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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1993
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Commission file number 1-10360
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CRIIMI MAE INC.
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(Exact name of registrant as specified in charter)
Maryland 52-1622022
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11200 Rockville Pike, Rockville, Maryland 20852
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(Address of principal executive offices) (Zip Code)
(301) 468-9200
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(Registrant's telephone number, including area code)
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.
Securities registered pursuant to Section 12(g) of the Act:
NONE
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of January 7, 1994, 19,943,789 shares of common stock, with an aggregate
market value of $219,381,679, were outstanding and held by nonaffiliates of the
Registrant on such date.
DOCUMENTS INCORPORATED BY REFERENCE
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Form 10-K Parts Document
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I, II, III and IV 1993 Annual Report to Shareholders
III 1994 Notice of Annual Meeting of
Shareholders and Proxy Statement
2
CRIIMI MAE INC.
1993 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
------
Page
----
Item 1. Business..................................... 5
Item 2. Properties................................... 5
Item 3. Legal Proceedings............................ 6
Item 4. Submission of Matters to a Vote of
Security Holders............................. 6
PART II
--------
Item 5. Market for the Registrant's Common Stock
and Related Stockholder Matters.............. 6
Item 6. Selected Financial Data...................... 6
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations................................ 6
Item 8. Financial Statements and Supplementary Data.. 7
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure....... 7
PART III
--------
Item 10. Directors and Executive Officers
of the Registrant........................... 7
Item 11. Executive Compensation...................... 8
Item 12. Security Ownership of Certain Beneficial
Owners and Management....................... 8
Item 13. Certain Relationships and Related
Transactions................................ 8
3
PART IV
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Page
----
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K......................... 10
Signature................................................ 17
Cross Reference Sheet.................................... 19
Exhibit Index............................................ 21
4
PART I
ITEM 1. BUSINESS
Development and Description of Business
- ---------------------------------------
Information concerning the business of CRIIMI MAE Inc. (CRIIMI MAE) is
contained in Part II, Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, and in Notes 1, 5 and 14 of the notes to
the consolidated financial statements of CRIIMI MAE contained in Part IV (filed
in response to Item 8 hereof), which is incorporated herein by reference.
Employees
- ---------
CRIIMI MAE has no employees. Services are performed for CRIIMI MAE by
CRI Insured Mortgage Associates Adviser Limited Partnership (the Adviser) and
agents retained by it.
ITEM 2. PROPERTIES
CRIIMI MAE does not hold title to any real estate. CRIIMI MAE
indirectly holds interests in real estate through CRI Liquidating REIT, Inc.'s
(CRI Liquidating) equity investment in three Participating Mortgage
Investments. These investments were comprised of two components: 85% of the
original investment amount was a GNMA Mortgage-Backed Security; and 15% of the
original investment amount was an uninsured equity contribution to the limited
partnership (a Participation) which owns the underlying property. During 1993,
CRI Liquidating sold the GNMA Mortgage-Backed Securities, but retained its
Participations. The aggregate carrying value of these Participations
represents less than 1% of CRIIMI MAE's total consolidated assets as of
December 31, 1992 and 1993.
Although CRIIMI MAE does not own the related real estate, the
government insured and guaranteed mortgage investments (Government Insured
Multifamily Mortgages) in which CRIIMI MAE has invested are first or second
liens, or are collateralized by first or second liens, on the respective
residential apartment, nursing home or townhouse complexes.
5
PART I
ITEM 3. LEGAL PROCEEDINGS
Reference is made to Note 15 of the notes to the consolidated financial
statements on pages 134 through 135 of the 1993 Annual Report to Shareholders,
which is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the security holders to be voted on
during the fourth quarter of 1993.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
(a), (b) and (c) The information required in these sections is
included in Selected Consolidated Financial Data on pages 22 through 26 of the
1993 Annual Report to Shareholders, which section is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA
Reference is made to Selected Consolidated Financial Data on pages 22
through 26 of the 1993 Annual Report to Shareholders, which section is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations on pages 27 through 63 of the 1993 Annual
Report to Shareholders, which section is incorporated herein by reference.
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to pages 64 through 74 of the 1993 Annual Report to
Shareholders for the consolidated financial statements of CRIIMI MAE, which are
incorporated herein by reference. See also Item 14 of this report for
information concerning financial statements and financial statement schedules.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a), (b), (c) and (e)
The information required by Item 10 (a), (b), (c) and (e) with regard
to directors and executive officers of the registrant is incorporated
herein by reference to CRIIMI MAE's 1994 Notice of Annual Meeting of
Shareholders and Proxy Statement to be filed with the
6
Securities and Exchange Commission no later than April 30, 1994.
(d) There is no family relationship between any of the directors and
executive officers.
(f) Involvement in certain legal proceedings.
None.
(g) Promoters and control persons.
Not applicable.
7
PART III
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by
reference to CRIIMI MAE's 1994 Notice of Annual Meeting of Shareholders and
Proxy Statement to be filed with the Commission no later than April 30, 1994,
and Note 3 of the notes to the consolidated financial statements included in
the 1993 Annual Report to Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by Item 12 is incorporated herein by
reference to CRIIMI MAE's 1994 Notice of Annual Meeting of Shareholders and
Proxy Statement to be filed with the Commission no later than April 30, 1994.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Transactions with management and others.
Of CRIIMI MAE's five officers, two are executive officers who serve
on CRIIMI MAE's Board of Directors. CRIIMI MAE's 1994 Notice of
Annual Meeting of Shareholders and Proxy Statement to be filed with
the Commission no later than April 30, 1994, and Note 3 of the notes
to the consolidated financial statements, included in the 1993 Annual
Report to Shareholders, which contain a discussion of the amounts,
fees and other compensation paid or accrued by CRIIMI MAE to the
directors and executive officers and their affiliates, are
incorporated herein by reference.
(b) Certain business relationships.
CRIIMI MAE has no business relationship with entities of which the
general and limited partners of the Adviser to CRIIMI MAE are
officers, directors or equity owners other than as set forth in
CRIIMI MAE's 1994 Notice of
8
PART III
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -
Continued
Annual Meeting of Shareholders and Proxy Statement to be filed with
the Commission no later than April 30, 1994, which is incorporated
herein by reference.
(c) Indebtedness of management.
None.
(d) Transactions with promoters.
Not applicable.
9
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) List of documents filed as part of this report:
1 and 2. Financial Statements and Financial Statement Schedules
The following financial statements are incorporated herein by
reference in Item 8 from the indicated pages of the 1993 Annual
Report to Shareholders:
Page
Description Number(s)
- ----------- -------------
Consolidated Balance Sheets as of December 31,
1992 and 1993 65 through 67
Consolidated Statements of Income for the years
ended December 31, 1991, 1992 and 1993 68 through 69
Consolidated Statements of Changes in
Shareholders' Equity for the years ended
December 31, 1991, 1992 and 1993 70 through 71
Consolidated Statements of Cash Flows for the
years ended December 31, 1991, 1992 and 1993 72 through 74
Notes to Consolidated Financial Statements
which include the information required to be
included in Schedule XII - Mortgage Loans on
Real Estate and Schedule XII - Short Term
Borrowings 75 through 135
The report of CRIIMI MAE's independent accountants with respect to the above
listed consolidated financial statements appears on page 64 of the 1993 Annual
Report to Shareholders.
10
All other financial statements and financial statement schedules have been
omitted since the required information is included in the financial
statements or the notes thereto, or is not applicable or required.
(a) 3. Exhibits (listed according to the number assigned in the table in
Item 601 of Regulation S-K)
Exhibit No. 3 - Articles of incorporation and bylaws.
d. Articles of Incorporation of CRIIMI MAE Inc. (Incorporated by
reference from Exhibit 3(d) to the Quarterly Report on Form
10-Q for the quarter ended June 30, 1993).
e. Bylaws of CRIIMI MAE Inc. (Incorporated by reference from Exhibit
3(e) to the Quarterly Report on Form 10-Q for the quarter ended
June 30, 1993).
f. Agreement and Articles of Merger between CRIIMI MAE Inc. and CRI
Insured Mortgage Association, Inc. as filed with the Office of
the Secretary of the State of Delaware (Incorporated by reference
from Exhibit 3(f) to the Quarterly Report on Form 10-Q for the
quarter ended June 30, 1993).
g. Agreement and Articles of Merger between CRIIMI MAE Inc. and CRI
Insured Mortgage Association, Inc. as filed with the State
Department of Assessment and Taxation for the State of Maryland
(Incorporated by reference from Exhibit 3(g) to the Quarterly
Report on Form 10-Q for the quarter ended June 30, 1993).
11
Exhibit No. 4 - Instruments defining the rights of security holders,
including indentures.
a. $85,000,000 Credit Agreement, and the exhibits thereto, dated as
of October 23, 1991, between CRI Insured Mortgage Association,
Inc., Signet Bank/Virginia and Westpac Banking Corporation
(Incorporated by reference from Exhibit 4(g) to the Annual Report
on Form 10-K for 1991).
b. Collateral Pledge Agreement, and the exhibits thereto, dated as
of December 31, 1991, between CRI Insured Mortgage Association,
Inc., Signet Bank/Virginia, Westpac Banking Corporation and
Chemical Bank (Incorporated by reference from Exhibit 4(h) to the
Annual Report on Form 10-K for 1991).
c. Temporary Global Note, dated as of December 31, 1991, in the
aggregate amount of $19,190,625 issued by the registrant
(Incorporated by reference from Exhibit 4(i) to the Annual Report
on Form 10-K for 1991).
d. $100,000,000 Amended and Restated Credit Agreement, and the
exhibits thereto, dated as of October 23, 1991 and Amended
December 22, 1992, between CRI Insured Mortgage Association,
Inc., Signet Bank/Virginia and Westpac Banking Corporation
(Incorporated by reference from Exhibit 4(d) to the Annual Report
on Form 10-K for 1992).
12
e. Amended and Restated Collateral Pledge Agreement, and the
exhibits thereto, dated as of December 31, 1991 and amended and
restated as of December 29, 1992, between CRI Insured Mortgage
Association, Inc. and Chemical Bank (Incorporated by reference
from Exhibit 4(e) to the Annual Report on Form 10-K for 1992).
f. Amended and Restated Letter of Credit and Reimbursement Agreement
and the exhibits thereto, dated as of February 9, 1993 between
CRI Funding Corporation, Canadian Imperial Bank of Commerce New
York Agency and National Australia Bank Limited, New York Branch
(Incorporated by reference from Exhibit 4(f) to the Annual Report
on Form 10-K for 1992).
g. Amended and Restated Guaranty, dated as of February 9, 1993
between CRI Insured Mortgage Association, Inc., Canadian Imperial
Bank of Commerce New York Agency and National Australia Bank
Limited, New York Branch (Incorporated by reference from Exhibit
4(g) to the Annual Report on Form 10-K for 1992).
h. Amended and Restated Loan Agreement and the exhibits thereto,
dated as of February 9, 1993 between CRI Insured Mortgage
Association, Inc. and CRI Funding Corporation (Incorporated by
reference from Exhibit 4(h) to the Annual Report on Form 10-K for
1992).
i. Second Amended and Restated Security Agreement and the exhibits
thereto, dated as of February 9, 1993 between CRI Insured
Mortgage Association, Inc., Canadian Imperial Bank of Commerce
New York Agency and Chemical Bank (Incorporated by reference from
Exhibit 4(i) to the Annual Report on Form 10-K for 1992).
j. Committed Master Repurchase Agreement between Nomura Securities
International, Inc. and CRI Insured Mortgage Association, Inc.
dated April 30, 1993 (Incorporated by reference from Exhibit 4(j)
to the Quarterly Report on Form 10-Q for the quarter ended June
30, 1993).
k. Committed Master Repurchase Agreement Governing Purchases and
Sales of Participation Certificates between Nomura Asset Capital
Corporation and CRI Insured Mortgage Association, Inc. dated
April 30, 1993 (Incorporated by reference from Exhibit 4(k) to
the Quarterly Report on Form 10-Q for the quarter ended June 30,
1993).
13
l. Committed Master Repurchase Agreement between Nomura Securities
International, Inc. and CRIIMI MAE Inc. dated November 30, 1993
(filed herewith).
m. Committed Master Repurchase Agreement Governing Purchases and
Sales of Participation Certificates between Nomura Asset Capital
Corporation and CRIIMI MAE Inc. dated November 30, 1993 (filed
herewith).
n. Extension and Amendment Agreement between CRI Funding Corporation,
CRIIMI MAE Inc., Canadian Imperial Bank of Commerce New York
Agency, National Australia Bank Limited, New York Branch, and The
Fuji Bank, Ltd., New York Branch dated January 25, 1994 (filed
herewith).
o. Settlement Agreement between Alex J. Meloy, Trustee of the Harry
Meloy Family Trust and Alan J. Hunken, Trustee of the Alan J.
Hunken
14
Retirement Plan, individually and in their capacities as
representatives of certain plaintiff classes in Alex J. Meloy, et
-----------------
al., v. CRI Liquidating REIT, Inc., et al., and (ii) CRI
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Liquidating REIT, Inc.; CRIIMI MAE Inc.; C.R.I., Inc.; William B.
Dockser; Martin C. Schwartzberg, and H. William Willoughby dated
September 24, 1993 (filed herewith).
Exhibit No. 10 - Material contracts.
a. Revised Form of Advisory Agreement. (Incorporated by reference
from Exhibit No. 10.2 to the Registration Statement).
Exhibit No. 13 - Annual Report to security holders, Form 10-Q or
Quarterly Report to security holders.
a. 1993 Annual Report to Shareholders.
Exhibit No. 21 - Subsidiaries of the registrant.
a. CRI Liquidating REIT, Inc., incorporated in the state of Maryland.
b. CRIIMI, Inc., incorporated in the state of Maryland.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1993.
(c) Exhibits
The list of Exhibits required by Item 601 of Regulation S-K is
included in Item (a)(3) above.
15
(d) Financial Statement Schedules
See Item (a) 1 and 2 above.
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CRIIMI MAE INC.
February 15, 1994 /s/ William B. Dockser
- --------------------- ------------------------------
DATE William B. Dockser
Chairman of the Board and
Principal Executive Officer
17
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
February 15, 1994 /s/ Elizabeth O. Flanagan
- --------------------- ---------------------------------
DATE Elizabeth O. Flanagan
Chief Financial Officer and
Principal Financial and
Accounting Officer
February 15, 1994 /s/ H. William Willoughby
- --------------------- ---------------------------------
DATE H. William Willoughby
Director, President and
Secretary
February 15, 1994 /s/ Jay R. Cohen
- --------------------- ---------------------------------
DATE Jay R. Cohen
Executive Vice President
and Treasurer
February 2, 1994 /s/ Frederick J. Burchill
- --------------------- ---------------------------------
DATE Frederick J. Burchill
Executive Vice President
February 2, 1994 /s/ Garrett G. Carlson, Sr.
- --------------------- ---------------------------------
DATE Garrett G. Carlson, Sr.
Director
February 10, 1994 /s/ G. Richard Dunnells
- --------------------- ---------------------------------
DATE G. Richard Dunnells
Director
February 15, 1994 /s/ Robert F. Tardio
- --------------------- ---------------------------------
DATE Robert F. Tardio
Director
18
CROSS REFERENCE SHEET
The item numbers and captions in Parts I, II, III and IV hereof and the
page and/or pages in the referenced materials where the corresponding
information appears are as follows:
Item Reference Materials Page
- -----------------------------------------------------------------------------
3. Legal Proceedings 1993 Annual Report 134 through 135
5. Market for the 1993 Annual Report 22 through 26
Registrant's
Common Stock and Related
Stockholder Matters
6. Selected Financial Data 1993 Annual Report 22 through 26
7. Management's Discussion 1993 Annual Report 27 through 63
and Analysis of Financial
Condition and Results of
Operations
8. Financial Statements, 1993 Annual Report 64 through 74
including Auditors'
Report, and Supplementary
Data
10. Directors and Executive 1994 Notice of Annual
Officers of the Meeting
Registrant of Shareholders and
Proxy
Statement
11. Executive Compensation 1993 Annual Report and 86 through 95
1994 Notice of Annual
Meeting
of Shareholders and
Proxy
Statement
12. Security Ownership of 1994 Notice of Annual
Certain Beneficial Owners Meeting of Shareholders
and Management and Proxy Statement
13. Certain Relationships and 1993 Annual Report and 86 through 95
Related Transactions 1994 Notice of Annual
Meeting of Shareholders
and Proxy Statement
19
CROSS REFERENCE SHEET
Item Reference Materials Page
- -----------------------------------------------------------------------------
14. Exhibits, Financial 1993 Annual Report 64 through 135
Statement Schedules, and
Reports on Form 8-K
20
EXHIBIT INDEX
Exhibit Page
- ------- ------------
(4)(l) Committed Master Repurchase Agreement 1 through 29
(4)(m) Committed Master Repurchase Agreement Governing 1 through 37
Purchases and Sales of Participation Certificates
(4)(n) Extension and Amendment Agreement 1 through 7
(4)(o) Settlement Agreement 1 through 21
(13) 1993 Annual Report to Shareholders 22 through 151
(21) 1994 Notice of Annual Meeting of Shareholders
and Proxy Statement to be filed with the Securities
and Exchange Commission no later than April 30, 1994
21
CRIIMI MAE INC.
ANNUAL REPORT TO SHAREHOLDERS
22
Selected Consolidated Financial Data
For the years ended
December 31, 1989(a) 1990 1991 1992 1993
------- ------- ------- ------- ------
(In thousands, except per share data)
TAX BASIS ACCOUNTING
Composition of dividends
per share
for income tax purposes:
Ordinary income $ 0.93 $ 0.82 $ 0.67 $ 0.75 $ 0.91
Capital gains 0.02 0.26 0.41 0.33 0.21
Non-taxable dividend 0.54 -- -- -- --
------- ------- ------- ------- -------
Total dividends per
share $ 1.49(b) $ 1.08 $ 1.08 $ 1.08 $ 1.12
======= ======= ======= ======= =======
Tax basis income $26,987 $22,276 $22,037 $21,626 $23,015
======= ======= ======= ======= =======
Tax basis income per share $ 1.31 $ 1.10 $ 1.09 $ 1.07 $ 1.14
======= ======= ======= ======= =======
ACCOUNTING UNDER GENERALLY
ACCEPTED ACCOUNTING
PRINCIPLES
Statement of Income Data:
Income:
Mortgage investment
income $40,008 $50,039 $49,323 $45,931 $50,270
Other income 2,647 4,991 4,995 4,771 6,180
------- ------- ------- ------- -------
Total income 42,655 55,030 54,318 50,702 56,450
------- ------- ------- ------- -------
Expenses:
Interest expense 1,136 22,346 25,791 24,392 28,008
Termination of
interest rate swap -- -- -- -- 4,890
Other operating
expenses 2,560 3,182 3,752 3,505 4,639
Fees to related party 1,839 2,544 2,325 2,238 2,715
Provision for
settlement of
litigation -- -- -- -- 1,500
------- ------- ------- ------- -------
Total expenses 5,535 28,072 31,868 30,135 41,752
------- ------- ------- ------- -------
23
CRIMIMI MAE INC.
Selected Consolidated Financial Data - Continued
Years ended December 31, 1989(a) 1990 1991 1992 1993
-------- -------- -------- ------- --------
Income before mortgage dispositions,
gain on sale of shares of subsidiary,
loss on investment in limited
partnership, non- recurring merger
costs and minority interests 37,120 26,958 22,450 20,567 14,698
Net gains from mortgage dispositions 2,958 3,794 4,048 5,733 7,358
Gain on sale of shares of subsidiary -- -- -- -- 3,281
Loss on investment in limited
partnership -- -- -- (732) --
Non-recurring merger costs (9,561) -- -- -- --
Minority interests (10,977) (12,379) (10,855) (9,527) (9,580)
-------- -------- -------- ------- -------
Income before extraordinary loss 19,540 18,373 15,643 16,041 15,757
Extraordinary loss from extinguishment
of debt -- -- (6,642) -- --
-------- -------- -------- ------- -------
Net income $ 19,540 $ 18,373 $ 9,001(c) $16,041 $15,757
======== ======== ======== ======= =======
Net income per share $0.95 $0.91 $ 0.45(c) $0.79 $0.78
======== ======== ======== ======= =======
Weighted average shares outstanding 20,567 20,184 20,184 20,184 20,184
24
CRIIMI MAE INC.
Selected Consolidated Financial Data - Continued
As of December 31,
-------------------------------------------------
1989 1990 1991 1992 1993
-------- -------- -------- -------- --------
(In thousands)
Balance Sheet Data:
Investment in mortgages (excludes
mortgages held for disposition) $456,692 $546,448 $446,703 $448,319 $730,265(d)
Total assets 502,530 602,786 546,054 526,667 808,701
Total debt 139,426 264,605 245,555 247,968 479,045
Shareholders' equity 223,472 211,195 198,397 193,109 215,289(d)
The selected consolidated statements of income data presented above for the
years ended December 31, 1991, 1992 and 1993, and the consolidated balance sheet
data as of December 31, 1992 and 1993, were derived from and are qualified by
reference to CRIIMI MAE's consolidated financial statements which have been
included elsewhere in this Annual Report to Shareholders. The consolidated
statements of income data for the years ended December 31, 1989 and 1990 and the
consolidated balance sheet data as of December 31, 1989, 1990 and 1991 were
derived from audited financial statements not included in this Annual Report to
Shareholders. This data should be read in conjunction with the consolidated
financial statements and the notes thereto.
(a) All financial information of CRIIMI MAE for the periods prior to
the Merger (defined below) on November 27, 1989 has been presented in a
manner similar to a pooling of interests, which effectively combines the
historical results of the CRIIMI Funds (defined below). The dividends and
net income per share amounts for the year ended December 31, 1989 have been
restated based upon the weighted average shares outstanding as if the
Merger had been consummated on January 1, 1989.
(b) This amount does not include the special dividend of $2.31 per
share paid to CRIIMI MAE shareholders of record on November 27, 1989.
(c) Includes recognition of an extraordinary loss of approximately
$6.6 million ($0.33 per share) resulting from the refinancing of certain
notes payable.
25
CRIIMI MAE INC.
Selected Consolidated Financial Data - Continued
(d) Includes net unrealized gain on mortgage investments of CRI
Liquidating of approximately $29.0 million due to the implementation of
Statement of Financial Accounting Standard No. 115.
Market Data
- -----------
On November 28, 1989, CRIIMI MAE was listed on the New York Stock Exchange
(Symbol CMM). Prior to that date, there was no public market for CRIIMI MAE's
shares. As of December 31, 1992 and 1993, there were 20,183,533 shares held by
approximately 23,000 investors. The following table sets forth the high and low
closing sales prices and the dividends per share for CRIIMI MAE shares during
the periods indicated:
1992
-------------------------------
Sales Price Dividends
Quarter Ended High Low per Share
------------- ----------- ------- ---------
March 31, $ 9 1/2 $ 8 7/8 $ .27
June 30, 9 1/2 8 3/4 .27
September 30, 9 7/8 9 3/8 .27
December 31, 10 9 1/4 .27
------- ------- -----
$1.08
=====
1993
-------------------------------
Sales Price Dividends
Quarter Ended High Low per Share
------------- ----------- ------- ---------
March 31, $11 1/4 $ 9 7/8 $ .28
June 30, 11 5/8 10 3/4 .28
September 30, 12 3/8 11 1/4 .28
December 31, 12 5/8 11 .28
------- ------- -----
$1.12
=====
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Background
- ----------
CRIIMI MAE Inc. (CRIIMI MAE) (formerly CRI Insured Mortgage Association,
Inc.), an infinite-life, actively managed real estate investment trust (REIT),
is the largest REIT specializing in government insured and guaranteed mortgage
investments secured by multifamily housing complexes (Government Insured
Multifamily Mortgages) located throughout the United States. CRIIMI MAE's
principal objectives are to provide stable or growing quarterly cash
distributions to its shareholders while preserving and protecting its capital.
CRIIMI MAE seeks to achieve these objectives by investing primarily in
Government Insured Multifamily Mortgages using a combination of debt and equity
financing. CRIIMI MAE and its subsidiary, CRI Liquidating REIT, Inc. (CRI
Liquidating), are Maryland corporations.
CRIIMI MAE and CRI Liquidating were formed in 1989 to effect the merger
into CRI Liquidating (the Merger) of three federally insured mortgage funds
sponsored by C.R.I., Inc. (CRI), a Delaware corporation formed in 1974: CRI
Insured Mortgage Investments Limited Partnership (CRIIMI I); CRI Insured
Mortgage Investments II, Inc. (CRIIMI II); and CRI Insured Mortgage Investments
III Limited Partnership (CRIIMI III; and, together with CRIIMI I and CRIIMI II,
the CRIIMI Funds). The Merger was effected to provide certain potential
benefits to investors in the CRIIMI Funds, including the elimination of
unrelated business taxable income for certain tax-exempt investors, the
diversification of investments, the reduction of general overhead and
administrative costs as a percentage of assets and total income and the
simplification of tax reporting information. In the Merger, which was approved
by investors in each of the CRIIMI Funds and subsequently consummated on
November 27, 1989, investors in the CRIIMI Funds received, at their option,
shares of CRI Liquidating common stock or shares of CRIIMI MAE common stock.
Investors in the CRIIMI Funds that received shares of CRIIMI MAE common
stock became shareholders in an infinite-life, actively managed REIT having the
potential to increase the size of its portfolio and enhance the returns to its
shareholders. CRIIMI MAE shareholders retained their economic interests in the
assets of the CRIIMI Funds which were transferred to CRI Liquidating through the
issuance of one CRI Liquidating share to CRIIMI MAE for each
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
share of CRIIMI MAE common stock issued to investors in the Merger. Upon the
completion of the Merger, CRIIMI MAE held a total of 20,361,807 CRI Liquidating
shares, or approximately 67% of the issued and outstanding CRI Liquidating
shares.
Investors in the CRIIMI Funds that received shares of CRI Liquidating
common stock, as well as CRIIMI MAE, became shareholders in a finite-life,
self-liquidating REIT the assets of which consist primarily of Government
Insured Multifamily Mortgages and other assets formerly held by the CRIIMI
Funds. CRI Liquidating intends to hold, manage and dispose of its mortgage
investments in accordance with the objectives and policies of the CRIIMI Funds,
including disposing of any remaining mortgage investments by 1997 through an
orderly liquidation.
Pursuant to a Registration Rights Agreement dated November 28, 1989
between CRIIMI MAE and CRI Liquidating, CRIIMI MAE sold 3,162,500 of its CRI
Liquidating shares in an underwritten public offering which was consummated in
November 1993. As a result of such sale, CRIIMI MAE holds a total of 17,199,307
CRI Liquidating shares, or approximately 57% of CRI Liquidating's issued and
outstanding common stock. CRIIMI MAE used approximately $4.9 million of the
approximately $26.5 million in net proceeds to terminate a 9.23% interest rate
swap agreement on $25 million of CRIIMI MAE's existing indebtedness and used the
remaining net proceeds to purchase Government Insured Multifamily Mortgages.
CRIIMI MAE and CRI Liquidating are governed by a board of directors, a
majority of whom are independent directors with extensive industry related
experience. The Board of Directors of CRIIMI MAE and CRI Liquidating has
engaged CRI Insured Mortgage Associates Adviser Limited Partnership (the
Adviser) to act in the capacity of adviser to CRIIMI MAE and CRI Liquidating.
The Adviser's general partner is CRI and its operations are conducted by CRI's
employees. CRIIMI MAE's and CRI Liquidating's executive officers are senior
executive officers of CRI. The Adviser manages CRIIMI MAE's portfolio of
Government Insured Multifamily Mortgages and other assets with the goal of
maximizing CRIIMI MAE's value, and conducts CRIIMI MAE's day-to-day operations.
Under an advisory agreement between CRIIMI MAE and the Adviser, the Adviser and
its affiliates receive certain fees and expense reimbursements.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
CRIIMI MAE Investments
- ----------------------
CRIIMI MAE's investment policies, which are overseen by the CRIIMI MAE
Board of Directors, are intended to foster its objectives of providing stable or
growing quarterly cash distributions to its shareholders while preserving and
protecting its capital. CRIIMI MAE seeks to achieve these objectives by
investing primarily in Government Insured Multifamily Mortgages issued or sold
pursuant to programs sponsored by the Federal Housing Administration (FHA) and
the Government National Mortgage Association (GNMA). CRIIMI MAE's sources of
capital include borrowings, principal distributions received on its CRI
Liquidating shares, principal proceeds of CRIIMI MAE mortgage dispositions and
proceeds from equity offerings.
As of December 31, 1992 and 1993, CRIIMI MAE directly owned 60 and 126
Government Insured Multifamily Mortgages, respectively, which had a weighted
average effective interest rate of approximately 10.1% and 8.52%, a weighted
average remaining term of approximately 31 years and 34 years, and a tax basis
of approximately $226 million and $499 million, respectively.
As of December 31, 1992 and 1993, CRIIMI MAE indirectly owned through its
subsidiary, CRI Liquidating, 73 and 63 Government Insured Multifamily Mortgages,
respectively, which had a weighted average effective interest rate of
approximately 9.91% and 10.03%, a weighted average remaining term of
approximately 28 years and 27 years, and a tax basis of approximately $221
million and $173 million, respectively.
Thus, on a consolidated basis, as of December 31, 1992 and 1993, CRIIMI
MAE owned, directly or indirectly, 133 and 189 Government Insured Multifamily
Mortgages, respectively. These consolidated mortgage investments (including
Mortgages Held for Disposition) had a weighted average effective interest rate
of approximately 9.98%, a weighted average remaining term of approximately 29
years and a tax basis of approximately $447 million, as of December 31, 1992.
These amounts compare to a weighted average effective interest rate of
approximately 8.95%, a weighted average remaining term of approximately 32 years
and a tax basis of approximately $672 million, as of December 31, 1993. In
addition, as of December 31, 1993, CRIIMI MAE had committed
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
approximately $41 million for investment in Government Insured Multifamily
Mortgages or advances on FHA-Insured Loans (defined below) relating to the
construction or rehabilitation of multifamily housing projects, including
nursing homes and intermediate care facilities (Government Insured Construction
Mortgages), to be funded by borrowings under the Commercial Paper Facility and
the remaining funds available under the Master Repurchase Agreements, as defined
below in "Liquidity-Corporate Borrowings".
In connection with CRI Liquidating's business plan which calls for an
orderly liquidation of approximately 25% of its December 31, 1993 portfolio
balance each year through 1997, on February 10, 1994, CRI Liquidating sold
twelve Government Insured Multifamily Mortgages resulting in net sales proceeds
of approximately $48.7 million. As of the date of the sale, these twelve
Government Insured Multifamily Mortgages had a weighted average effective
interest rate of approximately 10.3%, a weighted average remaining term of
approximately 28 years and a tax basis of approximately $34 million. This sale
is expected to result in financial statement and tax basis gains of
approximately $11.7 million and $14.7 million, respectively.
As discussed below, CRIIMI MAE is permitted to make direct investments in
primarily two categories of Government Insured Multifamily Mortgages at, near,
or above par value (Near Par or Premium Mortgage Investments).
FHA-Insured Loans--The first category of Near Par or Premium Mortgage
Investments in which CRIIMI MAE is permitted to invest consists of Government
Insured Multifamily Mortgages insured by FHA pursuant to provisions of the
National Housing Act (FHA-Insured Loans). All of the FHA-Insured Loans in which
CRIIMI MAE invests are insured by HUD for effectively 99% of their current face
value. As part of its investment strategy, CRIIMI MAE also invests in
Government Insured Construction Mortgages which involve a two-tier financing
process in which a short-term loan covering construction costs is converted into
a permanent loan. CRIIMI MAE also becomes the holder of the permanent loan upon
conversion. The construction loan is funded in HUD-approved draws based upon the
progress of construction. The construction loans are GNMA-guaranteed or insured
by HUD. The construction loan generally
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
does not amortize during the construction period. Amortization begins upon
conversion of the construction loan into a permanent loan, which generally
occurs within a 24-month period from the initial endorsement by HUD.
Mortgage-Backed Securities--The second category of Near Par or Premium
Mortgage Investments in which CRIIMI MAE is permitted to invest consists of
federally guaranteed mortgage-backed securities or other securities backed by
Government Insured Multifamily Mortgages issued by entities other than GNMA
(Mortgage-Backed Securities) and Mortgage-Backed Securities 100% guaranteed as
to principal and interest by GNMA (GNMA Mortgage-Backed Securities). As of
December 31, 1993, all of CRIIMI MAE's mortgage investments in this category
were GNMA Mortgage-Backed Securities. The GNMA Mortgage-Backed Securities in
which CRIIMI MAE invests are backed by Government Insured Multifamily Mortgages
insured in whole by HUD, or insured by HUD and a coinsured lender under HUD
mortgage insurance programs and the coinsurance provisions of the National
Housing Act. The Mortgage-Backed Securities in which CRIIMI MAE is permitted to
invest, although none have been acquired as of December 31, 1993, are backed by
Government Insured Multifamily Mortgages which are insured in whole by HUD under
HUD mortgage insurance programs.
Generally, Government Insured Multifamily Mortgages which are purchased
near, at or above par value will result in a loss if the mortgage investment is
prepaid or assigned prior to maturity because the amortized cost of the mortgage
investment, including acquisition costs, is approximately the same as or
slightly higher than the insured amount of the mortgage investment. As of
December 31, 1993, substantially all of the mortgage investments owned directly
by CRIIMI MAE consisted of Government Insured Multifamily Mortgages that are
Near Par or Premium Mortgage Investments. Based on current interest rates, the
Adviser does not believe that the prepayment, assignment, or sale of any of
CRIIMI MAE's Government Insured Multifamily Mortgages would result in a material
financial statement or tax basis gain or loss.
CRI Liquidating Mortgage Investments--CRI Liquidating's mortgage
investments consist solely of the Government Insured Multifamily Mortgages it
acquired from the CRIIMI Funds in the Merger. The CRIIMI Funds invested
primarily in Government Insured
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Multifamily Mortgages issued or sold pursuant to programs of GNMA and FHA.
The majority of CRI Liquidating's mortgage investments were acquired by
the CRIIMI Funds at a discount to face value (Discount Mortgage Investments) on
the belief that based on economic, market, legal and other factors, such
Discount Mortgage Investments might be sold for cash, prepaid as a result of a
conversion to condominium housing or otherwise disposed of or refinanced in a
manner requiring prepayment or permitting other profitable disposition three to
twelve years after acquisition by the CRIIMI Funds. Based on current interest
rates, the Adviser expects that (i) the disposition of most of CRI Liquidating's
Government Insured Multifamily Mortgages will result in a gain on a financial
statement basis, and (ii) the disposition of any of CRI Liquidating's Government
Insured Multifamily Mortgages will not result in a material loss on a financial
statement basis and will result in a gain on a tax basis.
Other CRIIMI MAE Mortgage Investments--In addition to investing in
FHA-Insured Loans and GNMA-Mortgage Backed Securities, CRIIMI MAE's investment
policies also permit CRIIMI MAE to invest in Government Insured Multifamily
Mortgages which are not FHA-insured or GNMA-guaranteed (Other Insured Mortgages)
and in certain other mortgage investments which are not federally insured or
guaranteed (Other Multifamily Mortgages). Pursuant to CRIIMI MAE's policy, at
the time of their acquisition, Other Multifamily Mortgages must have an expected
yield of at least 150 basis points (1.5%) greater than the yield on Government
Insured Multifamily Mortgages which could be acquired in the then current market
and must meet certain other strict underwriting guidelines. The CRIIMI MAE Board
of Directors has adopted a policy limiting Other Multifamily Mortgages to 20% of
CRIIMI MAE's total consolidated assets. As of December 31, 1993, CRIIMI MAE had
not invested or committed to invest in any Other Insured Mortgages or Other
Multifamily Mortgages and CRIIMI MAE does not currently intend to invest in any
Other Multifamily Mortgages for at least twelve months after the filing date of
this report.
CRIIMI MAE is currently exploring opportunities in connection with the
sponsorship of securities offerings which involve the pooling of certain Other
Multifamily Mortgages to further enhance
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
potential returns to CRIIMI MAE shareholders. Such sponsorship may also include
the investment by CRIIMI MAE in the non-investment grade or unrated tranches of
mortgage pools having a high current yield. As of December 31, 1993, CRIIMI MAE
had not participated in the sponsorship of any such securities offerings. The
Adviser does not expect that investments of this nature will exceed 5% of CRIIMI
MAE's total consolidated assets for at least twelve months after the filing date
of this report.
Investment in Insured Mortgage Funds and Advisory Partnership--On
September 6, 1991, CRIIMI MAE, through its wholly owned subsidiary CRIIMI, Inc.,
acquired from Integrated Resources, Inc. all of the general partnership
interests in four publicly held limited partnerships known as the American
Insured Mortgage Investors Funds (the AIM Funds). The AIM Funds own mortgage
investments which are substantially similar to those owned by CRIIMI MAE and CRI
Liquidating. CRIIMI, Inc. receives the general partner's share of income, loss
and distributions (which ranges among the AIM Funds from 2.9% to 4.9%) from each
of the AIM Funds. In addition, CRIIMI MAE owns indirectly a limited partnership
interest in the adviser to the AIM Funds in respect of which CRIIMI MAE receives
a guaranteed return each year.
Acquisitions
- ------------
During 1993, CRIIMI MAE directly acquired 61 Government Insured
Multifamily Mortgages with an aggregate purchase price of approximately $284
million at purchase prices ranging from $0.5 million to $30.8 million, with a
weighted average effective interest rate of approximately 7.56% and a weighted
average remaining term of approximately 33.4 years. In addition, during 1993,
CRIIMI MAE funded advances of approximately $29 million on Government Insured
Construction Mortgages with a weighted average effective interest rate of
approximately 8.73%. As of December 31, 1993, CRIIMI MAE had committed to
acquire additional Government Insured Multifamily Mortgages and to make
additional advances on and/or acquire Government Insured Construction Mortgages,
totalling approximately $41 million.
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
During 1993, CRIIMI MAE, and, during each of 1992 and 1993, CRI
Liquidating entered into transactions in which mortgage-backed and other
government agency securities were purchased. These transactions provided CRIIMI
MAE with above average returns compared to its other short-term investments
while maintaining the high quality of its assets and assisted in maintaining CRI
Liquidating's REIT status. Some of these purchases were financed with
borrowings which were nonrecourse and fully secured with the purchased
mortgage-backed and other government agency securities. As of December 31, 1993,
CRIIMI MAE and as of December 31, 1992 and 1993, CRI Liquidating had disposed of
the mortgage-backed and other government agency securities acquired in such year
and repaid the related debt.
Dispositions
- ------------
Dispositions result from prepayments of, defaults on and sales of
Government Insured Multifamily Mortgages. Decreases in market interest rates
could result in the prepayment of certain mortgage investments. CRIIMI MAE
believes, however, that declining interest rates result in increased prepayments
of single-family mortgages to a greater extent than mortgages on multifamily
properties. This is partially due to lockouts (i.e. prepayment prohibitions),
prepayment penalties or difficulties in obtaining refinancing for multifamily
dwellings. However, because of the current low interest rates and HUD's current
strategy of encouraging mortgagors to refinance high interest rate loans, CRIIMI
MAE may experience increased prepayment levels as compared to prior years.
Decreases in occupancy levels, rental rates or value of any property
underlying a mortgage investment may result in the mortgagor being unable or
unwilling to make required payments on the mortgage and thereby defaulting. The
proceeds from the assignment (following a default) or prepayment of a Discount
Mortgage Investment are expected to exceed the amortized cost of the investment.
The proceeds from the assignment or prepayment of a Near Par or Premium Mortgage
Investment may be slightly less than, the same as, or slightly more than, the
amortized cost of the investment. The proceeds from the sale of any mortgage
investment, whether a Discount Mortgage Investment or a Near Par or Premium
Mortgage Investment may be slightly less than, the same
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
as, or more than the amortized cost of the investment depending on interest
rates at the time of sale.
On an amortized cost and tax basis, substantially all of CRIIMI MAE's
mortgages are Near Par or Premium Mortgage Investments. Therefore, the proceeds
from a default or prepayment of any of CRIIMI MAE's mortgage investments are
expected to be slightly less than, the same as, or slightly more than the
amortized cost and tax basis of such mortgages.
On an amortized cost basis, as of December 31, 1993, approximately 91% of
CRI Liquidating's mortgages were Discount Mortgage Investments and approximately
9% were Near Par or Premium Mortgage Investments. On a tax basis, all of CRI
Liquidating's mortgages were Discount Mortgage Investments. Therefore, whether
by default or prepayment, the proceeds from the disposition of CRI Liquidating's
mortgage investments would, for a majority of such mortgages, be expected to
exceed the tax basis of such mortgages. However, on an amortized cost basis, the
proceeds from a default on, or prepayment of CRI Liquidating's Near Par or
Premium Mortgage Investments would be expected to be slightly less than, the
same as, or slightly more than the amortized cost.
While it is not expected that CRIIMI MAE will sell any of its mortgage
investments, CRI Liquidating's business plan calls for an orderly liquidation of
approximately 25% of its December 31, 1993 portfolio balance per year through
1997. Therefore, to the extent mortgage investments are not otherwise disposed
of, CRI Liquidating intends to sell a substantial portion of its portfolio as is
necessary to effect its liquidation plan.
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Historical Dispositions
- -----------------------
The following table sets forth certain information concerning dispositions
of Government Insured Multifamily Mortgages by CRIIMI MAE and CRI Liquidating
for the past five years:
Net Gain/(Loss)
Recognized for Net Gain/(Loss)
Financial Recognized
Type of Dispositions Statement For Tax
Year Assignment(1) Sale Prepayment Total Purposes Purposes(3)
- ---- ------------- ---- ---------- ----- --------------- ---------------
1989-CRI Liq. 5 1 1 7 $ 2,957,598 $ 2,977,188
CRIIMI MAE -- -- -- -- -- --
1990-CRI Liq. 6 -- -- 6 3,853,503 8,005,092
CRIIMI MAE 2 -- -- 2 (59,338) (59,338)
1991-CRI Liq. 8 19 -- 27 4,481,534 12,706,737
CRIIMI MAE 5 1 -- 6 (433,648) (310,089)
1992-CRI Liq. 3 -- -- 3 6,097,102 11,202,237
CRIIMI MAE 4 -- -- 4 (363,957) (118,498)
1993-CRI Liq. 2 5 3 10 8,089,840 14,938,128
CRIIMI MAE 2 -- 5 7 (732,095) (650,339)
---- ---- ---- ---- ---------- ----------
37(2) 26 9 72 $23,890,539 $48,691,118
==== ==== ==== ==== ========== ==========
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
(1) CRIIMI MAE or CRI Liquidating may elect to receive insurance benefits in
the form of cash when a Government Insured Multifamily Mortgage defaults.
In that event, 90% of the face value of the mortgage generally is received
within approximately 90 days of assignment of the mortgage to HUD and 9%
of the face value of the mortgage is received upon final processing by HUD
which may not occur in the same year as assignment. If CRIIMI MAE or CRI
Liquidating elects to receive insurance benefits in the form of HUD
debentures, 99% of the face value of the mortgage is received upon final
processing by HUD. Gains from dispositions are recognized upon receipt of
funds or HUD debentures and losses generally are recognized at the time of
assignment.
(2) Eight of the 37 assignments were sales of Government Insured Multifamily
Mortgages then in default and resulted in the CRIIMI Funds, CRI
Liquidating or CRIIMI MAE receiving near or above face value.
(3) In connection with the Merger, CRI Liquidating recorded its investment in
mortgages at the lower of cost or fair value, which resulted in an overall
net write down for tax purposes. For financial statement purposes,
carryover basis of accounting was used. Therefore, since the Merger, the
net gain for tax purposes was greater than the net gain recognized for
financial statement purposes. As a REIT, dividends to shareholders are
based on tax basis income.
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Liquidity
- ---------
CRIIMI MAE and CRI Liquidating closely monitor their cash flow and
liquidity positions in an effort to ensure that sufficient cash is available for
operations and debt service requirements and to continue to qualify as REITs.
CRIIMI MAE and CRI Liquidating's cash receipts, which have been derived from
scheduled payments of outstanding principal of and interest on, and proceeds
from dispositions of, mortgage investments held by CRIIMI MAE and CRI
Liquidating, plus cash receipts from interest on temporary investments,
borrowings, cash received from CRIIMI MAE's interests in the AIM Funds and
advisory partnership, and cash received from CRI Liquidating's investment in
limited partnerships (Participations), were sufficient for the years 1991, 1992
and 1993 to meet operating, investing and financing cash requirements. It is
anticipated that cash receipts will be sufficient in future years to meet
similar cash requirements. Cash flow was also sufficient to provide for the
payment of dividends to shareholders. As of December 31, 1993, there were no
significant commitments for capital expenditures; however, as of such date,
CRIIMI MAE had committed to fund additional Government Insured Construction
Mortgages and acquire additional Government Insured Multifamily Mortgages
totaling approximately $41.0 million.
Dividends -- During 1993, CRIIMI MAE increased its quarterly dividend to
$0.28 per share. Dividends totaled $1.12 per share for 1993. During the twelve
consecutive quarters before 1993, CRIIMI MAE paid dividends of $0.27 per share.
CRIIMI MAE's objective is to pay a stable quarterly dividend and to increase the
tax basis income over time, and thereby increase the quarterly dividend.
Although CRIIMI MAE's mortgage investments yield a fixed monthly mortgage
payment once purchased, the cash dividends paid by CRIIMI MAE and by CRI
Liquidating will vary during each year due to several factors. The factors
which impact CRIIMI MAE's dividend include (i) the distributions which CRIIMI
MAE receives on its CRI Liquidating shares, (ii) the Net Positive Spreads (as
defined below) on borrowings under CRIIMI MAE's financing facilities, (iii) the
fluctuating yields on short-term debt and the rate at which CRIIMI MAE's
commercial paper rate based and London Interbank Offered Rate (LIBOR) based debt
is priced, (iv) the fluctuating yields in the short-term money market
38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
where the monthly mortgage payments received are temporarily invested prior to
the payment of quarterly dividends, (v) the yield at which principal from
scheduled monthly mortgage payments, mortgage dispositions and distributions
from the AIM Funds and from CRI Liquidating can be reinvested, (vi) variations
in the cash flow received from the AIM Funds, and (vii) changes in operating
expenses. Additionally, mortgage dispositions may increase the return to the
shareholders for a period, although neither the timing nor the amount can be
predicted.
The factors which impact CRI Liquidating's dividend include (i) yields on
CRI Liquidating's mortgage investments, (ii) the reduction in the asset base and
monthly mortgage payments due to monthly mortgage payments received or mortgage
dispositions, (iii) the fluctuating yields in the short-term money market where
the monthly mortgage payments received are temporarily invested prior to the
payment of quarterly dividends, (iv) changes in operating expenses and (v)
variations in the cash flow received from the Participations.
Asset/Liability Management -- CRIIMI MAE seeks to enhance the return to
its shareholders through the use of leverage. Nevertheless, CRIIMI MAE's use of
leverage carries with it the risk that the cost of borrowings could increase
relative to the return on its mortgage investments, which could result in
reduced net income or a net loss and thereby reduce the return to shareholders.
A key objective of asset/liability management is to reduce interest rate risk.
The Adviser continuously monitors CRIIMI MAE's outstanding borrowings in an
effort to ensure that CRIIMI MAE is making optimal use of its borrowing ability
based on market conditions and opportunities. Over the past four years, the
Adviser has reduced CRIIMI MAE's effective borrowing rate through refinancings
and new financings and the Adviser continues to evaluate opportunities to
further reduce CRIIMI MAE's borrowing costs.
CRIIMI MAE expects to continue to use leverage only to the extent that (i)
the proceeds therefrom will be used for investments such as CRIIMI MAE's current
portfolio of Government Insured Multifamily Mortgages or other high quality
assets including Other Multifamily Mortgages and Other Insured Mortgages; (ii)
the risk of adverse changes in interest rates is reduced by
39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
the use of hedging techniques such as those currently employed by CRIIMI MAE;
and (iii) the Adviser believes that after investing all funds from any specific
borrowing, a Net Positive Spread (the difference between the yield on a mortgage
investment acquired with borrowings and all incremental borrowing and operating
expenses on a tax basis associated with the acquisition of such mortgage
investment) of at least 40 basis points will be achievable.
It is CRIIMI MAE's policy to borrow only when the Net Positive Spread on
the borrowing is at least 40 basis points at inception of the borrowing. Such
policy provides that if Net Positive Spreads of at least 40 basis points are not
maintained, the annual and master servicing fees payable to the Adviser, which
are calculated as a percentage of invested assets, will be reduced so that such
fees, in basis points, equal the Net Positive Spread, in basis points. As of
December 31, 1992 and 1993, CRIIMI MAE had a Net Positive Spread of
approximately 60 and 177 basis points, respectively, on its borrowings. With
respect to approximately $300.0 million of new borrowings invested or committed
for investment during 1993, as of December 31, 1993, CRIIMI MAE had an average
Net Positive Spread of approximately 250 basis points.
CRIIMI MAE's secured financings require that its debt-to-equity ratio not
exceed 2.5:1. As of December 31, 1993, CRIIMI MAE's debt-to-equity ratio,
excluding approximately $41 million of borrowings committed for investment in
mortgages, was 2.2:1, and its debt-to-equity ratio, including such borrowings,
was 2.4:1.
40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Corporate Borrowings--The following table summarizes CRIIMI MAE's
corporate borrowings as of December 31, 1993:
As of
December 31, 1993
-----------------
Short-term debt:
Commercial Paper Facility $ 95,306,000
============
Long-term debt:
Master Repurchase Agreements $331,712,648
Bank Term Loan 52,026,400
------------
$383,739,048
Total Corporate Borrowings $479,045,048
============
CRIIMI MAE's long-term debt matures over the next three years as follows:
1994 $ 15,800,000
1995 15,800,000
1996 352,139,048
------------
Total $383,739,048
============
41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
(1) Commercial Paper Facility--The following table shows commercial paper
borrowing activity as of December 31, 1992 and 1993 and for the years then
ended:
As of December 31,
---------------------------
1992 1993
------------ ------------
Amount borrowed $186,300,000 $ 95,306,000
Weighted average interest rate
(including all borrowing and
hedging costs) 8.96% 7.84%
Year ended December 31,
---------------------------
1992 1993
------------ ------------
Maximum amount outstanding $186,300,000 $186,300,000
Average amount outstanding $179,174,236 $133,563,678
Weighted average interest rate
(including all borrowing and
hedging costs) 8.79% 8.25%
The base issuance rate for commercial paper issued under CRIIMI MAE's
commercial paper facility (the Commercial Paper Facility) ranged from 3.20% to
4.45% during the year ended December 31, 1992 and 3.15% to 3.68% during the year
ended December 31, 1993, and was 4.02% and 3.41% as of December 31, 1992 and
1993, respectively.
CRIIMI MAE's Commercial Paper Facility provides for the issuance of
commercial paper by CRI Funding Corporation, an unaffiliated special purpose
corporation, which lends the proceeds from the issuance to CRIIMI MAE. If
commercial paper is not issued, the special purpose corporation may meet its
obligation to
42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
provide financing to CRIIMI MAE by borrowing at a rate of LIBOR plus 0.50% under
a $140.0 million revolving credit facility which was established in connection
with the Commercial Paper Facility.
Borrowings pursuant to the Commercial Paper Facility are collateralized by
a pledge of certain of CRIIMI MAE's Government Insured Multifamily Mortgages.
The loan agreements contain numerous covenants which CRIIMI MAE must satisfy,
including requirements that the fair value of collateral pledged must equal at
least 110% of the amounts borrowed and that interest on the collateral pledged
equal at least 120% of the debt service on the amounts borrowed. In addition,
60% of the Government Insured Multifamily Mortgages pledged as collateral must
be GNMA-Mortgage Backed Securities. As of December 31, 1993, Government Insured
Multifamily Mortgages held directly by CRIIMI MAE with a market value and face
value of approximately $145.4 million and $139.7 million, respectively, were
used as collateral pursuant to the Commercial Paper Facility.
In February 1993, CRIIMI MAE entered into an agreement to replace a $190.0
million letter of credit which provided the credit enhancement for the
Commercial Paper Facility and related revolving credit facility, with two
letters of credit in the amount of $35.0 million and $155.0 million provided by
National Australia Bank, Limited and Canadian Imperial Bank of Commerce (CIBC),
respectively. In April 1993, the letter of credit provided by CIBC was reduced
to $105.0 million. Subsequent to December 31, 1993, the special purpose
corporation replaced borrowings under the Commercial Paper Facility with
revolving credit loans. These revolving credit loans were scheduled to mature
on January 28, 1994; however, the maturity date has been extended until February
28, 1994. CRIIMI MAE executed a Commitment Letter and Term Sheet for a
revolving credit facility, dated November 24, 1993, to replace these agreements
with a 30-month non-amortizing bank loan to be issued prior to the expiration
date of the letter of credit agreements by lenders including the aforementioned
bank group on terms substantially similar to the April 1993 Master Repurchase
Agreements (defined below). While there is no assurance, CRIIMI MAE expects to
close on such new revolving credit facility on or before February 28, 1994. If
CRIIMI MAE is unable to consummate the loan by such
43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
date, the Adviser believes that it will be able to obtain a further extension of
its existing revolving credit loans.
(2) Master Repurchase Agreements--On April 30, 1993, CRIIMI MAE entered
into master repurchase agreements (the Master Repurchase Agreements) with Nomura
Securities International, Inc. and Nomura Asset Capital Corporation
(collectively, Nomura) which provide CRIIMI MAE with $350.0 million of available
financing for a three-year term. CRIIMI MAE intends to seek renewal of the
Master Repurchase Agreements upon expiration. Interest on such borrowings is
based on the three-month LIBOR plus 0.75% or 0.50% depending on whether
FHA-Insured Loans or GNMA Mortgage-Backed Securities, respectively, are pledged
as collateral. For April through December 1993, the three-month LIBOR for these
borrowings ranged from 3.18% to 3.50%. The value of the collateral pledged must
equal at least 105% and 110% of the amounts borrowed for GNMA Mortgage-Backed
Securities and FHA-Insured Loans, respectively. No more than 60% of the
collateral pledged may be FHA-Insured Loans and no less than 40% may be GNMA
Mortgage-Backed Securities. As of December 31, 1993, mortgage investments
directly owned by CRIIMI MAE which approximate $349.4 million at market value
and $342.2 million at face value, were used as collateral pursuant to certain
terms of the Master Repurchase Agreements.
As of December 31, 1993, CRIIMI MAE used approximately $281.7 million of
the funds available under the Master Repurchase Agreements to acquire Government
Insured Multifamily Mortgages and $50.0 million to repay a portion of borrowings
under the Commercial Paper Facility. In addition, approximately $18.3 million
of the balance of the funds available have been committed for investment in
Government Insured Multifamily Mortgages or advances on Government Insured
Construction Mortgages.
On November 30, 1993, CRIIMI MAE entered into additional repurchase
agreements with Nomura pursuant to which Nomura will provide CRIIMI MAE with an
additional $150.0 million of available financing for a three-year term. The
agreements provide that the funding will be utilized to purchase FHA-Insured
Loans and GNMA Mortgage-Backed Securities in the event of the successful
completion of the Equity Offering (described below in "Other Events"). In that
event, it is contemplated that CRIIMI MAE will borrow the full $150.0 million no
earlier than the consummation of
44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
the Equity Offering, but no later than July 1, 1994. The terms of the $150.0
million financing arrangements are similar to the terms of the Master Repurchase
Agreements entered into in April 1993.
(3) Bank Term Loan--On October 23, 1991, CRIIMI MAE entered into a credit
agreement with two banks for a reducing term loan facility (the Bank Term Loan)
in an aggregate amount not to exceed $85.0 million, subject to certain terms and
conditions. In December 1992, the credit agreement was amended to increase the
reducing term loan by $15.0 million. The Bank Term Loan had an outstanding
principal balance of approximately $61.7 million and $52.0 million as of
December 31, 1992 and 1993, respectively. As of December 31, 1992 and 1993, the
Bank Term Loan was secured by the value of 17,784,000 and 13,874,000 CRI
Liquidating shares owned by CRIIMI MAE, respectively. As a result of principal
payments on the Bank Term Loan in 1993, 750,000 of the 13,874,000 CRI
Liquidating shares pledged as collateral were released in January 1994. The
Bank Term Loan requires a quarterly principal payment based on the greater of
the return of capital portion of the dividend received by CRIIMI MAE on its CRI
Liquidating shares securing the Bank Term Loan or an amount to bring the Bank
Term Loan to its scheduled outstanding balance at the end of such quarter. The
minimum amount of annual principal payments is approximately $15.8 million, with
any remaining amounts of the original $85.0 million of principal due in April
1996 and any remaining amounts of the $15.0 million of increased principal due
in December 1996.
The amended Bank Term Loan provides for an interest rate of 1.10% over
three-month LIBOR plus an agent fee of 0.05% per year. During 1992 and 1993,
three-month LIBOR for borrowings under the Bank Term Loan ranged from 3.44% to
4.50% and 3.19% to 3.59%, respectively.
Hedging -- CRIIMI MAE is subject to the risk that changes in interest rates
could reduce Net Positive Spreads by increasing CRIIMI MAE's borrowing costs
and/or decreasing the yield on its Government Insured Multifamily Mortgages. An
increase in CRIIMI MAE borrowing costs could result from an increase in
short-term interest rates. To partially limit the adverse effects of rising
interest rates, CRIIMI MAE has entered into a series of interest rate hedging
agreements in an aggregate notional amount
45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
approximately equal to all of its outstanding borrowings and commitments. To
the extent CRIIMI MAE has not fully hedged its portfolio, in periods of rising
interest rates CRIIMI MAE's overall borrowing costs would increase with little
or no overall increase in mortgage investment income, resulting in returns to
shareholders that would be lower than those available if interest rates had
remained unchanged.
Borrowings by CRIIMI MAE generally are hedged by swap, cap or collar
agreements. As of December 31, 1993, CRIIMI MAE had in place interest rate
collars on the indices underlying borrowing rates for the Commercial Paper
Facility (the CP Index) with an aggregate notional amount of $115 million, a
weighted average floor of 8.55% and a weighted average cap of 10.37%. An
interest rate collar limits the CP Index to a maximum interest rate and also
enables CRIIMI MAE to receive the benefit of a decline in the CP Index to the
floor of the collar for the period of the collar. To the extent that the CP
Index increases, CRIIMI MAE's overall borrowing costs would not increase until
the CP Index reaches the level of the floor of the collar. At that point,
CRIIMI MAE's borrowing costs would increase as the CP Index increases but only
until the CP Index reaches the maximum rate provided for by the collar.
As of December 31, 1993, CRIIMI MAE had in place interest rate caps on the
CP Index and LIBOR underlying borrowing rates for the Commercial Paper Facility
and Master Repurchase Agreements. The caps based on the CP Index have an
aggregate notional amount of $50 million and a weighted average cap of 8.73%.
The caps based on LIBOR have an aggregate notional amount of $300 million with a
weighted average cap of 6.23%. CRIIMI MAE also had an interest rate cap with a
notional amount of approximately $63 million and a cap of 6.5% on the LIBOR
underlying the Bank Term Loan. An interest rate cap effectively limits CRIIMI
MAE's interest rate risk on floating rate borrowings by limiting the CP Index or
LIBOR, as the case may be, to a maximum interest rate for the period of the cap.
To the extent the CP Index or LIBOR decrease, CRIIMI MAE's borrowing costs would
decrease under such caps. To the extent the CP Index or LIBOR increase, CRIIMI
MAE's borrowing costs would increase but only until the CP Index or LIBOR
reaches the maximum rate provided for by the cap. As of December 31, 1993,
certain cap agreements based on the three-month
46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
LIBOR with a notional amount of $300 million were between approximately 2.62%
and 3.13% above the current three-month LIBOR.
On December 1, 1993, CRIIMI MAE paid approximately $4.9 million to
terminate an interest rate swap entered into on February 8, 1990 with a notional
amount of $25 million and a fixed rate of 9.23%. The termination of this swap
was effective December 1, 1993. The cost to terminate the interest rate swap
was expensed in the accompanying consolidated statement of income for the year
ended December 31, 1993 as the underlying debt under the Commercial Paper
Facility being hedged was repaid. As of December 31, 1993, CRIIMI MAE had in
place no swap agreements.
Current interest rates are substantially lower than when CRIIMI MAE entered
into $165 million of its existing interest rate hedging agreements. As of
December 31, 1993, certain collar agreements based on the CP Index with a
notional amount of $115 million carried minimum interest rates which were
between approximately 5.0% and 5.4% above the current CP Index. Such hedging
agreements expire in 1995. While there is no assurance that any new agreements
will be made, the Adviser is actively exploring alternatives to replace these
hedging agreements when they expire in order to capitalize on the current low
interest rate environment.
As a result of minimum interest rate levels associated with the swap
agreement terminated in December, 1993 and the collar agreements which expire in
1995, CRIIMI MAE incurred additional interest expense of $4.3 million, $8.1
million and $8.6 million for the years ended December 31, 1991, 1992 and 1993,
respectively, of which approximately $0.8 million, $1.3 million and $1.4
million, respectively, was attributable to the terminated swap agreement. The
additional interest expense amounts also include amortization of approximately
$0.1 million, $0.2 million and $0.6 million, respectively, related to up-front
hedging costs.
47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
The following table sets forth information relating to CRIIMI MAE's hedging
agreements with respect to borrowings under the Commercial Paper Facility and
Master Repurchase Agreements:
Hedging Notional
Instrument Amount Effective Date Maturity Date Floor Cap Index(c)
- ---------------------- -------------- -------------------- ------------------ ------------ ------------ ---------------
Collar $ 30.0 million March 7, 1990 March 7, 1995 8.375% 10.125% CP
Collar 20.0 million March 30, 1990 March 30, 1995 8.375% 10.125% CP
Collar 30.0 million July 8, 1990 February 8, 1995 8.625% 10.625% CP
July 9, 1990 through
Accreting Collar 35.0 million December 9, 1990 July 9, 1995 8.750% 10.500% CP
Cap (a) 25.0 million May 24, 1991 May 24, 1996 N/A(a) 9.000% CP
Cap 25.0 million June 17, 1991 June 17, 1996 N/A 8.450% CP
Cap (b) 50.0 million June 25, 1993 June 25, 1998 N/A 6.50% LIBOR
Cap (b) 50.0 million July 1, 1993 June 3, 1996 N/A 6.50% LIBOR
Cap (b) 50.0 million July 20, 1993 July 20, 1998 N/A 6.25% LIBOR
Cap (b) 50.0 million August 10, 1993 August 10, 1997 N/A 6.00% LIBOR
Cap (b) 50.0 million August 27, 1993 August 27, 1997 N/A 6.125% LIBOR
Cap (b) 50.0 million November 10, 1993 November 10, 1997 N/A 6.00% LIBOR
-------------
$465.0 million
=============
(a) On May 24, 1993, CRIIMI MAE and CIBC terminated the floor on this former
collar. In consideration of such termination, CRIIMI MAE paid CIBC
approximately $2.3 million. This amount was deferred on the accompanying
consolidated balance sheet as the underlying debt being hedged is still
outstanding. This amount will be amortized for the period from May 24,
1993 through May 24, 1996. CRIIMI MAE amortized approximately $0.5 million
of this deferred amount in the accompanying consolidated statements of
income for the year ended December 31, 1993.
(b) Approximately $4.5 million of costs were incurred in 1993 in connection
with the establishment of interest rate hedges. These costs are being
amortized using the effective interest method over the term of the
interest rate hedge agreement for financial statement purposes and in
accordance with the regulations under Internal Revenue Code Section 446
with respect to notional principal contracts for tax purposes.
(c) The hedges are based either on the 30-day Commercial Paper Composite Index
(CP) or three-month LIBOR.
48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
In addition, CRIIMI MAE entered into an interest rate hedge agreement on
the Bank Term Loan to cap LIBOR at 6.5% based on the expected paydown schedule
and an incremental hedge of 10.5% on the difference between the required and
expected paydown schedules. As of December 31, 1993, three-month LIBOR was
approximately 3.13% below the 6.5% cap.
Although CRIIMI MAE expects the overall average life of its mortgage
investments to exceed ten years, CRIIMI MAE's hedging agreements range in
maturity from 3 to 10 years principally because of the limited availability and
high cost of instruments with maturities greater than 10 years. Thus, to the
extent CRIIMI MAE has not completely matched the duration of its existing
mortgages to that of its existing hedges, upon the expiration of these hedges
CRIIMI MAE would be fully exposed to the adverse effects of rising interest
rates. The Adviser continues to actively review asset/liability hedging
techniques as CRIIMI MAE's existing hedges approach their expiration dates and
to monitor the duration of its hedges relative to its assets.
A reduction in long-term interest rates could increase the level of
prepayments of CRIIMI MAE's Government Insured Multifamily Mortgages. CRIIMI
MAE's yield on mortgage investments will be reduced to the extent CRIIMI MAE
reinvests the proceeds from such prepayments in new mortgage investments with
effective rates which are below the rates of the prepaid mortgages.
In addition, the fluctuation of long-term interest rates may affect the
value of CRIIMI MAE's Government Insured Multifamily Mortgages. Although
decreases in long-term rates could increase the value of CRIIMI MAE's mortgage
investments, increases in such long-term rates could decrease the value of
CRIIMI MAE's mortgage investments and, in certain circumstances, require CRIIMI
MAE to pledge additional collateral in connection with its borrowing facilities.
This would reduce CRIIMI MAE's borrowing capacity and, in an extreme case, may
force CRIIMI MAE to liquidate a portion of its assets at a loss in order to
comply with certain covenants under its financing facilities.
CRIIMI MAE is exposed to credit loss in the event of nonperformance by the
other parties to the interest rate hedge agreements should interest rates exceed
the caps. However, the
49
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Adviser does not anticipate nonperformance by any of the counterparties, each of
which has long-term debt ratings of A or above by Standard and Poor's and A2 or
above by Moody's.
Cash Flow--1993 versus 1992
- ---------------------------
Net cash provided by operating activities increased for 1993 as compared to
1992 principally due to an increase in mortgage investment income partially
offset by an increase in interest expense due primarily to mortgage acquisition
activity in 1993 funded by proceeds from financings. Also contributing to the
increase in cash provided by operating activities was an increase in accounts
payable and accrued expenses attributable to the accrued costs incurred by
CRIIMI MAE with respect to its Equity Offering of common stock, as described
below in "Other Events". Partially offsetting the increase in net cash provided
by operating activities for 1993 was the payment of approximately $4.9 million
to terminate an interest rate swap agreement and an increase in interest expense
due primarily to mortgage acquisition activity in 1993 funded by proceeds from
financings.
Net cash used by investing activities increased for 1993 as compared to
1992. This increase was principally due to the acquisition of Government Insured
Multifamily Mortgages and advances on Government Insured Construction Mortgages
of approximately $312.7 million in 1993 as compared to $31.8 million in 1992.
Also contributing to the increase in cash used by investing activities was the
acquisition of other short-term investments of approximately $175.3 million in
1993 as compared to approximately $66.8 million in 1992. In addition, proceeds
of approximately $6.1 million were received during 1993 related to the sale of
HUD debentures, as compared to the receipt of proceeds of approximately $2.3
million during the same period in 1992 related to the redemption of HUD
debentures. Partially offsetting the increase in net cash used by investing
activities was the receipt of approximately $167.1 million from the disposition
of other short-term investments and proceeds from mortgage dispositions of
approximately $93.4 million in 1993 as compared to approximately $65.5 million
and $50.4 million, respectively, in 1992.
50
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Net cash provided by financing activities increased for 1993 compared to
1992. This increase was primarily due to the receipt of net proceeds of
approximately $331.7 million from the Master Repurchase Agreements,
approximately $115.6 million from the financing of other short-term investments
and approximately $15.0 million from an expansion of CRIIMI MAE's Bank Term
Loan, partially offset by payments on short-term and long-term debt, a paydown
of borrowings of commercial paper and the payment of deferred financing costs.
Cash Flow--1992 versus 1991
- ---------------------------
Net cash provided by operating activities increased for 1992 as compared to
1991 principally due to an increase in interest payable and a decrease in
receivables and other assets compared to 1991 partially offset by a decrease in
accounts payable and accrued expenses. The increase in interest payable for
1992 compared to 1991 is due to the payment in 1991 of approximately $3.0
million in interest accrued as of December 31, 1990. The decrease in
receivables and other assets was attributable to the collection of the accrued
interest on a mortgage which defaulted in the second half of 1991. The decrease
in accounts payable and accrued expenses was due to the payment of acquisition
costs incurred and accrued with respect to the acquisition of the AIM Funds in
1991.
Net cash provided by investing activities decreased for 1992 as compared to
1991. This decrease resulted principally from the disposition in 1992 by CRIIMI
MAE and CRI Liquidating of five Government Insured Multifamily Mortgages and the
remaining 9% of two previously disposed Government Insured Multifamily Mortgages
resulting in disposition proceeds aggregating approximately $50.4 million. This
compares to 33 mortgage dispositions during 1991 resulting in disposition
proceeds of approximately $119.0 million. Also during 1992, cash of
approximately $65.5 million and approximately $2.3 million was received from the
sale of other short-term investments and the redemption of HUD debentures,
respectively. However, this was offset by the purchase of other short-term
investments in 1992. During 1991, CRIIMI MAE and CRIIMI, Inc. paid a total of
approximately $24.4 million to acquire interests in the AIM Funds and the
limited partnership that serves as their adviser. In addition, CRIIMI MAE paid
51
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
approximately $3.7 million during 1991 for costs associated with this
acquisition. This acquisition was principally funded with the proceeds from the
sale of Government Insured Multifamily Mortgages.
Net cash used in financing activities decreased for 1992 as compared to
1991. This decrease was primarily due to approximately $97.6 million paid in
1991 for the early extinguishment of long-term debt and the purchase of
approximately $21.6 million in U.S. Treasury Securities in connection with the
defeasance of long-term debt which occurred in 1991, partially offset by $85.0
million in proceeds received in 1991 from the refinancing. This decrease was
also offset by an increase in principal payments on long-term debt from
approximately $13.3 million during 1991 to $23.3 million in 1992.
Results of Operations
- ---------------------
1993 versus 1992
- ----------------
CRIIMI MAE earned approximately $23.0 million in tax basis income for 1993,
a 6.4% increase from approximately $21.6 million for 1992. On a per share basis,
tax basis income for 1993 increased to approximately $1.14 per share from
approximately $1.07 per share for 1992.
Net income for financial statement purposes was approximately $15.8 million
for 1993, a 1.8% decrease from approximately $16.0 million for 1992. On a per
share basis, financial statement net income for 1993 decreased to approximately
$0.78 per share from $0.79 per share for 1992.
Mortgage investment income increased $4.4 million or 9.4% to $50.3 million
for 1993 from $45.9 million for 1992. This increase was due principally to an
increase in mortgage investments, net of dispositions, resulting from
acquisitions and advances on Government Insured Construction Mortgages during
1993 which were funded principally by proceeds from the Master Repurchase
Agreements.
52
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Other income increased $1.4 million or 30.0% to $6.2 million for 1993 from
$4.8 million for 1992. This increase was attributable primarily to approximately
$175 million in other short-term investments acquired by CRIIMI MAE and CRI
Liquidating during 1993, all of which were disposed of by December 31, 1993 as
compared to approximately $67 million in other short-term investments acquired
by CRI Liquidating during 1992, all of which were disposed of by December 31,
1992.
Total income increased $5.8 million or 11.3% to $56.5 million for 1993 from
$50.7 million for 1992. This increase was primarily due to the growth in
mortgage investment income and other income during 1993.
Interest expense increased $3.6 million or 14.8% to $28.0 million for 1993
from $24.4 million for 1992. This increase was principally a result of greater
amounts borrowed during 1993 under the Master Repurchase Agreements entered into
in April 1993 which provided financing of $350 million, of which approximately
$331.7 million was outstanding as of December 31, 1993. This increase was
partially offset by a reduction in interest rates on CRIIMI MAE's borrowings for
1993 as compared to 1992.
In December 1993, CRIIMI MAE paid approximately $4.9 million to CIBC to
terminate an interest rate swap entered into on February 8, 1990 with a notional
amount of $25 million and a fixed rate of 9.23%. The termination of this swap
was effective December 1, 1993.
Other operating expenses increased $1.1 million or 32.4% to $4.6 million in
1993 from $3.5 million in 1992. This increase was attributable primarily to
legal fees incurred in connection with certain litigation as described below in
"Other Events." Also contributing to the increase in other operating expenses
was an increase in general and administrative expenses due primarily to
increased mortgage acquisition and disposition activities, the increase in costs
to produce CRIIMI MAE's 1992 Annual Report to Shareholders due to its increased
size and mailing costs, and the recognition of costs incurred in connection with
CRIIMI MAE's reincorporation as a Maryland corporation which was effective in
July 1993.
53
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Fees to related party are comprised of annual fees and incentive fees paid
to the Adviser. The Adviser receives annual fees for managing the portfolios of
CRIIMI MAE and CRI Liquidating. These fees include a base component equal to a
percentage of average invested assets. In addition, fees paid to the Adviser by
CRI Liquidating may include a performance based component that is referred to as
the deferred component. The deferred component, which is also calculated as a
percentage of average invested assets, is computed each quarter but paid (and
expensed) only upon meeting certain cumulative performance goals. If these goals
are not met, the deferred component accumulates, and may be paid in the future
if cumulative goals are met. In addition, certain incentive fees are paid by
CRIIMI MAE and CRI Liquidating on a current basis if certain performance goals
are met.
Fees to related party increased $0.5 million or 21.3% to $2.7 million for
1993 from $2.2 million for 1992. This increase was due primarily to an increase
in annual fees and incentive fees during 1993, as discussed below. Annual fees
increased $0.4 million or 20.6% to $2.5 million for 1993 from $2.1 million for
1992. This increase was primarily due to increased CRIIMI MAE mortgage assets,
including advances on Government Insured Construction Mortgages. Also
contributing to the increase for 1993 was the payment by CRI Liquidating in
1993, of the deferred component of the annual fee due to specific performance
goals being met, which included the payment of the deferred component for the
second half of 1992. Partially offsetting the increase in annual fees for 1993
was a reduction in the mortgage base, which is a component used in determining
the annual fees payable by CRI Liquidating. The mortgage base has been
decreasing as CRI Liquidating effects its business plan to liquidate by 1997.
The CRIIMI MAE incentive fee is equal to 25% of the amount by which net
income from additional mortgage investments exceeds the annual target return on
equity and is payable quarterly, subject to year-end adjustment. The incentive
fee increased approximately $50,000 or 30.6% to $0.2 million for 1993 from $0.2
million for 1992. This increase was primarily attributable to the fact that
CRIIMI MAE's net income from additional mortgage investments exceeded the annual
target return on equity during both the second and third quarters of 1993;
accordingly, an incentive fee was paid
54
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
during those quarters. This compares to 1992 when CRIIMI MAE's net income from
additional mortgage investments exceeded the annual target return on equity only
in the third quarter.
During 1993, CRIIMI MAE recorded a provision of $1.5 million, including
$0.25 million paid in cash, in connection with the settlement of the litigation
described below in "Other Events."
Total expenses increased $11.7 million or 38.6% to $41.8 million for 1993
from $30.1 million for 1992. This increase was principally due to costs incurred
to terminate an interest rate swap, an increase in interest expense and the
recognition of a provision for settlement of litigation described below in
"Other Events".
Net gains on mortgage dispositions increased $1.7 million or 28.3% to $7.4
million in 1993 from $5.7 million in 1992. Gains or losses on mortgage
dispositions are based on the number, carrying amounts, and proceeds of mortgage
investments disposed of during the period. Gains on mortgage dispositions
increased $2.0 million or 32.7% to $8.1 million in 1993 from $6.1 million in
1992. This increase was primarily due to the disposition of 17 mortgages during
1993, 11 of which resulted in gains. This compares to the disposition of seven
mortgages during 1992, three of which resulted in gains. Losses on mortgage
dispositions increased $0.4 million or 98.4% to $0.8 million in 1993 from $0.4
million in 1992 due to the financial statement loss of $0.5 million recognized
in March 1993 as a result of the prepayment of the mortgage on Owings Manor
Apartments.
In November 1993, CRIIMI MAE recognized a financial statement gain of
approximately $3.3 million and a tax basis gain of approximately $4.9 million in
connection with the sale of 3,162,500 CRI Liquidating shares held by CRIIMI MAE.
1992 versus 1991
- ----------------
CRIIMI MAE earned approximately $21.6 million in tax basis income for 1992,
a 1.9% decrease from approximately $22.0 million for 1991. On a per share basis,
tax basis income for 1992 decreased to approximately $1.07 per share from
approximately $1.09 per share for 1991.
55
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Net income for financial statement purposes was approximately $16.0 million
for 1992, a 78.2% increase from approximately $9.0 million for 1991. On a per
share basis, financial statement net income for 1992 increased to approximately
$0.79 per share from $0.45 per share for 1991.
Mortgage investment income decreased $3.4 million or 6.9% to $45.9 million
for 1992 from $49.3 million for 1991. This decrease was due principally to the
mortgage dispositions during 1992 and 1991.
Other income decreased $.2 million or 4.5% to $4.8 million for 1992 from
$5.0 million for 1991. This decrease was primarily attributable to lower
interest rates available for short-term investments during 1992 and the
elimination on December 31, 1991, of the debt service reserve for certain notes
payable, which reserve was previously invested in short-term investments.
Partially offsetting this decrease was the interest earned on other short-term
investments purchased by CRI Liquidating in April, July and August 1992, net of
monthly option fees. In addition, this decrease in income was partially offset
by an increase in income from investments in the AIM Funds and the related
advisory partnership which were acquired in September 1991.
Total income decreased $3.6 million or 6.7% to $50.7 million for 1992 from
$54.3 million for 1991. This decrease was primarily due to a reduction in
mortgage investment income and partially offset by an increase in other income
during 1992.
Interest expense decreased $1.4 million or 5.4% to $24.4 million for 1992
from $25.8 million for 1991. This decrease was principally a result of a
reduction in both the amount of long-term debt outstanding and the interest rate
thereon resulting from the refinancing on December 31, 1991 of notes payable.
This decrease in interest expense on long-term debt was partially offset by an
increase in interest paid or accrued on borrowings under CRIIMI MAE's Commercial
Paper Facility as greater amounts were borrowed during 1992 and an increase in
interest expense attributable to the seller financing of 99% of the purchase
price of certain other short-term investments purchased by CRI Liquidating in
July and August 1992.
56
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Other operating expenses decreased $.3 million or 6.6% to $3.5 million in
1992 from $3.8 million in 1991. This decrease was attributable primarily to a
decrease in the amortization of deferred costs resulting from the mortgage
dispositions and the related reduction in the amount of capitalized deferred
costs which occurred during 1992 and 1991.
Fees to related party decreased $87,000 or 3.7% to $2.2 million in 1992
from $2.3 million in 1991. This decrease was due primarily to the reduction of
CRI Liquidating's portfolio as a result of mortgage dispositions. Also
contributing to this decrease was a reduction in the deferred component of the
Adviser's annual fee paid in 1992 as a result of certain performance goals that
were met for only two quarters in 1992 compared to all quarters in 1991.
Partially offsetting this decrease was an increase in the annual base component
resulting from CRIIMI MAE mortgage acquisitions.
Net gains on mortgage dispositions increased $1.7 million or 41.6% to $5.7
million in 1992 from $4.0 million in 1991. This increase was principally due to
the disposition, in 1992, of CRI Liquidating's investment in a mortgage which
resulted in the recognition of a gain in 1992 totalling approximately $5.9
million. This compares to the disposition of 13 Government Insured Multifamily
Mortgages during 1991 which resulted in gains totalling approximately $5.2
million.
CRI Liquidating's Government Insured Multifamily Mortgages have a different
tax basis than book basis because the Merger, while a taxable event, was treated
in a manner similar to a pooling of interests for financial accounting purposes.
Although some of the mortgage dispositions during 1992 resulted in a loss for
financial statement purposes, the combined dispositions resulted in a net tax
basis gain totalling approximately $11.1 million.
During 1992, two properties in which CRI Liquidating holds Participations
experienced operating results insufficient to pay debt service and the annual
return on such Participations. CRI Liquidating recognized a loss of
approximately $0.7 million with respect to the write-off of one of these
Participations.
57
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
In addition to the items discussed above, net income for 1992 increased
from 1991 due, in part, to the recognition of an extraordinary loss of
approximately $6.6 million in 1991 resulting from the refinancing of certain
notes payable. All other costs associated with the refinancing have been
included in deferred financing fees on the balance sheet and are being amortized
on the effective interest method over the term of the refinancing. However, for
tax purposes these deferred financing fees as well as the extraordinary loss
have been capitalized and are being amortized over the term of the refinancing.
REIT Status
- -----------
CRIIMI MAE and CRI Liquidating have qualified and intend to continue to
qualify as REITs as defined in the Internal Revenue Code and, as such, will not
be taxed on that portion of their taxable income which is distributed to
shareholders provided that at least 95% of such taxable income is distributed.
CRIIMI MAE and CRI Liquidating intend to distribute substantially all of their
taxable income and, accordingly, no provision for income taxes has been made in
the accompanying consolidated financial statements. CRIIMI MAE and CRI
Liquidating, however, may be subject to tax at normal corporate rates on net
income or capital gains not distributed.
Other Events
- ------------
On March 22, 1990, a complaint was filed, on behalf of a class comprised of
certain limited partners of CRIIMI III and shareholders of CRIIMI II (the
Plaintiffs), in the Circuit Court for Montgomery County, Maryland against CRIIMI
MAE, CRI Liquidating, CRIIMI I and its general partner, CRIIMI II, CRIIMI III
and its general partner, CRI and William B. Dockser, H. William Willoughby and
Martin C. Schwartzberg (the Defendants). On November 18, 1993, the Court entered
an order granting final approval of a settlement agreement between the
Plaintiffs and the Defendants pursuant to which CRIIMI MAE will issue to class
members, including certain former limited partners of CRIIMI I, up to 2.5
million warrants, exercisable for 18 months after issuance, to purchase shares
of CRIIMI MAE common stock at an exercise price of $13.17 per share. In
addition, the settlement included a payment of $1.4 million for settlement
administration costs and
58
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
the Plaintiff's attorneys' fees and expenses. Insurance provided $1.15 million
of the $1.4 million cash payment, with the balance paid by CRIIMI MAE. CRIIMI
MAE accrued a total provision of $1.5 million in the accompanying consolidated
statements of income for the uninsured portion of the cash settlement paid by
CRIIMI MAE and for the estimated value of the warrants that are expected to be
issued as part of the settlement. The number of warrants to be issued is
dependent on the number of class members who submit a proof of claim within 60
days of January 14, 1994 (the date the proof of claim was mailed by CRIIMI MAE).
The issuance of the warrants pursuant to the settlement agreement will have
no impact on CRIIMI MAE's tax basis income. Depending upon the number of
warrants issued, CRIIMI MAE will record in its financial statements a non-cash
expense ranging from $0 (if no warrants are issued) to $5 million (if all 2.5
million warrants are issued). Based on the Adviser's estimate of the number of
warrants to be issued, CRIIMI MAE has accrued a total provision of $1.5 million
(which includes the uninsured portion of the cash settlement) in the
accompanying consolidated statement of income for 1993, which provision may be
increased or decreased once the actual number of warrants issued is known. The
Adviser estimates that the final charge (after adjustments to the provision) to
net income and the increase in the number of shares of common stock outstanding
as a result of the exercise of the warrants will not have a material adverse
effect on CRIIMI MAE's net income and net income per share. The exercise of the
warrants will not result in a charge to CRIIMI MAE's tax basis income. Further,
the Adviser believes that the exercise of the warrants will not have a material
adverse effect on CRIIMI MAE's tax basis income per share or annualized cash
dividends per share because CRIIMI MAE intends to invest the proceeds from any
exercise of the warrants in accordance with its investment policy to purchase
Government Insured Multifamily Mortgages and other authorized investments.
However, in the case of a significant decline in the yield on mortgage
investments and a significant decrease in the Net Positive Spread which CRIIMI
MAE could achieve on its borrowings, t