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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
__________________
For the fiscal year ended December 31, 2000 Commission file number 1-10360
CRIIMI MAE INC.
(Exact name of registrant as specified in its charter)
Maryland 52-1622022
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
11200 Rockville Pike
Rockville, Maryland 20852
(301) 816-2300
(Address, including zip code, and telephone number,
Including area code, of registrant's principal executive offices)
__________________
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- ------------------- ----------------------------
Common Stock New York Stock Exchange, Inc.
Series B Cumulative Convertible New York Stock Exchange, Inc.
Preferred Stock
Series F Redeemable Cumulative Dividend New York Stock Exchange, Inc.
Preferred Stock
Series G Redeemable Cumulative Dividend New York Stock Exchange, Inc.
Preferred Stock
Securities registered pursuant to Section 12(g) of the Act:
None
__________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10K or any amendment to this
Form 10K. [_]
As of April 13, 2001, 99,049,850 shares of CRIIMI MAE Inc. common stock
(voting) with a par value of $0.01 were outstanding. The aggregate market value
(based upon the last reported sale price on the New York Stock Exchange on April
13, 2001) of the shares of CRIIMI MAE Inc. common stock (voting) held by non-
affiliates was approximately $69,334,895. (For purposes of calculating the
previous amount only, all directors and executive officers of the registrant are
assumed to be affiliates.)
__________________
Documents Incorporated By Reference
None.
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CRIIMI MAE INC.
2000 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
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PART I
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Item 1. Business...................................................................... 2
Item 2. Properties.................................................................... 22
Item 3. Legal Proceedings............................................................. 22
Item 4. Submission of Matters to a Vote of Security Holders........................... 30
PART II
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Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters...... 30
Item 6. Selected Financial Data....................................................... 33
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................ 36
Item 7A. Quantitative and Qualitative Disclosures About Market Risks................... 50
Item 8. Financial Statements and Supplementary Data................................... 52
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure......................................................... 52
PART III
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Item 10. Directors and Executive Officers of the Registrant............................ 53
Item 11. Executive Compensation........................................................ 57
Item 12. Security Ownership of Certain Beneficial Owners and Management................ 62
Item 13. Certain Relationships and Related Transactions................................ 63
PART IV
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Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............. 64
Signatures
Exhibit Index
PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS. When used in this Annual Report on Form 10-K, the
words "believes," "anticipates," "expects," "contemplates" and similar
expressions are intended to identify forward-looking statements. Statements
looking forward in time are included in this Annual Report on Form 10-K pursuant
to the "safe harbor" provision of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties, which
could cause actual results to differ materially, including, but not limited to
the risk factors contained under the headings "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" set
forth below. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly revise these forward-looking statements to
reflect events or circumstances occurring after the date hereof or to reflect
the occurrence of unanticipated events.
General
CRIIMI MAE Inc. (together with its consolidated subsidiaries, unless the
context otherwise indicates, "CRIIMI MAE" or the "Company") is a 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" or
"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. As
previously stated, 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"). On November 22, 2000, the United States Bankruptcy Court
for the District of Maryland, entered an order confirming the Debtors'
reorganization plan (the "Reorganization Plan").
The Company also 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. See Note 3 to
the Notes to Consolidated Financial Statements. With the exception of CM
Management and Holdings II, none of these affiliates filed for bankruptcy
protection on the Petition Date.
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. ("CRI") 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.
2
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 one of its secured creditors. 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 Bankruptcy Court.
On August 24, 2000, the Bankruptcy Court entered an order approving the
Debtors' Disclosure Statement and other proposed solicitation materials. All
impaired classes which voted on the Reorganization Plan voted overwhelmingly to
accept the Reorganization Plan.
On September 21, 2000, CRIIMI MAE, Salomon Smith Barney Inc. (as successor
to Citicorp Securities, Inc. ("SSB")), German American Capital Corporation
("GACC"), ORIX Real Estate Capital Markets, LLC ("ORIX"), the CMI Equity
Committee and the Unsecured Creditors Committee filed a Stipulation and Consent
Order (the "Stipulation and Consent") with the Bankruptcy Court providing for,
among other matters, the terms of an agreement with respect to the sale of the
Company's interest in CMO-IV and certain other CMBS to ORIX. On October 12,
2000, an order was entered by the Bankruptcy Court approving the Stipulation and
Consent. On October 30, 2000, the Court entered an amendment to the Stipulation
and Consent with respect to the agreed proceeds in connection with the sale to
ORIX (the "Order"). Pursuant to the Stipulation and consent as amended by the
Order, the Company sold its interest in CMO-IV and certain other CMBS to ORIX.
The CMI Equity Committee and Unsecured Creditors' Committee were deemed to have
agreed to such sale. The sale was completed on November 6, 2000 resulting in
total proceeds of approximately $189 million. The proceeds were used to pay off
$141 million of financing owed to SSB and $4 million to Citicorp Real Estate,
Inc. in full satisfaction of all asserted and unasserted claims of such
claimants. Additionally, approximately $14.2 million of the proceeds were used
to pay down secured financing provided by GACC. The Company will use the net
proceeds of approximately $30 million to help fund the Company's emergence from
Chapter 11.
As stated before, on November 22, 2000, the Bankruptcy Court entered an
order confirming the Reorganization Plan under which the Debtors' anticipated
emerging from Chapter 11 by March 15, 2001.
On March 9, 2001, the Bankruptcy Court, after notice and a hearing,
approved an extension of the effective date of the Reorganization Plan to April
13, 2001 and on April 13, 2001, the Bankruptcy Court approved a further
extension of the effective date of the Reorganization Plan until April 17, 2001.
The Company expects to sign all remaining closing documents, disburse funds, and
consummate the effective date by April 17, 2001. However, there can be no
assurance that the Company will emerge by such date.
The Reorganization Plan
The Reorganization Plan includes the payment in full of all of the allowed
claims of the Debtors primarily through recapitalization financing (including
proceeds from certain asset sales) aggregating $847 million (the
"Recapitalization Financing"). The sales of select CMBS (the "CMBS Sale") and
the Company's interest in CMO-IV (the "CMO-IV Sale") generated aggregate
proceeds of approximately $418.3 million toward the Recapitalization Financing
(see Notes 5 and 7), of which approximately $342.3 million was used to pay
related borrowings and approximately $76.0 million will be used to help fund the
Reorganization Plan. Included in the balance of the Recapitalization Financing
is approximately $262 million anticipated to be provided by affiliates of
Merrill Lynch Mortgage Capital Inc. ("Merrill Lynch" or "Merrill") and GACC
through a new secured financing facility (in the form of a repurchase
transaction), and approximately
3
$167 million anticipated to be provided through new secured notes issued to
certain of the Company's unsecured creditors (collectively, the "New Debt").
In connection with the Reorganization Plan, substantially all cash flows
relating to existing assets are expected to be used to satisfy principal,
interest and fee obligations under the New Debt. The approximate $262 million
secured financing would provide for (i) interest at a rate of one month London
Interbank Offered Rate ("LIBOR") plus 3.25%, (ii) principal
repayment/amortization obligations, (iii) extension fees after two years and
(iv) maturity on the fourth anniversary of the effective date of the
Reorganization Plan. The approximate $167 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 repayment/amortization
obligations, (iii) extension fees after four years and (iv) maturity on the
fifth anniversary of the effective date of the Reorganization Plan. The second
series of secured notes, representing an aggregate principal amount of
approximately $62 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 Reorganization Plan. The New Debt
described above is anticipated to be secured by substantially all of the
existing assets of the Company. It is contemplated that there will be
restrictive covenants, including financial covenants and certain restrictions
and requirements with respect to cash accounts and the collection, management,
use and application of funds, in connection with the New Debt.
The Company anticipates that the litigation with First Union National Bank
("First Union") will not be settled or resolved on or prior to the effective
date of the Reorganization Plan; and therefore, the classification of First
Union's claim under the Reorganization Plan will not be determined until after
the effective date (see "LEGAL PROCEEDINGS-Bankruptcy Related Litigation-First
Union" for further information regarding (a) the status of the First Union
litigation and (b) the treatment of First Union's Claim on the effective date of
the Reorganization Plan).
Under the Reorganization Plan, the holders of the Company's equity will
retain their stock. Pursuant to the terms of the anticipated New Debt, limited,
if any, dividends, other than if such dividend payments are required to maintain
REIT status (and assuming the Company has the cash available to make the
distributions), can be paid to existing shareholders. Under the Reorganization
Plan, cash dividends required to maintain REIT status would be paid first to
holders of certain of the New Debt who convert their notes into one or two new
series of preferred stock, which new series of preferred stock would be senior
to all other series of preferred stock of the Company, in the form of redemption
payments. The Reorganization Plan also includes certain amendments to the
Company's articles of incorporation, anticipated on the effective date of the
Reorganization Plan, including an increase in authorized shares from 145 million
(consisting of 120 million of common shares and 25 million of preferred shares)
to 375 million (consisting of 300 million of common shares and 75 million of
preferred shares). These amendments to the articles of incorporation will not be
effective until the Reorganization Plan is effective. (See Notes 11 and 12 to
the Notes to Consolidated Financial Statements for further discussion regarding
the Company's common stock and preferred stock.)
Reference is made to the Reorganization Plan and Disclosure Statement,
previously filed with the Bankruptcy Court (and with the Securities and Exchange
Commission (the "SEC") as exhibits to a Current Report on Form 8-K filed on
September 22, 2000), for a more detailed description of the financing
contemplated to be obtained under the Reorganization 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.
REIT Status and Other Tax Matters
REIT Status. CRIIMI MAE is required to meet income, asset, ownership and
distribution tests to maintain its REIT status. The Company believes that it
has satisfied the REIT requirements for all years through, and including, 1999
and 2000, as discussed below. However, there can be no assurance that CRIIMI
MAE will maintain its REIT status for 2001 or subsequent years. If the Company
fails to maintain 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 any such tax and also may be unable to comply with its
obligations under the New Debt.
4
As of March 15, 2001, the Company and three of its subsidiaries have
jointly elected to treat such three subsidiaries as Taxable REIT Subsidiaries
("TRS") effective January 1, 2001. There are limitations on the activities and
asset bases of a TRS, some of which are as follows:
. The deductible amount of interest paid or accrued by a TRS to its REIT
parent is limited under the interest stripping rules. The interest
stripping rules are designed to prevent the excessive reduction or
elimination of taxable income of a TRS through the use of interest
expense from loans made to the TRS by the REIT parent.
. A 100% excise tax is imposed when a REIT and a TRS engage in certain
transactions that do not reflect arm's length amounts. The 100% tax is
imposed on redetermined rents, redetermined deductions, and excess
interest, subject to certain safe harbors.
. No more than 20% of a REIT's total assets may be composed of securities
of TRSs.
The Company's 2000 Taxable Loss/Taxable Distribution Requirements
During 2000, the Company traded in both short and longer duration fixed
income securities, primarily subordinated and investment grade CMBS and
investment grade residential mortgage backed securities (such securities traded
and all other securities of the type described constituting the "Trading
Assets"), which, for financial reporting purposes, are classified as
Subordinated CMBS and Other MBS on the balance sheet. The Company seeks maximum
total return through short term trading, consistent with prudent investment
management. Returns from such activities consist primarily of capital
appreciation/depreciation resulting from changes in interest rates and spreads,
if any, and other arbitrage opportunities.
Internal Revenue Service Revenue procedure 99-17 provides securities and
commodities traders with the ability to elect mark-to-market treatment for the
2000 tax year and for all future tax years, unless the election is revoked with
the consent of the Internal Revenue Service. On March 15, 2000, CRIIMI MAE
elected for tax purposes to be classified as a trader in securities effective
January 1, 2000.
As a result of its trader election, CRIIMI MAE recognized a mark-to market
tax loss on its Trading Assets on January 1, 2000 of approximately $478 million
(the "January 2000 Loss"). This does not impact the GAAP financial statements.
Such loss is expected to be recognized evenly over four years beginning with the
year 2000 (i.e., approximately $120 million per year). The Company expects such
loss to be ordinary. Additionally, as a result of its trader election, the
Company is required to mark-to-market its Trading Assets on a tax basis at the
end of each tax year. 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 gains or losses, 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 for
years ending on or before December 31, 2000, and 90% for years beginning after
2000, 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 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.
For the year ended December 31, 2000, the Company recognized an unrealized
mark-to-market tax gain (or increase) of approximately $50 million on its
Trading Assets. Additionally, during the year ended December 31, 2000, realized
net gains on Trading Assets were approximately $1.5 million for financial
reporting purposes and
5
approximately $12.6 million for tax purposes. As discussed in Note 10 to the
Notes to Consolidated Financial Statements, the Company generated a net
operating loss of approximately $50 million for the year ended December 31,
2000. As such, the Company's taxable income was reduced to zero and,
accordingly, the Company's REIT distribution requirements were eliminated for
2000.
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 cannot 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 through taxable income. 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.
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, if any, 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 and, as such, the Company could lose
its REIT status or may not be able to satisfy its New Debt obligations.
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 substantial limitation under
Section 382. Generally, the use of net operating losses in any year is limited
to the value of the Company's stock on the date of the ownership change
multiplied by the long-term tax exempt rate (published by the IRS) with respect
to that date.
The Company's 1999 Taxable Income. For purposes of REIT distribution
requirements, 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. Unlike the 95%
distribution requirement or 90% for years beginning after 2000, 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 were considered as dividends paid for the
year ended December 31, 1999. On September 11, 2000, the Company declared a
dividend payable to common shareholders of approximately 3.75 million shares of
a new series of preferred stock with a face value of $10 per share (the "Series
G Preferred Stock") (see Note 12 to the Notes to Consolidated Financial
Statements). The purpose of the dividend was to distribute approximately $37.5
million in undistributed 1999 taxable income. To the extent that it is
determined that such amount was not distributed, the Company would bear a
corporate level income tax on the undistributed amount to the extent of noncash
income. There can be no assurance that the Company's tax liability was
eliminated by payment of such Series G Preferred Stock dividend. The Series G
Preferred Stock dividend was paid on November 13, 2000 to common shareholders of
record as of October 27, 2000. The Series G Preferred Stock dividend was
taxable to common shareholder recipients. The Series G Preferred Stock
shareholders were permitted to convert their shares of Series G Preferred Stock
into common shares during the period from February 21, 2001 through March 6,
2001. During that conversion period, an aggregate 2,496,535 shares of Series G
Preferred Stock were converted into 32,547,041 shares of common stock.
6
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 "Series F Preferred Stock"). 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 Series F Preferred Stock dividend. The Company paid the
Series F Preferred Stock dividend on November 5, 1999 to common shareholders of
record on October 20, 1999. The Series F Preferred Stock dividend was taxable
to common shareholder recipients. The Series F Preferred Stock shareholders
were permitted to convert their shares of Series F Preferred Stock into common
shares during two separate conversion periods. During these conversion periods,
an aggregate 1,020,241 shares of Series F Preferred Stock were converted into
8,798,009 shares of common stock.
Taxable Mortgage Pool Risks. An entity that constitutes a "taxable
mortgage pool" as defined in the Tax Code ("TMP") is treated as a separate
corporate level taxpayer for federal income tax purposes. In general, for an
entity to be treated as a TMP (i) substantially all of the assets must consist
of debt obligations and a majority of those debt obligations must consist of
mortgages; (ii) the entity must have more than one class of debt securities
outstanding with separate maturities and (iii) the payments on the debt
securities must bear a relationship to the payments received from the mortgages.
The Company currently owns all of the equity interests in two trusts that
constitute TMPs (CBO-1 and CBO-2, collectively the "Trusts"). See "BUSINESS-
Resecuritizations" and "BUSINESS-Loan Originations and Securitizations" and Note
5 to the Notes to Consolidated Financial Statements. 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
currently serve as collateral (the "Pledged Bonds") for short-term variable rate
borrowings used by the Company to finance their initial purchase and are
expected to serve as collateral for the New Debt. 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.
The CMBS Market
Historically, traditional lenders, including commercial banks, insurance
companies and savings and loans have been the primary holders of commercial
mortgages. The real estate market of the late 1980s and early 1990s created
business and regulatory pressure to reduce the real estate assets held on the
books of these institutions. As a result, there has been significant movement
of commercial real estate debt from private institutional holders to the public
markets. According to Commercial Mortgage Alert, CMBS issuances in the U.S.
equaled approximately $48.9 billion in 2000, $58.3 billion in 1999 and $77.7
billion in 1998.
7
CMBS are generally created by pooling commercial mortgage loans and
directing the cash flow from such mortgage loans to various tranches of
securities. The tranches consist of investment grade (AAA to BBB-), non-
investment grade (BB+ to CCC) and unrated securities. The first step in the
process of creating CMBS is loan origination. Loan origination occurs when a
financial institution lends money to a borrower to refinance or to purchase a
commercial real estate property, and secures the loan with a mortgage on the
property that the borrower owns or purchases. Commercial mortgage loans are
typically non-recourse to the borrower. A pool of these commercial real estate-
backed mortgage loans is then accumulated, often by a large commercial bank or
other financial institution. One or more rating agencies then analyze the loans
and the underlying real estate to determine their credit quality. The mortgage
loans are then deposited into an entity that is not subject to taxation, often a
real estate mortgage investment conduit ("REMIC"). The investment vehicle then
issues securities backed by the commercial mortgage loans, CMBS.
The CMBS are divided into tranches, which are afforded certain priority
rights to the cash flow from the underlying mortgage loans. Interest payments
typically flow first to the most senior tranche until it receives all of its
accrued interest and then to the junior tranches in order of seniority.
Principal payments typically flow to the most senior tranche until it is
retired. Tranches are then retired in order of seniority, based on available
principal. Losses, if any, are generally first applied against the principal
balance of the lowest rated or unrated tranche. Losses are then applied in
reverse order of seniority. Each tranche is assigned a credit rating by one or
more rating agencies based on the agencies' assessment of the likelihood of the
tranche receiving its stated payment of principal. The CMBS are then sold to
investors through either a public offering or a private placement. The Company
has primarily focused on acquiring or retaining non-investment grade and unrated
tranches, issued by mortgage conduits, where the Company believed its market
knowledge and real estate expertise allowed it to earn attractive risk-adjusted
returns.
At the time of a securitization, one or more entities are appointed as
"servicers" for the pool of mortgage loans, and are responsible for performing
servicing duties which include collecting payments (master or direct servicing),
monitoring performance (loan management) and working out or foreclosing on
defaulted loans (special servicing). Each servicer typically receives a fee and
other financial incentives based on the type and extent of servicing duties.
The CMBS market was adversely affected by the turmoil which occurred in the
capital markets commencing in late summer of 1998 that caused spreads between
CMBS yields and the yields on U.S. Treasury securities with comparable
maturities to widen, resulting in a decrease in the value of CMBS. As a result,
the creation of new CMBS and the trading of existing CMBS came to a near
standstill. In late November 1998, buying and trading activity in the CMBS
market began to recover, increasing liquidity in the CMBS market; however, these
improvements mostly related to investment grade CMBS. New issuances of CMBS
also returned in late November 1998 and continued through 2000 with the issuance
of newly created CMBS totaling approximately $48.9 billion and $58.3 billion for
2000 and 1999, respectively. 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 to the spring 1998 levels. Even if the market for Subordinated CMBS
recovers, the liquidity of such market has historically been limited.
Additionally, during adverse market conditions, the liquidity of such market has
been severely limited. Therefore, management's estimate of the value of the
Company's CMBS could vary significantly from the value that could be realized in
a current transaction between a willing buyer and a willing seller in other than
a forced sale or liquidation.
Subordinated CMBS Acquisitions
As of December 31, 2000, the Company's $1.6 billion portfolio of assets
included $853 million of Subordinated CMBS (representing approximately 55% of
the Company's total consolidated assets).
CRIIMI MAE Inc. did not acquire any Subordinated CMBS in 2000 or 1999. In
1998, CRIIMI MAE acquired Subordinated CMBS, from offerings which aggregated
$13.5 billion. These offerings comprised approximately 17.2% of the total
($58.3 billion face amount according to Commercial Mortgage Alert) CMBS market
for 1998. For the year ended December 31, 1998, the Company acquired
Subordinated CMBS with an aggregate face amount of approximately $1.2 billion,
making the Company a leading purchaser of Subordinated
8
CMBS in 1998. As of December 31, 2000, approximately 33% of the Company's CMBS
(based on fair value) were rated BB+, BB or BB-, 24% were B+, B, B- or CCC and
10% were unrated. The remaining approximately 33% represents investment grade
securities that the Company reflects on its balance sheet as a result of CBO-2.
See "BUSINESS-Resecuritizations" and "BUSINESS-The Portfolio-CMBS."
The Company generally acquired Subordinated CMBS in privately negotiated
transactions, which allowed it to perform due diligence on a substantial portion
of the mortgage loans underlying the Subordinated CMBS as well as the underlying
real estate prior to consummating the purchase. In connection with its
Subordinated CMBS acquisitions, the Company targeted diversified mortgage loan
pools with a mix of property types, geographic locations and borrowers. CRIIMI
MAE financed a substantial portion of its Subordinated CMBS acquisitions with
short-term, variable-rate financing facilities secured by the Company's CMBS.
The Company's business strategy was to periodically refinance a substantial
portion of the Subordinated CMBS in its portfolio through a resecuritization of
such Subordinated CMBS primarily to attain a better matching of the maturities
of its assets and liabilities through the refinancing of short-term, variable-
rate, recourse financing with long-term, fixed-rate, non-recourse financing.
See "BUSINESS-Resecuritizations," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," and Notes 5 and 8 to the Notes
to Consolidated Financial Statements.
The Company generally enters into interest rate protection agreements to
mitigate the adverse effects of a possible rise in short-term interest rates on
the interest payments due on its variable-rate financing facilities. The
Company follows an investment policy to hedge at least 75% of its variable-rate
debt with interest rate protection agreements that limit the cash flow exposure
to increases in interest rates beyond a certain level on the amount of interest
expense the Company must pay. Interest rate caps provide protection to the
Company to the extent interest rates, based on a readily determinable interest
rate index, increase above the stated interest rate cap, in which case the
Company would receive payments based on the difference between the index and the
cap. These payments would serve to reduce the interest payments due under the
variable-rate financing facilities. See "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and Notes 8 and 9 to the Notes
to Consolidated Financial Statements for a further discussion of the Company's
short-term, variable-rate secured financing facilities and interest rate
protection agreements.
Resecuritizations
The Company initially funded a substantial portion of its Subordinated CMBS
acquisitions with short-term, variable-rate secured financing facilities. To
further mitigate the Company's exposure to interest rate risk, the Company's
business strategy was to periodically refinance a significant portion of this
short-term, variable-rate debt with fixed-rate, non-recourse debt having
maturities that matched those of the Company's mortgage assets securing such
debt ("match-funded"). The Company effected such refinancing by pooling
Subordinated CMBS, once a sufficient pool of Subordinated CMBS had been
accumulated, and issuing newly created CMBS backed by the pooled Subordinated
CMBS. The CMBS issued in such resecuritizations were fixed-rate obligations
with maturities that matched the maturities of the Subordinated CMBS backing the
new CMBS. These resecuritizations also increased the amount of borrowings
available to the Company due to the increased collateral value of the new CMBS
relative to the pooled Subordinated CMBS. The increase in collateral value was
principally attributable to the seasoning of the underlying mortgage loans and
the diversification that occurred when such Subordinated CMBS were pooled. The
Company generally used the cash proceeds from the investment grade CMBS that
were sold in the resecuritization to reduce the amount of its short-term,
variable-rate secured borrowings. The Company then used the net excess
borrowing capacity created by the resecuritization to obtain new short-term,
variable-rate secured borrowings which were used with additional new short-term,
variable-rate secured borrowings typically provided by the Subordinated CMBS
seller and, to a lesser extent, cash, to purchase additional Subordinated CMBS.
Although the Company's resecuritizations mitigated the Company's exposure to
interest rate risk through match-funding, the Company's short-term, variable-
rate secured borrowings increased from December 31, 1996 to December 31, 1998,
as a result of the Company's continued acquisitions of Subordinated CMBS during
that period.
In December 1996, the Company completed its first resecuritization of
Subordinated CMBS ("CBO-1") with a combined face value of approximately $449
million involving 35 individual securities collateralized by 12 mortgage
securitization pools. The Company sold, in a private placement, securities with
a face amount of $142 million and retained securities with a face amount of
approximately $307 million. Through CBO-1, the Company
9
refinanced approximately $142 million of short-term, variable-rate, secured
borrowings with fixed-rate, non-recourse, match-funded debt. CBO-1 generated
excess borrowing capacity of approximately $22 million primarily as a result of
a higher overall weighted average credit rating for the new CMBS, as compared to
the weighted average credit rating on the related CMBS collateral.
In May 1998, the Company completed its second resecuritization of
Subordinated CMBS ("CBO-2") with a combined face value of approximately $1.8
billion involving 75 individual securities collateralized by 19 mortgage
securitization pools and three of the retained securities from CBO-1. In CBO-2,
the Company sold, in a private placement, securities with a face amount of $468
million and retained securities with a face amount of approximately $1.3
billion. Through CBO-2, the Company refinanced approximately $468 million of
short-term, variable-rate secured borrowings with fixed-rate, non-recourse,
match-funded debt. CBO-2 generated net excess borrowing capacity of
approximately $160 million primarily as a result of a higher overall weighted
average credit rating for the new CMBS, as compared to the weighted average
credit rating on the related CMBS collateral.
As of December 31, 2000, the Company's total debt was approximately $1.2
billion, of which approximately 54% was fixed-rate, match-funded debt and
approximately 46% was short-term, variable-rate or fixed-rate debt that was
recourse to the Company and not match-funded. See Note 8 to the Notes to
Consolidated Financial Statements regarding the Company's anticipated debt
structure after the effective date of the Reorganization Plan. For the year
ended December 31, 2000, the Company's weighted average cost of borrowing
(including amortization of discounts and deferred financing fees of
approximately $8.5 million) was approximately 8.1%. See "BUSINESS-Subordinated
CMBS Acquisitions," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" and Notes 5, 8 and 9 to the Notes to Consolidated
Financial Statements for further information regarding the Company's
resecuritizations, short-term, variable-rate secured financings, and interest
rate caps.
Loan Originations and Securitizations
Prior to the Petition Date, the Company originated mortgage loans
principally through mortgage loan conduit programs with major financial
institutions for the primary purpose of pooling such loans for securitization.
The Company viewed a securitization as a means of extracting the maximum value
from the mortgage loans originated. A portion of the mortgage loans originated
was financed through the creation and sale of investment grade CMBS to third
parties in connection with the securitization. The Company received net cash
flow on the CMBS not sold to third parties after payment of amounts due to
secured creditors who had provided acquisition financing. Additionally, the
Company received origination and servicing fees related to the mortgage loan
conduit programs.
Also 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"). In CMO-
IV, CRIIMI MAE sold $397 million face amount of fixed-rate, investment grade
CMBS. The Company originally intended to sell all of the investment grade
tranches of CMO-IV; however, two investment grade tranches were not sold until
1999. CRIIMI MAE had call rights on each of the issued securities and therefore
had not surrendered control of the bonds, thus requiring the transaction to be
accounted for as a financing of the mortgage loans collateralizing the
investment grade CMBS sold in the securitization. The Company sold its
remaining interest in CMO-IV in November 2000. See "MANAGEMENT DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-Liquidity and Capital
Resources" and Notes 5 and 8 to the Notes to Consolidated Financial Statements
for additional information regarding this securitization, including the 1999
sales of the two remaining investment grade tranches, the sale of the Company's
interest in CMO-IV and certain financial and accounting effects of such sales.
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").
10
The Citibank Program provided for CRIIMI MAE to pay to Citibank the face
value of the loans originated through the Program, which were funded by Citibank
and not otherwise securitized, plus or minus any hedging loss or gain, on
December 31, 1998. To secure this obligation, CRIIMI MAE was required to deposit
a portion of the principal amount of each originated loan in a reserve account.
On April 5, 1999, the Bankruptcy Court entered a Stipulation and Consent
Order (the "Order"), negotiated by the Company and Citibank. The negotiations
were in response to a letter Citibank sent to the Company on October 5, 1998
alleging that the Company was in default under the Citibank Program and that it
was terminating the Citibank Program. The Order provided that Citibank would,
with CRIIMI MAE's cooperation, sell the loans originated under the Citibank
Program pursuant to certain specified terms and conditions.
On August 5, 1999, all but three of the commercial loans originated under
the Citibank Program were sold in 1999 at a loss to the Company. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and Notes 7 and 9 to the Notes to Consolidated Financial Statements
for a further discussion of these commercial loan sales and certain financial
and accounting effects of such sales.
Under the Prudential Program, the Company had an option to pay 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. During the year ended December 31, 1998, the Company recorded
an unrealized loss of $2 million for its loss exposure under the Prudential
Program. The Company calculated the Prudential loss based upon the assumption
that the Company would not exercise its option with Prudential.
Servicing
CRIIMI MAE conducts its mortgage loan servicing and advisory operations
through its affiliate, CMSLP. At the time of the Chapter 11 filing, CMSLP was
responsible for certain servicing functions on a mortgage loan portfolio of
approximately $32.0 billion. Prior to the Petition Date, CRIIMI MAE increased
its mortgage loan servicing and advisory operations primarily through its
purchases of Subordinated CMBS by acquiring certain servicing rights for the
mortgage loans collateralizing the Subordinated CMBS, as well as providing
servicing on the loans originated through the CRIIMI MAE loan origination
programs.
CMSLP was formed under a limited partnership agreement in which CM
Management holds the limited partner interest and CRIIMI MAE Services, Inc.
("CMSI") is the general partner. As of December 31, 2000 and 1999, the limited
partnership interest and the general partnership interest in CMSLP were 73% and
27%, respectively. Therefore, all servicing activity of CMSLP is reflected in
Equity in Earnings (Losses) of Investments on a consolidated basis.
The Reorganization Plan included the sale of certain CMBS owned by CRIIMI
MAE. As a result of these CMBS sales, CMSLP is no longer the special servicer
related to such sold CMBS. Due to the nature of its relationship with CRIIMI
MAE and CRIIMI MAE Management, Inc., its limited partner, and as a result of the
CRIIMI MAE Management, Inc.'s Chapter 11 filing, in 1998 CMSLP was declared in
default under certain credit agreements with First Union National Bank. CMSLP
has also been under a high degree of scrutiny from servicing rating agencies.
In order to repay all such credit agreement obligations and to increase its
liquidity, CMSLP sold to ORIX its master servicing rights on two commercial
mortgage pools effective October 1998. CMSLP also sold master servicing rights
on two CMBS effective December 2000. In addition, in order to allay rating
agency concerns stemming from the CRIIMI MAE Management's Chapter 11 filing, in
October 1998, CRIIMI MAE designated ORIX as special servicer on approximately 33
separate CMBS securitizations totaling $29 billion, subject to certain
requirements contained in the respective servicing agreements. As of December
31, 2000, ORIX remains the special servicer on 27 of these CMBS securitizations.
This decrease is due to the sale in 2000 of six CMBS by CRIIMI MAE in which
CRIIMI MAE owned the lowest rated tranche and had named CMSLP as the special
servicer. CMSLP currently performs the special servicing as sub-servicer for
11
ORIX on all but four of the 27 transactions in which CRIIMI MAE has financial
interest. The servicing agreements on these four CMBS securitizations do not
permit a sub-special servicing agreement in which CRIIMI MAE has a financial
interest. The fee due to ORIX for its services performed under this agreement
is approximately 33 percent of certain ancillary income. Ancillary income is
primarily assumption, modification, and extension fees received by CMSLP.
CRIIMI MAE remains the owner of the lowest rated tranche of the related CMBS
and, as such, retains all rights pertaining to ownership, including the right to
replace the special servicer.
The Company is considering the transfer of its limited partnership interest
in CMSLP to a new, wholly owned TRS sometime in 2001. The REIT Modernization
Act of 1999 allows REITs to own up to 100% of a taxable "C" Corporation as long
as the subsidiary makes an election to be treated as a TRS. This law is
effective for years beginning after December 31, 2000. A TRS may conduct some
types of business that are prohibited to a REIT, and the income from a TRS is
not included in the income tests of the parent REIT. The Company is also
considering several restructuring options with respect to its interest in CRIIMI
MAE Services, Inc. ("CMSI" and CMSLP's general partner) and CMSI's interest in
CMSLP.
CMSLP's principal servicing activities are described below. For a summary
and discussion of the financial results of these activities, see
"ITEM 7-MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS-Equity
in Earnings (Losses) from Investments".
Special Servicing
A special servicer typically provides asset management and resolution
services with respect to nonperforming or underperforming loans within a pool of
mortgage loans. When acquiring Subordinated CMBS, CRIIMI MAE typically required
that it retain the right to appoint the special servicer for the related
mortgage pools. When serving as special servicer of a CMBS pool, CMSLP has the
authority to deal directly with any borrower that fails to perform under certain
terms of its mortgage loan, including the failure to make payments, and to
manage any loan workouts and foreclosures. As special servicer, CMSLP earns fee
income on services provided in connection with any loan servicing function
transferred to it from the master servicer. CRIIMI MAE believes that because it
owns the lowest rated or unrated tranche (first loss position) of the
Subordinated CMBS, CMSLP has an incentive to quickly resolve any loan workouts.
As of December 31, 2000, CMSLP was designated as the special servicer (or sub-
special servicer) for approximately 3,444 commercial mortgage loans,
representing an aggregate principal amount of approximately $19 billion, or 95%
of its servicing portfolio. See "The Portfolio-CMBS" and Note 5 to the Notes to
Consolidated Financial Statements regarding mortgage loans included in the
special servicing portfolio.
As of December 31, 2000, CMSLP had a special servicer rating of "CSS2" from
Fitch IBCA and had received indication from Moody's that CMSLP would be approved
on a transactional basis. However, CMSLP lost an "acceptable" special servicer
rating by Standard & Poor's ("S&P") in October 1998 as a result of the Chapter
11 filing of CRIIMI MAE.
Master Servicing
A master servicer typically provides administrative and reporting services
to the trustee with respect to a particular issuance of CMBS. Mortgage loans
underlying CMBS generally are serviced by a number of primary servicers. Under
most master servicing arrangements, the primary servicers retain primary
responsibility for administering the mortgage loans and the master servicer acts
as an intermediary in overseeing the work of the primary servicers, monitoring
their compliance with the standards of the issuer of the related CMBS and
consolidating the servicers' respective periodic accounting reports for
transmission to the trustee. When acting as master servicer of a CMBS pool,
CMSLP has greater control over the mortgage assets underlying its Subordinated
CMBS, including the authority to (i) collect monthly principal and interest
payments (either from a direct servicer or directly from borrowers) on loans
comprising a CMBS pool and remit such amounts to the pool trustee, (ii) oversee
the performance of sub-servicers and (iii) report to trustees. As master
servicer, CMSLP is usually paid a fee and can earn float income on the deposits
it holds. In addition to this fee and float income, the master servicer
typically has more direct and regular contact with borrowers than the special
servicer. As of December 31, 2000, CMSLP
12
remained master servicer on one CMBS portfolio representing commercial mortgage
loans with an aggregate principal amount of approximately $768 million.
As of December 31, 2000, CMSLP had a master servicer rating of "CMS3" from
Fitch IBCA and had received indication from Moody's that CMSLP would be approved
on a transactional basis. CMSLP lost an acceptable master servicer rating from
S&P in October 1998 as a result of the Chapter 11 filing of CRIIMI MAE.
Direct (or Primary) Servicing
Direct (or primary) servicers typically perform certain functions for the
master servicer. Direct serviced loans are those loans for which CMSLP collects
loan payments directly from the borrower (including tax and insurance escrows
and replacement reserves). The loan payments are remitted to the master
servicer for the loan (which may be the same entity as the direct servicer),
usually on a fixed date each month. The direct servicer is usually paid a fee
to perform these services, and is eligible to earn float income on the deposits
held. In addition to this fee and float income, the direct servicer, like the
master servicer, typically has more direct and regular contact with borrowers
than the special servicer. As of December 31, 2000, CMSLP was designated direct
servicer for approximately 316 commercial mortgage loans, representing an
aggregate principal amount of approximately $1.6 billion. This number of loans
excludes loans that are both direct and master serviced by CMSLP, which are
included in the master servicing figures above. As of December 31, 2000, CMSLP
had a primary servicer rating of "CPS3" from Fitch IBCA and had received
indication from Moody's that CMSLP would be approved on a transactional basis.
CMSLP lost an acceptable primary servicer rating from S&P in October 1998 as a
result of the Chapter 11 filing of CRIIMI MAE.
Loan Management
In certain cases, CMSLP acts as loan manager and monitors the ongoing
performance of properties securing the mortgage loans underlying its
Subordinated CMBS portfolio by continuously reviewing the property level
operating data and regular site inspections. For approximately half of these
loans, CMSLP performs these duties on a contractual basis; for the remaining
loans, as part of its routine asset monitoring process, it reviews the analyses
performed by other servicers. This allows CMSLP to identify and resolve
potential issues that could result in losses. As of December 31, 2000, CMSLP
served as contractual loan manager for approximately 1,737 commercial mortgage
loans representing an aggregate principal amount of approximately $8.2 billion.
As of December 31, 2000, CMSLP reviewed analyses performed by other servicers
for approximately 1,731 commercial mortgage loans, representing an aggregate
principal amount of $11.1 billion.
Underwriting Procedures
CRIIMI MAE believes that its experience in underwriting has enabled it to
properly manage certain of the risks associated with mortgage loans underlying
acquired Subordinated CMBS. Since the Company generally acquired CMBS through
privately negotiated transactions and originated commercial mortgage loans
through its regional offices, it was able to perform extensive due diligence on
a majority of the mortgage loans as well as the underlying real estate prior to
consummating any purchase or origination. The Company underwrote every loan it
originated and re-underwrote a substantial portion of the loans underlying the
Subordinated CMBS it acquired. Furthermore, the Company's credit committee,
composed of members of senior management, reviewed originated loans and
Subordinated CMBS acquisitions.
CRIIMI MAE's underwriting guidelines were designed to assess the adequacy
of the real property as collateral for the loan and the borrower's
creditworthiness. The underwriting process entailed a full independent review
of the operating records, appraisals, environmental studies, market studies and
architectural and engineering reports, as well as site visits to properties
representing a majority of the CMBS portfolio. The Company then tested the
historical and projected financial performance of the properties to determine
their resiliency to a market downturn and applied varying capitalization rates
to assess collateral value. To assess the borrower's creditworthiness, the
Company reviewed the borrower's financial statements, credit history, bank
references and managerial experience. The Company purchased Subordinated CMBS
when the loans it believed to be problematic (i.e., that did not meet its
underwriting criteria) were excluded from the CMBS pool, and when satisfactory
13
arrangements existed that enabled the Company to closely monitor the underlying
mortgage loans and provided the Company with appropriate workout and foreclosure
rights.
Employees
As of March 15, 2001, the Company had 37 employees, and CMSLP had 101
employees.
Employee Retention Plan
Upon commencement of the Chapter 11 cases, the Company believed it was
essential to both the efficient operation of the Company's business and the
reorganization effort that the Company maintain the support, cooperation and
morale of its employees. The Company obtained Bankruptcy Court approval to pay
certain pre-petition employee obligations in the nature of wages, salaries and
other compensation and to continue to honor and pay all employee benefit plans
and policies.
In addition, to ensure the Company's continued retention of its executives
and other employees and to provide meaningful incentives for these employees to
work toward the Company's financial recovery and reorganization, the Company's
management and Board of Directors developed a comprehensive and integrated
program to retain its executives and other employees throughout the
reorganization. On December 18, 1998, the Company obtained Bankruptcy Court
approval to adopt and implement an employee retention program (the "Employee
Retention Plan") with respect to all employees of the Company other than certain
key executives. On February 28, 1999, the Company received Bankruptcy Court
approval authorizing it to extend the Employee Retention Plan to the key
executives initially excluded, including modifying existing employment
agreements and entering into new employment agreements with such key executives.
The Employee Retention Plan permitted the Company to approve ordinary course
employee salary increases beginning in March 1999, subject to certain
limitations, and to grant options to its employees after the Petition Date, up
to certain limits. The Employee Retention Plan also provided for retention
payments aggregating up to approximately $3.5 million, including payments to
certain executives. Retention payments were 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 and final retention payment of
approximately $639,000 vested on October 5, 2000, $367,000 of which was paid on
October 13, 2000 and the final payment was made on January 31, 2001. William B.
Dockser, Chairman of the Board of Directors, and H. William Willoughby,
President and Secretary, did not 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. For a discussion of the Employee
Retention Plan as it related to named key executives of the Company, see
"EXECUTIVE COMPENSATION-Employment Agreements."
14
The Portfolio
CMBS
As of December 31, 2000, the Company owned, for purposes of generally
accepted accounting principles ("GAAP"), CMBS rated from A to CCC and unrated
with a total fair value amount of approximately $853 million (representing
approximately 55% of the Company's total consolidated assets), an aggregate
amortized cost of approximately $850 million, and an aggregate face amount of
approximately $1.6 billion. Such CMBS represent investments in CBO-1, CBO-2 and
Nomura Securities Corp. Series 1998-D6 (Nomura). The weighted average pass
through interest rate of these CMBS as of December 31, 2000 was 6.9% and the
weighted average life was 13 years.
The Company's unrated bonds from CBO-1, CBO-2 and Nomura, respectively,
experienced cumulative principal write-downs due to realized losses related to
certain underlying mortgage loans, from inception through March 31, 2001, of
approximately $4.0 million, $4.7 million and $0, respectively. Of the $20
billion and $20.2 billion, respectively, of underlying mortgage loans as of
March 31, 2001 and December 31, 2000, $443.5 million and $310.6 million,
respectively, were included in special servicing. For additional information
regarding the Company's CMBS portfolio and the performance of the underlying
mortgage loans, refer to Note 5 to the Notes to Consolidated Financial
Statements.
Insured Mortgage Securities
As of December 31, 2000 and 1999, the Company had $385.8 million
(representing approximately 25% of the Company's total consolidated assets) and
$394.9 million (at fair value), respectively, invested in mortgage securities,
consisting of GNMA Mortgage-Backed Securities and FHA-Insured Certificates, as
well as Freddie Mac participation certificates that are collateralized by GNMA
Mortgage-Backed Securities. As of December 31, 2000, approximately 16% of
CRIIMI MAE's investment in mortgage securities were FHA-Insured Certificates and
84% were GNMA Mortgage-Backed Securities (including certificates that
collateralize Freddie Mac participation certificates). See Notes 3 and 6 to the
Notes to Consolidated Financial Statements for further discussion.
Equity Investments
As of December 31, 2000 and 1999, the Company had approximately $33.8
million and $34.9 million, respectively, in investments accounted for under the
equity method of accounting. Included in equity investments are (a) the general
partnership interests (2.9% to 4.9% ownership interests) in American Insured
Mortgage Investors, American Insured Mortgage Investors-Series 85, L.P.,
American Insured Mortgage Investors L.P.-Series 86 and American Insured Mortgage
Investors L.P.-Series 88 (collectively the "AIM Funds"), owned by CRIIMI, Inc.,
a wholly owned subsidiary of CRIIMI MAE, (b) a 20% limited partnership interest
in the adviser to the AIM Funds, 50% of which is owned by CRIIMI MAE and 50% of
which is owned by CM Management, (c) CRIIMI MAE's interest in CRIIMI MAE
Services, Inc., and (d) CRIIMI MAE's interest in CMSLP. See Note 3 to the Notes
to Consolidated Financial Statements for further discussion.
Investment in Originated Loans
As of December 31, 2000 and 1999, the Company had $0 and $470.2 million
(at amortized cost), respectively, invested in commercial mortgage loans
primarily originated through the Company's mortgage loan conduit programs and
subsequently securitized in CMO-IV. The loans were sold as of November 6, 2000
and as such are no longer on the balance sheet. See "BUSINESS-Loan Originations
and Securitizations" and Notes 3 and 7 to the Notes to Consolidated Financial
Statements for further discussion.
15
Risk Factors
The risk factors enumerated below (other than "Risks Relating to the
Necessary New Debt"), generally assume consummation of the Reorganization Plan.
Risks Relating to the Necessary New Debt
Consummation of the Reorganization Plan is conditioned upon, among other
matters, the Company obtaining the New Debt. Although the Company has agreed to
terms with respect to the New Debt and is currently finalizing definitive
documentation for the New Debt, there can be no assurance that the Company will
obtain the New Debt and, if obtained, be able to satisfy all terms and
conditions of the New Debt.
Substantial Indebtedness; Leverage
The Company is now highly leveraged and will continue to be highly
leveraged after giving effect to the Reorganization Plan. As of December 31,
2000, the Company's total consolidated indebtedness was $1.2 billion, (of which
$559 million was recourse debt to the Company (i.e. not match-funded debt)). As
of December 31, 2000, the Company's stockholders' equity was $268 million. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS" and the
Consolidated Financial Statements of the Company and the accompanying notes
thereto.
Assuming the Reorganization Plan becomes effective, there can be no
assurance that the Company will have sufficient cash resources to pay interest,
scheduled principal and any other required payments on its outstanding
indebtedness for any specified period of time. If the Reorganization Plan is
consummated, the Company's ability to meet its debt service obligations will
depend on a number of factors, including management's ability to maintain cash
flow (which is impacted by, among other things, the credit performance of the
underlying mortgage loans) and to generate capital internally from operating and
investing activities and expected reductions in REIT distribution requirements
to shareholders due to expected net operating losses for tax purposes, in each
case consistent with the terms agreed to with Merrill and GACC and the Unsecured
Creditors' Committee as set forth in the Reorganization Plan. There can be no
assurance that targeted levels of cash flow will actually be achieved, that
reductions in REIT distribution requirements will be realized, or that, if
required, new capital will be available to the Company. The Company's ability to
maintain or increase cash flow and access new capital will depend upon, among
other things, interest rates, prevailing economic conditions and other factors,
many of which are beyond the control of the Company.
The Company's high level of debt limits its ability to obtain additional
capital, reduces income available for distributions, restricts the Company's
ability to react quickly to changes in its business and makes the Company more
vulnerable to economic downturns. In addition, the agreements governing the New
Debt may impose significant operating and financial restrictions on the Company.
See Note 1 and Note 8 to the Notes to Consolidated Financial Statements.
Borrowing Risks
A substantial portion of the Company's borrowings is, and is expected to
continue to be, in the form of collateralized borrowings. The terms of the New
Debt contemplated to be provided by Merrill and GACC will be collateralized by
first-priority liens and security interests in certain assets, and will be
subject to a number of terms, conditions and restrictions including, without
limitation, scheduled principal and interest payments, accelerated principal
payments and restrictions and requirements with respect to the collection,
management, use and application of funds. Certain events, including, without
limitation, the failure to satisfy certain payment obligations will result in
further restrictions on the ability of the Company to take certain actions
including, without limitation, to pay cash dividends to preferred or common
shareholders. The unsecured creditor New Debt will be collateralized by first or
second priority liens or security interests in certain assets or proceeds, and
will be subject to a number of terms, conditions and restrictions including,
without limitation, scheduled principal and interest payments, and restrictions
and requirements with respect to the use of funds.
16
A substantial portion of the Company's borrowings are, and a limited
portion of the Company's borrowings in the future, if CMBS acquisitions are
resumed, may be, in the form of collateralized, short-term floating-rate secured
borrowings. The amount borrowed under such agreements is typically based on the
market value of the CMBS pledged to secure specific borrowings. Under adverse
market conditions, the value of pledged CMBS would decline, and lenders could
initiate margin calls (in which case the Company could be required to post
additional collateral or to reduce the amount borrowed to restore the ratio of
the amount of the borrowing to the value of the collateral). The Company may be
required to sell CMBS to reduce the amount borrowed. If these sales were made
at prices lower than the carrying value of the CMBS, the Company would
experience losses.
A default by the Company under its collateralized borrowings could result
in a liquidation of the collateral. If the Company is forced to liquidate CMBS
that qualify as qualified real estate assets (under the REIT Provisions of the
Internal Revenue Code) to repay borrowings, there can be no assurance that it
will be able to maintain compliance with the REIT Provisions of the Internal
Revenue Code regarding asset and source of income requirements.
Limited Protection from Hedging Transactions
To minimize the risk of interest rate increases on interest expense as it
relates to its short-term, variable-rate debt, the Company follows a policy to
hedge at least 75% of the principal amount of its variable-rate debt with
interest rate protection agreements in order to provide a ceiling on the amount
of interest expense payable by the Company. As of December 31, 2000, 93% of the
Company's outstanding variable-rate debt was hedged with interest rate
protection agreements that partially limit the impact of rising interest rates
above a certain defined threshold, or strike price. When these interest rate
protection agreements expire, the Company will have increased interest rate risk
unless it is able to enter into replacement interest rate protection agreements.
As of December 31, 2000, the weighted average remaining term for the interest
rate protection agreements was approximately four months with a weighted average
strike price of 6.67%. The highest rate for one-month LIBOR during 2000 was
6.80%. In February 2001, the Company purchased a 2-year, 1-month LIBOR indexed,
amortizing interest cap with an original notional amount of $200 million and a
strike price of 5.25%, which was purchased to hedge the variable rate
Merrill/GACC anticipated New Debt. There can be no assurance that the Company
will be able to maintain interest rate protection agreements to meet its hedge
policy on satisfactory terms or to adequately protect against rising interest
rates on the Company's debt. During 2000 and 1999, the Company did not hedge
against interest rate risks, including increases in interest rate spreads and
increases in Treasury rates, which adversely affect the value of its CMBS.
Moreover, hedging involves risk and typically involves costs, including
transaction costs. Such costs increase dramatically as the period covered by
the hedging increases and during periods of rising and volatile interest rates.
The Company expects to increase its hedging activity in connection with the
Merrill/GACC New Debt and, thus, increase its hedging costs during such periods.
Risks of Owning Subordinated CMBS
As an owner of the most subordinate tranches of CMBS, the Company will be
the first to bear any loss and the last to have a priority right to the cash
flow of the related mortgage pool. For example, if the Company owns a $10
million subordinated interest in an issuance of CMBS consisting of $100 million
of mortgage loan collateral, a 7% loss on the underlying mortgage loans will
result in a 70% loss on the subordinated interest.
The Company's Subordinated CMBS can change in value due to a number of
economic factors. These factors include changes in the underlying real estate,
fluctuations in Treasury rates, and supply/demand mismatches which are reflected
in CMBS pricing spreads. For instance, changes in the credit quality of the
properties securing the underlying mortgage loans can result in interest payment
shortfalls, to the extent there are mortgage payment delinquencies, and
principal losses, to the extent that there are payment defaults and the amounts
are not fully recovered. These losses may result in a permanent decline in the
value of the CMBS, and the losses may change the Company's anticipated yield to
maturity if the losses are in excess of those previously estimated. CMBS are
priced at a spread above the current Treasury security with a maturity that most
closely matches the CMBS' weighted average life. The value of CMBS can be
affected by changes in Treasury rates, as well as changes in the spread between
such CMBS and the Treasury security with a comparable maturity. For example,
the spread to Treasury of a CMBS may have increased from 400 basis points to 500
basis points. If the Treasury security with a comparable maturity had a
constant yield of 5% then, in this example, the yield on the CMBS would have
changed from 9% to
17
10% and accordingly, the value of such CMBS would have declined. Generally,
increases and decreases in both Treasury rates or spreads will result in
temporary changes in the value of the Subordinated CMBS assuming that the
Company has the ability and intent to hold its CMBS investments until maturity.
However, such temporary changes in the value of Subordinated CMBS become
permanent changes realized through the income statement when the Company no
longer intends or fails to have the ability to hold such Subordinated CMBS to
maturity or expected credit losses are greater than originally anticipated. The
Company has historically been unable to obtain financing at the time of
acquisition that matches the maturity of the related investments, resulting in a
periodic need to obtain short-term financing secured by the Company's CMBS. The
inability to refinance this short-term floating-rate financing with long-term
fixed-rate financing or a decline in the value of the collateral securing such
short-term floating-rate indebtedness could result in a situation where the
Company is required to sell CMBS or provide additional collateral, which could
have, and has had, an adverse effect on the Company and its financial position
and results of operations. The Company's ability to borrow amounts in the future
may be impacted by, among other things, the credit performance of the underlying
pools of commercial mortgage loans, and other factors affecting the Subordinated
CMBS that it owns. (See Note 5 to the Notes to Consolidated Financial Statements
and Management's Discussion and Analysis of Financial Condition and Results of
Operations for information regarding the performance of the underlying
commercial mortgage loans.)
Limited Liquidity of Subordinated CMBS Market
There is currently no active secondary trading market for Subordinated
CMBS. This limited liquidity results in uncertainty in the valuation of the
Company's portfolio of Subordinated CMBS. In addition, even if the market for
Subordinated CMBS recovers, the liquidity of such market has historically been
limited; and furthermore, during adverse market conditions the liquidity of such
market has been severely limited, which would impair the amount the Company
could realize if it were required to sell a portion of its Subordinated CMBS.
Effect of Economic Slowdown and/or Recession on Losses and Defaults
Economic slowdown and/or recession has resulted in defaults on and may
continue to increase the risk of further defaults on commercial mortgage loans
and correspondingly increase losses and the risk of further losses on the
Subordinated CMBS backed by such loans. An economic recession may also cause the
values of commercial real estate securing the outstanding mortgage loans to
decline, weakening collateral coverage and increasing the possibility of losses
in the event of a default. In addition, an economic recession may cause reduced
demand for commercial mortgage real estate securing the mortgage loans (See Note
5 to the Notes to Consolidated Financial Statements and Management's Discussion
and Analysis of Financial Condition and Results of Operations for information
regarding the performance of the underlying commercial loans).
Results of Operations Adversely Affected by Factors Beyond Company's
Control
The Company's results of operations can be adversely affected by various
factors, many of which are beyond the control of the Company, and will depend
on, among other things, the level of net interest income generated by, and the
market value of, the Company's CMBS portfolio. The Company's net interest
income and results of operations will vary primarily as a result of fluctuations
in interest rates, CMBS pricing, and borrowing costs. The Company's results of
operations also will depend upon the Company's ability to protect against the
adverse effects of such fluctuations as well as credit risks. Interest rates,
credit risks, borrowing costs and credit losses depend upon the nature and terms
of the CMBS, conditions in financial markets, the fiscal and monetary policies
of the U.S. government, international economic and financial conditions and
competition, none of which can be predicted with any certainty. Because changes
in interest rates may significantly affect the Company's CMBS and other assets,
the operating results of the Company will depend, in large part, upon the
ability of the Company to manage its interest rate and credit risks effectively
while maintaining its status as a REIT. See "BUSINESS-Risk Factors-Limited
Protection from Hedging Transactions" for further discussion.
While the Company may resume more significant Subordinated CMBS
acquisitions and, possibly, its mortgage origination and securitization programs
at some time in the future based on the Company's ability to access capital,
prevailing industry conditions and the general business climate, and subject to
all applicable restrictions contained in financing agreements, there can be no
assurance of such resumption. All decisions concerning resumption of business
activities will be made by the Board of Directors of the Company, as determined
to be in the best interests of the Company. Consequently, there can be no
certainty as to the business decisions that will be made by the Board of
Directors of the Company. Failure to resume Subordinated CMBS acquisitions,
mortgage originations and/or securitizations could adversely impact the
Company's results of operations.
18
Shape of the Yield Curve Adversely Affects Income
The relationship between short-term and long-term interest rates is often
referred to as the "yield curve." Ordinarily, short-term interest rates are
lower than long-term interest rates. If short-term interest rates rise
disproportionately relative to long-term interest rates (a flattening of the
yield curve), the borrowing costs of the Company may increase more rapidly than
the interest income earned on its assets. Because borrowings will likely bear
interest at short-term rates (such as LIBOR) and CMBS will likely bear interest
at medium-term to long-term rates (such as those calculated based on the Ten-
Year U.S. Treasury Rate), a flattening of the yield curve will tend to decrease
the Company's net income, assuming the Company's short-term borrowing rates bear
a strong relationship to short-term Treasury rates. Additionally, to the extent
cash flows from long-term assets are reinvested in other long-term assets, the
spread between the coupon rates of long-term assets and short-term borrowing
rates may decline and also may tend to decrease the net income and mark-to-
market value of the Company's net assets. It is also possible that short-term
interest rates may adjust relative to long-term interest rates such that the
level of short-term rates exceeds the level of long-term rates (a yield curve
inversion). In this case, as well as in a flat or slightly positively sloped
yield curve environment, borrowing costs could exceed the interest income and
operating losses would be incurred.
Phantom Income May Result in Tax Liability
The Company's investment in Subordinated CMBS and certain other types of
mortgage related assets may cause it, under certain circumstances, to recognize
taxable income in excess of its economic income ("phantom income") and to
experience an offsetting excess of economic income over its taxable income in
later years. As a result, stockholders, from time to time, may be required to
treat distributions that economically represent a return of capital as taxable
dividends. Such distributions would be offset in later years by distributions
representing economic income that would be treated as returns of capital for
federal income tax purposes. Accordingly, if the Company recognizes phantom
income, its stockholders may be required to pay federal income tax with respect
to such income on an accelerated basis (i.e., before such income is realized by
the stockholders in an economic sense). Taking into account the time value of
money, such an acceleration of federal income tax liabilities would cause
stockholders to receive an after-tax rate of return on an investment in the
Company that would be less than the after-tax rate of return on an investment
with an identical before-tax rate of return that did not generate phantom
income. As the ratio of the Company's phantom income to its total income
increases, the after-tax rate of return received by a taxable stockholder of the
Company will decrease.
Effect of Rate Compression on Market Price of Stock
The Company's actual earnings performance as well as the market's
perception of the Company's ability to achieve earnings growth may affect the
market price of the Company's common stock. In the Company's case, the level of
earnings (or losses) depends to a significant extent upon the width and
direction of the spread between the net yield received by the Company on its
income-earning assets (principally, the long term, fixed-rate assets comprising
its CMBS portfolio) and its floating rate cost of borrowing. In periods of
narrowing or compressing spreads, the resulting pressure on the Company's
earnings may adversely affect the market value of its common stock. Spread
compression can occur in high or low interest rate environments and typically
results when net yield on the long term assets adjusts less frequently than the
current rate on debt used to finance their purchase. For example, if the
Company relies on short term, floating rate borrowings to finance the purchase
of long term fixed-rate CMBS assets, the Company may experience rate
compression, and a resulting diminution of earnings, if the interest rate on the
debt increases while the coupon and yield measure for the financed CMBS remain
constant. In such an event, the market price of the common stock may decline to
reflect the actual or perceived decrease in value of the Company resulting from
the spread compression. In an effort to mitigate this risk, the Company as a
matter of policy generally hedges at least 75% of the principal amount of its
variable-rate debt with interest-rate protection agreements to protect interest
cash flow against a significant rise in interest rates.
Risk of NYSE Delisting
On January 11, 2001, the Company received written notice from the New York
Stock Exchange that it was "below criteria" for continued listing on the
Exchange because the average closing price of its common stock was less than $1
over a consecutive thirty (30) trading-day period. The Company has six (6)
months from January 11,
19
2001 to raise its common stock price above the $1 level and the failure of the
common stock to average $1 over the 30 trading days preceding the expiration of
the six (6) month cure period will result in commencement of suspension and
delisting procedures.
Risks of Loss of REIT Status and Other Tax Matters
See "BUSINESS-Chapter 11 Filing and REIT Status and Other Tax Matters" for
a discussion.
Risks Associated with Trader Election
On March 15, 2000, the Company determined to elect mark-to-market treatment
as a securities trader for 2000. See "BUSINESS-Risk of Loss of REIT Status and
Other Tax Matters" for further discussion. There is no assurance, however, that
the Company's election will not be challenged on the ground that it is not in
fact a trader in securities, or that the Company is only a trader with respect
to some, but not all, of its securities. As such, there is a risk that the
Company will be limited in its ability to recognize certain losses if it is not
able to mark-to-market its securities.
The election to be treated as a trader will result in net operating losses
("NOLs") that generally may be carried forward for 20 years. The Company
believes it is possible it could experience an "ownership change" within the
meaning of Section 382 of the Code. Consequently, its use of NOLs generated
before the ownership change to reduce taxable income after the ownership change
may be subject to limitation under Section 382. Generally, the use of NOLs in
any year is limited to the value of the Company's stock on the date of the
ownership change multiplied by the long-term tax exempt rate (published by the
IRS) with respect to that date.
For the year 2000 and subsequent years, taxable income (loss) is, and will
likely be, different from the net income (loss) as calculated according to GAAP
as a result of, among other things, differing treatment of the unrealized gains
and losses on securities transactions as well as other timing differences. For
the Company's tax purposes, unrealized gains (losses) will be recognized at the
end of the year and will be aggregated with operating gains (losses) to produce
total taxable income (loss) for the year.
Failure to Manage Mismatch Between Long-Term Assets and Short-Term Funding
The Company's operating results will depend in large part on differences
between the income from its CMBS and its borrowing costs. If the Company
resumes the acquisition of Subordinated CMBS, the Company intends to fund a
significant portion of its CMBS with borrowings having interest rates (i.e.,
borrowing rates) that reset more frequently, usually monthly or quarterly. If
interest rates rise, borrowing rates (and borrowing costs) of the Company are
expected to rise more quickly that coupon rates (and investment income) on the
Company's CMBS. This would decrease both the Company's net income, potentially
resulting in a net loss, and the mark-to-market value of the Company's net
assets, and would be expected to decrease the market price of the Company's
common stock and to slow future acquisitions of assets. Although the Company
intends to invest primarily in fixed-rate CMBS, the Company also may own
adjustable rate CMBS. The coupon rates of adjustable rate CMBS normally
fluctuate with reference to specific rate indices. The Company may fund these
adjustable rate CMBS with borrowings having borrowing rates which reset monthly
or quarterly. To the extent that there is a difference between (i) the interest
rate index used to determine the coupon rate of the adjustable rate CMBS (asset
index) and (ii) the interest rate index used to determine the borrowing rate for
the Company's related financing (borrowing index), the Company will bear a
"basis" interest rate risk. Typically, if the borrowing index rises more than
the asset index, the net income of the Company would be decreased all other
things being constant. Additionally, the Company's adjustable rate CMBS may be
subject to periodic rate adjustment limitations and periodic and lifetime rate
caps which limit the amount that the coupon rate can change during any given
period. No assurance can be given as to the amount or timing of changes in
interest rates or their effect on the Company's CMBS, their valuation or income
derived therefrom. During periods of changing interest rates, coupon rate and
borrowing rate mismatches could negatively impact the Company's net income,
distributions and the market price of the common stock.
Competition
20
If the Company resumes the acquisition of Subordinated CMBS following its
reorganization, the Company would compete with mortgage REITs, specialty finance
companies, banks, hedge funds, investment banking firms, other lenders, and
other entities purchasing Subordinated CMBS. Many of the Company's competitors
for Subordinated CMBS may have greater access to capital and other resources (or
the ability to obtain capital at a lower cost) and may have other advantages
over the Company.
There can be no assurance that the Company would be able to obtain
financing at borrowing rates below the asset yields of its Subordinated CMBS.
In such event, the Company may incur losses or may be forced to further reduce
the size of its Subordinated CMBS portfolio. The Company would face competition
for financing sources which may limit the availability of, and affect the cost
of, funds to the Company.
Taxable Mortgage Pool Risks
See "BUSINESS-Chapter 11 Filing and REIT Status and Other Tax Matters" for
a discussion.
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 constitute Qualifying Interests. In accordance with current
SEC staff interpretations, the Company believes that all of its Subordinated
CMBS constitute Other Real Estate Interests and that [certain] of its
Subordinated CMBS also constitute Qualifying Interests. On certain of the
Company's Subordinated CMBS, the Company, along with other rights, has the
unilateral right to direct foreclosure with respect to the underlying mortgage
loans. Based on such rights and its economic interest in the underlying mortgage
loans, the Company believes that the related Subordinated CMBS constitute
Qualifying Interests. As of December 31, 2000, the Company believes that it was
in compliance with the 55% Requirement. In the fourth quarter of 2000, the
Company fell below the 25% Requirement in a transient manner by approximately
one half of one percent due to accumulated cash required to be retained while
the Company is in Chapter 11. The Company's retention of cash in this regard was
incidental to its approved Reorganization Plan and the effectuation thereof.
Upon distributions of cash on the effective date of the Reorganization Plan,
expected to be April 17, 2001, to holders of allowed claims entitled to receive
cash, the Company believes it will exceed 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, unless the
court found under the circumstances enforcement (or denial of rescission) would
produce a more equitable result than nonenforcement (or grant of rescission) and
would not be inconsistent with the Investment Company Act. 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
21
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.
Pending Litigation
The Company is involved in certain material litigation. See "Item 3-LEGAL
PROCEEDINGS" for descriptions of such litigation and other legal proceedings.
ITEM 2. PROPERTIES
CRIIMI MAE leases its corporate offices at 11200 Rockville Pike, Rockville,
Maryland. As of March 15, 2001, these offices occupy approximately 68,500
square feet.
ITEM 3. LEGAL PROCEEDINGS
Bankruptcy Proceedings
On the Petition Date, the Debtors each filed voluntary petitions for relief
under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. These cases
are being jointly administered for procedural purposes. None of the cases has
been substantively consolidated. Under the Bankruptcy Code, the Debtors are
authorized to manage their respective affairs and operate their business 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.
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 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 participated in the formation of the
Reorganization Plan. 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
22
acceptances of the plan. If a debtor-in-possession fails to file a plan during
the exclusivity period or such additional exclusivity period as may be ordered
by the Bankruptcy Court or, after such plan has been filed, fails to obtain
acceptance of such plan from impaired classes of creditors and equity security
holders during the exclusive solicitation period, any party in interest,
including a creditors' committee, an equity security holders' committee, a
creditor or an equity security holder may file a plan of reorganization for such
debtor. Additionally, if the Bankruptcy Court were to appoint a trustee, the
exclusivity period, if not previously terminated, would terminate.
The Debtors' initial exclusivity period to file a plan of reorganization
ended on February 2, 1999. The Bankruptcy Court extended this period through
August 2, 1999 and again through September 10, 1999. The Debtors sought a third
extension of exclusivity through November 10, 1999 and on September 20, 1999,
the Bankruptcy Court entered an order (i) extending the Debtors' right to file a
plan of reorganization through October 16, 1999, (ii) providing the Unsecured
Creditors' Committee and the CMI Equity Committee the right to jointly file a
plan of reorganization through October 16, 1999 and (iii) providing that any
party in interest may file a plan of reorganization after October 16, 1999. The
Debtors filed (i) a Joint Plan of Reorganization on September 22, 1999, (ii) an
Amended Joint Plan of Reorganization and proposed Joint Disclosure Statement on
December 23, 1999, (iii) a Second Amended Joint Plan of Reorganization and
proposed Amended Joint Disclosure Statement on March 31, 2000, and (iv) a Third
Amended Joint Plan of Reorganization and proposed Second Amended Joint
Disclosure Statement with respect thereto on April 25, 2000, which plan and
disclosure statement were amended and supplemented by praecipes filed with the
Bankruptcy Court on July 13, 14, 21, August 18, and November 22, 2000. The
Debtors' Third Amended Joint Plan of Reorganization is fully supported by the
CMI Equity Committee, which was a co-proponent of the Reorganization Plan.
Subject to the completion of mutually acceptable Unsecured Creditor Debt
Documentation, the Unsecured Creditors' Committee has agreed to support
confirmation of the Debtors' Reorganization 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 supported confirmation of the Debtors' Reorganization Plan
and asked the Bankruptcy Court to defer consideration of its plan pending
approval of the Debtors' Reorganization Plan and the completion of mutually
acceptable Unsecured Creditor Debt Documentation. Accordingly, the Debtors, the
CMI Equity Committee and the Unsecured Creditors' Committee together presented
the Debtors' Reorganization 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 resulted in the dismissal of
all outstanding litigation between the parties.
The Bankruptcy Court scheduled a hearing on August 23, 2000 with respect to
the proposed ballots submitted to the Bankruptcy Court to be sent to members of
all classes of impaired creditors and equity security holders in connection with
the Reorganization Plan. On August 24, 2000, the Bankruptcy Court entered an
order approving the proposed Disclosure Statement and other proposed
solicitation materials. The Bankruptcy Court scheduled a confirmation hearing
on the Reorganization Plan for November 15, 2000 and set September 5, 2000 as
the voting record date for determining the holders of common stock, preferred
stock, 9 1/8% senior notes and general unsecured creditors entitled to vote to
accept or reject the Reorganization Plan. The Company distributed copies of the
Reorganization Plan, the Disclosure Statement and other solicitation materials,
including ballots during the week of September 10, 2000 to members of all
classes of impaired creditors and all equity security holders for acceptance or
rejection. All impaired classes which voted on the Reorganization Plan voted
overwhelmingly to accept the Reorganization Plan.
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On November 22, 2000, the Bankruptcy Court entered an order (the
"Confirmation Order") confirming the Reorganization 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
Reorganization 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 Reorganization Plan or is not impaired under the plan, and
(iii) confirmation of the Reorganization 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
Reorganization Plan. The Confirmation Order stated that the effective date of
the Reorganization Plan shall occur no later than March 15, 2001 or such later
date as may be (i) agreed to by the Debtors, Merrill Lynch, GACC, the Unsecured
Creditors' Committee, the CMM Creditors' Committee and the CMI Equity Committee
and approved by the Bankruptcy Court, or (ii) extended by further order of the
Bankruptcy Court upon notice and a hearing (each party reserving its right to
support or oppose any such extension).
On March 9, 2001, the Bankruptcy Court, after notice and a hearing,
approved an extension of the effective date of the Reorganization Plan to April
13, 2001, and on April 13, 2001, the Bankruptcy Court approved a further
extension of the effective date of the Reorganization Plan until April 17, 2001.
The Company expects to sign all remaining closing documents, disburse funds, and
consummate the effective date by April 17, 2001. However, there can be no
assurance that the Company will emerge by such date.
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 all but one creditor, 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 the Reorganization Plan.
On September 7, 1999, the Company filed a Motion to Approve Stipulation and
Consent Order Providing for Adequate Protection. On or about September 27,
1999, the Unsecured Creditors' Committee and the CMI Equity Committee filed a
joint objection to the Motion. On December 3, 1999, the Bankruptcy Court
entered the Stipulation and Consent Order Providing For Adequate Protection (the
"Adequate Protection Order"), certain provisions of which were effective
retroactively. Pursuant to the Adequate Protection Order, a segregated interest
bearing debtor-in-possession account was created (the "Cash Collateral Account")
into which the Company's Distribution Share was deposited during the months of
August through December 1999. An additional 50 percent 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
24
continue to be deposited into such account through the effective date of the
Reorganization Plan. The Adequate Protection Order provides Merrill Lynch with a
first priority lien on the Cash Collateral Account. (See Note 1 to the Notes to
Consolidated Financial Statements for information with respect to the New Debt
anticipated to be provided by affiliates of Merrill Lynch and GACC pursuant to
the Reorganization Plan.)
Citicorp and Citibank
In addition to the Citibank Program pursuant to which the Company
originated loans, as previously discussed, the Company also has a financing
arrangement with Citicorp pursuant to which the Company pledged CMBS.
On October 13, 1998, Citicorp demanded from Norwest Bank Minnesota, N.A.
("Norwest") the immediate transfer of certain CMBS (the "Retained Bonds") issued
pursuant to CMO-IV. Norwest served as indenture trustee. The Retained Bonds
are collateral for amounts advanced to the Company by Citicorp under the
financing arrangement. As of the Petition Date, the Company owed Citicorp $79.1
million under the facility.
On October 15, 1998, the Company filed an emergency motion to enforce the
automatic stay against Norwest and Citicorp. Pursuant to an Order dated October
23, 1998, the Bankruptcy Court prohibited Citicorp from selling the Retained
Bonds without further order of the Bankruptcy Court. On October 23, 1998,
Citicorp requested an emergency hearing regarding the October 23 Order, and on
November 2, 1998, the Company filed a complaint against Citicorp seeking, among
other things, a declaratory judgment as to whether the automatic stay applies to
actions taken by Citicorp with respect to the Retained Bonds.
On March 11, 1999, the Company finalized agreements with Citicorp and
Citibank, pursuant to which the parties agreed to adjourn the pending litigation
for a four-month period. The Bankruptcy Court agreed to a request by CRIIMI
MAE, Citibank, and the Unsecured Creditors' Committee to further postpone the
pending litigation on July 7, 1999 and again on September 10, 1999. The trial
was not rescheduled due to a settlement reached among the parties, the terms of
which are described below.
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 were
held in an account controlled by the Bankruptcy Court. In January 2001,
proceeds from this account were released to the Company.
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
Reorganization 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
25
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 December 31, 2000.
On September 21, 2000, CRIIMI MAE, SSB, GACC, ORIX, the CMI Equity
Committee and the Unsecured Creditors' Committee filed a Stipulation and Consent
Order (the "Stipulation and Consent") with the Bankruptcy Court providing for,
among other matters, the terms of an agreement with respect to the sale of the
Company's interest in CMO-IV and certain other CMBS to ORIX. On October 12,
2000, an order was entered by the Bankruptcy Court approving the Stipulation and
Consent. On October 30, 2000, the Court entered an amendment to the Stipulation
and Consent with respect to the agreed proceeds in connection with the sale to
ORIX (the "Order"). Pursuant to the Stipulation and Consent as amended by the
Order, the Company sold its interest in CMO-IV and certain other CMBS to ORIX.
The CMI Equity Committee and Unsecured Creditors' Committee are deemed to have
agreed to such sale. The sale was completed on November 6, 2000 resulting in
total proceeds of approximately $189 million. The proceeds were used to pay off
$141 million of financing owed to SSB and $4 million to Citicorp Real Estate,
Inc. in full satisfaction of all asserted and unasserted claims of such
claimants. Additionally, approximately $14.2 million of the proceeds were used
to pay down secured financing provided by GACC. The Company will use the net
proceeds of approximately $30 million to help fund the Reorganization Plan.
First Union
First Union, a creditor of both the Company and CM Management, is asserting
substantial secured and unsecured claims. On or about March 23, 1999, First
Union filed in each of the Company's and CM Management's Chapter 11 cases a
motion for relief from the automatic stay pursuant to section 362(d) of the
United States Bankruptcy Code. On or about March 26, 1999, First Union
requested that the Court dismiss without prejudice both motions. On April 20,
1999, First Union refiled its motions for relief from the automatic stay. The
hearing was originally scheduled for May 14, 1999, but has been adjourned by
consent.
On or about July 1, 1999, the Company entered into an agreement with First
Union resolving its motion for relief from the automatic stay and authorizing
use of First Union's cash collateral. The agreement provides for the following:
(i) First Union has a valid, perfected, first priority security interest
in certain assignment securities and the assignment securities income
constitutes First Union's cash collateral;
(ii) First Union shall receive adequate protection payments of post-
petition interest at the non-default contract rate plus payments to
be applied to principal equal to 50% of the difference between the
assignment income and the Company's non-default contract interest
obligation. First Union has the option of using a portion of the
assignment income earmarked for principal to purchase a hedging
program;
(iii) The Company shall be entitled to use the assignment income not paid
to First Union in the ordinary course of its business subject to
certain limitations; and
(iv) First Union shall not seek relief from the automatic stay in the
Company's Chapter 11 case to foreclose upon the assignment securities
and/or the assignment income and none of the Company, the Unsecured
Creditors' Committee, the CMI Equity Committee or First Union shall
seek modification of the adequate protection arrangements set forth
in the agreement for a period commencing upon the date which the
Bankruptcy Court approves the agreement and terminating on December
31, 1999, subject to certain exceptions.
The agreement was approved and entered by the Bankruptcy Court on August 5,
1999. The Company's Unsecured Creditors' Committee consented to the agreement
with First Union.
26
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.
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 to help fund the
Reorganization Plan.
First Union has asserted a first priority security interest in certain
bonds that are or were in its possession, and the distributions made on those
bonds since the Petition Date, pursuant to a custodian agreement dated as of
October 10, 1997 by and between the Company and First Union. The Company
disputes First Union's claim to a security interest in those bonds and the
distributions made thereon. The bonds in issue are (i) the Morgan Stanley
Capital, Series 1998-WF2 Class N bond (the "Morgan N Bond"), (ii) the Chase
Commercial Mortgage, Series 1998-1 Class J bond (the "Chase J Bond"), and (iii)
the Nomura Asset Securitization Corporation, Series 1998-D6 Class B7 bond (the
"Nomura N Bond", collectively with the Morgan N Bond and the Chase J Bond, the
"Bonds"). The Morgan N Bond has been sold, and certain proceeds from the sale
thereof are being held in a segregated account in the name of First Union
pending further order of the Bankruptcy Court and resolution of the claim of
First Union thereto. On August 7, 2000, the Company sold certain CMBS to GACC
for approximately $43.8 million. The Chase J Bond composed part of the CMBS
sold to GACC. The proceeds received from the sale related to the Chase J Bond
were deposited in a segregated account in the name of First Union pending
resolution of First Union's claim of a security interest in the bonds. See
"Bankruptcy Litigation-Arrangements with Other Creditors" for further discussion
of the sale of certain CMBS to GACC.
Because the issues between First Union and the Company could not be
resolved consensually, First Union commenced an adversary proceeding against the
Company on September 6, 2000 by filing a complaint in the Bankruptcy Court
seeking a determination that it has a first priority perfected security interest
in the Bonds and the distributions made on the Bonds. On October 6, 2000, the
Company answered First Union's complaint and asserted
27
counterclaims against First Union, seeking turnover of the Bonds and damages for
conversion, breach of contract, and breach of fiduciary duty. On October 25,
2000, First Union filed an answer to the Company's counterclaims. Thereafter, on
November 1, 2000, First Union filed a motion for summary judgment.
The Company filed a cross-motion for summary judgment on November 17, 2000.
The parties are continuing to conduct discovery in the case. The Bankruptcy
Court has not set a hearing date for the motion and cross-motion for summary
judgment or a trial date on the complaint and counterclaim.
On March 9, 2001, the Company filed a motion to substitute and value
alleged cash collateral wherein it asked the Bankruptcy Court to (i) value the
Nomura N Bond at $8.7 million, (ii) require First Union to turn over the Nomura
N Bond to the Company, and (iii) authorize the Company to deposit an amount
equal to the value of the Nomura N Bond in a segregated interest bearing account
pending resolution of the complaint and counterclaim. The Company and First
Union subsequently reached an agreement regarding resolution of the motion to
substitute and value alleged cash collateral. On March 28, 2001, the Bankruptcy
Court approved and entered a Stipulation and Agreed Order (a) directing transfer
of the Nomura N Bond to the Company free and clear of alleged liens and
encumbrances, (b) valuing the Nomura N Bond at $8.7 million, and (c) authorizing
the Company to deposit the sum of $8.7 million in a segregated, interest bearing
account or other investment of funds acceptable to the Company and First Union
pending resolution of the complaint and counterclaim. Accordingly, in April
2001, $8,700,000 was transferred to such segregated account.
If First Union's claim with respect to the Bonds and/or the distributions
made on the Bonds is determined to be an Allowed Secured Claim, such Claim will
be treated as part of Class A2 under the Plan. If First Union's Claim is
determined to be an unsecured claim, it will be included in the Claims subject
to Class A10 under the Plan. However, until the Court allows First Union's
claim as either a secured or unsecured claim, First Union will not be entitled
to any distribution on its claim.
If the First Union litigation is not settled or resolved on or prior to the
effective date of the Reorganization Plan, the Company will, based on the amount
of First Union's claim, as of April 13, 2001, escrow approximately (a) $5.4
million in cash, (b) $7.9 million in Series A Senior Secured Notes, and (c) $4.6
million in Series B Senior Secured Notes on the effective date. These amounts
will be released to First Union, if the Bankruptcy Court determines that First
Union's Claim is unsecured and, therefore, are to be included in the Claims
subject to Class A10 under the Reorganization Plan. If the Bankruptcy Court
determines that First Union's Claim is secured, and thus, is to be treated as
part of Class A2 under the Reorganization Plan, then the approximately $15.8
million, as of April 13, 2001, held in a segregated account at First Union will
be released to First Union, and the balance of their claim will be treated as
part of Class A10 under the Reorganization Plan.
Arrangements with Other Creditors
In addition to the foregoing, the Company had discussions with other
secured creditors against whom the Company was not engaged in litigation. One
such creditor is GACC. On February 3, 1999, the Bankruptcy Court approved an
Amended Consent Order between the Company and GACC that provides for the
following: (i) acknowledgement that GACC has a valid perfected security interest
in its collateral; (ii) authority for GACC to hedge its loan, subject to a hedge
cost cap; and (iii) as adequate protection, the sharing of cash collateral on a
50/50 basis, after payment of interest expense, with the percentage received by
GACC to be applied to reduce principal and pay certain hedge costs, if any. In
addition, the Company is prohibited from using GACC's cash collateral for
certain purposes, including loan originations and Subordinated CMBS
acquisitions. The Amended Consent Order expired April 28, 1999. The Company
and GACC agreed to extend the Amended Consent Order until August 2, 1999 and a
stipulation to that effect was signed by the Company and GACC and approved by
the Bankruptcy Court on May 11, 1999. The Company and GACC had negotiated a
further extension of the stipulation through September 10, 1999, which has now
expired. On June 16, 2000, the Company and GACC signed a stipulation and agreed
order selling certain CMBS to GACC free and clear of liens, claims and
encumbrances (the "GACC Sale Stipulation"), and for the sharing of cash
collateral through the sale date. On July 7, 2000, the Bankruptcy Court
approved the GACC Sale Stipulation and subsequently amended its order and on
August 3, 2000 authorized the Company to sell its interest in the Chase J Bond
and the Chase Commercial Mortgage Securities Corporation Series 1998-1, Classes
F, G, H and I bonds (the "Chase Bond Portfolio") to GACC for an aggregate sale
price of approximately $43.4 million. On August 7, 2000, the Company sold the
Chase Bond Portfolio at the stated aggregate sales price and the
28
related variable rate secured debt of $36.6 million was paid off. Remaining net
proceeds of approximately $6.8 million will be used primarily to help fund the
Company's Reorganization Plan. CRIIMI MAE also received approximately $3.8
million from GACC from cash distributions that GACC had received through the
sale date. Additionally, in November 2000, the Company completed the sale of the
remaining CMBS subject to the CMBS Sale, including the DLJ Bond financed by
GACC, to ORIX. (See Note 1 and Note 5 to the Notes to Consolidated Financial
Statements for further discussion). (See also Note 8 to the Notes to
Consolidated Financial Statements regarding the New Debt anticipated to be
provided by GACC (together with affiliates of Merrill Lynch) pursuant to the
Reorganization Plan.)
Edge Partners Settlement
In February 1996, Edge Partners, L.P. ("Edge Partners"), on behalf of
CRIIMI MAE, filed a First Amended Class and Derivative Complaint (the
"Derivative Complaint") in the United States District Court for the District of
Maryland, Southern Division (the "District Court"). The Derivative Complaint
named as defendants each of the individuals who served on the 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.
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
were 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 had discussions with various creditors regarding the withdrawal of
certain claims and in some cases, objected to claims. The Debtors' efforts have
resulted in the reduction of approximately $1.97 billion from the claims pool by
means of objections, negotiated settlements and withdrawal of claims.
One large claim was the claim of the Capital Company of America, LLC
("CCA") (the "CCA Claim"). 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 was that neither of these contingencies were 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
29
because of its due diligence concerns. CCA refused to withdraw its claim, and on
August 31, 1999, CRIIMI MAE filed an objection to the CCA Claim. The CCA Claim
was filed for an amount in excess of $17,000,000 on February 11, 1999. On
October 9, 1999, CCA responded to the objection. By letter dated January 7,
2000, CCA indicated that the amount of its claim was $18.8 million. On March 27,
2000, CCA filed a motion with the Bankruptcy Court revising the amount of its
claim to $18.2 million. On July 26, 2000, the Bankruptcy Court entered an Order
temporarily allowing CCA's claim in the amount of $11,390,548 for purposes of
voting on the Reorganization Plan. This Order did not determine the allowed
amount of CCA's claim, if any, for purposes of treatment and distributions under
the Reorganization Plan.
In October 2000, CRIIMI MAE, the CMI Equity Committee, and CCA reached an
agreement with respect to the CCA claim (the "CCA Agreement"). On October 30,
2000, a Stipulation and Consent order regarding Proof of Claim No. 254 was
submitted to the Court for approval (the "CCA Stipulation"). On November 15,
2000, the Court approved the CCA Stipulation. Pursuant to the CCA Agreement,
CCA was granted an allowed general unsecured claim in the amount of $11.39
million (the "CCA Allowed Claim"). In full and final satisfaction of the CCA
Allowed Claim, CCA agreed to accept $2.5 million in cash (which is recorded as
litigation expense in the accompanying consolidated statements of income) or a
combination of cash, notes or other consideration. The amount of cash payable
to CCA shall be equivalent to CCA's pro rata portion of cash payments to be made
to other general unsecured creditors of CRIIMI MAE as determined by the amount
of CCA's allowed claim (up to a cap of $2.5 million). The CCA Agreement
resolved all claims CCA and its affiliates have asserted or may assert against
the Company.
The remaining allowed claims are carried on the balance sheet as of
December 31, 2000. These allowed claims are anticipated to be paid in full on
the effective date of the Reorganization Plan. The Debtors believe they have
substantial defenses to the First Union disputed claim, although there can be no
assurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the security holders to be voted on during the
fourth quarter of 2000.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Market Data
CRIIMI MAE's common stock is listed on the New York Stock Exchange (symbol
CMM). As of March 15, 2001, there were approximately 2,750 holders of record of
the Company's common stock. The following table sets forth the high and low
closing sales prices for CRIIMI MAE's common stock during the periods indicated.
As discussed below, the Company paid dividends to common shareholders in the
form of junior preferred stock.
2000 1999
-------------------------- -----------------------------
Sales Price Sales Price
-------------------------- -----------------------------
Quarter Ended High Low High Low
- ------------------ ------------ ----------- ------------- -------------
March 31 $1.6250 $1.0000 $3.8750 $2.5625
June 30 1.8750 1.2500 2.7500 1.9375
September 30 1.8125 1.3125 3.1875 1.9375
December 31 1.7500 0.6100 2.0000 1.0625
During the pendency of the Chapter 11 proceedings, the Company is
prohibited from paying cash dividends without first obtaining Bankruptcy Court
approval. (See Item 1-BUSINESS-REIT Status and Other Tax Matters). The terms of
the anticipated New Debt will restrict cash dividends to certain preferred
shareholders under certain circumstances and cash dividends required to be paid
to maintain the Company's REIT status. See "Item 1-BUSINESS -The Reorganization
Plan" for further discussion.
In September 2000, the Board of CRIIMI MAE declared a dividend on its
common stock, par value $0.01 per share, for the purpose of distributing
approximately $37.5 million in undistributed 1999 taxable income. The dividend
was paid to shareholders of record on October 27, 2000, provided that
shareholders maintained ownership of their common stock through the payment
date, November 13, 2000. The dividend was paid in shares of Series G Preferred
Stock.
In September 1999, the Board of CRIIMI MAE declared a dividend on its
common stock, par value $0.01 per share, for the purpose of distributing
approximately $15.7 million in undistributed 1998 taxable income. The dividend
was paid to shareholders of record on October 20, 1999, provided that
shareholders maintained ownership of their common stock through the payment
date, November 5, 1999. The dividend was paid in shares of Series F Preferred
Stock.
Adjustment to Conversion Price for Series B Preferred Stock
Due to the distribution of the Series F and Series G Preferred Stock to the
common shareholders on November 5, 1999 and November 13, 2000, respectively,
Section 10(f)(iii) of the Company's Articles Supplementary to the Articles of
Incorporation for Series B Preferred Stock was triggered, resulting in an
adjustment to the conversion price such that each share of Series B Preferred
Stock is, as of March 15, 2001, convertible into 4.2044 shares of common stock.
The issuance of the Series F and Series G Preferred Stock dividends also
triggered adjustments relating to the Company's two stock option plans and two
unrelated option agreements.
Series B and D Preferred Stock Directorships
On April 1, 2000, the Company's Board of Directors was automatically
increased from six to ten directors pursuant to the terms of the respective
Articles Supplementary to the Articles of Incorporation for CRIIMI MAE's Series
B Preferred Stock and Series D Preferred Stock. The Articles Supplementary for
each of Series B and D Preferred Stock provide that during any period in which
dividends are cumulatively in arrears for six or more quarterly dividend
payments, then the number of directors constituting the Board shall
automatically be increased by two. As discussed above, during the pendency of
the Chapter 11 proceedings, the Company is prohibited from paying cash dividends
without prior Bankruptcy Court approval. The Company has not paid any cash
dividends on either the Series B or D Preferred Stock since September 30, 1998.
Thus, the holders of each of the Series B and D Preferred Stock have the right
to elect two directors to the Company's Board (the "Election Right") at the next
annual meeting of stockholders or at a special meeting of stockholders held for
such purpose (and called in accordance with the applicable Articles
Supplementary).
Since the holders of the Series B Preferred Stock accepted the
Reorganization Plan, the relative rights and preferences of the Series B
Preferred Stock were amended to permit the payment of dividends, including
accrued and unpaid dividends, in common stock or cash, or a combination of both,
at the election of the Company. The payment of the accrued and unpaid dividends
by the Company on or after the effective date of the Reorganization Plan would
satisfy the dividend requirement and eliminate the Election Right.
The holder of the Series D Preferred Stock exchanged its shares of Series D
Preferred Stock for an identical number of shares of Series E Preferred Stock,
issued as of July 26, 2000. The Reorganization Plan provides that all accrued
and past due dividends on Series D Preferred Stock will be paid on the effective
date of the Reorganization Plan, in common stock, thereby satisfying the
dividend requirement the default and eliminating the Election Right.
Exchange of Series C Preferred Stock for Series E Preferred Stock
31
On February 22, 2000, CRIIMI MAE and the holder of its Series C Preferred
Stock entered into a Preferred Stock Exchange Agreement pursuant to which
103,000 shares of Series C Preferred Stock were exchanged for 103,000 shares of
a new series of preferred stock designated as Series E Preferred Stock. The
principal purpose of such exchange was to effect an extension of the mandatory
conversion date, upon which the Series C Preferred Stock would have converted
into common stock. Pursuant to the Preferred Stock Exchange Agreement, the
Company amended its Reorganization 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.
Exchange of Series D Preferred Stock for 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. The principal purpose of such exchange was to effect an
extension of the mandatory conversion date, upon which the Series D Preferred
Stock would have converted into common stock. Pursuant to the Preferred Stock
Exchange Agreement, and Series D Exchange Agreement, the Company amended its
Reorganization Plan to provide for a new mandatory conversion date and certain
additional terms and conditions with respect to the Series E Preferred Stock.
The additional terms principally address dividend and additional conversion
matters.
32
ITEM 6. SELECTED FINANCIAL DATA
Selected Consolidated Financial Data
Accounting Under Accounting Principles Generally Accepted in the United States
For the years ended December 31,
2000 1999 1998 1997 1996
-------- --------- -------- -------- --------
(in thousands, except per share amounts)
Statement of Income Data:
Interest income:
Subordinated CMBS $ 137,072 $ 154,205 $ 143,656 $ 79,670 $ 41,713
Insured mortgage securities 30,668 33,405 43,063 49,425 56,912
Originated loans 27,511 34,713 20,588 - -
----------- ---------- --------- -------- --------
Total interest income 195,251 222,323 207,307 129,095 98,625
Interest and related expense 139,366 151,337 136,268 77,919 63,079
----------- ---------- --------- -------- --------
Net interest margin 55,885 70,986 71,039 51,176 35,546
----------- ---------- --------- -------- --------
Equity in earnings (losses) from investments 1,512 (1,243) 2,618 3,612 4,432
Other income 4,915 3,024 4,279 2,610 2,898
Net gain on mortgage securities dispositions 280 2,128 1,196 17,343 9,601
Gain on originated loan dispositions 245 403 - - -
General and administrative expenses (11,301) (12,049) (14,623) (9,610) (7,970)
Amortization of assets acquired in the Merger (2,878) (2,878) (2,878) (2,878) (2,882)
Unrealized loss on warehouse obligation - (8,000) (30,378) - -
Litigation expense (2,500) - - - -
Impairment on CMBS (1) (143,478) - - - -
Reorganization items:
Other (4,951) (22,003) (9,857) - -
Impairment on CMBS (1) (15,833) (156,897) - - -
Loss on REO (924) - - - -
Gain on sale of CMBS 1,481 - - -
Loss on originated loans (45,846) - - - -
Realized loss on reverse repurchase obligation - - (4,503) - -
Gain on sale of CBO-2 - - 28,800
Write-off of capitalized origination costs - - (3,284) - -
----------- ---------- --------- -------- --------
(219,278) (197,515) (28,630) 11,077 6,079
----------- ---------- --------- -------- --------
Net income before minority interest (163,393) (126,529) 42,409 62,253 41,625
Minority interest in net income of consolidated
subsidiary - - (40) (8,065) (6,386)
Net (loss) income before extraordinary item (163,393) (126,529) 42,369 54,188 35,239
Extraordinary item-gain on debt extinguishment 14,809 - - - -
Net (loss) income before dividends accrued or (148,584) (126,529) 42,369 54,188 35,239
paid on preferred shares
Dividends accrued or paid on preferred shares (6,912) (5,840) (6,998) (6,473) (3,526)
----------- ---------- --------- --------- --------
Net (loss) income to common shareholders $ (155,495) $ (132,369) $ 35,371 $ 47,715 $ 31,713
=========== ========== ========= ========= ========
GAAP basis (loss) income per share - basic
before extraordinary item $ (2.74) $ (2.45) $ 0.75 $ 1.29 $ 1.03
=========== ========== ========= ========= ========
GAAP basis (loss) income per share - basic
after extraordinary item $ (2.50) $ (2.45) $ 0.75 $ 1.29 $ 1.03
=========== ========== ========= ========= ========
____________________
(1) For information pertaining to impairment on CMBS, reference is made to
Note 5 of the Notes to Consolidated Financial Statements.
33
As of December 31,
2000 1999 1998 1997 1996
----------- ------------ ------------ ------------ -----------
(in thousand)
Balance Sheet Data:
Mortgage Assets:
Subordinated CMBS and Other MBS $ 856,846 $ 1,179,270 $ 1,274,186 $ 1,114,480 $ 564,335
Insured mortgage securities 385,751 394,857 488,095 605,114 691,110
Investment in originated loans - 470,205 499,076 - -
Total assets 1,557,840 2,293,661 2,437,918 1,873,305 1,367,245
Total debt 1,203,756 1,982,350 2,085,722 1,414,932 982,258
Shareholders' equity 268,258 219,349 307,877 444,981 346,671
The selected consolidated statement of income data presented above for the
years ended December 31, 2000, 1999 and 1998, and the selected consolidated
balance sheet data as of December 31, 2000 and 1999, were derived from, and are
qualified by, reference to CRIIMI MAE's consolidated financial statements, which
have been included elsewhere in this Annual Report on Form 10-K. The selected
consolidated statement of income data for the years ended December 31, 1997 and
1996, and the selected consolidated balance sheet data as of December 31, 1998,
1997 and 1996, were derived from audited financial statements not included as
part of this Annual Report on Form 10-K. This data should be read in
conjunction with the consolidated financial statements and the notes thereto.
34
Tax Basis Accounting
For the years ended December 31,
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(in thousands, except per share amounts)
Interest income:
Subordinated CMBS $ 188,397 $ 210,332 $ 184,947 $ 86,166 $ 43,632
Insured mortgage securities 30,668 33,405 43,063 49,342 54,827
Originated loans 27,511 34,713 20,588 - -
---------- ---------- ---------- ---------- ----------
Total interest income 246,576 278,450 248,598 135,508 98,459
Interest and related expense 171,282 186,766 161,860 79,574 64,503
---------- ---------- ---------- ---------- ----------
Net interest margin 75,294 91,684 86,738 55,934 33,956
---------- ---------- ---------- ---------- ----------
Equity in earnings from investments 2,980 1,577 8,031 4,104 4,293
Other income 4,915 3,024 4,238 2,152 2,117
Net capital gains 572 3,276 1,746 7,815 9,618
Other operating and administrative expenses (11,648) (12,117) (14,445) (9,464) (7,451)
Loss on warehouse obligation - (36,328) - - -
Litigation expense (2,500) - - - -
Reorganization items:
Other (4,605) (12,950) (4,819) - -
Loss on REO (924) - - - -
Net loss on originated loans (30,075) - - - -
Loss on sale of trading assets (12,607) - - - -
Credit losses (1,287) (621) - - -
Realized loss on reverse repurchase obligation - - (4,503) - -
Write-off of capitalized origination costs - - (3,284) - -
January 2000 Loss recognized in 2000 (119,600) - - - -
Market-to-market gain on trading assets at 12/31/00 49,933 - - - -
Dividends accrued or paid on preferred shares (6,912) (5,840) (6,998) (6,473) (3,526)
Dividends not deductible due to net operating loss 6,912 - - - -
---------- ---------- ---------- ---------- ----------
Tax basis (loss) income to common shareholders $ (49,552) $ 31,705 $ 66,704 $ 54,068 $ 39,007
========== ========== ========== ========== ==========
Tax basis (loss) income per share:
Income before gains from CRI Liquidating $ (0.79) $ 0.57 $ 1.38 $ 1.24 $ 1.00
Capital gains from CRI Liquidating - - - 0.21 0.27
---------- ---------- ---------- ---------- ----------
Total tax basis (loss) income per share $ (0.79) $ 0.57 $ 1.38 $ 1.45 $ 1.27
========== ========== ========== ========== ==========
Tax basis shares 62,353 55,167 48,503 37,334 30,774
========== ========== ========== ========== ==========
Dividends paid on common shares (1)(2) $ - $ - $ 1.47 $ 1.42 $ 1.22
========== ========== ========== ========== ==========
(1) During 1999, the Company paid a dividend of $0.30 per common share for the
1998 taxable year in the form of Series F Preferred Stock.
(2) During 2000, the Company paid a dividend of $0.60 per common share for the
1999 taxable year in the form of Series G Preferred Stock.
35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction
The following discussion and analysis contains statements that may be
considered forward-looking. These statements contain a number of risks and
uncertainties as discussed herein and in Item 1 of this Form 10-K that could
cause actual results to differ materially.
Results of Operations
2000 versus 1999
For the year ended December 31, 2000, the Company reported a net loss for
consolidated financial statement purposes of approximately $155.5 million as
compared to a net loss of approximately $132.4 million for the year ended
December 31, 1999. On a basic and diluted per share basis, the financial
statement loss increased to $(2.50) per share for 2000 from $(2.45) per share
for 1999.
The primary factors resulting in the net loss for the year ended December
31, 2000 were the recognition of an accounting charge of $143.5 million related
to the impairment of retained CMBS, the recognition of a net loss of
approximately $31.0 million related to the sale of the Company's interest in
CMO-IV, and the recognition of approximately $15.8 million of impairment related
to certain sold CMBS, as discussed further below. Despite the recognition of
$143.5 million in impairment and the loss of $15.8 million on the sale of
certain CMBS during 2000, the impact on book equity of these two events was not
material since the Company had accounted for these assets at fair value with the
related fair value adjustment to the cost basis of the bonds already reflected
in equity (The segment discussion pertaining to the mortgage servicing (CMSLP)
segment is reflected below in Equity in Earnings (Losses) from Investments).
Interest Income - Subordinated CMBS
Income from Subordinated CMBS decreased by approximately $17.1 million, or
11%, to $137.1 million during 2000 as compared to $154.2 million during 1999.
This overall decrease in interest income was primarily the result of the sale of
certain CMBS: the Morgan bonds in February 2000; the First Union bonds in April
2000; the Chase bonds in August 2000, and the DLJ and Citicorp bonds in November
2000. This decrease in interest income was partially offset by the following
factors: 1) the impairment on certain CMBS resulting in an increase in the
subsequent income yields due to a lower cost basis, and 2) an increase in income
yields on CMBS due to a change in methodology in determining such yields. Other
than temporary impairment was recognized as of December 31, 1999 on the
Subordinated CMBS that were sold in 2000 as part of the CMBS Sale under the
Reorganization 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 had 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 during the last
nine months of 2000.
Generally Accepted Accounting Principles ("GAAP") requires 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 weighted average
anticipated unleveraged yield for CRIIMI MAE's Subordinated CMBS for financial
statement purposes as of January 1,2001 was approximately 12.4% as compared to
the anticipated weighted average yield used to recognize income from April 1,
2000 to December 31, 2000 of 11.1% and 10.9% as of December 31,1999. 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. As previously
discussed, 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, as a result of the strong U.S. economy the performance of
the mortgage loans underlying the CMBS had been better than management had
originally anticipated and credit losses were lower than originally estimated.
Therefore, the Company revised its estimated credit losses to occur later in the
weighted average life of the CMBS than originally projected. However, at that
time, the Company did not lower 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
36
occurrence of such losses resulted in increases in projected cash flow
(primarily in the form of interest income) as of April 1, 2000, which in turn
resulted in increases in anticipated yields to maturity. This revised yield was
used to recognize interest income from April 1, 2000 through December 31, 2000.
As a result of the revised later projected occurrence of credit losses, the
yields used to determine CMBS income increased. Through December 31, 2000, the
overall impact of this allocation and timing revision resulted in a 29 basis
point increase in total CMBS anticipated yields to maturity (24 basis point
increase related to the then remaining CMBS subject to the CMBS Sale and 30
basis point increase related to the Company's retained portfolio). These yield
increases resulted in approximately $2.1 million in additional CMBS income
during the year ended December 31, 2000, compared to income that would have been
recognized using prior unrevised yields related to the retained CMBS portfolio.
However, the U.S. economy began to slow during the later part of the year.
Accordingly, the Company began to see the impact of the slowing U.S. economy
through increased defaults in its loan portfolio. This trend has continued
during the first quarter of 2001, and as of March 31, 2001, approximately 2.2%
of the underlying loans in the Company's CMBS portfolio are in special
servicing. This compares to 1.5% and 1.0% as of December 31, 2000 and 1999,
respectively, and 1.3% as of April 1, 2000 when the Company revised its yields
upward as discussed above. As a result of the slowing U.S. economy and the
resulting increased defaults, and management's expectation of ensuing loan
losses thereon, the Company recognized an accounting charge of $143.5 million
for impairment in the fourth quarter 2000 related to its CMBS portfolio. This
charge through the income statement does not have a material impact on book
equity as the Company had carried its CMBS assets at fair value with changes in
fair value recorded through equity prior to the impairment charge. As a result
of recognizing impairment, the Company has, again, revised its anticipated
yields as of January 1, 2001, which will be used to recognize interest income
prospectively, beginning January 1, 2001. While the Company expects lower cash
flows from its CMBS portfolio than its previous estimates due to larger than
anticipated losses and those estimated losses occuring sooner than expected, the
yields will actually increase by 130 basis points because of a reduction in the
carrying value of the Company's CMBS portfolio to fair value (i.e. cash flows
divided by a much lower asset base cause yields to increase) See "FINANCIAL
CONDITION, LIQUIDITY AND CAPITAL RESOURCES" and Note 5 to the Notes to
Consolidated Financial Statements for further discussion of CRIIMI MAE's
Subordinated CMBS and the performance of the underlying mortgage loans.
Interest Income - Insured Mortgage Securities
Interest income from insured mortgage securities decreased by approximately
$2.7 million or 8% to $30.7 million for 2000 from $33.4 million for 1999. This
decrease was principally due to the prepayment of six mortgage securities held
by CRIIMI MAE and its wholly owned subsidiaries for net proceeds aggregating
approximately $12.6 million during the year ended 2000. These prepayments
represented approximately 2.6% of the total insured mortgage portfolio.
Interest Income - Originated Loans
Interest income from originated loans decreased by approximately $7.2 million
or 21% to approximately $27.5 million for 2000 as compared to $34.7 million for
1999. Interest income from originated loans was derived from originated loans
included in the CMO-IV securitization, a securitization of $496 million face
value of conduit loans in June 1998. The decrease was primarily due to the sale
of the Company's interest in CMO-IV in November 2000, which reduced interest
income for 2000 versus 1999. In addition, the decrease in interest income was
due to the prepayment of two originated loans aggregating $6.0 million during
the year ended 2000.
Interest Expense
Total interest expense decreased by approximately $11.9 million or 8% to
approximately $139.4 million for 2000 from approximately $151.3 million for
1999. This decrease was primarily attributable to decreases in interest expense
on variable-rate secured borrowings, reflecting the repayment of such debt after
the sale of certain CMBS and the Company's interest in CMO-IV during 2000. Also
contributing to the decrease was a decrease in interest expense on the fixed
rate debt related to the insured securities and on the fixed-rate debt issued in
the CMO-IV securitization. The Company sold its interest in CMO-IV during the
fourth quarter 2000 and, as such, no longer recognizes the interest expense on
the original securitization. These decreases were partially offset by the
following: (1) a discount amortization adjustment of approximately $1.5 million
related to the insured securities fixed-rate obligation debt due to an increase
in the estimate of future prepayment speeds during the second quarter of 2000.
37
(This increase in the estimate of future prepayment speeds was a result of these
obligations paying down faster than originally anticipated.); (2) the
replacement during 1999 of a portion of the Company's variable rate debt with
higher fixed rate debt. (The original sales of such fixed-rate securities were
treated as a financing for accounting purposes. As such, the Company records
the securities as liabilities and recognizes the related interest expense on an
ongoing basis. The fixed rate obligations sold typically carry a higher cost
than does the variable-rate secured borrowing that it replaces.) and; (3) an
increase in variable rate borrowing costs due to higher interest rates in 2000
than in 1999.
Equity in Earnings (Losses) from Investments
Equity in earnings (losses) reflects the activity of several of the
Company's equity investments including CMSLP and the Company's investment in the
AIM funds. Equity in earnings increased by approximately $2.7 million during
2000 due to equity in earnings of approximately $1.5 million as compared to
equity in losses of $1.2 million in 1999. The equity in earnings(losses) is
primarily comprised of $524,000 and ($1.7 million) related to CMSLP and $747,000
and $972,000 related to the AIM Funds in 2000 and 1999, respectively.
For the year ended December 31, 2000, CMSLP reported net income of
approximately $531,000 as compared to a net loss of approximately $2.4 million
for the year ended December 31, 1999.
CMSLP total revenues remain relatively unchanged in 2000 as compared to
1999, at $14.7 million for both years. The total servicing portfolio decreased
primarily due to CRIIMI MAE's sale of certain CMBS where CMSLP previously had
the special servicing rights, and because CMSLP sold two master servicing
contracts during 2000. Servicing fee income decreased by approximately $858,000,
or 13%, to $5.8 million for 2000 as compared to $6.7 million in 1999 due to the
reduced size of the servicing portfolio. This reduced income from servicing fees
was offset by an increase in assumption fees and other fee income.
CMSLP general and administrative expenses decreased by approximately $1
million, or 8%, to $11 million during 2000 as compared to $12 million in 1999.
The decrease in general and administrative expenses was primarily due to the
attrition of employees in 2000 and an approximate $821,000 prepayment loss in
1999.
CMSLP other expenses decreased by approximately $2 million, or 40%, to $3
million in 2000 as compared to $5 million in 1999. This decrease was
attributed to the amortization of purchased mortgage servicing rights. These
assets are amortized in proportion to, and over the period, of the estimated net
income (servicing revenue in excess of servicing costs) from the servicing
rights. Amortization expense also reflects the sale of certain servicing rights
during 2000.
Other Income
Other income increased by approximately $1.9 million or 63% to $4.9 million
during 2000 as compared to $3.0 million during 1999. This increase was primarily
attributable to the timing of temporary investments. Also included in other
income is approximately $6,000 in realized gains related to the Company's
trading of other MBS. Such trading activities included approximately 640 trades
during 2000.
Net Gains on Mortgage Security Dispositions
During 2000, net gains on mortgage security dispositions were approximately
$280,000 as a result of six prepayments of mortgage securities held by CRIIMI
MAE's subsidiaries, or approximately 2.6% of its portfolio. During 1999, net
gains on mortgage dispositions were approximately $2.1 million. For any year,
gains or losses on mortgage dispositions are based on the number, carrying
amounts and proceeds of mortgages disposed of during the period. The proceeds
realized from the disposition of mortgage assets are based on the net coupon
rates of the specific mortgages disposed of in relation to prevailing long-term
interest rates at the date of disposition.
Gain on Originated Loan Dispositions
During 2000, gains on originated loan dispositions were approximately
$245,000, as a result of two prepayments in the originated loan portfolio. As
previously stated, the Company sold all of its interest in the
38
originated loans during late 2000. In 1999, there were five prepayments that
resulted in gains on originated loan dispositions of approximately $403,000.
General and Administrative Expenses
General and administrative expenses decreased by approximately $748,000, or
6%, to $11.3 million for 2000 as compared to $12.0 million for 1999. The
decrease in general and administrative expenses was primarily due to a decrease
in employment costs from a reduced work force during this period, along with a
reduction in certain professional costs.
Unrealized Loss on Warehouse Obligations
During 2000, the Company recorded no unrealized loss on warehouse obligations.
This compares to 1999, when the Company recorded unrealized losses of
approximately $8.0 million in connection with the Citibank Program.
Litigation Expense
During 2000, the Company recorded a $2.5 million expense based on the
settlement of the CCA claim. See "Item 3-LEGAL PROCEEDINGS" for further
discussion of this claim and other legal matters.
Impairment on CMBS
As discussed earlier, as of December 31, 2000 the Company revised its
overall expected loss estimate related to its CMBS portfolio from $225 million
to $298 million, with such estimated losses expected to occur over the life of
the investment. In addition, the Company now expects such revised losses to
occur sooner than originally expected because of the slowing U.S. economy. This
revised loss estimate is a result of an increase in the number of loans that
have been placed in special servicing due primarily to loan defaults. As of
December 31, 2000, $310.6 million in mortgage loans underlying the Company's
CMBS portfolio are in special servicing as compared to $283.1 million as of
December 31, 1999. As of March 31, 2001, this amount had grown to $443.5 million
or 2.2% of the underlying loans in the CMBS portfolio, an increase from 1.3%
when the Company revised its yields as of April 2000. For reference purposes,
the aggregate principal balance of the mortgage loans underlying the CMBS pool
is approximately $20 billion as of March 31, 2001. During 2001 and 2002,
respectively, the Company expects that aggregate losses on the underlying
mortgage loans will be approximately $3 million and $21 million in excess of
that anticipated when it revised its yields as of April 1, 2000. There can be no
assurance that the Company's estimate of expected losses will not be exceeded by
additional adverse events, such as a continuing economic slowdown. As the
Company has determined that the current estimate of expected credit losses
exceeds credit losses as previously projected, the Company believes its CMBS
portfolio has been impaired under FAS 115. As the fair value of the CMBS is
$143.5 million below the amortized cost basis as of December 31, 2000, the
Company recorded an "other than temporary" impairment charge through the income
statement of $143.5 million during the fourth quarter of 2000 (except for the A
and BBB rated bonds). Unrealized losses related to these CMBS were previously
recognized through other comprehensive income in the equity section of the
balance sheet and as a result the impact of the impairment charge is not
material to book equity. As a result of the "other than temporary" impairment
recognized, the revised amortized cost basis of the CMBS as of December 31, 2000
substantially equals management's estimate of their fair value.
Reorganization Items:
Reorganization Items. During 2000 and 1999, the Company recorded
reorganization items due to the Chapter 11 filings of CRIIMI MAE, CM Management
and Holdings II, as follows:
39
Reorganization Items 2000 1999
- -------------------- ---------------- ---------------
Short-term interest income $(6,850,362) $ (1,518,667)
Professional fees 9,317,772 17,822,154
Employee Retention Program 851,948 1,589,236
Other 1,136,319 3,005,405
Write-off of debt discounts and deferred costs -- --
Excise tax accrued 495,000 1,105,000
----------- ------------
Subtotal 4,950,677 22,003,128
Impairment on CMBS regarding Reorganization 15,832,817 156,896,831
Impairment on REO (1) 924,283 --
Net gain on sale of CMBS (2) (1,481,029) --
Loss on originated loans (3) 45,845,712 --
----------- ------------
Total $66,072,460 $178,899,959
=========== ============
(1) The Company recognized impairment on its investment in Real Estate Owned
("REO") in 2000. This asset was sold in July 2000 as discussed in Note 3
and Note 8 to the Notes to Consolidated Financial Statements.
(2) Refer to Note 5 to the Notes to Consolidated Financial Statements for
information regarding the net gain on sale of CMBS.
(3) The Company recognized a loss of approximately $45.8 million on its
investment in originated loans. See Note 7 to the Notes to Consolidated
Financial Statements for further discussion.
Impairment on CMBS (regarding Reorganization). As discussed in Note 1 to
the Notes to Consolidated Financial Statements, under the Reorganization Plan, a
portion of the Recapitalization Financing resulted from the sale of certain CMBS
subject to the CMBS Sale, which sale was completed in November 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. The Company also sold its interest in CMO-IV in
November 2000 as part of the Reorganization Plan.
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 $173 million of other than temporary
impairment related to these CMBS, cumulatively, through the third quarter of
2000. Unrealized losses related to the CMBS subject to the CMBS Sale were
previously recognized through other comprehensive income in the equity section
of the balance sheet. The other than temporary impairment loss on CMBS is a
reorganization item on the income statement as the impairment was recognized as
part of the Reorganization Plan.
Extraordinary Item-Gain on Debt Extinguishment
As part of the Reorganization Plan, the Company's interest in CMO-IV was
sold in 2000. In accordance with EITF 96-19 "Debtor's Accounting for a
Modification or Exchange of Debt Instruments", the net loss on the sale of the
Company's interest in CMO-IV is required to be presented as two components
consisting of the loss on the sale of the originated loans and the subsequent
gain related to the extinguishment of debt. Because the Company decided in the
third quarter of 2000 to sell all of its interest in CMO-IV, the investment in
originated loans was adjusted from amortized cost to fair value resulting in a
$45.8 million loss in the third quarter which was classified as a reorganization
item. The gain related to the extinguishment of debt was approximately $14.8
million and was recognized in November 2000 as an extraordinary item. Therefore,
the net loss related to the sale of the Company's interest in CMO-IV was
approximately $31.0 million.
Taxable Loss-2000
40
CRIIMI MAE realized a net operating loss of approximately $49.6 million or
($0.79) per share for the year ended December 31, 2000 compared to net income of
approximately $31.7 million or $0.57 per share in 1999.
As previously discussed, 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 (2000, 2001, 2002,
and 2003) for tax purposes (i.e., approximately $120 million per year) beginning
with the year 2000. The Company recognized approximately $120 million of this
January 2000 Loss during the year ended December 31, 2000.
A summary of the Company's year 2000 net operating loss is as follows:
January 2000 Loss $ 478 million
LESS: Portion recognized in First through Fourth Quarters of 2000 (120) million
---------------
Balance Remaining of January 2000 Loss to be Recognized in Future Periods $ 358 million
===============
Taxable Income for the year ended December 31, 2000 Before Recognition of
January 2000 Loss $ 20 million
LESS: January 2000 Loss Recognized in 2000 (120) million
PLUS: Mark-to-market unrealized gain on Trading Assets as of December 31, 2000 (1) 50 million
---------------
Net Operating Loss for the year ended December 31, 2000 ($ 50) million
===============
Net Operating Loss through December 31, 2000 ($ 50) million
Net Operating Loss Utilization 0 million
---------------
Net Operating Loss Carried Forward for Use in Future Periods ($ 50) million
===============
(1) As of December 31, 2000, the combined fair value of the Trading Assets
approximated $1.2 billion for tax purposes.
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 (loss). 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, or taxable loss, as if the Company were a regular domestic
corporation. This taxable income or taxable loss level determines the amount of
dividends, if any, the Company is required to pay out over time in order to
eliminate its tax liability. See also "REIT Status and Other Tax Matters", which
follows.
Results of Operations
1999 versus 1998
For the year ended December 31, 1999, the Company reported a net loss for
financial statement purposes of approximately $132.4 million as compared to net
income available to common shareholders of approximately $35.4 million for the
year ended December 31, 1998. On a basic per share basis, the financial
statement net (loss) income decreased to $(2.45) per share for 1999 from $0.75
per share for 1998.
The primary factor resulting in the net loss for the year ended December
31, 1999 was the recognition of $157 million of other than temporary impairment
on certain Subordinated CMBS. The impairment is discussed further below. Other
factors contributing to the change in earnings from 1998 to 1999 were an
increase in other reorganization costs and other items as more fully discussed
below. The segment discussion pertaining to mortgage servicing (CMSLP) is
reflected below in Equity in Earnings (Losses) from Investments.
Interest Income - Subordinated CMBS
Income from Subordinated CMBS increased by approximately $10.5 million, or
7%, to $154.2 million during 1999 as compared to $143.7 million during 1998.
There were no Subordinated CMBS acquisitions in 1999. However, during 1998, the
Company increased its CMBS portfolio by acquiring Subordinated CMBS at purchase
41
prices aggregating approximately $853 million. The overall increase was
partially offset by a reduction in income from Subordinated CMBS due to the de-
recognition of $132 million face amount of CMBS from CBO-1 in connection with
CBO-2 and also the de-recognition of $345 million face amount of CMBS in
connection with CBO-2. See Note 5 to the Notes to Consolidated Financial
Statements for further discussion.
GAAP requires that interest income generated by Subordinated CMBS be
recorded based on the effective interest method using the anticipated yield over
the expected life of the Subordinated CMBS. This has resulted in income that is
lower for financial statement purposes than for tax purposes. Based upon the
timing and amount of future credit losses and certain other assumptions
estimated by management, as discussed below, the estimated weighted average
anticipated yield for CRIIMI MAE's Subordinated CMBS for financial statement
purposes as of December 31, 1999 was approximately 10.1%. These returns were
determined based on the anticipated yield over the expected weighted average
life of the Subordinated CMBS, which considers, among other things, anticipated
losses.
As discussed further below, impairment was recognized as of December 31,
1999 on the Subordinated CMBS that were sold in 2000 as part of the CMBS Sale.
This resulted in the cost basis being written down to fair value as of December
31, 1999. As a result of this new basis, these CMBS had new yields effective the
first quarter of 2000.
Interest Income - Insured Mortgage Securities
Interest income from insured mortgage securities decreased by approximately
$9.7 million or 22% to $33.4 million for 1999 from $43.1 million for 1998. This
decrease was principally due to the prepayment of 14 mortgage securities held by
CRIIMI MAE and its wholly owned subsidiaries for net proceeds aggregating
approximately $74.0 million during the year ended 1999.
Interest Income - Originated Loans
Interest income from originated loans increased by approximately $14.1
million or 69% to approximately $34.7 million for 1999 as compared to $20.6
million for 1998. Interest income from originated loans was derived from
originated loans included in the CMO-IV securitization, which resulted in the
securitization of $496 million face value of conduit loans in June 1998. The
increase from 1998 to 1999 was primarily due to only six months of interest
income recognized in 1998, partially reduced by the prepayment of five
originated loans in 1999.
Interest Expense
Total interest expense increased by approximately $15.0 million or 11% to
approximately $151.3 million for 1999 from approximately $136.3 million for
1998. This increase was principally a result of certain financing facilities
that were outstanding for the entire year ended December 31, 1999 as compared to
a partial year in 1998. Such financing facilities increased in connection with
the acquisition of Subordinated CMBS in 1998 and the issuance of collateralized
mortgage obligations in connection with CMO-IV during June 1998.
Equity in (Losses) Earnings from Investments
Equity in earnings (losses) reflects the activity of several of the
Company's equity investments including CMSLP and the Company's investment in the
AIM Funds. Equity in earnings decreased by approximately $3.8 million during
1999 due to a net loss of approximately $1.2 million for 1999 as compared to
equity in earnings of $2.6 million in 1998. Equity in earnings (losses) is
primarily comprised of ($1.7 million) and $1.1 million related to CMSLP and
$972,000 and $1.3 million related to the AIM Funds in 1999 and 1998,
respectively. The decrease is primarily due to a reduction in revenue and an
increase in certain expenses at CMSLP. The decrease in revenue is primarily due
to CMSLP's loss of certain servicing rights and the assignment of ORIX as the
successor servicer on those pools during the fourth quarter of 1998. The
increase in expenses includes an $821,000 expense for a prepayment penalty
shortfall incurred by CMSLP and an increase in general and administrative
expenses, including a long-term incentive program for CMSLP, effective in the
fourth quarter of 1998, and other payroll costs. In addition, expenses increased
due to a $500,000 write-off of a remaining investment balance associated with a
now dissolved affiliated entity. The servicing portfolio was approximately $28
billion as of December 31, 1999 as compared to approximately $31 billion as of
December 31, 1998.
Other Income
42
Other income decreased by approximately $1.3 million or 29% to $3.0 million
during 1999 as compared to $4.3 million during 1998. This decrease was primarily
attributable to a decrease in short-term interest and other income earned during
1999 on the amounts deposited in the loan origination reserve account, due to
suspension of the origination loan program in 1998. No interest income was
earned on the origination reserve account for the year ended December 31, 1999
as compared to approximately $1.9 million of short-term interest income and net-
carry income for 1998. The decrease was partially offset by an increase in other
short-term interest income of approximately $600,000 in 1999 versus 1998.
Net Gain on Mortgage Security Dispositions
During 1999, net gains on mortgage dispositions were approximately $2.1
million as a result of 14 prepayments of mortgage securities held by CRIIMI
MAE's subsidiaries, representing approximately 15% of its portfolio. During
1998, net gains on mortgage dispositions were approximately $1.2 million, of
which approximately $666,000 was a result of 22 prepayments of mortgage
securities held by CRIIMI MAE's subsidiaries, representing approximately 17% of
its portfolio. The remaining $531,000 was the result of the sale of four
unencumbered mortgage securities and the partial sale of a fifth unencumbered
mortgage security.
Gain on Originated Loan Dispositions
During 1999, gains on originated loan dispositions were approximately
$403,000, which was a result of five prepayments in the originated loan
portfolio. No originated loans were disposed of during 1998.
General and Administrative Expenses
General and administrative expenses decreased by approximately $2.5
million, or 18%, to $12.1 million for 1999 as compared to $14.6 million for
1998. The decrease in general and administrative expenses was primarily due to
the closing of regional offices, suspension of certain business activities and
the dismissal of employees following the Chapter 11 filing in the fourth quarter
of 1998.
Losses on Warehouse Obligations
During the year ended December 31, 1999, the Company recorded losses of
$8.0 million on its warehouse obligation, primarily due to a decrease in the
selling price of the loans in the Company's warehouse line with Citibank, when
the loans were sold in the third quarter of 1999. As of December 31, 1998, the
unrealized loss recorded on the obligation under the Citibank Program was $28.4
million. The Company recorded, in total, a loss of $36.3 million for this
transaction for both GAAP and tax purposes.
During the year ended December 31, 1998, the Company recorded an unrealized
loss of $2.0 million for its loss exposure under the Prudential Program. The
Company calculated the Prudential loss based upon the assumption that the
Company would not exercise its option with Prudential. As of December 31, 1999,
the sole loan originated under the Prudential Program had not yet been sold.
Reorganization Items:
Impairment on CMBS. As 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. 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 reorganization item on the income
statement as the impairment was recognized as part of the Reorganization Plan.
Other Reorganization Items. During 1999 and 1998, the Company also recorded
$22.0 million and $9.9 million, respectively, in other reorganization items due
to the Chapter 11 filings of CRIIMI MAE, CM Management and Holdings II.
43
Other Reorganization Items 1999 1998
------------------------------------------------ ------------ -----------
Short-term interest income $ (1,518,667) $ --
Professional fees 17,822,154 5,219,000
Write-off of debt discounts and deferred costs -- 2,835,210
Employee Retention Program accrued costs 1,589,236 612,885
Excise tax accrued 1,105,000 300,000
Other 3,005,405 889,852
------------ -----------
Total $ 22,003,128 $ 9,856,947
============ ===========
Gain on Sale of CBO-2
In May 1998, CRIIMI MAE completed CBO-2 pursuant to which it sold $468
million of investment grade securities created through the resecuritization of
approximately $1.8 billion of its Subordinated CMBS. CRIIMI MAE recognized a
gain of approximately $28.8 million on the sale of $345 million face amount
investment grade securities sold without call provisions, recognizing CRIIMI
MAE's transfer of control on those securities. Certain of these securities
included call provisions to enable CRIIMI MAE to 1) repurchase bonds if market
conditions warrant, and 2) call bonds when it is no longer cost effective to
service them. The sold investment grade securities treated as a financing, as
well as approximately $1.3 billion face amount of investment grade and non-
investment grade securities retained by CRIIMI MAE, are now required to be
reflected on CRIIMI MAE's balance sheet at their fair market value.
Additionally, due to the sale treatment under SFAS 125 ("Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities"
("FAS 125"), all remaining Subordinated CMBS and insured mortgage securities are
required to be carried at fair market value. Additionally, as part of CBO-2, in
May 1998, CMSLP sold trustee servicing rights for $4.2 million, resulting in a
gain of $4.2 million for tax purposes, and approximately $400,000 for financial
reporting purposes.
Loss on Reverse Repurchase Obligation
During 1998, the Company realized a loss of $4.5 million due to the impact
of financial market volatility on hedge positions. As part of CMO-IV, the
Company intended to sell certain of the investment grade tranches that were not
initially sold to the public. In anticipation of this sale, the Company entered
into a transaction to hedge the value of those securities in June 1998. This
transaction did not qualify for hedge accounting purposes because it involved
the purchase and sale of a cash instrument and therefore was required to be
recorded at market value ("marked to market"). Because Treasury rates declined
in the third quarter of 1998, the Company recorded a $4.1 million unrealized
loss as of September 30, 1998. CRIIMI MAE borrowed and then sold a 10-year
Treasury Note in the amount of $44 million, and the loss was realized in the
fourth quarter of 1998.
Write-Off of Capitalized Loan Origination Costs
Since the Company no longer had the intention to securitize the remaining
loans originated through the Citibank and Prudential Programs in warehouse
facilities, the net deferred costs of $3.3 million associated with the
warehoused loans were written off in 1998.
Taxable Income-1999
CRIIMI MAE earned approximately $31.7 million in tax basis income available
to common shareholders in 1999 or $0.57 per share, compared to approximately
$66.7 million or $1.38 per share in 1998.
The primary factor resulting in the decrease in taxable income from 1999 to
1998 was the approximately $36.3 million tax basis loss realized on the loans
sold in the third quarter of 1999 from the warehouse line with Citibank. Other
factors contributing to the decline in tax basis income were the deductions for
retention bonuses and professional fees and net decreases in earnings from
equity investments. In the second quarter of 1998, as part of CBO-2, CMSLP sold
servicing rights for $4.2 million resulting in a gain of $4.2 million for tax
purposes, which was included in equity in earnings in 1998. Partially offsetting
the aforementioned items was an increase in net interest
44
margin due to recognition of a full year of interest income and interest expense
in 1999 as compared to a partial year in 1998, as previously discussed.
Cash Flow
2000 versus 1999
Net cash provided by operating activities decreased in 2000 as compared to
1999. The decrease was primarily due to (1) an increase in restricted cash as
compared to 1999, representing cash that is restricted due to stipulations
entered into in connection with the Chapter 11 proceedings or due to agreements
that required certain CMBS interest income payments and/or CMBS sale proceeds to
be held in segregated accounts and (2) an increase in non-cash interest income
related to discount amortization.
Net cash provided by investing activities decreased for 2000 as compared to
1999 primarily due to a decrease in proceeds from mortgage securities
dispositions and originated loan dispositions. These decreases were partially
offset by an increase in proceeds from the sale of CMBS and the sale of the
Company's interest in CMO-IV, net of associated debt.
Net cash used in financing activities decreased in 2000 as compared to 1999
due to a decrease in principal payments on debt obligations.
1999 versus 1998
Net cash provided by operating activities decreased in 1999 as compared to
1998. The decrease was primarily due to a significant increase in the amount of
restricted cash. Partially offsetting this decrease was an overall increase in
net payables in 1999 as compared to 1998.
Net cash provided by investing activities increased for 1999 as compared to
1998 primarily due to the suspension of the Company's Subordinated CMBS
acquisition and origination programs as a result of the Chapter 11 filing in
October 1998.
Net cash used in financing activities increased in 1999 as compared to
1998. The increase was primarily due to the suspension of the Company's
Subordinated CMBS acquisition activities, suspension of equity and debt
offerings and payment of principal paydowns per the stipulation agreements with
secured lenders.
Financial Condition, Liquidity and Capital Resources
Activities/Events prior to Chapter 11 Filing
Prior to the Chapter 11 filing, 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.)
Also prior to the Chapter 11 filing, 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
45
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. Additionally 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 one of its secured creditors. The basis for
this collateral call, in the Company's view, was unreasonable. After giving
consideration to, among other things, this collateral call and the Company's
concern that its failure to satisfy this collateral call would cause the Company
to be in default under a substantial portion of its financing arrangements, the
Company reluctantly concluded on Sunday, October 4, 1998 that it was in the best
interests of creditors, equity holders and other parties in interest to seek
Chapter 11 protection. Accordingly, on Monday, October 5, 1998, the Company
filed for relief under Chapter 11 of the U.S. Bankruptcy Code in the Bankruptcy
Court.
Summary of Certain Asset Sales, Cash Position, and Shareholders' Equity
during Chapter 11 Proceedings
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 completed the CMBS Sale in November 2000.
The Company also sold its interest in CMO-IV in November 2000 as part of the
Reorganization Plan. The CMBS Sale and the sale of the Company's interest in
CMO-IV generated aggregate proceeds of approximately $418.3 million, of which
approximately $342.3 million was used to pay related borrowings and
approximately $76.0 million will be used to help fund the Reorganization Plan.
See Note 5 to the Notes to Consolidated Financial Statements for further
information regarding these sales.
CRIIMI MAE's restricted cash position has increased from approximately $7
million on October 5, 1998 to approximately $95.8 million as of December 31,
2000. Additionally, the Company's unrestricted cash position as of December 31,
2000 was approximately $106.6 million. See "Item 3-LEGAL PROCEEDINGS" for
information pertaining to agreements reached with certain creditors. As of April
12, 2001, the Company's restricted and unrestricted cash and cash equivalents
and its very liquid trading assets aggregated approximately $240 million, of
which approximately $190 million will be used toward the payment of the allowed
claims and estimated professional fees pursuant to the Reorganization Plan, with
a remaining aggregate balance of approximately $50 million.
As of December 31, 2000 and December 31, 1999, respectively,
shareholders' equity was approximately $268 million and $219 million.
Summary of Reorganization Plan
The Reorganization Plan includes the payment in full of the allowed claims
of the Debtors primarily through Recapitalization Financing aggregating $847
million. As previously discussed, the sales of select CMBS and the Company's
interest in CMO-IV generated aggregate proceeds of approximately $418.3 million
toward the Recapitalization Financing. Also included in the Recapitalization
Financing is approximately $262 million anticipated to be provided by affiliates
of Merrill Lynch and GACC through a new secured financing facility (in the form
of a repurchase transaction) , and approximately
46
$167 million anticipated to be provided through new secured notes issued to
certain of the Company's unsecured creditors.
In connection with the Reorganization Plan, substantially all cash flows
relating to existing assets are expected to be used to satisfy principal,
interest and fee obligations under the New Debt. The approximate $262 million
secured financing would provide for (i) interest at a rate of one month London
Interbank Offered Rate ("LIBOR") plus 3.25%, (ii) principal
repayment/amortization obligations, (iii) extension fees after two years and
(iv) maturity on the fourth anniversary of the effective date of the
Reorganization Plan. The approximate $167 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 repayment/amortization
obligations, (iii) extension fees after four years and (iv) maturity on the
fifth anniversary of the effective date of the Reorganization Plan. The second
series of secured notes, representing an aggregate principal amount of
approximately $62 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 Reorganization Plan. The New Debt
described above is anticipated to be secured by substantially all of the assets
of the Company. It is contemplated that there will be restrictive covenants,
including financial covenants and certain restrictions and requirements with
respect to cash accounts and the collection, management, use and application of
funds, in connection with the New Debt.
Due to the uncertainty of the effects of the Chapter 11 filing on the
business of the Company, pending litigation and numerous other factors beyond
the control of the Company, 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 bankrupcty. Assuming the Reorganization Plan becomes effective,
there can be no assurance that the Company will have sufficient cash resources
to pay interest, scheduled principal and any other required payments on the New
Debt for any specified period to time. The Company's ability to meet its debt
service obligations will depend on a number of factors, including management's
ability to maintain cash flow (which is impacted by, among other things, the
credit performance of the underlying mortgage loans) and to generate capital
internally from operating and investing activities and expected reductions in
REIT distribution requirements to shareholders due to expected net operating
losses for tax purposes, in each case consistent with the terms agreed to
pursuant to the New Debt. There can be no assurance that targeted levels of cash
flow will actually be achieved, that reductions in REIT distribution
requirements will be realized, or that, if required, new capital will be
available to the Company. The Company's ability to maintain or increase cash
flow and access new capital will depend upon, among other things, interest
rates, prevailing economic conditions and other factors, many of which are
beyond the control of the Company. The Company's high level of debt limits its
ability to obtain additional capital, reduces income available for
distributions, restricts the Company's ability to react quickly to changes in
its business and makes the Company more vulnerable to economic downturns. See
also "Item 1-BUSINESS-Risk Factors" for additional discussion.
The Company's ability to resume the acquisition of more significant
Subordinated CMBS, as well as its securitization programs (if it determines to
do so) depends, among other things, first, on its ability to emerge from
bankruptcy as a successfully reorganized company, and second, on its ability to
access additional capital, (including for the purpose of refinancing all or a
substantial portion of the New Debt), once it has successfully emerged from
Chapter 11. Factors which could affect the Company's ability to access
additional capital include, among other things, the cost and availability of
such capital, changes in interest rates and interest rate spreads, changes in
the commercial mortgage industry and the commercial real estate market, general
economic conditions, perceptions in the capital markets of the Company's
business, covenants and restrictions under the Company's New Debt 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.
Summary of Subordinated CMBS
As of December 31, 2000, the Company owned, for purposes of GAAP, CMBS
rated from A to CCC and unrated with a total fair value amount of approximately
$853 million (representing approximately 55% of the Company's total consolidated
assets), an aggregate amortized cost of approximately $850 million, and an
aggregate face amount of approximately $1.6 billion. Such CMBS represent
investments in CBO-1, CBO-2 and Nomura Asset Securities Corp. Series 1998-D6
(Nomura). The December 31, 2000 total fair value includes approximately 33% of
the Company's CMBS which are rated BB+, BB, or BB-, 24% which are rated B+, B,
B- or CCC and 10% which are unrated. The remaining approximately 33% represents
investment grade securities that the Company reflects on its balance sheet as a
result of CBO-2. The weighted average interest rate on these CMBS as of December
31, 2000 was 6.9% and the weighted average life was 13 years.
The Company's unrated bonds from CBO-1, CBO-2 and Nomura experienced
principal write downs during the following periods due to realized losses
related to certain underlying mortgage loans:
CBO-1 CBO-2 Nomura
----- ----- ------
Year 1999 $ 738,000 $ -- $ --
Year 2000 3,201,000 1,087,000 --
January 1, 2001 through March 31, 2001 59,000 3,564,000 --
--------------- -------------- ---------------
Cumulative Realized Losses through March 31, 2001 $ 3,998,000 $ 4,651,000 $ --
=============== ============== ===============
47
CRIIMI MAE, through CMSLP, performs servicing functions on a total CMBS
pool, including the sub-special servicer for specially serviced loans, as
summarized below:
03/31/01 12/31/00 12/31/99
--------- --------- ---------
Total CMBS Pool $ 20.0 billion $ 20.2 billion (c) $ 28.8 billion
============== ================== ===============
Specially serviced loans due to monetary default (a)(b) $373.0 million 259.1 million $159.9 million
Specially serviced loans due to covenant default/other 70.5 million 51.5 million 123.2 million
-------------- -------------- ---------------
Total specially serviced loans (d) $443.5 million $310.6 million $283.1 million
============== ============== ===============
(a) Includes $56.4 million, $48.3 million, and $17.7 million of Real Estate
Owned by underlying trusts.
(b) The increase in the specially serviced loans is due primarily to an
increase in unforeseen defaults related to commercial mortgage loans
secured principally by retail and hotel properties, which have been
adversely impacted by the recent economic slowdown.
(c) During 2000, certain servicing rights were lost in conjunction with the
sale of CMBS subject to the CMBS Sale.
(d) As of December 31, 2000, the Company recorded an impairment charge of
$143.5 million as a result of its revised estimate of credit losses in
the CMBS pool, as previously discussed.
"Appraisal Reductions" for the CMBS transactions in which the Company
retains an ownership interest as reported by the underlying trustees or as
calculated by CMSLP* were as follows:
CBO-1 CBO-2 Nomura
----- ----- ------
Year 1999 $ -- $ -- $ --
Year 2000 1,905,000 18,180,000 --
January 1, 2001 through March 31, 2001 7,525,000 1,250,000 440,000
------------ ------------- ----------
Cumulative Appraisal Reductions through March 31, 2001 $ 9,430,000 $ 19,430,000 $ 440,000
============ ============= ==========
* Not all underlying CMBS transactions require the calculation
of an appraisal reduction; however, where CMSLP obtains a third
party appraisal it calculates one for the purpose of estimating
potential losses.
The effect of an appraisal reduction, for those underlying CMBS
transactions that require an appraisal reduction to be calculated, generally is
that the servicer stops advancing interest payments on the unrated bonds (or if
no unrated bond, the lowest rated bond) as if such appraisal reduction was a
realized loss. However, an appraisal reduction may result in a higher or lower
realized loss based on the ultimate disposition or work-out of the mortgage
loan.
Summary of Other Assets
As of December 31, 2000 and 1999, the Company's other assets consisted
primarily of insured mortgage securities, equity investments, other mortgage
backed securities, cash and cash equivalents (as previously discussed),
principal and interest receivables on its various assets, and intangible assets
associated with the 1995 Merger.
The Company had $385.8 million and $394.9 million (at fair value)
invested in insured mortgage securities as of December 31, 2000 and 1999,
respectively. As of December 31, 2000, approximately 16% of CRIIMI MAE's
investment in insured mortgage securities were FHA-Insured Certificates and
84% were GNMA Mortgage-Backed Securities.
As of December 31, 2000 and 1999, the Company had approximately $33.8
million and $34.9 million, respectively, in investments accounted for under the
equity method of accounting. Included in equity investments are (a) the general
partnership interests (2.9% to 4.9% ownership interests) in the AIM Funds owned
by CRIIMI, Inc., a wholly owned subsidiary of CRIIMI MAE, (b) a 20% limited
partnership interest in the adviser to the AIM Funds, 50% of which is owned by
CRIIMI MAE and 50% of which is owned by CM Management, (c) CRIIMI MAE's interest
in CMSI, and (d) CRIIMI MAE's interest in CMSLP.
48
The Company's Other Mortgage-Backed Securities includes primarily
investment grade CMBS and investment grade residential mortgage backed
securities. As of December 31, 2000 and 1999, respectively, the Company's Other
Mortgage-Backed Securities were approximately $4,300,000 and $92,000,
respectively.
Dividends
During the pendency of the Chapter 11 proceedings, the Company is
prohibited from paying cash dividends without first obtaining Bankruptcy Court
approval. Among the other factors which impact CRIIMI MAE's dividends are (i)
the level of income earned on uninsured mortgage assets, such as Subordinated
CMBS (including, but not limited to, the amount of OID income, interest
shortfalls and losses, on Subordinated CMBS), and to the extent applicable,
originated loans, (ii) the level of income earned on CRIIMI MAE's or its
subsidiaries' insured mortgage security collateral depending on prepayments,
defaults, etc., (iii) the fluctuating yields on short-term, variable-rate debt
and the rate at which CRIIMI MAE's LIBOR-based debt is priced, as well as the
rate CRIIMI MAE pays on its other borrowings, (iv) the rate at which cash flows
from mortgage assets, mortgage dispositions, and, to the extent applicable,
distributions from its subsidiaries can be reinvested, (v) changes in operating
expenses (including those related to the Chapter 11 filing), (vi) to the extent
applicable, cash dividends paid on preferred shares, (vii) to the extent
applicable, whether the Company's taxable mortgage pools continue to be exempt
from corporate level taxes, (viii) the timing and amounts of cash flows
attributable to its other lines of business - mortgage servicing and other fee
income, (ix) realized losses on certain transactions and (x) net operating
losses.
Due to the Chapter 11 filing, no cash dividends were paid for the years
ended 2000 and 1999 on common shares. The Company paid a dividend on November 5,
1999 in the form of Series F Preferred Stock to its common shareholders for the
purpose of distributing approximately $15.7 million in undistributed 1998
taxable income intended to eliminate any federal income tax obligations for
1998. The Company also paid a dividend on November 13, 2000 in the form of
Series G Preferred Stock to its common shareholders for the purpose of
distributing approximately $37.5 million in undistributed 1999 taxable income
intended to satisfy the Company's REIT distribution requirements and to
eliminate any federal income tax obligations for 1999. See "BUSINESS-Chapter 11
Filing and REIT Status and Other Tax Matters" regarding such dividends.
Also during the Chapter 11 proceedings, dividend accrued on the Company's
Series B, Series C, Series D, Series E, Series F and Series G Preferred Stock.
For information pertaining to the accrual of such dividends refer to Note 12 of
the Notes to Consolidated Financial Statements.
49
Pursuant to the terms of the anticipated New Debt, limited, if any,
dividends, other than if such dividend payments are required to maintain REIT
status, can be paid. See "BUSINESS-The Reorganization Plan" for further
discussion.
On January 11, 2001, the Company received written notice from the New York
Stock Exchange that it was "below criteria" for continued listing on the
Exchange because the average closing price of its common stock was less than $1
over a consecutive thirty (30) trading-day period. The Company has six (6)
months from January 11, 2001 to raise its common stock price above the $1 level
and the failure of the common stock to average $1 over the 30 trading days
preceding the expiration of the six (6) month cure period will result in
commencement of suspension and delisting procedures.
REIT Status and Other Tax Matters
CRIIMI MAE has elected to qualify as a REIT for tax purposes under Sections
856-860 of the Internal Revenue Code for the 1999 tax year. To qualify for tax
treatment as a REIT under the Internal Revenue Code, CRIIMI MAE must satisfy
certain criteria, including certain requirements regarding the nature of its
ownership, assets, income and distributions of taxable income. For a discussion
of REIT status and related risks see "Item 1-BUSINESS-Chapter 11 Filing and REIT
Status and Other Tax Matters".
The recently issued Internal Revenue Service Revenue Procedure 99-17
provides securities and commodities traders with the ability to elect mark-to-
market treatment for 2000 by including an election with their timely filed 1999
federal tax extension. The election applies to all future years as well, unless
revoked with the consent of the Internal Revenue Service. On March 15, 2000, the
Company determined to elect mark-to-market treatment as a securities trader for
2000 and, accordingly, will recognize gains and losses prior to the actual
disposition of its securities. Moreover, some if not all of those gains and
losses, as well as some if not all gains or losses from actual dispositions of
securities, will be treated as ordinary in nature and not capital, as they would
be in the absence of the election. Therefore, any net operating losses generated
by the Company's trading activity will offset the Company's taxable income, and
reduce any required distributions to shareholders by a like amount. See
"BUSINESS-Risk Factors-Risks Associated with Trader Election" for further
discussion. If the Company does have a REIT distribution requirement (and such
distributions would be permitted under the Reorganization Plan), a substantial
portion of the Company's distributions would be in the form of non-cash taxable
dividends.
Investment Company Act
For a discussion of the Investment Company Act and the risk to the Company
if it were required to register as an Investment Company, see "BUSINESS-Risk
Factors-Investment Company Act Risk".
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal market risk is exposure to changes in interest
rates related to the U.S. Treasury market, and increases in the spread between
U.S. Treasury bonds and CMBS, 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 agreements 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 cap 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.
50
Prior to the Petition Date, CRIIMI MAE financed a substantial portion of
its Subordinated CMBS acquisitions with short-term, variable-rate borrowings
secured by the Company's CMBS. The agreements governing these financing
arrangements typically required the Company to maintain collateral at all times
with a market value not less than a specified percentage of the outstanding
indebtedness. The agreements further provided that the lenders could require the
Company to post cash or additional collateral if the value of the existing
collateral fell below this threshold amount. These financing arrangements were
used by CRIIMI MAE to provide financing during the period of time from the
acquisition or creation of the Subordinated CMBS to the date when CRIIMI MAE
would resecuritize the portfolio in order to match-fund a significant portion of
the portfolio with fixed-rate debt, thereby eliminating interest rate risk on
that portion of the CMBS. These transactions also increased the borrowing
capacity of the Company which was used to acquire Subordinated CMBS.
The table below provides information about the Company's Subordinated CMBS
and Insured Mortgage Securities as of December 31, 2000. For Subordinated CMBS
and Insured Mortgage Securities, the table presents anticipated principal and
interest cash flows based upon the assumptions used in determining the fair
value of these securities and the related weighted average interest rates by
expected maturity. See Notes 5 and 6 to the Notes to Consolidated Financial
Statements for discussion on fair value methodologies used for Subordinated CMBS
and Insured Mortgage Securities.
ESTIMATED PRINCIPAL & INTEREST CASHFLOWS
Assets (in millions) (1) 2001 2002 2003 2004 2005 Thereafter Total Fair Value
- ------------------------ ------ ------ ------ ------ ------ ----------- --------- ------------
Subordinated CMBS (2) (3) $ 86.6 $ 86.5 $ 86.6 $ 86.5 $ 86.2 $ 2,157.3 $ 2,589.8 $ 852.5
Average Stated Interest Rate 6.9% 6.9% 6.9% 6.9% 6.9% 6.4%
Insured Mortgage
Securities $35.1 $33.3 $33.3 $33.4 $33.4 $ 751.3 $ 919.8 $385.8
Average Stated Interest Rate 7.6% 7.6% 7.6% 7.6% 7.6% 7.8%
_______________
(1) The Company's Investment in Originated Loans was sold in November 2000 as
part of the Company's Reorganization Plan and therefore principal and
interest cash flows are no longer presented.
(2) Subordinated CMBS are reflected as two components on the balance sheet,
Subordinated CMBS and Other MBS and Subordinated CMBS pledged to creditors.
Subordinated CMBS and Other MBS also includes approximately $4.3 million of
Other MBS, which are not part of the cash flows presented above.
(3) The estimated cash flows presented are the gross cash flows used by the
Company to determine fair value. The cash flows do not include estimated
losses, as such assumed losses are reflected in the discount rate in
determining fair value.
The next table provides information about the Company's debt obligations
and derivative instruments. This table is based on the Company's debt
obligations as of December 31, 2000 and does not account for the contemplated
New Debt issued in connection with the Reorganization Plan. For debt
obligations, the table presents the contractual principal and interest payments
and the related weighted average interest rates by contractual maturity date.
For the caps, the table presents the notional amount of the agreement by fiscal
year of maturity and weighted average strike price and does not account for a
new cap contract purchased in February 2001.
ESTIMATED PRINCIPAL & INTEREST ON DEBT OBLIGATIONS
Debt Obligations
(in millions) 2001 2002 2003 2004 2005 Thereafter Total Fair Value
- ------------- ---- ---- ---- ---- ---- ---------- ----- ----------
Securitized Mortgage
Obligations - Fixed Rate $117.0 $94.6 $87.5 $104.3 $83.8 $537.3 $1,024.5 $661.6
Average Stated Interest Rate 7.0% 7.0% 7.0% 7.0% 7.0% 7.1%
51
ESTIMATED PRINCIPAL & INTEREST ON DEBT OBLIGATIONS
Debt Obligations
(in millions) 2001 2002 2003 2004 2005 Thereafter Total Fair Value
- ------------- ---- ---- ---- ---- ---- ---------- ----- ----------
Senior Unsecured Notes (2) $ 9.1 $108.4 $ 117.5 $ 94.8
Average Stated Interest Rate 9.1% 9.1%
Variable Rate Secured
Borrowings (1) -- -- -- -- -- -- -- N/A
Average Stated Interest Rate -- -- -- -- -- -- --
Other Variable Rate (1) -- -- -- -- -- -- -- N/A
Average Stated Interest Rate -- -- -- -- -- -- --
Derivative Contracts
(in millions)
- -------------
Cap Contracts $ 425 $ 425 $ 0.02
Average Strike Rate 6.67%
___________________
(1) These facilities are in default due to the Chapter 11 proceedings. As a
result, the maturity dates of these facilities have passed. See Note 8 to
the Notes to Consolidated Financial Statements for additional information.
(2) This facility is in default due to the Chapter 11 proceedings, however, the
maturity date has not passed as of December 31, 2000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are set forth in this
Annual Report on Form 10-K commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
52
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information concerning the executive officers and
directors of the Company as of March 15, 2001.
Name Age Position
---- --- --------
William B. Dockser (1)............. 64 Chairman of the Board and Director
H. William Willoughby (1).......... 54 President, Secretary and Director
David B. Iannarone................. 40 Executive Vice President
Cynthia O. Azzara.................. 41 Senior Vice President, Chief Financial
Officer and Treasurer
Brian L. Hanson.................... 39 Senior Vice President/Servicing
Garrett G. Carlson, Sr. (3)(4)(5).. 63 Director
G. Richard Dunnells(2)(3)(4)(5).... 63 Director
Robert J. Merrick (2)(3)(4)........ 56 Director
Robert E. Woods (2)(3)(4).......... 53 Director
John R. Cooper (6)................. 53 Director Nominee
Alan M. Jacobs (6)................. 52 Director Nominee
Donald J. MacKinnon (6)............ 36 Director Nominee
Donald C. Wood (6)................. 40 Director Nominee
Michael F. Wurst (6)............... 42 Director Nominee
________
(1) Member of the Transactional Committee.
(2) Member of the Audit Committee
(3) Member of the Compensation and Stock Option Committee
(4) Member of the Special Reorganization Committee
(5) Shall resign as a director as of the effective date of the Reorganization
Plan
(6) Shall be appointed as a director as of the effective date of the
Reorganization Plan
Mr. William B. Dockser, age 64, has been Chairman of the Board of Directors
of CRIIMI MAE since 1989. Since the inception of C.R.I., Inc. ("CRI") in 1974,
Mr. Dockser has served as Chairman of the Board of Directors of the former
advisor to CRIIMI MAE. Mr. Dockser was a co-founder of CRI. He holds a Bachelor
of Laws degree from Yale University Law School and a Bachelor of Arts degree
from Harvard University.
Mr. H. William Willoughby, age 54, has been President of CRIIMI MAE since
1990. Mr. Willoughby was a co-founder of CRI and has served as its President
since its inception in 1974. He holds a Juris Doctor degree, a Master of
Business Administration degree and a Bachelor of Science degree in Business
Administration from the University of South Dakota.
Mr. David B. Iannarone, age 40, has been Executive Vice President of CRIIMI
MAE since December 2000. From 1996 to December 2000, he was Senior Vice
President and General Counsel. Mr. Iannarone is responsible for acquisitions of
commercial mortgage-backed securities, structured finance, legal affairs and
investor relations. From 1991 to 1996, he served with the Federal Deposit
Insurance Company/Resolution Trust Company as Counsel-Securities and Finance.
Mr. Iannarone received a Master of Law degree from the Georgetown University Law
Center, a Juris Doctor degree from the University of Villanova School of Law,
and a Bachelor of Arts degree from Trinity College.
Ms. Cynthia O. Azzara, age 41, has been Chief Financial Officer since 1994,
a Senior Vice President since 1995 and Treasurer since 1997 of CRIIMI MAE. Ms.
Azzara is responsible for accounting, financial and treasury matters of CRIIMI
MAE as well as equity and debt placements in the capital markets. Ms. Azzara is
a certified
53
public accountant and holds a Bachelor of Business Administration degree in
Accounting from James Madison University, magna cum laude.
Mr. Brian L. Hanson, age 39, has been a Senior Vice President of CRIIMI MAE
since March 1998. From March 1996 to March 1998, he served as Group Vice
President of CRIIMI MAE. Mr. Hanson received a Bachelor of Arts degree in
Mathematics from Washington and Lee University, cum laude.
Mr. Garrett G. Carlson, Sr., age 63, has served as a Director of the
Company since 1989. Mr. Carlson has served as President of Can-American Realty
Corp. and the Canadian Financial Corp. since 1979 and 1974, respectively, and
President of Garrett Real Estate Development since 1982. Since 1996, Mr. Carlson
has served as a director of Satellite Broadcasting Company.
Mr. G. Richard Dunnells, age 63, has served as a Director of the Company
since 1991. Since 1995, Mr. Dunnells has served as the Hiring Partner of the law
firm Holland & Knight.
Mr. Robert J. Merrick, age 56, has served as a Director of CRIIMI MAE since
1997. Since February 1998, Mr. Merrick has served as the Chief Credit Officer
and Director of MCG Capital Corporation. From 1985 to 1997, he served as
Executive Vice President and Chief Credit Officer of Signet Banking Company
("Signet"). In addition, while at Signet, Mr. Merrick also served as Chairman of
the Credit Policy Committee and was a member of the Asset and Liability
Committee, as well as the Management Committee.
Mr. Robert Woods, age 53, has served as a Director of CRIIMI MAE since
1998. He is currently the Managing Director and head of loan syndications for
the Americas at Societe Generale in New York where he has served in that
position since 1997. Prior to that, Mr. Woods had been Managing Director and
Head of the Real Estate Capital Markets and Mortgage-Backed Securities division
at Citicorp since 1991.
Anticipated Board of Directors as of the effective date of the Reorganization
Plan
On the effective date of the Reorganization Plan, the Company's Board of
Directors shall be increased from six to nine directors. On the effective date,
(1) the appointments of John R. Cooper, Alan M. Jacobs, Donald J. MacKinnon,
Donald C. Wood, and Michael F. Wurst as new directors and (2) the resignation of
Garrett G. Carlson, Sr. and G. Richard Dunnells as directors shall become
effective.
Mr. John R. Cooper, age 53, is a Director Nominee. Mr. Cooper's nomination
and appointment will become effective on the effective date of the
Reorganization Plan. Mr. Cooper is Senior Vice President, Finance, of PG&E
National Energy Group, Inc. and Senior Vice President, Finance, and Chief
Financial Officer of PG&E National Energy Group Company, a subsidiary of PG&E
National Energy Group, Inc. Mr. Cooper has been with PG&E National Energy Group
Company and its predecessor, U.S. Generating Company, since its inception in
1989. PG&E National Energy Group, Inc. owns and operates electric generation and
natural gas transmission facilities and markets energy services and products
throughout North America.
Alan M. Jacobs, age 52, is a Director Nominee. Mr. Jacob's appointment will
become effective on the effective date of the Reorganization Plan. Mr. Jacobs is
a senior financial executive with more than 25 years of experience in business
turnarounds and insolvency, corporate restructuring and reorganization,
corporate finance and dispute resolution. He was a founding member and former
senior partner of Ernst & Young LLP's restructuring and reorganization practice,
which he left in September 1999 to form AMJ Advisors LLC ("AMJ"). Mr. Jacobs is
President of AMJ. AMJ was the financial advisor for the CMI Equity Committee
during its Chapter 11 proceedings. Mr. Jacobs is the president of T&W Financial
Corporation and the co-chairman and co-chief executive officer of West Coast
Entertainment Corporation, the Chapter 11 Trustee for Apponline.com, Inc. and
the Chapter 7 Trustee for Edison Brothers Stores, Inc. Mr. Jacobs is a director
of The Singer Sewing Company.
Donald J. MacKinnon, age 36, is a Director Nominee. Mr. MacKinnon's
appointment will become effective on the effective date of the Reorganization
Plan. Since September 2000, Mr. MacKinnon has served as chief executive officer
of REALM, a leading provider of software technology solutions for the commercial
real estate industry. Mr. MacKinnon has served as president of REALM since May
2000. REALM was formed in February 2000 as a roll-up of five technology
companies: ARGUS Financial Software, B.J. Murray, CTI Limited,
54
DYNA, and NewStar Solutions. Prior to joining REALM, Mr. MacKinnon was co-head
and co-founder of the Commercial Mortgage Group and manager of the European
Asset Securitization Group for Donaldson, Lufkin & Jenrette ("DLJ"), where he
managed all of DLJ's commercial mortgage origination, new product development,
credit exposure, rating agency relations and securitizations. Prior to joining
DLJ in 1992, Mr. MacKinnon worked in the Real Estate Finance Group at Salomon
Brothers, Inc. on a variety of commercial real estate debt and equity
transactions. Mr. MacKinnon is on the Board of Directors of the National Multi
Housing Council where he formerly held the position of chairman of the finance
committee.
Donald C. Wood, age 40, is a Director Nominee. Mr. Wood's appointment will
become effective on the effective date of the Reorganization Plan. Mr. Wood has
served as the President at Federal Realty Investment Trust (NYSE:FRT) since
February 2001 and as Chief Operating Officer since January 2000. He served as
Senior Vice President from May 1998 to February 2001. From May 1998 to December
1999, Mr. Wood was Federal Realty Investment Trust's Chief Financial Officer. He
is also a member of Federal Realty Investment Trust's three-person Senior
Executive Committee. Federal Realty Investment Trust is the owner, manager and
developer of 122 retail and mixed-use shopping center and urban real estate
assets nationwide. From 1990 to 1998, Mr. Wood was with ITT Corporation, serving
as Senior Vice President and Chief Financial Officer of Caesars World, Inc., a
wholly owned subsidiary of ITT Corp., from 1996 to 1998. From 1994 to 1996, he
was Vice President and Assistant/Deputy Controller for ITT Corp. and from 1990
to 1994 he was ITT's Director of Corporate Reporting and Assistant Director of
Management Reporting. Mr. Wood serves as a director of Storetrax.com, an online
retail leasing company.
Michael F. Wurst, age 42, is a Director Nominee. Mr. Wurst's appointment
will become effective on the effective date of the Reorganization Plan. Since
February 2000, Mr. Wurst has been a principal of Meridian Realty Advisors, Inc.
("Meridian"), a Dallas-based real estate investment firm focusing on out-of-
favor or liquidity-challenged sectors and assets. Prior to joining Meridian, Mr.
Wurst was a shareholder at the Dallas, Texas, law firm of Munsch, Hardt, Kopf &
Harr, P.C., where he practiced commercial bankruptcy and commercial real estate
law for nearly 14 years. Mr. Wurst was a member of CRIIMI MAE's CMI Equity
Committee during its Chapter 11 proceedings.
Meetings of Directors
During 2000, the Board of Directors met eight times and acted by unanimous
written consent on one occasion. Each member of the Board of Directors attended
at least 75% of the meetings of the Board of Directors and the committees on
which he served during 2000. Pursuant to the Company's Bylaws, a majority of the
Board of Directors shall at all times consist of directors who are not officers
or employees of the Company and do not perform any services for the Company
other than as a director ("Unaffiliated Directors").
Compensation of Directors
Directors who are also employees of the Company receive no additional
compensation for their services as directors. Each Unaffiliated Director
receives (i) an aggregate annual fee of $12,000, (ii) 500 common shares
annually, (iii) options to purchase 500 common shares annually and (iv) a fee of
$750 (for telephonic meetings) or $1,500 (for in-person meetings) per day for
each meeting in which such director participates, including committee meetings
held on days when the Board of Directors is not meeting. In addition, the
Company reimburses directors (including those employed by the Company as
executive officers) for travel and other expenses incurred in connection with
their duties as directors of the Company. The Unaffiliated Directors, in
addition to the foregoing compensation, received additional compensation for
their service on the Special Reorganization Committee. Messrs. Carlson, Dunnells
and Merrick each received $25,000 in 1999 and Mr. Woods, as lead director,
received $35,000 in 1999. Messrs. Carlson and Dunnells will resign as directors,
effective as of the effective date of the Reorganization Plan.
Committees of the Board of Directors
As of March 15, 2001, the Board of Directors has an Audit Committee, a
Compensation and Stock Option Committee, a Transactional Committee and a Special
Reorganization Committee. The Company has no nominating or similar committee.
55
Audit Committee. As of March 15, 2001, the Board of Directors has an Audit
Committee comprised of Messrs. Dunnells, Merrick and Woods, each of whom is an
Unaffiliated Director. The functions performed by the Audit Committee are to:
(1) recommend independent auditors to the Company; (2) review the scope of the
audit, audit fees, the audit report and the management letter with the Company's
independent auditors; (3) review the financial statements of the Company; (4)
review and approve non-audit services provided by the independent auditors; and
(5) consult with the independent auditors and management with regard to the
adequacy of internal controls. The Audit Committee met six times in 2000.
Compensation and Stock Option Committee. As of March 15, 2001, the Board of
Directors has a Compensation and Stock Option Committee, comprised of Messrs.
Carlson, Dunnells, Merrick and Woods, each of whom is an Unaffiliated Director.
The Compensation and Stock Option Committee was formed to establish, review and
modify the compensation (including salaries and bonuses) of the Company's
executive officers, to administer the Employee Stock Option Plan and to perform
such other duties as may be delegated to it by the Board of Directors. The
Compensation and Stock Option Committee met four times in 2000.
Transactional Committee. As of March 15, 2001, the Board of Directors has
a Transactional Committee comprised of Messrs. Dockser and Willoughby. The
Transactional Committee was formed to review and approve certain debt and equity
financings, and securitizations and resecuritizations of assets, with certain of
the foregoing subject to specific limitations. The Transactional Committee did
not meet in 2000.
Special Reorganization Committee. As of March 15, 2001, the Board of
Directors has a Special Reorganization Committee comprised of Messrs. Carlson,
Dunnells, Merrick and Woods established in connection with the Company's Chapter
11 proceeding. The Special Reorganization Committee met twice in 2000.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 of the Securities Exchange Act of 1934, as amended, requires
each director and executive officer of the Company and each person who owns more
than 10% of the Company's common stock to report to the SEC, by a specified
date, his, her or its beneficial ownership of, and certain transactions in, the
Company's common stock. Except as otherwise noted, based solely on its review of
Forms 3 and 4 and amendments thereto furnished to the Company, and written
representations from certain reporting persons that no Forms 5 were required for
those persons, the Company believes that all directors, officers and beneficial
owners of more than 10% of the common stock have filed on a timely basis Forms
3, 4 and 5 as required in the year ended December 31, 2000. Each director and
executive officer not a director filed a delinquent Form 4 reporting an increase
in the number of shares subject to their respective stock options due to an
adjustment effected as a result of the anti-dilution provisions of the
applicable stock option plan. In addition, two delinquent Form 5s were filed
to report increases in the number of shares held through indirect ownership of
an executive officer as a result of conversions of preferred shares.
56
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
earned during the last three years by the Chairman of the Board of Directors and
each of the other four most highly compensated executive officers of the Company
whose income exceeded $100,000 during the year ended December 31, 2000
(collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
------------------- ----------------------
Restricted Securities
Stock Underlying All Other
Year Salary ($) Bonus ($) Awards Options (#) Compensation ($)
---- ---------- --------- ------ ---------- ----------------
William B. Dockser 2000 $324,500 $ - -- $ -
Chairman of the Board 1999 318,354 - 125,000 -
1998 285,600 59,000 225,000 334,916 (1)
H. William Willoughby 2000 $324,500 $ - -- $ -
President and Secretary 1999 318,354 - 125,000 -
1998 285,600 59,000 225,000 334,916 (1)
David B. Iannarone 2000 $267,094 $ - 12,500 $136,125 (2)
Executive Vice President 1999 242,812 49,500 50,000 247,500 (3)
1998 163,882 45,000 15,000 -
Cynthia O. Azzara 2000 $267,094 $ - 12,500 $136,125 (2)
Senior Vice President, 1999 242,812 49,500 40,000 247,500 (3)
Chief Financial Officer 1998 185,150 45,000 20,000 -
and Treasurer
Brian L. Hanson 2000 (4) $207,740 $106,000 12,500 $211,750
Senior Vice President 1999 (5) 188,854 38,500 25,000 192,500
1998 147,235 40,000 15,000 -
(1) These amounts represent deferred compensation, which the Company has agreed
to pay for services performed in connection with the Merger. These amounts
were paid solely from principal and interest received by the Company from
CRI in connection with a note receivable acquired by the Company in the
Merger. As a result of the Company's Chapter 11 filing, these payments were
temporarily suspended.
(2) These amounts represent retention payments made in April 2000 pursuant to
the Employee Retention Plan. An additional $136,125 each was paid in
January 2001, representing the final retention payment pursuant to the
Employee Retention Plan.
(3) These amounts represent aggregate retention payments made in April 1999 and
October 1999 pursuant to the Employee Retention Plan.
(4) These amounts represent compensation paid by CMSLP throughout 2000 and
long-term incentive payments made in April 2000 and October 2000 pursuant
to the CMSLP Long-Term Incentive Plan.
(5) These amounts represent compensation paid by CMSLP throughout 1999 and
long-term incentive payments made in April 1999 and October 1999 pursuant
to the CMSLP Long-Term Incentive Plan.
Employment Agreements
On June 30, 1995, in connection with the Merger, the Company, through its
wholly-owned operating subsidiary CM Management, entered into employment
agreements with each of Messrs. Dockser and Willoughby. In connection with the
adoption of the Employee Retention Plan, such employment agreements were assumed
by CM
57
Management and were amended as of October 5, 1998 (together and as amended, the
"Employment Agreements.") The Employment Agreements each expire 45 days after
the effective date of the Reorganization Plan and provide that Messrs. Dockser
and Willoughby salaries will be adjusted at least annually by the Compensation
and Stock Option Committee of the Board of Directors. Each of Mr. Dockser and
Mr. Willoughby currently receive a base salary of $324,500. The Employment
Agreements require each of Messrs. Dockser and Willoughby to devote a
substantial portion of his time to the affairs of the Company and its affiliated
entities, except that each of them may devote time to other existing business
activities; provided that the time devoted to such other existing business
activities does not interfere with the performance of his duties to the Company
and its affiliated entities. The agreements define the phrase "substantial
portion" to mean all of the time required to perform the services necessary and
appropriate for the conduct of the businesses of the Company and its affiliated
entities.
In the event of a change of control, as defined in the Employment
Agreements, Messrs. Dockser and Willoughby reserve the right to voluntarily
terminate their employment with the Company. Messrs. Dockser and Willoughby are
entitled to severance payments in an amount equal to 18 months' base salary upon
termination without cause and upon an involuntary resignation for any of the
reasons set forth in the Employment Agreements, including a change of control.
Messrs. Dockser and Willoughby did not receive any retention payments under the
Employment Retention Plan.
The Employment Agreements provide for indemnification of Messrs. Dockser
and Willoughby to the extent provided for in the bylaws of the Company and/or CM
Management up to and including amounts totaling a maximum of $250,000 for all
covered persons, constituting the aggregate deductible under applicable Director
and Officer insurance policies, the application of any available portion of
proceeds of applicable Director and Officer insurance policies, up to $20
million in the aggregate for all covered persons, and the payment of all
uninsured indemnification arising under the post-petition actions of the
executives for which they are otherwise entitled to indemnification under the
Bylaws of the Company and/or CM Management.
On October 7, 1998, the Company entered into an employment agreement with
David B. Iannarone that, in connection with the Employee Retention Plan, was
assumed by CM Management and was amended as of October 7, 1998 (as amended, the
"Iannarone Employment Agreement"). The Iannarone Employment Agreement has a
three-year term and provides for minimum base annual compensation of $225,000.
In addition, Mr. Iannarone received retention payments, under the Employee
Retention Plan, equal to two times his base salary paid semiannually in four
equal installments over a two-year period, subject to certain conditions. The
fourth and final retention plan payment under the Employee Retention Plan was
paid to Mr. Iannarone on January 31, 2001.
Mr. Iannarone is entitled to severance payments in an amount equal to 24
months' base salary upon termination without cause. In addition, upon
termination following a change of control, all options to acquire shares of the
Company's common stock held by Mr. Iannarone, to the extent not then
exercisable, will become immediately exercisable. The Iannarone Employment
Agreement provides for indemnification of Mr. Iannarone to the extent provided
for in the bylaws of the Company and/or CM Management up to and including
amounts totaling a maximum of $250,000 for all covered persons, constituting the
aggregate deductible under applicable Officer and Director insurance policies,
the application of any available portion of proceeds of applicable Officer and
Director insurance policies, up to $20 million in the aggregate for all covered
persons, and the payment of all uninsured indemnification arising under the
post-petition actions of the executive for which he is otherwise entitled to
indemnification under the bylaws of the Company and/or CM Management.
In July 1998, the Company entered into a new employment agreement with Ms.
Cynthia O. Azzara that, in connection with the adoption of the Employee
Retention Plan, was assumed by CM Management and was amended as of October 5,
1998 (as amended, the "Azzara Employment Agreement"). The Azzara Employment
Agreement has a three-year term and provides for minimum base annual
compensation of $225,000. The Azzara Employment Agreement contains provisions
that prohibit Ms. Azzara from competing with the Company and certain of its
affiliates for a period not to extend beyond October 5, 2000, subject to certain
limited exceptions. In addition, Ms. Azzara received retention payments, under
the Employee Retention Plan, equal to two times her base salary paid
semiannually in four equal installments over a two-year period, subject to
certain conditions. The fourth and final retention plan payment under the
Employee Retention Plan was paid to Ms. Azzara on January 31, 2001.
58
Ms. Azzara is entitled to severance payments in an amount equal to 24
months' base salary upon termination without cause. In addition, upon
termination following a change of control, all options to acquire shares of the
Company's common stock held by Ms. Azzara, to the extent not then exercisable,
will become immediately exercisable. The Azzara Employment Agreement provides
for indemnification of Ms. Azzara to the extent provided for in the bylaws of
the Company and/or CM Management up to and including amounts totaling a maximum
of $250,000 for all covered persons, constituting the aggregate deductible under
applicable Officer and Director insurance policies, the application of any
available portion of proceeds of applicable Officer and Director insurance
policies, up to $20 million in the aggregate for all covered persons, and the
payment of all uninsured indemnification arising under the post-petition actions
of the executive for which she is otherwise entitled to indemnification under
the bylaws of the Company and/or CM Management.
Pursuant to the Employee Retention Plan, options granted to each of the
Named Executive Officers after October 5, 1998 shall immediately become
exercisable upon a change of control.
Employee Stock Option Plan
The purpose of the Employee Stock Option Plan is to enhance the long-term
profitability of the Company and shareholder value by offering incentives and
rewards to those officers and other employees of the Company and its
subsidiaries who are important to the Company's growth and success, and to
encourage such officers and employees to remain in the service of the Company
and its subsidiaries and to acquire and maintain stock ownership in the Company.
The Employee Stock Option Plan currently provides for grants of stock
options to purchase up to 2,828,011 shares of Company common stock (as adjusted
from 2,000,000 shares as a result of two separate series of the junior preferred
stock dividends paid to common shareholders in November 1999 and November 2000
and consistent with a Bankruptcy Court order limits the full adjustment to
3,059,961 shares of Company common stock, contemplated by the terms and
provisions of the Employee Stock Option Plan, until such time as the Company
emerges from Chapter 11). The Reorganization Plan contemplates certain
amendments to the Employee Stock Option Plan including an increase in the total
number of shares of common stock issuable under the Employee Stock Option Plan
to 4,500,000. Options granted under the Employee Stock Option Plan may be
designated as either "nonqualified stock options" or "incentive stock options."
The exercise price for options granted under the Employee Stock Option Plan may
not be less than the fair market value of a share of common stock on the date of
grant.
Any executive officer or other key employee of the Company or any
subsidiary of the Company is eligible to be granted options, subject to certain
limitations. The Compensation and Stock Option Committee is authorized to
select from among eligible employees the individuals to whom options are to be
granted and to determine the number of common shares subject to each option,
whether such options are to be incentive stock options or nonqualified stock
options, and the terms and conditions of the options consistent with the
Employee Stock Option Plan.
The Employee Stock Option Plan is administered by the Compensation and
Stock Option Committee. As of March 15, 2001, the Compensation and Stock Option
Committee consists of Messrs. Carlson, Dunnells, Merrick and Woods, each of whom
is an Unaffiliated Director. Except as permitted by Rule 16b-3(c)(2) under the
Exchange Act, options may not be granted under the Employee Stock Option Plan to
any member of the Compensation and Stock Option Committee during the term of his
or her membership on the Compensation and Stock Option Committee.
Pursuant to the Employee Retention Plan, options granted after October 5,
1998 will immediately become exercisable upon a change of control.
59
The following table sets forth certain information concerning options
granted to the Named Executive Officers during the year ended December 31, 2000:
OPTIONS GRANTED IN LAST FISCAL YEAR
Common Shares
Underlying % of Total Options
Options Granted to Employees Exercise Expiration Grant Date
Granted In Fiscal Year Price Date Present Value
------- ------------- ----- ---- -------------
William B. Dockser -- -- $ -- $
H. William Willoughby -- -- $ -- $
Cynthia O. Azzara 12,500 (1) 10.13% $ 1.0625 03/17/2008 $10,240 (2)
David B. Iannarone 12,500 (1) 10.13% $ 1.0625 03/17/2008 $10,240 (2)
Brian L Hanson 12,500 (1) 10.13% $ 1.0625 03/17/2008 $10,240 (2)
(1) These options were granted on March 17, 2000 and will vest in three equal
annual installments over three years commencing on the first anniversary of
the date of grant.
(2) These values are estimated on the date of grant using the Black-Scholes
option pricing model, which produces a per option share value as of March
17, 2000, the grant date, of $0.83 using the following principal
assumptions: expected stock price volatility 96.2%, risk free rate of
return of 6.44%, dividend yield of 0% and expected life of 5.29 years. No
adjustments have been made for forfeitures or non-transferability. The
actual value, if any, that the executive officer will realize from these
options will depend solely on the increase in the stock price over the
option price when the options are exercised.
60
The following table provides information concerning the exercise of options
during the year ended December 31, 2000 for each of the Named Executive
Officers.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 2000 AND YEAR END 2000 OPTION VALUES
Number of Common
Common Shares Shares
Acquired on Underlying Unexercised Value of Unexercised In-the-
Exercise During Value Options at FY-end Money Options at FY-end
2000 Realized Exercisable/Unexercisable Exercisable/Unexercisable (1)
---- -------- ------------------------- -----------------------------
William B. Dockser - $ - 1,826,727 242,554 $ - $ -
H. William Willoughby - $ - 2,018,372 242,554 $ - $ -
Cynthia O. Azzara - $ - 93,217 51,307 $ - $ -
David B. Iannarone - $ - 48,514 57,126 $ - $ -
Brian L. Hanson - $ - 47,540 37,724 $ - $ -
____________
(1) There were no unexercised in-the-money options as of December 31, 2000.
61
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's common stock as of March 29, 2001 by (i) each person
known by the Company to be the beneficial owner of more than 5% of its common
stock, (ii) each director of the Company, (iii) each Named Executive Officer,
and (iv) all directors and executive officers of the Company as a group. Unless
otherwise indicated, each stockholder has sole voting and investment power with
respect to the shares beneficially owned.
Amount and Nature of Common Percentage of Common
Name Shares Beneficially Owned Shares Outstanding
- ----------------------------------- ---------------------------------------------------- ---------------------------
William B. Dockser 6,502,296 (1)(2) 6.2%
H. William Willoughby 6,497,377 (1)(3) 6.2%
Garrett G. Carlson, Sr. 20,992 (4) *
G. Richard Dunnells 27,884 (5) *
Robert J. Merrick 6,746 (6) *
Robert E. Woods 3,373 (7) *
Cynthia O. Azzara 189,903 (8) *
Brian L Hanson 82,979 (9) *
David B. Iannarone 82,053 (10) *
Gotham Partners L.P.
Gotham Partners III
Gotham International Advisors LLC See footnote below (11)
110 East 42/nd/ Street, 18/th/ Floor
New York, NY 10017
All Directors and Executive Officers 13,407,404 (1)(2)(3)(4)(5)(6)(7)(8)(9)(10)(12) 12.7%
as a Group (9 persons)
__________________
*Less than 1%.
(1) Includes 6,199 common shares owned by CRI of which Messrs. Dockser and
Willoughby are the sole shareholders.
(2) Includes 2,873,020 shares available upon exercise of presently exercisable
options or those exercisable within 60 days. Includes 131,592 common
shares held by Mr. Dockser's wife, 156,817 common shares held by the
William B. Dockser '59 Charitable Lead Annuity Trust (for which Mr. Dockser
has sole voting power) and 250,907 common shares held by the Dockser Family
Foundation (for which Mr. Dockser has sole voting power).
(3) Includes 3,160,458 shares available upon exercise of presently exercisable
options or those exercisable within 60 days. Includes 97,234 common shares
held by the estate for Mr. Willoughby's wife, 49,827 common shares held by
Mr. Willoughby's parents, 22,555 common shares held by Mr. Willoughby's son
and 9,217 common shares held by Mr. Willoughby's daughter.
(4) Includes 4,492 shares available upon exercise of presently exercisable
options or those exercisable within 60 days. Includes 1,000 common shares
held by Mr. Carlson's wife and 15,500 common shares held by a partnership
for which Mr. Carlson is the sole general partner.
(5) Includes 4,492 shares available upon exercise of presently exercisable
options or those exercisable within 60 days.
(6) Includes 2,746 shares available upon exercise of presently exercisable
options or those exercisable within 60 days.
(7) Includes 1,873 shares available upon exercise of presently exercisable
options or those exercisable within 60 days.
(8) Includes 152,335 shares available upon exercise of presently exercisable
options or those exercisable within 60 days.
(9) Includes 82,979 shares available upon exercise of presently exercisable
options or those exercisable within 60 days.
(10) Includes 81,553 shares available upon exercise of presently exercisable
options or those exercisable within 60 days and 500 shares held by Mr.
Iannarone's father.
(11) Based on a Schedule 13G filed by Gotham Partners, L.P., Gotham Partners
III, L.P. and Gotham International Advisors L.L.C., ("Gotham") in September
2000, such entities collectively held 6,043,000 common shares, for which
they held sole voting and investment power. According to Bloomberg and
other similar reporting services, Gotham filed a Schedule 13 F reporting
102,888 common shares held as of December 2000.
(12) Includes 6,363,948 available upon exercise of presently exercisable options
or those exercisable within 60 days.
62
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company maintains its headquarters office in Rockville, Maryland.
Pursuant to an administrative services agreement with CRI which was entered into
in connection with the Merger (the "CRI Administrative Services Agreement"), CRI
is obligated to provide the Company and its subsidiaries with certain
administrative office, facility and other services, at cost, with respect to
certain aspects of the Company's business. The Company intends to use the
services provided under the CRI Administrative Services Agreement to the extent
such services are not performed by the Company or provided by another service
provider. The CRI Administrative Services Agreement is terminable on 30 days'
notice at any time by the Company. The Company and its subsidiaries paid charges
under the CRI Administrative Services Agreement of $151,171 and $182,691 for the
years ended December 31, 2000 and 1999, respectively.
In June 1997, a subsidiary of the Company acquired a Holiday Inn Express
hotel in Nashville, Tennessee in a foreclosure sale from a commercial mortgage-
backed security trust. In connection with such purchase, the subsidiary-owner of
the hotel entered into a hotel management agreement (the "Hotel Management
Agreement") with Capitol Hotel Group International, Inc. ("CHGI"), a Maryland
company partially owned by Messrs. Dockser and Willoughby. The Hotel Management
Agreement provides that in exchange for the hotel management and operating
duties set forth in the agreement, CHGI will receive an annual management fee in
an amount equal to four percent of the total annual revenues of the hotel plus
twenty percent of the annual net profit of the hotel. For the years ended
December 31, 2000 and 1999, the Company paid a total of $34,698 and $61,077,
respectively, to CHGI pursuant to the Hotel Management Agreement. Prior to
entering into the Hotel Management Agreement, the Company received a written
opinion from an independent hotel consulting and appraisal company that the
terms of the Hotel Management Agreement were reasonable and within industry
standards. This real estate property was sold to a third party in July 2000 and
the Hotel Management Agreement was terminated.
63
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report:
1 and 2. Financial Statements and Financial Statement Schedules
Page
Description Number(s)
- ----------- ---------
Report of Independent Public Accountants...................... F-1
Consolidated Balance Sheets as of December 31, 2000 and 1999.. F-2
Consolidated Statements of Income and Comprehensive Income
for the years ended December 31, 2000, 1999 and 1998........ F-3
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 2000, 1999 and 1998........ F-4
Consolidated Statements of Cash Flows
for the years ended December 31, 2000, 1999 and 1998........ F-5
Notes to Consolidated Financial Statements.................... F-6
All other financial statements and financial statement schedules have been
omitted since the required information is included in the financial statements
or the notes thereto, or is not applicable or required.
(a) 3. Exhibits (listed according to the number assigned in the table in
Item 601 of Regulation S-K)
Exhibit No. 2 - Plan of Acquisition, Reorganization, Arrangement,
Liquidation, or Succession.
a. Joint Plan of Reorganization of CRIIMI MAE Inc. and
its affiliates (incorporated by reference to the
Form 8-K filed with the Securities and Exchange
Commission on September 24, 1999).
b. Amended Joint Plan of Reorganization of CRIIMI MAE
Inc. and its affiliates (incorporated by reference
to the Form 8-K filed with the Securities and
Exchange Commission on December 27, 1999).
c. Second Amended Joint Plan of Reorganization of
CRIIMI MAE Inc. and its affiliates (incorporated by
reference to the Form 8-K filed with the Securities
and Exchange Commission on April 7, 2000).
d. Third Amended Joint Plan of Reorganization of
CRIIMI MAE Inc. and its affiliates CRIIMI MAE
Holdings II, L.P. and CRIIMI MAE Management, Inc.
(as supplemented and amended by praecipes filed
with the United States Bankruptcy Court for the
District of Maryland, Greenbelt on July 13, 14 and
21, 2000 (incorporated by reference from Exhibit 2
to the Form 8-K filed with the Securities and
Exchange Commission on September 22, 2000).
64
e. Amended Praecipe, dated December 8, 2000, filing
the Third Amended Joint Plan of Reorganization (as
amended and supplemented by praecipes filed with
the Bankruptcy Court on July 13, 14, 21 and
November 22, 2000, of CRIIMI MAE Inc., CRIIMI MAE
Holdings II, L.P. and CRIIMI MAE Management, Inc.,
as confirmed by the United States Bankruptcy Court
for the District of Maryland, Greenbelt Division on
November 22, 2000 (incorporated by reference from
Exhibit 2.1 to the Form 8-K filed with the
Securities and Exchange Commission on December 28,
2000).
Exhibit No. 3 - Articles of Incorporation and bylaws.
a. Articles of Incorporation of CRIIMI MAE Inc.
(incorporated by reference from Exhibit 3(d) to the
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1993).
b. Amended and Restated Bylaws of CRIIMI MAE Inc.
(incorporated by reference from Exhibit 4.2 to the
S-3 filed with the Securities and Exchange
Commission June 9, 1997).
c. Amendment to the Articles of Incorporation of
CRIIMI MAE Inc. (incorporated by reference from
Exhibit 3(c) to the Annual Report on Form 10-K for
1998).
d. Articles Supplementary to the Articles of
Incorporation of CRIIMI MAE Inc. designating
150,000 shares of the Company's Preferred Stock as
"Series A Cumulative Convertible Preferred Stock"
(incorporated by reference from Exhibit 4.1 to the
S-3 registration statement filed with the
Securities and Exchange Commission on June 26,
1996).
e. Articles Supplementary to the Articles of
Incorporation of CRIIMI MAE Inc. reclassifying
150,000 shares of the Corporation's "Series A
Cumulative Convertible Preferred Stock" to
authorized but unissued shares of the Corporation's
preferred stock (incorporated by reference from
Exhibit 3(e) to the Annual Report on Form 10-K for
1999).
f. Articles Supplementary to the Articles of
Incorporation of CRIIMI MAE Inc. designating
3,000,000 shares of the Company's Preferred Stock
as "Series B Cumulative Convertible Preferred
Stock" (incorporated by reference from Exhibit 4.1
to the S-3 registration statement filed with the
Securities and Exchange Commission on August 7,
1996).
g. Articles Supplementary to the Articles of
Incorporation of CRIIMI MAE Inc. designating
300,000 shares of the Company's Preferred Stock as
"Series C Cumulative Convertible Preferred Stock"
(incorporated by reference from Exhibit 4.1 to the
8-K filed with the Securities and Exchange
Commission on September 23, 1997).
h. Articles Supplementary to the Articles of
Incorporation of CRIIMI MAE Inc. designating
300,000 shares of the Company's Preferred Stock as
"Series D Cumulative Convertible Preferred Stock"
(incorporated by reference from Exhibit 4.1 to the
8-K filed with the Securities and Exchange
Commission on August 3, 1998).
i. Articles Supplementary to the Articles of
Incorporation of CRIIMI MAE Inc. designating
203,000 unissued shares of the Company's Preferred
Stock as "Series E Cumulative Convertible Preferred
Stock" (incorporated by
65
reference to the Form 8-K filed with the Securities
and Exchange Commission on April 10, 2000).
j. Articles of Amendment to Articles Supplementary to
the Articles of Incorporation in respect of Series
E Cumulative Convertible Preferred Stock
(incorporated by reference to the Form 8-K filed
with the Securities and Exchange Commission on
April 10, 2000).
k. Articles of Amendment to Articles Supplementary to
the Articles of Incorporation of CRIIMI MAE Inc. in
respect of the Series E Cumulative Convertible
Preferred Stock (incorporated by reference from
Exhibit 3.2 to the Form 8-K filed with the
Securities and Exchange Commission on September 14,
2000).
l. Articles Supplementary to the Articles of
Incorporation of CRIIMI MAE Inc. designating
1,610,000 shares of the Company's Preferred Stock
as "Series F Redeemable Cumulative Dividend
Preferred Stock" (incorporated by reference from
Exhibit 3(k) to the Annual Report on Form 10-K for
1999).
m. Certificate of Correction of Articles Supplementary
to the Articles of Incorporation of CRIIMI MAE Inc.
in respect of Series F Redeemable Cumulative
Dividend Preferred Stock (incorporated by reference
from Exhibit 3.1 to the Form 8-K filed with the
Securities and Exchange Commission on September 14,
2000).
n. Articles Supplementary to the Articles of
Incorporation of CRIIMI MAE Inc. for the issuance
of a new series of $10 face value Series G
Redeemable Cumulative Dividend Preferred Stock
(incorporated by reference from Exhibit 3.3 to the
Form 8-K filed with the Securities and Exchange
Commission on September 14, 2000).
o. Agreement and Articles of Merger between CRIIMI MAE
Inc. and CRI Insured Mortgage Association, Inc. as
filed with the Office of the Secretary of the State
of Delaware (incorporated by reference from Exhibit
3(f) to the Quarterly Report on Form 10-Q for the
quarter ended June 30, 1993).
p. Agreement and Articles of Merger between CRIIMI MAE
Inc. and CRI Insured Mortgage Association, Inc. as
filed with the State Department of Assessment and
Taxation for the State of Maryland (incorporated by
reference from Exhibit 3(g) to the Quarterly Report
on Form 10-Q for the quarter ended June 30, 1993).
q. Limited Partnership Agreement of CRIIMI MAE
Services Limited Partnership effective as of June
1, 1995 between CRIIMI MAE Management, Inc. and
CRIIMI MAE Services, Inc. (incorporated by
reference from Exhibit 3(n) to the Annual Report on
Form 10-k for 1995).
r. First Amendment to the Limited Partnership
Agreement of CRIIMI MAE Services Limited
Partnership effective as of December 31, 1995
between CRIIMI MAE Management Inc. and CRIIMI MAE
Services, Inc. (incorporated by reference from
Exhibit 3(g) to the Annual Report on Form 10-K for
1998).
s. Second Amendment to the Limited Partnership
Agreement of CRIIMI MAE Services Limited
Partnership effective as of January 2, 1997 between
66
CRIIMI MAE Management Inc. and CRIIMI MAE Services,
Inc. (incorporated by reference from Exhibit 3(h)
to the Annual Report on Form 10-K for 1998).
t. Third Amendment to the Limited Partnership
Agreement of CRIIMI MAE Services Limited
Partnership effective as of December 31, 1997
between CRIIMI MAE Management Inc. and CRIIMI MAE
Services, Inc. (incorporated by reference from
Exhibit 3(i) to the Annual Report on Form 10-K for
1998).
u. Articles of Merger merging CRI Acquisition, Inc.,
CRICO Mortgage Company, Inc. and CRI/AIM
Management, Inc. into CRIIMI MAE Management, Inc.
(incorporated by reference from Exhibit 10(i) to
the Annual Report on Form 10-K for 1995).
Exhibit No. 4 - Instruments defining the rights of security
holders, including indentures.
a. Dividend Reinvestment and Stock Purchase Plan
between CRIIMI MAE Inc. and shareholders
(incorporated by reference from the registration
statement on Form S-3A filed December 9, 1997).
b. Form of Indenture between CRIIMI MAE Financial
Corporation and the trustee (incorporated by
reference from Exhibit 4.1 to the S-3 Registration
Statement filed with the Securities and Exchange
Commission on September 12, 1995).
c. Form of Bond (incorporated by reference to Exhibit
4.2 to the S-3 Registration Statement filed with
the Securities and Exchange Commission on September
12, 1995).
d. Seven Percent Funding Note due September 17, 2031
dated September 22, 1995 between CRIIMI MAE
Financial Corporation II and the Federal Home Loan
Mortgage Corporation (incorporated by reference
from Exhibit 4(bbb) to the Annual Report on Form
10-K for 1995).
e. Funding Note Purchase and Security Agreement dated
as of September 22, 1995 among the Federal Home
Loan Mortgage Corporation, CRIIMI MAE Inc. and
CRIIMI MAE Financial Corporation II (incorporated
by reference from Exhibit 4(ccc) to the Annual
Report on Form 10-K for 1995).
f. Assignment and Agreement dated as of September 22,
1995 between CRIIMI MAE Inc. and CRIIMI MAE
Financial Corporation II (incorporated by reference
from Exhibit 4(ddd) to the Annual Report on Form
10-K for 1995).
g. Funding Note dated December 15, 1995 between CRIIMI
MAE Financial Corporation III and the Federal
National Mortgage Association (incorporated by
reference from Exhibit 4(lll) to the Annual Report
on Form 10-K for 1995).
h. Assignment and Agreement dated as of the 15th day
of December, 1995, by and between CRIIMI MAE Inc.
and CRIIMI MAE Financial Corporation III
(incorporated by reference from Exhibit 4(mmm) to
the Annual Report on Form 10-K for 1995).
67
i. Funding Note Issuance and Security Agreement dated as of
December 15, 1995 among Federal National Mortgage
Association, CRIIMI MAE Inc. and CRIIMI MAE Financial
Corporation III (incorporated by reference from Exhibit
4(nnn) to the Annual Report on Form 10-K for 1995).
j. Indenture Agreement dated December 20, 1996 between
CRIIMI MAE QRS 1, Inc. and the trustee (incorporated by
reference from Exhibit 4(sss) to the Annual Report on
Form 10-K for 1996).
k. Form of Bond to CRIIMI MAE Trust 1 Commercial Mortgage
Bonds, Class A-1 (incorporated by reference from Exhibit
4(ttt) to the Annual Report on Form 10-K for 1996).
l. Form of Bond to CRIIMI MAE Trust 1 Commercial Mortgage
Bonds, Class A-2 (incorporated by reference from Exhibit
4(uuu) to the Annual Report on Form 10-K for 1996).
m. Form of Bond to CRIIMI MAE Trust 1 Commercial Mortgage
Bonds, Class B (incorporated by reference from Exhibit
4(vvv) to the Annual Report on Form 10-K for 1996).
n. Form of Bond to CRIIMI MAE Trust 1 Commercial Mortgage
Bonds, Class C (incorporated by reference from Exhibit
4(www) to the Annual Report on Form 10-K for 1996).
o. Form of Bond to CRIIMI MAE Trust 1 Commercial Mortgage
Bonds, Class D (incorporated by reference from Exhibit
4(xxx) to the Annual Report on Form 10-K for 1996).
p. Form of Bond to CRIIMI MAE Trust 1 Commercial Mortgage
Bonds, Class E (incorporated by reference from Exhibit
4(yyy) to the Annual Report on Form 10-K for 1996).
q. Form of Bond to CRIIMI MAE Trust 1 Commercial Mortgage
Bonds, Class F (incorporated by reference from Exhibit
4(zzz) to the Annual Report on Form 10-K for 1996).
r. Indenture Agreement, dated as of November 19, 1997,
between the Company and State Street Bank and Trust
Company (incorporated by reference from Exhibit 4 (aaaa)
to the Annual Report on Form 10-K for 1997).
s. First Supplemental Indenture, dated as of November 21,
1997, between the Company and State Street Bank and Trust
Company (incorporated by reference from Exhibit 4 (bbbb)
to the Annual Report on Form 10-K for 1997).
t. Prospectus dated May 29, 1998 whereby CRIIMI MAE Inc.
from time to time may offer one or more series of debt
securities, preferred shares, common shares or warrants
to purchase Preferred Shares or Common shares up to an
aggregate public offering price of up to $350,000,000
(incorporated by reference from Form S-3 on Form 8-K
filed May 29, 1998).
68
u. Prospectus dated July 8, 1998 whereby CRIIMI MAE Inc.
offers participation in its Dividend Reinvestment and
Stock Purchase Plan (incorporated by reference from Form
S-3 filed on July 9, 1998).
Exhibit No. 10 - Material contracts.
a. Revised Form of Advisory Agreement (incorporated by
reference from Exhibit No. 10.2 to the Registration
Statement).
b. Allonge to Amended and Restated Promissory Note dated as
of June 23, 1995 between C.R.I., Inc. and CRI/AIM
Management, Inc. (incorporated by reference from Exhibit
10(c) to the Annual Report on Form 10-K for 1995).
c. Administrative Services Agreement dated June 30, 1995
between CRIIMI MAE Inc. and C.R.I., Inc. (incorporated by
reference from Exhibit 10(d) to the Annual Report on Form
10-K for 1995).
d. Asset Purchase Agreement dated as of June 30, 1995 among
CRICO Mortgage Company, Inc., CRIIMI MAE Services, Inc.,
William B. Dockser and H. William Willoughby
(incorporated by reference from Exhibit 10(e) to the
Annual Report on Form 10-K for 1995).
e. Asset Purchase Agreement dated as of June 30, 1995 among
CRI/AIM Management, Inc., CRIIMI MAE Services, Inc.,
William B. Dockser and H. William Willoughby
(incorporated by reference from Exhibit 10(f) to the
Annual Report on Form 10-K for 1995).
f. The CRIIMI MAE Management, Inc. Executive Deferred
Compensation Trust Agreement dated June 30, 1995 between
CRIIMI MAE Management, Inc. and Richard J. Palmer
(incorporated by reference from Exhibit 10(g) to the
Annual Report on Form 10-K for 1995).
g. Sublease dated June 30, 1995 between C.R.I., Inc. and
CRIIMI MAE Inc. (incorporated by reference from Exhibit
10(h) to the Annual Report on Form 10-K for 1995).
h. Reimbursement Agreement dated as of June 30, 1995 between
CRIIMI MAE Management, Inc. and C.R.I., Inc.
(incorporated by reference from Exhibit 10(j) to the
Annual Report on Form 10-K for 1995).
i. Certificate of Merger dated June 30, 1995 merging CRICO
Mortgage Company, Inc., CRI/AIM Management, Inc. and CRI
Acquisition, Inc. into CRIIMI MAE Management, Inc.
(incorporated by reference from Exhibit 10(k) to the
Annual Report on Form 10-K for 1995).
j. Asset Purchase Agreement dated as of June 30, 1995 among
C.R.I., Inc., CRI Acquisition, Inc. and William B.
Dockser and H. William Willoughby (incorporated by
reference from Exhibit 10(l) to the Annual Report on Form
10-K for 1995).
k. First Amendment to Employment and Non-Competition
Agreement, dated as of October 5, 1998, by and among
CRIIMI MAE Management, Inc., William B. Dockser and
CRIIMI MAE Inc. (incorporated by reference from Exhibit
10(t) to the Annual Report on Form 10-K for 1998).
69
l. Employment and Non-Competition Agreement dated April 20,
1995 between CRIIMI MAE Management, Inc. and William B.
Dockser (incorporated by reference from Exhibit 10(b) to the
Annual Report on Form 10-K for 1995).
m. Employment and Non-Competition Agreement dated June 30, 1995
between CRIIMI MAE Management, Inc. and Frederick J.
Burchill (incorporated by reference from Exhibit 10(n) to
the Annual Report on Form 10-K for 1995).
n. Employment and Non-Competition Agreement dated June 30, 1995
between CRIIMI MAE Management, Inc. and H. William
Willoughby (incorporated by reference from Exhibit 10(q) to
the Annual Report on Form 10-K for 1995).
o. First Amendment to Employment and Non-Competition Agreement,
dated as of October 5, 1998, by and among CRIIMI MAE
Management, Inc., H. William Willoughby and CRIIMI MAE Inc.
(incorporated by reference from Exhibit 10(u) to the Annual
Report on Form 10-K for 1998).
p. Employee Stock Option Agreements and Stock Option Plan for
Key Employees (incorporated by reference from Exhibit 4(c)
to the S-8 Registration Statement filed with the Securities
and Exchange Commission on June 20, 1997).
q. 1996 Non-Employee Director Stock Option Plan (incorporated
by reference from Exhibit 4 to the S-8 Registration
Statement filed with the Securities and Exchange Commission
on June 13, 1996).
r. Employment and Non-Competition Agreement dated as of July 1,
1998 between CRIIMI MAE Management, Inc. and Cynthia O.
Azzara (incorporated by reference from Exhibit 10(p) to the
Annual Report on Form 10-K for 1998).
s. First Amendment to the Employment and Non-Competition
Agreement dated as of October 5, 1998 by and among CRIIMI
MAE Management, Inc. and Cynthia O. Azzara and CRIIMI MAE
Inc. (incorporated by reference from Exhibit 10(q) to the
Annual Report on Form 10-K for 1998).
t. Employment and Non-Competition Agreement dated as of October
7, 1998 between CRIIMI MAE Management, Inc. and David B.
Iannarone (incorporated by reference from Exhibit 10(r) to
the Annual Report on Form 10-K for 1998).
u. First Amendment to the Employment and Non-Competition
Agreement, dated as of October 7, 1998, by and among CRIIMI
MAE Management, Inc., David B. Iannarone and CRIIMI MAE Inc.
(incorporated by reference from Exhibit 10(s) to the Annual
Report on Form 10-K for 1998).
v. Master Loan and Security Agreement dated as of March 31,
1998 between CRIIMI MAE Inc. and German American Capital
Corporation (incorporated by reference from Exhibit 10(a) to
the Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998).
w. Master Assignment Agreement dated as of November 25, 1997
between CRIIMI MAE Inc. and Lehman Commercial paper, Inc.
(incorporated by
70
reference from Exhibit 10(b) to the Quarterly Report on Form
10-Q for the quarter ended March 31, 1998).
x. Whole Loan Origination Facility Agreement between Prudential
Securities Credit Corp., and CRIIMI MAE Inc., dated as of
June 1, 1998 (incorporated by reference from Exhibit 10 to
the Quarterly Report on Form 10-Q for the quarter ended June
30, 1998).
y. Underwriting Agreement dated January 22, 1998 between CRIIMI
MAE Inc. and Prudential Securities Incorporated
(incorporated by reference from Exhibit 1.0 to the 8-K filed
with the Securities and Exchange Commission on January 23,
1998).
z. Underwriting Agreement dated March 19, 1998 between CRIIMI
MAE Inc. and Prudential Securities Incorporated and
Friedman, Billings, Ramsey & Co., Inc. (incorporated by
reference from Exhibit 1.0 to the 8-K filed with the
Securities and Exchange Commission on March 20, 1998).
aa. Amended and Restated Mortgage Loan Origination and
Disposition Program Agreement made as of May 1, 1998 between
Citicorp Real Estate, Inc. and CRIIMI MAE Inc. (incorporated
by reference from Exhibit 10(aa) to the Annual Report on
Form 10-K for 1998).
bb. Articles of Incorporation of CRIIMI MAE Management, Inc.
(incorporated by reference from Exhibit 3(h) to the Annual
Report on Form 10-K for 1995).
cc. Bylaws of CRIIMI MAE Management, Inc. (incorporated by
reference from Exhibit 3(i) to the Annual Report on Form 10-
K for 1995).
dd. Articles of Incorporation of CRIIMI MAE Services, Inc. as a
Maryland Close Corporation (incorporated by reference from
Exhibit 3(j) to the Annual Report on Form 10-K for 1995).
ee. Bylaws of CRIIMI MAE Services, Inc. (incorporated by
reference from Exhibit 3(k) to the Annual Report on Form 10-
K for 1995).
ff. Articles of Incorporation of CRIIMI MAE Financial
Corporation (incorporated by reference from Exhibit 3.1 to
the Form S-3 Registration Statement filed with the
Securities and Exchange Commission on September 12, 1995).
gg. By-laws of CRIIMI MAE Financial Corporation (incorporated by
reference from Exhibit 3.2 to the Form S-3 Registration
Statement filed with the Securities and Exchange Commission
on September 12, 1995).
hh. Articles of Incorporation of CRIIMI MAE Financial
Corporation II (incorporated by reference from Exhibit 3(q)
to the Annual Report on Form 10-K for 1995).
ii. Bylaws of CRIIMI MAE Financial Corporation II (incorporated
by reference from Exhibit 3(r) to the Annual Report on Form
10-K for 1995).
71
jj. Articles of Incorporation of CRIIMI MAE Financial
Corporation III (incorporated by reference from Exhibit 3(s)
to the Annual Report on Form 10-K for 1995).
kk. Bylaws of CRIIMI MAE Financial Corporation III (incorporated
by reference from Exhibit 3(t) to the Annual Report on Form
10-K for 1995).
ll. Certificate of Incorporation of CRIIMI MAE QRS 1, Inc.
(incorporated by reference from Exhibit 3(p) to the Annual
Report on Form 10-K for 1996).
mm. Bylaws of CRIIMI MAE QRS 1, Inc. (incorporated by reference
from Exhibit 3(q) to the Annual Report on Form 10-K for
1996).
nn. Certificate of Incorporation of CRIIMI MAE Holdings, Inc.
(incorporated by reference from Exhibit 3(r) to the Annual
Report on Form 10-K for 1996).
oo. Bylaws of CRIIMI MAE Holdings, Inc. (incorporated by
reference from Exhibit 3(s) to the Annual Report on Form 10-
K for 1996).
pp. Certificate of Limited Partnership of CRIIMI MAE Holdings,
L.P. (incorporated by reference from Exhibit 3(t) to the
Annual Report on Form 10-K for 1996).
qq. Limited Partnership Agreement of CRIIMI MAE Holdings, L.P.
effective as of December 17, 1996 between CRIIMI MAE Inc.,
CRIIMI MAE Services Limited Partnership and CRIIMI MAE
Holdings, Inc. (incorporated by reference from Exhibit 3(u)
to the Annual Report on Form 10-K for 1996).
rr. First Amendment to Preferred Stock Purchase Agreement for
Series C Preferred Stock dated May 9, 1997 (incorporated by
reference from Exhibit 10.2 to the Form 8-K filed with the
Securities and Exchange Commission on September 23, 1997).
ss. Second Amendment to Preferred Stock Purchase Agreement for
Series C Preferred Stock dated February 18, 1998
(incorporated by reference from Exhibit 4.1 to the Form 8-K
filed with the Securities and Exchange Commission on
February 20, 1998).
tt. Preferred Stock Exchange Agreement between CRIIMI MAE Inc.
and MeesPierson Investments Inc. dated February 22, 2000
(incorporated by reference to the Form 8-K filed with the
Securities and Exchange Commission on April 10, 2000).
uu. Preferred Stock Purchase Agreement for Series D Preferred
Stock dated July 22, 1998 (incorporated by reference from
Exhibit 10.1 to the Form 8-K filed with the Securities and
Exchange Commission on August 3, 1998).
vv. Preferred Stock Exchange Agreement entered into July 26,
2000 by CRIIMI MAE Inc. and the holder of its Series D
Cumulative Convertible Preferred Stock (incorporated by
reference from Exhibit 99.8 to the Form 8-K filed with the
Securities and Exchange Commission on September 22, 2000).
72
ww. Certificate of Limited Partnership of CRIIMI MAE
Holdings II, L.P. (incorporated by reference from
Exhibit 10(uu) to the Annual Report on Form 10-K for
1998).
xx. Limited Partnership Agreement of CRIIMI MAE Holdings
II, L.P. effective as of June 4, 1998 between CRIIMI
MAE Inc. and CRIIMI MAE Services Limited Partnership
(incorporated by reference from Exhibit 10(vv) to the
Annual Report on Form 10-K for 1998).
yy. Installment Note dated June 30, 1995 between CRIIMI MAE
Services, Inc. and CRI/AIM Management, Inc.
(incorporated by reference from Exhibit 4(oo) to the
Annual Report on Form 10-K for 1995).
zz. Installment Note dated June 30, 1995 between CRIIMI MAE
Services, Inc. and CRICO Mortgage Company, Inc.
(incorporated by reference from Exhibit 4(pp) to the
Annual Report on Form 10-K for 1995).
aaa. $9,100,000 Credit Agreement dated as of June 30, 1995
between CRIIMI MAE Management, Inc. and Signet
Bank/Virginia (incorporated by reference from Exhibit
4(qq) to the Annual Report on Form 10-K for 1995).
bbb. Loan Note dated June 30, 1995 between CRIIMI MAE
Management, Inc. and Signet Bank/Virginia (incorporated
by reference from Exhibit 4(rr) to the Annual Report on
Form 10-K for 1995).
ccc. Modification of Interest Rate dated August 22, 1995 for
the Credit Agreement Dated as of June 30, 1995 between
CRIIMI MAE Management, Inc. and Signet Bank/Virginia
(incorporated by reference from Exhibit 4(ss) to the
Annual Report on Form 10-K for 1995).
ddd. Guaranty dated June 30, 1995 entered into by CRIIMI MAE
Inc. in favor of and for the benefit of Signet
Bank/Virginia (incorporated by reference from Exhibit
4(tt) to the Annual Report on Form 10-K for 1995).
eee. First Amendment to Guaranty dated September 21, 1995
entered into by CRIIMI MAE Inc., in favor of and for
the benefit of Signet Bank/ Virginia (incorporated by
reference from Exhibit 4(yy) to the Annual Report on
Form 10-K for 1995).
fff. Second Amendment to Guaranty dated September 21, 1995
entered into by CRIIMI MAE Inc., in favor of and for
the benefit of Signet Bank/ Virginia (incorporated by
reference from Exhibit 4(zz) to the Annual Report on
Form 10-K for 1995).
ggg. Option agreement between CRIIMI MAE Inc. and William B.
Dockser (incorporated by reference from Exhibit No.
4(a) to the registration statement on Form S-8 filed
January 16, 1996).
hhh. Option agreement between CRIIMI MAE Inc. and H. William
Willoughby (incorporated by reference from Exhibit No.
4(b) to the registration statement on Form S-8 filed
January 16, 1996).
iii. Form of Option Agreement for Cynthia O. Azzara,
Frederick J. Burchill, Jay R. Cohen and Deborah A. Linn
(incorporated by reference from Exhibit No. 4(d) to the
registration statement on Form S-8 filed January 16,
1996).
73
jjj. Form of Option Agreement for other key employees
(incorporated by reference from Exhibit No. 4(e) to the
registration statement on Form S-8 filed January 16,
1996).
kkk. Master Assignment Agreement dated September 25, 1997
between CRIIMI MAE Inc. and Merrill Lynch Mortgage
Capital Inc. (incorporated by reference from Exhibit 4
(eeee) to the Annual Report on Form 10-K for 1997).
Exhibit No. 21 - Registrant.
a. CRIIMI, Inc., incorporated in the State of Maryland.
b. CRIIMI MAE Financial Corporation, incorporated in the
State of Maryland.
c. CRIIMI MAE Financial Corporation II, incorporated in
the State of Maryland.
d. CRIIMI MAE Financial Corporation III, incorporated in
the State of Maryland.
e. CRIIMI MAE Management, Inc., incorporated in the State
of Maryland.
f. CRIIMI MAE QRS 1, Inc., incorporated in the State of
Delaware.
g. CRIIMI MAE Services Limited Partnership formed in the
State of Maryland.
h. CRIIMI MAE Services Inc. incorporated in the State of
Maryland.
i. CRIIMI MAE Holdings L.P. II formed in the State of
Delaware.
j. CRIIMI MAE CMBS Corporation incorporated in the State
of Delaware.
Exhibit No. 99 - Additional Exhibits
a. United States Bankruptcy Court Voluntary Petition
#9823115 filed on October 5, 1998 for CRIIMI MAE Inc.
(incorporated by reference from Exhibit 99(a) to the
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998).
b. United States Bankruptcy Court Voluntary Petition
#9823116 filed on October 5, 1998 for CRIIMI MAE
Management, Inc. (incorporated by reference from
Exhibit 99(b) to the Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998).
c. United States Bankruptcy Court Voluntary Petition
#9823117 filed on October 5, 1998 for Holdings II, L.P.
(incorporated by reference from Exhibit 99(c) to the
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998).
d. Motion for an Order Extending the Debtor's Exclusive
Periods to File a Plan of Reorganization and Solicit
Acceptances Thereof Pursuant to 11 U.S.C. Sec. 1121(d)
filed on January 28, 1999 (incorporated by reference
from Exhibit 99(d) to the Annual Report on Form 10-K
for 1998).
74
e. Stipulation and Consent Order regarding Motion and
Adversary Proceeding (Merrill Lynch) entered December
4, 1998 (incorporated by reference from Exhibit 99(e)
to the Annual Report on Form 10-K for 1998).
f. Supplement to Stipulation and Consent Order Regarding
Motion and Adversary Proceeding (Merrill Lynch) entered
January 6, 1999 (incorporated by reference from Exhibit
99(f) to the Annual Report on Form 10-K for 1998).
g. Stipulation and Agreed Order Authorizing Use of Cash
Collateral (German American Capital Corporation)
entered February 2, 1999 (incorporated by reference
from Exhibit 99(g) to the Annual Report on Form 10-K
for 1998).
h. Stipulation and Consent Order Regarding Adversary
Proceeding (Morgan Stanley and Co. International
Limited) entered on January 26, 1999 (incorporated by
reference from Exhibit 99(h) to the Annual Report on
Form 10-K for 1998).
i. Stipulation and Order Regarding Proceeds Received by
the Debtor from the Sale of the BBB Bonds (Morgan
Stanley and Co. International Limited) entered on
January 26, 1999 (incorporated by reference from
Exhibit 99(i) to the Annual Report on Form 10-K for
1998).
j. Order Upon Motions for Reconsideration of Order
Extending Debtors' Exclusive Periods entered on
February 24, 1999 (incorporated by reference from
Exhibit 99(j) to the Annual Report on Form 10-K for
1998).
k. Stipulation and Consent Order Regarding Sale of Certain
Triple B Bonds (Citicorp) entered on April 5, 1999
(incorporated by reference from Exhibit 99(k) to the
Annual Report on Form 10-K for 1998).
l. Supplemental Stipulation and Consent Order Regarding
Sale of Certain Triple B Bonds (Citicorp) entered on
April 5, 1999 (incorporated by reference from Exhibit
99(l) to the Annual Report on Form 10-K for 1998).
m. Stipulation and Order Regarding Proceeds Received by
the Debtor from the Sale of Certain Triple B Bonds
(Citicorp) entered on April 5, 1999 (incorporated by
reference from Exhibit 99(m) to the Annual Report on
Form 10-K for 1998).
n. Stipulation and Consent Order Regarding Mortgage Loan
Origination Agreement with Citicorp Real Estate Inc.
entered on April 5, 1999 (incorporated by reference
from Exhibit 99(n) to the Annual Report on Form 10-K
for 1998).
o. Supplemental Stipulation and Consent Order Regarding
Mortgage Loan Origination Agreement with Citicorp Real
Estate, Inc. entered on April 5, 1999 (incorporated by
reference from Exhibit 99(o) to the Annual Report on
Form 10-K for 1998).
p. Stipulation and Order Regarding Proceeds Received by
the Debtor from Mortgage Loan Sale entered on April 5,
1999 (incorporated by reference from Exhibit 99(p) to
the Annual Report on Form 10-K for 1998).
q. Amended Stipulation and Agreed Order Authorizing Use of
Cash Collateral (German American Capital Corporation)
entered May 11, 1999 by reference
75
from Exhibit 99(a) to the Quarterly Report on Form 10-Q
for quarter ended June 30, 1999).
r. Stipulation Extending Wells Fargo Standstill (Morgan
Stanley and Co. International Limited) entered April 8,
1999 by reference from Exhibit 99(b) to the Quarterly
Report on Form 10-Q for quarter ended June 30, 1999).
s. Stipulation Extending Wells Fargo Standstill (Morgan
Stanley and Co. International Limited) entered April
23, 1999 by reference from Exhibit 99(c) to the
Quarterly Report on Form 10-Q for quarter ended June
30, 1999).
t. Stipulation Extending Wells Fargo Standstill (Morgan
Stanley and Co. International Limited) entered May 10,
1999 by reference from Exhibit 99(d) to the Quarterly
Report on Form 10-Q for quarter ended June 30, 1999).
u. Stipulation Extending Wells Fargo Standstill (Morgan
Stanley and Co. International Limited) entered May 24,
1999 by reference from Exhibit 99(e) to the Quarterly
Report on Form 10-Q for quarter ended June 30, 1999).
v. Stipulation Extending Wells Fargo Standstill (Morgan
Stanley and Co. International Limited) entered June 24,
1999 by reference from Exhibit 99(f) to the Quarterly
Report on Form 10-Q for quarter ended June 30, 1999).
w. Stipulation and Agreed Order (i) Authorizing Use of
Cash and (ii) Granting Other Relief (First Union
National Bank entered August 5, 1999 (incorporated by
reference from Exhibit 99(a) to the Quarterly Report on
Form 10-Q for quarter ended September 30, 1999).
x. Stipulation Extending Wells Fargo Standstill (Morgan
Stanley and Co. International Limited) entered July 9,
1999 (incorporated by reference from Exhibit 99(b) to
the Quarterly Report on Form 10-Q for quarter ended
September 30, 1999).
y. Stipulation Extending Wells Fargo Standstill (Morgan
Stanley and Co. International Limited) entered July 16,
1999 (incorporated by reference from Exhibit 99(c) to
the Quarterly Report on Form 10-Q for quarter ended
September 30, 1999).
z. Stipulation Extending Wells Fargo Standstill (Morgan
Stanley and Co. International Limited) entered August
9, 1999 (incorporated by reference from Exhibit 99(d)
to the Quarterly Report on Form 10-Q for quarter ended
September 30, 1999).
aa. Stipulation Extending Wells Fargo Standstill (Morgan
Stanley and Co. International Limited entered September
16, 1999 (incorporated by reference from Exhibit 99(e)
to the Quarterly Report on Form 10-Q for quarter ended
September 30, 1999).
bb. Stipulation Extending Wells Fargo Standstill (Morgan
Stanley and Co. International Limited) entered October
12, 1999 (incorporated by reference
76
from Exhibit 99(f) to the Quarterly Report on Form 10-Q
for quarter ended September 30, 1999).
cc. Stipulation Extending Wells Fargo Standstill (Morgan
Stanley and Co. International Limited) entered November
10, 1999 (incorporated by reference from Exhibit 99(cc)
to the Annual Report on Form 10-K for 1999).
dd. Stipulation and Consent Order providing Merrill Lynch
Mortgage Capital Inc. with adequate protection of its
interest in the Collateral Securities entered on
December 3, 1999 (incorporated by reference from
Exhibit 99(dd) to the Annual Report on Form 10-K for
1999).
ee. Stipulation and Consent Order Regarding Adversary
Proceeding (Morgan Stanley and Co. International
Limited) entered on February 24, 2000 (incorporated by
reference from Exhibit 99(ee) to the Annual Report on
Form 10-K for 1999).
ff. Second Stipulation and Agreed Order (i) Authorizing Use
of Cash Collateral and (ii) Granting Other Relief among
CMI, First Union National Bank, and the Official
Committee of Unsecured Creditors of CMI. entered on
March 28, 2000 (incorporate by reference from Exhibit
99(ff) to the Annual Report on Form 10-K for 1999).
gg. Stipulation of Dismissal with Prejudice of Adversary
Proceeding (Morgan Stanley and Co. International
Limited) entered on March 3, 2000 (incorporated by
reference from Exhibit 99(gg) to the Annual Report on
Form 10-K for 1999).
hh. Stipulation Extending Wells Fargo Standstill (Morgan
Stanley and Co. International Limited) entered January
27, 2000 (incorporated by reference from Exhibit 99(hh)
to the Annual Report on Form 10-K for 1999).
ii. Stipulation and Order Regarding Proceeds Received by
the Debtor from the Sale of the Wells Fargo Bonds
entered on February 28, 2000 (incorporated by reference
from Exhibit 99(ii) to the Annual Report on Form 10-K
for 1999).
jj. Joint Disclosure Statement (Proposed) of CRIIMI MAE
Inc. and its affiliates (incorporated by reference to
the Form 8-K filed with the Securities and Exchange
Commission on December 27, 1999).
kk. Amended Joint Disclosure Statement (Proposed) of CRIIMI
MAE Inc. and its affiliates (incorporated by reference
to the Form 8-K filed with the Securities and Exchange
Commission on April 10, 2000).
ll. Stipulation and Consent Order selling certain
commercial mortgage-backed securities to Lehman Ali
Inc. free and clear of liens, claims and encumbrances
entered April 19, 2000 (incorporated by reference from
Exhibit 99(a) to the Quarterly Report on Form 10-Q for
quarter ended March 31, 2000.
mm. Stipulation Resolving Objection to Shareholder
Plaintiffs to Debtors' Amended Joint Disclosure
Statement entered April 24, 2000 (incorporated by
reference from Exhibit 99(a) to the Quarterly Report to
Form 10-Q for quarter June 30, 2000).
77
nn. Expedited Motion to Clarify Order Granting Authority
for Debtor to Take Necessary Actions to Implement Sale
of Brick Church Property entered by the United States
Bankruptcy Court for the District of Maryland,
Greenbelt on June 26, 2000 (incorporated by reference
from Exhibit 99(b) to the Quarterly Report on Form 10-Q
for quarter ended June 30, 2000).
oo. 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
(incorporated by reference from Exhibit 99(c) to the
Quarterly Report on Form 10-Q for quarter ended June
30, 2000).
pp. 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 (incorporated by reference from Exhibit
99(d) to the Quarterly Report on Form 10-Q for quarter
ended June 30, 2000).
qq. Notice of Motion to Approve Stipulation and Consent
Order Selling Certain Commercial Mortgage-Backed
Securities to Lehman Ali, Inc. Free and Clear of Liens,
Claims and Encumbrances entered March 21, 2000
(incorporated by reference from Exhibit 99(a) to the
Quarterly Report on Form 10-Q for quarter ended
September 30, 2000).
rr. Notice of Motion to Approve Stipulation and Consent
Order Selling Certain Commercial Mortgage-Backed
Securities to ORIX Real Estate Capital Markets, LLC
Free and Clear of Liens, Claims and Encumbrances and
Compromising and Settling Claims entered on September
21, 2000 (incorporated by reference from Exhibit 99(b)
to the Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000).
ss. Notice of Motion to Approve Stipulation and Consent
Order Regarding Application of MCFI Bond Proceeds
entered on September 22, 2000 (incorporated by
reference from Exhibit 99(c) to the Quarterly Report on
Form 10-Q for the quarter ended September 30, 2000).
tt. Order and Ruling Upon Objection to Debtors' Proposed
Second Amended Joint Disclosure Statement entered on
July 12, 2000 and a Memorandum Opinion pertaining to
such objection entered by the Bankruptcy Court on July
12, 2000 (incorporated by reference from Exhibit 99.1
to the Form 8-K filed with the Securities and Exchange
Commission on July 20, 2000).
uu. The Debtors' Second Amended Joint Disclosure Statement
(as supplemented and amended by praecipes filed with
the Bankruptcy Court on July 13 and 21 and August 18,
2000 "Disclosure Statement") (incorporated by reference
from Exhibit 99.6 to the Form 8-K filed with the
Securities and Exchange Commission on September 22,
2000).
vv. Order entered by the Bankruptcy Court on August 24,
2000 (i) approving the disclosure statement; (ii)
fixing the time within which creditors and equity
interest holders may vote to accept or reject the plan;
(iii) fixing date, time and place for hearing on
confirmation of the plan; (iv) approving form of
ballots and voting procedures; and (v) approving manner
of notice
78
(incorporated by reference from Exhibit 99.2 to the
Form 8-K filed with the Securities and Exchange
Commission on September 22, 2000).
ww. Stipulation and Consent Order selling certain
Commercial Mortgage-Backed Securities to ORIX Real
Estate Capital Markets, LLC Free and Clear of Liens,
Claims and Encumbrances and Compromising and Settling
claims entered by the Bankruptcy Court on October 12,
2000 (incorporated by reference from Exhibit 99(g) to
the Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000).
xx. Amendment to Agreed Proceeds in Connection with
Stipulation and Consent Order selling certain
Commercial Mortgage-Backed Securities to ORIX Real
Estate Capital Markets, LLC Free and Clear of Liens,
Claims and Encumbrances and Compromising and Settling
Claims entered by the Bankruptcy Court on October 30,
2000 (incorporated by reference from Exhibit 99(h) to
the Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000).
yy. Tally of Ballots Voting on the Debtors' Plan filed on
November 9, 2000 (incorporated by reference from
Exhibit 99(i) to the Quarterly Report on Form 10-Q for
the quarter ended September 30, 2000).
zz. Stipulation and Consent Order regarding the Capital
Company of America's Proof of Claim No. 254 entered on
November 15, 2000 (filed herewith).
aaa. Order confirming Debtors' Third Amended Joint Plan of
Reorganization entered by the United States Bankruptcy
Court for the District of Maryland, Greenbelt on
November 22, 2000 (incorporated by reference from
Exhibit 99.1 to the Form 8-K filed with the Securities
and Exchange Commission on December 28, 2000).
bbb. CMBS Sale Portfolio Schedule in support of the
confirmation order of the Third Amended Joint Plan of
Reorganization (as amended and supplemented by
praecipes filed with the Bankruptcy Court on July 13,
14, and 21 and November 22, 2000) filed with the
Bankruptcy Court on November 15, 2000 (incorporated by
reference from Exhibit 99.1 to the Form 8-K filed with
the Securities and Exchange Commission on January 22,
2001).
ccc. Definition of Distribution Record in support of the
confirmation order of the Third Amended Joint Plan of
Reorganization (as amended and supplemented by
praecipes filed with the Bankruptcy Court on July 13,
14, and 21 and November 22, 2000) filed with the
Bankruptcy Court on November 15, 2000 (incorporated by
reference from Exhibit 99.2 to the Form 8-K filed with
the Securities and Exchange Commission on January 22,
2001).
ddd. Unaudited Pro Forma Consolidated Financial Statements
and Projected Financial Information in support of the
confirmation order of the Third Amended Joint Plan of
Reorganization (as amended and supplemented by
praecipes filed with the Bankruptcy Court on July 13,
14, and 21 and November 22, 2000, the "Plan") filed
with the Bankruptcy Court on November 15, 2000
(incorporated by reference from Exhibit 99.3 to the
Form 8-K filed with the Securities and Exchange
Commission on January 22, 2001).
79
eee. Liquidation Analysis in support of the confirmation
order of the Third Amended Joint Plan of Reorganization
(as amended and supplemented by praecipes filed with
the Bankruptcy Court on July 13, 14, and 21 and
November 22, 2000, the "Plan") filed with the
Bankruptcy Court on November 15, 2000 (incorporated by
reference from Exhibit 99.4 to the Form 8-K filed with
the Securities and Exchange Commission on January 22,
2001).
(b) Reports on Form 8-K
Date Purpose
---- -------
December 28, 2000 To report (1) the Amended Praecipe,
dated December 8, 2000, filing the Third
Amended Joint Plan of Reorganization (as
amended and supplemented by praecipes
filed with the Bankruptcy Court on July
13, 14, 21, August 18 and November 22,
2000, the "Plan") of CRIIMI MAE Inc.,
CRIIMI MAE Holdings II, L.P. and CRIIMI
MAE Management, Inc. (collectively, the
"Debtors") as confirmed by the United
States Bankruptcy Court for the District
of Maryland, Greenbelt Division on
November 22, 2000; (2) the Order entered
by the Bankruptcy Court on November 22,
2000 confirming the Debtors' Plan; and
(3) a press release issued by CRIIMI MAE
Inc. on November 27, 2000 announcing the
Bankruptcy Court's confirmation of the
Debtors' Plan.
(c) Exhibits
The list of Exhibits required by Item 601 of Regulation S-K is
included in Item (a)(3) above.
(d) Financial Statement Schedules
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CRIIMI MAE INC.
April 11, 2001 /s/ William B. Dockser
- ---------------- --------------------------------
DATE William B. Dockser
Chairman of the Board and
Principal Executive Officer
80
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
April 11, 2001 /s/ William B. Dockser
- ------------------------- --------------------------------
DATE William B. Dockser
Chairman of the Board and
Principal Executive Officer
April 16, 2001 /s/ H. William Willoughby
- ------------------------- --------------------------------
DATE H. William Willoughby
Director, President and
Secretary
April 16, 2001 /s/ Cynthia O. Azzara
- ------------------------- --------------------------------
DATE Cynthia O. Azzara
Senior Vice President, Chief
Financial Officer and Treasurer
April 13, 2001 /s/ Garret G. Carlson, Sr.
- ------------------------- --------------------------------
DATE Garret G. Carlson, Sr.
Director
April 12, 2001 /s/ G. Richard Dunnells
- ------------------------- --------------------------------
DATE G. Richard Dunnells
Director
April 12, 2001 /s/ Robert J. Merrick
- ------------------------- --------------------------------
DATE Robert J. Merrick
Director
April 11, 2001 /s/ Robert E. Woods
- ------------------------- --------------------------------
DATE Robert E. Woods
Director
81
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
CRIIMI MAE Inc.:
We have audited the accompanying consolidated balance sheets of CRIIMI MAE
Inc. (CRIIMI MAE) and its subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of income and comprehensive income, changes in
shareholders' equity and cash flows for the years ended December 31, 2000, 1999
and 1998. These financial statements are the responsibility of CRIIMI MAE's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of CRIIMI MAE and
its subsidiaries as of December 31, 2000 and 1999, and the consolidated results
of their operations and their cash flows for the years ended December 31, 2000,
1999 and 1998, in conformity with accounting principles generally accepted in
the United States.
The accompanying financial statements have been prepared assuming that
CRIIMI MAE will continue as a going concern. As discussed in Note 1 to the
financial statements, on October 5, 1998, CRIIMI MAE filed for relief under
Chapter 11 of the U.S. Bankruptcy Code which raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to this
matter are also described in Note 1. The financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
CRIIMI MAE be unable to continue as a going concern.
Arthur Andersen LLP
Vienna, Virginia
April 11, 2001
F-1
CRIMI MAE INC
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------------------
2000 1999
---------------- ----------------
Assets:
Mortgage assets:
Subordinated CMBS and Other MBS, at fair value $ 109,266,975 $ 142,435,429
Subordinated CMBS pledged to creditors, at fair value 747,579,293 1,036,927,670
Insured mortgage securities, at fair value 385,751,407 394,857,239
Investment in originated loans, at amortized cost - 470,204,780
Equity investments 33,779,658 34,929,523
Receivables 41,003,072 69,483,337
Other assets 38,043,461 53,276,333
Restricted cash and cash equivalents 95,846,001 38,036,624
Other cash and cash equivalents 106,569,778 53,510,311
--------------- ---------------
Total assets $ 1,557,839,645 $ 2,293,661,246
=============== ===============
Liabilities:
Liabilities not subject to Chapter 11 proceedings:
Securitized mortgage obligations:
--------------------------------
Collateralized bond obligations- CMBS $ 280,520,265 $ 278,165,968
Collateralized mortage obligations-
insured mortgage securities 364,649,925 378,711,602
Collateralized mortgage obligations-
originated loans - 399,768,513
Payables and accrued expenses 33,415,632 29,886,888
Liabilities subject to Chapter 11 proceedings:
Secured:
-------
Variable-rate secured borrowings-CMBS 367,535,895 732,904,775
Other financing facilities 1,300,000 3,050,000
Payables and accrued expenses 2,166,936 26,455,952
Unsecured:
---------
Senior unsecured notes 100,000,000 100,000,000
Other financing facilities 89,749,522 89,749,522
Payables and accured expenses 50,243,454 35,619,440
--------------- ---------------
Total liabilities 1,289,581,629 2,074,312,660
--------------- ---------------
Shareholders' equity:
Convertible preferred stock, $0.01 par; 25,000,000
shares authorized; 6,124,527 and 2,647,124 shares
issued and outstanding, respectively 61,245 26,471
Common stock, $0.01 par; 120,000,000 shares
authorized; 62,353,170 and 59,954,604 shares
issued and outstanding, respectively 623,532 599,546
Accumulated other comprehensive income (3,019,679) (207,421,788)
Additional paid-in capital 611,935,164 574,579,272
Accumulated deficit (341,342,246) (148,434,915)
--------------- ---------------
Total shareholders' equity 268,258,016 219,348,586
--------------- ---------------
Total liabilities and shareholders' equity $ 1,557,839,645 $ 2,293,661,246
=============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
CRIIMI MAE INC.
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
For the years ended December 13,
--------------------------------------------------------
2000 1999 1998
--------------- --------------- ---------------
Interest income:
Subordinated CMBS $ 137,072,372 $ 154,205,383 $ 143,656,307
Insured mortgage securities 30,668,228 33,405,171 43,062,743
Originated loans 27,511,041 34,712,674 20,588,112
--------------- --------------- ---------------
Total interest income 195,251,641 222,323,228 207,307,162
--------------- --------------- ---------------
Interest and related expenses:
Fixed-rate collateralized bond obligations-CMBS 25,345,519 22,054,939 8,945,570
Fixed-rate collateralized mortgage obligations-
insured securities 30,211,712 33,382,959 39,503,033
Fixed-rate collateralized mortgage obligations-
original loans 22,716,109 27,479,268 14,772,782
Fixed-rate senior unsecured notes 9,125,004 9,125,004 9,689,621
Variable-rate secured borrowings-CMBS 43,785,955 52,195,828 59,628,760
Other financing facilities 8,182,070 7,098,832 3,728,665
--------------- --------------- ---------------
Total interest expense 139,366,369 151,336,830 136,268,431
--------------- --------------- ---------------
Net interest margin 55,885,272 70,986,398 71,038,731
--------------- --------------- ---------------
Equity in earnings (losses) from investments 1,512,005 (1,243,562) 2,617,728
Other income 4,915,320 3,024,068 4,278,878
Net gain on mortgage security dispositions 279,815 2,127,691 1,196,499
Gain on originated loan dispositions 244,580 403,383 -
General and administrative expenses (11,301,385) (12,049,256) (14,623,407)
Amortization of assets acquired in the Merger (2,877,576) (2,877,576) (2,877,576)
Unrealized loss on warehouse obligation - (8,000,000) (30,378,173)
Litigation expense (2,500,000) - -
Impairment on CMBS (143,478,085) - -
Reorganization items:
Other (4,950,677) (22,003,128) (9,856,947)
Impairment on CMBS-Reorganization item (15,832,817) (156,896,831) -
Loss on REO (924,283) - -
Gain on sale of CMBS 1,481,029 -
Loss on originated loans (45,845,712) - -
Realized loss on reverse repurchase obligation - - (4,503,177)
Gain on sale of CBO-2 - - 28,800,408
Write-off of capitalized loan origination costs - - (3,284,037)
--------------- --------------- ---------------
(219,277,786) (197,515,211) (28,629,804)
Minority interest in net income of consolidated subsidiary - - (40,334)
--------------- --------------- ---------------
Net (loss) income before extraordinary item (163,392,514) (126,528,813) 42,368,593
Extraordinary item-gain on debt extinguishment 14,808,737 - -
--------------- --------------- ---------------
Net (loss) income before dividends accrued
or paid on preferred shares (148,583,777) (126,528,813) 42,368,593
Dividends accrued or paid on preferred shares (6,911,652) (5,840,152) (6,997,859)
--------------- --------------- ---------------
Net (loss) income available to common shareholders $ (155,495,429) $ (132,368,965) $ 35,370,734
=============== =============== ===============
Net (loss) income available to common shareholders
per common share:
Basic-before extraordinary item ($2.74) ($2.45) $ 0.75
=============== =============== ===============
Basic-after extraordinary item ($2.50) ($2.45) $ 0.75
=============== =============== ===============
Diluted-after extraordinary item ($2.50) ($2.45) $ 0.74
=============== =============== ===============
Shares used in computing basic earnings per share 62,144,788 53,999,782 47,280,371
--------------- --------------- ---------------
Comprehensive Income:
Net (loss) income before dividends accrued on preferred shares $ (148,583,777) $ (126,528,813) $ 42,368,593
Other comprehensive income (loss) 204,402,109 43,833,521 (252,338,120)
--------------- --------------- ---------------
Comprehensive income (loss) $ 55,818,332 $ (82,695,292) $ (209,969,527)
=============== =============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
CRIIMI MAE INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 2000, 1999 and 1998
Preferred Common Accumulated Other
Stock Par Stock Par Comprehensive Additional Paid-in Accumulated
Value Value Income Capital Deficit
------------ ----------- ------------------ ------------------- --------------
Balance at December 31, 1997 $ 18,294 $ 406,703 $ 1,082,811 $ 448,524,552 $ -
Net income - - - - 42,368,593
Dividends paid or accrued on
preferred shares - - - - (6,997,859)
Dividends of $0.75 per weighted
average common share - - - - (35,370,734)
Return of capital of $0.42 per
weighted average share - - - (19,582,467) -
Conversion of preferred shares
into common shares (2,624) 49,464 - (46,840) -
Stock options exercised 897 - 827,176 -
Adjustment to unrealized gains
on investments - - 4,016,052 - -
Adjustment to unrealized losses
on investments - - (256,354,172) - -
Shares issued 2,500 77,345 - 133,908,587 -
Treasury shares retired - (5,428) - (5,045,945) -
-------- ---------- ------------ -------------- -------------
Balance at December 31, 1998 18,170 528,981 (251,255,309) 558,585,063 -
Net loss - - - - (126,528,813)
Dividends accrued on preferred
shares - - - - (5,840,152)
Conversion of Preferred shares
into common shares (7,765) 70,545 - (62,780) -
Common shares issued - 20 - 7,105 -
Adjustment to unrealized losses
on investments - - 43,833,521 - -
Preferred shares issued 16,066 - - 16,049,884 (16,065,950)
-------- ---------- ------------ -------------- -------------
Balance at December 31, 1999 26,471 599,546 (207,421,788) 574,579,272 (148,434,915)
Net loss - - - - (148,583,777)
Dividends accrued on preferred
shares - - - - (6,911,652)
Conversion of preferred shares
into common shares (2,638) 23,966 - (21,328) -
Common shares issued - 20 - 2,730 -
Adjustment to unrealized losses
on investments - - 204,402,109 - -
Preferred shares issued 37,412 - - 37,374,490 (37,411,902)
-------- ---------- ------------ -------------- -------------
Balance at December 31, 2000 $ 61,245 $ 623,532 $ (3,019,679) $ 611,935,164 $(341,342,246)
======== ========== ============ ============== =============
Total
Shareholders'
Treasury Stock Equity
-------------- ----------------
Balance at December 31, 1997 $ (5,051,373) $ 444,980,987
Net income - 42,368,593
Dividends paid or accrued on
preferred shares - (6,997,859)
Dividends of $0.75 per weighted
average common share - (35,370,734)
Return of capital of $0.42 per
weighted average share - (19,582,467)
Conversion of preferred shares
into common shares - -
Stock options exercised - 828,073
Adjustment to unrealized gains
on investments - 4,016,052
Adjustment to unrealized losses
on investments - (256,354,172)
Shares issued - 133,988,432
Treasury shares retired 5,051,373 -
------------ -------------
Balance at December 31, 1998 - 307,876,905
Net loss - (126,528,813)
Dividends accrued on preferred
shares - (5,840,152)
Conversion of Preferred shares
into common shares - -
Common shares issued - 7,125
Adjustment to unrealized losses
on investments - 43,833,521
Preferred shares issued - -
------------ -------------
Balance at December 31, 1999 - 219,348,586
Net loss - (148,583,777)
Dividends accrued on preferred -
shares - (6,911,652)
Conversion of preferred shares -
into common shares - -
Common shares issued - 2,750
Adjustment to unrealized losses -
on investments - 204,402,109
Preferred shares issued - -
------------ -------------
Balance at December 31, 2000 $ - $ 268,258,016
============ =============
The accompanying notes are an integral part of these consolidated financial
statements.
CRIIMI MAE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
2000 1999 1998
-------------- -------------- ---------------
Cash flows from operating activities:
Net income/loss ($148,583,777) ($126,528,813) $ 42,368,593
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of discount and deferred financing
costs on debt 8,535,024 8,701,571 6,503,100
Amortization of assets acquired in the Merger 2,877,576 2,877,576 2,877,576
Depreciation and other amortization 1,191,587 2,407,103 2,030,183
Discount amortization on mortgage assets, net (14,179,631) (1,004,995) 424,293
Net gains on mortgage security dispositions (279,815) (2,127,691) (1,196,499)
Gain on originated loan dispositions (244,580) (403,383) -
Equity in (earnings) losses from investments (1,512,005) 1,243,562 (2,617,728)
Unrealized loss on warehouse obligation - 8,000,000 30,378,173
Impairment on CMBS 143,478,085 - -
Change in reorganization items accrual (471,568) 12,146,181 9,856,947
Impairment on CMBS-Reorganization item 15,832,817 156,896,831 -
Loss on REO 924,283 - -
Gain on sale of CMBS (1,481,024) -
Gain on extinguishment of debt - CMO IV (14,808,737)
Loss on originated loans 45,845,712 - -
Realized loss on reverse repurchase obligation - 4,503,177
Gain on sale of CBO-2 (28,800,408)
Write-off of capitalized origination costs - - 3,284,037
Minority interests in earnings of consolidated subsidiary - - 40,334
Changes in assets and liabilities:
Increase in restricted cash and cash equivalents (57,809,377) (35,683,064) (2,353,560)
Increase in receivables and other assets (2,990,078) (30,194,006) (35,231,425)
Increase in payables and accured expenses 21,408,572 29,733,222 16,793,946
------------- ------------- ---------------
Net cash (used in )provided by operating activities (2,266,936) 26,064,094 48,860,739
------------- ------------- ---------------
Cash flows from investing activities:
Proceeds from mortgage securities dispositions 12,572,549 74,003,394 117,414,346
Proceeds from originated loan dispositions 5,970,384 19,617,622 -
Proceeds from sale of CMBS, net 72,591,594 18,076,047 -
Proceeds from sale of CMO IV, net 3,519,468 - -
Proceeds from sale of collateralized bond obligations - - 334,919,531
Purchase of originated loans - - (495,825,576)
Purchase of Subordinated CMBS-Reorganizartion item - (852,560,342)
Return of loan origination reserve from securitization - - 71,877,560
Funding of loan origination reserve - - (75,433,979)
Payment of deferred costs - - (8,959,628)
Distributions received from AIM Investments 2,319,906 6,250,991 5,115,547
Distributions received from CMSLP - - 3,114,000
Receipt of principal payments 16,034,680 12,837,554 14,338,531
Purchase of other MBS, net (4,208,635) (92,793) -
Servicing rights acquired and contributed to CMSLP - - (3,880,235)
Collateral calls on reverse repurchase obligation - - (4,766,916)
------------- ------------- ---------------
Net cash provided by (used in) investing activities 108,799,946 130,692,815 (894,647,161)
------------- ------------- ---------------
Cash flows from financing activities:
Principal payments on securitized mortgage debt obligations (30,136,067) (106,543,623) (443,566,240)
Principal payments on secured borrowings and other debt facilities (23,337,476) (18,529,487) (1,147,770,905)
Proceeds from debt issuances - - 1,998,430,321
Proceeds from sale of CMO bonds - - 390,068,687
Increase in deferred financing costs - - (5,975,059)
Dividends (including return of capital) accrued or paid to
shareholders, including minority interests - - (60,499,169)
Proceeds from issuance of convertible preferred stock - - 25,000,000
Proceeds from issuance of common stock - - 109,816,505
------------- ------------- ---------------
Net cash (used in) provided by financing activities (53,473,543) (125,073,110) 865,504,140
------------- ------------- ---------------
Net increase in other cash and cash equivalents 53,059,467 31,683,799 19,717,718
Other cash and cash equivalents, beginning of year 53,510,311 21,826,512 2,108,794
------------- ------------- ---------------
Other cash and cash equivalents, end of year $ 106,569,778 $ 53,510,311 $ 21,826,512
============= ============= ===============
The accompanying notes are an integral part of these consolidated financial
statements.
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 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. As previously
stated, 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").
On November 22, 2000, the United States Bankruptcy Court for the District of
Maryland, entered an order confirming the Debtors' reorganization plan (the
"Reorganization Plan"). The Company expects to emerge from Chapter 11 by
April 17, 2001. However, there can be no assurance that the Company will emerge
from Chapter 11 by such date.
The Company's business is subject to a number of risks and uncertainties
including, but not limited to: (1) risks related to the anticipated New Debt
(defined below), (2) risk of loss of REIT status; (3) taxable mortgage pool
risk; (4) the effect of phantom income on total non-cash income; (5) the effect
of interest rate compression on the market price of the Company's stock; (6)
substantial indebtedness; (7) inherent risks in owning Subordinated CMBS; (8)
the limited protection provided by hedging transactions; (9) risk of foreclosure
by creditors on CMBS assets; (10) the limited liquidity of the CMBS market; (11)
pending litigation; (12) risk of becoming subject to the requirements of the
Investment Company Act of 1940; (13) possible effects of an economic recession
on losses and defaults related to the mortgages underlying the Company's CMBS
portfolio; (14) operations adversely affected by factors beyond the Company's
control; (15) other borrowing and refinancing risks; (16) the effect of the
yield curve on borrowing costs; (17) risks associated with the trader election
including those referenced in "2000 Taxable Loss/ Taxable Distribution
Requirements" below; (18) NYSE possible delisting regarding meeting certain
listing criteria; and (19) the effect of the Chapter 11 filing and the
substantial doubt as to the Company's ability to continue as a going concern.
The Company also 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. See Note 3. With the
exception of CM Management and Holdings II, none of these affiliates filed for
bankruptcy protection on the Petition Date.
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. ("CRI") were merged
into CRIIMI MAE (the "Merger"). The Company is not a government sponsored
entity or in any way affiliated with the United States government or any United
States government agency.
The Reorganization Plan
The Reorganization Plan includes the payment in full of all of the allowed
claims of the Debtors primarily through recapitalization financing (including
proceeds from certain asset sales) aggregating $847 million (the
F-6
"Recapitalization Financing"). The sales of select CMBS (the "CMBS Sale") and
the Company's interest in CMO-IV (the "CMO-IV Sale") generated aggregate
proceeds of approximately $418.3 million toward the Recapitalization Financing
(see Notes 5 and 7), of which approximately $342.3 million was used to pay
related borrowings and approximately $76.0 million will be used to help fund the
Reorganization Plan. Included in the balance of the Recapitalization Financing
is approximately $262 million anticipated to be provided by affiliates of
Merrill Lynch and GACC through a new secured financing facility (in the form of
a repurchase transaction), and approximately $167 million anticipated to be
provided through new secured notes issued to certain of the Company's unsecured
creditors (collectively, the "New Debt").
In connection with the Reorganization Plan, substantially all cash flows
relating to existing assets are expected to be used to satisfy principal,
interest and fee obligations under the New Debt. The approximate $262 million
secured financing would provide for (i) interest at a rate of one month London
Interbank Offered Rate ("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
Reorganization Plan. The approximate $167 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 Reorganization Plan. The second
series of secured notes, representing an aggregate principal amount of
approximately $62 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 Reorganization Plan. The New Debt
described above will be secured by substantially all of the existing assets of
the Company. It is contemplated that there will be restrictive covenants,
including financial covenants and certain restrictions and requirements with
respect to cash accounts and the collection, management, use and applications of
funds, in connection with the New Debt.
The Company anticipates that the litigation with First Union National Bank
("First Union") will not be settled or resolved on or prior to the effective
date of the Reorganization Plan; and therefore, the classification of First
Union's claim under the Reorganization Plan will not be determined until after
the effective date (see "LEGAL PROCEEDINGS-Bankruptcy Related Litigation-First
Union" for further information regarding (a) the status of the First Union
litigation and (b) the treatment of First Union's Claim on the effective date of
the Reorganization Plan).
Under the Reorganization Plan, the holders of the Company's equity will
retain their stock. Pursuant to the terms of the anticipated New Debt, limited,
if any, dividends, other than if such payments are required to maintain REIT
status (and assuming the Company has the cash available to make the
distributions), can be paid to existing shareholders. Under the Reorganization
Plan, cash dividends required to maintain REIT status would be paid first to
holders of certain of the New Debt who convert their notes into one or two new
series of preferred stock, which new series of preferred stock would be senior
to all other series of preferred stock of the Company, in the form of redemption
payments. The Reorganization Plan also includes certain amendments to the
Company's articles of incorporation, anticipated on the effective date of the
Reorganization Plan, including an increase in authorized shares from 145 million
(consisting of 120 million of common shares and 25 million of preferred shares)
to 375 million (consisting of 300 million of common shares and 75 million of
preferred shares). These amendments to the articles of incorporation will not be
effective until the Reorganization Plan is effective. (See Notes 11 and 12 for
further discussion regarding the Company's common stock and preferred stock.)
Reference is made to the Reorganization Plan and Disclosure Statement,
previously filed with the Bankruptcy Court (and with the Securities and Exchange
Commission (the "SEC") as exhibits to a Current Report on Form 8-K filed on
September 22, 2000), for a more detailed description of the financing
contemplated to be obtained under the Reorganization 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.
REIT Status and Other Tax Matters
REIT Status. CRIIMI MAE is required to meet income, asset, ownership and
distribution tests to maintain its REIT status. The Company believes that it
has satisfied the REIT requirements for all years through, and including, 1999
and 2000, as discussed below. However, there can be no assurance that CRIIMI
MAE will maintain
F-7
its REIT status for 2001 or subsequent years. If the Company fails to maintain
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 any such tax and also may be unable to comply with its
obligations under the New Debt.
As of March 15, 2001, the Company and three of its subsidiaries have
jointly elected to treat such three subsidiaries as Taxable REIT Subsidiaries
("TRS") effective January 1, 2001. There are limitations on the activities and
asset bases of a TRS, some of which are as follows:
. The deductible amount of interest paid or accrued by a TRS to its REIT
parent is limited under the interest stripping rules.
. A 100% excise tax is imposed when a REIT and a TRS engage in certain
transactions that do not reflect arm's length amounts. The 100% tax is
imposed on redetermined rents, redetermined deductions, and excess
interest, subject to certain safe harbors.
. No more than 20% of a REIT's total assets may be composed of securities of
TRS.
The Company's 2000 Taxable Loss/Taxable Distribution Requirements:
During 2000, the Company traded in both short and longer duration fixed
income securities, primarily subordinated and investment grade CMBS and
investment grade residential mortgage backed securities (such securities traded
and all other securities of the type described constituting the "Trading
Assets"), which, for financial reporting purposes, are classified as
Subordinated CMBS and Other MBS on the balance sheet. The Company seeks maximum
total return through short term trading, consistent with prudent investment
management. Returns from such activities consist primarily of capital
appreciation/depreciation resulting from changes in interest rates and spreads,
if any, and other arbitrage opportunities.
Internal Revenue Service Revenue procedure 99-17 provides securities and
commodities traders with the ability to elect mark-to-market treatment for the
2000 tax year and for all future tax years, unless the election is revoked with
the consent of the Internal Revenue Service. On March 15, 2000, CRIIMI MAE
elected for tax purposes to be classified as a trader in securities effective
January 1, 2000.
As a result of its trader election, CRIIMI MAE recognized a mark-to market
tax loss on its Trading Assets on January 1, 2000 of approximately $478 million
(the "January 2000 Loss"). This does not impact the GAAP Financial
Statements.Such loss is expected to be recognized evenly over four years
beginning with the year 2000 (i.e., approximately $120 million per year). The
Company expects such loss to be ordinary. Additionally, as a result of its
trader election, the Company is required to mark-to-market its Trading Assets on
a tax basis at the end of each tax year. 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 gains or losses, 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 for
years ending on or before December 31, 2000, and 90% for years beginning after
2000, 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 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.
F-8
For the year ended December 31, 2000, the Company recognized an unrealized
mark-to-market tax gain (or increase) of approximately $50 million on its
Trading Assets. Additionally, during the year ended December 31, 2000, realized
net gains on Trading Assets were approximately $1.5 million for financial
reporting purposes and approximately $12.6 million for tax purposes. As
discussed in Note 10, the Company generated a net operating loss of
approximately $50 million for the year ended December 31, 2000. As such, the
Company's taxable income was reduced to zero and, accordingly, the Company's
REIT distribution requirements were eliminated for 2000.
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 cannot 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 through taxable income. 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.
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, if any, are currently 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 and, as such, the Company could lose
its REIT status or may not be able to satisfy its New Debt obligations.
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 substantial limitation under
Section 382. Generally, the use of net operating losses in any year is limited
to the value of the Company's stock on the date of the ownership change
multiplied by the long-term tax exempt rate (published by the IRS) with respect
to that date.
The Company's 1999 Taxable Income. For purposes of REIT distribution
requirements, 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. Unlike the 95%
distribution requirement or 90% for years beginning after 2000, 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 were considered as dividends paid for the
year ended December 31, 1999. On September 11, 2000, the Company declared a
dividend payable to common shareholders of approximately 3.75 million shares of
a new series of preferred stock with a face value of $10 per share (the "Series
G Preferred Stock") (see Note 12). The purpose of the dividend was to
distribute approximately $37.5 million in undistributed 1999 taxable income. To
the extent that it is determined that such amount was not distributed, the
Company would bear a corporate level income tax on the undistributed amount to
the extent of non-cash income. There can be no assurance that the Company's tax
liability was eliminated by payment of such Series G Preferred Stock dividend.
The Series G Preferred Stock dividend was paid on November 13, 2000 to common
shareholders of record as of October 27, 2000. The Series G Preferred Stock
dividend was
F-9
taxable to common shareholder recipients. The Series G Preferred Stock
shareholders were permitted to convert their shares of Series G Preferred Stock
into common shares during the period from February 21, 2001 through March 6,
2001. During that conversion period, an aggregate 2,496,535 shares of Series G
Preferred Stock were converted into 32,547,041 shares of common stock.
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 "Series F Preferred Stock"). 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 Series F Preferred Stock dividend. The Company paid the
Series F Preferred Stock dividend on November 5, 1999 to common shareholders of
record on October 20, 1999. The Series F Preferred Stock dividend was taxable
to common shareholder recipients. The Series F Preferred Stock shareholders
were permitted to convert their shares of Series F Preferred Stock into common
shares during two separate conversion periods. During these conversion periods,
an aggregate 1,020,241 shares of Series F Preferred Stock were converted into
8,798,009 shares of common stock.
Taxable Mortgage Pool Risks. An entity that constitutes a "taxable
mortgage pool" as defined in the Tax Code ("TMP") is treated as a separate
corporate level taxpayer for federal income tax purposes. In general, for an
entity to be treated as a TMP (i) substantially all of the assets must consist
of debt obligations and a majority of those debt obligations must consist of
mortgages; (ii) the entity must have more than one class of debt securities
outstanding with separate maturities and (iii) the payments on the debt
securities must bear a relationship to the payments received from the mortgages.
The Company currently owns all of the equity interests in two trusts that
constitute TMPs (CBO-1 and CBO-2, collectively the "Trusts"). See Note 5 for
descriptions of CBO-1 and CBO-2. The statutory provisions and regulations
governing the tax treatment of TMPs (the "TMP Rules") provide an exemption for
TMPs that constitute "qualified REIT subsidiaries" (that is, entities whose
equity interests are wholly owned by a REIT). As a result of this exemption and
the fact that the Company owns all of the equity interests in each Trust, the
Trusts currently are not required to pay a separate corporate level tax on
income they derive from their underlying mortgage assets.
The Company also owns certain securities structured as bonds (the "Bonds")
issued by each of the Trusts. Certain of the Bonds owned by the Company
currently serve as collateral (the "Pledged Bonds") for short-term variable rate
borrowings used by the Company to finance their initial purchase and are
expected to serve as collateral for the New Debt. 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
F-10
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 constitute Qualifying Interests. In accordance with current
SEC staff interpretations, the Company believes that all of its Subordinated
CMBS constitute Other Real Estate Interests and that [certain] of its
Subordinated CMBS also constitute Qualifying Interests. On certain of the
Company's Subordinated CMBS, the Company, along with other rights, has the
unilateral right to direct foreclosure with respect to the underlying mortgage
loans. Based on such rights and its economic interest in the underlying mortgage
loans, the Company believes that the related Subordinated CMBS constitute
Qualifying Interests. As of December 31, 2000, the Company believes that it was
in compliance with the 55% Requirement. In the fourth quarter of 2000, the
Company fell below the 25% Requirement in a transient manner by approximately
one half of one percent due to accumulated cash required to be retained while
the Company is in Chapter 11. The Company's retention of cash in this regard was
incidental to its approved Reorganization Plan and the effectuation thereof.
Upon distributions of cash on the effective date of the Reorganization Plan,
expected to be April 17, 2001, to holders of allowed claims entitled to receive
cash, the Company believes it will exceed 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, unless the
court found under the circumstances enforcement (or denial of rescission) would
produce a more equitable result than nonenforcement (or grant of rescission) and
would not be inconsistent with the Investment Company Act. 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
Consolidation and Minority Interests
The consolidated financial statements reflect the financial position,
results of operations and cash flows of CRIIMI MAE; CM Management; CRIIMI, Inc.;
CRIIMI MAE Financial Corporation; CRIIMI MAE Financial Corporation II; CRIIMI
MAE Financial Corporation III; CRIIMI MAE QRS 1, Inc.; CRIIMI MAE Holdings II,
L.P.; and CRIIMI MAE CMBS Corporation for all periods presented. All
intercompany accounts and transactions have been eliminated in consolidation.
Method of Accounting
The consolidated financial statements of CRIIMI MAE are prepared on the
accrual basis of accounting in accordance with accounting principles generally
accepted in the United States ("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.
F-11
Reclassifications
Certain amounts in the consolidated financial statements for the years
ended December 31, 1999 and December 31, 1998 have been reclassified to conform
to the 2000 presentation.
Bankruptcy Accounting during Chapter 11 Proceedings
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 which are subject to Chapter 11 proceedings, including claims
that become known after the Petition Date, are reported at their expected
allowed claim amount in accordance with SFAS No. 5, "Accounting for
Contingencies". To the extent that the amounts of claims changed as a result of
actions in the Chapter 11 or other factors, the recorded amount of liabilities
subject to Chapter 11 proceeding is adjusted. The gain or loss resulting from
the entries to record the adjustment are 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
Chapter 11 proceedings.
. Professional fees and similar types of expenditures directly relating to the
Chapter 11 proceedings.
. Employee Retention Program costs and severance payments.
. Loss accruals or realized gains or losses resulting from activities of the
reorganization process such as the sale of certain assets, rejection of
certain executory contracts and the write-off of debt issuance costs and debt
discounts. See Notes 5 and 7 for further discussion of other than temporary
impairment and losses (gains) recognized on sales of CMBS and originated
loans.
During the years ended December 31, 2000, 1999, and 1998, the Company
recorded reorganization items, as summarized below, due to the Chapter 11
filings of CRIIMI MAE, CM Management and Holdings II.
Reorganization Items 2000 1999 1998
- -------------------- ----------- ------------ -----------
Short-term interest income $(6,850,362) $ (1,518,667) $ --
Professional fees 9,317,772 17,822,154 5,219,000
Employee Retention Program 851,948 1,589,236 612,885
Other 1,136,319 3,005,405 889,852
Write-off of debt discounts and deferred costs -- -- 2,835,210
Excise tax accrued 495,000 1,105,000 300,000
----------- ------------ -----------
Subtotal 4,950,677 22,003,128 9,856,947
Impairment on CMBS regarding Reorganization (4) 15,832,817 156,896,831 --
Impairment on REO (1) 924,283 -- --
Net gain on sale of CMBS (2) (1,481,029) -- --
Loss on originated loans (3) 45,845,712 -- --
----------- ------------ -----------
Total Expense, net $66,072,460 $178,899,959 $ 9,856,947
=========== ============ ===========
(1) The Company recognized impairment on its investment in REO in 2000. This
asset was sold in July 2000 as discussed in Note 3 and Note 8.
F-12
(2) Refer to Note 5 for information regarding the net gain on sale of CMBS.
(3) The Company recognized a loss of approximately $45.8 million on its
investment in originated loans. See Note 7 for further discussion.
(4) The Company recognized impairment on the CMBS subject to the CMBS Sale in
1999 and additional impairment on the remaining CMBS subject to the CMBS
Sale in 2000. The final bonds subject to the CMBS Sale were sold in
November 2000.
Condensed Financial Statements
In accordance with SOP 90-7, the three debtor entities, CRIIMI MAE, CM
Management and Holdings II, were required to present condensed financial
statements as of and for the years ending December 31, 2000 and 1999. (See Note
20).
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 are legally restricted pursuant to either various
financing facilities or, during the Chapter 11 proceedings, pursuant to various
stipulation and consent orders which provide for adequate protection with
certain of the Company's creditors or due to agreements which require certain
CMBS interest income and/or CMBS sale proceeds to be held in segregated
accounts. In addition, restricted cash and cash equivalents includes balances
held in separate trusts controlled by a trustee for the benefit of employees.
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 were
accounted for in accordance with Statement of Financial Accounting Standard 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 and Other Mortgage-Backed Securities
CRIIMI MAE recognizes income from Subordinated CMBS using the effective
interest method, using the anticipated yield over the projected life of the
investment. Changes in anticipated yields are generally calculated due to
revisions in estimates of future credit losses, actual losses incurred,
revisions in estimates of future prepayments and actual prepayments received.
Changes in anticipated yield resulting from prepayments are recognized through a
cumulative catch-up adjustment at the date of the change which reflects the
change in income of the security from the date of purchase through the date of
change in anticipated yield. The new yield is then used for income recognition
for the remaining life of the investment. Changes in anticipated yield
resulting from reduced estimates of losses are recognized on a prospective
basis. When other than temporary impairment is recognized, a
F-13
new yield is calculated on the CMBS based on its new cost basis (fair value at
date of impairment) and expected future cash flows. This revised yield is
employed prospectively.
On May 8, 1998, CRIIMI MAE consummated CBO-2 which resulted in the sale of
a portion of its Subordinated CMBS portfolio. As a result of this transaction
and in accordance with GAAP, effective in the second quarter of 1998, the
Company no longer classifies CMBS 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.
Investment income on other mortgage-backed securities consists of
amortization of the discount or premiums on primarily investment-grade
securities, plus the stated investment interest payments received or accrued on
other mortgage-backed securities. The difference between the cost and the
unpaid principal balance at the time of purchase is carried as a discount or
premium and amortized over the remaining contractual life of the investment
using the effective interest method. The effective interest method provides a
constant yield of income over the term of the investment.
The Company's other mortgage-backed securities are classified as Available
for Sale. As a result, the Company carries these securities at fair value where
changes in fair value are recorded as a component of shareholders' equity. Upon
the sale of such securities, any gain or loss is recognized in the income
statement.
Insured Mortgage Securities
Insured mortgage securities 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.
The Company's mortgage securities are 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 CBO-2, the securities were carried at their amortized cost basis as
the Company had the ability and intent to hold these securities to maturity.
CRIIMI MAE's consolidated investment in mortgage securities consists of
participation certificates evidencing a 100% undivided beneficial interest in
Government Insured Multifamily Mortgages issued or sold pursuant to programs of
the Federal Housing Administration ("FHA") ("FHA-Insured Certificates") and
mortgage-backed securities guaranteed by the Government National Mortgage
Association ("GNMA") ("GNMA Mortgage-Backed Securities"). Payment of principal
and interest on FHA-Insured Loans is insured by the U.S. Department of Housing
and Urban Development (HUD) pursuant to Title 2 of the National Housing Act.
Payment of principal and interest on GNMA Mortgage-Backed Securities is
guaranteed by GNMA pursuant to Title 3 of the National Housing Act.
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 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
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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.
("CMSI") under the equity method because it does not own the voting
common stock of CMSI. As of December 31, 2000, CMSI holds a 27% general
partner interest in CMSLP.
As of December 31, 2000, CRIIMI MAE, through CM Management, held a 73%
limited partnership interest in CMSLP. CRIIMI MAE's limited partner investment
in CMSLP is accounted for under the equity method as CRIIMI MAE does not control
CMSLP. However, because it owns 73% of the partnership and because it has
certain rights described below, it follows the equity method of accounting. As
a limited partner, CRIIMI MAE is entitled to all of the rights and benefits of
being a limited partner including the right to receive income and cash
distributions in accordance with its limited partner interest. In addition,
CRIIMI MAE has the right to approve the sale of the principal assets of CMSLP.
CMSI is the general partner of CMSLP and manages the day to day affairs of
CMSLP.
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 and the net amount was
added to the basis of the loans on the balance sheet upon acquisition. Income
is recognized using the effective interest method and consists of mortgage
income from the loans and amortization of deferred loan costs. Prior to the
third quarter of 2000, the Company carried these loans at amortized cost as the
Company intended to hold the loans for the long term. During the third quarter
of 2000, the Company decided to sell the loans as part of its Reorganization
Plan. As a result, these loans were carried at the lower of cost or market as
of September 30, 2000. See Note 7 for further discussion related to the sale of
the Company's interest in CMO-IV.
Impairment
Subordinated CMBS and Other Mortgage-Backed Securities
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 the Company 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 the Company 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 and management's estimates, 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 charges recognized in 2000 and 1999.
CRIIMI MAE assesses its other mortgage-backed securities ("other MBS") for
other than temporary impairment when the fair market value of the security
declines below amortized cost and CRIIMI MAE concludes that it no longer has the
ability to hold the security through the market downturn. The amount of
impairment loss is measured by comparing the fair value of the security to its
current cost basis; the difference is recognized as a loss in the income
statement. The Company did not recognize any impairment on its other mortgage-
backed securities for the year ended December 31, 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 in 2000, 1999 and 1998.
F-15
Equity Investments
Impairment is recognized on CRIIMI MAE's investments accounted for under
the equity method if a decline in the market value of the investment below its
carrying basis is judged to be "other than temporary". In this case, an
unrealized loss is recognized as the difference between the fair value and
carrying amount. The Company did not recognize impairment losses on its equity
investments in 2000, 1999 and 1998.
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.
Receivables
Receivables primarily consist of interest and principal receivables on the
Company's assets. 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, as of December 31,
1999, was Real Estate Owned ("REO") property acquired through foreclosure that
was held for sale. In June 1997, CRIIMI MAE acquired this real estate property
in a foreclosure sale from a CMBS trust. The property was 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 $924,000
was recorded during the year ended December 31, 2000 related to this sale. REO
property acquired through foreclosure is recorded at fair value on the date of
foreclosure. REO property held for sale is accounted for at the lower of its
cost basis or fair value less costs to sell. REO property held for the long
term is carried at cost and depreciated and 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 financing 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
F-16
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 Company's Chapter 11 filing in December 1998, CRIIMI MAE wrote off
all deferred costs in connection with its financing facilities that were subject
to the Chapter 11 filing.
Costs incurred in connection with the loan origination programs were netted
against any origination fees received and the net amount was deferred and was
recognized using the effective interest method over the life of the intended
securitization of the loans. These costs included a one-time fee to the
financial institution and direct costs of originating the loans for the program.
All net deferred costs were written off if the Company and the financial
institution decided to sell the loans in the warehouse program. In addition,
the Company was required to fund the estimated subordinated levels for the
securitization of the loans originated through its loan origination programs.
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 were 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 December 31, 2000, there were no reserve account balances
with respect to either the Citibank or Prudential Programs (as defined in Note
7).
Discount on Securitized Mortgage Obligation Issuances
Discounts incurred in connection with the issuance of debt are amortized
using the effective interest method over the projected term of the related debt,
which is based on management's estimate of prepayments on the underlying
collateral and are included as a component of interest expense.
Interest Rate Protection Agreements
CRIIMI MAE acquires interest rate protection agreements to reduce its
exposure to interest rate risk on variable rate borrowings. 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. See "New Accounting Statements" below
which discusses the impact of the adoption of FAS 133 "Accounting for
Derivative Instruments and for Hedging Activities" ("FAS 133") as of January 1,
2001.
Shareholders' Equity
CRIIMI MAE has authorized 120,000,000 shares of $0.01 par value common
stock and has issued 62,353,170 and 59,954,604 shares as of December 31, 2000
and 1999, respectively. All shares issued, exclusive of any shares held in
treasury, are outstanding. CRIIMI MAE, as of the anticipated effective date of
the Reorganization Plan, will have authorized 300,000,000 shares of $0.01 par
value common stock.
CRIIMI MAE has authorized 25,000,000 shares of $0.01 par value convertible
preferred stock as of December 31, 2000 and 1999. Of the total authorized,
3,000,000 shares are designated as Series B Cumulative Convertible Preferred
Stock, 203,000 shares are designated as Series E Preferred Stock, 1,610,000
shares are designated as Series F Preferred Stock and 3,760,000 shares are
designated as Series G Preferred Stock. At December 31, 2000, CRIIMI MAE had
1,593,982 shares of Series B Preferred Stock outstanding, 203,000 shares of
Series E Preferred Stock outstanding, 586,354 shares of Series F Preferred Stock
outstanding and 3,741,191 shares of Series G Preferred Stock outstanding. At
December 31, 1999, CRIIMI MAE had 1,593,982 shares of Series B Preferred Stock
outstanding, 103,000 shares of Series C Preferred Stock outstanding, 100,000
shares of Series D Preferred Stock outstanding and 850,142 shares of Series F
Preferred Stock outstanding. Additionally, as of the anticipated effective date
of the Reorganization Plan, CRIIMI MAE will have authorized 75,000,000 shares of
$0.01 par value convertible preferred stock.
F-17
Per Share Amounts
Basic earnings per share amounts for 2000, 1999 and 1998 represent net
income, or loss, available to common shareholders divided by the weighted
average common shares outstanding during the year. Diluted earnings, or loss,
per share amounts for 2000, 1999 and 1998 represent basic earnings, or loss, per
share adjusted for dilutive common stock equivalents, which for CRIIMI MAE could
include stock options and certain series of convertible preferred stock. For
the years ended December 31, 2000 and 1999, respectively, no common stock
equivalents were considered in the calculation of diluted earnings per share due
to the net losses. See Note 13 for a reconciliation of basic earnings per share
to diluted earnings per share.
Income Taxes
CRIIMI MAE has elected to qualify as a REIT for tax purposes under Sections
856-860 of the Internal Revenue Code for the 2000 tax year. To qualify for tax
treatment as a REIT under the Internal Revenue Code, CRIIMI MAE must satisfy
certain criteria including certain requirements regarding the nature of their
ownership, assets, income and distributions of taxable income. The income from
certain CRIIMI MAE activities, including origination and servicing, will not be
considered as Qualifying Income under Section 856. CRIIMI MAE will monitor and
minimize the levels of Non-Qualifying Income in order to meet REIT qualification
criteria. See Note 1 for additional discussion.
The Company is considering the transfer of its limited partnership interest
in CMSLP to a new, wholly owned TRS sometime in 2001. The REIT Modernization
Act of 1999 allows REITs to own up to 100% of a taxable "C" Corporation as long
as the subsidiary makes an election to be treated as a TRS; this law is
effective for years beginning after December 31, 2000. A TRS may conduct some
types of business that are prohibited to a REIT, and the income from a TRS is
not included in the income tests of the parent REIT. The Company is also
considering several restructuring options with respect to certain other
affiliates.
During the year ended December 31, 2000, excess inclusion income of $0.1474
per common share was distributed with the Series G Preferred Stock dividend.
Excess inclusion income results from the Company's prior resecuritization of
mortgage assets in its portfolio. A shareholder's allocable share of excess
inclusion represents the minimum taxable income reportable by the shareholder
for that year; it may not be offset by an NOL and may represent Unrelated
Business Taxable Income ("UBTI") for some shareholders. The excess inclusion
distributed in 2000 was generated in 1999. Excess inclusion of $0.1456 per
common share was distributed in 1998 along with the cash dividends paid during
that year. Because the Series F Preferred Stock dividend paid in 1999 related
to 1998's taxable income, no excess inclusion was distributed in 1999.
Consolidated Statements of Cash Flows
Since the consolidated statements of cash flows are intended to reflect
only cash receipt and cash payment activity, the consolidated statements of cash
flows do not reflect investing and financing activities that affect recognized
assets and liabilities while not resulting in cash receipts or cash payments. In
2000, based upon stipulation agreements with certain of the Company's lenders,
the Company reflected the receipt of interest on certain of its CMBS $82.0
million, along with the corresponding pay down of interest payable of $50.2
million. Net cash flow of $32 million was used to pay down approximately $19
million debt related to the respective variable rate financing facilities of
those lenders. Additionally, CMBS asset sales generated approximately $418
million in proceeds, approximately $342 million of which was used to pay down
debt. Only the net proceeds were remitted to the Company, and as such, only the
net proceeds are reflected in the consolidated statements of cash flows.
Cash payments made for interest for the years ended December 31, 2000,
1999, and 1998, were $137,110,022, $112,561,866, and $109,502,466, respectively.
Comprehensive Income
Comprehensive income includes net earnings as currently reported by the
Company adjusted for other comprehensive income. Other comprehensive income for
the Company is changes in unrealized gains and losses related to the Company's
CMBS and Other MBS and Insured Mortgage Securities accounted for as available
for
F-18
sale with changes in fair value recorded through equity. The table below details
other comprehensive income for the periods presented into the following two
categories: (1) the changes to unrealized gains and losses that relate to the
CMBS and mortgages which were disposed of or impaired during the period with the
resulting gain or loss reflected in net earnings (reclassification adjustments)
and (2) the change in the unrealized gain or loss related to those investments
that were not disposed of or impaired during the period.
2000 1999 1998
----------- ------------ -------------
Reclassification adjustment for (gains) losses from dispositions
included in net income $ 282,723 $ (760,694) $ (963,748)
Reclassification adjustment for impairment losses recognized on CMBS
included in net income 180,177,910 111,745,210 --
Unrealized holding gains (losses) arising during the period 23,941,476 (67,150,995) (251,374,372)
----------- ------------ -------------
Net adjustment to other comprehensive income $204,402,109 $ 43,833,521 $(252,338,120)
============ ============ =============
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.
Under FAS 133, changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge relationship and, if it is,
depending on the type of hedge relationship. For fair value hedge transactions,
changes in the fair value of the derivative instrument and changes in the fair
value of the hedged item due to the risk being hedged are recorded through the
income statement. For cash flow hedge transactions, effective changes in the
fair value of the derivative instrument are reported in other comprehensive
income while ineffective changes are recorded through the income statement. The
gains and losses on cash flow hedge transactions that are reported in other
comprehensive income are reclassified to earnings in the periods in which
earnings are affected by the hedged cash flows. Derivatives which are not part
of a hedge relationship are recorded at fair value through earnings.
Currently, the Company uses interest rate caps to hedge the variability in
interest payments associated with its variable rate secured borrowings. Prior
to FAS 133, the Company capitalized the purchase price of these interest rate
caps and amortized the amount over the term of the interest rate cap. The
Company has determined that these interest rate caps are effective cash flow
hedges under FAS 133. In accordance with FAS 133, all changes in the fair value
of the interest rate cap related to intrinsic value will be recorded in other
comprehensive income and all changes in fair value related to time value will be
recorded through earnings. Amounts recorded in other comprehensive income will
be reclassified into earnings in the period in which earnings are effected by
the hedged cash flows. The Company adopted FAS 133 on January 1, 2001. In
accordance with the transition provisions of FAS 133, the Company recorded a
cumulative-effect-type adjustment of $(135,142) in earnings to recognize at fair
value the interest rate caps designated as cash flow hedges.
During 2000, SFAS No. 140 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities - a Replacement of FASB
Statement No. 125" was issued. This Statement replaces FASB Statement No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. It revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of Statement 125's
provisions. This Statement
F-19
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. Those standards are based
on consistent application of a financial-components approach that focuses on
control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. This Statement provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings.
FAS 140 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. Requirements
regarding disclosures about securitizations, retained interest in securitized
financial assets and financial assets pledged as collateral are effective as of
and for the year ended December 31, 2000 for the Company, but are not required
to be comparative (see Notes 4 and 5).
In July 2000, FASB issued EITF 99-20 "Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets". This statement requires that all changes in assumptions
regarding expected future cash flows related to such assets that are used to
calculate income yields be recognized prospectively through revised income
yields unless impairment is required to be recognized, at which time an
investment is written down to fair value. EITF 99-20 impacts the Company's
income recognition for its CMBS portfolio. Currently, in accordance with SFAS
No. 91 "Accounting for Nonrefundable Fees and Costs Associated with Originating
or Acquiring Loans and Initial Direct Costs of Leases" ("FAS 91"), the Company
recognizes changes in income yields due to changes in expected prepayment speeds
as a cumulative catch-up in the period of change. In addition, in accordance
with AICPA Practice Bulletin 6, the Company recognizes changes related to
expected future cash flows due to credit losses prospectively if the change
results in less credit losses and as a cumulative catch-up if the change results
in more credit losses, unless impairment is required to be recognized at which
time the CMBS is written down to fair value. The Company does not believe EITF
99-20 will have a material impact on its CMBS income recognition as the Company
has not historically recorded significant cumulative catch-ups due to changes in
expected future cash flows. EITF 99-20 is effective on April 1, 2001.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values of CRIIMI MAE's consolidated financial
instruments are presented in accordance with GAAP, which define fair value as
the amount at which a financial instrument could be exchanged in a current
transaction between willing parties, in other than a forced sale or liquidation.
These values do not represent the liquidation value of the Company or the value
of the securities under a portfolio liquidation.
As of December 31, 2000 As of December 31, 1999
Amortized Cost Fair Value Amortized Cost Fair Value
-------------- ---------- -------------- ----------
ASSETS:
Subordinated CMBS and Other MBS (1) $109,256,045 $109,266,975 $ 173,580,901 $ 142,435,429
Subordinated CMBS pledged to creditors 745,520,425 747,579,293 1,200,592,118 1,036,927,670
Insured Mortgage Securities 390,840,884 385,751,407 407,469,108 394,857,239
Investment in originated loans -- -- 470,204,780 422,643,902
Restricted cash and cash equivalents 95,846,001 95,846,001 38,036,624 38,036,624
Other cash and cash equivalents 106,569,778 106,569,778 53,510,311 53,510,311
Accrued interest and principal receivable 41,003,072 41,003,072 69,483,337 69,483,337
Interest rate protection agreements 157,323 22,181 1,119,280 1,465,496
LIABILITIES:
Liabilities not Subject to Chapter 11 proceedings:
Securitized mortgage obligations:
Collateralized bond obligations-CMBS 280,520,265 283,336,965 278,165,968 253,084,864
Collateralized insured mortgage securities 364,649,925 378,303,100 378,711,602 381,129,836
obligations
Collateralized mortgage obligations-
originated loans -- -- 399,768,513 373,634,008
Liabilities Subject to Chapter 11 proceedings:
Variable rate secured borrowings-CMBS 367,535,895 N/A 732,904,775 N/A
Senior unsecured notes 100,000,000 94,750,000 100,000,000 86,000,000
Other financing facilities 91,049,522 N/A 92,799,522 N/A
(1) This amount includes approximately $4.3 million of amortized cost and fair
value related to Other MBS as of December 31, 2000 and approximately
$92,000 as of December 31, 1999.
F-20
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Subordinated CMBS and Other Mortgage-Backed Securities
Prior to 1998, the fair market value of the Company's portfolio of
Subordinated CMBS was based upon quotes obtained from, in most cases, the lender
to which the security was pledged. The lender also quoted the related unrated
bonds even though the bonds did not serve as collateral for CRIIMI MAE's
obligations. The Company obtained "ask" quotes as compared to "bid" quotes
because it is the owner of the securities. Due to the Chapter 11 filing, the
Company's lenders were not willing to provide fair value quotes for the CMBS
portfolio as of December 31, 2000 and 1999. As a result, the Company calculated
the estimated fair market value of its Subordinated CMBS portfolio as of
December 31, 2000 and 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. 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, recent trades, 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 December 31, 2000 and 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 through 2000 with the issuance
of newly created CMBS totaling approximately $48.9 billion and $58.3 billion for
2000 and 1999, respectively. 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 to the spring 1998 levels. Even if the market for Subordinated CMBS
recovers, the liquidity of such market has historically been limited.
Additionally, during adverse market conditions, the liquidity of such market has
been severely limited. Therefore, management's estimate of the value of the
Company's CMBS could vary significantly from the value that could be realized in
a current transaction between a willing buyer and a willing seller in other than
a forced sale or liquidation.
The fair value of the other MBS is an estimate based on the indicative
market price from publicly available pricing services. The Company normally
applies a slight discount to such prices as the Company believes it better
reflects fair value between willing buyers and sellers due to the relatively
smaller sizes of this component of the Trading Assets.
Insured Mortgage Securities
The fair market value of the Company's portfolio of insured mortgage
securities as of December 31, 1999 was based upon quotes obtained from an
investment banking institution, which trades these investments on a daily basis.
Due to the Chapter 11 filing and a change in staff at the investment banking
institution, the Company was unable to find an investment banking institution
willing to provide fair value quotes for the insured mortgage securities
portfolio as of December 31, 2000. As a result, the Company calculated the
estimated fair market value of its insured mortgage securities portfolio as of
December 31, 2000. The Company used a discounted cash flow methodology to
estimate the fair value of its insured mortgage securities portfolio. The cash
flows were discounted using a discount rate that, in the Company's view, was
commensurate with the market's perception of risk and value. The Company used a
variety of sources to determine its discount rate including: (i)
institutionally-available research reports, (ii) a relative comparison of dealer
provided quotes from the previous year to those disclosed in recent
F-21
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 December 31, 1999. The Company used the same discounted cash flow
methodology used in determining the fair value of its Subordinated CMBS
portfolio and further used cash flows projected at a prepayment speed of 0% to
14% depending upon the call protection of the loan. These cash flows were then
discounted using a weighted average discount rate of approximately 9.9% as of
September 30, 2000, which the Company believes was commensurate with the
market's perception of the risk and value. (See Note 7 regarding the sale in
November 2000 of the Company's interest in CMO-IV.)
Restricted and Other Cash and Cash Equivalents, Accrued Interest and Principal
Receivable
The carrying amount approximates fair value because of the short maturity
of these instruments.
Obligations Under Financing Facilities
The fair value of the securitized mortgage obligations as of December 31,
2000 and 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 were in
default and have been the subject of dispute as discussed in Note 8.
Interest Rate Protection Agreements
The fair value of interest rate protection agreements (used to hedge CRIIMI
MAE's variable rate debt) is the estimated amount that CRIIMI MAE would receive
to terminate the agreements as of December 31, 2000 and December 31, 1999,
taking into account current interest rates and the current creditworthiness of
the counterparties. The amount was determined based on a quote received from
the counterparty to each agreement.
5. SUBORDINATED CMBS
Information regarding the Company's Subordinated CMBS is as follows.
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 securitization
pools and three of the retained securities from CBO-1. In CBO-2, the Company
sold in a private placement securities with a face amount of $468 million and
retained securities with a face amount of approximately $1.3 billion. 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 the 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.
F-22
The aggregate investment by the underlying rating of the Subordinated CMBS,
along with information on the underlying mortgage loans, is as follows:
Weighted
Average Amortized Amortized
Pass Range of Discount Cost Cost
Face Amount Through Weighted Fair Value Rates Used to as of as of
as of 12/31/00 Rate as of Average as of 12/31/00 Calculate Fair 12/31/00 12/31/99
Security Rating (in millions) 12/31/00 Life (years) (1) (in millions) Value (in millions) (in millions)(6)
- --------------- ----------- -------- --------------- ----------- ----- ------------- --------------
A (2) $ 62.6 7.0% 5 $ 59.1 8.3% $ 58.0 $ 57.4
BBB (2) 150.6 7.0% 11 131.0 9.0% 130.1 127.7
BBB-(2) 115.2 7.0% 11 93.2 9.9% 93.2 93.5
BB+ 319.0 7.0% 12 215.5 12.1-12.4% 215.5 250.2
BB 70.9 7.0% 13 45.4 12.9% 45.4 54.8
BB- 35.4 7.0% 13 21.3 13.7% 21.3 26.6
B+ 88.6 7.0% 14 48.6 14.9% 48.6 63.1
B 177.2 7.0% 15 87.9 15.7-16.7% 87.9 119.3
B- 118.0 7.0% 15 51.3 18.2-18.7% 51.3 61.7
CCC 70.9 7.0% 17 17.0 31.0% 17.0 27.2
Unrated (3) 373.0 5.8% 19 82.2 32.0-33.0% 82.2 107.4
-------- --- -- ------- ------- -------
Total (4)(5)(7)(8) $1,582.0 6.9% 13 $ 852.5 $ 850.5 $ 988.9
======== === == ======= ======= =======
__________________________
(1) Weighted average life represents the weighted average expected life of the
Subordinated CMBS prior to consideration of losses, extensions or
prepayments.
(2) 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. Also in connection with CBO-2, in May 1998, the Company initially
retained $90.6 million (BBB rated) and $115.2 million (BBB- rated) face
amount of securities, both with call options, with the intention to sell
the securities at a later date. Such sale occurred March 5, 1999. Since the
Company retained call options on certain sold bonds, the Company did not
surrender control of 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.
(3) The Company's unrated bonds from CBO-1, CBO-2 and Nomura experienced
principal write downs during the following periods due to realized losses
related to certain underlying mortgage loans:
CBO-1 CBO-2 Nomura
----- ----- ------
Year 1999 $ 738,000 $ -- $ --
Year 2000 3,201,000 1,087,000 --
January 1, 2001 through March 31, 2001 59,000 3,564,000 --
---------- ---------- ----------
Cumulative Realized Losses through March 31, 2001 $3,998,000 $4,651,000 $ --
========== ========== ==========
F-23
(4) CRIIMI MAE, through CMSLP, performs servicing functions on a total CMBS
pool, including the sub-special servicer for specially serviced loans, as
summarized below:
03/31/01 12/31/00 12/31/99
-------- -------- --------
Total CMBS Pool $ 20.0 billion $ 20.2 billion (c) $ 28.8 billion
================== =================== ===================
Specially serviced loans due to monetary default (a)(b) $ 373.0 million $ 259.1 million $ 159.9 million
Specially serviced loans due to covenant default/other 70.5 million 51.5 million 123.2 million
------------------ --------------- -------------------
Total specially serviced loans (d) $ 443.5 million $ 310.6 million $ 283.1 million
================== =============== ===================
(a) Includes $56.4 million, $48.3 million, and $17.7 million of REO by
underlying trusts.
(b) The increase in the specially serviced loans is due primarily to an
increase in unforeseen defaults related to underlying commercial
mortgage loans secured principally by retail and hotel properties,
which have been adversely impacted by the recent economic slowdown.
(c) During 2000, certain servicing rights were lost in conjunction with the
sale of CMBS subject to the CMBS Sale.
(d) Amortized cost at December 31, 2000, reflects $143.5 million of
impairment charges as of December 31, 2000 related to the retained
CMBS (except for the A and BBB rated tranche) which was recognized in
the fourth quarter of 2000. At December 31, 2000 the Company revised
its overall expected loss estimate related to its CMBS portfolio from
$225 million to $298 million with such total losses expected to occur
over the life of the investment. In addition, the Company now expects
such revised losses to occur sooner than originally expected because of
the slowing U.S. economy. This revised loss estimate is a result of an
increase in the number of loans that have been placed in special
servicing due primarily to loan defaults. As of December 31, 2000,
$310.6 million in mortgage loans underlying the Company's CMBS
portfolio are in special servicing as compared to $283.1 million as of
December 31, 1999. As of March 31, 2001, this amount had grown to
$443.5 million, or 2.2% of the underlying mortgage loans in the CMBS
portfolio, an increase from 1.3% when the Company revised its yields as
of April 1, 2000. During 2001 and 2002, respectively, the Company
expects that aggregate losses on the underlying mortgage loans will be
approximately $3 million and $21 million in excess of that anticipated
when it revised its yields as of April 1, 2000. There can be no
assurance that the Company's estimate of expected losses will not be
exceeded by additional adverse events, such as a continuing economic
slowdown. As the Company has determined that the current estimate of
expected credit losses exceeds credit losses as previously projected,
the Company believes its CMBS portfolio has been impaired under FAS
115. As the fair value of the CMBS is $143.5 million below the
amortized cost basis as of December 31, 2000, the Company recorded an
other than temporary impairment charge through the income statement of
$143.5 million during the fourth quarter of 2000. Unrealized losses
related to these CMBS were previously recognized through other
comprehensive income in the equity section of the balance sheet and as
a result the impact of the impairment charge is not material to book
equity. As a result of the impairment recognized, the revised amortized
cost basis of the CMBS as of December 31, 2000 substantially equals
management's estimate of their fair value.
"Appraisal Reductions" for the CMBS transactions in which the Company
retains an ownership interest as reported by the underlying trustees or as
calculated by CMSLP* were as follows:
CBO-1 CBO-2 Nomura
----- ----- ------
Year 1999 $ -- $ -- $ --
Year 2000 1,905,000 18,180,000 --
January 1, 2001 through March 31, 2001 7,525,000 1,250,000 440,000
------------ ------------- ----------
Cumulative Appraisal Reductions through March 31, 2001 $ 9,430,000 $ 19,430,000 $ 440,000
============ ============= ==========
* Not all underlying CMBS transactions require the calculation of an
appraisal reduction; however, where CMSLP obtains a third party
appraisal it calculates one for the purpose of estimating potential
losses.
The effect of an appraisal reduction, for those underlying CMBS
transactions that require an appraisal reduction to be calculated, generally is
that the servicer stops advancing interest payments on the unrated bonds (or if
no unrated bond, the lowest rated bond) as if such appraisal reduction was a
realized loss. However, an appraisal reduction may result in a higher or lower
realized loss based on the ultimate disposition or work-out of the mortgage
loan.
(5) As of December 31, 2000 and 1999, the mortgage loans underlying the
Company's Subordinated CMBS portfolio were secured by properties of the
types and at the locations identified below:
12/31/00 12/31/99 12/31/00 12/31/99
Property Type Percentage/(a)/ Percentage/(a)/ Geographic Location/(b)/ Percentage/(a)/ Percentage/(a)/
------------- -------------- -------------- ----------------------- --------------- --------------
Multifamily.......... 30% 32% California............... 17% 17%
Retail............... 30% 29% Texas.................... 13% 13%
Office............... 13% 13% Florida.................. 8% 8%
Hotel................ 14% 14% New York................. 5% 5%
Other/(c)/........... 13% 12% Other/(c)/............... 57% 57%
--- --- --- ---
Total............ 100% 100% Total.................. 100% 100%
=== === === ===
(a) Based on a percentage of the total unpaid principal balance of the
underlying loans.
(b) No significant concentration by region.
(c) No other individual state makes up more than 5% of the total.
(6) Equals amortized cost basis as of December 31, 1999 of the portfolio owned
at December 31, 2000.
(7) As discussed below, during the year ended 2000, the Company completed the
sale of all CMBS subject to the CMBS sale.
(8) Refer to Notes 1 and 10 for information regarding the Subordinated CMBS for
tax purposes.
The following table summarizes additional information relating to the
Company's Subordinated CMBS on an aggregate pool basis as of December 31, 2000.
F-24
Original Anticipated Anticipated
Anticipated Yield to Yield to
Yield to Maturity Maturity
Pool Maturity (1) as of 4/1/00 (1) as of 1/1/01 (1)
----- ------------ ---------------- ------------------
Retained Securities from
CRIIMI 1998 C1 (CBO-2) 10.3% 10.5%(2) 11.8%(3)
Retained Securities from
CRIIMI 1996 C1 (CBO-1) 20.7% 22.3%(2) 21.0%(3)
Nomura Asset Securities Corp.
Series 1998-D6 Tranche B7 12.0% 13.6%(2) 25.3%(3)
- ------------ --------------- ------------------
Weighted Average 10.9% 11.1%(2) 12.4%(3)
_______________________________
(1) Represents the anticipated weighted average yield over the expected average
life of the Company's CMBS portfolio as of the date of acquisition,
April 1, 2000 and January 1, 2001 respectively, based on management's
estimate of the timing and amount of future credit losses and prepayments.
(2) The increase in anticipated yields to maturity as of April 1, 2000 (which
was used to recognize income from April 1, 2000 to December 31, 2000), as
compared to those originally anticipated, were primarily due to a change in
the allocation and timing of the estimated future credit losses related to
the mortgage loans underlying the CMBS, as a result of the strong U.S.
economy the performance of the mortgage loans underlying the CMBS had been
better than management had originally anticipated, and credit losses were
lower than originally estimated. Therefore, the Company revised its
estimated credit losses to later in the weighted average life of CMBS than
originally projected. However, at that time, the Company did not lower 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 resulted
in increases in projected cash flow (primarily in the form of interest
income) as of April 1, 2000, which in turn resulted in an increase in the
anticipated yields to maturity. This revised methodology was used to
recognize interest income from April 1, 2000 through December 31, 2000. As
a result of the revised later occurrence of credit losses, the anticipated
yields used to determine CMBS income increased. Through December 31, 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 resulted in approximately $2.1 million in additional CMBS
income related to the retained portfolio during 2000 compared to income
that would have been recognized using prior unrevised yields related to the
retained CMBS portfolio.
(3) As previously discussed, as of December 31, 2000 the Company revised its
overall expected loss estimate related to its CMBS portfolio from $225
million to $298 million which resulted in impairment recognition related to
the CMBS. As a result of recognizing impairment, the Company, has, again,
revised its anticipated yields as of January 1, 2001, which will be used
to recognize interest income prospectively, beginning January 1, 2001.
These anticipated revised yields take into account the lower cost basis as
of December 31, 2000, and contemplate larger than previously anticipated
losses and that those losses will occur sooner then anticipated. While the
Company expects lower cash flows from its CMBS portfolio than its previous
estimates, yields actually increase because of a reduction in the carrying
value of the Company's CMBS portfolio to fair value (i.e. cash flows
divided by a much lower asset base cause yields to increase).
The accounting treatment under GAAP requires that the income on
Subordinated CMBS be recorded based on the effective interest method using the
anticipated yield over the expected life of these mortgage assets. This method
can result in GAAP income recognition which is greater than or less than cash
received. For the years ended December 31, 2000, 1999 and 1998, the amount of
income recognized (less than) or in excess of cash received due to the effective
interest rate method was approximately $15,200,000, $1,123,600 and $(200,000),
respectively.
Subsequent to the Petition Date, CRIIMI MAE and certain secured creditors
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 were reached with certain creditors, is disclosed in Note 17
Litigation - Bankruptcy Related Litigation.
F-26
CMSLP did not file for protection under Chapter 11. However, because of the
related party nature of its relationship with CRIIMI MAE, during the Chapter 11
proceedings, CMSLP was under a high degree of scrutiny from servicing rating
agencies. As a result of CRIIMI MAE's Chapter 11 filing, CMSLP was also declared
in default under certain credit agreements with First Union. In order to repay
all such credit agreement obligations and to increase its liquidity, CMSLP
arranged for ORIX Real Estate Capital Markets, LLC ("ORIX"), formerly known as
Banc One Mortgage Capital Markets, LLC, to succeed it as master servicer on two
commercial mortgage pools on October 30, 1998. In addition, in order to allay
rating agency concerns stemming from CRIIMI MAE's Chapter 11 filing, in November
1998, CRIIMI MAE designated ORIX as special servicer on 33 separate CMBS
securitizations totaling approximately $29 billion, subject to certain
requirements contained in the respective servicing agreements. As of December
31, 2000, CMSLP continued to perform special servicing as sub-servicer for ORIX
on all but four of these securitizations. As of December 31, 2000, CRIIMI MAE
remained the owner of the lowest rated tranche of the related Subordinated CMBS
and, as such, retains rights pertaining to ownership, including the right to
replace the special servicer. CMSLP also lost the right to specially service the
DLJ MAC 95 CF-2 securitization when the majority holder of the lowest rated
tranches replaced CMSLP as special servicer. As of December 31, 2000 and 1999,
CMSLP's remaining servicing portfolio related to CMBS was approximately $20
billion and $29 billion, respectively. As part of CRIIMI MAE's Reorganization
Plan, certain of the Company's non-resecuritized Subordinated CMBS were sold. As
such, CMSLP no longer performs its special servicing duties related to those
underlying loans. The total servicing revenue earned during 2000 and 1999 by
CMSLP as the special servicer was approximately $500,000 and $1.2 million,
respectively.
The table below provides a summary of the CMBS Sale (and includes the CMO-
IV Sale in the sale of the "Citicorp Bonds") completed in connection with the
Reorganization Plan and included in the Recapitalization Financing.
Net Proceeds to
Face Debt CRIIMI
Sale Date Portfolio Classes Amount Sale Proceeds Paydown MAE Gain (Loss) (a)
--------- --------- ------- ------ ------------- ------- --- ---------------
in millions in millions in millions in millions in millions
02/29/00 Morgan Bonds 8 classes $ 87.0 $ 45.9 $ 37.5 $ 8.4 ($1.35) (b)
04/24/00 First Union Bonds 7 classes $290.0 $140.0 $113.0 $27.0 ($0.36) (c)
08/07/00 Chase Bonds 5 classes $ 81.8 $ 43.4 $ 36.6 $ 6.8 $1.37 (d)
11/01/00 DLJMAC 1997-CF2 1 class $ 36.4 $ 14.2 $ 14.2 -0- (0.09) (e)
("DLJ Bond")
11/06/00 MCFI 1998-MC1, 21 classes $291.0 $174.8 $141.0 $33.8 $1.91 (f)
MCFI 1998-MC2, ---------- ------ ------ ------ -----
CMM 1998-1 (g)(i)
("Citicorp Bonds") ($31.0) (h)
Total Sales 42 classes $786.2 $418.3 $342.3 $76.0
========== ====== ====== ====== =====
F-27
(a) Represents actual gain (loss) recognized when sold. Under GAAP, when the
fair value 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 additional $16 million of other than temporary impairment
during 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.
(b) These bonds were sold pursuant to a Stipulation and Order filed with the
Bankruptcy Court on February 22, 2000. The bonds were subsequently sold on
February 29, 2000.
(c) These bonds were sold pursuant to a Stipulation and Consent order filed
with the Bankruptcy Court on March 21, 2000. The court approved this order
on March 18, 2000 and the bonds were subsequently sold on April 24, 2000.
(d) These bonds were sold pursuant to a Stipulation and Consent Order filed
with the Bankruptcy Court on June 16, 2000. The court approved this order
on July 7, 2000 and the bonds were subsequently sold on August 7, 2000.
(e) These bonds were sold pursuant to a Stipulation and Consent order filed
with the Bankruptcy Court on September 21, 2000. The Court approved this
Order on October 12, 2000 and further amended on October 30, 2000. The
bonds were subsequently sold on November 1, 2000.
(f) This amount represents the gains recognized on the sale of MCFI 1998-MC1
and MCFI 1998-MC2. It does not include the loss on the sale of CMM 1998-1
(the Company's interest in CMO-IV), which is reflected on the consolidated
statements of income and comprehensive income as Loss on Originated Loans.
(g) Included in the sale of the Citicorp Bonds is the sale of CMM 1998-1. These
securities are not accounted for as CMBS but rather Originated Loans as
discussed further in Note 3 (Originated Loans) and Note 7. Although CMO-IV
was accounted for as a financing, economically, the Subordinated CMBS
tranches which CRIIMI MAE owned, generated monthly cash flows of
approximately $700,000. As of December 31, 2000, interest payments of
approximately $17.4 million were withheld with respect to certain tranches
of CMO-IV. As part of the sale of the Company's interest in CMO-IV, these
cumulative interest payments withheld were released to the Company in
January 2001 to help fund the Reorganization Plan.
(h) This amount represents the net loss recognized on the sale of the Company's
interest in CMO-IV. During the third quarter 2000, a loss of $45.8 million
was recognized. In the fourth quarter 2000, the Company recognized a gain
on debt extinguishment of $14.8 million.
(i) On September 21, 2000, CRIIMI MAE, SSB, GACC, ORIX, the CMI Equity
Committee and the Unsecured Creditors' Committee filed a Stipulation and
Consent Order (the "Stipulation and Consent") with the Bankruptcy Court
providing for, among other matters, the terms of an agreement with respect
to the sale of the Company's interest in CMO-IV and certain other CMBS to
ORIX. On October 12, 2000, an order was entered by the Bankruptcy Court
approving the Stipulation and Consent. On October 30, 2000, the Court
entered an amendment to the Stipulation and Consent with respect to the
agreed proceeds in connection with the sale to ORIX (the "Order"). Pursuant
to the Stipulation and Consent as amended by the Order, the Company sold
its interest in CMO-IV and certain other CMBS to ORIX. The CMI Equity
Committee and Unsecured Creditors' Committee were deemed to have agreed to
such sale. The sale was completed on November 6, 2000 resulting in total
proceeds of approximately $189 million. The proceeds were used to pay off
$141 million of financing owed to SSB and $4 million to Citicorp Real
Estate, Inc. in full satisfaction of all asserted and unasserted claims of
such claimants. Additionally, approximately $14.2 million of the proceeds
were used to pay down secured financing provided by GACC. The net proceeds
of approximately $30 million will be used to help fund the Reorganization
Plan.
Determining Fair Value of Retained Interests
The Company uses a discounted cash flow methodology for determining the
fair value of its retained Subordinated CMBS. The discounted cash flow
methodology includes the use of a third-party proprietary cash flow model to
project the gross cash flows from the underlying commercial mortgage pool that
serve as collateral for the Company's Subordinated CMBS. The gross mortgage
cash flows are based on the respective loan attributes of each commercial
mortgage, such as the interest rate, original loan amount and term to maturity
(contained within a commercial mortgage pool) and are projected assuming no
prepayments and no losses as is the market convention. The corresponding
distribution of each commercial mortgage pool's principal and interest payments
are based on specific documents unique to each CMBS transaction, referred to as
pooling and servicing agreements. The value of the resulting CMBS cash flow
distributions are then determined by applying a discount rate that, in the
Company's view, is commensurate with the market's perception of risk of
comparable assets. The Company used a variety of sources to determine its
discount rate including; institutionally-available research reports and
communications with
F-28
dealers and active subordinated CMBS investors regarding the valuation of
comparable securities. Since the Company calculated the estimated fair market
value of its Subordinated CMBS portfolio as of December 31, 2000 and 1999, it
has disclosed the range of discount rates by rating category used in determining
these fair market values.
Key Assumptions in Determining Fair Value
The gross mortgage cash flows from each commercial mortgage pool and
their corresponding distribution to the CMBS may be affected by numerous
assumptions and variables including:
(i) the receipt of mortgage payments earlier then projected ("prepayment");
(ii) delays in the receipt of monthly cash flow distributions to CMBS as a
result of mortgage loan defaults and/or extensions in the loan's term to
maturity (see "extension risk" below);
(iii) changes in the timing and/or amount of credit losses on the commercial
mortgage loans ("credit risk"), which are a function of:
. the percentage of mortgage loans that experience a default either
during the mortgage term or at maturity (referred to in the industry
as a "default percentage");
. the recovery period represented by the time that elapses between the
default of a commercial mortgage loan and the subsequent foreclosure
and liquidation of the corresponding real estate (a period of time
referred to in the industry as a "lag"); and,
. the percentage of mortgage loan principal lost as a result of the
deficiency in the liquidation proceeds resulting from the foreclosure
and sale of the commercial real estate (referred to in the industry
as a "loss severity");
(iv) the discount rate used to derive fair value which is comprised of the
following:
. a benchmark risk-free rate, calculated by using the current, "on-the-
run" U.S. Treasury curve and interpolating a comparable risk-free
rate based on the weighted-average life of each CMBS; plus,
. a credit risk premium; plus,
. a liquidity premium.
Sensitivities of Key Assumptions
Since the Company uses a discounted cash flow methodology to derive the
fair value of its Subordinated CMBS, changes in the timing and/or the amount of
cash flows received from the underlying commercial mortgages, and their
allocation to the CMBS, will directly impact the value of such securities.
Accordingly, delays in the receipt of cash flows and/or decreases in future cash
flows resulting from higher than anticipated credit losses will result in an
overall decrease in the fair value of the Company's Subordinated CMBS.
Furthermore, any increase/(decrease) in the required rate of return for
Subordinated CMBS will result in a corresponding (decrease)/increase in the
value of such securities. The Company has included the following narrative and
numerical disclosures to demonstrate the sensitivity of such changes to the fair
value of the Company's Subordinated CMBS.
Impact of Prepayment Risk on Fair Value
The Company's investments in Subordinated CMBS are purchased at a
discount to their face amount due to their subordinated claim to principal and
interest cash flows and priority of allocation of realized losses. As a result
of the discounted purchase price, the return of principal sooner than
anticipated from prepayments, and/or in amounts greater than initially assumed
by the Company when determining the discounted purchase price, would result in
an increase in the value of the Company's Subordinated CMBS. Such appreciation
in value would result from the higher subordination level of the CMBS
transaction relative to comparable CMBS and the potential for an upgrade in the
ratings category of the security. Since the effects of prepayments would enhance
the value of the Company's Subordinated CMBS, the effects of increased
prepayments were excluded from the sensitivity analysis below. (It should be
noted that the effects of a decline in prepayments is reflected in the
Sensitivity of Fair Value to Extension Risk below).
F-29
Key Assumptions Resulting in an Adverse Impact to Fair Value
Factors which could adversely affect the valuation of the Company's
Subordinated CMBS include: (i) the receipt of cash flows later than anticipated
(see Sensitivity of Fair Value to "Extension Risk" below), (ii) the receipt of
future cash flows less than anticipated due to higher credit losses (i.e.,
higher credit losses resulting from a larger percentage of loan defaults, and/or
longer periods of recovery between the date of default and liquidation, and/or
higher loss of principal; see Sensitivity of Fair Value to Credit Losses below)
and/or, (iii) an increase in the required rate of return (see Sensitivity of
Fair Value to "Discount Rate" below) for Subordinated CMBS.
Sensitivity of Fair Value to Extension Risk
For purposes of this disclosure, the Company assumed that the maturity date
of each commercial mortgage loan underlying its Subordinated CMBS was extended
for a period of 12 months and 24 months beyond the contractual maturity date
specified in each mortgage loan. The delay in the timing and receipt of such
cash flows for an extended period of time consisting of 12 months and 24 months,
respectively, resulted in a corresponding decline in the value of the Company's
Subordinated CMBS by approximately $5.8 million (or 0.68 percent) and $11.5
million (or 1.34 percent), respectively.
Sensitivity of Fair Value to Changes in Credit Losses
For purposes of this disclosure, the Company used a market convention for
simulating the impact of increased credit losses on Subordinated CMBS.
Generally, the industry uses a combination of an assumed percentage of loan
defaults (referred to in the industry as a Constant Default Rate or "CDR"), a
period between the date of default and the sale and application of liquidation
proceeds to the CMBS (referred to in the industry as a "lag"), and an assumed
percentage of principal loss on each commercial mortgage loan assumed to default
which is applied at the date of liquidation (referred to in the industry as a
"loss severity"). For purposes of this disclosure, the Company assumed the
following loss scenarios, each of which was assumed to begin 12 months from
December 31, 2000: (i) 1% per annum of each commercial mortgage was assumed to
default, a 12 month period of time was assumed to elapse between the date of
default and the date of liquidation (however, it was assumed that the master
servicer continued to advance scheduled principal and interest payments on
behalf of the borrower during this time), and 30% of the then outstanding
principal amount of each commercial mortgage loan was assumed to be lost
(referred to in the industry as a 1% CDR, 12 month lag, and 30% loss severity,
and referred to herein as the "1% CDR Loss Scenario"), and (ii) 2% per annum of
each commercial mortgage was assumed to default, a 12 month period of time was
assumed to elapse between the date of default and the date of liquidation
(however, it was assumed that the master servicer continued to advance scheduled
principal and interest payments on behalf of the borrower during this time), and
30% of the then outstanding principal amount of each commercial mortgage loan
was assumed to be lost (referred to in the industry as a 2% CDR, 12 month lag,
and 30% loss severity, and referred to herein as the "2% CDR Loss Scenario").
The delay in receipt and the reduction in amount of cash flows resulting from
the 1% CDR Loss Scenario and the 2% CDR Loss Scenario, respectively, resulted in
a corresponding decline in the fair value of the Company's Subordinated CMBS by
approximately $26.6 million (or 3.12 percent) and $76.1 million (or 8.93
percent), respectively.
The aggregate amount of credit losses assumed under the 1% CDR Loss
Scenario and the 2% CDR Loss Scenario totaled approximately $294.8 million and
$561.2 million, respectively. These amounts are in comparison to the aggregate
remaining amount of anticipated credit losses assumed by the Company's
management as of December 31, 2000 of approximately $298 million used to
calculate GAAP income yields. It should be noted that the amount and timing of
the anticipated credit losses assumed by the Company's management related to the
GAAP income yields are not directly comparable to those assumed under the 1% CDR
Loss Scenario and the 2% CDR Loss Scenario. As discussed above, gross cash flows
are used to calculate fair value.
Sensitivity of Fair Value to Changes in the Discount Rate
The required rate of return used to determine the fair value of the
Company's Subordinated CMBS is comprised of many variables, such as a risk-free
rate, a liquidity premium and a credit risk premium. These variables are
combined to determine a total rate that, when used to discount the Subordinated
CMBS' assumed stream of future cash flows, results in a net present value of
such cash flows. The determination of such rate is
F-30
dependent on many quantitative and qualitative factors, such as, but not limited
to, the market's perception of the Issuers and the credit fundamentals of the
commercial real estate underlying each pool of commercial mortgage loans. For
purposes of this disclosure, the Company assumed that the discount rate used to
determine the fair value of its Subordinated CMBS increased by 100 basis points
and 150 basis points. The increase in the discount rate by 100 and 150 basis
points, respectively, resulted in a corresponding decline in the value of the
Company's Subordinated CMBS by approximately $50.4 million (or 5.92 percent) and
$73.9 million (or 8.67 percent), respectively.
The sensitivities above are hypothetical and should be used with caution.
As the figures indicate, changes in fair value based on variations in
assumptions generally cannot be extrapolated because the relationship of the
change in assumption to the change in fair value may not be linear. Also, in
this table, the effect of a variation in a particular assumption on the fair
value of the retained interest is calculated without changing any other
assumption; in reality, changes in one factor may result in changes in another
(for example, increases in market interest rates may result in lower prepayments
and increased credit losses), which might magnify or counteract the
sensitivities.
6. 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 December 31, 2000, approximately 16% of
CRIIMI MAE's investment in mortgage securities were FHA-Insured Certificates and
84% were GNMA Mortgage-Backed Securities (including certificates which
collateralized Freddie Mac participation certificates). FHA-Insured Certificates
and GNMA Mortgage-Backed Securities are collectively referred to herein as
"mortgage securities."
CRIIMI MAE owns the following mortgages directly or indirectly through its
wholly owned subsidiaries:
As of December 31, 2000
-----------------------
Weighted
Number of Average Weighted Average
Mortgage Effective Interest Remaining
Securities Fair Value Amortized Cost Rate Term
CRIIMI MAE 1 $ 5,345,888 $ 5,402,205 8.00% 34 years
CRIIMI MAE Financial Corporation (1) 35 124,117,999 124,785,552 8.39% 28 years
CRIIMI MAE Financial Corporation II (1) 45 197,158,703 200,934,734 7.20% 26 years
CRIIMI MAE Financial Corporation III (1) 22 59,128,817 59,718,390 7.83% 28 years
---------- ------------- -------------- ----------- -----------
103 $ 385,751,407 $ 390,840,881 7.69% (2) 27 years (2)
========== ============= ============== =========== ===========
F-31
As of December 31, 1999
-----------------------
Weighted
Number of Average
Mortgage Effective Interest Weighted Average
Securities Fair Value Amortized Cost Rate Remaining Term
CRIIMI MAE 1 $ 5,268,982 $ 5,429,746 8.00% 35 years
CRIIMI MAE Financial Corporation (3) 36 123,757,775 126,621,745 8.40% 29 years
CRIIMI MAE Financial Corporation II (3) 49 204,437,012 212,474,158 7.24% 27 years
CRIIMI MAE Financial Corporation III (3) 23 61,393,470 62,943,459 7.84% 29 years
--------- ------------- ------------- ---------- -----------
109 $ 394,857,239 $ 407,469,108 7.68% (2) 28 years (2)
========= ============= ============= ========== ===========
- ----------------------
(1) During the year ended December 31, 2000, there were six prepayments of
mortgage loans underlying mortgage securities held by CRIIMI MAE's
financing subsidiaries. These prepayments generated net proceeds of
approximately $12.6 million and resulted in net financial statement gains
of approximately $280,000, which are included in gains on mortgage
securities dispositions on the accompanying consolidated statement of
income for the year ended December 31, 2000.
(2) Weighted averages were computed using total face value of the mortgage
securities.
(3) During the year ended December 31, 1999, there were 14 prepayments of
mortgage loans underlying mortgage loans underlying mortgage securities
held by CRIIMI MAE's financing subsidiaries. These prepayments generated
net proceeds of approximately $74.0 million and resulted in net financial
statement gains of approximately $2.1 million, which are included in gains
on mortgage securities dispositions on the accompanying consolidated
statement of income for the year ended December 31, 1999.
Descriptions of the mortgage securities owned, directly or indirectly
by CRIIMI MAE, which exceed 3% of the total carrying value of the consolidated
mortgage securities as of December 31, 2000, summarized information regarding
other mortgage securities and mortgage securities income earned in 2000, 1999
and 1998, including interest earned on the disposed mortgage securities, are as
follows:
F-32
Mortgage Securities as of December 31, 2000
-----------------------------------------------------------------------------------------------
Face Value (1) Fair Value (2)(4) Amortized Cost Effective Final Maturity
(1)(3) Interest Date Range
Rate
-----------------------------------------------------------------------------------------------
CRIIMI MAE
- ----------
GNMA Mortgage-Backed Securities
-------------------------------
Other (1 mortgage security) $ 5,402,205 $ 5,345,888 $ 5,402,205 8.00% 02/2035
--------------- -------------- ----------------
CRIIMI MAE Financial Corporation
- --------------------------------
FHA-Insured Certificates
------------------------
Other (20 mortgage securities) 61,243,577 61,265,973 61,294,560 7.35%-11.00% 02/2019-04/2034
GNMA Mortgage-Backed Securities
-------------------------------
Bellhaven Nursing Center 13,946,726 13,967,268 13,946,726 8.63% 12/2031
Other (15 mortgage securities) 49,206,279 48,884,758 49,544,266 7.93%-8.78% 06/2018-04/2035
--------------- -------------- ----------------
124,396,582 124,117,999 124,785,552
--------------- -------------- ----------------
CRIIMI MAE Financial Corporation II
- -----------------------------------
GNMA Mortgage-Backed Securities
-------------------------------
Oakwood Garden Apartments 12,685,687 12,564,691 12,935,464 7.51% 10/2023
San Jose South 27,577,577 27,314,541 27,790,168 7.66% 10/2023
Somerset Park 28,509,328 28,224,973 28,999,395 7.41% 07/2028
Yorkshire Apartments 14,500,264 14,353,170 14,565,486 7.21% 07/2031
Other (45 mortgage securities) 115,843,476 114,701,328 116,644,221 7.14%-7.90% 06/2018-05/2029
--------------- -------------- ----------------
199,116,332 197,158,703 200,934,734
--------------- -------------- ----------------
CRIIMI MAE Financial Corporation III
- ------------------------------------
GNMA Mortgage-Backed Securities
-------------------------------
Other (22 mortgage securities) 59,559,087 59,128,817 59,718,390 7.11%-10.94% 08/2015-02/2035
--------------- -------------- ----------------
Total Insured Mortgage Securities $388,474,206 $385,751,407 $390,840,881
=============== ============== ================
Insured Mortgage Security Dispositions
Insured Mortgage Securities Interest Income
Mortgage Income Earned
--------------------------------------------
2000 1999 1998
--------------------------------------------
CRIIMI MAE
- ----------
GNMA Mortgage-Backed Securities
-------------------------------
Other (1 mortgage security) $ 433,385 $ 435,493 $ 577,393
-------------- ----------- -----------
CRIIMI MAE Financial Corporation
- --------------------------------
FHA-Insured Certificates
------------------------
Other (20 mortgage securities) 5,549,004 5,598,209 5,638,466
GNMA Mortgage-Backed Securities
-------------------------------
Bellhaven Nursing Center 1,172,021 1,178,951 1,185,310
Other (15 mortgage securities) 3,943,526 3,984,759 4,022,790
-------------- ----------- -----------
10,664,551 10,761,919 10,846,566
-------------- ----------- -----------
CRIIMI MAE Financial Corporation II
- -----------------------------------
GNMA Mortgage-Backed Securities
-------------------------------
Oakwood Garden Apartments 916,455 930,496 943,526
San Jose South 2,007,005 2,037,043 2,064,876
Somerset Park 2,089,020 2,110,507 2,130,465
Yorkshire Apartments 1,017,995 1,026,277 1,033,985
Other (45 mortgage securities) 8,485,578 8,581,786 8,671,057
-------------- ----------- ------------
14,516,053 14,686,109 14,843,909
-------------- ----------- ------------
CRIIMI MAE Financial Corporation III
- ------------------------------------
GNMA Mortgage-Backed Securities
-------------------------------
Other (22 mortgage securities) 4,697,130 4,742,174 4,783,618
-------------- ------------ ------------
Total Insured Mortgage Securities $30,311,119 $30,625,695 $31,051,486
Insured Mortgage Security Dispositions 357,109 2,779,476 12,011,257
-------------- ------------ ------------
Insured Mortgage Securities Interest Income $30,668,228 $33,405,171 $43,062,743
============== ============ ============
________________________
(1) Principal and interest on mortgage securities is payable at level
amounts over the life of the mortgage asset. Total annual debt service
payable to CRIIMI MAE and its financing subsidiaries for the mortgage
securities held as of December 31, 2000 is approximately $34.5
million.
(2) Reconciliations of the carrying amount of CRIIMI MAE's insured
mortgage securities for the years ended December 31, 2000 and 1999
follow:
For the year ended
December 31,
2000 1999
------------ ------------
Balance at beginning of year $394,857,239 $488,095,221
Additions during the year:
Amortization of discount 16,554 19,226
Adjustment to net unrealized gains on mortgage securities 7,522,396 --
Deductions during the year:
F-33
For the year ended December 31,
2000 1999
--------------- -------------
Principal payments (4,264,161) (4,219,336)
Mortgage dispositions (12,292,734) (71,875,703)
Adjustment to net unrealized losses on insured mortgage securities --- (17,069,422)
Accretion of premium (87,887) (92,747)
--------------- -------------
Balance at end of year $385,751,407 $394,857,239
=============== =============
(3) All mortgages are collateralized by first or second liens on residential
apartment, retirement home, nursing home or townhouse complexes which have
diverse geographic locations and are FHA-Insured Certificates or GNMA
Mortgage-Backed Securities. Payment of the principal and interest on FHA-
Insured Certificates is insured by HUD pursuant to Title 2 of the National
Housing Act. Payment of the principal and interest on GNMA Mortgage-Backed
Securities is guaranteed by GNMA pursuant to Title 3 of the National
Housing Act.
(4) None of these mortgage securities are delinquent as of December 31, 2000.
7. 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.
Also 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 or CMO-IV. In CMO-
IV, CRIIMI MAE sold $397 million face amount of fixed-rate, investment grade
CMBS. CRIIMI MAE had call rights on each of the issued securities and therefore
had 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, as discussed
below, two investment grade tranches were not sold until 1999. Also, as
discussed further below, as part of the Reorganization Plan, the Company sold
its interest in CMO-IV in November 2000. Accordingly, during the fourth quarter
2000, the mortgage loans and related other assets and liabilities, were removed
from the balance sheet.
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, 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
F-34
in the reserve account. The minimum net proceeds provision was waived by written
agreement of the Company, the Unsecured Creditors' Committee and the Equity
Committee.
On April 5, 1999, the Company finalized an agreement by which SSB, in
cooperation with CRIIMI MAE, agreed to sell the remaining two classes of
investment grade CMBS from CMO-IV with a face amount of $45.9 million and an
average coupon rate of 6.96% constituting a portion of the collateral security
advances under financing agreements with Citicorp. CRIIMI MAE sold these two
classes of CMBS in 1999. CRIIMI MAE retained the right to call each CMBS when
the principal balance amortized to 15% of its original face balance. The 15%
call option prevented CRIIMI MAE from surrendering control of the assets
pursuant to the requirements of FAS 125 and thus the transaction was accounted
for as a financing and not a sale. 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.
On August 5, 1999, all but three of the commercial loans originated under
the Citibank Program in 1998 were sold for gross proceeds of approximately $308
million. The loans sold had an aggregate unpaid principal balance of $339
million. On September 16, 1999, the remaining three loans were sold for gross
proceeds of approximately $27.2 million. The loans sold had an aggregate
principal balance of $32.7 million. Prior to the actual sale of these loans, the
Company had recorded its unrealized losses based on pricing data received from
Citibank. In the case of each sale of the commercial loans, the minimum net
proceeds provision was waived by agreement of the Company, the Unsecured
Creditors' Committee and the CMI Equity Committee. For GAAP purposes, the
Company realized $36.3 million of losses from the third quarter of 1998 through
the third quarter of 1999. For income tax purposes, the entire loss of $36.3
million was recorded as a realized loss on the loan sale dates in the third
quarter of 1999.
Under the Prudential Program, the Company had an option to pay to
Prudential the face value of the loan plus or minus any hedging loss or gain, at
the earlier of June 30, 1999, or the date by which a stated quantity of loans
for securitization had been made. Under the Prudential Program, the Company was
required to fund a reserve account of approximately $2 million for the sole loan
originated under this Program. Since CRIIMI MAE was unable to exercise its
option under the Prudential Program, the Company forfeited the amount of the
reserve account.
F-35
In July 2000, the Company decided that, as part of the Reorganization Plan,
it would sell the remaining $53 million face amount of assets from CMO-IV that
it then owned. The proceeds from the CMO-IV Sale, together with certain of the
proceeds from the CMBS Sale, were used to pay down the related variable rate
debt secured by certain of such assets, and to satisfy all remaining Citigroup
claims, with the remaining proceeds retained by the Company. Upon the sale of
the CMO-IV assets, CRIIMI MAE no longer had any economic interest in CMO-IV.
The Company, as the owner of the issuer's equity of CMO-IV, held the call
options related to the $442.5 million (original face amount) of previously
issued securities that were classified as securitized debt on the Company's
balance sheet. Upon the sale of the issuer's equity, CRIIMI MAE no longer owned
these call options and, as a result, the securitization no longer qualified 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 were removed from CRIIMI MAE's
balance sheet upon the sale of the issuer's equity. The CMO-IV Sale was
completed on November 6, 2000. In accordance with EITF 96-19 "Debtor's
Accounting for a Modification or Exchange of Debt Instruments", the net loss on
the sale of the Company's interest in CMO-IV was required to be presented as two
components consisting of the loss on the sale of the originated loans and the
subsequent gain related to the extinguishment of debt. Because the Company
decided in the third quarter of 2000 to sell all of its interest in CMO-IV, the
investment in originated loans was adjusted from amortized cost to fair value
resulting in a $45.8 million loss in the third quarter 2000 which was classified
as a reorganization item. A gain related to the extinguishment of debt were not
recognized until the debt was actually extinguished on November 6, 2000. The
gain related to the extinguishment of debt was approximately $14.8 million and
was recognized in the fourth quarter of 2000 as an extraordinary item.
Therefore, the net loss related to the sale of the Company's interest in CMO-IV
was approximately $31.0 million for financial reporting purposes. For tax
purposes, the net loss was approximately $30.1 million and was recorded in the
fourth quarter 2000 as an ordinary loss.
A reconciliation of the carrying amount of CRIIMI MAE's originated loans
for the years ended December 31, 2000 and 1999, follows:
For the year ended December 31,
2000 1999
------------- ------------
Balance at beginning of year $ 470,204,780 $499,076,030
Deductions during the year:
Principal payments (7,234,410) (8,618,218)
Mortgage dispositions (5,725,803) (19,214,239)
Amortization of deferred loan costs (964,917) (1,038,793)
Loss on originated loans (45,845,712) --
Sale of originated loans (410,433,938) --
-------------- --------------
Balance at end of year -- $470,204,780
============== ==============
8. OBLIGATIONS UNDER FINANCING FACILITIES
Discussed below are the Company's obligations under financing facilities as
of December 31, 2000 and 1999. All such obligations, to the extent constituting
allowed claims, are anticipated to be paid in full as part of the Reorganization
Plan (except for the claim related to First Union), through either a cash
payment or issuance of New Debt, or a combination of both.
Obligations Outstanding as of December 31, 2000 and 1999
The following table summarizes CRIIMI MAE's debt outstanding as of December
31, 2000 and December 31, 1999. Obligations constituting allowed claims
are anticipated to be paid in full on the effective date of the
Reorganization Plan, as noted in footnote (b), below.
Year ended December 31, 2000
---------------------------------------------------------------------------------------------
Average
Effective Rate Effective
Ending Balance at Year End Average Balance Rate Stated Maturity Date
------------------- ---------------- ----------------- ------------- ---------------------
Securitized mortgage obligations:
Subordinated CMBS (1) $ 280,520,265 9.1% $279,680,235 9.1% Nov 2006-Nov 2011
F-37
Freddie Mac Funding Note (2) 192,168,879 7.5% 196,385,577 7.5% Sept 2031
Fannie Mae Funding Note (3) 57,765,188 7.4% 58,988,331 7.4% March 2035
CMO (4) 114,715,858 7.5% 115,196,505 7.5% Jan 2033
CMO-loan originations (5) -- -- 334,884,751 6.6% --
Variable-rate secured borrowings -
Subordinated CMBS (a)(b)(c) 367,535,895 7.9% 547,769,490 7.5% March 1999-Sept 2000
Senior unsecured notes (b)(c) 100,000,000 9.1% 100,000,000 9.1% Dec 2002
Bank term loan (b)(c) 1,300,000 8.0% 1,300,000 7.6% Dec 1998
Working capital line of credit (b)(c) 40,000,000 8.4% 40,000,000 8.2% Dec 1998
Bridge loan (b)(c) 49,749,522 9.0% 49,749,522 8.6% Feb 1999
------------------
Total $1,203,755,607
==================
(a) Certain debt balances have been reduced to reflect application of net
cash flow received during Chapter 11 proceedings.
(b) These facilities were in default as of December 31, 2000 and December
31, 1999 due to the Company's Chapter 11 filing. All outstanding unpaid
amounts under these facilities to the extent they constitute allowed
claims, are anticipated to be paid in full in connection with the
Reorganization Plan, except for the allowed claim related to First
Union, as discussed in Note 17, through either cash payment or issuance
of New Debt or a combination of both.
(c) As a result of the Chapter 11 petition filed on October 5, 1998, certain
lenders declared defaults or otherwise took action against the Company
with respect to a number of CRIIMI MAE's financing facilities. See Note
17 for additional information.
Year ended December 31, 1999
---------------------------------------------------------------------------------------------
Average
Effective Rate Effective
Ending Balance at Year End Average Balance Rate Stated Maturity Date
------------------- ---------------- ----------------- ------------- ---------------------
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
Senior unsecured notes 100,000,000 9.1% 100,000,000 9.1% Dec 2002
Bank term loans (6) 3,050,000 7.8% 3,050,000 7.1% Dec 1998
Working capital line of credit 40,000,000 8.2% 40,000,000 7.0% Dec 1998
Bridge loan 49,749,522 8.7% 49,749,522 7.5% Feb 1999
----------------
Total $1,982,350,380
================
(1) As of December 31, 2000 and 1999, the face amount of the debt was
$328,446,000 and $328,446,000 with unamortized discount of $47,925,734
and $50,280,032, respectively. During the year ended December 31, 2000
and 1999, discount amortization of $2,354,298 and $2,986,001,
respectively, was recorded as interest expense.
F-38
(2) As of December 31, 2000 and 1999, the face amount of the note was
$198,070,722 and $209,506,965, respectively, with unamortized discount of
$5,901,843 and $7,722,390, respectively. During the year ended December
31, 2000 and 1999, discount amortization of $1,820,547 and $460,788,
respectively, was recorded as interest expense.
(3) As of December 31, 2000 and 1999, the face amount of the note was
$59,112,927 and $62,359,630, respectively, with unamortized discount of
$1,347,738 and $1,506,512, respectively. During the year ended December
31, 2000 and 1999, discount amortization of $158,774 and $363,516,
respectively, was recorded as interest expense.
(4) As of December 31, 2000 and 1999, the face amount of the note was
$117,729,663 and $119,563,094, respectively, with unamortized discount of
$3,013,806 and $3,489,185, respectively. During the year ended December
31, 2000 and 1999, discount amortization of $475,379 and $823,068,
respectively, was recorded as interest expense.
(5) As of December 31, 2000 and 1999, the face amount of the debt was $-0- and
$411,110,641 with unamortized discount of $-0- and $11,342,128,
respectively. During the year ended December 31, 2000 and 1999, discount
amortization of $1,187,656 and $1,404,887, respectively, was recorded as
interest expense.
(6) The effective interest rate as of December 31, 1999 includes the impact of
a rate reduction agreement which was in place from July 1995 through
December 31, 1999, providing for a reduction in the rate on a portion of
the loans based on balances maintained at the bank.
(7) Stated maturities per respective loan agreements. The maturities of CRIIMI
MAE's debt are as follows:
2001 $ 564,813,457
2002 4,771,488
2003 5,163,229
2004 8,835,051
2005 6,046,671
2006-2035 672,314,832
------------------
$ 1,261,944,728 (a)
==================
_____________________
(a) Assumes all non-securitized mortgage obligations mature in 2001 due to
Chapter 11 proceedings and the Reorganization Plan. Payments of
principal on the securitized mortgage obligations are required to the
extent mortgage principal is received on the related collateral. The
projected principal paydown on the securitized mortgage obligations is
based upon the stated terms of the underlying mortgages. These amounts
do not include the associated unamortized discount.
Securitized 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
F-39
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.
As of December 31, 2000 and December 31, 1999, CMBS with a fair value of
$283.3 million and $253.1 million, respectively, collateralize these borrowings.
Securitized 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 $197 million and
$204 million as of December 31, 2000 and 1999, respectively, 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 $124 million and $124 million as of December 31, 2000 and 1999,
respectively. GNMA Mortgage-Backed Securities with a fair value of
approximately $59 million and $61 million as of December 31, 2000 and 1999,
respectively, 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.
Securitized 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 remained 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, were 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.
In April 1999, the Company finalized an agreement by which SSB, in
cooperation with CRIIMI MAE, agreed to sell the remaining two classes of
investment grade CMBS from CMO-IV with a face amount of $45.9 million and an
average coupon rate of 6.96% constituting a portion of the collateral security
advances under financing agreements with Citicorp. CRIIMI MAE sold these two
classes of CMBS in May and October 1999. 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.
F-40
During the fourth quarter of 2000, the Company sold its remaining interests
in CMO-IV, paid off the related secured debt, and removed the collateralized
mortgage obligations from its balance sheet. In accordance with EITF 96-19, the
net loss on the sale of the Company's interest in CMO-IV is required to be
presented as two components consisting of the loss on the sale of the originated
loans and the subsequent gain related to the extinguishment of debt. Because the
Company decided in the third quarter of 2000 to sell all of its interest in
CMO-IV, the investment in originated loans was adjusted from amortized cost to
fair value resulting in a $45.8 million loss in the third quarter of 2000 which
was classified as a reorganization item. The gain of $14.8 million related to
the extinguishment of debt was not recognized until the debt was actually
extinguished in November 2000, and was recognized as an extraordinary item.
Accordingly, the net loss related to the sale of the Company's interest in
CMO-IV was approximately $31.0 million.
Variable Rate Secured Borrowings-CMBS
As previously discussed, when CRIIMI MAE purchased Subordinated CMBS, it
initially financed (generally through short-term, variable-rate secured
borrowings) a portion of the purchase price of the Subordinated CMBS. These
secured borrowings were either provided by the issuer of the CMBS pool or
through master secured borrowing agreements, as discussed below. As of December
31, 2000, the secured borrowings on Subordinated CMBS had interest rates that
were generally based on the one-month LIBOR, plus a spread of 1.0% or 1.5%.
As discussed in Note 5, during 2000, the Company paid down variable rate
debt aggregating approximately $342.3 million as a result of the CMBS Sale and
the Company's interest in CMO-IV. Additionally, during 1999, the Company repaid
variable rate secured debt of approximating $141.2 million in connection with
the sale of the CBO-2 BBB bonds and $39.6 million in connection with the sale of
the BBB bonds issued in CMO-IV.
The secured borrowing agreements are secured by certain rated CMBS security
tranches with an aggregate fair value of approximately $464 million as of
December 31, 2000 and $784 million as of December 31, 1999. CRIIMI MAE's short-
term variable-rate financing facilities required that the value of the
collateral securing the facilities meet a minimum loan-to-value ratio. If the
value of the collateral was perceived such that the maximum loan-to-value ratio
is exceeded, then the lender required the Company to post cash or additional
collateral with sufficient value to cure the perceived value deficiency. As of
December 31, 2000, CRIIMI MAE had remaining secured borrowing agreements with
GACC and Merrill Lynch with respect to its Subordinated CMBS. 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.
The allowed claims related to the remaining variable rate secured borrowing
agreements are anticipated to be paid in full on the effective date of the
Reorganization Plan through a combination of cash and the issuance of new
secured debt.
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
were 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 was 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 were redeemable at any
time, in whole or in part, at the option of CRIIMI MAE.
The allowed claims related to the Notes are anticipated to be paid in full,
on the effective date of the Reorganization Plan, through a combination of cash
and the issuance of new secured notes.
Bank Term Loans
In connection with the Merger, CM Management assumed certain debt of
certain mortgage businesses affiliated with CRI in the principal amount of $9.1
million (the "Bank Term Loan"). The Bank Term Loan was secured by certain cash
flows generated by CRIIMI MAE's direct and indirect interests in the AIM Funds
and was guaranteed by CRIIMI MAE. The collateral for this loan is carried at a
cost basis of approximately $11.4 million on
F-41
the balance sheet and is reflected in Equity Investments. The loan requires
quarterly principal payments of $650,000 and was scheduled to mature on December
31, 1998. The amount outstanding as of December 31, 2000 and 1999 was $1.3
million. Interest on the loan was based on LIBOR, plus a spread of 1.25%.
The allowed claim related to the Bank Term Loan is anticipated to be paid
in full, in cash, on the effective date of the Reorganization Plan.
In addition, a wholly owned subsidiary had a loan secured by certain REO
and guaranteed by CRIIMI MAE. The loan required monthly interest payments and a
balloon principal payment at maturity. The loan was made January 22, 1998 and
matured on August 1, 1999. The Company received a default notice on August 3,
1999 from Citicorp. The property was sold to a third party in July 2000 and a
portion of the proceeds from the sale were used to pay off the outstanding loan
balance, and other related costs. The amount outstanding as of December 31,
2000 and 1999 was $0 and $1.75 million, respectively.
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 were based on interest at one-month LIBOR
plus a spread of 1.75%. As of December 31, 2000 and 1999, $40 million in
borrowings were outstanding under this facility.
The Company anticipates that the litigation with First Union (one of the
two lenders) will not be settled or resolved on or prior to the effective date
of the Reorganization Plan; and therefore, the classification of First Union's
claim under the Reorganization Plan will not be determined until after the
effective date (see "Item 3-LEGAL PROCEEDINGS-Bankruptcy Related Litigation-
First Union" for further information regarding (a) the status of the First Union
litigation and (b) the treatment of First Union's Claim on the effective date of
the Reorganization Plan).
The allowed claim related to the other lender is anticipated to be paid in
full on the effective date of the Reorganization Plan, through a combination of
cash and the issuance of new secured notes.
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 were based
on interest at one-month LIBOR plus a spread of 2.25%. As of December 31, 2000
and 1999, approximately $50 million in borrowings was outstanding under this
loan.
The allowed claim related to the bridge loan is anticipated to be paid in
full on the effective date of the Reorganization Plan, through a combination of
cash and the issuance of new secured notes.
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. 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 follows a policy to hedge at least 75% of the
principal amount of its variable-rate debt. As of December 31, 2000 and 1999,
93% and 94%, respectively, of CRIIMI MAE's variable-rate debt was hedged.
F-42
For the year ended December 31, 2000, CRIIMI MAE's weighted average cost of
borrowing, including amortization of discounts and deferred financing fees of
approximately $8.5 million, was approximately 8.1%. As of December 31, 2000,
CRIIMI MAE's debt-to-equity ratio was approximately 4.4 to 1 and CRIIMI MAE's
non-match-funded debt-to-equity ratio was approximately 2.1 to 1.
New Debt
The New Debt is expected to consist of approximately $262 million
anticipated to be provided by affiliates of Merrill Lynch and GACC through
a new secured financing facility (in the form of a repurchase transaction), and
approximately $167 million anticipated to be provided through new secured
notes issued to certain of the Company's unsecured creditors.
In connection with the Reorganization Plan, substantially all cash flows
relating to existing assets are expected to be used to satisfy principal,
interest and fee obligations under the New Debt. The approximate $262 million
secured financing would provide for (i) interest at a rate of one month London
Interbank Offered Rate ("LIBOR") plus 3.25%, (ii) principal
repayment/amortization obligations, (iii) extension fees after two years and
(iv) maturity on the fourth anniversary of the effective date of the
Reorganization Plan. The principal obligations require a minimum principal
amortization payment sufficient to amortize the related debt over a 15-year
period, and additional amortization payments as set forth in the terms of the
New Debt. The approximate $167 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 repayment/amortization
obligations, (iii) extension fees after four years and (iv) maturity on the
fifth anniversary of the effective date of the Reorganization Plan. The second
series of secured notes, representing an aggregate principal amount of
approximately $62 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 Reorganization Plan. The New Debt
described above will be secured by substantially all of the existing assets of
the Company. It is contemplated that there will be restrictive covenants,
including financial covenants and certain restrictions and requirements with
respect to cash accounts and the collection, management, use and application of
funds in connection with the New Debt.
9. INTEREST RATE PROTECTION AGREEMENTS
CRIIMI MAE has entered into interest rate protection agreements to
partially limit the adverse effects of a possible rise in interest rates on its
variable-rate borrowings. Interest rate caps ("caps"), as shown below, provide
protection to CRIIMI MAE to the extent interest rates, based on a readily
determinable interest rate index, increase above the stated interest rate cap,
in which case, CRIIMI MAE will receive payments based on the difference between
the index and the cap. If the cap qualifies for hedge accounting treatment, the
related cost, as well as gains or losses on terminated positions, have been
deferred and recognized into income over the life of the related debt. However,
with the sale of certain securities and subsequent pay down of the related
variable rate debt contemplated by the Reorganization Plan, certain of the
Company's interest rate caps will no longer qualify for hedge accounting. The
portion of such caps will be marked-to-market with the adjustment recorded
through earnings. At December 31, 2000, CRIIMI MAE held caps with a notional
amount of $425 million.
Notional Amount Effective Date Maturity Date (2) Cap (2) Index (3)
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
- --------------
$425,000,000 (1)(4)
==============
________________
(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 6.67 % and the weighted
average remaining term for these interest rate cap agreements is
approximately four months.
(3) The one month LIBOR rate was 6.56% at December 31, 2000.
(4) Subsequent to year end, the Company purchased a 2-year, 1-month LIBOR
indexed, $200 million notional amount, amortizing interest rate cap with a
strike price of 5.25%. This cap was purchased for $1.5 million to hedge
the anticipated New Debt.
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.
10. DIFFERENCES BETWEEN FINANCIAL STATEMENT NET INCOME (LOSS) AND TAXABLE
LOSS
The differences between financial statement (GAAP) net income (loss) and
taxable income (loss) are principally attributable to differing treatment of
unrealized/realized gains and losses associated with certain assets; the
impairment of certain assets; the bases, income, and/or credit loss recognition
related to certain assets; a portion of reorganization costs not deductible for
tax purposes; and amortization of certain costs.
As previously discussed in Note 1, as a result of its trader election in
early 2000, CRIIMI MAE recognized a mark-to-market tax loss of approximately
$478 million on certain Trading Assets on January 1, 2000 (the "January 2000
Loss"). The January 2000 Loss is expected to be recognized evenly over four
years (2000, 2001, 2002, and 2003), for tax purposes (i.e., approximately $120
million per year) beginning with the year 2000. The Company recognized one-
fourth (i.e. approximately $120 million) of this January 2000 loss during the
year ended December 31, 2000.
F-43
A summary of the Company's year 2000 net operating loss is as follows:
January 2000 Loss $ 478 million
LESS: Portion recognized in First through Fourth Quarters of 2000 (120) million
--------------
Balance Remaining of January 2000 Loss to be Recognized in Future Periods $ 358 million
==============
Taxable Income for the year ended December 31, 2000 Before Recognition of
January 2000 Loss $ 20 million
LESS: January 2000 Loss Recognized in 2000 (120) million
PLUS: Mark-to-market unrealized gain on Trading Assets as of December 31, 2000 (1) 50 million
--------------
Net Operating Loss for the year ended December 31, 2000 ($50) million
==============
Net Operating Loss through December 31, 2000 ($50) million
Net Operating Loss Utilization 0 million
--------------
Net Operating Loss Carried Forward for Use in Future Periods ($50) million
==============
(1) As of December 31, 2000, the combined fair value of the Trading Assets
approximated $1.2 billion for tax purposes.
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, or taxable loss, as if the Company were a regular domestic
corporation. This taxable income or taxable loss level determines the amount of
dividends, if any, the Company is required to pay out over time in order to
eliminate its tax liability.
During the year ended December 31, 2000, excess inclusion income of $0.1474
per common share was distributed with the Series G Preferred Stock dividend.
Excess inclusion income results from the Company's prior resecuritization of
mortgage assets in its portfolio. A shareholder's allocable share of excess
inclusion represents the minimum taxable income reportable by the shareholder
for that year; it may not be offset by an NOL and may represent Unrelated
Business Taxable Income for some shareholders. The excess inclusion distributed
in 2000 was generated in 1999. Excess inclusion of $0.1456 per common share was
distributed in 1998 along with the cash dividends paid during that year.
Because the Series F Preferred Stock dividend paid in 1999 related to 1998's
taxable income, no excess inclusion was distributed in 1999.
11. COMMON STOCK
CRIIMI MAE, as of the anticipated effective date of the Reorganization
Plan, expects to have authorized 300,000,000 shares of $0.01 par value common
stock; and, as of December 31, 2000 and 1999, has issued 62,353,170 and
59,954,604 shares, respectively. In January 2001, 2,000 shares were issued to
Directors pursuant to the Non-Employee Director Stock Plan. Additionally, from
January 1, 2001 through April 10, 2001, an additional 4,147,639 common shares
were issued as a result of the conversion of 30,000 shares of Series E
Cumulative Convertible Preferred Stock. Further, 32,547,041 additional common
shares were issued as a result of the conversion of 2,496,535 shares of Series G
Preferred Stock, as discussed further in Note 12, resulting in a total of
99,049,850 common shares outstanding as of April 10, 2001.
On January 11, 2001, CRIIMI MAE received notification from the New York
Stock Exchange that it is "below criteria" for continued listing on the New York
Stock Exchange because the average closing price of its common stock was less
than $1 over a consecutive 30 trading-day period. Additionally, the New York
Stock Exchange advised CRIIMI MAE Inc. that it has six months from January 11,
2001 to raise its common stock price above the $1 level and that failure of the
common stock to average $1 over the 30 trading days preceding the expiration of
the 6 month cure period will result in commencement of suspension and delisting
procedures.
Dividends
F-44
During the pendency of the Chapter 11 proceedings, the Company is
prohibited from paying cash dividends without first obtaining Bankruptcy Court
approval. Pursuant to the terms of the anticipated New Debt, limited, if any,
dividends, other than if such dividend payments are required to be paid to
maintain the Company's REIT status, can be paid to existing shareholders. See
Note 1 for further discussion.
As discussed below, in September 1999 and September 2000, the Company
declared a dividend on its common stock for the purpose of distributing
approximately $15.7 million and $37.5 million, respectively, in undistributed
1998 and 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.
Treasury Shares
In March 1998, approximately 540,000 treasury shares were retired and, as
such, as of December 31, 2000 no treasury shares are outstanding.
12. PREFERRED STOCK
CRIIMI MAE, as of the anticipated date of the Reorganization Plan, expects
to have authorized for issuance up to 75,000,000 shares of preferred stock. As
of December 31, 2000 and 1999, the Company has authorized 25,000,000 shares of
preferred stock, of which 3,000,000 shares are designated as Series B Cumulative
Convertible Preferred Stock, 203,000 shares are designated as Series E
Cumulative Convertible Preferred Stock, 1,610,000 shares are designated as
Series F Redeemable Cumulative Dividend Preferred Stock, and 3,760,000 shares
are designated as Series G Redeemable Cumulative Convertible Preferred Stock as
of December 31, 2000.
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. Since the Series B Preferred Stock voted to accept the
Reorganization Plan, the relative rights and preferences of the Series B
Preferred Stock were amended to permit the payment of dividends in cash or
common stock (or a combination thereof) at the Company's election. The Series B
Preferred Stock is (i) convertible at the option of the holders and (ii) subject
to redemption at CRIIMI MAE's sole discretion after the tenth anniversary of
issuance. Each share of Series B Preferred Stock was originally 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 and the payment of the Series G Redeemable
Cumulative Dividend Preferred Stock dividend resulted in an adjustment to the
conversion price such that one share of Series B Preferred Stock was, as of
December 31, 2000, convertible into 4.2044 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 December 31,
2000. Dividends accrued on the Series B Preferred Stock totaled
F-45
$9,755,170 as of December 31, 2000 (of which, $4,335,631 was accrued for 2000,
$4,335,631 was accrued during 1999 and $1,083,908 was accrued for the fourth
quarter of 1998).
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 $0.01 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. As of February 22, 2000, all of the
outstanding shares of Series C Preferred Stock were exchanged for Series E
Preferred Stock. (See Series E, below, for further discussion.) Dividends
accrued on the Series C Preferred Stock as of December 31, 2000 totaled
$1,137,720 (of which $181,411 was accrued for 2000, $697,172 for 1999 and
$259,137 for the fourth quarter of 1998).
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 $0.01 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. As
of July 26, 2000, all of the outstanding shares of Series D Preferred Stock were
exchanged for Series E Preferred Stock. (See Series E, below, for further
discussion.) Dividends accrued on the Series D Preferred Stock totaled
$1,283,700 as of December 31, 2000 (of which, $482,947 was accrued for 2000,
$645,822 was accrued for 1999 and $154,931 was accrued for the fourth quarter of
1998.
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
F-46
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 Reorganization 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.
Prior to the effective date, 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
included 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 $1,004,041 as of
December 31, 2000, (representing dividends from February 23, 2000 through
December 31, 2000). On April 13, 2001, the anticipated date of emergence, the
Company anticipates paying dividends which have accrued on the Series E
Preferred Stock from February 22, 2000 through the anticipated date of
emergence. Such dividends are anticipated to be paid through the issuance of
shares of common stock. The Series E Preferred Stock was not convertible into
shares of common stock at the option of the holder prior to the effective date
unless the effective date of the Reorganization Plan did not occur on or before
December 31, 2000. Since the effective date is anticipated to occur on April
13, 2001, 10,000 shares of Series E Preferred Stock became convertible at the
option of the holder into common stock each month preceding the effective date
of the Reorganization Plan. Each share of Series E Preferred Stock is
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. Prior to the effective date of the
Reorganization, 10,000, 10,000 and 10,000 shares of the Series E Preferred Stock
were converted into 1,369,863, 1,388,888, and 1,388,888, respectively, shares of
common stock on January 9, February 1, and March 15, 2001, respectively. As of
March 16, 2001, 173,000 shares of the Series E Preferred Stock remained
outstanding. 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.
Pursuant to the anticipated effective date of the Reorganization Plan,
amendments to the Series E Preferred Stock relative rights and preferences,
relating principally to conversion and dividend rights and terms, will be
effected, including an increase in the dividend rate equal to the sum of (i) 250
basis points plus (ii) LIBOR as of the second LIBOR Market Day preceding
commencement of the calendar quarter which includes such quarterly dividend
payment, a new mandatory conversion date and the provision of additional
conversion rights. For a more complete discussion of the relative rights and
preferences of the Series E Preferred Stock, reference is made to the Articles
Supplementary related to the Series E Preferred Stock, as amended, and the
Company's Reorganization Plan previously filed as exhibits to Current Reports on
Form 8-K with the Securities and Exchange Commission on April 10, September 14
and December 28, 2000.
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 paid 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.
F-47
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.
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 Preferred Stock outstanding at December
31, 2000. Dividends accrued on Series F Preferred Stock totaled $815,032 as of
December 31, 2000 (of which $703,625 was accrued for 2000 and $111,407 for
1999).
The Series F Preferred Stock provides for dividends at an annual fixed rate
of 12%. Since the holders of Series F Preferred Stock voted to accept the
Reorganization Plan, the relative rights and preferences of the Series F
Preferred Stock were amended to permit the payment of dividends in cash or
common stock (or a combination thereof) at the Company's election. The first
dividend will be paid no earlier than the end of the calendar quarter in which
the Reorganization Plan becomes effective, and no more than quarterly
thereafter. The Series F Preferred Stock is redeemable at the Company's option
after November 5, 2000 in cash or shares of parity stock, at the election of the
Company, at a price of $10.00 per share together with an amount (in cash and/or
common stock, as applicable) equal to any accrued and unpaid dividends through
the dividend declaration date next preceding the redemption date. The
liquidation value of the Series F Preferred Stock is $10.00 per share plus
accrued and unpaid dividends.
Series G Redeemable Cumulative Dividend Preferred Stock
On September 11, 2000, the Company declared a dividend on its common stock
for the purpose of distributing approximately $37.5 million in undistributed
1999 taxable income. The dividend was paid on November 13, 2000, to common
shareholders of record as of October 27, 2000 who maintained ownership of their
common stock through the payment date, in shares of Series G Redeemable
Cumulative Dividend Preferred Stock (convertible during the period of ten (10)
trading days commencing one-hundred calendar days after the initial issue date
or, if such commencement date is not a trading day, the first trading day
thereafter) (the "Series G Preferred Stock"). The shares of Series G Preferred
Stock which were issued were approved for listing on the New York Stock Exchange
and trade with the symbol CMM-PrG, with a par value of $0.01 and a face value of
$10 per share.
Holders of record of CRIIMI MAE common stock who maintained ownership of
their common stock through November 13, 2000, received for each share held
6/100ths of a share of Series G Preferred Stock (i.e., six shares of Series G
Preferred Stock for every 100 shares of common stock held). There were 3,741,191
shares of Series G outstanding as of December 31, 2000. The Series G Preferred
Stock was convertible into shares of common stock during a period of 10
consecutive trading days commencing on February 21, 2001 and ending on March 6,
2001. Conversions 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 13, 2000. During the conversion period, 2,496,535
shares of Series G Preferred Stock were converted, resulting in the issuance of
32,547,041 shares of common stock. Accrued and unpaid dividends will not be paid
on shares of Series G Preferred Stock converted into common stock during the
conversion period. At the end of the conversion period, March 6, 2001, all
conversion rights of the holders of Series G Preferred Stock expired. Dividends
accrued on Series G Preferred Stock totaled $254,117 as of December 31, 2000.
This amount takes into consideration the shares converted during the conversion
period.
Holders of Series G Preferred Stock will be entitled to receive, when
declared by the Board of Directors, cumulative dividends, payable in cash or
common stock (or a combination thereof) at the Company's option, at an annual
rate of 15%. The first dividend will be paid no earlier than the end of the
calendar quarter in which the
F-48
Reorganization Plan becomes effective, and no more than quarterly thereafter.
The Series G Preferred Stock is redeemable, at the Company's option, in whole or
in part, at any time after issuance in cash or shares of parity capital stock,
at the election of the Company, at a price of $10.00 per share together with an
amount (in cash and/or common stock, as applicable) equal to any accrued and
unpaid dividends through the dividend declaration date next preceding the
redemption date. The liquidation value of the Series G Preferred Stock is $10
per share plus accrued and unpaid dividends.
13. EARNINGS PER SHARE
The following table reconciles basic and diluted (loss) income per share
under FAS 128 for the years ended December 31, 2000, 1999, and 1998.
Per Share
(Loss)/income Shares Amount
---------------------- ------------------ --------------
Year ended December 31, 2000
- -----------------------------------------
Net (loss) before extraordinary item $(170,304,166) 62,144,788 $(2.74)
---------------------- ------------------ --------------
Extraordinary gain 14,808,737 62,144,788 $ 0.24
---------------------- ------------------ --------------
Basis earnings per share:
(Loss) to common shareholders (155,495,429) 62,144,788 $(2.50)
Dilutive effect of securities:
Stock options - -
Convertible preferred stock - -
---------------------- ------------------ --------------
Diluted earnings per share (1):
(Loss) to common shareholders and
assumed conversions $(155,495,429) 62,144,788 $(2.50)
====================== ================== ==============
Year ended December 31, 1999
- -----------------------------------------
Basis earnings per share:
(Loss) to common shareholders $(132,368,965) 53,999,782 $(2.45)
Dilutive effect of securities:
Stock options - -
Convertible preferred stock - -
---------------------- ------------------ --------------
Diluted earnings per share (1):
(Loss) to common shareholders and
assumed conversions $(132,368,965) 53,999,782 $(2.45)
====================== ================== ==============
Year ended December 31, 1998
- -----------------------------------------
Basis earnings per share:
Income available to common shareholders $ 35,370,374 47,280,371 $ 0.75
Dilutive effect of securities:
Stock options - 302,390
Convertible preferred stock 264,011 622,748
---------------------- ------------------ --------------
F-49
(Loss)/income Shares Per Share Amount
------------------- ------------------ -----------------
Diluted earnings per share (1):
Income available to common shareholders and
assumed conversions $ 35,634,385 48,205,509 $ 0.74
=================== ================== =================
___________________________
(1) 1,593,982 shares of Series B Preferred Stock; -0-, 103,000 and 123,000
shares of Series C Preferred Stock; -0-, 100,000 and 100,000 shares of
Series D Preferred Stock; 203,000, -0- and -0- Shares of Series E Preferred
Stock; 586,354, 850,142 and -0- shares of Series F Preferred Stock; and
3,741,191, -0- and -0- of Series G Preferred Stock were outstanding at
December 31, 2000, 1999 and 1998, respectively. For the year ended
December 31, 2000, the common stock equivalents for these shares were not
included in the calculation of diluted EPS because the effect would be
anti-dilutive.
14. STOCK BASED COMPENSATION PLANS
CRIIMI MAE has two stock option plans, the Stock Option Plan for Key
Employees ("Key Employee Plan") and the 1996 Non-Employee Director Stock Plan
("Director Plan"). In addition, CRIIMI MAE has granted to each of Messrs.
Dockser and Willoughby options to purchase common stock under separate stock
option agreements (the "Agreements") resulting from the Merger. CRIIMI MAE
accounts for these Agreements and Plans under APB Opinion No. 25, under which no
compensation cost has been recognized. The value of option shares granted as
part of the Merger was capitalized as a component to goodwill. Accordingly, the
pro forma information below excludes option shares granted at the time of the
Merger. During 1996, FASB Statement No. 123 became effective. This Statement
requires pro forma disclosure of the impact on net income and earnings per share
as if the options were recorded at their estimated fair value at the issuance
date and amortized over the options' vesting period. Had compensation cost for
these Plans been determined consistent with FASB Statement No. 123, CRIIMI MAE's
net income and earnings per share would have been recorded at the following pro
forma amounts:
Years ended December 31,
2000 1999 1998
-------------- ----------------- ---------------
Net (loss) income available to common shareholders $(155,495,429) $ (132,368,965) $ 35,370,734
============== ================= ===============
Pro forma net (loss) income available to common shareholders $(156,370,899) $ (133,490,853) $ 34,739,667
============== ================= ===============
Basic (loss) earnings per share $ (2.50) $ (2.45) $ 0.75
============== ================= ===============
Pro forma basic (loss) earnings per share $ (2.52) $ (2.47) $ 0.73
============== ================= ===============
Diluted (loss) earnings per share $ (2.50) $ (2.45) $ 0.74
============== ================= ===============
Pro forma diluted (loss) earnings per share $ (2.52) $ (2.47) $ 0.73
============== ================= ===============
The Key Employee Plan (as amended pursuant to the Reorganization Plan)
provides for total grants of stock options to purchase up to 4,500,000 shares of
Company Common Stock. As of December 31, 2000, 1,980,560 options have been
granted to employees. As of March 31, 2001, (after giving effect to the
adjustment as a result of the Series G Preferred Stock dividend paid in November
2000 and consistent with the Bankruptcy Court order that limits the full
adjustment), 2,571,402 options have been granted to employees. Under the Key
Employee Plan, options granted prior to July 28, 1995, have an option price of
$9.77, and options granted after July 28, 1995 must have an option price of not
less than fair market value of a share of common stock on the date of grant.
Options vest in equal installments on either the first three or four
anniversaries of the date of grant and expire after eight years.
F-50
CRIIMI MAE may grant stock and options for up to 873,129 common shares
under the Director Plan (as adjusted from 500,000 shares as a result of the
Series F and Series G Preferred Stock dividend paid to common shareholders in
November 1999 and November 2000, contemplated by the terms and provisions of the
Director Plan). CRIIMI MAE has granted options on 11,312 common shares through
December 31, 2000. As of March 31, 2001, 17,968 options are outstanding subject
to the Bankruptcy Court limitation on full adjustment. Under the Director Plan,
the option exercise price is equal to the market price of a share of common
stock on the date of grant, the options vest immediately, and the options expire
after ten years.
Under the Agreements, each of the Principals received from CRIIMI MAE
options to purchase 1,000,000 common shares at an exercise price equal to $1.50
per share more than the aggregate average of the high and low sales prices of
common shares on the New York Stock Exchange during the 10 trading days
preceding the closing date of the Merger, which average sales price was
calculated at $8.27 per share (the "Trading Price") and 400,000 common shares at
an exercise price equal to $4.00 per share more than the Trading Price. These
options vested in equal installments on the first four anniversaries of the
closing date. The Principals also received options to purchase 100,000 common
shares exercisable at $5.00 more than the Trading Price that vested on the fifth
anniversary of the closing date. The options will expire on the sixth
anniversary of the closing date of the Merger, which date is June 30, 2001. As
of March 31, 2001, the aggregate 3,000,000 common shares issuable upon exercise
of the options granted under the Agreements have been adjusted to an aggregate
4,748,412 common shares as a result of the Series F and Series G Preferred Stock
dividend paid to common shareholders in November 1999 and November 2000.
A summary of CRIIMI MAE's two stock option plans, plus options granted at
the time of the Merger, as of December 31, 2000, 1999 and 1998, and changes
during the years then ended is presented in the table below:
2000 1999 1998
------------------------- ---------------------------- -----------------------------
Shares Average Shares Average Shares Average
Price Price Price
------------ ----------- ----------- ------------ ------------ ------------
Outstanding at beginning of year 4,577,718 $10.62 4,087,145 $12.15 3,487,676 $11.40
Adjustment of 2/00 (1) 751,887 10.62 - - - -
Granted 123,348 $ 1.07 745,590 2.53 776,000 15.75
Exercised - - - - (69,699) 9.94
Forfeited (197,469) $ 6.85 (255,017) 11.41 (106,832) 15.29
------------ ------------ ----------- ------------ ------------ ------------
Outstanding at end of year 5,255,484 $10.54 4,577,718 $10.62 4,087,145 $12.15
============ ============ =========== ============ ============ ============
Exercisable at end of year 4,339,035 $11.21 2,619,957 $11.41 1,752,982 $10.85
============ ============ =========== ============ ============ ============
Weighted average fair value of options granted
during the year $ 0.83 $ 2.03 $ 1.33
============ ============ ============
(1) Adjustment as a result of anti-dilution provision associated with
conversion of Series F Preferred Stock into common stock.
The 5,255,484 options outstanding at December 31, 2000 have exercise prices
between $1.0625 and $15.9375, with a weighted average exercise price of $10.54
and a weighted average remaining contractual life of 2.5 years.
The fair value of the 2000, 1999 and 1998 option grants was estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in 2000, 1999 and 1998,
respectively: risk-free interest rate of 6.44%, 5.37% and 4.95%; expected life
of 5.29, 6.23 and 8.00 years; expected volatility of 96.2%, 95.2% and 26.6%;
dividend yield of approximately 0%, 0% and 9.4%.
F-51
15. EMPLOYEE RETENTION PLAN
Upon commencement of the Chapter 11 cases, the Company believed it was
essential to both the efficient operation of the Company's business and the
reorganization effort that the Company maintain the support, cooperation and
morale of its employees. The Company obtained Bankruptcy Court approval to pay
certain pre-petition employee obligations in the nature of wages, salaries and
other compensation and to continue to honor and pay all employee benefit plans
and policies.
In addition, to ensure the Company's continued retention of its executives
and other employees and to provide meaningful incentives for these employees to
work toward the Company's financial recovery and reorganization, the Company's
management and Board of Directors developed a comprehensive and integrated
program to retain its executives and other employees throughout the
reorganization. On December 18, 1998, the Company obtained Bankruptcy Court
approval to adopt and implement an employee retention program (the "Employee
Retention Plan") with respect to all employees of the Company other than certain
key executives. On February 28, 1999, the Company received Bankruptcy Court
approval authorizing it to extend the Employee Retention Plan to the key
executives initially excluded, including modifying existing employment
agreements and entering into new employment agreements with such key executives.
The Employee Retention Plan permitted the Company to approve ordinary course
employee salary increases beginning in March 1999, subject to certain
limitations, and to grant options to its employees after the Petition Date, up
to certain limits. The Employee Retention Plan also provided for retention
payments aggregating up to approximately $3.5 million, including payments to
certain executives. Retention payments were 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 and final retention payment of
approximately $639,000 vested on October 5, 2000, $367,000 of which was paid on
October 13, 2000 and the final payment was made on January 31, 2001. William B.
Dockser, Chairman of the Board of Directors, and H. William Willoughby,
President and Secretary, did not 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.
16. TRANSACTIONS WITH RELATED PARTIES
Below is a summary of the related party transactions that occurred during
the years ended December 31, 2000, 1999 and 1998. These items are described
further in the text which follows:
For the years ended December 31,
2000 1999 1998
------------------- ------------------- -------------------
Amounts received or accrued from related parties:
- -------------------------------------------------
CRIIMI Inc.
Income (1) $ 746,570 $ 972,180 $1,340,730
Return of Capital (2) 1,573,335 5,278,811 3,774,817
------------------- ------------------- -------------------
Total $2,319,905 $6,250,991 $5,115,547
=================== =================== ===================
CRI/AIM Investment Limited Partnership (1) $ 341,965 $ 444,393 $ 552,121
=================== =================== ===================
CRIIMI MAE Services Limited Partnership (3) $ - $ - $3,114,000
=================== =================== ===================
Expense reimbursements to CRIIMI Management:
- --------------------------------------------
AIM Funds and CRI Liquidating (3)(4)(5) $ 168,978 $ 183,579 $ 211,793
CMSLP (2)(3)(4) 39,602 946,461 76,621
------------------- ------------------- --------------------
Total $ 208,580 $1,130,040 $ 288,414
=================== =================== ===================
F-52
For the years ended December 31,
2000 1999 1998
------------------- ------------------- -------------------
Payments to CRI:
- ---------------------------------------------
Expense reimbursement - CRIIMI MAE (3)(4)(6) $ 151,171 $ 182,691 $ 352,471
=================== =================== ===================
Payments to Capital Hotel Group:
- ---------------------------------------------
Management fee (4)(7) $ 34,698 $ 61,077 $ 4,691
=================== =================== ===================
_______________________________
(1) Included as equity in earnings from investments on the accompanying
consolidated statements of income.
(2) Included as a reduction of equity investments on the accompanying
consolidated balance sheets.
(3) This is a distribution included on the balance sheet as a decrease in
equity investments.
(4) Included in general and administrative expenses on the accompanying
consolidated statements of income.
(5) Prior to CRIIMI MAE becoming a self-administered REIT, amounts were paid to
CRI 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 CRI are, effective June 30, 1995, paid to CM Management.
(6) Prior to CRIIMI MAE becoming a self-administered REIT, amounts were paid to
CRI 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 CRI (the "CRI Administrative Services Agreement"), CRI
provides CRIIMI MAE with certain administrative and office facility
services and other services, at cost, with respect to certain aspects of
CRIIMI MAE's business. CRIIMI MAE uses the services provided under the
C.R.I., Inc. Administrative Services Agreement to the extent such services
are not performed by CM Management or provided by another service provider.
The CRI Administrative Services Agreement is terminable on 30 days notice
at any time by CRIIMI MAE.
(7) Included as a reduction of net income earned from REO which is included in
other investment income on the accompanying consolidated statements of
income. See Note 8 for discussion of disposition of REO.
17. LITIGATION
Bankruptcy Proceedings
On the Petition Date, the Debtors each filed voluntary petitions for
relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. These
cases are being jointly administered for procedural purposes. None of the cases
has been substantively consolidated. Under the Bankruptcy Code, the Debtors are
authorized to manage their respective affairs and operate their business 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
F-53
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.
As noted above, the Debtors were 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 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 participated in the formation of the
Reorganization Plan. The Debtors are required to pay certain expenses of the
Committees, including professional fees, to the extent allowed by the Bankruptcy
Court.
Under the Bankruptcy Code, for 120 days following the Petition Date, only
the debtor-in-possession has the right to propose and file a plan of
reorganization with the Bankruptcy Court. If a debtor-in-possession files a plan
of reorganization during this exclusivity period, no other party may file a plan
of reorganization until 180 days following the Petition Date, during which
period the debtor-in-possession has the exclusive right to solicit acceptances
of the plan. If a debtor-in-possession fails to file a plan during the
exclusivity period or such additional exclusivity period as may be ordered by
the Bankruptcy Court or, after such plan has been filed, fails to obtain
acceptance of such plan from impaired classes of creditors and equity security
holders during the exclusive solicitation period, any party in interest,
including a creditors' committee, an equity security holders' committee, a
creditor or an equity security holder may file a plan of reorganization for such
debtor. Additionally, if the Bankruptcy Court were to appoint a trustee, the
exclusivity period, if not previously terminated, would terminate.
The Debtors' initial exclusivity period to file a plan of reorganization
ended on February 2, 1999. The Bankruptcy Court extended this period through
August 2, 1999 and again through September 10, 1999. The Debtors sought a third
extension of exclusivity through November 10, 1999 and on September 20, 1999,
the Bankruptcy Court entered an order (i) extending the Debtors' right to file a
plan of reorganization through October 16, 1999, (ii) providing the Unsecured
Creditors' Committee and the 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
Reorganization Plan and disclosure statement were amended and supplemented by
praecipes filed with the Bankruptcy Court on July 13, 14, 21, August 18, and
November 22, 2000. The Debtors' Third Amended Joint Plan of Reorganization is
fully supported by the CMI Equity Committee, which was a co-proponent of the
Reorganization Plan. Subject to the completion of mutually acceptable Unsecured
Creditor Debt Documentation, the Unsecured Creditors' Committee has agreed to
support confirmation of the Debtors' Reorganization 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 supported confirmation of the Debtors' Reorganization Plan
and asked the Bankruptcy Court to defer consideration of its plan pending
approval of the Debtors' Reorganization Plan and the completion of mutually
acceptable Unsecured Creditor Debt Documentation. Accordingly, the Debtors, the
CMI Equity Committee and the Unsecured Creditors' Committee together presented
the Debtors' Reorganization 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
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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
resulted in the dismissal of all outstanding litigation between the parties.
The Bankruptcy Court scheduled a hearing on August 23, 2000 with respect to
the proposed ballots submitted to the Bankruptcy Court to be sent to members of
all classes of impaired creditors and equity security holders in connection with
the Reorganization Plan. On August 24, 2000, the Bankruptcy Court entered an
order approving the proposed Disclosure Statement and other proposed
solicitation materials. The Bankruptcy Court scheduled a confirmation hearing
on the Reorganization Plan for November 15, 2000 and set September 5, 2000 as
the voting record date for determining the holders of common stock, preferred
stock, 9 1/8% senior notes and general unsecured creditors entitled to vote to
accept or reject the Reorganization Plan. The Company distributed copies of the
Reorganization Plan, the Disclosure Statement and other solicitation materials,
including ballots during the week of September 10, 2000 to members of all
classes of impaired creditors and all equity security holders for acceptance or
rejection. All impaired classes which voted on the Reorganization Plan voted
overwhelmingly to accept the Reorganization Plan.
On November 22, 2000, the Bankruptcy Court entered an order (the
"Confirmation Order") confirming the Reorganization 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
Reorganization 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
Reorganization Plan, (ii) with respect to each class of claims or equity
security holders, that such class has accepted the Reorganization Plan or is not
impaired under the Reorganization Plan, and (iii) confirmation of the
Reorganization 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 Reorganization Plan. The
Confirmation Order stated that the effective date of the Reorganization Plan
shall occur no later than March 15, 2001 or such later date as may be (i) agreed
to by the Debtors, Merrill Lynch, GACC, the Unsecured Creditors' Committee, the
CMM Creditors' Committee and the CMI Equity Committee and approved by the
Bankruptcy Court, or (ii) extended by further order of the Bankruptcy Court upon
notice and a hearing (each party reserving its right to support or oppose any
such extension).
On March 9, 2001, the Bankruptcy Court, after notice and a hearing,
approved an extension of the effective date of the Reorganization Plan to April
13, 2001, and on April 13, 2001 the Bankruptcy Court approved a further
extension of the Reorganization Plan until April 17, 2001. The Company expects
to sign all remaining documents, disburse funds and consummate the effective
date by April 17, 2001. However, there can be no assurance that the Company will
emerge by such date.
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 all but one creditor, 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.
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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 were 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
the Reorganization Plan.
On September 7, 1999, the Company filed a Motion to Approve Stipulation and
Consent Order Providing for Adequate Protection. On or about September 27, 1999,
the Unsecured Creditors' Committee and the CMI Equity Committee filed a joint
objection to the Motion. On December 3, 1999, the Bankruptcy Court entered the
Stipulation and Consent Order Providing For Adequate Protection (the "Adequate
Protection Order"), certain provisions of which were effective retroactively.
Pursuant to the Adequate Protection Order, a segregated interest bearing debtor-
in-possession account was created (the "Cash Collateral Account") into which the
Company's Distribution Share was deposited during the months of August through
December 1999. An additional 50 percent 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 Reorganization Plan. The Adequate Protection
Order provides Merrill Lynch with a first priority lien on the Cash Collateral
Account. (See Note 1 for information with respect to the New Debt anticipated to
be provided by affiliates of Merrill Lynch and GACC pursuant to the
Reorganization Plan.)
Citicorp and Citibank
In addition to the Citibank Program pursuant to which the Company
originated loans, as previously discussed, the Company also has a financing
arrangement with Citicorp pursuant to which the Company pledged CMBS.
On October 13, 1998, Citicorp demanded from Norwest Bank Minnesota, N.A.
("Norwest") the immediate transfer of certain CMBS (the "Retained Bonds") issued
pursuant to CMO-IV. Norwest served as indenture trustee. The Retained Bonds are
collateral for amounts advanced to the Company by Citicorp under the financing
arrangement. As of the Petition Date, the Company owed Citicorp $79.1 million
under the facility.
On October 15, 1998, the Company filed an emergency motion to enforce the
automatic stay against Norwest and Citicorp. Pursuant to an Order dated October
23, 1998, the Bankruptcy Court prohibited Citicorp from selling the Retained
Bonds without further order of the Bankruptcy Court. On October 23, 1998,
Citicorp requested an emergency hearing regarding the October 23 Order, and on
November 2, 1998, the Company filed a complaint against Citicorp seeking, among
other things, a declaratory judgment as to whether the automatic stay applies to
actions taken by Citicorp with respect to the Retained Bonds.
On March 11, 1999, the Company finalized agreements with Citicorp and
Citibank, pursuant to which the parties agreed to adjourn the pending litigation
for a four-month period. The Bankruptcy Court agreed to a request by CRIIMI MAE,
Citibank, and the Unsecured Creditors' Committee to further postpone the pending
litigation on July 7, 1999 and again on September 10, 1999. The trial was not
rescheduled due to a settlement reached among the parties, the terms of which
are described below.
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
F-56
$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 were
held in an account controlled by the Bankruptcy Court. In January 2001, proceeds
from this account were released to the Company.
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
Reorganization 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 December
31, 2000.
On September 21, 2000, CRIIMI MAE, SSB, GACC, ORIX, the CMI Equity
Committee and the Unsecured Creditors' Committee filed a Stipulation and Consent
Order (the "Stipulation and Consent") with the Bankruptcy Court providing for,
among other matters, the terms of an agreement with respect to the sale of the
Company's interest in CMO-IV and certain other CMBS to ORIX. On October 12,
2000, an order was entered by the Bankruptcy Court approving the Stipulation and
Consent. On October 30, 2000, the Court entered an amendment to the Stipulation
and Consent with respect to the agreed proceeds in connection with the sale to
ORIX (the "Order"). Pursuant to the Stipulation and Consent as amended by the
Order, the Company sold its interest in CMO-IV and certain other CMBS to ORIX.
The CMI Equity Committee and Unsecured Creditors' Committee are deemed to have
agreed to such sale. The sale was completed on November 6, 2000 resulting in
total proceeds of approximately $189 million. The proceeds were used to pay off
$141 million of financing owed to SSB and $4 million to Citicorp Real Estate,
Inc. in full satisfaction of all asserted and unasserted claims of such
claimants. Additionally, approximately $14.2 million of the proceeds were used
to pay down secured financing provided by GACC. The Company will use the net
proceeds of approximately $30 million to help fund the Reorganization Plan.
First Union
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;
F-57
(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.
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 to help fund the
Reorganization Plan.
F-58
First Union has asserted a first priority security interest in certain
bonds that are or were in its possession, and the distributions made on those
bonds since the Petition Date, pursuant to a custodian agreement dated as of
October 10, 1997 by and between the Company and First Union. The Company
disputes First Union's claim to a security interest in those bonds and the
distributions made thereon. The bonds in issue are (i) the Morgan Stanley
Capital, Series 1998-WF2 Class N bond (the "Morgan N Bond"), (ii) the Chase
Commercial Mortgage, Series 1998-1 Class J bond (the "Chase J Bond"), and (iii)
the Nomura Asset Securitization Corporation, Series 1998-D6 Class B7 bond (the
"Nomura N Bond", collectively with the Morgan N Bond and the Chase J Bond, the
"Bonds"). The Morgan N Bond has been sold, and certain proceeds from the sale
thereof are being held in a segregated account in the name of First Union
pending further order of the Bankruptcy Court and resolution of the claim of
First Union thereto. On August 7, 2000, the Company sold certain CMBS to GACC
for approximately $43.4 million. The Chase J Bond composed part of the CMBS sold
to GACC. The proceeds received from the sale related to the Chase J Bond were
deposited in a segregated account in the name of First Union pending resolution
of First Union's claim of a security interest in the bonds. See "Bankruptcy
Litigation-Arrangements with Other Creditors" for further discussion of the sale
of certain CMBS to GACC.
Because the issues between First Union and the Company could not be
resolved consensually, First Union commenced an adversary proceeding against the
Company on September 6, 2000 by filing a complaint in the Bankruptcy Court
seeking a determination that it has a first priority perfected security interest
in the Bonds and the distributions made on the Bonds. On October 6, 2000, the
Company answered First Union's complaint and asserted counterclaims against
First Union, seeking turnover of the Bonds and damages for conversion, breach of
contract, and breach of fiduciary duty. On October 25, 2000, First Union filed
an answer to the Company's counterclaims. Thereafter, on November 1, 2000, First
Union filed a motion for summary judgment.
The Company filed a cross-motion for summary judgment on November 17, 2000.
The parties are continuing to conduct discovery in the case. The Bankruptcy
Court has not set a hearing date for the motion and cross-motion for summary
judgment or a trial date on the complaint and counterclaim.
On March 9, 2001, the Company filed a motion to substitute and value
alleged cash collateral wherein it asked the Bankruptcy Court to (i) value the
Nomura N Bond at $8.7 million, (ii) require First Union to turn over the Nomura
N Bond to the Company, and (iii) authorize the Company to deposit an amount
equal to the value of the Nomura N Bond in a segregated interest bearing account
pending resolution of the complaint and counterclaim. The Company and First
Union subsequently reached an agreement regarding resolution of the motion to
substitute and value alleged cash collateral. On March 28, 2001, the Bankruptcy
Court approved and entered a Stipulation and Agreed Order (a) directing transfer
of the Nomura N Bond to the Company free and clear of alleged liens and
encumbrances, (b) valuing the Nomura N Bond at $8.7 million, and (c) authorizing
the Company to deposit the sum of $8.7 million in a segregated, interest bearing
account or other investment of funds acceptable to the Company and First Union
pending resolution of the complaint and counterclaim. Accordingly, in April,
2001, $8,700,000 was transferred to a segregated account.
If First Union's claim with respect to the Bonds and/or the distributions
made on the Bonds is determined to be an Allowed Secured Claim, such Claim will
be treated as part of Class A2 under the Plan. If First Union's Claim is
determined to be an unsecured claim, it will be included in the Claims subject
to Class A10 under the Plan. However, until the Court allows First Union's claim
as either a secured or unsecured claim, First Union will not be entitled to any
distribution on its claim.
If the First Union litigation is not settled or resolved on or prior to the
effective date of the Reorganization Plan, the Company will, based on the amount
of First Union's claim, as of April 13, 2001, escrow approximately (a) $5.4
million in cash, (b) $7.9 million in Series A Senior Secured Notes, and (c) $4.6
million in Series B Senior Secured Notes on the effective date. These amounts
will be released to First Union, if the Bankruptcy Court determines that First
Union's Claim is unsecured and, therefore, are to be included in the claims
subject to Class A10 under the Reorganization Plan. If the Bankruptcy Court
determines that First Union's Claim is secured, and thus, is to be treated as
part of Class A2 under the Reorganization Plan, then the approximately $15.8
million, as of April 13, 2001, held in a segregated account at First Union will
be released to First Union, and the balance of their claim will be treated as
part of Class A10 under the Reorganization Plan.
Arrangements with Other Creditors
F-59
In addition to the foregoing, the Company has had discussions with other
secured creditors against whom the Company was not engaged in litigation. One
such creditor is GACC. On February 3, 1999, the Bankruptcy Court approved an
Amended Consent Order between the Company and GACC that provides for the
following: (i) acknowledgement that GACC has a valid perfected security interest
in its collateral; (ii) authority for GACC to hedge its loan, subject to a hedge
cost cap; and (iii) as adequate protection, the sharing of cash collateral on a
50/50 basis, after payment of interest expense, with the percentage received by
GACC to be applied to reduce principal and pay certain hedge costs, if any. In
addition, the Company is prohibited from using GACC's cash collateral for
certain purposes, including loan originations and Subordinated CMBS
acquisitions. The Amended Consent Order expired April 28, 1999. The Company and
GACC agreed to extend the Amended Consent Order until August 2, 1999 and a
stipulation to that effect was signed by the Company and GACC and approved by
the Bankruptcy Court on May 11, 1999. The Company and GACC had negotiated a
further extension of the stipulation through September 10, 1999, which has now
expired. On June 16, 2000, the Company and GACC signed a stipulation and agreed
order selling certain CMBS to GACC free and clear of liens, claims and
encumbrances (the "GACC Sale Stipulation"), and for the sharing of cash
collateral through the sale date. On July 7, 2000, the Bankruptcy Court approved
the GACC Sale Stipulation and subsequently amended its order and on August 3,
2000 authorized the Company to sell its interest in the Chase J Bond and the
Chase Commercial Mortgage Securities Corporation Series 1998-1, Classes F, G, H
and I bonds (the "Chase Bond Portfolio") to GACC for an aggregate sale price of
approximately $43.4 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 $6.8 million will be used primarily to help fund the Company's
Reorganization Plan. CRIIMI MAE also received approximately $3.8 million from
GACC from cash distributions that GACC had received through the sale date.
Additionally, in November 2000, the Company completed the sale of the remaining
CMBS subject to the CMBS Sale, including the DLJ Bond financed by GACC, to ORIX.
(See Note 1 and Note 5 for further discussion). (See also Note 8 regarding the
New Debt anticipated to be provided by GACC (together with affiliates of Merrill
Lynch) pursuant to the Reorganization Plan.)
Edge Partners Settlement
In February 1996, Edge Partners, L.P. ("Edge Partners"), on behalf of
CRIIMI MAE, filed a First Amended Class and Derivative Complaint (the
"Derivative Complaint") in the United States District Court for the District of
Maryland, Southern Division (the "District Court"). The Derivative Complaint
named as defendants each of the individuals who served on the 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.
F-60
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
were 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 had discussions with various creditors regarding the withdrawal of
certain claims and in some cases, objected to claims. The Debtors' efforts have
resulted in the reduction of approximately $1.97 billion from the claims pool by
means of objections, negotiated settlements and withdrawal of claims.
One large claim was the claim of the Capital Company of America, LLC
("CCA") (the "CCA Claim"). 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 was that neither of these contingencies were fulfilled. After
preliminary due diligence, the Company expressed concern regarding the quality
of the mortgage loans underlying the CMBS. The Company's further due diligence
confirmed this preliminary view, and the Company exercised its right not to
proceed with the purchase because of its due diligence concerns. CCA refused to
withdraw its claim, and on August 31, 1999, CRIIMI MAE filed an objection to the
CCA Claim. The CCA Claim was filed for an amount in excess of $17,000,000 on
February 11, 1999. On October 9, 1999, CCA responded to the objection. By letter
dated January 7, 2000, CCA indicated that the amount of its claim was $18.8
million. On March 27, 2000, CCA filed a motion with the Bankruptcy Court
revising the amount of its claim to $18.2 million. On July 26, 2000, the
Bankruptcy Court entered an Order temporarily allowing CCA's claim in the amount
of $11,390,548 for purposes of voting on the Reorganization Plan. This Order did
not determine the allowed amount of CCA's claim, if any, for purposes of
treatment and distributions under the Reorganization Plan.
In October 2000, CRIIMI MAE, the CMI Equity Committee, and CCA reached an
agreement with respect to the CCA claim (the "CCA Agreement"). On October 30,
2000, a Stipulation and Consent order regarding Proof of Claim No. 254 was
submitted to the Court for approval (the "CCA Stipulation"). On November 15,
2000, the Court approved the CCA Stipulation. Pursuant to the CCA Agreement,
CCA was granted an allowed general unsecured claim in the amount of $11.39
million (the "CCA Allowed Claim"). In full and final satisfaction of the CCA
Allowed Claim, CCA agreed to accept $2.5 million in cash (which is recorded as
litigation expense in the accompanying consolidated statements of income) or a
combination of cash, notes or other consideration. The amount of cash payable
to CCA shall be equivalent to CCA's pro rata portion of cash payments to be made
to other general unsecured creditors of CRIIMI MAE as determined by the amount
of CCA's allowed claim (up to a cap of $2.5 million). The CCA Agreement
resolved all claims CCA and its affiliates have asserted or may assert against
the Company.
The remaining allowed claims are carried on the balance sheet as of
December 31, 2000. These allowed claims are anticipated to be paid in full on
the effective date of the Reorganization Plan. The Debtors believe they have
substantial defenses to the First Union disputed claim, although there can be no
assurance.
18. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for
the years ended December 31, 2000, 1999 and 1998:
2000
----------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
----------------- ---------------- --------------- ----------------
Income (principally interest income) $ 55,779,367 $ 52,229,973 $ 50,889,765 $ 42,779,861
F-61
2000
-----------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
----------------- ---------------- --------------- -----------------
Net income (loss) 4,035,611 3,742,484 (44,463,063) (118,810,461)
Basic net earnings (loss) per share 0.07 0.06 (0.71) (1.91)
Diluted net earnings (loss) per share 0.06 0.05 (0.71) (1.91)
1999
----------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
----------------- ---------------- --------------- ----------------
Income (principally interest income) $ 55,255,680 $ 56,463,980 $ 56,145,520 $ 56,238,554
Net income (loss) 13,416,949 (2,033,199) 8,100,173 (151,852,888)
Basic net earnings (loss) per share 0.25 (0.04) 0.15 (2.72)
Diluted net earnings (loss) per share 0.23 (0.04) 0.14 (2.72)
1998
----------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
----------------- ---------------- --------------- ----------------
Income (principally interest income) $ 44,970,292 $ 52,140,944 $ 59,415,552 $ 57,676,980
Net income (loss) 12,255,931 43,426,376 (8,651,379) (11,660,194)
Basic net earnings (loss) per share 0.29 0.92 (0.18) (0.23)
Diluted net earnings (loss) per share 0.28 0.85 (0.18) (0.23)
19. SEGMENT REPORTING
FAS 131 "Disclosures about Segments of an Enterprise and Related
Information" 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 Subordinated CMBS,
(ii) originating and underwriting mortgage loans, (iii) securitizing pools of
mortgage loans and pools of CMBS, (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 assets.
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. 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.
F-62
The following table details the Company's financial performance by these two
primary lines of business for the years ended December 31, 2000, 1999 and 1998.
The basis of accounting used in the table is GAAP.
2000
-------------------------------------------------------------------------
Portfolio Mortgage
Investment Servicing Elimination (1) Consolidated
-------------- ------------ --------------- --------------
Interest income:
Subordinated CMBS $ 137,072,372 $ 262,668 $ (262,668) $ 137,072,372
Insured mortgage securities 30,668,228 - - 30,668,228
Originated loans 27,511,041 - - 27,511,041
Other - 3,925,309 (3,925,309) -
Servicing income - 5,843,233 (5,843,233) -
Net gain on mortgage security dispositions 279,815 - - 279,815
Gain on originated loan dispositions 244,580 - - 244,580
Other income 5,616,723 4,653,457 (3,842,855) 6,427,325
-------------- ------------ ------------ --------------
Total revenue 201,392,759 14,684,667 (13,874,065) 202,203,361
-------------- ------------ ------------ --------------
General and administrative expenses (11,301,385) (11,986,788) 11,986,788 (11,301,385)
Interest expense (139,366,369) - 0 (139,366,369)
Reorganization items (66,072,460) - 0 (66,072,460)
Impairment on CMBS (143,478,085) (143,478,085)
Other expenses (5,377,576) (2,178,652) 2,178,652 (5,377,576)
-------------- ------------ ------------ --------------
Total expenses (365,595,875) (14,165,440) 14,165,440 (365,595,875)
-------------- ------------ ------------ --------------
Net income (164,203,116) 519,227 291,375 (163,392,514)
Extraordinary item-gain on debt extinguishment 14,808,737 - - 14,808,737
Preferred dividends accrued (6,911,652) - - (6,911,652)
-------------- ------------ ------------ --------------
Net (loss) income available to common
shareholders (156,306,031) $ 519,227 $ 291,375 (155,495,429)
============== ============ ============ ==============
Total assets $1,535,468,572 $ 25,930,760 $ (3,559,687) $1,557,839,645
============== ============ ============ ==============
- --------------------
(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.
F-63
1999
------------------------------------------------------------------------
Portfolio Mortgage
Investment Servicing Elimination(1) Consolidated
-------------- ------------ -------------- --------------
Interest income:
Subordinated CMBS $ 154,205,383 $ 282,148 (282,148) $ 154,205,383
Insured mortgage securities 33,405,171 - - 33,405,171
Originated loans 34,712,674 - - 34,712,674
Other - 3,384,533 (3,384,533) -
Servicing income - 6,701,244 (6,701,244) -
Net gain on mortgage security dispositions 2,127,691 - - 2,127,691
Gain on originated loan dispositions 403,383 - - 403,383
Other income 4,038,061 4,359,320 (6,616,875) 1,780,506
-------------- ------------ -------------- --------------
Total revenue 228,892,363 14,727,245 (16,984,800) 226,634,808
-------------- ------------ -------------- --------------
General and administrative expenses (12,049,256) (13,016,747) 13,016,747 (12,049,256)
Interest expense (151,336,830) - - (151,336,830)
Losses on warehouse obligations (8,000,000) - - (8,000,000)
Reorganization items (178,899,959) - - (178,899,959)
Other expenses (2,877,576) (4,139,118) 4,139,118 (2,877,576)
-------------- ------------ -------------- --------------
Total expenses (353,163,621) (17,155,865) 17,155,865 (353,163,621)
-------------- ------------ -------------- --------------
Net (loss) income (124,271,258) (2,428,620) 171,065 (126,528,813)
Preferred dividends accrued (5,840,152) - - (5,840,152)
-------------- ------------ -------------- --------------
Net (loss) income to common shareholders ($130,111,410) ($2,428,620) $ 171,065 ($132,368,965)
============== ============ ============== ==============
Total assets $2,272,100,775 $ 23,679,706 $ (2,119,235) $2,293,661,246
============== ============ ============== ==============
F-64
1998
----------------------------------------------------------------------
Portfolio Mortgage
Investment Servicing Elimination (1) Consolidated
-------------- ------------ --------------- --------------
Interest income:
Subordinated CMBS $ 143,656,307 $ - $ - $ 143,656,307
Insured mortgage securities 43,062,743 - - 43,062,743
Originated loans 20,588,112 - - 20,588,112
Other - 4,058,108 (4,058,108) -
Servicing income - 7,293,565 (7,293,565) -
Gain on sale of CMBS 28,800,408 - - 28,800,408
Gain on mortgage security dispositions 1,196,499 - - 1,196,499
Other income 5,695,194 5,712,017 (4,510,605) 6,896,606
-------------- ------------ --------------- --------------
Total revenue 242,999,263 17,063,690 (15,862,278) 244,200,675
-------------- ------------ --------------- --------------
General and administrative expenses (14,623,407) (10,518,183) 10,518,183 (14,623,407)
Interest expense (136,268,431) (451,938) 451,938 (136,268,431)
Realized loss on reverse repurchase obligation
and unrealized loss on warehouse obligations (34,881,350) - - (34,881,350)
Other expenses (16,058,894) (4,112,365) 4,112,365 (16,058,894)
-------------- ------------ --------------- --------------
Total expenses (201,832,082) (15,082,486) 15,082,486 (201,832,082)
-------------- ------------ --------------- --------------
Net income 41,167,181 1,981,204 (779,792) 42,368,593
Preferred dividends (6,997,859) - - (6,997,859)
-------------- ------------ --------------- --------------
Net income available to common shareholders $ 34,169,322 $ 1,981,204 ($779,792) $ 35,370,734
============== ============ =============== ==============
Total assets $2,414,099,927 $ 25,954,448 $ (2,136,422) $2,437,917,953
============== ============ =============== ==============
F-65
20. FINANCIAL STATEMENTS FOR THE DEBTOR ENTITIES
The following are the unconsolidated financial statements for CRIIMI MAE,
CM Management and Holdings II:
CRIIMI MAE INC.
BALANCE SHEETS
(Unconsolidated)
December 31,
---------------------------------------
2000 1999
-------------- --------------
Assets:
Subordinated CMBS and other MBS, at fair value $ 473,423,662 $ 826,897,948
Insured mortgage security, at fair value 5,345,888 5,268,982
Receivables and other assets 40,266,938 83,133,075
Restricted cash and cash equivalents 95,846,002 37,774,894
Cash and cash equivalents 103,695,327 52,114,880
Investment in subsidiaries 176,525,900 210,030,947
-------------- --------------
Total assets $ 895,103,717 $1,215,220,726
============== ==============
Liabilities:
Accounts payable and other accrued expenses $ 23,036,115 $ 21,580,384
Liabilities subject to Chapter 11 proceedings 603,809,586 974,291,756
-------------- --------------
Total liabilities 626,845,701 995,872,140
-------------- --------------
Shareholders' equity:
Convertible preferred stock 61,245 26,471
Common stock 623,532 599,546
Accumulated other comprehensive income (3,019,679) (207,421,788)
Accumulated deficit (341,342,246) (148,434,915)
Additional paid-in capital 611,935,164 574,579,272
-------------- --------------
Total shareholders' equity 268,258,016 219,348,586
-------------- --------------
Total liabilities and shareholders' equity $ 895,103,717 $1,215,220,726
============== ==============
The accompanying note is an integral part of these financial statements.
CRIIMI MAE INC.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unconsolidated)
For the years ended December 31,
2000 1999
------------- -------------
Interest income $ 91,279,561 $ 110,690,836
Interest expense 58,930,779 64,546,282
------------- -------------
Net interest margin 32,348,782 46,144,554
------------- -------------
Equity in earnings from investments (40,749,094) 11,926,161
Other income 2,986,889 2,649,745
General and administrative expenses (861,460) (794,237)
Amortization of assets acquired in the Merger (2,877,576) (2,877,576)
Realized loss on reverse repurchase obligation - -
Losses on warehouse obligations - (8,000,000)
Other expense 2,500,000 -
Impairment on CMBS (119,273,822) -
Reorganization items:
Impairment on CMBS (15,832,817) (156,896,831)
Gain on Sale of CMBS 1,481,029 -
Impairment on REO (924,284) -
Other (2,381,424) (18,680,629)
------------- -------------
Subtotal (180,932,559) (172,673,367)
------------- -------------
Net (loss) income before dividends accrued or
paid on preferred shares (148,583,777) (126,528,813)
Dividends accrued or paid on preferred shares (6,911,652) (5,840,152)
------------- -------------
Net (loss) income available to common
shareholders $(155,495,429) $(132,368,965)
============= =============
Comprehensive income (loss):
Net (loss) income before dividends paid or accrued on preferred shares $(148,583,777) (126,528,813)
Other comprehensive income (loss) 204,402,109 43,833,521
------------- -------------
Comprehensive income (loss) $ 55,818,332 $ (82,695,292)
============= =============
The accompanying note is an integral part of these financial statements.
CRIIMI MAE Inc.
NOTE TO FINANCIAL STATEMENTS
As of December 31, 2000 and 1999
(Unconsolidated)
1. BASIS OF PRESENTATION
Generally accepted accounting principles ("GAAP") require that certain
entities that meet specific criteria be consolidated with CRIIMI MAE including:
CM Management and Holdings II (Debtors) and CRIIMI MAE Financial Corporation,
CRIIMI MAE Financial Corporation II, CRIIMI MAE Financial Corporation III,
CRIIMI MAE QRS 1, Inc., CRIIMI MAE Holdings II, L.P., CRIIMI, Inc., and CRIIMI
MAE CMBS Corporation (Non-Debtors). For purposes of this presentation, CRIIMI
MAE accounts for all subsidiaries (those consolidated under GAAP and those
accounted for under the equity method under GAAP) using the equity method of
accounting.
All entities that CRIIMI MAE would normally consolidate for GAAP purposes
are being accounted for under the equity method of accounting. The equity
method of accounting consists of recording an original investment in an investee
as the amount originally contributed. Subsequently this balance is increased or
decreased for CRIIMI MAE's share of the investee's income or losses,
respectively, increased for additional contributions and decreased for
distributions received from the investee. CRIIMI MAE's share of the investee's
income is recognized as "Equity in earnings from subsidiaries" on the
accompanying statements of income.
In management's opinion, with the exception of those matters discussed
above, the financial statements of CRIIMI MAE contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the financial position of CRIIMI MAE as of December 31, 2000 and 1999, and the
unconsolidated results of its operations for the years ended December 31, 2000
and 1999.
CRIIMI MAE Management Inc.
BALANCE SHEETS
December 31,
-------------------------------
2000 1999
------------- -------------
Assets:
Note receivable $ 3,376,468 $ 3,376,468
Restricted cash and cash equivalents 673,383 261,729
Cash and cash equivalents 686,383 926,122
Other assets 3,053,977 2,969,939
Equity investments 12,983,795 12,794,963
------------ ------------
Total assets $ 20,774,006 $ 20,329,221
============ ============
Liabilities:
Accounts payable and other accrued expenses $ 3,315,401 $ 2,585,812
Liabilities subject to Chapter 11 proceedings 7,194,065 6,529,634
------------ ------------
Total liabilities 10,509,566 9,115,446
------------ ------------
Shareholders' equity 10,264,540 11,213,775
------------ ------------
Total liabilities and shareholders' equity $ 20,774,006 $ 20,329,221
============ ============
The accompanying note is an integral part of these financial statements.
CRIIMI MAE Management Inc.
STATEMENTS OF NET LOSS
For the years ended December 31,
2000 1999
------------ -------------
Interest income - note receivable and short-term interest income $ 375,633 $ 335,536
Equity in earnings (losses) from investments 546,416 (1,779,018)
------------ -------------
Total revenue 922,049 (1,443,482)
------------ -------------
Interest expense 478,289 420,628
Depreciation and amortization 569,235 527,948
General and administrative expenses 9,017,362 9,775,772
Reorganization items 2,300,940 2,335,969
------------ -------------
Total expenses 12,365,826 13,060,317
------------ -------------
Net loss $(11,443,777) $ (14,503,799)
============ =============
The accompanying note is an integral part of these financial statements.
CRIIMI MAE Management, Inc.
NOTE TO FINANCIAL STATEMENTS
As of December 31, 2000 and 1999
1. BASIS OF PRESENTATION
In management's opinion, the accompanying financial statements of CM
Management contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position of CM Management
on a stand-alone basis as of December 31, 2000 and 1999 and the results of its
operations for the years ended December 31, 2000 and 1999, in accordance with
generally accepted accounting principles.
CRIIMI MAE Holdings II, L.P.
BALANCE SHEETS
December 31,
-----------------------------------
2000 1999
----------- ---------------
Assets
Subordinated CMBS, at fair value $ - $ 38,211,075
Receivables 60,237 377,936
Cash 231,669 100
----------- ---------------
Total assets $ 291,906 $ 38,589,111
=========== ===============
Liabilities:
Liabilities not subject to Chapter 11 proceedings:
Collateralized mortgage obligations $ - $ 39,256,952
Payables and accrued expenses 340,114 541,360
Liabilities subject to Chapter 11 proceedings:
Variable-rate secured borrowings - -
----------- ---------------
Total liabilities 340,114 39,798,312
----------- ---------------
Partners' equity:
Contributed capital (48,208) 4,856,143
Other comprehensive income (loss) - (6,065,344)
----------- ---------------
Total partners' equity (48,208) (1,209,201)
----------- ---------------
Total liabilities and partners' equity $ 291,906 $ 38,589,111
=========== ===============
The accompanying note is an integral part of these financial statements.
CRIIMI MAE Holdings II, L.P.
STATEMENTS OF NET LOSS AND COMPREHENSIVE INCOME
For the years ended December 31,
2000 1999
-------------- ----------------
Interest income:
Subordinated CMBS $ 2,636,786 $ 3,186,441
Interest expense:
Collateralized bond obligations-CMBS 3,059,158 1,217,307
Variable-rate secured borrowings-CMBS - 1,336,421
------------ ------------
Total interest expense 3,059,158 2,553,728
------------ ------------
Net interest margin (422,372) 632,713
------------ ------------
Other investment income - 165
General and administrative expenses - (74,999)
Reorganization items:
Impairment on Subordinated CMBS (4,427,194) (944,845)
Other (190,712) -
------------ ------------
Subtotal (4,617,906) (1,019,679)
------------ ------------
Net loss $ (5,040,278) $ (386,966)
============ ============
Other comprehensive income (loss) 6,065,344 (3,861,634)
------------ ------------
Comprehensive income (loss) $ 1,025,066 $ (4,248,600)
============ ============
The accompanying note is and integral part of these financial statements.
CRIIMI MAE Holdings II, L.P.
NOTE TO FINANCIAL STATEMENTS
As of December 31, 2000 and 1999
1. BASIS OF PRESENTATION
Holdings II's CMBS (2 tranches from CMM 98-1) are carried as investments in
loans at cost basis in CRIIMI MAE's consolidated financial statements. (See
Notes 3 and 7 for discussion of this accounting.) On a stand-alone basis,
generally accepted accounting principles require that Holdings II's investment
in CMBS be carried as securities (as opposed to loans) at fair value.
In management's opinion, the accompanying unaudited financial statements of
Holdings II contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position of Holdings II
on a stand-alone basis as of December 31, 2000 and 1999 and the results of its
operations for the years ended December 31, 2000 and 1999.
EXHIBIT INDEX
-------------
99(22) Stipulation and Consent Order regarding the Capital Company of
America's Proof of Claim No. 254 entered on November 15, 2000.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
(Greenbelt Division)
*
In re:
*
CRIIMI MAE Inc., et al., Chapter 11
*Case No. 98-2-3115-DK
Debtors. (Jointly Administered)
*
* * * * * * * * * *
STIPULATION AND CONSENT ORDER
REGARDING PROOF OF CLAIM NO. 254
Upon the consent of CRIIMI MAE Inc. (the "Debtor" or "CMI"), The Capital
Company of America LLC ("CCA"), the Official Committee of Equity Security
Holders of CMI (the "Equity Committee") and the Official Committee of Unsecured
Creditors of CMI (the "Unsecured Committee") to the relief set forth in this
Stipulation and Consent Order and upon the stipulation by the Debtor, CCA, the
Equity Committee and the Unsecured Committee, the Court finds that:
A. Proper notice hereof has been given to the United States Trustee, to the
Equity Committee and the Unsecured Committee and to other necessary parties
pursuant to Fed. R. Bankr. P. 2002.
B. On October 5, 1998, CMI filed with this Court a voluntary petition for relief
pursuant to Chapter 11 of Title 11 of the United States Code (the "Bankruptcy
Code").
C. On February 11, 1999, CCA filed Proof of Claim No. 254 asserting a general
unsecured claim against CMI in an amount in excess of $17 million based upon an
August 14, 1998 agreement regarding the purchase of certain securities to be
issued by CCA in a securitization transaction known as The Capital Company of
America LLC Series 1998-D7.
D. CMI filed an objection to CCA's Proof of Claim on August 31, 1999, objecting
to Proof of Claim No. 254 in its entirety. The Equity Committee joined in CMI's
objection.
E. By motion dated April 3, 2000, CCA requested that the Court temporarily allow
its claim for purposes of voting on the Debtors' Third Amended Joint Plan of
Reorganization (the "Debtors' Plan") in the amount of $18.2 million.
F. On July 26, 2000, the Court entered an order temporarily allowing CCA's claim
in the amount of $11,390,548 for the purpose of voting on the Debtors' Plan.
G. CMI and CCA have conducted discovery with respect to CCA's proof of claim.
The intent and purpose of this Stipulation and Consent Order is to resolve all
outstanding issues between the Debtor and CCA.
H. The issues involved are complex and each party disputes the allegations of
the other. CMI believes that the settlement reflected herein is in the best
interests of the Debtor and its estate and is justified under Rule 9019 of the
Federal Rules of Bankruptcy Procedure.
NOW, THEREFORE, it is hereby ORDERED that:
1. CCA shall be granted an allowed general unsecured claim in the bankruptcy
case of CMI in the amount of $11,390,548 ("CCA's Allowed Claim").
2. CCA's Allowed Claim shall be classified as a Class A10 claim under the
Debtors' Plan.
3. If the Debtors' Plan is confirmed, CCA agrees to accept under the
Debtors' Plan $2.5 million in cash or a combination of cash and secured
promissory notes in full and final satisfaction of CCA's Allowed Claim, as
described herein.
4. If the Debtors' Plan is confirmed, CCA shall be paid its pro-rata
portion of the cash payment to be made to non-convenience Class A10 creditors
under the Debtors' Plan, as determined by the amount of CCA's Allowed Claim;
provided, however, that the payment to CCA shall not exceed $2.5 million.
5. If the cash payment to CCA under the Debtors' Plan is less than $2.5
million, CCA will receive a Class A9/A10 Note A (as that term is used in the
Debtors' Plan and Exhibit 2 thereto) in the principal amount of the difference
between the cash paid to CCA pursuant to paragraph 4 and $2.5 million (the "CCA
Note"). At CCA's option, the amount of the CCA Note shall be allocated between
two Class A9/A10 Note As in such proportion as CCA elects.
6. The distributions to CCA described in this Stipulation and Consent Order
shall be made under the Debtors' Plan contemporaneously with the distributions
to other Class A10 creditors.
7. If the Debtors' Plan is not confirmed, CCA shall continue to have an
allowed claim in the amount of $11,390,548 and CCA agrees to accept $2.5 million
in cash or a combination of cash, notes or other consideration in full and final
satisfaction of CCA's Allowed Claim. The amount of cash, notes or other
consideration payable to CCA pursuant to the terms of this paragraph 7 shall be
equivalent to CCA's pro rata portion (based on CCA's Allowed Claim) of cash,
notes or other consideration paid to other general unsecured creditors of CMI,
but shall not exceed in value a total of $2.5 million, and shall be paid when
distributions are made to other such general unsecured creditors of CMI.
8. After CCA is paid $2.5 million in cash or a combination of cash and
promissory notes as set forth herein-above, notwithstanding its treatment under
the Debtors' Plan as a class A10 creditor, CCA shall be deemed to have waived
any right to receive any other distributions, payments, notes or security
interests attributable to any remaining portion of CCA's Allowed Claim.
9. This Stipulation and Consent Order resolves Proof of Claim No. 254 filed
by CCA, as well as any and all other claims that may be or may have been
asserted by CCA against CMI, CRIIMI MAE Holdings II, L.P. and/or CRIIMI MAE
Management, Inc. or any of their affiliates (collectively, the "CMI Parties")
and any claims by the CMI Parties against CCA or Nomura Asset Capital
Corporation (collectively, the "CCA Parties").
10. The CCA Parties and the CMI Parties agree that upon CCA's receipt of
$2.5 million in cash or a combination of cash, notes or other consideration as
set forth herein-above, the CCA Parties shall be deemed to have released all
claims that arose heretofore against the CMI Parties and the CMI Parties shall
be deemed to have released all claims that arose heretofore against the CCA
Parties. Such release shall not be applicable to any obligations owing under any
secured notes including Class A9/A10 Note As if any such notes are issued to CCA
as set forth herein-above.
11. In the event that this Stipulation and Consent Order is not approved by
the Court, each party shall be deemed to have reverted nunc pro tunc to its
respective status as of the date and time immediately prior to the execution of
this Stipulation and Consent Order, and CMI, the Equity Committee, the Unsecured
Committee and CCA shall be entitled to proceed in all respects as if this
Stipulation and Consent Order had not been executed and without prejudice in any
way as a result of the negotiation or terms of this Stipulation and Consent
Order.
12. The parties have entered into this Stipulation and Consent Order for
purposes of settlement only. The terms and/or provisions contained herein shall
not be admissible in any legal proceeding if this Stipulation and Consent Order
is not approved by the Bankruptcy Court.
13. This Stipulation and Consent Order is not an admission of any kind on
the part of any of the signatories hereto.
14. The terms and provisions of this Stipulation and Consent Order shall be
binding on all parties in interest, the signatories hereto and on any trustee
appointed in this Chapter 11 case or in any Chapter 7 case to which this Chapter
11 case may be converted.
SO ORDERED AND APPROVED, THIS DAY OF , 2000.
----- -------------------------
/s/DUNCAN W. KEIR
---------------------------------
DUNCAN W. KEIR
United States Bankruptcy Judge
CONSENTED TO AND AGREED BY:
- ------------------------------------- ------------------------------
Gregory A. Cross, Esquire Barry J. Dichter, Esquire
Federal Bar No. 04571-G Admitted Pro Hac Vice
Heather Deans Foley, Esquire Mary Elizabeth Taylor
Federal Bar No. 25829 Admitted Pro Hac Vice
Venable, Baetjer and Howard, LLP Cadwalader, Wickersham & Taft
1800 Mercantile Bank & Trust Bldg. 100 Maiden Lane
Two Hopkins Plaza New York, New York 10038
Baltimore, Maryland 21201 (212) 504-6000
(410) 244-7400
Co-Counsel for Counsel for
CRIIMI MAE Inc. The Capital Company of America LLC
- -------------------------------- ------------------------------
Michael St. Patrick Baxter, Esquire Daniel M. Lewis, Esquire
Federal Bar No. 09694 Federal Bar No. 02998
Dennis B. Auerbach, Esquire Michael Bernstein, Esquire
Federal Bar No. 09290 Federal Bar No. 10406
Covington and Burling Arnold & Porter
1201 Pennsylvania Avenue, N.W. 555 Twelfth Street, N.W.
Washington, DC 20004 Washington, DC 20004
(202) 662-6000 (202) 942-5000
Counsel for the Official Committee Counsel for the Official Committee
of Equity Security Holders of Unsecured Creditors
of CRIIMI MAE Inc. of CRIIMI MAE Inc.
cc: Gregory A. Cross, Esq.
Heather Deans Foley, Esq.
Venable, Baetjer and Howard, LLP
1800 Mercantile Bank & Trust Bldg.
Two Hopkins Plaza
Baltimore, Maryland 21201
Barry J. Dichter, Esq.
Mary Elizabeth Taylor, Esq.
Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, New York 10038
Mark C. Ellenberg, Esq.
Cadwalader, Wickersham & Taft
1201 F Street, N.W.
Suite 1100
Washington, D.C. 20004
Stanley J. Samorajczyk, Esq.
Mark D. Taylor, Esq.
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1333 New Hampshire Avenue, N.W.
Washington, DC 20036
Michael St. Patrick Baxter, Esq.
Covington and Burling
1201 Pennsylvania Avenue, N.W.
Washington, DC 20004
Clifford J. White, III, Esq.
Office of the United States Trustee
6305 Ivy Lane, Suite 600
Greenbelt, MD 20770
Daniel M. Lewis, Esq.
Arnold & Porter
555 Twelfth Street, N.W.
Washington, DC 20004