<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
------------------
For the quarter ended June 30, 2000 Commission file number 1-10360
CRIIMI MAE INC.
(Exact name of registrant as specified in its charter)
Maryland 52-1622022
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
11200 Rockville Pike
Rockville, Maryland 20852
(301) 816-2300
(Address, including zip code, and telephone number,
Including area code, of registrant's principal executive offices)
------------------
Securities Registered Pursuant to Section 12(b) of the Act:
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
Preferred Stock New York Stock Exchange, Inc.
Securities Registered Pursuant to Section 12(g) of the Act:
None
------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding as of August 10, 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 June 30, 2000
(unaudited) and December 31, 1999............................................... 3
Consolidated Statements of Income and Comprehensive Income - for the three
and six months ended June 30, 2000 and 1999 (unaudited)......................... 4
Consolidated Statements of Changes in Shareholders' Equity - for the six
months ended June 30, 2000 (unaudited).......................................... 5
Consolidated Statements of Cash Flows - for the six months ended
June 30, 2000 and 1999 (unaudited).............................................. 6
Notes to Consolidated Financial Statements (unaudited)........................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................. 65
Item 2A. Quantitative and Qualitative Disclosures about Market Risk....................... 79
PART II. Other Information
Item 1. Legal Proceedings................................................................ 80
Item 2. Changes in Securities............................................................ 80
Item 3. Defaults Upon Senior Securities.................................................. 80
Item 4. Submission of Matters to a Vote of
Security Holders................................................................ 80
Item 5. Other Information................................................................ 80
Item 6. Exhibits and Reports on Form 8-K................................................. 80
Signature ................................................................................. 82
</TABLE>
2
<PAGE>
PART I. Item 1. FINANCIAL STATEMENTS
CRIIMI MAE INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------------- ------------
(Unaudited)
<S> <C> <C>
Assets:
Mortgage assets:
Subordinated CMBS, at fair value $ 1,018,145,199 $ 1,179,270,306
Insured mortgage securities, at fair value 381,201,135 394,857,239
Investment in originated loans, at amortized cost 464,478,082 470,204,780
Equity investments 33,785,169 34,929,523
Receivables 44,632,445 69,483,337
Other assets 46,227,668 53,276,333
Short term investments, at fair value 2,408,878 92,793
Restricted cash and cash equivalents 73,625,223 38,036,624
Other cash and cash equivalents 69,042,538 53,510,311
--------------- ---------------
Total assets $ 2,133,546,337 $ 2,293,661,246
=============== ===============
Liabilities:
Liabilities not subject to Chapter 11 proceedings:
Securitized mortgage obligations:
--------------------------------
Collateralized bond obligations-CMBS 279,348,933 $ 278,165,968
Collateralized mortgage obligations-
insured mortgage securities 369,023,933 378,711,602
Collateralized mortgage obligations-
originated loans 395,261,869 399,768,513
Payables and accrued expenses 32,929,586 29,886,888
Liabilities subject to Chapter 11 proceedings:
Secured:
-------
Variable-rate secured borrowings-CMBS 566,429,031 732,904,775
Other financing facilities 3,050,000 3,050,000
Payables and accrued expenses 2,480,168 26,455,952
Unsecured:
---------
Senior unsecured notes 100,000,000 100,000,000
Other financing facilities 89,749,522 89,749,522
Payables and accrued expenses 45,234,652 35,619,440
--------------- -------------
Total liabilities 1,883,507,694 2,074,312,660
--------------- -------------
Shareholders' equity:
Convertible preferred stock, $0.01 par; 25,000,000
shares authorized; 2,383,336 and 2,647,124 shares 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 (184,516,951) (207,421,788)
Accumulated deficit (140,656,820) (148,434,915)
Additional paid-in capital 574,565,049 574,579,272
--------------- -------------
Total shareholders' equity 250,038,643 219,348,586
--------------- -------------
Total liabilities and shareholders' equity $ 2,133,546,337 $ 2,293,661,246
=============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
CRIIMI MAE INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
AND COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended June 30, For the six months ended June 30,
2000 1999 2000 1999
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Interest income:
Subordinated CMBS $35,392,863 $38,418,611 $ 74,562,634 $76,903,756
Insured mortgage securities 7,670,728 8,489,030 15,467,929 17,389,338
Originated loans 8,210,791 8,647,815 16,698,417 17,488,642
----------- ----------- ------------ ------------
Total interest income 51,274,382 55,555,456 106,728,980 111,781,736
----------- ----------- ------------ ------------
Interest and related expenses:
Fixed-rate collateralized bond 6,192,363 5,948,766 12,678,575 9,449,286
obligations-CMBS
Fixed-rate collateralized mortgage
obligations- insured securities 9,308,798 8,304,889 16,355,730 16,709,161
Fixed-rate collateralized mortgage
obligations- originated loans 6,783,741 6,687,220 13,541,862 13,250,128
Fixed-rate senior unsecured notes 2,281,251 2,281,251 4,562,502 4,562,502
Variable-rate secured borrowings-CMBS 11,294,515 12,397,081 24,015,610 26,367,454
Other financing facilities 2,031,259 1,689,082 3,952,600 3,398,688
----------- ----------- ------------ ------------
Total interest expense 37,891,927 37,308,289 75,106,879 73,737,219
----------- ----------- ------------ ------------
Net interest margin 13,382,455 18,247,167 31,622,101 38,044,517
----------- ----------- ------------ ------------
Equity in (losses from) investments (26,270) 121,016 (38,186) (1,485,616)
Other income 981,861 787,508 1,318,546 1,423,540
Net gains on mortgage security dispositions 225,835 778,608 241,312 1,585,812
Gain on originated loan dispositions 37,885 58,810 37,885 160,210
General and administrative expenses (2,665,231) (3,617,040) (5,803,988) (6,251,154)
Amortization of assets acquired in the Merger (719,394) (719,394) (1,438,788) (1,438,788)
Unrealized loss on warehouse obligation - (10,871,970) - (6,925,495)
Reorganization items:
Other (2,723,109) (5,438,943) (6,971,564) (10,946,781)
Impairment on CMBS (1,809,062) - (5,252,821) -
Impairment on REO (924,283) - (924,283) -
Loss on Sale of CMBS (357,188) - (1,711,214) -
----------- ----------- ------------ ------------
(7,978,956) (18,901,405) (20,543,101) (23,878,272)
----------- ----------- ------------ ------------
Net income (loss) before dividends accrued
on preferred shares 5,403,499 (654,238) 11,079,000 14,166,245
Dividends accrued on preferred shares (1,661,015) (1,378,961) (3,300,905) (2,782,495)
----------- ----------- ------------ ------------
Net income (loss) available to common
shareholders $ 3,742,484 ($2,033,199) $ 7,778,095 $11,383,750
----------- ----------- ------------ ------------
Net income (loss) available to common
shareholders per common share:
Basic $ 0.06 ($0.04) $ 0.13 $ 0.21
=========== =========== ============ ============
Diluted $ 0.05 ($0.04) $ 0.11 $ 0.20
=========== =========== ============ ============
Shares used in computing basic
earnings per share 62,353,170 53,553,161 61,934,051 53,282,424
Comprehensive Income:
Net income (loss) before dividends
accrued on preferred shares $ 5,403,499 ($654,238) $ 11,079,000 $14,166,245
Other comprehensive Income (loss) (383,304) (29,613,575) 22,904,837 (38,285,985)
----------- ----------- ------------ ------------
Comprehensive Income (loss) $ 5,020,195 ($30,267,813) $ 33,983,837 ($24,119,740)
=========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
CRIIMI MAE INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the six months ended June 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Preferred Common Other Total
Stock Par Stock Par Comprehensive Additional Paid- Accumulated Shareholders'
Value Value Income in Capital Deficit Equity
---------- --------- ------------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 $ 26,471 $ 599,546 ($207,421,788) $ 574,579,272 ($148,434,915) $219,348,586
Net income - - - - 11,079,000 11,079,000
Dividends accrued on preferred
shares - - - - (3,300,905) (3,300,905)
Conversion of preferred shares
into common shares (2,638) 23,966 - (21,328) - -
Common shares issued - 20 - 7,105 - 7,125
Adjustment to unrealized losses
on investments - - 22,904,837 - - 22,904,837
---------- --------- ------------- --------------- ------------- -------------
Balance at June 30, 2000 $ 23,833 $ 623,532 $(184,516,951) $ 574,565,049 $(140,656,820) $250,038,643
========== ========= ============= =============== ============= =============
</TABLE>
The accompanying notes are an integral
part of these consolidated financial
statements.
5
<PAGE>
CRIIMI MAE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended June 30,
2000 1999
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 11,079,000 $ 14,166,245
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of discount and deferred financing
costs on debt 5,749,610 3,960,987
Amortization of assets acquired in the Merger 1,438,788 1,438,788
Depreciation and other amortization 967,515 739,313
Discount amortization on mortgage assets (6,820,239) (307,185)
Net gains on mortgage security dispositions (37,885) (1,585,812)
Gain on originated loan dispositions (241,312) (160,210)
Equity in losses from investments 38,186 1,485,616
Unrealized loss on warehouse obligation - 6,925,154
Change in reorganization items accrual 1,853,557 10,305,282
Impairment on CMBS 5,252,821 -
Impairment on REO 924,283 -
Loss on sale of CMBS 1,711,214 -
Changes in assets and liabilities:
(Increase) decrease in restricted cash and cash equivalents (35,588,599) 2,353,560
Increase in receivables and other assets (6,077,888) (25,336,567)
Increase in payables and accrued expenses 16,937,560 8,310,998
------------- ------------
Net cash (used in) provided by operating activities (2,813,389) 22,296,169
------------- ------------
Cash flows from investing activities:
Proceeds from mortgage securities dispositions 9,826,537 58,428,715
Proceeds from the sale of CMBS, net 35,693,577 -
Distributions received from AIM Investments 927,936 3,682,444
Receipt of principal payments 6,490,474 6,497,298
Purchase of short term investments, net (2,304,278) -
Proceeds from originated loan dispositions 927,102 7,747,205
------------- ------------
Net cash provided by investing activities 51,561,348 76,355,662
------------- ------------
Cash flows from financing activities:
Proceeds from debt issuances - 158,509,207
Principal payments on debt obligations, net (33,215,732) (211,550,173)
------------- ------------
Net cash used in financing activities (33,215,732) (53,040,966)
------------- ------------
Net increase in other cash and cash equivalents 15,532,227 45,610,865
Other cash and cash equivalents, beginning of period 53,510,311 21,826,512
------------- ------------
Other cash and cash equivalents, end of period $ 69,042,538 $ 67,437,377
============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
General
CRIIMI MAE Inc. (together with its consolidated subsidiaries, unless
the context otherwise indicates, "CRIIMI MAE" or the "Company") is a fully
integrated commercial mortgage company structured as a self-administered real
estate investment trust ("REIT"). Prior to the filing by CRIIMI MAE Inc.
(unconsolidated) and two of its operating subsidiaries, CRIIMI MAE Management,
Inc. ("CM Management"), and CRIIMI MAE Holdings II, L.P. ("Holdings II" and,
together with CRIIMI MAE and CM Management, the "Debtors"), for relief under
Chapter 11 of the U.S. Bankruptcy Code on October 5, 1998 (the "Petition Date")
as described below, CRIIMI MAE's primary activities included (i) acquiring non-
investment grade securities (rated below BBB- or unrated) backed by pools of
commercial mortgage loans on multifamily, retail and other commercial real
estate ("Subordinated CMBS"), (ii) originating and underwriting commercial
mortgage loans, (iii) securitizing pools of commercial mortgage loans and
resecuritizing pools of Subordinated CMBS, and (iv) through the Company's
servicing affiliate, CRIIMI MAE Services Limited Partnership ("CMSLP"),
performing servicing functions with respect to the mortgage loans underlying the
Company's Subordinated CMBS.
Since filing for Chapter 11 protection, CRIIMI MAE has suspended its
Subordinated CMBS acquisition, origination and securitization programs. The
Company continues to hold a substantial portfolio of Subordinated CMBS,
originated loans and mortgage securities and, through CMSLP, acts as a servicer
of mortgage loans.
The Company's business is subject to a number of risks and uncertainties
including, but not limited to: (1) the effect of the Chapter 11 filing and
substantial doubt as to the Company's ability to continue as a going concern;
(2) risks related to the Recapitalization Financing (defined below) under the
Company's Third Amended Joint Plan of Reorganization; (3) risk of loss of REIT
status; (4) taxable mortgage pool risk; (5) risk of phantom income resulting in
additional tax liability; (6) the effect of rate compression on the market price
of the Company's stock; (7) substantial leverage; (8) inherent risks in owning
Subordinated CMBS; (9) the limited protection provided by hedging transactions;
(10) risk of foreclosure on CMBS assets; (11) the limited liquidity of the CMBS
market; (12) pending litigation; (13) risk of becoming subject to the
requirements of the Investment Company Act of 1940; (14) possible effects of an
economic recession on losses and defaults; (15) borrowing risks; (16) the effect
of the yield curve on income; and (17) risks associated with the trader election
including those referenced in "2000 Taxable Income (Loss)/ Taxable Distribution
Requirements" below.
In addition to the two operating subsidiaries which filed for Chapter 11
protection with the Company, the Company owns 100% of multiple financing and
operating subsidiaries as well as various interests in other entities (including
CMSLP) which either own or service mortgage and mortgage-related assets (the
"Non-Debtor Affiliates"). See Note 3. None of the Non-Debtor Affiliates has
filed for bankruptcy protection.
The Company was incorporated in Delaware in 1989 under the name CRI Insured
Mortgage Association, Inc. ("CRI Insured"). In July 1993, CRI Insured changed
its name to CRIIMI MAE Inc. and reincorporated in Maryland. In June 1995,
certain mortgage businesses affiliated with C.R.I., Inc. were merged into CRIIMI
MAE (the "Merger"). The Company is not a government sponsored entity or in any
way affiliated with the United States government or any United States government
agency.
Chapter 11 Filing
Prior to the Petition Date, CRIIMI MAE financed a substantial portion of
its Subordinated CMBS acquisitions with short-term, variable-rate financing
facilities secured by the Company's CMBS. The agreements governing these
financing arrangements typically required the Company to maintain collateral
with a market value not less than a specified percentage of the outstanding
indebtedness ("loan-to-value ratio"). The agreements further provided that the
creditors could require the Company to provide cash or additional collateral if
the market value of the existing collateral fell below this minimum amount.
7
<PAGE>
As a result of the turmoil in the capital markets commencing in late summer
of 1998, the spreads between CMBS yields and yields on Treasury securities with
comparable maturities began to widen substantially and rapidly. Due to this
widening of CMBS spreads, the market value of the CMBS securing the Company's
short-term, variable-rate financing facilities declined. CRIIMI MAE's short-
term secured creditors perceived that the value of the CMBS securing their
facilities with the Company had fallen, creating a value deficiency as measured
by the loan-to-value ratio described above and, consequently, made demand upon
the Company to provide cash or additional collateral with sufficient value to
cure the perceived value deficiency. In August and September of 1998, the
Company received and met collateral calls from its secured creditors. At the
same time, CRIIMI MAE was in negotiations with various third parties in an
effort to obtain additional debt and equity financing that would provide the
Company with additional liquidity.
On Friday afternoon, October 2, 1998, the Company was in the closing
negotiations of a refinancing with one of its unsecured creditors that would
have provided the Company with additional borrowings when it received a
significant collateral call from Merrill Lynch Mortgage Capital, Inc. ("Merrill
Lynch"). The basis for this collateral call, in the Company's view, was
unreasonable. After giving consideration to, among other things, this
collateral call and the Company's concern that its failure to satisfy this
collateral call would cause the Company to be in default under a substantial
portion of its financing arrangements, the Company reluctantly concluded on
Sunday, October 4, 1998 that it was in the best interests of creditors, equity
holders and other parties in interest to seek Chapter 11 protection.
On October 5, 1998, the Debtors filed for relief under Chapter 11 of the
U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of
Maryland, Southern Division, in Greenbelt, Maryland (the "Bankruptcy Court").
These related cases are being jointly administered under the caption "In re
CRIIMI MAE Inc., et al.," Ch. 11 Case No. 98-2-3115-DK.
While in Chapter 11, CRIIMI MAE has streamlined its operations. The
Company has significantly reduced the number of employees in its origination and
underwriting operations. In connection with these reductions, the Company
closed its five regional loan origination offices.
Although the Company has significantly reduced its work force, the Company
recognizes that retention of its executives and other remaining employees is
essential to the efficient operation of its business and to its reorganization
efforts. Accordingly, the Company has, with Bankruptcy Court approval, adopted
an employee retention plan.
The Company's independent public accountants have issued a report on the
Company's 1999 financial statements expressing substantial doubt about the
Company's ability to continue as a going concern. In addition, the Company has
been advised by its independent public accountants that, if the Company's plan
of reorganization is not approved by the Bankruptcy Court prior to the
completion of their audit of the Company's financial statements for the year
ended December 31, 2000, the auditors' report on those financial statements will
continue to be modified to express substantial doubt about the Company's ability
to continue as a going concern.
CRIIMI MAE is working diligently toward emerging from bankruptcy as a
successfully reorganized company. In furtherance of such effort, the Debtors
filed their Third Amended Joint Plan of Reorganization (as amended and
supplemented by praecipes filed with the Bankruptcy Court on July 13, 14 and 21,
2000, the "Plan") and proposed Second Amended Joint Disclosure Statement (as
amended and supplemented by praecipes filed with the Bankruptcy Court on July
13 and 21, 2000, the "Proposed Disclosure Statement") on April 25, 2000.
The Plan was filed with the support of the Official Committee of Equity Security
Holders of CRIIMI MAE (the "CMI Equity Committee"), which is a co-proponent of
the Plan. Subject to the completion of mutually acceptable documentation,
evidencing the secured financing, to be provided by the unsecured creditors (the
"Unsecured Creditor Debt Documentation"), the Official Committee of Unsecured
Creditors of CRIIMI MAE (the "Unsecured Creditors' Committee") has agreed to
support confirmation of the Plan. The Company, the CMI Equity Committee and the
Unsecured Creditors' Committee are now all proceeding toward confirmation of the
Plan. Under the Plan, Merrill Lynch and German American Capital Corporation
("GACC"), two of the Company's largest secured creditors, would provide a
significant portion of the recapitalization financing contemplated by the Plan.
The Bankruptcy Court held a hearing on April 25, 2000 on approval of the
Proposed Disclosure Statement. During that hearing, the Bankruptcy Court
requested the filing of additional legal briefs by May 9, 2000 on two issues
raised at the hearing. The issues raised related to an objection to the
Company's Proposed Disclosure
8
<PAGE>
Statement filed by Salomon Smith Barney Inc./Citicorp Securities, Inc. and
Citicorp Real Estate, Inc. (together "Citigroup"). On July 12, 2000, the
Bankruptcy Court entered an order overruling the objections raised by Citigroup
as set forth in the Memorandum Opinion and Order filed and entered on that date
by the Bankruptcy Court. On July 21, 2000, the Company and Citigroup reached a
settlement regarding the treatment of Citigroup's claims under the Plan. The
settlement resolved Citigroup's objections to the Proposed Disclosure Statement.
The Citigroup objections were the only objections to the Proposed Disclosure
Statement pending before the Bankruptcy Court. See Note 16 for a summary of
certain material terms of the settlement between the Company and Citigroup.
The Bankruptcy Court has scheduled a hearing on August 23, 2000 with
respect to the proposed ballots submitted to the Bankruptcy Court to be sent to
members of all classes of impaired creditors and equity security holders in
connection with the Plan. Once the Proposed Disclosure Statement has been
approved by the Bankruptcy Court, the Plan will be sent, together with the
approved Disclosure Statement, to members of all classes of impaired creditors
and all equity security holders for acceptance or rejection.
The Unsecured Creditors' Committee filed its own plan of reorganization and
proposed disclosure statement, and various amendments to each of the foregoing,
with the Bankruptcy Court which, in general, provided for the liquidation of the
assets of the Debtors. However, as a result of successful negotiations between
the Debtors and the Unsecured Creditors' Committee, the Unsecured Creditors'
Committee has agreed to the treatment of unsecured claims under the Plan,
subject to completion of mutually acceptable Unsecured Creditor Debt
Documentation, and has asked the Bankruptcy Court to defer consideration of its
plan of reorganization and proposed disclosure statement.
The Plan of Reorganization
The Plan contemplates the payment in full of all of the allowed claims of
the Debtors primarily through recapitalization financing (including proceeds
from certain asset sales) aggregating at least $857 million (the
"Recapitalization Financing"). Approximately $275 million of the
Recapitalization Financing would be provided by Merrill Lynch and GACC through a
secured financing facility, and approximately $155 million would be provided
through new secured notes issued to the Company's major unsecured creditors
(collectively , the "New Debt"). The sale of select CMBS (the "CMBS Sale") and
the Company's interest in CMO-IV (as defined in Note 6) (the "CMO-IV Sale"), the
proceeds of which are expected to be used to pay down existing debt, is
contemplated to provide the balance of the Recapitalization Financing. The
Company may seek new equity capital from one or more investors to partially fund
the Plan, although new equity is not required to fund the Plan.
In connection with the Plan, substantially all cash flows are expected to
be used to satisfy principal, interest and fee obligations under the New Debt.
The $275 million secured financing would provide for (i) interest at a rate of
one month LIBOR plus 3.25%, (ii) principal prepayment/amortization obligations,
(iii) extension fees after two years and (iv) maturity on the fourth anniversary
of the effective date of the Plan. The approximate $155 million secured
financing would be effected through the issuance of two series of secured notes
under two separate indentures. The first series of secured notes, representing
an aggregate principal amount of approximately $105 million, would provide for
(i) interest at a rate of 11.75% per annum, (ii) principal
prepayment/amortization obligations, (iii) extension fees after four years and
(iv) maturity on the fifth anniversary of the effective date of the Plan. The
second series of secured notes, representing an aggregate principal amount of
approximately $50 million, would provide for (i) interest at a rate of 13% per
annum with additional interest at the rate of 7% per annum accreting over the
debt term, (ii) extension fees after four years and (iii) maturity on the sixth
anniversary of the effective date of the Plan. The New Debt described above
will be secured by substantially all of the assets of the Company. It is
contemplated that there will be restrictive covenants, including financial
covenants, in connection with the New Debt.
The Plan also contemplates that the holders of the Company's common stock
will retain their stock. Under the Plan, no cash dividends, other than a maximum
of $4.1 million to preferred shareholders, can be paid to existing shareholders.
Subject to the respective acceptances of the Plan by the holders of the
Company's Series B Cumulative Convertible Preferred Stock (the "Series B
Preferred Stock") and the Series F Redeemable Cumulative Dividend Preferred
Stock (the "Series F Preferred Stock" or "junior preferred stock"), the Plan
contemplates an amendment to their respective relative rights and preferences to
permit the payment of accrued and unpaid dividends in cash or common stock (or a
combination thereof), at the Company's election. The Plan further contemplates
9
<PAGE>
amendments to the relative rights and preferences of the Series E Cumulative
Convertible Preferred Stock (the "Series E Preferred Stock"), relating
principally to dividend and conversion rights.
Reference is made to the Plan and Proposed Disclosure Statement, filed with
the Bankruptcy Court (and with the Securities and Exchange Commission (the
"SEC") under cover of two Current Reports on Form 8-K filed on May 18, 2000 and
August 11, 2000, respectively), for a more detailed description of the financing
contemplated to be obtained under the Plan from the respective existing
creditors including, without limitation, payment terms, restrictive covenants
and collateral, and a more detailed description of the treatment of preferred
stockholders. Although the Company has commitments for substantially all of the
New Debt and has sold certain of the CMBS contemplated to be sold in connection
with the CMBS Sale, there can be no assurance that the Company will obtain the
Recapitalization Financing, that the Plan will be confirmed by the Bankruptcy
Court, or that the Plan, if confirmed, will be consummated. The Plan also
contemplates certain amendments to the Company's articles of incorporation,
including an increase in authorized shares from 120 million to 375 million
(consisting of 300 million of common shares and 75 million of preferred shares).
Effect of Chapter 11 Filing on REIT Status and Other Tax Matters
REIT Status. CRIIMI MAE is required to meet income, asset, ownership and
distribution tests to maintain its REIT status. The Company believes that it
has satisfied the REIT requirements for all years through, and including, 1998.
However, due to the uncertainty resulting from its Chapter 11 filing, there can
be no assurance that CRIIMI MAE will retain its REIT status for 1999 or
subsequent years. If the Company fails to retain its REIT status for any
taxable year, it will be taxed as a regular domestic corporation subject to
federal and state income tax in the year of disqualification and for at least
the four subsequent years. Depending on the amount of any such federal and
state income tax, the Company may have insufficient funds to pay such tax and
also may be unable to comply with its obligations under the New Debt.
2000 Taxable Income (Loss)/Taxable Distribution Requirements
Internal Revenue Service Revenue procedure 99-17 provides securities and
commodities traders with the ability to elect mark-to-market treatment for the
2000 tax year and for all future tax years, unless the election is revoked with
the consent of the Internal Revenue Service. On March 15, 2000, CRIIMI MAE
elected for tax purposes to be classified as a trader in securities effective
January 1, 2000. Such trading activity is, or is expected to be, in certain
types of mortgage-backed securities, including Subordinated CMBS (the "Trading
Assets").
As a result of its trader election, CRIIMI MAE recognized a mark-to market
tax loss on its Trading Assets on January 1, 2000 of approximately $478 million
(the "January 2000 Loss"). Such loss is expected to be recognized evenly over
four years beginning with the year 2000. The Company expects such loss to be
ordinary.
Additionally, as a result of its trader election, the Company will be
required to mark-to-market its Trading Assets at the end of each tax year,
including the year 2000. Any increase or decrease in the value of the Trading
Assets as a result of the year-end mark-to-market requirement will generally
result in either a tax gain (if an increase in value) or a tax loss (if a
decrease in value). Such tax gain or loss, as well as any realized gains or
losses from the disposition of Trading Assets during each year, are also
expected to be ordinary gains or losses.
Since gains and losses associated with trading activities are expected to
be ordinary, any gains will generally increase taxable income and any losses
will generally decrease taxable income. Since the Company is a REIT which is
generally required to distribute 95% of its taxable income to shareholders, any
increases in taxable income from trading activities will generally result in an
increase in REIT distribution requirements and any decreases in taxable income
from trading activities will generally result in a decrease in REIT distribution
requirements (or, if the taxable income is reduced to zero, eliminate REIT
distribution requirements).
Gains and losses from the mark-to-market requirement (including the January
2000 Loss) are unrealized. This creates a mismatch between REIT distribution
requirements and cash flow since the REIT distribution requirements will
generally fluctuate due to the mark-to-market adjustments, but the cash flow
from the Company's Trading Assets will not fluctuate as a result of the mark-to-
market adjustments.
Any accumulated and unused net operating losses, subject to certain
limitations, generally may be carried forward for up to 20 years to offset
taxable income until fully utilized. Accumulated and unused net operating
losses can not be carried back. If a security is marked down because of an
increase in interest rates, rather than from
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credit losses, such mark-to-market losses may be recovered over time. Any
recovered mark-to-market losses will generally be recognized as taxable income,
although there is expected to be no corresponding increase in cash flow.
There is no assurance that the Company's position with respect to its
election as a trader in securities will not be challenged by the IRS, and, if
challenged, will be defended successfully by the Company. As such, there is a
risk that the January 2000 Loss will be limited or disallowed, resulting in
higher tax basis income and a corresponding increase in REIT distribution
requirements.
As a REIT, CRIIMI MAE is generally required to distribute at least 95% of
its "REIT taxable income" to its shareholders each year. If CRIIMI MAE is
required to make taxable income distributions to its shareholders to satisfy
required REIT distributions, all or a substantial portion of these distributions
are expected to be in the form of non-cash dividends. There is no assurance
that such non-cash dividends would satisfy the REIT distribution requirements.
It is possible that the Company could experience an "ownership change"
within the meaning of Section 382 of the Tax Code. Consequently, its use of net
operating losses generated before the ownership change to reduce taxable income
after the ownership change may be subject to limitation under Section 382.
Generally, the use of net operating losses in any year is limited to the value
of the Company's stock on the date of the ownership change multiplied by the
long-term tax exempt rate (published by the IRS) with respect to that date.
See Note 8 for a discussion of differences between financial statement net
income (loss) and taxable income (loss).
The Company's 1999 Taxable Income. As a REIT, CRIIMI MAE is generally
required to distribute at least 95% of its "REIT taxable income" to its
shareholders each tax year. For purposes of this requirement, REIT taxable
income excludes certain excess noncash income such as original issue discount
("OID"). In determining its federal income tax liability, CRIIMI MAE, as a
result of its REIT status, is entitled to deduct from its taxable income
dividends paid to its shareholders. Accordingly, to the extent the Company
distributes its net income to shareholders, it effectively reduces taxable
income, on a dollar-for-dollar basis, and eliminates the "double taxation" that
normally occurs when a corporation earns income and distributes that income to
shareholders in the form of dividends. The Company, however, still must pay
corporate level tax on any 1999 taxable income not distributed to shareholders.
Unlike the 95% distribution requirement, the calculation of the Company's
federal income tax liability does not exclude excess noncash income such as OID.
In determining the Company's taxable income for 1999, distributions
declared by the Company on or before September 15, 2000 and actually paid by the
Company on or before December 31, 2000 will be considered as dividends paid for
the year ended December 31, 1999. The Company anticipates distributing all of
its 1999 taxable income in the form of non-cash taxable dividends. There can be
no assurance that the Company will be able to make such distributions with
respect to its 1999 taxable income. While the Company has not finalized its tax
return for 1999, should CRIIMI MAE terminate or fail to maintain its REIT status
during the year ended December 31, 1999, taxable income for the year ended
December 31, 1999 is estimated to be $37.5 million, which would generate a tax
liability of up to $15.0 million.
The Company's 1998 Taxable Income. On September 14, 1999, the Company
declared a dividend payable to common shareholders of approximately 1.61 million
shares of a new series of junior preferred stock with a face value of $10 per
share. The purpose of the dividend was to distribute approximately $15.7 million
in undistributed 1998 taxable income. To the extent that it is determined that
such amount was not distributed, the Company would bear a corporate level income
tax on the undistributed amount. There can be no assurance that all of the
Company's tax liability was eliminated by payment of such junior preferred stock
dividend. The Company paid the junior preferred stock dividend on November 5,
1999. The junior preferred stock dividend was taxable to common shareholder
recipients. Junior preferred shareholders were permitted to convert their shares
of junior preferred stock into common shares during two separate conversion
periods. During these conversion periods, an aggregate 1,020,241 shares of
junior preferred stock were converted into 8,798,009 shares of common stock.
Taxable Mortgage Pool Risks. An entity that constitutes a "taxable
mortgage pool" as defined in the Tax Code ("TMP") is treated as a separate
corporate level taxpayer for federal income tax purposes. In general, for an
entity to be treated as a TMP (i) substantially all of the assets must consist
of debt obligations and a majority of those debt obligations must consist of
mortgages; (ii) the entity must have more than one class of debt securities
outstanding with separate maturities and (iii) the payments on the debt
securities must bear a relationship to the
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payments received from the mortgages. The Company currently owns all of the
equity interests in three trusts that constitute TMPs (CBO-1, CBO-2 and CMO-IV,
collectively the "Trusts"). See Notes 5 and 6 for descriptions of CBO-1, CBO-2
and CMO-IV. See also Note 6 regarding the anticipated CMO-IV sale as part of the
Company's Plan. The statutory provisions and regulations governing the tax
treatment of TMPs (the "TMP Rules") provide an exemption for TMPs that
constitute "qualified REIT subsidiaries" (that is, entities whose equity
interests are wholly owned by a REIT). As a result of this exemption and the
fact that the Company owns all of the equity interests in each Trust, the Trusts
currently are not required to pay a separate corporate level tax on income they
derive from their underlying mortgage assets.
The Company also owns certain securities structured as bonds (the "Bonds")
issued by each of the Trusts. Certain of the Bonds owned by the Company serve as
collateral (the "Pledged Bonds") for short-term, variable-rate borrowings used
by the Company to finance their initial purchase. If the creditors holding the
Pledged Bonds were to seize or sell this collateral and the Pledged Bonds were
deemed to constitute equity interests (rather than debt) in the Trusts, then the
Trusts would no longer qualify for the exemption under the TMP Rules provided
for qualified REIT subsidiaries. The Trusts would then be required to pay a
corporate level federal income tax. As a result, available funds from the
underlying mortgage assets that would ordinarily be used by the Trusts to make
payments on certain securities issued by the Trust (including the equity
interests and the Pledged Bonds) would instead be applied to tax payments.
Since the equity interests and Bonds owned by the Company are the most
subordinated securities and, therefore, would absorb payment shortfalls first,
the loss of the exemption under the TMP rules could have a material adverse
effect on their value and the payments received thereon.
In addition to causing the loss of the exemption under the TMP Rules, a
seizure or sale of the Pledged Bonds and a characterization of them as equity
for tax purposes could also jeopardize the Company's REIT status if the value of
the remaining ownership interests in any Trust held by the Company (i) exceeded
5% of the total value of the Company's assets or (ii) constituted more than 10%
of the Trust's voting interests. Although it is possible that the election by
the TMPs to be treated as taxable REIT subsidiaries could prevent the loss of
CRIIMI MAE's REIT status, there can be no assurance that a valid election could
be made given the timing of a seizure or sale of the Pledged Bonds.
2. INVESTMENT COMPANY ACT OF 1940
Under the Investment Company Act of 1940, as amended (the "Investment
Company Act"), an investment company is required to register with the SEC and is
subject to extensive restrictive and potentially adverse regulation relating to,
among other things, operating methods, management, capital structure, dividends
and transactions with affiliates. However, as described below, companies that
are primarily engaged in the business of acquiring mortgages and other liens on
and interests in real estate ("Qualifying Interests") are excluded from the
requirements of the Investment Company Act.
To qualify for the Investment Company Act exclusion, CRIIMI MAE, among
other things, must maintain at least 55% of its assets in Qualifying Interests
(the "55% Requirement") and is also required to maintain an additional 25% in
Qualifying Interests or other real estate-related assets ("Other Real Estate
Interests" and such requirement, the "25% Requirement"). According to current
SEC staff interpretations, CRIIMI MAE believes that its government insured
mortgage securities and originated loans constitute Qualifying Interests. In
accordance with current SEC staff interpretations, the Company believes that all
of its Subordinated CMBS constitute Other Real Estate Interests and that certain
of its Subordinated CMBS also constitute Qualifying Interests. On certain of
the Company's Subordinated CMBS, the Company, along with other rights, has the
unilateral right to direct foreclosure with respect to the underlying mortgage
loans. Based on such rights and its economic interest in the underlying
mortgage loans, the Company believes that the related Subordinated CMBS
constitute Qualifying Interests. As of June 30, 2000, the Company believes that
it was in compliance with both the 55% Requirement and the 25% Requirement.
If the SEC or its staff were to take a different position with respect to
whether such Subordinated CMBS constitute Qualifying Interests, the Company
could, among other things, be required either (i) to change the manner in which
it conducts its operations to avoid being required to register as an investment
company or (ii) to register as an investment company, either of which could have
a material adverse effect on the Company. If the Company were required to
change the manner in which it conducts its business, it would likely have to
dispose of a significant portion of its Subordinated CMBS or acquire significant
additional assets that are Qualifying Interests. Alternatively, if the Company
were required to register as an investment company, it expects that its
operating expenses would significantly increase and that the Company would have
to reduce significantly its indebtedness,
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which could also require it to sell a significant portion of its assets. No
assurances can be given that any such dispositions or acquisitions of assets, or
deleveraging, could be accomplished on favorable terms.
Further, if the Company were deemed an unregistered investment company, the
Company could be subject to monetary penalties and injunctive relief. The
Company would be unable to enforce contracts with third parties and third
parties could seek to obtain rescission of transactions undertaken during the
period the Company was deemed an unregistered investment company. In addition,
as a result of the Company's Chapter 11 filing, the Company is limited in
possible actions it may take in response to any need to modify its business plan
in order to register as an investment company, or avoid the need to register.
Certain dispositions or acquisitions of assets would require Bankruptcy Court
approval. Also, any forced sale of assets that occurs after the bankruptcy stay
is lifted would change the Company's asset mix, potentially resulting in the
need to register as an investment company under the Investment Company Act or
take further steps to change the asset mix. Any such results would be likely to
have a material adverse effect on the Company.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
In management's opinion, the accompanying unaudited consolidated financial
statements of CRIIMI MAE, CM Management, Holdings II, CRIIMI MAE Financial
Corporation, CRIIMI MAE Financial Corporation II, CRIIMI MAE Financial
Corporation III, CRIIMI MAE QRS 1, Inc., CRIIMI MAE CMBS Corp., CRIIMI MAE
Holding Inc., CRIIMI MAE Holdings L.P., and CRIIMI, Inc., contain all
adjustments (consisting of only normal recurring adjustments and consolidating
adjustments) necessary to present fairly the consolidated balance sheets as of
June 30, 2000 and December 31, 1999, the consolidated results of its operations
for the three and six months ended June 30, 2000 and 1999 and its cash flows for
the six months ended June 30, 2000 and 1999.
These consolidated financial statements have been prepared pursuant to the
rules and regulations of the SEC. Certain information and note disclosures
normally included in annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted. While
management believes that the disclosures presented are adequate to make the
information not misleading, it is recommended that these consolidated financial
statements be read in conjunction with the consolidated financial statements and
the notes included in CRIIMI MAE's Annual Report filed on Form 10-K for the year
ended December 31, 1999 (audited).
Method of Accounting
The consolidated financial statements of CRIIMI MAE are prepared on the
accrual basis of accounting in accordance with generally accepted accounting
principles ("GAAP"). The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain amounts in the consolidated financial statements for the year ended
December 31, 1999 and the three and six months ended June 30, 1999 have been
reclassified to conform to the 2000 presentation.
Bankruptcy Accounting
Entering a reorganization, although a significant event, does not
ordinarily affect or change the application of GAAP followed by a company. The
accompanying financial statements have been prepared assuming that CRIIMI MAE
will continue as a going concern in accordance with SOP 90-7, "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7").
As such, asset and liability carrying amounts do not purport to represent
realizable or settlement values as contemplated by the Bankruptcy Code.
Liabilities Subject to Chapter 11 Proceedings
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
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Contingencies". To the extent that the amounts of claims change as a result of
actions in the bankruptcy case or other factors, the recorded amount of
liabilities subject to Chapter 11 proceeding will be adjusted. The gain or loss
resulting from the entries to record the adjustment will be recorded as a
reorganization item. In 1998, the Company wrote-off all $2.8 million of debt
discounts and deferred debt costs related to liabilities subject to Chapter 11
proceedings which resulted in these liabilities being carried at their face
amount.
Reorganization Items
Reorganization items are items of income and expense that are realized or
incurred by CRIIMI MAE because it is in reorganization. These include, but are
not limited to the following:
. Short-term interest income that would not have been earned but for the
Bankruptcy.
. Professional fees and similar types of expenditures directly relating to the
Chapter 11 proceeding.
. Employee Retention Program costs and severance payments.
. Loss accruals or realized gains or losses resulting from activities of the
reorganization process such as the sale of certain assets, rejection of
certain executory contracts and the write-off of debt issuance costs and
debt discounts. See Note 5 for further discussion of other than temporary
impairment and losses recognized on sales of CMBS.
During the three and six months ended June 30, 2000 and 1999, the Company
recorded reorganization items, as summarized below, due to the Chapter 11
filings of CRIIMI MAE, CM Management and Holdings II.
<TABLE>
<CAPTION>
Reorganization Items Three months Three months Six months Six months
-------------------- ended ended ended ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Short-term interest income ($1,434,012) ($237,000) ($2,438,672) ($469,400)
Professional fees 3,055,316 4,974,155 7,428,584 10,114,155
Employee Retention Program accrued costs 256,701 202,605 536,050 745,502
Other 845,104 499,183 1,445,602 556,524
----------- ---------- ----------- -----------
Subtotal 2,723,109 5,438,943 6,971,564 10,946,781
Impairment on CMBS 1,809,062 -- 5,252,821 --
Impairment on REO(1) 924,283 -- 924,283 --
Loss on sale of CMBS(2) 357,188 -- 1,711,214 --
----------- ---------- ----------- -----------
Total $ 5,813,642 $5,438,943 $14,859,882 $10,946,781
=========== ========== =========== ===========
</TABLE>
(1) The Company recognized impairment on its investment in REO as of June 30,
2000. This asset was sold in July 2000 as discussed in Note 3 and Note 9.
(2) The Company recognized a loss of approximately $1.35 million on the sale of
the Morgan Bonds in February 2000 and a loss of approximately $360,000 on
the sale of the First Union Bonds in April 2000.
Condensed Financial Statements
In accordance with SOP 90-7, the three debtor entities, CRIIMI MAE, CM
Management and Holdings II, are required to present condensed financial
statements for the three and six months ended June 30, 2000. (See Note 18).
Other Cash and Cash Equivalents
Cash and cash equivalents consist of U.S. Government and agency securities,
certificates of deposit, time deposits and commercial paper with original
maturities of three months or less.
Restricted Cash and Cash Equivalents
Restricted cash and cash equivalents consist of cash, certificates of
deposit and interest bearing securities maturing within three months from the
date of purchase that have been legally restricted pursuant to various
stipulation and consent orders providing for adequate protection with certain of
the Company's creditors or due to
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agreements that require certain CMBS interest income and/or CMBS sales proceeds
to be held in segregated accounts. In addition, restricted cash and cash
equivalents include balances held in separate trusts controlled by a trustee for
the benefit of employees. See Note 16 "Litigation-Bankruptcy Related Litigation"
for further discussion of these arrangements.
Transfer of Financial Assets
The Company transfers assets (mortgages and mortgage securities) in
securitization transactions where the transferred assets become the sole source
of repayment for newly issued debt. These transfers of financial assets are
accounted for in accordance with SFAS 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities" ("FAS 125").
When both legal and control rights to a financial asset are transferred, the
transfer is treated as a sale. Transfers are assessed on an individual
component basis. In a securitization, the cost basis of the original assets
transferred is allocated to each of the new financial components based upon the
relative fair value of the new financial components. For components where sale
treatment is achieved, a gain or loss is recognized for the difference between
that component's allocated cost basis and fair value. For components where sale
treatment is not achieved, an asset is recorded representing the allocated cost
basis of the new financial components retained and the related incurrence of
debt is also recorded. In transactions where none of the components are sold,
the Company recognizes the incurrence of debt and the character of the
collateralizing assets remains unchanged.
Income Recognition and Carrying Basis
Subordinated CMBS
CRIIMI MAE recognizes income from Subordinated CMBS using the effective
interest method, using the anticipated yield over the projected life of the
investment. Changes in anticipated yields are generally calculated due to
revisions in estimates of future credit losses, actual losses incurred,
revisions in estimates of future prepayments and actual prepayments received.
Changes in anticipated yield resulting from prepayments are recognized through a
cumulative catch-up adjustment at the date of the change which reflects the
change in income of the security from the date of purchase through the date of
change in anticipated yield. The new yield is then used for income recognition
for the remaining life of the investment. Changes in anticipated yield
resulting from reduced estimates of losses are recognized on a prospective
basis. When other than temporary impairment is recognized, a new yield is
calculated on the CMBS based on its new cost basis and expected future cash
flows. This revised yield is employed prospectively. See Note 5 for a
discussion of a revision in yields during the second quarter of 2000.
On May 8, 1998, CRIIMI MAE consummated CBO-2 which resulted in the sale of
a portion of its Subordinated CMBS portfolio. See Note 5. As a result of this
transaction and in accordance with GAAP, effective in the second quarter of
1998, the Company no longer classifies CMBS securities as Held to Maturity, but
instead classifies CMBS as Available for Sale. CRIIMI MAE carries its
Subordinated CMBS at fair market value where changes in fair value are recorded
as a component of shareholders' equity. See Note 5. Prior to this time, such
securities were carried at their amortized cost basis as the Company had the
ability and intent to hold these securities to maturity.
Insured Mortgage Securities
Mortgage income consists of amortization of the discount or premiums plus
the stated mortgage interest payments received or accrued. The difference
between the cost and the unpaid principal balance at the time of purchase is
carried as a discount or premium and amortized over the remaining contractual
life of the mortgage using the effective interest method. The effective
interest method provides a constant yield of income over the term of the
mortgage. Changes in anticipated yields are generally calculated due to
revisions in estimates of future prepayments and actual payments received.
As discussed in Note 7, as a result of the CBO-2 transaction involving the
sale of a portion of its Subordinated CMBS portfolio, the Company, in accordance
with GAAP, no longer classifies its insured mortgage securities as Held to
Maturity. The Company's mortgage securities are now classified as Available for
Sale. As a result, the Company now carries its mortgage securities at fair
value where changes in fair value are recorded as a component of shareholders'
equity. Prior to this time, the securities were carried at their amortized cost
basis as the Company had the ability and intent to hold these securities to
maturity.
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CRIIMI MAE's consolidated investment in mortgage securities consists of
participation certificates evidencing a 100% undivided beneficial interest in
Government Insured Multifamily Mortgages issued or sold pursuant to programs of
the Federal Housing Administration ("FHA") ("FHA-Insured Certificates") and
mortgage-backed securities guaranteed by the Government National Mortgage
Association ("GNMA") ("GNMA Mortgage-Backed Securities"). Payment of principal
and interest on FHA-Insured Loans is insured by the U.S. Department of Housing
and Urban Development (HUD) pursuant to Title 2 of the National Housing Act.
Payment of principal and interest on GNMA Mortgage-Backed Securities is
guaranteed by GNMA pursuant to Title 3 of the National Housing Act.
Investment in Originated Loans
This portfolio consists of commercial loans originated and securitized by
CRIIMI MAE in CMO-IV. The origination fee income, application fee income and
costs associated with originating the loans were deferred ("deferred loan
costs") and the net amount was added to the basis of the loans on the balance
sheet upon acquisition. Income is recognized using the effective interest method
and consists of mortgage income from the loans and amortization of deferred loan
costs. Changes in anticipated yields are generally calculated due to revisions
in estimates of future prepayments and actual prepayments received. See Note 6
for subsequent event related to the carrying basis and intended sale of the
Company's interest in CMO-IV.
Short Term Investments
Short term investment income consists of amortization of the discount or
premiums on primarily investment-grade securities, plus the stated investment
interest payments received or accrued on such securities. The difference
between the cost and the unpaid principal balance at the time of purchase is
carried as a discount or premium and amortized over the remaining contractual
life of the investment using the effective interest method. The effective
interest method provides a constant yield of income over the term of the
investment.
The Company's short term investments are classified as Available for Sale.
As a result, the Company carries its short term investments at fair value where
changes in fair value are recorded as a component of shareholders' equity. Upon
the sale of such short term investments, any gain or loss is recognized in the
income statement.
During late 1999, the Company began to trade mortgage-backed securities
which are reflected in Short Term Investments on the balance sheet. In general,
the Company trades in FNMA and FHLMC issued CMO tranches, as well as AAA rated
CMBS. The Company seeks maximum total return through short term trading,
consistent with prudent investment management. Returns from such activities
consist primarily of capital appreciation/depreciation resulting from changes in
interest rates and spreads, if any, discount amortization, and other arbitrage
opportunities as well as coupon interest income. For the six months ended June
30, 2000, trading gains and losses were immaterial; and, as of June 30, 2000,
trading securities approximated $2.4 million.
Equity Investments
CRIIMI, Inc., a wholly owned subsidiary of CRIIMI MAE, owns all of the
general partnership interests in American Insured Mortgage Investors, American
Insured Mortgage Investors - Series 85, L.P., American Insured Mortgage
Investors L.P.- Series 86 and American Insured Mortgage Investors L.P. - Series
88 (collectively, the "AIM Funds"). The AIM Funds own mortgage assets which are
substantially similar to the insured mortgage securities owned by CRIIMI MAE.
CRIIMI, Inc. receives the general partner's share of income, loss and
distributions (which ranges among the AIM Funds from 2.9% to 4.9%) from each of
the AIM Funds. In addition, CRIIMI MAE and CM Management each own 50% of the
limited partnership that owns a 20% limited partnership interest in the adviser
to the AIM Funds. CRIIMI MAE is utilizing the equity method of accounting for
its investment in the AIM Funds and advisory partnership, which provides for
recording CRIIMI MAE's share of net earnings or losses in the AIM Funds and
advisory partnership reduced by distributions from the limited partnerships and
adjusted for purchase accounting amortization.
CRIIMI MAE accounts for its investment in CRIIMI MAE Services, Inc.
("Services, Inc.") under the equity method because it does not own the voting
common stock of Services, Inc. As of June 30, 2000, Services Inc. holds a 27%
general partner interest in CMSLP.
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As of June 30, 2000, CRIIMI MAE, through CM Management, held a 73% limited
partnership interest in CMSLP. CRIIMI MAE's limited partner investment in CMSLP
is accounted for under the equity method as CRIIMI MAE does not control CMSLP.
However, because it owns 73% of the partnership and because it has certain
rights described below, it follows the equity method of accounting. As a
limited partner, CRIIMI MAE is entitled to all of the rights and benefits of
being a limited partner including the right to receive income and cash
distributions in accordance with its limited partner interest. In addition,
CRIIMI MAE has the right to approve the sale of the principal assets of CMSLP.
Services Inc. is the general partner of CMSLP and manages the day to day affairs
of CMSLP.
Impairment
Subordinated CMBS
CRIIMI MAE assesses each Subordinated CMBS for other than temporary
impairment when the fair market value of the asset declines below amortized cost
and when one of the following conditions also exists: 1) fair value has been
below amortized cost for a significant period of time and CRIIMI MAE concludes
that it no longer has the ability or intent to hold the security for the period
that fair value is expected to be below amortized cost through the period of
time CRIIMI MAE expects the value to recover to amortized cost or 2) the credit
quality of its Subordinated CMBS is declining and the Company determines that
the current estimate of expected future credit losses exceeds credit losses as
originally projected. The amount of impairment loss is measured by comparing
the fair value, based on available market information, of a Subordinated CMBS to
its current amortized cost basis, the difference is recognized as a loss in the
income statement.
The Company assesses current economic events and conditions that impact the
value of its Subordinated CMBS and the underlying real estate in making
judgments as to whether or not other than temporary impairment has occurred.
See Note 5 for a discussion of impairment losses recognized in 2000 and 1999.
Insured Mortgage Securities
CRIIMI MAE assesses each insured mortgage security for other than temporary
impairment when the fair market value of the asset declines below amortized cost
for a significant period of time and CRIIMI MAE concludes that it no longer has
the ability to hold the security through the market downturn. The amount of
impairment loss is measured by comparing the fair value of an insured mortgage
security to its current amortized cost basis, the difference is recognized as a
loss in the income statement. The Company did not recognize any impairment on
its insured mortgage securities for the three and six months ended June 30, 2000
and 1999.
Investment in Originated Loans
CRIIMI MAE recognizes impairment on the originated loans when it is
probable that CRIIMI MAE will not be able to collect all amounts due according
to the contractual terms of the loan agreement. CRIIMI MAE measures impairment
based on the present value of expected future cash flows discounted at the
loan's effective interest rate or the fair value of the collateral if the loan
is collateral dependent. The Company did not recognize impairment losses on its
originated loans for the three and six months ended June 30, 2000 and 1999.
Short Term Investments
CRIIMI MAE assesses each short term investment for other than temporary
impairment when the fair market value of the asset declines below amortized cost
and CRIIMI MAE concludes that it no longer has the ability to hold the security
through the market downturn. The amount of impairment loss is measured by
comparing the fair value of the short term investment to its current cost basis,
the difference is recognized as a loss in the income statement. The Company did
not recognize any impairment on its short term investments for the three and six
months ended June 30, 2000 and 1999.
Equity Investments
Impairment is recognized on CRIIMI MAE's investments accounted for under
the equity method if a decline in the market value of the investment below its
carrying basis is judged to be "other than temporary". In this case, an
unrealized loss is recognized as the difference between the fair value and
carrying amount. The Company
17
<PAGE>
did not recognize impairment losses on its equity investments for the three and
six months ended June 30, 2000 and 1999.
Receivables
Receivables primarily consist of interest and principal receivables on the
Company's Subordinated CMBS, insured mortgage securities and originated loan
portfolios. In addition, prepayments in the insured mortgage securities
portfolio, if any, that have not yet been received by CRIIMI MAE are included.
Other Assets
Other assets primarily include Merger assets and related costs, deferred
financing costs, deferred costs and investment in mezzanine loans, as further
discussed below. Additionally included in other assets is Real Estate Owned
("REO") property acquired through foreclosure that is held for sale. In June
1997, CRIIMI MAE acquired this real estate property in a foreclosure sale from a
CMBS trust which it subsequently sold to a third party in July 2000. Prior to
the sale, CRIIMI MAE's investment in REO property totaled approximately $3.4
million. A loss of approximately $900,000 was recorded as of June 30, 2000
related to the sale. REO property acquired through foreclosure is recorded at
fair value on the date of foreclosure. REO property held for sale is accounted
for at the lower of its cost basis or fair value less costs to sell. REO
property held for the long term will be evaluated for impairment by the Company
when events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. At such time, if the expected future undiscounted
cash flows from the property are less than the cost basis, the assets will be
marked down to fair value. Costs relating to development and improvement of
property are capitalized, provided that the resulting carrying value does not
exceed fair value. Costs relating to holding the assets are expensed.
The Merger assets acquired and costs incurred in connection with the Merger
were recorded using the purchase method of accounting. The amounts allocated to
the assets acquired were based on management's estimate of their fair values,
with the excess of purchase price over fair value allocated to goodwill. The
AIM Funds' subadvisory contracts and the mortgage servicing contracts
transferred to CMSLP are amortized using the effective interest method over 10
years through 2005. This amortization is reflected through CRIIMI MAE's equity
in earnings from investments. The remaining assets acquired by CRIIMI MAE,
including goodwill, are amortized using the straight-line method over 10 years
through 2005.
Deferred costs are costs incurred in connection with the establishment of
CRIIMI MAE's financing facilities and are amortized using the effective interest
method over the terms of the borrowings. Also included in deferred costs are
mortgage selection fees, which were paid to the adviser or were paid to the
former general partners or adviser to the predecessor entities of CRI
Liquidating (collectively, the "CRIIMI Funds"). These deferred costs are being
amortized using the effective interest method on a specific mortgage basis from
the date of the acquisition of the related mortgage over the term of the
mortgage from CRIIMI MAE. Upon disposition of a mortgage, the related
unamortized fee is treated as part of the mortgage asset carrying value in order
to measure the gain or loss on the disposition. As a result of the Chapter 11
filing in December 1998, CRIIMI MAE wrote off all deferred costs in connection
with its financing facilities that are subject to the Chapter 11 filing.
Costs incurred in connection with the loan origination programs are netted
against any origination fees received and the net amount is deferred and will be
recognized using the effective interest method over the life of the intended
securitization of the loans. These costs include a one-time fee to the
financial institution and direct costs of originating the loans for the program.
All net deferred costs are written off if the Company and the financial
institution decide to sell the loans in the warehouse program. In addition, the
Company is required to fund the estimated subordinated levels for the
securitization of the loans originated through its loan origination programs.
This subordinated level is held as a deposit at the financing institution and is
reflected in other assets. Due to the financial institution taking title to the
loans during the warehousing period and bearing substantive risk for the
investment portion of each loan, the originated loans are not recorded on the
Company's balance sheet during the warehouse period. As a result of the Chapter
11 filing, CRIIMI MAE wrote off all capitalized costs in connection with its
warehouse programs in December 1998. As of June 30, 2000, there were no reserve
account balances with respect to either the Citibank or Prudential Programs.
(See Note 6 for further discussion including the contemplated CMO-IV Sale.)
Discount on Securitized Mortgage Obligation Issuances
18
<PAGE>
Discounts incurred in connection with the issuance of debt are amortized
using the effective interest method over the projected term of the related debt,
which is based on management's estimate of prepayments on the underlying
collateral and are included as a component of interest expense.
Interest Rate Protection Agreements
CRIIMI MAE acquires interest rate protection agreements to reduce its
exposure to interest rate risk. The costs of such agreements which qualify for
hedge accounting are included in other assets and are amortized over the
interest rate agreement term. To qualify for hedge accounting, the interest
rate protection agreement must meet two criteria: (i) the debt to be hedged
exposes CRIIMI MAE to interest rate risk and (ii) the interest rate protection
agreement reduces CRIIMI MAE's exposure to interest rate risk. In the event
that interest rate protection agreements are terminated, the associated gain or
loss is deferred over the remaining term of the agreement, provided that the
underlying hedged asset or liability still exists. Amounts to be paid or
received under interest rate protection agreements are accrued currently and are
netted with interest expense for financial statement presentation purposes.
Additionally, in the event that interest rate protection agreements do not
qualify as hedges, such agreements are reclassified to be investments accounted
for at fair value, with any gain or loss included as a component of income.
Per Share Amounts
Basic earnings per share amounts for the three and six months ended June
30, 2000 and 1999 represent net income available to common shareholders divided
by the weighted average common shares outstanding during each quarter. Diluted
earnings per share amounts for the three and six months ended June 30, 2000 and
1999 represent basic earnings per share adjusted for dilutive common stock
equivalents, which for CRIIMI MAE could include stock options and certain series
of preferred stock. See Note 13 for a reconciliation of basic earnings per
share to diluted earnings per share.
Consolidated Statements of Cash Flows
Cash payments made for interest for the six months ended June 30, 2000 and
1999, were $81,200,828, and $56,800,796, respectively.
Comprehensive Income
Comprehensive income includes net earnings as currently reported by the
Company adjusted for other comprehensive income. Other comprehensive income for
the Company is changes in unrealized gains and losses related to the Company's
CMBS and mortgages accounted for as available for sale.
New Accounting Statements
During 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133 "Accounting for Derivative Instruments and for Hedging Activities" ("FAS
133"). In June 1999, the FASB issued Statement No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No. 133". In June 2000, the FASB issued Statement 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities",
an amendment of FASB Statement No. 133. FAS 133, as amended, establishes
accounting and reporting standards for derivative investments and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as a hedge. The accounting for the changes in the fair
value of a derivative depends on the intended use of the derivative and the
resulting designation. FAS 133 is effective for the Company beginning January 1,
2001. The Company believes the effect of adopting FAS 133 will not be material.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values of CRIIMI MAE's consolidated financial
instruments are presented in accordance with GAAP, which define fair value as
the amount at which a financial instrument could be exchanged 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.
19
<PAGE>
<TABLE>
<CAPTION>
As of June 30, 2000 As of December 31, 1999
Amortized Cost Fair Value Amortized Cost Fair Value
-------------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
ASSETS:
Subordinated CMBS $1,188,109,252 $1,018,145,199 $1,374,080,226 $1,179,270,306
Insured Mortgage Securities 395,742,226 381,201,135 407,469,108 394,857,239
Investment in originated loans 464,478,082 419,296,783 470,204,780 422,643,902
Restricted cash and cash equivalents 73,625,223 73,625,223 38,036,624 38,036,624
Other cash and cash equivalents 69,042,538 69,042,538 53,510,311 53,510,311
Short term investments 2,420,685 2,408,878 92,793 92,793
Accrued interest and principal 44,632,445 44,632,445 69,483,337 69,483,337
receivable
Interest rate protection agreements 575,556 1,204,196 1,119,280 1,465,496
LIABILITIES:
Liabilities not Subject to Chapter 11 proceedings:
Securitized mortgage obligations:
Collateralized bond obligations-CMBS 279,348,933 261,958,337 278,165,968 253,084,864
Collateralized insured mortgage securities 369,023,933 368,909,578 378,711,602 381,129,836
obligations
Collateralized mortgage obligations-
originated loans 395,261,869 370,100,820 399,768,513 373,634,008
Liabilities Subject to Chapter 11 proceedings:
Variable rate secured borrowings-CMBS 566,429,031 N/A 732,904,775 N/A
Senior unsecured notes 100,000,000 84,880,000 100,000,000 86,000,000
Other financing facilities 92,799,522 N/A 92,799,522 N/A
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Subordinated CMBS
Prior to 1998, the fair market value of the Company's portfolio of
Subordinated CMBS was based upon quotes obtained from, in most cases, the lender
to which the security was pledged. The lender also quoted the related unrated
bonds even though the bonds did not serve as collateral for CRIIMI MAE's
obligations. The Company obtained "ask" quotes as compared to "bid" quotes
because it is the owner of the securities. Due to the Chapter 11 filing, the
Company's lenders were not willing to provide fair value quotes for the CMBS
portfolio as of June 30, 2000 and December 31, 1999. As a result, the Company
calculated the estimated fair market value of its Subordinated CMBS portfolio as
of June 30, 2000 and December 31, 1999. The Company used a discounted cash flow
methodology to estimate the fair value of its Subordinated CMBS portfolio. The
projected cash flows used by the Company were the same collateral cash flows
used to calculate the anticipated weighted average unleveraged yield to
maturity. See Note 5 for additional discussion. The cash flows were then
discounted using a discount rate that, in the Company's view, was commensurate
with the market's perception of risk and value. The Company used a variety of
sources to determine its discount rate including; institutionally available
research reports, a relative comparison of dealer provided discount rates from
the previous quarter to those disclosed in recent research reports and
communications with dealers and active Subordinated CMBS investors regarding the
valuation of comparable securities. Since the Company calculated the estimated
fair market value of its Subordinated CMBS portfolio as of June 30, 2000 and
December 31, 1999, it has disclosed the range of discount rates by rating
category used in determining these fair market values in Note 5.
The CMBS market was adversely affected by the turmoil which occurred in the
capital markets commencing in late summer of 1998 that caused spreads between
CMBS yields and the yields on U.S. Treasury securities with comparable
maturities to widen, resulting in a decrease in the value of CMBS. As a result,
the creation of new CMBS and the trading of existing CMBS came to a near
standstill. In late November 1998, buying and trading activity in the CMBS
market began to recover, increasing liquidity in the CMBS market; however, these
improvements mostly related to investment grade CMBS. New issuances of CMBS
also returned in late November 1998 and continued throughout 1999 with the
issuance of newly created CMBS totaling approximately $58.3 billion for 1999.
The market for Subordinated CMBS has, however, been slower to recover. It is
difficult, if not impossible, to predict when or if the CMBS market and, in
particular, the Subordinated CMBS market, will recover. Even if the market for
Subordinated CMBS recovers, the liquidity of such market has historically been
limited. 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
20
<PAGE>
realized in a current transaction between a willing buyer and a willing seller
in other than a forced sale or liquidation.
Insured Mortgage Securities
The fair market value of the Company's portfolio of insured mortgage
securities as of December 31, 1999 was based upon quotes obtained from an
investment banking institution, which trades these investments on a daily basis.
Due to the Chapter 11 filing and a change in staff at the investment banking
institution, the Company was unable to find an investment banking institution
willing to provide fair value quotes for the insured mortgage securities
portfolio as of June 30, 2000. As a result, the Company calculated the
estimated fair market value of its insured mortgage securities portfolio as of
June 30, 2000. The Company used a discounted cash flow methodology to estimate
the fair value of its insured mortgage securities portfolio. The cash flows
were discounted using a discount rate that, in the Company's view, was
commensurate with the market's perception of risk and value. The Company used a
variety of sources to determine its discount rate including: (i)
institutionally-available research reports, (ii) a relative comparison of dealer
provided quotes from the previous year to those disclosed in recent research
reports and incorporating adjustments to reflect changes in the market, and
(iii) communications with dealers and active insured mortgage security investors
regarding the valuation of comparable securities.
Originated Loans
Due to the Chapter 11 filing, the Company's lenders were not willing to
provide fair value quotes for the portfolio. As a result, the Company
calculated the estimated fair market value of its originated loan portfolio as
of June 30, 2000 and December 31, 1999. The Company used the same discounted
cash flow methodology used in determining the fair value of its Subordinated
CMBS portfolio and further used cash flows projected at a prepayment speed of
0% to 14% depending upon the call protection of the loan. These cash flows were
then discounted using a weighted average discount rate of approximately 9.1% and
9.1% for both June 30, 2000 and December 31, 1999, which the Company believes
was commensurate with the market's perception of risk and value.
Short Term Investments
The fair value of the short term investments is an estimate based on the
indicative market price from publicly available pricing services. The Company
normally applies a slight discount to such prices as the Company believes it
better reflects fair value between willing buyers and sellers due to the
relatively smaller sizes of investments the Company purchases.
Restricted and Other Cash and Cash Equivalents, Accrued Interest and Principal
Receivable
The carrying amount approximates fair value because of the short maturity
of instruments.
Obligations Under Financing Facilities
The fair value of the securitized mortgage obligations as of June 30, 2000
and December 31, 1999 is calculated using a discounted cash flow methodology
similar to the discussion on Subordinated CMBS above. The fair value of the
senior unsecured notes was calculated using a quoted market price from
Bloomberg. Management has determined that fair value of the variable-rate
secured borrowings-CMBS and other financing facilities is not practicable to
measure because there is no quoted market price available and the facilities are
in default and have been the subject of dispute as discussed in Note 9. Also see
Note 9 for a detailed discussion of these facilities and the terms of the
facilities.
Interest Rate Protection Agreements
The fair value of interest rate protection agreements (used to hedge CRIIMI
MAE's variable-rate debt) is the estimated amount that CRIIMI MAE would receive
to terminate the agreements as of June 30, 2000 and December 31, 1999, taking
into account current interest rates and the current creditworthiness of the
counterparties. The amount was determined based on a quote received from the
counterparty to each agreement.
21
<PAGE>
5. SUBORDINATED CMBS
During 1997, FAS 125 "Accounting for Transfers and Servicing of Financial
Assets" became effective. This statement significantly changed the accounting
treatment for transfers of financial assets. FAS 125 changed accounting
standards to require transfers of assets to be accounted for on a component
basis instead of as an entire unit. Accordingly, in a securitization or
resecuritization, components (securities) are treated as sales or retained
interests based upon CRIIMI MAE's ability to control the component. Components
where control is not retained are treated as sales and those where control is
retained are treated as retained interests.
In May 1998, CRIIMI MAE completed its second resecuritization of CMBS
assets ("CBO-2"), with a combined face value of approximately $1.8 billion
involving 75 individual securities collateralized by 19 mortgage pools and three
of the retained securities from CBO-1. In CBO-2, the Company sold in a private
placement, securities with a face amount of $468 million and retained securities
with a face amount of approximately $1.3 billion. Certain securities included
call provisions to enable CRIIMI MAE to 1) call bonds if market conditions
warrant, and 2) call bonds when it is no longer cost effective to service them.
As a result, CBO-2 resulted in a sale of certain securities and the retention of
new securities. In accordance with FAS 125, the assets collateralizing the
resecuritization are "derecognized" and the combined amortized cost basis of the
collateralizing assets was allocated to the new securities issued. CRIIMI MAE
received $335 million for the $345 million face amount of investment grade
securities sold without call provisions which had an allocated cost basis of
$306 million, resulting in a gain of approximately $28.8 million. CRIIMI MAE
recorded retained assets totaling $926 million representing the allocated
amortized cost basis for the $123 million face amount of investment grade
securities issued with call provisions and the $1.3 billion face amount of non-
investment grade retained securities in CBO-2. CBO-2 generated $160 million of
net borrowing capacity primarily as a result of a higher overall weighted
average credit rating for its new securities as compared to the weighted average
credit rating on the related CMBS collateral. The net excess borrowing capacity
was used to obtain short-term, variable rate secured borrowings which were used
to acquire additional Subordinated CMBS during the second quarter of 1998.
The CBO-2 transaction requires reclassification of CRIIMI MAE's entire
portfolio of mortgage securities (consisting of mortgage security collateral and
CMBS) from Held to Maturity to Available for Sale. Therefore, CRIIMI MAE's
securities, effective the second quarter of 1998, are reflected on the balance
sheet at fair market value. At June 30, 2000, the amortized cost of the CMBS
exceeded the fair market value by approximately $170 million (after taking into
account the impairment write down of certain CMBS subject to the CMBS Sale,
which resulted in amortized cost being written down to fair value) as compared
to $194.8 million as of December 31, 1999 and is reflected as a decrease in
shareholders' equity.
At June 30, 2000, CRIIMI MAE held the following securities with respect to its
CMBS portfolio:
<TABLE>
<CAPTION>
Original 3/31/00 6/30/00
Anticipated Anticipated Anticipated
Yield to Yield to Yield to
Pool (1)(6) Maturity (2) Maturity (2) Maturity (2)
----------- ----------- ----------- -----------
<S> <C> <C> <C>
Retained Securities from
CRIIMI 1996 C1 (CBO-1) 19.5% 20.7%(4) 22.3%(3)
DLJ Mortgage Acceptance Corp.
Series 1997 CF2 Tranche B-30C 8.2% 11.9%(5) 12.0%(3)
Nomura Asset Securities Corp.
Series 1998-D6 Tranche B7 12.0% 12.0% 14.2%(3)
Retained Securities from
CRIIMI 1998 C1 (CBO-2) 10.3% 10.2%(4) 10.5%(3)(4)
Mortgage Capital Funding, Inc.
Series 1998-MC1 8.9% 13.5%(5) 13.8%(3)
Chase Commercial Mortgage Securities
Series 1998-1 (7) 8.8% 12.9%(5) 13.2%(3)
</TABLE>
22
<PAGE>
<TABLE>
<S> <C> <C> <C>
Mortgage Capital Funding, Inc.
Series 1998-MC2 8.7% 13.7%(5) 13.9%(3)
Weighted Average 10.1% 11.2% 11.5%(3)
</TABLE>
___________
(1) CRIIMI MAE, through CMSLP, performs servicing functions on a total CMBS
pool of approximately $24.4 billion as of June 30, 2000. Of the $24.4
billion of mortgage loans, approximately $369.6 million are being specially
serviced, of which approximately $261.4 million are being specially
serviced due to payment default (including $29.6 million of real estate
owned by the underlying trusts) and the remainder is being specially
serviced due to non-financial covenant default. Through June 30, 2000,
CMSLP has resolved and transferred out of special servicing approximately
$506.5 million of the approximately $876.1 million that has been
transferred into special servicing from inception as discussed below. As
discussed below, through June 30, 2000, actual losses on mortgage loans
underlying the CMBS transactions are lower than the Company's original loss
estimates.
(2) Represents the anticipated weighted average yield over the expected average
life of the Company's Subordinated CMBS portfolio as of the date of
acquisition, March 31, 2000 and June 30, 2000, respectively, based on
management's estimate of the timing and amount of future credit losses and
prepayments. (See also (3) below, for additional discussion.)
(3) The increases in anticipated yields to maturity for June 30, 2000, as
compared to March 31, 2000, are primarily due to a change in the allocation
and timing of the estimated future credit losses related to the mortgage
loans underlying the CMBS. Due to better than anticipated performance of
the mortgage loans underlying the CMBS, which has resulted in lower credit
losses than originally estimated, the Company has revised its estimated
credit losses to occur later in the weighted average life of the CMBS than
originally projected. However, the Company has not lowered the total amount
of estimated future credit losses related to the mortgage loans underlying
the CMBS. The change in allocation and timing of estimated future credit
losses to reflect a later occurrence of such losses results in increases in
projected cash flow (primarily in the form of interest income) as of June
30, 2000, which in turn results in increases in anticipated yields to
maturity as of June 30, 2000. As a result of the present value benefit of
a revised later projected occurrence of credit losses, the yields used to
determine CMBS income have increased. As of June 30, 2000, the overall
impact of this allocation and timing revision resulted in a 29 basis point
increase in total CMBS anticipated yields to maturity (24 basis point
increase related to the remaining CMBS subject to the CMBS Sale and 30
basis point increase related to the Company's retained portfolio). These
yield increases have resulted in approximately $700,000 in additional CMBS
income during the second quarter compared to income that would have been
recognized using prior unrevised yields. The Company estimates that total
CMBS income related to the Company's retained portfolio will be higher by
approximately $2 million for the period April 1 through December 31, 2000
than if the prior unrevised yields were used. As it is not certain when
the remaining CMBS subject to the CMBS Sale will be sold, the Company has
not estimated the dollar impact for the year. These CMBS yield increases
have been applied prospectively as of April 1, 2000, the first day of the
second quarter.
(4) The increase in the anticipated yield resulted from the reallocation of
CBO-1 asset basis in conjunction with the CBO-2 resecuritization. While it
had no impact on the anticipated yield, the unrated bond from CBO-1
experienced an approximate $738,000 principal write-down in 1999 and an
approximate $2.2 million principal write-down in 2000 due to losses on the
foreclosure of two underlying loans. Further, the unrated bond from CBO-2
experienced an approximate $879,000 principal write-down in 1999 and an
approximate $374,000 principal write-down in 2000 due to losses on the
foreclosure of two underlying loans.
(5) As discussed further below, under the Plan, the Company intends to sell
these CMBS pools and as such, impairment was recognized as of December 31,
1999, March 31, 2000, and/or June 30, 2000 related to these CMBS. The
impairment losses resulted in the cost basis being written down to fair
value as of December 31, 1999, March 31, 2000, and June 30, 2000. The
increase in yields between those originally projected and those projected
as of March 31, 2000 is primarily a result of this new lower basis.
(6) The following table summarizes certain CMBS sales for the six months ended
June 30, 2000:
<TABLE>
<CAPTION>
Net Proceeds
Face Sale Debt to CRIIMI
Sale Date CMBS Portfolio Classes Amount Proceeds Paydown MAE Loss (a)
--------- -------------- ------- ------ -------- ------- --- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
02/29/00 Morgan Stanley Capital 7 classes $87 million $45.9 $37.5 $8.4 million ($1.35 million)
I, Series 1998-WF2 million million
("Wells Fargo Bonds")
04/24/00 First Union-Lehman 7 classes $290 $140 $113 $27 million ($0.36 million)
Brothers-Bank of million million million
America Commercial
Mortgage Trust Series
1998-C2
("First Union Bonds")
</TABLE>
(a) Represents actual loss recognized when sold. Losses had been recognized
through impairment in previous periods.
(7) The sale of these bonds occurred in August 2000, as discussed below.
23
<PAGE>
The aggregate investment by the underlying rating of the Subordinated CMBS is as
follows:
<TABLE>
<CAPTION>
Range of Discount Amortized Cost
Face Amount Weighted Average Weighted Fair Value Rates Used to as of
as of 6/30/00 Pass- Average As of 6/30/00 Calculate Fair 6/30/00
Security Rating (in millions) Through Rate Life (1) (in millions)(2) Value (2) (in millions)
--------------- ------------- ------------ -------- ---------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
A (3) $ 62.6 7% 6 years $ 55.3 9.6% $ 57.7
BBB (3) 150.6 7% 11 years 121.2 10.0% 129.0
BBB-(3) 115.2 7% 12 years 85.5 11.0% 93.9
BB+ 373.4 7.1% 11 years 251.1 11.1% -12.8% 292.9
BB 255.9 6.7% 11 years 116.7 11.4% -13.5% 125.5
BB- 81.2 6.7% 12 years 38.9 12.7% -14.5% 44.8
B+ 122.7 7% 14 years 45.6 15.7% 63.4
B 294.2 6.5% 14 years 120.8 14.9% -16.7% 154.0
B- 186.7 6.7% 14 years 66.7 15.7% -19.2% 78.8
CCC 87.9 7% 17 years 17.0 31% 27.3
Unrated (4) 471.4 5.8% 17 years 99.3 29% -33% 120.8
-------- --- --------- -------- --------
Total (5)(6) $2,201.9 6.8% 12 years $1,018.1 $1,188.1(7) (8)
======== === ========= ======== ========
<CAPTION>
Amortized Cost
as of
12/31/99
Security Rating (in millions)
--------------- -------------
<S> <C>
A (3) $ 57.4
BBB (3) 127.7
BBB-(3) 93.5
BB+ 305.5
BB 206.1
BB- 58.6
B+ 82.1
B 178.2
B- 98.1
CCC 32.5
Unrated (4) 134.4
---------
Total (5)(6) $ 1,374.1
=========
</TABLE>
_______________
(1) Weighted average life represents the weighted average expected life of the
Subordinated CMBS prior to consideration of losses, extensions or
prepayments.
(2) The estimated fair values of Subordinated CMBS represent the carrying value
of these assets. Due to the Chapter 11 filing, the Company's lenders were
not willing to provide fair value quotes for the portfolio as of June 30,
2000 and December 31, 1999. As a result, the Company calculated the
estimated fair market value of its Subordinated CMBS portfolio as of June
30, 2000 and December 31, 1999. The Company used a discounted cash flow
methodology to estimate the fair value of its Subordinated CMBS portfolio.
The cash flows for each bond were projected assuming no prepayments and no
losses as is the market convention. The cash flows were then discounted
using a discount rate that, in the Company's view, was commensurate with
the market's perception of risk and value. The Company used a variety of
sources to determine its discount rate including institutionally available
research reports and communications with dealers and active Subordinated
CMBS investors regarding the valuation of comparable securities. Since the
Company calculated the estimated fair market value of its Subordinated CMBS
portfolio as of June 30, 2000 and December 31, 1999, it has disclosed in
the table the range of discount rates by rating category used in
determining these fair market values. See Note 4 for a discussion on the
CMBS market.
(3) In connection with CBO-2, $62.6 million (A rated) and $60.0 million (BBB
rated) face amount of investment grade securities were sold with call
options and $345 million (A rated) face amount were sold without call
options. In connection with CBO-2, in May 1998, the Company initially
retained $90.6 million (BBB rated) and $115.2 million (BBB- rated) face
amount of securities, both with call options, with the intention to sell
the securities at a later date. Such sale occurred March 5, 1999. See
also Note 16. Since the Company retained call options on certain sold
bonds, the Company did not surrender control of these assets pursuant to
the requirements of FAS 125 and thus these securities are accounted for as
a financing and not a sale. Since the transaction is recorded as a partial
financing and a partial sale, CRIIMI MAE has retained the securities with
call options in its Subordinated CMBS portfolio reflected on its balance
sheet.
(4) The unrated bond from CBO-1 experienced an approximate $738,000 principal
write-down in 1999 and an approximate $2.2 million principal write-down in
2000 due to losses on the foreclosure of two underlying loans. Further,
the unrated bond from CBO-2 experienced an approximate $879,000 principal
write-down in 1999 and an approximate $374,000 principal write-down in 2000
due to losses on the foreclosure of two underlying loans.
(5) Refer to Note 8 for additional information regarding the Subordinated CMBS
for tax purposes.
(6) Similar to the Company's other sponsored CMOs, CMO-IV, resulted in the
creation of CMBS, in which the Company sold certain tranches. Since the
Company retained call options on the sold bonds, the Company did not
surrender control of the assets for purposes of FAS 125 and thus the entire
transaction is accounted for as a financing and not a sale. Since the
transaction is recorded as a financing, the Subordinated CMBS are not
reflected in the Company's Subordinated CMBS portfolio. Instead, the
underlying loans contributed to CMO-IV are reflected in Investment in
Originated Loans on the balance sheet. See Note 6.
(7) Amortized cost reflects the cumulative $75 million impairment loss write-
down as of June 30, 2000, related to the remaining CMBS subject to the CMBS
Sale. See below for further discussion.
(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.
24
<PAGE>
As of June 30, 2000 and December 31, 1999, the mortgage loans underlying
CRIIMI MAE's Subordinated CMBS portfolio were secured by properties of the types
and at the locations identified below:
<TABLE>
<CAPTION>
6/30/00 12/31/99 6/30/00 12/31/99
Property Type Percentage/(1)/ Percentage/(1)/ Geographic Location/(2)/ Percentage/(1)/ Percentage/(1)/
------------- --------------- --------------- ------------------------ --------------- ---------------
<S> <C> <C> <C> <C> <C>
Multifamily. 31% 32% California............... 16% 17%
Retail...... 29% 29% Texas.................... 13% 13%
Office...... 14% 13% Florida.................. 7% 8%
Hotel....... 14% 14% New York................. 6% 5%
Other....... 12% 12% Other/(3)/............... 58% 57%
----- ------- ------- --------
Total...... 100% 100% Total................. 100% 100%
====== ======== ======= ========
</TABLE>
(1) Based on a percentage of the total unpaid principal balance of the
underlying loans.
(2) No significant concentration by region.
(3) No other individual state makes up more than 5% of the total.
The Subordinated CMBS tranches owned by CRIIMI MAE provide credit support
to the more senior tranches of the related commercial securitization. Cash flow
from the underlying mortgages generally is allocated first to the senior
tranches, with the most senior tranche having a priority right to cash flow.
Then, any remaining cash flow is generally allocated among the other tranches in
order of their relative seniority. To the extent there are defaults and
unrecoverable losses on the underlying mortgages, resulting in reduced cash
flows, the subordinate tranche will bear this loss first. To the extent there
are losses in excess of the most subordinate tranche's stated right to principal
and interest, then the remaining tranches will bear such losses in order of
their relative subordination.
The accounting treatment under GAAP requires that the income on
Subordinated CMBS be recorded based on the effective interest method using the
anticipated yield over the expected life of these mortgage assets. This method
can result in GAAP income recognition which is greater than or less than cash
received. For the three and six months ended June 30, 2000, the amount of income
recognized in excess of cash received due to the effective interest rate method
was approximately $4.2 million and $6.9 million, respectively. For the three and
six months ended June 30, 1999, the amount of income recognized in excess of
cash received due to the effective interest rate method was approximately
$209,000 and $336,000, respectively.
Since the Petition Date, CRIIMI MAE and certain secured creditors have
disagreed about the effect of the stay provisions of the Bankruptcy Code on such
secured lenders and the subject assets. A summary of material litigation, and
agreements that have been reached with certain creditors, is disclosed in Note
16 Litigation - Bankruptcy Related Litigation. In addition, the Company has
been in discussions with certain other creditors not in litigation with the
Company. See Note 16 Litigation - Arrangements with Other Creditors.
As discussed in Note 1, under CRIIMI MAE's Plan, a portion of the
Recapitalization Financing is expected to result from the CMBS Sale. The
remaining CMBS subject to the CMBS Sale had a fair value and amortized cost of
$204 million and $198 million, respectively, as of June 30, 2000. The Company
first filed a plan with the Bankruptcy Court in the fourth quarter of 1999 and
during that same quarter CRIIMI MAE began marketing for sale the CMBS subject to
the CMBS Sale. CRIIMI MAE sold a portion of these bonds in February 2000 and
April 2000 and intends to enter into additional agreements during 2000 to sell
the remaining CMBS subject to the CMBS Sale, although there can be no assurance
that such bonds will be sold. The Company also intends to sell its interest in
CMO-IV as part of the Plan, although there can be no assurance that the CMO-IV
Sale will be completed.
GAAP states that when the fair market value of an investment declines below
its amortized cost for a significant period of time and the entity no longer has
the ability or intent to hold the investment for the period the entity
anticipates is required for the value to recover to amortized cost, other than
temporary impairment on the investment should be recognized. This other than
temporary impairment is recognized through the income statement as the
difference between amortized cost and fair value. Additional accounting
guidance states that other than temporary impairment should be recognized in the
period the decision to sell any investment is made if the entity does not expect
the fair value to recover before the sale date. As the Company decided in the
fourth quarter of 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
25
<PAGE>
impairment related to these CMBS through earnings in the fourth quarter of 1999.
The Company recognized an additional $5.3 million of other than temporary
impairment during the first half of 2000 related to these same bonds. Unrealized
losses related to these CMBS were previously recognized through other
comprehensive income in the equity section of the balance sheet. The other than
temporary impairment loss is a part of the reorganization items on the income
statement as the impairment was recognized as part of the reorganization.
CMSLP did not file for protection under Chapter 11. However, because of the
related party nature of its relationship with CRIIMI MAE, CMSLP has been under a
high degree of scrutiny from servicing rating agencies. As a result of CRIIMI
MAE's Chapter 11 filing, CMSLP was declared in default under certain credit
agreements with First Union National Bank ("First Union"). In order to repay all
such credit agreement obligations and to increase its liquidity, CMSLP arranged
for ORIX Real Estate Capital Markets, LLC ("ORIX"), formerly known as Banc One
Mortgage Capital Markets, LLC to succeed it as master servicer on two commercial
mortgage pools on October 30, 1998. In addition, in order to allay rating agency
concerns stemming from CRIIMI MAE's Chapter 11 filing, in November 1998, CRIIMI
MAE designated ORIX as special servicer on 33 separate CMBS securitizations
totaling approximately $29 billion, subject to certain requirements contained in
the respective servicing agreements. CMSLP continues to perform special
servicing as sub-servicer for ORIX on all but five of these securitizations.
CRIIMI MAE remains the owner of the lowest rated tranche of the related
Subordinated CMBS and, as such, retains rights pertaining to ownership,
including the right to replace the special servicer. CMSLP lost the right to
specially service the DLJ MAC 95 CF-2 securitization when the majority holder of
the lowest rated tranches replaced CMSLP as special servicer. As part of the
Plan, certain of the Company's non-resecuritized CMBS and its interest in CMO-IV
are intended to be sold. If such sales are completed, CMSLP will most likely
lose its special servicing duties related to these securities. In 1999, CMSLP
generated gross revenues of approximately $1.1 million in fees on these CMBS.
6. LOAN ORIGINATION PROGRAM
Prior to the Petition Date, the Company originated mortgage loans
principally through mortgage loan conduit programs with major financial
institutions for the primary purpose of pooling such loans for securitization.
The Company viewed a securitization as a means of extracting the maximum value
from the mortgage loans originated. A portion of the mortgage loans originated
was financed through the creation and sale of investment grade CMBS to third
parties in connection with the securitization. The Company received net cash
flow on the CMBS not sold to third parties after payment of amounts due to
secured creditors who had provided acquisition financing. Additionally, the
Company received origination and servicing fees related to the mortgage loan
conduit programs.
A majority of the mortgage loans originated under the Company's loan
conduit programs were "No Lock" mortgage loans. Unlike most commercial mortgage
loans originated for the CMBS market which contain "lock-out" clauses (that is,
provisions which prohibit the prepayment of a loan for a specified period after
the loan is originated or impose costly yield maintenance provisions), the
Company's No Lock loans allowed borrowers the ability to prepay loans at any
time by paying a prepayment penalty.
Prior to the Petition Date, the Company had originated over $900 million in
aggregate principal amount of loans. In June 1998, the Company securitized
approximately $496 million of the commercial mortgage loans originated or
acquired through a mortgage loan conduit program with Citicorp Real Estate, Inc.
("Citibank") and, through CRIIMI MAE CMBS Corp., issued Commercial Mortgage Loan
Trust Certificates, Series 1998 1 ("CMO-IV"). A majority of these mortgage loans
were "No Lock" loans. In CMO-IV, CRIIMI MAE sold $397 million face amount of
fixed-rate, investment grade CMBS. CRIIMI MAE has call rights on each of the
issued securities and therefore has not surrendered control of the bonds, thus
requiring the transaction to be accounted for as a financing of the mortgage
loans collateralizing the investment grade CMBS sold in the securitization.
Therefore, the mortgage loans remained on the Company's balance sheet. The
Company originally intended to sell all of the investment grade tranches of
CMO-IV; however, two investment grade tranches were not sold until 1999. As
discussed further below, as part of the Plan, the Company will sell its
remaining interest in CMO-IV. Accordingly, upon such sale, the mortgage loans,
and related other assets and liabilities will be removed from the balance sheet.
On April 5, 1999, the Company finalized an agreement by which Salomon Smith
Barney, in cooperation with CRIIMI MAE, agreed to sell the remaining two classes
of investment grade CMBS from CMO-IV with a face 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
26
<PAGE>
October 1999. CRIIMI MAE retained the right to call each CMBS when the principal
balance amortizes to 15% of its original face balance. The 15% call option
prevents CRIIMI MAE from surrendering control of the assets pursuant to the
requirements of FAS 125 and thus the transaction has been accounted for as a
financing and not a sale. Gross proceeds from the sale were used to pay off
$39.6 million of secured debt and certain costs, and the remainder of
approximately $315,000 was remitted to CRIIMI MAE. This resulted in CRIIMI MAE
recognizing fixed-rate debt for these bonds in the amount of the gross proceeds
received. In addition, CRIIMI MAE received past due CMBS payments on these two
classes.
In July 2000, the Company decided that, as part of the Plan, it would sell
the remaining $53 million face amount of assets from CMO-IV that it currently
owns. The proceeds would be used to pay down the variable rate debt secured by
certain assets from CMO-IV with any remaining proceeds retained by the Company.
Upon the sale of these assets, CRIIMI MAE will no longer have any economic
interest in CMO-IV. The Company, as the owner of the issuer's equity of CMO-IV,
holds the call options related to the $442.5 million (original face amount) of
previously issued securities that are currently classified as securitized debt
on the Company's balance sheet. Upon the sale of the issuer's equity, CRIIMI
MAE will no longer own these call options and, as a result, the securitization
will no longer qualify as a financing under SFAS 125. As a result, all assets
(Investment in Originated Loans and related deferred financing costs) and
liabilities (Collateralized mortgage obligations - Originated Loans and a
portion of variable rate secured borrowings - CMBS) related to the
securitization will be removed from CRIIMI MAE's balance sheet upon the sale of
the issuer's equity. If the sale of CRIIMI MAE's economic interest in CMO-IV
took place as of June 30, 2000, based on the June 30, 2000 balance sheet and
estimated fair values, the Company would recognize an approximate $24 million
loss for financial statement purposes, and an approximate $23 million loss for
tax purposes.
As of June 30, 2000 and December 31, 1999, the originated loans were
secured by properties of the types and at the locations identified below:
<TABLE>
<CAPTION>
June 30, December 31, June 30, December 31,
Property Type 2000(1) 1999 (1) Geographic Location(2) 2000(1) 1999 (1)
------------- ------- ------- ---------------------- ------ --------
<S> <C> <C> <C> <C> <C>
Multifamily........ 38% 37% Michigan.................... 21% 20%
Hotel.............. 26% 26% Texas....................... 7% 7%
Retail............. 20% 20% Illinois.................... 7% 7%
Office............. 11% 11% California.................. 6% 6%
Other.............. 5% 6% Maryland.................... 6% 6%
---- ------
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.
Descriptions of the originated loans categorized by unpaid principal
balances as of June 30, 2000 are as follows:
<TABLE>
<CAPTION>
As of June 30, 2000
-------------------
Weighted
Average
Number of Face Effective Weighted Average
Unpaid Principal Balance (1) Loans(2) Value(3)(4) Interest Rate Remaining Term
---------------------------- -------- ---------- ------------- --------------
<S> <C> <C> <C> <C>
$ 0 - $ 4.99 million 91 $213,304,109 7.48% 8.1 years
$ 5 - $ 9.99 million 21 153,143,809 8.31% 9.6 years
$10 - $14.99 million 6 75,040,519 7.15% 8.4 years
$15 - $20 million 1 16,986,770 7.15% 9.4 years
--- ------------ ---- ---------
119 $458,475,207 7.52% 8.9 years
=== ============ ==== =========
</TABLE>
_________________
(1) The carrying amount of the originated loans of $464,478,082 is comprised of
$458,475,207 face amount of loans plus $6,002,875 of deferred loan costs.
27
<PAGE>
(2) Several loans in CMO-IV are collateralized by multiple properties. The
table reflects the actual number of loans.
(3) During the six months ended June 30, 2000, there was one loan prepayment in
CMO-IV. This prepayment generated net proceeds of approximately $927,100
and resulted in a financial statement gain of $37,885, which is included in
Gain on Originated Loan Dispositions on the accompanying consolidated
statement of income for the six months ended June 30, 2000.
(4) All originated loans are collateralized by first or second liens on
multifamily, hotel, retail, office or other commercial properties.
Approximately 78% of the unpaid principal balance of the loans in the
securitization are No-Lock loans.
(5) The fair value of the originated loans at June 30, 2000 was $419,296,783.
Descriptions of the originated loans categorized by unpaid principal
balances as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
As of December 31, 1999
-----------------------
Weighted
Average
Number of Face Effective Weighted Average
Unpaid Principal Balance Loans Value(1) Interest Rate Remaining Term
------------------------ ----- -------- ------------- --------------
<S> <C> <C> <C> <C>
$ 0 - $ 4.99 million 92 $216,386,540 7.48% 8.6 years
$ 5 - $ 9.99 million 21 154,467,547 7.36% 8.9 years
$10 - $14.99 million 6 75,822,080 7.15% 8.9 years
$15 - $20 million 1 17,076,246 7.15% 9.9 years
--- ------------ ----- ---------
120 $463,752,413 7.37% 9.1 years
=== ============ ===== =========
</TABLE>
________________________
(1) The fair value of the originated loans at December 31, 1999 was
$422,643,902.
Although CMO-IV was accounted for as a financing, as described above,
economically, the Subordinated CMBS tranches created in this transaction which
CRIIMI MAE owns, currently generate monthly cash flows of approximately
$700,000. As of June 30, 2000, interest payments of approximately $13.4 million
were withheld with respect to certain tranches of CMO-IV.
At the time it filed for protection under Chapter 11, the Company had a
second mortgage loan conduit program with Citicorp Real Estate, Inc. (the
"Citibank Program") and a loan conduit program with Prudential Securities
Incorporated and Prudential Securities Credit Corporation (collectively,
"Prudential") (the "Prudential Program").
The Citibank Program provided for CRIIMI MAE to pay to Citibank the face
value of the loans originated through the Program, which were funded by Citibank
and not otherwise securitized, plus or minus any hedging loss or gain on
December 31, 1998. To secure this obligation, CRIIMI MAE was required to deposit
a portion of the principal amount of each originated loan in a reserve account.
On April 5, 1999, the Bankruptcy Court entered a Stipulation and Consent
Order (the "Order"), negotiated by the Company and Citibank. The negotiations
were in response to a letter Citibank sent to the Company on October 5, 1998
alleging that the Company was in default under the Citibank Program and that it
was terminating the Citibank Program. The Order provided that Citibank would,
with CRIIMI MAE's cooperation, sell the loans originated under the Citibank
Program provided that the sale resulted in CRIIMI MAE receiving minimum net
proceeds of not less than $3.5 million, after satisfying certain amounts due to
Citibank under the Citibank Program from the amount held in the reserve account.
The minimum net proceeds provision could be waived by written agreement of the
Company, the Unsecured Creditors' Committee and the Equity Committee.
On August 5, 1999, all but three of the commercial loans originated under
the Citibank Program in 1998 were sold for gross proceeds of approximately $308
million. The loans sold had an aggregate unpaid principal balance of $339
million. On September 16, 1999, the remaining three loans were sold for gross
proceeds of approximately $27.2 million. The loans sold had an aggregate
principal balance of $32.7 million. Prior to the actual sale of these loans, the
Company had recorded its unrealized losses based on pricing data received from
Citibank. In the case of each sale of the commercial loans, the minimum net
proceeds provision was waived by agreement of the Company, the Unsecured
Creditors' Committee and the CMI Equity Committee. For GAAP purposes, the
28
<PAGE>
Company realized $36.3 million of losses from the third quarter of 1998 through
the third quarter of 1999. For income tax purposes, the entire loss of $36.3
million was recorded as a realized loss on the loan sale dates in the third
quarter of 1999.
Under the Prudential Program, the Company had an option to pay to
Prudential the face value of the loan plus or minus any hedging loss or gain, at
the earlier of June 30, 1999, or the date by which a stated quantity of loans
for securitization had been made. Under the Prudential Program, the Company was
required to fund a reserve account of approximately $2 million for the sole loan
originated under this Program. Since CRIIMI MAE was unable to exercise its
option under the Prudential Program, the Company forfeited the amount of the
reserve account.
7. INSURED MORTGAGE SECURITIES
CRIIMI MAE's consolidated portfolio of mortgage securities is comprised of
FHA-Insured Certificates and GNMA Mortgage-Backed Securities. Additionally,
mortgage securities include Federal Home Loan Mortgage Corporation (Freddie Mac)
participation certificates which are collateralized by GNMA Mortgage-Backed
Securities, as discussed below. As of June 30, 2000, approximately 16% of
CRIIMI MAE's investment in mortgage securities were FHA-Insured Certificates and
84% were GNMA Mortgage-Backed Securities (including certificates which
collateralized Freddie Mac participation certificates). FHA-Insured
Certificates and GNMA Mortgage-Backed Securities are collectively referred to
herein as "mortgage securities."
29
<PAGE>
CRIIMI MAE owns the following mortgages directly or indirectly through its
wholly-owned subsidiaries:
<TABLE>
<CAPTION>
As of June 30, 2000
-------------------
Weighted
Number of Average
Mortgage Effective Interest Weighted Average
Securities Fair Value (1) Amortized Cost Rate Remaining Term
------------- ---------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
CRIIMI MAE 1 $ 5,232,527 $ 5,416,259 8.00% 35 years
CRIIMI MAE Financial Corporation (2) 35 121,450,651 125,378,096 8.39% 29 years
CRIIMI MAE Financial Corporation II (2) 46 196,269,500 204,917,710 7.20% 27 years
CRIIMI MAE Financial Corporation III (2) 22 58,248,457 60,030,161 7.83% 29 years
-------------- ---------------- --------------- -------------- -----------------
104 $381,201,135 $395,742,226 7.68% (3) 28 years (3)
============== ================ =============== ============== =================
<CAPTION>
As of December 31, 1999
-----------------------
Weighted
Number of Average
Mortgage Effective Interest Weighted Average
Securities Fair Value (1) Amortized Cost Rate Remaining Term
------------- ---------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
CRIIMI MAE 1 $ 5,268,982 $ 5,429,746 8.00% 35 years
CRIIMI MAE Financial Corporation 36 123,757,775 126,621,745 8.40% 29 years
CRIIMI MAE Financial Corporation II 49 204,437,012 212,474,158 7.24% 27 years
CRIIMI MAE Financial Corporation III 23 61,393,470 62,943,459 7.84% 29 years
------------- -------------- -------------- -------------- ----------------
109 $394,857,239 $407,469,108 7.68% (3) 28 years (3)
============= ============== ============== ============== ================
</TABLE>
________________________
(1) The fair value of the mortgage securities was based on the estimated
discounted future cash flows. As of June 30, 2000 and December 31, 1999,
all mortgage securities were classified as Available for Sale and carried
at fair value on the balance sheet. See fair market value discussion in
Note 4.
(2) During the six months ended June 30, 2000, there were five prepayments of
mortgage loans underlying mortgage securities held by CRIIMI MAE's
financing subsidiaries. These prepayments generated net proceeds of
approximately $9.8 million and resulted in net financial statement gains of
approximately $241,300, which are included in gains on mortgage securities
dispositions on the accompanying consolidated statement of income for the
six months ended June 30, 2000.
(3) Weighted averages were computed using total face value of the mortgage
securities.
As a result of the CBO-2 transaction (see Note 5), the Company, in
accordance with GAAP, no longer classifies its mortgage securities as Held to
Maturity. The Company's mortgage securities are now classified as Available for
Sale. As a result, the Company now carries its mortgage securities at fair
value. The difference between the amortized cost and the fair value of mortgage
assets recorded at fair value represents the net unrealized gains or losses on
those mortgage securities, which is reported as a separate component of
shareholders' equity as of June 30, 2000 and December 31, 1999.
8. DIFFERENCES BETWEEN FINANCIAL STATEMENT NET INCOME (LOSS) AND TAXABLE
INCOME (LOSS)
The differences between financial statement (GAAP) net income (loss) and
taxable income (loss) are principally attributable to differing treatment of
unrealized/realized gains and losses associated with certain assets; the
impairment of certain assets; the bases, income, and/or credit loss recognition
related to certain assets; a portion of reorganization costs not deductible for
tax purposes; and amortization of certain costs.
As previously discussed in Note 1, as a result of its trader election in
early 2000, CRIIMI MAE recognized a mark-to-market tax loss of approximately
$478 million on certain Trading Assets on January 1, 2000 (the "January 2000
Loss"). The January 2000 Loss is expected to be recognized evenly over four
years for tax purposes (i.e., approximately $120 million per year) beginning
with the year 2000. The Company recognized one-fourth (i.e., approximately $30
million) of this year's portion of the January 2000 Loss during each of the
first two quarters of 2000. The Company expects to continue to recognize
approximately $30 million of loss related to the January 2000
30
<PAGE>
Loss in each quarter for the fiscal years 2000-2003. (See Note 1 "2000 Taxable
Income (Loss)/ Taxable Distribution Requirements" for a more complete
discussion).
A summary of the estimated first half 2000 net operating loss is as
follows:
<TABLE>
<S> <C>
January 2000 Loss $478 million
LESS: Portion recognized in First Quarter 2000 (30) million
LESS: Portion recognized in Second Quarter 2000 (30) million
--------------
Balance Remaining of January 2000 Loss to be Recognized $418 million
==============
Taxable Income for the six months ended June 30, 2000 Before
Recognition of January 2000 Loss $ 27 million
LESS: January 2000 Loss Recognized in First Quarter 2000 (30) million
LESS: January 2000 Loss Recognized in Second Quarter 2000 (30) million
--------------
Net Operating Loss for the six months ended June 30, 2000 ($33) million
Net Operating Loss through June 30, 2000 ($33) million
Net Operating Loss Utilization 0.0 million
--------------
Net Operating Loss Carried Forward for Use in Future Periods ($33) million
</TABLE>
The distinction between taxable income (loss) and GAAP income (loss) is
important to the Company's shareholders because dividends or distributions are
declared and paid on the basis of taxable income. The Company does not pay taxes
so long as it satisfies the requirements for exemption from taxation pursuant to
the REIT requirements of the Code. The Company calculates its taxable income as
if the Company were a regular domestic corporation. This taxable income level
determines the amount of dividends the Company is required to pay out over time
in order to eliminate its tax liability.
9. OBLIGATIONS UNDER FINANCING FACILITIES
Default Declarations
As a result of the Chapter 11 petition filed on October 5, 1998, certain
lenders have declared defaults or otherwise taken action against the Company
with respect to a number of CRIIMI MAE's financing facilities. See Note 16 for a
discussion of material litigation between the Company and various creditors and
agreements the Company has reached with certain of these creditors. See Note 1
"Organization - The Plan of Reorganization" for a discussion of the New Debt
contemplated by the Company's Plan.
31
<PAGE>
The following table summarizes CRIIMI MAE's debt outstanding as of June 30, 2000
and December 31, 1999:
<TABLE>
<CAPTION>
Six months ended June 30, 2000
------------------------------------------------------------------------------------------------
Effective Average
Rate at Effective
Ending Balance Quarter End Average Balance Rate Stated Maturity Date
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Securitized mortgage obligations:
Subordinated CMBS (1) $ 279,348,933 8.9% $279,126,655 8.9% Nov 2006-Nov 2011
Freddie Mac Funding Note (2) 195,830,884 7.4% 198,089,838 7.4% Sept 2031
Fannie Mae Funding Note (3) 58,022,397 7.5% 60,082,063 7.5% March 2035
CMO (4) 115,170,652 7.5% 115,391,409 7.5% Jan 2033
CMO-loan originations (5) 395,261,869 6.6% 397,748,035 6.6% Oct 2001-May 2008
Variable-rate secured borrowings -
Subordinated CMBS (a) 566,429,031 7.7% 658,252,233 7.5% Various
Bank term loans 3,050,000 8.0% 3,050,000 7.7% Dec 1998
Working capital line of credit 40,000,000 8.4% 40,000,000 8.1% Dec 1998
Bridge loan 49,749,522 8.9% 49,749,522 8.5% Feb 1999
Senior unsecured notes 100,000,000 9.1% 100,000,000 9.1% Dec 2002
--------------------
Total $1,802,863,288
====================
</TABLE>
(a) Certain debt balances have been reduced to reflect application of net cash
flow received during Chapter 11 pursuant to agreements with certain
creditors. See also Note 5 for a summary of year to date sales of CMBS
subject to the CMBS Sale and the related debt paid off.
<TABLE>
<CAPTION>
Year ended December 31, 1999
-------------------------------------------------------------------------------------------------
Average
Effective Rate Effective
Ending Balance at Year End Average Balance Rate Stated Maturity Date
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Securitized mortgage obligations:
Subordinated CMBS (1) $ 278,165,968 8.9% $217,285,484 8.9% Nov 2006-Nov 2011
Freddie Mac Funding Note (2) 201,784,575 7.4% 211,889,272 7.4% Sept 2031
Fannie Mae Funding Note (3) 60,853,118 7.4% 66,918,215 7.4% March 2035
CMO (4) 116,073,909 7.4% 129,616,228 7.4% Jan 2033
CMO-loan originations (5) 399,768,513 6.6% 388,431,011 6.5% Oct 2001-May 2008
Variable-rate secured borrowings -
Subordinated CMBS 732,904,775 7.7% 794,212,980 6.2% Various
Bank term loans 3,050,000 7.8% 3,050,000 7.1% Dec 1998
Working capital line of credit 40,000,000 8.2% 40,000,000 7.0% Dec 1998
Bridge loan 49,749,522 8.7% 49,749,522 7.5% Feb 1999
</TABLE>
32
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Senior unsecured notes 100,000,000 9.1% 100,000,000 9.1% Dec 2002
-------------------
Total $1,982,350,380
===================
</TABLE>
(1) As of June 30, 2000 and December 31, 1999, the face amount of the debt was
$328,446,000 and $328,446,000 with unamortized discount of $49,097,067 and
$50,280,032, respectively. During the six months ended June 30, 2000 and
1999, discount amortization of $1,182,695 and $715,283, respectively, was
recorded as interest expense.
(2) As of June 30, 2000 and December 31, 1999, the face amount of the note was
$201,994,118 and $209,506,965, respectively, with unamortized discount of
$6,163,234 and $7,722,390, respectively. During the six months ended June
30, 2000 and 1999, discount amortization of $1,559,156 and $205,672,
respectively, was recorded as interest expense.
(3) As of June 30, 2000 and December 31, 1999, the face amount of the note was
$59,420,879 and $62,359,630, respectively, with unamortized discount of
$1,398,482 and $1,506,512, respectively. During the six months ended June
30, 2000 and 1999, discount amortization of $108,030 and $153,185,
respectively, was recorded as interest expense.
(4) As of June 30, 2000 and December 31, 1999, the face amount of the note was
$118,302,509 and $119,563,094, respectively, with unamortized discount of
$3,131,856 and $3,489,185, respectively. During the six months ended June
30, 2000 and 1999, discount amortization of $357,329 and $367,567,
respectively, was recorded as interest expense.
(5) As of June 30, 2000 and December 31, 1999, the face amount of the debt was
$405,933,679 and $411,110,641 with unamortized discount of $10,671,810 and
$11,342,128, respectively. During the six months ended June 30, 2000 and
1999, discount amortization of $670,319 and $727,018, respectively, was
recorded as interest expense.
Collateralized Bond Obligations - CMBS
In the May 1998 CBO-2 transaction, CRIIMI MAE, through its wholly-owned
subsidiary CRIIMI MAE CMBS Corp., issued an aggregate of $468 million of longer-
term, fixed-rate investment grade debt securities to reduce an equivalent amount
of short-term, variable-rate secured borrowings used to initially fund CMBS
acquisitions. Of the $468 million in investment grade securities, $345 million
were non-callable securities and $123 million were callable securities.
On March 5, 1999, $205.8 million face amount of callable CBO-2 BBB Bonds
with a coupon rate of 7% were sold. Of the $159 million of net sale proceeds,
$141.2 million was used to repay variable-rate secured borrowings under the
agreement with Morgan Stanley and $17.8 million was remitted to CRIIMI MAE.
FAS 125 provides guidance as to whether a transfer of financial assets,
such as in a securitization, will qualify for sale treatment or secured
borrowing treatment. This distinction is made by determining whether a
transferor relinquishes control over the transferred assets. If the transferor
is considered to no longer control the assets, the securities receive sale
treatment which calls for the de-recognition of all assets surrendered and
liabilities settled, the recognition of all assets received and liabilities
incurred and the recognition of a gain or loss through earnings. If the
transferor maintains control over the transferred assets, the assets remain on
the balance sheet and a corresponding amount of debt is recognized for all
securities not held by the transferor. The determination of control is made on
a security by security basis.
As a result of CBO-2, control was retained over $123 million of the
securities because CRIIMI MAE has the right to call the securities. The $345
million of non-callable investment grade securities were treated as a sale, the
corresponding assets and debt were de-recognized from the balance sheet and a
gain of $28.8 million was recognized through earnings. The $123 million of
callable investment grade securities and the corresponding amount of debt are
recorded on the balance sheet. The March 5, 1999 transaction was accounted for
as a financing by the Company rather than a sale. This resulted in CRIIMI MAE
recognizing a fixed-rate liability for these bonds in the amount of gross
proceeds.
33
<PAGE>
Collateralized Mortgage Obligations - Insured Mortgage Securities
During late 1995, CRIIMI MAE, through three wholly owned financing
subsidiaries, issued approximately $664 million (face amount) of long-term,
fixed-rate debt in order to refinance short-term, variable-rate debt. Changes
in interest rates will have no impact on the cost of funds or the collateral
requirements on this debt. Proceeds from the issuance of this long-term debt,
net of original issue discount, were originally applied as follows:
approximately $557 million was used to pay down short-term, variable-rate debt
facilities, approximately $8 million was used to pay transaction costs and
approximately $80 million was used to purchase Subordinated CMBS.
The refinancings were completed through three separate transactions. GNMA
Mortgage-Backed Securities with a fair value of approximately $233 million as of
December 31, 1998, were pledged as security for a funding note payable to
Freddie Mac (the "Freddie Mac Funding Note"). The Collateralized Mortgage
Obligations (CMOs) were collateralized by FHA-Insured Certificates and GNMA
Mortgage-Backed Securities with a fair value of approximately $161 million as of
December 31, 1998. GNMA Mortgage-Backed Securities with a fair value of
approximately $89 million as of December 31, 1998, were pledged as security for
a funding note payable to Fannie Mae (the "Fannie Mae Funding Note").
Each of the above-mentioned transactions has been accounted for as a
financing in accordance with FASB Technical Bulletin 85-2. The discount on the
CMOs and the Funding Notes is being amortized on a level yield basis.
In the second quarter of 2000, the Company increased the estimate of future
prepayment speeds used to recognize interest expense related to these
obligations. This increase in the estimate of future prepayment speeds is a
result of these obligations paying down faster than originally projected. This
resulted in an additional $1.5 million of discount amortization in the second
quarter of 2000 which is reflected in interest expense.
Collateralized Mortgage Obligations - Originated Loans
In the June 1998 CMO-IV transaction, $496 million of originated or acquired
commercial mortgage loans were securitized, and CRIIMI MAE sold $397 million
face amount of fixed-rate investment-grade debt securities. CRIIMI MAE retained
call options on all of the securities such that control was not relinquished.
Therefore, the mortgage loans remain on CRIIMI MAE's balance sheet as assets for
accounting purposes (along with the collateralized mortgage obligations) for all
securities sold by CRIIMI MAE.
The securities were issued at a discount of approximately $6.6 million.
Such discount, as well as approximately $6.7 million of deferred costs and
securitization transaction costs, are amortized on a level yield basis over the
expected life of the related security. The securities not sold to third parties
were partially financed with secured borrowings. The related lending agreements
are secured by certain of the CMO-IV securities with an aggregate fair value of
approximately $43.3 million and $42.8 million as of June 30, 2000 and December
31, 1999, respectively.
On April 5, 1999, the Company finalized an agreement by which Salomon Smith
Barney, in cooperation with CRIIMI MAE, agreed to sell the remaining two classes
of investment grade CMBS from CMO-IV with a face amount of $45.9 million and an
average coupon rate of 6.96% constituting a portion of the collateral security
advances under financing agreements with Citicorp. CRIIMI MAE sold these two
classes of CMBS in May and October 1999. CRIIMI MAE retains the right to call
each CMBS when the principal balance amortizes to 15% of its original face
balance. The 15% call option prevents CRIIMI MAE from surrendering control of
the assets pursuant to the requirements of FAS 125 and thus the transaction has
been accounted for as a financing and not a sale. Gross proceeds from the sale
were used to pay off $39.6 million of secured debt and certain costs, and the
remainder of approximately $315,000 was remitted to CRIIMI MAE. This resulted
in CRIIMI MAE recognizing fixed-rate debt for these bonds in the amount of the
gross proceeds received.
See Note 6 regarding the extinguishment of this debt in connection with the
Company's Plan.
Variable Rate Secured Borrowings-CMBS
As previously discussed, when CRIIMI MAE purchased Subordinated CMBS, it
initially financed (generally through short-term, variable-rate secured
borrowings) a portion of the purchase price of the Subordinated CMBS. These
secured borrowings were either provided by the issuer of the CMBS pool or
through master secured
34
<PAGE>
borrowing agreements, as discussed below. As of June 30, 2000, the secured
borrowings on Subordinated CMBS have interest rates that are generally based on
the one-month London Interbank Offered Rate (LIBOR), plus a spread ranging from
0.5% to 1.5%. Due to the Chapter 11 filing and the automatic stay provisions
granted under the Bankruptcy Code, the actual maturity date is undeterminable
for facilities that have expired or will expire in 2000 per the stated
maturities.
As discussed in Note 5, during the six months ended June 30, 2000, the
Company paid down variable rate debt aggregating $150.5 million as a result of
the sale of certain CMBS subject to the CMBS Sale. Upon the disposition of the
remaining CMBS subject to the CMBS Sale and the Company's interest in CMO-IV, of
which there can be no assurance, it is expected that the variable rate debt
secured by such sold assets will be paid down. During 1999, the Company repaid
variable rate secured debt approximating $141.2 million in connection with the
sale of the CBO-2 BBB bonds and $39.6 million in connection with the sale of the
BBB bonds issued in CMO-IV.
The secured borrowing agreements are secured by certain rated CMBS security
tranches with an aggregate fair value of approximately $635 million as of June
30, 2000 and $784 million as of December 31, 1999. CRIIMI MAE's short-term
variable-rate financing facilities require that the value of the collateral
securing the facilities meet a minimum loan-to-value ratio. If the value of the
collateral is perceived such that the maximum loan-to-value ratio is exceeded,
then the lender may require the Company to post cash or additional collateral
with sufficient value to cure the perceived value deficiency. At August 1,
2000, CRIIMI MAE had secured borrowing agreements with respect to its CMBS
securities with German American Capital Corporation, Merrill Lynch, and Citicorp
Securities, Inc. ("Citicorp"). These secured borrowing agreements qualify as
financings under FAS 125 because CRIIMI MAE is required to purchase the same
securities collateralizing the borrowing before their maturity.
Senior Unsecured Notes
In November 1997, CRIIMI MAE issued senior unsecured notes ("Notes") due on
December 1, 2002 in an aggregate principal amount of $100 million. The Notes
are effectively subordinated to the claims of any secured lender to the extent
of the value of the collateral securing such indebtedness. Interest on the
Notes is payable semi-annually in arrears on June 1 and December 1, commencing
June 1, 1998 at a fixed annual rate of 9.125%. The Notes are redeemable at any
time, in whole or in part, at the option of CRIIMI MAE.
The Indenture contains certain covenants which, among other things,
restricts the ability of the Company and its subsidiaries to incur additional
indebtedness, pay dividends, or make distributions in respect of the Company's
or such subsidiaries' capital stock, make other restricted payments, enter into
transactions with affiliates or related persons, or consolidate, merge or sell
all or substantially all of their assets. These covenants are subject to
exceptions and qualifications.
Under the terms of the Indenture, the Company cannot incur additional
indebtedness (except for Permitted Debt, which includes secured borrowings,
working capital lines of credit, borrowings under facilities in place as of
November 21, 1997), unless at the time of such incurrence either (a) the ratio
of Adjusted Earnings Available for Fixed Charges to Adjusted Fixed Charges
giving proforma effect for the new borrowings is greater than 1.75 to 1.0 or (b)
the Adjusted Debt to Capital Ratio on a proforma basis after giving effect to
the incurrence of the new debt is less than 2.0 to 1.0.
Bank Term Loans
In connection with the Merger, CM Management assumed certain debt of
certain mortgage businesses affiliated with C.R.I., Inc. in the principal amount
of $9.1 million (the "Bank Term Loan"). The Bank Term Loan is secured by
certain cash flows generated by CRIIMI MAE's direct and indirect interests in
the AIM Funds and is guaranteed by CRIIMI MAE. The loan requires quarterly
principal payments of $650,000 and matured on December 31, 1998. The amount
outstanding as of June 30, 2000 and December 31, 1999 was $1.3 million.
Interest on the loan is based on LIBOR, plus a spread of 1.25%.
In addition, a wholly owned subsidiary has a loan secured by certain Real
Estate Owned Property and guaranteed by CRIIMI MAE. The loan requires monthly
interest payments and a balloon principal payment at maturity. The loan was
made January 22, 1998 and matured on August 1, 1999. The Company received a
default notice on August 3, 1999 from Citicorp. The amount outstanding as of
June 30, 2000 and December 31, 1999 was $1.75 million. Interest on the loan is
based on LIBOR plus a spread of 1.5%. The property was sold to a third party in
July, 2000 and a portion of the proceeds from the sale were used to pay off the
outstanding loan
35
<PAGE>
balance, and other related costs.
Working Capital Line of Credit
In 1996, CRIIMI MAE entered into an unsecured working capital line of
credit provided by two lenders which provided for up to $40 million in
borrowings. The credit facility matured on December 31, 1998. Outstanding
borrowings under this line of credit are based on interest at one-month LIBOR
plus a spread of 1.75%. As of June 30, 2000 and December 31, 1999, $40 million
in borrowings were outstanding under this facility.
Bridge Loan
In August 1998, CRIIMI MAE entered into a bridge loan for $50 million
provided by a lender. The total unpaid principal balance and accrued interest
was due in February 1999. Outstanding borrowings under this facility are based
on interest at one-month LIBOR plus a spread of 2.25%. As of June 30, 2000 and
December 31, 1999, approximately $50 million in borrowings was outstanding under
this loan.
Other Debt Related Information
Changes in interest rates will have no impact on the cost of funds or the
collateral requirements on CRIIMI MAE's fixed-rate debt, which approximates 63%
of CRIIMI MAE's consolidated debt as of June 30, 2000. Fluctuations in interest
rates will continue to impact the value of that portion of CRIIMI MAE's mortgage
assets which are not match-funded and could impact the net interest margin
through increased cost of funds on the variable-rate debt in place. CRIIMI MAE
has a series of interest rate cap agreements in place in order to partially
limit the adverse effects of rising interest rates on the remaining variable-
rate debt. When CRIIMI MAE's cap agreements expire, CRIIMI MAE will have
interest rate risk to the extent interest rates increase on any variable-rate
borrowings unless the caps are replaced or other steps are taken to mitigate
this risk. Furthermore, CRIIMI MAE has interest rate risk to the extent that
the LIBOR interest rate increases between the current rate and the cap rate.
However, CRIIMI MAE's investment policy contemplates that at least 75% of
variable-rate debt be hedged. As of June 30, 2000 and December 31, 1999, 100%
and 94%, respectively, of CRIIMI MAE's variable-rate debt was hedged.
For the six months ended June 30, 2000, CRIIMI MAE's weighted average cost
of borrowing, including amortization of discounts and deferred financing fees of
approximately $5.7 million, was approximately 8%. As of June 30, 2000, CRIIMI
MAE's debt-to-equity ratio was approximately 7.2 to 1 and CRIIMI MAE's non-
match-funded debt-to-equity ratio was approximately 3.0 to 1. Under certain of
CRIIMI MAE's existing debt facilities, CRIIMI MAE's debt-to-equity ratio, as
defined, may not exceed 5.0 to 1.0, among other requirements.
10. INTEREST RATE PROTECTION AGREEMENTS
CRIIMI MAE has entered into interest rate protection agreements to
partially limit the adverse effects of rising interest rates on its variable-
rate borrowings. Interest rate caps ("caps"), as shown below, provide protection
to CRIIMI MAE to the extent interest rates, based on a readily determinable
interest rate index, increase above the stated interest rate cap, in which case,
CRIIMI MAE will receive payments based on the difference between the index and
the cap. If the cap qualifies for hedge accounting treatment, the related cost,
as well as gains or losses on terminated positions, have been deferred and
recognized into income over the life of the related debt. However, with the sale
of certain securities contemplated to be sold by the Plan, certain of the
Company's interest rate caps will no longer qualify for hedge accounting. These
caps will be marked-to-market with the adjustment recorded through earnings.
At June 30, 2000, CRIIMI MAE held caps with a notional amount of $675 million
of which $659 million was used to hedge the Company's variable rate debt and
the remaining $16 million notional amount was carried at fair value with changes
in fair value reported in earnings as it no longer qualified for hedge
accounting.
36
<PAGE>
<TABLE>
<CAPTION>
Notional
Amount Effective Date Maturity Date (2) Cap (2) Index (3)
------------- ------------------ ------------------ ------- -----------
<C> <S> <C> <C> <C>
$ 100,000,000 September 22, 1997 September 22, 2000 6.6563% 1M LIBOR
100,000,000 December 7, 1997 November 7, 2000 6.6563% 1M LIBOR
50,000,000 December 23, 1997 December 23, 2000 6.9688% 1M LIBOR
100,000,000 March 11, 1998 March 12, 2001 6.6875% 1M LIBOR
100,000,000 April 30, 1998 March 30, 2001 6.6875% 1M LIBOR
100,000,000 June 4, 1998 June 4, 2001 6.6563% 1M LIBOR
100,000,000 June 26, 1998 June 26, 2001 6.6563% 1M LIBOR
25,000,000 September 6, 1998 August 6, 2001 6.6523% 1M LIBOR
-------------
$ 675,000,000 (1)
=============
</TABLE>
_________________
(1) CRIIMI MAE's designated interest rate protection agreements hedge CRIIMI
MAE's variable-rate borrowing costs.
(2) The weighted average strike price is approximately 6.7% and the weighted
average remaining term for these interest rate cap agreements is
approximately one year.
(3) The one month LIBOR rate was 6.6419% at June 30, 2000.
CRIIMI MAE is exposed to credit loss in the event of non-performance by the
counterparties to the interest rate protection agreements should interest rates
exceed the caps. However, management does not anticipate non-performance by any
of the counterparties. All of the counterparties have long-term debt ratings of
A+ or above by Standard and Poor's and A1 or above by Moody's. Although none of
CRIIMI MAE's caps are exchange-traded, there are a number of financial
institutions which enter into these types of transactions as part of their day-
to-day activities.
11. COMMON STOCK
CRIIMI MAE had 62,353,170 and 59,954,604 common shares issued and outstanding as
of June 30, 2000 and December 31, 1999, respectively. See also Note 1
"Organization - The Plan of Reorganization" and "The Company's 1999 Taxable
Income".
Stock Purchase Plan
In December 1997, CRIIMI MAE registered with the Securities and Exchange
Commission up to 3 million shares of CRIIMI MAE common stock ("Common Shares")
in connection with a Dividend Reinvestment and Stock Purchase Plan (the "DRIP
Plan"). Subsequently, in May 1998, the shareholders approved the issuance of up
to 4.7 million common shares in connection with the DRIP Plan. Subject to the
suspension referenced below, the DRIP Plan allows investors the opportunity to
purchase additional CRIIMI MAE Common Shares through the reinvestment of CRIIMI
MAE's dividends, optional cash payments and initial cash investments.
In October 1998, due to the filing under Chapter 11, the Company suspended
the initial cash investment and optional cash payment portion of the DRIP Plan
until further notice.
Dividends
During the pendency of the Chapter 11 proceedings, the Company is prohibited
from paying cash dividends without first obtaining Bankruptcy Court approval
(and subject to there being funds legally available for any such dividend under
state corporate law). (See Note 1-Effect of Chapter 11 Filing on REIT Status and
other Tax Matters).
In September 1999, the Company declared a dividend to common shareholders
payable in shares of a new series of preferred stock designated as Series F
Redeemable Cumulative Dividend Preferred Stock with a face value of $10 per
share. The Series F Preferred Stock was convertible into shares of common stock
during two, 10-business day windows. During the first conversion period
(November 15 through November 30, 1999), 756,453 shares of Series F Preferred
Stock were converted, resulting in the issuance of 6,401,443 shares of common
stock. During the second and final conversion period for the Series F Preferred
Stock (January 21 through February 3, 2000), 263,788 additional shares were
converted, resulting in the issuance of 2,396,566 shares of common stock. See
Note 12 for further discussion.
37
<PAGE>
12. PREFERRED STOCK
CRIIMI MAE's charter authorizes the issuance of up to 25,000,000 shares of
preferred stock, of which 3,000,000 shares have been designated as Series B
Cumulative Convertible Preferred Stock, 300,000 shares have been designated as
Series C Cumulative Convertible Preferred Stock, 300,000 shares have been
designated as Series D Cumulative Convertible Preferred Stock, 203,000 shares
have been designated as Series E Cumulative Convertible Preferred Stock, and
1,610,000 shares have been designated as Series F Redeemable Cumulative Dividend
Preferred Stock as of June 30, 2000. See also Note 1 "Organization - The Plan
of Reorganization" and "The Company's 1999 Taxable Income".
Series B Cumulative Convertible Preferred Stock
In August 1996, CRIIMI MAE completed a public offering of 2,415,000 shares
of Series B Cumulative Convertible Preferred Stock, with a par value of $0.01
per share (the "Series B Preferred Stock"), at an aggregate offering price of
$60,375,000. The Series B Preferred Stock pays a dividend in an amount equal to
the sum of (i) $0.68 per share per quarter plus (ii) the product of the excess
over $0.30, if any, of the quarterly cash dividend declared and paid with
respect to each share of common stock times a conversion ratio of 2.2844 times
one plus a conversion premium of 3%, subject to adjustment upon the occurrence
of certain events. If the Series B Preferred Stock votes to accept the Plan,
the relative rights and preferences of the Series B Preferred Stock would be
amended to permit the payment of dividends in cash or common stock (or a
combination thereof) at the Company's election. The Series B Preferred Stock is
(i) convertible at the option of the holders and (ii) subject to redemption at
CRIIMI MAE's sole discretion after the tenth anniversary of issuance. Each
share of Series B Preferred Stock is convertible into 2.2844 shares of common
stock, subject to adjustment upon the occurrence of certain events. Due to
certain adjustment provisions in the Series B Preferred Stock Articles
Supplementary, the payment of the Series F Redeemable Cumulative Dividend
Preferred Stock dividend resulted in an adjustment to the conversion price such
that one share of Series B Preferred Stock is now convertible into 2.6379 shares
of common stock. The liquidation preference and the redemption price on the
Series B Preferred Stock equals $25 per share, together with accrued and unpaid
dividends. There were 1,593,982 shares of Series B Preferred Stock outstanding
as of June 30, 2000. Dividends accrued on the Series B Preferred Stock totaled
$7,587,355 as of June 30, 2000 (of which, $2,167,816 was accrued for the first
six months of 2000, $4,335,631 was accrued during 1999 and $1,083,908 was
accrued for the fourth quarter of 1998, but not paid to date as a result of the
Chapter 11 filing).
Series C Cumulative Convertible Preferred Stock
In March 1997, CRIIMI MAE entered into an agreement with an institutional
investor pursuant to which the Company had the right to sell, and such investor
was obligated to purchase, up to 300,000 shares of Series C Cumulative
Convertible Preferred Stock, par value $.01 per share (the "Series C Preferred
Stock"), through June 1998 at a price of $100 per share. The Series C Preferred
Stock paid a dividend at an annual rate equal to the sum of (i) 75 basis points
plus (ii) LIBOR as of the second LIBOR Market Day preceding the commencement of
the calendar quarter which includes such quarterly dividend payment. The Series
C Preferred Stock was convertible into shares of common stock at the option of
the holder and was subject to redemption by CRIIMI MAE. The outstanding shares
of Series C Preferred Stock were subject to mandatory conversion into common
shares on February 23, 2000. Each share of Series C Preferred Stock was
convertible into common shares based on a formula, the numerator of which was
$100 and the denominator of which was a closing trade price of the common stock
within the conversion period or the average of the closing trade prices of the
common stock over the applicable twenty-one (or such fewer number as was
mutually acceptable) day period immediately preceding the date of delivery. The
liquidation preference and redemption price on the Series C Preferred Stock were
$100 and $106, respectively, per share plus an amount equal to all dividends
accrued and unpaid thereon. On September 23, 1997, 150,000 shares were issued
under this agreement, resulting in net proceeds of approximately $15 million.
On February 23, 1998, another 150,000 shares of Series C Preferred Stock were
issued under this agreement, resulting in net proceeds of approximately $15
million. These proceeds were used to fund purchases of Subordinated CMBS.
During 1999, 20,000 shares of Series C Preferred Stock were converted into
653,061 common shares, resulting in 103,000 shares of Series C Preferred Stock
outstanding at December 31, 1999. Dividends accrued on the Series C Preferred
Stock as of June 30, 2000 totaled $1,094,993 (of which $138,682 was accrued for
the first half of 2000, $697,172 for 1999 and $259,139 for the fourth quarter of
1998, but not paid to date as a result of the Chapter 11 filing). As of
February 22, 2000, all of the outstanding shares of Series C Preferred Stock
were exchanged for Series E Preferred Stock. See below for further discussion.
38
<PAGE>
Series D Cumulative Convertible Preferred Stock
In July 1998, CRIIMI MAE entered into an agreement with an institutional
investor pursuant to which the Company had the right to sell, and such investor
was obligated to purchase, up to 300,000 shares of Series D Cumulative
Convertible Preferred Stock par value $.01 per share (the "Series D Preferred
Stock") at price of $100 per share. The Series D Preferred Stock paid a
dividend at an annual rate equal to the sum of (i) 75 basis points plus (ii)
LIBOR as of the second LIBOR Market Day preceding the commencement of the
calendar quarter which includes such quarterly dividend payment. The Series D
Preferred Stock was convertible into shares of common stock at the option of the
holder and was subject to redemption by CRIIMI MAE. The outstanding Series D
Preferred Stock was subject to mandatory conversion into common shares on July
31, 2000. Each share of Series D Preferred Stock was convertible into common
shares based on a formula, the numerator of which is $100 and the denominator of
which was a closing trade price of the common stock within the conversion period
or the average of the closing trade prices of the common stock over the
applicable twenty-one (or such fewer number as was mutually acceptable) day
period immediately preceding the date of delivery. The liquidation preference
and redemption price on the Series D Preferred Stock were $100 and $106,
respectively, per share plus an amount equal to all dividends accrued and unpaid
thereon. On July 31, 1998, 100,000 shares of Series D Preferred Stock were
issued under this agreement, resulting in net proceeds of approximately $10
million. There were no Series D Preferred Stock converted into common shares
during 1999, resulting in 100,000 shares outstanding at December 31, 1999.
Dividends accrued on the Series D Preferred Stock totaled $1,181,409 as of June
30, 2000 (of which, $380,656 was accrued for the first half of 2000, $645,822
was accrued for 1999 and $154,931 was accrued for the fourth quarter of 1998,
but not paid to date as a result of the Chapter 11 filing). As of July 26,
2000, all of the outstanding shares of Series D Preferred Stock were exchanged
for Series E Preferred Stock. See below for further discussion.
Series E Cumulative Convertible Preferred Stock
On February 22, 2000, CRIIMI MAE and the holder of its Series C Preferred
Stock entered into a Preferred Stock Exchange Agreement (the "Series C Exchange
Agreement") pursuant to which 103,000 shares of Series C Preferred Stock were
exchanged (the "Series C Exchange") for 103,000 shares of a new series of
preferred stock designated as "Series E Cumulative Convertible Preferred Stock",
par value $0.01 per share (the "Series E Preferred Stock"). On July 26, 2000,
CRIIMI MAE and the holder of its Series D Preferred Stock entered into a
Preferred Stock Exchange agreement (the "Series D Exchange Agreement") pursuant
to which 100,000 shares of Series D Preferred Stock were exchanged (the "Series
D Exchange" and together with the Series C Exchange, the "Exchanges") for
100,000 shares of Series E Preferred Stock. The principal purpose of the
Exchanges was to effect an extension of the mandatory conversion dates, upon
which the Series C Preferred Stock and Series D Preferred Stock would have
converted into common stock. Pursuant to the Series C Exchange Agreement and
Series D Exchange Agreement, the Company has amended its Plan to provide for a
new mandatory conversion date and certain additional terms and conditions with
respect to the Series E Preferred Stock. The additional terms principally
address dividend and additional conversion matters.
Until the Company's Plan is effective, the principal terms of the Series E
Preferred Stock are as set forth below. The Series E Preferred Stock pays a
dividend at an annual rate equal to the sum of (i) 75 basis points plus (ii)
LIBOR as of the second LIBOR Market Day preceding commencement of the calendar
quarter which includes such quarterly dividend payment. Quarterly dividends
payable with respect to calendar quarters and any partial quarter will be
payable in common stock. Dividends accrued on Series E Preferred Stock totaled
$258,029 as of June 30, 2000, (representing dividends from February 23, 2000
through June 30, 2000). The Series E Preferred Stock is not convertible into
shares of common stock at the option of the holder unless the effective date of
the Plan does not occur on or before December 31, 2000. In such event, 10,000
shares of Series E Preferred Stock shall become convertible at the option of the
holder into common stock in January 2001 and in each month thereafter until the
effective date of the Plan. If the Series E Preferred Stock becomes convertible
into common stock, then each share of Series E Preferred Stock shall be
convertible into common stock based on a formula, the numerator of which will be
$100 and the denominator of which will be a closing trade price of the common
stock within the conversion pricing period that is mutually acceptable or the
average of the closing trade prices of the common stock over the applicable
twenty-one (or such fewer number as is mutually acceptable) day period
immediately preceding the date of delivery. The Series E Preferred Stock is
subject to redemption by CRIIMI MAE. The liquidation preference and the
redemption price on the Series E Preferred Stock are $100 and $106,
respectively, per share plus an amount equal to all dividends accrued and unpaid
thereon.
39
<PAGE>
Once the Company's Plan is effective, amendments to the Series E
Preferred Stock relative rights and preferences, relating principally to
conversion and dividend rights and terms, would be effected, including an
increase in the dividend rate, a new mandatory conversion date and the provision
of additional conversion rights. Reference is made to the Plan, previously filed
with the SEC as an exhibit to a Current Report on Form 8-K, for a complete
description of such amendments to the relative rights and preferences of the
Series E Preferred Stock, as contemplated by the Plan.
Series F Redeemable Cumulative Dividend Preferred Stock
On September 14, 1999, the Company declared a dividend on its common
stock for the purpose of distributing approximately $15.7 million in
undistributed 1998 taxable income. The dividend was payable to common
shareholders of record on October 20, 1999, provided that the shareholders
maintained ownership of their common stock through the payment date. The
dividend was paid on November 5, 1999 in shares of Series F Redeemable
Cumulative Preferred Dividend Preferred Stock (the "Series F Preferred Stock").
The 1,606,595 shares of Series F Preferred Stock issued were approved for
listing on the New York Stock Exchange and trade with the symbol CMM-PrF, with a
par value of $0.01 and a face value of $10.
Holders of record of each share of CRIIMI MAE common stock who
maintained ownership of their common stock through November 5, 1999, received
3/100ths of a share of Series F Preferred Stock (i.e., three shares of Series F
Preferred Stock for every 100 shares of common stock held). The Series F
Preferred Stock was convertible into shares of common stock during two 10-
business day conversion periods. The first conversion period was from November
15, 1999 through November 30, 1999 and the second conversion period was from
January 21, 2000 through February 3, 2000. Conversions were based on the
volume-weighted average of the sale prices of the common stock for the 10-
trading days prior to the date converted, subject to a floor of 50% of the
volume-weighted average of the sale prices of the common stock on November 5,
1999. Holders of Series F Preferred Stock have no right to convert their Series
F Preferred Stock into common stock after February 3, 2000.
The Series F Preferred Stock provides for cash dividends at an annual
fixed rate of 12%. The first dividend will be paid no earlier than the end of
the calendar quarter in which a plan of reorganization for the Company becomes
effective, and no more than quarterly thereafter. If the Series F Preferred
Stock votes to accept the Plan, then the relative rights and preferences of the
Series F Preferred Stock would be amended to permit the payment of dividends in
cash or common stock (or a combination thereof) at the Company's election. 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. During the second and final conversion period (January 21 through
February 3, 2000) for the Series F Preferred Stock, 263,788 additional shares
were converted, resulting in the issuance of 2,396,566 shares of common stock.
There were 586,354 shares of Series F outstanding at June 30, 2000. Dividends
accrued on Series F Preferred Stock totaled $517,248 as of June 30, 2000 (of
which $355,721 was accrued for the first six months of 2000 and $161,527 for
1999).
40
<PAGE>
13. EARNINGS PER SHARE
The following table reconciles basic and diluted earnings per share under
FAS 128 for the three and six months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
For the three months ended June 30, 2000 For the three months ended June 30, 1999
----------------------------------------- ------------------------------------------
Income Income (loss)
Per Share Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
---------
Net income
(loss)
Available to
Common
Shareholders $3,742,484 62,353,170 $0.06 $(2,033,199) 53,553,161 $(0.04)
Effect of
Dilutive
Securities (1)
----------
Net effect of
assumed
exercise of
stock options -- -- --
81,439
Convertible
Preferred
Stock $ 399,246 13,929,870 $ -- --
---------- ---------- ----------- ----------
Diluted EPS
-----------
Income (loss)
available to
Common
Shareholders
and assumed
conversions $4,141,731 76,364,479 $0.05 $(2,033,199) 53,553,161 $(0.04)
========== ========== ===== =========== ========== ======
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
For the six months ended June 30, 2000 For the six months ended June 30, 1999
--------------------------------------- --------------------------------------
Income Income
Per Share Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
---------
Net Income
Available to
Common
Shareholders
$7,778,095 61,934,051 $0.13 $11,383,750 53,553,161 $ 0.21
Effect of
Dilutive
Securities (1)
--------------
Net effect of
assumed
exercise of
stock options -- 35,813 -- --
Convertible
Preferred
Stock (1) $ 777,368 15,603,382 $ 614,680 7,606,685
---------- ---------- ----------- ----------
Diluted EPS
-----------
Income
available to
Common
Shareholders
and assumed
conversions $8,555,463 77,577,654 $0.11 $11,998,430 60,889,109 $0.20
========== ========== ===== =========== ========== =====
</TABLE>
___________________________
(1) As of June 30, 2000 and 1999, respectively, the following shares of
preferred stock were outstanding: 1,593,982 shares of Series B Preferred
Stock, -0- and 103,000 shares of Series C Preferred Stock, 100,000 shares
of Series D Preferred Stock, 103,000 and -0- shares of Series E Preferred
Stock, and 586,354 and -0- shares of Series F Preferred Stock. The common
stock equivalents for the Series B Preferred Stock and the Series F
Preferred Stock are not included in the calculation of diluted EPS because
the effect would be anti-dilutive.
14. EMPLOYEE RETENTION PLAN
Upon commencement of the Chapter 11 cases, the Company believed it was
essential to both the efficient operation of the Company's business and the
reorganization effort that the Company maintain the support, cooperation and
morale of its employees. The Company obtained Bankruptcy Court approval to pay
certain pre-petition employee obligations in the nature of wages, salaries and
other compensation and to continue to honor and pay all employee benefit plans
and policies.
In addition, to ensure the Company's continued retention of its executives
and other employees and to provide meaningful incentives for these employees to
work toward the Company's financial recovery and reorganization, the Company's
management and Board of Directors developed a comprehensive and integrated
program to retain its executives and other employees throughout the
reorganization. On December 18, 1998, the Company obtained Bankruptcy Court
approval to adopt and implement an employee retention program (the "Employee
Retention Plan") with respect to all employees of the Company other than certain
key executives. On February 28, 1999, the Company received Bankruptcy Court
approval authorizing it to extend the Employee Retention Plan to the key
executives initially excluded, including modifying existing employment
agreements and entering into new employment agreements with such key executives.
The Employee Retention Plan permitted the Company to approve ordinary course
employee salary increases beginning in March 1999, subject to certain
limitations, and to grant options to its employees after the Petition Date, up
to certain limits. The Employee
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<PAGE>
Retention Plan also provides for retention payments aggregating up to
approximately $3.5 million, including payments to certain executives. Retention
payments are payable semiannually over a two-year period. The first retention
payment of approximately $909,000 vested on April 5, 1999, and was paid on April
15, 1999. The second retention payment of approximately $865,000 vested on
October 5, 1999 and was paid on October 15, 1999. The third retention payment of
approximately $653,000 vested on April 5, 2000, and was paid on April 14, 2000.
The fourth retention payment will vest on October 5, 2000 and is expected to be
paid on October 16, 2000. Any unpaid portion of the retention payments will
become due and payable (i) upon the effective date of a plan of reorganization
of the Company and, with respect to certain key executives, court approval or
(ii) upon termination without cause. William B. Dockser, Chairman of the Board
of Directors, and H. William Willoughby, President, are not currently entitled
to receive any retention payments. Subject to the terms of their respective
employment agreements, certain key executives will be entitled to severance
benefits if they resign or their employment is terminated following a change of
control. The other employees will be entitled to severance benefits if they are
terminated without cause subsequent to a change of control of the Company and
CMM. In addition, options granted by the Company after October 5, 1998 will,
subject to Bankruptcy Court approval, become exercisable upon a change of
control.
15. TRANSACTIONS WITH RELATED PARTIES
Below is a summary of the related party transactions which occurred during
the three and six months ended June 30, 2000 and 1999. These items are described
further in the text which follows:
<TABLE>
<CAPTION>
For the three months ended June 30, For the six months ended June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Amounts received or accrued from related parties:
-------------------------------------------------
CRIIMI Inc.
-----------
Income(1) $189,076 $ 205,255 $375,484 $ 482,292
Return of Capital(2) 184,372 1,656,155 445,644 3,165,773
-------- ---------- -------- ----------
Total $373,448 $1,861,410 $821,128 $3,648,065
======== ========== ======== ==========
CRI/AIM Investment Limited Partnership (1) $ 84,119 $ 103,858 $178,232 $ 235,669
======== ========== ======== ==========
Expense reimbursements to CRIIMI Management:
--------------------------------------------
AIM Funds and CRI Liquidating (3)(4) $ 52,209 $ 91,278 $ 99,633 $ 122,346
CMSLP (2)(3) 0 249,821 39,602 543,280
-------- ---------- -------- ----------
Total $ 52,209 $ 341,099 $139,235 $ 665,626
======== ========== ======== ==========
Payments to CRI:
----------------
Expense reimbursement - CRIIMI MAE(3)(5) $ 39,562 $ 48,600 $ 72,744 $ 97,376
======== ========== ======== ==========
Payments to Capital Hotel Group(5)
----------------------------------
Management Fee (6) $ 21,914 $ 17,096 $ 34,698 $ 28,899
======== ========== ======== ==========
</TABLE>
______________________________________
(1) Included as equity in earnings from investments on the accompanying
consolidated statements of income.
(2) Included as a reduction of equity investments on the accompanying
consolidated balance sheets.
(3) Included in general and administrative expenses on the accompanying
consolidated statements of income.
(4) Prior to CRIIMI MAE becoming a self-administered REIT, amounts were paid to
C.R.I., Inc. as reimbursement for expenses incurred by the adviser on
behalf of CRI Liquidating and the AIM Funds. The transaction in which
CRIIMI MAE became a self-administered REIT had no impact on CRI
Liquidating's or the AIM Funds' financial statements except that the
expense reimbursements previously paid to C.R.I., Inc. are, effective June
30, 1995, paid to CM Management.
(5) Prior to CRIIMI MAE becoming a self-administered REIT, amounts were paid to
C.R.I., Inc. as reimbursement for expenses incurred by the adviser on
behalf of CRIIMI MAE. In connection with the Merger, on June 30, 1995,
CRIIMI MAE was no longer required to reimburse the adviser, as these
expenses are now directly incurred by CRIIMI MAE. However, pursuant to an
agreement between CRIIMI MAE and
43
<PAGE>
C.R.I., Inc. (the "CRI Administrative Services Agreement"), C.R.I., Inc.
provides CRIIMI MAE with certain administrative and office facility
services and other services, at cost, with respect to certain aspects of
CRIIMI MAE's business. CRIIMI MAE uses the services provided under the
C.R.I., Inc. Administrative Services Agreement to the extent such services
are not performed by CM Management or provided by another service provider.
The CRI Administrative Services Agreement is terminable on 30 days notice
at any time by CRIIMI MAE.
(6) Included as a reduction of net income earned from Real Estate Owned
property which is included in other investment income on the accompanying
consolidated statements of income.
16. LITIGATION
Bankruptcy Proceedings
On the Petition Date, the Debtors each filed voluntary petitions for relief
under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. These cases are
being jointly administered for procedural purposes. None of the cases has been
substantively consolidated. Under the Bankruptcy Code, the Debtors are
authorized to manage their respective affairs and operate their businesses as
debtors-in-possession while they attempt to confirm and consummate their plan of
reorganization that will restructure their financial affairs and allow them to
emerge from bankruptcy. As a debtor-in-possession under the Bankruptcy Code, no
Debtor may engage in any transaction outside the ordinary course of business
without the approval of the Bankruptcy Court. The following discussion describes
certain aspects of the Chapter 11 cases of the Debtors (the "Chapter 11 Cases"),
but it is not intended to be a complete summary.
Pursuant to the Bankruptcy Code, the commencement of the Chapter 11 Cases
created an automatic stay, applicable generally to creditors and other parties
in interest, but subject to certain limited exceptions, of: (i) the commencement
or continuation of judicial, administrative or other actions or proceedings
against the Debtors that were or could have been commenced prior to the
commencement of the Chapter 11 Cases; (ii) the enforcement against the Debtors
or their property of any judgments obtained prior to the commencement of the
Chapter 11 Cases; (iii) the taking of any action to obtain possession of
property of the Debtors or to exercise control over such property; (iv) the
creation, perfection or enforcement of any lien against the property of the
bankruptcy estates of the Debtors; (v) any act to create, perfect or enforce
against the property of the Debtors any lien that secures a claim that arose
prior to the commencement of the Chapter 11 Cases; (vi) the taking of any action
to collect, assess or recover claims against the Debtors that arose before the
commencement of the Chapter 11 Cases; (vii) the set-off of any debt owing to the
Debtors that arose prior to the commencement of the Chapter 11 Cases against any
claim against the Debtors; or (viii) the commencement or continuation of a
proceeding before the United States Tax Court concerning the Debtors. Any entity
may apply to the Bankruptcy Court, upon appropriate showing of cause, for relief
from the automatic stay.
As noted above, the Debtors are authorized to manage their respective
properties and operate their respective businesses pursuant to the Bankruptcy
Code. During the course of the Chapter 11 Cases, the Debtors will be subject to
the jurisdiction and supervision of the Bankruptcy Court. The United States
Trustee has appointed (i) the Unsecured Creditors' Committee, (ii) the Official
Committee of Unsecured Creditors in the CM Management Chapter 11 Case (the "CMM
Creditors' Committee") and (iii) the CMI Equity Committee (collectively, the
"Committees"). The Committees are expected to participate in the formulation of
the plans of reorganization for the respective Debtors. The Debtors are required
to pay certain expenses of the Committees, including professional fees, to the
extent allowed by the Bankruptcy Court.
Under the Bankruptcy Code, for 120 days following the Petition Date, only
the debtor-in-possession has the right to propose and file a plan of
reorganization with the Bankruptcy Court. If a debtor-in-possession files a plan
of reorganization during this exclusivity period, no other party may file a plan
of reorganization until 180 days following the Petition Date, during which
period the debtor-in-possession has the exclusive right to solicit acceptances
of the plan. If a debtor-in-possession fails to file a plan during the
exclusivity period or such additional exclusivity period as may be ordered by
the Bankruptcy Court or, after such plan has been filed, fails to obtain
acceptance of such plan from impaired classes of creditors and equity security
holders during the exclusive solicitation period, any party in interest,
including a creditors' committee, an equity security holders' committee, a
creditor or an equity security holder may file a plan of reorganization for such
debtor. Additionally, if the Bankruptcy Court were to appoint a trustee, the
exclusivity period, if not previously terminated, would terminate.
The Debtors' initial exclusivity period to file a plan of reorganization
ended on February 2, 1999. The Bankruptcy Court extended this period through
August 2, 1999 and again through September 10, 1999. The Debtors
44
<PAGE>
sought a third extension of exclusivity through November 10, 1999 and on
September 20, 1999, the Bankruptcy Court entered an order (i) extending the
Debtors' right to file a plan of reorganization through October 16, 1999, (ii)
providing the Unsecured Creditors' Committee and the CMI Equity Committee the
right to jointly file a plan of reorganization through October 16, 1999 and
(iii) providing that any party in interest may file a plan of reorganization
after October 16, 1999. The Debtors filed (i) a Joint Plan of Reorganization on
September 22, 1999, (ii) an Amended Joint Plan of Reorganization and proposed
Joint Disclosure Statement on December 23, 1999, (iii) a Second Amended Joint
Plan of Reorganization and proposed Amended Joint Disclosure Statement on March
31, 2000, and (iv) a Third Amended Joint Plan of Reorganization and proposed
Second Amended Joint Disclosure Statement with respect thereto on April 25,
2000, which plan and disclosure statement were amended and supplemented by
praecipes filed with the Bankruptcy Court on July 13, 14 and 21, 2000. The
Debtors' Third Amended Joint Plan of Reorganization is fully supported by the
CMI Equity Committee, which is a co-proponent of the Plan. Subject to the
completion of mutually acceptable Unsecured Creditor Debt Documentation, the
Unsecured Creditors' Committee has agreed to support confirmation of the
Debtors' Plan.
On December 20, 1999, the Unsecured Creditors' Committee filed its own plan
of reorganization and proposed disclosure statement with the Bankruptcy Court.
On January 11, 2000 and on February 11, 2000, the Unsecured Creditors' Committee
filed its first and second amended plans of reorganization, respectively, with
the Bankruptcy Court and its amended proposed disclosure statements with respect
thereto. However, as a result of the successful negotiations, the Unsecured
Creditors' Committee is now supporting confirmation of the Debtors' Plan and has
asked the Bankruptcy Court to defer consideration of its plan pending approval
of the Debtors' Plan and the completion of mutually acceptable Unsecured
Creditor Debt Documentation. Accordingly, the Debtors, the CMI Equity Committee
and the Unsecured Creditors' Committee are together presenting the Debtors' Plan
for approval by all holders of claims and interests in impaired classes.
The Bankruptcy Court held a hearing on April 25, 2000 on the Proposed
Disclosure Statement. During that hearing, the bankruptcy judge requested the
filing of additional legal briefs by May 9, 2000 on two issues raised at the
hearing. The issues raised related to an objection to the Proposed Disclosure
Statement filed by Salomon Smith Barney Inc./Citicorp Securities, Inc. and
Citicorp Real Estate, Inc. (together "Citigroup"). On July 12, 2000, the
Bankruptcy Court entered an order overruling the objections raised by Citigroup
as set forth in the Memorandum Opinion and Order filed and entered on that date
by the Bankruptcy Court. The Citigroup objections were the only objections to
the Proposed Disclosure Statement pending before the Bankruptcy Court. On July
21, 2000, CRIIMI MAE and Citigroup reached a settlement regarding the treatment
of Citigroup's claims under the Plan. This accord resolved Citigroup's
objections to the Proposed Disclosure Statement and contemplates the dismissal
of all outstanding litigation between the parties. The Bankruptcy Court has
scheduled a hearing on August 23, 2000 with respect to the proposed ballots
submitted to the Bankruptcy Court to be sent to members of all classes of
impaired creditors and equity security holders in connection with the Plan.
Once the Proposed Disclosure Statement has been approved by the Bankruptcy
Court, the Plan will be sent together with the approved Disclosure Statement to
members of all classes of impaired creditors and all equity security holders for
acceptance or rejection. Following voting on the Plan by impaired classes of
creditors and equity security holders, the Bankruptcy Court, after notice and a
hearing, will consider whether to confirm the Plan before it. To confirm a
plan, the Bankruptcy Court is required to find among other things: (i) with
respect to each class of impaired creditors and equity security holders, that
each holder of a claim or interest of such class either (a) will, pursuant to
the plan, receive or retain property of a value as of the effective date of the
plan, that is at least as much as such holder would have received in a
liquidation on such date of the Debtors or (b) has accepted the plan, (ii) with
respect to each class of claims or equity security holders, that such class has
accepted the plan or is not impaired under the plan, and (iii) confirmation of
the plan is not likely to be followed by the liquidation or need for further
financial reorganization of the Debtors or any successor unless such liquidation
or reorganization is proposed in the plan.
If any impaired class of creditors or equity security holders does not
accept a plan, the proponent of the plan may invoke the so-called "cramdown"
provisions of the Bankruptcy Code. Under these provisions, the Bankruptcy Court
may confirm a plan, notwithstanding the non-acceptance of the plan by an
impaired class of creditors or equity security holders, if certain requirements
of the Bankruptcy Code are met. These requirements include: (i) the plan does
not discriminate unfairly and (ii) the plan is fair and equitable, with respect
to each class of claims or interests that is impaired under, and has not
accepted, the plan. As used in the Bankruptcy Code, the phrases "discriminate"
and "fair and equitable" have narrow and specific meanings and their use herein
is qualified in its entirety by reference to the Bankruptcy Code.
45
<PAGE>
Bankruptcy Related Litigation
The following is a summary of material litigation matters between the
Company and certain of its secured creditors since the Petition Date. The
Company has reached agreement with certain of these creditors, as set forth in
greater specificity below.
Merrill Lynch
As of the Petition Date, the Company owed Merrill Lynch approximately
$274.8 million with respect to advances to the Company under an assignment
agreement pursuant to which the Company pledged Subordinated CMBS. Borrowings
under this assignment agreement are secured by a first priority security
interest in certain CMBS issued in connection with CBO-2, together with all
proceeds, distributions and amounts realized therefrom (the "Distributions")
(the CMBS pledged to Merrill Lynch and the Distributions are hereafter referred
to collectively as the "Merrill Collateral").
On October 16, 1998, Merrill Lynch filed a motion with the Bankruptcy Court
for relief from the automatic stay or, in the alternative, for entry of an order
directing the Company to provide adequate protection for its interest in the
Merrill Collateral. On October 21, 1998, the Company filed a complaint against
Merrill Lynch for turnover of Distributions remitted to Merrill Lynch on October
2, 1998 by LaSalle National Bank, as well as other relief.
On December 4, 1998, the Bankruptcy Court approved a consent order entered
into between the Company and Merrill Lynch. Among other things, pursuant to the
consent order, the pending litigation with Merrill Lynch was dismissed without
prejudice. The consent order also preserved the portfolio of CMBS pledged as
collateral to Merrill Lynch and provided for the Company to receive
distributions of 50 percent of the monthly cash flow from those CMBS net of
interest payable to Merrill Lynch (the "Company's Distribution Share"). The 50
percent of distributions received by Merrill Lynch is to be applied to reduce
principal. Such arrangement will remain in effect until the earlier of a
further order of the Bankruptcy Court affecting the arrangement or the effective
date of a plan of reorganization of the Company.
On September 7, 1999, the Company filed a Motion to Approve Stipulation and
Consent Order Providing for Adequate Protection. On or about September 27,
1999, the Unsecured Creditors' Committee and the CMI Equity Committee filed a
joint objection to the Motion. On December 3, 1999, the Bankruptcy Court
entered the Stipulation and Consent Order Providing For Adequate Protection (the
"Adequate Protection Order"), certain provisions of which were effective
retroactively. Pursuant to the Adequate Protection Order, a segregated interest
bearing debtor-in-possession account was created (the "Cash Collateral Account")
into which the Company's Distribution Share was deposited during the months of
August through December 1999. An additional fifty percent (50%) of the
Company's Distribution Share has been deposited into such account since January
and absent a further ruling by the Bankruptcy Court, or the occurrence of
certain market events detailed in the Adequate Protection Order, will continue
to be deposited into such account through the effective date of the Plan. The
Adequate Protection Order provides Merrill Lynch with a first priority lien on
the Cash Collateral Account.
Citicorp and Citibank
In addition to the Citibank Program pursuant to which the Company
originated loans, as previously discussed, the Company also has a financing
arrangement with Citicorp pursuant to which the Company pledged CMBS.
On October 13, 1998, Citicorp demanded from Norwest Bank Minnesota, N.A.
("Norwest") the immediate transfer of certain CMBS (the "Retained Bonds") issued
pursuant to CMO-IV. Norwest served as indenture trustee. The Retained Bonds
are collateral for amounts advanced to the Company by Citicorp under the
financing arrangement. As of the Petition Date, the Company owed Citicorp $79.1
million under the facility.
On October 15, 1998, the Company filed an emergency motion to enforce the
automatic stay against Norwest and Citicorp. Pursuant to an Order dated October
23, 1998, the Bankruptcy Court prohibited Citicorp from selling the Retained
Bonds without further order of the Bankruptcy Court. On October 23, 1998,
Citicorp requested an emergency hearing regarding the October 23 Order, and on
November 2, 1998, the Company filed a complaint
46
<PAGE>
against Citicorp seeking, among other things, a declaratory judgment as to
whether the automatic stay applies to actions taken by Citicorp with respect to
the Retained Bonds.
On March 11, 1999, the Company finalized agreements with Citicorp and
Citibank, pursuant to which the parties agreed to adjourn the pending litigation
for a four-month period. The Bankruptcy Court agreed to a request by CRIIMI
MAE, Citibank, and the Unsecured Creditors' Committee to further postpone the
pending litigation on July 7, 1999 and again on September 10, 1999. The trial
has not yet been rescheduled.
The agreements reached by the Company with Citicorp and Citibank on March
11, 1999 were approved by the Bankruptcy Court through stipulations and consent
orders entered on April 5, 1999. One of the agreements also provided that
Salomon Smith Barney, in cooperation with CRIIMI MAE, agreed to sell two classes
of investment-grade CMBS from CMO-IV constituting a portion of the collateral
securing advances under the Citicorp financing arrangement. In May 1999,
Salomon Smith Barney sold $20 million of the CMO-IV securities held by Holdings
II. This sale reduced the amounts owed from Holdings II to Citicorp by
approximately $17 million. On October 8, 1999, the remaining CMO-IV securities
held by Holdings II were sold. This sale reduced the amounts owed from Holdings
II to Citicorp by approximately $22 million and Holdings II received net
proceeds of approximately $315,000. In addition, Citibank, in cooperation with
CRIIMI MAE, agreed to sell commercial mortgages originated in 1998 under the
Citibank Program, provided that the sale resulted in CRIIMI MAE receiving
minimum net proceeds of not less than $3.5 million, after satisfying certain
amounts due to Citibank, from the amount held in the reserve account. On August
5, 1999, all but three of the commercial loans originated under the Citibank
Program in 1998, with an aggregate unpaid principal balance of approximately
$339 million, were sold for gross proceeds of approximately $308 million. On
September 16, 1999, Citibank sold the remaining three loans, with an aggregate
unpaid principal balance of approximately $32.7 million, for gross proceeds of
approximately $27.2 million. In the case of each sale of the commercial loans,
the minimum net proceeds provision was waived by agreement of the Company, the
Unsecured Creditors' Committee and the CMI Equity Committee.
A related interpleader action between Norwest, the Company and Citicorp,
which was initiated on October 20, 1998 by Norwest to determine whether the
Company or Citicorp is the rightful owner of funds that were to have been paid
by Norwest, as indenture trustee, remains pending before the Bankruptcy Court.
During the pendency of this matter, certain payments on the Retained Bonds are
held in an account controlled by the Bankruptcy Court. No trial date has been
set for this matter.
A settlement was reached on July 21, 2000, among the Company and Citigroup.
The terms of the settlement agreement with Citigroup are incorporated into the
Company's Plan and provide for the satisfaction of all Citigroup claims
(including dismissal of all litigation) through the payment of: (a) principal
and interest due in connection with certain financings provided by Salomon
Smith Barney, Inc./Citicorp Securities, Inc. relating to the bonds designated
CMCMBS 1998-1 (CMO-IV) (Classes F through J and IO), MCFI 1998-MC1 (Classes H
through M) and MCFI 1998-MC2 (Classes F through K); (b) outstanding principal,
interest and expenses due in connection with a loan provided by Citicorp Real
Estate, Inc. to a Company subsidiary; and (c) $4,000,000 in cash for all
remaining claims of Citigroup, which has been accrued on the balance sheet as of
June 30, 2000. The payment to Citigroup will come from the proceeds of the sale
or refinance of the referenced bonds. Citigroup has agreed to cooperate in
connection with the sale of these bonds. There can be no assurance that all or
any portion of these bonds will be sold or refinanced on or before the effective
date of the Plan.
First Union
First Union National Bank ("First Union"), a creditor of both the Company
and CM Management, is asserting substantial secured and unsecured claims. On or
about March 23, 1999, First Union filed in each of the Company's and CM
Management's Chapter 11 cases a motion for relief from the automatic stay
pursuant to section 362(d) of the United States Bankruptcy Code. On or about
March 26, 1999, First Union requested that the Court dismiss without prejudice
both motions. On April 20, 1999, First Union refiled its motions for relief
from the automatic stay. The hearing was originally scheduled for May 14, 1999,
but has been adjourned by consent.
On or about July 1, 1999, the Company entered into an agreement with First
Union resolving its motion for relief from the automatic stay and authorizing
use of First Union's cash collateral. The agreement provides for the following:
(i) First Union has a valid, perfected, first priority security interest
in certain assignment securities and the assignment securities income
constitutes First Union's cash collateral;
47
<PAGE>
(ii) First Union shall receive adequate protection payments of post-
petition interest at the non-default contract rate plus payments to
be applied to principal equal to 50% of the difference between the
assignment income and the Company's non-default contract interest
obligation. First Union has the option of using a portion of the
assignment income earmarked for principal to purchase a hedging
program;
(iii) The Company shall be entitled to use the assignment income not paid
to First Union in the ordinary course of its business subject to
certain limitations; and
(iv) First Union shall not seek relief from the automatic stay in the
Company's Chapter 11 case to foreclose upon the assignment
securities and/or the assignment income and none of the Company, the
Unsecured Creditors' Committee, the CMI Equity Committee or First
Union shall seek modification of the adequate protection
arrangements set forth in the agreement for a period commencing upon
the date which the Bankruptcy Court approves the agreement and
terminating on December 31, 1999, subject to certain exceptions.
The agreement was approved and entered by the Bankruptcy Court on August 5,
1999. The Company's Unsecured Creditors' Committee has consented to the
agreement with First Union.
In addition, on or about July 1, 1999, CM Management and First Union
entered into an agreement resolving its motion for relief from the automatic
stay. On July 1, 1999, CM Management filed a motion for approval of the
agreement resolving First Union's motion for relief from the automatic stay. On
October 22, 1999, to provide the parties with more time to negotiate a
modification to the agreement, CM Management, with the consent of First Union
and the CMM Creditors' Committee, advised the Bankruptcy Court that it would be
withdrawing the motion for approval of the agreement, without prejudice to CM
Management's right to re-file once an agreement has been reached with First
Union and the CMM Creditors' Committee. The motion was subsequently withdrawn.
On or about February 18, 2000, the Company, the Unsecured Creditors'
Committee and First Union entered into a Second Stipulation and Agreed Order:
(i) Authorizing Use of Cash Collateral and (ii) Granting Other Relief (the
"Second Stipulation"). The Second Stipulation provides for, among other things,
the following:
(i) the reaffirmation of all of the terms contained in the July 1, 1999
agreement except as expressly provided in the Second Stipulation;
(ii) the extension from January 1, 2000 through March 31, 2000 of the
provisions in the July 1, 1999 agreement relating to use of the
assignment securities income;
(iii) the extension from December 31, 1999 to March 31, 2000 of the
provisions in the July 1, 1999 agreement relating to (i) First
Union's agreement not to seek relief from the automatic stay to
foreclose on the assignment securities or the assignment securities
income and (ii) the agreement by First Union, the Company and the
Unsecured Creditors' Committee not to seek modification of the
adequate protection arrangements contained in the July 1, 1999
agreement; and
(iv) the consummation of the Stipulation and Consent Order Selling the
Wells Fargo Bonds to Morgan Stanley, which occurred in February 2000.
See "Bankruptcy Related Litigation-Morgan Stanley" for further
discussion.
On February 22, 2000, the Company filed a motion with the Bankruptcy Court
for approval of the Second Stipulation. CRIIMI MAE, First Union and Lehman also
reached an agreement that called for the sale of seven classes of Subordinated
CMBS from First Union Lehman Brothers Series 98 C-2 the ("First Union Lehman
Bonds"). The agreement was filed with the Bankruptcy Court on March 21, 2000 for
approval. On March 28, 2000, the Bankruptcy Court approved the Second
Stipulation. On April 24, 2000, the First Union Lehman Bonds were sold. The
transaction generated proceeds of $140 million, of which approximately $113
million was used to pay the related debt owed to Lehman and First Union. The
approximate $27 million of remaining proceeds will be used primarily to help
fund the Plan.
48
<PAGE>
First Union has asserted a first priority security interest in certain
bonds that are or were in its possession, and the distributions made on those
bonds since the Petition Date, pursuant to an agreement dated as of October 10,
1997 by and between the Company and First Union. The Company disputes First
Union's claim to a security interest in those bonds and the distributions made
thereon. The bonds in issue are (i) the Morgan Stanley Capital, Series 1998-WF2
Class N bond, (ii) the Chase Commercial Mortgage, Series 1998-1 Class J bond
(the "Chase J Bond"), and (iii) the Nomura Asset Securitization 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. On August 7, 2000, the Company sold certain
CMBS to GACC for approximately $43.8 million. The Chase J Bond composed part of
the CMBS sold to GACC. The proceeds received from the sale related to the Chase
J Bond were deposited in a segregated account in the name of First Union pending
resolution of First Union's claim of a security interest in the bonds. See
"Bankruptcy Litigation-Arrangements with other Creditors" for further discussion
on the sale of certain CMBS to GACC. If the issues between the Company and First
Union are not otherwise resolved, an adversary proceeding will likely be
commenced to resolve the dispute between the Company and First Union with
respect to the foregoing bonds and/or the distributions made on those bonds. If
First Union's claim with respect to those bonds and/or the distributions made on
those bonds is determined to be an Allowed Secured Claim, such Claim will be
treated as part of Class A2 under the Plan. If First Union's Claim is determined
to be an unsecured claim, it will be included in the Claims subject to Class A10
under the Plan.
Morgan Stanley
As of the Petition Date, the Company owed Morgan Stanley approximately
$182.4 million with respect to advances to the Company under an agreement
pursuant to which the Company pledged CMBS. The borrowings under this agreement
were secured by certain CMBS, including (i) CRIIMI MAE Commercial Mortgage
Trust, Series 1998-C1, Class B and C Certificates (collectively or any portion
thereof, the "CBO-2 BBB Bonds") and (ii) Morgan Stanley Capital I., Inc., Series
1998-W2, Class F, G, H, J, K, L and M Certificates (collectively or any portion
thereof, the "Wells Fargo Bonds" and, together with the CBO-2 BBB Bonds, the
"Morgan Collateral").
On October 6, 1998, Morgan Stanley advised the Company that it was
exercising alleged ownership rights over the Morgan Collateral. On October 20,
1998, the Company filed an adversary proceeding against Morgan Stanley alleging,
among other things, that Morgan Stanley violated the automatic stay, and seeking
turnover of the Morgan Collateral.
On March 5, 1999, the CBO-2 BBB Bonds were sold. Of the $159 million in net
sale proceeds, $141.2 million was used to repay the Company's borrowings under
the agreement with Morgan Stanley, and $17.8 million was remitted to CRIIMI MAE.
As a result of the transaction, CRIIMI MAE's litigation against Morgan Stanley
has been resolved with respect to the CBO-2 BBB Bonds to the satisfaction of
both parties.
The Company and Morgan Stanley reached an agreement to sell the Wells Fargo
Bonds (the "Morgan Stanley Agreement"). On February 29, 2000, the Wells Fargo
Bonds were sold. Of the approximately $45.9 million in net sales proceeds, $37.5
million was used to pay off all outstanding borrowings owed to Morgan Stanley
and the remaining proceeds of approximately $8.4 million will be used primarily
to help fund the Plan. Pursuant to the terms of the Morgan Stanley Agreement,
the Company and Morgan Stanley mutually released any claims that they may have
against each other and filed a stipulation of dismissal with prejudice of the
October 20, 1998 adversary proceeding.
Arrangements with Other Creditors
In addition to the foregoing, the Company has had discussions with other
secured creditors against whom the Company was not engaged in litigation. One
such creditor is GACC. On February 3, 1999, the Bankruptcy
49
<PAGE>
Court approved an Amended Consent Order between the Company and GACC that
provides for the following: (i) acknowledgement that GACC has a valid perfected
security interest in its collateral; (ii) authority for GACC to hedge its loan,
subject to a hedge cost cap; and (iii) as adequate protection, the sharing of
cash collateral on a 50/50 basis, after payment of interest expense, with the
percentage received by GACC to be applied to reduce principal and pay certain
hedge costs, if any. In addition, the Company is prohibited from using GACC's
cash collateral for certain purposes, including loan originations and
Subordinated CMBS acquisitions. The Amended Consent Order expired April 28,
1999. The Company and GACC agreed to extend the Amended Consent Order until
August 2, 1999 and a stipulation to that effect was signed by the Company and
GACC and approved by the Bankruptcy Court on May 11, 1999. The Company and GACC
had negotiated a further extension of the stipulation through September 10,
1999, which has now expired. On June 16, 2000, the Company and GACC signed a
stipulation and agreed order selling certain CMBS to GACC free and clear of
liens, claims and encumbrances (the "GACC Sale Stipulation"), and for the
sharing of cash collateral through the sale date. On July 7, 2000, the
Bankruptcy Court approved the GACC Sale Stipulation and subsequently amended its
order and on August 3, 2000 authorized the Company to sell its interest in the
Chase J Bond and the Chase Commercial Mortgage Securities Corp. Series 1998-1,
Classes F, G, H and I bonds, (the "Chase Bond Portfolio") to GACC for an
aggregate sale price of approximately $43.8 million. On August 7, 2000, the
Company sold the Chase Bond Portfolio at the stated aggregate sales price and
the related variable rate secured debt of $36.6 million was paid off. Remaining
net proceeds of approximately $7.2 million will be used primarily to help fund
the Company's Plan. CRIIMI MAE also received approximately $3.8 million from
GACC representing its portion of cash collateral through the sale date.
Shareholder Litigation
Between October 7, 1998 and November 30, 1998, certain plaintiffs filed 20
separate class action civil lawsuits (the "Complaints") in the United States
District Court for the District of Maryland (the "District Court" or the
"Court") against certain officers and directors of the Company. On March 9,
1999, the District Court ordered the consolidation of the Complaints into a
single action entitled "In Re CRIIMI MAE Inc. Securities Litigation", which
Complaints have since been dismissed, as discussed below.
On April 23, 1999, a group of thirteen putative members of the class of
individuals who allegedly suffered damages during the class period between
February 20, 1998 and October 5, 1998 (collectively, the "Plaintiffs") filed an
Amended and Consolidated class action Complaint alleging violations of federal
securities laws (the "Consolidated Amended Complaint").
The Consolidated Amended Complaint alleged generally that the defendants
violated Section 10(b) of the Securities and Exchange Act of 1934 as amended
(the "Exchange Act") by, among other things, making false statements of material
fact and failing to disclose certain material facts. The Consolidated Amended
Complaint also generally alleges that the defendants violated Section 20(a) of
the Exchange Act because each defendant was allegedly a "controlling person" as
that term is defined under Section 20(a).
On July 9, 1999, the defendants filed a Motion to Dismiss, with prejudice,
the Consolidated Amended Complaint. The defendants filed the motion under Rule
12(b)(6) of the Federal Rules of Civil Procedure on the grounds that the
Plaintiffs failed to plead sufficient facts with the requisite particularity to
establish a claim for securities fraud under the Reform Act. The Plaintiffs
filed their Opposition to defendants' Motion to Dismiss on September 24, 1999.
On March 30, 2000, the Court granted the Defendants' Motion to Dismiss
the Consolidated Amended Complaint and as a result entered an Order and
Memorandum Opinion dismissing the Consolidated Amended Complaint. The Court
concluded that the Plaintiffs did not substantiate their claims that specific
CRIIMI MAE officers and directors violated Section 10(b) of the Exchange Act.
The Court concluded that because the Plaintiffs failed to substantiate their
claims of a "primary violation" of Section 10(b) of the Exchange Act, they
likewise failed to substantiate a claim against the individual Defendants as
controlling persons under Section 20(a) of the Exchange Act.
On May 1, 2000, the Plaintiffs filed a Notice of Appeal from the Court's
Memorandum Opinion and Order dated March 30, 2000. On July 10, 2000, the United
States Court of Appeals for the Fourth Circuit dismissed the appeal by agreement
of the parties.
The dismissal of this lawsuit does not dispose of other pending lawsuits
and/or claims in bankruptcy which may affect the Company, as more fully
described under other subheadings of this Note 16.
50
<PAGE>
Edge Partners Settlement
In February 1996, Edge Partners, L.P. ("Edge Partners"), on behalf of
CRIIMI MAE, filed a First Amended Class and Derivative Complaint (the
"Derivative Complaint") in the Bankruptcy Court. The Derivative Complaint named
as defendants each of the individuals who served on the Board of Directors at
the time of the Merger and CRIIMI MAE as a nominal defendant. The Company was
subject to indemnity obligations to the directors under provisions of its
constituent documents. In addition, the Company had directors and officers
liability insurance policies with a combined coverage limit of $5 million.
Count I of the Derivative Complaint alleged violations of Section 14(a) of
the Exchange Act for issuing a materially false and misleading proxy in
connection with the Merger and alleged derivatively on behalf of CRIIMI MAE a
breach of fiduciary duty owed to CRIIMI MAE and its shareholders. Edge Partners
sought, among other relief, that unspecified damages be accounted to CRIIMI MAE,
that the shareholder vote in connection with the Merger be null and void and
that certain salaries and other remuneration paid to the directors be returned
to the Company.
On June 16, 1998, the District Court approved a settlement agreement (the
"Settlement Agreement"). Under the terms of the Settlement Agreement, the
Company agreed to make certain disclosures relating to alleged conflicts between
two directors and the Company in connection with the Merger transaction and
adopted a non-binding policy relating generally to the approval of certain
interested transactions. Among other things, the non-binding policy adopted by
the Board of Directors imposes certain conditions on the Board's approval of
transactions between the Company and any director, officer or employee who owns
greater than 1% of the outstanding common shares of the Company. Such conditions
generally include: (1) approval by written resolution of any transaction
involving an amount in excess of $5 million in any year adopted by a majority of
the members of the Board having no personal stake in the transaction; and (2) in
the case of any such transaction in excess of $15 million in any year,
consideration by the Board as to the formation of a special committee of the
Board, to be comprised of at least two directors having no personal stake in
such transaction.
Other Litigation
The Company is aware that an alleged shareholder, on behalf of himself and
all others similarly situated, who purchased common stock in a registered common
stock offering made by the Company in January 1998, filed a class action lawsuit
against Prudential Securities Incorporated ("Prudential") and the Company's
independent public accountants (the "Recupito Complaint") in the United States
District Court for the District of Maryland. Neither the Company nor any officer
or director of the Company was named as a defendant in this lawsuit.
The Recupito Complaint alleges generally that the registration statement
dated October 21, 1997, including a prospectus dated January 20, 1998 and
supplemented on January 23, 1998, contained materially false and misleading
statements about the Company and its condition.
The Company may be subject to potential exposure to Prudential under
contractual provisions and to both defendants under applicable law. Prudential
may assert that it is entitled to indemnification from the Company based upon an
indemnification provision contained in the underwriting agreement entered into
with the Company in connection with the common stock offering. Certain courts
have held and it is the position of the SEC that indemnification for liabilities
arising under the Securities Act of 1933 is against public policy and
unenforceable.
The Company cannot predict with any certainty the ultimate outcome of such
litigation or its potential exposure to one or both of the defendants.
Claims
Over 850 claims with a face amount of nearly $2.53 billion have been filed
in the Chapter 11 cases, including approximately $355 million in unsecured
claims and approximately $2.2 billion in secured claims. Many of these claims
are duplicate claims filed by the same creditor in each of the three cases. This
amount is far in excess of the approximately $1.18 billion in liabilities
identified by the Debtors in their schedules, which were filed with the
Bankruptcy Court on November 20, 1998. The Debtors have undertaken extensive
efforts to reduce the claims pool. In addition to analyzing the claims, the
Debtors have opened discussions with various creditors regarding the withdrawal
of certain claims and in some cases, have objected to claims. The Debtors'
efforts have resulted in the reduction of approximately $1.76 billion from the
claims pool by means of objections, negotiated settlements and withdrawal of
claims.
Three large claims are summarized as follows: (i) the claim of Andrew N.
Friedman on behalf of a class of shareholders in the amount of $100 million (the
"Claim Number 330"); (ii) the claim of the Capital Company of America, LLC
("CCA") for approximately $18 million (the "CCA Claim") and (iii) the claim of
GP Properties Group, Inc., for approximately $882,000 (the "GP Properties
Claim").
Claim Number 330 related to shareholder litigation against CRIIMI MAE's
officers and directors, which has already been discussed in "Legal
Proceedings-Shareholder Litigation." On March 20, 2000, the Company moved to
withdraw reference of the litigation relating to Claim Number 330 to the United
States District Court for the District of Maryland, and on March 30, 2000,
CRIIMI MAE filed an objection to Claim Number 330. On April 27, 2000, the United
States District Court for the District of Maryland withdrew the reference of the
contested matter relating to Claim Number 330. On May 26, 2000, the claimant
filed a statement with the District Court seeking to withdraw Claim Number 330
on grounds that it was mooted by the disposition of the Shareholder Litigation.
On July 19, 2000, the District Court entered a consent order disallowing Claim
Number 330 with prejudice.
The CCA Claim relates to an August 14, 1998 letter of intent between CRIIMI
MAE and CCA for the purchase of subordinated CMBS. The letter of intent included
financing and due diligence contingencies. The Company's position is that
neither of these contingencies was fulfilled. After preliminary due diligence,
the Company expressed concern regarding the quality of the mortgage loans
underlying the CMBS. The Company's further due diligence confirmed this
preliminary view, and the Company exercised its right not to proceed with the
purchase because of its due diligence concerns. CCA refused to withdraw its
claim, and on August 31, 1999, CRIIMI MAE filed an objection to the CCA Claim.
The CCA Claim was filed for an amount in excess of $17,000,000 on February 11,
1999. On October 9, 1999, CCA responded to the objection. By letter dated
January 7, 2000, CCA indicated that the amount of its claim was $18.8 million.
On March 27, 2000, CCA filed a motion with the Bankruptcy Court revising the
amount of its claim to $18.2 million. Litigation is continuing with respect to
the CCA Claim and the Company's objection thereto. On July 26, 2000, the
Bankruptcy Court entered an Order temporarily allowing CCA's claim in the amount
of $11,390,548 for purposes of voting on the Plan. This Order did not determine
the allowed amount of CCA's claim, if any, for purposes of treatment and
distributions under the Plan. The allowed amount of CCA's claim, if any, will be
determined after a full evidentiary hearing.
The GP Properties Claim related to the Company's loan origination program.
In August and September 1998, the Company and GP Properties were involved in a
preliminary loan application process. These preliminary processes did not give
rise to a loan commitment. On October 7, 1998, GP Properties advised the Company
that it closed on alternative lending. GP Properties refused the Company's
request that it withdraw its claim, and on October 26, 1999 CRIIMI MAE objected
to the GP Properties Claim. GP Properties did not respond to the objection on or
prior to the objection deadline. On May 9, 2000, the Bankruptcy Court entered an
order disallowing and expunging the GP Properties Claim.
The remaining claims of approximately $770 million, excluding accrued
interest, are carried on the balance sheet as of June 30, 2000. The Debtors
believe they have substantial defenses to each of the disputed claims and that
the ultimate allowed amount of these claims, if any, will be insignificant,
although there can be no assurance.
17. SEGMENT REPORTING
During 1997, FASB issued SFAS 131 "Disclosures about Segments of an
Enterprise and Related Information" ("FAS 131"). FAS 131 establishes standards
for the way that public business enterprises report information about operating
segments and related disclosures about products and services, geographical areas
and major customers.
Management assesses Company performance and allocates capital principally
on the basis of two lines of business: portfolio investment and mortgage
servicing. These two lines of business are managed separately as they provide
different sources and types of revenues for the Company.
Portfolio investment primarily includes (i) acquiring non-investment grade
subordinated securities backed by pools of mortgage loans on multifamily, retail
and other commercial real estate and by pools of mortgage-backed securities,
backed, in turn, by loans on such properties ("Subordinated CMBS"), (ii)
originating and underwriting mortgage loans, (iii) securitizing pools of
mortgage loans and pools of commercial mortgage-backed securities ("CMBS") and
to a lesser degree, (iv) direct investments in government insured securities and
entities that own government insured securities and (v) securities trading
activities. The Company's income is primarily generated from these investments.
Mortgage servicing, which consists of all the operations of CMSLP, includes
performing servicing functions with respect to the Company's mortgage loans and
the mortgage loans underlying the Company's Subordinated CMBS. CMSLP performs a
variety of servicing including special, master, direct and loan management as
well as advisory services. For these services, CMSLP earns a servicing fee
which is calculated as a percentage of the principal amount of the servicing
portfolio typically paid when the related service is rendered. These services
may include either routine monthly services, non-monthly periodic services or
event-triggered services. In acting as a servicer, CMSLP also earns interest
income on the investment of escrows held on behalf of borrowers and other income
which includes, among other things, assumption fees and modification fees.
CMSLP is an unconsolidated affiliate of CRIIMI MAE. The results of its
operations are reported in the Company's income statement in equity in earnings
from investments.
Revenues, expenses and assets are accounted for in accordance with the
accounting policies set forth in Note 3, "Summary of Significant Accounting
Policies." Overhead expenses, such as administrative expenses, are allocated
either directly to each business line or through estimates based on factors such
as number of personnel or square footage of office space.
The following table details the Company's financial performance by these
two lines of business for the three and six months ended June 30, 2000, and
1999. The basis of accounting used in the table is GAAP.
51
<PAGE>
<TABLE>
<CAPTION>
For the three months ended June 30,
2000
------------------------------------------------------------------------
Portfolio Mortgage
Investment Servicing Elimination (1) Consolidated
--------------- -------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Interest income:
Subordinated CMBS $ 35,392,863 $ 15,477 $ (15,477) $ 35,392,863
Insured mortgage securities 7,670,728 - - 7,670,728
Originated loans 8,210,791 - - 8,210,791
Other - 893,626 (893,626) -
Servicing income - 1,448,192 (1,448,192) -
Net gain on mortgage security dispositions 225,835 - - 225,835
Gain on originated loan dispositions 37,885 - - 37,885
Other income 1,158,273 1,213,446 (1,416,128) 955,591
-------------- ------------ -------------- ---------------
Total revenue 52,696,375 3,570,741 (3,773,423) 52,493,693
-------------- ------------ -------------- ---------------
General and administrative expenses (2,665,231) (2,963,548) 2,963,548 (2,665,231)
Interest expense (37,891,927) - - (37,891,927)
Losses on warehouse obligations - - - -
Reorganization items (5,813,642) - - (5,813,642)
Other expenses (719,394) (897,663) 897,663 (719,394)
-------------- ------------ -------------- ---------------
Total expenses (47,090,194) (3,861,211) 3,861,211 (47,090,194)
-------------- ------------ -------------- ---------------
Net income 5,606,181 (290,470) 87,788 5,403,499
Preferred dividends accrued (1,661,015) - - (1,661,015)
-------------- ------------ -------------- ---------------
Net (loss) income available to common
shareholders $ 3,945,166 ($290,470) $ 87,788 $ 3,742,484
============== ============ ============== ===============
Total assets $2,154,708,472 $ 23,628,650 $ (44,790,785) $ 2,133,546,337
============== ============ ============== ===============
<CAPTION>
For the three months ended June 30,
1999
------------------------------------------------------------------------
Portfolio Mortgage
Investment Servicing Elimination (1) Consolidated
-------------- ----------- ----------------- --------------
Interest income:
Subordinated CMBS $ 38,418,611 $ - $ - $ 38,418,611
Insured mortgage securities 8,489,030 - - 8,489,030
Originated loans 8,647,815 - - 8,647,815
Other - 979,299 (979,299) -
Servicing income - 1,906,579 (1,906,579) -
Net gain on mortgage security dispositions 778,608 - - 778,608
Gain on originated loan dispositions 58,810 - - 58,810
Other income 995,976 737,344 (824,796) 908,524
---------------- ----------- -------------- --------------
Total revenue 57,388,850 3,623,222 (3,710,674) 57,301,398
---------------- ----------- -------------- --------------
General and administrative expenses (3,617,040) (3,058,507) 3,058,507 (3,617,040)
Interest expense (37,308,289) (166,783) 166,783 (37,308,289)
Unrealized loss on warehouse obligation (10,871,970) - - (10,871,970)
Reorganization items (5,438,943) - - (5,438,943)
Other expenses (719,394) (500,244) 500,244 (719,394)
---------------- ----------- -------------- --------------
Total expenses (57,955,636) (3,725,534) 3,725,534 (57,955,636)
---------------- ----------- -------------- --------------
Net (loss) income (566,786) (102,312) 14,860 (654,238)
Preferred dividends accrued (1,378,961) - - (1,378,961)
---------------- ----------- -------------- --------------
Net (loss) income available to common
shareholders ($1,945,747) ($102,312) $ 14,860 ($2,033,199)
================ =========== ============== ==============
Total assets $ 2,363,929,463 $23,898,795 $ (2,083,056) $2,385,745,202
================ =========== ============== ==============
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
For the six months ended June 30,
2000
-------------------------------------------------------------------------
Portfolio Mortgage
Investment Servicing Elimination (1) Consolidated
---------------- -------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Interest income:
Subordinated CMBS $ 74,562,634 $ 29,291 $ (29,291) $ 74,562,634
Insured mortgage securities 15,467,929 - - 15,467,929
Originated loans 16,698,417 - - 16,698,417
Other - 1,661,114 (1,661,114) -
Servicing income - 2,918,439 (2,918,439) -
Net gain on mortgage security dispositions 241,312 - - 241,312
Gain on originated loan dispositions 37,885 - - 37,885
Other income 1,678,696 2,127,656 (2,525,992) 1,280,360
--------------- ------------ ------------- ---------------
Total revenue 108,686,873 6,736,500 (7,134,836) 108,288,537
--------------- ------------ ------------- ---------------
General and administrative expenses (5,803,988) (6,149,243) 6,149,243 (5,803,988)
Interest expense (75,106,879) - 0 (75,106,879)
Losses on warehouse obligations - - 0 -
Reorganization items (14,859,882) - 0 (14,859,882)
Other expenses (1,438,788) (1,029,080) 1,029,080 (1,438,788)
--------------- ------------ ------------- ---------------
Total expenses (97,209,537) (7,178,323) 7,178,323 (97,209,537)
--------------- ------------ ------------- ---------------
Net income 11,477,336 (441,823) 43,487 11,079,000
Preferred dividends accrued (3,300,905) - - (3,300,905)
--------------- ------------ ------------- ---------------
Net (loss) income available to common
shareholders $ 8,176,431 $ (441,823) $ 43,487 $ 7,778,095
=============== ============ ============= ===============
Total assets $ 2,154,708,472 $ 23,628,650 $ (44,790,785) $ 2,133,546,337
=============== ============ ============= ===============
<CAPTION>
For the six months ended June 30,
1999
-------------------------------------------------------------------------
Portfolio Mortgage
Investment Servicing Elimination (1) Consolidated
---------------- -------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Interest income:
Subordinated CMBS $ 76,903,756 $ - $ - $ 76,903,756
Insured mortgage securities 17,389,338 - - 17,389,338
Originated loans 17,488,642 - - 17,488,642
Other - 1,552,054 (1,552,054) -
Servicing income - 3,520,524 (3,520,524) -
Net gain on mortgage security dispositions 1,585,812 - - 1,585,812
Gain on originated loan dispositions 160,210 - - 160,210
Other income 1,940,211 2,023,624 (4,025,911) (62,076)
--------------- ------------ ------------- ---------------
Total revenue 115,467,969 7,096,202 (9,098,489) 113,465,682
--------------- ------------ ------------- ---------------
General and administrative expenses (6,251,154) (7,540,790) 7,540,790 (6,251,154)
Interest expense (73,737,219) (181,231) 181,231 (73,737,219)
Unrealized loss on warehouse obligation (6,925,495) - - (6,925,495)
Reorganization items (10,946,781) - - (10,946,781)
Other expenses (1,438,788) (1,503,206) 1,503,206 (1,438,788)
--------------- ------------ ------------- ---------------
Total expenses (99,299,437) (9,225,227) 9,225,227 (99,299,437)
--------------- ------------ ------------- ---------------
Net (loss) income 16,168,532 (2,129,025) 126,738 14,166,245
Preferred dividends accrued (2,782,495) - - (2,782,495)
--------------- ------------ ------------- ---------------
Net (loss) income available to common
shareholders $ 13,386,037 ($2,129,025) $ 126,738 $ 11,383,750
=============== ============ ============= ===============
Total assets $ 2,363,929,463 $ 23,898,795 $ (2,083,056) $ 2,385,745,202
=============== ============ ============= ===============
</TABLE>
(1) The Company performs the mortgage servicing function through CMSLP which is
accounted for under the equity method. The elimination column reclassifies
CMSLP under the equity method as it is accounted for in the Company's
consolidated financial statements.
53
<PAGE>
18. FINANCIAL STATEMENTS FOR THE DEBTOR ENTITIES
The following are unconsolidated financial statements for CRIIMI MAE,
CM Management and Holdings II:
CRIIMI MAE INC.
BALANCE SHEETS
(Unconsolidated)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------------ --------------------
<S> <C> <C>
Assets:
Subordinated CMBS, at fair value $ 659,979,459 $ 826,897,948
Insured mortgage security, at fair value 5,232,527 5,268,982
Receivables and other assets 46,441,552 83,133,075
Restricted cash and cash equivalents 73,050,129 37,774,894
Cash and cash equivalents 65,170,671 52,114,880
Investment in subsidiaries 217,781,072 210,030,947
------------------ ------------------
Total assets $ 1,067,655,410 $ 1,215,220,726
================== ==================
Liabilities:
Accounts payable and other accrued expenses $ 21,383,068 $ 21,580,384
Liabilities subject to Chapter 11 proceedings 796,233,699 974,291,756
------------------ ------------------
Total liabilities 817,616,767 995,872,140
------------------ ------------------
Shareholders' equity:
Convertible preferred stock 23,833 26,471
Common stock 623,532 599,546
Accumulated other comprehensive income (184,516,951) (207,421,788)
Accumulated deficit (140,656,820) (148,434,915)
Additional paid-in capital 574,565,049 574,579,272
------------------ ------------------
Total shareholders' equity 250,038,643 219,348,586
------------------ ------------------
Total liabilities and shareholders' equity $ 1,067,655,410 1,215,220,726
==================- ==================-
</TABLE>
54
<PAGE>
CRIIMI MAE INC.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unconsolidated)
<TABLE>
<CAPTION>
For the three months ended June 30, For the six months ended June 30,
2000 1999 2000 1999
--------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Interest income $ 24,406,010 $ 24,736,124 $ 51,510,235 $ 54,986,974
Interest expense 15,500,940 15,288,982 31,613,535 32,092,608
--------------- --------------- ------------- --------------
Net interest margin 8,905,070 9,447,142 19,896,700 22,894,366
--------------- --------------- ------------- --------------
Equity in earnings from investments 1,656,794 6,233,334 5,131,982 8,568,440
Other income 878,167 643,711 1,169,690 1,030,956
General and administrative expenses (247,021) (283,432) (450,745) (424,875)
Amortization of assets acquired in the Merger (719,394) (719,394) (1,438,788) (1,438,788)
Realized loss on reverse repurchase obligation - - - -
Losses on warehouse obligations - (10,871,970) - (6,925,495)
Reorganization items: -
Impairment on CMBS (1,809,062) - (5,252,821) -
Loss on Sale of CMBS (357,188) - (1,711,214) -
Impairment on REO (924,283) - (924,283) -
Other (1,979,584) (5,103,629) (5,341,521) (9,538,359)
--------------- --------------- ------------- --------------
Subtotal (3,501,571) (10,101,380) (8,817,700) (8,728,121)
--------------- --------------- ------------- --------------
Net (loss) income before dividends accrued or paid on
preferred shares 5,403,499 (654,238) 11,079,000 14,166,245
Dividends accrued or paid on preferred shares (1,661,015) (1,378,961) (3,300,905) (2,782,495)
--------------- --------------- ------------- --------------
Net (loss) income available to common shareholders 3,742,484 (2,033,199) 7,778,095 11,383,750
=============== =============== ============= ==============
Comprehensive (loss) income:
Net (loss) income before dividends paid or accrued on
preferred shares 5,403,499 (654,238) 11,079,000 14,166,245
Other comprehensive income (loss) (383,304) (29,613,575) 22,904,837 (38,285,985)
--------------- --------------- ------------- --------------
Comprehensive (loss) income 5,020,195 (30,267,813) 33,983,837 (24,119,740)
=============== =============== ============= ==============
</TABLE>
The accompanying note is an integral part of these financial statements.
55
<PAGE>
CRIIMI MAE Inc.
Note to Financial Statements
As of June 30, 2000 and 1999
(Unconsolidated)
1. BASIS OF PRESENTATION
GAAP requires that certain entities that meet specific criteria be
consolidated with CRIIMI MAE including: CM Management (Debtor), and Holdings II
(Debtor), CRIIMI MAE Financial Corporation III, CRIIMI MAE QRS 1, Inc., CRIIMI
MAE Holdings Inc. (currently inactive), CRIIMI MAE Holdings L.P. (currently
inactive), CRIIMI, Inc., and CRIIMI MAE CMBS Corporation. For purposes of this
presentation CRIIMI MAE accounts for all subsidiaries (those consolidated under
GAAP and those accounted for under the equity method under GAAP) using the
equity method of accounting.
All entities that CRIIMI MAE would normally consolidate for GAAP
purposes are being accounted for under the equity method of accounting. The
equity method of accounting consists of recording an original investment in an
investee as the amount originally contributed. Subsequently this investment is
increased/(decreased) for CRIIMI MAE's share of the investee's income/(losses)
and increased for additional contributions and decreased for distributions
received from the investee. CRIIMI MAE's share of the investee's income is
recognized as "Equity in earnings from subsidiaries" on the income statement.
In management's opinion, with the exception of the matter discussed
above, the financial statements of CRIIMI MAE contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the financial position of CRIIMI MAE as of June 30, 2000 and December 31, 1999,
and the unconsolidated results of its operations for the three and six months
ended June 30, 2000 and 1999.
56
<PAGE>
CRIIMI MAE Management Inc.
BALANCE SHEETS
June 30, December 31,
-------------- ---------------
2000 1999
--------------- ---------------
Assets:
Note receivable $ 3,376,468 $ 3,376,468
Restricted cash and cash equivalents 575,094 261,729
Cash and cash equivalents 684,075 926,122
Other assets 2,878,043 2,969,939
Equity investments 12,462,733 12,794,963
-------------- --------------
Total assets $ 19,976,413 $ 20,329,221
============== ==============
Liabilities:
Accounts payable and other accrued expenses $ 2,870,566 $ 2,585,812
Liabilities subject to Chapter 11 proceedings 6,917,520 6,529,634
-------------- --------------
Total liabilities 9,788,086 9,115,446
-------------- --------------
Shareholders' equity 10,188,327 11,213,775
-------------- --------------
Total liabilities and shareholders' equity $ 19,976,413 $ 20,329,221
============== ==============
The accompanying note is an integral part of these financial statements.
57
<PAGE>
CRIIMI MAE Management Inc.
STATEMENTS OF NET LOSS
<TABLE>
<CAPTION>
For the three months ended June 30, For the six months ended June 30,
2000 1999 2000 1999
----------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Interest income - note receivable and short-term
interest income $ 97,074 $ 73,156 $ 187,817 $ 164,602
Equity in losses from investments (218,376) (73,082) (330,198) (1,537,000)
------------- ------------ -----------
Total revenue (121,302) 74 (142,381) (1,372,398)
------------ ------------- ------------ -----------
Interest expense 122,649 93,460 236,916 205,324
Depreciation and amortization 145,155 130,105 276,495 264,445
General and administrative expenses 2,015,030 2,966,019 4,564,392 5,088,867
Reorganization items 676,014 94,023 1,494,626 973,800
------------ ------------- ------------ -----------
Total expenses 2,958,848 3,283,607 6,572,429 6,532,436
------------ ------------- ------------ -----------
Net loss $ (3,080,150) $ (3,283,533) $ (6,714,810) $(7,904,834)
============ ============= ============ ===========
</TABLE>
The accompanying note is an integral part of these financial statements
58
<PAGE>
CRIIMI MAE Management, Inc.
Note to Financial Statements
As of June 30, 2000 and 1999
1. BASIS OF PRESENTATION
In management's opinion, the accompanying unaudited financial
statements of CM Management contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position of CM
Management on a stand-alone basis as of June 30, 2000 and December 31, 1999 and
the results of its operations for the three and six months ended June 30, 2000
and 1999, in accordance with GAAP.
59
<PAGE>
CRIIMI MAE Holdings II, L.P.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
--------------- ------------------
<S> <C> <C>
Assets:
Subordinated CMBS, at fair value $ 39,562,952 $ 38,211,075
Interest receivable 446,476 377,936
Cash 100 100
--------------- ------------------
Total assets $ 40,009,528 $ 38,589,111
=============== ==================
Liabilities:
Liabilities not subject to Chapter 11 proceedings:
Collateralized mortgage obligations $ 39,495,844 $ 39,256,952
Payables and accrued expenses 597,017 541,360
Liabilities subject to Chapter 11 proceedings:
Variable-rate secured borrowings - -
--------------- ------------------
Total liabilities 40,092,861 39,798,312
--------------- ------------------
Partners' equity:
Contributed capital 4,444,800 4,856,143
Accumulated other comprehensive income (4,528,133) (6,065,344)
--------------- ------------------
Total partners' equity (83,333) (1,209,201)
--------------- ------------------
Total liabilities and partners' equity $ 40,009,528 $ 38,589,111
=============== ==================
</TABLE>
The accompanying note is an integral part of these financial statements.
60
<PAGE>
CRIIMI MAE Holdings II, L.P.
STATEMENTS OF NET LOSS AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
For the three months ended June 30, For the six months ended June 30,
2000 1999 2000 1999
----------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
Interest income:
Subordinated CMBS $ 796,510 $ 796,630 $ 1,593,020 $ 1,593,299
Interest expense:
Collateralized bond obligations-CMBS 937,023 145,838 1,842,902 145,838
Variable-rate secured borrowings-CMBS - 542,804 - 1,102,717
------------- ----------- ------------ -------------
Total interest expense 937,023 688,642 1,842,902 1,248,555
------------- ----------- ------------ -------------
Net interest margin (140,513) 107,988 (249,882) 344,744
------------- ----------- ------------ -------------
Other investment income 0 - - -
General and administrative expenses 0 - - -
Reorganization costs (50,394) (223,044) (103,251) (416,372)
------------ ----------- ------------ -------------
Subtotal (50,394) (223,044) (103,251) (416,372)
------------- ----------- ------------ -------------
Net loss $ (190,907) $ (115,056) $ (353,133) $ (71,628)
============= =========== ============ =============
Other comprehensive income 258,054 (2,396,210) 629,344 (3,008,070)
------------- ----------- ------------ -------------
Comprehensive income $ 67,147 $ (2,511,266) $ 276,211 $ (3,079,698)
============= =========== ============ =============
</TABLE>
The accompanying note is an integral part of these financial statements.
61
<PAGE>
Holdings II, L.P.
Note to Financial Statements
As of June 30, 2000 and 1999
1. BASIS OF PRESENTATION
Holdings II's CMBS (2 tranches from CMO-IV) are carried as investments in
loans at amortized cost basis in CRIIMI MAE's second quarter Form 10-Q's
consolidated financial statements. (See Notes 3 and 6 for discussion of this
accounting.) On a stand-alone basis, GAAP requires that Holdings II's
investment in CMBS be carried as securities (as opposed to loans) at fair value.
In management's opinion, the accompanying unaudited financial statements of
Holdings II contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position of Holdings II
on a stand-alone basis as of June 30, 2000 and December 31, 1999 and the results
of its operations for the three and six months ended June 30, 2000 and 1999.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS. When used in this Quarterly Report on Form
10-Q, the words "believes," "anticipates," "expects" and similar expressions are
intended to identify forward-looking statements. Statements looking forward in
time are included in this Quarterly Report on Form 10-Q pursuant to the "safe
harbor" provision of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties, which could cause
actual results to differ materially, including, but not limited to, the risk
factors contained below, in the Company's Proposed Disclosure Statement (as
defined below) filed with the Bankruptcy Court (and with the Securities and
Exchange Commission under cover of two Current Reports on Form 8-K filed on May
18, 2000 and August 11, 2000, respectively) and in the Company's reports filed
with the Securities and Exchange Commission ("SEC") pursuant to the Securities
Exchange Act of 1934, including its Annual Report on Form 10-K for the year
ended December 31, 1999. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. The
Company undertakes no obligation to publicly revise these forward-looking
statements to reflect events or circumstances occurring after the date hereof or
to reflect the occurrence of unanticipated events.
General
CRIIMI MAE Inc. (together with its consolidated subsidiaries, unless the
context otherwise indicates, "CRIIMI MAE" or the "Company") is a fully
integrated commercial mortgage company structured as a self-administered real
estate investment trust ("REIT"). Prior to the filing by CRIIMI MAE Inc.
(unconsolidated) and two of its operating subsidiaries, CRIIMI MAE Management,
Inc. ("CM Management"), and CRIIMI MAE Holdings II, L.P. ("Holdings II" and,
together with CRIIMI MAE and CM Management, the "Debtors"), for relief under
Chapter 11 of the U.S. Bankruptcy Code on October 5, 1998 (the "Petition Date")
as described below, CRIIMI MAE's primary activities included (i) acquiring non-
investment grade securities (rated below BBB- or unrated) backed by pools of
commercial mortgage loans on multifamily, retail and other commercial real
estate ("Subordinated CMBS"), (ii) originating and underwriting commercial
mortgage loans, (iii) securitizing pools of commercial mortgage loans and
resecuritizing pools of Subordinated CMBS, and (iv) through the Company's
servicing affiliate, CRIIMI MAE Services Limited Partnership ("CMSLP"),
performing servicing functions with respect to the mortgage loans underlying the
Company's Subordinated CMBS.
Since filing for Chapter 11 protection, CRIIMI MAE has suspended its
Subordinated CMBS acquisition, origination and securitization programs. The
Company continues to hold a substantial portfolio of Subordinated CMBS,
originated loans and mortgage securities and, through CMSLP, acts as a servicer
of commercial mortgage loans.
The Company's business is subject to a number of risks and uncertainties
including, but not limited to: (1) the effect of the Chapter 11 filing and
substantial doubt as to the Company's ability to continue as a going concern;
(2) risks related to the Recapitalization Financing under the Company's Third
Amended Joint Plan of Reorganization; (3) risk of loss of REIT status; (4)
taxable mortgage pool risk; (5) risk of phantom income resulting in additional
tax liability; (6) the effect of rate compression on the market price of the
Company's stock; (7) substantial leverage; (8) inherent risks in owning
Subordinated CMBS; (9) the limited protection provided by hedging transactions;
(10) risk of foreclosure on CMBS assets; (11) the limited liquidity of the CMBS
market; (12) pending litigation; (13) risk of becoming subject to the
requirements of the Investment Company Act of 1940; (14) possible effects of an
economic recession on losses and defaults; (15) borrowing risks; (16) the effect
of the yield curve on income; and (17) risks associated with the trader election
including those referenced in "2000 Taxable Income (Loss)/ Taxable Distribution
Requirements" below.
In addition to the two operating subsidiaries which filed for Chapter 11
protection along with the Company, the Company owns 100% of multiple financing
and operating subsidiaries as well as various interests in other entities
(including CMSLP) which either own or service mortgage and mortgage-related
assets (the "Non-Debtor Affiliates"). See Note 3 of the Notes to Consolidated
Financial Statements. None of the Non-Debtor Affiliates has filed for
bankruptcy protection.
The Company was incorporated in Delaware in 1989 under the name CRI Insured
Mortgage Association, Inc. ("CRI Insured"). In July 1993, CRI Insured changed
its name to CRIIMI MAE Inc. and reincorporated in
63
<PAGE>
Maryland. In June 1995, certain mortgage businesses affiliated with C.R.I., Inc.
were merged into CRIIMI MAE (the "Merger"). The Company is not a government
sponsored entity or in any way affiliated with the United States government or
any United States government agency.
Chapter 11 Filing
Prior to the Petition Date, CRIIMI MAE financed a substantial portion of
its Subordinated CMBS acquisitions with short-term, variable-rate financing
facilities secured by the Company's CMBS. The agreements governing these
financing arrangements typically required the Company to maintain collateral
with a market value not less than a specified percentage of the outstanding
indebtedness ("loan-to-value ratio"). The agreements further provided that the
creditors could require the Company to provide cash or additional collateral if
the market value of the existing collateral fell below this minimum amount.
As a result of the turmoil in the capital markets commencing in late summer
of 1998, the spreads between CMBS yields and yields on Treasury securities with
comparable maturities began to widen substantially and rapidly. Due to this
widening of CMBS spreads, the market value of the CMBS securing the Company's
short-term, variable-rate financing facilities declined. CRIIMI MAE's short-
term secured creditors perceived that the value of the CMBS securing their
facilities with the Company had fallen, creating a value deficiency as measured
by the loan-to-value ratio described above and, consequently, made demand upon
the Company to provide cash or additional collateral with sufficient value to
cure the perceived value deficiency. In August and September of 1998, the
Company received and met collateral calls from its secured creditors. At the
same time, CRIIMI MAE was in negotiations with various third parties in an
effort to obtain additional debt and equity financing that would provide the
Company with additional liquidity.
On Friday afternoon, October 2, 1998, the Company was in the closing
negotiations of a refinancing with one of its unsecured creditors that would
have provided the Company with additional borrowings when it received a
significant collateral call from Merrill Lynch Mortgage Capital, Inc. ("Merrill
Lynch"). The basis for this collateral call, in the Company's view, was
unreasonable. After giving consideration to, among other things, this
collateral call and the Company's concern that its failure to satisfy this
collateral call would cause the Company to be in default under a substantial
portion of its financing arrangements, the Company reluctantly concluded on
Sunday, October 4, 1998 that it was in the best interests of creditors, equity
holders and other parties in interest to seek Chapter 11 protection.
On October 5, 1998, the Debtors filed for relief under Chapter 11 of the
U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of
Maryland, Southern Division, in Greenbelt, Maryland (the "Bankruptcy Court").
These related cases are being jointly administered under the caption "In re
CRIIMI MAE Inc., et al.," Ch. 11 Case No. 98-2-3115-DK.
While in bankruptcy, CRIIMI MAE has streamlined its operations. The
Company has significantly reduced the number of employees in its origination and
underwriting operations. In connection with these reductions, the Company
closed its five regional loan origination offices.
Although the Company has significantly reduced its work force, the Company
recognizes that retention of its executives and other remaining employees is
essential to the efficient operation of its business and to its reorganization
efforts. Accordingly, the Company has, with Bankruptcy Court approval, adopted
an employee retention plan.
The Company's independent public accountants have issued a report on the
Company's 1999 financial statements expressing substantial doubt about the
Company's ability to continue as a going concern. In addition, the Company has
been advised by its independent public accountants that, if the Company's Plan
of reorganization is not approved by the Bankruptcy Court prior to the
completion of their audit of the Company's financial statements for the year
ended December 31, 2000, the auditors' report on those financial statements will
continue to be modified to express substantial doubt about the Company's ability
to continue as a going concern.
CRIIMI MAE is working diligently toward emerging from bankruptcy as a
successfully reorganized company. On April 25, 2000, the Debtors filed their
Third Amended Joint Plan of Reorganization (as amended and supplemented by
praecipes filed with the Bankruptcy Court on July 13, 14 and 21, 2000, the
"Plan") and proposed Second Amended Joint Disclosure Statement (as amended and
supplemented by praecipes filed with the Bankruptcy
64
<PAGE>
Court on July 13 and 21, 2000, the "Proposed Disclosure Statement"). The
Plan was filed with the support of the Official Committee of Equity Security
Holders of CRIIMI MAE (the "CMI Equity Committee"), which is a co-proponent of
the Plan. Subject to the completion of mutually acceptable documentation
evidencing the secured financing to be provided by the unsecured creditors (the
"Unsecured Creditor Debt Documentation"), the Official Committee of Unsecured
Creditors of CRIIMI MAE (the "Unsecured Creditors' Committee") has agreed to
support confirmation of the Plan. The Company, the CMI Equity Committee and the
Unsecured Creditors' Committee are now all proceeding toward confirmation of the
Plan. Under the Plan, Merrill Lynch and German American Capital Corporation
("GACC"), two of the Company's largest secured creditors, would provide a
significant portion of the recapitalization financing contemplated by the Plan.
The Bankruptcy Court held a hearing on April 25, 2000 on approval of the
Proposed Disclosure Statement. During that hearing, the bankruptcy judge
requested the filing of additional legal briefs by May 9, 2000 on two issues
raised at the hearing. The issues raised related to an objection to the
Company's Proposed Disclosure Statement filed by Salomon Smith Barney
Inc./Citicorp Securities, Inc. and Citicorp Real Estate, Inc. (together
"Citigroup"). On July 12, 2000, the Bankruptcy Court entered an order
overruling the objections raised by Citigroup as set forth in the Memorandum
Opinion and Order filed and entered on that date by the Bankruptcy Court. Also
on July 21, 2000, the Company and Citigroup reached a settlement regarding the
treatment of Citigroup's claims under the Plan. (See Note 16 for a summary of
certain material terms of the settlement between the Company and Citigroup.)
The settlement resolved Citigroup's objections to the Proposed Disclosure
Statement. The Citigroup objections were the only objections to the Proposed
Disclosure Statement pending before the Bankruptcy Court.
The Bankruptcy Court has scheduled a hearing on August 23, 2000 with respect
to the proposed ballots submitted to the Bankruptcy Court to be sent to members
of all classes of impaired creditors and equity security holders in connection
with the Plan. Once the Proposed Disclosure Statement has been approved by the
Bankruptcy Court, the Plan will be sent, together with the approved Disclosure
Statement, to members of all classes of impaired creditors and all equity
security holders for acceptance or rejection.
The Unsecured Creditors' Committee filed its own plan of reorganization, and
proposed disclosure statement, and various amendments to each of the foregoing,
with the Bankruptcy Court which, in general, provided for the liquidation of the
assets of the Debtors. However, as a result of successful negotiations between
the Debtors and the Unsecured Creditors' Committee, the Unsecured Creditors'
Committee has agreed to the treatment of unsecured claims under the Plan,
subject to completion of mutually acceptable Unsecured Creditor Debt
Documentation, and has asked the Bankruptcy Court to defer consideration of its
plan of reorganization and second amended proposed disclosure statement.
The Plan of Reorganization
The Plan contemplates the payment in full of all of the allowed claims of
the Debtors primarily through recapitalization financing (including proceeds
from certain asset sales) aggregating at least $857 million (the
"Recapitalization Financing"). Approximately $275 million of the
Recapitalization Financing would be provided by Merrill Lynch and GACC through a
secured financing facility, and approximately $155 million would be provided
through new secured notes issued to the Company's major unsecured creditors
(collectively, the "New Debt"). The sale of select CMBS (the "CMBS Sale") and
the Company's interest in CMO-IV (the "CMO-IV Sale"), the proceeds of which are
expected to be used to pay down existing debt, is contemplated to provide the
balance of the Recapitalization Financing. The Company may seek new equity
capital from one or more investors to partially fund the Plan, although new
equity is not required to fund the Plan.
In connection with the Plan, substantially all cash flows are expected to be
used to satisfy principal, interest and fee obligations under the New Debt. The
$275 million secured financing would provide for (i) interest at a rate of one
month LIBOR plus 3.25%, (ii) principal prepayment/amortization obligations,
(iii) extension fees after two years and (iv) maturity on the fourth anniversary
of the effective date of the Plan. The approximate $155 million secured
financing would be effected through the issuance of two series of secured notes
under two separate indentures. The first series of secured notes, representing
an aggregate principal amount of approximately $105 million, would provide for
(i) interest at a rate of 11.75% per annum, (ii) principal
prepayment/amortization obligations, (iii) extension fees after four years and
(iv) maturity on the fifth anniversary of the effective date of the Plan. The
second series of secured notes, representing an aggregate principal amount of
approximately $50 million, would provide for (i) interest at a rate of 13% per
annum with additional interest at the rate of 7% per annum
65
<PAGE>
accreting over the debt term, (ii) extension fees after four years and (iii)
maturity on the sixth anniversary of the effective date of the Plan. The New
Debt described above will be secured by substantially all of the assets of the
Company. It is contemplated that there will be restrictive covenants, including
financial covenants, in connection with the New Debt.
The Plan also contemplates that the holders of the Company's common stock
will retain their stock. Under the Plan, no cash dividends, other than a
maximum of $4.1 million to preferred shareholders, can be paid to existing
shareholders. See "Effect of Chapter 11 on REIT Status and Other Tax Matters"
for further discussion. Subject to the respective acceptances of the Plan by
the holders of the Company's Series B Cumulative Convertible Preferred Stock
(the "Series B Preferred Stock") and the Series F Redeemable Cumulative Dividend
Preferred Stock (the "Series F Preferred Stock" or "junior preferred stock"),
the Plan contemplates an amendment to their respective relative rights and
preferences to permit the payment of accrued and unpaid dividends in cash or
common stock, or a combination thereof, at the Company's election. The Plan
further contemplates amendments to the relative rights and preferences of the
Series E Preferred Stock, relating principally to dividend and conversion
rights.
Reference is made to the Plan and Proposed Disclosure Statement, previously
filed with the Bankruptcy Court and with the SEC under cover of two current
reports on Form 8-K filed on May 18, 2000 and August 11, 2000, respectively, for
a more detailed description of the financing contemplated to be obtained under
the Plan from the respective existing creditors including, without limitation,
payment terms, restrictive covenants and collateral, and a more detailed
description of the treatment of preferred stockholders. Although the Company has
commitments for substantially all of the New Debt and has sold certain of the
CMBS contemplated to be sold in connection with the CMBS Sale, there can be no
assurance that the Company will obtain the Recapitalization Financing, that the
Plan will be confirmed by the Bankruptcy Court, or that the Plan, if confirmed,
will be consummated. The Plan also contemplates certain amendments to the
Company's articles of incorporation, including an increase in authorized shares
from 120 million to 375 million (consisting of 300 million of common shares and
75 million of preferred shares).
Effect of Chapter 11 Filing on REIT Status and Other Tax Matters
REIT Status
CRIIMI MAE is required to meet income, asset, ownership and distribution
tests to maintain its REIT status. The Company believes that it has satisfied
the REIT requirements for all years through, and including, 1998. However, due
to the uncertainty resulting from its Chapter 11 filing, there can be no
assurance that CRIIMI MAE will retain its REIT status for 1999 or subsequent
years. If the Company fails to retain its REIT status for any taxable year, it
will be taxed as a regular domestic corporation subject to federal and state
income tax in the year of disqualification and for at least the four subsequent
years. Depending on the amount of any such federal and state income tax, the
Company may have insufficient funds to pay such tax and also may be unable to
comply with its obligations under the New Debt.
2000 Taxable Income (Loss)/Taxable Distribution Requirements
Internal Revenue Service Revenue procedure 99-17 provides securities and
commodities traders with the ability to elect mark-to-market treatment for the
2000 tax year and for all future tax years, unless the election is revoked with
the consent of the Internal Revenue Service. On March 15, 2000, CRIIMI MAE
elected for tax purposes to be classified as a trader in securities effective
January 1, 2000. Such trading activity is, or is expected to be, in certain
types of mortgage-backed securities, including Subordinated CMBS (the "Trading
Assets").
As a result of its trader election, CRIIMI MAE recognized a mark-to market
tax loss on its Trading Assets on January 1, 2000 of approximately $478 million
(the "January 2000 Loss"). Such loss is expected to be recognized evenly over
four years beginning with the year 2000. The Company expects such loss to be
ordinary.
Additionally, as a result of its trader election, the Company will be
required to mark-to-market its Trading Assets at the end of each tax year,
including the year 2000. Any increase or decrease in the value of the Trading
Assets as a result of the year-end mark-to-market requirement will generally
result in either a tax gain (if an increase in value) or a tax loss (if a
decrease in value). Such tax gain or loss, as well as any realized gains or
losses from the disposition of Trading Assets during each year, are also
expected to be ordinary gains or losses.
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Since gains and losses associated with trading activities are expected to
be ordinary, any gains will generally increase taxable income and any losses
will generally decrease taxable income. Since the Company is a REIT which is
generally required to distribute 95% of its taxable income to shareholders, any
increases in taxable income from trading activities will generally result in an
increase in REIT distribution requirements and any decreases in taxable income
from trading activities will generally result in a decrease in REIT distribution
requirements (or, if the taxable income is reduced to zero, eliminate REIT
distribution requirements).
Gains and losses from the mark-to-market requirement (including the January
2000 Loss) are unrealized. This creates a mismatch between REIT distribution
requirements and cash flow since the REIT distribution requirements will
generally fluctuate due to the mark-to-market adjustments, but the cash flow
from the Company's Trading Assets will not fluctuate as a result of the mark-to-
market adjustments.
Any accumulated and unused net operating losses, subject to certain
limitations, generally may be carried forward for up to 20 years to offset
taxable income until fully utilized. Accumulated and unused net operating
losses can not be carried back. If a security is marked down because of an
increase in interest rates, rather than from credit losses, such mark-to-market
losses may be recovered over time. Any recovered mark-to-market losses will
generally be recognized as taxable income, although there is expected to be no
corresponding increase in cash flow.
There is no assurance that the Company's position with respect to its
election as a trader in securities will not be challenged by the IRS, and, if
challenged, will be defended successfully by the Company. As such, there is a
risk that the January 2000 Loss will be limited or disallowed, resulting in
higher tax basis income and a corresponding increase in REIT distribution
requirements.
As a REIT, CRIIMI MAE is generally required to distribute at least 95% of
its "REIT taxable income" to its shareholders each year. If CRIIMI MAE is
required to make taxable income distributions to its shareholders to satisfy
required REIT distributions, all or a substantial portion of these distributions
are expected to be in the form of non-cash dividends. There is no assurance
that such non-cash dividends would satisfy the REIT distribution requirements.
It is possible that the Company could experience an "ownership change"
within the meaning of Section 382 of the Code. Consequently, its use of net
operating losses generated before the ownership change to reduce taxable income
after the ownership change may be subject to limitation under Section 382.
Generally, the use of net operating losses in any year is limited to the value
of the Company's stock on the date of the ownership change multiplied by the
long-term tax exempt rate (published by the IRS) with respect to that date.
See Taxable Income (Loss) below, and Notes 1 and 8 to Notes to Consolidated
Financial Statements for additional information related to the foregoing
matters.
Dividends During Bankruptcy
During the pendency of the Chapter 11 proceedings, the Company is
prohibited from paying cash dividends without first obtaining Bankruptcy Court
approval (and subject to their being funds legally available for any such
dividend under state corporate law). See "Effect of Chapter 11 Filing on REIT
Status and Other Tax Matters" regarding the declaration of a junior preferred
dividend with respect to 1998 taxable income and the anticipated distribution of
all or a substantial portion of its 1999 taxable income in the form of non-cash
taxable dividends. Dividends may be paid pursuant to and consistent with the
terms of the Plan, a copy of which has been filed with the SEC as an exhibit to
a Current Report on Form 8-K.
Due to the Chapter 11 filing on October 5, 1998, cash dividends have not
been paid on common or preferred shares. However, since dividends on the
Company's Series B, C, D, E and F Preferred Stock are cumulative, the dividends
payable at June 30, 2000 were accrued in the financial statements.
Dividends paid or accrued per share on the Company's common stock, Series B
Preferred Stock and Series F Preferred Stock are summarized below:
For the three months ended For the six months ended
June 30, June 30,
2000 1999(1) 2000 1999(1)
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<TABLE>
<S> <C> <C> <C> <C>
Common shares $ -- $ -- $ -- $ --
Series B Preferred Stock 0.68 0.68 1.36 1.36
Series F Preferred Stock 0.30 -- 0.60 --
</TABLE>
__________________
(1) Due to the Chapter 11 filing on October 5, 1998, cash dividends were not
paid for the year ended 1999 on common or preferred shares. The Company
paid a dividend on November 5, 1999 in the form of junior preferred stock
to its common shareholders for the purpose of distributing approximately
$15.7 million in undistributed 1998 taxable income. See "Effect of Chapter
11 Filing on REIT Status and Other Tax Matters" regarding this dividend and
the anticipated distribution of all of the Company's 1999 taxable income in
the form of non-cash taxable dividends. However, since dividends on the
Company's preferred shares are cumulative, the dividends payable at June
30, 2000 and June 30, 1999 were accrued in the financial statements.
In addition to the per share amounts described above, dividends were paid
or accrued on the Company's Series C Preferred Stock, Series D Preferred Stock,
and Series E Preferred Stock. Amounts payable to Series C Preferred Stock for
the six months ended June 30, 2000 were $138,682 as dividends accrued for only a
portion of this period due to the exchange of Series C Preferred Stock for
Series E Preferred Stock referenced below. This compares to amounts paid or
payable to Series C Preferred Stock for the six months ended June 30, 1999 of
$323,681. Amounts payable to Series D Preferred Stock for the six months ended
June 30, 2000 were $380,656. This compares to amounts paid or payable to Series
D Preferred Stock for the six months ended June 30, 1999 of $290,999. Amounts
paid or payable to the Series E Preferred Stock for the six months ended June
30, 2000 were $258,029. Nothing was payable to the Series E Preferred Stock in
1999. Amounts payable to the Series F Preferred Stock for the six months ended
June 30, 2000 were $355,721. Nothing was payable to the Series F Preferred
Stock for the six months ended June 30, 1999.
On February 22, 2000, CRIIMI MAE and the holder of its Series C Preferred
Stock entered into a Preferred Stock Exchange Agreement pursuant to which
103,000 shares of Series C Preferred Stock were exchanged for 103,000 shares of
a new series of preferred stock designated as Series E Preferred Stock. On July
26, 2000, CRIIMI MAE and the holder of its Series D Preferred Stock entered into
a Preferred Stock Exchange Agreement pursuant to which 100,000 shares of Series
D Preferred Stock were exchanged for 100,000 shares of Series E Preferred Stock.
See Note 12 of Notes to Consolidated Financial Statements for a further
discussion of the exchange of Series C Preferred Stock for Series E Preferred
Stock, and the exchange of the Series D Preferred Stock for Series E Preferred
Stock.
The Company's 1999 Taxable Income
As a REIT, CRIIMI MAE is generally required to distribute at least 95% of
its "REIT taxable income" to its shareholders each tax year. For purposes of
this requirement, REIT taxable income excludes certain excess noncash income
such as original issue discount ("OID"). In determining its federal income tax
liability, CRIIMI MAE, as a result of its REIT status, is entitled to deduct
from its taxable income dividends paid to its shareholders. Accordingly, to the
extent the Company distributes its net income to shareholders, it effectively
reduces taxable income, on a dollar-for-dollar basis, and eliminates the "double
taxation" that normally occurs when a corporation earns income and distributes
that income to shareholders in the form of dividends. The Company, however,
still must pay corporate level tax on any 1999 taxable income not distributed to
shareholders. Unlike the 95% distribution requirement, the calculation of the
Company's federal income tax liability does not exclude excess noncash income
such as OID.
In determining the Company's taxable income for 1999, distributions
declared by the Company on or before September 15, 2000 and actually paid by the
Company on or before December 31, 2000 will be considered as dividends paid for
the year ended December 31, 1999. The Company anticipates distributing all of
its 1999 taxable income in the form of non-cash taxable dividends. There can be
no assurance that the Company will be able to make such distributions with
respect to its 1999 taxable income. While the Company has not finalized its tax
return for 1999, should CRIIMI MAE terminate or fail to maintain its REIT status
during the year ended December 31, 1999, taxable income for the year ended
December 31, 1999 is estimated to be $37.5 million, which would generate a tax
liability of up to $15.0 million.
The Company's 1998 Taxable Income
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
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dividend was to distribute approximately $15.7 million in undistributed 1998
taxable income. To the extent that it is determined such amount was not
distributed, the Company would bear a corporate level income tax on the
undistributed amount. There can be no assurance that all of the Company's tax
liability was eliminated by payment of such junior preferred stock dividend. The
Company paid the junior preferred stock dividend on November 5, 1999. The junior
preferred stock dividend was taxable to common shareholder recipients. Junior
preferred shareholders were permitted to convert their shares of junior
preferred stock into common shares during two separate conversion periods.
During these conversion periods, an aggregate 1,020,241 shares of junior
preferred stock were converted into 8,798,009 shares of common stock.
Taxable Mortgage Pool Risks
An entity that constitutes a "taxable mortgage pool" as defined in the Tax
Code ("TMP") is treated as a separate corporate level taxpayer for federal
income tax purposes. In general, for an entity to be treated as a TMP (i)
substantially all of the assets must consist of debt obligations and a majority
of those debt obligations must consist of mortgages; (ii) the entity must have
more than one class of debt securities outstanding with separate maturities and
(iii) the payments on the debt securities must bear a relationship to the
payments received from the mortgages. The Company currently owns all of the
equity interests in three trusts that constitute TMPs (CBO-1, CBO-2 and CMO-IV,
collectively the "Trusts"). See Notes 5 and 6 of the Notes to Consolidated
Financial Statements for descriptions of CBO-1, CBO-2 and CMO-IV. See also Note
6 regarding the anticipated CMO-IV sale as part of the Plan. The statutory
provisions and regulations governing the tax treatment of TMPs (the "TMP Rules")
provide an exemption for TMPs that constitute "qualified REIT subsidiaries"
(that is, entities whose equity interests are wholly owned by a REIT). As a
result of this exemption and the fact that the Company owns all of the equity
interests in each Trust, the Trusts currently are not required to pay a separate
corporate level tax on income they derive from their underlying mortgage assets.
The Company also owns certain securities structured as bonds (the "Bonds")
issued by each of the Trusts. Certain of the Bonds owned by the Company serve
as collateral (the "Pledged Bonds") for short-term, variable-rate borrowings
used by the Company to finance their initial purchase. If the creditors holding
the Pledged Bonds were to seize or sell this collateral and the Pledged Bonds
were deemed to constitute equity interests (rather than debt) in the Trusts,
then the Trusts would no longer qualify for the exemption under the TMP Rules
provided for qualified REIT subsidiaries. The Trusts would then be required to
pay a corporate level federal income tax. As a result, available funds from the
underlying mortgage assets that would ordinarily be used by the Trusts to make
payments on certain securities issued by the Trust (including the equity
interests and the Pledged Bonds) would instead be applied to tax payments.
Since the equity interests and Bonds owned by the Company are the most
subordinated securities and, therefore, would absorb payment shortfalls first,
the loss of the exemption under the TMP rules could have a material adverse
effect on their value and the payments received thereon.
In addition to causing the loss of the exemption under the TMP Rules, a
seizure or sale of the Pledged Bonds and a characterization of them as equity
for tax purposes could also jeopardize the Company's REIT status if the value of
the remaining ownership interests in any Trust held by the Company (i) exceeded
5% of the total value of the Company's assets or (ii) constituted more than 10%
of the Trust's voting interests. Although it is possible that the election by
the TMPs to be treated as taxable REIT subsidiaries could prevent the loss of
CRIIMI MAE's REIT status, there can be no assurance that a valid election could
be made given the timing of a seizure or sale of the Pledged Bonds.
Investment Company Act Risk
Under the Investment Company Act of 1940, as amended (the "Investment
Company Act"), an investment company is required to register with the SEC and is
subject to extensive restrictive and potentially adverse regulation relating to,
among other things, operating methods, management, capital structure, dividends
and transactions with affiliates. However, as described below, companies that
are primarily engaged in the business of acquiring mortgages and other liens on
and interests in real estate ("Qualifying Interests") are excluded from the
requirements of the Investment Company Act.
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
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current SEC staff interpretations, the Company believes that all of its
Subordinated CMBS constitute Other Real Estate Interests and that certain of its
Subordinated CMBS also constitute Qualifying Interests. On certain of the
Company's Subordinated CMBS, the Company, along with other rights, has the
unilateral right to direct foreclosure with respect to the underlying mortgage
loans. Based on such rights and its economic interest in the underlying mortgage
loans, the Company believes that the related Subordinated CMBS constitute
Qualifying Interests. As of June 30, 2000, the Company believes that it was in
compliance with both the 55% Requirement and the 25% Requirement.
If the SEC or its staff were to take a different position with respect to
whether such Subordinated CMBS constitute Qualifying Interests, the Company
could, among other things, be required either (i) to change the manner in which
it conducts its operations to avoid being required to register as an investment
company or (ii) to register as an investment company, either of which could have
a material adverse effect on the Company. If the Company were required to
change the manner in which it conducts its business, it would likely have to
dispose of a significant portion of its Subordinated CMBS or acquire significant
additional assets that are Qualifying Interests. Alternatively, if the Company
were required to register as an investment company, it expects that its
operating expenses would significantly increase and that the Company would have
to reduce significantly its indebtedness, which could also require it to sell a
significant portion of its assets. No assurances can be given that any such
dispositions or acquisitions of assets, or deleveraging, could be accomplished
on favorable terms.
Further, if the Company were deemed an unregistered investment company, the
Company could be subject to monetary penalties and injunctive relief. The
Company would be unable to enforce contracts with third parties and third
parties could seek to obtain rescission of transactions undertaken during the
period the Company was deemed an unregistered investment company. In addition,
as a result of the Company's Chapter 11 filing, the Company is limited in
possible actions it may take in response to any need to modify its business plan
in order to register as an investment company, or avoid the need to register.
Certain dispositions or acquisitions of assets would require Bankruptcy Court
approval. Also, any forced sale of assets that occurs after the bankruptcy stay
is lifted would change the Company's asset mix, potentially resulting in the
need to register as an investment company under the Investment Company Act or
take further steps to change the asset mix. Any such results would be likely to
have a material adverse effect on the Company.
Results of Operations
2000 versus 1999
Financial Statement Net Income
------------------------------
Financial statement net income available to common shareholders for the
three and six months ended June 30, 2000 was approximately $3.7 million and $7.8
million, respectively, as compared to a net loss to common shareholders of
approximately ($2.0) million and net income available to common shareholders of
$11.4 million for the same periods in 1999. The primary reasons for the changes
in net earnings during these periods are described below.
Interest Income - Subordinated CMBS
Income from Subordinated CMBS decreased by approximately $3.0 million, or
8%, to $35.4 million during the three months ended June 30, 2000 as compared to
$38.4 million during the three months ended June 30, 1999. Interest income from
Subordinated CMBS decreased by approximately $2.3 million or 3% to approximately
$74.6 million for the six months ended June 30, 2000 as compared to $76.9
million for the corresponding period in 1999. This overall decrease in interest
income was primarily the result of the sale of certain CMBS, the Morgan Stanley
CMBS in February 2000 and the Lehman CMBS in April 2000. This net decrease was
partially offset by the following factors: 1) the impairment on certain CMBS
which results in higher yields, and 2) an upward revision in yields on CMBS.
Other than temporary impairment was recognized as of December 31, 1999 on the
Subordinated CMBS that have been or are intended to be sold in 2000 as part of
the CMBS Sale under the Plan. The impairment resulted in the CMBS cost basis
being written down to fair value as of December 31, 1999. As a result of this
new basis, these CMBS have revised higher yields effective the first quarter of
2000. These higher yields resulted in more income being recognized for financial
statement purposes. Further, yields on CMBS increased effective April 1, 2000
due to a change in the allocation and timing of loss estimates (as discussed
further below), which resulted in additional income recognized. See Note 5 to
Notes to Consolidated Financial Statements.
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Generally accepted accounting principles ("GAAP") require that interest
income earned on Subordinated CMBS be recorded based on the effective interest
method using the anticipated yield over the expected life of the Subordinated
CMBS. Based upon the timing and amount of future credit losses and certain other
assumptions estimated by management, as discussed below, the estimated weighted
average anticipated unleveraged yield for CRIIMI MAE's Subordinated CMBS for
financial statement purposes as of June 30, 2000 was approximately 11.5% as
compared to the anticipated weighted average yield as of December 31, 1999 of
10.1%. These yields were determined based on the anticipated yield over the
expected weighted average life of the Subordinated CMBS, which considers, among
other things, anticipated losses and any other than temporary impairment.
Effective April 1, 2000, the Company changed the allocation and timing of the
estimated future credit losses related to the mortgage loans underlying the
CMBS. Due to the better than anticipated performance of the mortgage loans
underlying the CMBS, which has resulted in lower credit losses than originally
estimated, the Company has revised its estimated credit losses to occur later in
the weighted average life of the CMBS than originally projected. However, the
Company has not lowered the total amount of estimated future credit losses
related to the mortgage loans underlying the CMBS. The change in allocation and
timing of estimated future credit losses to reflect a later occurrence of such
losses results in increases in projected cash flow (primarily in the form of
interest income) as of June 30, 2000, which in turn results in increases in
anticipated yields to maturity as of June 30, 2000. As a result of the present
value benefit of a revised later projected occurrence of credit losses, the
yields used to determine CMBS income have increased. As of June 30, 2000, the
overall impact of this allocation and timing revision resulted in a 29 basis
point increase in total CMBS anticipated yields to maturity (24 basis point
increase related to the remaining CMBS subject to the CMBS Sale and 30 basis
point increase related to the Company's retained portfolio). These yield
increases have resulted in approximately $700,000 in additional CMBS income
during the second quarter compared to income that would have been recognized
using prior unrevised yields. The Company estimates that total CMBS income
related to the Company's retained CMBS portfolio will be higher by approximately
$2 million for the period April 1 through December 31, 2000 than if the
unrevised yields were used. As it is not certain when the remaining CMBS subject
to the CMBS Sale will be sold, the Company has not estimated the dollar impact
for the year. The CMBS yield increases have been accounted for as estimates and
will be applied prospectively as of April 1, 2000, the first day of the second
quarter.
Interest Income-Insured Mortgage Securities
Interest income from insured mortgage securities decreased by approximately
$819,000 or 10% to $7.7 million for the three months ended June 30, 2000 from
$8.5 million for the three months ended June 30, 1999. Interest income from
insured mortgage securities decreased by approximately $1.9 million or 11% to
approximately $15.5 million for the six months ended June 30, 2000 from
approximately $17.4 million for the corresponding period in 1999. These
decreases were primarily due to the reduced asset base as a result of
prepayments aggregating $42.4 million subsequent to March 1999.
Interest Income-Originated Loans
Interest income from originated loans decreased by approximately $400,000
or 5% to $8.2 million for the three months ended June 30, 2000 from $8.6 million
for the three months ended June 30, 1999. Interest income from originated loans
decreased by approximately $800,000 or 5% to approximately $16.7 million for the
six months ended June 30, 2000 from approximately $17.5 million for the
corresponding period in 1999. These decreases were primarily due to the
prepayment of originated loans aggregating $14.8 million subsequent to March
1999.
Interest Expense
Total interest expense increased by approximately $0.6 million to
approximately $37.9 million or 2% for the three months ended June 30, 2000 from
approximately $37.3 million for the corresponding period in 1999. Total interest
expense increased by approximately $1.4 million or 2% to approximately $75.1
million for the six months ended June 30, 2000 compared to approximately $73.7
million for the corresponding period in 1999. These increases were primarily
attributable to the following: (1) during the second quarter of 2000 a discount
amortization adjustment of approximately $1.5 million related to the insured
securities fixed-rate obligation debt due to an increase in the estimate of
future prepayment speeds. (This increase in the estimate of future prepayment
speeds is a result of these obligations paying down faster than originally
anticipated); (2) the sale of certain investment grade bonds associated with the
CBO-2 transaction in March 1999 and; (3) the sale of two remaining classes of
investment grade bonds associated with the 1998 CMO-IV transaction in May 1999
and October 1999. The sales of these securities were treated as a financing for
accounting purposes. As such, the Company records the securities as liabilities
and recognizes the
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related interest expense on an ongoing basis. The fixed rate obligations sold
typically carry a higher cost than does the variable-rate secured borrowing that
it replaces. Such increases in interest expense were offset, in part, by
decreases in interest expense on variable-rate secured borrowings, reflecting
pay downs of such borrowings through asset sales, along with a reduction in
certain borrowings as a result of asset prepayments, pay downs pursuant to
agreements with certain creditors, and refinancing of variable rate debt into
fixed rate debt, as previously discussed.
Equity in (Losses) from Investments
Equity in losses increased by approximately $150,000 during the three
months ended June 30, 2000 due to equity in losses of approximately $26,000 as
compared to equity in earnings of approximately $121,000 for the second quarter
of 1999. Equity in losses decreased by approximately $1.4 million during the six
months ended June 30, 2000 due to equity in losses of approximately $38,000 as
compared to equity in losses of approximately $1.5 million for the corresponding
period in 1999. Equity in losses increased during the quarter ended June 30,
2000 versus the same period in 1999 primarily due to an increase in impairment
related to certain servicing rights of CMSLP. Such increase was partially offset
by a reduction in amortization of certain servicing rights and a small net
decrease in servicing and other fee revenues as CMSLP's servicing portfolio
declined primarily from sale of certain CMBS subject to the CMBS Sale.
Equity in losses decreased during the six months ended June 30, 2000 as
compared to 1999 primarily due to an $800,000 prepayment penalty shortfall which
occurred in 1999. Additionally, a reduction in general and administrative
expenses and amortization in certain servicing rights contributed to the overall
reduction in equity in losses during the six months ended June 30, 2000.
However, these reductions were partially offset by a net decrease in servicing
and other fee revenues as CMSLP's servicing portfolio declined due primarily to
the sale of certain CMBS subject to the CMBS Sale.
Other Income
Other income increased by approximately $194,000 or 25% to approximately
$982,000 during the second quarter of 2000 as compared to approximately $788,000
during the corresponding period in 1999. Other income decreased by
approximately $105,000 or 7% during the six months ended June 30, 2000. The
increase for the three months ended June 30, 2000 was primarily attributable to
the timing of temporary investments. The decrease for the six months ended June
30, 2000 was primarily attributable to a reduction in net income associated with
the Company's investment in REO.
Net Gains on Mortgage Securities Dispositions
During the second quarter of 2000 and 1999, net gains on mortgage
dispositions were approximately $226,000 and $779,000, respectively. For the six
months ended June 30, 2000 and 1999, net gains on mortgage dispositions were
approximately $241,000 and $1.6 million, respectively. For the six months ended
June 30, 2000, the prepayments of mortgage securities represented approximately
2% of CRIIMI MAE's beginning of the year portfolio balance. For any quarter,
gains or losses on mortgage dispositions are based on the number, carrying
amounts and proceeds of mortgages disposed of during the period.
Gain on Originated Loan Dispositions
During the second quarter of 2000, there was one originated loan
disposition resulting in a gain of approximately $38,000. For the same quarter
of 1999, there was one mortgage prepayment in the originated loan portfolio
resulting in a gain of approximately $59,000. During the six months ended June
30, 2000, net gain on originated loan dispositions was approximately $38,000
versus approximately $160,000 for the six months ended June 30, 2000. The
decreases were due to one disposition and two dispositions, respectively, in the
corresponding periods.
General and Administrative Expenses
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General and administrative expenses decreased by approximately $950,000 or
26% to approximately $2.7 million during the second quarter of 2000 as compared
to $3.6 million for the corresponding period in 1999. General and
administrative expenses decreased by approximately $447,000 or 7% to
approximately $5.8 million for the six months ended June 30, 2000 as compared to
approximately $6.3 million for the corresponding period in 1999. The decreases
were primarily attributable to decreases in employment costs from a reduced work
force during these periods along with a reduction in certain professional costs.
Unrealized Loss on Warehouse Obligation
During the three and six months ended June 30, 2000, the Company recorded
no loss on warehouse obligations as all of the loans under the Citibank
origination program were sold in 1999. This compares to the three and six
months ended June 30, 1999, when the Company recorded unrealized losses of
approximately $10.9 million and $6.9 million, respectively, in connection with
the Company's warehouse line with Citibank.
Reorganization Items
Impairment on CMBS. As discussed in Note 1 of the Notes to Consolidated
Financial Statements, under the Plan, a portion of the Recapitalization
Financing is expected to result from the CMBS Sale. The remaining CMBS subject
to the CMBS Sale had a fair value and amortized cost of approximately $204
million and $198 million, respectively, as of June 30, 2000. The Company first
filed a plan with the Bankruptcy Court in the fourth quarter of 1999 and during
that same quarter began marketing for sale the CMBS subject to the CMBS Sale.
CRIIMI MAE sold a portion of these bonds in February 2000 and April 2000 and
intends to enter into additional agreements during 2000 to sell the remaining
CMBS subject to the CMBS Sale, although there can be no assurance such bonds
will be sold. The Company also intends to sell its interest in CMO-IV as part of
the Plan, although there can be no assurance that the CMO-IV Sale will be
completed.
GAAP states that when the fair market value of an investment declines below
its amortized cost for a significant period of time and the entity no longer has
the ability or intent to hold the investment for the period the entity
anticipates is required for the value to recover to amortized cost, other than
temporary impairment on the investment should be recognized. This other than
temporary impairment is recognized through the income statement as the
difference between amortized cost and fair value. Additional accounting guidance
states that other than temporary impairment should be recognized in the period
the decision to sell any investment is made if the entity does not expect the
fair value to recover before the sale date. As the Company decided in the fourth
quarter of 1999 to sell the CMBS subject to the CMBS Sale and it did not expect
the value of these bonds to significantly recover before the future sale dates,
the Company has recognized approximately $162 million of other than temporary
impairment related to these CMBS cumulatively, through earnings through the
second quarter of 2000. Unrealized losses related to the CMBS subject to the
CMBS Sale were previously recognized through other comprehensive income in the
equity section of the balance sheet. The other than temporary impairment loss on
CMBS is a part of the reorganization items on the income statement as the
impairment was recognized as part of the reorganization.
Other Reorganization Items. During the three and six months ended June 30,
2000 and 1999, the Company recorded reorganization items, as summarized below,
due to the Chapter 11 filings of CRIIMI MAE, CM Management and Holdings II.
<TABLE>
<CAPTION>
Reorganization Items Three months Three months Six months Six months
--------------------
ended ended ended ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Short-term interest income ($1,434,012) ($237,000) ($2,438,672) ($469,400)
Professional fees 3,055,316 4,974,155 7,428,584 10,114,155
Employee Retention Program 256,701 202,605 536,050 745,502
accrued costs
Other 845,104 499,183 1,445,602 556,524
------------ ---------- ------------- -----------
Subtotal 2,723,109 5,438,943 6,971,564 10,946,781
Impairment on CMBS 1,809,062 -- 5,252,821 --
Impairment on REO(1) 924,283 -- 924,283 --
Loss on sale of CMBS(2) 357,188 -- 1,711,214 --
------------ ---------- ------------- -----------
Total $ 5,813,642 $5,438,943 $ 14,859,882 $10,946,781
============ ========== ============= ===========
</TABLE>
(1) The Company recognized impairment on its investment in REO as of June 30,
2000. This asset was sold in July 2000 as discussed in Note 3 and Note 9.
73
<PAGE>
(2) The Company recognized a loss of approximately $1.35 million on the sale of
the Morgan Bonds in February 2000 and a loss of approximately $360,000 on
the sale of the First Union Bonds in April 2000.
Taxable Income (Loss)
CRIIMI MAE realized a net operating loss of approximately $18 million and
$33 million during the three and six months ended June 30, 2000, compared to tax
basis income of approximately $11.9 million and $31.5 million during the
corresponding periods in 1999. Included in the net operating loss during the
three and six months ended June 30, 2000, was a realized loss on the sale of
CMBS of $2.1 million and $3.6 million, respectively. As previously discussed, on
March 15, 2000, CRIIMI MAE elected to be classified as a trader in securities
for tax purposes effective January 1, 2000. As a result of its trader election,
CRIIMI MAE recognized a mark-to-market tax loss of approximately $478 million on
its Trading Assets on January 1, 2000 (the "January 2000 Loss"). The January
2000 Loss is expected to be recognized evenly over four years (i.e.,
approximately $120 million per year) beginning with the year 2000. The Company
recognized one-fourth (i.e., approximately $30 million) of this year's portion
of the January 2000 Loss during both the first and second quarter 2000. The
Company expects to continue to recognize approximately $30 million of loss
related to the January 2000 Loss in each quarter for the next four years. (See
also "2000 Taxable Income (Loss)/Taxable Distribution Requirements" for a more
complete discussion and Note 8 for a discussion of differences between financial
statement net income (loss) and taxable income (loss)).
A summary of the estimated first half 2000 net operating loss is as
follows:
<TABLE>
<S> <C>
January 2000 Loss $ 478 million
LESS: Portion recognized in First Quarter 2000 (30) million
LESS: Portion recognized in Second Quarter 2000 (30) million
-------------
Balance Remaining of January 2000 Loss to be Recognized $ 418 million
=============
Taxable Income for the six months ended June 30, 2000 Before $ 27 million
Recognition of January 2000 Loss
LESS: January 2000 Loss Recognized in First Quarter 2000 (30) million
LESS: January 2000 Loss Recognized in Second Quarter 2000 (30) million
-------------
Net Operating Losses for the six months ended June 30, 2000 ($33) million
Net Operating Loss through June 30, 2000 ($33) million
Net Operating Loss Utilization 0.0
-------------
Net Operating Loss Carried Forward for Use in Future Periods ($33) million
=============
</TABLE>
(1) So long as available, net operating losses, including the allocable portion
of the January 2000 Loss, are expected to offset taxable income on an
annual basis.
The distinction between taxable income (loss) and GAAP income (loss) is
important to the Company's shareholders because dividends or distributions are
declared and paid on the basis of taxable income. The Company does not pay
taxes so long as it satisfies the requirements for exemption from taxation
pursuant to the REIT requirements of the Code. The Company calculates its
taxable income as if the Company were a regular domestic corporation. This
taxable income level determines the amount of dividends the Company is required
to pay out over time in order to eliminate its tax liability.
Securities Trading Activities
During late 1999, the Company began to trade mortgage-backed securities. In
general, the Company trades in FNMA and FHLMC issued CMO tranches, as well as
AAA rated CMBS. The Company seeks maximum total return through short term
trading, consistent with prudent investment management. Returns from such
activities consist primarily of capital appreciation/depreciation resulting from
changes in interest rates and spreads, if any, discount amortization, and other
arbitrage opportunities as well as coupon interest income. For the six months
ended June 30, 2000, trading gains and losses were immaterial; and, as of June
30, 2000, trading assets (reflected as Short Term Investments on the balance
sheet) approximated $2.4 million.
74
<PAGE>
Cash Flow
2000 versus 1999
Net cash provided by operating activities decreased for the six months
ended June 30, 2000 as compared to the six months ended June 30, 1999. The
decrease was primarily due to an increase in restricted cash as compared to the
same period last year. The increase in restricted cash was partially offset by a
decrease in receivables and other assets.
Net cash provided by investing activities decreased for the six months
ended June 30, 2000 as compared to the six months ended June 30, 1999 due to a
decrease in proceeds from mortgage securities dispositions and originated loan
dispositions compared to the same period last year. These decreases were
partially offset by an increase in proceeds from the sale of CMBS, net of
associated debt. See Note 5 for further discussion of those sales.
Net cash used in financing activities decreased for the six months ended
June 30, 2000 as compared to the six months ended June 30, 1999 due to a
decrease in principal payments on debt obligations, partially offset by a
decrease in proceeds from debt issuances as compared to the same period last
year.
Liquidity and Capital Resources
Prior to the Petition Date, CRIIMI MAE used proceeds from long-term, fixed-
rate match-funded debt refinancings, short-term, variable-rate secured
borrowings, unsecured and other borrowings, securitizations and issuances of
common and preferred shares to meet the capital requirements of its business
plan. Since the Chapter 11 filing, the Company has suspended its Subordinated
CMBS acquisition, origination and securitization operations, but continues to
service mortgage loans through CMSLP.
Prior to the Petition Date, CRIIMI MAE financed a substantial portion of
its Subordinated CMBS acquisitions with short-term, variable-rate borrowings
secured by the Company's Subordinated CMBS. The agreements governing these
financing arrangements typically required the Company to maintain loan-to-value
ratios. The agreements further provided that the lenders could require the
Company to post cash or additional collateral if the value of the existing
collateral fell below the minimum amount required.
In order to refinance a portion of its short-term, variable-rate secured
borrowings with long-term, fixed-rate debt, the Company entered into
resecuritization transactions. In May 1998, CRIIMI MAE completed CBO-2, its
second resecuritization of its Subordinated CMBS portfolio, which under FAS 125,
qualified for both sale and financing accounting. Through CBO-2, CRIIMI MAE
refinanced $468 million of its variable-rate debt with fixed-rate, match-funded
debt. The debt is considered match-funded because the maturities and principal
requirements of the debt closely match those of the related collateral. The
transaction also generated additional borrowing capacity of approximately $160
million, which was used primarily to fund additional Subordinated CMBS
purchases. In June 1998, CRIIMI MAE securitized $496 million of originated and
acquired commercial mortgage loans by selling $397 million face amount of fixed-
rate investment grade securities. The tranches not sold to the public were
partially financed with variable-rate secured financing agreements.
After the above structured finance transactions, the Company continued to
have a substantial amount of short-term, variable-rate secured financing
facilities which were subject to the previously discussed collateral
requirements based on CMBS security values. As a result of the turmoil in the
capital markets commencing in late summer of 1998, the spreads between CMBS
yields and the yields on Treasury securities with comparable maturities began to
increase substantially and rapidly. CRIIMI MAE's short-term secured creditors
perceived that the value of the Subordinated CMBS securing their facilities with
the Company had fallen, creating a value deficiency as measured by the loan-to-
value ratio and, consequently, made demand upon the Company to provide cash or
additional collateral with sufficient value to cure the perceived value
deficiency. In August and September 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
75
<PAGE>
unreasonable. After giving consideration to, among other things, this collateral
call and the Company's concern that its failure to satisfy this collateral call
would cause the Company to be in default under a substantial portion of its
financing arrangements, the Company reluctantly concluded on Sunday, October 4,
1998 that it was in the best interests of creditors, equity holders and other
parties in interest to seek Chapter 11 protection. Accordingly, the Company
filed for relief under Chapter 11 on Monday, October 5, 1998.
As of August 1, 2000, CRIIMI MAE had secured financing agreements with
GACC, Merrill Lynch, and Citicorp with respect to certain of its CMBS. Certain
of these lenders have registered the pledged securities in their own names. As a
result, the trustee makes payments on such securities to the registered holder.
Since the Chapter 11 filing occurred, certain registered holders withheld
payments related to securities not registered to CRIIMI MAE. As previously
discussed, the Company has entered into various agreements with these creditors.
CRIIMI MAE Inc.'s restricted cash position has increased from approximately $7
million on October 5, 1998 to approximately $73.6 million as of June 30, 2000.
Due to the uncertainty of the effects of the Chapter 11 filing on the business
of the Company, pending litigation, material reorganization items to be incurred
during the pendency of the bankruptcy and numerous other factors beyond the
Company's control, no assurance can be given that the Company's cash flow will
be sufficient to fund operations for any specified period while the Company is
in bankruptcy.
Under CRIIMI MAE's Plan, a portion of the Recapitalization Financing is
expected to result from the CMBS Sale. The remaining CMBS subject to the CMBS
Sale had a fair value and amortized cost of approximately $204 million and $198
million, respectively, as of June 30, 2000. The Company first filed a plan with
the Bankruptcy Court in the fourth quarter of 1999 and during that same quarter
CRIIMI MAE began marketing for sale the CMBS subject to the CMBS Sale. CRIIMI
MAE sold a portion of these bonds in February 2000 and April 2000 and intends to
enter into additional agreements during 2000 to sell the remaining CMBS subject
to the CMBS Sale, although there can be no assurance that such bonds will be
sold. As the Company decided in the fourth quarter of 1999 to sell the CMBS
subject to the CMBS Sale and it does not expect the value of these bonds to
significantly recover before the future sale dates, the Company has recognized
approximately $162 million of other than temporary impairment related to these
CMBS cumulatively, through earnings through the first six months of 2000. (See
Note 5 to the Financial Statements for a discussion regarding CMBS sales through
August 2000.) The Company also intends to sell its interest in CMO-IV as part of
the Plan, although there can be no assurance that the CMO-IV Sale will be
completed.
In July 2000, the Company decided that, as part of the Plan, it would sell
the remaining $53 million face amount of assets from CMO-IV that it currently
owns. The proceeds would be used to pay down the variable rate debt secured by
certain securities from CMO-IV with any remaining proceeds retained by the
Company. Upon the sale of these assets, CRIIMI MAE will no longer have any
economic interest in CMO-IV. CRIIMI MAE, as the owner of the issuer's equity of
CMO-IV, holds the call options related to the $442.5 million (original face
amount) of previously issued securities that are currently classified as
securitized debt on the Company's balance sheet. Upon the sale of the issuer's
equity, CRIIMI MAE will no longer own these call options and, as a result, the
securitization will no longer qualify as a financing under SFAS 125. As a
result, all assets (Investment in Originated Loans and related deferred
financing costs) and liabilities (Collateralized mortgage obligations -
Originated Loans and a portion of variable rate secured borrowings - CMBS)
related to the securitization will be removed from CRIIMI MAE's balance sheet
upon the sale of the issuer's equity. If the sale of CRIIMI MAE's economic
interest in CMO-IV took place as of June 30, 2000, based on the June 30, 2000
balance sheet and estimated fair values, the Company would recognize an
approximate $24 million loss for financial statement purposes and an approximate
$23 million loss for tax purposes.
The value of the Company's Subordinated CMBS and government-insured
securities is based upon the combined yield of current treasury rates and the
current spread above treasury rates that an investor would require in a purchase
transaction. During the six months ended June 30, 2000, the required spreads
above treasury rates were substantially unchanged on a total portfolio basis.
However, treasury rates decreased, generally, from December 31, 1999 which, when
combined with the required spreads, resulted in an aggregate $13.7 million net
increase in the value of the Company's portfolio of CMBS and FHAs and GNMAs from
December 31, 1999 to June 30, 2000.
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
76
<PAGE>
mortgage industry and the commercial real estate market, general economic
conditions, perceptions in the capital markets of the Company's business,
covenants under the Company's debt securities and credit facilities, results of
operations, leverage, financial condition, and business prospects. The Company
can give no assurance as to whether it will be able to obtain additional capital
or the terms of any such capital. See Note 1 to Notes to Consolidated Financial
Statements for a discussion of the New Debt contemplated under the Plan.
ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal market risk is exposure to changes in interest
rates related to the U.S. Treasury market as well as the LIBOR market. The
Company will have an increase in the amount of interest expense paid on its
variable-rate obligations primarily due to increases in One-Month LIBOR. The
Company will also experience fluctuations in the market value of its assets
related to changes in the interest rates of U.S. Treasury bonds as well as
increases in the spread between U.S. Treasury bonds and CMBS.
CRIIMI MAE has entered into interest rate protection agreements to mitigate
the adverse effects of rising interest rates on the amount of interest expense
payable under its variable-rate borrowings. The caps provide protection to
CRIIMI MAE to the extent interest rates, based on a readily determinable
interest rate index (typically One-Month LIBOR), increase above the stated
interest rate cap, in which case, CRIIMI MAE will receive payments based on the
difference between the index and the cap. The term of the cap as well as the
stated interest rate of the cap, which in all cases is currently above the
current rate of the index, will limit the amount of protection that the caps
offer.
Prior to the Petition Date, CRIIMI MAE financed a substantial portion of
its Subordinated CMBS acquisitions with short-term, variable-rate borrowings
secured by the Company's CMBS. The agreements governing these financing
arrangements typically required the Company to maintain collateral at all times
with a market value not less than a specified percentage of the outstanding
indebtedness. The agreements further provided that the lenders could require
the Company to post cash or additional collateral if the value of the existing
collateral fell below this threshold amount. These financing arrangements were
used by CRIIMI MAE to provide financing during the period of time from the
acquisition or creation of the Subordinated CMBS to the date when CRIIMI MAE
would resecuritize the portfolio in order to match-fund a significant portion of
the portfolio with fixed-rate debt, thereby eliminating interest rate risk on
that portion of the CMBS. These transactions also increased the borrowing
capacity of the Company which was used to acquire Subordinated CMBS.
77
<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 Resolving Objection to Shareholder
Plaintiffs to Debtors' Amended Joint Disclosure
Statement entered April 24, 2000 (filed herewith).
99(b) Expedited motion to Clarify Order Granting Authority
for Debtor to take necessary action to implement sale
of Brick Church Property entered by the United States
Bankruptcy Court on June 26, 2000 (filed herewith).
99(c) Order and Ruling Upon Objection to Debtors' Second
Amended Disclosure Statement entered by the United
States Bankruptcy Court for the District of Maryland,
Greenbelt on July 12, 2000 and Memorandum Opinion
entered by the United States Bankruptcy Court for the
District of Maryland, Greenbelt on July 12, 2000 (filed
herewith).
99(d) Motion for Entry of an Order Amending Stipulation and
Agreed Order Selling certain Commercial Mortgage-Backed
Securities to German American Capital Corporation Free
and Clear of Liens, Claims and Encumbrances entered
August 3, 2000 (filed herewith).
(b) REPORTS ON FORM 8-K
Date Purpose
---- -------
78
<PAGE>
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).
79
<PAGE>
Signature
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-Q to
be signed on its behalf by the undersigned, thereunto duly authorized.
CRIIMI MAE INC.
/s/ August 11, 2000 /s/ Cynthia O. Azzara
------------------- -----------------------------
DATE Cynthia O. Azzara
Senior Vice President,
Principal Accounting Officer
and Chief Financial Officer
80
<PAGE>
EXHIBIT 99(A)
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
At Greenbelt
__________________________________________
)
)
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
SHAREHOLDER PLAINTIFFS TO
DEBTORS' AMENDED JOINT DISCLOSURE STATEMENT
-------------------------------------------
It is hereby stipulated and agreed (the "Stipulation") by and between
CRIIMI MAE Inc. (the "Debtor") and the plaintiffs in the consolidated class
action entitled In re CRIIMI MAE Inc. Securities Litigation, DKC 98-3373 (the
"Shareholder Plaintiffs"), by their respective undersigned counsel, as follows:
1. The Debtor has agreed to amend the Second Amended Plan of
Reorganization and [Proposed] Amended Joint Disclosure Statement (the
"Disclosure Statement") with respect thereto to include therein the paragraph
attached hereto as Exhibit 1.
2. Based upon the foregoing, the Shareholder Plaintiffs agree that their
Objection to the Disclosure Statement is resolved.
3. The Stipulation is made without prejudice to the rights of the
Shareholder Plaintiffs, if any, to raise objections to the confirmation of the
Debtors' Amended Joint Plan of Reorganization.
1
<PAGE>
4. The undersigned counsel hereby represent and certify that they are
authorized to enter into this Stipulation on their behalf clients.
Dated: April _____, 2000
_____________________________________
Richard L. Wasserman (MD Fed. Bar No. 02784)
Venable, Baetjer and Howard, LLP
1800 Mercantile Bank and Trust Bldg.
2 Hopkins Plaza
Baltimore, Maryland 21201
(410) 244-7400
_____________________________________
Mark D. Taylor (MD Fed. Bar No. 013418)
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1333 New Hampshire Avenue, N.W.
Washington, D.C. 20036
(202) 887-4000
Co-Counsel to CRIIMI MAE Inc.
_____________________________________
Michael S. Etkin
Lowenstein, Sandler, P.C.
65 Livingston Avenue
Roseland, New jersey 07068
(973) 597-2500
Bankruptcy Counsel to Shareholder Plaintiffs
2
<PAGE>
CERTIFICATE OF SERVICE
----------------------
I HEREBY CERTIFY that a copy of the foregoing Stipulation resolving
Objection of Shareholder Plaintiffs to Debtors' Second 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, NW.
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 L.L.P.
Seven St. Paul Street
Suite 1400
Baltimore, Maryland 21202
Clifford J. White, III, Esquire
Assistant United States Trustee
Office of the United States Trustee
6305 Ivy Lane, Suite 6000
Greenbelt, Maryland 20770
Morton A. Faller, Esq.
Schulman, Rogers, Gandal, Pordy
& Ecker, P.A.
11921 Rockville Pike, 3/rd/ Floor
Rockville, MD 20852-2743
_____________________________
Mark D. Taylor
3
<PAGE>
EXHIBIT 1
---------
On the Effective Date, each of the Debtors shall release unconditionally,
and hereby is deemed to release unconditionally (i) each of the Debtors, then-
current and former officers, directors, shareholders, employees, consultants,
attorneys, accountants, financial advisors and other representatives (solely in
their capacities as such) (collectively, the Debtor Releasees") and (ii) the
Committees and, solely in their capacity as members or representatives of the
Committees, each member, consultant, attorney, accountant, financial advisor or
other representative of the Committees (collectively, the "Committee Releasees")
from any and all claims, obligations, suits, judgements, damages, rights, causes
of action and liabilities whatsoever, whether known or unknown, foreseen or
unforeseen, existing or hereafter arising, in law, equity or otherwise, based in
whole or in part upon any act or omission, transaction, event or other
occurrence taking place on or after the Petition Date and up to and including
the Effective Date in any way relating to the Reorganization Cases, the Plan or
the Disclosure Statement.
On the Effective Date, each Holder of a Claim or Interest shall be deemed
to have unconditionally released the Debtor Releasees and the Committee
Releasees from any and all claims, obligations, suits, judgments, damages,
rights, causes of action and liabilities whatsoever which any such holder may be
entitled to assert, whether known or unknown, foreseen or unforeseen, existing
or hereafter arising, in law, equity or otherwise, based in whole or in part
upon any act or omission, transaction, event or other occurrence taking place on
or after the Petition Date and up to and including the Effective Date in any way
relating to the Reorganization Cases, the Plan or the Disclosure Statement,
excepting, however, from such release any obligation owing to a Holder of an
Allowed Claim or Allowed Interest provided for in this Plan or the Confirmation
Order.
1
<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)
)
________________________________________)
ORDER AMENDING STIPULATION AND AGREED ORDER SELLING
CERTAIN COMMERCIAL MORTGAGE-BACKED SECURITIES
TO GERMAN AMERICAN CAPITAL CORPORATION FREE
AND CLEAR OF LIENS, CLAIMS AND ENCUMBRANCES
-------------------------------------------
Upon consideration of the Motion for Entry of an Order Amending
Stipulation and Agreed Order Selling Certain Commercial-Mortgage Backed
Securities to German American Capital Corporation Free and Clear of Liens,
Claims and Encumbrances (the "Motion"), good cause having been shown, it is this
______ day of _____, 2000, by the United States Bankruptcy Court for the
District of Maryland, sitting in Greenbelt, hereby
ORDERED, that the Motion be, and the same hereby is, GRANTED; and it
is further,
ORDERED, that the Stipulation and Agreed Order Selling Certain
Commercial-Mortgage Backed Securities to German American Capital Corporation
Free and Clear of Liens, Claims and Encumbrances be, and the same hereby is,
AMENDED to permit the adjustment in the purchase price as set forth in the
Motion.
<PAGE>
________________________________________
DUNCAN W. KEIR
United States Bankruptcy Judge
cc: Gregory A. Cross, Esquire
Venable, Baetjer And Howard, LLP
1800 Mercantile Bank & Trust Building
2 Hopkins Plaza
Baltimore, Maryland 21201
Daniel M. Lewis, Esquire
Arnold & Porter
555 Twelfth Street, N.W.
Washington, D.C. 20044
Michael St. Patrick Baxter, Esquire
Covington & Burling
1201 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
John F. Horstmann, Esquire
Duane, Morris & Heckscher
1 Liberty Place
Philadelphia, PA 19103
Michael B. Benner, Esquire
Richard G. Mason, Esquire
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Clifford J. White, III, Esquire
Office of U.S. Trustee
6305 Ivy Lane
Greenbelt, Maryland 20770
2
<PAGE>
EXHIBIT 99(b)
UNITED STATES BANKRUPTCY COURT
DISTRICT OF MARYLAND
Greenbelt Division
*
In re: *
CRIIMI MAE Inc., et al., *
Case Nos. 98-23115 -98-23117
Debtors.
(Chapter 11)
* * * * * * * * * *
EXPEDITED MOTION TO CLARIFY ORDER GRANTING AUTHORITY FOR DEBTOR TO TAKE
NECESSARY ACTIONS TO IMPLEMENT SALE OF BRICK CHURCH PROPERTY
CRIIMI MAE Inc. ("CMI"), debtor and debtor-in-possession herein, by and
through its undersigned counsel, files this Motion to Clarify Order Granting
Authority for Debtor to Take Necessary Actions to Implement Sale of Brick Church
Property, (the "Motion"), pursuant to Section 363 of the Bankruptcy Code, and in
support thereof, states as follows:
1. This Court has jurisdiction over this Motion pursuant to 28 U.S.C. Sec.
157 and 1334. Venue is proper pursuant to 28 U.S.C. Sec. 1409. This is a core
proceeding pursuant to 28 U.S.C. Sec. 157(b)(2).
2. CRIIMI MAE Brick Church, Inc. ("Brick Church"), a Maryland corporation,
is a wholly owned, non-debtor subsidiary of CMI. The sole asset owned by Brick
Church is a commercial lot, motel building and associated personal property
located at 2401 Brick Church Pike, Nashville, Tennessee 37207 (the "Property").
3. The Property is operated as a Holiday Inn Express franchise.
4. The Property is encumbered by a Deed of Trust, Assignment of Rents and
Security Agreement (the "Deed of Trust") in favor of Citicorp Real Estate, Inc.
("CREI") dated January 16, 1998. The Deed of Trust secures a promissory note in
the amount of $1,750,000 (the "Note").
5. CMI guaranteed the obligations of Brick Church to CREI.
6. CREI is alleging that a default has occurred and is demanding immediate
payment.
7. On September 24, 1999, Brick Church signed a Contract for Sale and
Purchase of Real and Personal Property ("the Original Contract") of the Property
at a price of $4,300,000 to Himanshu Patel, Manisha Patel, Prakash N. Shah and
Ketki P. Shah (the "Purchasers"). A copy of the Original Contract is attached as
Exhibit A.
8. As the sole stockholder of Brick Church, CMI must approve the sale of
the Property in order for the sale to be duly authorized under applicable
corporate law.
9. On October 1, 1999, CMI filed a Motion Seeking Authority to take
Necessary Actions to Implement the Sale of Brick Church Property (the "Corporate
Formalities Motion").
10. On October 1, 1999, notice of the Corporate Formalities Motion was sent
to all necessary parties pursuant to Rule 2002(a) of the Federal Rules of
Bankruptcy Procedure.
11. The Court entered an Order granting the Corporate Formalities Motion on
October 25, 1999, and authorized CMI to take all corporate actions necessary to
accomplish the sale pursuant to the terms of the Original Contract.
PRICE AND PROCEEDS
12. The sale of the Property pursuant to the Original Contract was
anticipated to produce sufficient income to pay the Note in full and other debts
of Brick Church, and would have produced approximately $2,200,000 in excess
proceeds to the bankruptcy estate. CMI would thereafter have had no further
financial obligations associated with Brick Church or the Property.
13. Pursuant to the Original Contract, one of the conditions to closing was
the ability of the Purchasers to obtain a new franchise agreement with Holiday
Inn for the operation of the business. See Exhibit A at p. 2.
14. The Property failed to satisfy certain franchise requirements, and
several repairs were made to the Property in an effort to preserve the Holiday
Inn franchise. Unfortunately, it is unclear if Brick Church will be able to
maintain the Holiday Inn franchise.
15. The Purchasers, however, have agreed to go forward with the transaction
and signed a revised contract of sale on May 5, 2000 (the "Revised Contract"). A
copy of the Revised Contract together with an addendum thereto is attached as
Exhibit B.
16. CMI was not a party to the Original Contract and is not a party to the
Revised Contract. Under the terms of the Revised Contract, CMI will continue to
be relieved of any further obligation associated with the Brick Church Property,
but will receive less proceeds than under the Original Contract.
17. As a consequence of costs incurred making necessary repairs to the
property prior to closing, costs incurred for property taxes, accounts payable,
and carrying costs, the net proceeds to CMI from the sale may be as low as
$650,000, rather than the $2,200,000 anticipated under the Original Contract.
CLARIFICATION REQUESTED
18. CMI is requesting a further Order of the Court because the original
Order Granting Authority to Debtor to Take Necessary Actions to Implement Sale
of Brick Church Property (which was submitted by the Debtor) referred to the
proceeds being received by CMI pursuant to the Original Contract. The attached
proposed form of Order simply authorizes the Debtor to take necessary corporate
actions to implement the Revised Contract.
19. CMI respectfully submits that the proposed sale of the Property 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 Property and that the proposed sale is in the best
interest of the estates and all parties in interest.
20. Because the terms of the sale do not require Court approval and the net
effect of the sale (e.g., removing a $1.7 million liability from the books of
CMI) is unchanged, CMI does not believe that its request for court approval to
take necessary corporate actions requires additional notice to the creditors of
CMI.
21. Pursuant to the Revised Contract, the parties anticipate that closing
will occur on or before July 14, 2000. For this reason, the Debtor respectfully
requests that the Court consider this Motion on an expedited basis.
22. Both the Official Committee of Equity Security Holders of CMI and the
Official Unsecured Creditors' Committee have consented to the terms of the sale
and the accompanying proposed Order.
WHEREFORE, CMI requests that this Court enter an Order (i)-allowing CMI to
take all corporate actions necessary to accomplish the sale of the Property
pursuant to the terms set forth in the Revised Contract and as clarified in this
Motion, and (ii) granting CMI such other and further relief as the Court deems
just and proper.
DATED: June _____, 2000. _____________________________________
Richard L. Wasserman
Federal Bar No. 02784
Gregory A. Cross
Federal Bar No. 04571-G
Carrie B. Weinfeld
Federal Bar No. 25365
Venable, Baetjer and Howard, LLP
1800 Mercantile Bank and Trust Building
Two Hopkins Plaza
Baltimore, Maryland 21201-2978
(410) 244-7400
Co-Counsel for CRIIMI MAE Inc.
Debtor-in-Possession
___________________________
Daniel M. Lewis
Michael L. Bernstein
Arnold & Porter
555 Twelfth Street, N.W.
Washington, D.C. 20036
(202) 942-5500
Counsel for the Official Committee
of Unsecured Creditors of CRIIMI MAE Inc.
_____________________________
Michael St. Patrick Baxter
Covington and Burling
1201 Pennsylvania Avenue, N.W
Washington, D.C. 20044
(202) 662-5164
Counsel for the Official Committee
of Equity Equity Security Holders
of CRIIMI MAE Inc.
<PAGE>
CERTIFICATE OF SERVICE
I HEREBY CERTIFY that on this ___ day of June, 2000, a copy of the Motion
to Clarify Order Granting Authority for Debtor to Take Necessary Actions to
Implement Sale of Brick Church Property, together with a proposed Order thereon,
were sent via first class mail, postage prepaid, to the following parties:
Clifford J. White, III, Esquire
Office of U.S. Trustee
6305 Ivy Lane
Greenbelt, Maryland 20770
Daniel M. Lewis
Michael L. Bernstein
Arnold & Porter
555 Twelfth Street, N.W.
Washington, D.C. 20036
Michael St. Patrick Baxter
Covington and Burling
1201 Pennsylvania Avenue, N.W
Washington, D.C. 20044
__________________________
Carrie B. Weinfeld
<PAGE>
UNITED STATES BANKRUPTCY COURT
DISTRICT OF MARYLAND
Greenbelt Division
In re: *
CRIIMI MAE Inc., et al., *
Case Nos. 98-23115 -98-23117 Debtors.
* (Chapter 11)
* * * * * * * * * *
REVISED ORDER GRANTING AUTHORITY TO
DEBTOR TO TAKE NECESSARY ACTIONS
TO IMPLEMENT SALE OF BRICK CHURCH PROPERTY
Upon consideration of the Motion Seeking Authority for Debtor to Take
Necessary Actions to Implement Sale of Brick Church Property, proper notice
having been given and good cause having been shown, it is this ______ day of
_____, 2000, by the United States Bankruptcy Court for the District of Maryland,
sitting in Greenbelt, hereby
ORDERED, that the Motion be, and the same hereby is, GRANTED; and it is
further,
ORDERED, that CMI be, and the same hereby is, AUTHORIZED to approve the
sale of the Property as defined in the Motion and to undertake all necessary
corporate formalities to accomplish the sale pursuant to the terms of the
Contract for Sale and Purchase of Real and Personal Properties that is attached
as Exhibit B to the Motion and all amendments thereto.
________________________________________
DUNCAN W. KEIR
United States Bankruptcy Judge
cc: Gregory A. Cross, Esquire
Venable, Baetjer And Howard, LLP
1800 Mercantile Bank & Trust Building
2 Hopkins Plaza
Baltimore, Maryland 21201
Daniel M. Lewis, Esquire
Arnold & Porter
555 Twelfth Street, N.W.
Washington, D.C. 20044
Michael St. Patrick Baxter, Esquire
Covington & Burling
1201 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
Clifford J. White, III, Esquire
Office of U.S. Trustee
6305 Ivy Lane
Greenbelt, Maryland 20770
<PAGE>
EXHIBIT 99(c)
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
at Greenbelt
IN RE: *
*
CRIIMI MAE, INC., et al. * CASE NO. 98-2-3115-DK
-----
* CHAPTER 11
Debtor(s). *
*
--------------------------------------------------------------------------------
ORDER AND RULING UPON OBJECTION TO DEBTORS'
-------------------------------------------
SECOND AMENDED DISCLOSURE STATEMENT
-----------------------------------
For the reasons set forth in the accompanying memorandum opinion entered on
even date herewith, the court finds that debtors' disclosure statement does not
fail as a matter of law for either of the two reasons argued by creditor Solomon
Smith Barney, (that the plan (i) proposed an illegal use of SSB's property; or
(ii) that the plan could not be confirmed over SSB's objection without
compliance with 11 U.S.C. ~ 1129(b) (2) (A) (ii)).
There remains a dispute of material fact, however, regarding the ownership
of the Disputed Securities. The parties additionally dispute whether debtors'
treatment of SSB's claim meets the indubitable equivalence test of 1129(b) (2)
(A) (iii). Finally, the debtors have not yet submitted all the technical
amendments to the disclosure statement, proposed form of ballots, and proposed
voting procedures agreed to by the parties at the disclosure statement hearing
on April 25, 2000.
It is therefore, by the United States Bankruptcy Court for the District of
Maryland,
ORDERED that debtors shall submit modifications addressing the above issues
to the Second Amended Disclosure Statement within 7 days from date of entry of
this Order, providing chambers and all interested parties with a red-line copy
of all changes submitted.
1
<PAGE>
Upon consideration of the modifications, if the court determines that the
modifications adequately address all issues, the modified Second Amended
Disclosure Statement shall be approved, and the court shall at that time issue
an order setting the time for the hearing on confirmation.
Date Signed: _______________ __________________________
DUNCAN W. KEIR, Judge
United States Bankruptcy
Court for the District of Maryland
cc: Richard L. Wasserman, Esq.
Venable, Baetjer and Howard, LLP
1800 Mercantile Bank & Trust Bldg.
2 Hopkins Plaza
Baltimore, MD 21201
Judy G.Z. Liu, Esq.
Weil, Gotshal, Manges, LLP
767 Fifth Avenue
New York, NY 10153
Troy C. Swanson, Esq.
Kincaid, Cohen & Swanson, PC
800 North Charles Street, Suite 400
Baltimore, ND 21201
Stanley J. Samorajczyk, Esq.
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1333 New Hampshire Avenue, N.W., Suite 400
Washington, D.C. 20036
Daniel M. Lewis, Esq.
Arnold & Porter
555 Twelfth Street, N.W.
Washington, DC. 20004-1206
Michael St. Patrick Baxter, Esq.
Covington & Burling
1201 Pennsylvania Avenue, N.W.
Washington, D.C. 20044-7566
2
<PAGE>
Paul M. Nussbaum, Esq.
Whiteford, Taylor & Preston, LLP
Seven Saint Paul Street, Suite 1400
Baltimore, MD 21202-1626
Morton A. Faller, Esq.
Shulman, Rogers, Gandal, Pordy & Ecker, P.A.
11921 Rockville Pike, 3~ Floor
Rockville, MD 20852-2743
Charles F. Lettow. Esq.
Cleary, Gottlieb, Steen & Hamilton
2000 Pennsylvania Avenue, N.W.
Washington, D.C. 20006-1801
Thomas J. Maloney, Esq.
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, NY 10006-1404
David R. Kuney, Esq.
Brown & Wood LLP
1666 K. St. N.W.
Washington, D.C. 20006
A. Robert Pietrzak, Esq.
Brown & Wood LLP
One World Trade Center
New York, NY 10048-0557
Ira S. Sacks, Esq.
Fried Prank Harris Shriver & Jacobson
One New York Plaza
New York, NY 10004-1980
Jeffrey L. Schwartz, Esq.
Hahn & Hesson LLP
Empire State Building
350 Fifth Avenue
New York, NY 10118
Bradford F. Englander, Esq.
Linowes & Blocher LLP
1010 Wayne Avenue, 10th Floor
Silver Spring, MD 20910-5600
3
<PAGE>
John H. Culver, III
NationsBank Corporate Center, Suite 4200
100 North Tryon Street
Charlotte. NC 28202-4006
David N. Roberts
Angelo, Gordon & Co.
245 Park Avenue, 26th Floor
New York, NY 10167
Peter Chapman
24 Pericaris Place
Trenton, NJ 08618
Christopher Beard, Esq.
Beard & Beard
4601 North Park Avenue
Chevy Chase, MD 20815
Michael B. Benner, Esq.
Watchell, Lipton, Rosen & Katz
51 West 52~ Street
New York, NY 10019
Daniel M. Litt, Esq.
Dickstein Shapiro Morin & Oshinsky, LLP
2101 L Street, N.W.
Washington, D.C. 20037-1526
John F. Horstmann, Esq.
Duane, Norris & Heckscher LLP
4200 One Liberty P1.
Philadelphia, PA 19103-7396
Daniel W. Sklar, Esq.
Peabody & Brown
889 Elm Street
Manchester, NH 03101
Deborah L. Thaxter, Esq.
Peabody & Brown
101 Federal Street
Boston, MA 02110
4
<PAGE>
Richard M. Kremen, Esq.
Piper, Marbury, Rudnick & Wolfe LLP
6225 Smith Avenue
Baltimore, ND 21209-3600
Robert L. Bodansky, Esq.
Nixon, Hargrave, Devans & Doyle, LLP
Suite 700, One Thomas Circle
Washington, D.C. 20005
Mark N. Polebaum, Esq.
Hale & Dorr, LLP
60 State Street
Boston, MA 02109
Michelle Chrein, Esq.
Kasowitz & Benson
1301 Avenue of the Americas
New York, NY 10019
Prudential Securities Credit Corp.
c/o Vincent T. Pica II, President
One New York Plaza, 18th Floor
New York, NY 10292
Standich, Ayer & Wood, Inc.
c/o Pierre Y. Chung, Asst. Vice President
One Financial Center
Boston, MA 02111
Riggs Bank, NA
c/o Al Serafino
808 17/th/ Street, N.W.
Washington, D.C. 20006
Conseco Capital Management, Inc.
c/o Eric Johnson
11825 North Pennsylvania Street
Carmel, IN 46032
RER Resources, LP
c/o Bruce M. Levy, Vice Chairman
950 Herndon Parkway, Suite 200
Herndon, VA 20170
5
<PAGE>
Charles Koehler
P.O. Box 394
Bowling Green, OH 43402-0394
Vickie Corbitt, Esq.
Legal Office
Tennessee Department of Revenue
312 8/th/ Avenue North
27th Floor
Nashville, TM 37243
Bruce Lane. Esq.
Peabody & Brown
1225 23/rd/ Street, N.W.
Washington, D.C. 20037
Andrews Office Products
8400 Ardwick Ardmore Road
Landover, MD 20785-2301
The Ad Solution
11810 Parklawn Drive
Rockville, MD 20852
Dun & Bradstreet
c/o John Haiser
600 East Jefferson Street, Suite 300
Rockville, MD 20852
Lawrence D. Coppel, Esq.
Gordon, Feinblatt, Rothman
Hoffberger & Hollander, LLC
233 East Redwood Street
Baltimore, MD 21202
Bill Wang
Amroc Investments, Inc.
335 Madison Ave., 26th Floor
New York, NY 10017
Susan R. Sherrill
U.S. Securities & Exchange Commission
Atlanta District Office
3475 Lenox Road, N.E., Suite 1000
Atlanta, GA 30326-1232
6
<PAGE>
Linda V. Donhauser, Esq.
Miles & Stockbridge, PC
10 Light Street
Baltimore, MD 21202
George Keilman, Esq.
8200 Jones Branch Dr. - MS 202
McLean, VA 22102
Robert R. Smith, Esq.
111 Cathedral Street
P.O. Box 827
Annapolis, MD 21404-0827
Robert A. Gutkin, Esq.
Pillsbury, Madison & Sutro, LLP
1100 New York Avenue, N.W.
Ninth Floor, East Tower
Washington, D.C. 20005-3918
A. David Minnick, Esq.
Pillsbury, Madison & Sutro, LLP
235 Montgomery Street
San Francisco, CA 94101
Christine Rotter
Wells Fargo Bank
555 Montgomery Street, 10/th/ Floor
San Francisco, CA 94111
Daniel J. Hartnett, Esq.
McDermott, Will & Emery
227 West Monroe Street
Chicago, IL 60606-5096
Melvin White, Esq.
McDermott, Will & Emery
600 13th Street, N.W.
Washington, D.C. 20005-3096
Fred D. Ross
11901 Greenleaf Avenue
Potomac, MD 20854-3319
7
<PAGE>
Amanda D. Darwin, Esq.
Peabody & Arnold, LLP
50 Rowes Wharf
Boston, Massachusetts 02110
G. Christian Ulrich
First Union National Bank
NC 0737
301 South College St., DC-5
Charlotte, N.C. 28288-0737
Sprint Business
Attn: Bankruptcy
8330 Ward Parkway
Kansas City, Missouri 64114
Lauri E. Cleary, Esq.
Lerch, Early & Brewer, Chartered
3 Betbesda Metro Center, Suite 380
Bethesda, MD 20814-5367
Thomas P. Ogden, Esq.
Davis Polk & Wardwell
450 Lexington Avenue
New York, NY 10017
Kenneth C. Davies, Esq.
Wright, Constable & Skeen, L.L.P.
100 N. Charles Street, 16th Floor
Baltimore, MD 21201
Robert T. Pace, Esq.
800 Silverado Street, Second Floor
La Jolla, CA 92037
Barry J. Dichter, Esq.
Cadwalader, Wickersham & Taft
1333 New Hampshire Avenue, N.W.
Suite 700
Washington. D.C. 20036
Clifford J. White, III, Esq.
Office of the United States Trustee
6305 Ivy Lane, Suite 600
Greenbelt, MD 20770
8
<PAGE>
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
at Greenbelt
IN RE: *
*
CRIIMI MAE, INC., et al. * CASE NO. 98-2-3115-DK
-- --
* CHAPTER 11
Debtor(s). *
*
-------------------------------------------------------------------------------
MEMORANDUM OPINION
------------------
On March 31, 2000, the debtors, CRIIMI MAE, Inc., CRIIMI MAE, Management,
Inc., and CRIIMI MAE Holdings II, L.P., filed the Second Joint Amended Plan and
its Amended Disclosure Statement. By Order entered February 7, 2000, this court
set a hearing to consider approval of the previous filed Disclosure Statement
and directed debtors to give notice of the filing of Disclosure Statement and
hearing. On April 25, 2000, debtors filed with the court a Third Amended Joint
Plan and Second Amended Disclosure Statement and requested that the court
consider approval of the Second Amended Disclosure Statement (hereinafter
"Disclosure Statement"). After a review of the Disclosure Statement in
comparison with the Joint Amended Disclosure Statement, the court determined
that the modifications were not material and therefore there was no required re-
noticing of the Disclosure Statement before the court would conduct the hearing
to consider approval.
Although initially a number of objections were filed to the Amended Joint
Disclosure Statement, at the hearing on April 25, 2000 (the "Hearing"), only
Citicorp Securities, Inc./Solomon Smith Barney ("SSB")/1/ appeared and argued in
opposition to approval of the
________________________
/1/ Pursuant to a Stipulation and Order entered by this court on December 18,
1998, Salomon Smith Barney, Inc. is the successor-in-interest to CitiCorp
Securities, Inc.
1
<PAGE>
Disclosure Statement. All other objections had been withdrawn in light of the
changes set forth in the Disclosure Statement, with the exception of a hand-
written objection filed by shareholder, Thomas Gill. For the reasons set forth
orally by the court on the record at the Hearing, the objection to approval of
Disclosure Statement by Thomas Gill was denied.
SSB argued three issues at the Hearing. Subject to the opportunity to more
closely study the last minute revisions set forth in the Disclosure Statement,
SSB indicated that the revisions appeared to remedy additional issues that had
been raised in its written objection.
The issues argued by SSB are as follows:
1. SSB asserts that it is the owner of certain securities which it holds
under a Master Repurchase Agreement dated August 1, 1997 and Annexes thereto
(collectively, the "Repo Agreement"). SSB further asserts that debtor CRIIMI
MAE, Inc. ("CMI") has no right of ownership in those securities. The plan
provides for the sale by CMI of some of the securities (the "Disputed
Securities"), on or before the confirmation date, to create funds necessary to
make disbursements under the plan. If CMI is not the owner of the Disputed
Securities, SSB concludes that CMI cannot legally sell the securities and
therefore as a matter of law the plan cannot be confirmed.
2. SSB asserts that should the court determine that it holds a security
interest in the Disputed Securities, as opposed to an ownership interest, and
that the obligations and arrangements under the Repo Agreement constitute a
secured lending, the sale by CMI of the Disputed Securities, without affording
to SSB a right to credit bid pursuant to 11 U.S.C. (S) 363(k), cannot constitute
fair and equitable treatment of its secured claim as required by 11 U.S.C. (S)
1129 (b) (2). SSB asserts that any sale of the collateral of a dissenting class
of secured claim must be governed by section 1129 (b) (2) (A) (ii). In response
debtors argue that the
2
<PAGE>
proposed sale of the Disputed Securities and other terms of the plan, provide
SSB the indubitable equivalent of its claim under section 1129 (b) (2) (a)
(iii). Therefore, debtors conclude that the plan can be confirmed without
compliance with the credit bid requirement incorporated into section 1129 (b)
(2) (A) (ii).
3. SSB asserts that the treatment of its claim, consisting of the payment
to it of a portion of the proceeds from the sale of the Disputed Securities, and
a portion of proceeds derived from the Disputed Securities currently held in an
interpleader fund, (with the use by the debtors of the remaining proceeds from
these sources to pay other claims), the amortized payment of the remaining
approximate $35 Million Dollars of its claim over 4 years, (with a provision for
replacement or additional collateral), does not constitute the indubitable
equivalent of its claim. SSB concludes that the plan cannot be confirmed under
1129 (b) (2) (A) (iii).
At a scheduling conference prior to the Hearing, the court informed the
parties that objections to confirmation of the plan, as opposed to the adequacy
of disclosure of information in the Disclosure Statement, would not be heard and
determined at the Hearing, with limited exceptions. The exception announced was
that the court (time permitting) would hear and determine objections to
confirmation arising solely as a dispute of law and for which determination
there was no material dispute of fact. "It is now well accepted that a court may
disapprove of a disclosure statement, even if it provides adequate information
about a proposed plan, if the plan could not possibly be confirmed." In re Main
----------
Street AC, Inc., 234 B.R. 771, 775 (Bankr. N.D. Cal. 1999) (citing, In re Allied
---------------------------------- ------------
Gaming Management, Inc., 209 B.R. 201, 202 (Bankr. W.D. La. 1977); In re Curtis
---------------------- ------------
Center Ltd. Partnership, 195 B.R. 631, 638 (Bankr. E.D. Pa. 1996); In re 266
----------------------- ---------
Washington Assocs., 141 B.R.. 275, 288 (Bankr. E.D.N.Y. 1992); In re Bjolmes
----------------- -------------
Realty Trust, 134 B.R. 1000, 1002 (Bankr. D. Mass. 1991)).
------------
3
<PAGE>
In its argument before the court at the Hearing, SSB asserted that
confirmation of the plan must be denied as a matter of law upon either and each
of the first two enumerated issues set forth above. SSB conceded that the third
issue, indubitable equivalence, is a question of fact, not determinable without
an evidentiary hearing. See In re James Wison Assocs., 965 F.2d 160, 172 (7/th/
--- -------------------------
Cir. 1992) ("question of whether the interest received by a secured creditor
under a plan of reorganization is the indubitable equivalent of his lien is one
of fact"); see also, In re Snowshoe Co., 789 F.2d 1085, 1088 (4th Cir. 1986)
----------------------------
(finding indubitable equivalence in context of 11 U.S.C. (S) 361(3) to be "a
question of fact rooted in measurements of value and the credibility of
witnesses").
Debtors in argument, supported by the committees appointed in this case,
asserted that the first enumerated issue (ownership v. lien upon the Disputed
Securities) involved disputed material facts. Debtors concede that the second
enumerated issue (must a cramdown involving sale of collateral meet the
requirements of 1129 (b) (2) (A) (ii) even if Debtors offer the indubitable
equivalent of the creditor's claims) was solely a dispute of law.
After denying the objection to the Disclosure Statement by creditor Thomas
Gill and making partial findings as to the adequacy of the Disclosure Statement,
the court held open the record of the hearing for the submission of briefs on
enumerated issues 1 and 2. In doing so the court explained that it would
consider the matter under the same standard applicable to a motion for summary
judgment. If as a matter of law, there being no material dispute of fact, the
plan could not be confirmed, approval of the Disclosure Statement would be
denied. If as a matter of law, there being no material dispute of fact, the
treatment proposed by the plan does not violate the law, the Disclosure
Statement would be approved and remaining issues as to confirmation would be
heard at the hearing upon confirmation. If the court determines the second
enumerated
4
<PAGE>
issue in favor of debtor but concludes that there is a material dispute of fact
necessary for the resolution of enumerated issue No. 1, the Disclosure Statement
must be modified to disclose the existence of that dispute and upon such
modification would be approved. The disputed factual issue would be heard as a
part of the confirmation hearing.
The parties have submitted briefs in accordance with the court's directive.
The court finds that an additional hearing as to whether issues No. 1 and 2 may
be resolved as a matter of summary judgment would not aid the court in its
decision on these issues.
I.
Did the Master Repurchase Agreement convey absolute ownership
-------------------------------------------------------------
of the disputed securities to SSB?
----------------------------------
The first issue identified above requires the court to determine the exact
nature of the interests conveyed by CMI to SSB, by the Repo Agreement./2/ If
the Repo Agreement in effect pledged a lien upon the securities described in the
Annexes, CMI retained ownership interests which may permit its proposed use of
these securities under the plan. If the Repo Agreement transferred all ownership
interests in the securities and CMI retained solely a contractual right as a
buyer to enforce a repurchase obligation of SSB, the plan illegally proposes to
permit CMI to dispose of property (securities) that are the sole property of
SSB.
The distinction between a repurchase transaction and a secured lending,
while critical to an issue in this bankruptcy case, is virtually without meaning
as to the practical effects of the transaction and the purposes for which it is
made. It is clearly an effort by the industry of
________________________
/2/ Exhibit 2. (References to exhibit numbers in this opinion are to exhibits
1-10 of the debtor's "Exhibits in Support of Supplemental Response to Objection
of Salomon Smith Barney, Inc. and Citicorp Real Estate, Inc. to the Debtors'
Amended Proposed Joint Disclosure Statement," attached to paper 1030 of the
court file).
5
<PAGE>
creditors dealing in this type of transaction to avoid potential unfavorable
treatment that a security interest might receive in bankruptcy./3/
Both security interests and repos purport to be present
conveyances of property from one party in exchange for value
given by another party plus an anticipated future conveyance
of property from that party to the original party upon its
performance of the contractual obligation. The question is,
therefore, whether a meaningful difference resides within the
property rights acquired by the repo buyer in a security
interest and a repo. In both a repo and in a typical secured
transaction, the value given by the transferee is usually an
advance of money, and the contractual obligation of the
transferor is usually a payment of an amount of money equal to
the original advance, plus a premium for the use of the money
(i.e., interest). In a secured transaction, the secured party
only obtains a limited property interest in the conveyed
property, known as a security interest, which is subject to
the limited property interest retained by the debtor,
sometimes known as debtor's equity. In a sale, the conveyance
conveys its entire property interest to the conveyancee.
Schroeder, supra note 3, at 1017.
-----
_________________________
/3/ Jeanne L. Schroeder, RePo Madness: The Characterization of Repurchase
----------------------------------
Agreements Under the Bankruptcy Code and the U.C.C., 46 Syracuse L. Rev. 999.
--------------------------------------------------
1010 (1996).
6
<PAGE>
That is not to say that the law does not recognize the difference between
the pledge of a lien versus the absolute conveyance with a promise to
repurchase. In re Bevel, Bresler & Schulman Asset Management Corp., 67 B.R. 557
------------------------------------------------------
(D.N.J. 1986). Indeed, in the bankruptcy context, Congress has legislated a
definition of "repurchase agreement"/4/ and enacted special treatment for the
contractual rights of a participant in a repurchase arrangement that meets the
definition under the statute./5/
Although a repurchase agreement may serve the same economic ends as a
secured loan, there is a critical difference in the quality of property interest
conveyed to and held by the party which initially advances the funding. The
critical distinction is whether the transferor of the securities retained
meaningful property interests inconsistent with an outright sale of the
securities. One essential difference in the rights of a transferee under a true
sale, as opposed to the transferee of a lien, is the right of the transferee to
dispose of the securities and otherwise to deal with the securities as the
absolute property of the transferee during the pendency of the
repurchase/repayment obligation under the contract.
In a true repo, the repo buyer has no obligation to return the
conveyed security to the repo seller parallel to the obligation of
a secured party to release collateral to the debtor upon
performance of the secured transaction. Even more significantly,
the repo buyer does not even have any obligation to maintain the
[sic.] either the original security or any substitute collateral
for the account of the repo seller pending the "repurchase." The
repo buyer's only obligation is to sell an "equivalent" security to
the repo seller. In many, if not most, repos, the repo buyer has
________________________________
/4/ 11 U.S.C. (S) 101(47).
7
<PAGE>
complete power and right of possession, enjoyment and alienation
over the underlying security. The security is delivered to the repo
buyer upon the conveyance, and the repo buyer has the right to
collect payments under the repo. Further, the repo buyer is
permitted to sell the original security immediately upon its
purchase, and is only required to acquire a new security to perform
its back end obligation at the last moment in time.
Schroeder, supra note 3, at 1020. "Unlike a lender taking collateral for a
-----
secured loan, a repo buyer `take[s] title to the securities received and can
trade, sell or pledge them.'" Granite Partners, L.P. v. Bear Stearns & Co.,
---------------------------------------------
Inc., 17 F. Supp. 2d. 275, 298 (S.D.N.Y. 1998) (quoting in part, SEC v. Drydale,
--- ---------------
Sec. Corp., 75 F.2d 38, 41 (2d Cir. 1986)).
-----------
Although bankruptcy law often affects the exercise by parties of rights to
property and under contract, it is the applicable non-bankruptcy law which
defines the property interests of the debtor and other parties as of the date of
the petition. Raleigh v. Illinois Dept. of Revenue, 120 (S) Ct. 1951, 1955
------------------------------------
(2000) (citing, Butner v. U.S., 440 U.S. 48, 55 (1979)). Here, due to a choice
--------------
of law provision in the Repo Agreement, the applicable law is the law of the
State of New York.
The common law of New York follows the accepted rule that it is the
objective intent of the parties to a contract that governs the contract's
meaning and effect. Brown Bro. Electrical Contractors, Inc. v. Beam Construction
------------------------------------------------------------
Corp., 41 N.Y.2c1 397, 399, 361 N.E.2d 999, 1001 (1977) (existence of binding
-----
contract "is not dependant on . . . subjective intent... ;" rather court must
look to "the objective manifestations of the intent of the parties as gathered
by their expressed words and deeds."). Courts have applied this rule when
analyzing repurchase agreements. "The key to the inquiry as to whether the repos
... should be characterized as
--------------------------------------------------------------------------------
/5/ 11 U.S.C. (S) 559.
8
<PAGE>
purchase and sale agreements or secured loans lies in the intention of the
parties." Granite Partners, 17 F. Supp. 2d. at 300. "The objective intent of the
----------------
parties `expressed or apparent in the writing controls' the agreement's
interpretation, while the `undisclosed, subjective intent of the parties has no
bearing' on the construction of the contract. "Id. (quoting in part from In re
--- -----
Bevill, 67 B.R. at 586). Where the document is unambiguous, its meaning is an
------
issue of law which the court should determine upon a motion for summary
judgment. Chimart Associates v. Paul, 66 N.Y.2d 570, 572-73, 489 N.E.2d 231,
--------------------------
233 (1986); Mallard Construction Corp. v. County Federal Savings & Loan
-----------------------------------------------------------
Association, 32 N.Y.2d 285, 291, 298 N.E.2d 96 (1973). "It is the primary rule
-----------
of construction of contracts that when the terms of a written contract are clear
and unambiguous, the intent of the parties must be found within the four corners
of the contract, giving a practical interpretation of the language employed and
the parties' reasonable expectations."Slamow v. Del Cool, 174 A.D.2d 725, 726,
------------------
571 N.Y.S.2d. 335 (1991), affirmed 79 N.Y.2d 1016, 594 N.E.2d 918 (1992).
--------
However, "[w]here. . . there are internal inconsistencies in a contract
pointing to ambiguity, extrinsic evidence is admissible to 10 determine the
parties' intent." Federal Ins. Co. v. Americas Ins. Co., 258 A.D.2d 39, 43, 691
-------------------------------------
N.Y.S.2d 508, 512 (1999). As an initial matter then, the court must determine
whether the Repo Agreement "on its face is reasonably susceptible to more than
one interpretation." Chimart Associates, 66 N.Y.2d at 573.
------------------
The title of the Repo Agreement, "Master Repurchase Agreement," is an
indication of the intent of the parties, however, it not dispositive. European
--------
Am. Bank v. Sackman Mortgage Corp. (In re Sackman Mortgage Corp.), 158 B.R.
------------------------------------------------------------------
926, 932 (Bankr. S.D.N.Y. 1993) ("Labels cannot change the true nature of the
underlying transactions."); Williams Press, Inc., v. State, 37 N.Y.2d 434, 440,
------------------------------
335 N.E.2d 299, 302 (1975) (meaning of contract may be distorted where
9
<PAGE>
undue force is given to single words or phrases); Tougher Heating & Plumbing Co.
-----------------------------
v. State, 73 A.D.2d 732, 733, 423 N.Y.S.2d 289, 290-91 (1979) ("It is a
--------
is a fundamental principle that the intention of the parties must be gleaned
from all corners of the document, rather than from sentences or clauses viewed
in isolation") (internal citations omitted). The court must examine the
substantive provisions of the contract. Thus, it is not the characterization
contained within the contract but the effect of its terms which are relevant.
In examining the four corners of the Repo Agreement, the court first notes
that it states:
Although the parties intend that all transactions hereunder be
sales and purchases and not loans, in the event any such
Transactions are deemed to be loans, seller shall be deemed to
have pledged to buyer as security for the performance by seller
of its obligations under each such transaction, and shall be
deemed to have granted to buyer a security interest in, all of
the purchased securities which respect to all transactions
hereunder and all income thereon and other proceeds thereof.
Exhibit 2, Master Repurchase Agreement, (P) 6.
The first part of this paragraph seemingly is an unequivocal statement of
the intent of the parties that the transaction be a purchase and sale and not a
loan. The statement of intent is not vitiated or made equivocal by the
protective provision set forth in the second part of the paragraph should the
transaction be deemed to be a loan. The law has recognized the right of a party
to act in a protective manner should a transaction intended to be otherwise, be
deemed by a court to be some other type of transaction./6/ However, simply
because the contract labels the
________________________
/6/ UCC (S) 9-408, for example, for allows a consignor or lessor of goods to
file a financing statement as a protective measure should a court deem the
transaction to be secured transaction. While such a filing by itself will not
determine the nature of the transaction. "if it is determined for other reasons
that the consignment or lease is ...
10
<PAGE>
transaction to be a sale and purchase does not mandate a finding that it
actually conveyed an absolute transfer of the securities. The court must
consider the whole of the contract in determining whether it expresses such an
unambiguous intent within its four corners. Kass v. Kass, 91 N.Y.2d 554, 566-
------------
567, 696 N.E.2d 174 (1998) (entire document reveals parties' object and
purpose); Williams Press, supra., 37 N.Y.2d 434, 440, 335 N.E.2d 299 (entire
----------------------
agreement must be considered); Rentways, Inc., v. O'Neill Milk & Cream Co., 308
-------------------------------------------
N.Y. 342, 347, 126 N.E.2d 271 (1955) (same).
The Repo Agreement provides that from time to time the parties may enter
into transactions under which the Seller agrees to "transfer" to the Buyer,
securities or other assets against the transfer of funds by the Buyer, with a
simultaneous agreement by Buyer to transfer to Seller such securities at a date
certain or on demand, against a transfer of the funds by Seller./7/ The word
transfer would be consistent with an absolute purchase and sale of the
securities and also would be consistent with a loan transaction in which only a
security interest is transferred. Although the words "Purchased Securities" are
used to identify the res of the contract, this term is defined in the contract
as the securities transferred and thus does not itself lend any greater
illumination upon which of the two types of transactions is being effectuated by
the transfer. Purchased Securities are to be identified in writings including,
where applicable, by CUSIP numbers.
Under paragraph 4 of the Repo Agreement, the Seller must maintain a margin
value over the amount of the repurchase obligation in order to protect the Buyer
from the possibility of the Seller's failure to perform Seller's repurchase
obligation. While loan to value requirements are
--------------------------------------------------------------------------------
intended [to be a secured transaction], a security interest of the consignor or
lessor which attaches to the consigned or leased goods is perfected by such
filing." UCC (S) 9-408.
/7/ For ease of identification, this opinion refers to the parties by the
defined terms (Buyer/Seller) used in the Agreement.
11
<PAGE>
most common in lending transactions, the maintenance of such a margin value is
also by itself not definite as to the two possible interpretations of this
contract. Similarly, under paragraph 5 the Seller is entitled to the equivalent
of the income earned by the Purchased Securities after they have been
transferred to the Buyer but before default by the Seller on the repurchase
obligation. Normally, reservation of the right to receive income from the
property would be consistent with a reservation of an ownership right in the
property. However, the drafters of the Repo Agreement have been careful to make
Seller's entitlement to an amount equal to such income, as opposed to a direct
right against the income itself.
In paragraph 8 of the Agreement, the second sentence initially provides
that "[a]ll of the Seller's interest in the Purchased Securities shall pass to
the Buyer on the Purchase Date . . ." Standing alone, this provision would
indicate an unambiguous intent to transfer all ownership rights in the
securities. However, the remainder of the sentence provides:
and, unless otherwise agreed by Buyer and Seller, nothing in this
agreement shall preclude Buyer from engaging in repurchase
transactions with the Purchased Securities or otherwise selling,
transferring, pledging or hypothecating the Purchased Securities,
but no such transaction shall relieve Buyer of its obligations to
transfer Purchased Securities to Seller pursuant to paragraph 3, 4,
or 11 hereof or Buyer's obligation to credit or pay income to, or
apply income to the obligations of, Seller pursuant to paragraph 5
hereof.
This second part of the sentence creates an ambiguity as to the otherwise
unconditional statement concerning the Seller's interests passing to the Buyer
on the purchase date.
If the transaction is an absolute sale, there would be no reason for the
paragraph 8 to specifically empower the Buyer to engage in repurchase
transactions with the Repurchased
12
<PAGE>
Securities or to otherwise sell, transfer, pledge or hypothecate the securities,
subject to the duties of the Buyer to deliver the Purchased Securities to the
purchaser at time of repurchase. Thus, reading the first part of the sentence as
a statement of absolute transfer could render the second part of the sentence
superfluous to the contract. One rule of legal interpretation is that the court
should strive to read all of the terms of the contract in a manner that gives
effect to all such terms and renders no parts superfluous. Bretton v. Mutual of
--------------------
Omaha Ins. Co., 110 A.D.2d 46, 50, 492 N.Y.S.2d 760, 763 (1985) ("policy's terms
--------------
should not be assumed to be superfluous or to have been idly inserted."); see,
---
also, Tougher Heating & Plumbing, supra, 73 A.D.2d at 733, 423 N.Y.S.2d at 291
---------------------------------------
("every part of a contract should be interpreted to give effect to its general
purpose").
More importantly, the obligation of the Buyer to transfer the Purchased
Securities back to the Seller at the time of repurchase requires Buyer to
transfer the same, not merely equivalent, securities. As stated in paragraph
3(c) of the Repo Agreement, termination of a transaction "will be effected by
transfer to Seller or its agent of the Purchased Securities . . . ." As
previously noted, the term "Purchased Securities" is defined as "the Securities
transferred . . . and any Securities substituted therefore in accordance with
paragraph 9" of the Repo Agreement./8/ Paragraph 9 provides that Seller may
substitute securities for Purchased Securities with the acceptance of Buyer.
It does not provide Buyer with the right to substitute securities in
effectuating the repurchase upon termination of the contract. Thus, the seeming
absolute transfer under paragraph 8 is limited by the absolute duty of the Buyer
to produce back to the Seller the exact same securities upon termination of the
transaction.
_______________________
/8/ Exhibit 2, Master Repurchase Agreement, (P) 2(p).
13
<PAGE>
Further ambiguity creeps into the Repo Agreement upon the event of a
default. Under paragraph 11(b), if the Seller defaults, "all Income paid after
the [default] shall be retained by" the Buyer. This may imply that a right to
income remains in the Seller until default, when it shifts to the Buyer. Such a
retention of right to income until default is more consistent with a loan
transaction than an absolute purchase. Further, the negative pregnant of this
subparagraph would appear to be that until default, all income may not be
retained by the Buyer. Also, if Buyer unequivocally received the right to all
income at the time of the initial transfer, a provision permitting the Buyer to
retain such income upon default of the Seller would be superfluous.
References within the contract to provisions of Title 11, United States
Code, shed no greater illumination upon the parties' intent. Paragraph 19 of the
Repo Agreement (titled "Intent") states that the parties recognize each
transaction is a "repurchase agreement" as that term is defined in Section 101
of Title 11 of the United States Code, except as in so far as the type of
securities subject to such transaction would render the definition inapplicable.
11 U.S.C. (S) 101(47) defines "repurchase agreement" as "an agreement ... which
provides for the transfer of certificates of deposit, eligible bankers'
acceptances, or securities that are direct obligations of, or that are fully
guaranteed as to the principal and interest by, the United States or any agency
of the United States...." The Purchased Securities set forth in the annexes to
the Repo Agreement, are not certificates of deposit, bankers' acceptances, or
obligations of the United States and there is no evidence that the Purchased
Securities are guaranteed by the United States or any agency thereof. The
parties by contract cannot place their agreement within the purview of a statute
that on its face does not apply.
Nor does the provision in that paragraph 19 that each transaction is a
"`securities contract' as that term is defined in Section 741 of Title 11"
address any distinction that is
14
<PAGE>
material to the outcome of this dispute. The definition of securities contract
found under 11 U.S.C. (S) 741 (which provision is inapplicable to this
bankruptcy case pending under Chapter 11 of the United States Bankruptcy Code),
includes a contract for purchase, sale or loan of a security. Thus, the
statutory definition to which the contract refers encompasses either of the two
possible interpretations of the contract (purchase or loan).
The additional language made part of the Repo Agreement and contained in
the annexes does not clear up the ambiguities. The annexes provide in part:
"title to all Purchased Securities shall pass to Buyer on the purchase date."
However, the annexes further provide that "nothing contained herein, or in the
Master Agreement shall be deemed to preclude Buyer from engaging in repurchase
transactions with the Purchase Securities or otherwise pledging or hypothecating
the Purchased Securities prior to the repurchase date."/9/ As with the language
in the Repo Agreement, the second sentence would be superfluous if the first
sentence created an absolute transfer of all interests of the Seller at the time
of the initiation of the transaction. Further, there is clearly not found in the
second sentence a right to sell the Purchased Securities. Back to back
repurchase agreements or hypothecation agreements which are tailored to make
available to the Buyer the Purchased Securities at time of the repurchase
obligation of Seller are clearly permitted. The annexes do not remove the duty
of the Buyer to retransfer back to Seller the exact same Purchased Securities at
the termination of the transaction.
After review of all of the terms of the Repo Agreement, this court finds
that there is ambiguity within the Repo Agreement as to the nature of the
interests in Purchased Securities transferred to, and the extent of interests
retained, by CMI. Therefore, the court must consider extrinsic evidence to find
the objective intent of the parties.
_______________________
/9/ Exhibit 2, Annexes, page 2.
15
<PAGE>
Although debtors have submitted some extrinsic evidence in support of their
argument that the parties intended the Repo Agreement to be a secured lending,
that evidence is not conclusive./10/ The court concludes that the intent of the
parties involves issues of material fact which must be resolved upon a full
evidentiary hearing.
Having found a dispute of material fact as to the ownership of the Disputed
Securities, the court cannot conclude as a matter of law that the Plan
contemplates an illegal use of property owned by SSB Accordingly, debtors'
disclosure statement will not be disapproved on the basis.
_________________________
/10/ For example, at least one corporate designee of SSB, Richard L. Jarocki,
Jr., indicated his belief that absent a default, that SSB had no right under the
Repo Agreement to sell the Disputed Securities. Exhibit 5, Jarocki deposition,
p41. As previously noted, such a restriction on alienability is inconsistent
with a SSB's claim that the Repo Agreement accomplished a complete transfer in
ownership of the Disputed Securities. However, the court notes that the highly
edited Jarocki deposition is but a small portion of the substantial discovery
that has taken place in preparation for a trial between debtor and SSB (in part,
on the issue of ownership of the Disputed Securities) in Adversary Proceeding
No. 98-1637-DK. The court will not determine the issue of ownership without
allowing the parties the opportunity for a full evidentiary hearing.
16
<PAGE>
II.
Must a Cramdown Involving the Sale of Collateral Meet the
---------------------------------------------------------
Requirements of 11 U.S.C. (S) 1129(b) (2) (A)(ii) even if it Offers the
-----------------------------------------------------------------------
Indubitable Equivalent of the Creditor's Claim?
-----------------------------------------------
SSB next argues that even if the court determines that it holds a security
interest in the Disputed Securities, as opposed to an ownership interest, the
sale by CMI of the Disputed Securities, without affording to SSB a right to
credit bid pursuant to 11 U.S.C. S 363(k), cannot constitute fair and equitable
treatment of its secured claim as required by 11 U.S.C. 5 1129(b) (2).
In its initial objection, SSB argued that the disclosure statement should
be disapproved because it contemplated a plan that "does not satisfy any of the
three tests [demonstrating fair and equitable treatment of its claim] contained
in section 1129(b) (2) (A)." Objection and Memorandum of Law of Solomon Smith
Barney et. al. at 58 (emphasis supplied). At the hearing on the disclosure
statement, and in its supplemental memorandum in support of its objection, SSB
refined its argument. It now asserts no plan that contemplates the sale of
collateral of a dissenting class of secured claim can be found "fair and
equitable" unless it complies with section 1129(b) (2) (A) (ii). SSB maintains
that debtors' Plan fails that test because it does not provide SSB the right to
credit bid its claim pursuant to 11 U.S.C. 363 (k).
Debtors respond that section 1129(b) (2) (A) is crafted in the disjunctive,
and that a plan can be confirmed over a secured creditor's objection if it meets
any of the three alternative tests set forth in subsections (i), (ii), or (iii).
Debtors further argue that the proposed sale of the Disputed Securities and
other terms of the plan meet the "fair and equitable test" set forth in section
1129(b) (2) (A) (iii) because they provide SSB with the "indubitab1e equivalent"
of its claim. As previously noted, the parties agreed at the disclosure
statement hearing, that the issue
17
<PAGE>
of whether the plan does provide the "indubitable equivalent" of SSB's claim
cannot be determined without an evidentiary hearing.
The court agrees with debtors that a plan can meet the fair and equitable
test imposed by section 1129(b) (2) (A) by complying with any of the three
enumerated subsections. Section 1129(b) (2) provides as follows:
(2) For the purpose of this subsection, the condition that a plan
be fair and equitable with respect to a class includes the
following requirements:
(A) With respect to a class of secured claims, the plan
provides -
(i) (I) that the holders of such claims retain the
liens securing such claims, whether the property subject to
such liens is retained by the debtor or transferred to another
entity, to the extent of the allowed amount of such claims;
and (II) that each holder of a claim of such class receive on
account of such claim deferred cash payments totaling at least
the allowed amount of such claim, of a value, as of the
effective date of the plan, of at least the value of such
holder's interest in the estate's interest in such property;
(ii) for the sale, subject to section 363(k) of this
title, of any property that is subject to the liens securing
such claims, free and clear of such liens, with such liens to
attach to the proceeds of such sale, and the treatment of such
liens on proceeds under clause (I) or (iii) of this
subparagraph; or
--
(iii) for the realization by such holder of the
indubitable equivalent of such claims.
(Emphasis supplied).
By using the word "or", Congress plainly drafted section 1129(b) (2) (A) so
that compliance with any of the enumerated subsections, (i), (ii) or (iii),
would result in a finding that a plan of reorganization was fair and equitable
as to the treatment of an objecting class of secured claims. Further, 11 U.S.C.
S 102(5) provides that "`or is not exclusive...". The legislative history to
section 102(5) provides that "if a party `may do (a) or (b)', then the party may
do either or both." Thus, any doubt as to whether subsections (i), (ii), and
(iii) were meant to be alternative paths to meeting the fair and equitable test
of section 1129(b) (2) (A) is put to rest by the Bankruptcy Code itself. Accord
------
Wade v. Bradford, 39 F.3d 1126, 1130 (10/th/ Cir. 1994)
----------------
18
<PAGE>
(section 1129(b) (2) (A) requirements "are written in the disjunctive requiring
the plan to satisfy only one before it could be confirmed" over secured
creditor's objection); In re Arnold & Baker Farms, 85 F.3d 1415, 1420 (9th Cir.
1996).
SSB nevertheless argues that where a plan proposes to sell a objecting
secured creditor's collateral free and clear of liens, that the fair and
equitable test can be satisfied only under section 1129(b) (2) (A) (ii)./11/ SSB
admits that both subsection (ii) and (iii) are applicable to the contemplated
sale of the Disputed Securities, but asserts that while subsection (ii) deals
specifically with the "sale... of property ... free and clear of liens,"
subsection (iii) merely provides for the `realization ... of the indubitable
equivalent" of the claim. SSB relies on Beard Plumbing & Heating, Inc. v.
---------------------------------
Thompson P1astics, Inc., 152 F.3d 313 (4th Cir. 1998) for the proposition that
-----------------------
where "one section [of conflicting statutes] addresses a subject in a general
way and the other section speaks to part of the same subject in a more specific
manner, the latter prevails." Beard Plumbing at 320. SSB argues that subsection
--------------
(ii) of 1129(b) (2) (A) is more specific than subsection (iii), and that it
should govern. SSB also relies on In re Kent Terminal Corp., 166 BR. 555 (Bankr.
S.D.N.Y. 1994) which found that a plan that proposed to sell a secured
creditor's collateral free and clear of liens could not be confirmed without
affording a credit-bid opportunity. The court finds neither case persuasive on
the issue now before it.
In Beard P1umbing, the Fourth Circuit sought to construe two apparently
conflicting provisions of Virginia's version of the Uniform Commercial Code.
Finding no case law jointly construing UCC provisions (S) 2-318 and (S) 2-715
with regard to economic loss, the court certified a question to the Supreme
Court of Virginia. In its response, the state court relied on the rule of
______________________
/11/ Debtors argue that even under section 1129(b) (2) (A) (ii) there is no
absolute right to credit bid, because section 363(k) allows the court to curtail
--------
a credit bid opportunity "for cause." Because the debtors have indicated that
they intend to rely on subsection (iii) to meet the "fair and equitable" test of
1129(b) (2) (A), the court need not here decide whether there is "cause" to deny
a credit bid opportunity under subsection (ii).
19
<PAGE>
construction that where statutes conflict and "one section addresses a subject
in a general way and the other section speaks to part of the same subject in a
more specific manner, the latter prevails," Beard Plumbing, 152 F.3d at 320.
SSB's attempt to apply the same rule in the instant case is misplaced,
because, unlike the statutory provisions analyzed in Beard Plumbing, 11 U.S.C. 5
1129(b) (2) (A) plainly indicates that subsections (i), (ii) and (iii) are to be
treated as distinct alternatives. As a result, the provisions are not in
conflict and the argued for rule of construction is inapplicable.
Kent Terminal is also inapposite. That case came before the United States
Bankruptcy Court for the District of New York on a secured creditor's motion for
relief from stay, or for dismissal of debtor's chapter 11 petition. Debtor's
plan contemplated a contingent sale of the creditor's co1lateral, free and clear
of liens, without giving the creditor an opportunity to credit bid. The debtor
argued that the plan was confirmable either under 11 U.S.C. S 1129(b) (2) (A)
(i) or (ii). The court concluded that the plan did not meet the fair and
equitable test as to either subsection. As to subsection (ii), the court stated
that the plan was not "fair and equitable" because it did not afford the
creditor with the right to bid its lien in the event that the property was sold
free and clear of liens under the plan. 166 B.R. at 567. Unlike the instant
case, however, the Kent Terminal court had no occasion to test subsection (iii),
because the debtor made no attempt to provide substitute collateral. As
previously stated, because of the disjunctive construction of section 1129(b)
(2) (A), if debtors can meet the test of indubitable equivalence, the plan can
be confirmed without compliance with subsection (ii).
Conclusion
----------
In summary, the court finds that debtors' failure to provide to SSB a right
to credit bid does not render the plan unconfirmable as a matter of law.
Debtors must prove by evidence at
20
<PAGE>
confirmation that the plan provides the indubitable equivalent of SSB's
claim./12/ Further, the court finds that the plan's use of the Disputed
Securities cannot be determined to violate 11 U.S.C. (S) 1129(a) (3) as a matter
of law. The debtor will be required to prove at the confirmation hearing that
such use of the Disputed Securities is legally permissible.
Date Signed: _______________ _________________________________
DUNCAN W. KEIR, Judge
United States Bankruptcy
Court for the District of Maryland
cc: Richard L. Wasserman, Esq.
Venable, Baetjer and Howard, LLP
1800 Mercantile Bank & Trust Bldg.
2 Hopkins Plaza
Baltimore, MD 21201
Judy G.Z. Liu, Esq.
Weil, Gotshal, Manges, LLP
767 Fifth Avenue
New York, NY 10153
Troy C. Swanson, Esq.
Kincaid, Cohen & Swanson, PC
800 North Charles Street, Suite 400
Baltimore, ND 21201
Stanley J. Samorajczyk, Esq.
Akin, Gump, Strauss, Hauer & Fled, L.L.P.
1333 New Hampshire Avenue, NW, Suite 400
Washington, D.C. 20036
Daniel M. Lewis, Esq.
Arnold & Porter
555 Twelfth Street, NW
Washington, DC. 20004-1206
___________________________
/12/ The court notes that if CMI is to succeed in meeting the "fair and
equitable" test under this third alternative of section 1129(b) (2) (A), it
faces a formidable task. Something is "dubitable" if it is "open to doubt or
question." Webster's Third New International Dictionary, Unabridged (1993).
Conversely, something is "indubitable" if it is without question, or doubt. In
re Freymiller Trucking, Inc., 190 BR. 913, 915-16 (Bank. W.D. Okla. 1996).
21
<PAGE>
Michael St. Patrick Baxter, Esq.
Covington & Burring
1201 Pennsylvania Avenue, NW
Washington, D.C. 20044-7566
Paul M. Nussbaum, Esq.
Whiteford, Taylor & Preston, LLP
Seven Saint Paul Street, Suite 1400
Baltimore, MD 21202-1626
Morton A. Faller, Esq.
Shulman, Rogers, Gandal, Pordy & Ecker, P.A.
11921 Rockville Pike, 3rd Floor
Rockville, MD 20852-2743
Charles F. Lettow. Esq.
Cleary, Gottlieb, Steen & Hamilton
2000 Pennsylvania Avenue, N.W.
Washington, D.C. 20006-1801
Thomas J. Maloney, Esq.
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, NY 10006-1404
David R. Kuney, Esq.
Brown & Wood LLP
1666 K. St. N.W.
Washington, D.C. 20006
A. Robert Pietrzak, Esq.
Brown & Wood LLP
One World Trade Center
New York, NY 10048-0557
Ira S. Sacks, Esq.
Fried Prank Harris Shriver & Jacobson
One New York Plaza
New York, NY 10004-1980
Jeffrey L. Schwartz, Esq.
Hahn & Hesson LLP
Empire State Building
350 Fifth Avenue
New York, NY 10118
22
<PAGE>
Bradford F. Englander, Esq.
Linowes & Blocher LLP
1010 Wayne Avenue, 10th Floor
Silver Spring, MD 20910-5600
John H. Culver, III
NationsBank Corporate Center, Suite 4200
100 North Tryon Street
Charlotte. NC 28202-4006
David N. Roberts
Angelo, Gordon & Co.
245 Park Avenue, 26th Floor
New York, NY 10167
Peter Chapman
24 Pericaris Place
Trenton, NJ 08618
Christopher Beard, Esq.
Beard & Beard
4601 North Park Avenue
Chevy Chase, MD 20815
Michael B. Benner, Esq.
Watchell, Lipton, Rosen & Katz
51 West 52/nd/ Street
New York, NY 10019
Daniel M. Litt, Esq.
Dickstein Shapiro Morin & Oshinsky, LLP
2101 L Street, N.W.
Washington, D.C. 20037-1526
John F. Horstmann, Esq.
Duane, Norris & Heckscher LLP
4200 One Liberty P1.
Philadelphia, PA 19103-7396
Daniel W. Sklar, Esq.
Peabody & Brown
889 Elm Street
Manchester, NH 03101
Deborah L. Thaxter, Esq.
Peabody & Brown
23
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101 Federal Street
Boston, MA 02110
Richard M. Kremen, Esq.
Piper, Marbury, Rudnick & Wolfe LLP
6225 Smith Avenue
Baltimore, ND 21209-3600
Robert L. Bodansky, Esq.
Nixon, Hargrave, Devans & Doyle, LLP
Suite 700, One Thomas Circle
Washington, D.C. 20005
Mark N. Polebaum, Esq.
Hale & Dorr, LLP
60 State Street
Boston, MA 02109
Michelle Chrein, Esq.
Kasowitz & Benson
1301 Avenue of the Americas
New York, NY 10019
Prudential Securities Credit Corp.
c/o Vincent T. Pica II, President
One New York Plaza, 18th Floor
New York, NY 10292
Standich, Ayer & Wood, Inc.
c/o Pierre Y. Chung, Asst. Vice President
One Financial Center
Boston, MA 02111
Riggs Bank, NA
c/o Al Serafino
808 17/th/ Street, N.W.
Washington, D.C. 20006
Conseco Capital Management, Inc.
c/o Eric Johnson
11825 North Pennsylvania Street
Carmel, IN 46032
RER Resources, LP
c/o Bruce M. Levy, Vice Chairman
950 Herndon Parkway, Suite 200
24
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Herndon, VA 20170
Charles Koehler
P.O. Box 394
Bowling Green, OH 43402-0394
Vickie Corbitt, Esq.
Legal Office
Tennessee Department of Revenue
312 8/th/ Avenue North
27th Floor
Nashville, TM 37243
Bruce Lane. Esq.
Peabody & Brown
1225 23/rd/ Street, N.W.
Washington, D.C. 20037
Andrews Office Products
8400 Ardwick Ardmore Road
Landover, MD 20785-2301
The Ad Solution
11810 Parklawn Drive
Rockville, MD 20852
Dun & Bradstreet
c/o John Haiser
600 East Jefferson Street, Suite 300
Rockville, MD 20852
Lawrence D. Coppel, Esq.
Gordon, Feinblatt, Rothman
Hoffberger & Hollander, LLC
233 East Redwood Street
Baltimore, MD 21202
Bill Wang
Amroc Investments, Inc.
335 Madison Ave., 26th Floor
New York, NY 10017
Susan R. Sherrill
U.S. Securities & Exchange Commission
Atlanta District Office
3475 Lenox Road, N.E., Suite 1000
25
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Atlanta, GA 30326-1232
Linda V. Donhauser, Esq.
Miles & Stockbridge, PC
10 Light Street
Baltimore, MD 21202
George Keilman, Esq.
8200 Jones Branch Dr. - MS 202
McLean, VA 22102
Robert R. Smith, Esq.
111 Cathedral Street
P.O. Box 827
Annapolis, MD 21404-0827
Robert A. Gutkin, Esq.
Pillsbury, Madison & Sutro, LLP
1100 New York Avenue, N.W.
Ninth Floor, East Tower
Washington, D.C. 20005-3918
A. David Manruck, Esq.
Pillsbury, Madison & Sutro, LLP
235 Montgomery Street
San Francisco, CA 94101
Christine Rotter
Wells Fargo Bank
555 Montgomery Street, 10/th/ Floor
San Francisco, CA 94111
Daniel J. Hartnett, Esq.
McDermott, Will & Emery
227 West Monroe Street
Chicago, IL 60606-5096
Melvin White, Esq.
McDermott, Will & Emery
600 13th Street, N.W.
Washington, D.C. 20005-3096
Fred D. Ross
11901 Greenleaf Avenue
Potomac, MD 20854-3319
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Amanda D. Darwin, Esq.
Peabody & Arnold, LLP
50 Rowes Wharf
Boston, Massachusetts 02110
G. Christian Ulrich
First Union National Bank
NC 0737
301 South College St., DC-5
Charlotte, N.C. 28288-0737
Sprint Business
Attn: Bankruptcy
8330 Ward Parkway
Kansas City, Missouri 64114
Lauri E. Cleary, Esq.
Lerch, Early & Brewer, Chartered
3 Bethesda Metro Center, Suite 380
Bethesda, MD 20814-5367
Thomas P. Ogden, Esq.
Davis Polk & Wardwell
450 Lexington Avenue
New York, NY 10017
Kenneth C. Davies, Esq.
Wright, Constable & Skeen, L.L.P.
100 N. Charles Street, 16th Floor
Baltimore, MD 21201
Robert T. Pace, Esq.
800 Silverado Street, Second Floor
La Jolla, CA 92037
Barry J. Dichter, Esq.
Cadwalader, Wickersham & Taft
1333 New Hampshire Avenue, N.W.
Suite 700
Washington. D.C. 20036
Clifford J. White, III, Esq.
Office of the United States Trustee
6305 Ivy Lane, Suite 600
Greenbelt, MD 20770
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EXHIBIT 99(d)
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
(Greenbelt Division)
______________________________________
)
)
In re )
)
CRIIMI MAE Inc., et al., ) Chapter 11
) Case Nos. 98-2-3115(DK)
Debtors. ) through 98-2-3117(DK)
) (Jointly Administered)
)
______________________________________)
MOTION FOR ENTRY OF AN ORDER AMENDING STIPULATION AND
AGREED ORDER SELLING CERTAIN COMMERCIAL MORTGAGE-
BACKED SECURITIES TO GERMAN AMERICAN CAPITAL CORPORATION
FREE AND CLEAR OF LIENS,
CLAIMS AND ENCUMBRANCES
-----------------------
CRIIMI MAE Inc., Debtor and Debtor-in-Possession herein ("CMI"), the
Official Committee of Unsecured Creditors of CMI (the "CMI Unsecured
Committee"), the Official Committee of Equity Security Holders (the "Equity
Committee"), and German American Capital Corporation ("GACC"), by and through
their undersigned counsel, hereby file this Motion for Entry of an Order
Amending Stipulation and Agreed Order Selling Certain Commercial-Mortgage Backed
Securities to GACC Free and Clear of Liens, Claims and Encumbrances (the
"Motion"), pursuant to Sections 105(a) and 363(b) of Title 11 of the United
States Code (the "Bankruptcy Code") and Fed. R. Bankr. P. 6004, and in support
thereof state as follows:
1. This Court has jurisdiction over this Motion pursuant to 28
U.S.C. (S)(S)157 and 1334. Venue is proper pursuant to 28 U.S.C. (S)1409. This
is a core proceeding pursuant to 28 U.S.C. (S)157(b)(2).
<PAGE>
2. On June 16, 2000, CMI filed a Motion to Approve Stipulation and
Agreed Order Selling Certain Commercial-Mortgage Backed Securities to GACC Free
and Clear of Liens, Claims and Encumbrances (the "Sale Motion"). Pursuant to the
formula set forth in Exhibit B to the Stipulation and Agreed Order Selling
Certain CMBS to GACC Free and Clear of Liens, Claims and Encumbrances (the
"Stipulation and Agreed Order"), the aggregate purchase price to be paid by GACC
for the Chase Bond Portfolio (as defined in the Stipulation and Agreed Order)/1/
was $45,228,876, subject to adjustment in accordance with the provisions of
Exhibit B to the Stipulation and Agreed Order to reflect changes in the
applicable "spreads" between the date the Stipulation was signed and the date
GACC acquired the Chase Bond Portfolio.
3. No objections to the Sale Motion were filed and on July 7, 2000,
this Court entered the Stipulation and Agreed Order.
4. Following entry of the Stipulation and Agreed Order, GACC raised
due diligence concerns regarding a large property in the pool of mortgages
collateralizing the Chase Bond Portfolio. As a consequence of these due
diligence concerns, GACC requested and the Debtor has agreed, to adjust the
purchase price for the Chase Bond Portfolio from $45,228,876, to $43,834,893
(the "Adjusted Purchase Price").
5. GACC has agreed to purchase the Bonds at the Adjusted Purchase
Price without adjustment for subsequent changes in the treasury
___________________
/1/ The Chase Bond Portfolio is comprised of the GACC Chase Bonds identified
in Exhibit A to the Stipulation and Agreed Order and the Class J Chase Bond as
identified in the Stipulation and Agreed Order.
2
<PAGE>
rate or market rate spreads provided that the Stipulation and Agreed Order is
entered by next Friday, August 4, 2000 and closing occurs no later than August
10, 2000. A copy of a letter agreement from GACC is attached as Exhibit A to
this Motion.
6. The adjustment will not reduce the proceeds paid into escrow for
the benefit of First Union National Bank ("First Union") in accordance with
paragraph 11 of the Stipulation and Agreed Order.
7. CMI, the CMI Unsecured Committee and the Equity Committee have
agreed to the Adjusted Purchase Price. They also believe that the Adjusted
Purchase Price is not a material change in terms warranting a renewed notice
period.
8. If the Stipulation and Agreed Order is amended by the Court as
requested, GACC is prepared to close within five days.
WHEREFORE, CMI, the CMI Unsecured Committee, the Equity Committee and
GACC respectfully request that this Court enter an Order (i) granting this
Motion; (ii) amending the Stipulation and Agreed Order to permit the sale of the
CMBS at the Adjusted Purchase Price; and (iii) granting such other and further
relief as is just and proper.
3
<PAGE>
Dated: July ___, 2000
____________________________ __________________________________
Richard L. Wasserman Michael St. Patrick Baxter
Federal Bar No. 02784 Federal Bar No. 09694
Gregory A. Cross Dennis B. Auerbach
Federal Bar No. 04571-G Federal Bar No. 09290
Venable, Baetjer and Howard, LLP Covington & Burling
1800 Mercantile Bank & Trust Bldg. 1201 Pennsylvania Avenue, N.W.
Two Hopkins Plaza Washington, D.C. 20044
Baltimore, Maryland 21201 (202) 662-6000
(410) 244-7400
Counsel for the Official
Committee
Co-Counsel for CRIIMI MAE Inc., of Equity Security Holders of
Debtor-in-Possession CRIIMI MAE Inc.
____________________________ __________________________________
Daniel M. Lewis Michael B. Benner
Federal Bar No. Richard G. Mason
Michael L. Bernstein Wachtell, Lipton, Rosen & Katz
Federal Bar No. 51 West 52nd Street
Arnold & Porter New York, New York 10019
555 Twelfth Street, N.W.
Washington, D.C. 20004 Counsel for German
American
Capital Corporation
Counsel for the Official Committee
of Unsecured Creditors
4
<PAGE>
CERTIFICATE OF SERVICE
----------------------
I hereby certify that on this _____ day of July, 2000, a copy of the
foregoing Motion for Entry of an Order Amending Stipulation and Agreed Order
Selling Certain Commercial Mortgage-Backed Securities to German American Capital
Corporation Free and Clear of Liens, Claims and Encumbrances was mailed first
class to the following parties:
Michael St. Patrick Baxter, Esquire
Covington and Burling
1201 Pennsylvania Avenue, N.W.
Washington, DC 20044
Daniel M. Lewis, Esquire
Michael L. Bernstein, Esquire
Arnold & Porter
555 Twelfth Street, N.W.
Washington, D.C. 20004
John F. Horstmann, Esquire
Duane, Morris & Heckscher
1 Liberty Place
Philadelphia, PA 19103
Michael B. Benner, Esquire
Richard G. Mason, Esquire
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Clifford J. White, Esquire
Office of the U.S. Trustee
6305 Ivy Lane, Suite 600
Greenbelt, Maryland 20770
___________________________________________
Carrie B. Weinfeld
