<Page> CLARION COMMERCIAL HOLDINGS, INC. FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 Commission File Number: 1-14167 CLARION COMMERCIAL HOLDINGS, INC. (Exact name of registrant as specified in its charter) Maryland 13-3988895 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 335 Madison Avenue, 10017 New York, New York - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (Registrant's telephone number including area code): (212) 883-2500 NOT APPLICABLE (Former name, former address, and former fiscal year if changed since last report) 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 ( ) As of August 13, 2001, 4,078,393 shares of Class A Common Stock ($.001 par value) were outstanding. <Page> CLARION COMMERCIAL HOLDINGS, INC. FORM 10-Q INDEX PART I FINANCIAL INFORMATION........................................................................3 Item 1: Financial Statements......................................................................3 Consolidated Statements of Financial Condition/Net Assets..........................................3 Consolidated Statements of Operations..............................................................4 Consolidated Statement of Changes in Stockholders' Equity/Net Assets...............................5 Consolidated Statements of Cash Flows..............................................................6 NOTES TO FINANCIAL STATEMENTS......................................................................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......11 Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................15 PART II - OTHER INFORMATION.............................................................................15 Item 1. Legal Proceedings............................................................................15 Item 2. Changes in Securities and Use of Proceeds....................................................15 Item 3. Defaults Upon Senior Securities..............................................................15 Item 4. Submission of Matters to a Vote of Security Holders..........................................15 Item 5. Other Information............................................................................15 Item 6. Exhibits and Reports on Form 8-K.............................................................15 SIGNATURES..............................................................................................16 2 <Page> PART I FINANCIAL INFORMATION Item 1: Financial Statements CLARION COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION/NET ASSETS (Unaudited) Liquidation Going Concern Basis Basis June 30, December 31, 2001 2000 ---------------------------------- ASSETS Cash and cash equivalents $ 88,450 $ 733,253 Securities - trading, at fair value 43,887,481 48,605,957 Other investments 3,632,664 3,918,651 Deposits with brokers as collateral for securities sold short - 28,023,910 Trade receivable 5,765,388 - Accrued interest receivable and other assets 760,732 644,225 ---------------------------------- Total assets 54,134,715 $81,925,996 ---------------------------------- LIABILITIES Repurchase agreements 16,098,000 $14,100,000 Government securities sold short - 28,225,294 Dividends payable - 812,873 Other liabilities 365,014 844,464 Reserve for estimated costs during liquidation period 1,115,186 - ---------------------------------- Total liabilities 17,578,200 43,982,631 ---------------------------------- STOCKHOLDERS' EQUITY/NET ASSETS Preferred Stock, par value $.01 per share, 25,000,000 shares Authorized; no shares issued - Class A Common Stock, par value $.001 per share, 74,000,000 shares Authorized; 4,073,393 and 4,064,367 shares issued and outstanding on June 30, 2001 and December 31, 2000, respectively 4,064 Additional paid-in capital 88,078,116 Net loss and distributions (50,138,815) ----------------- Total stockholders' equity 37,943,365 ----------------- Total liabilities and stockholders' equity $81,925,996 ================= Net assets in liquidation $36,556,515 ================= The accompanying notes are an integral part of these consolidated financial statements. 3 <Page> CLARION COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) FOR THE FOR THE THREE MONTHS ENDED SIX MONTHS ENDED Going Concern Basis Going Concern Basis June 30, June 30, June 30, June 30, 2001 2000 2001 2000 ------------------------------------------------------------------------ Income: Interest income from securities - trading $ 1,438,492 $ 2,340,470 $ 2,947,927 $ 5,147,270 Income from other investments 128,521 90,898 255,804 225,301 Interest income from cash and cash equivalents 4,885 71,945 10,541 79,279 ------------------------------------------------------------------------ Total income 1,571,898 2,503,313 3,214,272 5,451,850 ------------------------------------------------------------------------ Expenses: Interest 215,562 1,032,235 574,832 2,359,648 Management fee 125,748 127,617 255,171 256,481 Other expenses 321,954 389,822 618,503 556,283 ------------------------------------------------------------------------ Total expenses 663,264 1,549,674 1,448,506 3,172,412 ------------------------------------------------------------------------ Other operating gains and losses: Loss from securities-trading (1,353,764) (759,666) (1,288,251) (395,502) ------------------------------------------------------------------------ Income (loss) - going concern basis (445,130) 193,973 477,515 1,883,936 Estimated costs during liquidation period (1,115,186) - (1,115,186) - ------------------------------------------------------------------------ Net Income (Loss) $(1,560,316) $ 193,973 $(637,671) $ 1,883,936 ======================================================================== Net Income (Loss) per share: Basic $ (0.38) $ 0.05 $ (0.16) $ 0.46 ======================================================================== Diluted $ (0.38) $ 0.05 $ (0.16) $ 0.46 ======================================================================== Weighted average shares Basic 4,073,393 4,061,968 4,073,343 4,071,920 ======================================================================== Diluted 4,073,393 4,061,968 4,073,343 4,071,920 ======================================================================== The accompanying notes are an integral part of these consolidated financial statements. 4 <Page> CLARION COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY/NET ASSETS FOR THE SIX MONTHS ENDED JUNE 30, 2001 (Unaudited) Stockholders' equity, January 1, 2001 $ 37,943,365 Class A common stock dividend declared and paid (814,679) Net loss (637,671) Issuance of Common Stock - Class A 65,500 -------------- Net assets in liquidation, June 30, 2001 $ 36,556,515 ============== The accompanying notes are an integral part of these consolidated financial statements. 5 <Page> CLARION COMMERCIAL HOLDINGS, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED (Unaudited) Going Concern Basis June 30, June 30, 2001 2000 Cash flows from operating activities: Net income (loss) $ (637,671) $1,883,936 Adjustments to reconcile net income to net cash used by Operating activities: Accretion and amortization, net (183,040) (259,419) Issuance of shares fees and compensation 65,500 77,000 Net increase (decrease) in unrealized loss on securities-trading 1,865,264 (414,890) Change in unrealized (gain) loss on government securities sold short (1,916,881) 1,224,265 Increase in accrued interest receivable & other assets (116,507) (168,515) Decrease in other liabilities (479,450) (428,146) Increase in estimated costs during liquidation period 1,115,186 - Purchase of securities-trading (18,779,453) (30,458,810) Sale and principal payments of securities-trading 21,841,692 66,995,987 Increase in trade receivable (5,765,388) - Decrease (increase) in deposits with broker as collateral for securities sold 28,023,910 (81,817) short Decrease in government securities sold short (26,308,413) (246,583) -------------------------------------- Net cash provided (used) by operating activities (1,275,251) 38,123,008 -------------------------------------- Cash flows from investing activities: Sale of other investments 250,000 - Principal payments received on mezzanine investment 10,000 43,333 -------------------------------------- Net cash provided by investing activities 260,000 43,333 -------------------------------------- Cash flows from financing activities: Borrowings (repayments) under reverse repurchase agreements, net 1,998,000 (33,936,000) Dividends paid (1,627,552) (1,651,560) Repurchases of common stock - (2,506,276) -------------------------------------- Net cash provided (used) by financing activities 370,448 (38,093,836) -------------------------------------- Net increase (decrease) in cash and cash equivalents (644,803) 72,505 Cash and cash equivalents at beginning of period 733,253 1,143,182 -------------------------------------- Cash and cash equivalents at end of period $ 88,450 $1,215,687 ====================================== Supplemental information: Interest paid $807,254 $1,834,196 ====================================== The accompanying notes are an integral part of these consolidated financial statements. 6 <Page> NOTES TO FINANCIAL STATEMENTS NOTE 1 ORGANIZATION AND BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the annual financial statements and notes thereto included in the Company's annual report on Form 10-K filed with the Securities and Exchange Commission. The consolidated financial statements include the accounts of Clarion Commercial Holdings, Inc. ("Clarion") and its consolidated subsidiaries (together with Clarion, the "Company"). All intercompany transactions and balances are eliminated in consolidation. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, which except for the entries required to adopt the liquidation basis as discussed below, consist of normal and recurring accruals, necessary for a fair presentation of the consolidated financial condition of the Company at June 30, 2001 and December 31, 2000 and the results of its operations and its cash flows for the three months and six months ended June 30, 2001 and 2000. Operating results for the period ended June 30, 2001 are not necessarily indicative of the results that may be expected for any other interim periods or the year ending December 31, 2001. Clarion was incorporated in Maryland in February 1998 and commenced its operations on June 2, 1998. The Company is a specialty finance company organized to invest in commercial mortgage-backed securities (primarily subordinate securities) commercial mortgage loans, mezzanine investments, equity investments and other real estate related investments. On October 12, 2000, the Company's Board of Directors unanimously voted to recommend that a plan of liquidation and dissolution be submitted to its stockholders. After reviewing the Company's strategic alternatives, the Board concluded that the liquidation of the Company was the best available alternative for maximizing stockholder value and, accordingly, was in the best interest of the Company and its stockholders. On March 6, 2001, the Company's Board of Directors approved a specific plan of liquidation and dissolution and determined to submit the plan to the Company's stockholders for their consideration. On May 31, 2001, the Company's stockholders approved the liquidation agreement pursuant to which the Company's existing management agreement with Clarion Capital, LLC would be amended to provide that Clarion Capital, LLC, the existing manager of the Company's assets, will manage the liquidation of the Company. The Company adopted the liquidation basis of accounting as of June 30, 2001. Accordingly, the Company's assets are stated at their estimated net realizable values and liabilities include estimated costs and expenses to be incurred through the anticipated date of liquidation. Prior to June 30, 2001, the Company's books were maintained on the going concern basis of accounting. Because most of the Company's investments were carried at their estimated fair values, adoption of the liquidation basis of accounting did not have a material effect on the Company's net assets. However, due to changes in market conditions, the timing of sales, and other factors, the amounts ultimately realized upon liquidation of the Company's investments may differ, perhaps materially, from the carrying amounts as of June 30, 2001. NOTE 2 SIGNIFICANT ACCOUNTING POLICIES In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated statement of financial condition and revenues and expenses for the periods covered. Actual results could differ from those estimates and assumptions. A summary of the Company's significant accounting policies follows: SECURITIES - TRADING 7 <Page> At the date of acquisition, the Company elected to designate its government securities and commercial mortgage-backed securities ("CMBS") as trading assets. Such securities are carried at their estimated fair value, with the net unrealized gains or losses included in earnings. For a description of the methodology used in determining fair value of the Company's CMBS investments, refer to Note 3. Interest income is recognized as it becomes receivable, and includes amortization of premiums and accretion of discounts, computed using the effective yield method, after considering estimated prepayments and credit losses. Actual credit loss and prepayment experience is reviewed periodically and effective yields adjusted if necessary. RISK MANAGEMENT During the first quarter of 2001 the Company implemented a hedging strategy based on the use of Treasury yield locks. A Treasury yield lock is a contract to sell short a specific Treasury and buy it back on a specified date sometime in the future. The Company utilized these contracts as a means of mitigating ("hedging") the potential financial statement impact of changes in the fair value of its portfolio of CMBS due to changes in interest rates. These instruments are recorded at fair value, with unrealized gains or losses recorded in earnings as part of the gain (loss) on securities-trading. OTHER INVESTMENTS The Company's 10% interest in Clarion Capital, LLC (the "Manager") along with an option to purchase the remaining 90% membership interest was sold to the Manager for $250,000 pursuant to the plan of liquidation and dissolution. This sale was completed during June 2001 and resulted in no gain or loss to the Company. The preferred interest in a limited partnership is accounted for at cost, which is deemed to approximate its net realizable value, if the preferred interest were sold outright. COMPREHENSIVE INCOME SFAS No. 130, "Reporting Comprehensive Income" defines comprehensive income as the change in equity of a business enterprise during a period from transactions and other events and circumstances, excluding those resulting from investments by and distributions to owners. The Company had no items of other comprehensive income during any of the periods presented, so its comprehensive income was the same as its net income. NEW ACCOUNTING PRONOUNCEMENT Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that the Company recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge of the exposure to changes in the fair value of a recognized asset or liability or a hedge exposure to variable cash flows of a forecasted transaction. The accounting for changes in the fair value of a derivative (e.g. through earnings or outside earnings, through comprehensive income) depends on the intended use of the derivative and the resulting designation. On January 1, 2001, the Company adopted SFAS 133, as amended. Based on the Company's hedging strategies, adoption of SFAS 133 had no impact on the Company's financial statements. NET INCOME PER SHARE Net income per share is computed in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share, and is calculated on the basis of the weighted average number of common shares outstanding during the period plus the additional dilutive effect of common stock equivalents. The dilutive effect of outstanding stock options is calculated using the treasury stock method. 8 <Page> For the three months and six months ending June 30, 2001 and 2000, diluted net income per share was the same as basic net income per share, because all outstanding stock options were not dilutive. DIVIDENDS On April 16, 2001, the Company made a distribution of $0.20 per share to stockholders of record at the close of business on March 31, 2001. The character of the distribution to the stockholders for income tax purposes has not been determined at this time. INCOME TAXES The Company has elected to be taxed as a Real Estate Investment Trust ("REIT") and has complied with the provisions of the Internal Revenue Code of 1986, as amended (the "Code"), with respect thereto. Accordingly, the Company is not subject to federal income tax to the extent of its distributions to stockholders as long as certain asset, income and stock ownership tests are met. The Company intends to conduct its activities during the liquidation period in a manner that will enable it to maintain its REIT status. The Company has elected mark-to market valuation treatment for its investment portfolio under Internal Revenue Code Section 475. Under this election the Company must treat all unrealized trading gains and losses as realized for income tax purposes as well as treating all trading transactions as operating gains and losses. NOTE 3 SECURITIES - TRADING The Company's securities - trading consist of CMBS with an estimated fair value of $43,887,481 and an amortized cost of $57,323,064 at June 30, 2001, resulting in an unrealized loss of $13,435,583 at that date. At December 31, 2000, the Company's securities - trading consisted of CMBS with an estimated fair value of $48,605,957 and an amortized cost of $60,176,274, resulting in an unrealized loss of $11,570,317 at that date. The aggregate estimated fair values by underlying credit rating of the Company's CMBS at June 30, 2001 and December 31, 2000 are as follows: June 30, 2001 December 31, 2000 ------------------ --------------------- Security Rating Estimated Fair Value % of Total Estimated Fair Value % of Total - ----------------------------------------------------------------------------------------------------------------------- AAA $ 12,999,047 29.6% $ - 0.0% BBB - 0.0% 16,078,336 33.1% BB 20,120,516 45.8% 20,461,704 42.1% B 6,610,374 15.1% 7,156,176 14.7% B- 1,366,313 3.1% 1,859,459 3.8% NR 2,791,231 6.4% 3,050,282 6.3% ----------------------------------------------------------------------------------------------- $ 43,887,481 100.0% $ 48,605,957 100.0% =============================================================================================== As of June 30, 2001, the mortgage loans underlying the CMBS interests held by the Company were secured by properties of the types and in the states identified below: Property Type Percentage (1) State Percentage (1) - ----------------------------------------- -------------------------------------- Retail 39.0% MN 18.2% Multifamily 20.2 TX 11.3 Office 16.4 CA 9.8 Hotel 12.0 NY 8.3 Other 12.4 All others (2) 52.4 (1) Based on a percentage of the total unpaid principal balance of the underlying loans. (2) No other state comprises more than 5% of the total. 9 <Page> As of June 30, 2001, the weighted average unpaid principal balance of loans underlying the CMBS investments of the Company that are more than 60 days delinquent is 0.06% of the unpaid principal balance of the total collateral as of that date. The fair value of the Company's portfolio of CMBS is generally estimated by management based on market prices provided by third party market participants. The market for the Company's CMBS periodically suffers from a lack of liquidity, accordingly, the fair values reported reflect estimates and may not necessarily be indicative of the amounts the Company could realize in a current market exchange. On February 16, 2001, the Company closed all of its contracts to sell U.S. Treasury securities (short sales) and entered into a Treasury yield lock to hedge the interest rate risk of its CMBS portfolio. A Treasury yield lock is a contract to sell short a specific U.S. Treasury and buy it back on a specified date sometime in the future. These instruments are recorded at fair value, with unrealized gains or losses recorded in earnings as part of the gain (loss) on securities-trading. The contract has a notional amount of $31,593,000, is referenced to the US Treasury, 5.50%, 05/15/09 and was scheduled to terminate on August 20, 2001. The fair value of this contract at June 30, 2001 was an asset of $128,238, which is included in other assets on the balance sheet. The net gain on the Company's hedging activities for the three and six months ended June 30, 2001 was $849,964 and $331,205, respectively, which is included in gains from securities-trading in the consolidated statement of operations. In addition, the Company earned $200,080 on short sale proceeds held by brokers and incurred interest of $197,385 on the short sales contracts prior to their termination during the first quarter of 2001. On July 31, 2001, the Company closed the Treasury yield lock and realized a loss of approximately $655,000. This loss resulted from a decrease in the yield on the related US Treasury during July of approximately 0.42% and corresponded to an increase in the Company's CMBS investments. On July 31, 2001 the Company opened contracts to sell U.S. Treasury securities (short sales) as a means of hedging its interest rate risk. The unrealized gain (loss) on the short US Treasury contracts for the three months and six months ending June 30, 2000 was $526,398 and ($1,224,265), respectively, which is included in gain (loss) from securities-trading in the consolidated statement of operations. The realized gain (loss) on these contracts for the three months and six months ended June 30, 2000 was ($550,332) and $375,500, respectively, which is included in gain (loss) from securities-trading in the consolidated statement of operations. The Company earned $390,637 and $715,790 on short sale proceeds held by brokers and incurred interest of $358,230 and $713,838 on the short sales contracts for the three months and six months ending June 30, 2000, respectively. NOTE 4 TRANSACTIONS WITH AFFILIATES Clarion has a management agreement with the Manager, as amended by the liquidation agreement, under which the Manager manages the Company's day-to-day operations during the liquidation process, subject to the direction and oversight of Clarion's Board of Directors. The Company pays the Manager a monthly fee plus various incentives based on the Manager's performance. The management fee as amended by the liquidation agreement is payable commencing June 1, 2001 and until such time as the manager has sold the last CMBS asset of the Company or the management agreement terminates. The manager will receive a monthly fee as follows: $44,000 for June 2001 through November 2001; $25,000 for December 2001 and January 2002; and $7,500 for each subsequent month. Upon the complete liquidation of all of the CMBS assets of the Company, for the eighteen calendar months from June 1, 2001 through November 30, 2002, but prior to the dissolution of the Company, the monthly fee payable to the manager will be reduced to $7,500. At any point following the reduction of the monthly fee to $7,500, the Company can terminate this agreement. Upon the sale or liquidation of the mezzanine investment or termination of the management agreement prior to the sale or liquidation of the mezzanine investment, the manager will receive a one-time fee of $80,000. Upon completion of the sale or liquidation of the CMBS assets, the manager will receive additional compensation according to the following schedule: 10 <Page> If sale of last CMBS asset Manager will receive occurs in month additional compensation of: ------------------------------- ------------------------------ August 2001 $472,000 September 2001 428,000 October 2001 384,000 November 2001 340,000 December 2001 290,000 January 2002 265,000 February 2002 or later 250,000 In accordance with the terms of the management agreement and the management agreement as amended by the liquidation plan, the Company paid $125,748 and $255,171 in management fees for the three months and six months ended June 30, 2001. In addition, the Company has accrued $640,000 in management fees into the reserve for estimated costs during liquidation. The Company incurred $127,617 and $256,481 in management fees for the three months and six months ended June 30, 2000, respectively. The Company has not accrued for, or paid, the Manager any incentive compensation since inception. NOTE 5 REPURCHASE AGREEMENTS The Company has entered into repurchase agreements with Bear Stearns to finance a portion of its investments. As of June 30, 2001 and December 31, 2000, the Company had entered into repurchase agreements in the amount of $16,098,000 and $14,100,000, respectively. The maturity of the agreements as of June 30, 2001 was 31 days and the weighted average interest rate was 4.39%, based on one-month LIBOR plus a weighted average spread of 0.52%. The maturity of the agreements as of December 31, 2000 was 29 days and the weighted average interest rate was 7.40%, based on one-month LIBOR plus a weighted average spread of 0.84%. The repurchase agreements are collateralized by certain of the Company's portfolio of CMBS investments, with an aggregate carrying value of approximately $24.3 million at June 30, 2001, including one asset which was sold on June 28, 2001 and settled on July 3, 2001. The proceeds of the sale are included in trade receivable on the balance sheet and were used to reduce the related repurchase agreement. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company was organized in February 1998 to invest in commercial mortgage-backed securities (primarily subordinate securities), commercial mortgage loans, mezzanine investments, equity investments, and other real estate related investments. The Company is currently in the process of liquidation. The following discussion of the Company's financial condition, results of operations, and capital resources and liquidity should be read in conjunction with the Company's financial statements and related notes. MARKET CONDITIONS: Spreads on investment grade CMBS decreased by approximately 20 basis points, while spreads on CMBS rated BB remained unchanged and spreads for CMBS rated B increased by 125 basis points. The price of a fixed income security (such as a CMBS) or a commercial loan is often determined by adding an interest rate spread to a benchmark interest rate, such as the U.S. Treasury rate. As the spread on a security increases (decreases), the value of the security decreases (increases). The ten-year U.S Treasury rate increased approximately 0.50% for the three months ended June 30, 2001. This compares to an increase 0.01% in the three months ended June 30, 2000. In the same way that a change in spread for CMBS causes its value to change, changing interest rates also causes its value to change. In order to offset the potential change in CMBS value due to changing interest rates, the Company "sells short" U.S. Treasury securities or 11 <Page> enters into Treasury yield lock contracts. In the three months ended June 30, 2001 and 2000, the Company's hedging activities effectively offset the change in value of the Company's CMBS positions due to the change in interest rates. RESULTS OF OPERATIONS General: Net loss for the three months and six months ending June 30, 2001 amounted to $1,560,316 or $0.38 per share, basic and diluted, and $637,671 or $0.16 per share, basic and diluted, respectively. The net loss for the three months ending June 30, 2001 was attributable primarily to income from investments of $1.6 million. This was offset by net realized and unrealized losses from securities-trading of $1.4 million, interest expense of $0.2 million, other expenses of $0.4 million and the accrual of estimated costs to be incurred during the liquidation period of $1.1 million. The net income for the six months ending June 30, 2001 was attributable primarily to income from investments of $3.2 million and was offset by interest expense of $0.6 million, other expenses of $0.9 million, estimated liquidation costs of $1.1 million and a $1.3 million loss (realized and unrealized) from securities-trading. Net income for the three months and six months ending June 30, 2000 amounted to $193,973 or $0.05 per share, basic and diluted, and $1,883,936 or $0.46 per share, basic and diluted, respectively. The net income for the three months ending June 30, 2000 was attributable primarily to income from investments of $2.5 million. This was offset by interest expense of $1.0 million, net loss (realized and unrealized) from securities-trading of $0.8 million and other expenses of $0.5 million. The net income for the six months ending June 30, 2000 was attributable primarily to income from investments of $5.5 million and was offset by interest expense of $2.4 million, other expenses of $0.8 million, and a $0.4 million loss (realized and unrealized) from securities-trading. Investment Income: For the three months and six months ending June 30, 2001 and for the three months and six months ending June 30, 2000, the Company earned income from investments, as follows: <Table> <Caption> Three Months Six Months Three Months Six Months Ending Ending Ending Ending Investment June 30, 2001 June 30, 2001 June 30, 2000 June 30, 2000 - ------------------------------------------------------------------------------------------------------------------------------- CMBS $ 1,438,492 $ 2,747,847 $ 1,949,833 $ 4,431,480 Deposits with brokers as collateral for securities sold short - 200,080 390,637 715,790 Mezzanine investment 128,521 255,804 90,898 225,301 Cash and cash equivalents 4,885 10,541 71,945 79,279 ------------------------------------------------------------------------------------ TOTAL $ 1,571,898 $ 3,214,272 $ 2,503,313 $ 5,451,850 ==================================================================================== </Table> Interest Expense: For the three months and six months ending June 30, 2001, the Company incurred interest expense of $215,562 and $377,446, respectively from repurchase agreements and $0 and $197,386 from government securities sold short, respectively. As of June 30, 2001 and December 31, 2000, the Company had entered into repurchase agreements in the amount of $16,098,000 and $14,100,000, respectively. The weighted average interest rates were 4.39% and 7.40%, respectively, and are based on a variable rate, one-month LIBOR plus a weighted average spread of 0.52% and 0.84%, respectively. All of the Company's repurchase agreements are with Bear Stearns. 12 <Page> During the first quarter of 2001, the Company closed all short positions in U.S. Treasury securities. The Company utilized a Treasury yield lock contract to hedge certain assets in its CMBS portfolio. The Treasury yield lock open at June 30, 2001 has a notional amount of $31,953,000, is referenced to the U.S. Treasury 5.50%, 05/15/09, and matures on August 20, 2001. The fair value of this contract at June 30, 2001 was $128,238 which is included in "accrued interest receivable and other assets" on the balance sheet. On July 31, 2001, the Company closed the Treasury yield lock and realized a loss of approximately $655,000. This loss resulted from a decrease in the yield on the related US Treasury during July of approximately 0.42% and corresponded to an increase in the Company's CMBS investments. On July 31, 2001 the Company opened contracts to sell U.S. Treasury securities (short sales) as a means of hedging its interest rate risk. As of December 31, 2000, the Company had the following open short positions in U.S. Treasury securities: $2,263,000 (face) of U.S. Treasury 5.25%, 02/15/2029 and $25,516,000 (face) of U.S. Treasury 5.50%, 05/15/2009. Other Expenses: In accordance with the terms of the management agreement and the management agreement as amended by the liquidation plan, the Company paid $125,748 and $255,171 in management fees for the three months and six months ended June 30, 2001, respectively. In addition, the Company has accrued $640,000 in management fees into the reserve for estimated costs during liquidation. The Company incurred $127,617 and $256,481 in management fees for the three months and six months ended June 30, 2000, respectively. The Company has not accrued for, or paid, the Manager any incentive compensation since inception. Other Operating Gains & Losses For the three months and six months ending June 30, 2001, the Company recorded realized and unrealized losses of $1,353,764 and $1,288,251, respectively, on its securities portfolio. For the three months and six months ending June 30, 2000, the Company recognized losses of $759,666 and $395,502 respectively, on its securities portfolio. In the three months ending June 30, 2001 the Company sold one of its CMBS investments for total proceeds of $5,765,388. This transaction resulted in a realized loss of $11,722. CHANGES IN FINANCIAL CONDITION General: Total assets as of June 30, 2001, amounted to $54.1 million and were comprised primarily of $43.9 million of CMBS, a mezzanine investment of $3.6 million and a trade receivable of $5.8 million. Total liabilities of the Company as of June 30, 2001 amounted to $17.6 million and were comprised primarily of repurchase agreements in the amount of $16.1 million and a reserve for estimated costs during liquidation period of $1.1 million. CAPITAL RESOURCES AND LIQUIDITY: Liquidity is a measurement of the Company's ability to meet its potential cash requirements during the liquidation period including ongoing commitments to repay borrowings and other general business purposes. The Company's primary sources of funds for liquidity consist of repurchase agreements and maturities and principal payments on securities and loans, and proceeds from sales thereof. The Company believes that its cash on hand, earnings from its assets and proceeds from sales will be adequate to support the Company and pay its obligations during the liquidation period. The Company's operating activities used cash of $1.3 million during the six months ending June 30, 2001. This was due primarily to the Company's trading and hedging activities. This compares with the Company's operating activities during the six months ending June 30, 2000, which generated cash flows of $38.1 million. This was due primarily to an excess of interest income on investments over financing costs of approximately $2.3 million and net proceeds from purchasing and selling commercial mortgage backed securities of $36.5 million, which was used primarily to reduce outstanding debt. 13 <Page> The Company's investing activities provided cash of $0.3 million during the six months ending June 30, 2001, due primarily to the sale of the Company's investment in the Manager. The Company's financing activities generated cash of $0.4 million during the six months ending June 30, 2001, due primarily to proceeds from borrowings on repurchase agreements of $2.0 million and offset by distributions to shareholders of $1.6 million. The Company's financing activities used cash of $38.1 million during the six months ending June 30, 2000, due primarily to payments made on repurchase agreements of $33.9 million, purchases of treasury stock of $2.5 million and distributions to shareholders of $1.7 million. On October 12, 2000, the Company's Board of Directors unanimously voted to recommend that a plan of liquidation and dissolution be submitted to its stockholders. After reviewing the Company's strategic alternatives, the Board concluded that the liquidation of the Company was the best available alternative for maximizing stockholder value and, accordingly, was in the best interest of the Company and its stockholders. On March 6, 2001, the Company's Board of Directors approved a specific plan of liquidation and dissolution and determined to submit the plan to the Company's stockholders for their consideration. On May 31, 2001, the Company's stockholders approved the liquidation agreement pursuant to which the Company's existing management agreement with Clarion Capital, LLC would be amended to provide that Clarion Capital, LLC, the existing manager of the Company's assets, will manage the liquidation of the Company. The Company has begun the process of liquidating its assets, pursuant to the plan of liquidation. Three CMBS assets were sold in June and July for proceeds totaling approximately $22.5 million. The proceeds were used to pay off the repurchase agreements, with the excess available for liquidating distributions to the stockholders. The timing and amount of any distributions depends upon a variety of factors, some of which are not under the Company's control. Although the Company considers its assumptions and estimates of the values and timing of the liquidation to be reasonable, there can be no assurance that the values ultimately realized, the timing of such sales and the costs actually incurred during liquidation will not be materially different from the Company's estimate. Except as discussed herein, management is not aware of any other trends, events, commitments or uncertainties that may have a significant effect on liquidity. STOCKHOLDERS' EQUITY/NET ASSETS IN LIQUIDATION Net assets in liquidation as of June 30, 2001 was $36.6 million. In the six months ending June 30, 2001, stockholders' equity/net assets in liquidation decreased by $1.4 million. This decrease was due to the net loss from operations of $0.6 million and by the payment of $0.8 million in distributions. SUBSEQUENT EVENT: SALE OF SECURITIES On July 30, 2001, the Company sold two of its CMBS assets to an unaffiliated broker-dealer for total proceeds of $16.7 million. The sale was an arms length transaction following the solicitation of bids from several dealers in such securities. FORWARD-LOOKING STATEMENTS: Certain statements contained herein are not, and certain statements contained in future filings by the Company with the SEC, in the Company's press releases or in the Company's other public or shareholder communications may not be, based on historical facts and are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements which are based on various assumptions (some of which are beyond the Company's control), may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as "may," "will," "believe," "expect," "anticipate," "continue," or similar terms or variations on those terms, or the negative of those terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, those related to the economic environment, particularly in the market areas in which the Company operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset/liability management, the financial and securities markets and the availability of and costs associated with sources of liquidity. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions, which may be made to any 14 <Page> forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk is the exposure to loss resulting from changes in interest rates, lending environments, changes in spreads on CMBS, real estate cash flows and values, foreign currency exchange rates, commodity prices and equity prices. The primary market risks to which the investments of the Company are exposed are lending environments, interest rate risk, real estate cash flows and CMBS spread risk, which are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond the control of the Company. Changes in the general level of interest rates can also affect the net interest income of the Company. The Company is further exposed to interest rate risk through its short term financing through repurchase agreements at rates that are based on 30-day LIBOR. The repurchase agreements into which the Company has entered are for terms of less than, or equal to 30 days. Changes in interest rates may increase the Company's cost of financing its investments. Furthermore, if the Company were unable to replace its short term financing, it may be forced to sell its assets in order to pay down its repurchase agreements at a time when the market for the sale of such assets is unfavorable. If this were to occur, the Company could realize substantial losses. The investments of the Company are also exposed to spread risk. The price of a fixed income security is generally determined by adding an interest rate spread to a benchmark interest rate, such as the U.S. Treasury rate. As the spread on a security widens (or increases), the price (or value) of the security falls. As spreads on CMBS widen, the fair value of the Company's portfolio falls. Spread widening in the market for CMBS can occur as a result of market concerns over the stability of the commercial real estate market, excess supply of CMBS, or general credit or liquidity concerns in CMBS markets or other markets. The Company enters into contracts to sell securities that it does not own at the time of the sale, at a specified price at a specified time (short sales). The Company also utilizes Treasury yield locks. A Treasury yield lock is a contract to sell short a specific Treasury and buy it back on a specified date sometime in the future. The Company utilizes these contracts as a means of mitigating ("hedging") the potential financial statement impact of changes in the fair value of its portfolio of CMBS due to changes in interest rates. As the value of the Company's CMBS declines (increases) with increases (decreases) in interest rates, the value of the contracts increases (decreases). There can be no guarantee, however, that the change in value of the contract will completely offset the change in value of the fixed-rate interest-earning asset. Risks in these contracts arise from the possible inability of counterparties to meet the terms of their contracts and from movements in securities values and interest rates. Furthermore, if the market value of the securities involved in the short sale increases, the Company may be required to meet a "margin call". PART II - OTHER INFORMATION Item 1. Legal Proceedings At June 30, 2001 there were no legal proceedings to which the Company was a party or of which any of its property was subject. Item 2. Changes in Securities and Use of Proceeds Not applicable Item 3. Defaults Upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None 15 <Page> Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CLARION COMMERCIAL HOLDINGS, INC, Dated: August 13, 2001 By: /s/ Fredrick D. Arenstein ------------------------------------------- Name: Fredrick D. Arenstein Title: Treasurer 16