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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the quarter ended June 30, 2002 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
- ------------------- -----------------------------
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 whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No[ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding as of August 12, 2002
----- ---------------------------------
Common Stock, $0.01 par value 13,941,668
CRIIMI MAE INC.
Quarterly Report on Form 10-Q
Page
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2002
(unaudited) and December 31, 2001.............................. 3
Consolidated Statements of Income for the three and six
months ended June 30, 2002 and 2001 (unaudited)................ 4
Consolidated Statements of Changes in Shareholders' Equity
for the six months ended June 30, 2002 (unaudited)............. 5
Consolidated Statements of Cash Flows for the six
months ended June 30, 2002 and 2001 (unaudited)................ 6
Notes to Consolidated Financial Statements (unaudited).......... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 35
Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 61
PART II. Other Information
Item 2. Changes in Securities........................................... 62
Item 4. Submission of Matters to a Vote of Security Holders............. 62
Item 6. Exhibits and Reports on Form 8-K................................ 63
Signatures ............................................................... 65
PART I
ITEM 1. FINANCIAL STATEMENTS
CRIIMI MAE INC.
CONSOLIDATED BALANCE SHEETS
CAPTION>
June 30, December 31,
2002 2001
------------------- -------------------
(unaudited)
Assets:
Mortgage assets:
Subordinated CMBS and Other MBS, at fair value $ 549,298,785 $ 536,204,992
Subordinated CMBS pledged to secure Securitized Mortgage
Obligation - CMBS, at fair value 310,509,815 296,477,050
Insured mortgage securities, at fair value 311,314,273 343,091,303
Equity investments 8,080,823 9,312,156
Other assets 26,070,661 37,180,968
Receivables 24,843,347 18,973,680
Servicing other assets 20,917,586 18,250,824
Servicing cash and cash equivalents 5,208,440 6,515,424
Restricted cash and cash equivalents 8,027,400 38,214,277
Other cash and cash equivalents 14,073,124 10,783,449
------------------- -------------------
Total assets $ 1,278,344,254 $ 1,315,004,123
=================== ===================
Liabilities:
Variable-rate secured borrowing $ 228,945,230 $ 244,194,590
Series A senior secured notes 95,854,483 99,505,457
Series B senior secured notes 66,175,191 63,937,383
Payables and accrued expenses 21,263,547 25,946,959
Mortgage payable 7,161,953 7,109,252
Servicing liabilities 1,049,369 3,660,173
Securitized mortgage obligations:
Collateralized bond obligations-CMBS 284,491,760 283,047,470
Collateralized mortgage obligations-
insured mortgage securities 294,717,999 326,558,161
------------------- -------------------
Total liabilities 999,659,532 1,053,959,445
------------------- -------------------
Shareholders' equity:
Preferred stock, $0.01 par; 75,000,000
shares authorized; 3,424,992 and 3,597,992 shares
issued and outstanding, respectively 34,250 35,980
Common stock, $0.01 par; 300,000,000 shares
authorized; 13,941,668 and 12,937,341 shares
issued and outstanding, respectively 139,417 129,373
Accumulated other comprehensive income (loss):
Unrealized gains (losses) on mortgage assets 30,607,630 (6,060,398)
Unrealized losses on interest rate caps (1,124,674) (383,200)
Deferred compensation (52,985) -
Additional paid-in capital 619,178,364 632,887,967
Accumulated deficit (370,097,280) (365,565,044)
------------------- -------------------
Total shareholders' equity 278,684,722 261,044,678
------------------- -------------------
Total liabilities and shareholders' equity $ 1,278,344,254 $ 1,315,004,123
=================== ===================
The accompanying notes are an integral part of these consolidated financial
statements.
CRIIMI MAE INC.
CONSOLIDATED STATEMENTS OF INCOME
For the three For the six
months ended June 30, months ended June 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Interest income:
Subordinated CMBS $ 25,600,119 $ 26,355,666 $ 51,136,504 $ 52,671,461
Insured mortgage securities 6,143,229 7,362,820 12,638,723 14,858,069
------------ ------------ ------------ ------------
Total interest income 31,743,348 33,718,486 63,775,227 67,529,530
------------ ------------ ------------ ------------
Interest and related expenses:
Variable-rate secured borrowing 3,825,304 4,764,250 7,696,951 4,764,250
Series A senior secured notes 2,928,412 2,615,322 5,892,821 2,615,322
Series B senior secured notes 3,444,073 2,626,185 6,809,205 2,626,185
Fixed-rate collateralized bond obligations-CMBS 6,573,995 6,422,105 12,939,900 12,786,162
Fixed-rate collateralized mortgage obligations - insured securities 6,160,178 6,832,650 12,654,718 13,837,188
Variable-rate secured borrowings-CMBS - 1,059,418 - 7,325,059
Fixed-rate senior unsecured notes - 430,891 - 2,712,142
Other interest expense 253,400 177,148 497,982 2,095,692
------------ ------------ ------------ ------------
Total interest expense 23,185,362 24,927,969 46,491,577 48,762,000
------------ ------------ ------------ ------------
Net interest margin 8,557,986 8,790,517 17,283,650 18,767,530
------------ ------------ ------------ ------------
General and administrative expenses (2,679,860) (2,609,919) (5,882,474) (4,983,051)
Depreciation and amortization (368,564) (839,198) (608,540) (1,840,683)
Servicing revenue 2,494,037 - 5,257,573 -
Servicing general and administrative expenses (2,134,890) - (4,625,984) -
Servicing amortization, depreciation, and impairment expenses (402,931) - (910,810) -
Servicing restructuring expenses (141,240) - (141,240) -
Servicing gain on sale of servicing rights 4,817,598 - 4,817,598 -
Income tax expense - servicing (975,220) - (908,776) -
Equity in earnings (losses) from investments 118,438 (1,360,743) 232,742 (1,954,541)
Other income, net 585,528 785,618 1,430,431 2,352,849
Net losses on mortgage security dispositions (146,473) (66,214) (256,292) (55,802)
Impairment on CMBS (5,151,091) - (5,151,091) -
Hedging expense (306,569) (67,780) (396,327) (921,039)
Investment banking fees (244,444) - (244,444) -
Reorganization items - (1,025,411) - (1,445,628)
Emergence financing origination fee - (3,936,616) - (3,936,616)
------------ ------------ ------------ ------------
(4,535,681) (9,120,263) (7,387,634) (12,784,511)
------------ ------------ ------------ ------------
Net income (loss) before cumulative effect of changes in accounting
principles 4,022,305 (329,746) 9,896,016 5,983,019
Cumulative effect of adoption of SFAS 142 - - (9,766,502) -
Cumulative effect of change in accounting principle related to
servicing revenue - - - 1,995,262
Cumulative effect of adoption of SFAS 133 - - - (135,142)
------------ ------------ ------------ -----------
Net income (loss) before dividends accrued or paid on preferred shares 4,022,305 (329,746) 129,514 7,843,139
Dividends accrued or paid on preferred shares (1,726,560) (2,046,072) (4,661,750) (4,188,797)
------------ ------------ ------------ -----------
Net income (loss) available to common shareholders $ 2,295,745 $ (2,375,818) $ (4,532,236) $ 3,654,342
============ ============ ============ ============
Net income (loss) available to common shareholders per common share:
Basic - before cumulative effect of changes in accounting
principles $ 0.16 $ (0.21) $ 0.39 $ 0.19
============ ============ ============ ============
Basic - after cumulative effect of changes in accounting
principles $ 0.16 $ (0.21) $ (0.34) $ 0.39
============ ============ ============ ============
Diluted - before cumulative effect of changes in accounting
principles $ 0.16 $ (0.21) $ 0.38 $ 0.19
============ ============ ============ ============
Diluted - after cumulative effect of changes in accounting
principles $ 0.16 $ (0.21) $ (0.34) $ 0.37
============ ============ ============ ============
Shares used in computing basic earnings (loss) per share 13,915,490 11,297,061 13,487,773 9,425,586
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
CRIIMI MAE INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the six months ended June 30, 2002
(Unaudited)
Accumulated
Preferred Common Additional Other Total
Stock Par Stock Par Paid-in Accumulated Comprehensive Deferred Shareholders'
Value Value Capital Deficit Income (Loss) Compensation Equity
--------- ----------- ----------- ------------ -------------- ------------- -------------
Balance at December 31, 2001 $ 35,980 $ 129,373 $ 632,887,967 $(365,565,044) $ (6,443,598) $ - $ 261,044,678
Net income before dividends
accrued or paid on preferred
shares - - - 129,514 - - 129,514
Adjustment to unrealized
gains/losses on mortgage assets - - - - 36,668,028 - 36,668,028
Adjustment to unrealized losses
on interest rate caps - - - - (741,474) - (741,474)
Dividends accrued or paid on
preferred shares - - - (4,661,750) - - (4,661,750)
Common shares issued related
to preferred stock dividends - 9,664 3,435,128 - - - 3,444,792
Common shares issued - 55 23,994 - - - 24,049
Issuance of restricted stock - 325 129,350 - - (129,675) -
Amortization of deferred
compensation - - - - - 76,690 76,690
Redemption of Series E
Preferred Stock (1,730) - (17,298,075) - - - (17,299,805)
---------- --------- ------------- ------------- ------------- ----------- ------------
Balance at June 30, 2002 $ 34,250 $ 139,417 $ 619,178,364 $(370,097,280) $ 29,482,956 $ (52,985) $ 278,684,722
========== ========= ============= ============= ============= =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
CRIIMI MAE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30,
2002 2001
----------------- -----------------
Cash flows from operating activities:
Net income before dividends accrued or paid on preferred shares $ 129,514 $ 7,843,139
Adjustments to reconcile net income before dividends accrued or paid
on preferred shares to net cash provided by operating activities:
Gain on sale of servicing rights 4,817,598 -
Amortization of discount and deferred financing costs on debt 3,075,631 3,052,810
Accrual of extension fees related to New Debt 2,137,877 860,711
Depreciation and amortization 608,540 1,854,643
Discount amortization on mortgage assets, net (5,677,819) (4,866,995)
Net losses on mortgage security dispositions 256,292 55,802
Equity in (earnings) losses from investments (232,742) 1,954,541
Servicing amortization, depreciation and impairment 910,810 -
Hedging expense 396,327 1,056,181
Amortization of deferred compensation 76,690 -
Impairment on CMBS 5,151,091 -
Cumulative effect of adoption of SFAS 142 9,766,502 -
Cumulative effect of change in accounting principle related to
servicing revenue - (1,995,262)
Changes in assets and liabilities:
Decrease in restricted cash and cash equivalents 30,186,877 59,564,084
(Increase) decrease in receivables and other assets (6,975,698) 23,045,303
Decrease in payables and accrued expenses (4,366,333) (41,785,299)
Increase in servicing other assets (6,665,966) -
Decrease in servicing liabilities (2,610,804) -
Sales (purchases) of other MBS, net 873,048 (2,944,461)
Change in reorganization items accrual - 176,267
Non-cash reorganization items - (431,902)
----------------- -----------------
Net cash provided by operating activities 31,857,435 47,439,562
----------------- -----------------
Cash flows from investing activities:
Proceeds from mortgage security prepayments 37,115,941 9,362,453
Distributions received from AIM Investments 1,464,075 1,496,818
Receipt of principal payments 1,980,474 2,182,226
Cash received in excess of income recognized on unrated Subordinated CMBS 1,857,293 3,263,795
Proceeds from sale of servicing rights by CMSLP 8,180,561 -
Purchases of investment-grade CMBS by CMSLP (9,905,520) -
----------------- -----------------
Net cash provided by investing activities 40,692,824 16,305,292
----------------- -----------------
Cash flows from financing activities:
Principal payments on securitized mortgage obligations (32,907,210) (11,455,602)
Principal payments on New Debt (18,900,334) -
Principal payments on secured borrowings and other debt obligations (50,161) (138,914,941)
Proceeds from the issuance of common stock 24,049 -
Redemption of Series E Preferred Stock, including accrued dividends (18,733,912) -
----------------- -----------------
Net cash used in financing activities (70,567,568) (150,370,543)
----------------- -----------------
Net increase (decrease) in cash and cash equivalents 1,982,691 (86,625,689)
Cash and cash equivalents, beginning of period (1) 17,298,873 106,569,778
----------------- -----------------
Cash and cash equivalents, end of period (1) $ 19,281,564 $ 19,944,089
================= =================
(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 (Unaudited)
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 reorganization under Chapter 11 of the U.S. Bankruptcy Code (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 principally with respect 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 Company's variable-rate secured financing facility (the
"Variable-Rate Secured Borrowing"), Series A Senior Secured Notes, and Series B
Senior Secured Notes (collectively, 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 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.
The Company is exploring possible ways of achieving improved financial
flexibility and other strategic alternatives to maximize shareholder value. In
May 2002, the Company retained the investment banking firm of Friedman,
Billings, Ramsey & Co., Inc. ("FBR") to assist the Company with an evaluation of
strategic alternatives designed to maximize shareholder value. The Company is
exploring a range of strategic alternatives. There can be no assurance that the
Company will be successful in achieving its goals to maximize shareholder value.
If it is determined that a sale of Subordinated CMBS would maximize shareholder
value, in part due to the expressions of interest received to date, there can be
no assurance that such a sale will be for consideration equal to or greater than
the Company's estimate of the fair value of the Subordinated CMBS (as of June
30, 2002) to be sold. See further discussion of the Subordinated CMBS in Notes 3
and 4.
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) restrictions on dividends;
(4) the limited protection provided by hedging transactions; (5) inherent risks
in owning Subordinated CMBS; (6) the limited liquidity of the Subordinated CMBS
market; (7) 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; (8) risks related to the New Debt including the
ability to meet payment and other obligations thereunder; (9) risks associated
with the trader election and limitation or loss of net operating losses for tax
purposes; (10) results of operations adversely affected by factors beyond the
Company's control; (11) the effect of the yield curve on borrowing costs; (12)
the effect of phantom (non-cash) income on total income; (13) the effect of
interest rate compression on the market price of the Company's stock; (14) risk
of loss of REIT status and other tax matters; (15) failure to manage the
mismatch between long-term assets and short-term funding; (16) competition; (17)
taxable mortgage pool risk; (18) risk of becoming subject to the requirements of
the Investment Company Act of 1940; (19) risk that future issuances of shares of
common stock issued in payment of dividends on preferred shares could adversely
affect the common stock price and impair the Company's ability to raise capital;
(20) risk of failure to achieve strategic alternatives; and (21) risk that
charter ownership limitations and anti-takeover measures could prevent or delay
a change in control.
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.
REIT Status and Other Tax Matters
REIT Status. CRIIMI MAE is required to meet income, asset, ownership and
distribution tests to maintain its REIT status. Although there can be no
assurance, the Company believes that it has satisfied the REIT requirements for
all years through, and including 2001. 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's Net Operating Loss for Tax Purposes/Shareholder Rights Plan
In 2000, the Company began trading 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
("Other MBS")), 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.
As a result of its trader election in 2000, 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 an ordinary loss for tax purposes. 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, a subsidiary of the Company, as part of the
Company's Chapter 11 reorganization plan (the "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 treated as ordinary, any gains will generally increase taxable income and any
losses will generally decrease taxable income. Because the REIT rules generally
require the Company to distribute 90% of its taxable income to shareholders, any
increases in taxable income from trading activities will generally result in an
increase in REIT distribution requirements and any decreases in taxable income
from trading activities will generally result in a decrease in REIT distribution
requirements (or, if 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 for the year ended December 31, 2001. As such, the
Company's taxable income was reduced to zero and, accordingly, the Company's
REIT distribution requirement was eliminated for 2001. As of December 31, 2001,
the Company's accumulated and unused net operating loss ("NOL") was $(146.5)
million. 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. See also the discussion
in Note 9 with respect to the remaining January 2000 Loss.
There can be no assurance that the Company's position with respect to its
election as a trader in securities will not be challenged by the Internal
Revenue Service ("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 of 1986, as
amended (the "Tax Code"), however, interest may also be due to the IRS 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 can be 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 Tax Code. As a result of these limitations imposed by Section 382 of the Tax
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 carryforwards 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 its capital stock
that has created an "ownership change" under Section 382 of the Tax Code.
Currently, the Company does not know of any acquisition of shares of its capital
stock that will create an "ownership change" under Section 382 of the Tax Code.
The Company adopted a shareholder rights plan in January 2002 and amended its
corporate charter ("Charter") in May 2002 to allow it to minimize the chance of
an ownership change within the meaning of Section 382 of the Tax Code. There can
be no assurance that an ownership change will not occur. The Charter amendments
were approved by the Company's shareholders on May 14, 2002 and became effective
on May 15, 2002.
If an "ownership change" occurs under Section 382 of the Tax Code, the
Company's prospective use of its accumulated and unused NOL and the remaining
January 2000 Loss, representing a combined total amount of approximately
$(363.7) million (as of June 30, 2002), 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 $22.7 million for the year ended December 31,
2001. This increase in taxable income would have created a requirement to
distribute 100 percent of this income to the Company's common shareholders. 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 for the year ended December 31, 2001.
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 Securities
and Exchange Commission ("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 June 30, 2002, 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
significantly reduce 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 a court
found that 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
In management's opinion, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments and consolidating adjustments) necessary to present fairly the
consolidated balance sheets as of June 30, 2002 and December 31, 2001 (audited),
the consolidated results of operations for the three and six months ended June
30, 2002 and 2001, and cash flows for the six months ended June 30, 2002 and
2001. The accompanying consolidated financial statements include the financial
results of CRIIMI MAE and all of its majority-owned and controlled subsidiaries.
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.
These consolidated financial statements have been prepared pursuant to the
rules and regulations of the SEC. Certain information and note disclosures
normally included in annual financial statements prepared in accordance with
generally accepted accounting principles ("GAAP") have been condensed or
omitted. While management believes that the disclosures presented are adequate
to make the information not misleading, it is recommended that these
consolidated financial statements be read in conjunction with the consolidated
financial statements and the notes included in CRIIMI MAE's Annual Report on
Form 10-K for the year ended December 31, 2001.
Reclassifications
Certain 2001 amounts have been reclassified to conform to the 2002
presentation.
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 Subordinated 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 Emerging
Issues Task Force ("EITF") Issue No. 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 calculates 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. Upon the sale of such securities, any gain or loss is
recognized in the income statement.
Interest income on Other MBS 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 MBS 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.
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 Subordinated CMBS and the
Subordinated CMBS's current cost basis result in a decrease in the yield that
was previously used to recognize income. This decrease in yield would be
primarily 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 that 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. Impairment charges
aggregating approximately $5.2 million were recognized during the three and six
months ended June 30, 2002. See Note 4 for further discussion of the impairment
charges.
CRIIMI MAE assesses each Other MBS for other than temporary impairment when
the fair market value of the security declines below the respective 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. No impairment loss
was recognized during the three and six months ended June 30, 2002.
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.
The following is the supplemental cash flow information:
Three months ended June 30, Six months ended June 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Cash paid for interest $20,420,677 $63,813,340 $37,155,371 $82,747,701
Non-cash investing and financing
activities:
Issuance of restricted stock -- -- 129,675 --
Preferred stock dividends paid in
shares of common stock 3,444,792 14,999,183 3,444,792 14,999,183
Comprehensive Income (Loss)
The following table presents comprehensive income (loss) for the three and
six months ended June 30, 2002 and 2001:
Three months ended June 30, Six months ended June 30,
2002 2001 2002 2001
-------------- --------------- --------------- -------------
Net income (loss) before dividends
accrued or paid on preferred shares $ 4,022,305 $ (329,746) $ 129,514 $ 7,843,139
Adjustment to unrealized
gains/losses on mortgage assets 35,548,935 (17,087,250) 36,668,028 (4,383,086)
Adjustment to unrealized losses on
interest rate caps (812,055) -- (741,474) --
------------ ------------ ------------ ------------
Comprehensive income (loss) $ 38,759,185 $(17,416,996) $ 36,056,068 $ 3,460,053
============ ============ ============ ============
Change in Accounting Principle due to Adoption of SFAS No. 142
In June of 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 occurs at the reporting unit
level (as defined in FAS 142) and is performed using a fair value based
approach. FAS 142 was effective for the Company on January 1, 2002. The
transition provisions of FAS 142 required 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 resulted 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
non-cash 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 14). 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 reduces the
Company's annual amortization expense by approximately $2.8 million.
The following table presents pro forma disclosures assuming that FAS 142
was adopted at the beginning of 2001:
Three months Six months
ended June 30, ended June 30,
2001 2001
-------------- --------------
Reported net (loss) income available to common shareholders $ (2,375,818) $ 3,654,342
Add: Goodwill amortization 99,867 199,734
Add: Intangible assets amortization 597,500 1,195,002
-------------- --------------
Adjusted net (loss) income available to common shareholders $ (1,678,451) $ 5,049,078
============== ==============
Basic earnings per share ("EPS"):
Reported basic EPS after cumulative effect of changes in accounting principles $ (0.21) $ 0.39
Goodwill amortization 0.01 0.02
Intangible assets amortization 0.05 0.13
-------------- --------------
Adjusted basic EPS after cumulative effect of changes in accounting principles $ (0.15) $ 0.54
============== ==============
Diluted EPS:
Reported diluted EPS after cumulative effect of changes in accounting
principles $ (0.21) $ 0.37
Dilutive effect of convertible preferred stock (a) -- (0.01)
Goodwill amortization 0.01 0.02
Intangible assets amortization 0.05 0.10
-------------- --------------
Adjusted diluted EPS after cumulative effect of changes in accounting principles $ (0.15) $ 0.48
============== ==============
(a) The addition of the goodwill and intangible assets amortization to
reported net income caused the Series E Preferred Stock (as defined in Note
11) to be dilutive.
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 changed its accounting policy to recognize
the special servicing fees in earnings on a current basis as it believed 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 rights
are evidenced and governed by separate legal instruments or contracts.
The Company was 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 six months ended June 30,
2001. The results of operations for the three and
six months ended June 30, 2002 and 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. The effect of this change was to increase net income (loss) before
cumulative effect of changes in accounting principles by approximately $182,000
($0.02 per diluted share before cumulative effect of changes in accounting
principles) for the three months ended June 30, 2001 and by approximately
$327,000 ($0.03 per diluted share before cumulative effect of changes in
accounting principles) for the six months ended June 30, 2001.
3. 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 June 30, 2002 As of December 31, 2001
Amortized Cost Fair Value Amortized Cost Fair Value
-------------- ---------- -------------- ----------
ASSETS:
Subordinated CMBS and Other MBS (1) $ 543,347,916 $ 549,298,785 $ 546,981,955 $ 536,204,992
Subordinated CMBS pledged to secure
Securitized Mortgage Obligation - CMBS 285,460,371 310,509,815 283,993,690 296,477,050
Insured mortgage securities 311,836,099 311,314,273 350,982,991 343,091,303
Interest rate protection agreements 1,743,098 572,788 448,789 65,589
Servicing other assets See footnote(2) See footnote(2) See footnote(2) See footnote(2)
Servicing cash and cash equivalents 5,208,440 5,208,440 6,515,424 6,515,424
Restricted cash and cash equivalents 8,027,400 8,027,400 38,214,277 38,214,277
Other cash and cash equivalents 14,073,124 14,073,124 10,783,449 10,783,449
LIABILITIES:
Variable-rate secured borrowing 228,945,230 228,945,230 244,194,590 244,194,590
Series A senior secured notes 95,854,483 90,582,486 99,505,457 95,276,475
Series B senior secured notes 66,175,191 58,234,168 63,937,383 54,826,306
Securitized mortgage obligations:
Collateralized bond obligations-CMBS 284,491,760 310,509,815 283,047,470 296,477,050
Collateralized mortgage obligations-
insured mortgage securities 294,717,999 326,115,262 326,558,161 351,983,544
Mortgage Payable 7,161,953 7,063,737 7,109,252 7,109,252
(1) Includes approximately $7.7 million of amortized cost and fair value
related to Other MBS as of June 30, 2002 and approximately $8.6 million of
amortized cost and $8.5 million of fair value as of December 31, 2001.
(2) CMSLP owns Subordinated CMBS and interest-only strips with an aggregate
amortized cost basis of $2.1 million and $2.3 million and a fair value of
$2.2 million and $2.4 million as of June 30, 2002 and December 31, 2001,
respectively. Additionally, during June 2002, CMSLP purchased
investment-grade CMBS for approximately $9.9 million. These
investment-grade CMBS have an aggregate cost basis and a fair value of $9.8
million as of June 30, 2002.
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 June 30, 2002 and December 31, 2001, 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 June 30, 2002 and
December 31, 2001, it has disclosed the range of discount rates by rating
category used in determining the fair market values as of June 30, 2002, in Note
4.
The liquidity of the Subordinated CMBS 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 June 30, 2002 and December 31, 2001, 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 values of the securitized mortgage obligations as of June 30, 2002
and December 31, 2001 were calculated using a discounted cash flow methodology
similar to that discussed in Subordinated CMBS above. The fair values of the
Series A and Series B Senior Secured Notes are based on quoted market prices
from an investment banking institution. 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 Agreements
The fair values of the interest rate protection agreements used to hedge
CRIIMI MAE's Variable-Rate Secured Borrowing are the estimated amounts that
CRIIMI MAE would receive to terminate the agreements as of June 30, 2002 and
December 31, 2001, taking into account current interest rates and the current
creditworthiness of the counterparties. The amounts were determined based on
quotes received from the counterparties to the agreements.
4. SUBORDINATED CMBS
As of June 30, 2002, the Company owned CMBS rated from A+ to CCC and
unrated with a total fair value amount for purposes of GAAP of approximately
$852 million (representing approximately 67% of the Company's total consolidated
assets), an aggregate amortized cost of approximately $821 million, and an
aggregate face amount of approximately $1.6 billion. Such CMBS represent
investments in securities issued in CBO-1, CBO-2 and Nomura. The June 30, 2002
total fair value includes approximately 34% of the Company's CMBS which are
rated BB+, BB, or BB-, 23% which are rated B+, B, B- or CCC and 7% which are
unrated. The remaining approximate 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 June 30, 2002 was 6.0% and
the weighted average life was 13 years.
The aggregate investment by the rating of the Subordinated CMBS is as
follows:
Discount Rate
or Range of
Weighted Discount Rates
Face Amount Average Fair Value Used to Amortized Cost Amortized Cost
as of Pass-Through Weighted as of Calculate as of 6/30/02 as of 12/31/01
Security Rating 6/30/02 (in Rate Average 6/30/02 (in Fair Value (in millions) (in millions)
millions) 6/30/02 Life (1) millions) as of 6/30/02 (3) (4)
- --------------------------------------------------------------------------------------------------------------------
A+ (2) $ 62.6 7.0% 4 years $ 63.8 6.4% $ 59.0 $ 58.7
BBB+ (2) 150.6 7.0% 9 years 142.6 7.9% 131.7 131.1
BBB (2) 115.2 7.0% 10 years 104.1 8.5% 94.7 94.2
BB+ 319.0 7.0% 11 years 222.6 12.1%-12.3% 220.9 219.0
BB 70.9 7.0% 11 years 46.8 12.8% 46.4 46.0
BB- 35.5 7.0% 12 years 21.7 13.9% 20.6 20.5
B+ 88.6 7.0% 12 years 46.4 16.1% 45.7 45.2
B 177.2 7.0% 13 years 85.5 16.9%-17.2% 84.4 83.7
B- 118.3 7.1% 15 years 48.8 19.5%-20.4% 48.3 48.1
CCC 70.9 7.0% 15 years 13.2 40.1% 13.0 13.1
Unrated/Issuer's 353.5 2.4% 18 years 56.6 35.0%-67.4% 56.4 62.8
Equity
---------- --------- ---------- ---------
Total (6) $1,562.3 6.0% 13 years $ 852.1 (6) $ 821.1 (5) $ 822.4
========== ========= ========== =========
(1) Weighted average life represents the weighted average expected life of the
Subordinated CMBS prior to consideration of losses, extensions or
prepayments. The weighted average life of the Subordinated CMBS may be
significantly shorter, particularly with respect to the Issuer's Equity in
CBO-1 (face amount of $93.9 million) and CBO-2 (face amount of $213.8
million) based on the Company's current loss expectations or potential
additional increases in such loss expectations.
(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 securities pursuant to the requirements of SFAS No. 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 impairment charges of approximately
$5.2 million related to the Nomura and CBO-2 unrated bonds, which were
recognized during the three months ended June 30, 2002. These impairment
charges are in addition to the cumulative impairment charges of
approximately $178.1 million that were recognized through December 31,
2001. These impairment charges are discussed later in this note.
(4) Amortized cost reflects approximately $178.1 million of cumulative
impairment charges related to certain CMBS (all bonds except those rated
A+ and BBB+), which were recognized through December 31, 2001.
(5) See Notes 1 and 9 to Notes to Consolidated Financial Statements for
information regarding the Subordinated CMBS for tax purposes.
(6) As of June 30, 2002, the aggregate fair values of the CBO-1, CBO-2
and Nomura bonds were approximately $37.1 million, $806.9 million and $8.1
million, respectively.
Mortgage Loan Pool
CRIIMI MAE, through CMSLP, performs servicing functions on commercial
mortgage loans totaling $18.4 billion and $19.3 billion as of June 30, 2002 and
December 31, 2001, 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:
6/30/02 12/31/01 Geographic 6/30/02 12/31/01
Property Type Percentage(i) Percentage(i) Location (ii) Percentage(i) Percentage(i)
- ------------- ------------- ------------- ------------- ------------- -------------
Retail........... 30% 30% California........... 16% 16%
Multifamily...... 29% 29% Texas................ 12% 13%
Hotel............ 15% 14% Florida.............. 8% 8%
Office........... 13% 13% Pennsylvania......... 5% 5%
Other (iv)....... 13% 14% New York............. 5% 5%
---- ---- Other(iii)........... 54% 53%
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 the
CMBS owned by CRIIMI MAE in this transaction. 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 June 30, 2002, the Company reviewed the loans currently under
surveillance by the healthcare and senior housing mortgage loans servicer.
Based on its review as of June 30, 2002, the Company does not believe that
the aggregate remaining shortfalls and/or realized losses on such
healthcare and senior housing mortgage loans 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 June 30, 2002 does
not include any provision for shortfalls and/or realized losses arising
from the healthcare and senior housing mortgage loans currently in special
servicing 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 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 applicable CMBS pooling and servicing 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 of the CMBS transactions
related to its Subordinated CMBS, CMSLP has an incentive to quickly resolve any
loan workouts. As of June 30, 2002 and December 31, 2001, specially serviced
mortgage loans included in the commercial mortgage loans described above are as
follows:
6/30/02 12/31/01
------- --------
Specially serviced loans due to monetary default (a) $797.8 million $701.7 million
Specially serviced loans due to covenant default/other 94.9 million 90.0 million
-------------- ----------------
Total specially serviced loans (b) $892.7 million $791.7 million
============== ================
Percentage of total mortgage loans (b) 4.8% 4.1%
============== ================
(a) Includes $103.4 million and $94.5 million, respectively, of real estate
owned by underlying trusts.
(b) As of July 31, 2002, total specially serviced loans were approximately $826
million, or 4.6% of the total mortgage loans. See discussion below for
additional information regarding specially serviced loans.
The specially serviced mortgage loans as of June 30, 2002 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........... $ 486.9 54% Florida............... $ 138.5 16%
Retail.......... 273.9 31% Oregon................ 93.4 10%
Multifamily..... 43.9 5% Texas................. 76.4 9%
Office.......... 32.1 4% New York.............. 44.5 5%
Healthcare...... 27.7 3% Georgia............... 44.5 5%
Industrial...... 18.2 2% California............ 34.6 4%
Other........... 10.0 1% Other................. 460.8 51%
-------- ---- ------- ----
Total......... $ 892.7 100% Total............... $ 892.7 100%
======== ==== ======= ====
As reflected above, as of June 30, 2002, approximately $486.9 million, or
54%, of the specially serviced mortgage loans are secured by mortgages on hotel
properties. The hotel properties that secure the mortgage loans underlying the
Company's Subordinated CMBS portfolio are geographically diverse, with a mix of
hotel property types and franchise affiliations. Of the mortgage loans
underlying the Company's Subordinated CMBS, loans representing a total
outstanding principal amount of $1.3 billion are secured by limited service
hotels, of which $298.2 million are in special servicing as of June 30, 2002.
Limited service hotels are generally hotels with room-only operations or hotels
that offer a bedroom and bathroom, but limited other amenities, and are often in
the budget or economy group. Of the mortgage loans underlying the Company's
Subordinated CMBS, loans representing a total outstanding principal amount of
$1.5 billion are secured by full service hotels, of which $188.7 million are in
special servicing as of June 30, 2002. Full service hotels are generally
mid-price, upscale or luxury hotels with restaurant and lounge facilities and
other amenities. Of the $486.9 million of hotel loans in special servicing as of
June 30, 2002, approximately $304.1 million, or 62%, relate to four borrowing
relationships more fully described as follows:
o 25 loans totaling $98.1 million spread across four CMBS transactions
secured by hotel properties throughout the U.S. In one of these CMBS
transactions, which contains 10 loans totaling $39.0 million, the
Company holds only a 25% ownership interest in the non-rated class. In
the other three CMBS transactions, the Company holds a 100% ownership
interest in the non-rated class. The 25 loans were transferred into
special servicing in December 2001 due to the bankruptcy filing of each
special purpose borrowing entity and their parent company. The parent
company was able to obtain debtor-in-possession financing. The
borrowers are currently paying post-petition interest on $71 million of
these loans. The properties relating to the remaining $27 million of
loans were deemed by the borrowers to be highly leveraged, and
therefore, not able to support additional debt. Interest is not being
paid current on these loans, and consensual resolution and emergence
strategies are currently being negotiated. Based on current
negotiations and estimation of property values and potential recoveries
on these loans at the completion of the expected workout period, the
Company's current estimate of future credit losses includes $3.1
million arising from these mortgage loans currently in special
servicing.
o 27 loans totaling $140.4 million spread across three CMBS transactions
secured by hotel properties in the west and Pacific northwest states.
The borrower has filed for bankruptcy protection. 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. Based
upon the current estimate of potential recoveries on these loans, which
in turn is based on the Company's estimates of property values and
pending additional developments in the bankruptcy proceedings, the
Company's current estimate of future credit losses includes
approximately $5.5 million arising from these mortgage loans currently
in special servicing. In calculating estimated recoveries, management
considered potential additional recoveries available because of the
cross collateralization of certain of these loans as well as other
factors specific to the bankruptcy filing. The Company expects to
reevaluate recoveries on these loans within approximately 60 days,
after the acceptance of final appraisals.
o Five loans totaling $46.1 million secured by hotel properties
in Florida and Texas. The loans are past due for the February 2002
payment. Based upon current negotiations and appraised values of these
properties,
the Company's current estimate of future credit losses
includes $7.3 million arising from these mortgage loans currently in
special servicing.
o Nine loans totaling $19.5 million secured by limited service
hotels in midwestern states. The loans are past due for the February
2002 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. Based on current negotiations and appraised
values of these properties, the Company's current estimate of future
credit losses does not include any provision for losses arising from
these mortgage loans currently in special servicing.
There can be no assurance that the Company's estimate of future credit
losses related to any one or more of the foregoing mortgage loans or other
mortgage loans underlying the Company's Subordinated CMBS will not be exceeded
as a result of additional or existing adverse events or circumstances. Such
events or circumstances include, but are not limited to, the receipt of new or
updated appraisals at lower than anticipated amounts, legal proceedings
(including bankruptcy filings) involving borrowers, an economic downturn or
recession, a delay in disposition of specially serviced mortgage loans, or an
unforeseen reduction in expected recoveries, any of which could result in
additional future credit losses and/or possible impairment to CRIIMI MAE's
Subordinated CMBS, the effect of which could be potentially adverse to CRIIMI
MAE.
The following table provides a summary of the change in the balance of
specially serviced loans from March 31, 2002 to June 30, 2002 and from December
31, 2001 to March 31, 2002:
3/31/02 12/31/01
to to
6/30/02 3/31/02
------- --------
(in millions)
Specially Serviced Loans, beginning of period $ 898.9 $ 791.7
Transfers in due to monetary default 48.4 172.8 (1)
Transfers in due to covenant default and other 4.2 18.7
Transfers out of special servicing (54.2) (2) (79.0)
Loan amortization (4.6) (3) (5.3) (3)
------- -------
Specially Serviced Loans, end of period $ 892.7 $ 898.9
======= =======
(1) Approximately $113.7 million, or 66%, are loans secured by hotel
properties. Included in this total is $98 million resulting from the
borrowing relationship comprised of 25 hotel loans spread across four CMBS
transactions that is described in the first bullet point above.
(2) In addition to these transfers out of special servicing, loans totaling
approximately $52 million related to a portfolio of retail property loans
transferred out of special servicing in July 2002. The Company fully
recovered the outstanding principal and interest on these loans.
(3) Represents the reduction of the scheduled principal balances due to
advances made by the master servicers.
For all loans in special servicing, CMSLP is pursuing remedies available to
it in order to maximize the recovery of the outstanding debt. See Exhibit 99.1
to this Quarterly Report on Form 10-Q for a detailed listing of all specially
serviced loans underlying the Company's Subordinated CMBS.
Appraisal Reductions and Losses on CMBS
The effect of an appraisal reduction generally is that the master servicer
stops advancing interest payments on the amount by which the aggregate of debt,
advances and other expenses exceeds 90% (in most cases) of 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. For 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 2000 $ 1,872,000 $18,871,000 $ -- $ 20,743,000
Year 2001 15,599,000 31,962,000 874,000 48,435,000
January 1, 2002 through June 30, 2002 13,568,000 29,564,000 (874,000) 42,258,000
----------- ----------- -------- ------------
Cumulative Appraisal Reductions through June 30, 2002 $31,039,000 $80,397,000 $ -- $111,436,000
=========== =========== ======== ============
* Not all underlying CMBS transactions require the calculation of an
appraisal reduction; however, when CMSLP obtains a third-party appraisal, it
calculates one.
The Company's unrated bonds/issuer's equity from the CBO-1, CBO-2 and
Nomura transactions are expected to experience principal write-downs over their
expected lives. The following tables summarize the actual realized losses on
CMBS through June 30, 2002 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
Actual realized losses, January 1 through June 30, 2002 1,664,000 8,655,000 563,000 10,882,000
------------ ------------ ------------ ------------
Cumulative actual realized losses through June 30, 2002 $ 6,148,000 $ 18,139,000 $ 801,000 $ 25,088,000
============ ============ ============ ============
Cumulative expected loss estimates (including cumulative
actual realized losses) through the year 2002 $ 28,046,000 $ 32,525,000 $ 3,199,000 $ 63,770,000
Expected loss estimates for the year 2003 10,317,000 53,370,000 1,544,000 65,231,000
Expected loss estimates for the years 2004-2006 27,452,000 120,384,000 23,259,000 171,095,000
Expected loss estimates for the years 2007-2009 3,867,000 16,719,000 4,539,000 25,125,000
Expected loss estimates for the remaining life of
investment (for the years 2010-2027) 10,974,000 12,650,000 2,529,000 26,153,000
------------ ------------ ------------ ------------
Cumulative expected loss estimates (including cumulative
actual realized losses) through life of CMBS $ 80,656,000 $235,648,000 $ 35,070,000 $351,374,000
============ ============ ============ ============
As of June 30, 2002, the Company revised its overall expected loss estimate
related to its Subordinated CMBS portfolio from $335 million to $351 million,
with such total losses occurring or expected to occur through the life of its
Subordinated CMBS portfolio. The revision to the overall expected loss estimate
is primarily the result of increased projected loan losses due to lower than
anticipated appraisals and revised internal estimates on properties underlying
certain defaulted mortgage loans. The Company's overall expected loss estimate
of $351 million through the life of its Subordinated CMBS portfolio represents
the Company's estimate of total principal write-downs to its Subordinated 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 previously discussed, there can be no assurance that this
revised overall expected loss estimate will not be exceeded as a result of
additional or existing adverse events or circumstances.
In conjunction with the Company's revised loss estimates, the Company has
determined that there has been an adverse change in expected future cash flows
for the Nomura and CBO-2 unrated bonds as of June 30, 2002. As a result, the
Company believes the Nomura and CBO-2 unrated bonds have 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 June 30, 2002. As the fair values of the impaired Nomura and CBO-2 unrated
bonds aggregated approximately $5.2 million below the amortized cost basis as of
June 30, 2002, the Company recorded other than temporary non-cash impairment
charges through the income statement of that same amount during the three months
ended June 30, 2002.
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 Anticipated
Yield-to- Yield-to- Yield-to-
Maturity Maturity Maturity
Pool as of 1/1/01 (1) as of 1/1/02 (1) as of 7/1/02 (1)
---- ---------------- ---------------- ----------------
Retained Securities from
CRIIMI 1998 C1 (CBO-2) 11.8% (2) 12.1% (3) 12.1% (4)
Retained Securities from
CRIIMI 1996 C1 (CBO-1) 21.0% (2) 14.3% (3) 18.8% (4)
Nomura Asset Securities Corp.
Series 1998-D6 Tranche B7 (Nomura) 25.3% (2) 28.7% (3) 19.7% (4)
--------- --------- ---------
Weighted Average (5) 12.4% (2) 12.4% (3) 12.5% (4)
(1) Represents the anticipated weighted average yield over the expected
average life of the Company's Subordinated CMBS portfolio as of January 1,
2001, January 1, 2002 and July 1, 2002 based on management's estimate of
the timing and amount of future credit losses.
(2) As of December 31, 2000, the Company revised its overall expected
loss estimate related to its Subordinated CMBS portfolio to $298 million
which resulted in non-cash impairment recognition to certain Subordinated
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 on the Subordinated CMBS as of
December 31, 2000, and contemplated larger than previously anticipated
losses that were expected to occur sooner than previously anticipated.
(3) As of December 31, 2001, the Company again revised its overall
expected loss estimate related to its Subordinated CMBS portfolio to $335
million which resulted in non-cash impairment recognition to certain
Subordinated 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 are being used to recognize interest
income beginning January 1, 2002. These anticipated revised yields took
into account the lower cost basis on the impaired Subordinated CMBS as of
December 31, 2001, and contemplated larger than previously anticipated
losses that were generally expected to occur sooner than previously
anticipated.
(4) As of June 30, 2002, as previously discussed, there had been an adverse
change in expected future cash flows for the Nomura and CBO-2 unrated bonds
which resulted in non-cash impairment recognition on those Subordinated
CMBS. As a result of this change in expected future cash flows and the
recognition of impairment on the Nomura and CBO-2 unrated bonds, the
Company revised its anticipated yields on those bonds, which are being used
to recognize interest income beginning July 1, 2002. In addition, as of
June 30, 2002, the Company determined there had been a change in expected
future cash flows on certain of the other Subordinated CMBS from those
previously projected as of January 1, 2002. As a result of this change in
expected future cash flows on those Subordinated CMBS, the Company revised
its anticipated yields as of July 1, 2002, which are being used to
recognize interest income beginning July 1, 2002. These anticipated revised
yields take into account the lower cost basis on the impaired Subordinated
CMBS as of June 30, 2002, and contemplate changes in the Company's
assumptions relating to prepayment speeds and/or credit losses.
(5) 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 six months ended June 30, 2002 and 2001, 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 $5.7 million and $4.7 million, respectively.
5. INSURED MORTGAGE SECURITIES
CRIIMI MAE owns the following insured mortgage securities directly or indirectly
through wholly owned subsidiaries:
As of June 30, 2002
-------------------
Number of Weighted Average
Mortgage Effective Interest Weighted Average
Securities Fair Value Amortized Cost Rate Remaining Term
----------- -------------- --------------- ------------------- -------------------
CRIIMI MAE 1 $ 5,365,805 $ 5,356,405 8.00% 32 years
CRIIMI MAE Financial Corporation 25 94,014,065 93,559,101 8.37% 27 years
CRIIMI MAE Financial Corporation II 35 163,430,822 164,454,284 7.20% 24 years
CRIIMI MAE Financial Corporation III 18 48,503,582 48,466,309 7.93% 28 years
-- ------------- ------------- ----- --------
79 (1) $311,314,273 $311,836,099 7.67% (2) 26 years (2)
== ============ ============= ===== ========
As of December 31, 2001
-----------------------
Number of Weighted Average
Mortgage Effective Interest Weighted Average
Securities Fair Value Amortized Cost 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 $343,091,303 $350,982,991 7.70% (2) 26 years (2)
== ============ ============ ===== ========
(1) During the six months ended June 30, 2002, 13 mortgage loans
underlying mortgage securities held by CRIIMI MAE's financing subsidiaries
referenced above were prepaid. These prepayments generated net proceeds of
approximately $36.9 million and resulted in a net financial statement loss
of approximately $256,000, which is included in net losses on mortgage
security dispositions in the accompanying consolidated statement of income
for the six months ended June 30, 2002.
(2) Weighted averages were computed using total face value of the mortgage
securities.
6. OBLIGATIONS UNDER FINANCING FACILITIES
The following table summarizes CRIIMI MAE's debt outstanding as of June 30,
2002 and December 31, 2001 and for the six months ended June 30, 2002.
As of and for the six months ended June 30, 2002
-------------------------------------------------------------------
Average
Effective Rate Effective December 31, 2001
Ending Balance at Quarter End Average Balance Rate Ending Balance
-------------- -------------- --------------- --------- -----------------
Variable-rate secured borrowing (1) $ 228,945,230 6.5% $ 235,999,660 6.6% $ 244,194,590
Series A senior secured notes (2) 95,854,483 12.1% 97,800,658 12.1% 99,505,457
Series B senior secured notes (3) 66,175,191 21.0% 64,869,803 21.0% 63,937,383
Securitized mortgage obligations:
CMBS (4) 284,491,760 9.1% 283,717,593 9.1% 283,047,470
Freddie Mac funding note (5) 157,352,038 7.6% 166,735,491 8.4% 180,291,091
Fannie Mae funding note (6) 46,923,536 7.4% 47,723,953 8.0% 48,062,403
CMO (7) 90,442,425 7.5% 95,286,620 7.8% 98,204,667
Mortgage payable (8) 7,161,953 12.0% 7,131,416 12.0% 7,109,252
------------- ------------- --------------
Total Debt $ 977,346,616 9.1% $ 999,265,194 9.3% $1,024,352,313
============= ============= ==============
(1) The effective interest rate at June 30, 2002 and during the six
months ended June 30, 2002 reflects the accrual of estimated extension fees
that are expected to be payable in the future. During the six months ended
June 30, 2002 and 2001, the Company recognized interest expense of
$1,635,717 and $601,796 related to the expected extension fees.
(2) The effective interest rate at June 30, 2002 and during the six
months ended June 30, 2002 reflects the accrual of estimated extension fees
that are expected to be payable in the future. During the six months ended
June 30, 2002 and 2001, the Company recognized interest expense of $162,747
and $138,836 related to the expected extension fees.
(3) The effective interest rate at June 30, 2002 and during the six
months ended June 30, 2002 reflects the accrual of estimated extension fees
that are expected to be payable in the future. During the six months ended
June 30, 2002 and 2001, the Company recognized interest expense of $339,413
and $120,079 related to the expected extension fees.
(4) As of June 30, 2002 and December 31, 2001, the face amount of the
debt was $328,446,000 and $328,446,000, respectively, with unamortized
discount of $43,954,240 and $45,398,530, respectively. During the six
months ended June 30, 2002 and 2001, discount amortization of $1,444,290
and $1,290,551, respectively, was recorded as interest expense.
(5) As of June 30, 2002 and December 31, 2001, the face amount of the
note was $161,973,812 and $185,616,298, respectively, with unamortized
discount of $4,621,774 and $5,325,207, respectively. During the six months
ended June 30, 2002 and 2001, discount amortization of $703,433 and
$294,532, respectively, was recorded as interest expense.
(6) As of June 30, 2002 and December 31, 2001, the face amount of the
note was $47,926,253 and $49,182,632, respectively, with unamortized
discount of $1,002,717 and $1,120,229, respectively. During the six months
ended June 30, 2002 and 2001, discount amortization of $117,512 and
$76,496, respectively, was recorded as interest expense.
(7) As of June 30, 2002 and December 31, 2001, the face amount of the
note was $92,719,187 and $100,727,532, respectively, with unamortized
discount of $2,276,762 and $2,522,865, respectively. During the six months
ended June 30, 2002 and 2001, discount amortization of $246,103 and
$230,120, respectively, was recorded as interest expense.
(8) As of June 30, 2002 and December 31, 2001, the unpaid principal
balance of this mortgage payable was $8,774,127 and $8,824,288,
respectively, and the unamortized discount was $1,612,174 and $1,715,036,
respectively. The coupon rate on the mortgage payable is 7.34%. The
effective interest rate on the mortgage payable is 12.00% as a result of
the discount amortization. The discount is being amortized to interest
expense through maturity in 2008. During the six months ended June 30, 2002
and 2001, discount amortization of $102,861 and $-0-, respectively, was
recorded as interest expense.
Information Regarding Certain Terms and Restrictions Pertaining to New Debt
Substantially all cash flows relating to the Company's 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. The operative documents governing the New Debt contain
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 by the Company 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 total realized
losses and appraisal reduction amounts with respect to mortgage loans underlying
the Company's Subordinated CMBS (as determined under the New Debt documents)
exceed certain loss threshold amounts, 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 June 30, 2002, the Company had exceeded
the loss threshold amounts under the applicable operative documents evidencing
the New Debt. 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 the payment terms, restrictions,
covenants, events of default, and collateral.
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 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.
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 Secured Borrowing. CRIIMI MAE has purchased
interest rate cap agreements in order to partially limit the adverse effects of
rising interest rates on the Company's Variable-Rate Secured Borrowing. When the
interest rate cap agreements expire, CRIIMI MAE will have interest rate risk to
the extent interest rates increase on any variable-rate borrowings unless the
interest rate caps are 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 7 for further discussion of interest rate caps.
For the six months ended June 30, 2002, CRIIMI MAE's weighted average cost
of borrowing, including amortization of discounts, deferred financing fees and
extension fees of approximately $5.2 million, was approximately 9.3%. As of June
30, 2002, CRIIMI MAE's debt-to-equity ratio was approximately 3.5 to 1 and
CRIIMI MAE's non-match-funded debt-to-equity ratio was approximately 1.4 to 1.
The following table lists the fair market value of the collateral related
to the Company's Securitized Mortgage Obligations:
Collateral Fair Value as of
Securitized Mortgage Obligations June 30, 2002 December 31, 2001
- -------------------------------- ------------- -----------------
(in millions)
CMBS $ 311 $ 296
Freddie Mac Funding Note 163 183
Fannie Mae Funding Note 49 49
CMO 94 106
7. INTEREST RATE PROTECTION AGREEMENTS
As of June 30, 2002, CRIIMI MAE has interest rate protection agreements
("interest rate caps") 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 June 30, 2002, CRIIMI MAE held the
following interest rate caps:
Notional Amount Effective Date Maturity Date Cap Index
- --------------- -------------- -------------- ---- -----
$ 175,000,000 (1) May 1, 2002 November 3, 2003 3.25% (3) 1 month LIBOR
$ 179,000,000 (2) April 2, 2001 April 2, 2003 5.25% (3) 1 month LIBOR
(1) CRIIMI MAE's designated (as defined in SFAS No. 133) interest rate
protection agreement, which hedges CRIIMI MAE's variable-rate borrowing
costs, hedges approximately 76% of the Company's Variable-Rate Secured
Borrowing. This interest rate cap was purchased in April 2002 for
approximately $1.6 million.
(2) This interest rate protection agreement is undesignated (as defined in
SFAS No. 133).
(3) One-month LIBOR was 1.84% at June 30, 2002.
8. SALE OF CMBS MASTER AND DIRECT SERVICING RIGHTS
In February 2002, CMSLP sold all of its rights and obligations under its
CMBS master and direct servicing contracts because the contracts were not
profitable, given the relatively small volume of master and direct CMBS
servicing that CMSLP was performing. In connection with this restructuring, 34
employee positions were eliminated. CMSLP received approximately $11.8 million
in cash in the first quarter of 2002, which included reimbursement of servicing
advances. CMSLP expects to receive additional cash of approximately $564,000
from the sale during the third quarter of 2002. CMSLP has estimated that the
purchaser will retain approximately $350,000 of the sales price upon final
settlement of the post-closing contingencies. GAAP required the gain of $4.8
million to be deferred until the second quarter of 2002 due to the contingencies
related to the sale. Any difference in the actual amount retained by the
purchaser and CMSLP's estimate of the amount to be retained as of June 30, 2002
will be reflected as an adjustment to the gain on the sale of servicing rights
in the third quarter of 2002. During the six months ended June 30, 2002, the
Company recognized approximately $0.9 million of income tax expense primarily
related to the gain on the sale of the servicing rights.
As a result of this sale and related restructuring, CMSLP recorded
restructuring expenses of $437,723 in the fourth quarter of 2001. During the
three months ended June 30, 2002, CMSLP recorded additional restructuring
expenses of $151,462 primarily related to rent on vacant office space that is
taking longer to sublease than originally anticipated. The following is a
reconciliation of the restructuring accrual:
Severance and
other employee Non-cancelable
benefits Lease Costs Other Total
------------------ --------------- ------------ ------------
Balance, December 31, 2001 $184,967 $100,372 $10,000 $295,339
Amounts paid (170,304) (100,372) (13,686) (284,362)
Additional accrual - 138,676 12,786 151,462
Accrual reversed (10,222) - - (10,222)
-------- -------- ------- --------
Balance, June 30, 2002 $ 4,441 $138,676 $ 9,100 $152,217
======== ======== ======= ========
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 as long as
it satisfies the requirements for exemption from taxation pursuant to the REIT
requirements of the Tax 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 distribute 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 year-to-date net operating loss as of June 30,
2002 is as follows:
(in millions)
------------------
January 2000 Loss $ (478.2)
LESS: Amounts recognized in 2001 and 2000 239.1
LESS: Amounts recognized during the six months ended June 30, 2002 59.8
---------
Balance remaining of January 2000 Loss to be recognized in future periods $ (179.3)
=========
Taxable income for the six months ended June 30, 2002 before recognition
of January 2000 Loss $ 21.9
LESS: January 2000 Loss recognized during the six months ended June 30, 2002 (59.8)
---------
Net Operating Loss for the six months ended June 30, 2002 $ (37.9)
=========
Accumulated Net Operating Loss through December 31, 2001 $ (146.5)
Net Operating Loss created during the six months ended June 30, 2002 (37.9)
Net Operating Loss utilization -
---------
Net Operating Loss carried forward for use in future periods $ (184.4)
=========
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 have 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 authorized shares and 13,941,668 and 12,937,341 issued and
outstanding shares of $0.01 par value common stock as of June 30, 2002 and
December 31, 2001, respectively.
As discussed in Note 6, the terms of the New Debt significantly restrict
the amount of cash dividends that can be paid by the Company 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. Preferred stock dividends for the fourth quarter of
2001 and the first quarter of 2002 were paid in shares of common stock in April
2002 except for dividends on the Company's Series E Cumulative Convertible
Preferred Stock ("Series E Preferred Stock"), which were paid in cash in
conjunction with the redemption of the Series E Preferred Stock. The following
table summarizes the common stock activity through June 30, 2002:
Common Shares Balance of Common
Date Description Issued Shares Outstanding
- ------------------------ ----------------------------------------- ----------------- -------------------
12/31/01 Beginning balance 12,937,341
01/02/02 Restricted stock issued 32,500
- ------------------------------------------------------------------------------------------------------------
03/31/02 Balance 12,969,841
- ------------------------------------------------------------------------------------------------------------
04/15/02 Dividends to Series B Preferred Stock 607,938
04/15/02 Dividends to Series F Preferred Stock 97,824
04/15/02 Dividends to Series G Preferred Stock 260,565
06/10-18/02 Stock options exercised 5,500
- ------------------------------------------------------------------------------------------------------------
06/30/02 Balance 13,941,668
- ------------------------------------------------------------------------------------------------------------
11. PREFERRED STOCK
As of June 30, 2002 and December 31, 2001, 75,000,000 shares of preferred
stock were authorized. As of June 30, 2002 and December 31, 2001, 3,000,000
shares were designated as Series B Cumulative Convertible Preferred Stock
("Series B Preferred Stock"), 1,610,000 shares were designated as Series F
Redeemable Cumulative Dividend Preferred Stock ("Series F Preferred Stock"), and
3,760,000 shares were designated as Series G Redeemable Cumulative Dividend
Preferred Stock ("Series G Preferred Stock"). In addition, 203,000 shares were
designated as Series E Preferred Stock as of December 31, 2001.
On December 3, 2001, the Company's Board of Directors decided to defer the
payment of dividends on CRIIMI MAE's Series B Preferred Stock, Series E
Preferred Stock, Series F Preferred Stock, and 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 were payable in shares of common stock. Such preferred
stock dividends, payable in shares of the Company's common stock, were paid on
April 15, 2002 to holders of record on April 1, 2002.
On May 16, 2002, the Company's Board of Directors decided to defer the
payment of dividends on the Company's Series B Preferred Stock, Series F
Preferred Stock and Series G Preferred Stock for the second quarter of 2002.
Series B Cumulative Convertible Preferred Stock
As of June 30, 2002 and December 31, 2001, there were 1,593,982 shares of
Series B Preferred Stock issued and outstanding. The following table summarizes
the dividend payment activity for 2002 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 Dividends (b) are accrued Issued
- -------------------------------------------------------------------------------------------------------
March 21, 2002 April 15, 2002 $ 1.36 $ 2,167,816 10/1/01-3/31/02 607,938 (a)
(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) Although the payment of dividends for the second quarter of 2002 was
deferred, the Company accrued $1,083,908 for the Series B Preferred Stock
second quarter dividends at a dividend rate of $0.68 per share as of June
30, 2002.
As of June 30, 2002, each share of Series B Preferred Stock was convertible
into 0.4797 shares of common stock.
Series E Cumulative Convertible Preferred Stock
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 in
cash 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 for the period October 1, 2001 through
March 21, 2002). The $1,038,000 difference between the aggregate liquidation
value and the redemption price is reflected as a dividend on preferred stock
during the six months ended June 30, 2002. The Series E Preferred Stock was held
by the Company's principal creditor. As of June 30, 2002 and December 31, 2001,
there were -0- and 173,000 shares, respectively, of Series E Preferred Stock
issued and outstanding.
Series F Redeemable Cumulative Dividend Preferred Stock
As of June 30, 2002 and December 31, 2001, there were 586,354 shares of
Series F Preferred Stock issued and outstanding. The following table summarizes
the dividend payment activity for 2002 for the Series F Preferred Stock:
Dividends Time period for Number of
per Series F Amount of which dividends Shares of Common
Declaration Date Payment Date Share Dividends (b) are accrued Stock Issued
- ---------------------------------------------------------------------------------------------------------------
March 21, 2002 April 15, 2002 $ 0.60 $ 351,812 10/1/01-3/31/02 97,824 (a)
(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) Although the payment of dividends for the second quarter of 2002 was
deferred, the Company accrued $175,906 for the Series F Preferred Stock
second quarter dividends at a dividend rate of $0.30 per share as of June
30, 2002.
Series G Redeemable Cumulative Dividend Preferred Stock
As of June 30, 2002 and December 31, 2001, there were 1,244,656 shares of
Series G Preferred Stock issued and outstanding. The following table summarizes
the dividend payment activity for 2002 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 (b) are accrued Issued
- ------------------------------------------------------------------------------------------------------------
March 21, 2002 April 15, 2002 $ 0.75 $ 933,492 10/1/01-3/31/02 260,565 (a)
(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) Although the payment of dividends for the second quarter of 2002 was
deferred, the Company accrued $466,746 for the Series G Preferred Stock
second quarter dividends at a dividend rate of $0.375 per share as of June
30, 2002.
12. EARNINGS PER SHARE
The following tables reconcile basic and diluted EPS for the three and six
months ended June 30, 2002 and 2001. The 2001 per share amounts have been
adjusted to reflect the one-for-ten reverse stock split effected on October 17,
2001.
For the three months ended June 30, 2002 For the three months ended June 30, 2001
Per Share Per Share
Income Shares (2) Amount Income Shares (2) Amount
--------------- --------------- -------------- --------------- --------------- ------------
Basic income (loss) per share:
- -----------------------------
Net income (loss) to common
shareholders $ 2,295,745 13,915,490 $0.16 $ (2,375,818) 11,297,061 $(0.21)
Dilutive effect of securities:
Stock options -- 151,459 -- -- -- --
Convertible preferred stock (1) -- -- -- -- -- --
--------------- --------------- -------------- -------------- ------------ -----------
Diluted income (loss) per share:
- --------------------------------
Income (loss) to common shareholders
and assumed conversions $ 2,295,745 14,066,949 $0.16 $ (2,375,818) 11,297,061 $(0.21)
=============== =============== ============== =============== ============ ===========
For the six months ended June 30, 2002 For the six months ended June 30, 2001
Per Share Per Share
Income Shares (2) Amount Income Shares (2) Amount
-------------- --------------- -------------- --------------- --------------- ------------
Net income before cumulative effect
of changes in accounting
principles $ 5,234,266 13,487,773 $0.39 $ 1,794,222 9,425,586 $ 0.19
Cumulative effect of change in
accounting principle related
to SFAS 142 (9,766,502) 13,487,773 (0.72) -- -- --
Cumulative effect of change in
accounting principle related
to servicing fee revenue -- -- -- 1,995,262 9,425,586 0.21
Cumulative effect of change in
accounting principle related
to SFAS 133 -- -- -- (135,142) 9,425,586 (0.01)
-------------- --------------- -------------- --------------- ------------ ----------
Basic (loss) income per share:
- ------------------------------
(Loss) income to common
shareholders (4,532,236) 13,487,773 (0.34) 3,654,342 9,425,586 0.39
Dilutive effect of securities:
Stock options -- -- -- -- 1,725 --
Convertible preferred stock (1) -- -- -- 684,805 2,413,381 (0.02)
------------- --------------- -------------- --------------- ----------- -----------
Diluted (loss) income per share:
- -------------------------------
(Loss) income to common shareholders
and assumed conversions $(4,532,236) 13,487,773 $(0.34) $4,339,147 11,840,692 $0.37
=============== =============== =============== =============== =========== ===========
- ------------------------------------
(1) The common stock equivalents for the Preferred Stock that are
convertible as of June 30 of the applicable year are not included in the
calculation of diluted EPS for the three months ended June 30, 2002 and
2001 and the six months ended June 30, 2002 because the effect would be
anti-dilutive.
(2) Includes the weighted average number of common shares payable or
paid to preferred stockholders related to dividends as of the respective
dividend declaration dates.
13. TRANSACTIONS WITH RELATED PARTIES
Below is a summary of the related party transactions which occurred during
the three and six months ended June 30, 2002 and 2001.
For the three months ended June 30, For the six months ended June 30,
2002 2001 2002 2001
---- ---- ---- ----
Amounts received or accrued from related parties:
AIM Funds
Income(1) $ 144,182 $ 200,044 $ 290,631 $ 360,341
Return of capital(2) 206,946 95,699 1,052,048 1,136,478
---------- --------- ------------ ------------
Total $ 351,128 $ 295,743 $ 1,342,679 $ 1,496,819
========= ========= =========== ============
AIM Acquisition Limited Partnership (1) $ 60,418 $ 74,537 $ 121,394 $ 150,494
========= ========= =========== ============
Expense reimbursements from:
- ---------------------------
AIM Funds (3) $ 43,729 $ 53,398 $ 95,227 $ 98,955
CMSLP (3)(5) - 120,000 - 248,428
-------- --------- ----------- ------------
Total $ 43,729 $ 173,398 $ 95,227 $ 347,383
======== ========= =========== ============
Expense reimbursement (to) from CRI:
Expense reimbursement to CRI (3) (4) $(46,305) $ (72,918) $ (89,762) $ (125,737)
Expense reimbursement from CRI (3) 53,538 1,536 76,438 10,891
-------- ---------- ----------- ------------
Net expense reimbursement $ 7,233 $ (71,382) $ (13,324) $ (114,846)
======== ========== =========== ============
(1) Included as equity in earnings from investments on the accompanying
consolidated statements of income.
(2) Included as a reduction of equity investments on the accompanying
consolidated balance sheets.
(3) Included in general and administrative expenses on the accompanying
consolidated statements of income.
(4) 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 CRIIMI MAE Management or provided by another
service provider. The CRI Administrative Services Agreement is terminable
on 30 days notice at any time by CRIIMI MAE.
(5) Includes payroll reimbursement for services provided by CRIIMI MAE
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.
14. 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) managing the Company's
Subordinated CMBS, (ii) managing its investments in government-insured mortgage
securities and entities that own government-insured mortgage securities and
(iii) 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 and is 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 earnings (losses) 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. Overhead expenses, such as
administrative expenses, are allocated either directly to each business line or
through estimates based on factors such as number of personnel or square footage
of office space.
The following tables detail the Company's financial performance by these
two primary lines of business for the three and six months ended June 30, 2002
and 2001. The basis of accounting used in the tables is GAAP.
As of and for the three months ended June 30, 2002
------------------------------------------------------------------------------------
Elimination of
Portfolio Mortgage Intercompany
Investment Servicing Transactions Consolidated
------------------- ---------------- ------------------- ------------------
Interest income $ 31,743,348 $ - $ - $ 31,743,348
Interest expense (23,185,362) - - (23,185,362)
------------------- ---------------- ------------------- ------------------
Net interest margin 8,557,986 - - 8,557,986
------------------- ---------------- ------------------- ------------------
General and administrative expenses (2,738,135) - 58,275 (2,679,860)
Depreciation and amortization (368,564) - - (368,564)
Equity in earnings (losses) from
investments 118,438 - - 118,438
Other, net 132,486 - - 132,486
Impairment on CMBS (5,151,091) - - (5,151,091)
Investment banking expense (244,444) - - (244,444)
Servicing income - 2,620,190 (126,153) 2,494,037
Servicing general and administrative
expenses - (2,202,768) 67,878 (2,134,890)
Servicing amortization, depreciation
and impairment - (402,931) - (402,931)
Servicing restructuring expenses - (141,240) - (141,240)
Servicing gain on sale of servicing
rights - 4,817,598 - 4,817,598
Income tax expense - servicing - (975,220) - (975,220)
------------------- ---------------- ------------------- ------------------
(8,251,310) 3,715,629 - (4,535,681)
------------------- ---------------- ------------------- ------------------
Net income (loss) before changes in
accounting principles $ 306,676 $ 3,715,629 $ - $ 4,022,305
=================== ================ =================== ==================
Total assets $ 1,251,963,947 $ 26,380,307 $ - $ 1,278,344,254
=================== ================ =================== ==================
As of and for the three months ended June 30, 2001
------------------------------------------------------------------------------------
Portfolio Mortgage
Investment Servicing Elimination (1) Consolidated
------------------- ---------------- ------------------- ------------------
Interest income $ 33,718,486 $ - $ - $ 33,718,486
Interest expense (24,927,969) - - (24,927,969)
------------------- ---------------- ------------------- ------------------
Net interest margin 8,790,517 - - 8,790,517
------------------- ---------------- ------------------- ------------------
General and administrative expenses (2,609,919) - - (2,609,919)
Depreciation and amortization (839,198) - - (839,198)
Equity in earnings (losses) from
investments 180,983 - (1,541,726) (1,360,743)
Other, net 651,624 - - 651,624
Reorganization items (1,025,411) - - (1,025,411)
Emergence loan origination fee (3,936,616) - - (3,936,616)
Servicing income - 2,935,050 (2,935,050) -
Servicing general and administrative
expenses - (3,756,392) 3,756,392 -
Servicing amortization, depreciation
and impairment - (567,579) 567,579 -
------------------- ---------------- ------------------- ------------------
(7,578,537) (1,388,921) (152,805) (9,120,263)
------------------- ---------------- ------------------- ------------------
Net income (loss) before changes in
accounting principles $ 1,211,980 $ (1,388,921) $ (152,805) $ (329,746)
=================== ================ =================== ==================
Total assets $ 1,350,847,503 $ 24,731,911 $ (4,967,226) $ 1,370,612,188
=================== ================ =================== ==================
(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.
As of and for the six months ended June 30, 2002
-------------------------------------------------------------------------------------
Elimination of
Portfolio Mortgage Intercompany
Investment Servicing Transactions Consolidated
------------------- ---------------- ------------------- -------------------
Interest income $ 63,775,227 $ - $ - $ 63,775,227
Interest expense (46,491,577) - - (46,491,577)
------------------- ---------------- ------------------- -------------------
Net interest margin 17,283,650 - - 17,283,650
------------------- ---------------- ------------------- -------------------
General and administrative expenses (6,008,075) - 125,601 (5,882,474)
Depreciation and amortization (608,540) - - (608,540)
Equity in earnings (losses) from
investments 232,742 - - 232,742
Other, net 777,812 - - 777,812
Impairment on CMBS (5,151,091) - - (5,151,091)
Investment banking expense (244,444) (244,444)
Servicing income - 5,582,308 (324,735) 5,257,573
Servicing general and
administrative expenses - (4,825,118) 199,134 (4,625,984)
Servicing amortization,
depreciation and impairment - (910,810) - (910,810)
Servicing restructuring expenses - (141,240) - (141,240)
Servicing gain on sale of servicing
rights - 4,817,598 - 4,817,598
Income tax expense - servicing - (908,776) - (908,776)
------------------- ---------------- ------------------- -------------------
(11,001,596) 3,613,962 - (7,387,634)
------------------- ---------------- ------------------- -------------------
Net income (loss) before changes in
accounting principles $ 6,282,054 $ 3,613,962 $ - $ 9,896,016
=================== ================ =================== ===================
Total assets $1,251,963,947 $ 26,380,307 $ - $ 1,278,344,254
=================== ================ =================== ===================
As of and for the six months ended June 30, 2001
-------------------------------------------------------------------------------------
Portfolio Mortgage
Investment Servicing Elimination (1) Consolidated
------------------- ---------------- ------------------- -------------------
Interest income $ 67,529,530 $ - $ - $ 67,529,530
Interest expense (48,762,000) - - (48,762,000)
------------------- ---------------- ------------------- -------------------
Net interest margin 18,767,530 - - 18,767,530
------------------- ---------------- ------------------- -------------------
General and administrative expenses (4,983,051) - - (4,983,051)
Depreciation and amortization (1,840,683) - - (1,840,683)
Equity in earnings (losses) from
investments 324,193 - (2,278,734) (1,954,541)
Other, net 1,376,008 - - 1,376,008
Reorganization items (1,445,628) - - (1,445,628)
Emergence loan origination fee (3,936,616) - - (3,936,616)
Servicing income - 5,819,609 (5,819,609) -
Servicing general and
administrative expenses - (7,026,543) 7,026,543 -
Servicing amortization,
depreciation and impairment - (934,833) 934,833 -
------------------- ---------------- ------------------- -------------------
(10,505,777) (2,141,767) (136,967) (12,784,511)
------------------- ---------------- ------------------- -------------------
Net income (loss) before changes in
accounting principles $ 8,261,753 $ (2,141,767) $ (136,967) $ 5,983,019
=================== ================ =================== ===================
Total assets $1,350,847,503 $ 24,731,911 $ (4,967,226) $ 1,370,612,188
=================== ================ =================== ===================
(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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS. When used in this Quarterly Report on Form 10-Q, the
words "believes," "anticipates," "expects" and similar expressions are intended
to identify forward-looking statements. Statements looking forward in time are
included in this Quarterly Report on Form 10-Q pursuant to the "safe harbor"
provision of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties, which could cause
actual results to differ materially, including, but not limited to, the risk
factors contained below and in the Company's reports filed with the Securities
and Exchange Commission pursuant to the Securities Exchange Act of 1934, as
amended, including its Annual Report on Form 10-K for the year ended December
31, 2001. 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.
All information set forth in this Quarterly Report on Form 10-Q has been
retroactively adjusted to reflect a one-for-ten reverse stock split effected on
October 17, 2001.
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 reorganization under Chapter 11 of the U.S. Bankruptcy Code (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 principally with respect 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 Company's variable-rate secured financing facility (the
"Variable-Rate Secured Borrowing"), Series A Senior Secured Notes, and Series B
Senior Secured Notes (collectively, 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 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.
The Company is exploring possible ways of achieving improved financial
flexibility and other strategic alternatives to maximize shareholder value. In
May 2002, the Company retained the investment banking firm of Friedman,
Billings, Ramsey & Co., Inc. ("FBR") to assist the Company with an evaluation of
strategic alternatives designed to maximize shareholder value. The Company is
exploring a range of strategic alternatives. There can be no assurance that the
Company will be successful in achieving its goals to maximize shareholder value.
If it is determined that a sale of Subordinated CMBS would maximize shareholder
value, in part due to the expressions of interest received to date, there can be
no assurance that such a sale will be for consideration equal to or greater than
the Company's estimate of the fair value of the Subordinated CMBS (as of June
30, 2002) to be sold. See further discussion of the Subordinated CMBS in Notes 3
and 4 of the Notes to Consolidated Financial Statements. In connection with the
pursuit of strategic alternatives, the Company's previously announced search for
a new chief executive/operating officer has been temporarily suspended.
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) restrictions on dividends;
(4) the limited protection provided by hedging transactions; (5) inherent risks
in owning Subordinated CMBS; (6) the limited liquidity of the Subordinated CMBS
market; (7) 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; (8) risks related to the New Debt including the
ability to meet payment and other obligations thereunder; (9) risks associated
with the trader election and limitation or loss of net operating losses for tax
purposes; (10) results of operations adversely affected by factors beyond the
Company's control; (11) the effect of the yield curve on borrowing costs; (12)
the effect of phantom (non-cash) income on total income; (13) the effect of
interest rate
compression on the market price of the Company's stock; (14) risk of loss of
REIT status and other tax matters; (15) failure to manage the mismatch between
long-term assets and short-term funding; (16) competition; (17) taxable mortgage
pool risk; (18) risk of becoming subject to the requirements of the Investment
Company Act of 1940; (19) risk that future issuances of shares of common stock
issued in payment of dividends on preferred shares could adversely affect the
common stock price and impair the Company's ability to raise capital; (20) risk
of failure to achieve strategic alternatives; and (21) risk that charter
ownership limitations and anti-takeover measures could prevent or delay a change
in control.
2002 compared to 2001
Results of Operations
Financial Statement Net Income
Financial statement net income to common shareholders for the three months
ended June 30, 2002 was approximately $2.3 million compared to a net loss of
approximately $(2.4) million for the three months ended June 30, 2001. The 2002
results include a one-time gain of approximately $4.8 million from the sale by
CMSLP of its master and direct servicing rights, approximately $1.0 million of
income tax expense related to the sale of the servicing rights, and
approximately $0.1 million of additional servicing restructuring expenses. The
2001 results include approximately $5.0 million of net expenses relating to the
Company's bankruptcy reorganization and approximately $0.7 million of
amortization that was recorded during the three months ended June 30, 2001 on
the goodwill written-off on January 1, 2002. Excluding the items mentioned
above, the second quarter 2002 pro forma net loss to common shareholders would
have been approximately $(1.4)million compared to pro forma net income to common
shareholders of approximately $3.3 million in 2001. The second quarter 2002
results include impairment charges of approximately $5.2 million, as discussed
below.
The following table provides a summary of the components of proforma net
(loss) income to common shareholders and a reconciliation of the pro forma net
(loss) income to common shareholders to net income (loss) to common shareholders
reported in accordance with generally accepted accounting principles ("GAAP")
for the three months ended June 30, 2002 and 2001:
Three months ended June 30,
2002 2001
---- ----
Net interest margin $ 8,557,986 $ 8,790,517
General and administrative expenses (2,679,860) (2,609,919)
Depreciation and amortization (368,564) (141,831)
Servicing operations, net (excluding one-time items discussed above) (43,784) (1,542,130)(a)
Impairment on CMBS (5,151,091) --
Investment banking fees (244,444) --
Hedging expense (306,569) (67,780)
Other, net 557,493 900,791
Dividends accrued or paid on preferred shares (1,726,560) (2,046,072)
------------ ------------
Pro forma net (loss) income to common shareholders (1,405,393) 3,283,576
Adjustments to GAAP net income (loss):
- -------------------------------------
Servicing gain on sale of servicing rights 4,817,598 --
Income tax expense-servicing (975,220) --
Servicing restructuring expenses (141,240) --
Amortization of goodwill and intangible assets written-off -- (697,367)
Reorganization items -- (1,025,411)
Emergence financing origination fee -- (3,936,616)
------------ ------------
GAAP net income (loss) to common shareholders $ 2,295,745 $ (2,375,818)
============ ============
(a) Included in equity in earnings (losses) from investments.
Financial statement net loss to common shareholders for the six months
ended June 30, 2002 was $(4.5) million compared to approximately $3.7 million of
net income to common shareholders for the six months ended June 30, 2001. Net
loss to common shareholders for the six months ended June 30, 2002 includes an
approximate $9.8 million non-cash charge related to the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 142, approximately $1.0 million
reflected as an additional dividend on preferred stock in connection with the
redemption of Series E Preferred Stock (representing the difference between the
aggregate liquidation value and the redemption price), approximately $4.8
million from the gain on the sale by CMSLP of its master and direct servicing
rights as discussed above, approximately $0.9 million of income tax expense
related to the sale of the servicing rights, and approximately $0.1 million of
additional servicing restructuring expenses. The 2001 results include
approximately $2.0 million of revenue due to the change in accounting for
servicing revenue, approximately $0.1 million of expense for the adoption of
SFAS No. 133, approximately $5.4 million of net expenses relating to the
Company's bankruptcy reorganization, and approximately $1.4 million of
amortization that was
recorded during the six months ended June 30, 2001 on the goodwill written-off
on January 1, 2002. Excluding the items mentioned above, the pro forma net
income to common shareholders during the six months ended June 30, 2002 would
have been approximately $2.5 million compared to approximately $8.6 million
during the six months ended June 30, 2001. The 2002 results include impairment
charges of approximately $5.2 million, as discussed below.
The following table provides a summary of the components of pro forma net
income to common shareholders and a reconciliation of pro forma net income to
common shareholders to GAAP net (loss) income to common shareholders for the six
months ended June 30, 2002 and 2001:
Six months ended June 30,
2002 2001
---- ----
Net interest margin $ 17,283,650 $ 18,767,530
General and administrative expenses (5,882,474) (4,983,051)
Depreciation and amortization (608,540) (445,947)
Servicing operations, net (excluding one-time items discussed above) (279,221) (2,279,138) (a)
Impairment on CMBS (5,151,091) --
Investment banking fees (244,444) --
Hedging expense (396,327) (921,039)
Other, net 1,406,881 2,621,644
Dividends accrued or paid on preferred shares (3,623,750) (4,188,797)
----------------- -------------
Pro forma net income to common shareholders 2,504,684 8,571,202
Adjustments to GAAP net (loss) income:
- -------------------------------------
Servicing gain on sale of servicing rights 4,817,598 --
Income tax expense-servicing (908,776) --
Servicing restructuring expenses (141,240) --
Cumulative effect of accounting changes (9,766,502) 1,860,120
Additional Series E Preferred Stock dividends (1,038,000) --
Amortization of goodwill and intangible assets written-off -- (1,394,736)
Reorganization items -- (1,445,628)
Emergence financing origination fee -- (3,936,616)
----------------- -------------
GAAP net (loss) income to common shareholders $ (4,532,236) $ 3,654,342
================= =============
(a) Included in equity in earnings (losses) from investments.
Interest Income - Subordinated CMBS
Interest income from Subordinated CMBS decreased by approximately $0.8
million, or 3%, to $25.6 million during the three months ended June 30, 2002 as
compared to $26.4 million during the three months ended June 30, 2001. This
overall decrease in interest income was primarily the result of a 3% reduction
in the amortized cost of the Subordinated CMBS from December 31, 2000 to
December 31, 2001 primarily as a result of the $34.7 million of non-cash
impairment charges that were recognized during 2001 due to changes in the
Company's loss estimates related to the Subordinated CMBS. Since the weighted
average yield-to-maturity was 12.4% during the three months ended June 30, 2002
and 2001, the reduction in the interest income generally corresponds with the
reduction in the amortized cost of the Subordinated CMBS. Following the
recognition of non-cash impairment charges on two Subordinated CMBS bonds during
the three months ended June 30, 2002 and the revision of the anticipated
yields-to-maturity on all of the Company's Subordinated CMBS as of June 30,
2002, the weighted average yield-to-maturity relating to the Company's
Subordinated CMBS is 12.5% effective July 1, 2002.
Interest income from Subordinated CMBS decreased by approximately $1.5
million, or 3%, to $51.1 million during the six months ended June 30, 2002 as
compared to $52.7 million during the six months ended June 30, 2001. As
discussed in the paragraph above, this decrease corresponds with the 3%
reduction in the amortized cost of the Subordinated CMBS from December 31, 2000
to December 31, 2001.
GAAP requires that interest income earned on Subordinated CMBS be recorded
based on the effective interest method using the anticipated yield over the
expected life of the Subordinated CMBS. Based upon the timing and amount of
future credit losses and certain other assumptions estimated by management, as
discussed below, the weighted average anticipated unleveraged yield for CRIIMI
MAE's Subordinated CMBS for financial statement purposes as of January 1, 2002
and 2001 was approximately 12.4%. 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 three months ended June 30, 2002 and 2001, the amount of income
recognized in excess of cash received due to the effective interest rate method
was approximately $3.0 million and $2.5 million,
respectively. For the six months ended June 30, 2002 and 2001, the amount of
income recognized in excess of cash received was approximately $5.7 million and
$4.7 million, respectively.
Interest Income - Insured Mortgage Securities
Interest income from insured mortgage securities decreased by approximately
$1.2 million, or 17%, to $6.1 million for the three months ended June 30, 2002
from $7.4 million for the three months ended June 30, 2001. This decrease was
principally due to the prepayment of 22 mortgages underlying the insured
mortgage securities and the assignment of two mortgages to the U.S. Department
of Housing and Urban Development ("HUD"), representing approximately 18.6% of
the total insured mortgage portfolio, from January 1, 2001 through June 30,
2002.
Interest income from insured mortgage securities decreased by approximately
$2.2 million, or 15%, to $12.6 million during the six months ended June 30, 2002
from $14.9 million during the six months ended June 30, 2001. As discussed
above, this decrease was primarily due to the prepayments and assignments of the
mortgages underlying the insured mortgage securities.
During the twelve months ended June 30, 2002, 20 mortgages have prepaid
resulting in net proceeds of approximately $62.8 million to the Company. During
the six months ended June 30, 2002, 13 mortgages prepaid resulting in net
proceeds of $36.9 million to the Company. This increase in prepayment activity
corresponds with the low mortgage interest rate environment and the expiration
of prepayment lock-out periods on many of the insured mortgages. These
prepayments result in corresponding reductions in the outstanding principal
balances of the collateralized mortgage obligations-insured mortgage securities
and the related interest expense.
Interest Expense
Interest expense of approximately $23.2 million for the three months ended
June 30, 2002 was approximately $1.7 million lower than the interest expense of
approximately $24.9 million for the same period in 2001. The decrease is
primarily attributable to the Company's lower average debt balance during the
second quarter of 2002 ($988 million) compared to 2001 ($1.1 billion), which was
partially offset by a higher average effective interest rate on the total debt
outstanding during the second quarter of 2002 (9.4%) compared to 2001 (9.2%). In
addition, interest expense on the collateralized mortgage obligations-insured
mortgage securities decreased following the significant prepayments of mortgages
underlying the insured mortgage securities discussed previously. The decrease in
interest expense on the collateralized mortgage obligations-insured mortgage
securities was partially offset by $397,000 of additional deferred financing
costs and discount amortization expenses, which are reflected as interest
expense. These additional expenses are the result of the mortgages prepaying
faster than anticipated which, under the effective interest method of
recognizing interest expense, required an adjustment to cumulative interest
expense.
Interest expense of approximately $46.5 million for the six months ended
June 30, 2002 was approximately $2.3 million lower than the interest expense of
approximately $48.8 million for the same period in 2001. The decrease is
attributable to the Company's lower average debt balance during the six months
ended June 30, 2002 ($999 million) compared to 2001 ($1.2 billion), which was
partially offset by a higher average effective interest rate on the total debt
outstanding during 2002 (9.3%) compared to 2001 (8.4%). In addition, interest
expense on the collateralized mortgage obligations-insured mortgage securities
decreased following the significant prepayments of mortgages underlying the
insured mortgage securities discussed previously. The decrease in interest
expense on the collateralized mortgage obligations-insured mortgage securities
was partially offset by approximately $759,000 of additional deferred financing
costs and discount amortization expenses, which are reflected as interest
expense. These additional expenses are the result of the mortgages prepaying
faster than anticipated which, under the effective interest method of
recognizing interest expense, required an adjustment to cumulative interest
expense.
The overall weighted average effective interest rate on the New Debt was
10.3% for the three and six months ended June 30, 2002, and the weighted average
coupon (pay) rate on the New Debt was 8.0% during the same periods. 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 Senior Secured Notes, both of
which are included in the weighted average effective interest rate, but not
included in the weighted average pay rate. The weighted average effective
interest rate on the recourse debt was 10.5% and 8.8% for the three and six
months ended June 30, 2001, respectively. The weighted average coupon (pay) rate
on the recourse debt was 8.8% and 8.0% for the three and six months ended June
30, 2001, respectively.
General and Administrative Expenses
General and administrative expenses increased by approximately $0.1 million
to $2.7 million during the three months ended June 30, 2002 as compared to $2.6
million during the three months ended June 30, 2001 primarily due to an increase
in employee costs resulting from more CRIIMI MAE employees in 2002 compared to
2001 and to higher directors and officers liability insurance premiums in 2002,
partially offset by a reduction in legal costs.
General and administrative expenses increased by approximately $0.9 million
to $5.9 million during the six months ended June 30, 2002 as compared to $5.0
million during the six months ended June 30, 2001 primarily due to an increase
in employment costs in 2002 compared to 2001, higher directors and officers
liability insurance premiums in 2002, and expenses relating to the recently
suspended search for a new chief executive/operating officer in 2002.
Depreciation and Amortization
Depreciation and amortization was approximately $0.4 million and $0.8
million during the three months ended June 30, 2002 and 2001, respectively, and
approximately $0.6 million and $1.8 million during the six months ended June 30,
2002 and 2001, respectively. The decreases are primarily attributable to the
Company's adoption of SFAS No. 142, "Goodwill and Other Intangible Assets,"
("SFAS 142") on January 1, 2002. The adoption of SFAS 142 reduced the Company's
amortization expense by approximately $0.7 million and $1.4 million during the
three and six months ended June 30, 2002, respectively, as compared to 2001. See
further discussion of SFAS 142 in "Cumulative Effect of Adoption of SFAS 142"
below.
Equity in Earnings (Losses) from Investments/Servicing 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 is a summary of the consolidated results of operations of
CMSLP:
Three months ended June 30, Six months ended June 30,
Description 2002 2001 2002 2001
----------- ---- ---- ---- ----
CMSLP's results of operations (reflected in
consolidated income statements effective July 1, 2001):
Servicing revenue $ 2,494,037 N/A $ 5,257,573 N/A
Servicing general and administrative expenses (2,134,890) N/A (4,625,984) N/A
Servicing amortization, depreciation and impairment (402,931) N/A (910,810) N/A
Servicing restructuring expenses (141,240) N/A (141,240) N/A
Servicing gain on sale of servicing rights 4,817,598 (1) N/A 4,817,598 (1) N/A
------------- ----- ------------ -----
GAAP net income from CMSLP $ 4,632,574 $ -- $ 4,397,137 $ --
============= ===== ============ =====
(1) See also the discussion in "Income Tax Expense-Servicing," which follows.
The net income from CMSLP of $4.6 million for the three months ended June
30, 2002 compares to the net equity in losses from CMSLP/CRIIMI MAE Services,
Inc. ("CMSI") of $(1.5) million for the three months ended June 30, 2001 (as
summarized below). CMSLP's net income of $4.6 million during the three months
ended June 30, 2002 includes a $4.8 million one-time gain from the sale of
master and direct servicing rights and $141,000 of restructuring expenses.
During the three months ended June 30, 2002, amortization, depreciation and
impairment was approximately $0.4 million as compared to $1.1 million in 2001.
This decrease was primarily the result of the sale of servicing rights in
February 2002 which reduced amortization expense, and lower impairment on CMBS
held by CMSLP during 2002 as compared to 2001. CMSLP's total revenue decreased
by approximately $0.4 million to approximately $2.5 million during the three
months ended June 30, 2002 compared to $2.9 million during the three months
ended June 30, 2001. This decrease is primarily the result of the sale of
servicing rights which reduced mortgage servicing income and interest income
earned on the escrow balances, partially offset by higher revenue from special
servicing. General and administrative expenses were $2.1 million and $3.2
million during the three months ended June 30, 2002 and 2001, respectively. The
decrease was primarily attributable to the staff reductions that occurred in the
fourth quarter of 2001 and the
first quarter of 2002 following CMSLP's sale of its CMBS master and direct
servicing contracts, as discussed below.
The net income from CMSLP of $4.4 million for the six months ended June 30,
2002 compares to the net equity in losses from CMSLP/CMSI of $(2.3) million for
the six months ended June 30, 2001 (as summarized below). CMSLP's net income of
$4.4 million during the six months ended June 30, 2002 includes a $4.8 million
gain from the sale of servicing rights and $141,000 of restructuring expenses.
During the six months ended June 30, 2002, amortization, depreciation and
impairment was approximately $0.9 million as compared to $1.7 million during the
six months ended June 30, 2001. This decrease was primarily the result of the
sale of servicing rights in February 2002 which reduced amortization expense,
and lower impairment on CMBS held by CMSLP during 2002 as compared to 2001.
CMSLP's total revenue decreased by approximately $0.5 million to approximately
$5.3 million during the six months ended June 30, 2002 compared to $5.8 million
during the six months ended June 30, 2001. This decrease is primarily the result
of the sale of servicing rights which reduced mortgage servicing income and
interest income earned on the escrow balances, partially offset by higher
revenue from special servicing. General and administrative expenses were $4.6
million and $6.3 million during the six months ended June 30, 2002 and 2001,
respectively. The decrease was primarily attributable to the staff reductions
that occurred in the fourth quarter of 2001 and the first quarter of 2002
following CMSLP's sale of its CMBS master and direct servicing contracts, as
discussed below.
In February 2002, CMSLP sold all of its rights and obligations under its
CMBS master and direct servicing contracts because the contracts were not
profitable, given the relatively small volume of master and direct CMBS
servicing that CMSLP was performing. In connection with this restructuring, 34
employee positions were eliminated. 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. During the three months ended June 30, 2002, additional
restructuring expenses of approximately $141,000 were recorded primarily to
account for vacant office space that is taking longer to sublease than
originally anticipated. CMSLP received approximately $11.8 million in cash in
the first quarter of 2002, which included reimbursement of servicing advances in
connection with this sale. CMSLP expects to receive additional cash of
approximately $564,000 from the sale during the third quarter of 2002. CMSLP has
estimated that the purchaser will retain approximately $350,000 of the sales
price upon final settlement of the post-closing contingencies. GAAP required the
gain of $4.8 million to be deferred until the second quarter due to the
contingencies related to the sale. Any difference in the actual amount retained
by the purchaser and CMSLP's estimate of the amount to be retained as of June
30, 2002 will be reflected as an adjustment to the gain on the sale of servicing
rights in the third quarter of 2002.
Total equity in earnings (losses) from investments for the three and six
months ended June 30, 2002 and 2001 include CRIIMI MAE's net equity from the AIM
Funds, four limited partnerships that primarily invest in insured mortgages for
which a subsidiary of the Company owns the general partnership interests, during
these periods, and include net equity from CMSLP/CMSI for the three and six
months ended June 30, 2001 (since CMSLP's operations are consolidated into
CRIIMI MAE effective July 1, 2001). On a comparative basis, the net equity from
the AIM Funds decreased primarily due to a reduction in the AIM Funds' mortgage
assets. The following is a summary of the financial statement presentation of
the Company's equity in earnings (losses) from investments:
Three months ended June 30, Six months ended June 30,
Description 2002 2001 2002 2001
----------- ---- ---- ---- ----
Equity in Earnings (Losses) from Investments (as presented
on income statements):
The AIM Funds - net equity in income $ 118,438 $ 181,387 $ 232,742 $ 324,597
CMSLP/CMSI - net equity in losses -- (1,542,130) -- (2,279,138)
----------- ------------ ----------- ------------
Total Equity in Earnings (Losses) from Investments 118,438 (1,360,743) 232,742 (1,954,541)
=========== ============ =========== ============
Income Tax Expense - Servicing
For the three months ended June 30, 2002 and 2001, the Company incurred
income tax expense of $1.0 million and $0, respectively. For the six months
ended June 30, 2002 and 2001, the Company incurred income tax expense of $0.9
million and $0, respectively. The income tax expense is primarily the result of
the income taxes on the gain on the sale by CMSLP of its master and direct
servicing rights. The income tax expense was incurred by the Company through one
of its wholly-owned taxable REIT subsidiaries ("TRSs") that owns partnership
interests in CMSLP. This TRS is a separately taxable entity that cannot use the
Company's NOL to reduce its taxable income.
Other Income
Other income decreased by approximately $0.2 million to $0.6 million during
the three months ended June 30, 2002 from $0.8 million during the same period in
2001. During the six months ended June 30, 2002, other income decreased by
approximately $0.9 million to $1.4 million from $2.4 million during the same
period in 2001. These decreases were primarily attributable to lower interest
income due to lower cash balances during 2002 as compared to the same periods in
2001.
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
("REO"). 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 is being held for investment. During the three and
six months ended June 30, 2002, the Company recognized a net loss of
approximately $148,000 and $352,000 from the operations of the REO,
respectively, which includes approximately $214,000 and $427,000 of interest
expense, respectively, and approximately $35,000 and $79,000 of depreciation
expense, respectively. The remaining income of approximately $101,000 and
$154,000 is included in other income in the consolidated statement of income
during the three and six months ended June 30, 2002, respectively. The Company
hopes to reposition and stabilize this asset to increase 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 REO for more than one year.
Net Losses on Mortgage Security Dispositions
Net losses on mortgage security dispositions were approximately $146,000
during the three months ended June 30, 2002 compared to approximately $66,000
during the three months ended June 30, 2001. During the second quarter of 2002,
there were seven prepayments of mortgage securities, or approximately 5.9% of
the related portfolio (using the December 31, 2001 face amounts of the
portfolio). During the second quarter of 2001, there were two prepayments and
two assignments to HUD. During the six months ended June 30, 2002, net losses on
mortgage security dispositions were approximately $256,000 compared to $56,000
during the six months ended June 30, 2001. During the six months ended June 30,
2002 and 2001, there were 13 and two prepayments, respectively. In addition,
during 2001, there were two mortgages assigned to HUD. The net losses were
primarily due to the write-off of unamortized costs associated with the disposed
mortgages at the disposition dates, partially offset by prepayment penalties, if
applicable. For any period, gains or losses on mortgage dispositions are based
on the number, carrying amounts and proceeds of mortgages disposed of during the
period.
Impairment on CMBS
The Company has determined that there has been an adverse change in
expected future cash flows for the Nomura and CBO-2 unrated bonds as of June 30,
2002 due primarily to increased projected loan losses resulting from lower than
anticipated appraisals and revised internal estimates on properties underlying
certain mortgage loans. As a result, the Company believes the Nomura and CBO-2
unrated bonds have 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 June 30, 2002. As the fair
values of the impaired Nomura and CBO-2 unrated bonds aggregated approximately
$5.2 million below the amortized cost basis as of June 30, 2002, the Company
recorded other than temporary non-cash impairment charges through the income
statement of that same amount during the three months ended June 30, 2002.
There can be no assurance that the Company's revised overall expected loss
estimate of $351 million will not be exceeded as a result of additional or
existing adverse events or circumstances. Such events or circumstances include,
but are not limited to, the receipt of new or updated appraisals at lower than
anticipated amounts, legal proceedings (including bankruptcy filings) involving
borrowers, an economic downturn or recession, a delay in disposition of
specially serviced mortgage loans, or an unforseen reduction in expected
recoveries, any of which could result in additional future credit losses and/or
possible impairment to CRIIMI MAE's Subordinated CMBS, the effect of which could
be potentially adverse to CRIIMI MAE.
Hedging Expense and Cumulative Effect of Adoption of SFAS 133
In April 2002, CRIIMI MAE entered into a second interest rate protection
agreement. This interest rate protection agreement, or cap, which was effective
on May 1, 2002, is for a notional amount of $175.0 million, caps LIBOR at 3.25%,
and matures on November 3, 2003. The cap was purchased for approximately $1.6
million and has been designated to hedge the Variable-Rate Secured Borrowing.
The fair value of this cap has decreased by approximately $890,000 to
approximately $572,000 since the purchase date. This decrease is reflected in
other
comprehensive income. The decrease is attributable to a change in the
expectation of future interest rates since the cap was purchased in April 2002.
During the three months ended June 30, 2002 and 2001, the Company
recognized hedging expense through earnings of approximately $307,000 and
$68,000 on its interest rate caps, respectively. During the six months ended
June 30, 2002 and 2001, the Company recognized hedging expense through earnings
of approximately $396,000 and $921,000, respectively, on its interest rate caps
and a $135,000 loss through earnings due to the adoption of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("FAS 133")
during the six months ended June 30, 2001.
The fair value of the first interest rate cap has decreased significantly
due to a decline in interest rates since the cap was purchased in April 2001 for
$1.5 million. This cap is set at a one-month LIBOR rate of 5.25%. As of June 30,
2002, the one-month London Interbank Offered Rate ("LIBOR") rate was 1.84%. As
of June 30, 2002, this interest rate cap was undesignated. As a result, all
future changes in the fair value will be recognized through current earnings in
the consolidated statement of income. As of June 30, 2002, the fair value of
this interest rate cap was $776.
Investment Banking Fees
As discussed previously, the Company hired FBR in May 2002 to assist the
Company with an evaluation of strategic alternatives to maximize shareholder
value. The investment banking fees of approximately $244,000 for the three and
six months ended June 30, 2002 represent the fees attributable to the services
performed by FBR through June 30, 2002. Additional compensation to FBR of at
least $439,000 and $167,000 is expected to be recognized in the third and fourth
quarters of 2002, respectively, in accordance with the terms set forth in the
engagement letter.
Reorganization Items
During the three months ended June 30, 2002 and 2001, the Company expensed
$0 and approximately $1.0 million, respectively, of reorganization items due to
the Chapter 11 bankruptcy proceedings. During the six months ended June 30, 2002
and 2001, the Company expensed $0 and approximately $1.4 million, respectively,
of reorganization items due to the Chapter 11 bankruptcy proceedings.
Emergence Financing Origination Fee
In connection with the emergence from Chapter 11 bankruptcy reorganization,
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 required such fee to be expensed immediately.
Cumulative effect of adoption of SFAS 142
In June of 2001, the FASB issued SFAS 142. SFAS 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 SFAS 142, the method for testing goodwill for impairment
occurs at the reporting unit level (as defined in SFAS 142) and is performed
using a fair value based approach. SFAS 142 was effective for the Company on
January 1, 2002. 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 14 of the Notes to
Consolidated Financial Statements). 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 Company's merger of certain mortgage businesses affiliated with
C.R.I., Inc. (the "Merger") in 1995. This change in accounting principle will
reduce the Company's annual amortization expense by approximately $2.8 million.
REIT Status and Other Tax Matters
REIT Status. CRIIMI MAE is required to meet income, asset, ownership and
distribution tests to maintain its REIT status. Although there can be no
assurance, the Company believes that it has satisfied the REIT requirements for
all years through, and including 2001. 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's Net Operating Loss for Tax Purposes/Shareholder Rights Plan
In 2000, the Company began trading 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
("Other MBS")), 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.
As a result of its trader election in 2000, 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 an ordinary loss for tax purposes. 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, a subsidiary of the Company, as part of the
Company's Chapter 11 reorganization plan (the "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 treated as ordinary, any gains will generally increase taxable income and any
losses will generally decrease taxable income. Because the REIT rules generally
require the Company to distribute 90% of its taxable income to shareholders, any
increases in taxable income from trading activities will generally result in an
increase in REIT distribution requirements and any decreases in taxable income
from trading activities will generally result in a decrease in REIT distribution
requirements (or, if 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 for the year ended December 31, 2001. As such, the
Company's taxable income was reduced to zero and, accordingly, the Company's
REIT distribution requirement was eliminated for 2001. As of December 31, 2001,
the Company's accumulated and unused net operating loss ("NOL") was $(146.5)
million. 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. See also the discussion that follows with respect to the remaining
January 2000 Loss.
There can be no assurance that the Company's position with respect to its
election as a trader in securities will not be challenged by the Internal
Revenue Service ("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 of 1986, as amended (the "Tax Code"), however,
interest may also be due to the IRS 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 can be 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 Tax Code. As a result of these limitations imposed by Section 382 of the Tax
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 carryforwards 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 its capital stock
that has created an "ownership change" under Section 382 of the Tax Code.
Currently, the Company does not know of any acquisition of shares of its capital
stock that will create an "ownership change" under Section 382 of the Tax Code.
The Company adopted a shareholder rights plan in January 2002 and amended its
corporate charter ("Charter") in May 2002 to allow it to minimize the chance of
an ownership change within the meaning of Section 382 of the Tax Code. There can
be no assurance that an ownership change will not occur. The Charter amendments
were approved by the Company's shareholders on May 14, 2002 and became effective
on May 15, 2002.
If an "ownership change" occurs under Section 382 of the Tax Code, the
Company's prospective use of its accumulated and unused NOL and the remaining
January 2000 Loss, representing a combined total amount of approximately
$(363.7) million (as of June 30, 2002), 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 $22.7 million for the year ended December 31,
2001. This increase in taxable income would have created a requirement to
distribute 100 percent of this income to the Company's common shareholders. 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 for the year ended December 31, 2001.
Net Operating Loss for Tax Purposes-Six months ended June 30, 2002. CRIIMI
MAE generated a net operating loss for tax purposes of approximately $(37.9)
million during the six months ended June 30, 2002.
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 year-to-date net operating loss as of June 30,
2002 is as follows:
(in millions)
------------------
January 2000 Loss $ (478.2)
LESS: Amounts recognized in 2001 and 2000 239.1
LESS: Amounts recognized during the six months ended June 30, 2002 59.8
---------
Balance remaining of January 2000 Loss to be recognized in future periods $ (179.3)
=========
Taxable income for the six months ended June 30, 2002 before recognition
of January 2000 Loss $ 21.9
LESS: January 2000 Loss recognized during the six months ended June 30, 2002 (59.8)
---------
Net Operating Loss for the six months ended June 30, 2002 $ (37.9)
=========
Accumulated Net Operating Loss through December 31, 2001 $ (146.5)
Net Operating Loss created during the six months ended June 30, 2002 (37.9)
Net Operating Loss utilization -
---------
Net Operating Loss carried forward for use in future periods $ (184.4)
=========
Cash Flow
2002 compared to 2001
Net cash provided by operating activities decreased by approximately $15.6
million to $31.9 million during the six months ended June 30, 2002 from $47.4
million during the six months ended June 30, 2001. The decrease was primarily
attributable to a smaller decrease in restricted cash and cash equivalents and
an increase in receivables and other assets during 2002 compared to a decrease
in 2001, partially offset by a smaller decrease in accounts payable and accrued
expenses and net sales of Other MBS during 2002 compared to net purchases during
2001. The 2002 increase in receivables and other assets is primarily
attributable to $5.9 million of proceeds from the prepayment of an insured
mortgage security that had not been received from the trustee as of June 30,
2002. The 2002 results also reflect a decrease in restricted cash and accounts
payable and accrued expenses following the settlement of the First Union
litigation in March 2002. The 2001 decrease in receivables and other assets
reflects the January 2001 receipt of funds withheld related to the Company's
interest in CMO-IV. The 2001 results also reflect a decrease in restricted cash
and accounts payable and accrued expenses caused by cash outflows on the
Effective Date, including approximately $44.7 million to pay off 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.
Net cash provided by investing activities increased by approximately $24.4
million to $40.7 million during the six months ended June 30, 2002 from $16.3
million during the six months ended June 30, 2001. The increase was primarily
attributable to a $27.8 million increase in proceeds from mortgage security
dispositions and $8.2 million of proceeds from the sale by CMSLP of its
servicing rights (excludes reimbursement of advances, which are included in
operating cash flows) during 2002, partially offset by $9.9 million of cash that
CMSLP invested in investment-grade CMBS.
Net cash used in financing activities decreased by approximately $79.8
million to $70.6 million during the six months ended June 30, 2002 from $150.4
million during the six months ended June 30, 2001. The decrease in cash used is
primarily attributable to an outflow of cash of approximately $127.2 million on
the Effective Date in April 2001, which was used to pay off a portion of the
aggregate principal relating to debt incurred prior to the Chapter 11 filing.
During 2002 there were $18.9 million of principal payments on the New Debt,
$18.7 million paid to redeem the Series E Preferred Stock, and a $21.5 million
increase in principal payments on the securitized mortgage debt obligations due
primarily to the higher mortgage security dispositions in 2002. 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 approximately $18.7 million (approximately $396,000 of
which represented accrued and unpaid dividends). The approximate $1.0 million
difference between the aggregate liquidation value and the redemption price is
reflected as a dividend on preferred stock in the first quarter of 2002.
The following table, which is intended to provide a more clear
understanding of net cash flows, but which is not presented in accordance with
GAAP, provides a summary of CRIIMI MAE's net cash flows for the three months
ended June 30, 2002 and March 31, 2002 (in millions):
Three months Three months
ended 06/30/02 ended 03/31/02
-------------- --------------
Net cash flows (1):
CMBS cash inflows (BB+ through unrated) (3) $ 18.1 $18.0
Other cash, net 2.5 1.9
Interest expense paid on Variable-Rate
Secured Borrowing (3.1) (3.1)
Interest expense paid on Series A Senior Secured Notes (2.9) (2.9)
Interest expense accrued for Series B Senior Secured
Notes' semi-annual payment (2.1) (2.1)
General and administrative expenses (3.0) (2.9)
-------- -------
Net cash flows during the quarter $ 9.5 $ 8.9
======== =======
Principal payments on New Debt:
Variable-Rate Secured Borrowing $ 7.2 (4) $ 8.1 (2)
Series A Senior Secured Notes 2.2 1.5
-------- -------
Total principal payments on New Debt during the
quarter $ 9.4 $ 9.6
======== =======
REO cash inflow (outflow), net $ (0.1) (5) $ (0.1) (5)
======== =======
(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) CMBS cash inflows received on December 21, 2001 included a
one-time recovery of a prior interest shortfall related to an
underlying defaulted mortgage loan. Such receipt occurred after the
December debt paydown and was therefore not applied to the debt paydown
until January 2002.
(3) The Company believes total CMBS cash inflows will decline in
2002 as compared to 2001 due primarily to the increase in appraisal
reduction amounts on properties underlying the CMBS, and realized
losses on CMBS.
(4) For the three months ended June 30, 2002, the Company paid $7.2
million in principal payments on the Variable-Rate Secured Borrowing,
which is $4.5 million in excess of the minimum principal payment
requirement of $2.7 million based upon a 15-year amortization schedule
for the same three month period.
(5) The Company expects to pay a total of approximately $0.9 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.
Financial Condition, Liquidity and Capital Resources
Limited Summary of New Debt
The following limited summary of the New Debt is qualified by reference to
the operative documents evidencing the New Debt. The 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 Series A Senior Secured Notes 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 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.
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 total realized losses and
appraisal reduction amounts with respect to mortgage loans underlying the
Company's Subordinated CMBS (as determined under the New Debt operative
documents) exceed certain loss threshold amounts, 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 June 30, 2002, 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 total realized losses and appraisal
reduction amounts no longer exceed the loss threshold amounts under the
applicable operative documents evidencing the New Debt.
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 of the operative documents governing 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 debt and/or any debt incurred to refinance all or any portion of 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, or
acheive any other strategic alternative that will increase its financial
flexibility.
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 debt (or any debt incurred to
refinance all or any portions of such debt), results of the Company's
operations, and the Company's financial 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. As discussed above, CRIIMI MAE 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 June 30, 2002, CRIIMI MAE's restricted and unrestricted cash and cash
equivalents aggregated approximately $22.1 million. Additionally, CMSLP had cash
and cash equivalents of approximately $5.2 million. CMSLP's cash has decreased
from $15.8 million as of March 31, 2002 as a result of CMSLP investing
approximately $9.9 million of its available cash in liquid, investment-grade
CMBS in June 2002 in order to earn a higher return on its invested cash.
As of June 30, 2002 and December 31, 2001, shareholders' equity was
approximately $278.7 million or $15.56 per diluted share and approximately
$261.0 million or $11.54 per diluted share, respectively. After giving effect to
the redemption of the Series E Preferred Stock and the First Union settlement
which occurred in March 2002, the Company's pro forma book value per diluted
share would have been $14.18 as of December 31, 2001. The increase in the
diluted book value per share is primarily attributable to an overall increase in
fair value of the Company's Subordinated CMBS and insured mortgage securities
primarily due to a decrease in long-term interest rates as of June 30, 2002
compared to December 31, 2001.
Summary of Subordinated CMBS
As of June 30, 2002, the Company owned CMBS rated from A+ to CCC and
unrated with a total fair value amount for purposes of GAAP of approximately
$852 million (representing approximately 67% of the Company's total consolidated
assets), an aggregate amortized cost of approximately $821 million, and an
aggregate face amount of approximately $1.6 billion. Such CMBS represent
investments in securities issued in CBO-1, CBO-2 and Nomura. The June 30, 2002
total fair value includes approximately 34% of the Company's CMBS which are
rated BB+, BB or BB-, 23% which are rated B+, B, B- or CCC and 7% which are
unrated. The remaining approximate 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 June 30, 2002 was 6.0% and
the weighted average life was 13 years. The anticipated yield to maturity
related to the Company's Subordinated CMBS on an aggregate pool basis was 12.4%
as of January 1, 2002 and 12.5% as of July 1, 2002.
The aggregate investment by the rating of the Subordinated CMBS is as
follows:
Discount Rate
or Range of
Weighted Discount Rates
Face Amount Average Fair Value Used to Amortized Cost Amortized Cost
as of Pass-Through Weighted as of Calculate as of 6/30/02 as of 12/31/01
Security Rating 6/30/02 (in Rate Average 6/30/02 (in Fair Value (in millions) (in millions)
millions) 6/30/02 Life (1) millions) as of 6/30/02 (3) (4)
- --------------------------------------------------------------------------------------------------------------------
A+ (2) $ 62.6 7.0% 4 years $ 63.8 6.4% $ 59.0 $ 58.7
BBB+ (2) 150.6 7.0% 9 years 142.6 7.9% 131.7 131.1
BBB (2) 115.2 7.0% 10 years 104.1 8.5% 94.7 94.2
BB+ 319.0 7.0% 11 years 222.6 12.1%-12.3% 220.9 219.0
BB 70.9 7.0% 11 years 46.8 12.8% 46.4 46.0
BB- 35.5 7.0% 12 years 21.7 13.9% 20.6 20.5
B+ 88.6 7.0% 12 years 46.4 16.1% 45.7 45.2
B 177.2 7.0% 13 years 85.5 16.9%-17.2% 84.4 83.7
B- 118.3 7.1% 15 years 48.8 19.5%-20.4% 48.3 48.1
CCC 70.9 7.0% 15 years 13.2 40.1% 13.0 13.1
Unrated/Issuer's 353.5 2.4% 18 years 56.6 35.0%-67.4% 56.4 62.8
Equity
---------- --------- ---------- ---------
Total (6) $1,562.3 6.0% 13 years $ 852.1 (6) $ 821.1 (5) $ 822.4
========== ========= ========== =========
(1) Weighted average life represents the weighted average expected life of the
Subordinated CMBS prior to consideration of losses, extensions or
prepayments. The weighted average life of the Subordinated CMBS may be
significantly shorter, particularly with respect to the Issuer's Equity in
CBO-1 (face amount of $93.9 million) and CBO-2 (face amount of $213.8
million) based on the Company's current loss expectations or potential
additional increases in such loss expectations.
(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 on 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 securities pursuant to the
requirements of SFAS No. 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 impairment charges of approximately
$5.2 million related to the Nomura and CBO-2 unrated bonds, which were
recognized during the three months ended June 30, 2002. These impairment
charges are in addition to the cumulative impairment charges of
approximately $178.1 million that were recognized through December 31,
2001. These impairment charges are discussed in "Results of Operations."
(4) Amortized cost reflects approximately $178.1 million of cumulative
impairment charges related to certain CMBS (all bonds except those rated A+
and BBB+), which were recognized through December 31, 2001.
(5) See "REIT Status and Other Tax Matters" for information regarding the
Subordinated CMBS for tax purposes.
(6) As of June 30, 2002, the aggregate fair values of the CBO-1, CBO-2
and Nomura bonds were approximately $37.1 million, $806.9 million and $8.1
million, respectively.
Mortgage Loan Pool
CRIIMI MAE, through CMSLP, performs servicing functions on commercial
mortgage loans totaling $18.4 billion and $19.3 billion as of June 30, 2002 and
December 31, 2001, 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:
6/30/02 12/31/01 Geographic 6/30/02 12/31/01
Property Type Percentage(i) Percentage(i) Location (ii) Percentage(i) Percentage(i)
- ------------- ------------- ------------- ------------- ------------- -------------
Retail........... 30% 30% California........... 16% 16%
Multifamily...... 29% 29% Texas................ 12% 13%
Hotel............ 15% 14% Florida.............. 8% 8%
Office........... 13% 13% Pennsylvania......... 5% 5%
Other (iv)....... 13% 14% New York............. 5% 5%
---- ---- Other(iii)........... 54% 53%
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 the
CMBS owned by CRIIMI MAE in this transaction. 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 June 30, 2002, the Company reviewed the loans currently under
surveillance by the healthcare and senior housing mortgage loans servicer.
Based on its review as of June 30, 2002, the Company does not believe that
the aggregate remaining shortfalls and/or realized losses on such
healthcare and senior housing mortgage loans 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 June 30, 2002 does
not include any provision for shortfalls and/or realized losses arising
from the healthcare and senior housing mortgage loans currently in special
servicing 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 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 applicable CMBS pooling and servicing 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 of the CMBS transactions
related to its Subordinated CMBS, CMSLP has an incentive to quickly resolve any
loan workouts. As of June 30, 2002 and December 31, 2001, specially serviced
mortgage loans included in the commercial mortgage loans described above are as
follows:
6/30/02 12/31/01
------- --------
Specially serviced loans due to monetary default (a) $797.8 million $701.7 million
Specially serviced loans due to covenant default/other 94.9 million 90.0 million
--------------- ----------------
Total specially serviced loans (b) $892.7 million $791.7 million
=============== ================
Percentage of total mortgage loans (b) 4.8% 4.1%
=============== ================
(a) Includes $103.4 million and $94.5 million, respectively, of real estate
owned by underlying trusts.
(b) As of July 31, 2002, total specially serviced loans were approximately
$826 million, or 4.6% of the total mortgage loans. See discussion
below for additional information regarding specially serviced loans.
The specially serviced mortgage loans as of June 30, 2002 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........... $ 486.9 54% Florida............... $ 138.5 16%
Retail.......... 273.9 31% Oregon................ 93.4 10%
Multifamily..... 43.9 5% Texas................. 76.4 9%
Office.......... 32.1 4% New York.............. 44.5 5%
Healthcare...... 27.7 3% Georgia............... 44.5 5%
Industrial...... 18.2 2% California............ 34.6 4%
Other........... 10.0 1% Other................. 460.8 51%
-------- ---- ------- ----
Total......... $ 892.7 100% Total............... $ 892.7 100%
======== ==== ======= ====
As reflected above, as of June 30, 2002, approximately $486.9 million, or
54%, of the specially serviced mortgage loans are secured by mortgages on hotel
properties. The hotel properties that secure the mortgage loans underlying the
Company's Subordinated CMBS portfolio are geographically diverse, with a mix of
hotel property types and franchise affiliations. Of the mortgage loans
underlying the Company's Subordinated CMBS, loans representing a total
outstanding principal amount of $1.3 billion are secured by limited service
hotels, of which $298.2 million are in special servicing as of June 30, 2002.
Limited service hotels are generally hotels with room-only operations or hotels
that offer a bedroom and bathroom, but limited other amenities, and are often in
the budget or economy group. Of the mortgage loans underlying the Company's
Subordinated CMBS, loans representing a total outstanding principal amount of
$1.5 billion are secured by full service hotels, of which $188.7 million are in
special servicing as of June 30, 2002. Full service hotels are generally
mid-price, upscale or luxury hotels with restaurant and lounge facilities and
other amenities. Of the $486.9 million of hotel loans in special servicing as of
June 30, 2002, approximately $304.1 million, or 62%, relate to four borrowing
relationships more fully described as follows:
o 25 loans totaling $98.1 million spread across four CMBS transactions
secured by hotel properties throughout the U.S. In one of these CMBS
transactions, which contains 10 loans totaling $39.0 million, the
Company holds only a 25% ownership interest in the non-rated class. In
the other three CMBS transactions, the Company holds a 100% ownership
interest in the non-rated class. The 25 loans were transferred into
special servicing in December 2001 due to the bankruptcy filing of each
special purpose borrowing entity and their parent company. The parent
company was able to obtain debtor-in-possession financing. The
borrowers are currently paying post-petition interest on $71 million of
these loans. The properties relating to the remaining $27 million of
loans were deemed by the borrowers to be highly leveraged, and
therefore, not able to support additional debt. Interest is not being
paid current on these loans, and consensual resolution and emergence
strategies are currently being negotiated. Based on current
negotiations and estimation of property values and potential recoveries
on these loans at the completion of the expected workout period, the
Company's current estimate of future credit losses includes $3.1
million arising from these mortgage loans currently in special
servicing.
o 27 loans totaling $140.4 million spread across three CMBS transactions
secured by hotel properties in the west and Pacific northwest states.
The borrower has filed for bankruptcy protection. 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. Based
upon the current estimate of potential recoveries on these loans, which
in turn is based on the Company's estimates of property values and
pending additional developments in the bankruptcy proceedings, the
Company's current estimate of future credit losses includes
approximately $5.5 million arising from
these mortgage loans currently in special servicing. In calculating
estimated recoveries, management considered potential additional
recoveries available because of the cross collateralization of certain
of these loans as well as other factors specific to the bankruptcy
filing. The Company expects to reevaluate recoveries on these loans
within approximately 60 days, after the acceptance of final appraisals.
o Five loans totaling $46.1 million secured by hotel properties
in Florida and Texas. The loans are past due for the February 2002
payment. Based upon current negotiations and appraised values of these
properties, the Company's current estimate of future credit losses
includes $7.3 million arising from these mortgage loans currently in
special servicing.
o Nine loans totaling $19.5 million secured by limited service
hotels in midwestern states. The loans are past due for the February
2002 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. Based on current negotiations and appraised
values of these properties, the Company's current estimate of future
credit losses does not include any provision for losses arising from
these mortgage loans currently in special servicing.
There can be no assurance that the Company's estimate of future credit
losses related to any one or more of the foregoing mortgage loans or other
mortgage loans underlying the Company's Subordinated CMBS will not be exceeded
as a result of additional or existing adverse events or circumstances. Such
events or circumstances include, but are not limited to, the receipt of new or
updated appraisals at lower than anticipated amounts, legal proceedings
(including bankruptcy filings) involving borrowers, an economic downturn or
recession, a delay in disposition of specially serviced mortgage loans, or an
unforeseen reduction in expected recoveries, any of which could result in
additional future credit losses and/or possible impairment to CRIIMI MAE's
Subordinated CMBS, the effect of which could be potentially adverse to CRIIMI
MAE.
The following table provides a summary of the change in the balance of
specially serviced loans from March 31, 2002 to June 30, 2002 and from December
31, 2001 to March 31, 2002:
3/31/02 12/31/01
to to
6/30/02 3/31/02
------- -------
(in millions)
Specially Serviced Loans, beginning of period $ 898.9 $ 791.7
Transfers in due to monetary default 48.4 172.8 (1)
Transfers in due to covenant default and other 4.2 18.7
Transfers out of special servicing (54.2) (2) (79.0)
Loan amortization (4.6) (3) (5.3) (3)
------- ------
Specially Serviced Loans, end of period $ 892.7 $898.9
======= ======
(1) Approximately $113.7 million, or 66%, are loans secured by hotel
properties. Included in this total is $98 million resulting from the
borrowing relationship comprised of 25 hotel loans spread across four
CMBS transactions that is described in the first bullet point above.
(2) In addition to these transfers out of special servicing, loans
totaling approximately $52 million related to a portfolio of retail
property loans transferred out of special servicing in July 2002. The
Company fully recovered the outstanding principal and interest on these
loans.
(3) Represents the reduction of the scheduled principal balances due to
advances made by the master servicers.
For all loans in special servicing, CMSLP is pursuing remedies available to
it in order to maximize the recovery of the outstanding debt. See Exhibit 99.1
to this Quarterly Report on Form 10-Q for a detailed listing of all specially
serviced loans underlying the Company's Subordinated CMBS.
Appraisal Reductions and Losses on CMBS
The effect of an appraisal reduction generally is that the master servicer
stops advancing interest payments on the amount by which the aggregate of debt,
advances and other expenses exceeds 90% (in most cases) of 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. For 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 2000 $ 1,872,000 $18,871,000 $ -- $ 20,743,000
Year 2001 15,599,000 31,962,000 874,000 48,435,000
January 1, 2002 through June 30, 2002 13,568,000 29,564,000 (874,000) 42,258,000
----------- ------------ -------- ------------
Cumulative Appraisal Reductions through June 30, 2002 $31,039,000 $80,397,000 $ -- $111,436,000
=========== ============ ======== ============
* Not all underlying CMBS transactions require the calculation of an
appraisal reduction; however, when CMSLP obtains a third-party appraisal, it
calculates one.
The Company's unrated bonds/issuer's equity from the CBO-1, CBO-2 and
Nomura transactions are expected to experience principal write-downs over their
expected lives. The following tables summarize the actual realized losses on
CMBS through June 30, 2002 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
Actual realized losses, January 1 through June 30, 2002 1,664,000 8,655,000 563,000 10,882,000
------------ ------------ ------------ ------------
Cumulative actual realized losses through June 30, 2002 $ 6,148,000 $ 18,139,000 $ 801,000 $ 25,088,000
============ ============ ============ ============
Cumulative expected loss estimates (including cumulative
actual realized losses) through the year 2002 $ 28,046,000 $ 32,525,000 $ 3,199,000 $ 63,770,000
Expected loss estimates for the year 2003 10,317,000 53,370,000 1,544,000 65,231,000
Expected loss estimates for the years 2004-2006 27,452,000 120,384,000 23,259,000 171,095,000
Expected loss estimates for the years 2007-2009 3,867,000 16,719,000 4,539,000 25,125,000
Expected loss estimates for the remaining life of
investment (for the years 2010-2027) 10,974,000 12,650,000 2,529,000 26,153,000
------------ ------------ ------------ ------------
Cumulative expected loss estimates (including cumulative
actual realized losses) through life of CMBS $ 80,656,000 $235,648,000 $ 35,070,000 $351,374,000
============ ============ ============ ============
As of June 30, 2002, the Company revised its overall expected loss estimate
related to its Subordinated CMBS portfolio from $335 million to $351 million,
with such total losses occurring or expected to occur through the life of its
Subordinated CMBS portfolio. This revision to the overall expected loss estimate
is primarily the result of increased projected loan losses due to lower than
anticipated appraisals and revised internal estimates on properties underlying
certain defaulted mortgage loans. The Company's overall expected loss estimate
of $351 million through the life of its Subordinated CMBS portfolio represents
the Company's estimate of total principal write-downs to its Subordinated 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, there can be no assurance that this revised overall
expected loss estimate will not be exceeded as a result of additional or existng
adverse events or circumstances.
A table of the anticipated yields-to-maturity is provided in Note 4 of
Notes to Consolidated Financial Statements.
Summary of Other Assets
CRIIMI MAE's Other Assets
As of June 30, 2002 and December 31, 2001, the CRIIMI MAE's other assets
consisted primarily of insured mortgage securities, equity investments, other
mortgage-backed securities, cash and cash equivalents (as previously discussed),
principal and interest receivables on its various assets, and REO.
The Company had $311.3 million and $343.1 million (at fair value) invested
in insured mortgage securities as of June 30, 2002 and December 31, 2001,
respectively. The change in fair value is primarily attributable to the
prepayment of insured mortgage securities, which had fair values of $36.5
million at December 31, 2001. As of June 30, 2002, 89% were GNMA Mortgage-Backed
Securities and approximately 11% of CRIIMI MAE's investment in insured mortgage
securities were FHA-Insured Certificates. The total mortgage securities of
$311.3 million include an unencumbered insured mortgage security with a fair
value of $5.4 million. The remaining $305.9 million of mortgage securities are
pledged to secure certain collateralized mortgage obligations or securities
issued in connection with three securitization transactions aggregating $294.7
million as of June 30, 2002. 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 June 30, 2002 and December 31, 2001, the Company had approximately
$8.1 million and $9.3 million, respectively, in investments accounted for under
the equity method of accounting. Included in equity investments are (a) the
general partnership interests (2.9% to 4.9% ownership interests) in the AIM
Funds, and (b) a 20% limited partnership interest in the adviser to the AIM
Funds. The decrease in these investments is primarily the result of partner
distributions declared by the AIM Funds during the first and second quarters of
2002 due to loan pay-offs and normal cash flow distributions. The carrying
values of these equity investments are expected to continue to decline over time
as the AIM Funds decrease their asset bases and distribute proceeds to their
partners.
The Company's Other Mortgage-Backed Securities includes primarily
investment grade CMBS and investment grade residential mortgage-backed
securities. As of June 30, 2002 and December 31, 2001, the fair values of the
Company's Other Mortgage-Backed Securities were approximately $7.7 million and
$8.5 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 is being held for investment. The mezzanine loan payable is
eliminated in consolidation. As of June 30, 2002 and December 31, 2001, the
Company had $8.7 million and $8.6 million, respectively, in REO assets included
in other assets ($8.3 million relating to the actual building and land). In
addition, the Company had $7.2 million and $7.1 million of mortgage payable (net
of discount) related to the REO as of June 30, 2002 and December 31, 2001,
respectively. The Company hopes to reposition and stabilize this asset to
increase 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 REO for more than
one year.
As discussed previously, $9.8 million of the Company's goodwill and
intangible assets related to the 1995 Merger (previously included in the
Company's other assets) were written-off on January 1, 2002 upon the adoption of
SFAS 142.
Servicing's Other Assets
As of June 30, 2002, CMSLP's other assets consisted primarily of
investments in liquid, investment-grade CMBS, advances receivable, fixed assets,
investments in interest-only strips and investments in subadvisory contracts. As
of December 31, 2001, CMSLP's other assets consisted primarily of advances
receivable, investments in mortgage servicing rights, fixed assets, investments
in interest-only strips and investments in subadvisory contracts. The servicing
other assets have increased by approximately $2.7 million from $18.2 million at
December 31, 2001 to $20.9 million at June 30, 2002. The increase is primarily
the result of CMSLP's purchase of $9.9 million of liquid, investment-grade CMBS
in June 2002 with cash that was available for investment following the sale of
the servicing rights in February 2002. This increase was partially offset by a
$4.1 million decrease in investments in mortgage servicing rights and a $2.5
million decrease in advances receivable following the sale of the servicing
rights.
Liabilities
CRIIMI MAE's Liabilities
As of June 30, 2002 and December 31, 2001, CRIIMI MAE's liabilities
consisted primarily of debt, accrued interest, and accounts payable. Total
recourse debt decreased by approximately $16.6 million to $398.1 million as of
June 30, 2002 from $414.7 million as of December 31, 2001 due to principal
repayments of $18.9 million during the six months ended June 30, 2002, partially
offset by interest accretion of $2.2 million on the Series B Senior Secured
Notes. Total non-recourse debt decreased by approximately $30.4 million to
$579.2 million as of June 30, 2002 from $609.6 million as of December 31, 2001.
This decrease is primarily attributable to the significant prepayments of the
mortgages underlying the insured mortgage securities that occurred during the
six months ended June 30, 2002, which resulted in a corresponding reduction in
the principal balances of the securitized mortgage obligations. CRIIMI MAE's
payables and accrued liabilities decreased by approximately $4.7 million to
$21.3 million as of June 30, 2002 from $25.9
million as of December 31, 2001 primarily as a result of the settlement of
the litigation with First Union National Bank in March 2002.
Servicing's Liabilities
As of June 30, 2002 and December 31, 2001, CMSLP's liabilities consisted
primarily of accounts payable and accrued expenses. The liabilities as of
December 31, 2001 also included a payable for a line of credit that was used by
CMSLP to fund property protection advances as a master servicer. The servicing
liabilities decreased by approximately $2.6 million to $1.0 million as of June
30, 2002 from $3.7 million as of December 31, 2001. The decrease is primarily
the result of the repayment of the $1.7 million line of credit for property
protection advances following the sale of servicing rights in February 2002. The
remaining decrease is the result of reduced normal operations following the sale
of the servicing rights and the resulting reduction in staff.
Dividends/Other
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
original issue discount 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
insured mortgage securities depending primarily on prepayments and defaults,
(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
"Financial Condition, Liquidity and Capital Resources" for a discussion of
restrictions on paying cash dividends.
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 Securities
and Exchange Commission ("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 June 30, 2002, 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
significantly reduce 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 a court
found that 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.
ITEM 3. 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 mortgage
assets related to changes in the interest rates of U.S. Treasury securities as
well as changes in the spread between U.S. Treasury securities and the mortgage
assets. As of June 30, 2002, the average U.S. Treasury rate used to price the
Company's CMBS had decreased by approximately 25 basis points and credit spreads
had widened by approximately 18 basis points compared to December 31, 2001. In
addition to the factors described above, the fair values of the insured mortgage
securities are also affected by changes in the weighted average lives of the
insured mortgage securities, which results in adjustments to the terms of the
U.S. Treasury securities that are used in the determination of the fair values.
As of June 30, 2002, the terms of the U.S. Treasury securities that were used to
value the insured mortgage securities were shorter than those used at December
31, 2001 due to lower market interest rates and other loan attributes of the
underlying insured mortgage securities.
In April 2002, CRIIMI MAE entered into a second interest rate protection
agreement. This interest rate protection agreement, or cap, which was effective
on May 1, 2002, is for a notional amount of $175.0 million, caps LIBOR at 3.25%,
and matures on November 3, 2003. The cap was purchased for approximately $1.6
million.
CRIIMI MAE has interest rate caps to mitigate the adverse effects of rising
interest rates on the amount of interest expense payable under its Variable-Rate
Secured Borrowing. The caps provide protection to CRIIMI MAE to the extent
interest rates, based on a readily determinable interest rate index (typically
one-month LIBOR), increase above the stated interest rate cap, in which case,
CRIIMI MAE will receive payments based on the difference between the index and
the caps. The terms of the caps as well as the stated interest rates of the
caps, which in all cases are currently above the current rate of the index, will
limit the amount of protection that the caps offer. The average one-month LIBOR
index was 1.85% during the six months ended June 30, 2002, which was a 2 basis
point decrease from December 31, 2001.
PART II
ITEM 2. CHANGES IN SECURITIES
As a result of the payment of dividends on shares of Series F Preferred
Stock and Series G Preferred Stock in shares of the Company's common stock on
April 15, 2002, the conversion price of the Series B Preferred Stock was
adjusted such that one share of Series B Preferred Stock is convertible into
0.4797 shares of common stock as of April 15, 2002. Prior to April 15, 2002, the
conversion price was 0.4668 shares of common stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 14, 2002.
(1) The stockholders elected each of the following Class II Nominees
to the Board of Directors for terms expiring at the 2005 annual meeting
of stockholders and until their successors have been duly elected and
qualified:
For Withhold
Director % Shares % Shares
-------- --- ------ --- ------
H. William Willoughby 91.8% 9,724,484 8.2% 872,299
Alan M. Jacobs (a) 92.7% 9,818,946 7.3% 777,837
Donald C. Wood 92.7% 9,821,134 7.3% 775,649
The following individuals continue to serve on the Board of Directors:
William B. Dockser, John R. Cooper, Donald J. MacKinnon, Robert J. Merrick, and
Robert E. Woods.
(a) Alan M. Jacobs subsequently resigned from the Board of Directors
effective May 28, 2002.
(2) The stockholders approved amendments to the Company's Charter to
effect additional restrictions upon the transfer of the Company's
capital stock which prohibit (unless approved by the Company's Board of
Directors or otherwise excepted in the amendments to the Charter) (a)
any person or group from beneficially owning five percent (5%) or more
of the market value of the Company's outstanding capital stock or (b)
an existing 5% stockholder from acquiring additional shares of the
Company's capital stock, such amendments intended to protect the
Company's net operating losses for tax purposes.
Common Stockholders
% Shares
--- ------
For 72.2% 9,362,207
Against 9.2% 1,189,149
Abstain 0.4% 45,427
Series B Preferred Stock Holders
% Shares
--- ------
For 86.3% 1,376,124
Against 9.3% 148,642
Abstain 0.2% 3,390
(3) The stockholders approved an amendment to the 2001 Stock
Incentive Plan to increase the number of shares available for issuance
under the 2001 Stock Incentive Plan from 610,000 to 1,235,000.
% Shares
--- ------
For 85.3% 9,041,398
Against 14.2% 1,502,453
Abstain 0.5% 52,932
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit No. Description
3 Registrant's Articles of Amendment, filed
with the Maryland State Department of
Assessments and Taxation on October 12, 2001
(incorporated by reference to Exhibit 3.1 to
the Company's Form S-8 filed with the SEC on
June 13, 2002).
3.1 Registrant's Articles Supplementary for its
Series H Junior Preferred Stock, filed with
the Maryland State Department of
Assessments and Taxation on January 30, 2002
(incorporated by reference to Exhibit 3.2 to
the Company's Form S-8 filed with the SEC on
June 13, 2002).
3.2 Registrant's Articles of Amendment, filed
with the Maryland State Department of
Assessments and Taxation on May 15, 2002
(incorporated by reference to Exhibit 3 to
the Registrant's Current Report on Form 8-K
filed with the SEC on May 16, 2002).
4 Amended and Restated First Amendment to
Rights Agreement, dated as of June 10, 2002
between CRIIMI MAE Inc. and Registrar and
Transfer Company, as Rights Agent
(incorporated by reference to Exhibit 4.1 to
the Company's Form 8-A/A filed with the SEC
on June 13, 2002).
10 Agreement dated May 20, 2002 between CRIIMI
MAE Inc. and Friedman, Billings, Ramsey &
Co., Inc. ("FBR") to retain FBR as the
financial advisor to the Company (filed
herewith).
99.1 Special Serviced Loan Report relating to
specially serviced loans underlying the
Company's CMBS as of June 30, 2002 (filed
herewith).
99.2 Certifications pursuant to Section 906 of
the Sarbanes-Oxley Act (filed herewith).
(b) REPORTS ON FORM 8-K
Date Purpose
May 10, 2002 To report the Board of Directors' decision to
dismiss the Company's independent auditors,
Arthur Andersen LLP, effective upon the
completion of Arthur Andersen's audit of the
December 31, 2001 financial statements of the
CRIIMI MAE Management, Inc. Retirement Plan
and the related filing of the Annual Report
on Form 11-K with the SEC.
May 16, 2002 To report: (1) the receipt of an unsolicited
offer to purchase all of the issued and
outstanding shares of the Company's common
stock for $7.00 per share from a group of
individual shareholders, and (2) the
approval by the Company's shareholders at the
2002 annual meeting held on May 14, 2002 of
an amendment to the Company's Charter, to
place additional restrictions on the transfer
of the Company's capital stock and an
amendment to the Company's 2001 Stock
Incentive Plan (the "Plan") increasing the
number of shares available under the Plan.
May 22, 2002 To report: (1) a press release on May 16,
2002 announcing the Board of Directors'
decision to defer the payment of second
quarter dividends on shares of the Company's
Series B Preferred Stock, Series F Preferred
Stock, and Series G Preferred Stock, and
(2) a press release on May 20, 2002
announcing the Board of Directors' decision
to retain the investment banking firm of
Friedman, Billings, Ramsey & Co., Inc.
to assist the Board with an evaluation of
strategic alternatives designed to maximize
shareholder value.
May 23, 2002 A Form 8-K/A to amend the Current Report on
Form 8-K, dated May 10, 2002, to reflect the
fact that Arthur Andersen LLP was dismissed
on May 14, 2002 upon the completion of its
audit of the December 31, 2001 financial
statements of the CRIIMI MAE Management, Inc.
Retirement Plan and the related filing of the
Annual Report on Form 11-K with the SEC
on May 14, 2002, as anticipated.
June 6, 2002 To report: (1) the Board of Directors'
selection of Ernst & Young LLP as the Company
independent auditors for the Company's
consolidated financial statements for the
year ending on December 31, 2002, and (2)
the resignation of Alan M. Jacobs from the
Company's Board of Directors.
Signature
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report on
Form 10-Q to be signed on its behalf by the undersigned, thereunto duly
authorized.
CRIIMI MAE INC.
August 14, 2002 /s/Cynthia O. Azzara
- --------------- -------------------------------
DATE Cynthia O. Azzara
Senior Vice President,
Principal Accounting Officer
and Chief Financial Officer