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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2001 Commission file number 1-10360
CRIIMI MAE INC.
(Exact name of registrant as specified in its charter)
Maryland 52-1622022
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
11200 Rockville Pike
Rockville, Maryland 20852
(301) 816-2300
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
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Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common Stock New York Stock Exchange, Inc.
Series B Cumulative Convertible New York Stock Exchange, Inc.
Preferred Stock
Series F Redeemable Cumulative 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
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10K or any amendment to this
Form 10K. [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities and
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]
As of March 22, 2002, 12,969,841 shares of CRIIMI MAE Inc. common stock
with a par value of $0.01 were outstanding. The aggregate market value (based
upon the last reported sale price on the New York Stock Exchange on March 22,
2002) of the shares of CRIIMI MAE Inc. common stock held by non-affiliates was
approximately $43,179,256. (For purposes of calculating the previous amount
only, all directors and executive officers of the registrant are assumed to be
affiliates.)
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Documents Incorporated By Reference
The information required by Part III (Items 10, 11, 12 and 13) is incorporated
by reference to the Registrant's definitive proxy statement to be filed pursuant
to Regulation 14A relating to the Registrant's 2002 annual meeting of
stockholders.
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CRIIMI MAE INC.
2001 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
PART I
Item 1. Business ......................................................................... 4
Item 2. Properties.........................................................................21
Item 3. Legal Proceedings..................................................................22
Item 4. Submission of Matters to a Vote of Security Holders................................22
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters...........23
Item 6. Selected Financial Data............................................................25
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................28
Item 7A. Quantitative and Qualitative Disclosures About Market Risks........................54
Item 8. Financial Statements and Supplementary Data........................................56
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................................56
PART III
Item 10. Directors and Executive Officers of the Registrant.................................57
Item 11. Executive Compensation.............................................................57
Item 12. Security Ownership of Certain Beneficial Owners and Management.....................57
Item 13. Certain Relationships and Related Transactions.....................................57
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................57
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 or referenced under the headings "Business," "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").
On April 17, 2001, the Company and certain of its subsidiaries emerged from
Chapter 11 of the U.S. Bankruptcy Code.
The Company's current primary activities include the ownership and
management, in large part through the Company's servicing subsidiary, CRIIMI MAE
Services Limited Partnership ("CMSLP"), of a significant portfolio of
mortgage-related assets. See "The Portfolio". Prior to the Chapter 11 filing,
CRIIMI MAE's primary activities included (a) 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"), (b) originating and underwriting commercial mortgage loans, (c)
securitizing pools of commercial mortgage loans and resecuritizing pools of
Subordinated CMBS, and (d) primarily through CMSLP, performing servicing
functions with respect principally to the mortgage loans underlying the
Company's Subordinated CMBS.
Virtually all of the Company's cash flows relating to existing assets are,
and are currently expected to be, used to satisfy principal, interest and fee
obligations under the new secured debt incurred in connection with its emergence
from Chapter 11 and to pay general and administrative and other operating
expenses of the Company. Therefore, although the Company continues to pay down
its debt obligations, the utilization of cash flows for debt service and
operating expenses results in virtually no remaining net cash flow available for
other activities, to the extent permitted under the operative documents
evidencing the new debt incurred upon emergence from Chapter 11. See "The
Reorganization Plan", "Certain Risk Factors - Substantial Indebtedness;
Leverage", "Certain Risk Factors - Borrowing Risks," and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS". The
Company is exploring possible ways of achieving improved financial flexibility,
such as refinancing all or a substantial portion of the new debt incurred upon
emergence from Chapter 11; however, there can be no assurance that the Company
will be able to refinance such new debt or otherwise improve its financial
flexibility.
On March 21, 2002, the Company redeemed in cash all 173,000 outstanding
shares of its Series E Cumulative Convertible Preferred Stock (the "Series E
Preferred Stock") at the stated redemption price of $106 per share plus accrued
and unpaid dividends through and including the date of redemption. The total
redemption price was $18,734,107 ($396,107 of which represented accrued and
unpaid dividends). The Series E Preferred Stock were held by the Company's
principal creditor.
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
On October 5, 1998 (the "Petition Date"), 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") 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"). As previously stated, the Company emerged from
Chapter 11 on April 17, 2001.
The Reorganization Plan provided for 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
of which approximately $342.3 million of such proceeds was used to pay related
borrowings and approximately $76.0 million of such proceeds was used on the
Effective Date to help fund the Reorganization Plan. Included in the balance of
the Recapitalization Financing was approximately $262.4 million provided by
affiliates of Merrill Lynch Mortgage Capital, Inc. (such affiliate referred to
as "Merrill Lynch" or "Merrill") and German American Capital Corporation (such
affiliate referred to as "GACC") through a new, variable-rate secured financing
facility (in the form of a repurchase transaction) (the "Variable-Rate Secured
Borrowing"), and approximately $166.8 million provided through two new series of
secured notes issued to certain of the Company's unsecured creditors
(collectively, the "New Debt"). Effective as of June 5, 2001, all rights and
obligations of Merrill and GACC under the operative agreements evidencing the
Variable-Rate Secured Borrowing were assigned by Merrill and GACC to ORIX
Capital Markets, LLC ("ORIX"). ORIX also owns a significant aggregate principal
amount of each of the respective two new series of secured notes referenced
above as part of the New Debt. ORIX is an affiliate of a publicly-traded company
and is an investor in CMBS and servicer of commercial real estate loans
underlying CMBS. Substantially all cash flows relating to existing assets are,
and are currently expected to be, used to satisfy principal, interest and fee
obligations under the New Debt. See "Risk Factors - Substantial Indebtedness
Leverage." The New Debt is directly or indirectly secured by substantially all
of the Company's assets. See Note 7 to Notes to Consolidated Financial
Statements for further discussion regarding the New Debt.
The Company's litigation with First Union National Bank ("First Union") was
not settled or resolved prior to the Effective Date; and therefore, the
classification and allowance of First Union's claim under the Reorganization
Plan was not determined on such date. On March 5, 2002, the Bankruptcy Court
entered an order approving a settlement agreement among the Company and First
Union. See Note 15 to Notes to Consolidated Financial Statements for further
information regarding the settlement of the First Union litigation.
Under the Reorganization Plan, the holders of the Company's equity retained
their stock. The terms of the New Debt significantly restrict the amount of cash
dividends that can be paid to shareholders. One such restriction provides that
any cash dividends required to maintain REIT status (assuming the Company has
the cash to make such distributions and that it is permitted to make such
distributions under the terms of the New Debt) would be paid first to holders of
certain of the New Debt who convert their secured 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. Another such restriction provides that if realized losses (as defined
in the New Debt documents, and including appraisal reduction amounts on
properties underlying the CMBS) on CMBS exceed certain thresholds, then the
Company is prohibited from paying cash dividends or making other cash
distributions or payments to its shareholders, except as required to maintain
REIT status with any such cash distributions to be paid in accordance with the
terms set forth in the preceding sentence. As of December 31, 2001, the Company
had exceeded the loss threshold amounts under the respective applicable
operative documents evidencing the New Debt. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" for a further
discussion of the restrictions resulting from exceeding the loss threshold
amounts. The Reorganization Plan also provided for certain amendments to the
Company's articles of incorporation, 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 became effective on the Effective Date.
Although there can be no assurance, the Company believes that it will have
sufficient cash resources to pay interest, scheduled principal and any other
required payments on the New Debt through the remainder of 2002. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS". The Company's ability to meet its debt service obligations through
the remainder of 2002 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 short-term interest
rates) 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, significantly reduces cash
flow available for other activities, restricts the Company's ability to react
quickly to changes in its business, limits its ability to hedge its assets and
liabilities, and makes the Company more vulnerable to economic downturns.
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 $74.3 billion in 2001, $48.9 billion in 2000, and $58.5
billion in 1999.
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
mortgage-backed 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. Buying and trading activity in investment grade CMBS and new
issuances of CMBS have recovered over the last several years. The market for
Subordinated CMBS has, however, been slower to recover. It is difficult, if not
impossible, to predict when or if the Subordinated CMBS market will recover to
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
Subordinated 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, 2001, the Company's $1.3 billion portfolio of assets
included $824 million of Subordinated CMBS (representing approximately 63% of
the Company's total consolidated assets). As of December 31, 2001, approximately
33% of the Company's CMBS (based on fair value) were rated BB+, BB or BB-, 23%
were B+, B, B- or CCC and 8% were unrated. The remaining approximately 36%
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."
CRIIMI MAE Inc. did not acquire any Subordinated CMBS in 2001, 2000 or
1999. Prior to the Fall of 1998, 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 its variable-rate debt through a
resecuritization of its Subordinated CMBS primarily to attain a better matching
of the maturities of its assets and liabilities through the refinancing of such
short-term, variable-rate, recourse financing with long-term, fixed-rate,
non-recourse financing. See "BUSINESS-Resecuritizations."
The Company generally enters into interest rate protection agreements to
partially limit the adverse effects of potential rising interest rates 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. 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. As of December 31, 2001, the remaining term for the
Company's interest rate protection agreement was approximately 15 months with a
strike price of 5.25%, and one-month LIBOR was 1.87%. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and
Notes 7 and 8 to the Notes to Consolidated Financial Statements for a further
discussion of the Company's variable-rate secured financing facilities and its
interest rate protection agreement. The Company has not hedged against interest
rate risks, including increases in interest rate spreads and increases in
Treasury rates, which adversely affect the value of its CMBS.
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 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 private transactions, securities with an aggregate face
amount of $673 million and retained securities with a face amount of
approximately $1.1 billion. 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, 2001, the Company's total debt was approximately $1.0
billion, of which approximately 60% was fixed-rate, match-funded, non-recourse
debt and approximately 40% was variable-rate or fixed-rate debt that was not
match-funded. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" and Notes 5 and 7 to the Notes to Consolidated
Financial Statements for further information regarding the Company's
resecuritizations and variable-rate secured financings.
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'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS-Financial Condition, Liquidity and Capital Resources" and Note 5 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").
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 the Petition Date 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 at
a loss to the Company. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS".
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.
Underwriting Procedures
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
arrangements existed that enabled the Company to closely monitor the underlying
mortgage loans and provided the Company with appropriate workout and foreclosure
rights.
Servicing
CRIIMI MAE conducts its mortgage loan servicing operations through CMSLP.
CMSLP was formed under a limited partnership agreement in which CM Management
was the sole limited partner and CRIIMI MAE Services, Inc. ("CMSI") was the sole
general partner. As of December 31, 2000, the limited partnership interest and
the general partnership interest in CMSLP were 73% and 27%, respectively.
Effective July 2001, CRIIMI MAE, which had previously accounted for CMSLP under
the equity method, acquired voting control of CMSLP and is now accounting for
this subsidiary on a consolidated basis. CMSLP's assets, liabilities, revenues
and expenses are labeled as "servicing" on the Company's consolidated financial
statements.
Although CMSLP did not file for protection under Chapter 11, it and the
bonds it serviced were under a high degree of scrutiny from servicing rating
agencies because of CMSLP's relationship with CRIIMI MAE. 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 CMBS securitizations
totaling approximately $29 billion, subject to certain requirements contained in
the respective servicing agreements. CMSLP continued to perform special
servicing as sub-servicer for ORIX on all but four of these securitizations. In
conjunction with the Company's emergence from Chapter 11, CMSLP was redesignated
as special servicer on the Company's remaining CMBS securitizations effective
August 27, 2001.
On October 8, 2001, Standard & Poor's ("S&P") affirmed its "average"
overall mortgage servicing rankings for CMSLP and, in its report, S&P ranked
CMSLP's outlook as "positive" as a commercial loan servicer, commercial master
servicer and commercial special servicer. On October 24, 2001, Fitch issued two
ratings upgrades and one ratings affirmation for CMSLP. Fitch upgraded CMSLP's
special servicer rating to "CSS2+" and upgraded the servicer rating to "CPS2".
Fitch's reasons for the primary servicer upgrade include CMSLP's "continued
attention to improving technology and the experienced, well-tenured servicing
team." In addition, CMSLP's master servicer rating of "CMS3" was affirmed.
On December 17, 2001, CMSLP announced its intention to sell all of its
rights and obligations under its CMBS master and primary servicing contracts
because the contracts were not profitable, given the relatively small volume of
master and primary CMBS servicing that CMSLP was performing. In connection with
this determination, 34 employees were terminated. A restructuring charge of
approximately $438,000 was recorded during the fourth quarter of 2001 to account
for employee severance costs, noncancellable lease costs, and other costs
related to the restructuring. All rights and obligations under these servicing
contracts were sold in February 2002. CMSLP received approximately $11.3 million
in cash, which included reimbursement of advances. This is expected to result in
a gain on sale of approximately $4.3 million, subject to adjustment for certain
post-closing contingencies, in the second quarter of 2002. In addition, CMSLP
may receive up to an additional $0.9 million from the sale in the third quarter
of 2002, which would be reflected as an additional gain on sale, following the
completion of a post-closing contingency period. See Note 3 to Notes to the
Consolidated Financial Statements.
CMSLP's principal servicing activities are described below. For a summary
and discussion of the financial results of CMSLP, see "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and Note 3 to
Notes to the Consolidated Financial Statements.
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 first loss unrated or lowest rated bond of all but one CMBS, CMSLP has
an incentive to quickly resolve any loan workouts. As of December 31, 2001,
CMSLP was designated as the special servicer for 3,459 commercial mortgage
loans, representing an aggregate principal amount of approximately $19 billion,
or 91% of its servicing portfolio. See "The Portfolio-CMBS and Other MBS" and
Note 5 to the Notes to Consolidated Financial Statements regarding mortgage
loans included in the special servicing portfolio.
As of December 31, 2001, CMSLP had a special servicer rating of "average"
from S&P and "CSS2+" from Fitch.
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, 2001, CMSLP
served as contractual loan manager for 1,739 commercial mortgage loans
representing an aggregate principal amount of approximately $8.1 billion. As of
December 31, 2001, CMSLP reviewed analyses performed by other servicers for
1,585 commercial mortgage loans, representing an aggregate principal amount of
$10.4 billion.
Master Servicing
A master servicer typically provides administrative and reporting services
to the trustee with respect to a particular issuance of CMBS or other
securitized pools of mortgages. Mortgage loans underlying securitized pools
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. As master servicer, CMSLP was usually paid a fee and earned float
income on the deposits held. As of December 31, 2001, CMSLP remained master
servicer on one CMBS portfolio representing commercial mortgage loans with an
aggregate principal amount of approximately $711 million. As discussed above, in
February 2002, CMSLP sold all rights and obligations under its CMBS master and
primary servicing contracts.
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 collected
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. As of
December 31, 2001, CMSLP was designated direct servicer for approximately 280
commercial mortgage loans, representing an aggregate principal amount of
approximately $1.4 billion. This number of loans excludes loans that were both
direct and master serviced by CMSLP, which are included in the master servicing
figure above. As discussed above, in February 2002, CMSLP sold all rights and
obligations under its CMBS master and primary servicing contracts.
Employees
As of March 1, 2002, the Company had 112 employees, 75 of which are
employed by CMSLP.
The Portfolio
CMBS and Other MBS
As of December 31, 2001, 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 $824 million
(representing approximately 63% of the Company's total consolidated
assets), an aggregate amortized cost of approximately $822 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 weighted average pass through rate of these CMBS as of December
31, 2001 was 6.3% 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 December 31, 2001, of
approximately $4.5 million, $9.5 million and $0.2 million, respectively. Of the
$19.3 billion and $20.2 billion, respectively, of underlying mortgage loans as
of December 31, 2001 and 2000, $791.7 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 "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" and Note 5 to Notes to Consolidated Financial Statements.
In addition to the CMBS discussed above, the Company owns $8.5 million of
Other MBS, which are held for trading purposes, as of December 31, 2001 (see
also "REIT Status/Net Operating Loss for Tax Purposes").
Servicing Portfolio
As discussed under the heading "Servicing", CMSLP conducts mortgage loan
servicing operations. As of December 31, 2001 and 2000, CMSLP was performing
certain servicing functions on commercial mortgage loans of $19.3 billion and
$20.2 billion, respectively. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" for a discussion of the servicing
operations.
Insured Mortgage Securities
As of December 31, 2001 and 2000, the Company had $343.1 million and $385.8
million at fair value (representing approximately 26% and 25%, respectively, of
the Company's total consolidated assets) and $351.0 million and $390.8 million
at amortized cost, 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, 2001, 87% were GNMA Mortgage-Backed Securities
(including certificates that collateralize Freddie Mac participation
certificates) and approximately 13% of CRIIMI MAE's investment in mortgage
securities were FHA-Insured Certificates. See Notes 3 and 6 to the Notes to
Consolidated Financial Statements for further discussion.
Equity Investments
As of December 31, 2001 and 2000, the Company had approximately $9.3
million and $33.8 million, respectively, in investments accounted for under the
equity method of accounting. Included in equity investments as of December 31,
2000 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. Effective July 2001, CRIIMI MAE, which had previously accounted for CMSLP
under the equity method, acquired voting control of CMSLP and began accounting
for this subsidiary on a consolidated basis. CMSLP's assets, liabilities,
revenues and expenses are labeled as "servicing" on the Company's Consolidated
Financial Statements. See Note 3 to the Notes to Consolidated Financial
Statements for further discussion.
Real Estate Owned ("REO")
As of December 31, 2001 and 2000, the Company had approximately $8.3
million and $0, respectively, of real estate being held for investment. This
real estate consists of a shopping center in Orlando, Florida. See "Other
Income" and "Summary of Other Assets" in "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" for a further discussion of
this REO.
Certain Risk Factors
In addition to the risk factors set forth below, please see those set forth
in "BUSINESS" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS."
Substantial Indebtedness; Leverage
The Company is highly leveraged. As of December 31, 2001, the Company's
total consolidated indebtedness was $1.0 billion (of which $408 million was
recourse debt to the Company). As of December 31, 2001, the Company's
shareholders' equity was approximately $261 million. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and
the Consolidated Financial Statements of the Company and the accompanying notes
thereto. Virtually all cash flows relating to existing assets are, and are
currently expected to be, used to satisfy principal, interest and fee
obligations under the New Debt, and to pay general and administrative and other
operating expenses of the Company.
Although there can be no assurance, the Company believes that it will have
sufficient cash resources to pay interest, scheduled principal and any other
required payments on the New Debt through the remainder of 2002. The Company's
ability to meet its debt service obligations through the remainder of 2002 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 stockholders due to expected net operating losses for tax purposes, in each
case consistent with the terms of the New Debt. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS". 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, significantly reduces cash flow available for other activities,
restricts the Company's ability to react quickly to changes in its business,
limits its ability to hedge its assets and liabilities, and makes the Company
more vulnerable to economic downturns. In addition, the documents evidencing the
New Debt impose significant operating and financial restrictions on the Company.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and Notes 1 and 7 to the Notes to Consolidated Financial Statements.
Additionally, there can be no assurance that the Company will be able to
refinance all or any portion of the New Debt at or prior to maturity on terms
favorable to it, or on any terms at all.
Borrowing Risks
Substantially all of the Company's borrowings, including the New Debt, are,
and are expected to continue to be, in the form of collateralized borrowings.
The Variable-Rate Secured Borrowing is collateralized by first, second or third
priority direct or indirect (in connection with an affiliate reorganization
discussed in Note 7 to Notes to Consolidated Financial Statements) liens and
security interests on or in substantially all of the Company's assets (although
the Variable-Rate Secured Borrowing is not collateralized by certain
miscellaneous assets which, in addition to the collateral that secures the
Variable-Rate Secured Borrowing, collateralizes the balance of the New Debt),
and is subject to a number of terms, conditions and restrictions including,
without limitation, scheduled principal and interest payments, accelerated
principal payments, restrictions and requirements with respect to the
collection, management, use and application of funds. 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. The balance of the New Debt, represented by the Series A Senior Secured
Notes and Series B Senior Secured Notes (collectively the "Senior Secured
Notes"), is collateralized by first, second or third priority direct or
indirect liens or security interests on or in substantially all of the
Company's assets (although in some cases with respect to certain miscellaneous
assets, the lien and security interest is only on or in proceeds of such
assets), and is 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. The Company has
exceeded certain loss threshold amounts under the operative documents related to
the Variable-Rate Secured Borrowing and the Senior Secured Notes, which has
resulted in certain additional restrictions. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
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. CRIIMI MAE Inc. is currently
prohibited from acquiring CMBS rated "B" or lower or unrated under certain
documents evidencing the New Debt.
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. The liquidation
of Subordinated CMBS could also result in the loss of the Company's Investment
Company Act exclusion. See "Investment Company Act."
Limited Protection from Hedging Transactions
To minimize the risk of interest rate increases on interest expense as it
relates to its 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, 2001, approximately 77% of
the Company's Variable-Rate Secured Borrowing was hedged with an interest rate
protection agreement that partially limits the impact of rising interest rates
above a certain defined threshold, or strike price. When this interest rate
protection agreement expires, the Company will have increased interest rate risk
unless it is able to enter into replacement interest rate protection agreements.
As of December 31, 2001, the remaining term for the interest rate protection
agreement was approximately 15 months with a strike price of 5.25%. As of
December 31, 2001, one-month LIBOR was 1.87%. 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 variable-rate debt. During 2001, 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.
CRIIMI MAE is exposed to credit loss in the event of non-performance by the
counterparty to the interest rate protection agreement should interest rates
exceed the cap. However, management does not anticipate non-performance by the
counterparty. The counterparty has long-term debt ratings of A+ or above by S&P
and A1 or above by Moody's. Although CRIIMI MAE's cap is not exchange-traded,
there are a number of financial institutions which enter into these types of
transactions as part of their day-to-day activities.
Risks of Owning Subordinated CMBS
As an owner of the most subordinate tranches of CMBS, the Company will be
the first to bear any loss and the last to have a priority right to the cash
flow of the related mortgage pool. For example, if the Company owns a $10
million subordinated interest in an issuance of CMBS consisting of $100 million
of mortgage loan collateral, a 7% loss on the underlying mortgage loans will
result in a 70% loss on the subordinated interest.
The Company's Subordinated CMBS can change in value due to a number of
economic factors. These factors include changes in the underlying real estate,
fluctuations in Treasury rates, and supply/demand mismatches which are reflected
in CMBS pricing spreads. For instance, changes in the credit quality of the
properties securing the underlying mortgage loans can result in interest payment
shortfalls, to the extent there are mortgage payment delinquencies, and
principal losses, to the extent that there are payment defaults and the amounts
are not fully recovered. These losses may result in a permanent decline in the
value of the CMBS, and the losses may change the Company's anticipated yield to
maturity if the losses are in excess of those previously estimated. CMBS are
priced at a spread above the current Treasury security with a maturity that most
closely matches the CMBS' weighted average life. The value of CMBS can be
affected by changes in Treasury rates, as well as changes in the spread between
such CMBS and the Treasury security with a comparable maturity. For example, the
spread to Treasury of a CMBS may have increased from 400 basis points to 500
basis points. If the Treasury security with a comparable maturity had a constant
yield of 5% then, in this example, the yield on the CMBS would have changed from
9% to 10% and, accordingly, the value of such CMBS would have declined.
Generally, increases and decreases in both Treasury rates or spreads will result
in temporary changes in the value of the Subordinated CMBS assuming that the
Company has the ability and intent to hold its CMBS investments until maturity.
However, such temporary changes in the value of Subordinated CMBS become
permanent changes realized through the income statement when the Company no
longer intends or fails to have the ability to hold such Subordinated CMBS to
maturity or expected credit losses are greater than originally anticipated. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Results of Operations for 2001 versus 2000 (Impairment on CMBS);
Results of Operations for 2000 versus 1999 (Impairment on CMBS), and Financial
Condition, Liquidity and Capital Resources (Summary of Subordinated CMBS)" and
Note 5 to Notes to Consolidated Financial Statements.
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 certain of 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, and restrictions under the
operative agreements evidencing the New Debt.
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 to spring 1998 levels, 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.
Possible Effects of Terrorist Attacks, Economic Slowdown and/or Recession
on Losses and Defaults
The economic slowdown, recession and terrorist attacks have been factors
contributing to 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. Such
factors may continue to negatively impact the values of commercial real estate
securing the mortgage loans, weakening collateral coverage and increasing the
possibility of defaults and losses in the event of defaults, and the demand for
commercial 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.
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 than 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. CRIIMI MAE Inc. is
currently prohibited from acquiring CMBS rated "B" or lower or unrated under
certain documents evidencing the New Debt.
Risks Associated with Trader Election and Limitation of Net Operating
Losses for Tax Purposes
On March 15, 2000, the Company determined to elect mark-to-market treatment
as a securities trader effective January 1, 2000. As a result of the election,
the Company recognized a mark-to-market tax loss on its Trading Assets, on
January 1, 2000 of approximately $478 million (the "January 2000 Loss"). See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - REIT Status/Net Operating Loss for Tax Purposes" for further
discussion, including a definition of Trading Assets. 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. It is possible that
the amount of any under-distribution for a taxable year could be corrected with
a "deficiency dividend" as defined in Internal Revenue Code Section 860,
however, interest may also be due to the Internal Revenue Service on the amount
of this under-distribution.
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 obligations under the
operative documents evidencing the New Debt.
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) on Trading Assets 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.
The election to be treated as a trader will result in net operating losses
that generally may be carried forward for 20 years. The Company's future use of
net operating losses for tax purposes (collectively, the "NOLs") could be
substantially limited in the event of an "ownership change" as defined under
Section 382 of the Internal Revenue Code. As a result of these limitations
imposed by Section 382 of the Internal Revenue Code, in the event of an
ownership change, the Company's ability to use its NOL carryforwards in future
years may be limited and, to the extent the NOL carryforwards cannot be fully
utilized under these limitations within the carryforward periods, the NOL carry
forwards would expire unutilized. Accordingly, after any ownership change, the
Company's ability
to use its NOLs to reduce or offset taxable income would be substantially
limited or not available under Section 382. In general, a company reaches the
"ownership change" threshold if the "5% shareholders" increase their aggregate
ownership interest in the company over a three-year testing period by more than
50 percentage points. The ownership interest is measured in terms of market
value of the company's capital stock.
The Company is not aware of any acquisition of shares of the Company's
capital stock that has created an "ownership change" under Section 382, but
believes that it may be close to approaching the 50% threshold for an "ownership
change" under Section 382. The Company is concerned that future acquisitions of
common stock, preferred stock or a combination of both by an existing "5%
shareholder" or a new "5% shareholder" could cause an "ownership change". If an
"ownership change" occurs, the Company's ability to use its NOLs to reduce or
offset its taxable income would be substantially limited or not available under
Section 382 of the Internal Revenue Code on a prospective basis. The Company
would then have REIT distribution requirements based upon its taxable income at
the beginning of the year such ownership change occurs. As stated above, any
such distributions are expected to be in the form of non-cash taxable dividends.
Currently, the Company does not know of any acquisition of shares of its
capital stock that would create an "ownership change" of its common stock under
Section 382 of the Internal Revenue Code. The Company has adopted a shareholder
rights plan to deter an ownership change within the meaning of Section 382 of
the Internal Revenue Code, however there can be no assurance that an ownership
change will not occur. See "MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS" for a discussion of a recently adopted shareholder rights
plan.
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 variable-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, variable-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.
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.
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, effects of terrorism, 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
applicable restrictions contained in financing agreements (including the
operative documents evidencing the New Debt), 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.
CRIIMI MAE Inc. is currently prohibited from acquiring CMBS rated "B" or lower
or unrated under certain documents evidencing the New Debt.
Competition
If the Company resumes the acquisition of Subordinated CMBS, 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 these competitors 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.
CRIIMI MAE Inc. is currently prohibited from acquiring CMBS rated "B" or
lower or unrated under certain documents evidencing the New Debt.
Investment Company Act
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 all of its government
insured mortgage securities constitute Qualifying Interests with the exception
of one such security which constitutes an Other Real Estate Interest. 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, 2001, the Company
believes that it was in compliance with both the 55% Requirement and the 25%
Requirement.
If the SEC or its staff were to take a different position with respect to
whether such Subordinated CMBS constitute Qualifying Interests, the Company
could, among other things, be required either (i) to change the manner in which
it conducts its operations to avoid being required to register as an investment
company or (ii) to register as an investment company, either of which could have
a material adverse effect on the Company. If the Company were required to change
the manner in which it conducts its business, it would likely have to dispose of
a significant portion of its Subordinated CMBS or acquire significant additional
assets that are Qualifying Interests. Alternatively, if the Company were
required to register as an investment company, it expects that its operating
expenses would significantly increase and that the Company would have to reduce
significantly its indebtedness, which could also require it to sell a
significant portion of its assets. No assurances can be given that any such
dispositions or acquisitions of assets, or deleveraging, could be accomplished
on favorable terms, or at all. There are restrictions under certain of the
operative documents evidencing the New Debt which could limit possible actions
the Company 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 could require approval or consent
of certain holders of the New Debt. Any such results could have a material
adverse effect on the Company.
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.
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.
Pending Litigation
See "LEGAL PROCEEDINGS" for a description of material litigation.
Risk of New York Stock Exchange Delisting
The Company recently implemented a one-for-ten reverse stock split
designed, in part, to satisfy the New York Stock Exchange ("NYSE") market price
listing requirement. There can be no assurance that such market price listing
requirement or that all other NYSE listing requirements will continue to be met.
Taxable Mortgage Pool Risks
An entity that constitutes a "taxable mortgage pool" as defined in the
Internal Revenue 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. As of December 31,
2001, the Company owned all of the equity interests in two trusts that
constitute TMPs (CBO-1 and CBO-2, collectively the "Trusts"). See
"BUSINESS-Resecuritizations" and Note 5 to the Notes to Consolidated Financial
Statements for descriptions of CBO-1 and CBO-2. The statutory provisions and
regulations governing the tax treatment of TMPs (the "TMP Rules") provide an
exemption for TMPs that constitute "qualified REIT subsidiaries" (that is,
entities whose equity interests are wholly owned by a REIT or a qualified REIT
subsidiary). As a result of this exemption and the fact that as of December 31,
2001 the Company owned all of the equity interests in each Trust, the Trusts, as
of December 31, 2001, were not required to pay a separate corporate level tax on
income they derive from their underlying mortgage assets.
As of December 31, 2001, the Company also owned certain securities
structured as bonds (the "Bonds") issued by each of the Trusts. As of December
31, 2001, certain of the Bonds owned by the Company served as collateral (the
"Pledged Bonds") for the New Debt. If the creditors holding the Pledged Bonds
were to seize or sell this collateral (unless seized by or sold to a REIT or a
qualified REIT subsidiary) 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 Trusts (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.
On the Effective Date of the Reorganization Plan, the Company effected an
affiliate reorganization in order to indirectly secure the New Debt with the
equity interests in CBO-1 and CBO-2. Pursuant to the affiliate reorganization,
CRIIMI MAE Inc. formed a new REIT subsidiary ("CBO REIT"), all shares of which
were initially issued to CRIIMI MAE Inc., pledged the previously Pledged Bonds
and all outstanding shares of two qualified REIT subsidiaries (which own the
equity interests in CBO-1 and CBO-2) (the "QRS Shares") to secure the New Debt,
pledged the shares held by CRIIMI MAE in CBO REIT (the "REIT Shares") to secure
the New Debt represented by the two new series of secured notes, contributed the
Pledged Bonds and the QRS Shares to CBO REIT, and transferred the REIT Shares,
in a repurchase transaction, to an affiliate of Merrill, as agent for affiliates
of Merrill and GACC. Subject to the terms of the documents evidencing the New
Debt, CRIIMI MAE Inc. has retained the right to exercise all voting and other
corporate rights and powers of ownership with respect to the REIT Shares. CRIIMI
MAE believes that the taxable mortgage pool risks set forth above remain
applicable as of the Effective Date with respect to CBO REIT, which owns all
equity interests in the Trusts (through its ownership of the two qualified REIT
subsidiaries referenced above) and the Pledged Bonds; provided, however, that
the risks referenced in the two immediately preceding paragraphs should only
apply if the creditors were to seize or sell collateral which constituted or
represented only a portion of the equity interests in a Trust.
REIT Status and Other Tax Matters
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - REIT Status/Net Operating Loss for Tax Purposes" for a
discussion of REIT status and other tax matters.
Executive Officers
The following table sets forth information concerning the executive
officers of the Company as of February 28, 2002:
Name Age Position
William B. Dockser 64 Chairman of the Board
H. William Willoughby 55 President, Secretary and Director
David B. Iannarone 41 Executive Vice President
Cynthia O. Azzara 42 Senior Vice President,
Chief Financial Officer and
Treasurer
Brian L. Hanson 40 Senior Vice President
William B. Dockser has served as Chairman of the Board of CRIIMI MAE since
1989. Mr. Dockser is also the founder of C.R.I., Inc. ("CRI"), serving as its
Chairman of the Board since 1974.
H. William Willoughby has served as President of CRIIMI MAE since 1990 and
a Director and Secretary of CRIIMI MAE since 1989. Mr. Willoughby has been a
director of CRI since 1974, Secretary of CRI from 1974 to 1990 and President of
CRI since 1990.
David B. Iannarone has served as Executive Vice President of CRIIMI MAE
since December 2000; as Senior Vice President and General Counsel of CRIIMI MAE
from March 1998 to December 2000; and as Vice President and General Counsel of
CRIIMI MAE from July 1996 to March 1998.
Cynthia O. Azzara has served as Chief Financial Officer of CRIIMI MAE since
1994. She has also served as Senior Vice President of CRIIMI MAE since 1995 and
Treasurer of CRIIMI MAE since 1997.
Brian L. Hanson has served as Senior Vice President of CRIIMI MAE since
March 1998; Group Vice President of CRIIMI MAE from March 1996 to March 1998.
ITEM 2. PROPERTIES
CRIIMI MAE leases its corporate offices at 11200 Rockville Pike, Rockville,
Maryland. As of December 31, 2001, these offices occupy approximately 67,600
square feet. As of February 28, 2002, approximately 5,100 square feet of this
office space was sublet to third parties.
ITEM 3. LEGAL PROCEEDINGS
Bankruptcy Proceedings and Other Litigation
The Company emerged from Chapter 11 on April 17, 2001, at which date all
material litigation matters existing subsequent to the Petition Date had been
settled or resolved except for the First Union litigation referenced below.
First Union
First Union and the Company entered into a settlement agreement dated as of
February 6, 2002 (the "Settlement Agreement"). On March 5, 2002, the Bankruptcy
Court entered an order approving the Settlement Agreement. The Settlement
Agreement became effective on March 20, 2002 (the "Settlement Effective Date").
The dispute concerned whether First Union was a secured or unsecured creditor in
connection with certain credit and custodian agreements between CRIIMI MAE and
First Union. First Union's claim amount was approximately $18.6 million.
On the Settlement Effective Date, a previously issued Series A Senior
Secured Note having a December 31, 2001 face amount of $7,484,650 and previously
issued Series B Senior Secured Notes having a December 31, 2001 aggregate face
amount of $4,809,273 (collectively, the "Notes") were released from escrow to
First Union. On the Settlement Effective Date, First Union sold the Notes to
ORIX. The proceeds from the sale of the Notes, combined with the escrowed cash,
resulted in total proceeds of approximately $18.8 million. CRIIMI MAE retained
the approximate $238,000 of cash in excess of the First Union claim amount of
$18.6 million. In addition, approximately $22,938,260 of the Company's
restricted cash became unrestricted.
Reference is made to the Settlement Agreement, previously filed with the
Bankruptcy Court (and with the Securities and Exchange Commission as an exhibit
to a Current Report on Form 8-K filed on February 13, 2002), for a more detailed
description of the terms and conditions of the Settlement Agreement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2001.
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). On October 17, 2001, the Company implemented a one-for-ten reverse stock
split designed, in part, to satisfy the New York Stock Exchange ("NYSE") market
price listing requirement. There can be no assurance that such market price
listing requirement or that all other NYSE requirements will continue to be met.
All share and per share information in this Annual Report on Form 10-K has been
retroactively adjusted to reflect the reverse stock split. Share information
adjustments include, without limitation, adjustments to the number of common
shares issued and outstanding, issued as dividends on and upon conversion of
shares of preferred stock and issuable under outstanding options.
As of February 28, 2002, there were approximately 2,500 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.
2001 2000
-------------------------------- -------------------------------
Sales Price Sales Price
-------------------------------- -------------------------------
Quarter Ended High Low High Low
---------------------- -------------- -------------- -------------- ------------
March 31 $9.00 $6.90 $16.25 $10.00
June 30 7.90 5.70 18.75 12.50
September 30 7.00 3.90 18.13 13.13
December 31 4.25 2.53 17.50 6.10
The terms of the New Debt significantly restrict the amount of cash
dividends that can be paid to shareholders. One such restriction provides that
any cash dividends required to maintain REIT status (assuming the Company has
the cash to make such distributions and that it is permitted to make such
distributions under the terms of the New Debt) would be paid first to holders of
certain of the New Debt who convert their secured 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. Another such restriction provides that if realized losses (as defined
in the New Debt documents, and including appraisal reduction amounts on
properties underlying the CMBS) on CMBS exceed certain thresholds, then the
Company is prohibited from paying cash dividends to its shareholders, except as
required to maintain REIT status with any such cash dividends to be paid in
accordance with the terms set forth in the preceding sentence. As of December
31, 2001, the Company had exceeded the loss threshold amounts under the
applicable operative documents evidencing the New Debt. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" for
further discussion of the restrictions resulting from exceeding the loss
threshold amounts. No cash dividends were paid to common shareholders during
2001 or 2000. During 2001, dividends were paid to preferred shareholders in the
form of shares of common stock. During 2000 and 1999, dividends were paid to
common shareholders in the form of shares of preferred stock. See Notes 10 and
11 to Notes to Consolidated Financial Statements for a detailed discussion of
the non-cash dividends that were paid to common and preferred shareholders and
changes in the conversion price for one of the Company's series of preferred
stock.
On December 3, 2001, the Company's Board of Directors decided to defer the
payment of dividends on CRIIMI MAE's Series B Cumulative Convertible Preferred
Stock, Series E Cumulative Convertible Preferred Stock, Series F Redeemable
Cumulative Dividend Preferred Stock, and Series G Redeemable Cumulative Dividend
Preferred Stock for the fourth quarter of 2001. In connection with the
redemption of the Series E Preferred Stock on March 21, 2002, the Board declared
dividends on shares of Series B Preferred Stock, Series F Preferred Stock and
Series G Preferred Stock for the fourth quarter of 2001 and the first quarter
of 2002, such dividends payable in shares of common stock. For further
information on the redemption of the Series E Preferred Stock and the dividend
declarations, see "BUSINESS - The Reorganization Plan" and Note 11 to Notes to
Consolidated Financial Statements.
Shareholder Rights Plan
On January 23, 2002, the Company's Board of Directors adopted a Shareholder
Rights Plan (the "Rights Plan") to preserve the Company's net operating losses
for tax purposes. As discussed in "Risk Factors - Risk Associated with Trader
Election and Limitation of Net Operating Losses for Tax Purposes", "Management's
Discussion and Analysis of Financial Condition and Results of Operations - REIT
Status/Net Operating Loss for Tax Purposes", and Note 1 to Notes to Consolidated
Financial Statements, the Company's future use of its NOLs could be
substantially limited in the event of an "ownership change" within the meaning
of Section 382 of the Internal Revenue Code. The Rights Plan is designed to
deter an "ownership change" within the meaning of Section 382 of the Internal
Revenue Code by discouraging any person or group from acquiring five percent or
more of the Company's outstanding common shares.
Under the Rights Plan, one right was distributed for each share of the
Company's common stock to shareholders of record as of February 4, 2002. The
rights trade with the underlying shares of CRIIMI MAE common stock. The rights
will become exercisable if a person or group acquires beneficial ownership of 5%
of CRIIMI MAE's outstanding common stock or announces a tender offer for 5% or
more of the common stock (an "Acquiring Person"). An Acquiring Person also
includes a person or group that held 5% or more of the common stock as of
January 23, 2002, and that acquires additional common shares. An exception could
be made if the transaction is approved by CRIIMI MAE's board of directors.
If the rights become exercisable, each right will entitle its holder to
purchase one one-thousandth of a share of a new series of the Company's
preferred stock at an exercise price of $23 per share. If a person or group
becomes an Acquiring Person in a transaction that has not been approved by the
board of directors, then each right, other than those owned by the Acquiring
Person, would entitle the holder to purchase $46.00 worth of CRIIMI MAE common
stock for the $23.00 exercise price.
The Company generally will be entitled to redeem the rights at $0.001 per
right. The rights will expire 10 years after the date of issuance. However, the
Board of Directors may amend the Rights Plan to provide that the rights will
expire at an earlier date. The Rights Plan was filed with the Securities and
Exchange Commission as an exhibit to a Current Report on Form 8-K on January 25,
2002.
Other Stockholder Matters
For adjustments to the conversion price for the Series B Preferred Stock,
see Note 11 to Notes to Consolidated Financial Statements.
For information pertaining to the exchange of Series C and Series D
Preferred Stock for Series E Preferred Stock, see Note 11 to Notes to
Consolidated Financial Statements.
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,
2001 2000 1999 1998 1997
----------- ----------- ------------- ----------- -----------
(in thousands, except per share amounts)
Statement of Income Data:
Interest income $134,376 $195,251 $222,323 $207,307 $129,095
Interest and related expense 97,788 139,366 151,337 136,268 77,919
----------- ----------- ------------- ----------- -----------
Net interest margin 36,588 55,885 70,986 71,039 51,176
----------- ----------- ------------- ----------- -----------
General and administrative expenses (11,548) (11,301) (12,049) (14,623) (9,610)
Amortization of assets acquired in the Merger (2,878) (2,878) (2,878) (2,878) (2,878)
Other, net 3,071 2,940 5,555 5,475 19,953
Equity in (losses) earnings from investments (1,632) 1,512 (1,243) 2,618 3,612
Servicing income 6,886 - - - -
Servicing expenses (8,019) - - - -
Impairment on CMBS (34,655) (143,478) - - -
Reorganization items (1,813) (66,073) (178,900) (9,857)
Emergence loan origination fee (3,937) - - - -
Unrealized loss on warehouse obligation - - (8,000) (30,378) -
Realized loss on reverse repurchase obligation - - - (4,503) -
Gain on sale of CBO-2 - - - 28,800 -
Write-off of capitalized origination costs - - - (3,284) -
----------- ----------- ------------- ----------- -----------
(54,525) (219,278) (197,515) (28,630) 11,077
----------- ----------- ------------- ----------- -----------
Net (loss) income before minority interest (17,937) (163,393) (126,529) 42,409 62,253
Minority interest in net income of consolidated subsidiary - - - (40) (8,065)
----------- ----------- ------------- ----------- -----------
Net (loss) income before extraordinary item and before
cumulative effect of changes in accounting principles (17,937) (163,393) (126,529) 42,369 54,188
Extraordinary item-gain on debt extinguishment - 14,809 - - -
Cumulative effect of adoption of SFAS 133 (135) - - - -
Cumulative effect of change in accounting principle
related to servicing revenue 1,995 - - - -
----------- ----------- ------------- ----------- -----------
Net (loss) income before dividends accrued
or paid on preferred shares (16,077) (148,584) (126,529) 42,369 54,188
Dividends accrued or paid on preferred shares (8,146) (6,912) (5,840) (6,998) (6,473)
----------- ----------- ------------- ----------- -----------
Net (loss) income to common shareholders $(24,223) $(155,496) $ (132,369) $ 35,371 $ 47,715
=========== =========== ============= =========== ===========
Net (loss) income available to common shareholders per common share:
Basic - before extraordinary item and cumulative
effect of changes in accounting principles $ (2.35) $ (27.40) $ (24.51) $ 7.48 $ 12.90
=========== =========== ============= =========== ===========
Basic - after extraordinary item and cumulative effect of
changes in accounting principles $ (2.18) $ (25.02) $ (24.51) $ 7.48 $ 12.90
=========== =========== ============= =========== ===========
Weighted average shares outstanding 11,088 6,214 5,400 4,728 3,699
=========== =========== ============= =========== ===========
Pro forma disclosures for change in accounting for servicing revenue:
Pro forma net (loss) income to common shareholders
before extraordinary item and cumulative
effect of changes in accounting principles $(26,083) $(169,925) $ (131,836) $ 35,850 $ 48,216
=========== =========== ============= =========== ===========
Pro forma basic (loss) earnings per share - before
extraordinary item and cumulative effect of
changes in accounting principles $ (2.35) $ (27.34) $ (24.41) $ 7.58 $ 13.03
=========== =========== ============= =========== ===========
Pro forma net (loss) income to common shareholders $(26,218) $(155,116) $ (131,836) $ 35,850 $ 48,216
=========== =========== ============= =========== ===========
Pro forma basic (loss) earnings per share $ (2.36) $ (24.96) $ (24.41) $ 7.58 $ 13.03
=========== =========== ============= =========== ===========
As of December 31,
2001 2000 1999 1998 1997
-------------- -------------- -------------- -------------- --------------
(in thousands)
Balance Sheet Data:
Mortgage Assets:
Subordinated CMBS and Other MBS $ 832,682 $ 856,846 $ 1,179,363 $ 1,274,186 $ 1,114,480
Insured mortgage securities 343,091 385,751 394,857 488,095 605,114
Investment in originated loans - - 470,205 499,076 -
Restricted and unrestricted cash 48,998 202,416 91,547 24,180 2,109
Total assets 1,315,004 1,557,840 2,293,661 2,437,918 1,873,305
Debt:
Total recourse debt 407,637 558,585 925,704 1,125,036 718,507
Total nonrecourse debt 616,715 645,170 1,056,646 960,686 696,425
Total liabilities 1,053,959 1,289,582 2,074,313 2,130,041 1,427,392
Shareholders' equity 261,045 268,258 219,349 307,877 444,981
The selected consolidated statement of income data presented above for the
years ended December 31, 2001, 2000 and 1999, and the selected consolidated
balance sheet data as of December 31, 2001 and 2000, were derived from, and are
qualified by, reference to CRIIMI MAE's consolidated financial statements, which
are included elsewhere in this Annual Report on Form 10-K. The selected
consolidated statement of income data for the years ended December 31, 1998 and
1997, and the selected consolidated balance sheet data as of December 31, 1999,
1998 and 1997, 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.
Tax Basis Accounting
For the years ended December 31,
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(in thousands, except per share amounts)
Interest income $ 187,079 $ 246,576 $ 278,450 $ 248,598 $ 135,508
Interest and related expense 135,470 171,282 186,766 161,860 79,574
----------- ----------- ----------- ----------- -----------
Net interest margin 51,609 75,294 91,684 86,738 55,934
----------- ----------- ----------- ----------- -----------
Other operating and administrative expenses (11,803) (11,648) (12,117) (14,445) (9,464)
Other, net 6,460 2,415 3,024 4,238 2,152
Equity in earnings from investments 244 2,980 1,577 8,031 4,104
Reorganization items (10,159) (35,604) (12,950) (4,819) -
Emergence loan origination fee (937) - - - -
Net capital gains 224 572 3,276 1,746 7,815
Credit losses (4,370) (1,287) (621) - -
January 2000 Loss recognized (119,542) (119,600) - - -
Mark-to-market loss on trading assets as of
04/17/01 (8,573) - - - -
Mark-to-market (loss) gain on trading assets (135) 49,933 - - -
Dividends accrued or paid on preferred shares (8,145) (6,912) (5,840) (6,998) (6,473)
Dividends not deductible due to net operating loss 8,145 6,912 - - -
Loss on warehouse obligation - - (36,328) - -
Realized loss on reverse repurchase obligation - - - (4,503) -
Write-off of capitalized origination costs - - - (3,284) -
Loss on sale of trading assets - (12,607) - - -
----------- ----------- ----------- ----------- -----------
(Net operating loss)/Taxable income $(96,982) $(49,552) $ 31,705 $ 66,704 $ 54,068
=========== =========== =========== =========== ===========
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.
All information set forth in this Annual Report on Form 10-K has been
retroactively adjusted to reflect a one-for-ten reverse stock split effected on
October 17, 2001.
Results of Operations
2001 versus 2000
Financial statement net loss to common shareholders for the years ended
December 31, 2001 and 2000 was $(24.2) million and $(155.5) million,
respectively. Net loss to common shareholders for the year ended December 31,
2001 includes $34.7 million in non-cash accounting impairment charges related to
certain of the Company's Subordinated CMBS, reorganization expenses of $1.8
million, a one-time emergence financing origination fee expense of $3.9 million
related to the Company's emergence from Chapter 11 in April 2001, a $0.1 million
charge related to the adoption of Statement of Financial Accounting Standard No.
133, and $2.0 million of revenue related to a change in accounting principle for
servicing revenue. Excluding the impairment charges, reorganization expenses,
loss emergence financing fee and the changes in accounting principles, pro forma
net income to common shareholders would have been $14.3 million for the year
ended December 31, 2001, representing net earnings from the Company's retained
mortgage assets, as discussed more fully below.
The primary factors resulting in the net loss for the year ended December
31, 2000 were the recognition of a non-cash accounting impairment charge of
$143.5 million related to certain of the Company's retained Subordinated CMBS
and expenses related to the Company's Reorganization Plan and the sale of
certain mortgage assets during 2000, as discussed below.
Interest Income - Subordinated CMBS
Income from Subordinated CMBS decreased by approximately $31.5 million, or
23%, to $105.5 million during 2001 as compared to $137.1 million during 2000.
This overall decrease in interest income was primarily the result of the sale of
certain CMBS during 2000 as part of the Company's Reorganization Plan.
Generally accepted accounting principles ("GAAP") require that interest
income earned on Subordinated CMBS be recorded based on the effective interest
method using the anticipated yield over the expected life of the Subordinated
CMBS. Based upon the timing and amount of future credit losses and certain other
assumptions estimated by management, as discussed below, the 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 10.1% from December 31, 1999 through
March 31, 2000. These yields were determined based on the anticipated yield over
the expected life of the Subordinated CMBS, which considers, among other things,
anticipated losses and any other than temporary impairment. The effective
interest method of recognizing interest income on Subordinated CMBS results in
income recognition that differs from cash received. For the years ended December
31, 2001 and 2000, the amount of income recognized in excess of cash received
due to the effective interest rate method was approximately $10.2 million and
$15.2 million, respectively.
The U.S. economy began to slow during the latter part of 2000. Accordingly,
the Company began to see the impact of the slowing U.S. economy through
increased defaults on mortgage loans underlying its CMBS portfolio. This trend
continued during 2001, and as of December 31, 2001, approximately 4.1% of the
mortgage loans underlying the Company's CMBS portfolio were in default. This
compares to 1.5% as of December 31, 2000.
Primarily as a result of the continued slowing U.S. economy and recession
during 2001, which were exacerbated by the terrorist attacks on September 11,
2001 and subsequent terrorist actions and threats, the Company recognized a $3.9
million non-cash accounting impairment charge related to certain CMBS as of
September 30, 2001 due to a change in estimates of expected losses. In addition,
the Company recognized an additional non-cash impairment charge related to
certain CMBS of $30.8 million as of December 31, 2001. As a result of the
combined severity of the 2001 economic and terrorist events, the underlying
mortgage loans have had a greater than previously anticipated number of monetary
defaults. These were primarily defaults related to mortgage loans on hotel
properties. Additionally, recent appraisal amounts on properties underlying
certain defaulted loans were significantly lower than previously anticipated,
thereby increasing the estimated principal loss on the commercial loans. As a
result of the change in expected future cash flows, expected future credit
losses and the recognition of impairment, the Company revised its anticipated
yields as of October 1, 2001 and again as of January 1, 2002. The revised
weighted average yield of 12.4% will be used to recognize interest income
prospectively, beginning January 1, 2002.
Interest Income - Insured Mortgage Securities
Interest income from insured mortgage securities decreased by approximately
$1.8 million or 6% to $28.9 million for 2001 from $30.7 million for 2000. This
decrease was principally due to the prepayment of nine mortgage securities and
the assignment to HUD of two mortgage securities held by CRIIMI MAE and its
wholly owned subsidiaries for net proceeds aggregating approximately $35.2
million during the year ended 2001. These prepayments represented approximately
9% of the total insured mortgage portfolio.
Interest Income - Originated Loans
Interest income from originated loans decreased to $0 for 2001 as compared
to $27.5 million for 2000. 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 due to
the sale of the Company's interest in CMO-IV in November 2000, which eliminated
interest income for 2001 versus 2000.
Interest Expense
Total interest expense decreased by approximately $41.6 million or 30% to
approximately $97.8 million for 2001 from approximately $139.4 million for 2000.
This decrease was primarily attributable to the sale of the Company's interest
in CMO-IV and certain CMBS during 2000 and the reduction of the related debt.
These decreases were partially offset by higher rates of interest incurred
subsequent to April 17, 2001 on the Company's New Debt and the amortization of
the related extension fees on the New Debt under the effective interest method
beginning in April 2001, as compared to the interest rates incurred during 2000
on the recourse debt existing prior to emergence from Chapter 11.
The overall weighted average effective interest rate on the New Debt was
11.1% for the period April 17, 2001 to December 31, 2001; the weighted average
coupon rate on the New Debt was 8.9% for the period April 17 to December 31,
2001. The difference in the New Debt's weighted average effective interest rate
and the New Debt's weighted average coupon (pay) rate primarily relates to the
amortization of estimated extension fees and the accrued interest related to the
7% per annum, accreting interest on the Series B Secured Notes, both of which
are included in the weighted average effective interest rate, but not included
in the weighted average coupon (pay) rate.
The weighted average effective and coupon interest rates on the recourse
debt was 7.8% for the year ended December 31, 2000.
General and Administrative Expenses
General and administrative expenses increased slightly to $11.5 million for
2001 as compared to $11.3 million for 2000 primarily due to an increase in
professional fees, partially offset by lower employment costs due to fewer
employees and no CMO-IV mortgage servicing fees in 2001.
Amortization of Assets Acquired in the Merger
Amortization of assets acquired in the Merger was $2.9 million in 2001 and
2000. In June of 2001, the FASB issued SFAS No. 142 "Goodwill and Other
Intangible Assets" ("FAS 142"). FAS 142, among other things, prohibits the
amortization of existing goodwill and establishes a new method of testing
goodwill for impairment. FAS 142 became effective for the Company on January 1,
2002. Effective upon adoption on January 1, 2002, the Company wrote off $9.8
million of goodwill and other intangible assets, and recorded a resulting one
time, non-cash impairment charge of approximately $9.8 million for this change
in accounting principle. In addition, this change in accounting principle will
reduce the Company's annual amortization expense related to such assets by
approximately $2.8 million.
Equity in (Losses) Income from Investments/CMSLP Operations
Beginning July 1, 2001, CRIIMI MAE began accounting for CMSLP on a
consolidated basis as opposed to accounting for CMSLP using the equity method.
This change in accounting method was a result of a reorganization in which the
partnership interests of CMSLP are now held by two wholly-owned and controlled
taxable REIT subsidiaries ("TRSs") of CRIIMI MAE. Prior to July 1, 2001, CRIIMI
MAE accounted for CMSLP under the equity method as the Company did not control
the voting common stock of the general partner of CMSLP. CMSLP's assets,
liabilities, revenues and expenses are labeled as "servicing" on the Company's
consolidated financial statements.
The following information summarizes the financial statement presentation
of the Company's Equity in (Losses) Income from Investments and the consolidated
results of operations of CMSLP:
Year ended December 31,
Description 2001 2000
----------- ------------- --------------
Equity in (Losses) Income from Investments (as presented
on income statements):
The AIM Funds - net equity in income $ 647,096 $ 701,403
CMSLP/CMSI - net equity in (losses) income (2,279,138) (b) 810,602
------------- -------------
Total Equity in (Losses) Income from Investments $ (1,632,042) (a) $ 1,512,005 (a)
============= =============
(a) Total Equity in (Losses) Income from Investments for the years ended
December 31, 2001 and 2000 include CRIIMI MAE's net equity from the AIM Funds
during these periods, and include net equity from CMSLP/CRIIMI MAE Services,
Inc. ("CMSI") for six of the twelve months (January - June) in the year ended
December 31, 2001 (since CMSLP's operations are consolidated into CRIIMI MAE
effective July 1, 2001) and for the full year ended December 31, 2000. On a
comparative basis, the net equity from the AIM Funds decreased primarily due to
a reduction in the AIM Funds' mortgage assets.
The net equity in income of $810,602 from CMSLP/CMSI for 2000 compares to
the aggregate of the net equity in losses from CMSLP/CMSI of $(2,279,138) for
2001 and the net loss from CMSLP of $(1,133,741) for the six months ended
December 31, 2001 (as summarized below). CMSLP/CMSI's aggregate net loss of
$(3,412,879) during 2001 includes amortization, depreciation and impairment of
$3.4 million in 2001 as compared to $2.9 million in 2000. CMSLP's total revenues
decreased by approximately $2.0 million, or 13.5%, to $12.7 million in 2001
compared to $14.7 million in 2000, primarily due to lower interest income and
assumption fees resulting from low current interest rates and the decrease in
mortgage loans serviced. General and administrative expenses were $12.2 million
and $11.3 million in 2001 and 2000, respectively. The increase was due primarily
to an increase in information technology expenses. In addition, 2001 includes
restructuring expenses of $0.4 million related to CMSLP's sale of its rights and
obligations under its master and primary servicing contracts.
(b) Includes $474,850 of special servicing fee revenue recognized on a
current basis and included in Equity from Investments.
Year ended December 31,
Description 2001 2000
----------- ---------------- --------------
CMSLP's results of operations (reflected in consolidated
income statements effective July 1, 2001):
Servicing revenue $ 6,886,057 (c) N/A
Servicing general and administrative expenses (5,882,889) N/A
Servicing amortization, depreciation and impairment (1,699,186) N/A
Servicing restructuring expense (437,723) N/A
----------------- -------------
Net loss from CMSLP $ (1,133,741) $ --
================= =============
(c) Includes $681,709 of special servicing fee revenue recognized on a current
basis and reflected in consolidated income statements.
On December 17, 2001, CMSLP announced its intention to sell all of its
rights and obligations under its CMBS master and primary servicing contracts
because the contracts were not profitable, given the relatively small volume of
master and primary CMBS servicing that CMSLP was performing. In connection with
this determination, 34 employees were terminated. A restructuring charge of
approximately $438,000 was recorded during the fourth quarter of 2001 to account
for employee severance costs, noncancellable lease costs, and other costs
related to the restructuring. All rights and obligations under these servicing
contracts were sold in February 2002. CMSLP received approximately $11.3 million
in cash, which included reimbursement of advances. This is expected to result in
a gain on sale of approximately $4.3 million, subject to adjustment for certain
post-closing contingencies, in the second quarter of 2002. In addition, CMSLP
may receive up to an additional $0.9 million from the sale in the third quarter
of 2002, which would be reflected as an additional gain on sale, following the
completion of a post-closing contingency period. See Note 3 to Notes to the
Consolidated Financial Statements.
Other Income
Other income decreased by approximately $0.7 million or 15% to $4.2 million
during 2001 as compared to $4.9 million during 2000. This decrease was partially
attributable to lower interest rates earned on fewer temporary investments. Also
included in other income is approximately $43,700 in realized gains related to
the Company's trading of other MBS.
In October 2001, a wholly-owned subsidiary of CRIIMI MAE acquired certain
partnership interests in a partnership that was the obligor on a mezzanine loan
payable to CRIIMI MAE in exchange for curing a default on the first mortgage
loan through a cash payment of approximately $276,000. This partnership and
another wholly-owned subsidiary of CRIIMI MAE own 100% of the partnership
interests in the partnership which is the obligor on the first mortgage loan.
The first mortgage loan is secured by a shopping center in Orlando, Florida. As
a result of this acquisition, the Company, through certain of its wholly-owned
subsidiaries, owns 100% of the partnership interests in the partnership which
owns the real estate ("REO") and is consolidating its accounts as of October 1,
2001. At the date of acquisition, the Company adjusted the book values of the
assets acquired and the assumed mortgage payable to fair value. The discount on
the debt of $1.7 million will be amortized into interest expense over the life
of the mortgage, or approximately 6.5 years. During the period October 1 through
December 31, 2001, the Company recognized a net loss of approximately $266,000
from the operations of REO, which includes approximately $166,000 of interest
expense. The remainder of the net loss of approximately $100,000 is included in
other income, net, in the consolidated statement of income. The property is also
projected to have a net loss of approximately $0.9 million in 2002, which will
be included in the Company's consolidated statement of income. The Company hopes
to reposition and stabilize this property and then sell it when the Company
believes that it can sell it at a price that more accurately reflects its value,
although there can be no assurance the Company will be able to do so. Currently
the Company expects that it will hold the property for more than one year.
Net (Losses) Gains on Mortgage Security and Originated Loan Dispositions
During 2001, net losses on mortgage security dispositions were
approximately $(42,000) as a result of nine prepayments and two assignments to
HUD of mortgage securities held by certain of CRIIMI MAE's subsidiaries, or
approximately 9% of its related portfolio. There were no gains or losses on
originated loan dispositions in 2001
since the Company's originated loans were sold in 2000. During 2000, net
gains on mortgage security and originated loan dispositions were approximately
$524,000, which was comprised of net gains on mortgage security dispositions of
approximately $280,000 and net gains on originated loan dispositions of
$244,000. During 2000, there were six prepayments of mortgage securities and two
prepayments of originated loans. 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.
Impairment on CMBS
As of September 30, 2001, the Company revised its overall expected loss
estimate related to its CMBS portfolio from $298 million to $307 million. As of
December 31, 2001, the Company again revised its overall expected loss estimate
related to its CMBS portfolio from $307 million to $335 million over the life of
the CMBS. These revisions to loss estimates were primarily the result of the
continued slowing U.S. economy and recession, which were exacerbated by the
terrorist attacks on September 11, 2001 and subsequent terrorist actions and
threats. As previously discussed, principally as a result of the slowing economy
and terrorist actions and threats, the underlying mortgage loans have had a
greater than previously anticipated number of monetary defaults. Additionally,
recent appraisal amounts on properties underlying certain defaulted loans have
been significantly lower than previously anticipated, thereby increasing the
estimated principal loss on the commercial loans. At February 28, 2002, and
December 31, 2001, $902 million and $792 million, respectively, or 4.8% and
4.1%, respectively, in mortgage loans underlying the Company's CMBS portfolio
were in default. As of December 31, 2000, $311 million, or 1.5%, in mortgage
loans underlying the Company's CMBS portfolio were in default. As the Company
determined that there had been an adverse change in expected future cash flows,
the Company believed certain of the CMBS had been impaired under EITF 99-20 and
Statement of Financial Accounting Standard ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," ("SFAS 115") as of September
30, 2001 and December 31, 2001. As the fair value of the impaired CMBS was
approximately $3.9 million and $30.8 million below the amortized cost as of
September 30, 2001 and December 31, 2001, respectively, the Company recorded
other than temporary, non-cash impairment charges through the income statement
of these amounts during the third and fourth quarters of 2001 (see also Summary
of Subordinated CMBS, which follows). The aggregate non-cash accounting
impairment charges of $34.7 million in 2001 compare to a non-cash impairment
charge of $143.5 million in the fourth quarter of 2000 related to the Company's
CMBS portfolio.
These impairment charges do not reflect actual cash losses as of September
30, 2001 or December 31, 2001. There can be no assurance that the Company's
revised estimate of expected losses will not be exceeded as a result of
additional or continuing adverse events or circumstances, such as a continuing
economic slowdown or recession.
Hedging Loss and Cumulative Effect of Adoption of FAS 133
During the year ended December 31, 2001, the Company recognized a
mark-to-market loss through earnings of approximately $1.1 million on its
interest rate cap and a $135,000 loss through earnings due to the adoption of
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities"
("FAS 133"). See Note 3 of the Notes to Consolidated Financial Statements for
further discussion of FAS 133. The fair value of the interest rate cap has
decreased significantly due to a decline in interest rates since the cap was
purchased in April 2001. The cap is set at a one-month London Interbank Offered
Rate ("LIBOR") rate of 5.25%. As of December 31, 2001, the one-month LIBOR rate
was 1.87%.
Litigation Expense
During 2000, the Company recorded a $2.5 million expense based on the
settlement of the Capital Company of America, LLC ("CCA") Chapter 11 claim
related to a letter of intent in 1998 for the purchase of subordinated CMBS. No
such expense was recorded during 2001.
Reorganization Items
During 2001 and 2000, the Company recorded reorganization items due to the
Chapter 11 filings of CRIIMI MAE, CM Management and Holdings II, as follows:
Reorganization Items 2001 2000
-------------------- ----------------- -------------------
Short-term interest income $ 2,491,311 $ 6,850,362
Professional fees (3,870,185) (9,317,772)
Employee Retention Program -- (851,948)
Other (800,875) (1,136,319)
Excise tax accrued -- (495,000)
----------------- -------------------
Subtotal (2,179,749) (4,950,677)
Impairment on CMBS regarding Reorganization (2) -- (15,832,817)
Net recovery (loss) on real estate owned (1) 366,529 (924,283)
Net gain on sale of CMBS -- 1,481,029
Loss on originated loans -- (45,845,712)
---------------- -------------------
Total Reorganization Expense, net $ (1,813,220) $ (66,072,460)
================ ===================
(1) The Company recognized impairment on its investment in real estate
owned in 2000. This asset was sold in July 2000.
(2) The Company recognized impairment on the CMBS subject to the sales of
select CMBS (the "CMBS Sale") in 2000. The final bonds subject to the CMBS Sale
were sold in November 2000.
Emergence Financing Origination Fee
In connection with the emergence from Chapter 11, in April 2001 the Company
paid a one-time, emergence financing origination fee of approximately $3.9
million related to its new Variable-Rate Secured Borrowing. GAAP requires such
fee to be expensed immediately.
Cumulative effect of change in accounting principle
As discussed below, the cumulative effect of the change in accounting
principle of $2.0 million related to servicing revenue is reflected as of
January 1, 2001 as an adjustment to net income and therefore is reflected in the
year ended December 31, 2001 net income.
As of July 1, 2001, CMSLP changed its accounting policy related to the
recognition of special servicing fee revenue. Special servicing fees are paid to
CMSLP when mortgage loans collateralizing CMBS owned by the Company are in
default. Typically, CMSLP is paid 25 basis points of the unpaid principal
balance of the defaulted mortgage loans for as long as the loans are in default.
The fees are paid to compensate the special servicer for managing and resolving
the defaulted loan. Historically, CMSLP had deferred special servicing fee
revenue and recorded that revenue into earnings using the method consistent with
the Company's policy of recognizing interest income over the life of the CMBS
owned by CRIIMI MAE on the level yield basis. CMSLP is now recording these
special servicing fees in earnings on a current basis. This change was made to
better match revenues and expenses related to the actual special servicing of
the defaulted loans. The special servicing fees are paid on a current basis by
the Trusts holding the mortgage loans and those payments directly reduce the
cashflow paid on the Company's CMBS. Therefore, the special servicing fees paid
are built into the GAAP yields the Company uses to record interest income on its
CMBS. CMSLP has changed its accounting policy to recognize the special servicing
fees in earnings on a current basis as the Company believes this policy better
matches the special servicing fees it earns with the direct costs expended for
performing its special servicing obligations. The CMBS and special servicing
contracts are separate legal instruments or contracts.
The Company is required to reflect this change in accounting principle as a
cumulative catch-up as of January 1, 2001. As of January 1, 2001 CMSLP had
approximately $2.0 million in deferred revenue related to the special servicing
fee revenue. As a result, this amount was recorded in income and is reflected as
a cumulative change in accounting principle for the year ended December 31,
2001. The results of operations for the year ended
December 31, 2001 reflect the recognition of special servicing fee revenue
on a current basis. As previously discussed, prior to July 1, 2001, CMSLP was
accounted for using the equity method and, as a result, the impact of the new
accounting principle (except for the cumulative catch-up) is reflected in equity
in (losses) income from investments for the six months ended June 30, 2001 and
on a consolidated basis for the six months ended December 31, 2001. The proforma
net income disclosures on the income statement and proforma EPS disclosures in
Note 12 of the Notes to Consolidated Financial Statements related to this change
in accounting principle reflect what the Company's net income and EPS would have
been had this new accounting principle been applied to those periods presented.
Net income would have been $2.8 million less for the year ended December 31,
2001 had this new accounting principle not been adopted.
REIT Status/Net Operating Loss for Tax Purposes
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 2001,
although there can be no assurance. There can also be no assurance that CRIIMI
MAE will maintain its REIT status for 2002 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.
The Company and two of its subsidiaries incorporated in 2001 have jointly
elected to treat such two subsidiaries as TRSs effective January 1, 2001. The
TRSs allow the Company to earn non-qualifying REIT income while maintaining REIT
status. For tax and other reasons, a reorganization of CMSLP was effected such
that the partnership interests of CMSLP are held by these two subsidiaries.
The Company's 2001 and 2000 Net Operating Loss for Tax Purposes/Shareholder
Rights Plan
During 2001 and 2000, the Company traded in both short and longer duration
fixed income securities, including non-investment grade 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" to the extent owned by CRIIMI MAE Inc. or any qualified
REIT subsidiary, meaning generally any wholly-owned subsidiary that is not a
taxable REIT subsidiary), 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 include 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 in its income tax return on its Trading Assets on January 1, 2000 of
approximately $478 million (the "January 2000 Loss"). This loss is not recorded
on the GAAP financial statements. Such loss is expected to be recognized evenly
for tax purposes 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. Assets transferred to CBO REIT, Inc., a REIT
subsidiary of the Company formed as part of the Company's Reorganization Plan,
are no longer required to be marked-to-market on a tax basis since CBO REIT is
not a trader in securities for tax purposes. As a result, the mark-to-market of
such assets ceased as of April 17, 2001.
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 is generally required to
distribute 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 because of a net operating loss or
loss carryforward, 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.
The Company generated a net operating loss for tax purposes of
approximately $(96.9) million and $(49.6) million for the year ended December
31, 2001 and 2000, respectively. As such, the Company's taxable income was
reduced to zero and, accordingly, the Company's REIT distribution requirements
were eliminated for 2001 and 2000. As of December 31, 2001 the Company's
accumulated and unused net operating loss ("NOL") was $(146.5) million, as
further discussed below.
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 because CRIIMI MAE is a REIT. If a Trading Asset 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. It is possible that the amount of any under-distribution for a
taxable year could be corrected with a "deficiency dividend" as defined in
Section 860 of the Internal Revenue Code, however, interest may also be due to
the Internal Revenue Service on the amount of this under-distribution.
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 obligations under the
operative documents evidencing the New Debt.
The Company's future use of NOLs for tax purposes could be substantially
limited in the event of an "ownership change" as defined under Section 382 of
the Internal Revenue Code. As a result of these limitations imposed by Section
382 of the Internal Revenue Code, in the event of an ownership change, the
Company's ability to use its NOL carryforwards in future years may be limited
and, to the extent the NOL carryforwards cannot be fully utilized under these
limitations within the carryforward periods, the NOL carry forwards would expire
unutilized. Accordingly, after any ownership change, the Company's ability to
use its NOLs to reduce or offset taxable income would be substantially limited
or not available under Section 382. In general, a company reaches the "ownership
change" threshold if the "5% shareholders" increase their aggregate ownership
interest in the company over a three-year testing period by more than 50
percentage points. The ownership interest is measured in terms of total market
value of the company's capital stock.
The Company is not aware of any acquisition of shares of the Company's
capital stock that has created an "ownership change" under Section 382, but
believes that it may be close to approaching the 50% threshold for an "ownership
change" under Section 382. The Company is concerned that future acquisitions of
common stock, preferred stock or a combination of both by an existing "5%
shareholder" or a new "5% shareholder" could cause an
"ownership change." If an "ownership change" occurs, the Company's ability
to use its NOLs to reduce or offset its taxable income would be substantially
limited or not available under Section 382 of the Internal Revenue Code on a
prospective basis. This would mean the Company would have REIT distribution
requirements based upon its taxable income. As stated above, any such
distributions are expected to be in the form of non-cash taxable dividends.
If an "ownership change" occurs under Section 382 of the Internal Revenue
Code, the Company's prospective use of its accumulated NOL and the remaining
January 2000 Loss of a combined total amount of approximately $(385) million as
of December 31, 2001 will be limited. If the Company had lost its ability to use
its accumulated NOL as of January 1, 2001, the Company's taxable income would
have been $22.6 million. This increase in taxable income would have created a
100 percent distribution requirement. If the Company was unable to distribute
the taxable income to its shareholders, it would have been subject to corporate
Federal and state income taxes of up to approximately $9.3 million in 2001.
Currently, the Company does not know of any acquisition of shares of its
capital stock that would create an "ownership change" under Section 382 of the
Internal Revenue Code. The Company has adopted a shareholder rights plan to
deter an ownership change within the meaning of Section 382 of the Internal
Revenue Code, however there can be no assurance that an ownership change will
not occur. See "MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS" for a discussion of a recently adopted shareholder rights plan.
Net Operating Loss for Tax Purposes. CRIIMI MAE generated a net operating
loss for tax purposes of approximately $(96.9) million for the year ended
December 31, 2001 compared to a net operating loss of approximately $(49.6)
million in 2000.
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 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.
A summary of the Company's 2001 and 2000 net operating losses for tax
purposes is as follows:
2001 2000
---- ----
January 2000 Loss $478.2 million $478.2 million
LESS: Portion recognized in 2000 (119.6) million (119.6) million
LESS: Portion recognized in 2001 (119.5) million --
------------------ -----------------
Balance Remaining of January 2000 Loss to be Recognized in Future Periods $239.1 million $358.6 million
================== =================
Taxable Income for the year before recognition of January 2000 Loss (1) $ 22.7 million $ 20.1 million
LESS: January 2000 loss recognized (119.5) million (119.6) million
PLUS: Mark-to-market unrealized (loss) gain on Trading Assets (0.1) million 49.9 million
------------------ -----------------
Net Operating Loss for the year ended December 31 $( 96.9) million $ (49.6) million
================== =================
Accumulated Net Operating Loss through December 31 $(146.5) million $ (49.6) million
Net Operating Loss Utilization 0 million 0 million
------------------ -----------------
Net Operating Loss Carried Forward for Use in Future Periods $(146.5) million $ (49.6) million
================== =================
(1) Taxable income for the year ended December 31, 2001 includes an
approximate $8.6 million loss on certain Trading Assets in connection with the
transfer of certain Trading Assets on April 17, 2001 to CBO REIT, Inc. following
the reorganization effected to facilitate the collateral structure for the New
Debt. Assets transferred to CBO REIT, Inc. are no longer required to be
marked-to-market on a tax basis.
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 $(25.02) per share for 2000 from $(24.51) per share
for 1999.
The primary factors resulting in the net loss for the year ended December
31, 2000 were the recognition of a non-cash 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.
The weighted average yield used to recognize income from April 1, 2000 to
December 31, 2000 was 11.1% and 10.1% as of December 31, 1999. 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
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. These revised yields
were 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.
The U.S. economy began to slow during the later part of 2000. Accordingly,
the Company began to see the impact of the slowing U.S. economy through
increased defaults in its loan portfolio. This trend 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 were in special
servicing. This compared 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. Primarily 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 did 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.
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
(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.
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 in 2000 as compared to 1999, along
with a reduction in certain professional costs.
Equity in (Losses) Earnings from Investments
Equity in (losses) earnings from investments reflects the activity of
certain 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 (losses)
earnings 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 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.
Net Gains on Mortgage Security and Originated Loan 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.
During 2000, gains on originated loan dispositions were approximately
$244,000, as a result of two prepayments in the originated loan portfolio. As
previously stated, the Company sold all of its interest in the originated loans
during late 2000. In 1999, there were five prepayments that resulted in gains on
originated loan dispositions of approximately $403,000.
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, over the life of the investment. In addition, the Company
expected such revised losses to occur sooner than originally expected because of
the slowing U.S. economy. This revised loss estimate was a result of an increase
in the number of loans that were placed in special
servicing due primarily to loan defaults. As of December 31, 2000, $310.6
million of mortgage loans underlying the Company's CMBS portfolio were 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 2.20% of the
underlying 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 expected that aggregate losses on the underlying mortgage loans would be
approximately $3 million and $21 million in excess of that anticipated when it
revised its yields as of April 1, 2000. As the Company had determined that the
current estimate of expected credit losses exceeded credit losses as previously
projected, the Company believed its CMBS portfolio had been impaired under SFAS
115. As the fair value of the CMBS was $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.
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.
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:
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)
Excise tax accrued (495,000) (1,105,000)
------------------- -----------------
Subtotal (4,950,677) (22,003,128)
Impairment on CMBS regarding Reorganization (2) (15,832,817) (156,896,831)
Net loss on real estate owned (1) (924,283) --
Net gain on sale of CMBS 1,481,029 --
Loss on originated loans (45,845,712) --
------------------ -----------------
Total Reorganization Expense, net $ (66,072,460) $(178,899,959)
================== =================
(1) The Company recognized impairment on its investment in real estate
owned in 2000. This asset was sold in July 2000.
(2) 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.
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.
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 previously discussed, 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.
Net Operating Loss for Tax Purposes-2000 versus 1999
CRIIMI MAE realized a net operating loss for tax purposes of approximately
$(49.6) million for the year ended December 31, 2000 as compared to net income
of approximately $31.7 million in 1999. See also "REIT Status/Net Operating Loss
for Tax Purposes."
Cash Flow
2001 versus 2000
Net cash provided by operating activities increased for 2001 as compared to
2000. The increase was primarily due to a decrease in restricted cash and cash
equivalents and a decrease in receivables and other assets, partially offset by
a decrease in payables and accrued expenses. Receivables decreased primarily as
a result of the receipt in January 2001 of funds withheld related to the
Company's interest in CMO-IV. The decrease in restricted cash and cash
equivalents and the decrease in payables and accrued expenses were primarily
caused by cash outflows on the Effective Date, including approximately $44.7
million to payoff accrued interest on debt incurred prior to the Chapter 11
filing, $3.9 million to pay an emergence financing origination fee related to a
portion of the New Debt and $7.4 million to pay accrued payables related to the
Chapter 11 filing. The foregoing payoffs of accrued interest and accrued
expenses are included within the net (decrease) increase in payables and accrued
expenses line on the consolidated statements of cash flows.
Net cash provided by investing activities decreased for 2001 as compared to
2000. The decrease was primarily attributable to net proceeds of $72.6 million
received from the sale of CMBS during 2000 as part of the Company's
Reorganization Plan, as compared to no sales of CMBS during 2001. This decrease
was partially offset by an increase in the proceeds from insured mortgage
securities dispositions during 2001 as compared to 2000.
Net cash used in financing activities increased for 2001 as compared to
2000. The increase in cash used in 2001 was primarily attributable to an outflow
of cash of approximately $127.2 million on the Effective Date, which was used to
payoff a portion of the aggregate principal relating to debt incurred prior to
the Chapter 11 filing.
Included in CRIIMI MAE's net operating cash flows for the three months
ended September 30, 2001 and three months ended December 31, 2001 (the first two
full fiscal quarters since emerging from Chapter 11) are the following items (in
millions):
Three months Three months
ended 09/30/01 ended 12/31/01
-------------- --------------
Net operating cash flows (1):
CMBS cash inflows (BB+ through unrated) (2) $ 18.7 $18.7
Other cash, net 2.2 1.8
Interest expense paid on Variable-Rate
Secured Borrowing (4.6) (3.8)
Interest expense paid on Series A Senior Secured Notes (3.0) (3.0)
Interest expense accrued for Series B Senior Secured
Notes' semi-annual payment (2.0) (2.1)
General and administrative expenses (2.8) (3.0)
---------- --------
Net operating cash flows during third and fourth
quarters 2001 $ 8.5 $ 8.6
========== ========
Principal payments on New Debt:
Variable-Rate Secured Borrowing $ 6.8 $ 6.8 (3)
Series A Senior Secured Notes 1.7 1.8
----------- ---------
Total principal payments on New Debt during
third and fourth quarters 2001 $ 8.5 $ 8.6
=========== ========
REO cash inflow (outflow), net $ -- $ (0.2) (4)
=========== ========
(1) Virtually all cash flows relating to existing assets are, and are
currently expected to be, used to satisfy principal, interest and fee
obligations under the New Debt, and to pay general and administrative and other
operating expenses of the Company. Therefore, although the Company continues to
pay down its New Debt obligations, the utilization of cash flows for debt
service and operating expenses currently results in virtually no remaining net
cash flow available for other activities.
(2) The CMBS cash inflows include one-time recoveries of prior interest
shortfalls related to certain underlying defaulted mortgage loans. The Company
believes total CMBS cash inflows will decline in 2002 due primarily to the
increase in appraisal reduction amounts on properties underlying the CMBS, and
realized losses on CMBS.
(3) For the three months ended December 31, 2001, the Company paid $6.8
million in principal payments on the Variable-Rate Secured Borrowing, which
is in excess of the minimum principal requirement of $2.7 million based
upon a 15-year amortization schedule for the same three month period.
(4) The Company expects to pay approximately $1.1 million in 2002 to
service the mortgage debt on its REO and to fund capital improvements, because
the REO is not projected to generate sufficient operating income in 2002 to
service its mortgage debt or fund its capital improvements.
2000 versus 1999
Net cash provided by operating activities decreased in 2000 as compared to
1999. The decrease was primarily due to an increase in restricted cash as
compared to 1999, representing cash that was 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 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.
Financial Condition, Liquidity and Capital Resources
Limited Summary of Reorganization Plan Including New Debt
The Reorganization Plan provided for 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
of which approximately $342.3 million of such proceeds was used to pay related
borrowings and approximately $76.0 million of such proceeds was used on the
Effective Date to help fund the Reorganization Plan. Included in the balance of
the Recapitalization Financing was approximately $262.4 million provided by
affiliates of Merrill Lynch Mortgage Capital, Inc. (such affiliate referred to
as "Merrill Lynch" or "Merrill") and German American Capital Corporation (such
affiliate referred to as "GACC") through a new, variable-rate secured financing
facility (in the form of a repurchase transaction) (the "Variable-Rate Secured
Borrowing"), and approximately $166.8 million provided through two new series of
secured notes issued to certain of the Company's unsecured creditors
(collectively, the "New Debt"). Effective as of June 5, 2001, all rights and
obligations of Merrill and GACC under the operative agreements evidencing the
Variable-Rate Secured Borrowing were assigned by Merrill and GACC to ORIX Real
Estate Capital Markets, LLC, presently known as ORIX Capital Markets, LLC
("ORIX"). ORIX also owns a significant aggregate principal amount of each of the
respective two new series of secured notes referenced above as part of the New
Debt. ORIX is an affiliate of a publicly-traded company and is an investor in
CMBS and servicer of commercial real estate loans underlying CMBS.
Substantially all cash flows relating to existing assets are, and are
currently expected to be, used to satisfy principal, interest and fee
obligations under the New Debt. The approximate $262.4 million (original
principal amount) Variable-Rate Secured Borrowing provides for (i) interest at a
rate of one month London Interbank Offered Rate ("LIBOR") plus 3.25% payable
monthly, (ii) principal repayment/amortization obligations, including, without
limitation, a requirement to pay down an aggregate $50 million in principal by
April 16, 2003 (the failure to pay down this amount will not constitute an event
of default but will result in the continuation or reinstatement of certain
restrictions and additional restrictions), (iii) extension fees of 1.5% of the
unpaid principal balance payable at the end of 24, 30, 36 and 42 months after
the Effective Date and (iv) maturity on April 16, 2005 assuming the Company
exercises its options to extend the maturity date of the debt. The approximate
$166.8 million fixed-rate secured financing was effected through the issuance of
two series of secured notes under two separate indentures. The Series A Senior
Secured Notes, representing an aggregate original principal amount of $105
million, provides for (i) interest at a rate of 11.75% per annum payable
monthly, (ii) principal repayment/amortization obligations, including, without
limitation, a principal payment obligation of $5 million due April 15, 2003 (the
failure to make this payment will not constitute an event of default but will
result in a 200 basis point increase in the interest rate on the unpaid
principal amount if certain miscellaneous collateral is not sold or otherwise
disposed of), (iii) extension fees of 1.5% of the unpaid principal balance
payable at the end of 48, 54 and 60 months after the Effective Date and (iv)
maturity on April 15, 2006. The Series B Senior Secured Notes, representing an
aggregate original principal amount of approximately $61.8 million, provides for
(i) interest at a rate of 13% per annum payable semi-annually with additional
interest at the rate of 7% per annum accreting over the debt term, (ii)
extension fees of 1.5% of the unpaid principal balance payable at the end of 48,
54 and 60 months after the Effective Date (with the payment 60 months after the
Effective Date also including an amount based on the unpaid principal balance 66
months after the Effective Date) and (iii) maturity on April 15, 2007. The New
Debt described above is secured directly or indirectly by substantially all of
the Company's assets. There are 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. See Note 7 to Notes to Consolidated Financial
Statements for additional information regarding the New Debt. Additionally,
reference is made to the New Debt operative documents filed as exhibits to a
Current Report on Form 8-K in June 2001, for a more detailed description of the
New Debt including payment terms, restrictive covenants, events of default and
collateral.
The Company is exploring possible ways of achieving improved financial
flexibility, such as refinancing all or a substantial portion of the New Debt;
however, there can be no assurance that the Company will be able to refinance
such New Debt or otherwise improve its financial flexibility.
The Company's litigation with First Union National Bank ("First Union") was
not settled or resolved prior to the Effective Date; and therefore, the
classification and allowance of First Union's claim under the Reorganization
Plan was not determined on such date. On March 5, 2002, the Bankruptcy Court
entered an order approving a settlement agreement among the Company and First
Union. See "LEGAL PROCEEDINGS" and Note 15 to Notes to Consolidated Financial
Statements for further information regarding the settlement of the First Union
litigation.
Under the Reorganization Plan, the holders of the Company's equity retained
their stock. The terms of the New Debt significantly restrict the amount of cash
dividends that can be paid to shareholders. One such restriction provides that
any cash dividends required to maintain REIT status (assuming the Company has
the cash to make such distributions and that it is permitted to make such
distributions under the terms of the New Debt) would be paid first to holders of
certain of the New Debt who convert their secured 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. Another such restriction provides that if realized losses (as defined
in the New Debt documents, and including appraisal reduction amounts on
properties underlying the CMBS collateral) on CMBS exceed certain thresholds,
then the Company is prohibited from paying cash dividends or making other cash
distributions or payments to its shareholders, except as required to maintain
REIT status, with any such cash distributions to be paid in accordance with the
terms set forth in the preceding sentence. As of December 31, 2001, the Company
had exceeded the loss threshold amounts under the applicable operative documents
evidencing the New Debt. Exceeding such loss threshold amounts has also resulted
in restrictions on the acquisition of CMBS rated "B" or lower or unrated.
Additional restrictions include restrictions on the use of proceeds from equity
investments in the Company and specified cash flows from certain assets acquired
after the Effective Date. The restrictions implemented as a result of exceeding
the loss threshold amounts cease to apply after realized losses no longer exceed
the loss threshold amounts under the applicable operative documents evidencing
the New Debt. The Reorganization Plan also provided for certain amendments to
the Company's articles of incorporation, 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 became effective on the Effective Date.
On March 21, 2002, the Company redeemed all 173,000 outstanding shares of
its Series E Preferred Stock at the stated redemption price of $106 per share
plus accrued and unpaid dividends through and including the date of redemption.
The total redemption price was $18,734,107 ($396,107 of which represented
accrued and unpaid dividends). The $1.0 million difference between the aggregate
liquidation value and the redemption price will be reflected as a dividend on
preferred stock in the first quarter of 2002.
Although there can be no assurance, the Company believes that it will have
sufficient cash resources to pay interest, scheduled principal and any other
required payments on the New Debt through the remainder of 2002. The Company's
ability to meet its debt service obligations through the remainder of 2002 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, covenants and
restrictions under the operative documents evidencing the Company's New Debt and
any debt incurred to refinance the New Debt, 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, significantly reduces income available
for other activities, restricts the Company's ability to react quickly to
changes in its business, limits its ability to hedge its assets and
liabilities, and makes the Company more vulnerable to economic downturns.
Additionally, there can be no assurance that the Company will be able to
refinance all or any portion of the New Debt at or prior to maturity on terms
favorable to it, or on any terms at all.
The Company's ability to resume the acquisition of Subordinated CMBS, as
well as its securitization programs (if it determines to do so) depends, among
other things, on its ability to engage in such activities under the terms and
conditions of the operative documents evidencing the New Debt and/or any debt
incurred to refinance all or any portion of the New Debt and its ability to
access additional capital (including for the purpose of refinancing all or any
portion of the New Debt). 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, the
effects of terrorism, general economic conditions, perceptions in the capital
markets of the Company's business, covenants and restrictions under the
operative documents evidencing the Company's New Debt, results of operations,
leverage, financial condition, and business prospects. The Company can give no
assurance as to whether it will be able to resume its prior activities or obtain
additional capital or the terms of any such capital. CRIIMI MAE Inc. is
currently prohibited from acquiring CMBS rated "B" or lower or unrated under
certain documents evidencing the New Debt.
Summary of Cash Position and Shareholders' Equity
As of December 31, 2001, CRIIMI MAE's restricted and unrestricted cash and
cash equivalents aggregated approximately $49.0 million, including $6.8 million
escrowed in connection with the First Union litigation. Additionally, CMSLP's
cash and cash equivalents approximated $6.5 million as of December 31, 2001.
As previously discussed, in March 2002, the Company redeemed the Series E
Preferred Stock for a total redemption price of approximately $18.7 million.
After giving effect to the settlement of the First Union litigation and the
redemption of Series E Preferred Stock, CRIIMI MAE's cash and cash equivalents
aggregated approximately $24.6 million, including approximately $7.6 million of
restricted cash, as of March 21, 2002. In addition, CMSLP's cash and cash
equivalents approximated $15.5 million as of March 21, 2002.
As of December 31, 2001 and 2000, shareholders' equity was approximately
$261.0 million or $11.54 per diluted share. After giving effect to the First
Union settlement and the redemption of the Series E Preferred Stock, the
Company's pro forma book value per diluted share as of December 31, 2001 would
have been $14.18.
Summary of Subordinated CMBS
As of December 31, 2001, the Company owned, for purposes of GAAP, CMBS
rated from A to CCC and unrated with a total fair value amount of approximately
$824 million (representing approximately 63% of the Company's total consolidated
assets), an aggregate amortized cost of approximately $822 million, and an
aggregate face amount of approximately $1.6 billion. Such CMBS represent
investments in CBO-1, CBO-2 and Nomura. The December 31, 2001 total fair value
includes approximately 33% of the Company's CMBS which are rated BB+, BB, or
BB-, 23% which are rated B+, B, B- or CCC and 8% which are unrated. The
remaining approximately 36% represents investment grade securities that the
Company reflects on its balance sheet as a result of CBO-2. The weighted average
interest rate of these CMBS as of December 31, 2001 was 6.3% and the weighted
average life was 13 years.
The aggregate investment by the rating of the Subordinated CMBS is as
follows:
Weighted Discount Rate or Amortized Cost Amortized Cost
Face Amount as of Average Pass- Weighted Fair Value as of Range of Discount as of 12/31/01 as of 12/31/00
Security 12/31/01 (in Through Rate Average Life 12/31/01 (in Rated Used to (in millions) (in millions)
Rating millions) 12/31/01 (1) millions) Calculate Fair Value (3) (4)
- --------- ------------------ ------------- ------------ ---------------- -------------------- --------------- --------------
A+ (2)(7) $ 62.6 7.0% 4 years $ 61.8 7.3% $ 58.7 $ 58.0
BBB+ (2)(7) 150.6 7.0% 10 years 135.6 8.6% 131.1 130.1
BBB (2)(7) 115.2 7.0% 10 years 99.1 9.2% 94.2 93.2
BB+ 319.0 7.0% 11 years 209.8 12.8%-13.1% 219.0 215.5
BB 70.9 7.0% 12 years 44.2 13.6% 46.0 45.4
BB- 35.5 7.0% 12 years 20.5 14.6% 20.5 21.3
B+ 88.6 7.0% 13 years 45.2 16.4% 45.2 48.6
B 177.2 7.0% 14 years 83.7 17.1%-17.4% 83.7 87.9
B- 118.3 7.1% 15 years 48.0 19.7%-20.1% 48.1 51.3
CCC 70.9 7.0% 16 years 13.1 40.0% 13.1 17.0
Unrated/Issuer's 362.8 4.0% 18 years 63.2 35.0%-53.7% 62.8 82.2
Equity
---------- -------- -------- ---------
Total (5) $1,571.6 6.3% 13 years $ 824.2 (6) $822.4 (5) $ 850.5
========== ======== ======== =========
(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 a resecuritization of CMBS effected by the Company
in 1998 ("CBO-2"), $62.6 million (originally A rated, currently A+ rated) and
$60.0 million (originally BBB rated, currently BBB+ rated) face amount of
investment grade securities were sold with call options and $345 million
(originally A rated, currently 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 (originally BBB rated, currently BBB+ rated) and $115.2
million (originally BBB- rated, currently 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 A+, BBB+ and BBB 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) Amortized cost reflects approximately $30.8 million of impairment
charges related to certain CMBS (the CBO-1 B- and unrated bonds and the CBO-2
BB- through unrated bonds) which were recognized in the fourth quarter of 2001
and approximately $3.9 million of impairment charges related to certain CMBS
(the CBO-1 B- and unrated bonds and the Nomura unrated bond) which were
recognized in the third quarter of 2001, in addition to the losses discussed in
(4) below. These impairment charges are discussed further in "Results of
Operations".
(4) Amortized cost reflects $143.5 million of non-cash impairment charges
related to the retained CMBS (excluding the A+ and BBB+ rated tranches) which
were 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
expected life of the investment. In addition, the Company expected such revised
losses to occur sooner than originally expected because of the slowing U.S.
economy and recession. This revised loss estimate was a result of an increase in
the number of loans that were placed in special servicing due primarily to
monetary loan defaults. As of December 31, 2000, $310.6 million in mortgage
loans underlying the Company's CMBS portfolio were in special servicing. As of
March 31, 2001, this amount had grown to $443.5 million, or 2.2% of the mortgage
loans underlying the CMBS portfolio, an increase from 1.3% when the Company
revised its yields as of April 1, 2000.
(5) See Notes 1 and 9 to Notes to Consolidated Financial Statements for
information regarding the Subordinated CMBS for tax purposes.
(6) As of December 31, 2001, the aggregate fair values of the CBO-1, CBO-2
and Nomura bonds were approximately $37.7 million, $777.8 million and $8.7
million, respectively.
(7) In June 2001, Standard & Poor's upgraded its ratings on the following
CMBS: The Company's CBO-2 CMBS with original ratings of A, BBB and BBB- were
upgraded to A+, BBB+ and BBB, respectively.
Mortgage Loan Pool
CRIIMI MAE, through CMSLP, performs servicing functions on total commercial
mortgage loans of $19.3 billion and $20.2 billion as of December 31, 2001 and
2000, respectively. The mortgage loans underlying CRIIMI MAE's Subordinated CMBS
portfolio were secured by properties of the types and in the geographic
locations identified below:
12/31/01 12/31/00 12/31/01 12/31/00
Property Type Percentage(i) Percentage(i) Geographic Location (ii) Percentage(i) Percentage(i)
------------- ------------- ------------- ------------------------ ------------- -------------
Retail........... 30% 30% California.............. 16% 17%
Multifamily...... 29% 30% Texas................... 13% 13%
Hotel............ 14% 14% Florida................. 8% 8%
Office........... 13% 13% New York................ 5% 5%
Other (iv)....... 14% 13% Pennsylvania............ 5% 5%
---- ---- Other(iii).............. 53% 52%
Total........ 100% 100% ---- ----
==== ==== Total................ 100% 100%
==== ====
(i) Based on a percentage of the total unpaid principal balance of the
underlying loans.
(ii) No significant concentration by region.
(iii) No other individual state makes up more than 5% of the total.
(iv) The Company's ownership interest in one of the 20 CMBS transactions
underlying CBO-2 includes subordinated CMBS in which the Company's exposure to
losses arising from certain healthcare and senior housing mortgage loans is
limited by other subordinated CMBS (referred to herein as the "Subordinated
Healthcare/Senior-Housing CMBS"). The Subordinated Healthcare/Senior-Housing
CMBS are not owned by and are subordinate to CRIIMI MAE's CMBS. As a result,
CRIIMI MAE's investment in such underlying CMBS will only be affected if
interest shortfalls and/or realized losses on such healthcare and senior housing
mortgage loans are in excess of the Subordinated Healthcare/Senior-Housing CMBS.
As of February 28, 2002, the Company reviewed the loans currently under
surveillance by the healthcare and senior housing mortgage loans servicer. Based
on its review, the Company does not believe that the aggregate remaining
shortfalls and/or realized losses on such healthcare and senior housing mortgage
loans currently in special servicing is greater than the current outstanding
Subordinated Healthcare/Senior-Housing CMBS. As a result, the Company's current
estimate of future credit losses as of December 31, 2001 does not include any
provision for shortfalls and/or realized losses arising from the healthcare and
senior housing mortgage loans in this CMBS transaction. It should be noted that
changes in the future performance of the healthcare and senior housing mortgage
loans that result in greater shortfalls and/or losses may result in future
losses and/or possible impairment to CRIIMI MAE's CMBS.
Specially Serviced Mortgage Loans
CMSLP performs special servicing services on the loans underlying CRIIMI
MAE's Subordinated CMBS portfolio. A special servicer typically provides asset
management and resolution services with respect to nonperforming or
underperforming loans within a pool of mortgage loans. When serving as special
servicer of a mortgage loan pool, CMSLP has the authority, subject to certain
restrictions in the CMBS pool documents, 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 first loss unrated or lowest rated bond of all
but one CMBS, CMSLP has an incentive to quickly resolve any loan workouts. As of
December 31, 2001 and 2000, specially serviced mortgage loans included in the
commercial mortgage loans described above are as follows:
12/31/01 12/31/00
-------- --------
Specially serviced loans due to monetary default (a) $701.7 million $259.1 million
Specially serviced loans due to covenant default/other 90.0 million 51.5 million
--------------- ---------------
Total specially serviced loans (b) $791.7 million $310.6 million
=============== ===============
Percentage of total mortgage loans (b) 4.1% 1.5%
=============== ===============
(a) Includes $94.5 million and $48.3 million, respectively, of real estate
owned by underlying trusts.
(b) As of February 28, 2002, total specially serviced loans were
approximately $902 million, or 4.8% of the total mortgage loans (as discussed
further below).
The specially serviced mortgage loans as of December 31, 2001 were secured
by properties of the types and located in the states identified below:
Property Type $ (in millions) Percentage Geographic Location $ (in millions) Percentage
------------- --------------- ---------- ------------------- --------------- ----------
Hotel.............. $ 407.8 51% Florida.............. $ 109.8 14%
Retail............. 241.0 30% Texas................ 103.6 13%
Multifamily........ 44.9 6% Oregon............... 94.8 12%
Office............. 44.7 6% Georgia.............. 41.4 5%
Healthcare......... 31.7 4% California........... 41.2 5%
Industrial......... 14.1 2% New York............. 40.4 5%
Other.............. 7.5 1% Other................ 360.5 46%
------ ---- ------- -------
Total.......... $791.7 100% Total............. $ 791.7 100%
====== ==== ======= =======
As reflected above, as of December 31, 2001, approximately $407.8 million,
or 51%, of the specially serviced mortgage loans represent mortgages on hotel
properties. The hotel properties are geographically diverse, with a mix of hotel
property types and franchise affiliations. Of the mortgage loans underlying the
Company's CMBS, there are loans representing a total outstanding principal
amount of $1.3 billion secured by limited service hotels, of which $278.2
million, or 21.5%, are in special servicing as of December 31, 2001. Limited
service hotels are generally hotels with room-only operations or hotels that
offer a bedroom and bathroom for the night, but limited other amenities, and are
often in the budget or economy group. Of the mortgage loans underlying the
Company's CMBS, there are loans representing a total outstanding principal
amount of $1.51 billion secured by full service hotels, of which $129.6 million,
or 8.6%, are in special servicing as of December 31, 2001. Full service hotels
are generally mid-price, upscale or luxury hotels with restaurant and lounge
facilities and other amenities.
Also, as of December 31, 2001, of the mortgage loans underlying the
Company's CMBS, there are loans representing a total outstanding principal
amount of $5.7 billion secured by retail properties, of which approximately
$241.0 million are in special servicing. The retail loans comprise approximately
30% of the specially serviced loans as of December 31, 2001. The Company is
monitoring its exposure to certain retailers that are currently in bankruptcy or
are otherwise experiencing financial difficulties.
A more detailed listing of the hotel, retail and other specially serviced
loans as of December 31, 2001 is included in Exhibit 99(o) to this Annual Report
on Form 10-K.
As of February 28, 2002, specially serviced loans totaled $902.0 million.
During the period September 30, 2001 (the date the Company last revised the loss
estimates) through February 28, 2002, there was a $292.7 million, or 48%,
increase in specially serviced loans due to additional defaults on underlying
mortgage loans secured by a variety of property types, but primarily hotel
properties. The properties that secure these loans have been adversely impacted
by a variety of factors, including the economic slowdown and recession which,
especially for hotel properties, has been exacerbated by the
terrorist attacks of September 11, 2001. Of the monetary defaults on the
mortgage loans underlying the Company's CMBS which transferred into special
servicing between September 30, 2001 and February 28, 2002, an approximate
$358.9 million, or 76%, are loans secured by hotel properties. During this same
period, approximately $132.3 million of loans in special servicing due to
monetary default and real estate owned transferred out of special servicing due
to correction, dispositions or sale, resulting in a total special servicing
portfolio of $902.0 million as of February 28, 2002, of which $834.1 million
reflect monetary defaults and real estate owned.
Of the transfers into special servicing due to monetary default from
September 30, 2001 through February 28, 2002, $255 million were comprised of six
different borrowing relationships more fully described as follows:
o 25 hotel loans totaling $98.3 million spread across three
CMBS transactions. In one of these CMBS transactions, which
contains 10 loans totaling $38.8 million, the Company holds only a
25% ownership interest in the non-rated class. The 25 loans were
transferred into special servicing due to the bankruptcy filing of
each special purpose borrowing entity and their parent company in
December 2001. The parent company was able to obtain
debtor-in-possession financing that is expected to pay
post-petition interest on $71 million of these loans through
December 2002. The remaining $27 million of loans were deemed by
the borrower to be highly leveraged, and therefore, not able to
support additional debt. Interest will not be paid current on
these loans.
o Ten loans totaling $65.0 million spread across two CMBS
transactions secured by hotel properties in the Pacific west and
northwest states. These loans are past due for the October 2001
payment. The borrower has indicated that the properties have
experienced reduced operating performance due to new competition,
the economic recession, and reduced travel resulting from the
September 11, 2001 terrorist attacks. These loans are related to
17 other loans, secured by similar properties, totaling
approximately $78 million that transferred into special servicing
in January 2001.
o Five loans totaling $46.5 million secured by hotel
properties in Florida and Texas. The loans are past due for the
September 2001 payment.
o Nine loans totaling $19.8 million secured by limited service
hotels in the midwest. The loans are past due for the December
2001 payment. The borrower cites reduced occupancy related to the
recent downturn in travel as the cause for a drop in operating
performance at the properties. CMSLP is attempting to negotiate a
workout with the borrower.
o Two loans totaling $15.6 million secured by hotels in Texas.
The loans were transferred to special servicing in December 2001
for imminent payment default. Since that time, the borrower has
made a payment and the loans are now due for the February 2002
payment.
o Eight loans totaling $10.0 million secured by free-standing
retail stores in Maryland and Virginia. Each property is occupied
by a national retailer. The loans are past due for the December
2001 payment. CMSLP has entered into a workout with the borrower
whereby rents are being deposited directly into a lockbox.
Additional payments are being collected to bring the loans current
during 2002.
For all of its existing and recent transfers to special servicing,
including these large borrower relationships, CMSLP is pursuing remedies
available to it in order to maximize the recovery of the outstanding debt.
Appraisal Reductions and Losses on CMBS
The effect of an appraisal reduction generally is that the servicer stops
advancing interest payments on the amount by which the aggregate of debt,
advances and other expenses exceeds the appraisal amount, thus reducing the cash
flows to CRIIMI MAE as the holder of the first loss unrated or lowest rated
bonds, as if such appraisal reduction was a realized loss. As an example,
assuming a weighted average coupon of 6%, a $1 million appraisal reduction would
reduce net cash flows to the Company by $60,000 on an annual basis. See also
"Cash Flow" for additional discussion of the effect of appraisal reductions on
cash flows. An appraisal reduction may result in a higher or lower realized loss
based on the ultimate disposition or work-out of the mortgage loan. 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 Total
----- ----- ------ -----
Year 1999 $ -- $ -- $ -- $ --
Year 2000 1,872,000 18,871,000 -- 20,743,000
Year 2001 15,599,000 31,962,000 874,000 48,435,000
----------- ------------ --------- ------------
Cumulative Appraisal Reductions through December 31, 2001 (a) $17,471,000 $50,833,000 $ 874,000 $69,178,000
=========== =========== ========= ============
* Not all underlying CMBS transactions require the calculation of an
appraisal reduction; however, where CMSLP obtains a third party
appraisal, it calculates one.
(a) During the period January 1, 2002 through February 28, 2002,
there were an additional $15.7 million of appraisal reductions.
The Company's unrated bonds/issuer's equity from CBO-1, CBO-2 and Nomura
are expected to experience principal write-downs. The following table summarizes
the actual realized losses on CMBS through December 31, 2001 and the expected
future losses through the life of the CMBS:
CBO 1 CBO 2 Nomura Total
----- ----- ------ -----
Year 1999 actual realized losses $ 738,000 $ -- $ -- $ 738,000
Year 2000 actual realized losses 3,201,000 1,087,000 -- 4,288,000
Year 2001 actual realized losses 545,000 8,397,000 238,000 9,180,000
------------- ----------- --------- -----------
Cumulative actual realized losses through the year 2001 4,484,000 9,484,000 238,000 14,206,000
Expected loss estimates for the year 2002 29,878,000 31,915,000 1,032,000 62,825,000
Expected loss estimates for the year 2003 18,058,000 51,619,000 1,077,000 70,754,000
Expected loss estimates for the years 2004-2006 27,676,000 94,095,000 12,896,000 134,667,000
Expected loss estimates for the year 2007-2009 5,606,000 15,508,000 7,028,000 28,142,000
Expected loss estimates for the remaining life of
investment (for the years 2010-2027) 7,386,000 12,794,000 3,904,000 24,084,000
------------- ----------- ---------- ------------
Cumulative actual and expected loss estimates through
life of CMBS $ 93,088,000 $215,415,000 $26,175,000 $334,678,000
============= ============ =========== ============
As previously discussed in "Impairment on CMBS", at September 30, 2001, the
Company revised its overall expected loss estimate related to its CMBS portfolio
from $298 million to $307 million. As of December 31, 2001, the Company further
revised its overall expected loss estimate related to its CMBS portfolio from
$307 million to $335 million, with such total losses occurring or expected to
occur over the life of the CMBS investment. In addition, the Company expects
such revised losses to generally occur sooner than previously expected. The
Company's overall expected loss estimate of $335 million through the life of its
CMBS portfolio represents the Company's estimate of total principal write-downs
to its CMBS due to realized losses related to underlying mortgage loans, and is
included in the calculation of the current weighted average anticipated yield to
maturity, as previously discussed.
As the Company had determined that there had been an adverse change in
expected future cash flows and that its current estimate of expected credit
losses exceeded credit losses as previously projected, the Company believed
certain of the CMBS had been impaired under EITF 99-20 and FAS 115 as of
September 30, 2001 and again as of December 31, 2001. As the fair value of the
impaired CMBS was approximately $3.9 million and $30.8 million below the
amortized cost basis as of September 30, 2001 and December 31, 2001,
respectively, the Company recorded other than temporary non-cash impairment
charges through the income statement of those same amounts during the third and
fourth quarters of 2001. There can be no assurance that the Company's revised
estimate of expected losses will not be exceeded as a result of additional or
continuing adverse events or circumstances, such as a continuing economic
slowdown and recession.
The anticipated yield to maturity related to the Company's Subordinated
CMBS on an aggregate pool basis was 12.4% at January 1, 2001 and 2002.
Summary of Other Assets
As of December 31, 2001 and 2000, 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, real
estate owned ("REO"), and intangible assets associated with the 1995 Merger.
The Company had $343.1 million and $385.8 million (at fair value) invested
in insured mortgage securities as of December 31, 2001 and 2000, respectively.
As of December 31, 2001, 87% were GNMA Mortgage-Backed Securities and
approximately 13% of CRIIMI MAE's investment in insured mortgage securities were
FHA-Insured Certificates. The total mortgage securities of $343.1 million
includes an unencumbered insured mortgage security with a fair value of $5.3
million. The remaining $337.8 million of mortgage securities are pledged to
secure certain collateralized mortgage obligations or securities issued in
connection with three securitization transactions aggregating $326.6 million as
of December 31, 2001. CRIIMI MAE receives the net cash flows after debt service,
generally excess interest and prepayment penalties, from the three wholly-owned
subsidiaries that pledged these insured mortgage securities to secure the
related obligations, along with the cash flow from the one unencumbered mortgage
security, which represent the total cash flows that the Company receives from
these mortgage securities. The net cash flows after debt service are applied as
principal amortization payments (in connection with cash flow from other
miscellaneous assets) on Series A Senior Secured Notes.
As of December 31, 2001 and 2000, the Company had approximately $9.3
million and $33.8 million, respectively, in investments accounted for under the
equity method of accounting. Included in equity investments as of December 31,
2001 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, and (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. The foregoing and (a) CRIIMI MAE's interest in CMSI and (b) CRIIMI
MAE's interest in CMSLP were included in equity investments as of December 31,
2000. Effective July 2001, CRIIMI MAE, which had previously accounted for CMSLP
under the equity method, acquired voting control of CMSLP and began accounting
for this subsidiary on a consolidated basis. CMSLP's assets, liabilities,
revenues and expenses are labeled as "servicing" on the Company's consolidated
financial statements (see "Summary of Servicing Other Assets and Servicing
Liabilities" below).
The Company's Other Mortgage-Backed Securities includes primarily
investment grade CMBS and investment grade residential mortgage-backed
securities. As of December 31, 2001 and 2000, the Company's Other
Mortgage-Backed Securities were approximately $8.5 million and $4.3 million,
respectively.
In October 2001, a wholly-owned subsidiary of CRIIMI MAE acquired certain
partnership interests in a partnership that was the obligor on a mezzanine loan
payable to CRIIMI MAE in exchange for curing a default on the first mortgage
loan through a cash payment of approximately $276,000. This partnership and
another wholly-owned subsidiary of CRIIMI MAE own 100% of the partnership
interests in the partnership which is the obligor on the first mortgage loan.
The first mortgage loan is secured by a shopping center in Orlando, Florida. As
a result of this acquisition, the Company, through certain of its wholly-owned
subsidiaries, owns 100% of the partnership interests and is consolidating its
accounts as of October 1, 2001. The Company accounts for these assets as REO,
and the REO will be held for investment. As of December 31, 2001, the Company
has $8.6 million in REO assets included in other assets ($8.3 million relating
to the actual building and land), $7.1 million of mortgage payable (net of
discount), and $0.1 million in liabilities included in other liabilities on its
balance sheet. The Company hopes to reposition and stabilize this property and
then sell it when the Company believes that it can sell it at a price that more
accurately reflects its value, although there can be no assurance the Company
will be able to do so. Currently, the Company expects that it will hold the
property for more than one year.
As discussed previously, $9.8 million of the Company's goodwill and
intangible assets related to the 1995 Merger were written-off on January 1, 2002
upon the adoption of FAS 142.
Summary of Servicing Other Assets and Servicing Liabilities
The Company conducts its mortgage loan servicing operations through its
subsidiary, CMSLP. As of December 31, 2001, CMSLP was performing servicing
functions on commercial mortgage loans totaling $19.3 billion. As discussed
previously in "Equity in (Losses) Income from Investments/CMSLP Operations," the
Company began accounting for CMSLP on a consolidated basis as of July 1, 2001.
At December 31, 2001, the following comprised servicing other assets and
servicing liabilities:
Acquired mortgage servicing rights $ 4,096,333 (1)
AIM Fund subadvisory contracts 1,906,542
Investment in interest-only certificates and CMBS 2,395,576
Receivables and other assets 7,612,446
Fixed assets, net 2,239,927
-------------
Total servicing other assets $18,250,824
=============
Accounts and notes payable $ 3,660,173
=============
(1) As previously discussed, CMSLP sold all of its rights and
obligations under its CMBS master and primary contracts in February
2002. CMSLP received approximately $11.3 million in cash, which
includes reimbursement of advances. The Company expects to recognize a
gain on sale of approximately $4.3 million, subject to adjustment of
post-closing contingencies in 2002. This gain will be recognized during
the second quarter of 2002. In addition, although there can be no
assurance, CMSLP may receive up to an additional $0.9 million from the
sale in the third quarter of 2002, which would be reflected as an
additional gain on sale, following the completion of a post-closing
contingency period.
Dividends
The terms of the New Debt significantly restrict the amount of cash
dividends that can be paid. Among the other factors which impact CRIIMI MAE's
dividends, if any, 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), (ii) net
operating losses, (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) changes in operating
expenses, (v) the level of income earned on CRIIMI MAE's or its subsidiaries'
insured mortgage security collateral depending on prepayments, defaults, etc.,
(vi) the rate at which cash flows from mortgage assets, mortgage dispositions,
and, to the extent applicable, distributions from its subsidiaries can be
reinvested, (vii) to the extent applicable, cash dividends paid on preferred
shares, (viii) to the extent applicable, whether the Company's taxable mortgage
pools continue to be exempt from corporate level taxes, (ix) realized losses on
certain transactions, and (x) the timing and amounts of cash flows attributable
to its other lines of business - mortgage servicing and other fee income. See
"BUSINESS - Risk Factors - Substantial Indebtedness; Leverage," "MARKET FOR THE
REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and
Notes 10 and 11 of the Notes to Consolidated Financial Statements for a further
discussion of dividends.
Taxable Mortgage Pool Risks
See "BUSINESS - Risk Factors - Taxable Mortgage Pool Risks" for a
discussion of taxable mortgage pool risks.
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".
Critical Accounting Policies
The Company's significant accounting policies are described in Note 3 to
Notes to Consolidated Financial Statements. The Company believes its most
critical accounting policies (a critical accounting policy being one that is
both very important to the portrayal of the Company's financial condition and
results of operations and requires management's most difficult, subjective or
complex judgments) include the determination of fair value of the Company's
Subordinated CMBS and interest income recognition related to the Subordinated
CMBS.
o Fair Value of Subordinated CMBS - Due to the limited
liquidity of the subordinated CMBS market and the resulting lack of
a secondary market, the Company estimates the values of its
Subordinated CMBS internally. These estimates require significant
judgment regarding assumptions for defaults on the underlying
commercial mortgage loan collateral, resultant loss severity and
discount rates. Note 5 to Notes
to Consolidated Financial Statements contains a detailed discussion
of the methodology used to determine the fair value of the
Company's Subordinated CMBS as well as a sensitivity analysis
related to the fair value of these Subordinated CMBS due to changes
in assumptions related to losses on the underlying commercial
mortgage loan collateral and discount rates.
o Interest Income recognition related to Subordinated CMBS -
Interest income recognition under EITF 99-20 requires the Company
to make estimates regarding expected prepayment speeds as well as
expected losses on the underlying commercial mortgage loan
collateral (which directly impact the cash flows on the Company's
Subordinated CMBS in the form of interest shortfalls and loss of
principal) and the impact these factors would have on future cash
flow. Note 5 to Notes to Consolidated Financial Statements details
the expected realized losses by year the Company expects to incur
related to its Subordinated CMBS. The cash flows the Company
projects to arrive at the effective interest rate to recognize
interest income are adjusted for these expected losses. The
judgment regarding future expected credit losses is subjective as
credit performance is particular to an individual deal's specific
underlying commercial mortgage loan collateral. In general, if the
Company increases its expected losses or determines such losses
will occur sooner than previously projected and the CMBS's fair
value is below cost, then the CMBS will be considered impaired and
adjusted to fair value with the impairment charge recorded through
earnings.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal market risk is exposure to changes in interest
rates related to the U.S. Treasury market as well as the LIBOR market. The
Company will have fluctuations in the amount of interest expense paid on its
Variable-Rate Secured Borrowing primarily due to changes 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
changes in the spread between U.S. Treasury bonds and CMBS. As of December 31,
2001, the average treasury rate used to price the Company's CMBS had decreased
by approximately 6 basis points and credit spreads had widened by approximately
84 basis points compared to December 31, 2000.
CRIIMI MAE has entered into an interest rate protection agreement to
mitigate the adverse effects of rising interest rates on the amount of interest
expense payable under its Variable-Rate Secured Borrowing. The cap provides
protection to CRIIMI MAE to the extent the one-month LIBOR rate increases above
the stated interest rate cap, in which case, CRIIMI MAE will receive payments
based on the difference between the one-month LIBOR rate and the cap rate. The
term of the cap as well as the stated interest rate of the cap, which is
currently above the current one-month LIBOR rate, will limit the amount of
protection that the cap offers. The average LIBOR index was 3.89% during 2001.
As of December 31, 2001, one-month LIBOR was 1.87% which was a 469 basis point
decrease from December 31, 2000.
The Company's New Debt consists of a new Variable-Rate Secured Borrowing
(in the form of a repurchase transaction), and indebtedness evidenced by the
Series A Senior Secured Notes and the Series B Senior Secured Notes. Operative
documents evidencing the New Debt do not specifically require the Company to
maintain collateral of a specific market value.
The table below provides information about the Company's Subordinated CMBS
and Insured Mortgage Securities as of December 31, 2001. 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 Notes to Consolidated Financial
Statements for discussion of fair value methodologies used for Subordinated CMBS
and Insured Mortgage Securities.
ESTIMATED PRINCIPAL & INTEREST CASHFLOWS
Assets (in millions) 2002 2003 2004 2005 2006 Thereafter Total Fair Value
- -------------------------------- --------- --------- --------- --------- ---------- ------------ ----------- -----------
Subordinated CMBS (1) $84.8 $85.7 $85.9 $85.7 $85.8 $2,048.4 $2,476.3 $527.7
Average Stated Interest Rate 6.8% 6.9% 6.9% 6.9% 6.9% 6.9% 6.9%
Insured Mortgage
Securities (2) $91.6 $73.3 $83.4 $64.6 $42.1 $73.9 $428.9 $343.1
Average Stated Interest Rate 7.8% 7.7% 7.6% 7.6% 7.6% 7.6% 7.7%
- ----------------------------
(1) These amounts represent the estimated cash flows from the retained
Subordinated CMBS(BB+ through unrated bonds) that are used to estimate the
fair value of the Subordinated CMBS. Actual cash flows will be less than
these estimated cash flows due to actual realized losses, appraisal
reduction events and defaults and anticipated further realized losses,
appraisal reduction events and defaults.
(2) These amounts represent the projected cash flows that were used to
estimate the fair values of the Insured Mortgage Securities. The Company
estimated such cash flows using an assumed constant prepayment rate ("CPR")
of 35%, however it should be noted that there can be no assurance that this
estimated CPR will approximate the actual CPR. In addition, the 2002
amount includes known prepayments, which occurred in January and February
2002.
The next table provides information about the Company's debt obligations,
including the New Debt, and derivative instrument as of December 31, 2001. For
debt obligations, the table presents the contractual principal payments and the
related weighted average interest rates (coupon) by contractual maturity date.
For the cap, the table presents the notional amount of the agreement by fiscal
year of maturity and weighted average strike price.
ESTIMATED PRINCIPAL ON DEBT OBLIGATIONS
Debt Obligations
(in millions) 2002 2003 2004 2005 2006 Thereafter Total Fair Value
- -------------------------------- --------- ---------- ---------- --------- -------- ------------ ----------- ------------
Variable Rate Secured
Borrowing (1) $25.5 $16.0 $12.1 $190.6 $ -- $ -- $244.2 $244.2
Average Stated Interest Rate (2) 5.1% 5.1% 5.1% 5.1% -- -- 5.1%
Series A Senior Secured Notes(3) $6.0 $15.5 $20.1 $19.7 $38.2 $ -- $99.5 $95.3
Average Stated Interest Rate 11.8% 11.8% 11.8% 11.8% 11.8% -- 11.8%
Series B Senior Secured Notes (4) $ -- $ -- $ -- $ -- $ -- $63.9(4) $63.9 (4) $54.8
Average Stated Interest Rate 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%
Securitized Mortgage
Obligations - Fixed Rate (5) $67.5 $53.9 $72.1 $54.9 $95.2 $320.4 $664.0 $648.5
Average Stated Interest Rate 7.0% 7.0% 7.0% 7.0% 7.0% 7.2% 7.0%
Mortgage Payable $0.1 $0.1 $0.1 $0.1 $0.1 $8.2 $8.7 $7.1
Average Stated Interest Rate 7.3% 7.3% 7.3% 7.3% 7.3% 7.3% 7.3%
Derivative Contract
(in millions)
- --------------------------------
Cap Contract $18.0 $170.0 -- -- -- -- $188.0 $0.1
Average Strike Rate 5.25% 5.25% -- -- -- -- 5.25%
- ----------------------------
(1) The projected principal payments on the Variable-Rate Secured
Borrowing are based on the applicable amortization schedule provided in
the operative documents. In addition, the projected principal payments
include estimated principal payments from excess cash flow required to
be applied toward the redemption of principal under the operative
documents until a total of $50 million of the principal has been
repaid, which is expected to occur in 2003. These principal payments
are based on the Company's estimate of future cash flows as of
March 15, 2002, which are subject to continuous change due to, without
limitation, changes in interest rates, realized losses, appraisal
reductions, interest shortfalls, credit performance of underlying
loans, unanticipated expenses on foreclosed and non-performing loans,
accumulated advances, prepayments, the Company's obligations in
connection with REO, the Company's general and administrative expenses
and other operating expenses, and cash dividends, if any, paid to
shareholders. There can be no assurance that projected cash flows will
approximate the actual cash flows.
(2) The stated annual interest rate on the Variable-Rate Secured
Borrowing is LIBOR plus 3.25%.The average stated interest rate assumes
that LIBOR is unchanged from the December 31, 2001 LIBOR rate of 1.87%
over the remaining term of the debt. Any changes in the LIBOR rate will
affect the actual principal payments on the Company's Variable-Rate
Secured Borrowing in the future.
(3) The projected principal payments on the Series A Senior Secured
Notes are based, in part, on the Company's estimate of the cash flows
from the collateral securing the Series A Senior Secured Notes as of
March 15, 2002. In addition, there are principal payment obligations of
$5 million, $15 million, and $15 million due on April 16, 2003, 2004
and 2005, respectively. If the Company fails to make any one of these
payments, the interest rate on the unpaid principal amount would
increase by 200 basis points if certain miscellaneous collateral is not
sold or otherwise disposed of by the noteholders. These projected cash
flows are subject to continuous change due to, without limitation,
changes in interest rates, realized losses, appraisal reductions,
interest shortfalls, credit performance of underlying loans,
unanticipated expenses on foreclosed and non-performing loans,
accumulated advances, prepayments, the Company's obligations in
connection with REO, the Company's general and administrative expenses
and other operating expenses, and cash dividends, if any, paid to
shareholders. There can be no assurance that the projected cash flows
will approximate the actual cash flows.
(4) The Series B Senior Secured Notes have no contractual principal
payment requirements until maturity on April 15, 2007. The Series B
Senior Secured Notes accrete interest at an annual rate of 7%. This
accreted interest is added to the principal balance semi-annually on
the interest payment dates. For purposes of this disclosure, the
Company has not included any future accreted interest in the
contractual principal payment amount at maturity. The Company estimates
as of March 15, 2002 that the total principal payment due at maturity,
including accreted interest, will be approximately $93 million.
(5) The projected principal payments on the securitized mortgage
obligations are based on the projected cash flows that were used to
estimate the December 31, 2001 fair values of the related securities,
which collateralize this debt. The 2002 amounts include known
prepayments, which occurred in January and February 2002.
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 70.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The information required by Part III (Item 10-Directors and Executive
Officers, Item 11-Executive Compensation, Item 12-Security Ownership of Certain
Beneficial Owners and Management and Item 13-Certain Relationships and Related
Transactions) is incorporated herein by reference to the Registrant's definitive
proxy statement to be filed pursuant to Regulation 14A relating to the
Registrant's 2002 annual meeting of stockholders.
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
Description Page
- ----------- ----
Report of Independent Public Accountants........................................................70
Consolidated Balance Sheets as of December 31, 2001 and 2000....................................71
Consolidated Statements of Income for the years ended
December 31, 2001, 2000 and 1999..............................................................72
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income
for the years ended December 31, 2001, 2000 and 1999..........................................73
Consolidated Statements of Cash Flows
for the years ended December 31, 2001, 2000 and 1999..........................................74
Notes to Consolidated Financial Statements .....................................................75
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. Third Amended Joint Plan of Reorganization as confirmed by the
United States Bankruptcy Court for the District of Maryland,
Greenbelt Division on November 22, 2000 (incorporated by
reference to Exhibit 2.1 to 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 Amendment and Restatement of CRIIMI MAE Inc.,
including Exhibit A, Exhibit B, Exhibit C and Exhibit D thereto
pertaining to the preferences, conversion and other rights,
voting powers, restrictions and limitations as to dividends,
qualifications and terms and conditions of
redemption of the Series B Cumulative Convertible Preferred
Stock, Series E Cumulative Convertible Preferred Stock, the
Series F Redeemable Cumulative Dividend Preferred Stock and the
Series G Redeemable Cumulative Dividend Preferred Stock,
respectively, filed with the Maryland State Department of
Assessments and Taxation on April 17, 2001 (incorporated by
reference to Exhibit 3.1 to Current Report on Form 8-K filed
with the Securities and Exchange Commission ("SEC") on
June 1, 2001).
b. Articles of Amendment to Exhibit B of the Articles of Amendment
and Restatement of CRIIMI MAE Inc. which pertains to the
preferences, conversion and other rights, voting powers,
restrictions and limitations as to dividends, qualifications and
terms and conditions of redemption of the Series E Cumulative
Convertible Preferred Stock (incorporated by reference to Exhibit
3 to the Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001).
c. Second Amended and Restated Bylaws of CRIIMI MAE Inc.
(incorporated by reference to Exhibit 3.2 to Current Report on
Form 8-K filed with the SEC on June 1, 2001).
d. Articles of Incorporation of CBO REIT, Inc. filed with the
Maryland State Department of Assessments and Taxation on April
11, 2001 (incorporated by reference to Exhibit 3.3 to Current
Report on Form 8-K filed with the SEC on June 1, 2001).
e. Bylaws of CBO REIT, Inc., effective as of April 17, 2001
(incorporated by reference to Exhibit 3.4 to Current Report on
Form 8-K filed with the SEC on June 1, 2001).
f. Certificate of Incorporation of CRIIMI MAE QRS 1, Inc.
(incorporated by reference to Exhibit 3(p) to Annual Report on
Form 10-K for 1996.)
g. Bylaws of CRIIMI MAE QRS 1, Inc. (incorporated by reference to
Exhibit 3(q) to Annual Report on Form 10-K for 1996).
h. Certificate of Incorporation of CRIIMI MAE CMBS Corp (filed
herewith).
i. Bylaws of CRIIMI MAE CMBS Corp (filed herewith).
j. Articles of Incorporation of CRIIMI MAE Financial Corporation
(incorporated by reference to Exhibit 3.1 to Form S-3
Registration Statement filed with the Securities and Exchange
Commission on September 12, 1995).
k. By-laws of CRIIMI MAE Financial Corporation (incorporated by
reference to Exhibit 3.2 to Form S-3 Registration Statement filed
with the Securities and Exchange Commission on September 12,
1995).
l. Articles of Incorporation of CRIIMI MAE Financial Corporation II
(incorporated by reference to Exhibit 3(q) to Annual Report on
Form 10-K for 1995).
m. Bylaws of CRIIMI MAE Financial Corporation II (incorporated by
reference to Exhibit 3(r) to Annual Report on Form 10-K for
1995).
n. Articles of Incorporation of CRIIMI MAE Financial Corporation III
(incorporated by reference to Exhibit 3(s) to Annual Report on
Form 10-K for 1995).
o. Bylaws of CRIIMI MAE Financial Corporation III (incorporated by
reference to Exhibit 3(t) to Annual Report on Form 10-K for
1995).
p. 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 to Exhibit 3(n) to Annual Report on Form 10-K for
1995).
q. 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 to Exhibit 3(g) to Annual Report
on Form 10-K for 1998).
r. Second Amendment to the Limited Partnership Agreement of CRIIMI
MAE Services Limited Partnership effective as of January 2, 1997
between CRIIMI MAE Management Inc. and CRIIMI MAE Services, Inc.
(incorporated by reference to Exhibit 3(h) to Annual Report on
Form 10-K for 1998).
s. 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 to Exhibit 3(i) to Annual Report
on Form 10-K for 1998).
t. Fourth Amendment to Limited Partnership Agreement of CRIIMI MAE
Services Limited Partnership effective as of March 9, 2001
between CRIIMI MAE Services, Inc., CRIIMI MAE Management, Inc.
and CMSLP Holding Company, Inc. (filed herewith).
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 to Exhibit 10(i) to
Annual Report on Form 10-K for 1995).
v. 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
to Exhibit 3(f) to Quarterly Report on Form 10-Q for the quarter
ended June 30, 1993).
w. 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 to Exhibit 3(g) to Quarterly Report on
Form 10-Q for the quarter ended June 30, 1993).
Exhibit No. 4 - Instruments defining the rights of security holders, including
indentures.
a. Indenture, dated as of April 17, 2001 and all exhibits and
schedules thereto, by and between CRIIMI MAE Inc. and Wells Fargo
Bank Minnesota,
National Association, as trustee relating to the Series A Notes
(incorporated by reference to Exhibit T3C to Amendment No. 2
to Form T-3 relating to Series A Notes Indenture filed with the
SEC on April 13, 2001).
b. Indenture, dated as of April 17, 2001, and all exhibits and
schedules thereto, by and between CRIIMI MAE Inc. and Wells Fargo
Bank Minnesota, National Association, as trustees relating to the
Series B Notes (incorporated by reference to Exhibit T3C to
Amendment No. 2 to Form T-3 relating to Series B Notes Indenture
filed with the SEC on April 13, 2001).
c. Registrant's 2001 Stock Incentive Plan (incorporated by reference
to Annex B to Definitive Proxy Statement filed with the SEC on
August 16, 2001).
d. Registrant's Second Amended and Restated Stock Option Plan for
Key Employees (incorporated by reference herein to Exhibit G to
Exhibit 99.6 to the Registrant's Current Report on Form 8-K filed
with the SEC on September 22, 2000).
e. 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).
f. 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. Master Repurchase Agreement and Annex I to the Master Repurchase
Agreement, including Schedule 1-A (CBO-2 Securities), Schedule
1-B (CBO-1/Nomura Securities), Schedule 1-D (Loss Threshold
Amount) and Disclosure Schedule thereto (incorporated by
reference to Exhibit 10.1 to Current Report on Form 8-K filed on
June 1, 2001).
b. Security and Pledge Agreement, dated as of April 17, 2001, made
by CRIIMI MAE Inc. in favor of Merrill Lynch, Pierce, Fenner &
Smith Incorporated, as collateral agent (incorporated by
reference to Exhibit 10.3 to Current Report on Form 8-K filed on
June 1, 2001).
c. Addendum to Security and Pledge Agreement, dated as of April 17,
2001, executed by CBO REIT, Inc. and accepted and agreed to by
Merrill Lynch, Pierce, Fenner & Smith, Incorporated, as
collateral agent (incorporated by reference to Exhibit 10.5 to
Current Report on Form 8-K filed on August 14, 2001).
d. Security, Pledge and Collateral Assignment Agreement, dated as of
April 17, 2001, among the Company, CRIIMI MAE Management, Inc.
and CM Mallers Building, Inc. in favor of Wells Fargo Bank
Minnesota, National Association, as collateral agent
(incorporated by reference to Exhibit 10.4 to Current Report on
Form 8-K filed on August 14, 2001).
e. Foreclosure/Transfer Agreement, dated as of April 17, 2001, among
CRIIMI MAE Inc., Merrill Lynch International, acting through its
agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Wells Fargo Bank
Minnesota, National Association, acting as trustee under two
Indentures relating to Series A Notes and Series B Notes
(incorporated by reference to Exhibit 10.2 to Current Report
on Form 8-K filed on June 1, 2001).
f. Intercreditor Agreement, dated as of April 17, 2001, among
Merrill Lynch International, acting through its agent, Merrill
Lynch, Pierce, Fenner & Smith Incorporated and Wells Fargo Bank
Minnesota, National Association, acting as trustee under two
indentures relating to the Series A Notes and Series B Notes
(incorporated by reference to Exhibit 4.1 to Current Report on
Form 8-K filed with the SEC on June 1, 2001).
g. Employment Agreement dated and effective as of June 29, 2001
between the Company and William B. Dockser (incorporated by
reference to Exhibit 10.1 to Current Report on Form 8-K filed on
July 10, 2001).
h. Employment Agreement dated and effective as of June 29, 2001
between the Company and H. William Willoughby (incorporated by
reference to Exhibit 10.2 to Current Report on Form 8-K filed on
July 10, 2001).
i. Employment Agreement, dated and effective as of July 25, 2001,
between the Company and David B. Iannarone (incorporated by
reference to Exhibit 10.1 to Current Report on Form 8-K filed on
August 14, 2001).
j. Employment Agreement, dated and effective as of July 25, 2001,
between the Company and Cynthia O. Azzara (incorporated by
reference to Exhibit 10.2 to Current Report on Form 8-K filed on
August 14, 2001).
k. Employment Agreement, dated and effective as of July 25, 2001,
between the Company and Brian L. Hanson (incorporated by
reference to Exhibit 10.3 to Current Report on Form 8-K filed on
August 14, 2001).
l. CRIIMI MAE Management, Inc. Retirement Plan's Plan Agreement #001
dated July 7, 1997 between CRIIMI MAE Management, Inc. and Putnam
Fiduciary Trust Company (filed herewith).
m. Putnam Basic Plan Document #07 for the CRIIMI MAE Management,
Inc. Retirement Plan effective as of September 1, 1997 (filed
herewith).
n. First Amendment to the CRIIMI MAE Management, Inc. Retirement
Plan dated September 1, 1997 (filed herewith).
o. Second Amendment to the CRIIMI MAE Management, Inc. Retirement
Plan dated December 1, 1999 (filed herewith).
p. Third Amendment to the CRIIMI MAE Management, Inc. Retirement
Plan dated December 20, 2000 (filed herewith).
q. 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 to Exhibit
99.8 to Current Report on Form 8-K filed with the Securities and
Exchange Commission on September 22, 2000).
r. Preferred Stock Exchange Agreement between CRIIMI MAE Inc. and
MeesPierson Investments Inc. dated February 22, 2000
(incorporated by
reference to Exhibit 99.1 to Current Report on Form 8-K filed
with the Securities and Exchange Commission on April 10, 2000).
s. Terms Indenture Agreement dated May 8, 1998 between CRIIMI MAE
Commercial Mortgage Trust and the trustee (filed herewith).
t. Standard Indenture Provisions dated as of May 8, 1998 related to
Terms Indenture Agreement dated May 8, 1998 between CRIIMI MAE
Commercial Mortgage Trust and the trustee (filed herewith).
u. Indenture Agreement dated December 20, 1996 between CRIIMI MAE
QRS 1, Inc. and the trustee (incorporated by reference from
Exhibit 4(sss) to Annual Report on Form 10-K for 1996).
v. Form of Bond to CRIIMI MAE Trust 1 Commercial Mortgage Bonds,
Class A-1 (incorporated by reference to Exhibit 4(ttt) to Annual
Report on Form 10-K for 1996).
w. Form of Bond to CRIIMI MAE Trust 1 Commercial Mortgage Bonds,
Class A-2 (incorporated by reference to Exhibit 4(uuu) to Annual
Report on Form 10-K for 1996).
x. Form of Bond to CRIIMI MAE Trust 1 Commercial Mortgage Bonds,
Class B (incorporated by reference to Exhibit 4(vvv) to Annual
Report on Form 10-K for 1996).
y. Form of Bond to CRIIMI MAE Trust 1 Commercial Mortgage Bonds,
Class C (incorporated by reference to Exhibit 4(www) to Annual
Report on Form 10-K for 1996).
z. Form of Bond to CRIIMI MAE Trust 1 Commercial Mortgage Bonds,
Class D (incorporated by reference to Exhibit 4(xxx) to Annual
Report on Form 10-K for 1996).
aa. Form of Bond to CRIIMI MAE Trust 1 Commercial Mortgage Bonds,
Class E (incorporated by reference to Exhibit 4(yyy) to Annual
Report on Form 10-K for 1996).
bb. Form of Bond to CRIIMI MAE Trust 1 Commercial Mortgage Bonds,
Class F (incorporated by reference to Exhibit 4(zzz) to Annual
Report on Form 10-K for 1996).
cc. Form of Indenture between CRIIMI MAE Financial Corporation and
the trustee (incorporated by reference to Exhibit 4.1 to S-3
Registration Statement filed with the Securities and Exchange
Commission on September 12, 1995).
dd. Form of Bond (incorporated by reference to Exhibit 4.2 to S-3
Registration Statement filed with the Securities and Exchange
Commission on September 12, 1995).
ee. 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
to Exhibit 4(bbb) to Annual Report on Form 10-K for 1995).
ff. 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 to Exhibit 4(ccc) to Annual Report
on Form 10-K for 1995).
gg. Assignment and Agreement dated as of September 22, 1995 between
CRIIMI MAE Inc. and CRIIMI MAE Financial Corporation II
(incorporated by reference to Exhibit 4(ddd) to Annual Report on
Form 10-K for 1995).
hh. Funding Note dated December 15, 1995 between CRIIMI MAE Financial
Corporation III and the Federal National Mortgage Association
(incorporated by reference to Exhibit 4(lll) to Annual Report on
Form 10-K for 1995).
ii. 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
Annual Report on Form 10-K for 1995).
jj. 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 to Exhibit 4(nnn) to Annual Report on Form 10-K for
1995).
kk. Administrative Services Agreement dated June 30, 1995 between
CRIIMI MAE Inc. and C.R.I., Inc. (incorporated by reference to
Exhibit 10(d) to Annual Report on Form 10-K for 1995).
ll. 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 to
Exhibit 10(e) to Annual Report on Form 10-K for 1995).
mm. 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 to Exhibit
10(f) to Annual Report on Form 10-K for 1995).
nn. Sublease dated June 30, 1995 between C.R.I., Inc. and CRIIMI MAE
Inc. (incorporated by reference to Exhibit 10(h) to Annual Report
on Form 10-K for 1995).
oo. Reimbursement Agreement dated as of June 30, 1995 between CRIIMI
MAE Management, Inc. and C.R.I., Inc. (incorporated by reference
to Exhibit 10(j) to Annual Report on Form 10-K for 1995).
pp. 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 to
Exhibit 10(k) to Annual Report on Form 10-K for 1995).
qq. 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).
rr. 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 to Exhibit 10(c) to Annual Report on
Form 10-K for 1995).
ss. Revised Form of Advisory Agreement (incorporated by reference to
Exhibit No. 10.2 to Registration Statement).
Exhibit No. 18 - Letter re change in accounting principles
a. Letter from the Company's independent public accountants, Arthur
Andersen LLP, regarding the change in accounting policy related
to the recognition of special servicing fee revenue by CRIIMI MAE
Services Limited Partnership, a wholly owned subsidiary of the
Company (incorporated by reference to Exhibit 18 to Quarterly
Report on Form 10-Q for the quarter ended September 30, 2001).
Exhibit No. 21 - Subsidiaries of the Registrant.
a. CRIIMI, Inc., incorporated in the State of Maryland.
b. CRIIMI MAE Financial Corporation, incorporated in the State of
Maryland.
c. CRIIMI MAE Financial Corporation II, incorporated in the State of
Maryland.
d. CRIIMI MAE Financial Corporation III, incorporated in the State
of Maryland.
e. CRIIMI MAE Management, Inc., incorporated in the State of
Maryland.
f. CRIIMI MAE QRS 1, Inc., incorporated in the State of Delaware.
g. CRIIMI MAE Services Limited Partnership, formed in the State of
Maryland.
h. CRIIMI MAE CMBS Corp., incorporated in the State of Delaware.
i. CBO REIT, Inc., incorporated in the State of Maryland.
j. CMSLP Management Company, Inc., incorporated in the State of
Maryland.
k. CMSLP Holding Company, Inc., incorporated in the State of
Maryland.
Exhibit No. 99 - Additional Exhibits
a. Stipulation and Consent Order selling certain commercial
mortgage-backed securities to Lehman Ali Inc. free and clear of
liens, claims and encumbrances entered April 19, 2000
(incorporated by reference from Exhibit 99(a) to the Quarterly
Report on Form 10-Q for quarter ended March 31, 2000).
b. 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).
c. 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).
d. 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).
e. 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).
f. 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).
g. Order confirming Third Amended Joint Plan of Reorganization
entered by the United States Bankruptcy Court for the District of
Maryland, Greenbelt on November 22, 2000 (the "Confirmation
Order") (incorporated by reference from Exhibit 99.1 to Form 8-K
filed with the Securities and Exchange Commission on December 28,
2000).
h. Exhibit 11 in support of the Confirmation Order - CMBS Sale
Portfolio Schedule filed with the Bankruptcy Court on November
15, 2000 (incorporated by reference to Exhibit 99.1 to Form 8-K
filed with the Securities and Exchange Commission on January 22,
2001).
i. Exhibit 13 in support of the Confirmation Order - Definition of
Distribution Record filed with the Bankruptcy Court on November
15, 2000 (incorporated by reference to Exhibit 99.2 to Form 8-K
filed with the Securities and Exchange Commission on January 22,
2001).
j. Exhibit 14 in support of the Confirmation Order - Unaudited Pro
Forma Consolidated Financial Statements and Projected Financial
Information filed with the Bankruptcy Court on November 15, 2000
(incorporated by reference to Exhibit 99.3 to Form 8-K filed with
the Securities and Exchange Commission on January 22, 2001).
k. Exhibit 17 in support of the Confirmation Order - Liquidation
Analysis filed with the Bankruptcy Court on November 15, 2000
(incorporated by reference to Exhibit 99.4 to Form 8-K filed with
the Securities and Exchange Commission on January 22, 2001).
l. Special Serviced Loan Report relating to specially serviced loans
underlying the Company's CMBS as of March 31, 2001 (incorporated
by reference to Exhibit 99(a) to Quarterly Report on Form 10-Q
for the quarter ended March 31, 2001).
m. Special Serviced Loan Report relating to specially serviced loans
underlying the Company's CMBS as of June 30, 2001 (incorporated
by reference to Exhibit 99(a) to Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001).
n. Special Serviced Loan Report relating to specially serviced loans
underlying the Company's CMBS as of September 30, 2001
(incorporated by reference to Exhibit 99(a) to Quarterly Report
on Form 10-Q for the quarter ended September 30, 2001).
o. Special Serviced Loan Report relating to specially serviced loans
underlying the Company's CMBS as of December 31, 2001 (filed
herewith).
p. Letter to Securities and Exchange Commission from the Company
dated March 27, 2002 regarding the representations received from
Arthur Andersen LLP in connection with its audit of the
Company's December 31, 2001 consolidated financial statements
(filed herewith).
(b) Reports on Form 8-K
Date Purpose
December 19, 2001 To report the Company's mortgage
servicing subsidiary's, CRIIMI
MAE Services Limited
Partnership, plan to increase
its emphasis on loan management
and special servicing and its
intention to sell its remaining
master and primary servicing
contracts.
(c) Exhibits
The list of Exhibits required by Item 601 of Regulation S-K is
included in Item (a)(3) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CRIIMI MAE INC.
March 27, 2002 /s/William B. Dockser
- ---------------------- ---------------------------
DATE William B. Dockser
Chairman of the Board and
Principal Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints William B. Dockser and H. William
Willoughby, jointly and severally, his attorney-in-fact, each with the power of
substitution for him in any and all capacities, to sign any amendments to this
Annual Report on Form 10-K and to file the same with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each said attorney-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated:
March 27, 2002 /s/William B. Dockser
- -------------- -------------------------------
DATE William B. Dockser
Chairman of the Board and
Principal Executive Officer
March 27, 2002 /s/H. William Willoughby
- -------------- -------------------------------
DATE H. William Willoughby
Director, President and
Secretary
March 27, 2002 /s/Cynthia O. Azzara
- -------------- -------------------------------
DATE Cynthia O. Azzara
Senior Vice President, Chief
Financial Officer, Treasurer and
Principal Accounting Officer
March 21, 2002 /s/John R. Cooper
- -------------- -------------------------------
DATE John R. Cooper
Director
March 21, 2002 /s/Alan M. Jacobs
- -------------- -------------------------------
DATE Alan M. Jacobs
Director
March 21, 2002 /s/Donald J. MacKinnon
- -------------- -------------------------------
DATE Donald J. MacKinnon
Director
March 21, 2002 /s/Robert J. Merrick
- -------------- -------------------------------
DATE Robert J. Merrick
Director
March 22, 2002 /s/Donald C. Wood
- -------------- -------------------------------
DATE Donald C. Wood
Director
March 21, 2002 /s/Robert E. Woods
- -------------- -------------------------------
DATE Robert E. Woods
Director
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of CRIIMI MAE Inc.:
We have audited the accompanying consolidated balance sheets of CRIIMI MAE
Inc. and its subsidiaries (CRIIMI MAE) as of December 31, 2001 and 2000, and the
related consolidated statements of income, changes in shareholders' equity and
comprehensive income and cash flows for the years ended December 31, 2001, 2000
and 1999. 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 as
of December 31, 2001 and 2000, and the consolidated results of their operations
and their cash flows for the years ended December 31, 2001, 2000 and 1999, in
conformity with accounting principles generally accepted in the United States.
As discussed in Note 3 to the consolidated financial statements,
effective January 1, 2001, CRIIMI MAE changed its method of accounting for
derivatives. In addition, as discussed in Note 3 to the consolidated financial
statements, effective January 1, 2001, CRIIMI MAE Services Limited Partnership,
a wholly-owned subsidiary of CRIIMI MAE, changed its method of accounting
related to the recognition of special servicing fee revenue.
/s/Arthur Andersen, LLP
Vienna, Virginia
March 21, 2002
CRIIMI MAE INC.
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------------------------
2001 2000
----------------- -----------------
Assets:
Mortgage assets:
Subordinated CMBS and Other MBS, at fair value $ 536,204,992 $ 109,266,975
Subordinated CMBS pledged to Securitized Mortgage
Obligation-CMBS, at fair value 296,477,050 283,336,965
Subordinated CMBS pledged to creditors, at fair value - 464,242,328
Insured mortgage securities, at fair value 343,091,303 385,751,407
Equity investments 9,312,156 33,779,658
Other assets 37,180,968 38,043,461
Receivables 18,973,680 41,003,072
Servicing other assets 18,250,824 -
Servicing cash and cash equivalents 6,515,424 -
Restricted cash and cash equivalents 38,214,277 95,846,001
Other cash and cash equivalents 10,783,449 106,569,778
----------------- -----------------
Total assets $ 1,315,004,123 $ 1,557,839,645
================= =================
Liabilities:
Variable-rate secured borrowing $ 244,194,590 $ -
Series A senior secured notes 99,505,457 -
Series B senior secured notes 63,937,383 -
Payables and accrued expenses 25,946,959 33,415,632
Mortgage payable 7,109,252 -
Servicing liabilities 3,660,173 -
Securitized mortgage obligations:
Collateralized bond obligations-CMBS 283,047,470 280,520,265
Collateralized mortgage obligations-
insured mortgage securities 326,558,161 364,649,925
Liabilities subject to Chapter 11 proceedings:
Secured:
Variable-rate secured borrowings-CMBS - 367,535,895
Other financing facilities - 1,300,000
Payables and accrued expenses - 2,166,936
Unsecured:
Senior unsecured notes - 100,000,000
Other financing facilities - 89,749,522
Payables and accrued expenses - 50,243,454
----------------- -----------------
Total liabilities 1,053,959,445 1,289,581,629
----------------- -----------------
Shareholders' equity:
Convertible preferred stock, $0.01 par; 75,000,000 and
25,000,000 shares authorized; 3,597,992 and 6,124,527
shares issued and outstanding, respectively 35,980 61,245
Common stock, $0.01 par; 300,000,000 and 120,000,000
shares authorized; 12,937,341 and 6,235,317 shares
issued and outstanding, respectively 129,373 62,353
Accumulated other comprehensive income (loss):
Unrealized losses on mortgage assets (6,060,398) (3,019,679)
Unrealized loss on interest rate cap (383,200) -
Additional paid-in capital 632,887,967 612,496,343
Accumulated deficit (365,565,044) (341,342,246)
----------------- -----------------
Total shareholders' equity 261,044,678 268,258,016
----------------- -----------------
Total liabilities and shareholders' equity $ 1,315,004,123 $ 1,557,839,645
================= =================
The accompanying notes are an integral part of these
consolidated financial statements.
CRIIMI MAE INC.
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31,
2001 2000 1999
----------------- ----------------- ----------------
Interest income:
Subordinated CMBS $ 105,522,833 $ 137,072,372 $ 154,205,383
Insured mortgage securities 28,852,719 30,668,228 33,405,171
Originated loans - 27,511,041 34,712,674
----------------- ----------------- ----------------
Total interest income 134,375,552 195,251,641 222,323,228
----------------- ----------------- ----------------
Interest and related expenses:
Variable-rate secured borrowing 14,648,215 - -
Series A senior secured notes 8,780,576 - -
Series B senior secured notes 9,224,817 - -
Fixed-rate collateralized bond obligations-CMBS 25,518,425 25,345,519 22,054,939
Fixed-rate collateralized mortgage obligations-
insured securities 27,097,730 30,211,712 33,382,959
Fixed-rate collateralized mortgage obligations-
originated loans - 22,716,109 27,479,268
Variable-rate secured borrowings-CMBS 7,325,059 43,785,955 52,195,828
Fixed-rate senior unsecured notes 2,712,142 9,125,004 9,125,004
Other interest expense 2,480,604 8,182,070 7,098,832
----------------- ----------------- ----------------
Total interest expense 97,787,568 139,366,369 151,336,830
----------------- ----------------- ----------------
Net interest margin 36,587,984 55,885,272 70,986,398
----------------- ----------------- ----------------
General and administrative expenses (11,548,759) (11,301,385) (12,049,256)
Amortization of assets acquired in the Merger (2,877,576) (2,877,576) (2,877,576)
Equity in (losses) earnings from investments (1,632,042) 1,512,005 (1,243,562)
Servicing revenue 6,886,057 - -
Servicing general and administrative expenses (5,882,889) - -
Servicing amortization, depreciation and impairment (1,699,186) - -
Servicing restructuring expense (437,723) - -
Other income, net 4,186,837 4,915,320 3,024,068
Net (losses) gains on mortgage security and originated loan dispositions (41,982) 524,395 2,531,074
Impairment on CMBS (34,654,930) (143,478,085) -
Hedging loss (1,073,392) - -
Unrealized loss on warehouse obligation - - (8,000,000)
Litigation expense - (2,500,000) -
Reorganization items (1,813,220) (66,072,460) (178,899,959)
Emergence financing origination fee (3,936,616) - -
----------------- ----------------- ----------------
(54,525,421) (219,277,786) (197,515,211)
----------------- ----------------- ----------------
Net loss before extraordinary item and cumulative effect
of changes in accounting principles (17,937,437) (163,392,514) (126,528,813)
Extraordinary item-gain on debt extinguishment - 14,808,737 -
Cumulative effect of adoption of SFAS 133 (135,142) - -
Cumulative effect of change in accounting principle related to
servicing revenue 1,995,262 - -
----------------- ----------------- ----------------
Net loss before dividends accrued or paid on preferred shares (16,077,317) (148,583,777) (126,528,813)
Dividends accrued or paid on preferred shares (8,145,481) (6,911,652) (5,840,152)
----------------- ----------------- ----------------
Net loss to common shareholders $ (24,222,798) $ (155,495,429) $ (132,368,965)
================= ================= ================
Net loss to common shareholders per common share:
Basic and Diluted - before extraordinary item and cumulative effect
of changes in accounting principles $ (2.35) $ (27.40) $ (24.51)
================= ================= ================
Basic and Diluted - after extraordinary item and cumulative effect
of changes in accounting principles $ (2.18) $ (25.02) $ (24.51)
================= ================= ================
Shares used in computing basic (loss) earnings per share 11,087,790 6,214,479 5,399,978
================= ================= ================
Pro forma net loss to common shareholders before extraordinary item and
cumulative effect of changes in accounting principles - change in
accounting for servicing revenue $ (26,082,918) $ (169,925,028) $ (131,835,569)
================= ================= ================
Pro forma net loss to common shareholders - Change in accounting for
servicing revenue $ (26,218,060) $ (155,116,291) $ (131,835,569)
================= ================= ================
The accompanying notes are an integral part of these
consolidated financial statements.
CRIIMI MAE INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
For the years ended December 31, 2001, 2000 and 1999
Accumulated
Preferred Common Additional Other Total
Stock Par Stock Par Paid-in Accumulated Comprehensive Shareholders' Comprehensive
Value Value Capital Deficit Income (Loss) Equity Income (Loss)
---------- ---------- -------------- ------------- ------------- ----------- -------------
Balance at December 31, 1998 $ 18,170 $ 52,898 $ 559,061,146 $ - $ (251,255,309) $307,876,905
Net loss - - - (126,528,813) - (126,528,813) $(126,528,813)
Other comprehensive income:
Adjustment to unrealized losses
on mortgage assets - - - - 43,833,521 43,833,521 43,833,521
-------------
Comprehensive loss $ (82,695,292)
=============
Dividends accrued on preferred
shares - - - (5,840,152) - (5,840,152)
Conversion of preferred shares
into common shares (7,765) 7,055 710 - - -
Common shares issued - 2 7,123 - - 7,125
Preferred shares issued 16,066 - 16,049,884 (16,065,950) - -
---------- ---------- -------------- ------------- ------------- -----------
Balance at December 31, 1999 26,471 59,955 575,118,863 (148,434,915) (207,421,788) 219,348,586
Net loss - - - (148,583,777) - (148,583,777) $(148,583,777)
Other comprehensive income:
Adjustment to unrealized losses
on mortgage assets - - - - 204,402,109 204,402,109 204,402,109
--------------
Comprehensive income $ 55,818,332
==============
Dividends accrued on preferred
shares - - - (6,911,652) - (6,911,652)
Conversion of preferred shares
into common shares (2,638) 2,396 242 - - -
Common shares issued - 2 2,748 - - 2,750
Preferred shares issued 37,412 - 37,374,490 (37,411,902) - -
---------- ---------- -------------- ------------- ------------- -----------
Balance at December 31, 2000 61,245 62,353 612,496,343 (341,342,246) (3,019,679) 268,258,016
Net loss - - - (16,077,317) - (16,077,317) $ (16,077,317)
Other comprehensive income:
Adjustment to unrealized losses
on mortgage assets - - - - (3,040,719) (3,040,719) (3,040,719)
Adjustment to unrealized loss
on interest rate cap - - - - (383,200) (383,200) (383,200)
--------------
Comprehensive loss $ (19,501,236)
==============
Dividends accrued or paid on
preferred shares - - - (8,145,481) - (8,145,481)
Common shares issued related
to preferred stock dividends - 30,334 20,405,150 - - 20,435,484
Conversion of preferred shares
into common shares (25,265) 36,695 (11,430) - - -
Common shares issued - 2 1,458 - - 1,460
Common shares redeemed in
reverse stock split in lieu
of fractional shares - (11) (3,554) - - (3,565)
--------- ---------- ------------- -------------- ------------ -------------
Balance at December 31, 2001 $ 35,980 $ 129,373 $ 632,887,967 $(365,565,044) $ (6,443,598) $261,044,678
========= ========== ============= ============== ============ =============
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,
2001 2000 1999
----------------- ------------------- ------------------
Cash flows from operating activities:
Net loss $ (16,077,317) $ (148,583,777) $ (126,528,813)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Amortization of discount and deferred financing costs on debt 7,793,071 8,535,024 8,701,571
Amortization of assets acquired in the Merger 2,877,576 2,877,576 2,877,576
Depreciation and other amortization 1,130,470 1,191,587 2,407,103
Discount amortization on mortgage assets, net (10,121,136) (14,179,631) (1,004,995)
Net losses (gains) on mortgage security and originated loan
dispositions 41,982 (524,395) (2,531,074)
Equity in losses (income) from investments 1,632,042 (1,512,005) 1,243,562
Servicing amortization, depreciation and impairment 1,699,186 - -
Impairment on CMBS 34,654,930 143,478,085 -
Hedging loss 1,208,534 - -
Unrealized loss on warehouse obligation - - 8,000,000
Cumulative effect of change in accounting principle related to
servicing revenue (1,995,262) - -
Changes in assets and liabilities:
Decrease (increase) in restricted cash and cash equivalents 57,631,724 (57,809,377) (35,683,064)
Decrease (increase) in receivables and other assets 25,038,918 (2,990,078) (30,194,006)
(Decrease) increase in payables and accrued expenses (44,468,312) 21,408,572 29,733,222
Decrease in servicing other assets (1,369,229) - -
Decrease in servicing liabilities 449,580 - -
Change in reorganization items accrual (1,755,193) (471,568) 12,146,181
Non-cash reorganization items (366,529) 46,313,051 156,896,831
----------------- ------------------- ------------------
Net cash provided by (used in) operating activities 58,005,035 (2,266,936) 26,064,094
----------------- ------------------- ------------------
Cash flows from investing activities:
Proceeds from mortgage security dispositions 35,235,975 12,572,549 74,003,394
Distributions received from AIM Investments 2,474,971 2,319,906 6,250,991
Receipt of principal payments 7,899,959 16,034,680 12,837,554
Purchase of other MBS, net (4,244,330) (4,208,635) (92,793)
Cash reflected upon consolidation of CRIIMI MAE Services L.P. 6,841,907 - -
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 -
----------------- ------------------- ------------------
Net cash provided by investing activities 48,208,482 108,799,946 130,692,815
----------------- ------------------- ------------------
Cash flows from financing activities:
Principal payments on securitized mortgage debt obligations (39,386,850) (30,136,067) (106,543,623)
Principal payments on New Debt (23,740,992) - -
Principal payments on secured borrowings and other debt
obligations (132,353,015) (23,337,476) (18,529,487)
Common stock redeemed (3,565) - -
----------------- ------------------- ------------------
Net cash used in financing activities (195,484,422) (53,473,543) (125,073,110)
----------------- ------------------- ------------------
Net (decrease) increase in other cash and cash equivalents (89,270,905) 53,059,467 31,683,799
Cash and cash equivalents, beginning of period 106,569,778 53,510,311 21,826,512
----------------- ------------------- ------------------
Cash and cash equivalents, end of period (1) $ 17,298,873 $ 106,569,778 $ 53,510,311
================= =================== ==================
(1) Comprised of Servicing cash and cash equivalents and Other cash and cash
equivalents.
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").
On April 17, 2001, the Company and certain of its subsidiaries emerged from
Chapter 11 (the "Effective Date").
The Company's current primary activities include the ownership and
management, in large part through the Company's servicing subsidiary, CRIIMI MAE
Services Limited Partnership ("CMSLP"), of a significant portfolio of
mortgage-related assets. Prior to the Chapter 11 filing, CRIIMI MAE's primary
activities included (a) 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"), (b) originating
and underwriting commercial mortgage loans, (c) securitizing pools of commercial
mortgage loans and resecuritizing pools of Subordinated CMBS, and (d) primarily
through CMSLP, performing servicing functions with respect principally to the
mortgage loans underlying the Company's Subordinated CMBS.
Virtually all of the Company's cash flows relating to existing assets are,
and are currently expected to be, used to satisfy principal, interest and fee
obligations under the new secured debt incurred by the Company on the Effective
Date (as discussed in Note 7 to the financial statements) and to pay general and
administrative and other operating expenses of the Company. Therefore, although
the Company continues to pay down its debt obligations, the utilization of cash
flows for debt service and operating expenses results in virtually no remaining
net cash flow available for other activities, to the extent permitted under the
operative documents evidencing the new debt incurred upon emergence from Chapter
11. The Company is exploring possible ways of achieving improved financial
flexibility, such as refinancing all or a substantial portion of the new debt
incurred upon emergence from Chapter 11; however, there can be no assurance that
the Company will be able to refinance such new debt or otherwise improve its
financial flexibility.
The Company's business is subject to a number of risks and uncertainties
including, but not limited to: (1) risks associated with substantial
indebtedness or leverage; (2) borrowing risks; (3) the limited protection
provided by hedging transactions; (4) inherent risks in owning Subordinated
CMBS; (5) the limited liquidity of the Subordinated CMBS market; (6) possible
effects of terrorist attacks, an economic slowdown and/or recession on losses
and defaults related to the mortgages underlying the Company's CMBS portfolio;
(7) risks related to the New Debt (defined below) including the ability to meet
payment and other obligations thereunder; (8) risks associated with the trader
election and limitation or loss of net operating losses for tax purposes; (9)
the effect of interest rate compression on the market price of the Company's
stock; (10) the effect of the yield curve on borrowing costs; (11) operations
adversely affected by factors beyond the Company's control; (12) risk of
becoming subject to the requirements of the Investment Company Act of 1940; (13)
the effect of phantom (non-cash) income on total income; (14) pending
litigation; (15) possible New York Stock Exchange delisting due to failure to
maintain certain listing criteria; (16) competition; (17) taxable mortgage pool
risk; and (18) risk of loss of REIT status.
On March 21, 2002, the Company redeemed all 173,000 outstanding shares of
its Series E Cumulative Convertible Preferred Stock. See Note 11 for a further
discussion of this transaction.
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
On October 5, 1998 (the "Petition Date"), 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"), 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"). As previously stated, the Company emerged from
Chapter 11 on April 17, 2001.
The Reorganization Plan provided for 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 Commercial Mortgage Loan Trust Certificates, Series
1998-1 ("CMO-IV") (the "CMO-IV Sale") generated aggregate proceeds of
approximately $418.3 million toward the Recapitalization Financing of which
approximately $342.3 million of such proceeds was used to pay related borrowings
and approximately $76.0 million of such proceeds was used on the Effective Date
to help fund the Reorganization Plan. Included in the balance of the
Recapitalization Financing was approximately $262.4 million provided by
affiliates of Merrill Lynch Mortgage Capital, Inc. (such affiliate referred to
as "Merrill Lynch" or "Merrill") and German American Capital Corporation (such
affiliate referred to as "GACC") through a new, variable-rate secured financing
facility (in the form of a repurchase transaction) (the "Variable-Rate Secured
Borrowing"), and approximately $166.8 million provided through two new series of
secured notes issued to certain of the Company's unsecured creditors
(collectively, the "New Debt"). Effective as of June 5, 2001, all rights and
obligations of Merrill and GACC under the operative agreements evidencing the
Variable-Rate Secured Borrowing were assigned by Merrill and GACC to ORIX
Capital Markets, LLC ("ORIX"). ORIX also owns a significant aggregate principal
amount of each of the respective two new series of secured notes referenced
above as part of the New Debt. Substantially all cash flows relating to existing
assets are, and are currently expected to be, used to satisfy principal,
interest and fee obligations under the New Debt. The New Debt is directly or
indirectly secured by substantially all of the Company's assets. See Note 7 for
further discussion regarding the New Debt.
The Company's litigation with First Union National Bank ("First Union") was
not settled or resolved prior to the Effective Date; and therefore, the
classification and allowance of First Union's claim under the Reorganization
Plan was not be determined on such date. On March 5, 2002, the Bankruptcy Court
entered an order approving a settlement agreement among the Company and First
Union. See Note 15 for further information regarding the settlement of the First
Union litigation.
Under the Reorganization Plan, the holders of the Company's equity retained
their stock. The terms of the New Debt significantly restrict the amount of cash
dividends that can be paid to shareholders. One such restriction provides that
any cash dividends required to maintain REIT status (assuming the Company has
the cash to make such distributions and that it is permitted to make such
distributions under the terms of the New Debt) would be paid first to holders of
certain of the New Debt who convert their secured 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. Another such restriction provides that if realized losses (as defined
in the New Debt documents, and including appraisal reduction amounts on
properties underlying the CMBS) on CMBS exceed certain thresholds, then the
Company is prohibited from paying cash dividends or making other cash
distributions or payments to its shareholders, except as required to maintain
REIT status with any such cash distributions to be paid in accordance with the
terms set forth in the preceding sentence. As of December 31, 2001, the Company
had exceeded the loss threshold amounts under the respective applicable
operative documents evidencing the New Debt. Exceeding such loss threshold
amounts has also resulted in restrictions on the acquisition of CMBS rated "B"
or lower or unrated. Additional restrictions include restrictions on the use of
proceeds from equity investments in the Company and specified cash flows from
certain assets acquired after the Effective Date. The restrictions implemented
as a result of exceeding the loss threshold amounts cease to apply after
realized losses no longer exceed the loss threshold amounts under the applicable
operative documents evidencing the New Debt. The Reorganization Plan also
provided for certain amendments to the Company's articles of incorporation,
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 became effective on
the Effective Date.
As contemplated by the Reorganization Plan, on the Effective Date, the
Company effected an affiliate reorganization in order to indirectly secure the
New Debt with the equity interests in CBO-1 and CBO-2 (representing the
Company's December 1996 securitization of Subordinated CMBS and the Company's
May 1998 securitization of Subordinated CMBS, respectively). Pursuant to the
affiliate reorganization, CRIIMI MAE Inc. formed a new REIT subsidiary ("CBO
REIT"), all shares of which were initially issued to CRIIMI MAE Inc., pledged
certain previously pledged bonds (the "Pledged Bonds") and all outstanding
shares of two qualified REIT subsidiaries (which own the equity interests in
CBO-1 and CBO-2) (the "QRS Shares") to secure the New Debt, pledged the shares
held by CRIIMI MAE in CBO REIT (the "REIT Shares") to secure the New Debt
represented by the two new series of secured notes, contributed the Pledged
Bonds and the QRS Shares to CBO REIT, and transferred the REIT Shares, in a
repurchase transaction, to an affiliate of Merrill, as agent for affiliates of
Merrill and GACC. Effective June 5, 2001, Merrill and GACC transferred the REIT
Shares to ORIX. Subject to the terms of the documents evidencing the New Debt,
CRIIMI MAE Inc. has retained the right to exercise all voting and other
corporate rights and powers of ownership with respect to the REIT Shares.
Although there can be no assurance, the Company believes that it will have
sufficient cash resources to pay interest, scheduled principal and any other
required payments on the New Debt through the remainder of 2002. The Company's
ability to meet its debt service obligations through the remainder of 2002 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 short-term interest rates) 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, significantly reduces cash flow available
for other activities, restricts the Company's ability to react quickly to
changes in its business, limits its ability to hedge its assets and liabilities,
and makes the Company more vulnerable to economic downturns.
REIT Status/Net Operating Loss for Tax Purposes
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 2001,
although there can be no assurance. There can also be no assurance that CRIIMI
MAE will maintain its REIT status for 2002 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.
The Company and two of its subsidiaries incorporated in 2001 have jointly
elected to treat such two subsidiaries as Taxable REIT Subsidiaries ("TRSs")
effective January 1, 2001. The TRSs allow the Company to earn non-qualifying
REIT income while maintaining REIT status. For tax and other reasons, a
reorganization of CMSLP was effected such that the partnership interests of
CMSLP are held by these two subsidiaries.
The Company's 2001 and 2000 Net Operating Loss for Tax Purposes/Shareholder
Rights Plan
During 2001 and 2000, the Company traded in both short and longer duration
fixed income securities, including non-investment grade 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" to the extent owned by CRIIMI MAE Inc. or any qualified
REIT subsidiary, meaning generally any wholly-owned subsidiary that is not a
taxable REIT subsidiary), 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 include 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 in its income tax return on its Trading Assets on January 1, 2000 of
approximately $478 million (the "January 2000 Loss"). Such loss is expected to
be recognized evenly for tax purposes 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. Assets transferred to CBO REIT as part of the
Company's Reorganization Plan are no longer required to be marked-to-market on a
tax basis since CBO REIT is not a trader in securities for tax purposes. As a
result, the mark-to-market of such assets ceased as of April 17, 2001. The
transfer of assets to CBO REIT is discussed in this Note 1 under "The
Reorganization Plan".
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 was
generally required to distribute 95% of its taxable income to shareholders for
years ending on or before December 31, 2000 and is generally required to
distribute 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 because of a net operating loss or
loss carry forward, 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 mark-to-market adjustments, but the cash flow from
the Company's Trading Assets will not fluctuate as a result of mark-to-market
adjustments.
The Company generated a net operating loss for tax purposes of
approximately $(96.9) million and $(49.6) million for the year ended December
31, 2001 and 2000, respectively. As such, the Company's taxable income was
reduced to zero and, accordingly, the Company's REIT distribution requirements
were eliminated for 2001 and 2000. As of December 31, 2001 the Company's
accumulated and unused net operating loss ("NOL") was $(146.5) million. See Note
9 for further discussion.
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 because CRIIMI MAE is a REIT. If a Trading Asset 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. It is possible that the amount of any under-distribution for a
taxable year could be corrected with a "deficiency dividend" as defined in the
Internal Revenue Code Section 860, however, interest may also be due to the
Internal Revenue Service on the amount of this under-distribution.
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 obligations under the
operative documents evidencing the New Debt.
The Company's future use of NOLs for tax purposes could be substantially
limited in the event of an "ownership change" as defined under Section 382 of
the Internal Revenue Code. As a result of these limitations imposed by Section
382 of the Internal Revenue Code, in the event of an ownership change, the
Company's ability to use its NOL carryforwards in future years may be limited
and, to the extent the NOL carryforwards cannot be fully utilized under these
limitations within the carryforward periods, the NOL carry forwards would expire
unutilized. Accordingly, after any ownership change, the Company's ability to
use its NOLs to reduce or offset taxable income would be substantially limited
or not available under Section 382. In general, a company reaches the "ownership
change" threshold if the "5% shareholders" increase their aggregate ownership
interest in the company over a three-year testing period by more than 50
percentage points. The ownership interest is measured in terms of total market
value of the Company's capital stock.
The Company is not aware of any acquisition of shares of the Company's
capital stock that has created an "ownership change" under Section 382, but
believes that it may be close to approaching the 50% threshold for an "ownership
change" under Section 382. The Company is concerned that future acquisitions of
common stock, preferred stock or a combination of both by an existing "5%
shareholder" or a new "5% shareholder" could cause an "ownership change". If an
"ownership change" occurs, the Company's ability to use its NOLs to reduce or
offset its taxable income would be substantially limited or not available under
Section 382 of the Internal Revenue Code on a prospective basis. The Company
would then have REIT distribution requirements based upon its taxable income at
the beginning of the year such ownership change occurs. As stated above, any
such distributions are expected to be in the form of non-cash taxable dividends.
If an "ownership change" occurs under Internal Revenue Code Section 382,
the Company's prospective use of its accumulated NOL and the remaining January
2000 Loss of a combined total amount of approximately $(386) million (as of
December 31, 2001) will be limited. If the Company had lost its ability to use
its accumulated NOL as of January 1, 2001, the Company's taxable income would
have been $22.6 million. This increase in taxable income would have created a
100 percent distribution requirement. If the Company was unable to distribute
the taxable income to its shareholders, it would have been subject to corporate
Federal and state income taxes of up to approximately $9.3 million in 2001.
Currently, the Company does not know of any acquisition of shares of
Company's capital stock that will create an "ownership change" under Section 382
of the Internal Revenue Code. The Company has adopted a shareholder rights plan
designed to deter an ownership change within the meaning of Section 382 of the
Internal Revenue Code, however there can be no assurance that an ownership
change will not occur. See Note 10 for a further discussion of the shareholder
rights plan.
2. INVESTMENT COMPANY ACT OF 1940
Under the Investment Company Act of 1940, as amended (the "Investment
Company Act"), an investment company is required to register with the SEC and is
subject to extensive restrictive and potentially adverse regulation relating to,
among other things, operating methods, management, capital structure, dividends
and transactions with affiliates. However, as described below, companies that
are primarily engaged in the business of acquiring mortgages and other liens on
and interests in real estate ("Qualifying Interests") are excluded from the
requirements of the Investment Company Act.
To qualify for the Investment Company Act exclusion, CRIIMI MAE, among
other things, must maintain at least 55% of its assets in Qualifying Interests
(the "55% Requirement") and is also required to maintain an additional 25% in
Qualifying Interests or other real estate-related assets ("Other Real Estate
Interests" and such requirement, the "25% Requirement"). According to current
SEC staff interpretations, CRIIMI MAE believes that all of its government
insured mortgage securities constitute Qualifying Interests with the exception
of one such security which constitutes an Other Real Estate Interest. 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, 2001, the Company believes that it was
in compliance with both the 55% Requirement and the 25% Requirement.
If the SEC or its staff were to take a different position with respect to
whether such Subordinated CMBS constitute Qualifying Interests, the Company
could, among other things, be required either (i) to change the manner in which
it conducts its operations to avoid being required to register as an investment
company or (ii) to register as an investment company, either of which could have
a material adverse effect on the Company. If the Company were required to change
the manner in which it conducts its business, it would likely have to dispose of
a significant portion of its Subordinated CMBS or acquire significant additional
assets that are Qualifying Interests. Alternatively, if the Company were
required to register as an investment company, it expects that its operating
expenses would significantly increase and that the Company would have to reduce
significantly its indebtedness, which could also require it to sell a
significant portion of its assets. No assurances can be given that any such
dispositions or acquisitions of assets, or deleveraging, could be accomplished
on favorable terms, or at all. There are restrictions under certain of the
operative documents evidencing the New Debt which could limit possible actions
the Company 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 could require approval or consent
of certain holders of New Debt. Any such results could have a material adverse
effect on the Company.
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.
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; CMSLP
Management Company, Inc.; CMSLP Holding Company, Inc.; CRIIMI, Inc.; CRIIMI MAE
Financial Corporation; CRIIMI MAE Financial Corporation II; CRIIMI MAE Financial
Corporation III; CRIIMI MAE QRS 1, Inc.; CBO REIT, Inc.; CM Securities Trading
Co.; and CRIIMI MAE CMBS Corporation for all periods presented. In addition, the
consolidated financial statements reflect the financial position, results of
operations and cash flows of CRIIMI MAE Services Limited Partnership ("CMSLP")
from July 2001 and Shoppes Limited Partnership from October 2001. All
significant 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.
Reclassifications
Certain 2000 and 1999 amounts have been reclassified to conform to the 2001
presentation.
Other Cash and Cash Equivalents and Servicing 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 covenants under the New
Debt or, pursuant to various stipulation and consent orders which provide for
adequate protection with certain of the Company's creditors which litigation was
not resolved prior to the Company's emergence from Chapter 11.
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
("SFAS") No. 125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" ("FAS 125"), as amended by Statement of Financial
Accounting Standard No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities - a Replacement of FASB
Statement No. 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
Prior to April 1, 2001, CRIIMI MAE recognized income from Subordinated CMBS
using the effective interest method, using the anticipated yield over the
projected life of the investment. Changes in anticipated yields were 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 yields resulting from prepayments were
recognized through a cumulative catch-up adjustment at the date of the change
which reflected the change in income of the security from the date of purchase
through the date of change in anticipated yield. The new yield was then used for
income recognition for the remaining life of the investment. Changes in
anticipated yields resulting from reduced estimates of losses were recognized on
a prospective basis. When other than temporary impairment was recognized, a new
yield was calculated on the CMBS based on its new cost basis (fair value at date
of impairment) and expected future cash flows. This revised yield was employed
prospectively. Effective April 1, 2001, CRIIMI MAE adopted EITF 99-20
"Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets" to recognize income on its
Subordinated CMBS. Under EITF 99-20, when there has been a change in estimated
future cash flows from the cash flows previously projected (due to prepayment
speeds and/or credit losses), the Company will calculate a revised yield based
on the current amortized cost of the investment and the revised future cash
flows. This revised yield is applied prospectively to recognize interest income.
CRIIMI MAE classifies its Subordinated CMBS as available for sale and carries
them at fair market value where temporary changes in fair value are recorded as
a component of shareholders' equity.
Interest income on other mortgage-backed securities consists of
amortization of the discount or premium 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 insured mortgage securities are classified as Available for
Sale. As a result, the Company carries its insured mortgage securities at fair
value where changes in fair value are recorded as a component of shareholders'
equity.
CRIIMI MAE's consolidated investment in insured mortgage securities
consists of participation certificates evidencing a 100% undivided beneficial
interest in Government Insured Multifamily Mortgages issued or sold pursuant to
programs of the Federal Housing Administration ("FHA") ("FHA-Insured
Certificates") and mortgage-backed securities guaranteed by the Government
National Mortgage Association ("GNMA") ("GNMA Mortgage-Backed Securities").
Payment of principal and interest on FHA-Insured Certificates is insured by the
U.S. Department of Housing and Urban Development ("HUD") pursuant to Title 2 of
the National Housing Act. Payment of principal and interest on GNMA
Mortgage-Backed Securities is guaranteed by GNMA pursuant to Title 3 of the
National Housing Act.
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 (because it does not
control these investees) for its investment in the AIM Funds and advisory
partnership, which provides for recording CRIIMI MAE's share of net earnings or
losses in the AIM Funds and advisory partnership reduced by distributions from
the limited partnerships and adjusted for purchase accounting amortization.
Beginning July 1, 2001, CRIIMI MAE began accounting for CMSLP on a
consolidated basis as opposed to accounting for CMSLP under the equity method.
This change in accounting method was a result of a reorganization in which the
partnership interests in CMSLP are now held by two wholly-owned and controlled
TRSs of CRIIMI MAE. Prior to July 1, 2001, CRIIMI MAE accounted for CMSLP under
the equity method as the Company did not control the voting common stock of the
general partner of CMSLP. CMSLP's assets, liabilities, revenues and expenses are
labeled as "servicing" on the Company's consolidated financial statements.
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
Company's revised projected cash flows related to the CMBS and the CMBS's
current cost basis result in a decrease in the yield that was previously used to
recognize income. This decrease in yield would primarily be a result of the
credit quality of the security declining and the Company determining that the
current estimate of expected future credit losses exceeds credit losses as
originally projected or expected credit losses will occur sooner than originally
projected. The amount of impairment loss is measured by comparing the fair
value, based on available market information and management's estimates, of the
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 2001, 2000 and 1999.
CRIIMI MAE assesses its 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.
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 2001, 2000 and 1999.
Equity Investments
Impairment is recognized on CRIIMI MAE's investments accounted for under
the equity method if a decline in the market value of the investment below its
carrying basis is judged to be "other than temporary". In this case, an
unrealized loss is recognized as the difference between the fair value and
carrying amount. The Company did not recognize impairment losses on its equity
investments in 2001, 2000 and 1999.
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, investment in mezzanine loans and real estate
owned ("REO"), as further discussed below.
In October 2001, CRIIMI MAE acquired certain partnership interests in a
partnership that was indebted on a mezzanine loan payable to the Company in
exchange for curing a default on the first mortgage loan through a cash payment.
This partnership and another wholly-owned subsidiary of CRIIMI MAE own 100% of
the partnership interests in the partnership which is the obligor on the first
mortgage loan. The first mortgage loan is secured by a shopping center in
Orlando, Florida. As a result of this transaction, the Company, through certain
of its wholly-owned subsidiaries, owns 100% of the partnership interests in the
partnership and is consolidating its accounts as of October 1, 2001. The
mezzanine loan is eliminated in consolidation. The
Company accounts for these assets as REO, and the REO will be held for
investment. As of December 31, 2001, the Company has $8,565,035 in REO assets
included in other assets ($8,343,307 relating to the actual building and land),
$7,109,252 in a mortgage payable, and $83,498 of liabilities included in other
liabilities on its balance sheet. At the date of acquisition, the Company
adjusted the book values of the assets acquired and the assumed mortgage payable
to fair value. Adjusting the first mortgage to fair value resulted in the debt
being recorded at $7,130,638 compared to the unpaid principal balance of
$8,892,603. This discount on the debt of $1,761,965 will be amortized into
interest expense over the life of the mortgage, or 6.5 years. During the period
October 1 through December 31, 2001, the Company recognized a net loss of
approximately $265,688 from the operations of the REO, including interest
expense of $165,677. This net loss is included in the consolidated statement of
income. REO property held for investment is carried at cost and depreciated over
its estimated useful life 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
goodwill and intangible assets acquired by CRIIMI MAE are amortized using the
straight-line method over 10 years. As discussed later in this footnote, the
Company wrote-off $9.8 million of goodwill and intangible assets related to
these Merger assets on January 1, 2002 upon the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets." The value of the AIM Funds' subadvisory contracts 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.
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 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.
Servicing Other Assets and Servicing Liabilities
Beginning July 1, 2001, CRIIMI MAE began accounting for CMSLP on a
consolidated basis as opposed to accounting for CMSLP using the equity method.
This change in accounting method was a result of a reorganization in which the
partnership interests of CMSLP are now held by two wholly-owned and controlled
TRSs of CRIIMI MAE. Prior to July 1, 2001, CRIIMI MAE accounted for CMSLP under
the equity method as the Company did not control the voting common stock of the
general partner of CMSLP. CMSLP's assets, liabilities, revenues and expenses are
labeled as "servicing" on the Company's consolidated financial statements.
Servicing other assets is comprised of assets owned by CMSLP, including
receivables, other assets, fixed assets, acquired mortgage servicing rights,
rights under four AIM Fund subadvisory contracts, investments in interest-only
certificates, and investments in CMBS. Servicing liabilities consist primarily
of accounts and notes payable incurred by CMSLP. Unless otherwise stated, the
accounting policies related to assets and liabilities of CMSLP are the same as
CRIIMI MAE. Significant accounting policies related to servicing other assets
and servicing liabilities are as follows:
Acquired Mortgage Servicing Rights
These assets are amortized in proportion to, and over the period of, the
estimated net servicing income (servicing revenue in excess of servicing costs)
from the servicing rights. Mortgage servicing rights are carried at the lower of
amortized cost or fair value, and are assessed for impairment based on the fair
value of those rights.
Fair values are estimated based on market prices for similar mortgage
servicing rights and on the discounted anticipated future net cash flows which
involve consideration of historical loan prepayment experience, interest rates,
default assumptions, loan modifications, assumption activities, and other
economic factors. For purposes of impairment evaluation and measurement, CMSLP
stratifies the mortgage servicing rights based on predominant risk
characteristics. CMSLP has defined its principal risk characteristic as the
servicing contract because each commercial mortgage servicing contract is unique
and requires focused attention on non-standard clauses. Management's anticipated
returns on these investments are based upon a number of assumptions that are
subject to certain business and economic uncertainties and contingencies,
including, without limitation, prevailing interest rates (the decline of which
may lead to increased prepayments of the underlying mortgage loans, to the
extent that lockout clauses have expired) and the general condition of the real
estate market.
Components of Servicing Other Assets and Servicing Liabilities
At December 31, 2001, the following comprised servicing other assets and
servicing liabilities:
Acquired mortgage servicing rights $ 4,096,333 (1)
AIM Fund subadvisory contracts 1,906,542
Investment in interest-only certificates and CMBS 2,395,576
Receivables and other assets 7,612,446
Fixed assets, net 2,239,927
-------------
Total servicing other assets $ 18,250,824
=============
Accounts and notes payable $ 3,660,173
=============
(1) As discussed below, CMSLP sold all of its rights and obligations under
its CMBS master and primary contracts in February 2002.
Servicing Revenue, Servicing General and Administrative Expenses, Servicing
Restructuring Expense and Servicing Amortization, Depreciation and Impairment
Servicing revenue represents revenue earned by CMSLP, which primarily
consists of mortgage servicing fees, interest income, assumption fees and other
ancillary servicing fees, and AIM Fund subadvisory fees. Servicing general and
administrative expenses represents general and administrative expenses incurred
by CMSLP. Servicing amortization, depreciation and impairment represents
expenses incurred by CMSLP, including amortization of mortgage servicing rights,
impairment on mortgage servicing rights and depreciation and amortization of
fixed and other assets. Unless otherwise stated, the accounting policies related
to revenues and expenses of CMSLP are the same as CRIIMI MAE. Significant
accounting policies affecting servicing revenues and expenses are as follows:
Servicing Restructuring Expense
On December 17, 2001, CMSLP announced its intention to sell all of its
rights and obligations under its CMBS master and primary servicing contracts
because the contracts were not profitable, given the relatively small volume of
master and primary CMBS servicing that CMSLP was performing. In connection with
this determination, 34 employees were terminated. All rights and obligations
under these servicing contracts were sold in February 2002. CMSLP received
approximately $11.3 million in cash, which included reimbursement of advances.
This is expected to result in a gain on sale of approximately $4.3 million,
subject to adjustment for certain post-closing contingencies, in the second
quarter of 2002. In addition, CMSLP may receive up to an additional $0.9 million
from the sale in the third quarter of 2002, which would be reflected as an
additional gain on sale, following the completion of a post-closing contingency
period.
As a result of the restructuring plan, CMSLP recorded a restructuring
expense of $437,723 in the fourth quarter of 2001. A summary of the costs
comprising the total charge incurred in the fourth quarter is as follows:
Employee severance and other termination benefits $ 240,903
Non-cancelable lease costs 133,834
Other 62,986
---------
Total $ 437,723
=========
During the fourth quarter of 2001, approximately $55,936 in severance
costs, $33,462 in non-cancelable lease costs, and $52,986 in other costs were
paid. The remaining $295,339 of the restructuring accrual remains in Servicing
Liabilities at December 31, 2001.
Servicing and Subadvisory Fees
CMSLP receives servicing fees for property, standby and special servicing
provided on behalf of CMBS investors, represented principally by certain
affiliated entities, in connection with loans originated or acquired by mortgage
lenders. Mortgage servicing fees are generally calculated on the outstanding
principal balances of the loans serviced and are earned on a monthly basis as
mortgage loan principal and interest collections are due.
CMSLP also earns fees based on the invested assets of the AIM Funds as
CMSLP is the subadvisor to these funds. As the subadvisor, CMSLP is responsible
for managing the assets of the AIM Funds. These duties include the maintenance
and disposition of the AIM Funds' mortgage assets.
Assumption Fees
An assumption fee is income that CMSLP receives for the underwriting
involved in processing records for a new buyer in assuming an existing loan.
Typically, the fee is either based on a percentage of the unpaid principal
balance of the loan to be assumed (usually 1 percent) or is a fixed standard
cost, as provided for in the loan documents that is then shared with other
servicers. This income is recognized after the assumption of the loan has been
approved by CMSLP and documentation of the assumption has been completed and
executed.
Components of Servicing Revenue, Servicing General and Administrative
Expenses, Servicing Restructuring Charges and Servicing Amortization,
Depreciation and Impairment
For the six months ended December 31, 2001, the following comprised
servicing revenue and servicing expenses:
Mortgage servicing fees $ 3,570,603
Assumption fees and other servicing income 2,178,077
Interest income 834,664
AIM Fund subadvisory fees 302,713
------------
Total servicing revenue $ 6,886,057
============
Servicing general and administrative expenses $ 5,882,889
============
Servicing Restructuring Charges $ 437,723
============
Amortization of mortgage servicing rights $ 734,258
Depreciation and amortization of fixed and other assets 466,403
Impairment on mortgage servicing rights and CMBS 498,525
------------
Total servicing amortization, depreciation and impairment $ 1,699,186
============
Discounts and Deferred Financing Costs on Debt
Discounts and deferred financing costs 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. In addition, as discussed in Note 7, there are extension fees
payable under the terms of the New Debt in future years. The
Company has estimated the amounts of these extension fees and is amortizing
the fees using the effective interest method over the term of the related debt.
Interest Rate Protection Agreement
Currently, the Company uses interest rate caps to hedge the variability in
interest payments associated with its Variable-Rate Secured Borrowing. During
1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). In
June 1999, the FASB issued SFAS 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 SFAS 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of FASB Statement No.
133". 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. From January 1, 2001 through June 30, 2001, in
accordance with FAS 133, all changes in the fair value of the interest rate caps
related to intrinsic value were recorded in other comprehensive income ("OCI")
and all changes in fair value related to time value were recorded through
earnings as those changes in fair value were considered ineffective. Beginning
July 1, 2001, the Company recorded all changes in fair value (both intrinsic and
time value) through OCI in accordance with a FASB Derivatives Implementation
Group interpretation. Amounts recorded in OCI will be reclassified into earnings
in the period in which earnings are affected by the hedged cash flows, which is
monthly as the Variable-Rate Secured Borrowing's interest rate resets monthly to
one-month LIBOR as does the interest rate cap. Upon the termination of a hedging
relationship, the amount in OCI will be amortized over the remaining life of the
previously 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 as of January 1,
2001. As of December 31, 2001, the Company had recorded $(1,073,392) in earnings
and $(383,200) in OCI. This loss is reflected in Hedging Loss on the income
statement and the interest rate cap is carried as a part of Other Assets on the
balance sheet.
Bankruptcy Accounting during Chapter 11 Proceedings
Liabilities Subject to Chapter 11 Proceedings
Liabilities which were subject to Chapter 11 proceedings, including claims
that became known after the Petition Date, were 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 the Chapter 11 proceeding was adjusted. The gain or loss resulting
from the entries to record the adjustment was recorded as a reorganization item.
Reorganization Items
Reorganization items were items of income and expense that were realized or
incurred by CRIIMI MAE because it was in reorganization. These included, but
were not limited, to the following:
o Short-term interest income that would not have been earned but for the Chapter
11 proceedings.
o Professional fees and similar types of expenditures directly relating to the
Chapter 11 proceedings.
o Employee Retention Program costs and severance payments.
o 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.
During the years ended December 31, 2001, 2000, and 1999, the Company
recorded reorganization items, as summarized below, due to the Chapter 11
filings of CRIIMI MAE, CM Management and Holdings II.
Reorganization Items 2001 2000 1999
-------------------- --------------- --------------- ---------------
Short-term interest income $ 2,491,311 $ 6,850,362 $ 1,518,667
Professional fees (3,870,185) (9,317,772) (17,822,154)
Employee Retention Program -- (851,948) (1,589,236)
Other (800,875) (1,136,319) (3,005,405)
Excise tax accrued -- (495,000) (1,105,000)
--------------- --------------- ---------------
Subtotal (2,179,749) (4,950,677) (22,003,128)
Impairment on CMBS regarding Reorganization (2) -- (15,832,817) (156,896,831)
Net recovery (loss) on real estate owned (1) 366,529 (924,283) --
Net gain on sale of CMBS -- 1,481,029 --
Loss on originated loans -- (45,845,712) --
-------------- --------------- ---------------
Total Reorganization Expense, net $ (1,813,220) $ (66,072,460) $(178,899,959)
============== ================ ===============
(1) The Company recognized impairment on its investment in real estate
owned in 2000. This asset was sold in July 2000.
(2) 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.
Shareholders' Equity
On October 17, 2001, CRIIMI MAE effected a one-for-ten reverse stock split.
All share and per share information in these Notes to Consolidated Financial
Statements and the accompanying Consolidated Financial Statements has been
retroactively adjusted to reflect the reverse stock split. Share information
adjustments include, without limitation, adjustments to the number of common
shares issued and outstanding, issued as dividends on and upon conversion of
shares of preferred stock, and issuable under outstanding options. See Notes 10
and 11 for further discussion.
Per Share Amounts
Basic earnings per share ("EPS") amounts for 2001, 2000 and 1999 represent
net income, or loss, available to common shareholders divided by the weighted
average common shares outstanding during the year. The weighted average common
shares outstanding amounts include the weighted average amount of common shares
payable or paid to preferred shareholders related to dividends as of the
respective dividend declaration dates. Diluted EPS amounts for 2001, 2000 and
1999 represent basic EPS adjusted for dilutive common stock equivalents, which
for CRIIMI MAE could include stock options and certain series of convertible
preferred stock. See Note 12 for a reconciliation of basic EPS to diluted EPS.
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 2001 and 2000 tax years. 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.
During the year ended December 31, 2001, no excess inclusion was
distributed. 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.
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. On
the Effective Date, cash of approximately $127.2 million was used to payoff a
portion of the aggregate principal relating to debt incurred prior to the
Chapter 11 filing. The aggregate New Debt principal of approximately $429.2
million was incurred by the Company on the Effective Date to satisfy the
remaining principal owed on the debt incurred prior to the Chapter 11 filing.
The cash outflow of $127.2 million is included in principal payments on secured
borrowings and other debt obligations in the financing activities section of the
consolidated statements of cash flows. The aggregate New Debt principal of
$429.2 million resulted in no cash inflow to the Company and, accordingly, is
not reflected in the consolidated statements of cash flows. Also on the
Effective Date, cash of approximately $44.7 million was used to payoff accrued
interest on debt incurred prior to the Chapter 11 filing, cash of approximately
$3.9 million was used to pay an emergence financing origination fee related to a
portion of the New Debt, and cash of approximately $7.4 million was used to pay
accrued payables owed by the Company related to the Chapter 11 filing. This cash
activity is reflected in the operating activities section of the consolidated
statements of cash flows within the net income line or the (decrease) increase
in payables and accrued expenses line.
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 of
$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.
The following is the supplemental cash flow information:
2001 2000 1999
---- ---- ----
Cash paid for interest $ 129,864,255 $ 137,110,022 $ 112,561,866
Non-cash investing and financing activities:
Fair value of assets acquired 8,784,105 -- --
Fair value of liabilities acquired (569,991) -- --
Fair value of debt assumed (7,130,638) -- --
Comprehensive Income
Comprehensive income includes net earnings as currently reported by the
Company (before dividends accrued or paid on preferred shares) adjusted for
other comprehensive income. Other comprehensive income for the Company consists
of (a) changes in unrealized gains and losses related to the Company's CMBS and
Other MBS and Insured Mortgage Securities which were disposed of or impaired
during the period with the resulting gain or loss reflected in net earnings
(reclassification adjustments), (b) the change in the unrealized gain or loss
related to those investments that were not disposed of or impaired during the
period, and (c) certain changes in the fair value of the interest rate caps the
Company accounts for under SFAS 133. The table below details other comprehensive
income for the periods presented:
2001 2000 1999
---- ---- ----
Reclassification adjustment for losses (gains) from dispositions
included in net income $ 350,066 $ 282,723 $ (760,694)
Reclassification adjustment for impairment losses recognized on
CMBS included in net income -- 180,177,910 111,745,210
Unrealized holding (losses) gains on mortgage securities arising
during the period (3,390,785) 23,941,476 (67,150,995)
Unrealized (losses) gains on interest rate cap (383,200) -- --
------------ ------------ ------------
Net adjustment to other comprehensive income $(3,423,919) $204,402,109 $ 43,833,521
============ ============ ============
Change in Accounting Principle related to Special Servicing Fee Revenue
Recognition
As of July 1, 2001, CMSLP changed its accounting policy related to the
recognition of special servicing fee revenue. Special servicing fees are paid to
CMSLP when mortgage loans collateralizing CMBS owned by the Company are in
default. Typically, CMSLP is paid 25 basis points of the unpaid principal
balance of the defaulted mortgage loans for as long as the loans are in default.
The fees are paid to compensate the special servicer for managing and resolving
the defaulted loan. Historically, CMSLP had deferred special servicing fee
revenue and recorded that revenue into earnings using the method consistent with
the Company's policy of recognizing interest income over the life of the CMBS
owned by CRIIMI MAE on the level yield basis. CMSLP is now recording these
special servicing fees in earnings on a current basis. This change in accounting
policy was made to better match revenues and expenses related to the actual
special servicing of the defaulted loans. The special servicing fees are paid on
a current basis by the trusts holding the mortgage loans and those payments
directly reduce the cash flow paid on the Company's CMBS. Therefore, the special
servicing fees paid are built into the GAAP yields the Company uses to record
interest income on its CMBS. CMSLP has changed its accounting policy to
recognize the special servicing fees in earnings on a current basis as it
believes this policy better matches the special servicing fees it earns with the
direct costs expended for special servicing the loans. The CMBS and special
servicing contracts are separate legal instruments or contracts.
The Company is required to reflect this change in accounting principle as a
cumulative catch-up as of January 1, 2001. As of January 1, 2001 CMSLP had
approximately $2.0 million in deferred revenue related to the special servicing
fee revenue. As a result, this amount was recorded into income and is reflected
as a cumulative change in accounting principle for the year ended December 31,
2001. The results of operations for the year ended December 31, 2001 reflect the
recognition of special servicing fee revenue on a current basis. As previously
discussed, prior to July 1, 2001, CMSLP was accounted for using the equity
method and, as a result, the impact of the new accounting principle (except for
the cumulative catch-up) is reflected in equity in income from investments for
the six months ended June 30, 2001 and on a consolidated basis for the six
months ended December 31, 2001. The proforma net income disclosures on the
income statement related to this change in accounting principle present the
Company's net income assuming this new accounting principle had been applied to
those periods presented. Net income would have been $2.8 million less for the
year ended December 31, 2001 had this new accounting principle not been adopted.
New Accounting Statements
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. Previously, 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
recognized 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 American Institute of Certified Public Accountants Practice Bulletin 6, the
Company recognized changes related to expected future cash flows due to credit
losses prospectively if the change resulted in fewer credit losses and as a
cumulative catch-up if the change resulted in more credit losses, unless
impairment was required to be recognized at which time the CMBS was written down
to fair value. EITF 99-20 was adopted by the Company on April 1, 2001 and
resulted in no adjustment to interest income or impairment. Additionally, the
Company does not expect the adoption of EITF 99-20 to have a significant impact
on the Company's CMBS income recognition in the future.
In June of 2001, the FASB issued SFAS No. 142 "Goodwill and Other
Intangible Assets" ("FAS 142"). FAS 142, among other things, prohibits the
amortization of existing goodwill and certain types of other intangible assets
and establishes a new method of testing goodwill for impairment. Under FAS 142,
the method for testing goodwill for impairment will occur at the reporting unit
level (as defined in FAS 142) and will be performed using a fair value based
approach. FAS 142 will be effective for the Company on January 1, 2002. The
transition provisions of FAS 142 require the Company to reclassify $8.4 million
of intangible assets related to the Merger in 1995 to goodwill. When combined
with the current goodwill of $1.4 million, this will result in $9.8 million of
goodwill on the Company's books. Effective upon adoption on January 1, 2002, the
Company wrote off this goodwill and recorded a resulting impairment charge of
approximately $9.8 million for this change in accounting principle. The goodwill
relates to the Portfolio Investment reporting unit (as defined in Note 17). The
fair value of the reporting unit was determined using a market capitalization
approach and the impairment was primarily a result of the significant decrease
in the Company's common stock price since the Merger in 1995. This change in
accounting principle will reduce the Company's annual amortization expense by
approximately $2.8 million.
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, 2001 As of December 31, 2000
Amortized Cost Fair Value Amortized Cost Fair Value
-------------- ---------- -------------- ----------
ASSETS:
Subordinated CMBS and Other MBS (1) $ 546,981,955 $ 536,204,992 $ 109,256,045 $ 109,266,975
Subordinated CMBS pledged to Securitized
Mortgage Obligation - CMBS 283,993,690 296,477,050 281,278,097 283,336,965
Subordinated CMBS pledged to creditors -- -- 464,242,328 464,242,328
Insured mortgage securities 350,982,991 343,091,303 390,840,884 385,751,407
Interest rate protection agreement 448,789 65,589 157,323 22,181
Servicing other assets See footnote See footnote -- --
(2) (2)
Servicing cash and cash equivalents 6,515,424 6,515,424 -- --
Restricted cash and cash equivalents 38,214,277 38,214,277 95,846,001 95,846,001
Other cash and cash equivalents 10,783,449 10,783,449 106,569,778 106,569,778
LIABILITIES:
Variable-rate secured borrowing 244,194,590 244,194,590 -- --
Series A senior secured notes 99,505,457 95,276,475 -- --
Series B senior secured notes 63,937,383 54,826,306 -- --
Securitized mortgage obligations:
Collateralized bond obligations-CMBS 283,047,470 296,477,050 280,520,265 283,336,965
Collateralized mortgage obligations-
insured mortgage securities 326,558,161 351,983,544 364,649,925 378,303,100
Mortgage Payable 7,109,252 7,109,252 -- --
Variable-rate secured borrowings-CMBS -- -- 367,535,895 N/A
Senior unsecured notes -- -- 100,000,000 94,750,000
Other financing facilities -- -- 91,049,522 N/A
(1) This amount includes approximately $8.6 million of amortized cost and
$8.5 million of fair value related to Other MBS as of December 31, 2001 and
approximately $4.3 million of amortized cost and fair value as of December 31,
2000.
(2) CMSLP owns Subordinated CMBS and interest-only strips with an aggregate
amortized cost basis and fair value of $2.3 million and $2.4 million,
respectively, as of December 31, 2001.
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
The Company calculated the estimated fair market value of its Subordinated
CMBS portfolio as of December 31, 2001 and 2000, using a discounted cash flow
methodology. 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: (i) institutionally available research reports,
(ii) recent trades, and (iii) 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, 2001 and 2000, 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. Buying and trading activity in
investment grade CMBS and new issuances of CMBS have recovered over the
last several years. The market for Subordinated CMBS has, however, been slower
to recover. It is difficult, if not impossible, to predict when or if the
Subordinated CMBS market will recover to 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 Subordinated 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 Company calculated the estimated fair market value of its insured
mortgage securities portfolio as of December 31, 2001 and 2000, using a
discounted cash flow methodology. 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 and
(ii) communications with dealers and active insured mortgage security investors
regarding the valuation of comparable securities.
Servicing, Restricted and Other Cash and Cash Equivalents
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,
2001 and 2000 was calculated using a discounted cash flow methodology similar to
the discussion on Subordinated CMBS above. The fair values of the Series A and
Series B Senior Secured Notes are based on quoted market prices from investment
banking institutions. The carrying amount of the Variable-Rate Secured Borrowing
approximates fair value because the current rate on the debt resets monthly
based on market rates. The fair value of the mortgage payable is estimated based
on current market interest rates of mortgage debt.
Interest Rate Protection Agreement
The fair value of the interest rate protection agreement used to hedge
CRIIMI MAE's Variable-Rate Secured Borrowing is the estimated amount that CRIIMI
MAE would receive to terminate the agreement as of December 31, 2001 and 2000,
taking into account current interest rates and the current creditworthiness of
the counterparty. The amount was determined based on a quote received from the
counterparty to the agreement.
5. SUBORDINATED CMBS
As of December 31, 2001, the Company owned, for purposes of GAAP, CMBS
rated from A to CCC and unrated with a total fair value amount of approximately
$824 million (representing approximately 63% of the Company's total consolidated
assets), an aggregate amortized cost of approximately $822 million, and an
aggregate face amount of approximately $1.6 billion. Such CMBS represent
investments in CBO-1, CBO-2 and Nomura. The December 31, 2001 total fair value
includes approximately 33% of the Company's CMBS which are rated BB+, BB, or
BB-, 23% which are rated B+, B, B- or CCC and 8% which are unrated. The
remaining approximately 36% represents investment grade securities that the
Company reflects on its balance sheet as a result of CBO-2. The weighted average
interest rate of these CMBS as of December 31, 2001 was 6.3% and the weighted
average life was 13 years.
The aggregate investment by the rating of the Subordinated CMBS is as
follows:
Weighted Discount Rate or Amortized Cost Amortized Cost
Face Amount as of Average Pass- Weighted Fair Value as of Range of Discount as of 12/31 01 as of 12/31/00
Security 12/31/01 (in Through Rate Average Life 12/31/01 (in Rated Used to (in millions) (in millions)
Rating millions) 12/31/01 (1) millions) Calculate Fair Value (3) (4)
- --------- ------------------ ------------- ------------ ---------------- -------------------- --------------- --------------
A+ (2)(7) $ 62.6 7.0% 4 years $ 61.8 7.3% $ 58.7 $ 58.0
BBB+ (2)(7) 150.6 7.0% 10 years 135.6 8.6% 131.1 130.1
BBB (2)(7) 115.2 7.0% 10 years 99.1 9.2% 94.2 93.2
BB+ 319.0 7.0% 11 years 209.8 12.8%-13.1% 219.0 215.5
BB 70.9 7.0% 12 years 44.2 13.6% 46.0 45.4
BB- 35.5 7.0% 12 years 20.5 14.6% 20.5 21.3
B+ 88.6 7.0% 13 years 45.2 16.4% 45.2 48.6
B 177.2 7.0% 14 years 83.7 17.1%-17.4% 83.7 87.9
B- 118.3 7.1% 15 years 48.0 19.7%-20.1% 48.1 51.3
CCC 70.9 7.0% 16 years 13.1 40.0% 13.1 17.0
Unrated/Issuer's 362.8 4.0% 18 years 63.2 35.0%-53.7% 62.8 82.2
Equity
---------- -------- -------- ---------
Total (5) $1,571.6 6.3% 13 years $ 824.2 (6) $822.4 (5) $ 850.5
========== ======== ======== =========
(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 a resecuritization of CMBS effected by the
Company in 1998 ("CBO-2"), $62.6 million (originally A rated,
currently A+ rated) and $60.0 million (originally BBB rated, currently
BBB+ rated) face amount of investment grade securities were sold with
call options and $345 million (originally A rated, currently 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
(originally BBB rated, currently BBB+ rated) and $115.2 million
(originally BBB- rated, currently 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 A+, BBB+
and BBB 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) Amortized cost reflects approximately $30.8 million of
impairment charges related to certain CMBS (the CBO-1 B- and unrated
bonds and the CBO-2 BB- through unrated bonds) which were recognized
in the fourth quarter of 2001 and approximately $3.9 million of
impairment charges related to certain CMBS (the CBO-1 B- and unrated
bonds and the Nomura unrated bond) which were recognized in the third
quarter of 2001, in addition to the losses discussed in (4) below.
These impairment charges are discussed later in this section.
(4) Amortized cost reflects $143.5 million of non-cash impairment
charges related to the retained CMBS (excluding the A+ and BBB+ rated
tranches) which were 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 expected
life of the investment. In addition, the Company expected such revised
losses to occur sooner than originally expected because of the slowing
U.S. economy and recession. This revised loss estimate was a result of
an increase in the number of loans that were placed in special
servicing due primarily to monetary loan defaults. As of December 31,
2000, $310.6 million in mortgage loans underlying the Company's CMBS
portfolio were in special servicing. As of March 31, 2001, this amount
had grown to $443.5 million, or 2.2% of the mortgage loans underlying
the CMBS portfolio, an increase from 1.3% when the Company revised its
yields as of April 1, 2000.
(5) See Notes 1 and 9 to Notes to Consolidated Financial Statements for
information regarding the Subordinated CMBS for tax
purposes.
(6) As of December 31, 2001, the aggregate fair values of the CBO-1,
CBO-2 and Nomura bonds were approximately $37.7 million,
$777.8 million and $8.7 million, respectively.
(7) In June 2001, Standard & Poor's upgraded its ratings on the
following CMBS: The Company's CBO-2 CMBS with original ratings of A,
BBB and BBB- were upgraded to A+, BBB+ and BBB, respectively.
Mortgage Loan Pool
CRIIMI MAE, through CMSLP, performs servicing functions on commercial
mortgage loans totaling $19.3 billion and $20.2 billion as of December 31, 2001
and 2000, respectively. The mortgage loans underlying CRIIMI MAE's Subordinated
CMBS portfolio were secured by properties of the types and in the geographic
locations identified below:
12/31/01 12/31/00 12/31/01 12/31/00
Property Type Percentage(i) Percentage(i) Geographic Location (ii) Percentage(i) Percentage(i)
------------- ------------- ------------- ------------------------ ------------- -------------
Retail......... 30% 30% California.............. 16% 17%
Multifamily.... 29% 30% Texas................... 13% 13%
Hotel.......... 14% 14% Florida................. 8% 8%
Office......... 13% 13% New York................ 5% 5%
Other (iv)..... 14% 13% Pennsylvania............ 5% 5%
---- ---- Other(iii).............. 53% 52%
Total...... 100% 100% ---- ----
==== ==== Total................ 100% 100%
==== ====
(i) Based on a percentage of the total unpaid principal balance of the
underlying loans.
(ii) No significant concentration by region.
(iii) No other individual state makes up more than 5% of the total.
(iv) The Company's ownership interest in one of the 20 CMBS transactions
underlying CBO-2 includes subordinated CMBS in which the Company's
exposure to losses arising from certain healthcare and senior housing
mortgage loans is limited by other subordinated CMBS (referred to
herein as the "Subordinated Healthcare/Senior-Housing CMBS"). The
Subordinated Healthcare/Senior-Housing CMBS are not owned by and are
subordinate to CRIIMI MAE's CMBS. As a result, CRIIMI MAE's investment
in such underlying CMBS will only be affected if interest shortfalls
and/or realized losses on such healthcare and senior housing mortgage
loans are in excess of the Subordinated Healthcare/Senior-Housing CMBS.
As of February 28, 2002, the Company reviewed the loans currently under
surveillance by the healthcare and senior housing mortgage loans
servicer. Based on its review, the Company does not believe that the
aggregate remaining shortfalls and/or realized losses on such
healthcare and senior housing mortgage loans currently in special
servicing is greater than the current outstanding Subordinated
Healthcare/Senior-Housing CMBS. As a result, the Company's current
estimate of future credit losses as of December 31, 2001 does not
include any provision for shortfalls and/or realized losses arising
from the healthcare and senior housing mortgage loans in this CMBS
transaction. It should be noted that changes in the future performance
of the healthcare and senior housing mortgage loans that result in
greater shortfalls and/or losses may result in future losses and/or
possible impairment to CRIIMI MAE's CMBS.
Specially Serviced Mortgage Loans
CMSLP performs special servicing services on the loans underlying CRIIMI
MAE's Subordinated CMBS portfolio. A special servicer typically provides asset
management and resolution services with respect to nonperforming or
underperforming loans within a pool of mortgage loans. When serving as special
servicer of a mortgage loan pool, CMSLP has the authority, subject to certain
restrictions in the CMBS pool documents, 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
first loss unrated or lowest rated bond of all but one CMBS, CMSLP has an
incentive to quickly resolve any loan workouts. As of December 31, 2001 and
2000, specially serviced mortgage loans included in the commercial mortgage
loans described above are as follows:
12/31/01 12/31/00
-------- --------
Specially serviced loans due to monetary default (a) $701.7 million $259.1 million
Specially serviced loans due to covenant default/other 90.0 million 51.5 million
--------------- ---------------
Total specially serviced loans (b) $791.7 million $310.6 million
=============== ===============
Percentage of total mortgage loans (b) 4.1% 1.5%
=============== ===============
(a) Includes $94.5 million and $48.3 million, respectively, of real estate
owned by underlying trusts.
(b) As of February 28, 2002, total specially serviced loans were $902
million, or 4.8% of the total mortgage loans (as discussed further below).
The specially serviced mortgage loans as of December 31, 2001 were secured
by properties of the types and located in the states identified below:
Property Type $ (in millions) Percentage Geographic Location $ (in millions) Percentage
------------- --------------- ---------- ------------------- --------------- ----------
Hotel............ $ 407.8 51% Florida.............. $ 109.8 14%
Retail........... 241.0 30% Texas................ 103.6 13%
Multifamily...... 44.9 6% Oregon............... 94.8 12%
Office........... 44.7 6% Georgia.............. 41.4 5%
Healthcare....... 31.7 4% California........... 41.2 5%
Industrial....... 14.1 2% New York............. 40.4 5%
Other............ 7.5 1% Other................ 360.5 46%
------- ---- ------- ----
Total........ $ 791.7 100% Total............. $ 791.7 100%
======= ==== ======= ====
As reflected above, as of December 31, 2001, approximately $407.8 million,
or 51%, of the specially serviced mortgage loans represent mortgages on hotel
properties. The hotel properties are geographically diverse, with a mix of hotel
property types and franchise affiliations. Of the mortgage loans underlying the
Company's CMBS, there are loans representing a total outstanding principal
amount of $1.3 billion secured by limited service hotels, of which $278.2
million, or 21.5%, are in special servicing as of December 31, 2001. Limited
service hotels are generally hotels with room-only operations or hotels that
offer a bedroom and bathroom for the night, but limited other amenities, and are
often in the budget or economy group. Of the mortgage loans underlying the
Company's CMBS, there are loans representing a total outstanding principal
amount of $1.51 billion secured by full service hotels, of which $129.6 million,
or 8.6%, are in special servicing as of December 31, 2001. Full service hotels
are generally mid-price, upscale or luxury hotels with restaurant and lounge
facilities and other amenities.
Also, as of December 31, 2001, of the mortgage loans underlying the
Company's CMBS, there are loans representing a total outstanding principal
amount of $5.7 billion secured by retail properties, of which approximately
$241.0 million are in special servicing. The retail loans comprise approximately
30% of the specially serviced loans as of December 31, 2001. The Company is
monitoring its exposure to certain retailers that are currently in bankruptcy or
are otherwise experiencing financial difficulties.
As of February 28, 2002, specially serviced loans totaled $902.0 million.
During the period September 30, 2001 (the date the Company last revised the loss
estimates) through February 28, 2002, there was a $292.7 million, or 48%,
increase in specially serviced loans due to additional defaults on underlying
mortgage loans secured by a variety of property types, but primarily hotel and
retail properties. The properties that secure these loans have been adversely
impacted by a variety of factors, including the economic slowdown and recession
which, especially for hotel properties, has been exacerbated by the terrorist
attacks of September 11, 2001. Of the monetary defaults on the mortgage loans
underlying the Company's CMBS which transferred into special servicing between
September 30, 2001 and February 28, 2002, an approximate $358.9 million, or 76%,
are loans secured by hotel properties. During this same period, approximately
$132.3 million of loans in special servicing due to monetary default and real
estate owned transferred out of special
servicing due to correction, dispositions or sale, resulting in a total
special servicing portfolio of $902.0 million as of February 28, 2002, of which
$834.1 million reflect monetary defaults and real estate owned.
Of the transfers into special servicing due to monetary default from
September 30, 2001 through February 28, 2002, $255 million were comprised of six
different borrowing relationships more fully described as follows:
o 25 hotel loans totaling $98.3 million spread across three
CMBS transactions. In one of these CMBS transactions, which
contains 10 loans totaling $38.8 million, the Company holds only a
25% ownership interest in the non-rated class. The 25 loans were
transferred into special servicing due to the bankruptcy filing of
each special purpose borrowing entity and their parent company in
December 2001. The parent company was able to obtain
debtor-in-possession financing that is expected to pay
post-petition interest on $71 million of these loans through
December 2002. The remaining $27 million of loans were deemed by
the borrower to be highly leveraged, and therefore, not able to
support additional debt. Interest will not be paid current on
these loans.
o Ten loans totaling $65.0 million spread across two CMBS
transactions secured by hotel properties in the Pacific west and
northwest states. These loans are past due for the October 2001
payment. The borrower has indicated that the properties have
experienced reduced operating performance due to new competition,
the economic recession, and reduced travel resulting from the
September 11, 2001 terrorist attacks. These loans are related to
17 other loans, secured by similar properties, totaling
approximately $78 million that transferred into special servicing
in January 2001.
o Five loans totaling $46.5 million secured by hotel
properties in Florida and Texas. The loans are past due for the
September 2001 payment.
o Nine loans totaling $19.8 million secured by limited service
hotels in the midwest. The loans are past due for the December
2001 payment. The borrower cites reduced occupancy related to the
recent downturn in travel as the cause for a drop in operating
performance at the properties. CMSLP is attempting to negotiate a
workout with the borrower.
o Two loans totaling $15.6 million secured by hotels in Texas.
The loans were transferred to special servicing in December 2001
for imminent payment default. Since that time, the borrower has
made a payment and the loans are now due for the February 2002
payment.
o Eight loans totaling $10.0 million secured by free-standing
retail stores in Maryland and Virginia. Each property is occupied
by a national retailer. The loans are past due for the December
2001 payment. CMSLP has entered into a workout with the borrower
whereby rents are being deposited directly into a lockbox.
Additional payments are being collected to bring the loans current
during 2002.
For all of its existing and recent transfers to special servicing,
including these large borrower relationships, CMSLP is pursuing remedies
available to it in order to maximize the recovery of the outstanding debt.
Appraisal Reductions and Losses on CMBS
The effect of an appraisal reduction generally is that the servicer stops
advancing interest payments on the amount by which the aggregate of debt,
advances and other expenses exceeds the appraisal amount, thus reducing the cash
flows to CRIIMI MAE as the holder of the first loss unrated or lowest rated
bonds, as if such appraisal reduction was a realized loss. As an example,
assuming a weighted average coupon of 6%, a $1 million appraisal reduction would
reduce net cash flows to the Company by $60,000 on an annual basis. An appraisal
reduction may result in a higher or lower realized loss based on the ultimate
disposition or work-out of the mortgage loan. 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 Total
----- ----- ------ -----
Year 1999 $ -- $ -- $ -- $ --
Year 2000 1,872,000 18,871,000 -- 20,743,000
Year 2001 15,599,000 31,962,000 874,000 48,435,000
----------- ------------ -------- -----------
Cumulative Appraisal Reductions through December 31, 2001 (a) $17,471,000 $50,833,000 $874,000 $69,178,000
=========== =========== ======== ===========
* Not all underlying CMBS transactions require the calculation of an
appraisal reduction; however, where CMSLP obtains a third party
appraisal, it calculates one.
(a) During the period January 1, 2002 through February 28, 2002, there
were an additional $15.7 million of appraisal reductions.
The Company's unrated bonds/issuer's equity from CBO-1, CBO-2 and Nomura
are expected to experience principal write-downs. The following table summarizes
the actual realized losses on CMBS through December 31, 2001 and the expected
future losses through the life of the CMBS:
CBO 1 CBO 2 Nomura Total
----- ----- ------ -----
Year 1999 actual realized losses $ 738,000 $ -- $ -- $ 738,000
Year 2000 actual realized losses 3,201,000 1,087,000 -- 4,288,000
Year 2001 actual realized losses 545,000 8,397,000 238,000 9,180,000
------------- ----------- --------- -----------
Cumulative actual realized losses through the year 2001 4,484,000 9,484,000 238,000 14,206,000
Expected loss estimates for the year 2002 29,878,000 31,915,000 1,032,000 62,825,000
Expected loss estimates for the year 2003 18,058,000 51,619,000 1,077,000 70,754,000
Expected loss estimates for the years 2004-2006 27,676,000 94,095,000 12,896,000 134,667,000
Expected loss estimates for the year 2007-2009 5,606,000 15,508,000 7,028,000 28,142,000
Expected loss estimates for the remaining life of
investment (for the years 2010-2027) 7,386,000 12,794,000 3,904,000 24,084,000
------------- ------------ ----------- ------------
Cumulative actual and expected loss estimates through
life of CMBS $ 93,088,000 $215,415,000 $26,175,000 $334,678,000
============= ============ =========== ============
At September 30, 2001, the Company revised its overall expected loss
estimate related to its CMBS portfolio from $298 million to $307 million. As of
December 31, 2001, the Company further revised its overall expected loss
estimate related to its CMBS portfolio from $307 million to $335 million, with
such total losses occurring or expected to occur over the life of the CMBS
investment. These revisions to loss estimates were the result of the continued
slowing U.S. economy and recession during 2001, which were exacerbated by the
terrorist attacks on September 11, 2001 and subsequent terrorist actions and
threats. Principally as a result of the slowing economy and terrorist actions
and threats, the underlying mortgage loans have had a greater than previously
anticipated number of monetary defaults. Additionally, recent appraisal amounts
on properties underlying certain defaulted loans have been significantly lower
than anticipated, thereby increasing the estimated principal loss on the
commercial loans. The Company's overall expected loss estimate of $335 million
through the life of its CMBS portfolio represents the Company's estimate of
total principal write-downs to its CMBS due to realized losses related to
underlying mortgage loans, and is included in the calculation of the current
weighted average anticipated yield to maturity, as discussed below.
As the Company had determined that there had been an adverse change in
expected future cash flows and that its current estimate of expected credit
losses exceeded credit losses as previously projected, the Company believed
certain of the CMBS had been impaired under EITF 99-20 and FAS 115 as of
September 30, 2001 and again as of December 31, 2001. As the fair value of the
impaired CMBS was approximately $3.9 million and $30.8 million below the
amortized cost basis as of September 30, 2001 and December 31, 2001,
respectively, the Company recorded other than temporary non-cash impairment
charges through the income statement of those same amounts during the third and
fourth quarters of 2001. There can be no assurance that the Company's revised
estimate of expected losses will not be exceeded as a result of additional or
continuing adverse events or circumstances, such as a continuing economic
slowdown and recession.
Yield to Maturity
The following table summarizes yield-to-maturity information relating to
the Company's Subordinated CMBS on an aggregate pool basis:
Current
Anticipated Anticipated
Yield to Yield to
Maturity Maturity
Pool as of 1/1/01 (1) as of 1/1/02 (1)
---- ---------------- ----------------
Retained Securities from
CRIIMI 1998 C1 (CBO-2) 11.8% (2) 12.1% (3)
Retained Securities from
CRIIMI 1996 C1 (CBO-1) 21.0% (2) 14.3% (3)
Nomura Asset Securities Corp.
Series 1998-D6 Tranche B7 (Nomura) 25.3% (2) 28.7% (3)
--------- ---------
Weighted Average (4) 12.4% (2) 12.4% (3)
(1) Represents the anticipated weighted average yield over the expected
average life of the Company's CMBS portfolio as of January 1, 2001 and
2002, based on management's estimate of the timing and amount of future
credit losses.
(2) 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 non-cash impairment
recognition of $143.5 million related to the CMBS. As a result of
recognizing impairment, the Company revised its anticipated yields as of
January 1, 2001, which were used to recognize interest income beginning
January 1, 2001. These anticipated revised yields took into account the
lower cost basis as of December 31, 2000, and contemplated larger than
previously anticipated losses and those losses occurring sooner than
previously anticipated. While the Company expected lower cash flows from
its CMBS portfolio than its previous estimates, yields actually increased
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).
(3) As previously discussed, as of December 31, 2001, the Company again
revised its overall expected loss estimate related to its CMBS portfolio
from $307 million to $335 million which resulted in non-cash impairment
recognition to certain of the CMBS. As a result of this change in expected
future cash flows and the recognition of impairment, the Company revised
its anticipated yields as of January 1, 2002, which will be used to
recognize interest income beginning January 1, 2002. These anticipated
revised yields take into account the lower cost basis on the impaired CMBS
as of December 31, 2001, and contemplate larger than previously anticipated
losses and those losses generally occurring sooner than previously
anticipated.
(4) 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, 2001 and 2000, the
amount of income recognized in excess of cash received on all of the
Subordinated CMBS owned by the Company due to the effective interest rate
method was approximately $10.2 million and $15.2 million, respectively.
Determining Fair Value of Retained Interests (Subordinated CMBS)
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 pools 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 dealers and
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, 2001 and 2000, 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 on the CMBS may be affected by numerous assumptions
and variables including:
(i) the receipt of mortgage payments earlier than 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:
o 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");
o 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,
o 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:
o 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,
o a credit risk premium; plus,
o 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).
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 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 losses occurring sooner than
projected, 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
Changes in Credit Losses" below), (ii) an increase in the required rate of
return (see "Sensitivity of Fair Value to Changes in the Discount Rate" below)
for Subordinated CMBS, and/or (iii) the receipt of cash flows later than
anticipated (see "Sensitivity of Fair Value to Extension Risk" below).
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, 2001: (i) 1.5% 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 1.5% CDR, 12 month lag, and 30% loss severity,
and referred to herein as the "1.5% CDR Loss Scenario"), and (ii) 2.5% 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 2.5% CDR, 12 month lag,
and 30% loss severity, and referred to herein as the "2.5% CDR Loss Scenario").
The delay in receipt and the reduction in amount of cash flows resulting from
the 1.5% CDR Loss Scenario and the 2.5% CDR Loss Scenario, respectively,
resulted in a corresponding decline in the fair value of the Company's
Subordinated CMBS by approximately $24.9 million (or 3.0 percent) and $66.7
million (or 8.1 percent), respectively.
The aggregate amount of credit losses assumed under the 1.5% CDR Loss
Scenario and the 2.5% CDR Loss Scenario totaled approximately $403.1 million and
$669.7 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, 2001 of approximately $335 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 1.5%
CDR Loss Scenario and the 2.5% 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's assumed stream of future cash flows, results in a net present value of
such cash flows. The determination of such rate is 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 $44.9 million (or 5.4 percent) and $65.6
million (or 8.0 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.
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 $7.9 million (or 0.96 percent) and $14.2
million (or 1.72 percent), respectively.
Redesignation of CMSLP as Special Servicer
Although CMSLP did not file for protection under Chapter 11, it and the
bonds it serviced were under a high degree of scrutiny from servicing rating
agencies because of CMSLP's relationship with CRIIMI MAE. 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 CMBS securitizations
totaling approximately $29 billion, subject to certain requirements contained in
the respective servicing agreements. CMSLP continued to perform special
servicing as sub-servicer for ORIX on all but four of these securitizations. In
conjunction with the Company's emergence from Chapter 11, CMSLP was redesignated
as special servicer on the Company's remaining CMBS securitizations effective
August 27, 2001.
6. INSURED MORTGAGE SECURITIES
CRIIMI MAE's consolidated portfolio of mortgage securities is comprised of
GNMA Mortgage-Backed Securities and FHA-Insured Certificates. 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, 2001, 87% of CRIIMI MAE's
investment in mortgage securities were GNMA Mortgage-Backed Securities
(including securities which collateralized Freddie Mac participation
certificates) and approximately 13% were FHA-Insured Certificates. GNMA
Mortgage-Backed Securities and FHA-Insured Certificates are collectively
referred to herein as "mortgage securities."
CRIIMI MAE owns the following mortgage securities directly or indirectly through
its wholly-owned subsidiaries referenced below:
As of December 31, 2001
-----------------------
Weighted
Number of Average
Mortgage Effective Weighted Average
Securities Fair Value Amortized Cost Interest Rate Remaining Term
----------- --------------- ---------------- -------------- ----------------
CRIIMI MAE 1 $ 5,254,885 $ 5,372,303 8.00% 33 years
CRIIMI MAE Financial Corporation 30 106,445,595 107,546,937 8.44% 27 years
CRIIMI MAE Financial Corporation II 42 182,696,905 188,339,465 7.19% 25 years
CRIIMI MAE Financial Corporation III 19 48,693,918 49,724,286 7.97% 28 years
------- --------------- ---------------- ---------- ------------
92 (1)(2) $343,091,303 $350,982,991 7.70% (3) 26 years (3)
======= =============== ================ ========== ============
As of December 31, 2000
-----------------------
Weighted
Number of Average
Mortgage Effective Weighted Average
Securities Fair Value Amortized Cost Interest Rate Remaining Term
----------- --------------- ---------------- -------------- ----------------
CRIIMI MAE 1 $ 5,345,888 $ 5,402,205 8.00% 34 years
CRIIMI MAE Financial Corporation 35 124,117,999 124,785,552 8.39% 28 years
CRIIMI MAE Financial Corporation II 45 197,158,703 200,934,734 7.20% 26 years
CRIIMI MAE Financial Corporation III 22 59,128,817 59,718,390 7.83% 28 years
------- --------------- ---------------- ---------- ------------
103 (4) $385,751,407 $390,840,881 7.69% (3) 27 years (3)
======= =============== ================ ========== ============
(1) During the year ended December 31, 2001, there were 9 prepayments of
mortgage loans underlying mortgage securities held by CRIIMI MAE's
subsidiaries referenced above. These prepayments generated net proceeds of
approximately $29.9 million and resulted in net financial statement gains
of approximately $53,000, which are included in net (losses) gains on
mortgage security and originated loan dispositions in the accompanying
consolidated statement of income for the year ended December 31, 2001.
(2) During the year ended December 31, 2001, one of the Company's
subsidiaries referenced above received payments from HUD relating to the
assignment of two mortgage loans with a combined amortized cost of
approximately $5.5 million. These assignments resulted in a net financial
statement loss of approximately ($95,000), which is included in net
(losses) gains on mortgage security and originated loan dispositions in the
accompanying consolidated statement of income for the year ended December
31, 2001.
(3) Weighted averages were computed using total face value of the mortgage
securities.
(4) During the year ended December 31, 2000, there were six prepayments
of mortgage loans underlying mortgage securities held by CRIIMI MAE's
subsidiaries referenced above. 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 security
dispositions on the accompanying consolidated statement of income for the
year ended December 31, 2000.
As shown in the table referenced above, the total mortgage securities of
$343.1 million includes an unencumbered insured mortgage security with a fair
value of $5.3 million. The remaining $337.8 million of mortgage securities are
pledged to secure certain collateralized mortgage obligations or securities
issued in connection with three securitization transactions. As discussed in
Note 7, the secured obligations total approximately $326.6 million as of
December 31, 2001. CRIIMI MAE receives the net cash flows after debt service,
generally excess interest and prepayment penalties, from the three wholly-owned
subsidiaries that pledged these insured mortgage securities to secure the
related obligations, along with the cash flow from the one unencumbered mortgage
security, which represent the total cash flows that the Company receives from
these mortgage securities. These net cash flows after debt service are applied
as principal amortization payments (in connection with cash flow from other
miscellaneous assets) on Series A Senior Secured Notes.
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, 2001, summarized information regarding
other mortgage securities and mortgage securities income earned in 2001, 2000
and 1999, including interest earned on the disposed mortgage securities, are as
follows:
Mortgage Securities as of December 31, 2001 Mortgage Income Earned
-------------------------------------------------------------------- --------------------------------
Effective Maturity
Face Fair Amortized Cost Interest Final
Value (1) Value(2)(4) (1)(3) Rate Date Range 2001 2000 1999
------------ ------------ -------------- --------- ----------- ------- ------- --------
CRIIMI MAE
GNMA Mortgage-Backed
Securities
Other (1 mortgage
security) $ 5,372,303 $ 5,254,885 $ 5,372,303 8.00% 02/2035 $ 431,096 $433,385 $435,493
----------- ----------- ----------- ---------- --------- ----------
CRIIMI MAE Financial
Corporation
FHA-Insured Certificates
Other (16 mortgage 7.35%- 02/2019-
securities) 45,644,046 45,986,971 45,727,435 11.00% 04/2034 4,225,863 4,262,094 4,295,199
GNMA Mortgage-Backed
Securities
Bellhaven Nursing Center 13,852,292 13,694,357 13,852,292 8.63% 12/2031 1,164,470 1,172,021 1,178,951
Other (13 mortgage 7.93%- 06/2018-
securities) 47,644,065 46,764,267 47,967,210 8.78% 04/2035 3,817,987 3,862,001 3,902,597
----------- ----------- ------------ ---------- ---------- ----------
107,140,403 106,445,595 107,546,937 9,208,320 9,296,116 9,376,747
------------ ------------ ------------- ---------- ---------- ----------
CRIIMI MAE Financial
Corporation II
GNMA Mortgage-Backed
Securities
Oakwood Garden Apartments 12,473,329 12,212,757 12,711,676 7.51% 10/2023 901,325 916,455 930,496
San Jose South 27,115,928 26,549,468 27,318,857 7.66% 10/2023 1,974,586 2,007,005 2,037,043
Somerset Park Apartments 28,189,673 27,587,238 28,663,650 7.41% 07/2028 2,065,888 2,089,020 2,110,507
Yorkshire Apartments 14,369,116 14,059,340 14,432,569 7.21% 07/2031 1,009,096 1,017,995 1,026,277
Other (38 mortgage 7.14%- 06/2018-
securities) 104,508,110 102,288,102 105,212,713 7.90% 05/2029 7,646,453 7,741,289 7,829,298
------------ ------------- ------------- ---------- ---------- ----------
186,656,156 182,696,905 188,339,465 13,597,348 13,771,764 13,933,621
------------ ------------- ------------- ---------- ---------- ----------
CRIIMI MAE Financial
Corporation III
GNMA Mortgage-Backed
Securities
Other (19 mortgage 7.45%- 08/2015-
securities) 49,638,865 48,693,918 49,724,286 10.94% 02/2035 3,986,181 4,023,395 4,057,798
------------- ------------- -------------- ----------- ---------- ----------
Total Insured Mortgage
Securities $348,807,727 $343,091,303 $350,982,991 27,222,945 27,524,660 27,803,659
============= ============= =============
Insured Mortgage Security Dispositions 1,629,774 3,143,568 5,601,512
----------- ----------- -----------
Insured Mortgage Securities Interest Income $28,852,719 $30,668,228 $33,405,171
=========== =========== ===========
(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, 2001 is approximately $31.4 million.
(2) Reconciliations of the carrying amount of CRIIMI MAE's insured
mortgage securities for the years ended December 31, 2001 and 2000 follow:
For the year ended December 31,
2001 2000
---------------- ----------------
Balance at beginning of year $ 385,751,407 $ 394,857,239
Additions during the year:
Amortization of discount 15,688 16,554
Adjustment to net unrealized gains on mortgage securities -- 7,522,396
Deductions during the year:
Principal payments (4,308,118) (4,264,161)
Mortgage dispositions (35,469,292) (12,292,734)
Adjustment to net unrealized losses on insured mortgage
securities (2,802,216) ---
Accretion of premium (96,166) (87,887)
---------------- ----------------
Balance at end of year $ 343,091,303 $ 385,751,407
================ ================
(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, 2001.
7. OBLIGATIONS UNDER FINANCING FACILITIES
Discussed below are the Company's obligations under financing facilities as
of December 31, 2001 and 2000. All such obligations existing immediately prior
to the Effective Date, to the extent constituting allowed claims, were paid in
full on the Effective Date as part of the Reorganization Plan (except for a
claim related to First Union), through either a cash payment or issuance of New
Debt, or a combination of both. See Note 15 for additional information related
to the settlement of the First Union claim.
Obligations Outstanding as of December 31, 2001 and 2000
The following table summarizes CRIIMI MAE's debt outstanding as of December
31, 2001 and 2000:
Year ended December 31, 2001
-------------------------------------------------------------------------------------
Effective Average
Ending Interest Rate Average Effective Stated
Balance at Year End Balance Rate Maturity Date
----------------- ----------- --------------- --------- ---------------------
Variable-rate secured borrowing (11) $ 244,194,590 6.5% $ 179,214,481 (8) 8.2% April 2005
Series A senior secured notes (11) 99,505,457 12.2% 71,723,157 (8) 12.2% April 2006
Series B senior secured notes (11) 63,937,383 21.1% 43,876,198 (8) 21.0% April 2007
Securitized mortgage obligations:
CMBS (3) 283,047,470 9.1% 282,017,637 9.1% Nov 2006-Nov 2011
Freddie Mac funding note (4) 180,291,091 7.5% 187,895,844 7.5% Sept 2031
Fannie Mae funding note (5) 48,062,403 7.4% 53,304,433 7.4% March 2035
CMO (6) 98,204,667 7.5% 107,514,532 7.5% Jan 2033
Mortgage payable (10) 7,109,252 12.0% 1,777,203 12.0% May 2008
Variable-rate secured borrowings
CMBS (1) (2) -- -- 108,784,948 (9) 6.7% March 1999-Sept 2000
Bank term loan (2) -- -- 386,389 (9) 7.0% Dec 1998
Working capital line of credit (2) -- -- 11,888,889 (9) 7.5% Dec 1998
Bridge loan (2) -- -- 14,786,663 (9) 8.0% Feb 1999
Senior unsecured notes (2) -- -- 29,722,222 (9) 9.1% Dec 2002
---------------- --------------
Total Debt $ 1,024,352,313 9.1% $1,092,892,596 8.9%
================ ==============
Year ended December 31, 2000
-------------------------------------------------------------------------------------
Effective Average
Ending Interest Rate Average Effective Stated
Balance at Year End Balance Rate Maturity Date
----------------- ------------ --------------- --------- --------------------
Securitized mortgage obligations:
CMBS (3) $ 280,520,265 9.1% $ 279,680,235 9.1% Nov 2006-Nov 2011
Freddie Mac funding note (4) 192,168,879 7.5% 196,385,577 7.5% Sept 2031
Fannie Mae funding note (5) 57,765,188 7.4% 58,988,331 7.4% March 2035
CMO (6) 114,715,858 7.5% 115,196,505 7.5% Jan 2033
CMO-loan originations (7) -- -- 334,884,751 6.6% --
Variable-rate secured borrowings -
CMBS (1)(2) 367,535,895 7.9% 547,769,490 7.5% March 1999-Sept 2000
Senior unsecured notes (2) 100,000,000 9.1% 100,000,000 9.1% Dec 2002
Bank term loan (2) 1,300,000 8.0% 1,300,000 7.6% Dec 1998
Working capital line of credit (2) 40,000,000 8.4% 40,000,000 8.2% Dec 1998
Bridge loan (2) 49,749,522 9.0% 49,749,522 8.6% Feb 1999
---------------- --------------
Total Debt $1,203,755,607 8.2% $1,723,954,411 8.1%
================ ==============
(1) Certain debt balances were reduced to reflect application of net cash
flow received during the Chapter 11 proceeding.
(2) These facilities were in default as of December 31, 2000 due to the
Company's Chapter 11 filing. All outstanding unpaid amounts under these
facilities, to the extent they constituted allowed claims, were paid in full in
connection with the Reorganization Plan, except for the allowed claim related to
First Union, as discussed in Note 15, through either cash payment or issuance of
New Debt or a combination of both.
(3) As of December 31, 2001 and 2000, the face amount of the debt was
$328,446,000 and $328,446,000, respectively, with unamortized discount of
$45,398,530 and $47,925,735, respectively. During the years ended December 31,
2001 and 2000, discount amortization of $2,527,205 and $2,354,298, respectively,
was recorded as interest expense.
(4) As of December 31, 2001 and 2000, the face amount of the note was
$185,616,298 and $198,070,722, respectively, with unamortized discount of
$5,325,207 and $5,901,843, respectively. During the years ended December
31, 2001 and 2000, discount amortization of $576,636 and $1,820,547,
respectively, was recorded as interest expense.
(5) As of December 31, 2001 and December 31, 2000, the face amount of
the note was $49,182,632 and $59,112,927, respectively, with unamortized
discount of $1,120,229 and $1,347,739, respectively. During the years ended
December 31, 2001 and 2000, discount amortization of $227,510 and $158,774,
respectively, was recorded as interest expense.
(6) As of December 31, 2001 and 2000, the face amount of the note was
$100,727,532 and $117,729,663, respectively, with unamortized discount of
$2,522,865 and $3,013,805, respectively. During the years ended December
31, 2001 and 2000, discount amortization of $490,940 and $475,379,
respectively, was recorded as interest expense.
(7) As of December 31, 2001 and 2000, the face amount of the debt was
$-0- and $-0-, respectively, with unamortized discount of $-0- and $-0-,
respectively. During the years ended December 31, 2001 and 2000, discount
amortization of $-0- and $1,187,656, respectively, was recorded as interest
expense.
(8) The average balances of the New Debt from their effective date of
April 17, 2001 to December 31, 2001 were $253,539,866 for the Variable-Rate
Secured Borrowing, $102,056,666 for the Series A Senior Secured Notes and
$62,432,534 for the Series B Senior Secured Notes.
(9) The average balances of these facilities prior to the Effective Date
(for the period January 1, 2001 to April 17, 2001) were: $364,733,653 for
the variable-rate secured borrowings, $1,300,000 for the bank term loan,
$40,000,000 for the working capital line of credit, $49,749,522 for the
bridge loan and $100,000,000 for the senior unsecured notes.
(10) As of December 31, 2001, the unpaid principal balance of this
mortgage payable is $8,824,288 and the unamortized discount is $1,715,036.
The coupon rate on the mortgage debt is 7.34%. The effective interest rate
on the debt is 12.00% as a result of the discount amortization. The
discount is being amortized to interest expense through maturity in 2008.
During the year ended December 31, 2001, discount amortization of $46,929
was recorded as interest expense.
(11) The effective interest rate at December 31 and during the period
reflects the accrual of expected extension fees that will be payable.
During 2001, the Company recognized interest expense of $2,372,379,
$337,390, and $432,390 related to the expected extension fees for the
Variable-Rate Secured Borrowing, the Series A Senior Secured Notes, and the
Series B Senior Secured Notes, respectively.
(12) Stated maturities per respective loan agreements. The maturities of CRIIMI
MAE's debt are as follows:
2002 $ 99,163,840
2003 85,443,854
2004 104,326,019
2005 265,348,988
2006 133,600,338
Thereafter 392,551,141
-----------------
$1,080,434,180 (a)(b)(c)(d)(e)
=================
(a) The projected principal payments on the Variable-Rate Secured
Borrowing are based on the applicable amortization schedule provided in the
operative documents. In addition, the projected principal payments include
estimated principal payments from excess cash flow required to be applied
toward the redemption of principal under the operative documents until a
total of $50 million of the principal has been repaid, which is expected to
occur in 2003. These principal payments are based on the Company's estimate
of future cash flows as of March 15, 2002, which are subject to continuous
change due to, without limitation, changes in interest rates, realized
losses, appraisal reductions, interest shortfalls, credit performance of
underlying loans, unanticipated expenses on foreclosed and non-performing
loans, accumulated advances, prepayments, the Company's obligations in
connection with the REO, the Company's general and administrative and other
operating expenses, and cash dividends, if any, paid to shareholders.
There can be no assurance that projected cash flows will approximate the
actual cash flows.
(b) The stated annual interest rate on the Variable-Rate Secured Borrowing is
LIBOR plus 3.25%. The average stated interest rate assumes that
LIBOR is unchanged from the December 31, 2001 LIBOR rate of 1.87% over the
remaining term of the debt. Any changes in the LIBOR rate will affect the
actual principal payments on the Company's Variable-Rate Secured Borrowing
in the future.
(c) The projected principal payments on the Series A Senior Secured
Notes are based, in part, on the Company's estimate of the cash flows from
the collateral securing the Series A Senior Secured Notes as of March 15,
2002. In addition, there are principal payment obligations of $5 million,
$15 million, and $15 million due on April 15, 2003, 2004 and 2005,
respectively. If the Company fails to make any one of these payments, the
interest rate on the unpaid principal amount would increase by 200 basis
points if certain miscellaneous collateral is not sold or otherwise
disposed of by the noteholders. These projected cash flows are subject to
continuous change due to, without limitation, changes in interest rates,
realized losses, appraisal reductions, interest shortfalls, credit
performance of underlying loans, unanticipated expenses on foreclosed and
non-performing loans, accumulated advances, prepayments, the Company's
obligations in connection with the REO, the Company's general and
administrative and other operating expenses, and cash dividends, if any,
paid to shareholders. There can be no assurance that the projected cash
flows will approximate the actual cash flows.
(d) The Series B Senior Secured Notes have no contractual principal
payment requirements until maturity on April 15, 2007. The Series B
Senior Secured Notes accrete interest at an annual rate of 7%. This
accreted interest is added to the principal balance semi-annually on the
interest payment dates. For purposes of this disclosure, the Company has
not included any future accreted interest in the contractual principal
payment amount at maturity. The Company estimates as of March 15, 2002 that
the total principal payment due at maturity, including accreted interest,
will be approximately $93 million.
(e) The projected principal payments on the securitized mortgage
obligations are based on the projected cash flows that were used to
estimate the December 31, 2001 fair values of the related securities, which
collateralize this debt. The 2002 amounts include known prepayments, which
occurred in January and February 2002.
New Debt Effective as of Emergence from Chapter 11
The New Debt, which closed on the Effective Date, consists of three
components, as identified below. Substantially all cash flows relating to
existing assets are, and are currently expected to be, used to satisfy
principal, interest and fee obligations under the New Debt. The New Debt is
secured, by substantially all of the Company's assets. There are 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 terms of the New
Debt significantly restrict the amount of cash dividends that can be paid to
shareholders. One such restriction provides that any cash dividends required to
maintain REIT status (assuming the Company has the cash to make such
distributions and that it is permitted to make such distributions under the
terms of the New Debt) would be paid first to holders of certain of the New Debt
who convert their secured 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. Another such
restriction provides that if realized losses (as defined in the New Debt
documents, and including appraisal reduction amounts on properties underlying
the CMBS collateral) on CMBS exceed certain thresholds, then the Company is
prohibited from paying cash dividends to its shareholders, except as required to
maintain REIT status , with any such cash dividends to be paid in accordance
with the terms set forth in the preceding sentence. As of December 31, 2001, the
Company had exceeded the loss threshold amounts under the applicable operative
documents evidencing the New Debt. See Note 1 for a further discussion of the
restrictions resulting from exceeding the loss threshold amounts. In addition to
the further descriptions of the New Debt components set forth below, reference
is made to the New Debt operative documents filed as exhibits to a Current
Report on Form 8-K in June 2001 for a more detailed description of the New Debt
including payment terms, restrictions including restrictive covenants, events of
default, and collateral. See "Reorganization" discussion below relating to the
collateral structure for the New Debt.
Variable-Rate Secured Borrowing
The Variable-Rate Secured Borrowing (in the form of a repurchase
transaction), in an original principal amount of $262.4 million, provides for
(i) interest at a rate of one month LIBOR plus 3.25% payable monthly, (ii)
principal repayment/amortization obligations, including, without limitation, a
requirement to pay down an aggregate $50 million in principal by April 16, 2003
(the failure to pay down this amount will not constitute an event of default but
will result in the continuation or reinstatement of certain restrictions and
additional restrictions), (iii) extension fees of 1.5% of the unpaid principal
balance payable at the end of each of 24, 30, 36 and 42 months after the
Effective Date, and (iv) maturity on April 16, 2005 assuming the Company
exercises its options to extend the
maturity date of the debt. A monthly principal payment sufficient to
amortize the related debt over a 15-year period, and additional principal
amortization payments resulting from a cash flow sweep are required until the
original principal balance has been reduced by $50 million. Thereafter, a
monthly principal payment sufficient to amortize the related debt over a 13-year
period will be required subject to the reinstatement of the cash flow sweep
under certain limited circumstances. The Variable Rate Secured Borrowing had an
outstanding principal balance of $244.2 million as of December 31, 2001. In
connection with this Variable-Rate Secured Borrowing, the outstanding stock of
CBO REIT held by CRIIMI MAE was transferred to the lenders pursuant to a
repurchase agreement. The obligations under the repurchase agreement are secured
by a first or third priority lien on certain CMBS, the stock in certain
subsidiaries, and certain deposit accounts. The foregoing transferred stock and
assets securing the Variable-Rate Secured Borrowing also secure the Series A and
Series B Senior Secured Notes which constitute the balance of the New Debt.
Series A Senior Secured Notes
The Series A Senior Secured Notes, representing an aggregate original
principal amount of $105 million, provide for (i) interest at a rate of 11.75%
per annum payable monthly, (ii) principal repayment/amortization obligations,
including, without limitation, a principal payment obligation of $5 million due
April 15, 2003 (the failure to make this payment will not constitute an event of
default but will result in a 200 basis point increase in the interest rate on
the unpaid principal amount if certain miscellaneous collateral is not sold or
otherwise disposed of), (iii) extension fees of 1.5% of the unpaid principal
balance payable at the end of each of 48, 54, and 60 months after the Effective
Date, and (iv) maturity on April 15, 2006. The cash flow from the miscellaneous
assets referenced below, which secure both the Series A Senior Secured Notes and
the Series B Senior Secured Notes, will be applied, on a monthly basis, as
principal amortization payments on the Series A Senior Secured Notes. The Series
A Senior Secured Notes had an aggregate outstanding principal balance of $99.5
million as of December 31, 2001, and are secured by a first priority lien on the
stock transferred in connection with the Variable-Rate Secured Borrowing, by a
first or second priority lien on certain CMBS, the stock in certain
subsidiaries, and certain deposit accounts (these assets also securing the
Variable-Rate Secured Borrowing), and by a first priority lien on certain
miscellaneous assets.
Series B Senior Secured Notes
The Series B Senior Secured Notes, representing an aggregate original
principal amount of approximately $61.8 million, provide for (i) interest at a
rate of 13% per annum, payable semi-annually, with additional interest at the
rate of 7% per annum accreting over the debt term, (ii) extension fees of 1.5%
of the unpaid principal balance payable at the end of each of 48, 54 and 60
months after the Effective Date (with the payment 60 months after the Effective
Date also including an amount based on the unpaid principal balance 66 months
after the Effective Date), and (iii) maturity on April 15, 2007. The Series B
Senior Secured Notes had an aggregate outstanding principal balance of $63.9
million as of December 31, 2001, and are secured by a second priority lien on
the stock transferred in connection with the Variable-Rate Secured Borrowing
(this asset also securing the Series A Senior Secured Notes), by a second or
third priority lien on certain CMBS, the stock in certain subsidiaries, and
certain deposit accounts (those assets also securing the Variable-Rate Secured
Borrowing and the Series A Senior Secured Notes), and by a second priority lien
on certain miscellaneous assets (these assets also securing the Series A Senior
Secured Notes).
Reorganization
On the Effective Date of the Reorganization Plan, the Company effected an
affiliate reorganization in order to indirectly secure the New Debt with the
equity interests in CBO-1 and CBO-2. Pursuant to the affiliate reorganization,
CRIIMI MAE Inc. formed CBO REIT, all shares of which were initially issued to
CRIIMI MAE Inc., pledged certain previously pledged bonds (the "Pledged Bonds")
and all outstanding shares of two qualified REIT subsidiaries (which own the
equity interests in CBO-1 and CBO-2) (the "QRS Shares") to secure the New Debt,
pledged the shares held by CRIIMI MAE in CBO REIT (the "REIT Shares") to secure
the New Debt represented by the Series A Senior Secured Notes and Series B
Senior Secured Notes, contributed the Pledged Bonds and the QRS Shares to CBO
REIT, and transferred the REIT Shares, in a repurchase transaction, to the
lenders which provided the New Debt represented by the Variable-Rate Secured
Borrowing. Subject to the terms of the documents evidencing the New Debt, CRIIMI
MAE Inc. has retained the right to exercise all voting and other
corporate rights and powers of ownership with respect to the REIT Shares.
Information Regarding Certain Collateral Securing New Debt
Set forth below is certain information relating to the carrying value of certain
assets securing all three components of the New Debt.
Carrying Value at December 31, 2001
Collateral ($ in millions)
---------- -----------------------------------
Certain CMBS (1) $454.7
CBO REIT Stock (2) Not Available
CMBS Corp Stock (3) Not Available
QRS 1, Inc. Stock (4) Not Available
(1) Represents certain bonds pledged by CRIIMI MAE (i.e., the CBO-2
B-, B, B+, BB-, BB, BB+ rated bonds and the Nomura unrated bond) to secure
the New Debt. Such bonds are currently owned by CBO REIT, Inc., a
subsidiary of CRIIMI MAE.
(2) Represents all outstanding shares of CBO REIT, Inc. held by CRIIMI
MAE first pledged by CRIIMI MAE to secure the Series A Senior Secured Notes
and Series B Senior Secured Notes and then transferred by CRIIMI MAE in a
repurchase transaction in connection with the Variable-Rate Secured
Borrowing. CBO REIT, Inc. currently owns the pledged bonds identified in
footnote (1) above.
(3) Represents all outstanding shares of CRIIMI MAE CMBS Corp pledged
by CRIIMI MAE to secure the New Debt. Such shares are currently owned by
CBO REIT, Inc. CRIIMI MAE CMBS Corp owns the CCC rated and unrated bonds
from CBO-2 (representing the equity interests in CBO-2). The carrying value
of these CBO-2 bonds was approximately $35.4 million at December 31, 2001.
(4) Represents all outstanding shares of CRIIMI MAE QRS 1, Inc.
pledged by CRIIMI MAE to secure the New Debt. Such shares are currently
owned by CBO REIT, Inc. CRIIMI MAE QRS 1, Inc. owns the B- rated and
unrated bonds from CBO-1 (representing the equity interests in CBO-1). The
carrying value of these CBO-1 bonds was approximately $37.7 million at
December 31, 2001.
Other Debt Related Information
Fluctuations in interest rates will continue to impact the value of CRIIMI
MAE's mortgage assets and could impact the net interest margin through increased
cost of funds on the variable-rate debt in place. CRIIMI MAE has an interest
rate cap agreement in place in order to partially limit the adverse effects of
rising interest rates on the variable rate debt in place. When the cap agreement
expires, CRIIMI MAE will have interest rate risk to the extent interest rates
increase on any variable-rate borrowings unless the cap is replaced at
equivalent rates 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. See Note 8 for further
discussion of interest rate caps. As of December 31, 2001, CRIIMI MAE's
debt-to-equity ratio was approximately 3.9 to 1 and CRIIMI MAE's
non-match-funded debt-to-equity ratio was approximately 1.6 to 1.
The following table lists the fair market value of the collateral related
to the Company's Securitized Mortgage Obligations as of December 31, 2001 and
2000 (in millions):
Securitized Mortgage Obligations December 31, 2001 December 31, 2000
-------------------------------- ----------------- -----------------
CMBS $ 296 $ 283
Freddie Mac Funding Note 183 197
Fannie Mae Funding Note 49 59
CMO 106 124
Changes in interest rates will have no impact on the cost of funds or the
collateral requirements on these Securitized Mortgage Obligations.
Debt Prior to Emergence from Chapter 11
Variable-Rate Secured Borrowings-CMBS
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 other lenders under
master secured borrowing agreements. The secured borrowings were secured by
certain rated CMBS with an aggregate fair value of approximately $464 million as
of December 31, 2000. The allowed claims related to the foregoing variable-rate
secured borrowings were paid in full on the Effective Date in cash or through a
combination of cash and the new Variable-Rate Secured Borrowing.
Senior Unsecured Notes
In November 1997, CRIIMI MAE issued senior unsecured notes due on December
1, 2002 in an aggregate principal amount of $100 million. Such unsecured 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
unsecured 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 allowed claims
related to such unsecured notes were paid in full on the Effective Date through
a combination of cash, Series A Senior Secured Notes and Series B Senior Secured
Notes.
Bank Term Loan
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 was carried at a
cost basis of approximately $11.4 million on the balance sheet as of December
31, 2000 and was reflected in equity investments. The loan required quarterly
principal payments of $650,000 and was scheduled to mature on December 31, 1998.
The amount outstanding as of December 31, 2000 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 was paid in full, in cash, on the Effective Date.
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, $40 million in borrowings were
outstanding under this facility.
The Company's litigation with First Union (one of the two lenders) was not
settled or resolved prior to the Effective Date; and therefore, the
classification of First Union's claim under the Reorganization Plan was not
determined at the Effective Date. See Note 15 for further information regarding
the settlement of the First Union litigation.
The allowed claim related to the other lender was paid in full on the
Effective Date through a combination of cash, Series A Senior Secured Notes and
Series B Senior 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 loan were based on
interest at one-month LIBOR plus a spread of 2.25%. As of December 31, 2000,
approximately $50 million in borrowings was outstanding under this loan.
The allowed claim related to the bridge loan was paid in full on the
Effective Date through a combination of cash, Series A Senior Secured Notes and
Series B Senior Secured Notes.
8. INTEREST RATE PROTECTION AGREEMENT
CRIIMI MAE has entered into an interest rate protection agreement to
partially limit the adverse effects of potential rising interest rates on its
Variable-Rate Secured Borrowing. Interest rate caps provide protection to CRIIMI
MAE to the extent interest rates, based on a readily determinable interest rate
index, increase above the stated interest rate cap, in which case, CRIIMI MAE
will receive payments based on the difference between the index and the cap. At
December 31, 2001, CRIIMI MAE held one cap with a notional amount of $188.0
million, which hedged approximately 77% of the Company's variable-rate debt.
Notional Amount Effective Date Maturity Date Cap Index
- --------------- -------------- -------------- ---- -----
$ 188,000,000 (1) April 2, 2001 April 2, 2003 5.25% (2) 1 month LIBOR
(1) CRIIMI MAE's designated interest rate protection agreement hedges
CRIIMI MAE's variable-rate borrowing costs.
(2) The one month LIBOR rate was 1.87% at December 31, 2001.
CRIIMI MAE is exposed to credit loss in the event of non-performance by
the counterparty to the interest rate protection agreement should interest rates
exceed the cap. However, management does not anticipate non-performance by the
counterparty. The counterparty has long-term debt ratings of A+ or above by S&P
and A1 or above by Moody's. Although CRIIMI MAE's cap is not exchange-traded,
there are a number of financial institutions which enter into these types of
transactions as part of their day-to-day activities.
9. DIFFERENCES BETWEEN FINANCIAL STATEMENT NET INCOME (LOSS) AND TAXABLE LOSS
The differences between financial statement (GAAP) net income (loss) and
taxable income (loss) are generally attributable to differing treatment of
unrealized/realized gains and losses associated with certain assets; the bases,
income, impairment, and/or credit loss recognition related to certain assets;
and amortization of various costs. The distinction between GAAP net income
(loss) and taxable income (loss) is important to the Company's shareholders
because dividends or distributions are declared and paid on the basis of taxable
income, or taxable loss. The Company does not pay Federal income 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.
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.
A summary of the Company's 2001 and 2000 net operating losses for tax
purposes is as follows:
2001 2000
---- ----
January 2000 Loss $ 478.2 million $ 478.2 million
LESS: Portion recognized in 2000 (119.6) million (119.6) million
LESS: Portion recognized in 2001 (119.5) million --
------------------ -----------------
Balance Remaining of January 2000 Loss to be Recognized in Future Periods $ 239.1 million $ 358.6 million
================== =================
Taxable Income for the year before recognition of January 2000 Loss (1) $ 22.7 million $ 20.1 million
LESS: January 2000 loss recognized (119.5) million (119.6) million
PLUS: Mark-to-market unrealized (loss) gain on Trading Assets (0.1) million 49.9 million
------------------ -----------------
Net Operating Loss for the year ended December 31 $( 96.9) million $ (49.6) million
================== =================
Accumulated Net Operating Loss through December 31 $(146.5) million $ (49.6) million
Net Operating Loss Utilization 0 million 0 million
------------------ -----------------
Net Operating Loss Carried Forward for Use in Future Periods $(146.5) million $ (49.6) million
================== =================
(1) Taxable income for the year ended December 31, 2001 includes an
approximate $8.6 million loss on certain Trading Assets in connection
with the transfer of certain Trading Assets on April 17, 2001 to CBO
REIT following the reorganization effected to facilitate the collateral
structure for the New Debt. Assets transferred to CBO REIT are no
longer required to be marked-to-market on a tax basis.
During the year ended December 31, 2001, no excess inclusion income was
distributed. 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.
10. COMMON STOCK
On October 17, 2001, the Company implemented a one-for-ten reverse stock
split designed, in part, to satisfy the New York Stock Exchange ("NYSE") market
price listing requirement. There can be no assurance that such market price
listing requirement or that all other NYSE requirements will continue to be met.
All share and per share information in these notes to consolidated financial
statements and the accompanying consolidated financial statements has been
retroactively adjusted to reflect the reverse stock split. Share information
adjustments include, without limitation, adjustments to the number of common
shares issued and outstanding, issued as dividends on and upon conversion of
shares of preferred stock and issuable under outstanding options. CRIIMI MAE had
300,000,000 and 120,000,000 authorized shares and 12,937,341 and 6,235,317
issued and outstanding shares of $0.01 par value common stock as of December 31,
2001 and 2000, respectively.
As discussed in Note 1 under "The Reorganization Plan", the terms of the
New Debt significantly restrict the amount of cash dividends that can be paid to
shareholders. Presently, cash distributions may only be paid if required to
maintain REIT status, with such payments being made first, and possibly solely,
to holders of certain of the New Debt who convert their secured notes into one
or two new series of preferred stock (see Note 1 - "The Reorganization Plan").
Preferred stock dividends were paid in shares of common stock during 2001. The
following table summarizes the 2001 common stock activity:
Common Shares Balance of Common
Date Description Issued Shares Outstanding
- ------------------------ ----------------------------------------- ----------------- -------------------
12/31/00 Beginning balance 6,235,317
01/02/01 Director Stock Plan 200
01/09/01 Conversion of Series E Preferred Stock 136,986
02/01/01 Conversion of Series E Preferred Stock 138,889
02/21/01 to 03/06/01 Conversions of Series G Preferred Stock 3,254,704
03/15/01 Conversion of Series E Preferred Stock 138,889
- ------------------------------------------------------------------------------------------------------------
03/31/01 Balance 9,904,985
- ------------------------------------------------------------------------------------------------------------
04/17/01 Dividend to Series C, D & E Preferred Stock 563,265
06/01/01 Dividend to Series B Preferred Stock 1,454,508
06/29/01 Dividend to Series E Preferred Stock 40,605
- ------------------------------------------------------------------------------------------------------------
06/30/01 Balance 11,963,363
- ------------------------------------------------------------------------------------------------------------
07/02/01 Dividend to Series F Preferred Stock 185,996
07/02/01 Dividend to Series G Preferred Stock 189,450
09/28/01 Dividend to Series E Preferred Stock 64,373
- ------------------------------------------------------------------------------------------------------------
09/30/01 Balance 12,403,182
- ------------------------------------------------------------------------------------------------------------
10/10/01 Dividend to Series B Preferred Stock 413,145
10/10/01 Dividend to Series F Preferred Stock 33,334
10/10/01 Dividend to Series G Preferred Stock 88,717
10/17/01 Cash paid in lieu of fractional shares
in connection with the one-for-ten
reverse split (1,037)
- ------------------------------------------------------------------------------------------------------------
12/31/01 Ending Balance 12,937,341
- ------------------------------------------------------------------------------------------------------------
Shareholder Rights Plan
On January 23, 2002, the Company's Board of Directors adopted a Shareholder
Rights Plan (the "Rights Plan") to preserve the Company's net operating losses
for tax purposes. As discussed in Note 1, the Company's future use of its NOLs
could be substantially limited in the event of an "ownership change" within the
meaning of Section 382 of the Internal Revenue Code. The Rights Plan is designed
to deter an "ownership change" within the meaning of Section 382 of the Internal
Revenue Code by discouraging any person or group from acquiring five percent or
more of the Company's outstanding common shares.
Under the Rights Plan, one right was distributed for each share of the
Company's common stock to shareholders of record as of February 4, 2002. The
rights trade with the underlying shares of CRIIMI MAE common stock. The rights
will become exercisable if a person or group acquires beneficial ownership of 5%
of CRIIMI MAE's outstanding common stock or announces a tender offer for 5% or
more of the common stock (an "Acquiring Person"). An Acquiring Person also
includes a person or group that held 5% or more of the common stock as of
January 23, 2002, and that acquires additional common shares. An exception could
be made if the transaction is approved by CRIIMI MAE's board of directors.
If the rights become exercisable, each right will entitle its holder to
purchase one one-thousandth of a share of a new series of the Company's
preferred stock at an exercise price of $23 per share. If a person or group
becomes an Acquiring Person in a transaction that has not been approved by the
board of directors, then each right, other than those owned by the Acquiring
Person, would entitle the holder to purchase $46.00 worth of CRIIMI MAE common
stock for the $23.00 exercise price.
The Company generally will be entitled to redeem the rights at $0.001 per
right. The rights will expire 10 years after the date of issuance. However, the
Board of Directors may amend the Rights Plan to provide that the rights will
expire at an earlier date. The Rights Plan was filed with the Securities and
Exchange Commission as an exhibit
to a Current Report on Form 8-K on January 25, 2002.
11. PREFERRED STOCK
On December 3, 2001, the Company's Board of Directors decided to defer the
payment of dividends on CRIIMI MAE's Series B Cumulative Convertible Preferred
Stock ("Series B Preferred Stock"), Series E Cumulative Convertible Preferred
Stock ("Series E Preferred Stock"), Series F Redeemable Cumulative Dividend
Preferred Stock ("Series F Preferred Stock"), and Series G Redeemable Cumulative
Dividend Preferred Stock ("Series G Preferred Stock") for the fourth quarter of
2001. In connection with the redemption of the Series E Preferred Stock on March
21, 2002, the Board contemporaneously declared dividends on shares of Series B
Preferred Stock, Series F Preferred Stock and Series G Preferred Stock for the
fourth quarter of 2001 and the first quarter of 2002, which dividends are
payable in shares of common stock. Such common stock dividends will be paid on
April 15, 2002 to holders of record on April 1, 2002.
As of December 31, 2001 and 2000, 75,000,000 and 25,000,000 shares of
preferred stock, respectively, were authorized. As of December 31, 2001 and
2000, 3,000,000 shares were designated as Series B Preferred Stock, 203,000
shares were designated as Series E Preferred Stock, 1,610,000 shares were
designated as Series F Preferred Stock, and 3,760,000 shares were designated as
Series G Preferred Stock.
The following is a brief summary of certain terms of each of the four
series of preferred stock and is qualified by and subject to the descriptions
contained in the Company's Articles of Amendment and Restatement, as amended,
and reference is made to such Articles of Amendment and Restatement for a
complete description of the relative rights and preferences of each series of
CRIIMI MAE's preferred stock.
Series B Cumulative Convertible Preferred Stock
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 0.4668 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 in August
2006. Each share of Series B Preferred Stock was originally convertible into
0.22844 shares of common stock, subject to adjustment upon the occurrence of
certain events. Due to certain adjustment provisions in Exhibit A of the
Company's Articles of Amendment and Restatement related to the Series B
Preferred Stock, the payment of dividends to holders of common stock in the form
of preferred stock in 1999 and 2000, the payment of dividends on other series of
preferred stock in shares of common stock during 2001, and the reverse stock
split effected in 2001 resulted in adjustments to the Series B conversion price
such that one share of Series B Preferred Stock was convertible into 0.4668
shares of common stock as of December 31, 2001. There will be a further
adjustment to the conversion price of the Series B Preferred Stock as a result
of the payment of dividends on shares of Series F Preferred Stock and Series G
Preferred Stock on April 15, 2002, as referenced above. The liquidation
preference and the redemption price on the Series B Preferred Stock equals $25
per share, together with accrued and unpaid dividends.
As of December 31, 2001 and 2000, there were 1,593,982 shares of Series B
Preferred Stock issued and outstanding. The following table summarizes the
dividend payment activity for 2001 for the Series B Preferred Stock:
Number of
Time Period for Shares of
Dividends per Amount of which dividends Common Stock
Declaration Date Payment Date Series B Share (c) Dividends (c) are accrued Issued
-------------------------------------------------------------------------------------------------------
May 10, 2001 June 1, 2001 $ 6.80 $ 10,839,078 9/1/98-3/31/01 1,454,508 (a)
September 4, 2001 October 10, 2001 $ 1.36 $ 2,167,816 4/1/01-9/30/01 413,145 (b)
(a) Represents the number of shares of common stock issued in connection
with the payment of dividends to holders of Series B Preferred Stock. The
Company determined the number of shares of common stock to issue by
dividing the dollar amount of the dividend payable by the volume-weighted
average of the sale prices of the common stock for the 10-trading day
period commencing after the declaration date.
(b) Represents the number of shares of common stock issued in connection
with the payment of dividends to holders of Series B Preferred Stock. The
Company determined the number of shares of common stock to issue by
dividing the dollar amount of the dividend payable by the volume-weighted
average of the sale prices of the common stock for the 10-trading day
period (interrupted by the closing of equity markets due to the terrorist
attacks) beginning one trading day after the dividend declaration date. As
a result of the temporary closing of the U.S. equity markets from September
11 through September 14, the original payment date of September 28, 2001
was extended to October 10, 2001.
(c) Although the payment of dividends for the fourth quarter of 2001 was
initially deferred, the Company accrued $1,083,908 for the Series B
Preferred Stock fourth quarter dividends at a dividend rate of $0.68 per
share as of December 31, 2001. On March 21, 2002, the Board declared
dividends on shares of Series B Preferred Stock of $1,083,908 and
$1,083,908 for the fourth quarter of 2001 and the first quarter of 2002,
respectively. The dividends are payable in shares of common stock on
April 15, 2002 to holders of record on April 1, 2002. The Company will
determine the number of shares of common stock to issue for the dividend by
dividing $2,167,816 by the volume-weighted average of the sale prices of
the common stock for the 10-trading day period commencing on March 22,
2002.
Since the holders of the Series B Preferred Stock accepted the Company's
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.
Series C and Series D Cumulative Convertible Preferred Stock
As of February 22, 2000, all of the outstanding shares of Series C
Cumulative Convertible Preferred Stock ("Series C Preferred Stock") were
exchanged for Series E Preferred Stock. On April 17, 2001, the date of emergence
from Chapter 11, the Company paid, as an allowed claim, dividends and interest
of $1,161,137 (through the issuance of common stock aggregating 167,794 shares)
on the former Series C Preferred Stock which represented dividends accrued and
unpaid through February 22, 2000 (the date the Series C Preferred Stock shares
were exchanged for Series E Cumulative Convertible Preferred Stock shares) plus
interest on accrued and unpaid dividends from February 23, 2000 through April
17, 2001.
As of July 26, 2000, all of the outstanding shares of Series D Cumulative
Convertible Preferred Stock ("Series D Preferred Stock") were exchanged for
Series E Preferred Stock. On April 17, 2001, the date of emergence from Chapter
11, the Company paid, as an allowed claim, dividends and interest of $1,310,122
(through the issuance of common stock aggregating 189,324 shares) on the former
Series D Preferred Stock which represented dividends accrued and unpaid through
July 26, 2000 (the date the Series D Preferred Stock shares were exchanged for
Series E Preferred Stock shares) plus interest on accrued and unpaid dividends
from July 27, 2000 through April 17, 2001.
Series E Cumulative Convertible Preferred Stock
On February 22, 2000, CRIIMI MAE and the holder of its Series C Preferred
Stock entered into a Preferred Stock Exchange Agreement (the "Series C Exchange
Agreement") pursuant to which 103,000 shares of Series C Preferred Stock were
exchanged (the "Series C Exchange") for 103,000 shares of a new series of
preferred stock designated as Series E Cumulative Convertible Preferred Stock.
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.
On the 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, were effected. The Series E Preferred
Stock paid a dividend in an amount 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. Since the
holder of the Series E Preferred Stock voted to accept the Reorganization Plan,
the relative rights and preferences of the Series E Preferred Stock were amended
to permit the payment of dividends in cash or common stock (or a combination
thereof) at the Company's election.
On March 21, 2002, the Company redeemed all 173,000 outstanding shares of
its Series E Preferred Stock at the stated redemption price of $106 per share
plus accrued and unpaid dividends through and including the date of redemption.
The total redemption price was $18,734,107 ($396,107 of which represented
accrued and unpaid dividends). The $1.0 million difference between the aggregate
liquidation value and the redemption price will be reflected as a dividend on
preferred stock in the first quarter of 2002. The shares were held by the
Company's principal creditor.
Up to 50,750 shares of Series E Preferred Stock were convertible into
common stock during each of the periods beginning upon the expiration of three,
nine, twelve and fifteen months after the Effective Date. In addition, an
additional 15,000 shares of Series E Preferred Stock were convertible into
common stock during the period August 17, 2001 through December 17, 2001. As of
December 31, 2001, 30,000 shares of Series E Preferred Stock had been converted
into 414,764 shares of common stock. Each share of Series E Preferred Stock was
convertible into common stock 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 pricing period that was mutually acceptable 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. There was a mandatory conversion date of April
17, 2003. The Series E Preferred Stock was subject to redemption by CRIIMI MAE.
The liquidation preference and the redemption price on the Series E Preferred
Stock were $100 and $106, respectively, together with accrued and unpaid
dividends.
As of December 31, 2001 and 2000, there were 173,000 and 203,000 shares,
respectively, of Series E Preferred Stock issued and outstanding. The following
table summarizes the dividend payment activity for 2001 for the Series E
Preferred Stock:
Time period for Number of Shares of
Amount of which dividends Common Stock Issued
Declaration Date Payment Date Dividends (b) are accrued (a)
- --------------------------------------------------------------------------------------------------------------
March 26, 2001 April 17, 2001 $ 1,426,538 2/22/00-4/17/01 206,147
June 4, 2001 June 29, 2001 $ 262,308 4/18/01-6/30/01 40,605
September 4, 2001 September 28, 2001 $ 278,088 7/01/01-9/30/01 64,373
(a) Represents the number of shares of common stock issued in connection
with the payment of dividends to holders of Series E Preferred Stock. The
Company determined the number of shares of common stock to issue by
dividing the dollar amount of the dividend payable by the average of the
closing sale prices of the common stock for the 5-trading days prior to the
dividend payment date.
(b) Although the payment of dividends for the fourth quarter of 2001 was
initially deferred, the Company accrued $225,477 for the Series E Preferred
Stock fourth quarter dividends as of December 31, 2001. In connection with
the redemption of the Series E Preferred Stock, the Company paid all
accrued and unpaid dividends in cash on the Series E Preferred Stock
through and including March 21, 2002, the redemption date. The total
dividends paid were $396,107.
On October 26, 2001, Section 9(a)(ii) of Exhibit B to the Company's
Articles of Amendment and Restatement was amended to provide for an exception to
the 5% ownership restriction upon conversion(s) such that holder(s) of Series E
Preferred Stock may, upon receipt of the prior written consent of the Company
(which consent may be withheld by the Company in its sole discretion) and if
consistent with and otherwise permitted by the Company's Articles of Amendment
and Restatement, convert shares of Series E Preferred Stock such that the
holder(s) of Series E Preferred Stock own 5% or more but less than 9.8% of the
Company's then outstanding common stock for such period of time as is provided
in the written consent.
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 1,606,595 shares of Series F Preferred Stock.
Holders of record of CRIIMI MAE common stock who maintained ownership of
their common stock through November 5, 1999, received for each share held
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. During the first conversion period, 756,453 shares of Series F Preferred
Stock were converted, resulting in the issuance of 640,144 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 239,657 shares of common stock.
Accrued and unpaid dividends were not paid on shares of Series F Preferred Stock
converted into common stock during the conversion periods. After February 3,
2000, the Series F Preferred Stock is not convertible into common stock.
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 Series F
Preferred Stock is redeemable at the Company's option 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 Series F Preferred Stock provides for
dividends at a fixed annual rate of 12%. The liquidation value of the Series F
Preferred Stock is $10.00 per share plus accrued and unpaid dividends.
As of December 31, 2001 and 2000, there were 586,354 shares of Series F
Preferred Stock issued and outstanding. The following table summarizes the
dividend payment activity for 2001 for the Series F Preferred Stock:
Dividends Time period for Number of
per Series F Amount of which dividends are Shares of Common
Declaration Date Payment Date Share Dividends (c) accrued Stock Issued
- ---------------------------------------------------------------------------------------------------------------
June 4, 2001 July 2, 2001 $ 1.99 $ 1,166,844 11/5/99-6/30/01 185,996 (a)
September 4, 2001 October 10, 2001 $ 0.30 $ 175,906 7/1/01-9/30/01 33,334 (b)
(a) Represents the number of shares of common stock issued in connection
with the payment of dividends to holders of Series F Preferred Stock. The
Company determined the number of shares of common stock to issue by
dividing the dollar amount of the dividend payable by the volume-weighted
average of the sale prices of the common stock for the 10-trading day
period commencing after the declaration date.
(b) Represents the number of shares of common stock issued in connection
with the payment of dividends to holders of Series F Preferred Stock. The
Company determined the number of shares of common stock to issue by
dividing the dollar amount of the dividend payable by the volume-weighted
average of the sale prices of the common stock for the 10-trading day
period (interrupted by the closing of equity markets due to the terrorist
attacks) beginning one trading day after the dividend declaration date. As
a result of the temporary closing of the U.S. equity markets from September
11 through September 14, the original payment date of September 28, 2001
was extended to October 10, 2001.
(c) Although the payment of dividends for the fourth quarter of 2001 was
initially deferred, the Company accrued $175,906 for the Series F Preferred
Stock fourth quarter dividends at a dividend rate of $0.30 per share as of
December 31, 2001. On March 21, 2002, the Board declared dividends on
shares of Series F Preferred Stock of $175,906 and $175,906 for the fourth
quarter of 2001 and the first quarter of 2002, respectively. The dividends
are payable in shares of common stock on April 15, 2002 to holders of
record on April 1, 2002. The Company will determine the number of shares
of common stock to issue for the dividend by dividing $351,812 by the
volume-weighted average of the sale prices of the common stock for the 10
trading day period commencing on March 22, 2002.
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 to common shareholders of record on
October 27, 2000, provided that the shareholders maintained ownership of their
common stock through the payment date. The dividend was paid on November 13,
2000 in 3,741,191 shares of Series G Preferred Stock.
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). 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 ended 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
3,254,704 shares of common stock. Accrued and unpaid dividends were not paid on
shares of Series G Preferred Stock converted into common stock during the
conversion period. After March 6, 2001, the Series G Preferred Stock is not
convertible into common stock.
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%. Since the holders of the Series G Preferred Stock voted to accept
the Reorganization Plan, the relative rights and preferences of the Series G
Preferred Stock were amended to permit the payments of dividends in cash or
common stock (or a combination thereof) at the Company's election. 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.
As of December 31, 2001 and 2000, there were 1,244,656 and 3,741,191
shares, respectively, of Series G Preferred Stock issued and outstanding. The
following table summarizes the dividend payment activity for 2001 for the Series
G Preferred Stock:
Time period for Number of Shares
Dividends per Amount of which dividends of Common Stock
Declaration Date Payment Date Series G Share Dividends (c) are accrued Issued
------------------------------------------------------------------------------------------------------------
June 4, 2001 July 2, 2001 $ 0.955 $ 1,188,646 11/13/00-6/30/01 189,450 (a)
September 4, 2001 October 10, 2001 $ 0.375 $ 466,746 7/01/01-9/30/01 88,717 (b)
(a) Represents the number of shares of common stock issued in connection
with the payment of dividends to holders of Series G Preferred Stock. The
Company determined the number of shares of common stock to issue by
dividing the dollar amount of the dividend payable by the volume-weighted
average of the sale prices of the common stock for the 10-trading day
period commencing after the declaration date.
(b) Represents the number of shares of common stock issued in connection
with the payment of dividends to holders of Series G Preferred Stock. The
Company determined the number of shares of common stock to issue by
dividing the dollar amount of the dividend payable by the volume-weighted
average of the sale prices of the common stock for the 10-trading day
period (interrupted by the closing of equity markets due to the terrorist
attacks) beginning one trading day after the dividend declaration date. As
a result of the temporary closing of the U.S. equity markets from September
11 through September 14, the original payment date of September 28, 2001
was extended to October 10, 2001.
(c) Although the payment of dividends for the fourth quarter of 2001 was
initially deferred, the Company accrued $466,746 for the Series G Preferred
Stock fourth quarter dividends at a dividend rate of $0.375 per share as of
December 31, 2001. On March 21, 2002, the Board declared dividends on
shares of Series G Preferred Stock of $466,746 and $466,746 for the fourth
quarter of 2001 and the first quarter of 2002, respectively. The dividends
are payable in shares of common stock on April 15, 2002 to holders of
record on April 1, 2002. The Company will determine the number of shares
of common stock to issue for the dividend by dividing $933,492 by the
volume-weighted average of the sale prices of the common stock for the 10
trading day period commencing on March 22, 2002.
12. EARNINGS PER SHARE
The following table reconciles basic and diluted earnings per share ("EPS")
for the years ended December 31, 2001, 2000, and 1999. The per share amounts
have been adjusted to reflect the one-for-ten reverse stock split effected on
October 17, 2001.
(Loss)/income Shares Per Share Amount
---------------- -------------- --------------------------
Year ended December 31, 2001
- ------------------------------------
Net loss before cumulative effect
of changes in accounting principles $ (26,082,918) 11,087,790 $ (2.35)
Cumulative effect of change in
accounting principle related to SFAS 133 (135,142) 11,087,790 (0.01)
Cumulative effect of change in
accounting principle related to servicing
fee revenue 1,995,262 11,087,790 0.18
---------------- -------------- ----------
Basic earnings per share:
Loss to common shareholders (24,222,798) 11,087,790 (2.18)
Dilutive effect of securities:
Stock options -- -- --
Convertible preferred stock -- -- --
---------------- -------------- ----------
Diluted earnings per share (1):
Loss to common shareholders and
assumed conversions $ (24,222,798) 11,087,790 $ (2.18)
================ ============== ==========
Year ended December 31, 2000
- ------------------------------------
Net loss before extraordinary item $(170,304,166) 6,214,479 $(27.40)
Extraordinary gain 14,808,737 6,214,479 $2.38
---------------- -------------- ----------
Basic earnings per share:
Loss to common shareholders (155,495,429) 6,214,479 (25.02)
Dilutive effect of securities:
Stock options -- -- --
Convertible preferred stock -- -- --
---------------- -------------- ----------
Diluted earnings per share (1):
Loss to common shareholders and
assumed conversions $(155,495,429) 6,214,479 $(25.02)
================ ============== ==========
Year ended December 31, 1999
- ------------------------------------
Basic earnings per share:
Loss to common shareholders $(132,368,965) 5,399,978 $(24.51)
Dilutive effect of securities:
Stock options -- -- --
Convertible preferred stock -- -- --
---------------- -------------- ----------
Diluted earnings per share (1):
Loss to common shareholders and
assumed conversions $(132,368,965) 5,399,978 $(24.51)
================ ============== ==========
(1) The common stock equivalents for the Preferred Stock are not
included in the calculation of diluted EPS for 2001, 2000 or 1999 because
the effect would be anti-dilutive.
The following table presents the basic EPS assuming that servicing revenue
resulting from the change in accounting was recognized on a current basis at the
beginning of each of the periods presented.
2001 2000 1999
----------------- ------------------ ------------------
Pro forma net loss to common
shareholders before extraordinary
item and changes in accounting
principles $(26,082,918) $(169,925,028) $(131,835,569)
================= ================== ==================
Pro forma basic and diluted loss per
share $ (2.35) $ (27.34) $ (24.41)
================= ================== ==================
Pro forma net loss to common
shareholders $(26,218,060) $(155,116,291) $(131,835,569)
================= ================== ==================
Pro forma basic and diluted loss per
share $ (2.36) $ (24.96) $ (24.41)
================= ================== ==================
13. STOCK BASED COMPENSATION PLANS
CRIIMI MAE has three stock option plans: the 2001 Stock Incentive Plan
("2001 Stock Plan"), the Second Amended and Restated Stock Option Plan for Key
Employees ("Key Employee Plan") and the 1996 Non-Employee Director Stock Plan
("Director Plan").
Under the 2001 Stock Plan, a maximum of 610,000 shares (subject to
adjustment) are available for grant pursuant to stock awards and stock options.
As of December 31, 2001, options to purchase 285,000 shares had been granted to
employees. Under the 2001 Stock Plan, options granted must have an option price
of not less than fair market value of a share of common stock on the date of
grant. On November 16, 2001, CRIIMI MAE granted options to purchase an aggregate
285,000 shares under the 2001 Stock Plan. These options vest ratably with 33%
vesting on the date of grant and 33% vesting on each of the first and second
anniversaries of the date of grant. The options expire in 10 years, and have an
exercise price of $2.78 per share, which was the closing price of the Company's
common stock on the date of grant. No option or award of stock may be granted
under the 2001 Stock Plan after July 1, 2011.
Under the Key Employee Plan, a maximum of 450,000 shares (subject to
adjustment) are available for grant pursuant to stock options. As of December
31, 2001, options to purchase 448,161 shares had been granted to employees.
Under the Key Employee Plan, options granted prior to July 28, 1995, have an
option price of $97.70, 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 and expire after eight years. On June 18, 2001, CRIIMI MAE
granted options to purchase an aggregate 134,500 shares under the Key Employee
Plan. These options vested on the date of grant, expire in 8 years, and have an
exercise price of $5.70 per share, which was the closing price of the Company's
common stock on the date of grant. No option may be granted under the Key
Employee Plan after June 30, 2002.
Under the Director Plan, a maximum of 87,313 shares (subject to adjustment)
are available for grant pursuant to stock awards and stock options. As of
December 31, 2001, options to purchase 2,040 shares and stock awards for 1,200
shares had been granted to directors. These options have an exercise price equal
to the market price of a share of common stock on the date of grant, vested on
the date of grant, and expire after ten years.
A summary of CRIIMI MAE's stock option and award plans as of December 31,
2001, 2000 and 1999, and changes during the years then ended is presented in the
table below:
2001 Stock Plan Key Employee Plan Directors' Plan
------------------------ ------------------------- ------------------------
Average Average Average
Shares Price Shares Price Shares Price
------------------------ ------------------------- ------------------------
Balance, January 1, 1999 - $ - 136,194 $ 149.06 600 $ 128.96
Granted - - 74,359 25.26 200 35.63
Exercised - - - - - -
Forfeited - - (25,502) 114.12 - -
----------- ---------- ---------- -------- ----------- --------
Balance, December 31, 1999 185,051 104.13 800 105.63
Adjustment of 2/00 (1) - - 30,386 104.13 131 105.63
Granted - - 12,135 10.63 200 13.75
Exercised - - - - - -
Forfeited - - (19,747) 68.46 - -
---------- ---------- --------- -------- ---------- -------
Balance, December 31, 2000 - 207,825 102.08 1,131 87.25
Adjustment of 3/01 (2) - - 103,844 102.08 609 87.25
Granted 285,000 2.78 134,500 5.70 300 7.30
Exercised - - - - - -
Forfeited - - (14,302) 75.61 - -
---------- ----------- ---------- ---------- ----------- --------
Balance, December 31, 2001 285,000 $ 2.78 431,867 $72.94 2,040 $75.49
========== ========== ========== ========== =========== ========
Exercisable, December 31, 1999 -- -- 49,275 $ 144.35 800 $ 105.63
========== ========== ========= ========== =========== ========
Exercisable, December 31, 2000 -- -- 116,180 $ 124.60 1,131 $ 87.25
========== ========== ========= ========== =========== ========
Exercisable, December 31, 2001 94,998 $ 2.78 389,435 $ 78.53 2,040 $ 75.49
========== ========== ========= ========== =========== ========
(1) Adjustment as a result of anti-dilution provision associated with
Series F Preferred Stock dividend paid to holders of common stock.
(2) Adjustment as a result of anti-dilution provision associated with
Series G Preferred Stock dividend paid to holders of common stock.
In addition to the option information included in the table above, with
respect to options granted to the principals at the time of the Merger, options
to acquire 316,593 and 271,921 shares were outstanding as of December 31, 2000
and 1999, respectively. There were no exercises during the years ended December
31, 2001, 2000 and 1999. These Merger options expired during 2001.
The following table summarizes information about stock options outstanding
at December 31, 2001:
Options Outstanding Options Exercisable
------------------------------------------------------ ------------------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
exercise prices outstanding Contractual Life Price exercisable Price
-------------------- ------------ ------------------ ---------------- ------------ --------------
$2.78 - $15.94 465,664 8.8 $ 4.44 255,548 $ 5.17
$15.95 - $31.87 67,390 5.2 31.25 45,072 31.25
$31.88 - $47.81 348 7.0 35.63 348 35.63
$47.82 - $111.56 17,165 1.9 101.69 17,165 101.69
$111.57 - $143.44 3,840 3.2 127.50 3,840 127.50
$143.45 - $159.38 164,500 3.9 158.20 164,500 158.20
--------- ------------- ------------- --------- -----------
$2.78 - $159.38 718,907 7.1 $ 45.13 486,473 $ 63.73
=========== ============= ============= ========= ===========
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." As a result, CRIIMI MAE accounts for
these Agreements and Plans under Accounting Principles Board Opinion No. 25,
under which no compensation cost has been recognized. SFAS No. 123 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 SFAS 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,
2001 2000 1999
----------------- ----------------- -----------------
Pro forma net loss to common shareholders $(25,493,873) $(156,370,899) $(133,490,853)
================= ================= =================
Pro forma basic loss per share $ (2.30) $ ( 25.16) $ (24.72)
================= ================= =================
Pro forma diluted loss per share $ (2.30) $ (25.16) $ (24.72)
================= ================= =================
The weighted average fair value of the options granted was $2.66, $8.30,
and $20.30 during 2001, 2000, and 1999, respectively. The fair value of the
2001, 2000 and 1999 option grants was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:
2001 2000 1999
------------------ ------------------ ----------------------
Risk-free interest rate 4.29% 6.44% 5.37%
Expected life 4.78 years 5.29 years 6.23 years
Expected volatility 91.4% 96.2% 95.2%
Dividend yield --% --% --%
14. TRANSACTIONS WITH RELATED PARTIES
Below is a summary of the related party transactions that occurred during
the years ended December 31, 2001, 2000 and 1999. These items are described
further in the text which follows:
For the years ended December 31,
2001 2000 1999
---------------- --------------- ----------------
Amounts received or accrued from related parties:
CRIIMI Inc.
Income (1) $ 751,021 $ 746,570 $ 972,180
Return of Capital (2) 1,723,949 1,573,335 5,278,811
---------------- --------------- ----------------
Total $ 2,474,970 $ 2,319,905 $ 6,250,991
================ =============== ================
CRI/AIM Investment Limited Partnership (1) $ 284,411 $ 341,965 $ 444,393
================ =============== ================
Expense reimbursements to CRIIMI MAE Management:
AIM Funds (4) $ 183,898 $ 168,978 $ 183,579
CMSLP (2)(3)(4) 248,428 (6) 39,602 946,461
---------------- --------------- ----------------
Total $ 432,326 $ 208,580 $ 1,130,040
================ =============== ================
Payments to CRI:
Expense reimbursement - CRIIMI MAE (4)(5) $ 218,038 (7) $ 151,171 $ 182,691
================ =============== ================
Payments to Capital Hotel Group:
Management fee (4) $ -- $ 34,698 $ 61,077
================ =============== ================
(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) Effective October 1, 2001, CRIIMI MAE entered into an Administrative
Services and Loan Servicing Agreement with CMSLP to provide CRIIMI MAE
with certain loan servicing and surveillance services to assist CRIIMI
MAE in monitoring certain investments (the "Services Agreement"). In
addition, CRIIMI MAE provides CMSLP with the following services: human
resources, payroll, structured finance, information technology,
treasury, legal and administrative. CMSLP and CRIIMI MAE compensate
each other for these services at an amount that the Company
believes would be charged to, or by an unaffiliated third party for
comparable services.
(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 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 CRI Administrative
Services Agreement to the extent such services are not performed by
CM Management or provided by another service provider. The CRI
Administrative Services Agreement is terminable on 30 days notice at
any time by CRIIMI MAE.
(6) Includes payroll reimbursement for services provided by CM Management
employees to CMSLP through June 30, 2001. Since CMSLP has been
accounted for on a consolidated basis since July 1, 2001, there are no
related party transactions with CMSLP after that date.
(7) Includes a payment of approximately $48,000 to CRI related to a
pre-petition claim on April 17, 2001.
15. LITIGATION
Bankruptcy Proceedings and Other Litigation
On the Petition Date, the Debtors filed voluntary petitions for relief
under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. On November 22,
2000, the Bankruptcy Court entered an order (the "Confirmation Order")
confirming the Reorganization Plan before it. The Company emerged from Chapter
11 on April 17, 2001,
at which date all material litigation matters existing subsequent to the
Petition Date had been settled or resolved except for the First Union litigation
referenced below.
First Union
First Union and the Company entered into a settlement agreement dated as of
February 6, 2002 (the "Settlement Agreement"). On March 5, 2002, the Bankruptcy
Court entered an order approving the Settlement Agreement. The Settlement
Agreement became effective on March 20, 2002 (the "Settlement Effective Date").
The dispute concerned whether First Union was a secured or unsecured creditor
in connection with certain credit and custodian agreements between CRIIMI MAE
and First Union. First Union's claim amount was approximately $18.6 million.
On the Settlement Effective Date, a previously issued Series A Senior
Secured Note having a December 31, 2001 face amount of $7,484,650 and previously
issued Series B Senior Secured Notes having a December 31, 2001 aggregate face
amount of $4,809,273 (collectively, the "Notes") were released from escrow to
First Union. On the Settlement Effective Date, First Union sold the Notes to
ORIX. The proceeds from the sale of the Notes, combined with the escrowed cash,
resulted in total proceeds of approximately $18.8 million. CRIIMI MAE retained
the approximate $238,000 of cash in excess of the First Union claim amount of
$18.6 million. In addition, approximately $22,938,260 of the Company's
restricted cash became unrestricted.
Reference is made to the Settlement Agreement, previously filed with the
Bankruptcy Court (and with the Securities and Exchange Commission as an exhibit
to a Current Report on Form 8-K filed on February 13, 2002), for a more detailed
description of the terms and conditions of the Settlement Agreement.
16. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for
the years ended December 31, 2001, 2000 and 1999:
2001
-------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
---------------- ---------------- ---------------- ----------------
Interest Income $ 33,811,044 $ 33,718,486 $ 33,588,020 $ 33,258,002
Net income (loss) 6,030,160 (1) (2,375,818) (1) (723,708) (27,153,432)
Basic net earnings (loss) per share 0.80 (1) (0.21) (1) (0.06) (2.10)
Diluted net earnings (loss) per share 0.64 (1) (0.21) (1) (0.06) (2.10)
2000
-------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
---------------- ---------------- ---------------- ----------------
Interest Income $ 55,454,598 $ 51,274,382 $ 49,066,581 $ 39,456,080
Net income (loss) 4,035,611 3,742,484 (44,463,063) (118,810,461)
Basic net earnings (loss) per share 0.66 0.60 (7.13) (19.05)
Diluted net earnings (loss) per share 0.56 0.54 (7.13) (19.05)
1999
-------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
---------------- ---------------- ---------------- ----------------
Interest Income $ 56,226,280 $ 55,555,456 $ 55,436,380 $ 55,105,112
Net income (loss) 13,416,949 (2,033,199) 8,100,173 (151,852,888)
Basic net earnings (loss) per share 2.53 (0.38) 1.51 (27.19)
Diluted net earnings (loss) per share 2.30 (0.38) 1.36 (27.19)
(1) The net income has been adjusted to reflect the change in accounting
principle related to servicing revenue.
17. SEGMENT REPORTING
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) securitizing pools of mortgage loans and pools of CMBS, (iii) direct
investments in government insured securities and entities that own government
insured securities and (iv) securities trading activities. The Company's income
is primarily generated from these assets.
Mortgage servicing, which consists of all the operations of CMSLP,
primarily includes performing servicing functions with respect to the mortgage
loans underlying the Company's Subordinated CMBS. CMSLP performs a variety of
servicing including special servicing and loan management. 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. Through June 30, 2001, CMSLP was an
unconsolidated affiliate of CRIIMI MAE. Therefore, up through June 30, 2001, the
results of its operations were reported in the Company's income statement in
equity in (losses) earnings from investments. Beginning in the third quarter of
2001, CMSLP's results were consolidated into CRIIMI MAE's consolidated financial
statements as a result of a change in the ownership of CMSLP. See Note 3 for
further discussion. 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. As discussed in Note 3, CMSLP sold all of its rights
and obligations under its CMBS master and primary servicing contracts in
February 2002.
The following tables detail the Company's financial performance by these
two primary lines of business for the years ended December 31, 2001, 2000 and
1999. The basis of accounting used in the tables is GAAP.
2001
--------------------------------------------------------------------------------
Portfolio Mortgage Reclassification
Investment Servicing (2) Elimination (1) Consolidated
--------------- ------------- ------------------ --------------- ---------------
Interest income:
Subordinated CMBS $ 105,522,833 $ 310,690 $ (186,357) $ (124,333) $ 105,522,833
Insured mortgage securities 28,852,719 - - - 28,852,719
Other - 2,203,907 (648,307) (1,555,600) -
Servicing income - 6,419,399 3,315,456 (2,848,798) 6,886,057
Net gain on mortgage security dispositions (41,982) - - - (41,982)
Other income 4,833,529 3,771,670 (2,480,792) (3,569,612) 2,554,795
--------------- ------------- ------------------ --------------- ---------------
Total revenue
139,167,099 12,705,666 - (8,098,343) 143,774,422
--------------- ------------- ------------------ --------------- ---------------
General and administrative expenses (11,548,759) - - - (11,548,759)
Interest expense (97,787,568) - - - (97,787,568)
Reorganization items (1,813,220) - - - (1,813,220)
Other expenses (2,877,576) - - - (2,877,576)
Servicing general and administrative
expenses - (12,165,374) - 6,282,485 (5,882,889)
Servicing non-cash expenses - (3,378,076) - 1,678,890 (1,699,186)
CMSLP Restructuring - (437,723) - - (437,723)
Impairment on CMBS (34,654,930) - - - (34,654,930)
Emergence loan origination fee (3,936,616) - - - (3,936,616)
Hedging loss (1,073,392) - - - (1,073,392)
--------------- ------------- ------------------ --------------- ---------------
Total expenses
(153,692,061) (15,981,173) - 7,961,375 (161,711,859)
--------------- ------------- ------------------ --------------- ---------------
Net (loss) income before extraordinary
item and cumulative effect of
changes in accounting principles $ (14,524,962) $ (3,275,507) $ - $ (136,968) $ (17,937,437)
=============== ============= ================== =============== ===============
Total assets $1,289,827,494 $ 25,176,629 $ - $ - $1,315,004,123
=============== ============= ================== =============== ===============
- -----------------------------------------
(1) The Company performs the mortgage servicing function through CMSLP
which, through June 30, 2001, was accounted for under the equity method.
The elimination column reclassifies CMSLP under the equity method as it was
accounted for in the Company's consolidated financial statements. Beginning
in the third quarter of 2001, CMSLP's results were consolidated into CRIIMI
MAE Inc.'s consolidated financial statements.
(2) For consolidated financial statement purposes, all revenue earned by the
mortgage servicing function is classified as servicing income.
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) - - (139,366,369)
Reorganization items (66,072,460) - - (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 (loss) income before extraordinary item
and cumulative effect of changes in
accounting principles $ (164,203,116) $ 519,227 $ 291,375 $ (163,392,514)
================= ============== ================= =================
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, during the period covered, was 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.
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 before extraordinary
item and cumulative effect of changes
in accounting principles $ (124,271,258) $ (2,428,620) $ 171,065 $ (126,528,813)
================= ============== ================= ==================
Total assets $ 2,272,100,775 $ 23,679,706 $ (2,119,235) $ 2,293,661,246
================= ============== ================= ==================
(1) The Company performs the mortgage servicing function through CMSLP
which, during the period covered, was 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.