assets:
- -------
<S> <C> <C> <C> <C>
Subordinated CMBS $1,326,033,862 $1,153,691,004 $1,374,080,226 $1,179,270,306
Insured mortgage securities 401,789,401 389,998,612 407,469,108 394,857,239
Investment in originated loans 467,951,614 420,359,984 470,204,780 422,643,902
Restricted cash and cash equivalents 53,280,436 53,280,436 38,036,624 38,036,624
Other cash and cash equivalents 56,520,588 56,520,588 53,603,104 53,603,104
Accrued interest and principal receivable 74,921,239 74,921,239 69,483,337 69,483,337
Interest rate protection agreements 774,259 1,518,314 1,119,280 1,465,496
Liabilities:
- ------------
Liabilities not subject to Chapter 11 proceedings:
Securitized mortgage obligations:
Collateralized bond obligations-CMBS 278,904,376 256,008,064 278,165,968 253,084,864
Collateralized insured mortgage securities 373,258,851 374,675,395 378,711,602 381,129,836
obligations
Collateralized mortgage obligations- 397,980,878 370,552,721 399,768,513 373,634,008
originated loans
Liabilities subject to Chapter 11 proceedings:
Variable-rate secured borrowings-CMBS 688,859,967 N/A 732,904,775 N/A
Senior unsecured notes 100,000,000 85,500,000 100,000,000 86,000,000
Other financing facilities 92,799,522 N/A 92,799,522 N/A
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Subordinated CMBS
Prior to 1998, the fair market value of the Company's portfolio of
Subordinated CMBS was based upon quotes obtained from, in most cases, the lender
to which the security was pledged. The lender also quoted the related unrated
bonds even though the bonds did not serve as collateral for CRIIMI MAE's
obligations. The Company obtained "ask" quotes as compared to "bid" quotes
because it is the owner of the securities. Due to the Chapter 11 filing, the
Company's lenders were not willing to provide fair value quotes for the CMBS
portfolio as of March 31, 2000 and December 31, 1999. As a result, the Company
calculated the estimated fair market value of its Subordinated CMBS portfolio as
of March 31, 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 March 31, 2000 and
December 31, 1999, it has disclosed the range of discount rates by rating
category used in determining these fair market values in Note 5.
The CMBS market was adversely affected by the turmoil which occurred in the
capital markets commencing in late summer of 1998 that caused spreads between
CMBS yields and the yields on U.S. Treasury securities with comparable
maturities to widen, resulting in a decrease in the value of CMBS. As a result,
the creation of new CMBS and the trading of existing CMBS came to a near
standstill. In late November 1998, buying and trading activity in the CMBS
market began to recover, increasing liquidity in the CMBS market; however, these
improvements mostly related to investment grade CMBS. New issuances of CMBS also
returned in late November 1998 and continued throughout 1999 with the issuance
of newly created CMBS totaling approximately $58.3 billion for 1999. The market
for Subordinated CMBS has, however, been slower to recover. It is difficult, if
not impossible, to predict when or if the CMBS market and, in particular, the
Subordinated CMBS market, will recover. Even if the market for Subordinated CMBS
recovers, the liquidity of such market has historically been limited.
19
<PAGE>
Additionally, during adverse market conditions, the liquidity of such market has
been severely limited. Therefore, management's estimate of the value of the
Company's CMBS could vary significantly from the value that could be realized in
a current transaction between a willing buyer and a willing seller in other than
a forced sale or liquidation.
Insured Mortgage Securities
The fair market value of the Company's portfolio of Insured Mortgage
Securities as of December 31, 1999 was based upon quotes obtained from an
investment banking institution, which trades these investments on a daily basis.
Due to the Chapter 11 filing and a change in staff at the investment banking
institution, the Company was unable to find an investment banking institution
willing to provide fair value quotes for the Insured Mortgage Securities
portfolio as of March 31, 2000. As a result, the Company calculated the
estimated fair market value of its Insured Mortgage Securities portfolio as of
March 31, 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 quarter 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 March 31,
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 of 9.2% and
9.1% for March 31, 2000 and December 31, 1999, which the Company believes was
commensurate with the market's perception of risk and value.
Short Term Investments
The fair value of the short term investments is based on the quoted market
price from the dealer who sold the investments to the Company. The dealer
trades these instruments as part of its day-to-day activities.
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 March 31, 2000
and December 31, 1999 is calculated using a discounted cash flow methodology
similar to the discussion on Subordinated CMBS above. The fair value of the
senior unsecured notes was calculated using a quoted market price from
Bloomberg. Management has determined that fair value of the variable-rate
secured borrowings-CMBS and other financing facilities is not practicable to
measure because there is no quoted market price available and the facilities are
in default and have been the subject of dispute as discussed in Note 9. Also see
Note 9 for a detailed discussion of these facilities and the terms of the
facilities.
Interest Rate Protection Agreements
The fair value of interest rate protection agreements (used to hedge CRIIMI
MAE's variable-rate debt) is the estimated amount that CRIIMI MAE would receive
to terminate the agreements as of March 31, 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.
20
<PAGE>
5. SUBORDINATED CMBS
During 1997, FAS 125 "Accounting for Transfers and Servicing of Financial
Assets" became effective. This statement significantly changed the accounting
treatment for transfers of financial assets. FAS 125 changed accounting
standards to require transfers of assets to be accounted for on a component
basis instead of as an entire unit. Accordingly, in a securitization or
resecuritization, components (securities) are treated as sales or retained
interests based upon CRIIMI MAE's ability to control the component. Components
where control is not retained are treated as sales and those where control is
retained are treated as retained interests.
In May 1998, CRIIMI MAE completed its second resecuritization of CMBS
assets ("CBO-2"), with a combined face value of approximately $1.8 billion
involving 75 individual securities collateralized by 19 mortgage pools and three
of the retained securities from CBO-1. In CBO-2, the Company sold in a private
placement, securities with a face amount of $468 million and retained securities
with a face amount of approximately $1.3 billion. Certain securities included
call provisions to enable CRIIMI MAE to 1) call bonds if market conditions
warrant, and 2) call bonds when it is no longer cost effective to service them.
As a result, CBO-2 resulted in a sale of certain securities and the retention of
new securities. In accordance with FAS 125, the assets collateralizing the
resecuritization are "derecognized" and the combined amortized cost basis of the
collateralizing assets was allocated to the new securities issued. CRIIMI MAE
received $335 million for the $345 million face amount of investment grade
securities sold without call provisions which had an allocated cost basis of
$306 million, resulting in a gain of approximately $28.8 million. CRIIMI MAE
recorded retained assets totaling $926 million representing the allocated
amortized cost basis for the $123 million face amount of investment grade
securities issued with call provisions and the $1.3 billion face amount of non-
investment grade retained securities in CBO-2. CBO-2 generated $160 million of
net borrowing capacity primarily as a result of a higher overall weighted
average credit rating for its new securities as compared to the weighted average
credit rating on the related CMBS collateral. The net excess borrowing capacity
was used to obtain short-term, variable rate secured borrowings which were used
to acquire additional Subordinated CMBS during the second quarter of 1998.
The CBO-2 transaction requires reclassification of CRIIMI MAE's entire
portfolio of mortgage securities (consisting of mortgage security collateral and
CMBS) from Held to Maturity to Available for Sale. Therefore, CRIIMI MAE's
securities, effective the second quarter of 1998, are reflected on the balance
sheet at fair market value. At March 31, 2000, the amortized cost of the CMBS
exceeded the fair market value by approximately $172.3 million (after taking
into account the $156.9 impairment write down of certain CMBS subject to the
CMBS Sale as of December 31, 1999 and $3.4 million additional impairment as of
March 31, 2000, 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 March 31, 2000, CRIIMI MAE held the following securities with respect to its
CMBS portfolio:
Original 3/31/00
Anticipated Anticipated
Yield to Yield to
Pool (1) (5) (7) Maturity (2) Maturity (2)(3)
---------------- ------------ ---------------
Retained Securities from
CRIIMI 1996 C1 (CBO-1) 19.5% 20.7%(4)
DLJ Mortgage Acceptance Corp.
Series 1997 CF2 Tranche B-30C 8.2% 11.9%(6)
Nomura Asset Securities Corp.
Series 1998-D6 Tranche B7 12.0% 12.0%
Retained Securities from
CRIIMI 1998 C1 (CBO-2) 10.3% 10.2%(5)
Mortgage Capital Funding, Inc.
Series 1998-MC1 8.9% 13.5%(6)
Chase Commercial Mortgage Securities
Series 1998-1 8.8% 12.9%(6)
21
<PAGE>
First Union/Lehman Brothers
Series 1998 C2 8.9% 13.6%(6)(8)
Mortgage Capital Funding, Inc.
Series 1998-MC2 8.7% 13.7%(6)
Weighted Average 9.8%(1) 11.5%(1)
________________________________________
(1) CRIIMI MAE, through CMSLP, performs servicing functions on a total CMBS
pool of approximately $27.9 billion as of March 31, 2000. Of the $27.9
billion of mortgage loans, approximately $372.7 million are being specially
serviced, of which approximately $271 million are being specially
serviced due to payment default (including $36.2 million of real estate
owned) and the remainder is being specially serviced due to non-financial
covenant default. Through March 31, 2000, CMSLP has resolved and
transferred out of special servicing approximately $483.6 million of the
approximately $856.3 million that has been transferred into special
servicing. Through March 31, 2000, actual losses on mortgage loans
underlying the CMBS transactions are lower than the Company's original loss
estimates.
(2) Represents the anticipated weighted average yield over the expected average
life of the Company's Subordinated CMBS portfolio as of the date of
acquisition and March 31, 2000, respectively, based on management's
estimate of the timing and amount of future credit losses and prepayments.
(3) Unless otherwise noted, changes in the March 31, 2000 anticipated yield to
maturity from that originally anticipated are primarily the result of
changes in prepayment assumptions relating to mortgage collateral.
(4) The increase in the anticipated yield resulted from the reallocation of
CBO-1 asset basis in conjunction with the CBO-2 resecuritization. While it
had no impact on the anticipated yield, the unrated bond from CBO-1
experienced an approximately $1.6 million principal write-down in 1999 due
to a loss on the foreclosure of two underlying loans.
(5) On October 6, 1998, Morgan Stanley and Co. International Limited ("Morgan
Stanley") advised CRIIMI MAE that it was exercising alleged ownership
rights over certain classes of CMBS it held as collateral. In the first
quarter of 1999, the Company agreed to cooperate in selling two classes of
investment grade CMBS issued by CRIIMI MAE Commercial Mortgage Trust Series
1998-C1 (the "CBO-2 BBB Bonds") and to suspend litigation with Morgan
Stanley with respect to these CMBS. On March 5, 1999, the CBO-2 BBB Bonds
with a $205.8 million face amount and a coupon rate of 7% were sold in a
transaction that was accounted for as a financing by the Company rather
than a sale. Of the $159.0 million in proceeds, $141.2 million was used to
repay amounts due under the agreement with Morgan Stanley, and $17.8
million was paid to CRIIMI MAE.
(6) As discussed further below, under the Plan, the Company intends to sell
these CMBS pools and as such, impairment was recognized as of December 31,
1999 and March 31, 2000 related to these CMBS. The impairment losses
resulted in the cost basis being written down to fair value as of December
31, 1999 and March 31, 2000. As a result of this new basis, these bonds
have new yields effective the first quarter of 2000.
(7) CRIIMI MAE and Morgan Stanley reached an agreement that called for the sale
of seven classes of subordinated CMBS and a related unrated bond, issued by
Morgan Stanley Capital I Inc. Series 1998-WF2 (the "Wells Fargo Bonds").
The agreement was approved by the Bankruptcy Court on February 24, 2000.
On February 29, 2000, the Wells Fargo Bonds were sold. Of the
approximately $45.9 million in net sales proceeds, $37.5 million was used
to pay off all outstanding borrowings owed to Morgan Stanley and the
remaining proceeds of approximately $8.4 million will be used primarily to
help fund CRIIMI MAE's Plan. A realized loss related to this sale of
approximately $1.4 million was recognized during the quarter ended March
31, 2000.
(8) On April 24, 2000 CRIIMI MAE sold seven classes of CMBS rated BB to CCC and
unrated issued by First Union-Lehman Brothers-Bank of America Commercial
Mortgage Trust, Series 1998-C2 (the "First Union Bonds"). The CMBS were
sold to Lehman ALI, Inc. ("Lehman") pursuant to a consent order approved by
the Bankruptcy Court on April 18, 2000. The transaction generated
aggregate sales proceeds of $140 million of which approximately $113
million were used to retire the debt associated with these securities owed
to Lehman and First Union National Bank. The remaining proceeds,
approximately $27 million, will be used primarily to help fund CRIIMI MAE's
plan of reorganization.
22
<PAGE>
The aggregate investment by the underlying rating of the Subordinated CMBS is as
follows:
<TABLE>
<CAPTION>
Range of Discount
Face Amount as Weighted Weighted Fair Value as of Rates Used to Amortized Cost as Amortized Cost as
of 03/31/00 (in Average Pass- Average Life 03/31/00 (in Calculate Fair of 03/31/00 (in of 12/31/99 (in
Security Rating millions) Through Rate (1) millions) (2) Value (2) millions) millions)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
A (3) $ 62.6 7.0% 6 years $ 53.7 10.2% $ 57.6 $ 57.4
BBB (3) 150.6 7.0% 11 years 116.9 10.5% 128.7 127.7
BBB-(3) 115.2 7.0% 12 years 85.4 11.0% 93.7 93.5
BB+ 373.4 7.0% 12 years 249.6 11.4%-12.8% 292.0 305.5
BB 255.9 6.9% 14 years 180.5 11.8%-13.5% 189.8 206.1
BB- 81.2 6.8% 14 years 48.4 12.7%-14.5% 54.4 58.6
B+ 122.7 6.8% 15 years 62.9 14.4%-15.5% 79.4 82.1
B 294.2 6.7% 15 years 142.6 15.0%-16.7% 175.8 178.2
B- 186.7 6.7% 16 years 81.7 15.7%-19.0% 93.1 98.1
CCC 87.9 6.8% 19 years 21.6 27.0%-30.0% 31.3 32.5
Unrated (4) 471.4 5.5% 20 years 110.4 28.0%-32.0% 130.2 134.4
-------- -------- ------------ --------
Total (5)(6) $2,201.9 6.6% 15 years $1,153.7 $1,326.0 (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 March 31,
2000 and December 31, 1999. As a result, the Company calculated the
estimated fair market value of its Subordinated CMBS portfolio as of March
31, 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 March 31, 2000 and December 31, 1999, it has disclosed in
the table the range of discount rates by rating category used in
determining these fair market values. See Note 4 for a discussion on the
CMBS Market.
(3) In connection with CBO-2, $62.6 million (A rated) and $60.0 million (BBB
rated) face amount of investment grade securities were sold with call
options and $345 million (A rated) face amount were sold without call
options. In connection with CBO-2, in May 1998, the Company initially
retained $90.6 million (BBB rated) and $115.2 million (BBB- rated) face
amount of securities, both with call options, with the intention to sell
the securities at a later date. Such sale occurred March 5, 1999. See
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 approximately $1.6 million
principal write down in 1999 due to a loss on the foreclosure of two
underlying loans. Management believes that the current loss estimates used
to recognize income related to this bond remain adequate to cover losses.
(5) Refer to Note 8 for additional information regarding the Subordinated CMBS
for tax purposes.
(6) Similar to the Company's other sponsored CMOs, CMO-IV, as described in Note
6, resulted in the creation of CMBS, 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.
(7) Amortized cost reflects the cumulative $160.3 million impairment loss
write-down related to the CMBS subject to the CMBS Sale. See below for
further discussion.
(8) As previously discussed, in February 2000 the Wells Fargo Bonds were sold
for proceeds of approximately $45.9 million. Additionally, in April 2000
the First Union Bonds were sold for proceeds of $140 million.
23
<PAGE>
As of March 31, 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>
3/31/00 12/31/99 3/31/00 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.............. 30% 29% Texas................ 13% 13%
Office.............. 15% 13% Florida............... 7% 8%
Hotel............... 13% 14% New York............... 6% 5%
Other............... 11% 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 months ended March 31, 2000 and 1999, the amount of
income recognized in excess of cash received due to the effective interest rate
method was approximately $2.7 million and $127,000, 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.
The Company's CMBS portfolio currently generates monthly cash flow. As
of March 31, 2000, certain lenders have withheld payment to CRIIMI MAE of
approximately $34.5 million with respect to its CMBS portfolio (excluding those
securities that are match-funded). This amount includes approximately $9.6
million withheld during the first quarter of 2000.These payments are currently
reflected in receivables and other assets on the balance sheet. (Refer to
Note 6 for payments due the Company in connection with CMO-IV). The
realizability of these receivables is uncertain and is dependent upon reaching
successful agreements with the Company's lenders that do not result in the loss
of any collateral. A loss could occur if the lender fails to remit interest
payments to the Company.
As discussed in Note 1, under CRIIMI MAE's Plan a portion of the
Recapitalization Financing is expected to result from the CMBS Sale. The CMBS
subject to the CMBS Sale had a fair value and amortized cost of $341.2 million
and $339.3 million, respectively, as of March 31, 2000. The Company first filed
a plan with the Bankruptcy Court in the fourth quarter of 1999 and during that
same quarter CRIIMI MAE began marketing for sale the CMBS subject to the CMBS
Sale. CRIIMI MAE sold a portion of these bonds in February 2000 and April 2000
and intends to enter into additional agreements during the second quarter of
2000 to sell the remaining CMBS subject to the CMBS Sale, although there can be
no assurance that such bonds will be sold.
GAAP states that when the fair market value of an investment declines
below its amortized cost for a significant period of time and the entity no
longer has the ability or intent to hold the investment for the period the
entity anticipates is required for the value to recover to amortized cost, other
than temporary impairment on the investment should be recognized. This other
than temporary impairment is recognized through the income statement as the
difference between amortized cost and fair value. Additional accounting guidance
states that other than temporary impairment should be recognized in the period
the decision to sell any investment is made if the entity does not expect the
fair value to recover before the sale date. As the Company decided in the fourth
quarter of
24
<PAGE>
1999 to sell the CMBS subject to the CMBS Sale and it did not expect the value
of these bonds to significantly recover before the future sale dates, the
Company recognized approximately $157 million of other than temporary impairment
related to these CMBS through earnings in the fourth quarter of 1999. The
Company recognized an additional $3.4 million of other than temporary impairment
during the first quarter of 2000 related to these same bonds. Unrealized losses
related to these CMBS were previously recognized through other comprehensive
income in the equity section of the balance sheet. The other than temporary
impairment loss is a part of the reorganization items on the income statement as
the impairment was recognized as part of the reorganization.
CMSLP did not file for protection under Chapter 11. However, because
of the related party nature of its relationship with CRIIMI MAE, CMSLP has been
under a high degree of scrutiny from servicing rating agencies. As a result of
CRIIMI MAE's Chapter 11 filing, CMSLP was declared in default under certain
credit agreements with First Union National Bank ("First Union"). In order to
repay all such credit agreement obligations and to increase its liquidity, CMSLP
arranged for ORIX Real Estate Capital Markets, LLC ("ORIX"), formerly known as
Banc One Mortgage Capital Markets, LLC to succeed it as master servicer on two
commercial mortgage pools on October 30, 1998. In addition, in order to allay
rating agency concerns stemming from CRIIMI MAE's Chapter 11 filing, in November
1998, CRIIMI MAE designated ORIX as special servicer on 33 separate CMBS
securitizations totaling approximately $29 billion, subject to certain
requirements contained in the respective servicing agreements. CMSLP continues
to perform special servicing as sub-servicer for ORIX on all but five of these
securitizations. CRIIMI MAE remains the owner of the lowest rated tranche of the
related Subordinated CMBS and, as such, retains rights pertaining to ownership,
including the right to replace the special servicer. CMSLP lost the right to
specially service the DLJ MAC 95 CF-2 securitization when the majority holder of
the lowest rated tranches replaced CMSLP as special servicer. As part of CRIIMI
MAE's Plan, certain of the Company's non-resecuritized CMBS are intended to be
sold. As such, CMSLP will lose its special servicing rights related to these
CMBS. In 1999, CMSLP generated gross revenues of approximately $1.1 million in
fees on these CMBS.
25
<PAGE>
6. LOAN ORIGINATION PROGRAM
Prior to the Petition Date, the Company originated mortgage loans
principally through mortgage loan conduit programs with major financial
institutions for the primary purpose of pooling such loans for securitization.
The Company viewed a securitization as a means of extracting the maximum value
from the mortgage loans originated. A portion of the mortgage loans originated
was financed through the creation and sale of investment grade CMBS to third
parties in connection with the securitization. The Company received net cash
flow on the CMBS not sold to third parties after payment of amounts due to
secured creditors who had provided acquisition financing. Additionally, the
Company received origination and servicing fees related to the mortgage loan
conduit programs.
A majority of the mortgage loans originated under the Company's loan
conduit programs were "No Lock" mortgage loans. Unlike most commercial mortgage
loans originated for the CMBS market which contain "lock-out" clauses (that is,
provisions which prohibit the prepayment of a loan for a specified period after
the loan is originated or impose costly yield maintenance provisions), the
Company's No Lock loans allowed borrowers the ability to prepay loans at any
time by paying a prepayment penalty.
Prior to the Petition Date, the Company had originated over $900 million in
aggregate principal amount of loans. In June 1998, the Company securitized
approximately $496 million of the commercial mortgage loans originated or
acquired through a mortgage loan conduit program with Citicorp Real Estate, Inc.
("Citibank") and, through CRIIMI MAE CMBS Corp., issued Commercial Mortgage Loan
Trust Certificates, Series 1998-1 ("CMO-IV"). A majority of these mortgage
loans were "No Lock" loans. In CMO-IV, CRIIMI MAE sold $397 million face amount
of fixed-rate, investment grade CMBS. CRIIMI MAE has call rights on each of the
issued securities and therefore has not surrendered control of the bonds, thus
requiring the transaction to be accounted for as a financing of the mortgage
loans collateralizing the investment grade CMBS sold in the securitization. The
Company originally intended to sell all of the investment grade tranches of CMO-
IV; however, two investment grade tranches were not sold until 1999.
On April 5, 1999, the Company finalized an agreement by which Salomon Smith
Barney, in cooperation with CRIIMI MAE, agreed to sell the remaining two classes
of investment grade CMBS from CMO-IV with a face amount of $45.9 million and an
average coupon rate of 6.96% constituting a portion of the collateral security
advances under financing agreements with Citicorp. CRIIMI MAE sold these two
classes of CMBS in May and October 1999. CRIIMI MAE 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.
As of March 31, 2000 and December 31, 1999, the originated loans were
secured by properties of the types and at the locations identified below:
<TABLE>
<CAPTION>
March 31, December 31, March 31, December 31,
Property Type 2000(1) 1999 (1) Geographic Location(2) 2000(1) 1999 (1)
- ------------- ------- ------------ ---------------------- --------- ------------
<S> <C> <C> <C> <C> <C>
Multifamily........ 37% 37% Michigan................. 21% 20%
Hotel.............. 26% 26% Texas.................... 7% 7%
Retail............. 20% 20% Illinois................. 7% 7%
Office............. 11% 11% California............... 6% 6%
Other.............. 6% 6% Maryland................. 6% 6%
------- -------
Total.......... 100% 100% Connecticut.............. 6% 6%
======= =======
Florida.................. 5% 5%
Other(3)................. 42% 43%
---- -------
Total.................... 100% 100%
==== =======
</TABLE>
______________________________
(1) Based on a percentage of the total unpaid principal balance of the
underlying loans.
(2) No significant concentration by region.
(3) No other individual state makes up more than 5% of the total.
26
<PAGE>
Descriptions of the originated loans categorized by unpaid principal
balances as of March 31, 2000, are as follows:
As of March 31, 2000
--------------------
<TABLE>
<CAPTION>
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 92 $215,289,767 7.48% 8.4 years
$ 5 - $ 9.99 million 19 134,150,858 7.40% 8.7 years
$10 - $14.99 million 8 95,095,677 7.14% 8.7 years
$15 - $20 million 1 17,031,911 7.15% 9.7 years
--- ------------ ---- ---------
120 $461,568,213 7.38% 8.6 years
=== ============ ==== =========
</TABLE>
___________________________________________
(1) The carrying amount of the originated loans of $467,951,614 is comprised of
$461,568,213 face amount of loans plus $6,383,401 of deferred loan costs.
(2) Several loans in CMO-IV are collateralized by multiple properties. The
table reflects the actual number of loans.
(3) All originated loans are collateralized by first or second liens on
multifamily, hotel, retail, office or other commercial properties.
Approximately 78% of the unpaid principal balance of the loans in the
securitization are No-Lock loans.
(4) The fair value of the originated loans at March 31, 2000 was $420,359,984.
Descriptions of the originated loans categorized by unpaid principal
balances as of December 31, 1999 are as follows:
As of December 31, 1999
-----------------------
<TABLE>
<CAPTION>
Weighted
Average
Number of Face Effective Weighted Average
Unpaid Principal Balance Loans Value(1) Interest Rate Remaining Term
- ------------------------ ----- -------- ------------- --------------
<S> <C> <C> <C> <C>
$ 0 - $ 4.99 million 92 $216,386,540 7.48% 8.6 years
$ 5 - $ 9.99 million 21 154,467,547 7.36% 8.9 years
$10 - $14.99 million 6 75,822,080 7.15% 8.9 years
$15 - $20 million 1 17,076,246 7.15% 9.9 years
--- ------------ ----- ---------
120 $463,752,413 7.37% 9.1 years
=== ============ ===== =========
</TABLE>
___________________________________
(1) The fair value of the originated loans at December 31, 1999 was
$422,643,902.
Although CMO-IV was accounted for as a financing, as described above,
economically, the Company currently generates monthly cash flows of
approximately $763,000 from the Subordinated CMBS tranches created in the
transaction. As of March 31, 2000, payments of approximately $11.6 million,
were withheld by certain lenders, with respect to certain tranches of CMO-IV.
This amount includes approximately $1.8 million withheld during the first
quarter of 2000.
At the time it filed for bankruptcy, the Company had a second mortgage
loan conduit program with Citicorp Real Estate, Inc. (the "Citibank Program")
and a loan conduit program with Prudential Securities Incorporated and
Prudential Securities Credit Corporation (collectively, "Prudential") (the
"Prudential Program").
The Citibank Program provided for CRIIMI MAE to pay to Citibank the
face value of the loans originated through the Program, which were funded by
Citibank and not otherwise securitized, plus or minus any hedging loss or gain
on December 31, 1998. To secure this obligation CRIIMI MAE was required to
deposit a portion of the principal amount of each originated loan in a reserve
account.
On April 5, 1999, the Bankruptcy Court entered a Stipulation and
Consent Order (the "Order"), negotiated by the Company and Citibank. The
negotiations were in response to a letter Citibank sent to the Company on
October 5, 1998 alleging that the Company was in default under the Citibank
Program and that it was terminating
27
<PAGE>
the Citibank Program. The Order provided that Citibank would, with CRIIMI MAE's
cooperation, sell the loans originated under the Citibank Program provided that
the sale resulted in CRIIMI MAE receiving minimum net proceeds of not less than
$3.5 million, after satisfying certain amounts due to Citibank under the
Citibank Program from the amount held in the reserve account. The minimum net
proceeds provision could be waived by written agreement of the Company, the
Unsecured Creditors' Committee and the Equity Committee.
On August 5, 1999, all but three of the commercial loans originated under
the Citibank Program in 1998 were sold for gross proceeds of approximately $308
million. The loans sold had an aggregate unpaid principal balance of $339
million. On September 16, 1999, the remaining three loans were sold for gross
proceeds of approximately $27.2 million. The loans sold had an aggregate
principal balance of $32.7 million. Prior to the actual sale of these loans, the
Company had recorded its unrealized losses based on pricing data received from
Citibank. In the case of each sale of the commercial loans, the minimum net
proceeds provision was waived by agreement of the Company, the Unsecured
Creditors' Committee and the Equity Committee. For GAAP purposes, the Company
realized $36.3 million of losses from the third quarter of 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 March 31, 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."
CRIIMI MAE owns the following mortgages directly or indirectly through its
wholly-owned subsidiaries:
<TABLE>
<CAPTION>
As of March 31, 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 $ 5,269,773 $ 5,423,071 7.66% 35 years
CRIIMI MAE Financial Corporation (2) 35 123,037,240 125,665,151 8.39% 29 years
CRIIMI MAE Financial Corporation II (2) 47 200,315,951 207,916,252 7.20% 27 years
CRIIMI MAE Financial Corporation III (2) 23 61,375,648 62,784,927 7.85% 29 years
------------- ------------ -------------- ---------------- -------------
106 $389,998,612 $401,789,401 7.68% (3) 28 years (3)
============= ============ ============== ================ =============
<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>
28
<PAGE>
____________________________________
(1) The fair value of the mortgage securities was based on the estimated
discounted future cash flows. As of March 31, 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 three months ended March 31, 2000, there were three prepayments
of mortgage loans underlying mortgage securities held by CRIIMI MAE's
financing subsidiaries. These prepayments generated net proceeds of
approximately $4.6 million and resulted in net financial statement gains of
approximately $15,000, which are included in gains on mortgage securities
dispositions on the accompanying consolidated statement of income for the
three months ended March 31, 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 March 31, 2000 and December 31, 1999.
8. DIFFERENCES BETWEEN FINANCIAL STATEMENT NET INCOME (LOSS) AND TAXABLE
INCOME (LOSS)
The differences between financial statement (GAAP) net income (loss) and
taxable income (loss) are principally attributable to differing treatment of
unrealized/realized gains and losses associated with certain assets; the
impairment of certain assets; the bases, income, and/or credit loss recognition
related to certain assets; a portion of reorganization costs not deductible for
tax purposes; and amortization of certain costs.
As previously discussed in Note 1, as a result of its trader election in
early 2000, CRIIMI MAE recognized a mark-to market tax loss of approximately
$478 million on certain Trading Assets on January 1, 2000 (the "January 2000
Loss"). The January 2000 Loss is expected to be recognized evenly over four
years for tax purposes (i.e., approximately $120 million per year) beginning
with the year 2000. The Company recognized one-fourth (i.e., approximately $30
million) of this year's portion of the January 2000 Loss during the first
quarter 2000. The Company expects to continue to recognize approximately $30
million of loss related to the January 2000 Loss in each quarter for the next
four years. (See Note 1 "2000 Taxable Income(Loss)/Taxable Distribution
Requirements" for a more complete discussion).
A summary of the estimated first quarter 2000 net operating loss is
as follows:
January 2000 Loss $ 478 million
LESS: Portion recognized in First Quarter 2000 (30) million
----
Balance Remaining of January 2000 Loss to be Recognized $ 448 million
====
Taxable Income Before Recognition of January 2000 Loss $ 16 million
LESS: January 2000 Loss Recognized in First Quarter 2000 (30) million
----
Net Operating Loss for First Quarter 2000 ($14) million
Net Operating Loss Created in First Quarter 2000 ($14) million
Net Operating Loss Utilization 0.0
----
Net Operating Loss Carried Forward for Use in Future Periods $( 14) million
29
<PAGE>
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 bankruptcy petition filed on October 5, 1998, certain
lenders have declared defaults or otherwise taken action against the Company
with respect to a number of CRIIMI MAE's financing facilities. See Note 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.
30
<PAGE>
The following table summarizes CRIIMI MAE's debt outstanding as of March 31,
2000 and December 31, 1999:
<TABLE>
<CAPTION>
Quarter ended March 31, 2000
------------------------------------------------------------------------------------------------
Effective Average
Rate at Effective
Ending Balance Quarter End Average Balance Rate Stated Maturity Date
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Securitized mortgage obligations:
Subordinated CMBS (1) $ 278,904,376 9.0% $278,535,172 9.0% Nov 2006-Nov 2011
Freddie Mac Funding Note (2) 197,371,946 7.4% 199,578,261 7.4% Sept 2031
Fannie Mae Funding Note (3) 60,726,368 7.4% 60,789,743 7.4% March 2035
CMO (4) 115,160,537 7.4% 115,617,223 7.4% Jan 2033
CMO-loan originations (5) 397,980,878 6.6% 398,874,696 6.6% Oct 2001-May 2008
Variable-rate secured borrowings-
Subordinated CMBS 688,859,967 7.2% 715,274,261 7.1% Various
Bank term loans 3,050,000 7.3% 3,050,000 7.3% Dec 1998
Working capital line of credit 40,000,000 7.9% 40,000,000 7.9% Dec 1998
Bridge loan 49,749,522 8.2% 49,749,522 8.2% Feb 1999
Senior unsecured notes 100,000,000 9.1% 100,000,000 9.1% Dec 2002
--------------------
Total $1,931,803,594
====================
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1999
------------------------------------------------------------------------------------------------
Effective Average
Rate at Year Effective
Ending Balance 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>
31
<PAGE>
(1) As of March 31, 2000 and December 31, 1999, the face amount of the debt was
$328,446,000 with unamortized discount of $49,711,534 and $50,280,032,
respectively. During the three months ended March 31, 2000 and 1999,
discount amortization of $568,498 and $194,235, respectively, was recorded
as interest expense.
(2) As of March 31, 2000 and December 31, 1999, the face amount of the note was
$204,975,459 and $209,506,965, respectively, with unamortized discount of
$7,603,513 and $7,722,390, respectively. During the three months ended
March 31, 2000 and 1999, discount amortization of $118,877 and $90,828,
respectively, was recorded as interest expense.
(3) As of March 31, 2000 and December 31, 1999, the face amount of the note was
$62,202,722 and $62,359,630, respectively, with unamortized discount of
$1,476,354 and $1,506,512, respectively. During the three months ended
March 31, 2000 and 1999, discount amortization of $30,158 and $44,885,
respectively, was recorded as interest expense.
(4) As of March 31, 2000 and December 31, 1999, the face amount of the note was
$118,582,991 and $119,563,094, respectively, with unamortized discount of
$3,422,453 and $3,489,185, respectively. During the three months ended
March 31, 2000 and 1999, discount amortization of $66,732 and $74,664,
respectively, was recorded as interest expense.
(5) As of March 31, 2000 and December 31, 1999, the face amount of the debt was
$408,940,031 and $411,110,641 with unamortized discount of $10,959,152 and
$11,342,128, respectively. During the three months ended March 31, 2000 and
1999, discount amortization of $382,976 and $346,029, 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.
32
<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.
Collateralized Mortgage Obligations - Originated Loans
In the June 1998 CMO-IV transaction, $496 million of originated or acquired
commercial mortgage loans were securitized, and CRIIMI MAE sold $397 million
face amount of fixed-rate investment-grade debt securities. CRIIMI MAE retained
call options on all of the securities such that control was not relinquished.
Therefore, the mortgage loans remain on CRIIMI MAE's balance sheet as assets for
accounting purposes (along with the collateralized mortgage obligations) for all
securities sold by CRIIMI MAE.
The securities were issued at a discount of approximately $6.6 million.
Such discount, as well as approximately $6.7 million of deferred costs and
securitization transaction costs, are amortized on a level yield basis over the
expected life of the related security. The securities not sold to third parties
were partially financed with secured borrowings. The related lending agreements
are secured by certain of the CMO-IV securities with an aggregate fair value of
approximately $43.8 million and $42.8 million as of March 31, 2000 and December
31, 1999, respectively.
On April 5, 1999, the Company finalized an agreement by which Salomon Smith
Barney, in cooperation with CRIIMI MAE, agreed to sell the remaining two classes
of investment grade CMBS from CMO-IV with a face amount of $45.9 million and an
average coupon rate of 6.96% constituting a portion of the collateral security
advances under financing agreements with Citicorp. CRIIMI MAE sold these two
classes of CMBS in May and October 1999. CRIIMI MAE retains the right to call
each CMBS when the principal balance amortizes to 15% of its original face
balance. The 15% call option prevents CRIIMI MAE from surrendering control of
the assets pursuant to the requirements of FAS 125 and thus the transaction has
been accounted for as a financing and not a sale. Gross proceeds from the sale
were used to pay off $39.6 million of secured debt and certain costs, and the
remainder of approximately $315,000 was remitted to CRIIMI MAE. This resulted in
CRIIMI MAE recognizing fixed-rate debt for these bonds in the amount of the
gross proceeds received.
Variable Rate Secured Borrowings-CMBS
As previously discussed, when CRIIMI MAE purchased Subordinated CMBS, it
initially financed (generally through short-term, variable-rate secured
borrowings) a portion of the purchase price of the Subordinated CMBS. These
secured borrowings were either provided by the issuer of the CMBS pool or
through master secured borrowing agreements, as discussed below. As of March 31,
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.
33
<PAGE>
As discussed above, on March 5, 1999, the CBO-2 BBB Bonds were sold in a
transaction that was accounted for as a financing rather than a sale. Of the
$159.0 million of net sale proceeds, $141.2 million was used to repay variable
rate secured borrowings.
As discussed previously, in May and October 1999, a portion of the CMO-IV
CMBS was sold in a transaction that was accounted for as a financing rather than
a sale. Of the $39.9 million of net sale proceeds, $39.6 million was used to
repay variable-rate secured borrowings.
As discussed in Note 5, the Wells Fargo Bonds were sold in February 2000.
Of the $45.9 million in net sale proceeds, $37.5 million was used to repay
variable-rate secured borrowings. In addition, in April 2000, the First Union
Bonds were sold. Of the $140 million in sale proceeds, $113 million was used to
repay variable-rate secured borrowings.
The secured borrowing agreements are secured by certain rated CMBS security
tranches with an aggregate fair value of approximately $760 million as of March
31, 2000 and $784 million as of December 31, 1999. CRIIMI MAE's short-term
variable-rate financing facilities require that the value of the collateral
securing the facilities meet a minimum loan-to-value ratio. If the value of the
collateral is perceived such that the maximum loan-to-value ratio is exceeded,
then the lender may require the Company to post cash or additional collateral
with sufficient value to cure the perceived value deficiency. At May 1, 2000,
CRIIMI MAE had secured borrowing agreements with respect to its CMBS security
tranches with German American Capital Corporation, Merrill Lynch and Citicorp
Securities, Inc. ("Citicorp"). These secured borrowing agreements qualify as
financings under FAS 125 because CRIIMI MAE is required to purchase the same
securities collateralizing the borrowing before their maturity. Citicorp has
taken the position that CMBS that were pledged to them by the Company were
instead sold to them by the Company because the transactions between the parties
were documented using Bond Market Association Master Repurchase Agreement forms.
The Company disputes the position of Citicorp and has filed a complaint
contesting their claims of ownership. If Citicorp were to prevail, the portfolio
value of the Company's owned securities would decrease by the amount of bonds
that are deemed to have been sold to Citicorp and the corresponding obligations
would also decrease. (See Note 16).
Senior Unsecured Notes
In November 1997, CRIIMI MAE issued senior unsecured notes ("Notes") due on
December 1, 2002 in an aggregate principal amount of $100 million. The Notes are
effectively subordinated to the claims of any secured lender to the extent of
the value of the collateral securing such indebtedness. Interest on the Notes is
payable semi-annually in arrears on June 1 and December 1, commencing June 1,
1998 at a fixed annual rate of 9.125%. The Notes are redeemable at any time, in
whole or in part, at the option of CRIIMI MAE.
The Indenture contains certain covenants which, among other things,
restricts the ability of the Company and its subsidiaries to incur additional
indebtedness, pay dividends, or make distributions in respect of the Company's
or such subsidiaries' capital stock, make other restricted payments, enter into
transactions with affiliates or related persons, or consolidate, merge or sell
all or substantially all of their assets. These covenants are subject to
exceptions and qualifications.
Under the terms of the Indenture, the Company can not incur additional
indebtedness (except for Permitted Debt, which includes secured borrowings,
working capital lines of credit, borrowings under facilities in place as of
November 21, 1997), unless at the time of such incurrence either (a) the ratio
of Adjusted Earnings Available for Fixed Charges to Adjusted Fixed Charges
giving proforma effect for the new borrowings is greater than 1.75 to 1.0 or (b)
the Adjusted Debt to Capital Ratio on a proforma basis after giving effect to
the incurrence of the new debt is less than 2.0 to 1.0.
Bank Term Loans
In connection with the Merger, CM Management assumed certain debt of
certain mortgage businesses affiliated with C.R.I., Inc. in the principal amount
of $9.1 million (the "Bank Term Loan"). The Bank Term Loan is secured by certain
cash flows generated by CRIIMI MAE's direct and indirect interests in the AIM
Funds and is guaranteed by CRIIMI MAE. The loan requires quarterly principal
payments of $650,000 and matured on December 31, 1998. The amount outstanding as
of March 31, 2000 and December 31, 1999 was $1.3 million. Interest on the loan
is based on CRIIMI MAE's choice of one, two or three-month LIBOR, plus a spread
of 1.25%.
34
<PAGE>
In addition, a wholly owned subsidiary has a loan secured by certain Real
Estate Owned Property and guaranteed by CRIIMI MAE. The loan requires monthly
interest payments and a balloon principal payment at maturity. The loan was made
January 22, 1998 and matured on August 1, 1999. The Company received a default
notice on August 3, 1999 from Citicorp. The amount outstanding as of March 31,
2000 and December 31, 1999 was $1.75 million. Interest on the loan is based on
LIBOR plus a spread of 1.5%. Negotiations to sell the property to a third party
are taking place. Amounts received by any such sale would be used to pay off the
outstanding loan balance and the remaining proceeds are expected to be retained
by the Company.
Working Capital Line of Credit
In 1996, CRIIMI MAE entered into an unsecured working capital line of
credit provided by two lenders which provided for up to $40 million in
borrowings. The credit facility matured on December 31, 1998. Outstanding
borrowings under this line of credit are based on interest at one-month LIBOR
plus a spread of 1.75%. As of March 31, 2000 and December 31, 1999, $40 million
in borrowings were outstanding under this facility.
Bridge Loan
In August 1998, CRIIMI MAE entered into a bridge loan for $50 million
provided by a lender. The total unpaid principal balance and accrued interest
was due in February 1999. Outstanding borrowings under this facility are based
on interest at one-month LIBOR plus a spread of 2.25%. As of March 31, 2000 and
December 31, 1999, approximately $50 million in borrowings was outstanding under
this loan.
Other Debt Related Information
Changes in interest rates will have no impact on the cost of funds or the
collateral requirements on CRIIMI MAE's fixed-rate debt, which approximates 60%
of CRIIMI MAE's consolidated debt as of March 31, 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 March 31, 2000 and December 31, 1999, 99%
and 94%, respectively, of CRIIMI MAE's variable-rate debt was hedged.
For the quarter ended March 31, 2000, CRIIMI MAE's weighted average cost of
borrowing, including amortization of discounts and deferred financing fees of
approximately $2.1 million, was approximately 7.7%. As of March 31, 2000 ,
CRIIMI MAE's debt-to-equity ratio was approximately 7.8 to 1 and CRIIMI MAE's
non- match-funded debt-to-equity ratio was approximately 3.6 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. All of the caps currently qualify for hedge accounting treatment.
Therefore the related cost, as well as gains or losses on terminated positions,
have been deferred and recognized into income over the life of the related debt.
However, with the sale of certain CMBS contemplated to be sold by the Plan, the
Company interest rate caps may no longer qualify for hedge accounting. The
portion of such caps will be marked-to-market with the adjustment flowing
through earnings. At March 31, 2000, CRIIMI MAE held caps with a notional amount
of $775 million used to hedge $775 million of the Company's variable rate debt.
35
<PAGE>
<TABLE>
<CAPTION>
Notional
Amount Effective Date Maturity Date(2) Cap(2) Index(3)
- ------------------- ------------------ ------------------- ------- ---------
<C> <S> <C> <C> <C>
$ 100,000,000 April 8, 1997 April 10, 2000 6.6875% 1M LIBOR
100,000,000 September 22, 1997 September 22, 2000 6.6563% 1M LIBOR
100,000,000 December 7, 1997 November 7, 2000 6.6563% 1M LIBOR
50,000,000 December 23, 1997 December 23, 2000 6.9688% 1M LIBOR
100,000,000 March 11, 1998 March 12, 2001 6.6875% 1M LIBOR
100,000,000 April 30, 1998 March 30, 2001 6.6875% 1M LIBOR
100,000,000 June 4, 1998 June 4, 2001 6.6563% 1M LIBOR
100,000,000 June 26, 1998 June 26, 2001 6.6563% 1M LIBOR
25,000,000 September 6, 1998 August 6, 2001 6.6523% 1M LIBOR
----------------
$ 775,000,000 (1)
================
</TABLE>
----------------------------
(1) CRIIMI MAE's designated interest rate protection agreements hedge CRIIMI
MAE's variable-rate borrowing costs.
(2) The weighted average strike price is approximately 6.7% and the weighted
average remaining term for these interest rate cap agreements is
approximately one year.
(3) The one month LIBOR rate was 6.1325% at March 31, 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 March 31, 2000 and December 31, 1999, respectively. See also Note 1
"Organization - The Plan of Reorganization".
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 "Plan").
Subsequently, in May 1998, the shareholders approved the issuance of up to 4.7
million common shares in connection with the Plan. The Plan allows investors the
opportunity to purchase additional CRIIMI MAE Common Shares through the
reinvestment of CRIIMI MAE's dividends, optional cash payments and initial cash
investments.
In October 1998, due to the filing under Chapter 11, the Company suspended
the initial cash investment and optional cash payment portion of the Plan until
further notice.
Dividends
During the pendency of the bankruptcy proceedings, the Company is
prohibited from paying cash dividends without first obtaining Bankruptcy Court
approval. (See Note 1-Effect of Chapter 11 Filing on REIT Status and other Tax
Matters.
In September 1999, the Company declared a dividend to common shareholders
payable in shares of a new series of preferred stock designated as Series F
Redeemable Cumulative Dividend Preferred Stock with a face value of $10 per
share. The Series F Preferred Stock was convertible into shares of common stock
during two, 10-business day windows. During the first conversion period
(November 15 through November 30, 1999), 756,453 shares of Series F Preferred
Stock were converted, resulting in the issuance of 6,401,443 shares of common
stock. During the second and final conversion period for the Series F Preferred
Stock (January 21 through February 3, 2000), 263,788 additional shares were
converted, resulting in the issuance of 2,396,566 shares of common stock. See
Note 12 for further discussion.
36
<PAGE>
12. PREFERRED STOCK
CRIIMI MAE's charter authorizes the issuance of up to 25,000,000 shares of
preferred stock, of which 3,000,000 shares have been designated as Series B
Cumulative Convertible Preferred Stock, 300,000 shares have been designated as
Series C Cumulative Convertible Preferred Stock and 300,000 shares have been
designated as Series D Cumulative Convertible Preferred Stock, 103,000 shares
have been designated as Series E Cumulative Convertible Preferred Stock, and
1,610,000 shares have been designated as Series F Redeemable Cumulative Dividend
Preferred Stock as of March 31, 2000. See also Note 1 "Organization - The Plan
of Reorganization".
Series B Cumulative Convertible Preferred Stock
In August 1996, CRIIMI MAE completed a public offering of 2,415,000 shares
of Series B Cumulative Convertible Preferred Stock, with a par value of $0.01
per share (the "Series B Preferred Stock"), at an aggregate offering price of
$60,375,000. The Series B Preferred Stock pays a dividend in an amount equal to
the sum of (i) $0.68 per share per quarter plus (ii) the product of the excess
over $0.30, if any, of the quarterly cash dividend declared and paid with
respect to each share of common stock times a conversion ratio of 2.2844 times
one plus a conversion premium of 3%, subject to adjustment upon the occurrence
of certain events. The Series B Preferred Stock is (i) convertible at the option
of the holders and (ii) subject to redemption at CRIIMI MAE's sole discretion
after the tenth anniversary of issuance. Each share of Series B Preferred Stock
is convertible into 2.2844 shares of common stock, subject to adjustment upon
the occurrence of certain events. Due to certain adjustment provisions in the
Series B Preferred Stock Articles Supplementary, the payment of the Series F
Redeemable Cumulative Dividend Preferred Stock dividend resulted in an
adjustment to the conversion price such that one share of Series B Preferred
Stock is now convertible into 2.6379 shares of common stock. The liquidation
preference and the redemption price on the Series B Preferred Stock equals $25
per share, together with accrued and unpaid dividends. There were 1,593,982
shares of Series B Preferred Stock outstanding as of March 31, 2000. Dividends
accrued on the Series B Preferred Stock totaled $6,503,447 as of March 31, 2000
(of which, $1,083,908 was accrued for the first quarter 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 is
$100 and the denominator of which is a closing trade price of the common stock
within the conversion period or the average of the closing trade prices of the
common stock over the applicable twenty-one (or such fewer number as is mutually
acceptable) day period immediately preceding the date of delivery. The
liquidation preference and redemption 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 March 31, 2000 totaled $1,075,848 (of which $119,537 was accrued for
the first quarter of 2000, $697,172 for 1999 and $259,139 for the fourth quarter
of 1998, but not paid to date as a result of the Chapter 11 filing). As of
February 22, 2000, all of the outstanding shares of Series C Preferred Stock
were exchanged for Series E Cumulative Convertible Preferred Stock. See below
for further discussion.
Series D Cumulative Convertible Preferred Stock
37
<PAGE>
In July 1998, CRIIMI MAE entered into an agreement with an institutional
investor pursuant to which the Company had the right to sell, and such investor
was obligated to purchase, up to 300,000 shares of Cumulative Convertible
Preferred Stock par value $.01 per share (the "Series D Preferred Stock") at
price of $100 per share. The Series D Preferred Stock pays a dividend at an
annual rate equal to the sum of (i) 75 basis points plus (ii) LIBOR as of the
second LIBOR Market Day preceding the commencement of the calendar quarter which
includes such quarterly dividend payment. The Series D Preferred Stock is
convertible into shares of common stock at the option of the holder and is
subject to redemption by CRIIMI MAE. The outstanding Series D Preferred Stock is
subject to mandatory conversion into common shares on July 31, 2000. Each share
of Series D Preferred Stock is convertible into common shares based on a
formula, the numerator of which is $100 and the denominator of which is a
closing trade price of the common stock within the conversion period or the
average of the closing trade prices of the common stock over the applicable
twenty-one (or such fewer number as is mutually acceptable) day period
immediately preceding the date of delivery. The liquidation preference and
redemption price on the Series D Preferred Stock are $100 and $106,
respectively, per share plus an amount equal to all dividends accrued and unpaid
thereon. On July 31, 1998, 100,000 shares of Series D Preferred Stock were
issued under this agreement, resulting in net proceeds of approximately $10
million. There 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 $985,909 as of March
31, 2000 (of which, $185,156 was accrued for the first quarter 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). It is contemplated
that the Series D Preferred Stock will be exchanged for Series E Preferred Stock
on or before the effective date of the Plan.
Series E Cumulative Convertible Preferred Stock
On February 22, 2000, CRIIMI MAE and the holder of its Series C Preferred
Stock entered into a Preferred Stock Exchange Agreement (the "Exchange
Agreement") pursuant to which 103,000 shares of Series C Preferred Stock were
exchanged (the "Exchange") for 103,000 shares of a new series of preferred stock
designated as "Series E Cumulative Convertible Preferred Stock", par value $0.01
per share (the "Series E Preferred Stock"). The principal purpose of the
Exchange was to effect an extension of the mandatory conversion date, upon which
the Series C Preferred Stock would have converted into common stock. Pursuant to
the 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
$73,428 as of March 31, 2000, (representing dividends from February 23, 2000
through March 31, 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, 5,000
shares of Series E Preferred Stock shall become convertible at the option of the
holder into common stock in January 2001 and in each month thereafter until the
effective date of the Plan. If the Series E Preferred Stock becomes convertible
into common stock, then each share of Series E Preferred Stock shall be
convertible into common stock based on a formula, the numerator of which will be
$100 and the denominator of which will be the closing trade price of the common
stock within the conversion period or the average of the closing trade prices of
the common stock over the applicable twenty-one (or such fewer number as is
mutually acceptable) day period immediately preceding the date of delivery. The
Series E Preferred Stock is subject to redemption by CRIIMI MAE. The liquidation
preference and the redemption 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, previously filed with the SEC
as an exhibit to a Current Report on Form 8-K, for a complete description of
such amendments to the relative rights and preferences of the Series E Preferred
Stock, as contemplated by the Plan.
Series F Redeemable Cumulative Dividend Preferred Stock
38
<PAGE>
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 at the Company's election. It is possible that accrued and
unpaid dividends may be paid in common stock on or after the effective date of
the Plan. The Series F Preferred Stock is redeemable at the Company's option
after November 5, 2000 at a price of $10.00 per share plus accrued and unpaid
dividends. The liquidation value of Series F Preferred Stock is $10.00 per
share plus accrued and unpaid dividends.
During the first conversion period 756,453 shares of Series F
Preferred Stock were converted, resulting in the issuance of 6,401,443 shares of
common stock. After giving effect to the shares converted during the first
conversion period, there were 850,142 shares of Series F Preferred Stock
outstanding as of December 31, 1999. During the second and final conversion
period (January 21 through February 3, 2000) for the Series F Preferred Stock,
263,788 additional shares were converted, resulting in the issuance of 2,396,566
shares of common stock. Dividends accrued on Series F Preferred Stock totaled
$339,388 as of March 31, 2000 (of which $177,861 was accrued for the first
quarter of 2000 and $161,527 for 1999).
13. EARNINGS PER SHARE
The following table reconciles basic and diluted earnings per share
under FAS 128 for the three months ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
For the three months ended March 31, 2000 For the three months ended March 31, 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 $ 4,035,611 61,515,061 $ 0.07 $ 13,416,949 53,008,855 $ 0.25
Effect of
Dilutive
Securities
- ----------
Net effect of
assumed
exercise of -- -- -- --
stock options
Convertible
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Preferred
Stock (1) 378,121 17,774,275 - 319,626 6,697,322
---------- ----------- ---------- ---------- ----------
Diluted EPS
- ----------
Income
available to
Common
Shareholders and
assumed $4,413,732 79,289,337 $ 0.06 $13,736,575 59,706,177 $ 0.23
conversions ========== ========== ======= =========== ========== =======
</TABLE>
___________________________
(1) As of March 31, 2000 and 1999, respectively, the following shares of
preferred stock were outstanding: 1,593,982 shares of Series B Preferred
Stock, -0- and 103,000 shares of Series C Preferred Stock, 100,000 shares
of Series D Preferred Stock, 103,000 and -0- shares of Series E Preferred
Stock, and 586,354 and -0- shares of Series F Preferred Stock. The common
stock equivalents for the Series B Preferred Stock and the Series F
Preferred Stock are not included in the calculation of diluted EPS because
the effect would be anti-dilutive.
14. EMPLOYEE RETENTION PLAN
Upon commencement of the Chapter 11 cases, the Company believed it was
essential to both the efficient operation of the Company's business and the
reorganization effort that the Company maintain the support, cooperation and
morale of its employees. The Company obtained Bankruptcy Court approval to pay
certain pre-petition employee obligations in the nature of wages, salaries and
other compensation and to continue to honor and pay all employee benefit plans
and policies.
In addition, to ensure the Company's continued retention of its executives
and other employees and to provide meaningful incentives for these employees to
work toward the Company's financial recovery and reorganization, the Company's
management and Board of Directors developed a comprehensive and integrated
program to retain its executives and other employees throughout the
reorganization. On December 18, 1998, the Company obtained Bankruptcy Court
approval to adopt and implement an employee retention program (the "Employee
Retention Plan") with respect to all employees of the Company other than certain
key executives. On February 28, 1999, the Company received Bankruptcy Court
approval authorizing it to extend the Employee Retention Plan to the key
executives initially excluded, including modifying existing employment
agreements and entering into new employment agreements with such key executives.
The Employee Retention Plan permitted the Company to approve ordinary course
employee salary increases beginning in March 1999, subject to certain
limitations, and to grant options to its employees after the Petition Date, up
to certain limits. The Employee 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 entire unpaid portion of the retention
payments will become due and payable (i) upon the effective date of a plan of
reorganization of the Company and, with respect to certain key executives, court
approval or (ii) upon termination without cause. William B. Dockser, Chairman of
the Board of Directors, and H. William Willoughby, President, are not currently
entitled to receive any retention payments. Subject to the terms of their
respective employment agreements, certain key executives will be entitled to
severance benefits if they resign or their employment is terminated following a
change of control. The other employees will be entitled to severance benefits if
they are terminated without cause subsequent to a change of control of the
Company and CMM. In addition, options granted by the Company after October 5,
1998 will, subject to Bankruptcy Court approval, become exercisable upon a
change of control.
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15. TRANSACTIONS WITH RELATED PARTIES
Below is a summary of the related party transactions which occurred during
the three months ended March 31, 2000 and 1999. These items are described
further in the text which follows:
<TABLE>
<CAPTION>
For the three months ended March 31,
<S> <C> <C>
2000 1999
-------- ----------
Amounts received or accrued from related parties:
- -------------------------------------------------
CRIIMI Inc.
- -----------
Income(1) $186,408 $ 277,037
Return of Capital(2) 261,272 1,509,618
-------- -----------
Total $447,680 $ 1,786,655
======== ===========
CRI/AIM Investment Limited Partnership (1) $ 94,113 $ 131,811
======== ===========
Expense reimbursements to CRIIMI Management:
- --------------------------------------------
AIM Funds and CRI Liquidating (3)(4) $ 47,424 $ 31,068
CMSLP (2) (3) 39,602 293,459
-------- -----------
Total $ 87,026 $ 324,527
======== ===========
Payments to CRI:
- ----------------
Expense reimbursement - CRIIMI MAE(3)(5) $ 33,182 $ 48,776
======== ==========
Payments to Capital Hotel Group(5)
- ----------------------------------
Management Fee (6) $ 12,784 $ 11,692
======== ==========
</TABLE>
- --------------------------
(1) Included as equity in earnings from investments on the accompanying
consolidated statements of income.
(2) Included as a reduction of equity investments on the accompanying
consolidated balance sheets.
(3) Included in general and administrative expenses on the accompanying
consolidated statements of income.
(4) Prior to CRIIMI MAE becoming a self-administered REIT, amounts were paid to
C.R.I., Inc. as reimbursement for expenses incurred by the adviser on
behalf of CRI Liquidating and the AIM Funds. The transaction in which
CRIIMI MAE became a self-administered REIT had no impact on CRI
Liquidating's or the AIM Funds' financial statements except that the
expense reimbursements previously paid to C.R.I., Inc. are, effective June
30, 1995, paid to CM Management.
(5) Prior to CRIIMI MAE becoming a self-administered REIT, amounts were paid to
C.R.I., Inc. as reimbursement for expenses incurred by the adviser on
behalf of CRIIMI MAE. In connection with the Merger, on June 30, 1995,
CRIIMI MAE was no longer required to reimburse the adviser, as these
expenses are now directly incurred by CRIIMI MAE. However, pursuant to an
agreement between CRIIMI MAE and C.R.I., Inc. (the "CRI Administrative
Services Agreement"), C.R.I., Inc. provides CRIIMI MAE with certain
administrative and office facility services and other services, at cost,
with respect to certain aspects of CRIIMI MAE's business. CRIIMI MAE uses
the services provided under the C.R.I., Inc. Administrative Services
Agreement to the extent such services are not performed by CM Management or
provided by another service provider. The CRI Administrative Services
Agreement is terminable on 30 days notice at any time by CRIIMI MAE.
(6) Included as a reduction of net income earned from Real Estate Owned
property which is included in other investment income on the accompanying
consolidated statements of income.
16. LITIGATION
Bankruptcy Proceedings
On the Petition Date, the Debtors each filed voluntary petitions for relief
under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. These cases are
being jointly administered for procedural purposes. None of the cases has been
substantively consolidated. Under the Bankruptcy Code, the Debtors are
authorized to manage their respective affairs and operate their businesses as
debtors-in-possession while they attempt to confirm and consummate their plan of
reorganization that will restructure their financial affairs and allow them to
emerge
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from bankruptcy. As a debtor-in-possession under the Bankruptcy Code, no Debtor
may engage in any transaction outside the ordinary course of business without
the approval of the Bankruptcy Court. The following discussion describes certain
aspects of the Chapter 11 cases of the Debtors (the "Chapter 11 Cases"), but it
is not intended to be a complete summary.
Pursuant to the Bankruptcy Code, the commencement of the Chapter 11 Cases
created an automatic stay, applicable generally to creditors and other parties
in interest, but subject to certain limited exceptions, of: (i) the commencement
or continuation of judicial, administrative or other actions or proceedings
against the Debtors that were or could have been commenced prior to the
commencement of the Chapter 11 Cases; (ii) the enforcement against the Debtors
or their property of any judgments obtained prior to the commencement of the
Chapter 11 Cases; (iii) the taking of any action to obtain possession of
property of the Debtors or to exercise control over such property; (iv) the
creation, perfection or enforcement of any lien against the property of the
bankruptcy estates of the Debtors; (v) any act to create, perfect or enforce
against the property of the Debtors any lien that secures a claim that arose
prior to the commencement of the Chapter 11 Cases; (vi) the taking of any action
to collect, assess or recover claims against the Debtors that arose before the
commencement of the Chapter 11 Cases; (vii) the set-off of any debt owing to the
Debtors that arose prior to the commencement of the Chapter 11 Cases against any
claim against the Debtors; or (viii) the commencement or continuation of a
proceeding before the United States Tax Court concerning the Debtors. Any entity
may apply to the Bankruptcy Court, upon appropriate showing of cause, for relief
from the automatic stay.
As noted above, the Debtors are authorized to manage their respective
properties and operate their respective businesses pursuant to the Bankruptcy
Code. During the course of the Chapter 11 Cases, the Debtors will be subject to
the jurisdiction and supervision of the Bankruptcy Court. The United States
Trustee has appointed (i) the Unsecured Creditors' Committee, (ii) the Official
Committee of Unsecured Creditors in the CM Management Chapter 11 Case (the "CMM
Creditors' Committee") and (iii) the CMI Equity Committee (collectively, the
"Committees"). The Committees are expected to participate in the formulation of
the plans of reorganization for the respective Debtors. The Debtors are required
to pay certain expenses of the Committees, including professional fees, to the
extent allowed by the Bankruptcy Court.
Under the Bankruptcy Code, for 120 days following the Petition Date, only
the debtor-in-possession has the right to propose and file a plan of
reorganization with the Bankruptcy Court. If a debtor-in-possession files a plan
of reorganization during this exclusivity period, no other party may file a plan
of reorganization until 180 days following the Petition Date, during which
period the debtor-in-possession has the exclusive right to solicit acceptances
of the plan. If a debtor-in-possession fails to file a plan during the
exclusivity period or such additional exclusivity period as may be ordered by
the Bankruptcy Court or, after such plan has been filed, fails to obtain
acceptance of such plan from impaired classes of creditors and equity security
holders during the exclusive solicitation period, any party in interest,
including a creditors' committee, an equity security holders' committee, a
creditor or an equity security holder may file a plan of reorganization for such
debtor. Additionally, if the Bankruptcy Court were to appoint a trustee, the
exclusivity period, if not previously terminated, would terminate.
The Debtors' initial exclusivity period to file a plan of reorganization
ended on February 2, 1999. The Bankruptcy Court extended this period through
August 2, 1999 and again through September 10, 1999. The Debtors sought a third
extension of exclusivity through November 10, 1999 and on September 20, 1999,
the Bankruptcy Court entered an order (i) extending the Debtors' right to file a
plan of reorganization through October 16, 1999, (ii) providing the Unsecured
Creditors' Committee and the Equity Committee the right to jointly file a plan
of reorganization through October 16, 1999 and (iii) providing that any party in
interest may file a plan of reorganization after October 16, 1999. The Debtors
filed (i) a Joint Plan of Reorganization on September 22, 1999, (ii) an Amended
Joint Plan of Reorganization and proposed Joint Disclosure Statement on December
23, 1999, (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. 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
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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 final documentation. Accordingly, the Debtors,
the CMI Equity Committee and the Unsecured Creditors' Committee are together
presenting the Debtors' Plan for approval by all holders of claims and interests
in impaired classes.
The Bankruptcy Court scheduled a hearing for April 25 and April 26, 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 relate to an objection to the
disclosure statement filed by Salomon Smith Barney Inc. and Citicorp Real
Estate, Inc. (together "SSB"). On May 9, 2000, CRIIMI MAE filed its legal brief
with the court, as did SSB. In addition, the Equity Committee filed a brief in
support of CRIIMI MAE's position and the Unsecured Creditors Committee filed two
briefs also in support of CRIIMI MAE's position. The SSB objection is the only
objection to CRIIMI MAE's disclosure statement pending before the Bankruptcy
Court. Once the Proposed Disclosure Statement has been approved by the
Bankruptcy Court, the Plan will be sent, together with the approved Disclosure
Statement, to members of all classes of impaired creditors and equity security
holders for acceptance or rejection. Following voting on the Plan by impaired
classes of creditors and equity security holders, the Bankruptcy Court, after
notice and a hearing, will consider whether to confirm the Plan before it. To
confirm a plan, the Bankruptcy Court is required to find among other things: (i)
with respect to each class of impaired creditors and equity security holders,
that each holder of a claim or interest of such class either (a) will, pursuant
to the plan, receive or retain property of a value as of the effective date of
the plan, that is at least as much as such holder would have received in a
liquidation on such date of the Debtors or (b) has accepted the plan, (ii) with
respect to each class of claims or equity security holders, that such class has
accepted the plan or is not impaired under the plan, and (iii) confirmation of
the plan is not likely to be followed by the liquidation or need for further
financial reorganization of the Debtors or any successor unless such liquidation
or reorganization is proposed in the plan. The Bankruptcy Court has not yet
approved the Proposed Disclosure Statement or set a date for a confirmation
hearing on the Debtors' Plan.
If any impaired class of creditors or equity security holders does not
accept a plan, the proponent of the plan may invoke the so-called "cramdown"
provisions of the Bankruptcy Code. Under these provisions, the Bankruptcy Court
may confirm a plan, notwithstanding the non-acceptance of the plan by an
impaired class of creditors or equity security holders, if certain requirements
of the Bankruptcy Code are met. These requirements include: (i) the plan does
not discriminate unfairly and (ii) the plan is fair and equitable, with respect
to each class of claims or interests that is impaired under, and has not
accepted, the plan. As used in the Bankruptcy Code, the phrases "discriminate"
and "fair and equitable" have narrow and specific meanings and their use herein
is qualified in its entirety by reference to the Bankruptcy Code.
Bankruptcy Related Litigation
The following is a summary of material litigation matters between the
Company and certain of its secured creditors since the Petition Date. The
Company has reached agreement with certain of these creditors, as set forth in
greater specificity below.
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
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<PAGE>
until the earlier of a further order of the Bankruptcy Court affecting the
arrangement or the effective date of a plan of reorganization of the Company.
On September 7, 1999, the Company filed a Motion to Approve Stipulation and
Consent Order Providing for Adequate Protection. On or about September 27, 1999,
the Unsecured Creditors' Committee and the CMI Equity Committee filed a joint
objection to the Motion. On December 3, 1999, the Bankruptcy Court entered the
Stipulation and Consent Order Providing For Adequate Protection (the "Adequate
Protection Order"), certain provisions of which were effective retroactively.
Pursuant to the Adequate Protection Order, a segregated interest bearing debtor-
in-possession account was created (the "Cash Collateral Account") into which the
Company's Distribution Share was deposited during the months of August through
December 1999. An additional 50% of the Company's Distribution Share was
deposited in said account between January and March 2000. Although a new
stipulation has not been signed, the Company has received 50% of its
Distribution Share for the months of April and May 2000. The Adequate Protection
Order provides Merrill Lynch with a first priority lien on the Cash Collateral
Account. Subject to certain material adverse changes defined in the Adequate
Protection Order, Merrill Lynch agreed not to seek further adequate protection
or relief from the automatic stay before March 31, 2000.
Morgan Stanley
As of the Petition Date, the Company owed Morgan Stanley approximately
$182.4 million with respect to advances to the Company under an agreement
pursuant to which the Company pledged CMBS. The borrowings under this agreement
were secured by certain CMBS, including (i) CRIIMI MAE Commercial Mortgage
Trust, Series 1998-C1, Class B and C Certificates (collectively or any portion
thereof, the "CBO-2 BBB Bonds") and (ii) Morgan Stanley Capital I., Inc., Series
1998-W2, Class F, G, H, J, K, L and M Certificates (collectively or any portion
thereof, the "Wells Fargo Bonds" and, together with the CBO-2 BBB Bonds, the
"Morgan Collateral").
On October 6, 1998, Morgan Stanley advised the Company that it was
exercising alleged ownership rights over the Morgan Collateral. On October 20,
1998, the Company filed an adversary proceeding against Morgan Stanley alleging,
among other things, that Morgan Stanley violated the automatic stay, and seeking
turnover of the Morgan Collateral.
On January 12, 1999, the Company and Morgan Stanley agreed upon and filed
with the Bankruptcy Court a stipulation and consent order, which was approved by
the Bankruptcy Court and entered on January 26, 1999. The consent order
provided, among other things, for the following: (i) an agreed sale procedure
for the CBO-2 BBB Bonds during a specified sale period; (ii) the payment of a
portion of the sale proceeds of the CBO-2 BBB Bonds to the Company; (iii) a
standstill period relating to the Wells Fargo Bonds through March 31, 1999
unless otherwise extended by the Company and Morgan Stanley, during which time
Morgan Stanley may not sell, pledge, encumber or otherwise transfer the Wells
Fargo Bonds and (iv) the postponement of the litigation with Morgan Stanley
while the parties seek a permanent resolution of their disputes. On March 5,
1999, the CBO-2 BBB Bonds were sold. Of the $159 million in net sale proceeds,
$141.2 million was used to repay the Company's borrowings under the agreement
with Morgan Stanley, and $17.8 million was remitted to CRIIMI MAE. As a result
of the transaction, CRIIMI MAE's litigation against Morgan Stanley has been
resolved with respect to the CBO-2 BBB Bonds to the satisfaction of both
parties.
The Company and Morgan Stanley reached an agreement to sell the Wells Fargo
Bonds (the "Morgan Stanley Agreement"). CRIIMI MAE filed a motion with the
Bankruptcy Court to approve the Morgan Stanley Agreement on February 1, 2000.
The motion was approved by the Bankruptcy Court on February 24, 2000. On
February 29, 2000, the Wells Fargo Bonds were sold. Of the approximately $45.9
million in net sales proceeds, $37.5 million was used to pay off all outstanding
borrowings owed to Morgan Stanley and the remaining proceeds of approximately
$8.4 million will be used primarily to help fund CRIIMI MAE's Plan. Pursuant to
the terms of the Morgan Stanley Agreement, the Company and Morgan Stanley
mutually released any claims that they may have against each other and filed a
stipulation of dismissal with prejudice of the October 20, 1998 adversary
proceeding.
Citicorp and Citibank
In addition to the Citibank Program pursuant to which the Company
originated loans, as previously discussed, the Company also has a financing
arrangement with Citicorp pursuant to which the Company pledged CMBS.
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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. As of the Petition Date, the Company owed Citicorp $79.1 million
under the facility.
On October 15, 1998, the Company filed an emergency motion to enforce the
automatic stay against Norwest and Citicorp. Pursuant to an Order dated October
23, 1998, the Bankruptcy Court prohibited Citicorp from selling the Retained
Bonds without further order of the Bankruptcy Court. On October 23, 1998,
Citicorp requested an emergency hearing regarding the October 23 Order, and on
November 2, 1998, the Company filed a complaint against Citicorp seeking, among
other things, a declaratory judgment as to whether the automatic stay applies to
actions taken by Citicorp with respect to the Retained Bonds.
On March 11, 1999, the Company finalized agreements with Citicorp and
Citibank, pursuant to which the parties agreed to adjourn the pending litigation
for a four-month period. The Bankruptcy Court agreed to a request by CRIIMI MAE,
Citibank, and the Unsecured Creditors' Committee to further postpone the pending
litigation on July 7, 1999 and again on September 10, 1999. The trial has not
yet been rescheduled.
The agreements reached by the Company with Citicorp and Citibank on March
11, 1999 were approved by the Bankruptcy Court through stipulations and consent
orders entered on April 5, 1999. One of the agreements also provided that
Salomon Smith Barney, in cooperation with CRIIMI MAE, agreed to sell two classes
of investment-grade CMBS from CMO-IV constituting a portion of the collateral
securing advances under the Citicorp financing arrangement. In May 1999, Salomon
Smith Barney sold $20 million of the CMO-IV securities held by Holdings II. This
sale reduced the amounts owed from Holdings II to Citicorp by approximately $17
million. On October 8, 1999, the remaining CMO-IV securities held by Holdings II
were sold. This sale reduced the amounts owed from Holdings II to Citicorp by
approximately $22 million and Holdings II received net proceeds of approximately
$315,000. In addition, Citibank, in cooperation with CRIIMI MAE, agreed to sell
commercial mortgages originated in 1998 under the Citibank Program, provided
that the sale resulted in CRIIMI MAE receiving minimum net proceeds of not less
than $3.5 million, after satisfying certain amounts due to Citibank, from the
amount held in the reserve account. On August 5, 1999, all but three of the
commercial loans originated under the Citibank Program in 1998, with an
aggregate unpaid principal balance of approximately $339 million, were sold for
gross proceeds of approximately $308 million. On September 16, 1999, Citibank
sold the remaining three loans, with an aggregate unpaid principal balance of
approximately $32.7 million, for gross proceeds of approximately $27.2 million.
In the case of each sale of the commercial loans, the minimum net proceeds
provision was waived by agreement of the Company, the Unsecured Creditors'
Committee and the CMI Equity Committee.
A related interpleader action between Norwest, the Company and Citicorp,
which was initiated on October 20, 1998 by Norwest to determine whether the
Company or Citicorp is the rightful owner of funds that were to have been paid
by Norwest, as indenture trustee, remains pending before the Bankruptcy Court.
During the pendency of this matter, certain payments on the Retained Bonds are
held in an account controlled by the Bankruptcy Court. No trial date has been
set for this matter.
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
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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.
Based upon an objection filed by the CMM Creditors' Committee, the parties are
discussing a possible modification to the agreement and continue to negotiate
accordingly. On October 22, 1999, to provide the parties with more time to
negotiate a modification to the agreement, CM Management, with the consent of
First Union and the CMM Creditors' Committee, advised the Bankruptcy Court that
it would be withdrawing the motion for approval of the agreement, without
prejudice to CM Management's right to re-file once an agreement has been reached
with First Union and the CMM Creditors' Committee. The motion was subsequently
withdrawn.
On or about February 18, 2000, the Company, the Unsecured Creditors'
Committee and First Union entered into a Second Stipulation and Agreed Order:
(i) Authorizing Use of Cash Collateral and (ii) Granting Other Relief (the
"Second Stipulation"). The Second Stipulation provides for, among other things,
the following:
(i) the reaffirmation of all of the terms contained in the July 1, 1999
agreement except as expressly provided in the Second Stipulation;
(ii) the extension from January 1, 2000 through March 31, 2000 of the
provisions in the July 1, 1999 agreement relating to use of the
assignment securities income;
(iii) the extension from December 31, 1999 to March 31, 2000 of the
provisions in the July 1, 1999 agreement relating to (i) First
Union's agreement not to seek relief from the automatic stay to
foreclose on the assignment securities or the assignment securities
income and (ii) the agreement by First Union, the Company and the
Unsecured Creditors' Committee not to seek modification of the
adequate protection arrangements contained in the July 1, 1999
agreement; and
(iv) the consummation of the Stipulation and Consent Order Selling the
Wells Fargo Bonds to Morgan Stanley, which occurred in February
2000. See "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 known as First Union Lehman Brothers Series 98 C-2 the ("First Union Lehman
Bonds"). The agreement was filed with the Bankruptcy Court on March 21, 2000 for
approval. On March 28, 2000, the Bankruptcy Court approved the Second
Stipulation. On April 24, 2000, the First Union Lehman Bonds were sold. The
transaction generated proceeds of $140 million, of which approximately $113
million was used to retire the debt associated with these securities owed to
Lehman and First Union. The approximate $27 million of remaining proceeds will
be used primarily to help fund CRIIMI MAE's plan of reorganization.
First Union has asserted a first priority security interest in certain
bonds that are or were in its possession, and the distributions made on those
bonds since the Petition Date, pursuant to an agreement dated as of October 10,
1997 by and between the Company and First Union. The Company disputes First
Union's claim to a security interest in those bonds and the distributions made
thereon. The bonds in issue are (i) the Morgan Stanley Capital, Series 1998-WF2
Class N bond, (ii) the Chase Comm. Mtg, Series 1998-1 Class J bond, and (iii)
the Nomura Asset
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Sec. Corp, Series 1998-B7 Class N bond. The Morgan Stanley Capital Bond has been
sold, and certain proceeds from the sale thereof are being held in a segregated
account in the name of First Union pending further order of the Bankruptcy Court
and resolution of the claim of First Union thereto. If the issues between the
Company and First Union are not otherwise resolved, an adversary proceeding will
be commenced to resolve the dispute between the Company and First Union with
respect to the foregoing bonds and/or the distributions made on those bonds. If
First Union's claim with respect to those bonds and/or the distributions made on
those bonds is determined to be an Allowed Secured Claim, such Claim will be
treated as part of Class A2 under the Plan. If First Union's Claim is determined
to be an unsecured claim, it will be included in the Claims subject to Class A10
under the Plan.
Arrangements with Other Creditors
In addition to the foregoing, the Company has had discussions with other
secured creditors against whom the Company was not engaged in litigation. One
such creditor is GACC. On February 3, 1999, the Bankruptcy Court approved an
Amended Consent Order between the Company and GACC that provides for the
following: (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 September 9, 1999, GACC contacted the Company and requested similar
provisions afforded to Merrill Lynch in its most recent stipulation. See
"Bankruptcy Related Litigation-Merrill Lynch" for further discussion.
Shareholder Litigation
The Company is aware that certain plaintiffs filed 20 separate class action
civil lawsuits (the "Complaints") in the United States District Court for the
District of Maryland (the "District Court" or the "Court") against certain
officers and directors of the Company between October 7, 1998 and November 30,
1998. On March 9, 1999, the District Court ordered the consolidation of the
Complaints into a single action entitled "In Re CRIIMI MAE Inc. Securities
Litigation" (see below regarding dismissal of this litigation). On April 23,
1999, a group of thirteen putative members of the class of individuals who
allegedly suffered damages during the class period between February 20, 1998 and
October 5, 1998 (collectively, the "Plaintiffs") filed an Amended and
Consolidated class action Complaint alleging violations of federal securities
laws (the "Consolidated Amended Complaint"). The Consolidated Amended Complaint
names as defendants William B. Dockser, as Chairman of the Board of Directors,
H. William Willoughby as a member of the Board of Directors and an officer of
CRIIMI MAE, and Cynthia O. Azzara as an officer of CRIIMI MAE (collectively, the
"Defendants"). Although CRIIMI MAE, CM Management and Holdings II have not been
named as defendants, each company is subject to indemnity obligations to the
Defendants under the provisions of their respective constituent documents, the
Defendants' employment contracts and applicable state law. CRIIMI MAE has
directors and officers liability insurance policies that have a combined
coverage limit of $20 million.
The Consolidated Amended Complaint alleges generally that the Defendants
violated Section 10(b) of the Securities and Exchange Act of 1934 as amended
(the "Exchange Act") by, among other things, making false statements of material
fact and failing to disclose certain material facts concerning, among other
things, CRIIMI MAE's business strategy and its ability to meet collateral calls
from lenders. The Consolidated Amended Complaint also generally alleges that the
Defendants violated Section 20(a) of the Exchange Act because each Defendant was
allegedly a "controlling person" as that term is defined under Section 20(a).
The relief sought in the Consolidated Amended Complaint includes all or
substantially all of the following: (i) certification of a class under Rule 23
of the Federal Rules of Civil Procedure; (ii) certification of the Plaintiffs as
class representatives and as lead plaintiffs and their counsel as lead counsel;
(iii) award of monetary damages, including compensatory and rescissionary
damages and interest thereon; (iv) a judgment awarding the Plaintiffs and the
Class their counsel fees, experts' fee and other costs of suit; (v) award to the
Plaintiffs such other relief as the District Court deems just and proper or as
the District Court otherwise requires; and (vi) trial by jury.
47
<PAGE>
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 September 13, 1999, the Court denied the Plaintiffs' motions for
appointment of lead plaintiffs and for approval of selected counsel. The Court
also ordered the Plaintiffs' counsel to provide notice of the putative claims to
institutional investors identified by Defendants. Finally, the Court ordered
that the Plaintiffs nominate no more than three persons to serve as lead
plaintiffs, and that any potential lead plaintiffs nominate only one attorney or
law firm to serve as lead counsel.
On October 19, 1999, the Court approved the form of the renewed notice to
potential class members that the Plaintiffs submitted to the Court. The Court
also ordered the Defendants to provide a list of certain institutional investors
who had invested in the Company to the Plaintiffs to whom the renewed notice is
to be sent.
On December 10, 1999, the Defendants filed their Reply Brief to the
Plaintiffs' Opposition to the Motion to Dismiss.
On December 20, 1999, the Plaintiffs sent a notice of the Consolidated
Amended Complaint to certain institutional investors of their right to move the
Court to serve as lead plaintiffs of the class within sixty (60) days of the
notice. On March 9, 2000, the Plaintiffs filed a motion to approve the
nomination of three plaintiffs and one law firm to serve as lead counsel.
On March 23, 2000, the Defendants filed a Response to the Plaintiffs'
Motion to Approve the Nomination of Lead Plaintiffs and Lead Counsel. Although
the Defendants did not oppose the Plaintiffs' Motion, the Defendants expressly
reserved their rights under Rule 23 of the Federal Rules of Civil Procedure to
challenge, among other things, whether the action could be maintained as a class
action.
On March 30, 2000, the Court granted the Defendants' Motion to Dismiss the
Consolidated 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. This dismissal does not dispose of
other pending shareholder lawsuits and/or claims in bankruptcy which may affect
the Company, as more fully described under other subheadings of this section.
On May 1, 2000, the Plaintiffs filed a Notice of Appeal from the Court's
Memorandum Opinion and Order dated March 30, 2000.
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-
48
<PAGE>
binding policy relating generally to the approval of certain interested
transactions. Among other things, the non-binding policy adopted by the Board of
Directors imposes certain conditions on the Board's approval of transactions
between the Company and any director, officer or employee who owns greater than
1% of the outstanding common shares of the Company. Such conditions generally
include: (1) approval by written resolution of any transaction involving an
amount in excess of $5 million in any year adopted by a majority of the members
of the Board having no personal stake in the transaction; and (2) in the case of
any such transaction in excess of $15 million in any year, consideration by the
Board as to the formation of a special committee of the Board, to be comprised
of at least two directors having no personal stake in such transaction.
Other Litigation
The Company is aware that an alleged shareholder, on behalf of himself and
all others similarly situated, who purchased common stock in a registered common
stock offering made by the Company in January 1998, filed a class action lawsuit
against Prudential Securities Incorporated ("Prudential") and the Company's
independent public accountants (the "Recupito Complaint") in the United States
District Court for the District of Maryland. Neither the Company nor any officer
or director of the Company was named as a defendant in this lawsuit.
The Recupito Complaint alleges generally that the registration statement
dated October 21, 1997, including a prospectus dated January 20, 1998 and
supplemented on January 23, 1998, contained materially false and misleading
statements about the Company and its condition.
The Company may be subject to potential exposure to Prudential under
contractual provisions and to both defendants under applicable law. Prudential
may assert that it is entitled to indemnification from the Company based upon an
indemnification provision contained in the underwriting agreement entered into
with the Company in connection with the common stock offering. Certain courts
have held and it is the position of the SEC that indemnification for liabilities
arising under the Securities Act of 1933 is against public policy and
unenforceable.
The Company cannot predict with any certainty the ultimate outcome of such
litigation or its potential exposure to one or both of the defendants.
Claims
Over 850 claims with a face amount of nearly $2.5 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 cleanse the claims pool. In addition to analyzing the claims, the
Debtors have opened discussions with various creditors regarding the withdrawal
of certain claims and in some cases, have objected to claims. The Debtors'
efforts have resulted in the reduction of approximately $1.25 billion from the
claims pool by means of objections, negotiated settlements and withdrawal of
claims.
Three large disputed 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 relates to shareholders litigation against CRIIMI MAE's
officers and directors, which has already been discussed in "Legal Proceedings-
Shareholder Litigation." On March 30, 2000, CRIIMI MAE Inc. objected 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. Claim Number 330 is now pending before Judge Deborah Chasanow.
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,
49
<PAGE>
CRIIMI MAE filed an objection to the CCA Claim. The CCA Claim was filed for an
amount in excess of $17,000,000 on February 11, 1999. On October 9, 1999, CCA
responded to the objection. By letter dated January 7, 2000, CCA indicated that
the amount of its claim was $18.8 million. On March 27, 2000, CCA filed a motion
with the Bankruptcy Court revising the amount of its claim to $18.2 million.
Litigation is continuing with respect to the CCA Claim and the Company's
objection thereto.
The GP Properties Claim relates to the Company's loan origination program.
In August and September 1998, the Company and GP Properties were involved in a
preliminary loan application process. These preliminary processes did not give
rise to a loan commitment. On October 7, 1998, GP Properties advised the Company
that it closed on alternative lending. GP Properties refused the Company's
request that it withdraw its claim, and on October 26, 1999 CRIIMI MAE objected
to the GP Properties Claim. GP Properties did not respond to the objection on or
prior to the objection deadline. On May 8, 2000, the Court entered an order
disallowing and expunging the GP Properties Claim.
Of the $1.25 billion of remaining claims approximately $0.95 billion is
carried on the balance sheet as of March 31, 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. 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 quarter ended March 31, 2000, and 1999. The basis
of accounting used in the table is GAAP.
50
<PAGE>
<TABLE>
2000
-------------------------------------------------------------------------------------
Portfolio Mortgage
Investment Servicing Elimination (1) Consolidated
------------------ ------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Interest income:
Subordinated CMBS $ 39,169,771 $ 13,814 (13,814) $ 39,169,771
Insured mortgage securities 7,797,201 - - 7,797,201
Originated loans 8,487,626 - - 8,487,626
Other - 767,488 (767,488) -
Servicing income - 1,470,247 (1,470,247) -
Net gain on mortgage security dispositions 15,477 - - 15,477
Other income 520,423 914,210 (1,109,864) 324,769
------------------ ------------- --------------------- --------------------
Total revenue 55,990,498 3,165,759 (3,361,413) 55,794,844
------------------ ------------- --------------------- --------------------
General and administrative expenses (3,138,757) (3,185,695) 3,185,695 (3,138,757)
Interest expense (37,214,952) - - (37,214,952)
Reorganization items (9,046,240) - - (9,046,240)
Other expenses (719,394) (131,417) 131,417 (719,394)
------------------ ------------- --------------------- --------------------
Total expenses (50,119,343) (3,317,112) 3,317,112 (50,119,343)
------------------ ------------- --------------------- --------------------
Net (loss) income 5,871,155 (151,353) (44,301) 5,675,501
Preferred dividends accrued (1,639,890) - - (1,639,890)
------------------ ------------- --------------------- --------------------
Net (loss) income available to common
shareholders $ 4,231,265 ($151,353) $ (44,301) $ 4,035,611
================== ============= ===================== ====================
Total assets $ 2,259,744,680 $ 23,797,409 $ (2,432,592) $ 2,281,109,497
================== ============= ===================== ====================
</TABLE>
<TABLE>
1999
-------------------------------------------------------------------------------------
Portfolio Mortgage
Investment Servicing Elimination (1) Consolidated
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Subordinated CMBS $ 38,485,145 $ - $ - $ 38,485,145
Insured mortgage securities 8,900,308 - - 8,900,308
Originated loans 8,840,827 - - 8,840,827
Other - 572,755 (572,755) -
Servicing income - 1,613,945 (1,613,945) -
Net gain on mortgage security dispositions 908,604 - - 908,604
Gain on originated loan dispositions 3,946,475 - - 3,946,475
Other income 944,235 1,286,280 (3,201,115) (970,600)
----------------- -------------- -------------- ---------------
Total revenue 62,025,594 3,472,980 (5,387,815) 60,110,759
----------------- -------------- -------------- ---------------
General and administrative expenses (2,634,114) (4,482,283) 4,482,283 (2,634,114)
Interest expense (36,428,930) (14,448) 14,448 (36,428,930)
Losses on warehouse obligations - - - -
Reorganization items (5,507,838) - - (5,507,838)
Other expenses (719,394) (1,002,962) 1,002,962 (719,394)
----------------- -------------- -------------- ---------------
Total expenses (45,290,276) (5,499,693) 5,499,693 (45,290,276)
----------------- -------------- -------------- ---------------
Net (loss) income 16,735,318 (2,026,713) 111,878 14,820,483
Preferred dividends accrued (1,403,534) - - (1,403,534)
----------------- -------------- -------------- ---------------
Net (loss) income available to common
shareholders $ 15,331,784 ($2,026,713) $ 111,878 $ 13,416,949
================= ============== ============== ===============
Total assets $ 2,399,008,962 $ 24,820,676 $ (2,917,485) $ 2,420,912,153
================= ============== ============== ===============
</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.
51
<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 SHEET
(Unconsolidated)
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
----------------- ------------------
<S> <C> <C>
Assets
Subordinated CMBS, at fair value $ 798,571,198 $ 826,897,948
Insured Mortgage security, at fair value 5,269,773 5,268,982
Receivables and Other Assets 78,080,476 83,133,075
Restricted cash and cash equivalents 52,754,201 37,774,894
Other Cash and Cash Equivalents 53,722,235 52,114,880
Investment in Subsidiaries 215,736,482 210,030,947
-------------- --------------
Total Assets $ 1,204,134,365 $ 1,215,220,726
============== ==============
Liabilities
Accounts Payable and other Accrued Expenses $ 20,640,684 $ 21,580,384
Liabilities Subject to Chapter 11 Proceedings 936,814,218 974,291,756
------------ --------------
Total Liabilities 957,454,902 995,872,140
============ ==============
Shareholders' Equity
Convertible Preferred Stock 23,833 26,471
Common Stock 623,532 599,546
Accumulated other comprehensive income (184,133,647) (207,421,788)
Accumulated deficit (144,399,304) (148,434,915)
Additional paid-in capital 574,565,049 574,579,272
------------ -------------
Shareholders' Equity 246,679,463 219,348,586
------------- --------------
Total Liabilities and Shareholders' Equity $ 1,204,134,365 $ 1,215,220,726
. ============== ==============
</TABLE>
52
<PAGE>
CRIIMI MAE Inc.
STATEMENT OF NET INCOME
AND COMPREHENSIVE INCOME
(Unconsolidated)
<TABLE>
<CAPTION>
For the three months ended For the three months ended
March 31, 2000 March 31, 1999
--------------- --------------
<S> <C> <C>
Interest Income $ 27,104,225 $ 30,250,850
Interest Expense 16,112,595 16,803,626
------------- -----------
Net Interest Margin 10,991,630 13,447,224
------------ -----------
Equity in Earnings from Subsidiaries 3,475,188 2,335,106
Other Income 291,523 387,245
General and Administrative Expenses (203,724) (141,443)
Amortization of Assets Acquired in Merger (719,394) (719,394)
Unrealized gain on warehouse obligation - 3,946,475
Reorganization Items
Impairment on CMBS (3,443,759) -
Loss on Sale of CMBS (1,354,026) -
Other (3,361,937) (4,434,730)
------------- ------------
Subtotal (5,316,129) 1,373,259
------------- ------------
Net income before dividends accrued on preferred shares $ 5,675,501 $ 14,820,483
============ ===========
Dividends accrued on preferred shares (1,639,890) (1,403,534)
------------- ------------
Net income available to common shareholders $ 4,035,611 $ 13,416,949
============= ============
Comprehensive income:
Net income before dividends accrued on preferred shares $ 5,675,501 $ 14,820,483
Other comprehensive income (loss) 23,288,141 (1,586,425)
------------ -----------
Comprehensive income $ 28,963,642 $ 13,234,058
============ ============
</TABLE>
53
<PAGE>
CRIIMI MAE Inc.
Note to Financial Statements
As of March 31, 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 March 31, 2000 and December 31, 1999, and the
unconsolidated results of its operations for the three months ended March 31,
2000 and 1999.
54
<PAGE>
CRIIMI MAE Management Inc.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,2000 December 31, 1999
----------------- -------------------
<S> <C> <C>
Assets:
Note receivable $ 3,376,468 $ 3,376,468
Restricted cash and cash equivalents 289,363 261,729
Cash and cash equivalents 897,963 926,122
Other assets 2,868,939 2,969,939
Equity investments 12,665,916 12,794,963
----------------- -------------------
Total assets $ 20,098,649 $ 20,329,221
================= ===================
Liabilities:
Accounts payable and other accrued expenses $ 3,430,688 $ 2,585,812
Liabilities subject to Chapter 11 proceedings 6,778,485 6,529,634
----------------- -------------------
Total liabilities 10,209,173 9,115,446
----------------- -------------------
Shareholders' equity 9,889,476 11,213,775
----------------- -------------------
Total liabilities and shareholders' equity $ 20,098,649 $ 20,329,221
================= ===================
</TABLE>
55
<PAGE>
CRIIMI MAE Management Inc.
STATEMENTS OF NET LOSS
<TABLE>
<CAPTION>
For the three months ended March 31,
2000 1999
------------------ ------------------
<S> <C> <C>
Interest income - note receivable and
short-term interest income $ 90,743 $ 91,446
Equity in losses from investments (111,822) (1,463,918)
------------------ ------------------
Total revenue (21,079) (1,372,472)
------------------ ------------------
Interest expense 114,267 111,864
Depreciation and amortization 131,340 134,340
General and administrative expenses 2,549,362 2,122,848
Reorganization items 818,612 879,777
------------------ ------------------
Total expenses 3,613,581 3,248,829
------------------ ------------------
Net loss $ (3,634,660) $ (4,621,301)
================== ==================
</TABLE>
56
<PAGE>
CRIIMI MAE Management, Inc.
Note to Financial Statements
As of March 31, 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 March 31, 2000 and December 31, 1999 and the
results of its operations for the three months ended March 31, 2000 and 1999, in
accordance with GAAP.
57
<PAGE>
CRIIMI MAE Holdings II, L.P.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,2000 December 31, 1999
------------- -----------------
Assets:
<S> <C> <C>
Subordinated CMBS, at fair value $ 38,655,085 $ 38,211,075
Interest receivable 443,673 377,936
Cash 100 100
------------- -----------------
Total assets $ 39,098,858 $ 38,589,111
============= =================
Liabilities:
Liabilities not subject to Chapter 11 proceedings:
Collateralized mortgage obligations $ 39,364,778 $ 39,256,952
Payables and accrued expenses 611,231 541,360
Liabilities subject to Chapter 11 proceedings:
Variable-rate secured borrowings - -
------------- -----------------
Total liabilities 39,976,009 39,798,312
------------- -----------------
Partners' equity:
Contributed capital 4,816,903 4,856,143
Accumulated other comprehensive income (5,694,054) (6,065,344)
------------- -----------------
Total partners' equity (877,151) (1,209,201)
------------- -----------------
Total liabilities and partners' equity $ 39,098,858 $ 38,589,111
============= =================
</TABLE>
58
<PAGE>
CRIIMI MAE Holdings II, L.P.
STATEMENTS OF NET LOSS AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
For the three months ended
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Interest income:
Subordinated CMBS $ 796,510 $ 796,669
Interest expense:
Collateralized bond obligations-CMBS 905,879 -
Variable-rate secured borrowings-CMBS - 559,913
------------- --------------
Total interest expense 905,879 559,913
------------- --------------
Net interest margin (109,369) 236,756
------------- --------------
Other investment income - -
General and administrative expenses - -
Reorganization costs (52,857) (193,328)
------------- --------------
Subtotal (52,857) (193,328)
------------- --------------
Net loss $ (162,226) $ 43,428
============= ==============
Other comprehensive income 371,290 (611,860)
------------- --------------
Comprehensive income $ 209,064 $ (568,432)
============= ==============
</TABLE>
59
<PAGE>
Holdings II, L.P.
Note to Financial Statements
As of March 31, 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 first 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 March 31, 2000 and December 31, 1999 and the
results of its operations for the three months ended March 31, 2000 and 1999.
60
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS. When used in this Quarterly Report on Form 10-Q, the
words "believes," "anticipates," "expects" and similar expressions are intended
to identify forward-looking statements. Statements looking forward in time are
included in this Quarterly Report on Form 10-Q pursuant to the "safe harbor"
provision of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties, which could cause
actual results to differ materially, including, but not limited to, the risk
factors contained below 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
for its own as well as third party securitized mortgage loan pools.
The Company's business is subject to a number of risks and uncertainties
including, but not limited to: (1) the effect of the Chapter 11 filing and
substantial doubt as to the Company's ability to continue as a going concern;
(2) risks related to the 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 being considered an investment
company; (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 (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.
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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. In furtherance of such effort, the Debtors
filed (i) a Joint Plan of Reorganization on September 22, 1999, (ii) an Amended
Joint Plan of Reorganization and proposed Joint Disclosure Statement on December
23, 1999, (iii) a Second Amended Joint Plan of Reorganization and proposed
Amended Joint Disclosure Statement on March 31, 2000 and a Third Amended Joint
Plan of Reorganization (the "Plan") and proposed Second Amended Joint Disclosure
Statement (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 "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
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confirmation of the Debtors' Plan. The Company, the Equity Committee and the
Unsecured Creditors' Committee are now all proceeding toward confirmation of the
Plan. Under the Plan, Merrill Lynch and German American Capital Corporation
("GACC"), two of the Company's largest secured creditors, would provide a
significant portion of the recapitalization financing contemplated by the Plan.
The Bankruptcy Court scheduled a hearing for April 25 and 26, 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 relate to an objection to the Company's
disclosure statement filed by Salomon Smith Barney Inc. and Citicorp Real
Estate, Inc. (together "SSB"). On May 9, 2000, CRIIMI MAE filed its legal brief
with the court, as did SSB. In addition, the Equity Committee filed a brief in
support of CRIIMI MAE's position and the Unsecured Creditors Committee filed two
briefs also in support of CRIIMI MAE's position. The SSB objection is the only
objection to CRIIMI MAE's disclosure statement pending before the Bankruptcy
Court. Once the Disclosure Statement has been approved by the Bankruptcy Court,
the Plan, together with the Disclosure Statement and ballots, will be sent to
all impaired creditors and equity holders for acceptance or rejection.
On December 20, 1999, the Unsecured Creditors' Committee filed its own plan
of reorganization and proposed disclosure statement with the Bankruptcy Court
which, in general, provided for the liquidation of the assets of the Debtors. On
January 11, 2000 and February 11, 2000, the Unsecured Creditors' Committee filed
its first and second amended plans of reorganization, respectively, with the
Bankruptcy Court and amended proposed disclosure statements with respect
thereto. However, as a result of successful negotiations between the Debtors and
the Unsecured Creditors' Committee, the Unsecured Creditors' Committee has
agreed to the treatment of unsecured claims under the Debtors' Plan, subject to
completion of mutually acceptable Unsecured Creditor debt documentation, and has
asked the Bankruptcy Court to defer consideration of its second amended plan of
reorganization and second amended proposed disclosure statement.
The Plan of Reorganization
The Plan contemplates the payment in full of all of the allowed claims of
the Debtors primarily through recapitalization financing (including proceeds
from CMBS sales) aggregating at least $856 million (the "Recapitalization
Financing"). Approximately $275 million of the Recapitalization Financing would
be provided by Merrill Lynch and GACC through a secured financing facility,
approximately $155 million would be provided through new secured notes issued to
some of the Company's major unsecured creditors, and another $35 million would
be obtained from another existing creditor in the form of an additional secured
financing facility (collectively, the "New Debt"). The sale of select CMBS (the
"CMBS Sale"), the proceeds of which are expected to be used to pay down existing
debt, is contemplated to provide the balance of the Recapitalization Financing.
The Company may seek new equity capital from one or more investors to partially
fund the Plan, although new equity is not required to fund the Plan.
In connection with the Plan, substantially all cash flows are expected to
be used to satisfy principal, interest and fee obligations under the New Debt.
The $275 million secured financing would provide for (i) interest at a rate of
one month LIBOR plus 3.25%, (ii) principal prepayment/amortization obligations,
(iii) extension fees after two years and (iv) maturity on the fourth anniversary
of the effective date of the Plan. The Plan contemplates that the $35 million
secured financing would provide for terms similar to those referenced in the
preceding sentence; however, the proposed lender has not agreed to any terms of
the $35 million secured financing and there can be no assurance that an
agreement for this financing will be obtained or that, if obtained, the terms
will be as referenced above. The approximate $155 million secured financing
would be effected through the issuance of two series of secured notes under two
separate indentures. The first series of secured notes, representing an
aggregate principal amount of approximately $105 million, would provide for (i)
interest at a rate of 11.75% per annum, (ii) principal prepayment/amortization
obligations, (iii) extension fees after four years and (iv) maturity on the
fifth anniversary of the effective date of the Plan. The second series of
secured notes, representing an aggregate principal amount of approximately $50
million, would provide for (i) interest at a rate of 13% per annum with
additional interest at the rate of 7% per annum accreting over the debt term,
(ii) extension fees after four years and (iii) maturity on the sixth anniversary
of the effective date of the Plan. 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, at
the Company's election. The Plan further contemplates amendments to the relative
rights and preferences of the Series D Cumulative Convertible Preferred
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Stock (the "Series D Preferred Stock"), through an exchange of Series D
Preferred Stock for Series E Cumulative Convertible Preferred Stock (the "Series
E Preferred Stock"), similar to those amendments effected in connection with the
recent exchange of the former Series C Cumulative Convertible Preferred Stock
(the "Series C Preferred Stock") for Series E Preferred Stock.
Reference is made to the Plan and Proposed Disclosure Statement, previously
filed with the Securities and Exchange Commission (the "SEC") as exhibits to a
Form 8-K, for a complete description of the financing contemplated to be
obtained under the Plan from the respective existing creditors including,
without limitation, payment terms, restrictive covenants and collateral, and a
complete description of the treatment of preferred stockholders. Although the
Company has commitments for substantially all of the New Debt and has sold
certain of the CMBS contemplated to be sold in connection with the CMBS Sale,
there can be no assurance that the Company will obtain the Recapitalization
Financing, that the Plan will be confirmed by the Bankruptcy Court, or that the
Plan, if confirmed, will be consummated. The Plan also contemplates certain
amendments to the Company's articles of incorporation, including an increase in
authorized shares from 120 million to 375 million (consisting of 300 million of
common shares and 75 million of preferred shares).
Effect of Chapter 11 Filing on REIT Status and Other Tax Matters
REIT Status
CRIIMI MAE is required to meet income, asset, ownership and distribution
tests to maintain its REIT status. The Company believes that it has satisfied
the REIT requirements for all years through, and including, 1998. However, due
to the uncertainty resulting from its Chapter 11 filing, there can be no
assurance that CRIIMI MAE will retain its REIT status for 1999 or subsequent
years. If the Company fails to retain its REIT status for any taxable year, it
will be taxed as a regular domestic corporation subject to federal and state
income tax in the year of disqualification and for at least the four subsequent
years. Depending on the amount of any such federal and state income tax, the
Company may have insufficient funds to pay such tax and also may be unable to
comply with its obligations under the New Debt.
2000 Taxable Income (Loss)/Taxable Distribution Requirements
Internal Revenue Service Revenue procedure 99-17 provides securities and
commodities traders with the ability to elect mark-to-market treatment for the
2000 tax year and for all future tax years, unless the election is revoked with
the consent of the Internal Revenue Service. On March 15, 2000, CRIIMI MAE
elected for tax purposes to be classified as a trader in securities effective
January 1, 2000. Such trading activity is, or is expected to be, in certain
types of mortgage-backed securities, including Subordinated CMBS (the "Trading
Assets").
As a result of its trader election, CRIIMI MAE recognized a mark-to-market
tax loss on its Trading Assets on January 1, 2000 of approximately $478 million
(the "January 2000 Loss"). Such loss is expected to be recognized evenly over
four years beginning with the year 2000. The Company expects such loss to be
ordinary.
Additionally, as a result of its trader election, the Company will be
required to mark-to-market its Trading Assets at the end of each tax year,
including the year 2000. Any increase or decrease in the value of the Trading
Assets as a result of the year-end mark-to-market requirement will generally
result in either a tax gain (if an increase in value) or a tax loss (if a
decrease in value). Such tax gain or loss, as well as any realized gains or
losses from the disposition of Trading Assets during each year, are also
expected to be ordinary gains or losses.
Since gains and losses associated with trading activities are expected to
be ordinary, any gains will generally increase taxable income and any losses
will generally decrease taxable income (or, if the loss is large enough,
eliminate 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 cash flow from
the Company's Trading Assets will not fluctuate as a result of 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, but can not be carried back. If a security
is marked down because of an increase in interest rates, rather than from credit
losses, such mark-to-market losses may be recovered over time. Any recovered
mark-to market losses will generally be recognized as taxable income, although
there is expected to be no corresponding increase in cash flow.
There is no assurance that the Company's position with respect to its
election as a trader in securities will not be challenged by the IRS, and, if
challenged, will be defended successfully by the Company. As such, there is a
risk that the January 2000 Loss will be limited or disallowed, resulting in
higher tax basis income and a corresponding increase in REIT distribution
requirements.
As a REIT, CRIIMI MAE is generally required to distribute at least 95% of
its "REIT taxable income" to its shareholders each year. If CRIIMI MAE is
required to make taxable income distributions to its shareholders to satisfy
required REIT distributions, all or a substantial portion of these distributions
are expected to be in the form of non-cash dividends. There is no assurance that
such non-cash dividends would satisfy the REIT distribution requirements.
It is possible that the Company could experience an "ownership change"
within the meaning of Section 382 of the Code. Consequently, its use of net
operating losses generated before the ownership change to reduce taxable income
after the ownership change may be subject to limitation under Section 382.
Generally, the use of net operating losses in any year is limited to the value
of the Company's stock on the date of the ownership change multiplied by the
long-term tax exempt rate (published by the IRS) with respect to that date.
See Taxable Income (Loss) below, and Notes 1 and 8 to Notes to Consolidated
Financial Statements for additional information related to the foregoing
matters.
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Dividends During Bankruptcy
During the pendency of the Chapter 11 proceedings, the Company is
prohibited from paying cash dividends without first obtaining Bankruptcy Court
approval. 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 Company's plan of
reorganization, a copy of which has been filed with the SEC as an exhibit to a
Current Report on Form 8-K.
Due to the Chapter 11 filing on October 5, 1998, cash dividends have not
been paid on common or preferred shares. However, since dividends on the
Company's Series B, C, D, E and F Preferred Stock are cumulative, the dividends
payable at March 31, 2000 were accrued in the financial statements.
Dividends paid or accrued per share on the Company's common stock, Series B
Preferred Stock and Series F Preferred Stock are summarized below:
For the three months ended
March 31,
2000 1999(1)
--------------- ---------------
Common shares $ -- $ --
Series B Preferred Stock 0.68 0.68
Series F Preferred Stock 0.30 --
_____________________________
(1) Due to the Chapter 11 filing on October 5, 1998, cash dividends were not
paid for the year ended 1999 on common or preferred shares. The Company
paid a dividend on November 5, 1999 in the form of junior preferred stock
to its common shareholders for the purpose of distributing approximately
$15.7 million in undistributed 1998 taxable income. See "Effect of Chapter
11 Filing on REIT Status and Other Tax Matters" regarding this dividend and
the anticipated distribution of all or a substantial portion of its 1999
taxable income in the form of non-cash taxable dividends. However, since
dividends on the Company's preferred shares are cumulative, the dividends
payable at March 31, 2000 and March 31, 1999 were accrued in the financial
statements.
In addition to the per share amounts described above, dividends were paid
or accrued on the Company's Series C Preferred Stock, Series D Preferred Stock,
and Series E Preferred Stock. Amounts payable to Series C Preferred Stock for
the three months ended March 31, 2000 were $119,537 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 three months ended March 31, 1999 of
$173,974. Amounts payable to Series D Preferred Stock for the three months ended
March 31, 2000 were $185,156. This compares to amounts paid or payable to Series
D Preferred Stock for the three months ended March 31, 1999 of $145,652. Amounts
paid or payable to the Series E Preferred Stock for the three months ended March
31, 2000 were $73,428. Nothing was payable to the Series E Preferred Stock in
1999. Amounts payable to the Series F Preferred Stock for the three months ended
March 31, 2000 were $177,861. Nothing was payable to the Series F Preferred
Stock for the three months ended March 31, 1999.
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On February 22, 2000, CRIIMI MAE and the holder of its Series C Preferred
Stock entered into a Preferred Stock Exchange Agreement pursuant to which
103,000 shares of Series C Preferred Stock were exchanged for 103,000 shares of
a new series of preferred stock designated as Series E Preferred Stock. See 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.
The Company's 1999 Taxable Income
As a REIT, CRIIMI MAE is generally required to distribute at least 95% of
its "REIT taxable income" to its shareholders each tax year. For purposes of
this requirement, REIT taxable income excludes certain excess noncash income
such as original issue discount ("OID"). In determining its federal income tax
liability, CRIIMI MAE, as a result of its REIT status, is entitled to deduct
from its taxable income dividends paid to its shareholders. Accordingly, to the
extent the Company distributes its net income to shareholders, it effectively
reduces taxable income, on a dollar-for-dollar basis, and eliminates the "double
taxation" that normally occurs when a corporation earns income and distributes
that income to shareholders in the form of dividends. The Company, however,
still must pay corporate level tax on any 1999 taxable income not distributed to
shareholders. Unlike the 95% distribution requirement, the calculation of the
Company's federal income tax liability does not exclude excess noncash income
such as OID.
In determining the Company's taxable income for 1999, distributions
declared by the Company on or before September 15, 2000 and actually paid by the
Company on or before December 31, 2000 will be considered as dividends paid for
the year ended December 31, 1999. The Company anticipates distributing all, or a
substantial portion, of its 1999 taxable income in the form of non-cash taxable
dividends. There can be no assurance that the Company will be able to make such
distributions with respect to its 1999 taxable income. Should CRIIMI MAE
terminate or fail to maintain its REIT status during the year ended December 31,
1999, the taxable income for the year ended December 31, 1999 of up to
approximately $37.5 million would generate a tax liability of up to $15.0
million.
The Company's 1998 Taxable Income
On September 14, 1999, the Company declared a dividend payable to common
shareholders of approximately 1.61 million shares of a new series of junior
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.
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The Company currently owns all of the equity interests in three trusts that
constitute TMPs (CBO-1, CBO-2 and CMO-IV, collectively the "Trusts"). See Notes
5 and 6 of the Notes to Consolidated Financial Statements for descriptions of
CBO-1, CBO-2 and CMO-IV. The statutory provisions and regulations governing the
tax treatment of TMPs (the "TMP Rules") provide an exemption for TMPs that
constitute "qualified REIT subsidiaries" (that is, entities whose equity
interests are wholly owned by a REIT). As a result of this exemption and the
fact that the Company owns all of the equity interests in each Trust, the Trusts
currently are not required to pay a separate corporate level tax on income they
derive from their underlying mortgage assets.
The Company also owns certain securities structured as bonds (the "Bonds")
issued by each of the Trusts. Certain of the Bonds owned by the Company serve as
collateral (the "Pledged Bonds") for short-term, variable-rate borrowings used
by the Company to finance their initial purchase. If the creditors holding the
Pledged Bonds were to seize or sell this collateral and the Pledged Bonds were
deemed to constitute equity interests (rather than debt) in the Trusts, then the
Trusts would no longer qualify for the exemption under the TMP Rules provided
for qualified REIT subsidiaries. The Trusts would then be required to pay a
corporate level federal income tax. As a result, available funds from the
underlying mortgage assets that would ordinarily be used by the Trusts to make
payments on certain securities issued by the Trust (including the equity
interests and the Pledged Bonds) would instead be applied to tax payments. Since
the equity interests and Bonds owned by the Company are the most subordinated
securities and, therefore, would absorb payment shortfalls first, the loss of
the exemption under the TMP rules could have a material adverse effect on their
value and the payments received thereon.
In addition to causing the loss of the exemption under the TMP Rules, a
seizure or sale of the Pledged Bonds and a characterization of them as equity
for tax purposes could also jeopardize the Company's REIT status if the value of
the remaining ownership interests in any Trust held by the Company (i) exceeded
5% of the total value of the Company's assets or (ii) constituted more than 10%
of the Trust's voting interests. Although it is possible that the election by
the TMPs to be treated as taxable REIT subsidiaries could prevent the loss of
CRIIMI MAE's REIT status, there can be no assurance that a valid election could
be made given the timing of a seizure or sale of the Pledged Bonds.
Investment Company Act Risk
Under the Investment Company Act of 1940, as amended (the "Investment
Company Act"), an investment company is required to register with the SEC and is
subject to extensive restrictive and potentially adverse regulation relating to,
among other things, operating methods, management, capital structure, dividends
and transactions with affiliates. However, as described below, companies that
are primarily engaged in the business of acquiring mortgages and other liens on
and interests in real estate ("Qualifying Interests") are excluded from the
requirements of the Investment Company Act.
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 March 31, 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.
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Further, if the Company were deemed an unregistered investment company, the
Company could be subject to monetary penalties and injunctive relief. The
Company would be unable to enforce contracts with third parties and third
parties could seek to obtain rescission of transactions undertaken during the
period the Company was deemed an unregistered investment company. In addition,
as a result of the Company's Chapter 11 filing, the Company is limited in
possible actions it may take in response to any need to modify its business plan
in order to register as an investment company, or avoid the need to register.
Certain dispositions or acquisitions of assets would require Bankruptcy Court
approval. Also, any forced sale of assets that occurs after the bankruptcy stay
is lifted would change the Company's asset mix, potentially resulting in the
need to register as an investment company under the Investment Company Act or
take further steps to change the asset mix. Any such results would be likely to
have a material adverse effect on the Company.
Results of Operations
2000 versus 1999
Financial Statement Net Income
- ------------------------------
Financial statement net income available to common shareholders for the
quarter ended March 31, 2000 was approximately $4 million, as compared to
approximately $13.4 million for the same period in 1999. The primary reasons for
the reduction in earnings during this period are described as follows:
Interest Income - Subordinated CMBS
Income from Subordinated CMBS increased by approximately $0.7 million, or
1.8%, to $39.2 million during the first quarter of 2000 as compared to $38.5
million during the first quarter of 1999. This increase was primarily the result
of the recognition of other than temporary impairment recognized as of December
31, 1999 on the Subordinated CMBS that have been and are intended to be sold in
2000 as part of the CMBS Sale under the Plan. This resulted in the cost basis
being written down to fair value as of December 31, 1999. As a result of this
new basis, these CMBS have new higher yields effective the first quarter of
2000. This increase is partially offset by the sale of the Morgan Stanley CMBS
in February. See Note 5 to Notes to Consolidated Financial Statements.
Generally accepted accounting principles ("GAAP") require that interest
income generated by Subordinated CMBS be recorded based on the effective
interest method using the anticipated yield over the expected life of the
Subordinated CMBS. 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 March 31, 2000 was
approximately 11.5% as compared to the anticipated weighted average yield as of
December 31, 1999 of 10.1%. These returns were determined based on the
anticipated yield over the expected weighted average life of the Subordinated
CMBS, which considers, among other things, anticipated losses and the write down
to fair value.
Interest Income-Insured Mortgage Securities
Interest income from insured mortgage securities decreased by approximately
$1.1 million or 12.4% to $7.8 million for the first quarter of 2000 from $8.9
million for the first quarter of 1999. This decrease was principally due to the
prepayment of three mortgage securities during the first quarter of 2000.
Prepayments aggregated approximately $4.6 million and $31.1 million in net
proceeds for the three months ended March 31, 2000 and 1999, respectively.
Interest Expense
Total interest expense increased by approximately $0.8 million to
approximately $37.2 million for the first quarter of 2000 from approximately
$36.4 million for the first quarter of 1999. This increase was primarily
attributable to the following: (1) the sale of certain investment grade bonds
associated with the CBO-2 transaction in March 1999 and (2) the sale of two
remaining classes of investment grade bonds associated with the 1998 CMO-IV
transaction in May 1999 and October 1999. The sales of the aforementioned
securities were treated as a financing for accounting purposes. As such, the
Company records the securities as liabilities and recognizes the related
interest expense on an ongoing basis. The fixed rate obligations sold
typically carry a higher cost than does the variable-rate secured borrowing
that it replaces. Such increases in interest expense were offset, in part, by
decreases in interest paid on variable-rate secured borrowings, reflecting
paydowns of such facilities through asset sales, along with a reduction in
certain borrowings as a result of corresponding asset prepayments.
68
<PAGE>
Equity in (Losses) from Investments
Equity in losses decreased by approximately $1.6 million during the first
quarter of 2000 due to a net loss of approximately $12,000 as compared to a net
loss of $1.6 million during the first quarter of 1999. The decrease is primarily
due to a reduction in revenue offset by a decrease in certain expenses at CMSLP.
The decrease in revenue is primarily attributable to the reduction in the
servicing portfolio due to prepayments and the sale of certain CMBS of CRIIMI
MAE. The decrease in expenses reflects a reduction in certain expenses. During
the first quarter of 1999, expenses included an $800,000 prepayment penalty
shortfall; however, there was no such shortfall during the first quarter of
2000. In addition, the decrease in expenses reflects a decrease during the first
quarter of 2000 in the amortization and impairment recognized on certain
servicing rights of CMSLP. The servicing portfolio was approximately $27.9
billion as of March 31, 2000 as compared to approximately $29.8 billion as of
March 31, 1999.
Other Income
Other income decreased by approximately $300,000 to approximately $337,000
during the first three months of 2000 as compared to approximately $636,000
during the corresponding period in 1999. This decrease was primarily
attributable to a reduction in net income associated with the Company's
investment in REO as well as the timing of temporary investment of insured
mortgage security disposition proceeds.
Net Gains on Mortgage Securities Dispositions
During the first quarter of 2000, net gains on mortgage dispositions were
approximately $15,000 which was a result of three prepayments of mortgage
securities held by CRIIMI MAE's subsidiaries. During the first quarter of 1999,
net gains on mortgage dispositions were approximately $807,000 which was a
result of five prepayments of mortgage securities held by CRIIMI MAE's
subsidiaries. For any quarter, gains or losses on mortgage dispositions are
based on the number, carrying amounts and proceeds of mortgages disposed of
during the period.
Gain on Originated Loan Mortgage Dispositions
During the first quarter of 2000, there were no dispositions of originated
loans. For the same quarter of 1999, there was one mortgage prepayment in the
originated loan portfolio resulting in a gain of approximately $101,000.
General and Administrative Expenses
General and administrative expenses increased by approximately $500,000 or
19.2% to approximately $3.1 million during the first quarter of 2000 as compared
to $2.6 million for the corresponding period in 1999. The increase was
primarily attributable to an increase in general professional fees due to the
complexities of the Chapter 11 proceedings.
Unrealized Gain on Warehouse Obligation
During the first quarter ended March 31, 2000, the Company recorded no
gains on warehouse obligations as all of the loans under the Citibank
origination program were sold in 1999. This compares to the quarter ended March
31, 1999, when the Company had recorded unrealized gains on the obligation to
Citibank of approximately $3.9 million.
Reorganization Items
Impairment on CMBS. As discussed in Note 1 of the Notes to Consolidated
Financial Statements, under CRIIMI MAE's Plan, a portion of the Recapitalization
Financing is expected to result from the CMBS Sale. The CMBS subject to the
CMBS Sale had a fair value and amortized cost of $341.2 million and $339.3
million, respectively, as of March 31, 2000. The Company first filed a plan
with the Bankruptcy Court in the fourth quarter of 1999 and during that same
quarter began marketing for sale the CMBS subject to the CMBS Sale. CRIIMI MAE
sold a portion of these bonds in February 2000 and April 2000 and intends to
enter into additional agreements during the second quarter of 2000 to sell the
remaining CMBS subject to the CMBS Sale, although there can be no assurance such
bonds will be sold.
69
<PAGE>
GAAP states that when the fair market value of an investment declines below
its amortized cost for a significant period of time and the entity no longer has
the ability or intent to hold the investment for the period the entity
anticipates is required for the value to recover to amortized cost, other than
temporary impairment on the investment should be recognized. This other than
temporary impairment is recognized through the income statement as the
difference between amortized cost and fair value. Additional accounting
guidance states that other than temporary impairment should be recognized in the
period the decision to sell any investment is made if the entity does not expect
the fair value to recover before the sale date. As the Company decided in the
fourth quarter of 1999 to sell the CMBS subject to the CMBS Sale and it did not
expect the value of these bonds to significantly recover before the future sale
dates, the Company has recognized approximately $160 million of other than
temporary impairment related to these CMBS through earnings through the first
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 first quarter of 2000 and 1999, the
Company recorded other reorganization items, as summarized below, due to the
Chapter 11 filings of CRIIMI MAE, CM Management and Holdings II.
<TABLE>
<CAPTION>
Three months ended Three months ended
Reorganization Items March 31, 2000 March 31, 1999
-------------------- -------------- --------------
<S> <C> <C>
Short-term interest income $(1,004,660) $ (232,400)
Professional fees 4,373,268 5,140,000
Employee Retention Program accrued costs 279,349 542,897
Other 600,498 57,341
----------- ----------
Subtotal 4,248,455 5,507,838
Impairment on CMBS 3,443,759 --
Loss on sale of CMBS 1,354,026 --
----------- ----------
Total $ 9,046,240 $5,507,838
=========== ==========
</TABLE>
Taxable Income (Loss)
- ---------------------
CRIIMI MAE realized a net operating loss of approximately $14 million
during the first quarter of 2000, compared to tax basis income of approximately
$19.6 million or $0.37 per share in 1999. 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 quarter 2000. The Company expects to continue
to recognize approximately $30 million of loss related to the January 2000 Loss
in each quarter for the next four years. (See also "2000 Taxable
Income(Loss)/Taxable Distribution Requirements" for a more complete discussion
and Note 8 for a discussion of differences between financial statement net
income (loss) and taxable income (loss)).
A summary of the estimated first quarter 2000 net operating loss is as
follows:
January 2000 Loss $478 million
LESS: Portion recognized in First Quarter 2000 (30) million
----
Balance Remaining of January 2000 Loss to be Recognized $448 million
====
Taxable Income Before Recognition of January 2000 Loss $ 16 million
LESS: January 2000 Loss Recognized in First Quarter 2000 (30) million
----
Net Operating Loss for First Quarter 2000 ($14) million
Net Operating Loss Created in First Quarter 2000 ($14) million
Net Operating Loss Utilization 0.0
----
Net Operating Loss Carried Forward for Use in Future Periods ($14) million (1)
(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.
<PAGE>
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.
70
<PAGE>
Cash Flow
2000 versus 1999
Net cash provided by operating activities increased for the three months
ended March 31, 2000 as compared to the three months ended March 31, 1999. The
increase was primarily due to an increase in payables and accrued expenses.
Net cash provided by investing activities decreased for the three months
ended March 31, 2000 as compared to the three months ended March 31, 1999 due
to fewer net proceeds received from the sale of CMBS and mortgage security
dispositions in the first quarter of 2000 versus the same period in 1999.
Net cash used in financing activities decreased for the three months ended
March 31, 2000 as compared to the three months ended March 31, 1999. The
decrease was primarily due to greater principal payments on debt obligations
during the first quarter of 1999 compared to the first quarter of 2000.
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
71
<PAGE>
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.
As of May 1, 2000, CRIIMI MAE had secured financing agreements with GACC,
Merrill Lynch, and Citicorp. Certain of these lenders have registered the
pledged securities in their own names. As a result, the trustee makes payments
on such securities to the registered holder. Since the Chapter 11 filing
occurred, certain registered holders withheld payments related to securities not
registered to CRIIMI MAE. The Company has negotiated and finalized agreements
with five of its lenders. CRIIMI MAE Inc.'s unrestricted cash position has
increased from approximately $7 million on October 5, 1998 to approximately
$56.5 million as of March 31, 2000. Due to the uncertainty of the effects of
the Chapter 11 filing on the business of the Company, pending litigation,
material reorganization items to be incurred during the pendency of the
bankruptcy and numerous other factors beyond the Company's control, no
assurance can be given that the Company's cash flow will be sufficient to fund
operations for any specified period while the Company is in bankruptcy.
Under CRIIMI MAE's Plan, a portion of the Recapitalization Financing is
expected to result from the CMBS Sale. The CMBS subject to the CMBS Sale had a
fair value and amortized cost of $341.2 million and $339.3 million,
respectively, as of March 31, 2000. The Company first filed a plan with the
Bankruptcy Court in the fourth quarter of 1999 and during that same quarter
CRIIMI MAE began marketing for sale the CMBS subject to the CMBS Sale. CRIIMI
MAE sold a portion of these bonds in February 2000 and April 2000 and intends to
enter into additional agreements during the second quarter of 2000 to sell the
remaining CMBS subject to the CMBS Sale, although there can be no assurance that
such bonds will be sold. As the Company decided in the fourth quarter of 1999
to sell the CMBS subject to the CMBS Sale and it does not expect the value of
these bonds to significantly recover before the future sale dates, the Company
has recognized approximately $160 million of other than temporary impairment
related to these CMBS through earnings through the first quarter of 2000. (See
Note 5 to the Financial Statements for a discussion regarding CMBS sales through
April 2000.)
The value of the Company's Subordinated CMBS and government-insured
securities is based upon the combined yield of current treasury rates and the
current spread above treasury rates that an investor would require in a purchase
transaction. During the period ended March 31, 2000, the required spreads above
treasury rates were substantially unchanged on a total portfolio basis.
However, treasury rates decreased, generally, from December 31, 1999 which, when
combined with the required spreads, resulted in an aggregate $21.4 million net
increase in the value of the Company's portfolio of CMBS and FHAs and GNMAs from
December 31, 1999 to March 31, 2000.
The Company's ability to resume the acquisition of Subordinated CMBS, as
well as its loan origination and securitization programs, depends first on its
ability to obtain the requisite recapitalization proceeds, obtain confirmation
and approval of a plan reorganization and emerge from bankruptcy as a
successfully reorganized company, and second, on its ability to access
additional capital once it has successfully emerged from bankruptcy. Factors
which could affect the Company's ability to access additional capital include,
among other things, the cost and availability of such capital, changes in
interest rates and interest rate spreads, changes in the commercial mortgage
industry and the commercial real estate market, general economic conditions,
perceptions in the capital markets of the Company's business, covenants under
the Company's debt securities and credit facilities, results of operations,
leverage, financial condition, and business prospects. The Company can give no
assurance as to whether it will be able to obtain additional capital or the
terms of any such capital. See Note 1 to Notes to Consolidated Financial
Statements for a discussion of the New Debt contemplated under the Plan.
72
<PAGE>
ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal market risk is exposure to changes in interest
rates related to the U.S. Treasury market as well as the LIBOR market. The
Company will have an increase in the amount of interest expense paid on its
variable-rate obligations primarily due to increases in One-Month LIBOR. The
Company will also experience fluctuations in the market value of its assets
related to changes in the interest rates of U.S. Treasury bonds as well as
increases in the spread between U.S. Treasury bonds and CMBS.
CRIIMI MAE has entered into interest rate protection agreements to mitigate
the adverse effects of rising interest rates on the amount of interest expense
payable under its variable-rate borrowings. The caps provide protection to
CRIIMI MAE to the extent interest rates, based on a readily determinable
interest rate index (typically One-Month LIBOR), increase above the stated
interest rate cap, in which case, CRIIMI MAE will receive payments based on the
difference between the index and the cap. The term of the cap as well as the
stated interest rate of the cap, which in all cases is currently above the
current rate of the index, will limit the amount of protection that the caps
offer.
Prior to the Petition Date, CRIIMI MAE financed a substantial portion of
its Subordinated CMBS acquisitions with short-term, variable-rate borrowings
secured by the Company's CMBS. The agreements governing these financing
arrangements typically required the Company to maintain collateral at all times
with a market value not less than a specified percentage of the outstanding
indebtedness. The agreements further provided that the lenders could require
the Company to post cash or additional collateral if the value of the existing
collateral fell below this threshold amount. These financing arrangements were
used by CRIIMI MAE to provide financing during the period of time from the
acquisition or creation of the Subordinated CMBS to the date when CRIIMI MAE
would resecuritize the portfolio in order to match-fund a significant portion of
the portfolio with fixed-rate debt, thereby eliminating interest rate risk on
that portion of the CMBS. These transactions also increased the borrowing
capacity of the Company which was used to acquire Subordinated CMBS.
73
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Note 16 of Notes to Consolidated Financial Statements
of CRIIMI MAE Inc. which is incorporated herein by reference.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Reference is made to Notes 1, 5, 6, 9, 12 and 16 to Notes to Consolidated
Financial Statements of CRIIMI MAE which are incorporated herein by reference.
Such Notes contain a description of alleged defaults asserted by certain of the
Company's lenders.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit No. Description
----------- -----------
27 Financial Data Schedule (filed herewith)
99(a) Stipulation and Consent Order selling certain
commercial mortgage-backed securities to Lehman
Ali Inc. free and clear of liens, claims and
encumbrances entered April 19, 2000 (filed
herewith).
99(b) Stipulation and Order Regarding Proceeds Received
by the Debtor from the Sale of Certain Commercial
Mortgage-Backed Securities to Lehman Ali, Inc.
entered on April 19, 2000.
99(c) Stipulation Resolving Objection of First Union
National Bank to Debtors' Joint Disclosure
Statement entered on April 21, 2000 (filed
herewith).
(b) REPORTS ON FORM 8-K
Date Purpose
---- -------
May 18, 2000 To report (1) a Third Amended Joint Plan of
Reorganization and a Second Amended Disclosure
Statement (Proposed) filed by the Company and its
affiliates CRIIMI MAE Holdings II, L.P. and CRIIMI
MAE Management, Inc. with the Bankruptcy Court on
April 25, 2000 and (2) a press release issued by
the Company on April 26, 2000 announcing (i) a
request by the Bankruptcy Judge for the filing of
additional legal briefs by May 9, 2000; and (ii)
the filing of the Third Amended Joint Plan of
Reorganization and a Second Amended Disclosure
Statement (Proposed).
74
<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.
May 20, 2000 /s/ Cynthia O. Azzara
- --------------------- ------------------------------
DATE Cynthia O. Azzara
Senior Vice President,
Principal Accounting Officer
and Chief Financial Officer
75
<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 LEHMAN ALI INC. FREE AND CLEAR OF LIENS,
CLAIMS AND ENCUMBRANCES
CRIIMI MAE Inc., Debtor and Debtor-in-Possession herein ("CMI"), Lehman
Brothers, Inc. ("LBI"), Lehman ALI Inc. ("Lehman ALI"), First Union National
Bank ("FUNB") and the Official Committee of Equity Security Holders of CMI (the
"Equity Committee"), by and through their respective undersigned counsel, hereby
file this Stipulation and Consent Order Selling Certain Commercial-Mortgage
Backed Securities to Lehman ALI Inc. Free and Clear of Liens, Claims and
Encumbrances (the "Stipulation"), 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 in support thereof state as follows: This Court has jurisdiction over
this Stipulation pursuant to 28 U.S.C. 157 and 1334. Venue is proper pursuant
to 28 U.S.C. 1409. This is a core proceeding pursuant to 28 U.S.C. 157(b)(2).
LEHMAN AND LBI BACKGROUND 1. LBI and Lehman ALI are affiliates and are each
members of the Lehman Brothers group of companies (as used herein, "Lehman"),
Lehman ALI and CMI are parties to a Master Assignment Agreement ("MAA") dated as
of May 29, 1998 pursuant to which, in CMI's view, Lehman ALI made loans to CMI
(the "Lehman ALI Loan") secured by the "Lehman Bonds", as such term is more
particularly defined below. 2. LBI (the main U.S. broker-dealer affiliate of the
Lehman Brothers group) and CMI are parties to a Master Repurchase Agreement
dated as of October 11, 1995, (the "Repo"), pursuant to which, in the view of
Lehman Brothers, LBI acquired the Lehman Bonds. Lehman Brothers asserts that
since the inception of the transaction the books of LBI have reflected the
transaction and LBI has taken a full regulatory "capital charge" with respect to
the transaction. 3. Notwithstanding the different viewpoints of the parties, for
the purposes of this settlement and consent agreement, the parties have agreed
that whether the entity contracting with CMI was LBI or Lehman ALI and whether
the transaction was concluded under the MAA or the Repo shall be deemed
irrelevant. On the other hand, this arrangement shall not prejudice the rights
of LBI, Lehman ALI or CMI in the event this agreement is not consummated. 4. As
used herein, the "Lehman Bonds" consist of the following: Face First
Union-Lehman Brothers Series 1998-C2, Class G $61,857,261 First Union-Lehman
Brothers Series 1998-C2, Class H $10,309,530 First Union-Lehman Brothers Series
1998-C2, Class J $20,619,060 First Union-Lehman Brothers Series 1998-C2, Class K
$30,928,589 First Union-Lehman Brothers Series 1998-C2, Class L $20,619,060
5. For the purposes of this settlement, the parties agree that as of the
Petition Date, CMI is deemed to have had outstanding obligations to LBI of
$67,689,843.60 in principal and $295,694.83 in interest. 6. The Lehman Bonds pay
interest monthly. Since the Petition Date, CMI has received interest payments on
the Class H-L Lehman Bonds and has deposited the payments into a segregated
account (the "Lehman Account"). As of January 31, 2000, interest payments
totaling $6,879,892.80 have been received by CMI and deposited into the Lehman
Account. 7. From the Petition Date through January 31, 2000, LBI has received
$5,773,344.32 in interest payments on account of the Class G Lehman Bond and for
the purpose of this settlement, will be deemed to have applied those monies as
they were received to interest accrued under the Lehman Loan Agreement at the
non-default contract rate and to reduce outstanding principal owing on the
Lehman Loan. 8. As of January 31, 2000, for the purposes of this settlement, the
parties have agreed that CMI is obligated to LBI in the total sum of
$68,340,062.12, including $65,129,120.67 in principal, $3,210,941.45 in interest
which has accrued at the non-default contract rate (the "Existing LBI Debt").
FIRST UNION BACKGROUND 9. FUNB and CMI are parties to a certain Master
Assignment Agreement, dated June 30, 1998 (the "FUNB Agreement"), pursuant to
which FUNB made loans to CMI (collectively, the "FUNB Loan"). 10. As of the
Petition Date, $46,803,716.06 in principal and $43,716.54 in interest was due on
the FUNB Loan. 11. Pursuant to the FUNB Agreement, CMI pledged its interest in
the following securities to secure the FUNB Loan: First Union-Lehman Brothers
Series 1998-C2, Class G $40,384,321 First Union-Lehman Brothers Series 1998-C2,
Class H $ 6,730,711 First Union-Lehman Brothers Series 1998-C2, Class J
$13,461,422 First Union-Lehman Brothers Series 1998-C2, Class K $20,192,134
First Union-Lehman Brothers Series 1998-C2, Class L $13,461,422
The above bonds are hereinafter referred to as the "FUNB Bonds."
12. On August 5, 1999, the Court entered a Stipulation and Agreed Order (i)
authorizing use of cash collateral and (ii) granting other relief to CMI, FUNB
and the Official Committee of Unsecured Creditors of CMI (the "Unsecured
Committee") (the "FUNB Stipulation"). 13. Pursuant to the FUNB Stipulation, FUNB
has applied the monthly interest from the FUNB Bonds to interest accrued under
the FUNB Loan Agreement at the non-default contract rate and to reduce
outstanding principal. 14. As of January 31, 2000, FUNB is owed $44,623,600.42
in principal and $115,337.93 in interest on the FUNB Loan (the "Existing FUNB
Debt"). SALE OF CMBS TO LEHMAN 15. CMI proposes to sell to Lehman ALI the FUNB
Bonds and the Lehman Bonds free and clear of any liens, claims and encumbrances.
As part of this settlement LBI will be deemed to have consented to the unwinding
of the Repo for this purpose. 16. CMI also proposes to sell to Lehman ALI the
following unpledged bonds free and clear of any liens, claims and encumbrances:
First Union-Lehman Brothers Series 1998-C2, Class M (CCCrated) $17,040,241 First
Union-Lehman Brothers Series 1998-C2, Class N (unrated) $34,080,488
The above bonds are hereinafter referred to as the "Unpledged Bonds."
17. The FUNB Bonds, Lehman Bonds and Unpledged Bonds are collectively
referred to as the "Bond Portfolio". 18. Lehman ALI shall purchase the Lehman
Bonds not later than three business days after the date an Order approving this
Stipulation becomes final and non-appealable (a "Final Order") by paying the
Lehman Agreed Proceeds as set forth in Exhibit A to this Motion. 19. Lehman ALI
shall purchase the FUNB Bonds not later than three business days after the date
the Order approving this Stipulation becomes a Final Order by paying the FUNB
Agreed Proceeds as set forth in Exhibit A to the Motion. 20. 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 hereunder if the Lehman Agreed Proceeds are less
than $77.4 million, the FUNB Agreed Proceeds are less than $50.5 million and the
Unpledged Agreed Proceeds, are less than $12.1 million. 21. Lehman ALI shall
purchase the Unpledged Bonds not later than three business days after the date
the Order approving this Stipulation becomes a Final Order by paying the
Unpledged Agreed Proceeds as set forth in Exhibit A to this Motion. 22. The
Lehman Agreed Proceeds shall be paid by Lehman ALI as follows: (i) first, to LBI
in the amount of the Existing Lehman Debt less any additional principal payments
LBI has received since February 1, 2000 on account of the Class G Lehman Bond;
(ii) second, to LBI in the amount of any additional monies due to LBI that have
accrued since February 1, 2000 accruing at the contract (non-default) rate of
interest; (iii) third, to a segregated escrow account maintained at a depository
chosen by CMI in the amount of $200,000, with the liens and security interests,
if any, of Lehman ALI or the ownership interests of LBI attaching in the amount
of its respective claim for fees and costs, including, without limitation, legal
fees and costs that may be owing to Lehman ALI or LBI pursuant to the MAA or the
Repo to attach to all funds in the segregated escrow account (the "Lehman Fees
and Costs Escrow"). The Lehman Fees and Costs Escrow will remain in the
segregated escrow account pending the Bankruptcy Court's ruling on Lehman's fee
application for legal fees and costs incurred under the MAA or the Repo. Lehman
ALI and/or LBI shall have the right to file a fee application at any time after
the entry of the Final Order. Amounts awarded by the Bankruptcy Court to Lehman
ALI and/or LBI shall be paid from the Lehman Fees and Costs Escrow; and (iv)
fourth, to CMI. 23. The FUNB Agreed Proceeds shall be paid by Lehman ALI as
follows: (i) first, to FUNB in the amount of the Existing FUNB Debt less any
additional payments FUNB has received since February 1, 2000 on account of the
FUNB Bonds; (ii) second, to FUNB in the amount of any additional monthly
interest payments that have accrued on the FUNB Loan since February 1, 2000
accruing at the contract (non-default) rate of interest; and (iii) third, to a
segregated escrow account maintained at FUNB in the amount of $240,000, with the
liens and security interests, if any, of FUNB attaching in the amount of FUNB's
claim for fees and costs, including, without limitation, legal fees and costs
that may be owing to FUNB pursuant to the FUNB Agreement to all funds in the
segregated escrow account (the "FUNB Fees and Costs Escrow"). The FUNB Fees and
Costs Escrow will remain in the segregated escrow account pending the Bankruptcy
Court's ruling on FUNB's fee application for legal fees and costs incurred under
the FUNB Agreement. FUNB shall have the right to file a fee application at any
time after the entry of the Final Order. Amounts awarded by the Bankruptcy Court
to FUNB shall be paid from the FUNB Fees and Costs Escrow and/or funds held by
CMI; and (iv) fourth, to CMI. 24. The Unpledged Agreed Proceeds shall be paid to
CMI. 25. CMI and First Union shall take such steps as may be reasonably
necessary and shall provide Lehman ALI with such documents as it may reasonably
request to fully effectuate the transactions contemplated by this Stipulation.
26. To the extent any of CMI, LBI or FUNB 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, First Union and LBI (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. 27.
Until this Stipulation is decided [or withdrawn], none of the moving parties
will take any action with respect to the Bond Portfolio, except as specifically
set forth herein. 28. On and as of the date Lehman ALI purchases the Bond
Portfolio, CMI, First Union, LBI and Lehman ALI (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, and in addition, as to Lehman ALI and LBI, the MAA and the
Repo, respectively. 29. The parties hereto acknowledge that Lehman ALI (or its
designees) is currently conducting due diligence in connection with the Bond
Portfolio and therefore agree that, at any time prior to April 18, 2000, Lehman
ALI 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 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. Moreover,
if an order approving this Stipulation is not entered on or before April 30,
2000, or if an appeal is filed from an order approving the Stipulation, Lehman
ALI and/or CMI may, at any time thereafter and in their respective sole
discretion, elect to terminate this Stipulation by delivering a written notice
of such termination to the other parties to this Stipulation, whereupon this
Stipulation shall terminate and be void and of no further force and effect. 30.
In the event this Stipulation 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 filing of this Stipulation, and CMI, LBI, Lehman ALI
and First Union shall be entitled to proceed in all respects as if this
Stipulation had not been executed and without prejudice in any way as a result
of the negotiation or terms of this Stipulation (none of which shall be
admissible in any subsequent legal proceeding). 31. 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. CMI 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. 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. SO
ORDERED AND APPROVED this ____ day of March, 2000.
------------------------------------
DUNCAN S. KEIR
United States Bankruptcy Judge
Dated: March , 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 and 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
- ------------------------------ ------------------------------------
John F. Horstmann Jeffrey L. Schwartz
Duane, Morris & Heckscher Hahn & Hessen, LLP
1 Liberty Place Empire State Building
Philadelphia, PA 19103 350 Fifth Avenue
New York, New York 10118
Counsel for First Union
National Bank Counsel for Lehman ALI, Inc. and
Lehman Brothers, Inc.
EXHIBIT A
For purposes of the calculation of Agreed Proceeds, the "Published Spread
Report" shall mean the most recently published Lehman Brothers Commercial
Mortgage Backed Securities Index as of the date Lehman purchases the Bonds.
Agreed Proceeds includes Lehman Agreed Proceeds, FUNB Agreed Proceeds and
Unpledged Bonds Agreed Proceeds.
The Lehman Agreed Proceeds shall be $80.0 million: (1)(a) minus $59,000 for
each basis point by which the yield on the 10-year U.S. Constant Maturity
Treasury exceeds 6.379, (b) plus $59,000 for each basis point by which 6.379
exceeds the yield on the 10-year U.S. Constant Maturity Treasury and (2)(a)
minus $37,000 for each basis point by which the "spread" listed for 8.5 plus
year high yield BB CMBS in the Published Spread Report exceeds 573, (b) minus
$22,000 for each basis point by which the "spread" listed for 8.5 plus year high
yield B CMBS in the Published Spread Report exceeds 914, (c) plus $37,000 for
each basis point by which 573 exceeds the "spread" listed for 8.5 plus year high
yield BB CMBS in the Published Spread Report, (d) plus $22,000 for each basis
point by which 914 exceeds the "spread" listed for 8.5 plus year high yield B
CMBS in the Published Spread Report.
The FUNB Agreed Proceeds shall be $52.3 million: (1)(a) minus $38,500 for
each basis point by which the yield on the 10-year U.S. Constant Maturity
Treasury exceeds 6.379, (b) plus $38,500 for each basis point by which 6.379
exceeds the yield on the 10-year U.S. Constant Maturity Treasury; and (2)(a)
minus $24,000 for each basis point by which the "spread" listed for 8.5 plus
year high yield BB CMBS in the Published Spread Report exceeds 573, (b) minus
$14,500 for each basis point by which the "spread" listed for 8.5 plus year high
yield B CMBS in the Published Spread Report exceeds 914, (c) plus $24,000 for
each basis point by which 573 exceeds the "spread" listed for 8.5 plus year high
yield BB CMBS in the Published Spread Report, (d) plus $14,500 for each basis
point by which 914 exceeds the "spread" listed for 8.5 plus year high yield B
CMBS in the Published Spread Report.
The Unpledged Agreed Proceeds shall be $12.1 million.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
(Greenbelt Division)
In re: *
CRIIMI MAE INC., et al., * 98-2-3115-DK
(Chapter 11)
Debtors. * (Jointly Administered)
* * * * * * * * * * * * * * * * * * * * * * * * * * *
STIPULATION AND ORDER
REGARDING PROCEEDS RECEIVED BY THE DEBTOR
FROM THE SALE OF CERTAIN COMMERCIAL
MORTGAGE-BACKED SECURITIES TO LEHMAN ALI, INC.
It is hereby stipulated and agreed by and between CRIIMI MAE Inc. (the
"Debtor" or "CMI"), the Official Committee of Unsecured Creditors of CMI (the
"Unsecured Committee") and the Official Committee of Equity Security Holders of
CMI (the "Equity Committee") as follows: 1. The Debtor agrees that all proceeds
received by it from Lehman ALI Inc. ("Lehman ALI") from Lehman ALI's purchase of
certain Commercial Mortgage-Backed Securities (the "Bond Portfolio") (as that
term is defined in the Stipulation and Consent Order Selling Certain Commercial
Mortgage-Backed Securities to Lehman ALI Inc. Free and Clear of Liens, Claims
and Encumbrances that was filed on March 21, 2000, hereinafter referred to as
the "Lehman ALI Stipulation and Consent Order") shall be deposited by the Debtor
in a segregated, interest-bearing escrow account or other investment of funds
acceptable to the Debtor, the Unsecured Committee and the Equity Committee. Such
proceeds, together with all earnings thereon, are hereinafter referred to as the
"Lehman ALI Net Proceeds." 2. The Lehman ALI Net Proceeds can be used by the
Debtor for purposes of funding its Chapter 11 plan of reorganization. 3. Subject
to the provisions of paragraph 4 hereof, the Debtor agrees to give the Unsecured
Committee and the Equity Committee not less than 30 days prior written notice
through their respective counsel before the Debtor uses any of the Lehman ALI
Net Proceeds in any manner except for Chapter 11 plan purposes as provided in
paragraph 2 above. 4. Except for plan purposes as provided in paragraph 2 above,
the Debtor agrees not to use any of the Lehman ALI Net Proceeds without the
consent of the Unsecured Committee and the Equity Committee for the following
purposes: (i) originating commercial mortgage loans, (ii) purchasing mortgage
loans or mortgage-backed securities, or (iii) payment of dividends. The
foregoing Stipulation is hereby SO ORDERED this ____ day of April, 2000.
--------------------------------------
DUNCAN W. KEIR
United States Bankruptcy Judge
Dated: April 18, 2000
- ------------------------------ ------------------------------
Gregory A. Cross, Esquire Daniel M. Lewis, Esquire
Federal Bar No. 04571-G Michael L. Bernstein, Esquire
Venable, Baetjer and Howard, LLP Arnold & Porter
1800 Mercantile Bank & Trust Bldg. Thurman Arnold Building
2 Hopkins Plaza 555 Twelfth Street, N.W.
Baltimore, Maryland 21201 Washington, D.C. 20004-1202
410-244-7400 202-942-5000
Co-Counsel for CRIIMI MAE Inc. Counsel for the Official
Committee of Unsecured Creditors
- ------------------------------------
Michael St. Patrick Baxter, Esquire
Covington and Burling
1201 Pennsylvania Avenue, N.W.
Washington, D.C. 20044-7566
202-662-6000
Counsel for the Official
Committee of Equity Security
Holders
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 RESOLVING OBJECTION OF
FIRST UNION NATIONAL BANK TO
DEBTORS' AMENDED JOINT DISCLOSURE STATEMENT
It is hereby stipulated and agreed by and among CRIIMI MAE Inc., CRIIMI MAE
Management, Inc. and CRIIMI MAE Holdings II, L.P. (collectively, the "Debtors")
and First Union National Bank ("FUNB"), by their respective undersigned counsel,
as follows: 1. The Debtors have agreed to amend their proposed Disclosure
Statement with respect to their Second Amended Joint Plan of Reorganization, as
the same may be amended, to include in their Disclosure Statement the paragraph
attached hereto as Exhibit 1.
2. Based upon the foregoing, FUNB agrees that its Objection to Debtors'
Amended Joint Disclosure Statement [Proposed] is resolved. Dated: April ___,
2000.
- ------------------------------------ ---------------------------------
Richard L. Wasserman Stanley J. Samorajczyk
Federal Bar No. 02784 Akin, Gump, Strauss, Hauer & Feld,
Venable, Baetjer and Howard, LLP L.L.P.
1800 Mercantile Bank and Trust Bldg. 1333 New Hampshire Avenue, N.W.
2 Hopkins Plaza Washington, D.C. 20036
Baltimore, Maryland 21201 (202) 887-4000
(410) 244-7400
Co-Counsel to CRIIMI MAE Inc. and
Co-Counsel to CRIIMI MAE Inc. and CRIIMI MAE Holdings II, L.P.
CRIIMI MAE Holdings II, L.P.
- ------------------------------------ ---------------------------------
John F. Horstmann Morton A. Faller
Duane, Morris & Heckscher, LLP Shulman, Rogers, Gandal, Pordy
One Liberty Place & Ecker, P.A.
Philadelphia, Pennsylvania 19103-7396 11921 Rockville Pike, Third Floor
(215) 974-1000 Rockville, Maryland 20852-2753
(301) 231-0928
Co-Counsel to First Union National Bank
Counsel to CRIIMI MAE Management,
Inc.
- ------------------------------------
Richard M. Kremen
Piper Marbury Rudnick & Wolfe LLP
6225 Smith Avenue
Baltimore, Maryland 21209-3600
(410) 580-3000
Co-Counsel to First Union National Bank
CERTIFICATE OF SERVICE
I HEREBY CERTIFY that a copy of the foregoing Stipulation Resolving
Objection of First Union National Bank to Debtors' Amended Joint Disclosure
Statement was mailed, first class, postage prepaid, this ____ day of April,
2000, to: Michael St. Patrick Baxter, Esquire Covington & Burling 1201
Pennsylvania Avenue, N.W. Washington, D.C. 20044
Daniel M. Lewis, Esquire
Arnold & Porter
555 Twelfth Street, N.W.
Washington, D.C. 20004-1206
Paul M. Nussbaum, Esquire
Whiteford, Taylor & Preston LLP
Seven St. Paul Street
Suite 1400
Batlimore, Maryland 21202
Clifford J. White, III, Esquire
Assistant United States Trustee
Office of the United States Trustee
6305 Ivy Lane, Suite 600
Greenbelt, Maryland 20770
---------------------------------
Carrie B. Weinfeld
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE QUARTERLY REPORT
ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q.
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<MULTIPLIER> 1,000
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 109,801
<SECURITIES> 1,543,690
<RECEIVABLES> 124,058
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<COMMON> 624
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<TOTAL-LIABILITY-AND-EQUITY> 2,281,109
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