AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 16, 2003
REGISTRATION NO. 333-
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
CRESCENT REAL ESTATE EQUITIES COMPANY
(Exact Name of Registrant as Specified in its Charter)
TEXAS 6798 52-1862813
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employee
Incorporation or Organization) Classification Code Number) Identification No.)
777 MAIN STREET
SUITE 1200
FORTH WORTH, TEXAS 76102
(817) 321-2100
(Address, including zip code, and telephone number, including area
code, of Registrant's principal executive offices)
------------------
JOHN C. GOFF
CHIEF EXECUTIVE OFFICER
777 MAIN STREET
SUITE 1200
FORT WORTH, TEXAS 76102
(817) 321-2100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------------------
Copies to:
SYLVIA M. MAHAFFEY, ESQ DAVID M. DEAN
SHAW PITTMAN CRESCENT REAL ESTATE EQUITIES COMPANY
2300 N STREET, N.W. 777 MAIN STREET, SUITE 2100
WASHINGTON, D.C. FORT WORTH, TEXAS 76102
(202) 663-8000 (817) 321-2100
----------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration for the same offering.
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED SHARE PRICE REGISTRATION FEE
Common stock, par value $.01 $10,828,497 (1) $ 10,828,497 $ 996.23(2)
(1) Omitted pursuant to Rule 457(o) of the rules and regulations under the
Securities Act of 1933, as amended.
(2) Calculated pursuant to Rule 457(o) of the rules and regulations under the
Securities Act of 1933, as amended.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JANUARY 16, 2003
PROXY STATEMENT/PROSPECTUS
CRESCENT OPERATING, INC. CRESCENT REAL ESTATE EQUITIES COMPANY
777 MAIN STREET, SUITE 1240 Issuer of the common shares that
FORT WORTH, TEXAS 76102 may be issued to stockholders of Crescent
(817) 321-1601 Operating, Inc., as described in this proxy
statement/prospectus
THE PROXY STATEMENT/PROSPECTUS IS DATED JANUARY __, 2003 AND IS FIRST BEING
MAILED TO STOCKHOLDERS OF CRESCENT OPERATING ON OR ABOUT JANUARY __, 2003.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
The special meeting of stockholders of Crescent Operating, Inc., a Delaware
corporation, or Crescent Operating, will be held at The Fort Worth Club, located
at 306 West 7th Street, Fort Worth, Texas, on Thursday, March 6, 2003 at 10:00
a.m., Central Time, to vote on a proposal to accept a bankruptcy plan of
Crescent Operating to be implemented under Chapter 11 of the United States
Bankruptcy Code. The Crescent Operating bankruptcy plan provides as follows:
- Crescent Real Estate Equities Company and its affiliates, or Crescent Real
Estate, will make sufficient funds available to Crescent Operating to pay
in full or otherwise resolve the claims of those creditors of Crescent
Operating that Crescent Operating identified in the original Settlement
Agreement, other than Crescent Real Estate, and to cover the budgeted
expenses of implementing the Settlement Agreement and seeking to confirm
the bankruptcy plan.
- If the bankruptcy plan is accepted by holders of at least two-thirds of the
shares of Crescent Operating common stock voted at the special meeting and
is confirmed by the bankruptcy court, then Crescent Operating will cancel
all outstanding shares of its common stock and Crescent Real Estate will
issue to each holder of Crescent Operating common stock a number of common
shares of Crescent Real Estate equal to:
- the ownership percentage of Crescent Operating held by such holder on
the confirmation date of the bankruptcy plan, multiplied by
- $16.0 million less the aggregate amount of claims and expenses,
including the expenses of Crescent Real Estate but excluding payments
to satisfy an approximately $15.5 million potential claim against
Crescent Operating by Bank of America, that Crescent Real Estate pays
in connection with the Crescent Operating bankruptcy and the
reorganization transactions, divided by
- the average of the daily closing prices per Crescent Real Estate common
share as reported on the New York Stock Exchange Composite Transactions
reporting system for the 10 consecutive trading days immediately
preceding the date of confirmation of the bankruptcy plan.
As of December 31, 2002, Crescent Real Estate had incurred approximately
$8.5 million in claims and expenses in connection with the Crescent Operating
bankruptcy and the reorganization transactions and expects to incur an aggregate
of $10.6 million to $13.8 million in total claims and expenses. Accordingly, the
total value of the Crescent Real Estate common shares issuable to Crescent
Operating's stockholders is currently expected to be between $5.4 million and
$2.16 million or $0.50 to $0.20 per share of Crescent Operating common stock.
Regardless of the total amount of claims and expenses that are paid by Crescent
Real Estate in connection with the bankruptcy plan and the reorganization
transactions, if the bankruptcy plan is accepted by the requisite vote of
Crescent Operating stockholders and is confirmed by the bankruptcy court, then
the stockholders of Crescent Operating will receive common shares of Crescent
Real Estate with a value of at least $2.16 million, or $0.20 per share of
Crescent Operating common stock. In no event will the Crescent Operating
stockholders be entitled to reconsider their approval of the bankruptcy plan.
Crescent Real Estate common shares are listed on the New York Stock Exchange
under the symbol "CEI."
THE SOLE DIRECTOR OF CRESCENT OPERATING HAS APPROVED THE BANKRUPTCY PLAN
AND, AFTER CONSULTATION WITH OUTSIDE ADVISORS, HAS DETERMINED THAT THE
BANKRUPTCY PLAN IS FAIR TO, AND IN THE BEST INTERESTS OF, CRESCENT OPERATING'S
STOCKHOLDERS. ACCORDINGLY, THE SOLE DIRECTOR RECOMMENDS THAT YOU VOTE "FOR"
ACCEPTANCE OF THE BANKRUPTCY PLAN.
INVESTING IN CRESCENT REAL ESTATE COMMON SHARES INVOLVES RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 23.
Only stockholders of record of Crescent Operating at the close of business
on January 8, 2003 will be entitled to notice of, and to vote at, the special
meeting or any adjournment or postponement thereof.
Dated January __, 2003 By order of the Sole Director
/s/ JEFFREY L. STEVENS
Jeffrey L. Stevens, Chief Executive Officer
YOUR VOTE IS VERY IMPORTANT. WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING,
PLEASE SIGN AND DATE THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE POSTAGE-PAID
ENVELOPE PROVIDED OR VOTE BY TELEPHONE IN ACCORDANCE WITH THE DIRECTIONS
CONTAINED ON THE PROXY CARD. PROXIES ARE REVOCABLE, AND YOU MAY WITHDRAW YOUR
PROXY AND VOTE IN PERSON AT THE SPECIAL MEETING.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
proxy statement/prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
WHERE YOU CAN FIND MORE INFORMATION
CRESCENT OPERATING, INC.
Crescent Operating files annual, quarterly, and special reports, proxy
statements, and other information with the Securities and Exchange Commission.
You may read and copy any document on the Securities and Exchange Commission's
website at http://www.sec.gov or at the Securities and Exchange Commission's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the Securities and Exchange Commission's Regional Office at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Crescent Operating's
common stock is traded on the Over The Counter Bulletin Board, or the OTC
Bulletin Board, market under the symbol "COPI.OB."
WHO CAN HELP ANSWER MY QUESTIONS?
If you have additional questions about the Crescent Operating
bankruptcy plan, you should contact:
Crescent Operating, Inc.
Attention: Jeffrey L. Stevens or Kiersten Thompson
777 Main Street, Suite 1240
Fort Worth, Texas 76102
Phone Number: (817) 321-1602
CRESCENT REAL ESTATE EQUITIES COMPANY
Crescent Real Estate files annual, quarterly, and special reports,
proxy statements and other information with the Securities and Exchange
Commission. You may read and copy any document on the Securities and Exchange
Commission's website at http://www.sec.gov or at the Securities and Exchange
Commission's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549 and at the Securities and Exchange Commission's Regional Office at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
In addition, Crescent Real Estate's common shares are listed on the New York
Stock Exchange, or NYSE, under the symbol "CEI". You can inspect any reports,
proxy statements and other information at the offices of the NYSE, 20 Broad
Street, New York, NY 10005.
Crescent Real Estate has filed with the Securities and Exchange
Commission a registration statement under the Securities Act of 1933, as
amended, that registers the distribution to Crescent Operating stockholders of
the Crescent Real Estate common shares to be issued in connection with the
Crescent Operating bankruptcy plan. In addition to serving as a proxy statement
of Crescent Operating for the special meeting of Crescent Operating's
stockholders, this document also serves as a prospectus for the Crescent Real
Estate common shares to be issued under the Crescent Operating bankruptcy plan.
The registration statement, including the attached exhibits and schedules,
contains additional relevant information about Crescent Real Estate. The rules
and regulations of the Securities and Exchange Commission permit Crescent Real
Estate to omit from this document some of the information included in the
registration statement. Copies of the registration statement, including
exhibits, may be inspected without charge at the offices of the Securities and
Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and copies
may be obtained from the Securities and Exchange Commission at prescribed rates.
The registration statement is also available from the Securities and Exchange
Commission's website.
The Securities and Exchange Commission allows Crescent Real Estate to
"incorporate by reference" information into this document. This means that
Crescent Real Estate can disclose important information to you by referring you
to another document filed with the Securities and Exchange
Commission. The information incorporated by reference is considered to be part
of this proxy statement/prospectus, except to the extent it has been superceded
by information that is included in this document or in a document subsequently
filed with the Securities and Exchange Commission that is incorporated by
reference.
Crescent Real Estate incorporates by reference important business and
financial information not otherwise included in this proxy statement/prospectus
but contained in the following documents, and any additional documents filed by
Crescent Real Estate with the Securities and Exchange Commission under Sections
13(a), 14 or 15(d) of the Securities Exchange Act of 1934, as amended, between
the date of this proxy statement/prospectus and the date of the Crescent
Operating special meeting:
- Crescent Real Estate's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002;
- Crescent Real Estate's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002;
- Amendment No. 1 to Crescent Real Estate's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002.
- Crescent Real Estate's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002;
- Amendment No. 3 to Crescent Real Estate's Annual Report on
Form 10-K/A for the fiscal year ended December 31, 2001.
- Amendment No. 2 to Crescent Real Estate's Annual Report on
Form 10-K/A for the fiscal year ended December 31, 2001;
- Amendment No. 1 to Crescent Real Estate's Annual Report on
Form 10-K/A for the fiscal year ended December 31, 2001;
- Crescent Real Estate's Annual Report on Form 10-K for the
fiscal year ended December 31, 2001;
- Crescent Real Estate's Current Report on Form 8-K filed June
26, 2002;
- Crescent Real Estate's Current Report on Form 8-K filed May
14, 2002;
- Amendment No. 1 to Crescent Real Estate's Current Report on
Form 8-K/A filed April 29, 2002;
- Crescent Real Estate's Current Report on Form 8-K filed April
25, 2002;
- Crescent Real Estate's Current Report on Form 8-K filed April
16, 2002;
- Crescent Real Estate's Current Report on Form 8-K filed April
1, 2002;
- Crescent Real Estate's Definitive Proxy Statement on Schedule
14A filed May 16, 2002;
- Crescent Real Estate's Registration Statement on Form 8-B
filed on March 24, 1997 registering the Crescent Common Shares
under Section 12(b) of the Exchange Act.
Documents incorporated by reference are available from Crescent Real
Estate, without charge, excluding any exhibits to those documents, unless the
exhibit is specifically incorporated by reference as an exhibit in this proxy
statement/prospectus. You can obtain documents incorporated by reference in
this proxy statement/prospectus by requesting them in writing or by telephone
from Crescent Real Estate at the following address:
Crescent Real Estate Equities Company
777 Main Street, Suite 2100
Fort Worth, Texas 76102
Attention: Keira B. Moody
(817) 321-2100
If you would like to request documents, please do so by February 27,
2003 to receive them before the special meeting. If you request any incorporated
document, Crescent Real Estate will mail it to you by first-class mail, or
another equally prompt means, as soon as practicable following receipt of your
request.
TABLE OF CONTENTS
NOTICES TO STOCKHOLDERS......................................................................................... vii
QUESTIONS AND ANSWERS ABOUT THE CRESCENT OPERATING BANKRUPTCY PLAN AND THE SPECIAL MEETING...................... 1
SUMMARY......................................................................................................... 12
The Companies............................................................................................... 12
Agreement for Transfer of Crescent Operating Assets to Crescent Real Estate................................. 16
Settlement Agreement........................................................................................ 16
Other Crescent Operating Recent Developments................................................................ 18
Summary of the Plan of Reorganization....................................................................... 19
Release and Waiver of Claims by Crescent Operating and Stockholders of Crescent Operating................... 21
Special Meeting and Voting.................................................................................. 23
Recommendation of Sole Director of Crescent Operating....................................................... 23
No Dissenters' Appraisal Rights............................................................................. 24
Tax Considerations.......................................................................................... 24
Interests of Certain Persons in the Reorganization Transactions............................................. 24
RISK FACTORS.................................................................................................... 27
Risks Associated with the Crescent Operating Bankruptcy Plan................................................ 27
Risks Associated with an Investment in Crescent Real Estate Common Shares................................... 33
COMPARATIVE PER SHARE MARKET PRICE INFORMATION.................................................................. 46
SELECTED HISTORICAL FINANCIAL INFORMATION OF CRESCENT REAL ESTATE............................................... 46
SELECTED HISTORICAL FINANCIAL INFORMATION OF CRESCENT OPERATING................................................. 48
SELECTED PRO FORMA FINANCIAL AND OPERATING INFORMATION OF CRESCENT REAL ESTATE.................................. 48
COMPARATIVE PER SHARE DATA...................................................................................... 50
THE SPECIAL MEETING OF CRESCENT OPERATING STOCKHOLDERS.......................................................... 51
Proxy Statement/Prospectus.................................................................................. 51
Date, Time, and Place of Special Meeting.................................................................... 51
Purpose of the Special Meeting.............................................................................. 51
Stockholder Record Date for the Special Meeting............................................................. 53
Vote of Crescent Operating Stockholders Required for Acceptance
of the Crescent Operating Bankruptcy Plan................................................................... 53
Proxies..................................................................................................... 53
Proxy Solicitation.......................................................................................... 54
Effect of Abstentions and Broker Non-Votes.................................................................. 54
i
THE REORGANIZATION TRANSACTIONS................................................................................. 54
Reasons for the Reorganization Transactions................................................................. 54
Summary of the Reorganization Transactions.................................................................. 56
Analysis of Alternatives.................................................................................... 67
Liquidation Analyses........................................................................................ 70
Events Leading to the Reorganization Transactions........................................................... 78
Recommendation of the Sole Director of Crescent Operating................................................... 85
Opinion of Crescent Operating's Financial Advisor........................................................... 85
Interests of Certain Persons in the Reorganization Transactions............................................. 92
Restrictions on Sales of Crescent Real Estate Common Shares by Affiliates of Crescent Operating............. 94
Listing on the New York Stock Exchange of Crescent Real Estate Common Shares to be Issued in the
Reorganization Transactions................................................................................. 94
No Dissenters' Appraisal Rights............................................................................. 94
THE PLAN OF REORGANIZATION...................................................................................... 94
Overview and Incorporation by Reference..................................................................... 94
Brief Explanation of Chapter 11............................................................................. 95
Classification and Treatment of Claims and Interests........................................................ 95
Conditions to Occurrence of the Effective Date.............................................................. 97
Executory Contracts and Unexpired Leases.................................................................... 98
Modifications of Plan of Reorganization; Severability of Provisions......................................... 98
Confirmation of the Plan of Reorganization.................................................................. 98
Implementation of the Plan of Reorganization................................................................ 102
Manner of Distribution of Property under the Plan of Reorganization......................................... 104
Effects of Confirmation of the Plan of Reorganization....................................................... 106
The Solicitation; Voting.................................................................................... 110
Acceptance or Cramdown...................................................................................... 111
FEDERAL INCOME TAX CONSIDERATIONS............................................................................... 112
Tax Consequences of the Crescent Operating Bankruptcy Plan.................................................. 112
Taxation of Crescent Real Estate............................................................................ 113
Taxation of Taxable U.S. Shareholders....................................................................... 121
Taxation of Tax-Exempt U.S. Shareholders.................................................................... 123
ii
Taxation of Non-U.S. Shareholders........................................................................... 123
State and Local Tax Consequences............................................................................ 126
Tax Aspects of Crescent Real Estate's Investment in Crescent Partnership and Subsidiary Partnerships........ 126
DESCRIPTION OF CRESCENT OPERATING'S BUSINESS.................................................................... 128
Overview of Crescent Operating.............................................................................. 128
Business Segments........................................................................................... 129
Equipment Sales and Leasing............................................................................ 130
Hospitality............................................................................................ 133
Temperature-Controlled Logistics....................................................................... 136
Land Development....................................................................................... 140
Other Investments...................................................................................... 143
Employees................................................................................................... 145
Properties.................................................................................................. 145
Legal Proceedings........................................................................................... 145
DESCRIPTION OF CRESCENT REAL ESTATE'S BUSINESS.................................................................. 147
Overview of Crescent Real Estate............................................................................ 147
Industry Segments........................................................................................... 147
Resort/Hotel Segment................................................................................... 153
Residential Development Segment........................................................................ 154
Temperature-Controlled Logistics Segment............................................................... 155
Employees................................................................................................... 157
Properties.................................................................................................. 157
Legal Proceedings........................................................................................... 171
CRESCENT OPERATING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........ 171
Overview.................................................................................................... 171
Recent Developments......................................................................................... 176
Results of Operations....................................................................................... 176
Three and Nine Months ended September 30, 2002, as Compared to Three and Nine Months
Ended September 30, 2001............................................................................... 176
Year Ended December 31, 2001, as Compared to 2000...................................................... 179
Year Ended December 31, 2000, as Compared to 1999...................................................... 182
Liquidity and Capital Resources............................................................................. 186
Three and Nine Months ended September 30, 2002......................................................... 187
Year ended December 31, 2001........................................................................... 189
iii
Critical Accounting Policies................................................................................ 193
Quantitative and Qualitative Disclosures About Market Risk.................................................. 193
CRESCENT REAL ESTATE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...... 194
Segment Information......................................................................................... 194
Office Segment......................................................................................... 194
Resort/Hotel Segment................................................................................... 196
Residential Development Segment........................................................................ 197
Temperature-Controlled Logistics Segment............................................................... 200
Behavioral Healthcare Segment.......................................................................... 201
Results of Operations....................................................................................... 203
Three Months Ended September 30, 2002 as Compared to Three Months Ended September 30, 2001............. 206
Nine Months Ended September 30, 2002 as Compared to Nine Months Ended September 30, 2001............... 211
Year Ended December 31, 2001 as Compared to 2000....................................................... 217
Year Ended December 31, 2000 as Compared to 1999....................................................... 219
Liquidity and Capital Resources............................................................................. 222
Nine Months Ended September 30, 2002................................................................... 222
Year ended December 31, 2001........................................................................... 226
Debt Financing Arrangements................................................................................. 256
Quantitative and Qualitative Disclosure about Market Risk................................................... 261
PRICE RANGE OF CRESCENT OPERATING COMMON STOCK, DIVIDENDS AND RELATED STOCKHOLDER MATTERS....................... 263
PRICE RANGE OF CRESCENT REAL ESTATE COMMON SHARES, DIVIDENDS AND RELATED SHAREHOLDER MATTERS.................... 265
SHARE OWNERSHIP BY PRINCIPAL STOCKHOLDERS, MANAGEMENT AND DIRECTORS OF CRESCENT OPERATING....................... 267
CRESCENT REAL ESTATE MANAGEMENT AND ADDITIONAL INFORMATION...................................................... 268
DESCRIPTION OF CAPITAL STOCK OF CRESCENT REAL ESTATE............................................................ 273
Description of Crescent Real Estate Common Shares........................................................... 273
Description of Series A Preferred Shares.................................................................... 276
Description of Common Share Warrants........................................................................ 283
COMPARISON OF RIGHTS OF HOLDERS OF CRESCENT OPERATING COMMON STOCK AND CRESCENT
REAL ESTATE COMMON SHARES....................................................................................... 283
Form of Entity.............................................................................................. 284
Capitalization.............................................................................................. 284
iv
Classified Board of Directors/Trust Managers; Number of Directors/Trust Managers............................ 284
Removal of Directors/Trust Managers......................................................................... 284
Filling Vacancies on the Board of Directors/Trust Managers.................................................. 285
Limits on Stockholder Action by Written Consent............................................................. 285
Ability to Call Special Meetings............................................................................ 286
Advance Notice Provisions for Stockholder Nominations and Proposals......................................... 286
Vote Required for Certain Stockholder Actions............................................................... 287
Amendment of Certificate of Incorporation/Declaration of Trust.............................................. 288
Amendment of Bylaws......................................................................................... 288
Restrictions on Business Combinations....................................................................... 289
Control Share Acquisition................................................................................... 289
Dividends................................................................................................... 291
Appraisal Rights............................................................................................ 292
Limitation of Personal Liability of Directors/Trust Managers and Officers................................... 293
Indemnification of Directors/Trust Managers and Officers.................................................... 293
Excess Share Provisions..................................................................................... 295
Anti-Takeover Provisions.................................................................................... 296
MATERIAL CONTACTS BETWEEN CRESCENT REAL ESTATE AND CRESCENT OPERATING........................................... 299
Intercompany Agreement...................................................................................... 299
LEGAL MATTERS................................................................................................... 300
EXPERTS......................................................................................................... 300
NOTICE REGARDING ARTHUR ANDERSEN LLP............................................................................ 301
STATEMENTS REGARDING FORWARD-LOOKING INFORMATION................................................................ 301
Crescent Operating, Inc. ................................................................................... 302
Crescent Real Estate Equities Company....................................................................... 304
Additional Information...................................................................................... 305
INDEX TO FINANCIAL STATEMENTS................................................................................... F-1
v
ANNEX INDEX
Annex A - Plan of Reorganization
Annex B - Settlement Agreement and First Amendment to Settlement Agreement
Annex C - Fairness Opinion of Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
vi
NOTICES TO STOCKHOLDERS
THE CRESCENT OPERATING BANKRUPTCY PLAN IS TO BE FILED IN CONNECTION
WITH A CASE TO BE COMMENCED IN THE FUTURE BY CRESCENT OPERATING UNDER CHAPTER 11
OF THE U.S. BANKRUPTCY CODE. AT THIS TIME, CRESCENT OPERATING HAS NOT COMMENCED
A CHAPTER 11 CASE. IF SUFFICIENT VOTES ARE RECEIVED ACCEPTING THE CRESCENT
OPERATING BANKRUPTCY PLAN, IT IS CRESCENT OPERATING'S PRESENT INTENTION TO
COMMENCE A CHAPTER 11 CASE AND SEEK TO HAVE THE CRESCENT OPERATING BANKRUPTCY
PLAN CONFIRMED BY THE BANKRUPTCY COURT AS PROMPTLY AS PRACTICABLE. IF THE
CRESCENT OPERATING BANKRUPTCY PLAN IS NOT ACCEPTED BY THE REQUIRED VOTE,
CRESCENT OPERATING WILL STILL FILE THE CHAPTER 11 CASE AND REQUEST THAT THE
BANKRUPTCY COURT CONFIRM THE CRESCENT OPERATING BANKRUPTCY PLAN UNDER THE
PROVISION OF THE BANKRUPTCY CODE WHICH IS COMMONLY REFERRED TO AS THE "CRAMDOWN
PROVISION." THIS PROVISION WOULD PERMIT CONFIRMATION OF THE CRESCENT OPERATING
BANKRUPTCY PLAN IF THE COURT FINDS THAT THE CRESCENT OPERATING BANKRUPTCY PLAN
DOES NOT DISCRIMINATE UNFAIRLY AGAINST, AND IS FAIR AND EQUITABLE TO, CRESCENT
OPERATING'S STOCKHOLDERS. THE CRESCENT OPERATING BANKRUPTCY PLAN PROVIDES THAT,
IF THE CRESCENT OPERATING BANKRUPTCY PLAN IS NOT ACCEPTED BY THE REQUIRED VOTE
OF THE CRESCENT OPERATING STOCKHOLDERS, AND IF THE CRESCENT OPERATING BANKRUPTCY
PLAN IS CONFIRMED BY THE BANKRUPTCY COURT PURSUANT TO THE "CRAMDOWN PROVISION,"
THEN THE STOCKHOLDERS OF CRESCENT OPERATING WILL NOT RECEIVE ANY COMMON SHARES
OF CRESCENT REAL ESTATE.
THIS PROXY STATEMENT/PROSPECTUS GIVES YOU DETAILED INFORMATION ABOUT
THE PROPOSED CRESCENT OPERATING BANKRUPTCY PLAN. YOU ARE ENCOURAGED TO READ THIS
PROXY STATEMENT/PROSPECTUS CAREFULLY. IN PARTICULAR, YOU SHOULD READ THE "RISK
FACTORS" SECTION BEGINNING ON PAGE 23 FOR A DESCRIPTION OF THE VARIOUS RISKS
YOU SHOULD CONSIDER IN EVALUATING THE PROPOSED CRESCENT OPERATING BANKRUPTCY
PLAN.
ON FEBRUARY 14, 2002, CRESCENT OPERATING AND CERTAIN OF ITS AFFILIATED
ENTITIES EXECUTED THE SETTLEMENT AGREEMENT, WHICH HAS SINCE BEEN AMENDED AND
WHICH IS ATTACHED TO THIS PROXY STATEMENT/PROSPECTUS AS ANNEX B.
CONTEMPORANEOUSLY WITH EXECUTION OF THE SETTLEMENT AGREEMENT, CRESCENT OPERATING
AND CRESCENT REAL ESTATE EXCHANGED MUTUAL RELEASES. IN PERTINENT PART, CRESCENT
OPERATING RELEASED ANY AND ALL CLAIMS THAT IT MIGHT HAVE AGAINST CRESCENT REAL
ESTATE AND CERTAIN AFFILIATES ARISING AT ANY TIME PRIOR TO EXECUTION OF THE
SETTLEMENT AGREEMENT.
PRIOR TO ENTERING INTO THE SETTLEMENT AGREEMENT, CRESCENT OPERATING,
ANALYZED WHETHER IT HAD CLAIMS AGAINST CRESCENT REAL ESTATE THAT SHOULD BE
PURSUED AS AN ALTERNATIVE TO THE PROPOSED SETTLEMENT AGREEMENT. CRESCENT
OPERATING CONSULTED ITS COUNSEL WHO REVIEWED, AMONG OTHER MATTERS, THE ORIGIN OF
CRESCENT OPERATING'S INDEBTEDNESS TO CRESCENT REAL ESTATE AND THE BUSINESS
RELATIONSHIP BETWEEN CRESCENT OPERATING AND CRESCENT REAL ESTATE THAT BEGAN IN
1997 WHEN THE SHARES OF CRESCENT OPERATING COMMON STOCK WERE DISTRIBUTED TO
CRESCENT REAL ESTATE SHAREHOLDERS. CRESCENT OPERATING INDEPENDENTLY EVALUATED
WHETHER THE BENEFIT TO CRESCENT OPERATING CREDITORS AND STOCKHOLDERS IN
CONSUMMATING THE SETTLEMENT AGREEMENT OUTWEIGHED THE BENEFIT THAT MIGHT BE
OBTAINED FROM NOT ENTERING INTO THE PROPOSED SETTLEMENT AGREEMENT AND INSTEAD
PURSUING CLAIMS AGAINST CRESCENT REAL ESTATE. IN MAKING THIS EVALUATION,
CRESCENT OPERATING TOOK INTO CONSIDERATION THE RELATIVE CERTAINTY OF ITS
CREDITORS AND STOCKHOLDERS REALIZING THE BENEFITS PROVIDED FOR IN THE SETTLEMENT
AGREEMENT AND THE RELATIVE UNCERTAINTY OF RECOVERY IN, AS WELL AS THE COSTS AND
DELAY ASSOCIATED WITH, PROSECUTING ANY CLAIMS, AND PARTICULARLY CLAIMS OF
UNCERTAIN MERIT.
BASED UPON THE TOTALITY OF THE CIRCUMSTANCES, CRESCENT OPERATING MADE
THE INDEPENDENT JUDGMENT THAT THE BEST INTERESTS OF ITS CREDITORS AND
STOCKHOLDERS WOULD BE SERVED BY ENTERING INTO THE SETTLEMENT AGREEMENT. CRESCENT
OPERATING CONCLUDED THAT THE BENEFITS TO ITS CREDITORS AND STOCKHOLDERS THAT
COULD BE REALIZED THROUGH THE SETTLEMENT AGREEMENT OUTWEIGHED THE COST TO
CRESCENT OPERATING OF GRANTING THE RELEASES TO CRESCENT REAL ESTATE.
THE SETTLEMENT AGREEMENT AND THE MUTUAL RELEASES
vii
EXECUTED IN CONNECTION WITH THE SETTLEMENT AGREEMENT, INCLUDING CRESCENT
OPERATING'S RELEASE OF ALL CLAIMS IT MAY HAVE AGAINST CRESCENT REAL ESTATE, ARE
ENFORCEABLE WHETHER OR NOT THE BANKRUPTCY PLAN IS APPROVED BY CRESCENT
OPERATING'S STOCKHOLDERS AND WHETHER OR NOT THE BANKRUPTCY PLAN IS CONFIRMED BY
THE BANKRUPTCY COURT. THE SETTLEMENT AGREEMENT ALSO PROVIDES THAT CRESCENT
OPERATING AND CRESCENT REAL ESTATE AND THE DIRECTORS OR TRUST MANAGERS,
OFFICERS, AGENTS AND EMPLOYEES OF EACH WILL BE RELEASED FROM ALL LIABILITIES AND
CLAIMS ARISING PRIOR TO THE EFFECTIVE DATE OF THE BANKRUPTCY PLAN.
IF THE BANKRUPTCY PLAN IS ACCEPTED BY THE STOCKHOLDERS AND CONFIRMED BY
THE BANKRUPTCY COURT, THEN, ON THE EFFECTIVE DATE OF THE CRESCENT OPERATING
BANKRUPTCY PLAN, EACH STOCKHOLDER OF CRESCENT OPERATING WHO IS A MEMBER OF A
CLASS THAT VOTES TO ACCEPT THE BANKRUPTCY PLAN OR WHO RECEIVES A DISTRIBUTION
UNDER THE BANKRUPTCY PLAN, WILL BE DEEMED TO UNCONDITIONALLY RELEASE CRESCENT
OPERATING AND CRESCENT REAL ESTATE AND ALL CURRENT AND FORMER OFFICERS AND
DIRECTORS OR TRUST MANAGERS OF CRESCENT OPERATING AND CRESCENT REAL ESTATE FROM
ALL CLAIMS AND LIABILITIES, EXCEPT FOR PERFORMANCE OR NONPERFORMANCE UNDER THE
SETTLEMENT AGREEMENT OR THE BANKRUPTCY PLAN AND EXCEPT FOR ANY ACTION OR
OMISSION THAT CONSTITUTES ACTUAL FRAUD OR CRIMINAL BEHAVIOR.
THE RELEASE OF CRESCENT OPERATING STOCKHOLDER CLAIMS WILL NOT APPLY IF
THE HOLDERS OF THE CRESCENT OPERATING COMMON STOCK, VOTING AS A CLASS, VOTE
AGAINST THE BANKRUPTCY PLAN. IN ADDITION, THE RELEASE OF CRESCENT OPERATING
STOCKHOLDER CLAIMS WILL NOT APPLY TO THE CLAIMS, IF ANY, OF A PERSON WHO SOLD
ITS CRESCENT OPERATING STOCK BEFORE THE RECORD DATE FOR THE VOTE, OR WHO EITHER
VOTED AGAINST THE BANKRUPTCY PLAN OR DID NOT VOTE AND THEREAFTER EITHER DID NOT
RECEIVE OR REFUSED TO ACCEPT A DISTRIBUTION OF CRESCENT REAL ESTATE COMMON
SHARES. THE RELEASE OF CRESCENT OPERATING STOCKHOLDER CLAIMS WILL APPLY TO
CRESCENT OPERATING STOCKHOLDERS ONLY IN THEIR CAPACITY AS CRESCENT OPERATING
STOCKHOLDERS, AND WILL NOT AFFECT THEIR RIGHTS AS HOLDERS OF CRESCENT REAL
ESTATE COMMON SHARES.
THIS RELEASE WILL BE SUBJECT TO THE EFFECT OF SECTION 29 OF THE
SECURITIES EXCHANGE ACT OF 1934, WHICH PROVIDES THAT ANY AGREEMENT BINDING ANY
PERSON TO WAIVE COMPLIANCE WITH THE EXCHANGE ACT IS VOID. YOU SHOULD BE AWARE
THAT IT IS THE POSITION OF THE SECURITIES AND EXCHANGE COMMISSION THAT THE
RELEASE WILL NOT BE EFFECTIVE WITH RESPECT TO CERTAIN CLAIMS ARISING UNDER
FEDERAL SECURITIES LAWS. IN ADDITION, IT IS THE POSITION OF THE SECURITIES AND
EXCHANGE COMMISSION THAT THE RELEASE OF AFFILIATES OF CRESCENT OPERATING AND THE
CURRENT AND FORMER OFFICERS AND DIRECTORS OR TRUST MANAGERS OF CRESCENT
OPERATING AND CRESCENT REAL ESTATE VIOLATES SECTION 524(E) OF THE BANKRUPTCY
CODE UNLESS SEPARATE CONSIDERATION IS PROVIDED BY THESE PARTIES OR THE RELEASE
IS VOLUNTARY.
EFFECTIVE OCTOBER 1, 2002, CRESCENT OPERATING AND CRESCENT REAL ESTATE
AMENDED THE SETTLEMENT AGREEMENT. THE AMENDMENT PROVIDES FOR, AMONG OTHER
THINGS, A MINIMUM VALUE OF CRESCENT REAL ESTATE COMMON SHARES TO BE ISSUED IN
CONNECTION WITH THE BANKRUPTCY PLAN IF THE BANKRUPTCY PLAN IS ACCEPTED BY THE
REQUISITE VOTE OF CRESCENT OPERATING STOCKHOLDERS AND CONFIRMED BY THE
BANKRUPTCY COURT.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE CRESCENT OPERATING BANKRUPTCY
PLAN, PASSED ON THE MERITS OR FAIRNESS OF THE CRESCENT OPERATING BANKRUPTCY PLAN
OR PASSED ON THE ADEQUACY OR ACCURACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROXY STATEMENT/PROSPECTUS HAS NOT BEEN APPROVED BY THE BANKRUPTCY
COURT WITH RESPECT TO ADEQUACY OF INFORMATION. HOWEVER, IF THE CRESCENT
OPERATING BANKRUPTCY PLAN IS ACCEPTED BY THE REQUIRED VOTE, CRESCENT OPERATING
WILL SEEK BANKRUPTCY COURT APPROVAL OF THIS PROXY STATEMENT/PROSPECTUS AS PART
OF THE ORDER CONFIRMING THE CRESCENT OPERATING BANKRUPTCY PLAN.
THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS SHALL NOT UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION SET FORTH HEREIN OR ANY ATTACHMENTS
viii
HERETO OR IN THE AFFAIRS OF CRESCENT REAL ESTATE, CRESCENT OPERATING, OR ANY OF
THEIR SUBSIDIARIES SINCE THE DATE HEREOF.
PRIOR TO VOTING, STOCKHOLDERS ARE ENCOURAGED TO READ AND CONSIDER
CAREFULLY THIS ENTIRE PROXY STATEMENT/PROSPECTUS INCLUDING THE BANKRUPTCY PLAN
OF REORGANIZATION ATTACHED HERETO AS ANNEX A AND THE MATTERS DESCRIBED IN THIS
PROXY STATEMENT/PROSPECTUS.
IN MAKING A DECISION IN CONNECTION WITH THE CRESCENT OPERATING
BANKRUPTCY PLAN, STOCKHOLDERS MUST RELY ON THEIR OWN EXAMINATION OF CRESCENT
OPERATING AND CRESCENT REAL ESTATE AND THE TERMS OF THE CRESCENT OPERATING
BANKRUPTCY PLAN, INCLUDING THE MERITS AND RISKS INVOLVED. STOCKHOLDERS SHOULD
NOT CONSTRUE THE CONTENTS OF THIS PROXY STATEMENT/PROSPECTUS AS PROVIDING ANY
LEGAL, BUSINESS, FINANCIAL OR TAX ADVICE. EACH STOCKHOLDER SHOULD CONSULT WITH
ITS OWN LEGAL, BUSINESS, FINANCIAL AND TAX ADVISORS WITH RESPECT TO ANY SUCH
MATTERS CONCERNING THIS PROXY STATEMENT/PROSPECTUS, THE CRESCENT OPERATING
BANKRUPTCY PLAN OR THE TRANSACTIONS CONTEMPLATED THEREBY.
ix
QUESTIONS AND ANSWERS ABOUT THE CRESCENT
OPERATING BANKRUPTCY PLAN AND THE SPECIAL
MEETING
Unless the context otherwise requires, the terms Crescent Operating and
Crescent Real Estate include the subsidiaries of each and, in the case of
Crescent Real Estate, includes Crescent Real Estate Equities Limited
Partnership, or Crescent Partnership. Unless the context otherwise requires,
"bankruptcy plan" and "Plan of Reorganization" both refer to the Crescent
Operating bankruptcy plan that is described in this proxy statement/prospectus.
The Plan of Reorganization is attached to this proxy statement/prospectus as
Annex A and is incorporated by reference to this proxy statement/prospectus.
Unless the context otherwise requires, "Settlement Agreement" refers to the
Settlement Agreement executed on February 14, 2002, as amended by the First
Amendment to Settlement Agreement executed effective October 1, 2002. The
Settlement Agreement and the First Amendment to Settlement Agreement are
attached to this proxy statement/prospectus as Annex B and are incorporated by
reference to this proxy statement/prospectus.
The Crescent Operating Bankruptcy Plan
Q. WHAT AM I VOTING ON?
A. You are voting on a proposal to accept a bankruptcy plan that will
result in the orderly termination of Crescent Operating's business
and could result in your receiving Crescent Real Estate common
shares.
Q. WHY IS CRESCENT OPERATING PROPOSING THE BANKRUPTCY PLAN?
A. Crescent Operating is proposing the bankruptcy plan to effect an
orderly termination of its business. Substantially all of Crescent
Operating's assets are or were encumbered by liens in favor of Crescent
Real Estate. Crescent Operating is in default in its obligations to
Crescent Real Estate. The value of Crescent Operating's assets was, and
continues to be, insufficient to satisfy the secured claims of Crescent
Real Estate. On February 14, 2002, Crescent Operating entered into the
original Settlement Agreement with Crescent Real Estate and transferred
many of the encumbered assets to Crescent Real Estate in partial
satisfaction of its claims. The Settlement Agreement requires the
filing of a prepackaged bankruptcy plan for Crescent Operating. If the
bankruptcy plan is confirmed, the Settlement Agreement obligates
Crescent Real Estate to provide Crescent Operating with funds to cover
budgeted expenses and pay in full or otherwise resolve the claims of
those creditors of Crescent Operating identified in the original
Settlement Agreement and gives Crescent Operating stockholders the
opportunity to receive Crescent Real Estate common shares.
Q. WHY IS THE SOLE DIRECTOR OF CRESCENT OPERATING RECOMMENDING THAT I VOTE
FOR THE CRESCENT OPERATING BANKRUPTCY PLAN?
A. Crescent Operating's sole director is recommending that you vote for
the Crescent Operating bankruptcy plan because he concluded that the
bankruptcy plan, which provides for payments to Crescent Operating's
creditors as well as the opportunity for Crescent Operating
stockholders to receive Crescent Real Estate common shares with a value
that is expected to be between $0.20 to $0.50 per share, but will not
be less than $0.20 per share, of Crescent Operating common stock,
1
was the best available alternative for Crescent Operating, its
creditors and stockholders.
After Crescent Real Estate terminated the asset purchase agreement and
the securities purchase agreement described below under "The
Reorganization Transactions - Events Leading to the Reorganization
Transactions," the sole director, working with Crescent Operating's
counsel, analyzed Crescent Operating's alternatives. These alternatives
included the following:
- exploring the possibility of obtaining additional funds sufficient to
satisfy its obligations and continue its ongoing operations;
- liquidating Crescent Operating under Chapter 7 of the Bankruptcy Code;
- instigating litigation requesting that a court set aside Crescent Real
Estate's liens or recharacterize the Crescent Real Estate agreements
as equity infusions rather than loans; and
- not settling its claims with Crescent Real Estate and filing for
bankruptcy to avoid a foreclosure by Crescent Real Estate.
After analyzing these alternatives, the sole director concluded that
the bankruptcy plan provided the best alternative with regard to the
amount and the likelihood of recovery for the creditors and
stockholders of Crescent Operating. Before finalizing his evaluation,
however, Crescent Operating's sole director consulted with legal and
financial advisors and also obtained an opinion stating that the
aggregate consideration to be received by Crescent Operating and its
stockholders, taken as a whole, in connection with the transactions
contemplated by the bankruptcy plan and the Settlement Agreement is
fair to the public stockholders of Crescent Operating from a financial
point of view, assuming a distribution of Crescent Real Estate common
shares with a value of $0.32 to $0.50. However, this opinion maintains
that it would not necessarily change if Crescent Real Estate were to
advance additional funds, as Crescent Real Estate agreed to do in the
October 2002 amendment to the Settlement Agreement and as described
below in "The Reorganization Transactions - Summary of the
Reorganization Transactions - Payment by Crescent Real Estate of
Crescent Operating Claims and Expenses," that reduce the value of
Crescent Real Estate common shares to below $0.32. See "The
Reorganization Transactions - Analysis of Alternatives" for a more
detailed description of the analyses performed on behalf of Crescent
Operating by the sole director and third-party consultants.
Crescent Operating's sole director performed these analyses and
negotiated the bankruptcy plan and Settlement Agreement independently
from the other four members of the Crescent Operating Board of
Directors, each of whom also serves as a trust manager of Crescent Real
Estate. In order to avoid conflicts of interest, none of these four
directors participated in the negotiations on behalf of Crescent
Operating, and all four resigned as directors of Crescent Operating on
February 13, 2002. One of these directors, John C. Goff, participated
in the initial structuring of the proposed transactions, but did not
participate in any negotiations due to potential conflicts of interest
arising primarily from his position as Chief Executive Officer and a
trust manager of Crescent Real Estate, as more fully described in "The
Reorganization Transactions - Interests of Certain Persons in the
Reorganization Transactions." As a result of these analyses, the sole
director concluded that the Settlement Agreement and the pre-packaged
bankruptcy were the best available alternatives for the Crescent
Operating creditors and stockholders and the alternatives most likely
to maximize stockholder value.
Q. WHAT IS THE VOTE REQUIRED TO ACCEPT THE CRESCENT OPERATING BANKRUPTCY
PLAN?
A. The affirmative vote of two-thirds of the votes cast in person or by
proxy is required to accept the Crescent Operating bankruptcy plan. In
addition, at least a majority of the outstanding Crescent Operating
common stock must be represented at the special meeting to constitute a
quorum. Holders of Crescent Operating common stock are entitled to one
vote for each share of Crescent Operating common stock they hold.
2
Q. WHAT HAPPENS IF THE CRESCENT OPERATING STOCKHOLDERS VOTE FOR ACCEPTANCE
OF THE CRESCENT OPERATING BANKRUPTCY PLAN?
A. If the Crescent Operating stockholders cast enough votes to accept the
Crescent Operating bankruptcy plan, Crescent Operating will file a
bankruptcy petition under the Bankruptcy Code and will submit the
bankruptcy plan to the bankruptcy court for confirmation. If the
bankruptcy court confirms the bankruptcy plan, you will cease to be a
stockholder of Crescent Operating on the date the bankruptcy plan
becomes effective. You will receive common shares of Crescent Real
Estate subject to the conditions discussed below in the answer to the
question "Are there conditions to my receipt of Crescent Real Estate
common shares?"
If the holders of Crescent Operating common stock, voting as a class,
vote for acceptance of the bankruptcy plan, each stockholder will be
deemed to unconditionally release Crescent Operating and Crescent Real
Estate and all current and former officers and directors or trust
managers of Crescent Operating and Crescent Real Estate from all claims
and liabilities, except for performance or nonperformance under the
Settlement Agreement and the bankruptcy plan and except for any action
or omission that constitutes actual fraud or criminal behavior. The
Settlement Agreement and the mutual releases executed in connection
with the Settlement Agreement, including Crescent Operating's release
of all claims it may have against Crescent Real Estate, are enforceable
whether or not the bankruptcy plan is approved by Crescent Operating's
stockholders and whether or not the bankruptcy plan is confirmed by the
bankruptcy court. If the Crescent Operating stockholders vote to accept
the bankruptcy plan, but an individual stockholder votes against the
bankruptcy plan, abstains or does not vote, and either does not receive
or refuses to accept any distribution under the bankruptcy plan, then
that stockholder will not be deemed to have released any claims against
Crescent Real Estate or its current or former officers and trust
managers or Crescent Operating's current or former officers and
directors. The release of Crescent Operating stockholder claims will
apply to Crescent Operating stockholders only in their capacity as
Crescent Operating stockholders and will not affect their rights as
holders of Crescent Real Estate common shares.
In substance, section 524(e) of the Bankruptcy Code provides that the
release of third party claims against a debtor such as Crescent
Operating does not release any other person. In addition to the release
of Crescent Operating, the bankruptcy plan includes releases of
Crescent Real Estate and all current and former officers and directors
or trust managers of Crescent Operating or Crescent Real Estate. It is
the position of the Securities and Exchange Commission that these
additional releases violate section 524(e) unless separate
consideration is provided by the specific parties being released or the
releases are voluntary. Crescent Operating believes the releases
contemplated by the bankruptcy plan comply with section 524(e) of the
Bankruptcy Code and applicable law, both because Crescent Real Estate
is paying substantial consideration to Crescent Operating and its
stockholders to obtain the releases provided under the bankruptcy plan
and because the releases are voluntary.
In addition, as discussed in this proxy statement, Crescent Real Estate
is providing sufficient funds both to pay in full or otherwise resolve
the claims of those creditors of Crescent Operating identified in the
original Settlement Agreement and to cover budgeted expenses of
Crescent Operating. In addition, Crescent Real Estate is providing a
distribution to Crescent Operating stockholders of Crescent Real Estate
common shares if the stockholders vote to accept the bankruptcy plan
and the bankruptcy court confirms the plan. Accordingly, the
consideration is being provided either directly by the persons who
receive the benefit of the releases provided in the bankruptcy plan or
on their behalf. Whether this consideration for the releases is
sufficient is an issue of fact that the bankruptcy court has authority
to determine. If the bankruptcy court
3
concludes that the releases in the bankruptcy plan violate section
524(e) of the Bankruptcy Code, the bankruptcy court may refuse to
confirm the bankruptcy plan as written. In that event, Crescent Real
Estate does not have an obligation to fund payments to Crescent
Operating's creditors or to make a distribution to stockholders of
Crescent Operating even though the stockholders cast enough votes to
accept the Crescent Operating bankruptcy plan proposed to them.
Crescent Operating also believes that the release by any stockholder
who accepts the bankruptcy plan is voluntary. Any Crescent Operating
stockholder who does not wish to provide the release may retain full
rights to pursue claims against Crescent Real Estate, Crescent
Operating and their current and former officers and directors or trust
managers by voting against the bankruptcy plan, abstaining or not
voting, and either not receiving or refusing to accept any distribution
under the bankruptcy plan.
Q. IS THE TOTAL VALUE OF THE CRESCENT REAL ESTATE COMMON SHARES BEING
OFFERED TO CRESCENT OPERATING STOCKHOLDERS IN THE CRESCENT OPERATING
BANKRUPTCY PLAN SUBJECT TO ADJUSTMENT?
A. Yes. The total value of the Crescent Real Estate common shares offered
to Crescent Operating stockholders will depend on the dollar amount of
claims and expenses paid by Crescent Real Estate in connection with the
Crescent Operating bankruptcy and the reorganization transactions, but
will not be less than approximately $2.16 million, or $0.20 per share
of Crescent Operating common stock.
Q. HOW WILL CRESCENT REAL ESTATE AND CRESCENT OPERATING DETERMINE THE
TOTAL VALUE OF THE CRESCENT REAL ESTATE COMMON SHARES BEING OFFERED TO
CRESCENT OPERATING STOCKHOLDERS PURSUANT TO THE CRESCENT OPERATING
BANKRUPTCY PLAN?
A. The total value of the Crescent Real Estate common shares offered to
Crescent Operating stockholders will equal the greater of:
- approximately $2.16 million; or
- $16.0 million minus the total amount of payments made by Crescent Real
Estate for claims and expenses relating to the Crescent Operating
bankruptcy and the reorganization transactions, including expenses of
Crescent Real Estate but excluding payments in satisfaction of the
Bank of America claim.
As of December 31, 2002, Crescent Real Estate had incurred
approximately $8.5 million in claims and expenses in connection with
the Crescent Operating bankruptcy and the reorganization transactions
and expects to incur an aggregate of $10.6 million to $13.8 million in
total claims and expenses.
Q. HOW MUCH DO CRESCENT OPERATING AND CRESCENT REAL ESTATE EXPECT CRESCENT
REAL ESTATE TO PAY FOR CLAIMS AND EXPENSES, AND WHAT IS THE TOTAL VALUE
OF THE CRESCENT REAL ESTATE COMMON SHARES THAT CRESCENT OPERATING AND
CRESCENT REAL ESTATE BELIEVE WILL BE ISSUED TO CRESCENT OPERATING
STOCKHOLDERS?
A. Crescent Operating and Crescent Real Estate currently estimate that
Crescent Real Estate will advance funds to pay in full or otherwise
resolve total claims and expenses of between $10.6 million and $13.8
million. Accordingly, the total value of the Crescent Real Estate
common shares issued to the Crescent Operating stockholders is expected
to be between $5.4 million and
4
$2.16 million, or $0.50 to $0.20 per share of Crescent Operating common
stock. If a material variance in this estimated range of aggregate
claims and expenses occurs after the date that Crescent Operating mails
this proxy statement/prospectus to its stockholders, then Crescent
Operating will issue a press release and file a Current Report on Form
8-K with the Securities and Exchange Commission disclosing the material
variance. Regardless of the actual amount of claims and expenses, in no
event will the stockholders of Crescent Operating have the opportunity
to reconsider approval of the bankruptcy plan. As of December 31, 2002,
Crescent Real Estate had incurred approximately $8.5 million in claims
and expenses.
Q. CAN THE TOTAL CLAIMS AND EXPENSES THAT CRESCENT REAL ESTATE PAYS IN
CONNECTION WITH THE CRESCENT OPERATING BANKRUPTCY AND THE
REORGANIZATION TRANSACTIONS REDUCE THE VALUE OF THE DISTRIBUTION OF
CRESCENT REAL ESTATE COMMON SHARES TO THE CRESCENT OPERATING
STOCKHOLDERS TO LESS THAN $0.20 PER SHARE?
A. No. Regardless of the total amount of claims and expenses that are paid
by Crescent Real Estate in connection with the bankruptcy plan and the
reorganization transactions, if the bankruptcy plan is accepted by the
requisite vote of the Crescent Operating stockholders and is confirmed
by the bankruptcy court, then Crescent Operating stockholders will
receive common shares of Crescent Real Estate with a value of at least
$2.16 million, or $0.20 per share of Crescent Operating common stock.
Q. HOW IS THE VALUE OF THE CRESCENT REAL ESTATE COMMON SHARES CALCULATED?
A. The value of the Crescent Real Estate common shares to be issued
pursuant to the bankruptcy plan is computed based on the average of the
closing prices of the Crescent Real Estate common shares on the New
York Stock Exchange, or the NYSE, for the ten trading days immediately
preceding the date of confirmation of the Crescent Operating bankruptcy
plan.
Q. ARE THERE CONDITIONS TO MY RECEIPT OF CRESCENT REAL ESTATE COMMON
SHARES?
A. Yes. There are three principal conditions:
- Crescent Operating stockholders must accept the Crescent Operating
bankruptcy plan by the requisite vote (2/3 or more of the number of
votes cast at the meeting in person or by proxy);
- the bankruptcy court must confirm the Crescent Operating bankruptcy
plan, including the releases incorporated in the bankruptcy plan; and
- you must be a Crescent Operating stockholder on the confirmation date.
Q. WHAT SHOULD I KNOW ABOUT CRESCENT REAL ESTATE AND THE CRESCENT REAL
ESTATE COMMON SHARES?
A. Crescent Real Estate is a real estate investment trust. This proxy
statement/prospectus contains a description of Crescent Real Estate and
its business, as well as its financial statements. You should carefully
review this proxy statement/prospectus, including the annexes hereto,
before casting your vote. An investment in Crescent Real Estate common
shares involves risks, as described in "Risk Factors - Risks Associated
with an Investment in Crescent Real Estate Common Shares". The common
shares of Crescent Real Estate trade publicly on the NYSE under the
symbol "CEI."
5
Q. WHAT HAPPENS IF THE CRESCENT OPERATING STOCKHOLDERS VOTE AGAINST
ACCEPTANCE OF THE CRESCENT OPERATING BANKRUPTCY PLAN?
A. If a sufficient number of Crescent Operating stockholders vote against
the Crescent Operating bankruptcy plan, such that not enough votes are
cast to accept the bankruptcy plan, the bankruptcy plan provides that
none of the stockholders of Crescent Operating will receive Crescent
Real Estate common shares under the plan. Crescent Operating will still
file a bankruptcy petition under the Bankruptcy Code and seek to have
the bankruptcy plan, as currently proposed to the stockholders of
Crescent Operating, confirmed by the bankruptcy court pursuant to the
"cramdown" provision of the Bankruptcy Code. If the bankruptcy court
confirms the plan pursuant to the "cramdown" provision, Crescent
Operating stockholders will not receive common shares of Crescent Real
Estate but will still cease to be stockholders of Crescent Operating on
the date the bankruptcy plan becomes effective. In this circumstance,
the stockholder releases described in the answer to the question "What
happens if the Crescent Operating stockholders vote FOR acceptance of
the Crescent Operating bankruptcy plan?" will not take effect, and the
Crescent Operating stockholders will not be deemed to have released any
of their direct claims against Crescent Operating or Crescent Real
Estate or against the current and former officers and the directors or
trust managers of either Crescent Operating or Crescent Real Estate. In
addition, each Crescent Operating stockholder would retain the right to
seek to enforce a Crescent Operating cause of action against parties
other than Crescent Real Estate and the other parties released under
the Settlement Agreement. Crescent Operating's pre-bankruptcy release
of its claims against Crescent Real Estate, including claims by
stockholders seeking to enforce, on behalf of Crescent Operating, a
claim of Crescent Operating against Crescent Real Estate, however, will
remain in effect.
The bankruptcy court has authority to determine whether Crescent
Operating's release of its claims, or the other transactions under the
Settlement Agreement, could be avoided or set aside as a fraudulent
transfer under either Texas law or section 548 of the Bankruptcy Code.
The primary consideration in a fraudulent transfer action is whether
the transferor received reasonably equivalent value in exchange for the
transfer. In this case, Crescent Operating believes that the payments
and other consideration that Crescent Real Estate is providing pursuant
to the Settlement Agreement in connection with the bankruptcy plan
constitute reasonably equivalent value for the consideration Crescent
Operating gave Crescent Real Estate in the Settlement Agreement.
Fraudulent transfer claims are typically brought for the benefit of
creditors. In this case, Crescent Real Estate agreed, if the bankruptcy
plan is confirmed, to pay in full or otherwise resolve the claims of
the Crescent Operating creditors that Crescent Operating identified at
the time of the execution of the original Settlement Agreement. As a
result, these creditors, rather than being harmed by the Settlement
Agreement, will benefit from the Settlement Agreement.
If the bankruptcy court refuses to confirm the bankruptcy plan
described in this proxy statement, Crescent Operating may seek to have
an alternative plan confirmed by the court. In that event, Crescent
Operating creditors and stockholders will receive further notice
regarding the alternative plan.
Q. WHAT RIGHTS DO I HAVE IF I OPPOSE THE CRESCENT OPERATING BANKRUPTCY
PLAN?
A. If you oppose the bankruptcy plan, you may vote against it. There are
no dissenters' appraisal rights available under applicable state
corporate law with respect to the Crescent Operating bankruptcy plan.
After the bankruptcy plan is filed with the bankruptcy court, you may
hire an attorney to argue your position to the court and you may file
pleadings with the bankruptcy court
6
explaining why you believe the bankruptcy plan should not be confirmed,
whether or not the Crescent Operating stockholders approved the
bankruptcy plan.
As described previously in "What happens if the Crescent Operating
stockholders vote AGAINST acceptance of the Crescent Operating
bankruptcy plan?", Crescent Operating will file its bankruptcy petition
and seek to have the bankruptcy plan confirmed even if the requisite
numbers of Crescent Operating stockholders do not vote to accept the
bankruptcy plan. Crescent Operating believes it will be successful in
obtaining confirmation of the bankruptcy plan, even over the
stockholders' failure to approve the bankruptcy plan or a stockholder's
objection, but it is not a certainty that the court will confirm the
bankruptcy plan.
If the Crescent Operating bankruptcy plan is confirmed by the
bankruptcy court, all of the stockholders of Crescent Operating will be
bound by all of the terms and conditions of the bankruptcy plan.
However, Crescent Operating stockholders who sell their shares of
Crescent Operating common stock before the voting record date, as well
as Crescent Operating stockholders who vote against the bankruptcy
plan, abstain from voting or do not vote on the bankruptcy plan, and
who do not receive or refuse to accept a distribution under the
bankruptcy plan, will not be bound by the releases in the bankruptcy
plan. If the class of Crescent Operating stockholders votes against the
bankruptcy plan, the Crescent Operating stockholders will not release
any direct, or non-derivative, claims against third parties. Each
Crescent Operating stockholder would retain the right to assert any
direct claims that the stockholder may have against Crescent Operating
or Crescent Real Estate, or the officers and directors or trust
managers of either entity, including claims alleging violations of
applicable state or federal securities laws. In addition, each Crescent
Operating stockholder would retain the right to seek to enforce a
Crescent Operating cause of action against parties other than Crescent
Real Estate and the other parties released under the Settlement
Agreement. The Settlement Agreement and the mutual releases executed in
connection with the Settlement Agreement, including Crescent
Operating's release of all claims it may have against Crescent Real
Estate and affiliates arising prior to the execution of the original
Settlement Agreement, are enforceable whether or not the bankruptcy
plan is approved by Crescent Operating's stockholders and whether or
not the bankruptcy plan is confirmed by the bankruptcy court. The
bankruptcy court has the authority to determine whether Crescent
Operating's release of its claims, or the other transactions under the
Settlement Agreement, could be avoided or set aside as a fraudulent
transfer under either state law or section 548 of the Bankruptcy Code.
The primary consideration in a fraudulent transfer action is whether
the transferor received reasonably equivalent value for the transfer.
In this case, Crescent Operating believes that the payments and other
consideration that Crescent Real Estate is providing pursuant to the
Settlement Agreement and in connection with the bankruptcy plan
constitute reasonably equivalent value for the consideration Crescent
Operating gave Crescent Real Estate in the Settlement Agreement.
Fraudulent transfer claims are typically brought for the benefit of
creditors. In this case, Crescent Real Estate agreed, if the bankruptcy
plan is confirmed, to pay all the claims of the Crescent Operating
creditors that Crescent Operating identified at the time of the
Settlement Agreement. As a result, these creditors, rather than being
harmed by the Settlement Agreement, in fact will benefit from the
Settlement Agreement.
Q. WAS A FAIRNESS OPINION RENDERED IN CONNECTION WITH THE CRESCENT
OPERATING BANKRUPTCY PLAN?
A. Yes. The sole director of Crescent Operating has received and relied
upon an opinion from Houlihan Lokey Howard & Zukin Financial Advisors,
Inc., an investment-banking firm, dated February 14, 2002, that,
subject to and based on the considerations in its opinion, the
aggregate consideration to be received by Crescent Operating and its
stockholders, taken as a whole, in connection with the transactions
7
contemplated by the bankruptcy plan and the Settlement Agreement is
fair to the public stockholders of Crescent Operating from a financial
point of view, assuming a distribution of Crescent Real Estate common
shares with a value of $0.32 to $0.50. However, Houlihan Lokey's
opinion specifically stated that its opinion would not necessarily
change if Crescent Real Estate were to advance additional funds, as
Crescent Real Estate agreed to do in the October 2002 amendment to the
Settlement Agreement and as described below in "The Reorganization
Transactions - Summary of the Reorganization Transactions - Payment by
Crescent Real Estate of Crescent Operating Claims and Expenses," that
reduce the value of Crescent Real Estate common shares to below $0.32.
The full text of Houlihan Lokey's opinion, which sets forth, among
other things, the assumptions made, procedures followed, matters
considered and limitations on the review undertaken by Houlihan Lokey,
is attached as Annex C to this proxy statement/prospectus. Crescent
Operating urges you to read the Houlihan Lokey opinion in its entirety.
See "The Crescent Operating Bankruptcy Plan - Opinion of Crescent
Operating's Financial Advisor" for a more detailed description of the
opinion and the background of the opinion. In addition, you should read
"Risk Factors - Limitations on the scope of Houlihan Lokey's fairness
opinion could lead to Crescent Operating stockholders to assign too
much importance to the fairness opinion in making their decision on
whether to vote to approve the bankruptcy plan" for a discussion of
issues and concerns related to the date and the limited scope of
Houlihan Lokey's opinion.
Q. WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF THE CRESCENT OPERATING
BANKRUPTCY PLAN?
A. The distribution to you of Crescent Real Estate common shares will be
treated as a distribution in liquidation of Crescent Operating. You
will realize gain or loss based on the difference between your basis in
your shares of Crescent Operating common stock and the fair market
value of the Crescent Real Estate common shares you receive. In
general, if you are not a dealer in securities, you must treat this
gain or loss as a long term capital gain or loss if you held your
shares of Crescent Operating common stock for more than one year or,
otherwise, as a short term capital gain or loss. If you acquired shares
of Crescent Operating common stock at different times, the
determination of gain or loss and the holding period is made on the
facts specific to each share. Your basis in the Crescent Real Estate
common shares you will receive will be the fair market value of the
Crescent Real Estate common shares at the time of distribution.
Q. ARE THERE ANY RISKS IN THE CRESCENT OPERATING BANKRUPTCY PLAN?
A. Yes. If there are enough votes to accept the Crescent Operating
bankruptcy plan, you are expected to receive Crescent Real Estate
common shares only if the bankruptcy plan is confirmed and you own
shares of Crescent Operating common stock on the date that the Crescent
Operating bankruptcy plan is confirmed. The number of Crescent Real
Estate common shares that you will receive is subject to reduction
depending on the amount of expenses and claims relating to the Crescent
Operating bankruptcy plan and reorganization transactions that Crescent
Real Estate pays, however, in no event will the Crescent Operating
stockholders receive Crescent Real Estate common shares with a value of
less than approximately $2.16 million or $0.20 per share of Crescent
Operating common stock if the bankruptcy plan is accepted by the
Crescent Operating stockholders and confirmed by the bankruptcy court.
If there are not enough votes of the Crescent Operating stockholders to
accept the Crescent Operating bankruptcy plan, Crescent Operating will
still seek confirmation of the bankruptcy plan, but the Crescent
Operating stockholders will receive no Crescent Real Estate common
shares. Other risks relating to the bankruptcy plan, including, but not
limited to, the bankruptcy court denying confirmation of the bankruptcy
plan and Crescent Real Estate electing not to assume any unidentified
liabilities of
8
Crescent Operating are described in "Risk Factors - Risks Associated
with the Crescent Operating Bankruptcy Plan."
Q. ARE THERE ANY CONDITIONS TO CONFIRMATION AND IMPLEMENTATION OF THE
CRESCENT OPERATING BANKRUPTCY PLAN?
A. Yes. The Crescent Operating bankruptcy plan provides that, except as
expressly waived by Crescent Operating with the consent of Crescent
Real Estate, the following are conditions to confirmation and
implementation of the Crescent Operating bankruptcy plan:
- the bankruptcy court has signed a confirmation order confirming the
Crescent Operating bankruptcy plan, and the clerk of the bankruptcy
court has duly entered the confirmation order on the docket for the
bankruptcy case in a form and substance that is acceptable to Crescent
Operating;
- the confirmation order has become effective and has not been stayed,
modified, reversed or amended; and
- Crescent Real Estate has received all regulatory approvals and
authorizations necessary to create the subsidiary of Crescent Real
Estate that will acquire Crescent Operating's entire membership
interest in COPI Cold Storage, LLC, and that will distribute its
shares to the holders of Crescent Real Estate common shares, other
than the holders of Crescent Real Estate common shares distributed to
the Crescent Operating stockholders as a result of the Crescent
Operating bankruptcy plan.
Q. WHEN DO YOU EXPECT THE CRESCENT OPERATING BANKRUPTCY PLAN TO BE
CONFIRMED BY THE BANKRUPTCY COURT?
A. Crescent Operating's goal is to have the Crescent Operating bankruptcy
plan confirmed as quickly as possible. Crescent Operating currently
believes that the Crescent Operating bankruptcy plan will be confirmed
in the first quarter of 2003.
The Special Meeting
Q. HOW DO I VOTE?
A. After you carefully read this document, you may vote by proxy using any
of the following means:
- by indicating on the enclosed proxy card how you want to vote, signing
it, dating it and mailing it in the enclosed prepaid return envelope;
- by touchtone telephone from the U.S. and Canada, using the toll-free
telephone number on the proxy card; or
- in person at the special meeting, unless you are a "street name"
holder without a proxy signed by your broker.
You should indicate your vote now by proxy even if you expect to attend
the special meeting and vote in person. Indicating your vote now will not
prevent you from later canceling or revoking your vote at any time prior to the
vote at the special meeting and will ensure that your shares are voted if you
later find you cannot attend the special meeting.
9
Q. CAN I CHANGE MY VOTE AFTER I HAVE VOTED BY PROXY?
A. Yes. Unless you hold your shares in "street name" through your broker,
you can change your vote prior to the taking of the vote at the special
meeting:
- by giving written notice of revocation to the secretary of Crescent
Operating;
- only if the prior vote was by written proxy, by properly submitting a
duly executed proxy bearing a later date;
- only if the prior vote was by telephone, by casting a subsequent vote
by telephone prior to the special meeting; or
- by voting in person at the special meeting.
Only the last vote of a stockholder will be counted. For a more
complete description of voting procedures, see "The Special Meeting of Crescent
Operating Stockholders - Proxies."
Q. IF MY BROKER HOLDS MY SHARES IN "STREET NAME," WILL MY BROKER VOTE MY
SHARES FOR ME?
A. No. Unless you provide instructions to your broker on how to vote your
"street name" shares, your broker will be unable to vote them for you.
You should follow the directions provided by your broker regarding how
to instruct your broker to vote your shares. If you wish to change your
vote, you must contact your broker.
Q. WHAT IS THE EFFECT OF MY FAILURE TO VOTE?
A. If you sign and send in your proxy card and do not indicate how you
want to vote, your shares will be voted in favor of acceptance of the
Crescent Operating bankruptcy plan. If you do not return your proxy
card, do not vote by telephone, or do not vote in person at the special
meeting, your shares will not be voted. IF NOT ENOUGH STOCKHOLDERS OF
CRESCENT OPERATING VOTE TO ACCEPT THE CRESCENT OPERATING BANKRUPTCY
PLAN, THE BANKRUPTCY PLAN PROVIDES THAT NONE OF THE STOCKHOLDERS OF
CRESCENT OPERATING WILL RECEIVE CRESCENT REAL ESTATE COMMON SHARES. See
"The Special Meeting of Crescent Operating Stockholders - Effect of
Abstentions and Broker Non-Votes" for more information regarding the
effect of your failure to vote.
Q. DO I NEED TO SEND ANYTHING IN ADDITION TO MY PROXY AT THIS TIME?
A. No. If Crescent Real Estate issues common shares to Crescent Operating
stockholders, then after you receive written notice that the Crescent
Operating bankruptcy plan has become effective, the disbursement agent
will send you a letter and written instructions relating to any
information that is required from you to ensure that the stock
certificates representing your Crescent Real Estate common shares are
issued and delivered to you. You will receive your Crescent Real Estate
common shares promptly after the disbursement agent receives the
requested information from you.
Q. WHO CAN HELP ANSWER MY QUESTIONS?
A. If you would like additional copies of this document, or have any
questions about the Crescent Operating bankruptcy plan, you should
contact:
10
Crescent Operating, Inc.
Attention: Jeffrey L. Stevens or Kiersten Thompson
777 Main Street, Suite 1240
Fort Worth, Texas 76102
Phone Number: (817) 321-1602
11
SUMMARY
This summary highlights selected information presented in this proxy
statement/prospectus and may not contain all of the information that is
important to you. To understand the Crescent Operating bankruptcy plan to be
voted on at the special meeting more fully, you should carefully read this
entire proxy statement/prospectus and the documents to which this proxy
statement/prospectus refers. See "Where You Can Find More Information." In
particular, you should read the documents attached to this proxy
statement/prospectus, including the Plan of Reorganization attached as Annex A
and the Settlement Agreement attached as Annex B, both of which are incorporated
by reference into this proxy statement/prospectus.
THE COMPANIES
CRESCENT OPERATING, INC.
777 Main Street, Suite 1240
Fort Worth Texas 76102
(817) 321-1602
Overview
Crescent Operating, Inc., a Delaware corporation, was formed on April
1, 1997, by Crescent Real Estate. Effective June 12, 1997, Crescent Real Estate
distributed shares of Crescent Operating common stock to shareholders of
Crescent Real Estate and limited partners of Crescent Partnership, and, on that
date, Crescent Operating became a public company. Crescent Operating was formed
to be the lessee and operator of certain assets owned or to be acquired by
Crescent Real Estate.
As of December 31, 2001, Crescent Operating, through various
subsidiaries and affiliates, had assets and operations consisting of four
business segments:
- equipment sales and leasing segment;
- hospitality segment;
- temperature-controlled logistics segment; and
- land development segment.
In February and March 2002, pursuant to the terms of the Settlement
Agreement, Crescent Operating transferred to Crescent Real Estate, in lieu of
foreclosure, the assets of its hospitality segment, and, pursuant to a strict
foreclosure, the interests in its land development segment. As a result,
Crescent Operating no longer has operations in these two segments. In addition,
on February 6, 2002, Crescent Machinery Company, through which Crescent
Operating operates its equipment sales and leasing segment, filed for protection
under the federal bankruptcy laws. Crescent Machinery has filed schedules of
assets and liabilities in its bankruptcy case. Those schedules indicate that
virtually all of Crescent Machinery's assets are subject to lien claims of
certain secured lenders. Moreover, the schedules indicate that the collateral
securing the claims of these creditors has a value at or below the amount owed
to the lenders. In fact, the only unencumbered assets owned by Crescent
Machinery are several parcels of real estate that Crescent Machinery estimates
to have a fair market value of approximately $3.0 million and miscellaneous
inventory and accounts receivable of undetermined value. The value of the real
estate will need to be first used to pay administrative expense claims in the
bankruptcy case, after which it might be
12
available for distribution to unsecured creditors. There are approximately $17.0
million of unsecured claims in the Crescent Machinery bankruptcy case. Crescent
Operating expects the Crescent Machinery creditors to object to Crescent
Operating receiving any distribution unless those creditors are paid in full.
Although there can be no assurance as to the outcome of the Crescent Machinery
bankruptcy case, Crescent Operating believes the prudent course is to estimate
that it would not receive a material distribution in respect of either its
unsecured claim in the Crescent Machinery case or in respect of its ownership of
100% of the Crescent Machinery common stock.
As of the date of this proxy statement/prospectus, the only remaining
operating assets of Crescent Operating are its 40% interest in AmeriCold
Logistics, LLC and its 100% equity interest in Crescent Machinery.
Historical Operations
As of December 31, 2001, Crescent Operating owned the following:
- The equipment sales and leasing segment, consisting of a 100%
interest in Crescent Machinery and its subsidiary, a
construction equipment sales, leasing and service company
which had as many as 18 locations in seven states. As of
September 30, 2002, Crescent Machinery operated nine locations
in three states.
- The hospitality segment, consisting of the following assets:
- Crescent Operating's lessee interests in three
upscale business class hotels owned by Crescent Real
Estate. The hotels are the Denver Marriott City
Center, the Hyatt Regency Albuquerque, and the
Renaissance Hotel in Houston, Texas.
- Lessee interests in three destination resort
properties owned by Crescent Real Estate. The
properties are the Hyatt Regency Beaver Creek, the
Ventana Inn and Spa and the Sonoma Mission Inn and
Spa (including the Sonoma Mission Inn Golf and
Country Club).
- Lessee interests in two destination fitness resort
and spa properties owned by Crescent Real Estate. The
properties are Canyon Ranch-Tucson and Canyon
Ranch-Lenox.
- A 5% economic interest in CRL Investments, Inc., or
CRL, which has an investment in the Canyon Ranch Day
Spa in the Venetian Hotel in Las Vegas, Nevada and
participates in the future use of the "Canyon Ranch"
name. Crescent Real Estate owned the remaining 95%
economic interest.
Crescent Operating's lessee interests in these eight properties and its
interest in CRL are referred to as the hotel operations.
- The temperature-controlled logistics segment, consisting of a
40% interest in the operations of AmeriCold Logistics, LLC,
which operates 100 refrigerated storage properties with an
aggregate storage capacity of approximately 525 million cubic
feet. Crescent Real Estate has a 40% interest in AmeriCold
Corporation, which owned 89 of the 100 properties.
- The land development segment, consisting of the following
assets:
13
- A 4.65% economic interest in Desert Mountain, a master
planned, luxury residential and recreational community in
northern Scottsdale, Arizona. Crescent Real Estate owned an
88.35% economic interest in Desert Mountain.
- A 52.5% general partner interest in The Woodlands Operating
Company, L.P.
- A 2.625% economic interest in The Woodlands Land Development
Company L.P. Crescent Real Estate owned a 49.875% economic
interest in this entity.
- A 60% general partner interest in COPI Colorado, LP, a company
that has a 10% economic interest in Crescent Resort Development,
Inc., or CRDI, formerly Crescent Development Management Corp.
Crescent Real Estate owned the remaining 90% economic interest in
CRDI.
These interests are referred to as the land development interests.
Structure
The following chart depicts the structure of Crescent Operating's
ownership of assets as of September 30, 2002. As a result of the transactions
described in this section, the entities in Crescent Operating's hospitality and
land development segments no longer hold any assets and, therefore, do not
appear on this chart. Subsequent to the consummation of the bankruptcy plan and
the reorganization transactions, Crescent Operating and its subsidiaries will be
dissolved.
[ORGANIZATIONAL CHART]
14
CRESCENT REAL ESTATE EQUITIES COMPANY
777 Main Street, Suite 2100
Fort Worth, Texas 76102
(817) 321-2100
Overview
Crescent Real Estate Equities Company was organized in 1994 and
operates as a real estate investment trust, or REIT, for federal income tax
purposes. Together with its subsidiaries, Crescent Real Estate provides
management, leasing and development services for some of its properties.
Crescent Real Estate conducts all of its business through Crescent
Partnership and its other subsidiaries. Crescent Real Estate is structured to
facilitate and maintain the qualification of Crescent Real Estate as a REIT.
This structure permits persons contributing properties, or interests in
properties, to Crescent Real Estate to defer some or all of the tax liability
that they otherwise might have incurred in connection with the sale of assets to
Crescent Real Estate.
In February 2002, pursuant to the terms of the Settlement Agreement,
Crescent Real Estate acquired from Crescent Operating, through transfers in lieu
of foreclosure, the interests in Crescent Operating's hospitality segment and,
pursuant to a strict foreclosure, the assets of Crescent Operating's land
development segment. Crescent Real Estate holds these assets and interests
through two newly organized corporations and one newly organized limited
liability company that are wholly owned subsidiaries of Crescent Real Estate, or
taxable REIT subsidiaries. Crescent Real Estate included these assets in its
resort/hotel and residential development segments beginning on the dates of the
transfers.
Historical Operations
As of September 30, 2002, Crescent Real Estate's assets and operations
were composed of four major investment segments:
- office segment;
- resort/hotel segment;
- residential development segment; and
- temperature-controlled logistics segment.
Within these segments, Crescent Real Estate owned, directly or indirectly, the
following real estate, referred to as the Crescent Real Estate properties, as of
September 30, 2002.
- Office segment consisted of 73 office properties located in 25
metropolitan submarkets in six states with an aggregate of
approximately 28.5 million net rentable square feet.
- Resort/hotel segment consisted of five destination resort
properties with a total of 1,036 rooms/guest nights and four
upscale business-class hotels with a total of 1,771 rooms, or
the Crescent Real Estate hotel properties.
15
- Residential development segment consisted of Crescent Real
Estate's ownership of real estate mortgages and voting and
non-voting common stock representing interests ranging from
94% to 100% in five unconsolidated residential development
corporations, which in turn, through joint venture or
partnership arrangements, owned 21 upscale residential
development properties. These are referred to as the Crescent
Real Estate residential development properties.
- Temperature-controlled logistics segment consisted of Crescent
Real Estate's 40% interest in a general partnership referred
to as the temperature-controlled logistics partnership, which
owns all of the common stock, representing substantially all
of the economic interest, of AmeriCold Corporation, a REIT,
which directly or indirectly owned 88 temperature-controlled
logistics properties, or the Crescent Real Estate
temperature-controlled logistics properties, with an aggregate
of approximately 441.5 million cubic feet, or 17.5 million
square feet, of warehouse space.
- Other Crescent Real Estate properties consisted of 9
behavioral healthcare properties.
AGREEMENT FOR TRANSFER OF CRESCENT OPERATING ASSETS TO CRESCENT REAL ESTATE
On June 28, 2001, Crescent Operating and Crescent Real Estate entered
into an asset and stock purchase agreement in which Crescent Real Estate agreed
to acquire the hotel operations, the land development interests and other assets
in exchange for $78.4 million. Crescent Real Estate also entered into an
agreement to make a $10.0 million investment in Crescent Machinery, which, along
with capital from a third-party investment firm, was expected to put Crescent
Machinery on solid financial footing.
Following the date of the agreements, the results of operations for the
hotel operations and the land development interests declined, due in part to the
slowdown in the economy after September 11. In addition, Crescent Machinery's
results of operations suffered because of the economic environment and the
overall reduction in national construction levels that has affected the
equipment rental and sale business, particularly post September 11. As a result,
Crescent Real Estate believes that a significant additional investment would
have been necessary to adequately capitalize Crescent Machinery and satisfy
concerns of Crescent Machinery's lenders.
On January 23, 2002, Crescent Real Estate terminated the purchase
agreement pursuant to which Crescent Real Estate would have acquired the
Crescent Operating hotel operations, the Crescent Operating land development
interests and other assets. On February 4, 2002, Crescent Real Estate terminated
the agreement relating to its planned investment in Crescent Machinery.
On February 6, 2002, Crescent Machinery filed for protection under the
federal bankruptcy laws.
On February 12 and February 13, 2002, Crescent Real Estate delivered
default notices to Crescent Operating relating to approximately $49.0 million of
unpaid rent and approximately $76.2 million of principal and accrued interest
due to Crescent Real Estate under certain secured loans.
SETTLEMENT AGREEMENT
On February 14, 2002, Crescent Operating and Crescent Real Estate
entered into the Settlement Agreement, which was amended effective October 1,
2002. The amendment provides for, among other things, a minimum value of
Crescent Real Estate common shares to be issued in connection with the
bankruptcy plan if the bankruptcy plan is accepted by the requisite vote of
Crescent Operating stockholders and confirmed by the bankruptcy court. The
Settlement Agreement provided the basis for Crescent Operating
16
to file a prepackaged bankruptcy plan that Crescent Operating believes will
provide for a limited recovery to its stockholders. The principal terms of the
Settlement Agreement are set forth below.
- Pursuant to the Settlement Agreement, Crescent Operating
transferred the following assets, and related indebtedness,
to Crescent Real Estate:
- all of its hotel operations, in lieu of foreclosure,
on February 14, 2002, in exchange for a $23.6 million
reduction in its rent obligations to Crescent Real
Estate; and
- all of its land development interests pursuant to a
strict foreclosure on February 14, 2002 and March 22,
2002, in exchange for a $40.1 million reduction of
its debt obligations to Crescent Real Estate.
- If the bankruptcy court confirms the bankruptcy plan, Crescent
Real Estate will make sufficient funds available to Crescent
Operating to pay in full or otherwise resolve the claims of
the creditors that Crescent Operating identified in the
original Settlement Agreement and to cover the budgeted
expenses of implementing the Settlement Agreement and seeking
to confirm the bankruptcy plan. To facilitate Crescent
Operating's repayment of $15.0 million, plus interest, that it
owes to Bank of America, Crescent Real Estate has allowed
Crescent Operating to secure the Bank of America debt with a
pledge of Crescent Operating's interest in AmeriCold
Logistics, LLC. The Settlement Agreement and the bankruptcy
plan contemplate that a Crescent Real Estate affiliate will
purchase Crescent Operating's interest in AmeriCold Logistics
for between $15.0 to $15.5 million.
- If Crescent Operating's stockholders accept the bankruptcy
plan by the requisite vote and the bankruptcy court confirms
the bankruptcy plan, then Crescent Real Estate will issue
common shares of Crescent Real Estate to the Crescent
Operating stockholders pursuant to the formula contained in
the bankruptcy plan and described in "Summary - Summary of the
Plan of Reorganization" below. If the stockholders of Crescent
Operating do NOT accept the bankruptcy plan, they will NOT
receive a distribution of common shares of Crescent Real
Estate.
- Crescent Operating stockholders receiving Crescent Real Estate
shares, regardless of the value of the shares they receive,
will be deemed to have released all claims they may have
against Crescent Operating and Crescent Real Estate and those
acting on their behalf that arose before the effective date of
the bankruptcy plan. The release of Crescent Operating
stockholder claims will apply to Crescent Operating
stockholders only in their capacity as Crescent Operating
stockholders, and will not affect their rights as shareholders
of Crescent Real Estate. IF THE CRESCENT OPERATING
STOCKHOLDERS DO NOT CAST ENOUGH VOTES TO ACCEPT THE CRESCENT
OPERATING BANKRUPTCY PLAN, CRESCENT OPERATING WILL STILL SEEK
TO HAVE ITS BANKRUPTCY PLAN CONFIRMED BY THE BANKRUPTCY COURT
PURSUANT TO THE "CRAMDOWN" PROVISION OF THE BANKRUPTCY CODE.
IF THE BANKRUPTCY COURT CONFIRMS THE BANKRUPTCY PLAN, CRESCENT
OPERATING STOCKHOLDERS WILL NOT RECEIVE COMMON SHARES OF
CRESCENT REAL ESTATE BUT WILL STILL CEASE TO BE STOCKHOLDERS
OF CRESCENT OPERATING ON THE DATE THE BANKRUPTCY PLAN BECOMES
EFFECTIVE.
- Crescent Operating will cancel all outstanding shares of its
common stock.
17
- Crescent Operating and Crescent Real Estate exchanged mutual
releases. Pursuant to the Settlement Agreement, Crescent
Operating and Crescent Real Estate and the directors,
officers, agents and employees of each will be released from
all liabilities and claims arising prior to the effective date
of the bankruptcy plan.
- Pursuant to both the Settlement Agreement and the bankruptcy
plan, Crescent Operating will transfer the remaining assets of
Crescent Operating at the direction of Crescent Real Estate.
- If Crescent Real Estate, in its sole discretion, offers to
settle or assume unsecured claims that were not identified by
Crescent Operating in the original Settlement Agreement and
that are asserted by third parties, and Crescent Operating
accepts the offer, then the total value of the Crescent Real
Estate common shares paid to Crescent Operating stockholders
will be reduced (but not below a total value of approximately
$2.16 million, or $0.20 per share of Crescent Operating common
stock) by the amount agreed to by Crescent Real Estate and
Crescent Operating, and approved by the bankruptcy court, as
compensation to Crescent Real Estate for assuming the claims.
If Crescent Real Estate and Crescent Operating are not able to
agree to Crescent Real Estate's assumption of any such
unresolved third party claims that were not identified by
Crescent Operating in the original Settlement Agreement and
that are an obstacle to confirmation of the Crescent Operating
bankruptcy plan, then it is possible that the bankruptcy plan
will not be confirmed.
A copy of the Settlement Agreement, including the amendment to the
Settlement Agreement, is attached as Annex B to this proxy statement/prospectus.
Regardless of whether the bankruptcy plan is approved by Crescent Operating's
stockholders and/or confirmed by the bankruptcy court, (i) the Settlement
Agreement is effective, (ii) the mutual releases executed in connection with the
Settlement Agreement, including Crescent Operating's release of all claims it
may have against Crescent Real Estate, are enforceable, and (iii) Crescent Real
Estate is obligated to assist Crescent Operating in resolving creditor claims
identified by Crescent Operating in the original Settlement Agreement. Crescent
Operating does not believe that the Settlement Agreement or the releases
incorporated therein would be avoidable in bankruptcy if Crescent Operating
elected to file a bankruptcy case independent of the pre-packaged plan.
OTHER CRESCENT OPERATING RECENT DEVELOPMENTS
Effective December 31, 2001, Crescent Operating, in connection with
extending the maturity of its $15.0 million loan from Bank of America from
December 31, 2001 to August 15, 2002, agreed to modify the loan from an
unsecured to a secured credit facility. Crescent Operating, with the consent of
Crescent Partnership which agreed to subordinate its security interest in
Crescent Operating's 40% interest in AmeriCold Logistics, pledged all of its
interest in AmeriCold Logistics to Bank of America to secure the loan. On August
14, 2002, Bank of America further extended the maturity of this loan to January
15, 2003 and Crescent Operating prepaid interest for that time period in the
amount of $0.3 million. In January 2003, Bank of America further extended the
maturity of this loan to March 15, 2003 and Crescent Operating agreed to prepay
an additional two months of interest at the loan's current rate. These
modifications delay, but do not reduce, any liability that Mr. Rainwater and Mr.
Goff may have under the support agreement in which they personally agree to make
additional equity investments in Crescent Operating if and to the extent
Crescent Operating defaults on payment obligations on its line of credit with
Bank of America. Any further defaults by Crescent Operating under the line of
credit will revive the default that was waived under the August 2002 amendment
to the line of credit.
Effective February 13, 2002, all of the directors of Crescent
Operating, other than Jeffrey L. Stevens, who became the sole director of
Crescent Operating, resigned. The four directors who resigned continue to serve
as trust managers of Crescent Real Estate. In addition, two of these directors,
Richard E. Rainwater and John C. Goff, also served as officers of both Crescent
Operating and Crescent Real
18
Estate. Mr. Rainwater continues to serve as Chairman of the Board of Crescent
Real Estate and Mr. Goff continues to serve as Vice Chairman of the Board and
Chief Executive Officer of Crescent Real Estate. Both resigned from their
executive officer positions with Crescent Operating effective February 14, 2002.
The directors and officers who resigned determined that resignation was
advisable and in the interest of the Crescent Operating stockholders in order to
avoid potential conflicts of interest and the appearance of impropriety.
On December 19, 2002, the Official Unsecured Creditors Committee of
Crescent Machinery Company, referred to in this proxy statement/prospectus as
the Crescent Machinery Committee, commenced a lawsuit in the District Court of
Tarrant County, Texas, styled "The Estates of Crescent Machinery and E.L.
Lester, Inc. v. Mark Roberson, Jeffrey Stevens, Gerald Haddock, Rick Knight and
Crescent Operating, Inc." The lawsuit seeks an unspecified amount of direct,
consequential and punitive damages, as well as related attorneys' fees, for
alleged breaches of fiduciary duty, aiding and abetting breaches of fiduciary
duty, negligent misrepresentation, and gross negligence. The Crescent Machinery
Committee has alleged that the creditors of Crescent Machinery have been damage
as a result of the following:
- lack of experienced management;
- failure to have a written acquisition plan;
- withdrawal of acquisition funding by Crescent Operating;
- accounting misstatements; and
- failure to restructure Crescent Machinery.
Each of the named individual defendants was either an officer or
director, or both, of Crescent Machinery at the time the alleged breaches
occurred. Pursuant to the certificate of incorporation and bylaws of Crescent
Operating, each of the individual defendants may be entitled to indemnification
by Crescent Operating against some or all of the claims alleged in the lawsuit,
including reimbursement of reasonable attorney's fees incurred in defending the
lawsuit. Crescent Operating has director's and officer's liability insurance in
the face amount of $3.0 million that may afford coverage for these indemnity
claims. Nonetheless, if any of the Crescent Machinery Committee's claims against
these officers and directors are allowed in an amount in excess of any available
insurance, then that claim will have to be satisfied before any distribution
could be made to Crescent Operating's stockholders. Crescent Operating intends
to vigorously defend against the allegations and claims in the lawsuit. There is
a risk that substantial delays could result from the process in which the
Crescent Machinery Committee's lawsuit is adjudicated. In addition, there is a
risk that if the Crescent Machinery Committee were ultimately successful in the
prosecution of its lawsuit, or if Crescent Real Estate, pursuant to the
Settlement Agreement, offers to assume or settle any obligations under the
Crescent Machinery Committee's lawsuit and Crescent Operating accepts the offer,
the total value of the Crescent Real Estate common shares that the Crescent
Operating stockholders will receive will be reduced and the Crescent Operating
stockholders will receive fewer Crescent Real Estate common shares. There is
also a risk that the total obligations of Crescent Operating to the unsecured
creditors of Crescent Operating identified in the original Settlement Agreement,
plus newly asserted claims such as those in the lawsuit, will exceed the amount
of funds that Crescent Real Estate will make available to Crescent Operating for
the payment of such claims and that, as a result, the bankruptcy court will not
confirm the bankruptcy plan. However, even if Crescent Real Estate does offer to
assume or settle obligations under the Crescent Machinery Committee's lawsuit
and Crescent Operating accepts the offer, the total value of Crescent Real
Estate common shares that the Crescent Operating stockholders will be entitled
to receive will be at least $2.16 million, or $0.20 per share of Crescent
Operating common stock, if the bankruptcy plan is accepted by the Crescent
Operating stockholders and confirmed by the bankruptcy court. For more
information regarding this dispute, please see "Description of Crescent
Operating's Business - Legal Proceedings."
SUMMARY OF THE PLAN OF REORGANIZATION
Crescent Operating's Plan of Reorganization, attached as Annex A to
this proxy statement/prospectus, is a bankruptcy plan that will be filed with
the Bankruptcy Court that is supported by the Settlement Agreement between
Crescent Operating and certain of its affiliates on the one hand and Crescent
Real Estate on the other hand. In the Settlement Agreement, Crescent Real Estate
has agreed to make funds available to Crescent Operating that Crescent Operating
will use to satisfy the claims of those creditors that Crescent Operating
identified in the original Settlement Agreement. Following the satisfaction of
all conditions to the bankruptcy plan, on the effective date of the bankruptcy
plan or the date upon which the bankruptcy plan becomes final, at Crescent Real
Estate's election, or as soon thereafter as practicable, a plan administrator
will make distributions to the holders of allowed claims against Crescent
Operating and prepare Crescent Operating for dissolution.
The Plan of Reorganization provides that, upon its acceptance by the
Crescent Operating stockholders and its confirmation by the bankruptcy court,
Crescent Real Estate will pay on the effective date of the bankruptcy plan or
the date upon which the bankruptcy plan becomes final, at Crescent Real
19
Estate's election, or as soon thereafter as practicable, to each holder of
Crescent Operating common stock the product of:
- the number of shares of Crescent Operating common stock owned
by such holder on the confirmation date, divided by the number
of shares of Crescent Operating common stock outstanding on
the confirmation date, and
- the consideration amount, as described below, divided by the
average of the daily closing prices per Crescent Real Estate
common share as reported on the New York Stock Exchange
Composite Transaction reporting system for the 10 consecutive
NYSE trading days immediately preceding confirmation of the
Crescent Operating bankruptcy plan by the bankruptcy court.
The consideration amount will equal the greater of:
- approximately $2.16 million; or
- $16.0 million minus the total amount of payments made by
Crescent Real Estate for claims and expenses relating to the
Crescent Operating bankruptcy and the reorganization
transactions, including expenses of Crescent Real Estate but
excluding payments in satisfaction of the Bank of America
claim.
As of December 31, 2002, Crescent Real Estate had incurred approximately $8.5
million in claims and expenses and expects to incur an aggregate of $10.6
million to $13.8 million in total claims and expenses. Based on these estimates,
the consideration amount would be between $5.4 million and $2.16 million. If
there occurs a material variance in this estimated range of aggregate claims and
expenses after the date that Crescent Operating mails this proxy
statement/prospectus to its stockholders, then Crescent Operating will issue a
press release and file a Current Report on Form 8-K with the Securities and
Exchange Commission disclosing the material variance. Regardless of the total
amount of claims and expenses paid by Crescent Real Estate in connection with
the Crescent Operating bankruptcy and reorganization transactions, if the
bankruptcy plan is accepted by the Crescent Operating stockholders and confirmed
by the bankruptcy court, the stockholders of Crescent Operating will receive
common shares of Crescent Real Estate with a value of at least $2.16 million, or
$0.20 per share of Crescent Operating common stock.
No certificate or scrip representing fractional Crescent Real Estate
common shares shall be issued, no cash share be paid in lieu of fractional
shares, and all fractional shares shall be rounded up or down to the nearest
whole Crescent Real Estate common share. If the Crescent Operating stockholders
accept the bankruptcy plan and the bankruptcy court confirms the bankruptcy
plan, the stockholders will be deemed to have released all claims they may have
against Crescent Operating and Crescent Real Estate, as well as their respective
officers, directors, stockholders, employees, consultants, attorneys,
accountants and other representatives, that arose prior to the effective date of
the bankruptcy plan. The release of Crescent Operating stockholder claims will
not apply to the claims, if any, of a person who sold its shares of Crescent
Operating common stock before the record date for voting on the bankruptcy plan
or who voted against the bankruptcy plan, abstained or did not vote on the
bankruptcy plan, and thereafter either did not receive or refused to accept a
distribution of Crescent Real Estate common shares. The releases of Crescent
Operating stockholder claims will apply to Crescent Operating stockholders only
in their capacity as Crescent Operating stockholders, and will not affect their
rights as holders of Crescent Real Estate common shares. The Crescent Operating
common stock will be cancelled upon confirmation of the bankruptcy plan. If the
Crescent Operating stockholders reject the bankruptcy plan, the Crescent
Operating stockholders will receive no distribution under the bankruptcy plan
and will not be deemed to have released any claims. Crescent Operating will seek
to
20
have the bankruptcy plan confirmed over the objection of its stockholders if
they do not vote to accept the bankruptcy plan.
The bankruptcy plan must be approved by certain of Crescent Operating's
creditors and the bankruptcy court before it can become effective. Please see
"The Plan of Reorganization - Confirmation of the Plan of Reorganization" for a
discussion of the requirements for confirmation.
RELEASE AND WAIVER OF CLAIMS BY CRESCENT OPERATING AND STOCKHOLDERS OF CRESCENT
OPERATING
The bankruptcy plan provides that on its effective date, Crescent
Operating, on its own behalf and as representative of its bankruptcy estate,
will release unconditionally, and will be deemed to release unconditionally,
from any and all claims, obligations, suits, judgments, damages, rights, causes
of action and liabilities whatsoever, whether known or unknown, foreseen or
unforeseen, existing or hereafter arising, in law, equity or otherwise, based in
whole or in part upon any act or omission, transaction, event or other
occurrence taking place on or prior to the effective date of the bankruptcy plan
in any way relating to the releasees, Crescent Operating, the Chapter 11 case or
the bankruptcy plan:
- each of Crescent Operating's officers, directors,
shareholders, employees, consultants, attorneys, accountants
and other representatives;
- Crescent Partnership and each of Crescent Partnership's
officers, directors, partners, employees, consultants,
attorneys, accountants, affiliates and other representatives;
- Crescent Real Estate and each of Crescent Real Estate's
officers, trust managers, shareholders, employees,
consultants, attorneys, accountants, affiliates and other
representatives;
- the creditors' committee appointed in the Chapter 11
proceedings, if any; and
- solely in their capacity as members and representatives of the
creditors' committee, each member, consultant, attorney,
accountant or other representative of the creditors'
committee.
The bankruptcy plan further provides that each holder of a claim or
interest:
- who has accepted the bankruptcy plan;
- whose claim or interest is in a class that has accepted or is
deemed to have accepted the bankruptcy plan pursuant to
section 1126 of the Bankruptcy Code; or
- who may be entitled to receive a distribution of property
pursuant to the bankruptcy plan, shall be deemed to have
unconditionally released the above releasees, from any and all
rights, claims, causes of action, obligations, suits,
judgments, damages and liabilities whatsoever which any such
holder may be entitled to assert, whether known or unknown,
foreseen or unforeseen, existing or hereafter arising, in law,
equity or otherwise, based in whole or in part upon any act or
omission, transaction, event or other occurrence taking place
on or before the effective date of the bankruptcy plan in any
way relating to Crescent Operating, the Chapter 11 case or the
bankruptcy plan, provided however, that the foregoing shall
not apply to all rights, claims and obligations created by or
arising under the bankruptcy plan.
The release of Crescent Operating stockholder claims will not apply to
the claims, if any, of a person who sold its shares of Crescent Operating common
stock before the record date for voting on the bankruptcy plan or who voted
against the bankruptcy plan, abstained or did not vote, and thereafter either
21
did not receive or refused to accept a distribution of Crescent Real Estate
common shares. The release of Crescent Operating stockholder claims also will
not apply if the holders of Crescent Operating common stock, voting as a class,
vote against the bankruptcy plan. The release of Crescent Operating stockholder
claims will apply to Crescent Operating stockholders only in their capacity as
Crescent Operating stockholders, and will not affect their rights as holders of
Crescent Real Estate common shares.
In the event that the bankruptcy court concludes that the bankruptcy
plan cannot be confirmed without excising any portion of the release of claims
held by creditors and stockholders, then, with the consent of Crescent Real
Estate in its sole discretion, the bankruptcy plan may be confirmed with the
portion of the releases that the bankruptcy court finds is a bar to confirmation
excised so as to give effect as much as possible to the foregoing releases
without precluding confirmation of the bankruptcy plan. If Crescent Real Estate
does not consent to modification of the release, the bankruptcy plan will not be
confirmed and Crescent Real Estate will not be obligated to pay in full or
otherwise resolve the claims of the creditors that Crescent Operating identified
in the original Settlement Agreement or to make a distribution to Crescent
Operating stockholders.
In substance, section 524(e) of the Bankruptcy Code provides that the
release of third party claims against a debtor such as Crescent Operating does
not release any other person. In addition to the release of Crescent Operating,
the bankruptcy plan includes releases of Crescent Real Estate and all current
and former officers and directors or trust managers of Crescent Operating or
Crescent Real Estate. It is the position of the Securities and Exchange
Commission that these additional releases violate section 524(e) unless separate
consideration is provided by the specific parties being released or the releases
are voluntary. Crescent Operating believes the releases contemplated by the
bankruptcy plan comply with section 524(e) of the Bankruptcy Code and applicable
law, both because Crescent Real Estate is paying substantial consideration to
Crescent Operating and its stockholders to obtain the releases provided under
the bankruptcy plan and because the releases are voluntary.
As discussed in this proxy statement, Crescent Real Estate is providing
sufficient funds both to pay in full or otherwise resolve the claims of those
creditors of Crescent Operating identified in the original Settlement Agreement
and to cover budgeted expenses of Crescent Operating. In addition, Crescent Real
Estate is providing a distribution to Crescent Operating stockholders of
Crescent Real Estate common shares if the stockholders vote to accept the
bankruptcy plan and the bankruptcy court confirms the plan. Accordingly, the
consideration is being provided, either directly by the persons who receive the
benefit of the releases provided in the bankruptcy plan or on their behalf.
Whether this consideration for the releases is sufficient is an issue of fact
that the bankruptcy court has authority to determine.
Crescent Operating also believes that the release by any stockholder
who accepts the bankruptcy plan is voluntary. Any Crescent Operating stockholder
who does not wish to provide the release may retain full rights to pursue claims
against Crescent Real Estate, Crescent Operating and their current and former
officers and directors or trust managers by voting against the bankruptcy plan,
abstaining or not voting, and either not receiving or refusing to accept any
distribution under the bankruptcy plan.
The releases given by Crescent Operating to Crescent Real Estate in the
Settlement Agreement survive and are effective regardless of whether the
bankruptcy plan is confirmed or the releases described above are included in or
excised from the bankruptcy plan. The Crescent Operating release in the
Settlement Agreement includes a release of all derivative claims, which are
claims brought by a stockholder of a corporation to enforce, on behalf of the
corporation, a cause of action that belongs to the corporation.
22
SPECIAL MEETING AND VOTING
Crescent Operating will hold its special meeting of stockholders at The
Fort Worth Club, located at 306 West 7th Street, Fort Worth, Texas, on Thursday,
March 6, 2003, at 10:00 a.m. Central Time. At the special meeting, Crescent
Operating stockholders will be asked to consider and vote upon the acceptance of
the Crescent Operating bankruptcy plan.
A majority of the outstanding shares of common stock of Crescent
Operating entitled to vote is necessary to constitute a quorum for the
transaction of business at the special meeting. The affirmative vote of
two-thirds or more of the votes cast in person or by proxy at the special
meeting is required for acceptance of the Crescent Operating bankruptcy plan.
The Bankruptcy Code deems a class of stockholders to have accepted a bankruptcy
plan if it is accepted by two-thirds of the votes cast at the special meeting,
rather than two-thirds of the outstanding shares. As a result, a failure to
vote, unlike a vote against the bankruptcy plan, has no effect on the outcome of
the vote on the bankruptcy plan, but will affect whether or not a quorum has
been reached at the special meeting.
Only Crescent Operating stockholders of record as of the close of
business on the record date, January 8, 2003, are entitled to notice of, and to
vote at, the special meeting. At the close of business on the record date,
10,828,497 shares of Crescent Operating common stock were issued, outstanding
and entitled to vote at the special meeting. The trust managers and executive
officers of Crescent Real Estate own shares of Crescent Operating common stock
representing approximately 14.0% of the Crescent Operating common stock
outstanding on the record date and have advised the sole director of Crescent
Operating that they intend to vote their shares in favor of acceptance of the
Crescent Operating bankruptcy plan. Each outstanding share is entitled to one
vote. Shares cannot be voted at the special meeting unless the record holder
thereof is present or represented by proxy.
RECOMMENDATION OF SOLE DIRECTOR OF CRESCENT OPERATING
Crescent Operating's sole director performed a comprehensive analysis
of Crescent Operating's strategic alternatives for maximizing creditor and
stockholder value. These alternatives, in the judgment of the sole director, are
unlikely to result in any significant recovery for the creditors, other than
Crescent Real Estate. Based upon the liquidation analysis of Crescent Operating,
the director determined that neither creditors, other than Crescent Real Estate,
nor Crescent Operating stockholders would receive anything in a liquidation of
Crescent Operating. Crescent Operating's sole director also consulted with
financial and legal advisors and obtained an opinion stating that the aggregate
consideration to be received by Crescent Operating and its stockholders, taken
as a whole, in connection with the transactions contemplated by the bankruptcy
plan and the Settlement Agreement is fair to the public stockholders from a
financial point of view, assuming a distribution of Crescent Real Estate common
shares with a value of $0.32 to $0.50. However, this opinion maintains that it
would not necessarily change if Crescent Real Estate were to advance additional
funds that reduce the value of Crescent Real Estate common shares to below
$0.32. Based on this information and analysis for Crescent Operating creditors
and stockholders, Crescent Operating's sole director determined that the
Crescent Operating bankruptcy plan was the best available alternative and the
alternative most likely to maximize stockholder value. Crescent Operating's sole
director performed these analyses and negotiated the bankruptcy plan and
Settlement Agreement independently from the persons then serving as the other
four members of the Crescent Operating Board of Directors, each of whom also
serves as a trust manager of Crescent Real Estate. In order to avoid any
conflicts of interest, none of these four directors participated in the
negotiations on behalf of Crescent Operating, and all of them resigned as
directors of Crescent Operating on February 13, 2002. One such director, John C.
Goff, participated in initial structuring of the proposed transactions, but did
not participate in any negotiations due to potential conflicts of interest.
23
The sole director is recommending that Crescent Operating stockholders
vote for acceptance of the Crescent Operating bankruptcy plan.
NO DISSENTERS' APPRAISAL RIGHTS
There are no dissenters' appraisal rights available under applicable
state corporate law with respect to the reorganization transactions. If the
Crescent Operating bankruptcy plan is confirmed by the bankruptcy court, all
Crescent Operating stockholders will be bound by all of the terms and conditions
of the Crescent Operating bankruptcy plan, except that those stockholders who
vote against the bankruptcy plan, abstain or do not vote, and who thereafter
either do not receive or refuse to accept any distribution under the bankruptcy
plan, will not be deemed to have released the claims discussed in the bankruptcy
plan.
TAX CONSIDERATIONS
The distribution of Crescent Real Estate common shares to Crescent
Operating stockholders will be treated as a distribution in liquidation of
Crescent Operating. Stockholders of Crescent Operating will realize gain or loss
based on the difference between their basis in their shares of Crescent
Operating common stock and the fair market value of the Crescent Real Estate
common shares they receive. In general, a Crescent Operating stockholder who is
not a dealer in securities must treat this gain or loss as a long term capital
gain or loss if the stockholder held the shares of Crescent Operating common
stock for more than one year or, otherwise, as a short term capital gain or
loss. If a stockholder acquired shares of Crescent Operating common stock at
different times, the determination of gain or loss and the holding period is
made on the facts specific to each share. The stockholders' basis in the
Crescent Real Estate common shares they will receive will be the fair market
value of the Crescent Real Estate common shares at the time of distribution.
INTERESTS OF CERTAIN PERSONS IN THE REORGANIZATION TRANSACTIONS
Richard E. Rainwater, who serves as the Chairman of the Board of
Crescent Real Estate and served as the Chairman of the Board of Crescent
Operating until February 2002, and John C. Goff, who serves as Vice Chairman and
Chief Executive Officer of Crescent Real Estate and served as Vice Chairman,
President and Chief Executive Officer of Crescent Operating until February 2002,
have financial interests in the Crescent Operating bankruptcy plan. As of the
record date, Mr. Rainwater was the beneficial owner of approximately 11.5% of
the outstanding shares of Crescent Operating common stock and approximately
14.6% of the outstanding Crescent Real Estate common shares, including in each
case shares underlying vested options. As of the same date, Mr. Goff was the
beneficial owner of approximately 6.6% of the outstanding shares of Crescent
Operating common stock and approximately 4.1% of the outstanding Crescent Real
Estate common shares, including in each case shares underlying vested options.
As beneficial owners of Crescent Real Estate common shares, Messrs. Rainwater
and Goff may have interests in the Crescent Operating bankruptcy plan that
differ from those of beneficial owners of Crescent Operating common stock who
are also not owners of Crescent Real Estate common shares. As beneficial owners
of Crescent Operating common stock, Messrs. Rainwater and Goff will receive
Crescent Real Estate common shares if the Crescent Operating bankruptcy plan is
approved by the required vote of the shares of Crescent Operating common stock
and confirmed by the bankruptcy court. Messrs. Rainwater and Goff have stated an
intention to vote in favor of the bankruptcy plan.
Messrs. Goff and Rainwater are also parties to a support agreement with
Crescent Operating and Bank of America whereby they have personally agreed to
make additional equity investments in Crescent Operating if and to the extent
Crescent Operating defaults on payment obligations on its line of credit with
Bank of America.
24
Effective December 31, 2001, Crescent Operating, in connection with
extending the maturity of its $15.0 million loan from Bank of America from
December 31, 2001 to August 15, 2002, agreed to modify the loan from an
unsecured to a secured credit facility. The amendment to the line of credit also
waived Crescent Operating's default under the line of credit, as a result of
Crescent Operating's failure to pay the principal balance in full on December
31, 2001. During August 2002, Bank of America further extended the maturity of
this loan to January 15, 2003 and Crescent Operating prepaid interest for that
time period in the amount of $0.3 million. In January 2003, Bank of America
further extended the maturity of this loan to March 15, 2003 and Crescent
Operating agreed to prepay an additional two months of interest at the loan's
current rate. These modifications delay, but do not reduce, any liability that
Mr. Rainwater and Mr. Goff may have under the support agreement. Any future
defaults by Crescent Operating under the line of credit will revive the default
that was waived under the August 2002 amendment to the line of credit. In
connection with the Crescent Operating bankruptcy plan, it is expected that
Crescent Operating's line of credit with Bank of America will be fully repaid,
and Messrs. Goff and Rainwater will be relieved of their potential personal
liability under the support agreement. As of September 30, 2002, the aggregate
amount outstanding under the loan was $15.0 million.
Mr. Goff was subject to conflicts of interest as a result of his
participation in the initial proposal of the Crescent Operating bankruptcy plan
and related agreements while serving simultaneously as an executive officer and
trust manager of Crescent Real Estate and as an executive officer of Crescent
Operating, but he did not participate in negotiations of the terms of the
Settlement Agreement or the bankruptcy plan.
Additionally, Jeffrey L. Stevens, Crescent Operating's current chief
executive officer and sole director, will serve as plan administrator of
Crescent Operating's contemplated Chapter 11 bankruptcy. For more information
regarding the plan administrator, see "The Plan of Reorganization -
Implementation of the Plan of Reorganization - The Plan Administrator."
In addition, pursuant to the Settlement Agreement and the Crescent
Operating bankruptcy plan, the current and former directors and officers of
Crescent Operating and the current and former trust managers and officers of
Crescent Real Estate will receive certain liability releases as described below
in "The Reorganization Transactions - Interests of Certain Persons in the
Reorganization Transactions" and "The Plan of Reorganization - Effects of the
Confirmation of the Plan of Reorganization - Releases."
In February and March 2002, pursuant to the terms of the Settlement
Agreement, Crescent Operating transferred to Crescent Real Estate, in lieu of
foreclosure, the interests in its hospitality segment and, pursuant to a strict
foreclosure, the assets of its land development segment. Crescent Real Estate
holds these assets and interests through two newly organized corporations and
one newly organized limited liability company that are wholly owned subsidiaries
of Crescent Real Estate, or taxable REIT subsidiaries. In addition, in
connection with the execution of the Settlement Agreement, Crescent Real Estate
and Crescent Operating exchanged mutual releases. In pertinent part, Crescent
Operating released any and all claims that it might have against Crescent Real
Estate and its current and former trust managers and officers, and Crescent Real
Estate released any and all claims that it might have against Crescent Operating
and its current and former directors and officers arising at any time prior to
the original execution of the Settlement Agreement. This release remains
effective regardless of whether the bankruptcy plan is accepted by Crescent
Operating's stockholders and/or confirmed by the bankruptcy court.
In addition, pursuant to the Crescent Operating bankruptcy plan,
Crescent Real Estate will receive certain liability releases from the Crescent
Operating stockholders as described in "The Plan of Reorganization - Effects of
Confirmation of the Plan of Reorganization - Releases" if the bankruptcy
25
plan is accepted by the requisite vote of the Crescent Operating stockholders
and confirmed by the bankruptcy court.
26
RISK FACTORS
Before voting in favor of the Crescent Operating bankruptcy plan, you
should be aware that there are risks associated with the Crescent Operating
bankruptcy plan and in receiving Crescent Real Estate common shares. You should
carefully consider these risk factors together with all of the information
included or incorporated by reference in this proxy statement/prospectus before
you decide to vote in favor of the Crescent Operating bankruptcy plan and
possibly receive Crescent Real Estate common shares. This section includes
certain forward-looking statements. Please refer to the explanation of the
qualifications and limitations on such forward-looking statements beginning on
Page 275.
RISKS ASSOCIATED WITH THE CRESCENT OPERATING BANKRUPTCY PLAN
THE CRESCENT OPERATING BANKRUPTCY PLAN MAY NOT BE CONFIRMED BY THE
BANKRUPTCY COURT, AND CONFIRMATION IS A CONDITION TO THE DISTRIBUTION OF
CRESCENT REAL ESTATE COMMON SHARES TO CRESCENT OPERATING STOCKHOLDERS.
There are many reasons why the Crescent Operating bankruptcy plan may
not be confirmed by the bankruptcy court. These reasons include the following:
- Crescent Operating may not receive the votes necessary to
accept the Crescent Operating bankruptcy plan.
- Even if Crescent Operating receives the votes necessary to
accept the Crescent Operating bankruptcy plan, the bankruptcy
court may decide not to confirm the Crescent Operating
bankruptcy plan because the Crescent Operating bankruptcy plan
provides that Crescent Operating and each holder of Crescent
Operating common stock on the confirmation date of the
Crescent Operating bankruptcy plan will be deemed to release
certain parties from specified liabilities. Crescent Operating
may not modify the bankruptcy plan to remove or alter the
releases without the consent of Crescent Real Estate. If
Crescent Real Estate does not consent to modification of the
release, the bankruptcy plan will not be confirmed and
Crescent Real Estate will not be obligated to pay in full or
otherwise resolve the claims of the creditors that Crescent
Operating identified in the original Settlement Agreement or
to make a distribution to Crescent Operating stockholders.
- Even if Crescent Operating receives the votes necessary to
accept the Crescent Operating bankruptcy plan, the bankruptcy
court may determine not to consider these votes if it
determines that (a) the Crescent Operating bankruptcy plan was
not transmitted to substantially all of Crescent Operating's
stockholders, (b) an unreasonably short time was prescribed
for Crescent Operating's stockholders to accept or reject the
Crescent Operating bankruptcy plan, (c) the solicitation was
not made in accordance with applicable nonbankruptcy law or,
if there is no such law, that this proxy statement/prospectus
does not contain adequate information for purposes of section
1125(a) of the Bankruptcy Code; or (d) the voting was not
limited to persons or entities that were stockholders of
record as of the record date.
- Even if Crescent Operating receives the votes necessary to
accept the Crescent Operating bankruptcy plan, the bankruptcy
court may still deny confirmation of the Crescent Operating
bankruptcy plan if it determines that the Crescent Operating
bankruptcy plan does not meet the requirements of applicable
law, including the applicable requirements of section 1129 of
the Bankruptcy Code, which requires the Crescent Operating
bankruptcy plan be in the "best
27
interests" of dissenting members of impaired classes and be
"feasible." The requirement that a bankruptcy plan be in the
best interests of dissenting members of impaired classes
generally means that the value of the consideration to be
distributed under the Crescent Operating bankruptcy plan to
Crescent Operating's stockholders is not less than those
parties would receive if Crescent Operating were liquidated in
a hypothetical liquidation under Chapter 7 of the Bankruptcy
Code. Under the feasibility requirement, the bankruptcy court
must find that confirmation of the Crescent Operating
bankruptcy plan is not likely to be followed by the need for
further financial reorganization. Thus, Crescent Operating
cannot assure you that the bankruptcy court will determine
that the Crescent Operating bankruptcy plan is in the "best
interests" of dissenting members of impaired classes and is
"feasible."
- Even if Crescent Operating receives the votes necessary to
accept the Crescent Operating bankruptcy plan, Crescent
Operating is not permitted by the current bankruptcy plan to
seek confirmation of the plan if Crescent Operating cannot pay
all unsecured claims in full. Crescent Real Estate has agreed
to pay the unsecured claims against Crescent Operating that
were identified in the original Settlement Agreement. These
claims do not include the claims contained in the lawsuit
filed by the Crescent Machinery Committee. If Crescent Real
Estate does not offer to assume or settle these claims, or if
Crescent Real Estate offers to assume or settle these claims
and Crescent Operating does not accept the offer, Crescent
Operating will not have sufficient funds to pay its unsecured
creditors in full. Because the bankruptcy plan provides that
the unsecured creditors will be paid in full, the Bankruptcy
Code does not require Crescent Operating to solicit their
votes on the bankruptcy plan, and Crescent Operating has not
solicited their votes. As a result, Crescent Operating may not
seek confirmation of the bankruptcy plan unless the unsecured
creditors will be paid in full. The Bankruptcy Code also
prohibits Crescent Operating from making any distribution to
its stockholders if unsecured claims are not paid in full
unless the holders of the unsecured claims agree to such a
distribution. For these reasons, Crescent Operating does not
expect the bankruptcy court to confirm the current bankruptcy
plan if the total unsecured claims against Crescent Operating
exceed the amount that Crescent Real Estate will agree to make
available to pay unsecured claims. Further, Crescent Operating
does not expect Crescent Real Estate to pay unsecured claims
in addition to those identified in the original Settlement
Agreement without a reduction in the amount of the
distribution otherwise available to Crescent Operating
stockholders, although the distribution will not be reduced
below approximately $2.16 million, or $0.20 per share of the
Crescent Operating common stock.
Crescent Operating no longer has assets that generate revenue. Crescent
Operating is currently operating based upon limited financial support from
Crescent Real Estate. If the Crescent Operating bankruptcy plan is not confirmed
and the reorganization transactions are not otherwise consummated, Crescent
Operating will be unable to continue to operate as a going concern and it is
likely that Crescent Operating would have to liquidate its assets. The auditor's
report filed in connection with Crescent Operating's annual report on Form 10-K
for the year ended December 31, 2001 is qualified by a reference to Crescent
Operating's recurring net losses, net capital deficiency, debts in default and
other liabilities which it is unable to liquidate in the normal course of
business. In addition, the auditor's report mentions the transfer the assets and
operations of Crescent Operating's hospitality and land development segments to
Crescent Real Estate, Crescent Operating's intent to file a pre-packaged
bankruptcy plan, and Crescent Machinery filing for bankruptcy. The auditor's
report states that "these conditions raise substantial doubt about the company's
ability to continue as a going concern."
28
THE RELEASE OF CRESCENT REAL ESTATE BY CRESCENT OPERATING AND THE
STOCKHOLDERS OF CRESCENT OPERATING AND THE RELEASE OF CRESCENT OPERATING AND ITS
OFFICERS AND DIRECTORS BY THE STOCKHOLDERS OF CRESCENT OPERATING MAY RESULT IN
THE RELEASE OF VIABLE CLAIMS.
In connection with execution of the Settlement Agreement, Crescent
Operating released all claims that it had or might have had against Crescent
Real Estate and affiliates arising prior to the execution of the original
Settlement Agreement. To the extent that a stockholder has claims which are
derivative of, or derived from, those of Crescent Operating, those derivative
claims, which are claims that may be made by a stockholder of a corporation to
enforce, on behalf of the corporation a claim that belongs to the corporation,
were released in the Settlement Agreement, and are or will be effective whether
or not the Crescent Operating stockholders receive any common shares of Crescent
Real Estate. In addition, the bankruptcy plan provides that Crescent Operating
will release all claims that it has or might have against Crescent Real Estate
and affiliates, whether or not those claims arose prior to execution of the
Settlement Agreement. As a result, if the bankruptcy plan is confirmed, the
Crescent Operating stockholders will not, after confirmation, be able to pursue
any derivative claims against Crescent Real Estate and the other parties
released by Crescent Operating under the Settlement Agreement. Also, if the
Crescent Operating stockholders accept the bankruptcy plan and the bankruptcy
court confirms the bankruptcy plan, each Crescent Operating stockholder that is
a member of the class that accepted the bankruptcy plan and that was a holder on
the confirmation date will be deemed on the effective date of the bankruptcy
plan to unconditionally release certain parties, including, without limitation,
each of Crescent Operating's current and former officers and directors,
employees, agents, attorneys, financial advisors and other representatives,
Crescent Real Estate and each of Crescent Real Estate's current and former
officers and directors, employees, agents, attorneys, financial advisors,
affiliates and other representatives from all claims and liabilities relating to
the reorganization transactions, except for performance or nonperformance under
the Crescent Operating bankruptcy plan or any action or omission that
constitutes actual fraud or criminal behavior. The potential claims covered by
the Crescent Operating stockholders' release include direct claims against
Crescent Operating and its officers and directors and direct claims against
Crescent Real Estate and the other parties released by Crescent Operating under
the Settlement Agreement. However, if a stockholder of Crescent Operating sells
its stock before the voting record date for the bankruptcy plan or if a
stockholder votes against the bankruptcy plan, abstains from voting or does not
vote on the bankruptcy plan, and either does not receive or refuses to accept
any distribution of Crescent Real Estate common shares, that stockholder will
not release its direct claims. The releases of Crescent Operating stockholder
claims will apply to Crescent Operating stockholders only in their capacity as
Crescent Operating stockholders, and will not affect their rights as holders of
Crescent Real Estate common shares. As a result of the releases provided for in
the bankruptcy plan, confirmation of the bankruptcy plan may result in the
release of claims that a Crescent Operating stockholder could otherwise raise if
the bankruptcy court confirms the bankruptcy plan.
IF THE CRESCENT OPERATING BANKRUPTCY PLAN IS NOT ACCEPTED BY THE
CRESCENT OPERATING STOCKHOLDERS, THE BANKRUPTCY PLAN MAY STILL BE CONFIRMED BY
THE BANKRUPTCY COURT, AND, IN THAT CASE, THE CRESCENT OPERATING STOCKHOLDERS
WOULD RECEIVE NOTHING.
Section 1129(b) of the Bankruptcy Code contains provisions for the
confirmation of a bankruptcy plan even if the bankruptcy plan is not accepted by
the stockholders of Crescent Operating as long as the bankruptcy plan "does not
discriminate unfairly" and is "fair and equitable" with respect to such class.
This provision is commonly referred to as the "cramdown provision." Crescent
Operating anticipates that it would seek to utilize the "cramdown provision" of
section 1129(b) of the Bankruptcy Code if necessary to confirm the bankruptcy
plan. The bankruptcy plan provides that the stockholders of Crescent Operating
are entitled to receive common shares of Crescent Real Estate only if the
bankruptcy plan is accepted by the required vote of the Crescent Operating
stockholders. Accordingly, if the holders of Crescent Operating common stock,
voting as a class, vote against the bankruptcy plan and if the bankruptcy plan
is instead confirmed pursuant to the "cramdown provision" of section 1129(b) of
the
29
Bankruptcy Code, the stockholders of Crescent Operating will receive nothing
under the bankruptcy plan, their shares of Crescent Operating common stock will
be canceled and the release of stockholder claims will not apply. However, the
Settlement Agreement and the mutual releases executed in connection with the
Settlement Agreement, including Crescent Operating's release of all claims it
may have against Crescent Real Estate, are enforceable whether or not the
bankruptcy plan is approved by Crescent Operating's stockholders or confirmed by
the bankruptcy court.
CRESCENT OPERATING STOCKHOLDERS MAY RECEIVE FEWER CRESCENT REAL ESTATE
COMMON SHARES AS A RESULT OF INCREASED CLAIMS AND EXPENSES AGAINST CRESCENT
OPERATING.
As payments by Crescent Real Estate for claims and expenses relating to
the Crescent Operating bankruptcy and the reorganization transactions, including
the expenses of Crescent Real Estate but excluding payments in satisfaction of
the Bank of America claim, increase, the total value of the Crescent Real Estate
common shares that the Crescent Operating stockholders will receive will be
reduced and the Crescent Operating stockholders will receive fewer Crescent Real
Estate common shares. The total value of the Crescent Real Estate common shares
that the Crescent Operating stockholders will receive is equal to the greater of
(a) approximately $2.16 million and (b) $16.0 million minus the total amount of
any payments by Crescent Real Estate for claims and expenses relating to the
Crescent Operating bankruptcy and the reorganization transactions, including the
expenses of Crescent Real Estate but excluding payments in satisfaction of the
Bank of America claim. As of December 31, 2002, Crescent Real Estate had
incurred approximately $8.5 million in claims and expenses in connection with
the Crescent Operating bankruptcy and the reorganization transactions.
Currently, Crescent Real Estate and Crescent Operating estimate that Crescent
Real Estate will advance the funds to pay in full or otherwise resolve total
claims and expenses of between $10.6 million and $13.8 million. Accordingly, the
total value of the Crescent Real Estate common shares issued to the Crescent
Operating stockholders is expected to be between $5.4 million and $2.16 million,
or $0.50 to $0.20 per share of Crescent Operating common stock. In addition, if
Crescent Real Estate, pursuant to the Settlement Agreement, offers to assume or
settle any obligations arising from the lawsuit brought by the Crescent
Machinery Committee or another unsecured claim not identified in the original
Settlement Agreement and Crescent Operating accepts the offer, the total value
of the Crescent Real Estate common shares that the Crescent Operating
stockholders will receive will be reduced and the Crescent Operating
stockholders will receive fewer Crescent Real Estate common shares. However,
even if Crescent Real Estate does offer to assume or settle obligations under
the Crescent Machinery Committee's lawsuit and Crescent Operating accepts the
offer, then the total value of the Crescent Real Estate common shares that the
Crescent Operating stockholders will be entitled to receive if the bankruptcy
plan is accepted by the Crescent Operating stockholders and confirmed by the
bankruptcy court will be at least $2.16 million, or $0.20 per share of Crescent
Operating common stock. More information regarding the Crescent Machinery
Committee's claim, is set forth in "Description of Crescent Operating's Business
- Legal Proceedings."
LIMITATIONS ON THE SCOPE OF HOULIHAN LOKEY'S FAIRNESS OPINION COULD
LEAD CRESCENT OPERATING STOCKHOLDERS TO ASSIGN TOO MUCH IMPORTANCE TO THE
FAIRNESS OPINION IN MAKING THEIR DECISION ON WHETHER TO VOTE TO APPROVE THE
BANKRUPTCY PLAN.
Houlihan Lokey's fairness opinion is limited in scope and is subject to
various qualifications and assumptions. These limitations, qualifications and
assumptions include the following:
- the opinion covers only the fairness to the public
stockholders of Crescent Operating of the aggregate
consideration to be received by Crescent Operating and its
stockholders, taken as a whole, in connection with the
transactions contemplated by the bankruptcy plan from a
financial point of view and does not opine as to the overall
fairness of the bankruptcy plan and the Settlement Agreement
to the stockholders;
30
- the opinion assumes that the stockholders will receive common
shares of Crescent Real Estate with a value of between $0.32
and $0.50 per share of Crescent Operating, but it maintains
that it would not necessarily change if Crescent Real Estate
were to advance additional funds, as Crescent Real Estate
agreed to do in the October 2002 amendment to the Settlement
Agreement and as described below in "The Reorganization
Transaction - Summary of the Reorganization Transactions -
Payment by Crescent Real Estate of Crescent Operating Claims
and Expenses," that reduced the value of Crescent Real Estate
common shares to below $0.32; and
- the opinion does not attribute any value to the potential
claims against Crescent Real Estate that are being released by
Crescent Operating and its stockholders in connection with the
bankruptcy plan.
In addition, the opinion predates the First Amendment to the Settlement
Agreement pursuant to which Crescent Real Estate agreed to issue a minimum
number of its common shares to Crescent Operating stockholders if the bankruptcy
plan is accepted by the Crescent Operating stockholders and approved by the
bankruptcy court. Further, since the date of the opinion, the estimated claims
and expenses to be paid by Crescent Real Estate in connection with the
reorganization transactions have increased as a result of delays in the
commencement of Crescent Operating's solicitation of the vote of its
stockholders that have resulted in, among other things, higher legal and
accounting expenses of Crescent Real Estate and Crescent Operating and ongoing
interest charges and other expenses incurred by Crescent Operating. Accordingly,
the total value of Crescent Real Estate and Crescent Operating common stock
issuable to Crescent Operating stockholders is currently expected to be between
$0.20 and $0.50 per share of the Crescent Operating common stock, rather than
the $0.32 to $0.50 that Houlihan Lokey determined was fair to the Crescent
Operating stockholders from a financial point of view.
Accordingly, you should consider the following factors that are not
covered by the fairness opinion:
- whether the value of the Crescent Real Estate common shares
will be within the range assumed in the fairness opinion,
particularly since the current estimated value is between
$0.20 (which is less than the low end of the range that
Houlihan Lokey concluded was fair to the Crescent Operating
stockholders from a financial point of view) and $0.50 and
since the claims and allegations in the lawsuit filed by the
Crescent Machinery Committee were made after the issuance of
the fairness opinion;
- the value and likelihood of recovery of the potential claims
against Crescent Real Estate that are being released as a part
of the overall transaction; and
- the alternatives to the bankruptcy plan that are or may be
available to the Crescent Operating stockholders and the
likelihood of their success.
For information related to Crescent Operating's analysis of these
factors, please see "The Reorganization Transactions - Analysis of
Alternatives."
THE SOLE DIRECTOR AND FORMER OFFICERS AND DIRECTORS OF CRESCENT
OPERATING HAVE INTERESTS IN THE ACCEPTANCE OF THE CRESCENT OPERATING BANKRUPTCY
PLAN THAT MAY CONFLICT WITH THE INTERESTS OF CRESCENT OPERATING'S STOCKHOLDERS.
The sole director and the former directors and officers of Crescent
Operating received liability releases for events prior to execution of the
Settlement Agreement. If the Crescent Operating bankruptcy plan
31
becomes effective, these persons also will receive liability releases through
the effective date of the bankruptcy plan. Richard E. Rainwater and John C.
Goff, who are officers and trust managers of Crescent Real Estate and who were
officers and directors of Crescent Operating, also have a financial interest in
the reorganization transactions. See "The Reorganization Transactions -
Interests of Certain Persons in the Reorganization Transactions" for a more
detailed description of these and other benefits to current and former officers
and directors of Crescent Operating resulting from the reorganization
transactions.
LIABILITY RELEASES. Upon approval of the Crescent Operating bankruptcy
plan, in addition to the releases that Crescent Operating granted in connection
with the Settlement Agreement, which are already effective, each of the present
and former officers and directors of Crescent Operating will be released from
substantially all claims and liabilities related to Crescent Operating's
business, the bankruptcy case, the reorganization transactions, and the Crescent
Operating bankruptcy plan and will be entitled to indemnification to the fullest
extent permitted under applicable law if the Crescent Operating bankruptcy plan
is confirmed.
OTHER INTERESTS. As of January 8, 2003, Richard E. Rainwater, the
Chairman of the Board of Crescent Real Estate, and John C. Goff, the Chief
Executive Officer, President and Vice Chairman of the Board of Crescent Real
Estate, together with the other trust managers and executive officers of
Crescent Real Estate, beneficially owned an approximately 18.5% equity interest
in Crescent Real Estate in the aggregate. In addition, as of January 8, 2003,
Messrs. Rainwater and Goff beneficially owned an aggregate of approximately
17.4% of the outstanding common stock of Crescent Operating through their
aggregate ownership of Crescent Operating common stock, including shares
underlying vested options. As equity owners of both Crescent Real Estate and
Crescent Operating, and as persons who, until February 2002, also served as
directors and executive officers of Crescent Operating, Messrs. Goff and
Rainwater have a potential conflict of interest in voting on the acceptance of
the Crescent Operating bankruptcy plan and reorganization transactions.
Additionally, Mr. Goff was subject to conflicts of interests as a result of his
participation in the initial proposal of the Crescent Operating bankruptcy plan
and related agreements while serving simultaneously as an executive officer and
trust manager of Crescent Real Estate and as an executive officer of Crescent
Operating. Neither Mr. Rainwater nor, once the original structure of the
bankruptcy plan and reorganization transactions was proposed, Mr. Goff
participated in the negotiation of the Crescent Operating bankruptcy plan and
reorganization transactions, in order to avoid potential conflicts of interest
and the appearance of impropriety.
THE SETTLEMENT AGREEMENT MAY BE TERMINATED AND CRESCENT OPERATING WOULD
BE UNABLE TO CONFIRM THE CRESCENT OPERATING BANKRUPTCY PLAN.
If the Settlement Agreement were terminated, Crescent Operating would
be unable to confirm the Crescent Operating bankruptcy plan as currently
proposed, and no alternative to the Crescent Operating bankruptcy plan may be
available or, if available, such alternatives may not be as favorable to the
Crescent Operating stockholders as the Crescent Operating bankruptcy plan. The
Settlement Agreement may be terminated at any time prior to the effective date
of the bankruptcy plan by mutual agreement of Crescent Operating and Crescent
Real Estate, or by either Crescent Operating or Crescent Real Estate if the
other is in material breach after notice and a 10-business-day opportunity to
cure. See "The Reorganization Transactions - Summary of the Reorganization
Transactions - Other Material Terms of the Settlement Agreement" for a
discussion of the events that could lead to the termination of the Settlement
Agreement.
32
THE SETTLEMENT AGREEMENT LIMITS CRESCENT OPERATING'S ABILITY TO
UNDERTAKE ALTERNATIVE TRANSACTIONS WITH ANYONE OTHER THAN CRESCENT REAL ESTATE,
AND THIS LIMITATION COULD DISCOURAGE THIRD PARTIES FROM MAKING PROPOSALS THAT
WOULD BE MORE FAVORABLE TO CRESCENT OPERATING STOCKHOLDERS THAN THE CRESCENT
OPERATING BANKRUPTCY PLAN.
The Settlement Agreement places substantial restrictions on Crescent
Operating's ability to contact, solicit, encourage or pursue possible
alternative transactions with any person other than Crescent Real Estate. These
provisions could have the effect of discouraging third parties that might
otherwise have an interest in making a proposal with respect to a transaction
that could result in distributions to Crescent Operating's stockholders that
exceed those provided under the Settlement Agreement and the Crescent Operating
bankruptcy plan. See "The Reorganization Transactions - Summary of the
Reorganization Transactions - Other Material Terms of the Settlement Agreement -
Covenants of Crescent Operating" for a discussion of these provisions.
RISKS ASSOCIATED WITH AN INVESTMENT IN CRESCENT REAL ESTATE COMMON SHARES
The risk factors enumerated below assume the confirmation and
consummation of the Crescent Operating bankruptcy plan and all transactions
contemplated by the bankruptcy plan, and do not include matters that could
prevent or delay confirmation of the Crescent Operating bankruptcy plan.
CRESCENT REAL ESTATE MAY BE UNABLE TO INTEGRATE CRESCENT OPERATING'S
RESORT/HOTEL AND RESIDENTIAL DEVELOPMENT SEGMENTS INTO ITS OPERATIONS
SUCCESSFULLY.
In the first quarter of 2002, in satisfaction of a portion of its
outstanding debt and rental obligations to Crescent Real Estate, Crescent
Operating transferred to subsidiaries of Crescent Real Estate, in lieu of
foreclosure, its lessee interests in eight resort/hotel properties that it
leased from Crescent Real Estate and, pursuant to a strict foreclosure, its
voting interests in three of Crescent Real Estate's residential development
corporations, in which Crescent Real Estate already owned the nonvoting stock,
and other assets. Crescent Real Estate will face significant challenges in
integrating Crescent Operating's hotel and residential development segments into
Crescent Real Estate's resort/hotel and residential development segments in a
timely and efficient manner. The integration will be complex and time-consuming.
The consolidation of operations will require substantial attention from
management. The diversion of management attention and any difficulties
encountered in the transition and integration process, as well as any
unanticipated or undisclosed liabilities, could adversely affect Crescent Real
Estate's results of operations and its ability to make distributions to its
shareholders and decrease its cash flow. In addition, if the transfers are
challenged by Crescent Operating's stockholders or creditors or other claims are
made, Crescent Real Estate could incur additional costs in defending its
position. These risks would increase if the Crescent Operating bankruptcy plan
were not consummated.
CRESCENT REAL ESTATE'S PERFORMANCE AND VALUE ARE SUBJECT TO GENERAL
RISKS ASSOCIATED WITH THE REAL ESTATE INDUSTRY.
Crescent Real Estate's economic performance and the value of its real
estate assets, and consequently the value of its investments, are subject to the
risk that if its office, resort/hotel, residential development and
temperature-controlled logistics properties do not generate revenues sufficient
to meet its operating expenses, including debt service and capital expenditures,
its cash flow and ability to pay distributions to its shareholders will be
adversely affected. As a real estate company, Crescent Real Estate is
susceptible to the following real estate industry risks:
- downturns in the national, regional and local economic
conditions where its properties are located;
33
- competition from other office, resort/hotel, residential
development and temperature-controlled logistics properties;
- adverse changes in local real estate market conditions, such
as oversupply or reduction in demand for office space,
resort/hotel space, luxury residences or
temperature-controlled logistics storage space;
- changes in tenant preferences that reduce the attractiveness
of its properties to tenants;
- tenant defaults;
- zoning or regulatory restrictions;
- decreases in market rental rates;
- costs associated with the need to periodically repair,
renovate and relet space;
- increases in the cost of adequate maintenance, insurance and
other operating costs, including real estate taxes, associated
with one or more properties, which may occur even when
circumstances such as market factors and competition cause a
reduction in revenues from one or more properties; and
- illiquidity of real estate investments, which may limit its
ability to vary its portfolio promptly in response to changes
in economic or other conditions.
CRESCENT REAL ESTATE MAY EXPERIENCE DIFFICULTY OR DELAY IN RENEWING
LEASES OR RE-LEASING SPACE.
Crescent Real Estate derives most of its revenue directly or indirectly
from rent received from its tenants. Crescent Real Estate is subject to the
risks that, upon expiration, leases for space in its office properties may not
be renewed, the space may not be re-leased, or the terms of renewal or re-lease,
including the cost of required renovations or concessions to tenants, may be
less favorable than current lease terms. As a result, Crescent Real Estate's
cash flow could decrease and its ability to make distributions to its
shareholders could be adversely affected.
As of September 30, 2002, office properties with leases with respect to
approximately 1.7 million, 3.6 million and 4.4 million square feet, representing
approximately 7%, 14%, and 17% of net rentable area, expire in 2002, 2003 and
2004, respectively. During these same three years, leases of approximately 34%
of the net rentable area of Crescent Real Estate's office properties in Dallas
and approximately 42% of the net rentable area of its office properties in
Houston expire.
MANY REAL ESTATE COSTS ARE FIXED, EVEN IF INCOME FROM CRESCENT REAL
ESTATE'S PROPERTIES DECREASES.
Crescent Real Estate's financial results depend primarily on leasing
space in its office properties to tenants, renting rooms at its resorts and
hotels and successfully developing and selling lots, single family homes,
condominiums, town homes and time share units at Crescent Real Estate's
residential development properties, in each case on terms favorable to Crescent
Real Estate. Costs associated with real estate investment, such as real estate
taxes and maintenance costs, generally are not reduced even when a property is
not fully occupied, the rate of sales at a project decreases, or other
circumstances cause a reduction in income from the investment.
34
As a result, cash flow from the operations of Crescent Real Estate's
office properties may be reduced if a tenant does not pay its rent. Under those
circumstances, Crescent Real Estate might not be able to enforce its rights as
landlord without delays, and may incur substantial legal costs. The income from
Crescent Real Estate's office properties also may be reduced if tenants are
unable to pay rent or Crescent Real Estate is unable to rent properties on
favorable terms. Crescent Real Estate's income from its resorts and hotels may
be reduced if it is unable to rent a sufficient number of rooms on favorable
terms, and Crescent Real Estate's income from its residential development
properties may decrease if it is unable to sell the lots or other components of
a particular residential development project at the rates or on the terms it
anticipated. Additionally, new properties that Crescent Real Estate may acquire
or develop may not produce any significant revenue immediately, and the cash
flow from existing operations may be insufficient to pay the operating expenses
and debt service associated with that property until the property is fully
leased.
CRESCENT REAL ESTATE DERIVES THE SUBSTANTIAL MAJORITY OF ITS OFFICE
RENTAL REVENUES FROM ITS GEOGRAPHICALLY CONCENTRATED MARKETS.
As of September 30, 2002, approximately 73% of Crescent Real Estate's
office portfolio, based on total net rentable square feet, representing 63% of
its total revenues for the year ended December 31, 2001, was located in the
metropolitan areas of Dallas/Fort Worth and Houston, Texas. Due to this
geographic concentration, any deterioration in economic conditions in the
Dallas/Fort Worth or Houston metropolitan areas, or in other geographic markets
in which Crescent Real Estate in the future may acquire substantial assets,
could adversely affect Crescent Real Estate's results of operations and its
ability to make distributions to its shareholders and decrease its cash flow. In
addition, Crescent Real Estate competes for tenants based on rental rates,
attractiveness and location of a property and quality of maintenance and
management services. An increase in the supply of properties competitive with
Crescent Real Estate's properties in these markets could have a material adverse
effect on Crescent Real Estate's ability to attract and retain tenants in these
markets.
CRESCENT REAL ESTATE MAY HAVE LIMITED FLEXIBILITY IN DEALING WITH ITS
JOINTLY OWNED INVESTMENTS.
Crescent Real Estate's organizational documents do not limit the amount
of funds that it may invest in properties and assets jointly with other persons
or entities. Approximately 12% of the net rentable area of Crescent Real
Estate's office properties is held jointly with other persons or entities. In
addition, as of September 30, 2002, all of Crescent Real Estate's residential
development and temperature-controlled logistics properties were owned jointly.
Joint ownership of properties may involve special risks, including the
possibility that Crescent Real Estate's partners or co-investors might become
bankrupt, that those partners or co-investors might have economic or other
business interests or goals which are unlike or incompatible with Crescent Real
Estate's business interests or goals, and that those partners or co-investors
might be in a position to take action contrary to Crescent Real Estate's
suggestions or instructions, or in opposition to Crescent Real Estate's policies
or objectives. Joint ownership gives a third party the opportunity to influence
the return Crescent Real Estate can achieve on some of its investments and may
adversely affect Crescent Real Estate's ability to make distributions to its
shareholders. In addition, in many cases Crescent Real Estate does not control
the timing or amount of distributions that it receives from the joint
investment, and amounts otherwise available for distribution to Crescent Real
Estate may be reinvested in the property or used for other costs and expenses of
the joint operation.
ACQUISITIONS AND NEW DEVELOPMENTS MAY FAIL TO PERFORM AS EXPECTED.
35
Crescent Real Estate intends to focus its investment strategy primarily
on investment opportunities and markets considered "demand-driven" within its
office property segment, with a long-term strategy of acquiring properties at a
cost significantly below that which would be required to develop a comparable
property. Acquisition or development of properties entails risks that include
the following, any of which could adversely affect Crescent Real Estate's
results of operations and its ability to meet its obligations:
- Crescent Real Estate may not be able to identify suitable
properties to acquire or may be unable to complete the
acquisition of the properties it selects for acquisition;
- Crescent Real Estate may not be able to integrate new
acquisitions into its existing operations successfully;
- Crescent Real Estate's estimate of the costs of improving,
repositioning or redeveloping an acquired property may prove
to be too low, and, as a result, the property may fail to meet
Crescent Real Estate's estimates of the profitability of the
property, either temporarily or for a longer time;
- Office properties, resorts or hotels Crescent Real Estate
acquires may fail to achieve the occupancy and rental or room
rates Crescent Real Estate anticipates at the time it makes
the decision to invest in the properties, resulting in lower
profitability than expected in analyzing the properties;
- Crescent Real Estate's pre-acquisition evaluation of the
physical condition of each new investment may not detect
certain defects or necessary repairs until after the property
is acquired, which could significantly increase Crescent Real
Estate's total acquisition costs; and
- Crescent Real Estate's investigation of a property or building
prior to its acquisition, and any representations it may
receive from the seller, may fail to reveal various
liabilities, which could effectively reduce the cash flow from
the property or building, or increase Crescent Real Estate's
acquisition cost.
CRESCENT REAL ESTATE MAY BE UNABLE TO SELL PROPERTIES WHEN APPROPRIATE
BECAUSE REAL ESTATE INVESTMENTS ARE ILLIQUID.
Real estate investments generally cannot be sold quickly. In addition,
there are some limitations under federal income tax laws applicable to REITs
that may limit Crescent Real Estate's ability to sell its assets. Crescent Real
Estate may not be able to alter its portfolio promptly in response to changes in
economic or other conditions. Crescent Real Estate's inability to respond
quickly to adverse changes in the performance of its investments could have an
adverse effect on Crescent Real Estate's ability to meet its obligations and
make distributions to its shareholders.
THE REVENUES FROM CRESCENT REAL ESTATE'S NINE HOTEL PROPERTIES, EVEN
AFTER ACQUISITIONS OF THE CRESCENT OPERATING HOTEL OPERATIONS, DEPEND ON
THIRD-PARTY OPERATORS THAT CRESCENT REAL ESTATE DOES NOT CONTROL.
Crescent Real Estate owns nine hotel properties, eight of which are
leased to Crescent Real Estate's subsidiaries. Crescent Real Estate currently
leases the remaining hotel property, the Omni Austin Hotel, to a third party
entity, HCD Austin Corporation. To maintain Crescent Real Estate's status as a
REIT, third-party property managers manage each of the nine hotel properties. As
a result, Crescent Real
36
Estate is unable to directly implement strategic business decisions with respect
to the operation and marketing of its hotel properties, such as decisions with
respect to the quality of accommodations, room rate structure, the quality and
scope of amenities such as food and beverage facilities and similar matters. The
amount of revenue that Crescent Real Estate receives from the hotel properties
is dependent on the ability of the property managers to maintain and increase
the gross receipts from these properties. Although Crescent Real Estate consults
with the managers with respect to strategic business plans, the managers are
under no obligation to implement any of Crescent Real Estate's recommendations
with respect to these matters. If the gross receipts of the resort/hotels
decline, Crescent Real Estate's revenues would decrease as well, which could
reduce the amount of cash available to meet its obligations and for distribution
to its shareholders.
THE REVENUES FROM CRESCENT REAL ESTATE'S NINE HOTEL PROPERTIES ARE
SUBJECT TO RISKS ASSOCIATED WITH THE HOSPITALITY INDUSTRY.
The following factors, among others, are common to the resort/hotel
industry, and may reduce the receipts generated by Crescent Real Estate's hotel
properties:
- based on such features as access, location, quality of
accommodations, room rate structure and, to a lesser extent,
the quality and scope of other amenities such as food and
beverage facilities, Crescent Real Estate's hotel properties
compete for guests with other resorts and hotels, a number of
which have greater marketing and financial resources than the
lessees or the hotel property managers;
- if there is an increase in operating costs resulting from
inflation or other factors, Crescent Real Estate or the
property managers may not be able to offset such increase by
increasing room rates;
- Crescent Real Estate's hotel properties are subject to
fluctuating and seasonal demands for business travelers and
tourism; and
- Crescent Real Estate's hotel properties are subject to general
and local economic conditions that may affect the demand for
travel in general and other factors that are beyond Crescent
Real Estate's control, such as acts of terrorism.
In addition, Crescent Real Estate's hotel properties have experienced a
decrease in occupancy rates, revenue per available room and total revenue since
September 11, 2001. For the year ended December 31, 2001, compared to the year
ended December 31, 2000, the weighted average occupancy of Crescent Real
Estate's hotel properties decreased approximately 6%, the average daily rate
decreased approximately 3%, revenue per available room decreased approximately
6% and same store net operating income decreased by an average of 16%. For the
nine months ended September 30, 2002, compared to the nine months ended
September 30, 2001, the weighted average occupancy of Crescent Real Estate's
hotel properties decreased approximately 1%, the average daily rate decreased
approximately 2.0%, the revenue per available room decreased approximately 3.3%
and the same store net operating income decreased by an average of 6.8%.
Military actions against terrorists, new terrorist attacks, actual or
threatened, and other political events could cause a lengthy period of
uncertainty that might increase customer reluctance to travel and therefore
adversely affect Crescent Real Estate's results of operations and its ability to
meet its obligations.
THE PERFORMANCE OF CRESCENT REAL ESTATE'S RESIDENTIAL DEVELOPMENT
PROPERTIES IS AFFECTED BY NATIONAL, REGIONAL AND LOCAL ECONOMIC CONDITIONS.
37
Crescent Real Estate's residential development properties, which
include The Woodlands and Desert Mountain, are generally targeted toward
purchasers of high-end primary residences or seasonal secondary residences. As a
result, the economic performance and value of these properties is particularly
sensitive to changes in national, regional and local economic and market
conditions. Economic downturns may discourage potential customers from
purchasing new, larger primary residences or vacation or seasonal homes. In
addition, other factors may affect the performance and value of a property
adversely, including changes in laws and governmental regulations (including
those governing usage, zoning and taxes), changes in interest rates (including
the risk that increased interest rates may result in decreased sales of lots in
any residential development property) and the availability to potential
customers of financing. Adverse changes in any of these factors, each of which
is beyond Crescent Real Estate's control, could reduce the income that it
receives from the properties, and adversely affect Crescent Real Estate's
ability to meet its obligations.
CRESCENT REAL ESTATE DOES NOT CONTROL REVENUES FROM ITS
TEMPERATURE-CONTROLLED LOGISTICS PROPERTIES, AND THE LESSEE MAY BE UNABLE TO
MEET ALL OF ITS RENT OBLIGATIONS.
Crescent Real Estate owns a 40% interest in the temperature-controlled
logistics partnership that owns AmeriCold Corporation, which in turn directly or
indirectly owns the Crescent Real Estate temperature-controlled logistics
properties. The temperature-controlled logistics properties are operated by, and
leased to, AmeriCold Logistics, L.L.C., owned 60% by Vornado Operating and 40%
by COPI Cold Storage. Crescent Real Estate has no ownership interest in
AmeriCold Logistics and, thus, does not have the authority to control the
management or operation of the Crescent Real Estate temperature-controlled
logistics properties.
Pursuant to the leases, AmeriCold Logistics may elect to defer a
portion of the rent for the Crescent Real Estate temperature-controlled
logistics properties for up to three years beginning on March 12, 1999, to the
extent that available cash, as defined in the leases, is insufficient to pay
such rent. The leases were amended in February 22, 2001 to extend the rent
deferral period to December 31, 2003. Through September 30, 2002, AmeriCold
Logistics has deferred approximately $70.5 million of rent, of which Crescent
Real Estate's portion is approximately $28.2 million. In December 2001, the
temperature-controlled logistics partnership, as lessor, waived its rights to
collect $39.8 million of the $49.9 million of deferred rent, of which Crescent
Real Estate's share was $15.9 million. The remaining deferred rent, or rent
payable in the future, may not be paid in full on a timely basis.
Crescent Real Estate cannot assure its shareholders that AmeriCold
Logistics will operate the Crescent Real Estate temperature-controlled logistics
properties in a manner which will enable it to meet its ongoing rental
obligations to Crescent Real Estate. In the event that AmeriCold Logistics is
unable to make its rental payments, Crescent Real Estate's cash flow would be
adversely affected, which could affect Crescent Real Estate's results of
operations, ability to meet its obligations and the amount of distributions made
to Crescent Real Estate's shareholders.
THE AMOUNT OF DEBT CRESCENT REAL ESTATE HAS AND THE RESTRICTIONS
IMPOSED BY THAT DEBT COULD ADVERSELY AFFECT CRESCENT REAL ESTATE'S FINANCIAL
CONDITION.
Crescent Real Estate has a substantial amount of debt. As of September
30, 2002, Crescent Real Estate had approximately $2.4 billion of consolidated
debt outstanding, of which approximately $1.6 billion was secured by
approximately 31% of Crescent Real Estate's gross total assets. In addition, as
a result of the acquisition by subsidiaries of Crescent Real Estate of Crescent
Operating's lessee interests in eight hotel properties then leased to
subsidiaries of Crescent Operating, the voting interests in three of Crescent
Real Estate's residential development corporations and other assets, Crescent
Real Estate is now required to consolidate an additional approximately $99.0
million of debt as of September 30, 2002.
38
Crescent Real Estate's organizational documents do not limit the level
or amount of debt that Crescent Real Estate may incur. Crescent Real Estate does
not have a policy limiting the ratio of its debt to total capitalization or
assets. The amount of debt Crescent Real Estate has and may have outstanding
could have important consequences to Crescent Real Estate's shareholders. For
example, it could:
- make it difficult to satisfy Crescent Real Estate's debt
service requirements;
- prevent Crescent Real Estate from making distributions on its
outstanding common shares and preferred shares;
- require Crescent Real Estate to dedicate a substantial portion
of its cash flow from operations to payments on its debt,
thereby reducing funds available for operations, property
acquisitions and other appropriate business opportunities that
may arise in the future;
- require Crescent Real Estate to dedicate increased amounts of
its cash flow from operations to payments on its variable
rate, unhedged debt if interest rates rise;
- limit Crescent Real Estate's flexibility in planning for, or
reacting to, changes in its business and the factors that
affect the profitability of Crescent Real Estate's business;
- limit Crescent Real Estate's ability to obtain additional
financing, if Crescent Real Estate needs it in the future for
working capital, debt refinancing, capital expenditures,
acquisitions, development or other general corporate purposes;
- increase the adverse effect on Crescent Real Estate's
available cash flow from operations that may result from
changes in conditions in the economy in general and in the
areas in which Crescent Real Estate's properties are located;
and
- limit Crescent Real Estate's flexibility in conducting its
business, which may place Crescent Real Estate at a
disadvantage compared to competitors with less debt.
Crescent Real Estate's ability to make scheduled payments of the
principal of, to pay interest on, or to refinance, its indebtedness will depend
on Crescent Real Estate's future performance, which to a certain extent is
subject to economic, financial, competitive and other factors beyond Crescent
Real Estate's control. There can be no assurance that Crescent Real Estate's
business will continue to generate sufficient cash flow from operations in the
future to service its debt or meet its other cash needs. If Crescent Real Estate
is unable to do so, it may be required to refinance all or a portion of its
existing debt, or to sell assets or obtain additional financing. Crescent Real
Estate cannot assure its shareholders that any such refinancing, sale of assets
or additional financing would be possible on terms that Crescent Real Estate
would find acceptable.
If Crescent Real Estate were to breach certain of its debt covenants,
Crescent Real Estate's lenders could require it to repay the debt immediately,
and, if the debt is secured, could immediately take possession of the property
securing the loan. In addition, if any other lender declared its loan due and
payable as a result of a default, the holders of Crescent Real Estate's public
and private notes, along with the lenders under Crescent Real Estate's credit
facility, might be able to require that those debts be paid immediately. As a
results, any default under Crescent Real Estate's debt covenants could have an
adverse effect on its financial condition, its results of operations, its
ability to meet its obligations and the market value of its shares.
39
CRESCENT REAL ESTATE IS OBLIGATED TO COMPLY WITH FINANCIAL AND OTHER
COVENANTS IN ITS DEBT THAT COULD RESTRICT ITS OPERATING ACTIVITIES, AND THE
FAILURE TO COMPLY COULD RESULT IN DEFAULTS THAT ACCELERATE THE PAYMENT UNDER ITS
DEBT.
Crescent Real Estate's secured debt generally contains customary
covenants, including, among others, provisions:
- relating to the maintenance of the property securing the debt;
- restricting Crescent Real Estate's ability to pledge assets or
create other liens;
- restricting Crescent Real Estate's ability to incur additional
debt;
- restricting Crescent Real Estate's ability to amend or modify
existing leases; and
- restricting Crescent Real Estate's ability to enter into
transactions with affiliates.
Crescent Real Estate's unsecured debt generally contains various
restrictive covenants. The covenants in Crescent Real Estate's unsecured debt
include, among others, provisions restricting its ability to:
- incur additional debt;
- incur additional debt and subsidiary debt;
- make certain distributions, investments and other restricted
payments, including distribution payments on Crescent Real
Estate's or Crescent Real Estate's subsidiaries' outstanding
common and preferred equity;
- limit the ability of restricted subsidiaries to make payments
to Crescent Real Estate;
- enter into transactions with affiliates;
- create certain liens;
- sell assets;
- enter into certain sale-leaseback transactions; and
- consolidate, merge or sell all or substantially all of
Crescent Real Estate's assets.
In addition, certain covenants in Crescent Real Estate's bank
facilities require Crescent Real Estate and its subsidiaries to maintain certain
financial ratios.
Any of the covenants described in this risk factor may restrict
Crescent Real Estate's operations and its ability to pursue potentially
advantageous business opportunities. Crescent Real Estate's failure to comply
with these covenants could also result in an event of default that, if not cured
or waived, could result in the acceleration of all or a substantial portion of
Crescent Real Estate's debt.
40
RISING INTEREST RATES COULD ADVERSELY AFFECT CRESCENT REAL ESTATE'S
CASH FLOW.
Of Crescent Real Estate's approximately $2.4 billion of debt
outstanding as of September 30, 2002, approximately $228 million was unhedged
variable rate debt. Crescent Real Estate also may borrow additional funds at
variable interest rates in the future, and Crescent Real Estate has entered, and
in the future may enter, into other transactions to limit its exposure to rising
interest rates. Increases in interest rates, or the loss of the benefits of any
interest rate hedging arrangements, would increase Crescent Real Estate's
interest expense on its variable rate debt, which would adversely affect cash
flow and its ability to service its debt, meet its obligations and make
distributions to its shareholders.
THE NUMBER OF SHARES AVAILABLE FOR FUTURE SALE COULD ADVERSELY AFFECT
THE MARKET PRICE OF CRESCENT REAL ESTATE'S PUBLICLY TRADED SECURITIES.
Crescent Real Estate has entered into various private placement
transactions whereby units and limited partnership interests in Crescent
Partnership were issued in exchange for properties or interests in properties.
These units and interests are currently exchangeable for Crescent Real Estate
common shares on the basis of two shares for each one unit or, at Crescent Real
Estate's option, an equivalent amount of cash. Upon exchange for Crescent Real
Estate's common shares, those common shares may be sold in the public market
pursuant to registration rights. As of September 30, 2002, approximately
6,541,234 units were outstanding, which were exchangeable for 13,082,468
Crescent Real Estate common shares or, at Crescent Real Estate's option, an
equivalent amount of cash. In addition, as of December 31, 2001, Crescent
Partnership had outstanding options to acquire approximately 1,197,143 units, of
which 882,857 options were exercisable at a weighted average price of $18.00
with a weighted average remaining contractual life of 4.8 years. Crescent Real
Estate has also reserved a number of common shares for issuance pursuant to its
employee benefit plans, and such common shares will be available for sale from
time to time. As of December 31, 2001, Crescent Real Estate had issued options
to acquire approximately 6,975,334 common shares outstanding, of which
approximately 3,126,684 options were exercisable at a weighted average exercise
price of $24.00, with a weighted average remaining contractual life of seven
years. Crescent Real Estate's employees may also participate in an employee
stock purchase plan that allows them to purchase up to 1,000,000 newly issued
common shares. Crescent Real Estate cannot predict the effect that future sales
of common shares, or the perception that such sales could occur, will have on
the market prices of its equity securities.
ENVIRONMENTAL PROBLEMS ARE POSSIBLE AND MAY BE COSTLY.
Under various federal, state and local laws, ordinances and
regulations, Crescent Real Estate may be required to investigate and clean up
certain hazardous or toxic substances released on or in properties Crescent Real
Estate owns or operates, and also may be required to pay other costs relating to
hazardous or toxic substances. This liability may be imposed without regard to
whether Crescent Real Estate knew about the release of these types of substances
or was responsible for their release. The presence of contamination or the
failure to remediate properly contaminations at any of Crescent Real Estate's
properties may adversely affect its ability to sell or lease the properties or
to borrow using the properties as collateral. The costs or liabilities could
exceed the value of the affected real estate. Crescent Real Estate has not been
notified by any governmental authority, however, of any non-compliance,
liability or other claim in connection with any of its properties, and Crescent
Real Estate is not aware of any other environmental condition with respect to
any of its properties that management believes would have a material adverse
effect on its business, assets or results of operations taken as a whole.
The uses of any of Crescent Real Estate's properties prior to Crescent
Real Estate's acquisition of the property and the building materials used at the
property are among the property-specific factors that will affect how the
environmental laws are applied to Crescent Real Estate's properties. In general,
before Crescent Real Estate purchased each of its properties, independent
environmental consultants conducted or updated Phase I environmental
assessments, which generally do not involve invasive
41
techniques such as soil or ground water sampling, and where indicated, based on
the Phase I results, conducted Phase II environmental assessments which do
involve this type of sampling. None of these assessments revealed any materially
adverse environmental condition relating to any particular property not
previously known to Crescent Real Estate. Crescent Real Estate believes that all
of these previously known conditions either have been remediated or are in the
process of being remediated at this time. There can be no assurance, however,
that environmental liabilities have not developed since these environmental
assessments were prepared, or that future uses or conditions, including changes
in applicable environmental laws and regulations, will not result in imposition
of environmental liabilities. If Crescent Real Estate is subject to
environmental liabilities, the liabilities could adversely affect Crescent Real
Estate's results of operations and its ability to meet its obligations, which
could in turn affect the market value of its common shares.
COMPLIANCE WITH THE AMERICANS WITH DISABILITIES ACT COULD BE COSTLY.
Under the Americans with Disabilities Act of 1990, all public
accommodations and commercial facilities must meet certain federal requirements
related to access and use by disabled persons. Compliance with the ADA
requirements could involve removal of structural barriers from certain disabled
persons' entrances. Other federal, state and local laws may require
modifications to or restrict further renovations of Crescent Real Estate's
properties with respect to such accesses. Although Crescent Real Estate believes
that its properties are substantially in compliance with present requirements,
noncompliance with the ADA or related laws or regulations could result in the
United States government imposing fines or private litigants being awarded
damages against Crescent Real Estate. Costs such as these, as well as the
general costs of compliance with these laws or regulations, may adversely affect
Crescent Real Estate's ability to make payments under its debt and adversely
affect the price of its common shares.
DEVELOPMENT AND CONSTRUCTION RISKS COULD ADVERSELY AFFECT CRESCENT REAL
ESTATE'S PROFITABILITY.
Crescent Real Estate is currently developing, expanding or renovating
some of its office or hotel properties and may in the future engage in these
activities for other properties it owns. In addition, Crescent Real Estate's
residential development properties engage in the development of raw land and
construction of single-family homes, condominiums, town homes and timeshare
units. These activities may be exposed to the following risks, each of which
could adversely affect Crescent Real Estate's results of operations and its
ability to meet its obligations.
- Crescent Real Estate may be unable to obtain, or suffer delays
in obtaining, necessary zoning, land-use, building, occupancy
and other required governmental permits and authorizations,
which could result in increased costs or abandonment of these
activities.
- Crescent Real Estate may incur costs for development,
expansion or renovation of a property which exceed its
original estimates due to increased costs for materials or
labor or other costs that were unexpected.
- Crescent Real Estate may not be able to obtain financing with
favorable terms, which may make Crescent Real Estate unable to
proceed with development and other related activities on the
schedule originally planned or at all.
42
- Crescent Real Estate may be unable to complete construction
and sale or lease-up of a lot, office property or residential
development unit on schedule, which could result in increased
debt service expense or construction costs.
Additionally, the time frame required for development, construction and
lease-up of these properties means that Crescent Real Estate may have to wait a
few years for a significant cash return. As a REIT, Crescent Real Estate is
required to make cash distributions to its shareholders. If Crescent Real
Estate's cash flow from operations is not sufficient, Crescent Real Estate may
be forced to borrow to fund these distributions, which could affect its ability
to meet its other obligations.
COMPETITION FOR ACQUISITIONS MAY RESULT IN INCREASED ACQUISITION COSTS.
Crescent Real Estate plans to make select additional investments from
time to time in the future and may compete for available investment
opportunities with entities that have greater liquidity or financial resources.
Several real estate companies may compete with Crescent Real Estate in seeking
properties for acquisition or land for development and prospective tenants,
guests or purchasers. This competition may increase the costs of any
acquisitions that Crescent Real Estate makes and adversely affect its ability to
meet its obligations by:
- reducing the number of suitable investment opportunities
offered to Crescent Real Estate; and
- increasing the bargaining power of property owners.
In addition, if a competitor succeeds in making an acquisition in a
market in which Crescent Real Estate's properties compete, ownership of that
investment by a competitor may adversely affect Crescent Real Estate's results
of operations and its ability to meet its obligations by:
- interfering with Crescent Real Estate's ability to attract and
retain tenants, guests or purchasers; and
- adversely affecting Crescent Real Estate's ability to minimize
expenses of operation.
FAILURE TO QUALIFY AS A REIT WOULD CAUSE CRESCENT REAL ESTATE TO BE
TAXED AS A CORPORATION, WHICH WOULD SUBSTANTIALLY REDUCE FUNDS AVAILABLE FOR
PAYMENT OF DISTRIBUTIONS.
Crescent Real Estate intends to continue to operate in a manner that
allows it to meet the requirements for qualification as a REIT under the
Internal Revenue Code of 1986, as amended. A REIT generally is not taxed at the
corporate level on income it distributes to its shareholders, as long as it
distributes at least 90 percent of its income to its shareholders annually and
satisfies certain other highly technical and complex requirements. Unlike many
REITs, which tend to make only one or two types of real estate investments,
Crescent Real Estate invests in a broad range of real estate products. Several
of its investments also are more complicated than those of other REITs. As a
result, Crescent Real Estate is likely to encounter a greater number of
interpretative issues under the REIT qualification rules, and more issues which
lack clear guidance, than are other REITs. Crescent Real Estate, as a matter of
policy, consults with outside tax counsel in structuring its new investments in
an effort to satisfy the REIT qualification rules. Shaw Pittman LLP, tax counsel
to Crescent Real Estate, has given Crescent Real Estate an opinion stating that
Crescent Real Estate qualified as a REIT under the Internal Revenue Code for its
taxable years ending on or before December 31, 2001, that Crescent Real Estate
is organized in conformity with the requirements for qualification as a REIT
under the Internal Revenue Code and that its proposed method of operation will
permit Crescent Real Estate to continue to meet the requirements for
43
qualification and taxation as a REIT. This opinion is based on representations
made by Crescent Real Estate as to factual matters, opinions of other law firms
and on existing law, which is subject to change, both retroactively and
prospectively, and to possibly different interpretations. Shaw Pittman LLP's
opinion also is not binding on either the Internal Revenue Service or the
courts.
Crescent Real Estate must meet the requirements of the Internal Revenue
Code in order to qualify as a REIT now and in the future. The laws and
regulations governing federal income taxation are the subject of frequent review
and amendment, and proposed or contemplated changes in the laws or regulations
may affect Crescent Real Estate's ability to qualify as a REIT and the manner in
which Crescent Real Estate conducts its business. If Crescent Real Estate fails
to qualify as a REIT for federal income tax purposes, Crescent Real Estate would
not be allowed a deduction for distributions to shareholders in computing
taxable income and would be subject to federal income tax at regular corporate
rates. In addition to these taxes, Crescent Real Estate may be subject to the
federal alternative minimum tax. Unless Crescent Real Estate is entitled to
relief under certain statutory provisions, Crescent Real Estate could not elect
to be taxed as a REIT for four taxable years following any year during which
Crescent Real Estate was first disqualified. Therefore, if Crescent Real Estate
loses its REIT status, Crescent Real Estate could be required to pay significant
income taxes, which would reduce its funds available for investments or for
distributions to its shareholders. This would likely adversely affect the value
of an investment in Crescent Real Estate. In addition, Crescent Real Estate
would no longer be required by law or its operating agreements to make any
distributions to its shareholders.
PROVISIONS OF CRESCENT REAL ESTATE'S DECLARATION OF TRUST AND BYLAWS
COULD INHIBIT CHANGES IN CONTROL OR DISCOURAGE TAKEOVER ATTEMPTS BENEFICIAL TO
SHAREHOLDERS.
Certain provisions of Crescent Real Estate's declaration of trust and
bylaws may delay or prevent either a change in control of Crescent Real Estate
or another transaction that could provide its shareholders with a premium over
the then-prevailing market price of Crescent Real Estate's common shares or
which might otherwise be in the best interest of its security holders. These
include a staggered Board of Trust Managers, which makes it more difficult for a
third party to gain control of Crescent Real Estate's Board, and the ownership
limit described below. In addition, any future series of preferred shares may
have certain voting provisions that could delay or prevent a change of control
or other transaction that might involve a premium price or otherwise be
beneficial to its security holders. The declaration of trust also establishes
special requirements with respect to "business combinations," including certain
issuances of equity securities, between Crescent Real Estate and an "interested
shareholder," and mandates procedures for obtaining voting rights with respect
to "control shares" acquired in a control share acquisition.
OWNERSHIP OF CRESCENT REAL ESTATE'S SHARES IS SUBJECT TO LIMITATION FOR
REIT TAX PURPOSES.
To remain qualified as a REIT for federal income tax purposes, not more
than 50% in value of Crescent Real Estate's outstanding shares may be owned,
directly or indirectly, by five or fewer individuals (as defined in the federal
income tax laws applicable to REITs) at any time during the last half of any
taxable year, and Crescent Real Estate's outstanding shares must be beneficially
owned by 100 or more persons at least 335 days of a taxable year. To facilitate
maintenance of its REIT qualification, Crescent Real Estate's declaration of
trust, subject to certain exceptions, prohibits ownership by any single
shareholder of more than 8.0% of its issued and outstanding common shares, or
such greater percentage as established by the Board of Trust Managers, but in no
event greater than 9.9% of its issued and outstanding preferred shares. In
addition, the declaration of trust prohibits ownership by Richard E. Rainwater,
the Chairman of the Board of Trust Managers, together with certain of his
affiliates or relatives, initially of more than 8.0% and subsequently of more
than 9.5% of the issued and outstanding Crescent Real Estate common shares.
Crescent Real Estate refers to these limits collectively as the
44
"ownership limit." Any transfer of shares may be null and void if it causes a
person to violate the ownership limit, and the intended transferee or holder
will acquire no rights in the shares. Those shares will automatically convert
into excess shares, and the shareholder's rights to distributions and to vote
will terminate. The shareholder would have the right to receive payment of the
purchase price for the shares and certain distributions upon Crescent Real
Estate's liquidation. Excess shares will be subject to repurchase by Crescent
Real Estate at its election. While the ownership limit helps preserve Crescent
Real Estate's status as a REIT, it could also delay or prevent any person or
small group of persons from acquiring, or attempting to acquire, control of
Crescent Real Estate and, therefore, could adversely affect Crescent Real
Estate's shareholders' ability to realize a premium over the then-prevailing
market price for their shares.
CRESCENT REAL ESTATE'S INSURANCE COVERAGE ON ITS PROPERTIES MAY BE
INADEQUATE.
Crescent Real Estate currently carries comprehensive insurance on all
of its properties, including insurance for liability, fire and flood. Crescent
Real Estate believes this coverage is of the type and amount customarily
obtained for or by an owner of real property assets. Crescent Real Estate
intends to obtain similar insurance coverage on subsequently acquired
properties. Crescent Real Estate's existing insurance policies expire in October
2003.
As a consequence of the September 11, 2001 terrorist attacks, Crescent
Real Estate may be unable to renew or duplicate its current insurance coverage
in adequate amounts or at reasonable prices. In addition, insurance companies
may no longer offer coverage against certain types of losses, such as losses due
to terrorist acts and toxic mold, or, if offered, the expense of obtaining these
types of insurance may not be justified. Crescent Real Estate therefore may
cease to have insurance coverage against certain types of losses and/or there
may be decreases in the limits of insurance available. If an uninsured loss or a
loss in excess of its insured limits occurs, Crescent Real Estate could lose all
or a portion of the capital it has invested in a property, as well as the
anticipated future revenue from the property, but still remain obligated for any
mortgage debt or other financial obligations related to the property. Crescent
Real Estate cannot guarantee that material losses in excess of insurance
proceeds will not occur in the future. If any of Crescent Real Estate's
properties were to experience a catastrophic loss, it could seriously disrupt
Crescent Real Estate's operations, delay revenue and result in large expenses to
repair or rebuild the property. Also, due to inflation, changes in codes and
ordinances, environmental considerations and other factors, it may not be
feasible to use insurance proceeds to replace a building after it has been
damaged or destroyed. Events such as these could adversely affect Crescent Real
Estate's results of operations and its ability to meet its obligations,
including distributions to its shareholders.
CRESCENT REAL ESTATE IS DEPENDENT ON ITS KEY PERSONNEL WHOSE CONTINUED
SERVICE IS NOT GUARANTEED.
To a large extent Crescent Real Estate is dependent on its executive
officers, particularly John C. Goff, Vice Chairman of the Board of Trust
Managers and Chief Executive Officer and Richard E. Rainwater, Chairman of the
Board of Trust Managers, for strategic business direction and real estate
experience. While Crescent Real Estate believes that it could find replacements
for its key personnel, loss of their services could adversely affect Crescent
Real Estate's operations. Crescent Real Estate does not have key man life
insurance for its executive officers.
45
COMPARATIVE PER SHARE MARKET PRICE
INFORMATION
Crescent Real Estate's common shares are traded on the NYSE under the
symbol "CEI," and Crescent Operating's common stock is traded on the OTC
Bulletin Board under the symbol "COPI.OB." On February 13, 2002, the last full
trading day prior the date of the execution of the original Settlement
Agreement, the closing sale price per Crescent Real Estate common share on the
NYSE, the closing sale price per share of Crescent Operating common stock on the
OTC Bulletin Board and the equivalent per share price were as set forth in the
table below. The equivalent per share price is the value of the Crescent Real
Estate common shares that Crescent Operating stockholders will receive for each
share of Crescent Operating stock they own if the Crescent Operating
stockholders approve the Crescent Operating bankruptcy plan, assuming that the
total claims and expenses paid by Crescent Real Estate in connection with the
Crescent Operating bankruptcy agreement and the reorganization transactions is
$10.6 million to $13.8 million. The actual number of the Crescent Real Estate
common shares that Crescent Operating stockholders will receive will be based on
the average of the closing prices of the Crescent Real Estate common shares on
the ten trading days prior to the date of confirmation of the Crescent Operating
bankruptcy plan. In addition, the value of the Crescent Real Estate common
shares that Crescent Operating stockholders will receive may be decreased or
increased, but will not be less than $0.20 per share of Crescent Operating
common stock if the bankruptcy plan is accepted by the Crescent Operating
stockholders and confirmed by the bankruptcy court. See "The Reorganization
Transactions -- Summary of the Reorganization Transactions -- Issuance of
Crescent Real Estate Common Shares to Crescent Operating Stockholders" for a
description of the circumstances under which the value of the Crescent Real
Estate common shares that Crescent Operating stockholders will receive may be
decreased or increased.
EQUIVALENT PER
SHARE PRICE
--------------------------------------------------
CRESCENT REAL CRESCENT ASSUMING $10.6 MILLION ASSUMING $13.8
ESTATE OPERATING IN CRESCENT REAL MILLION IN CRESCENT
COMMON SHARES COMMON STOCK ESTATE EXPENSES REAL ESTATE EXPENSES
------------- ------------ --------------- --------------------
February 13, 2002 $17.25 $0.01 $0.50 $0.20
SELECTED HISTORICAL FINANCIAL INFORMATION
OF CRESCENT REAL ESTATE
The following table sets forth selected historical financial and operating
information for Crescent Real Estate on a consolidated basis. All information
relating to Crescent Real Estate common shares has been adjusted to reflect the
two-for-one stock split effected in the form of a 100% share dividend paid on
March 26, 1997 to shareholders of record on March 20, 1997. The selected balance
sheet information and operating data for the nine months ended September 30,
2002 and 2001 is based on the unaudited financial statements of Crescent Real
Estate included in this proxy statement/prospectus. The selected balance sheet
information for each of the two years ended December 31, 2000 and 2001, and the
operating data for the three years ended December 31, 1999, 2000 and 2001 is
based on the audited financial statements of Crescent Real Estate included in
this proxy statement/prospectus, and the information for the preceding years is
based on the audited financial statements of Crescent Real Estate
46
previously filed with the Securities and Exchange Commission. The following
information should be read in conjunction with "Crescent Real Estate
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical financial statements of Crescent Real Estate and
notes to the financial statements included in this proxy statement/prospectus.
YEAR ENDED
NINE MONTHS ENDED SEPTEMBER 30, DECEMBER 31,
--------------------------------- -------------
2002 2001 2001
------------- ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATING DATA:
Total revenue $ 760,191 $ 537,181 $ 686,194
Operating (loss) income 28,650 66,235 (29,923)
Income before minority interests,
income taxes, discontinued
operations, extraordinary item
and cumulative effect of a
change in accounting principle 68,277 103,687 25,733
Basic earnings per common share:
(Loss) income before
extraordinary item, discontinued
operations and cumulative effect
of a change in accounting
principle $ 0.41 $ 0.63 $ (0.08)
Net (Loss) income 0.37 0.54 (0.17)
Diluted earnings per common share:
(Loss) income before
discontinued operations,
extraordinary item and
cumulative effect of a change in
accounting principle $ 0.41 $ 0.62 $ (0.08)
Net (Loss) income 0.37 0.53 (0.17)
BALANCE SHEET DATA
(AT PERIOD END):
Total assets $ 4,341,111 $ 4,139,905 $ 4,142,149
Total debt 2,412,544 2,083,930 2,214,094
Total shareholders' equity 1,431,939 1,594,912 1,405,940
OTHER DATA:
Funds from operations - new
definition(1) $ 167,344 $ 216,585 $ 177,117
Cash distribution declared per
common share $ 1.125 $ 1.475 $ 1.85
Weighted average
common shares and units
outstanding - basic 104,526,572 108,170,259 121,017,605
Weighted average
common shares and units
outstanding - diluted 105,041,173 110,011,558 122,544,421
Cash flow provided by
(used in):
Operating activities $ 152,706 $ 253,817 $ 212,813
Investing activities 106,012 166,593 209,994
Financing activities (212,361) (426,213) (425,488)
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
2000 1999 1998 1997
------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATING DATA:
Total revenue $ 707,480 $ 734,448 $ 698,343 $ 447,373
Operating (loss) income 86,524 (59,063) 143,893 111,281
Income before minority interests,
income taxes, discontinued
operations, extraordinary item
and cumulative effect of a
change in accounting principle 299,692 9,234 183,210 135,024
Basic earnings per common share:
(Loss) income before
extraordinary item, discontinued
operations and cumulative effect
of a change in accounting
principle $ 2.05 $ (0.09) $ 1.26 $ 1.25
Net (Loss) income 2.05 (0.06) 1.26 1.25
Diluted earnings per common share:
(Loss) income before
discontinued operations,
extraordinary item and
cumulative effect of a change in
accounting principle $ 2.02 $ (0.09) $ 1.21 $ 1.20
Net (Loss) income 2.02 (0.06) 1.21 1.20
BALANCE SHEET DATA
(AT PERIOD END):
Total assets $ 4,543,318 $ 4,950,561 $ 5,043,447 $ 4,179,980
Total debt 2,271,895 2,598,929 2,318,156 1,710,125
Total shareholders' equity 1,731,327 2,056,774 2,422,545 2,197,317
OTHER DATA:
Funds from operations - new
definition(1) $ 326,897 $ 340,777 $ 341,713 $ 214,396
Cash distribution declared per
common share $ 2.20 $ 2.20 $ 1.86 $ 1.37
Weighted average
common shares and units
outstanding - basic 127,535,069 135,954,043 132,429,405 106,835,579
Weighted average
common shares and units
outstanding - diluted 128,731,883 137,891,561 140,388,063 110,973,459
Cash flow provided by
(used in):
Operating activities $ 275,715 $ 336,060 $ 299,497 $ 211,714
Investing activities 428,306 (205,811) (820,507) (2,294,428)
Financing activities (737,981) (167,615) 564,680 2,123,744
____________________________________
(1) Funds from operations, or FFO, based on the revised definition adopted by
the Board of Governors of the National Association of Real Estate
Investment Trusts, or NAREIT, effective January 1, 2000, and as used
herein, means net income (loss), determined in accordance with GAAP,
excluding gains (losses) from sales of depreciable operating property,
excluding extraordinary items, as defined by GAAP, plus depreciation and
amortization of real estate assets, and after adjustments for
unconsolidated partnerships and joint ventures. FFO is a non-GAAP measure
and should not be considered an alternative to GAAP measures, including net
income and cash generated from operating activities. For a more detailed
definition and description of FFO and comparisons to GAAP measures, see
"Crescent Real Estate Management's Discussion and Analysis of Financial
Condition and Results of Operations."
47
SELECTED HISTORICAL FINANCIAL INFORMATION
OF CRESCENT OPERATING
The following table sets forth certain selected historical financial
information for Crescent Operating and for its predecessors, taken as a group.
For purposes of this table, the predecessors consist of Moody-Day, Inc. and
Hicks Muse Tate & First Equity Fund II, L.P., which are collectively referred to
as the Carter-Crowley Asset Group. The selected balance sheet information and
operating data for the nine months ended September 30, 2002 and 2001 is based on
the unaudited financial statements included in this proxy statement/prospectus.
The selected balance sheet information for each of the two years ended December
31, 2000 and 2001, and the operating data for the three years ended December 31,
1999, 2000 and 2001 is based on the audited financial statements of Crescent
Operating included in this proxy statement/prospectus, and the information for
the preceding years is based on the audited financial statements of Crescent
Operating previously filed with the Securities and Exchange Commission. The
following information should be read in conjunction with "Crescent Operating
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical financial statements of Crescent Operating and
notes to the financial statements included in this proxy statement/prospectus.
CARTER-CROWLEY
ASSET
GROUP
(PREDECESSORS)
--------------
FOR THE
FOR THE PERIOD
PERIOD FROM FROM
FOR THE NINE MONTHS FOR THE YEAR ENDED MAY 9, 1997 JANUARY 1,
ENDED SEPTEMBER 30, DECEMBER 31, TO 1997 TO
----------------------- ------------------------------------------------ DECEMBER 31, MAY 8
2002 2001 2001 2000 1999 1998 1997 1997
-------- --------- --------- --------- --------- --------- --------- ------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATING DATA:
Revenues $ 25,992 $ 50,884 $ 67,521 $ 102,591 $ 97,615 $ 80,754 $ 19,600 $4,657
(Loss) income from
operations (6,059) (19,937) (22,893) 1,027 2,440 2,734 (556) 158
Net income (loss) 10,208 (43,439) (78,133) (3,690) (2,695) 1,141 (22,165) 25
Income (Loss) per share -
basic and diluted 0.95 (4.20) (7.55) (0.36) (0.26) 0.10 (2.00) --
BALANCE SHEET DATA:
Total assets $ 61,548 $ 988,544 $ 945,404 $ 910,528 $ 795,653 $ 937,333 $ 602,083 --
Total debt 93,440 592,462 587,110 473,517 421,874 371,139 258,129 --
Total shareholders' (80,022) (57,286) (93,388) (23,533) (20,522) (16,068) (8,060) --
deficit
SELECTED PRO FORMA FINANCIAL AND OPERATING
INFORMATION OF CRESCENT REAL ESTATE
The following table sets forth selected pro forma financial and operating
information for Crescent Real Estate for the nine months ended September 30,
2002 and for the year ended December 31, 2001. The pro forma financial and
operating information gives effect to:
48
- the transfer to some of Crescent Real Estate's subsidiaries of Crescent
Operating's lessee interests in Crescent Real Estate's eight resort/hotel
properties, Crescent Operating's voting interests in three of Crescent
Real Estate's residential development corporations and other assets owned
by Crescent Operating;
- the capitalization of Crescent Spinco, a newly formed company that will
commit to purchase Crescent Operating's interest in COPI Cold Storage,
L.L.C., which owns a 40% partnership interest in the owner of AmeriCold
Logistics, and the distribution of the common stock of Crescent Spinco to
Crescent Real Estate shareholders and the unitholders of Crescent Real
Estate's operating partnership;
- the issuance of Crescent Real Estate's common shares to the stockholders
of Crescent Operating in connection with a prepackaged bankruptcy plan of
Crescent Operating;
- Crescent Real Estate's April 2002 notes offering and the application of
net proceeds thereof;
- Crescent Real Estate's April 2002 Series A Preferred share offering and
the application of proceeds thereto; and
- Crescent Real Estate's May 2002 offering of its Series B Cumulative
Redeemable Preferred Shares and the application of $81.9 million in net
proceeds thereof.
The pro forma financial and operating information set forth below should
be read in conjunction with, and is qualified in its entirety by, the
historical and pro forma financial statements and notes to the financial
statements of Crescent Real Estate included in this proxy statement/prospectus.
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------ ----------
OPERATING DATA
Total revenue $ 853,714 $1,138,968
Operating income (loss) 24,746 (36,715)
Income before minority interests 62,403 16,446
Basic earnings per common share:
Income (loss) before
extraordinary item,
discontinued operations and
cumulative effect of change in
accounting principle $ 0.34 $ (0.30)
Diluted earnings per common share:
Income (loss) before
extraordinary item and
cumulative effect of change in
accounting principle $ 0.34 $ (0.30)
BALANCE SHEET DATA (AT PERIOD END):
Total assets $ 4,341,111 N/A
Total debt 2,428,044 N/A
Total shareholders' equity 1,418,595 N/A
Weighted average
common shares
outstanding - basic 104,670,322 N/A
Weighted average
common shares
outstanding - diluted 105,184,923 N/A
49
COMPARATIVE PER SHARE DATA
Set forth below are historical and pro forma earnings per share, cash
dividends per share and book value per share data for Crescent Real Estate's
common shares and Crescent Operating's common stock. The data set forth below
should be read in conjunction with Crescent Real Estate's and Crescent
Operating's audited financial statements, including the notes to the financial
statements, which are included in this proxy statement/prospectus. The data
should also be read in conjunction with the unaudited pro forma financial
statements, including the notes to the pro forma financial statements, included
in this proxy statement/prospectus. The pro forma data gives effect to:
- the transfer to some of Crescent Real Estate's subsidiaries of Crescent
Operating's lessee interests in Crescent Real Estate's eight resort/hotel
properties, Crescent Operating's voting interests in three of Crescent
Real Estate's residential development corporations and other assets owned
by Crescent Operating;
- the capitalization of Crescent Spinco, which will commit to purchase
Crescent Operating's interest in COPI Cold Storage, L.L.C., which owns a
40% partnership interest in the owner of AmeriCold Logistics and the
distribution of the common stock of Crescent Spinco to Crescent Real
Estate shareholders and the unitholders of Crescent Real Estate's
operating partnership;
- the issuance of Crescent Real Estate's common shares to the stockholders
of Crescent Operating in connection with a prepackaged bankruptcy plan of
Crescent Operating;
- Crescent Real Estate's April 2002 notes offering and the application of
net proceeds thereof;
- Crescent Real Estate's April 2002 Series A Preferred share offering and
the application of proceeds thereto; and
- Crescent Real Estate's May 2002 offering of its Series B Cumulative
Redeemable Preferred Shares and the application of $81.9 million in net
proceeds thereof.
The pro forma data are not necessarily indicative of the actual financial
position that would have occurred, or future operating results that will occur,
upon consummation of the Crescent Operating bankruptcy plan.
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
2002 2001
HISTORICAL -- CRESCENT REAL ESTATE
Basic earnings per share $ 0.34 $ (0.17)
Diluted earnings per share 0.34 (0.17)
Cash dividends per share(1) 1.125 1.85
HISTORICAL -- CRESCENT OPERATING
Basic earnings per share $ 0.95 $ (7.55)
Diluted earnings per share 0.95 (7.55)
Cash dividends per share -- --
PRO FORMA COMBINED(2)
Basic earnings per share $ 0.09 $ (0.37)
Diluted earnings per share 0.09 (0.37)
Cash dividends paid per share 1.125 1.85
Equivalent per Crescent Operating share .015 .025
STOCKHOLDERS' EQUITY (BOOK VALUE) PER SHARE (END OF PERIOD)
Historical Crescent Real Estate $ 15.42 $ 16.34
Historical Crescent Operating (7.39) (8.99)
Pro forma combined per Crescent Real Estate share (2) 15.40 N/A
Equivalent pro forma combined per Crescent Operating share 0.20 N/A
------------------
(1) On October 17, 2001, Crescent Real Estate announced that its quarterly
distribution was reduced from $0.55 per common share to $0.375 per common
share. See "Price Range of Crescent Real Estate Common Shares, Dividends
and Related Shareholder Matters" for more information regarding Crescent
Real Estate's distributions.
(2) The pro forma combined per share data for Crescent Real Estate has been
prepared as if the Crescent Operating bankruptcy plan and other
transactions had been consummated as of January 1, 2001, and resulted
in an increase in weighted average Crescent Real Estate common shares
outstanding of 143,750 shares for the nine months ended September 30, 2002
and year ended December 31, 2001.
50
THE SPECIAL MEETING OF CRESCENT OPERATING
STOCKHOLDERS
PROXY STATEMENT/PROSPECTUS
This proxy statement/prospectus is being furnished to you in connection
with the solicitation of proxies by Crescent Operating's sole director in
connection with the Crescent Operating bankruptcy plan.
This proxy statement/prospectus is first being furnished to Crescent
Operating stockholders on or about January __, 2003.
Before voting to accept or reject the Crescent Operating bankruptcy plan,
each Crescent Operating stockholder should carefully review the Plan of
Reorganization attached as Annex A and described below under "The Plan of
Reorganization." All descriptions of the Crescent Operating bankruptcy plan that
are contained in this proxy statement/prospectus are subject to the terms and
conditions of the Plan of Reorganization attached as Annex A. Instructions for
voting on the Crescent Operating bankruptcy plan are set forth in the
instructions contained in the enclosed proxy.
DATE, TIME, AND PLACE OF SPECIAL MEETING
Crescent Operating will hold its special meeting of stockholders at The
Fort Worth Club, located at 306 West 7th Street, Fort Worth, Texas, on
Thursday, March 6, 2003, at 10:00 a.m. Central Time.
PURPOSE OF THE SPECIAL MEETING
The special meeting is being held so that Crescent Operating stockholders
may consider and vote upon the proposal to accept the Crescent Operating
bankruptcy plan. The bankruptcy plan provides as follows:
- Crescent Real Estate Equities Company will make sufficient funds available
to Crescent Operating to pay in full or otherwise resolve those creditor
claims of Crescent Operating that Crescent Operating identified in the
original Settlement Agreement, other than the Crescent Real Estate claims,
and to cover the budgeted expenses of implementing the Settlement
Agreement and
51
seeking to confirm the bankruptcy plan. To facilitate Crescent Operating's
repayment of $15.0 million, plus interest, that it owes to Bank of
America, Crescent Real Estate has allowed Crescent Operating to secure the
Bank of America debt with a pledge of Crescent Operating's interest in
AmeriCold Logistics, LLC. The Settlement Agreement and the bankruptcy plan
contemplate that Crescent Spinco, an affiliate of Crescent Real Estate,
will purchase Crescent Operating's interest in AmeriCold Logistics for
between $15.0 to $15.5 million.
- If Crescent Operating's stockholders accept the bankruptcy plan and the
bankruptcy court confirms the bankruptcy plan, Crescent Real Estate will
issue common shares of Crescent Real Estate to the Crescent Operating
stockholders. In no event will the Crescent Operating stockholders be
entitled to reconsider their approval of the bankruptcy plan.
- The total value of the Crescent Real Estate common shares that the
Crescent Operating stockholders would receive would be the greater of:
- Approximately $2.16 million; or
- $16.0 million minus the total amount of payments made by Crescent Real
Estate for claims and expenses relating to the Crescent Operating
bankruptcy and the reorganization transactions, including the expenses
of Crescent Real Estate but excluding payments in satisfaction of the
Bank of America claim.
- As of December 31, 2002, Crescent Real Estate had incurred approximately
$8.5 million in claims and expenses and expects to incur an aggregate of
$10.6 million to $13.8 million in total claims and expenses. If there
occurs a material variance in this estimated range of aggregate claims and
expenses after the date that Crescent Operating mails this proxy
statement/prospectus to its stockholders, then Crescent Operating will
issue a press release disclosing the material variance and will file a
Current Report on Form 8-K with the Securities and Exchange Commission
disclosing the same information.
- If the Crescent Operating stockholders accept the bankruptcy plan and the
bankruptcy court confirms the bankruptcy plan, the stockholders will be
deemed to have released all claims they may have against Crescent
Operating and Crescent Real Estate, as well as their respective officers,
directors, stockholders, employees, consultants, attorneys, accountants
and other representatives, that arose prior to the effective date of the
bankruptcy plan. The release of Crescent Operating stockholder claims will
not apply to the claims, if any, of a person who sold its shares of
Crescent Operating common stock before the record date for voting on the
bankruptcy plan or who either voted against the bankruptcy plan, abstained
or did not vote on the bankruptcy plan, and thereafter either did not
receive or refused to accept a distribution of Crescent Real Estate common
shares. In addition, the release of Crescent Operating stockholder claims
will apply to Crescent Operating stockholders only in their capacity as
Crescent Operating stockholders, and will not affect their rights as
holders of Crescent Real Estate common shares. The Crescent Operating
common stock will be cancelled. If the Crescent Operating stockholders
reject the bankruptcy plan, the Crescent Operating stockholders will
receive no distribution under the bankruptcy plan and will not be deemed
to have released any claims. The Settlement Agreement and the mutual
releases executed in connection with the Settlement Agreement, including
Crescent Operating's release of all claims that it may have against
Crescent Real Estate, are enforceable whether or not the bankruptcy plan
is approved by Crescent Operating's stockholders and whether or not the
bankruptcy plan is confirmed by the bankruptcy court.
52
- Pursuant to both the Settlement Agreement and the bankruptcy plan,
Crescent Operating will transfer the remaining assets of Crescent
Operating at the direction of Crescent Real Estate.
STOCKHOLDER RECORD DATE FOR THE SPECIAL MEETING
Only stockholders of record as the close of business on the record date,
January 8, 2003, are entitled to notice of, and to vote at, the special
meeting. At the record date, 10,828,497 shares of Crescent Operating common
stock were issued, outstanding and entitled to vote at the special meeting. Each
outstanding share is entitled to one vote. The enclosed proxy card shows the
number of shares of Crescent Operating common stock that the recipient of the
proxy card is entitled to vote. Shares cannot be voted at the special meeting
unless the holder thereof is present or represented by proxy.
VOTE OF CRESCENT OPERATING STOCKHOLDERS REQUIRED FOR ACCEPTANCE OF THE CRESCENT
OPERATING BANKRUPTCY PLAN
A majority of the outstanding shares of Crescent Operating common stock
entitled to vote is necessary to constitute a quorum for the transaction of
business at the special meeting. The affirmative vote of two-thirds of the votes
cast in person or by proxy is required to accept the Crescent Operating
bankruptcy plan. Each holder of common stock is entitled to one vote at the
special meeting for each share of Crescent Operating common stock held by such
stockholder.
PROXIES
A proxy for use at the special meeting and a return envelope are enclosed.
Shares of Crescent Operating's common stock represented by a properly executed
written proxy and delivered pursuant to this solicitation, and not later
revoked, will be voted at the special meeting in accordance with the
instructions indicated in such proxy. If no instructions are given, the properly
executed proxy will be voted "FOR" acceptance of the Crescent Operating
bankruptcy plan.
In addition, you may vote your proxy by touchtone telephone from the U.S.
and Canada, using the toll-free telephone number on the proxy card and other
enclosures. "Street name" holders may vote by telephone if their bank or broker
makes those methods available, in which case the bank or broker will enclose the
instructions with the proxy statement. The telephone voting procedures,
including the use of control numbers, are designed to authenticate share owners'
identities, to allow share owners to vote their shares, and to confirm that
their instructions have been properly recorded.
All stockholders whose shares are not held in "street name" may vote in
person at the special meeting.
If your broker holds your shares in "street name," your broker will not be
able to vote your shares for you unless you provide instructions to your broker
on how to vote your "street name" shares. You should follow the directions
provided by your broker regarding how to instruct your broker to vote your
shares. If you do not instruct your broker to vote in favor of or against the
Crescent Operating bankruptcy plan, your broker will not be able to vote for
you, and your shares will not be voted. Once you have instructed your broker on
how to vote your shares, you may revoke your proxy or change your vote only by
following the instructions provided by your broker.
A stockholder who has voted and who does not hold his shares in "street
name" may change his vote at any time prior to the taking of the vote at the
special meeting:
- by giving written notice of revocation to the secretary of the special
meeting;
53
- only if the prior vote was by written proxy, by properly submitting a duly
executed proxy bearing a later date;
- only if the prior vote was by telephone, by casting a subsequent vote by
telephone prior to the special meeting; or
- by voting in person at the special meeting.
Only the last vote of a stockholder will be counted.
All written notices of revocation should be addressed as follows: Crescent
Operating, Inc., 777 Main Street, Suite 1240, Fort Worth, Texas 76102,
Attention: Jeffrey L. Stevens.
PROXY SOLICITATION
Crescent Real Estate has agreed to pay all reasonable documented
out-of-pocket expenses incurred by Crescent Operating or its subsidiaries
through the date on which the Crescent Operating bankruptcy plan is confirmed,
subject to certain limitations described in "The Reorganization Transactions."
As a result, all costs of preparing, assembling and mailing proxy solicitation
materials as well as the costs of the proxy solicitation will be borne by
Crescent Real Estate. These costs will be included with other reorganization
costs in the formula used to determine the number of Crescent Real Estate common
shares to be distributed to the stockholders of Crescent Operating under the
Crescent Operating bankruptcy plan. See "Summary - Summary of the Reorganization
Transactions" above. Crescent Operating has engaged an independent proxy
solicitor, D.F. King & Co., Inc., to assist in solicitation of proxies. Under
its engagement agreement, D.F. King will receive approximately $10,000 in fees,
plus $5.00 per soliciting phone call to stockholders, plus expense
reimbursements, all of which will ultimately be borne by Crescent Real Estate.
Crescent Operating has also made arrangements with brokerage firms, banks,
nominees and other fiduciaries to forward proxy solicitation materials for
shares held of record by them to the beneficial owners of such shares and to
obtain the proxies of such beneficial holders. Crescent Real Estate will
reimburse such persons for postage and reasonable clerical expenses incurred in
connection with forwarding such materials and obtaining proxies.
EFFECT OF ABSTENTIONS AND BROKER NON-VOTES
Under Delaware law and Crescent Operating's bylaws, a majority of the
outstanding shares of Crescent Operating common stock entitled to vote is
necessary to constitute a quorum for the transaction of business at the special
meeting. The affirmative vote of two-thirds of the votes cast in person or by
proxy is required to accept the Crescent Operating bankruptcy plan. As a result,
abstentions and broker non-votes will have no effect on the outcome of the vote
on such proposal.
THE REORGANIZATION TRANSACTIONS
REASONS FOR THE REORGANIZATION TRANSACTIONS
Crescent Operating and its operating units have defaulted in the payments
of debts to Crescent Real Estate. As of February 12, 2002, these debts were
approximately $125.2 million and are secured by substantially all of Crescent
Operating's assets. These debts arose from loans made by Crescent Real Estate to
Crescent Operating and from deferrals by Crescent Real Estate of Crescent
Operating's obligations to pay rent.
54
On February 12, 2002 and February 13, 2002, Crescent Real Estate notified
Crescent Operating that each of Crescent Operating's obligations to Crescent
Real Estate was in default. Moreover, Crescent Real Estate announced that it
would seek to enforce collection by foreclosure or otherwise of its claims
against Crescent Operating and its operating units as quickly as possible.
Crescent Operating lacked sufficient liquidity or capital resources to
address the issues arising from the defaults that Crescent Real Estate had
declared. Crescent Operating's operating income had been at or less than the
amount necessary to pay direct operating expenses. Based upon then current and
reasonably forecasted operating results, Crescent Operating did not believe that
it would, in the reasonably foreseeable future, be able to pay all of its
obligations as they accrued. Likewise, it would not be able to repay the
obligations to Crescent Real Estate as to which a default had been declared.
Crescent Operating analyzed various alternatives for resolution of the
Crescent Real Estate obligations, including a foreclosure or bankruptcy
proceeding. For a description of the various alternatives examined by Crescent
Operating, please see "-- Analysis of Alternatives." Neither of these options
would have likely resulted in any recovery for Crescent Operating's unsecured
creditors and stockholders. In addition, these proceedings would have been
costly and time consuming. Moreover, Crescent Real Estate would likely have
opposed any attempt by Crescent Operating to use its cash collateral to pay the
costs of a bankruptcy proceeding other than to maintain Crescent Real Estate's
collateral. Accordingly, Crescent Operating and Crescent Real Estate determined
it would be in each of its respective best interests to negotiate an alternative
settlement. An alternative that became available to the parties only after the
effectiveness of the REIT Modernization Act on January 1, 2001 was Crescent Real
Estate's acquisition of the Crescent Operating hotel operations and land
development interests. Crescent Real Estate previously was unable to lease or
own these interests without jeopardizing its status as a REIT for federal income
tax purposes. After extensive negotiations and discussions, Crescent Operating
and Crescent Real Estate agreed to the Settlement Agreement and Crescent
Operating bankruptcy plan. The bankruptcy plan is attractive to Crescent
Operating as it provides that consideration will be delivered to all of Crescent
Operating's unsecured creditors identified by Crescent Operating in the original
Settlement Agreement, as well as to the Crescent Operating stockholders. For
Crescent Real Estate, the Settlement Agreement and bankruptcy plan enabled
Crescent Real Estate to obtain the assets of Crescent Operating securing the
Crescent Operating obligations in a quick and efficient manner, without
litigation.
As essential consideration for its agreement to enter into the Settlement
Agreement, Crescent Real Estate required the execution of a mutual release
between Crescent Real Estate and Crescent Operating. Pursuant to this release,
Crescent Operating released Crescent Real Estate and its affiliates from any and
all claims that Crescent Operating might have that arose at any time prior to
the execution of the Settlement Agreement. This release also provides that
Crescent Real Estate has released Crescent Operating and its affiliates from any
and all claims that it may have that arose at any time prior to the execution of
the Settlement Agreement. Furthermore, as essential consideration for its
agreement to enter into the Settlement Agreement, Crescent Real Estate required
that the bankruptcy plan include a provision that Crescent Operating
stockholders who vote to accept the bankruptcy plan or who accept the
distribution of Crescent Real Estate common shares under the bankruptcy plan,
will be deemed to have released Crescent Real Estate and its affiliates from any
and all claims that may have arisen on or before the effective date of the
bankruptcy plan, except for performance or non-performance under the Settlement
Agreement or the bankruptcy plan and except for any act or omission that
constitutes actual fraud or criminal behavior.
Prior to entering into the Settlement Agreement, Crescent Operating
analyzed whether it had claims against Crescent Real Estate that should be
pursued as an alternative to the proposed Settlement Agreement. Crescent
Operating consulted its counsel who reviewed, among other matters, the origin of
55
the indebtedness to Crescent Real Estate and the business relationship between
Crescent Operating and Crescent Real Estate that began in 1997 when the shares
of Crescent Operating common stock were distributed to Crescent Real Estate
shareholders. Crescent Operating independently evaluated whether the benefit to
Crescent Operating stockholders in consummating the Settlement Agreement
outweighed the benefit that might be derived from declining the proposed
Settlement Agreement and instead pursuing claims against Crescent Real Estate.
In making this evaluation, Crescent Operating took into consideration the
relative certainty of its creditors and stockholders realizing the benefits
provided for in the Settlement Agreement and the relative uncertainty of
recovery in, as well as the costs and delay associated with, prosecuting any
claims, and particularly claims of uncertain merit. Based upon the totality of
all the circumstances, Crescent Operating made the independent judgment that the
best interests of its creditors and stockholders would be served by entering
into the Settlement Agreement. Crescent Operating concluded that the benefits to
its creditors and stockholders that would be realized through the Settlement
Agreement outweighed the cost to Crescent Operating of granting the releases to
Crescent Real Estate.
After giving effect to the transfer of Crescent Operating's hospitality
and land development assets and the reduction in Crescent Operating's debt under
the terms of the Settlement Agreement, the outstanding amounts that Crescent
Operating owed to Crescent Real Estate as of September 30, 2002, totaled $68.5
million. This amount consists of $23.7 million of deferred rent obligations and
$44.8 million of principal and accrued interest.
SUMMARY OF THE REORGANIZATION TRANSACTIONS
The Settlement Agreement, dated as of February 14, 2002 and amended as of
October 1, 2002, between Crescent Partnership, Crescent Real Estate, Crescent
Operating and certain subsidiaries of Crescent Operating, contains the basic
structure of the reorganization transactions. The Settlement Agreement provides
for a "pre-packaged" bankruptcy of Crescent Operating on the terms set forth in
the Settlement Agreement and the Plan of Reorganization. The Settlement
Agreement and the mutual releases executed in connection with the Settlement
Agreement, including Crescent Operating's release of all claims it may have
against Crescent Real Estate, are effective and enforceable, and Crescent Real
Estate is obligated to assist Crescent Operating in resolving creditor claims
identified by Crescent Operating in the original Settlement Agreement, only if
the bankruptcy plan is confirmed by the bankruptcy court. Similarly, the
Settlement Agreement provides that distributions to Crescent Operating
stockholders will be made only if Crescent Operating stockholders accept the
bankruptcy plan and the bankruptcy plan is confirmed. Effective October 1, 2002,
Crescent Operating and Crescent Real Estate amended the Settlement Agreement.
The amendment provides for, among other things, a minimum value of Crescent Real
Estate common shares to be issued in connection with the bankruptcy plan if the
bankruptcy plan is accepted by the requisite vote of Crescent Operating
stockholders and the bankruptcy court confirms the bankruptcy plan.
The following summarizes the principal reorganization transactions
provided for in the Crescent Operating bankruptcy plan and the Settlement
Agreement and is not intended to be complete. You should refer to the Plan of
Reorganization attached as Annex A and the Settlement Agreement attached as
Annex B for a complete description of the provisions of the Crescent Operating
bankruptcy plan.
Transfer of Assets
Under the Crescent Operating loans, Crescent Real Estate had a security
interest in substantially all of Crescent Operating's assets and was entitled to
exercise its rights under the loans and related pledge agreements upon a default
by Crescent Operating under the loans. The assets pledged to Crescent Real
Estate included the Crescent Operating hotel operations and the Crescent
Operating land development
56
interests. Crescent Real Estate was entitled to terminate the leases of the
hotel properties upon a default under the leases. Crescent Real Estate notified
Crescent Operating that it was in default under the loans and the leases.
Hospitality Assets. Pursuant to the Settlement Agreement, in lieu of a
foreclosure by Crescent Real Estate on these equity interests, the lessees of
the hotel properties, all of which are wholly owned subsidiaries of Crescent
Operating, agreed to transfer the Crescent Operating hotel operations to
Crescent Real Estate in exchange for cancellation of an aggregate amount of
rental payments due to Crescent Real Estate equal to the agreed upon value of
the transferred assets, or $23.6 million. The Crescent Operating hotel
operations include all of the hotel property leases and all business contracts,
licenses, furniture, fixtures and equipment, cash and intellectual property
relating to the hospitality business. Crescent Operating also agreed to
cooperate with Crescent Real Estate to assure the transfer of all of the assets
relating to the hospitality business to Crescent Real Estate.
Crescent Real Estate has not agreed to assume obligations or liabilities
of the lessees that arose prior to the date of the transfer, and has not waived
its rights to seek collection in bankruptcy of the remaining $25.4 million in
unpaid rent due to Crescent Real Estate.
As of the date hereof, all of the assets associated with the businesses of
the following hotel properties, constituting all of Crescent Operating's
hospitality assets, have been transferred to Crescent Real Estate in lieu of
foreclosure: (i) the Denver Marriott, (ii) the Hyatt Regency Beaver Creek, (iii)
the Hyatt Regency Albuquerque, (iv) Sonoma Mission Inn & Spa, (v) Ventana Inn &
Spa, (vi) Houston Renaissance, (vii) Canyon Ranch - Lenox, and (viii) Canyon
Ranch - Tucson.
Equity Interests in Residential Land Development and Other Companies.
Beginning in 1997 and ending in 2000, pursuant to various credit and security
agreements, and a pledge agreement, as amended, Crescent Real Estate made
several loans to Crescent Operating which were secured by assets of Crescent
Operating. Crescent Operating agreed, under the Settlement Agreement, to consent
to Crescent Real Estate's acquisition through strict foreclosure of some of
these pledged assets, which included stock, membership interests and partnership
interests, in satisfaction of $40.1 million of Crescent Operating debt, as
follows:
- 500 shares of voting common stock, $.01 par value, of CRL,
representing 100% of the issued and outstanding voting capital stock
and 5% of the issued and outstanding capital stock of CRL;
- a 1.5% membership interest in CR License LLC, an Arizona limited
liability company;
- 100 shares of common stock, $.01 par value, of WOCOI Investment
Company, a Texas corporation, representing 100% of the issued and
outstanding capital stock of WOCOI Investment Company;
- 500 shares of voting common stock, $.01 par value, of The Woodlands
Land Company, Inc., a Texas corporation, representing 100% of the
issued and outstanding voting capital stock and 5% of the issued and
outstanding capital stock of The Woodlands Land Company;
- 50 shares of voting common stock, $.01 par value, of Desert Mountain
Development Corporation, a Delaware corporation, representing 100%
of the issued and outstanding voting capital stock and 5% of the
issued and outstanding capital stock of Desert Mountain Development
Corporation;
57
- 10 shares of voting common stock, $.01 par value, of CRE Diversified
Holdings, Inc., a Delaware corporation, representing 100% of the
issued and outstanding voting capital stock and 1% of the issued and
outstanding capital stock of CRE Diversified Holdings; and
- Crescent Operating's general partner interest in COPI Colorado,
representing a 60% general partner interest in COPI Colorado.
Crescent Operating also agreed to cause all of the officers and directors
of the corporate entities that are also officers, directors or employees of
Crescent Operating to resign or to remove them.
As of the date of this proxy statement/prospectus, Crescent Real Estate
has acquired the equity interests of all of the entities listed above. As a
result, Crescent Real Estate now controls all of those entities.
Crescent Real Estate has not agreed to assume obligations or liabilities
of those entities that arose prior to the date of the transfer, and has not
waived its rights to collection in the bankruptcy of the remaining $36.6 million
in unpaid indebtedness at September 30, 2002.
The Settlement Agreement provides that Crescent Operating will transfer
its remaining assets at the direction of Crescent Real Estate. The bankruptcy
plan similarly provides that, in partial satisfaction of Crescent Real Estate's
claim, Crescent Operating will transfer its remaining assets at the direction of
Crescent Real Estate. Those transfers may be made before or after the bankruptcy
plan is filed or confirmed. Crescent Operating and Crescent Real Estate
contemplate that all transfers will be complete on or about the effective date
of the bankruptcy plan. The transfers will be made to Crescent Real Estate or
its affiliates in partial satisfaction of Crescent Operating's debts to Crescent
Real Estate. In the event that Crescent Operating receives a distribution in the
Crescent Machinery bankruptcy or retains its interest in Crescent Machinery
prior to the effective date of the bankruptcy plan, Crescent Real Estate is
likely to elect to have Crescent Operating transfer the distribution or interest
to Crescent Real Estate.
Bankruptcy Plan
Pursuant to the Settlement Agreement, Crescent Operating has agreed to
file a petition under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the District of Delaware, or such other
jurisdiction as Crescent Real Estate and Crescent Operating shall agree, as soon
as practicable after the date of the special meeting. On the same date, Crescent
Operating will file with the bankruptcy court the Plan of Reorganization in such
form attached as Annex A, this proxy statement/prospectus and all other related
disclosure and solicitation materials delivered to the Crescent Operating
stockholders and impaired creditors in connection with this solicitation.
Crescent Operating has agreed to seek approval of this proxy
statement/prospectus and other disclosure and solicitation materials, and
confirmation of the Crescent Operating bankruptcy plan, within 45 days after
filing the petition with the bankruptcy court.
Payment by Crescent Real Estate of Crescent Operating Claims and Expenses
Pursuant to the Settlement Agreement, Crescent Real Estate has agreed to
advance funds to Crescent Operating sufficient for Crescent Operating to pay its
reasonable and necessary documented out-of-pocket expenses to the extent
Crescent Operating is unable to pay them, in accordance with the monthly budget
prepared by Crescent Operating. Advances in excess of the budget are at Crescent
Real Estate's discretion. A revolving demand note entered into on February 14,
2002, and amended and restated effective as of October 1, 2002, evidences
Crescent Real Estate's obligation to advance up to $3.2 million to cover these
expenses through September 2002. In addition, Crescent Real Estate has
58
agreed to advance funds to Crescent Operating, under the amended and restated
note, in an aggregate amount of up to $2.7 million, to cover specified known
contingent obligations. Under the amended and restated note, these contingent
obligations are identified as follows:
- up to $1,500,000 for federal, state and local taxes and fees that
may be required to be paid by Crescent Operating;
- up to $700,000 for payments owed by Crescent Operating in connection
with its investment in AmeriCold Logistics; and
- up to $500,000 for amounts that may become due to Crescent Machinery
if a payment by Crescent Machinery to Crescent Operating is
determined, in connection with the bankruptcy proceedings of
Crescent Machinery, to be a preference payment that Crescent
Operating must return to Crescent Machinery; and
As of the effective date of the amended and restated note, Crescent Real
Estate had advanced the $3.2 million provided for budgeted operating expenses of
Crescent Operating, plus an additional $431,000. The additional $431,000
consists of:
- $381,000 to cover out-of-pocket expenses that Crescent Operating
incurred, as specified in its monthly budget, but requiring an
advance from Crescent Real Estate because Crescent Operating has not
yet received the return of its $900,000 overpayment to a health
insurer that Crescent Operating expected to receive and budgeted for
receipt in September 2002; and
- $50,000 to cover amounts paid by Crescent Operating to Delaware
counsel for its prior services to Crescent Operating.
In addition, although the original note provided that Crescent Real Estate
would advance up to $1,725,000 to Crescent Operating for its obligations under
notes payable to E.L. Lester and Company, Harvey Equipment Center, Inc. and L
and H Leasing Company, as payees under the notes, Crescent Real Estate purchased
these notes directly from the payees for $1,321,258. This purchase satisfied
Crescent Operating's contingent obligation relating to these notes and,
accordingly, the up to $1,725,000 Crescent Real Estate had agreed to advance to
Crescent Operating to permit it to satisfy the obligation has been eliminated in
the amended and restated note. Similarly, the up to $900,000 that Crescent Real
Estate had agreed to advance to Crescent Operating if Crescent Operating's
overpayment to a health insurer was not returned by September 2002 has been
reduced to the $381,000 already advanced.
As a result of the advances and changes in circumstances detailed in the
two preceding paragraphs, the amended and restated note provides for an
aggregate loan in the principal amount of $6,331,000, $3,631,000 of which had
been advanced under the note as of December 31, 2002.
Crescent Operating's management believes that the aggregate amount
specified in the amended and restated note is a "worst case" estimates and
expects that the actual payments will be less in the aggregate. Crescent
Operating has agreed to seek approval of the bankruptcy court to provide
Crescent Real Estate with a priority claim and lien for the funds Crescent Real
Estate advances under the amended and restated note.
Under the Settlement Agreement, Crescent Real Estate also has agreed,
under a separate, secured promissory note entered into effective October 1,
2002, to advance up to $2,900,000 in additional funds to Crescent Operating.
Under this secured note, which is a revolving demand note, Crescent Real Estate
has
59
agreed to advance funds sufficient for Crescent Operating to pay its reasonable
and necessary documented out-of-pocket expenses to the extent Crescent Operating
is unable to pay them, in accordance with the monthly budget prepared by
Crescent Operating for expenses through March 2003. Other than as described
below, advances in excess of $2,000,000 are at Crescent Real Estate's
discretion. The secured note is secured by an interest in the $900,000 insurance
overpayment expected to be returned to Crescent Operating by a health insurer by
March 2003. In addition, Crescent Real Estate has agreed to advance up to an
additional $900,000 to Crescent Operating to cover Crescent Operating's budgeted
out-of-pocket expenses in the event that the overpayment is not returned to
Crescent Operating, or in the event that Crescent Operating, in accordance with
the security agreement relating to the return of the overpayment, pays the
amount returned to Crescent Real Estate.
As Crescent Real Estate advances funds to Crescent Operating to pay for or
otherwise resolve claims and expenses in connection with the Crescent Operating
bankruptcy and the reorganization transactions, including expenses of Crescent
Real Estate, the total value of the Crescent Real Estate common shares to be
offered to the Crescent Operating stockholders (assuming that the stockholders
accept, and the bankruptcy court confirms, the bankruptcy plan) will decrease,
but not below a total value of approximately $2.16 million, or $0.20 per share
of Crescent Operating common stock.
Crescent Operating believes that, other than claims of trade creditors and
other claims associated with the ordinary, day-to-day business operations of
Crescent Operating, the only other claims against Crescent Operating are
possible liabilities relating to the bankruptcy of Crescent Machinery and the
Bank of America claim.
The Settlement Agreement provides that, if Crescent Real Estate, in its
sole discretion, offers to settle or assume unsecured claims asserted by third
parties and not identified by Crescent Operating in the original Settlement
Agreement, and Crescent Operating accepts the offer, then the total value of the
Crescent Real Estate common shares paid to Crescent Operating stockholders will
be reduced (but not below a total value of approximately $2.16 million, or $0.20
per share of Crescent Operating common stock) by the amount agreed to by
Crescent Real Estate and Crescent Operating, and approved by the bankruptcy
court, as compensation to Crescent Real Estate for assuming the claims. If
Crescent Real Estate and Crescent Operating are not able to agree to Crescent
Real Estate's assumption of any such unresolved third party claims that were not
identified by Crescent Operating in the original Settlement Agreement and that
are an obstacle to confirmation of the Crescent Operating bankruptcy plan, then
it is possible that the bankruptcy plan will not be confirmed.
Payment of Bank of America Claim
Crescent Operating is the obligor under a loan from Bank of America in the
principal amount of $15.0 million and does not have sufficient funds to repay
the obligation. Crescent Real Estate holds a first lien security interest in
Crescent Operating's entire membership interest in COPI Cold Storage. Pursuant
to the Settlement Agreement, Crescent Real Estate has agreed to allow Crescent
Operating to grant Bank of America a first priority security interest in
Crescent Operating's entire membership interest in COPI Cold Storage and to
subordinate Crescent Real Estate's security interest in COPI Cold Storage to
Bank of America. Crescent Real Estate has also agreed to use commercially
reasonable efforts to assist Crescent Operating in arranging Crescent
Operating's repayment of its $15.0 million obligation to Bank of America,
together with up to $0.5 million of accrued interest. Crescent Real Estate will
undertake the transactions described below under "-- Spin Off of AmeriCold
Logistics Interest to Crescent Real Estate Shareholders," including the
formation of a new entity referred to as Crescent Spinco, to be owned by the
shareholders of Crescent Real Estate. Crescent Spinco would purchase the
AmeriCold Logistics interest. Crescent Operating has agreed that it will use the
proceeds of the sale of the AmeriCold Logistics interest to repay Bank of
America in full.
60
Spin Off of AmeriCold Logistics Interest to Crescent Real Estate Shareholders
and Crescent Partnership Unitholders
Pursuant to the Settlement Agreement, Crescent Real Estate will form and
capitalize Crescent Spinco, which will file a Form S-1 registration statement
with the Securities and Exchange Commission. Crescent Real Estate has committed
to cause Crescent Spinco to commit to acquire Crescent Operating's entire
membership interest in COPI Cold Storage for between $15.0 to $15.5 million.
COPI Cold Storage owns a 40% general partner interest in the owner of AmeriCold
Logistics. Upon effectiveness of the Form S-1 registration statement, Crescent
Spinco will distribute its shares to the holders of Crescent Real Estate common
shares and the unitholders of Crescent Partnership and will purchase Crescent
Operating's membership interest in COPI Cold Storage. The distribution of the
Crescent Spinco shares will be made to the holders of Crescent Real Estate
common shares prior to the issuance of Crescent Real Estate common shares to the
Crescent Operating stockholders. As a result, the holders of Crescent Operating
common stock will not receive any interest in Crescent Spinco.
Issuance of Crescent Real Estate Common Shares to Crescent Operating
Stockholders
If the Crescent Operating stockholders accept Crescent Operating's
bankruptcy plan and the bankruptcy court confirms the bankruptcy plan, Crescent
Real Estate will distribute to each holder of Crescent Operating common stock,
common shares of Crescent Real Estate equal to the product of:
- the number of shares of Crescent Operating common stock owned by the
holder on the confirmation date, divided by the number of shares of
Crescent Operating common stock outstanding on the confirmation
date, and
- the consideration amount, as described below, divided by the average
of the daily closing prices per Crescent Real Estate common share as
reported on the NYSE Composite Transaction reporting system for the
10 consecutive NYSE trading days immediately preceding confirmation
of the Crescent Operating bankruptcy plan by the bankruptcy court,
but in no event will the value of the distributed common shares of
Crescent Real Estate be less than approximately $0.20 per share of
Crescent Operating common stock outstanding.
Crescent Real Estate will make this distribution to the Crescent Operating
stockholders promptly following the effective date of the Crescent Operating
bankruptcy plan or the date upon which the bankruptcy plan becomes final, at
Crescent Real Estate's election, or as soon thereafter as practicable.
The consideration amount will equal the greater of:
- approximately $2.16 million; or
- $16.0 million minus the total amount of payments made by Crescent
Real Estate or claims and expenses relating to the Crescent
Operating bankruptcy and the reorganization transactions, including
expenses of Crescent Real Estate but excluding payments in
satisfaction of the Bank of America claim.
Crescent Operating and Crescent Real Estate estimate that Crescent Real
Estate will advance the funds to Crescent Operating or pay in full or otherwise
resolve claims and expenses related to the Crescent Operating bankruptcy and the
reorganization transactions, including Crescent Real Estate expenses but
excluding payments in satisfaction of the Bank of America claim, of $10.6
million to $13.8
61
million. These expenses include the payments referred to above in "-- Payment by
Crescent Real Estate of Crescent Operating Claims and Expenses."
Crescent Operating does not believe that there are any significant claims
against Crescent Operating that Crescent Real Estate has not agreed to use
commercially reasonable efforts to satisfy, with the exception of the disputed
claims of the Crescent Machinery Committee. In addition, Crescent Operating has
determined its ongoing cash flow requirements, which are set forth in a budget
approved by Crescent Real Estate and attached to the up to approximately $2.9
million secured note payable to Crescent Real Estate by Crescent Operating. As a
result, Crescent Operating and Crescent Real Estate believe that the $10.6
million to $13.8 million claims and expenses estimate is based upon reasonable
assumptions. However, Crescent Real Estate's actual expenses will depend on a
number of factors that may differ, some materially, from these assumptions. As a
result, Crescent Operating and Crescent Real Estate cannot assure you that the
consideration amount will not be significantly less than the high estimate of
$5.4 million. In no event, however, will the Crescent Operating stockholders
receive Crescent Real Estate common shares with a total value of less than
approximately $2.16 million, or $0.20 per share of Crescent Operating common
stock if the bankruptcy plan is accepted by the Crescent Operating stockholders
and confirmed by the bankruptcy court.
For purposes of the following example, assume that
- Crescent Real Estate pays $10.6 million in expenses relating to the
Crescent Operating bankruptcy,
- the total number of shares of Crescent Operating common stock
outstanding is 10,828,497 (the total number of shares of Crescent
Operating common stock outstanding at January 8, 2003), and
- the average of the daily closing prices per Crescent Real Estate
common share as reported on the NYSE Composite Transaction reporting
system for the 10 consecutive NYSE trading days immediately
preceding confirmation of the Crescent Operating bankruptcy plan by
the bankruptcy court is $20.00.
Based on the preceding assumptions, Crescent Real Estate will distribute a
total of approximately 0.0249 Crescent Real Estate common shares per share of
Crescent Operating common stock to Crescent Operating stockholders.
Making the same assumptions described in the second and third bullet
points above, but assuming that Crescent Real Estate instead pays $13.8 million
in expenses relating to the Crescent Operating bankruptcy, Crescent Real Estate
will distribute a total of approximately 0.0102 Crescent Real Estate common
shares per share of Crescent Operating common stock to Crescent Operating
stockholders.
As soon as practicable after the effective date, Crescent Real Estate will
deposit with the disbursement agent for the Crescent Operating bankruptcy plan,
in trust for the holders of shares of Crescent Operating common stock on such
date, certificates representing the Crescent Real Estate common shares issuable
to the Crescent Operating stockholders. As soon as practicable after the
effective date, the disbursement agent shall mail to each record holder of a
certificate or certificates that immediately prior to the effective date
represented outstanding shares of Crescent Operating common stock, or the
Certificates, a letter of transmittal in form reasonably acceptable to Crescent
Operating, which shall specify that delivery shall be effected, and risk of loss
and title to the Certificates shall pass, only upon actual delivery of the
Certificates to the disbursement agent, and shall contain instructions for use
in effecting the surrender of the Certificates. Upon surrender for cancellation
to the disbursement
62
agent of a Certificate, together with such letter of transmittal, duly executed,
the holder of such Certificate shall be entitled to receive a certificate
representing that number of Crescent Real Estate common shares, rounded up or
down to the nearest whole number, provided for in the Crescent Operating
bankruptcy plan, and any Certificate so surrendered shall be canceled.
After the confirmation date, there will be no further transfers of
Crescent Operating common stock on the stock transfer books of Crescent
Operating. Shares of Crescent Operating common stock will be deemed for all
corporate purposes to evidence only the right to receive the number of Crescent
Real Estate common shares to which the holder is entitled under the Crescent
Operating bankruptcy plan. If a certificate representing Crescent Operating
common stock is presented for transfer on or after the confirmation date, a
certificate representing the appropriate number of whole Crescent Real Estate
common shares will be issued in exchange therefor.
Cancellation of Crescent Operating Common Stock
At the confirmation date of the Crescent Operating bankruptcy, Crescent
Operating will close its stock transfer books, and no further transfers of
Crescent Operating common stock will be possible. On the date on which the
Crescent Operating bankruptcy plan becomes effective, all shares of Crescent
Operating common stock shall automatically be canceled and retired and shall
cease to exist. Each holder of a stock certificate shall cease to have any
rights with respect thereto, except the right to receive certificates
representing the Crescent Real Estate common shares to which such holder is
entitled based on the number of shares held by the holder on the confirmation
date. No fractional Crescent Real Estate common shares will be issued, no cash
shall be paid in lieu of fractional shares, and any fractional share amounts
shall be rounded up or down to the closest number of whole Crescent Real Estate
common shares. Accordingly, assuming a share price of $20.00 per Crescent Real
Estate common share, a payment by Crescent Real Estate of $13.8 million in
expenses relating to the Crescent Operating bankruptcy and a distribution of
$0.20 per share of Crescent Operating common stock, each Crescent Operating
stockholder must hold at least 50 shares of Crescent Operating common stock in
order to receive any Crescent Real Estate common shares.
Mutual Release
Pursuant to the Settlement Agreement, on February 14, 2002, Crescent
Operating and the lessees of the hotel properties, on the one hand, and Crescent
Real Estate, on the other hand, have executed and delivered to each other a
general release of each other, their respective officers, directors, trust
managers, agents and employees from all liabilities and claims of any nature
arising from events, matters or transactions occurring prior to the date of the
release, except for liabilities or claims arising under the Settlement
Agreement. This release remains effective regardless of whether the bankruptcy
plan is accepted by Crescent Operating's stockholders and/or confirmed by the
bankruptcy court. Crescent Operating does not believe the release can be avoided
both because Crescent Real Estate is paying substantial consideration to
Crescent Operating and its stockholders to obtain the releases provided under
the bankruptcy plan and because the releases are voluntary.
Termination Agreement
Pursuant to the Settlement Agreement, on February 14, 2002, Crescent
Operating executed an agreement terminating the Intercompany Agreement between
Crescent Operating and Crescent Real Estate. Under the Intercompany Agreement,
Crescent Operating and Crescent Real Estate granted each other rights to
participate in certain transactions involving the other party. In order to
participate in those transactions, each party was required to contribute
financially to the transactions. Crescent Operating currently neither has funds
available nor a means of obtaining funds to be used for additional investments.
63
As a result, the termination of the Intercompany Agreement is not expected to
affect Crescent Operating's operations.
Other Material Terms of the Settlement Agreement
Representations and Warranties of Crescent Operating.
The Settlement Agreement contains representations and warranties made by
Crescent Operating and the Crescent Operating subsidiaries that are parties to
the Settlement Agreement. Crescent Operating and these Crescent Operating
subsidiaries represent and warrant:
- that they are duly organized, existing and in good standing;
- that they have the requisite power and authority to enter into the
Settlement Agreement, to undertake the obligations contained therein
and to consummate the transactions contemplated thereby;
- that to Crescent Operating's knowledge, there are no obligations or
claims existing or assertable against Crescent Operating, other than
the claims referred to in the Settlement Agreement; and
- as to their ownership interests in the entities to be retained by
Crescent Real Estate pursuant to the Plan of Reorganization.
Representations and Warranties of Crescent Real Estate and Crescent
Partnership.
The Settlement Agreement also contains certain representations and
warranties made by Crescent Real Estate and Crescent Partnership to Crescent
Operating and the Crescent Operating subsidiaries. Crescent Real Estate and
Crescent Partnership represent and warrant:
- that they are duly organized, existing and in good standing;
- that they have the requisite power and authority to enter into the
Settlement Agreement, to undertake the obligations contained
therein, and to consummate the transactions contemplated thereby;
and
- that the Crescent Real Estate common shares to be issued to the
Crescent Operating stockholders pursuant to the Settlement Agreement
have been duly authorized for issuance and will be validly issued,
fully paid, nonassessable, and free of any liens upon issuance.
Each representation, warranty, covenant and agreement contained in the
Settlement Agreement survives indefinitely.
Covenants of Crescent Operating.
Pursuant to the Settlement Agreement, Crescent Operating and its
subsidiaries signatory thereto agree:
- to obtain and cooperate in obtaining consents, to make filings with
and to give notices to governmental or regulatory authorities or any
other person required to consummate the purchase of the assets;
- to provide Crescent Partnership and its representatives access to
its books and records;
- not to pursue any agreement or arrangement for the transfer of the
assets that Crescent Partnership will obtain pursuant to the
Settlement Agreement;
- to conduct business only in the ordinary course, consistent with
past practices; and
64
- to take all commercially reasonable steps to satisfy obligations of
Crescent Partnership and not to take or fail to take any action that
could be expected to result in the nonfulfillment of any such
condition.
Further, each of Crescent Operating, its subsidiaries signatory to the
Settlement Agreement and the transferred businesses whose stock Crescent
Operating is transferring to Crescent Partnership and their subsidiaries, agrees
to refrain from, without the prior written consent of Crescent Partnership:
- acquiring or disposing of any assets and properties used to conduct
the businesses of the subsidiary signatories or the transferred
businesses, other than in the ordinary course of business;
- creating or incurring a lien on any assets and properties used to
conduct the businesses of the subsidiary signatories or the
transferred businesses, other than in the ordinary course of
business or in favor of Crescent Partnership or its affiliates;
- entering into, amending, modifying, terminating, granting any waiver
under or giving consent to any material contract, other than in the
ordinary course of business;
- violating, breaching or defaulting under, or taking or failing to
take any action that would constitute a violation, breach of or
default under, any term of a material contract;
- engaging in a business combination;
- engaging in transactions with their affiliates, other than in the
ordinary course of business or on an arm's-length basis;
- amending their formation documents;
- selling, transferring or otherwise encumbering their stock, or
agreeing to any restrictions on their stock;
- incurring or increasing any indebtedness, other than in the ordinary
course of business;
- giving third-party guarantees;
- making capital expenditures or commitments for additions to
property, plant or equipment constituting capital assets on behalf
of the businesses of the subsidiary signatories in excess of $75,000
in the aggregate;
- making any significant payments outside a delineated budget.
The preceding list of restrictions will remain in effect even if the
bankruptcy plan is not confirmed. These restrictions are contained in the
Settlement Agreement, a binding agreement between the parties that will remain
in effect, and with which Crescent Operating intends to comply, even if the
bankruptcy plan is not confirmed.
Crescent Operating and its subsidiaries are required to comply with the
preceding list of restrictions on their business activities from the original
execution date of the Settlement Agreement until:
- the last date on which the remaining consents, approvals, notices or
waiting periods necessary for any transferred business to transfer,
and Crescent Partnership to receive, the assets owned by such
transferred business, or such other date as Crescent Partnership
determines, provided that Crescent Partnership gives the transferred
businesses the required notice and allows the transferred business
time to obtain the necessary consents, approvals, notices or waiting
periods;
- the last date on which Crescent Partnership retains some or all of
the Crescent Operating equity interests in residential land
development and other companies in satisfaction of $40.1 million of
Crescent Operating debt, or such other date as Crescent Partnership
determines;
- any other date to which Crescent Operating consents in writing; or
65
- termination of the Settlement Agreement in accordance with its
terms, except that each transferred business will remain liable to
Crescent Real Estate and Crescent Operating for any willful breach
of the Settlement Agreement by the transferred business existing at
the time of such termination, and Crescent Real Estate or Crescent
Operating will remain liable to each transferred business for any
willful breach of the Settlement Agreement by Crescent Real Estate
or Crescent Operating, respectively, existing at the time of such
termination.
Crescent Operating also covenants to cause Jeffrey L. Stevens and any
other Crescent Operating officer, director or employee, other than John C. Goff,
to resign from specified Crescent Operating subsidiaries on the date any stock
of such subsidiaries is transferred to Crescent Partnership.
Covenants of Crescent Real Estate and Crescent Partnership.
Pursuant to the Settlement Agreement, Crescent Partnership and Crescent
Real Estate covenant to obtain consents from, to make filings with and to give
notices to governmental or regulatory authorities or any other person required
to consummate the purchase of the assets. Crescent Partnership also agrees to
take all commercially reasonable steps to satisfy identified obligations of the
Crescent Operating and will not take or fail to take any action that could be
expected to result in the nonfulfillment of any condition.
Indemnification.
The Settlement Agreement provides for indemnification with respect to
Crescent Operating, Crescent Partnership and Crescent Real Estate as follows:
- Crescent Operating shall indemnify Crescent Partnership and Crescent
Real Estate and their respective officers, directors, trust
managers, employees and agents against any and all losses suffered
by any of them relating to any misrepresentation and any
nonfulfillment of or failure to perform any covenant or agreement;
- Crescent Partnership shall indemnify Crescent Operating and its
officers, directors, employees and agents against any and all losses
suffered by any of them relating to any misrepresentation and any
nonfulfillment of or failure to perform any covenant or agreement;
- Crescent Real Estate shall indemnify Crescent Operating and its
officers, directors, employees and agents against any and all losses
suffered by any of them relating to any misrepresentation and any
nonfulfillment of or failure to perform any covenant or agreement;
and
- The indemnification obligations are subject to limitations for
actual damages incurred and reductions for amounts actually received
by an indemnified party.
Termination.
Subject to various limitations, the Settlement Agreement may be
terminated:
- by mutual consent of Crescent Operating, each Crescent Operating
subsidiary that is a party to the Settlement Agreement, Crescent
Real Estate, and Crescent Partnership;
- by Crescent Operating and the Crescent Operating subsidiaries in the
event of a material breach by Crescent Real Estate or Crescent
Partnership that is not cured within 10 business days following
notification of the material breach;
- by Crescent Real Estate or Crescent Partnership in the event of a
material breach by Crescent Operating and the Crescent Operating
subsidiaries that is not cured within 10 business days following
notification of the material breach; and
66
- by any party, if such party's obligations under the Settlement
Agreement become impossible or impractical within the use of
commercially reasonable means, unless such impossibility or
impracticality is caused by a material breach of such party.
If the Settlement Agreement is terminated pursuant to the provisions set
forth in the preceding paragraph, the Settlement Agreement shall be null and
void and all liability and obligations of each party shall cease, except that:
- the confidentiality provisions of the Settlement Agreement will
continue to apply;
- Crescent Operating or any Crescent Operating subsidiary, where
applicable, will remain liable to Crescent Real Estate or Crescent
Partnership for any willful breach of the Settlement Agreement
existing at the time of termination of the Settlement Agreement; and
- Crescent Real Estate or Crescent Partnership will remain liable to
Crescent Operating or any Crescent Operating subsidiary, where
applicable, for any willful breach of the Settlement Agreement
existing at the time of termination of the Settlement Agreement.
ANALYSIS OF ALTERNATIVES
Crescent Operating, in conjunction with its legal counsel, undertook an
analysis of its claims and defenses to Crescent Real Estate's claims against it
and investigated whether proceedings under the bankruptcy laws might provide
solutions to Crescent Operating's obligations to Crescent Real Estate. Upon
reviewing the agreements creating Crescent Real Estate's claims against Crescent
Operating and security interests in Crescent Operating's assets, Crescent
Operating's counsel advised that the agreements appeared valid and enforceable.
Crescent Operating's counsel advised management that, because Crescent
Operating's existing obligations to Crescent Real Estate were in default,
Crescent Operating would have to obtain Crescent Real Estate's agreement before
incurring additional or replacement debt sufficient to satisfy Crescent
Operating's obligations and continue its ongoing operations. In addition,
Crescent Operating anticipated that it would be unlikely to locate a lender that
would be willing to provide the necessary loans under such circumstances.
Crescent Operating also believed that obtaining additional funds through the
sale of equity would not be a feasible alternative, because the demand for
Crescent Operating's equity was not adequate to meet Crescent Operating's
capital requirements.
Crescent Operating engaged counsel to examine the facts and circumstances
of Crescent Real Estate's business relationships and connections to Crescent
Operating to determine whether there was any basis to achieve a better result
for Crescent Operating creditors and stockholders than is provided pursuant to
the Settlement Agreement and the bankruptcy plan. Crescent Operating's counsel
advised management that the most likely way to prevent Crescent Real Estate from
enforcing its agreements would be to instigate litigation requesting that a
court set aside Crescent Real Estate's liens or recharacterize the Crescent Real
Estate loans as equity infusions. This type of litigation is very expensive and
difficult to win, and Crescent Operating did not have sufficient funds to pursue
litigation that is generally pursued for the benefit of creditors, not equity
holders. Because each loan from Crescent Real Estate to Crescent Operating would
be analyzed separately, it is unlikely that all of the loans would be
recharacterized. Any loans not recharacterized as equity would have to be repaid
before there could be any distribution to the stockholders of Crescent
Operating. In addition, it is very difficult to predict the effect that
recharacterizing the loans would have on distributions to Crescent Real Estate
and to Crescent Operating's stockholders. Crescent Operating's counsel is not
aware of any case law precedent determining how Crescent Real Estate and
Crescent Operating stockholders would share in any value that would be available
to Crescent Operating if Crescent Real Estate's transactions were altered by a
court. As noted above, these types of claims are usually asserted for the
benefit of creditors, not equity holders, and the only parties that receive any
value are creditors. Since the Settlement Agreement provides for
67
payment in full of Crescent Operating's creditors and is not contingent on the
outcome of risky and expensive litigation, the sole director concluded that the
Settlement Agreement and the bankruptcy plan provide a better outcome to
creditors and stockholders.
Prior to entering into the Settlement Agreement, Crescent Operating
analyzed whether it had claims against Crescent Real Estate that should be
pursued as an alternative to the proposed Settlement Agreement. Crescent
Operating consulted its counsel who reviewed, among other matters, the origin of
the indebtedness to Crescent Real Estate and the business relationship between
Crescent Operating and Crescent Real Estate that began in 1997 when the shares
of Crescent Operating common stock were distributed to Crescent Real Estate
shareholders. Crescent Operating then independently evaluated whether the
benefit to Crescent Operating creditors and stockholders in consummating the
Settlement Agreement outweighed the benefit that might be derived from declining
the proposed Settlement Agreement and instead pursuing claims against Crescent
Real Estate. In making this evaluation, Crescent Operating took into
consideration the relative certainty of its creditors and stockholders realizing
the benefits provided for in the Settlement Agreement and the relative
uncertainty of recovery in, as well as the costs and delay associated with,
prosecuting any claims, and particularly claims of uncertain merit. Based upon
the totality of the circumstances, Crescent Operating made the independent
judgment that the best interests of its creditors and stockholders would be
served by entering into the Settlement Agreement. Crescent Operating concluded
that the benefits to its creditors and stockholders that would be realized
through the Settlement Agreement outweighed the cost to Crescent Operating of
granting the releases to Crescent Real Estate.
Without the alternatives provided by the Settlement Agreement and the
bankruptcy plan, Crescent Operating could have been liquidated under Chapter 7
of the Bankruptcy Code by Crescent Real Estate's foreclosure of its liens. In
response, Crescent Operating could have either allowed Crescent Real Estate to
exercise its remedies or Crescent Operating could have not settled its claims
with Crescent Real Estate and filed bankruptcy to avoid the foreclosure. If
Crescent Operating had filed a bankruptcy in response to a foreclosure, unless
Crescent Operating successfully challenged the Crescent Real Estate liens,
Crescent Operating would not have been able to propose and fund a plan that paid
its unsecured creditors or that made any distribution to stockholders because
Crescent Operating has no equity in the assets pledged to Crescent Real Estate.
Crescent Operating did not consider proposing a pre-packaged bankruptcy
plan that does not pay Bank of America because Crescent Operating wanted to
confirm a bankruptcy plan that made a distribution to its stockholders. Under
the absolute priority rule, Crescent Operating would be prohibited from making a
distribution to its stockholders if it failed to pay its unsecured creditors,
such as Bank of America, in full. Absent the Settlement Agreement, which
provides for and requires a bankruptcy plan that pays Bank of America in full,
it is likely that all of Crescent Operating's assets would be exhausted in
satisfying the secured claims of Crescent Real Estate and there would be no
distribution to holders of unsecured claims or stockholders.
Crescent Operating did not seek any alternative offers for the purchase of
its hospitality and land development segments. The large amount of debt owed to
Crescent Real Estate carried by Crescent Operating made acquisition of Crescent
Operating unattractive to other third-party buyers. Furthermore, most of
Crescent Operating's debt was secured by liens in favor of Crescent Real Estate
and these liens would have prevented Crescent Operating from transferring its
hospitality and land development assets without the approval of Crescent Real
Estate. Finally, Crescent Operating's management believed that the price offered
by Crescent Real Estate exceeded what could reasonably be expected of a
competing third-party offer.
68
In either a litigation or a bankruptcy proceeding, the claims of Bank of
America, other than to the extent of its first priority lien on Crescent
Operating's interest in AmeriCold Logistics, and other creditors' claims are
contractually subordinate to the claims and liens held by Crescent Real Estate.
Rights of Crescent Operating stockholders are in turn legally subordinated to
the rights of Bank of America and the rights of other Crescent Operating
creditors. Management concluded that, in the event of a litigation or a
non-negotiated bankruptcy proceeding, there would be few or no assets available
for satisfaction of claims of any creditor other than the senior and secured
claims of Crescent Real Estate. After taking steps to convert all its assets to
cash in an orderly fashion, there would still not be sufficient funds to pay the
outstanding indebtedness to Crescent Real Estate. Management believed that
Crescent Operating may not even have sufficient liquidity to pay its liabilities
on a current basis. Additional costs associated with litigation or a
non-negotiated bankruptcy would diminish further the funds available for
payments to creditors or stockholders. In fact, virtually all of Crescent
Operating's current cash flow is encumbered by liens in favor of Crescent Real
Estate. There is a material risk in a litigation or a non-negotiated bankruptcy
that Crescent Real Estate could successfully object to Crescent Operating's use
of this cash flow for any purpose other than for payment of obligations directly
related to the preservation of Crescent Real Estate's collateral.
If Crescent Operating is not able to consummate the Crescent Operating
bankruptcy plan, no Crescent Real Estate stock would be issued to Crescent
Operating's stockholders. If the plan is not consummated, Crescent Operating
anticipates that Crescent Real Estate and Bank of America would enforce their
liens. In that event, Crescent Operating would have few, if any, funds available
to pay its administrative or priority tax claims or its other unsecured
creditors. In all likelihood, Bank of America would foreclose its liens in the
AmeriCold Interests in satisfaction of its claims. Any remaining asset value
would continue to be subject to the liens and claims of Crescent Real Estate. As
a result of any failure to consummate the bankruptcy plan, the unsecured
creditors identified by Crescent Operating in the original Settlement Agreement
would probably not be paid and stockholders would receive nothing. Crescent
Operating could file a Chapter 7 bankruptcy liquidation case. Pursuant to
Chapter 7, a third party would be appointed and would liquidate Crescent
Operating's assets for distribution to creditors in accordance with the
priorities established by the Bankruptcy Code. Crescent Operating believes that
in a Chapter 7 proceeding, the trustee would consent to Crescent Real Estate and
Bank of America foreclosing on their respective collateral. Crescent Operating
believes it is also likely that the trustee would not have sufficient funds to
pay administrative, priority tax and unsecured claims in full. Crescent
Operating believes there would not be a distribution to stockholders in a
Chapter 7 liquidation. The liquidation analysis that assumes that the
transactions contemplated by the Settlement Agreement have been consummated is
presented in "--Liquidation Analyses - Table 2 - Liquidation After Giving Effect
to Settlement Agreement."
In deciding whether to enter into the Settlement Agreement and whether the
Crescent Operating bankruptcy plan is in the best interests of Crescent
Operating's creditors and stockholders, Crescent Operating also prepared an
analysis of the estimated value that might be obtained by holders of general
unsecured claims and Crescent Operating's stockholders if Crescent Operating had
not entered into the Settlement Agreement and Crescent Operating were liquidated
in a hypothetical Chapter 7 case. Based on this analysis, Crescent Operating
believes that liquidation under Chapter 7 would result in no distribution being
made to Crescent Operating's stockholders and creditors, other than Crescent
Real Estate. Crescent Operating then compared the results of this liquidation
analysis to the distributions to be made to creditors and stockholders pursuant
to the Settlement Agreement and the bankruptcy plan and concluded that the
results for these persons under the Settlement Agreement and bankruptcy plan
were superior to the results that would occur if the Settlement Agreement and
bankruptcy plan were not consummated and Crescent Operating's assets were
liquidated under Chapter 7 of the Bankruptcy Code. The liquidation analysis
based on the assumption that the Settlement Agreement and bankruptcy plan
69
were not consummated is presented in "--Liquidation Analyses - Table 1 -
Liquidation Before Giving Effect to Settlement Agreement."
Crescent Operating believes that, if the Crescent Operating bankruptcy
plan is not consummated, it will be unable to meet its financial obligations and
continue as a going concern. See "-- Liquidation Analyses."
Given the extent of Crescent Real Estate's liens and the benefits provided
to both Crescent Operating's creditors and stockholders by the Settlement
Agreement, Crescent Operating's sole director determined that the Crescent
Operating bankruptcy plan was the best available alternative and the alternative
most likely to maximize stockholder value.
LIQUIDATION ANALYSES
If Crescent Operating is not able to consummate the Crescent Operating
bankruptcy plan, no Crescent Real Estate stock could be issued to Crescent
Operating's stockholders. In all likelihood, Bank of America would foreclose its
liens in the AmeriCold Interest in satisfaction of its claims. Any remaining
asset value would continue to be subject to the liens and claims of Crescent
Real Estate. Thus, if the plan were not consummated, the unsecured creditors
identified by Crescent Operating in the original Settlement Agreement would
probably not be paid in full and Crescent Operating stockholders would receive
nothing. Crescent Operating could simply allow Crescent Real Estate and Bank of
America to enforce their liens in the remaining assets. Alternatively, Crescent
Operating could file a Chapter 7 bankruptcy liquidation case. Pursuant to
Chapter 7, a third party would be appointed and would liquidate Crescent
Operating's assets for distribution to creditors in accordance with the
priorities established by the Bankruptcy Code. Crescent Operating believes that
in a Chapter 7 proceeding, the trustee would consent to Crescent Real Estate and
Bank of America foreclosing on their respective collateral. As in the other
alternatives, Crescent Operating believes that, in a Chapter 7 liquidation,
there would not be a distribution to stockholders.
In deciding to enter into the Settlement Agreement, and to assist in the
determination of whether the Settlement Agreement and the Crescent Operating
bankruptcy plan would be in the best interests of Crescent Operating's creditors
and stockholders, Crescent Operating prepared two liquidation analyses. The
first analysis, which is presented in Tables 1A and 1B, illustrates the
estimated value that might have been distributed to holders of general unsecured
claims and to Crescent Operating's stockholders if Crescent Operating had not
entered into the Settlement Agreement and Crescent Operating was liquidated in a
hypothetical Chapter 7 case as of November 30, 2001. Based on this analysis,
Crescent Operating believes that if it had not entered into the Settlement
Agreement, liquidation under Chapter 7 would have resulted in no distribution
being made to Crescent Operating's stockholders and creditors, other than
Crescent Real Estate. The second analysis, which is presented in Tables 2A and
2B, illustrates the outcome for creditors and stockholders in a Chapter 7
liquidation after giving effect to the transfers and credits provided for in the
Settlement Agreement as of March 31, 2002. Under this analysis stockholders
would receive nothing.
These analyses are based upon a number of estimates and assumptions,
including those described after the table, that are inherently subject to
significant uncertainties and contingencies, many of which would be beyond the
control of Crescent Operating. Accordingly, while the analyses that follow are
necessarily presented with numerical specificity, there can be no assurance that
the values assumed would be realized if Crescent Operating were in fact
liquidated, nor can there be any assurance that a bankruptcy court would accept
these analyses or concur with such assumptions in making its determinations
under the Bankruptcy Code. Actual liquidation proceeds could be materially lower
or higher than the amounts set forth below, and no representation or warranty
can or is being made with respect to the actual
70
proceeds that could be received in a Chapter 7 liquidation of Crescent
Operating. The liquidation valuations have been prepared solely for the purposes
of estimating proceeds available in a Chapter 7 liquidation of Crescent
Operating and do not represent values that may be appropriate for any other
purpose. Nothing contained in these valuations is intended or may constitute a
concession or admission of Crescent Operating for any other purpose. These
liquidation analyses have not been independently audited or verified.
71
TABLE 1A - LIQUIDATION BEFORE GIVING EFFECT TO SETTLEMENT AGREEMENT
SUMMARY OF LIQUIDATION VALUE OF ASSETS (1) (2)
(unaudited, dollars in thousands)
Estimated Estimated
Estimated Recovery Range(3) Recovery Range (3)
Value ---------------------- ----------------------
as of 11/30/01 Low (%) High (%) Low ($) High ($)
--------------- ------- -------- -------- -------
Cash and cash equivalents $ 627 100% 100% $ 627 $ 627
Accounts receivable 1,489 75% 85% 1,117 1,266
Notes receivable 10,165 0% 0% - -
Prepaid expenses 3,637 0% 0% - -
Other current assets 13,599 0% 0% - -
--------- -------- --------
TOTAL CURRENT ASSETS 29,517 1,744 1,893
Partnership and member interests (4) 11,874 80% 100% 9,499 11,874
Property and equipment 57 25% 50% 14 29
Investment in Crescent Machinery 29,147 0% 0% - -
Intangibles and other assets 42 0% 0% - -
Deferred tax asset 10,377 0% 0% - -
--------- -------- --------
TOTAL FIXED ASSETS 51,497 9,513 11,903
TOTAL LIQUIDATION VALUE OF
ASSETS (5) $ 81,014 $ 11,257 $ 13,796
--------------------------
(1) All recoveries shown before any possible applicable present value
discount.
(2) All recoveries are shown before the addition of certain ongoing operating
expenses that may be required throughout the Chapter 7 case.
(3) Recovery ranges estimated by Crescent Operating's management.
(4) Excludes negative book value investments.
(5) In preparing these estimates, Crescent Operating management did not assign
any value to litigation claims against Crescent Real Estate. Crescent
Operating analyzed the documentation and the surrounding facts and
circumstances in respect of its relationship with, and its obligations to,
Crescent Real Estate to determine whether there might be value for
creditors and stockholders that would support a decision to forgo the
Settlement Agreement in favor of pursuing litigation. As discussed in "--
Analysis of Alternatives," Crescent Operating independently concluded that
it should enter into the Settlement Agreement based on the totality of the
circumstances, which included as factors the benefits that the Settlement
Agreement conferred upon creditors and stockholders, the relative
certainty of the creditors and stockholders of Crescent Operating
realizing those benefits, and the relative uncertainty of recovery in, as
well as the costs and delay associated with the prosecution of any claims,
and particularly claims of uncertain merit. As described in the answer to
the question "What happens if the Crescent Operating stockholders vote
AGAINST acceptance of the Crescent Operating bankruptcy plan?", Crescent
Operating also did not assign any value to potential preference or
fraudulent transfer claims, primarily because (i) Crescent Real Estate is
paying substantial consideration to Crescent Operating and its creditors
and stockholders and (ii) the claims of Crescent Real Estate were fully
secured.
72
TABLE 1B - LIQUIDATION BEFORE GIVING EFFECT TO SETTLEMENT AGREEMENT
SUMMARY CLAIMS RECOVERIES (1)
(unaudited, dollars in thousands)
----------------------------------------------------------------------------------------------------------------------------------
Estimated Estimated
Value Recovery Range Recovery Range
as of -------------------------- ---------------------
11/30/01 Low (%) High (%) Low ($) High ($)
-------- ------- -------- ------- --------
ASSETS AVAILABLE FOR SECURED, ADMINISTRATIVE, PRIORITY $11,257 $13,796
TAX AND UNSECURED CLAIMS
SECURED CLAIMS:
Crescent Real Estate Equities, Ltd. (debt and accrued
interest) $70,258 16%(2) 20% $11,257 $13,796
------- ------- -------
SECURED CLAIMS RECOVERY 70,258 11,257 13,796
ASSETS AVAILABLE FOR ADMINISTRATIVE, PRIORITY TAX AND
UNSECURED CLAIMS -- --
ADMINISTRATIVE CLAIMS:
Trustee expenses (including legal and accounting) 250 0% 0% -- --
------- ------- -------
TOTAL ADMINISTRATIVE CLAIMS 250 0% 0% -- --
PRIORITY TAX CLAIMS: 1,500 0% 0% -- --
-- --
NET ASSETS AVAILABLE FOR UNSECURED CLAIMS --
UNSECURED CLAIMS:(3)
Bank of America 15,000 0% 0% -- --
Trade Debt 507 0% 0% -- --
Seller Notes (debt and accrued interest) 3,660 0% 0% -- --
Other Accrueds 1,164 0% 0% -- --
------- ------- -------
TOTAL UNSECURED CLAIMS(3) 20,331 -- --
------- ------- -------
NET ASSETS AVAILABLE FOR EQUITY HOLDERS $ -- $ -- $ --
--------------------------
(1) Classification of claims for purposes of analysis presented after
consultation with Crescent Operating's counsel.
(2) Assumes 100% of liquidation value of assets would be distributed to
Crescent Real Estate on account of its secured claims.
(3) The table does not assign any value to the lawsuit filed by the
Crescent Machinery Committee because Crescent Operating intends to
vigorously defend against the allegations and claims in the lawsuit. If
the claims in the lawsuit are successfully pursued, however, they could
negatively impact Crescent Operating's ability to confirm the bankruptcy
plan.
73
TABLE 2A - LIQUIDATION AFTER GIVING EFFECT TO SETTLEMENT AGREEMENT
SUMMARY CLAIMS RECOVERIES (1)
(unaudited, dollars in thousands)
Estimated Estimated
Estimated Recovery Range (3) Recovery Range (3)
Value ------------------------ -------------------------
as of 3/31/02 Low (%) High (%) Low ($) High ($)
------------- ------- -------- ------- --------
Cash and cash equivalents $ 1,105 100% 100% $ 1,105 $ 1,105
Accounts receivable 978 75% 85% 734 831
Notes receivable -- 0% 0% -- --
Prepaid expenses 10 0% 0% -- --
Other current assets 12,483 0% 0% -- --
---------- -------- ---------
TOTAL CURRENT ASSETS 14,576 1,839 1,936
Partnership and member interests (4) 15,000 70% 100% 10,500 15,000
Property and equipment 50 25% 50% 13 25
Intangibles and other assets -- 0% 0% -- --
Deferred tax asset 6,678 0% 0% -- --
---------- -------- ---------
TOTAL FIXED ASSETS 21,728 10,513 15,025
TOTAL LIQUIDATION VALUE OF
ASSETS (5) $ 36,304 $ 12,352 $ 16,961
___________________________
(1) All recoveries shown before any possible applicable present value
discount.
(2) All recoveries are shown before the addition of certain ongoing operating
expenses that may be required throughout a Chapter 7 case.
(3) Recovery ranges estimated by Crescent Operating's management.
(4) Excludes negative book investments. Includes AmeriCold Logistics interest
pledged to Bank of America at an agreed upon value.
(5) In preparing these estimates, Crescent Operating management did not assign
any value to litigation claims against Crescent Real Estate. Crescent
Operating analyzed the documentation and the surrounding facts and
circumstances in respect of its relationship with, and its obligations to,
Crescent Real Estate to determine whether there might be value for
creditors and stockholders that would support a decision to forgo the
Settlement Agreement in favor of pursuing litigation. As discussed in "--
Analysis of Alternatives," Crescent Operating independently concluded that
it should enter into the Settlement Agreement based on the totality of the
circumstances, which included as factors the benefits that the Settlement
Agreement conferred upon creditors and stockholders, the relative
certainty of the creditors and stockholders of Crescent Operating
realizing those benefits, and the relative uncertainty or recovery in, as
well as the costs and delay associated with the prosecution of any claims,
and particularly claims of uncertain merit. As described in the answer to
the Question "What happens if the Crescent Operating stockholders vote
AGAINST acceptance of the Crescent Operating bankruptcy plan?", Crescent
Operating also did not assign any value to potential preference or
fraudulent transfer claims, primarily because (i) Crescent Real Estate is
paying substantial consideration to Crescent Operating and its creditors
and stockholders and (ii) the claims of Crescent Real Estate were fully
secured.
74
TABLE 2B -- LIQUIDATION AFTER GIVING EFFECT TO SETTLEMENT AGREEMENT
SUMMARY CLAIMS RECOVERIES(1)
(unaudited, dollars in thousands)
--------------------------------------------------------------------------------------------------------------------------------
Estimated Estimated
Estimated Recovery Range Recovery Range
Claims ---------------------- -----------------------
as of 3/31/02 Low (%) High (%) Low ($) High ($)
--------------- ------- --------- ---------- ----------
ASSETS AVAILABLE FOR SECURED, ADMINISTRATIVE AND $ 12,352 $ 16,961
UNSECURED CLAIMS
SECURED CLAIMS:
Bank of America (secured by AmeriCold Logistics
Interest) $ 15,000 70% 100% 10,500 15,000
Crescent Real Estate Equities, Ltd. (debt and accrued
interest) (secured by blanket lien on all assets;
subordinate to Bank of America in
AmeriCold) 38,688 4.8%(2) 5.1% 1,852 1,961
-------- -------- --------
ASSETS AVAILABLE FOR ADMINISTRATIVE, PRIORITY TAX AND
UNSECURED CLAIMS AFTER SATISFACTION OF SECURED CLAIMS -- --
ADMINISTRATIVE CLAIMS:
Trustee expenses (including legal and accounting) 250 0% 0% -- --
-------- -------- --------
TOTAL ADMINISTRATIVE CLAIMS 250 -- --
PRIORITY TAX CLAIMS: 1,500 0% 0% -- --
NET ASSETS AVAILABLE FOR UNSECURED CLAIMS -- -- --
UNSECURED CLAIMS(3)
Trade Debt -- 100% 100% -- --
Other Accrueds -- 100% 100% -- --
-------- -------- --------
TOTAL UNSECURED CLAIMS () -- -- --
NET ASSETS AVAILABLE FOR EQUITY HOLDERS $ -- $ -- $ --
___________________________
(1) Classification of claims for purposes of analysis presented after
consultation with Crescent Operating's counsel.
(2) Assumes 100% of liquidation value of assets would be distributed to
Crescent Real Estate on account of its secured claims.
(3) The table does not assign any value to the lawsuit filed by the
Crescent Machinery Committee because Crescent Operating intends to
vigorously defend against the allegations and claims in the lawsuit. If
the claims in the lawsuit are successfully pursued, however, they could
negatively impact Crescent Operating's ability to confirm the bankruptcy
plan.
75
General Assumptions
Liquidation Before Giving Effect To Settlement Agreement
Estimated Liquidation Proceeds. Estimates were made of the cash proceeds
that might be available for distribution and the allocation of such proceeds
among various claimants based on their relative priority under the assumption
that Crescent Operating had not entered into and made the transfers and received
the credits on its debt to Crescent Real Estate as provided for in the
Settlement Agreement. It is probable in a Chapter 7 liquidation that the trustee
would conclude that the Chapter 7 estate had no beneficial interest in the
collateral securing the Crescent Real Estate claims. Under such circumstances,
it is reasonable to assume that the Crescent Operating Bankruptcy trustee would
either abandon the estate's interest in the assets or agree to a court order
that Crescent Real Estate could foreclose on its collateral.
Crescent Operating considered a number of factors and data in estimating
the liquidation proceeds, including the following, in no particular order:
- Crescent Operating's operating and projected financial performance;
- The attractiveness of each of the operating segments to potential buyers;
- The potential universe of possible buyers;
- The potential impact of a Chapter 7 case upon the operating segments as
well as possible buyers' pricing strategies;
- The relative timing of the potential sale of Crescent Operating's
operating segments; and
- Analysis of the liabilities and obligations of Crescent Operating's
operating segments.
In estimating the liquidation proceeds and applying the foregoing factors
and considerations to make such estimate, both the general economic environment
as well as the current condition of Crescent Operating's business were
considered. See "Crescent Operating Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Description of Crescent
Operating's Business" for information regarding the current condition of
Crescent Operating's business.
Investment in Crescent Machinery. On February 6, 2002, Crescent Machinery
filed for protection under Chapter 11 in the Bankruptcy Court in Fort Worth,
Texas and filed its Schedules and Statement of Financial Affairs on March 22,
2002. Crescent Operating has reviewed this financial information. Crescent
Operating has discussed with Crescent Machinery management and counsel the
likelihood that Crescent Machinery will emerge from Chapter 11 as an operating
company and the probable impact of such an outcome on Crescent Operating's
equity interest in Crescent Machinery. Based upon its independent review of the
financial information contained in the Crescent Machinery bankruptcy file and
the statements of Crescent Machinery management and counsel regarding Crescent
Machinery's reorganization prospects, Crescent Operating has concluded that it
is highly unlikely that any value will be realized by Crescent Operating in
respect of its stock ownership in Crescent Machinery. Crescent Operating has
claims against Crescent Machinery based upon intercompany advances it made prior
to Crescent Machinery's Chapter 11 filing. It is not possible to predict whether
any monies will be distributed to Crescent Operating in respect of these claims.
For purpose of the liquidation analyses, Crescent Operating has assumed that it
will not receive anything of value for its claims against Crescent Machinery.
Trustee in Bankruptcy. In a Chapter 7 case, Crescent Operating's
management would be replaced by a Chapter 7 trustee. Under ordinary
circumstances, a Chapter 7 trustee is not authorized to continue operating a
debtor's business. Crescent Operating assumes that any Chapter 7 trustee
appointed would not continue Crescent Operating's business operations. This
liquidation analysis also assumes the Chapter 7 trustee would elect to liquidate
Crescent
76
Operating's assets, as opposed to paying another liquidating agent to conduct
liquidation sales. Crescent Operating cannot assure you that these assumptions
would be made or accepted by a bankruptcy court.
Nature and Timing of the Liquidation Process. Pursuant to the Bankruptcy
Code, a Chapter 7 trustee must, among other duties, collect and convert the
property of the debtor's estate to cash and close the estate as expeditiously as
is compatible with the best interests of the parties in interest. Solely for
purposes of preparing this liquidation analysis, Crescent Operating assumed that
it would have filed the Chapter 7 liquidation on November 30, 2001.
Additional Liabilities and Reserves. Crescent Operating believes that
there would be certain actual and contingent liabilities and expenses for which
provision would be required in a Chapter 7 liquidation before distributions
could be made to creditors, including the following:
- additional administrative expenses involved in the appointment of a
trustee and attorneys and other professionals to assist such trustee;
- additional expenses and claims, some of which would be entitled to
priority over Crescent Operating's creditors and stockholders, which would
be generated during the liquidation and from the rejection of leases and
other executory contracts in connection with a cessation of Crescent
Operating's operations; and
- a failure to realize any going concern value from Crescent Operating's
assets since Crescent Operating has pledged substantially all of its
assets, other than a small amount of cash, to Crescent Real Estate to
secure repayment of $76.2 million in debt.
Crescent Operating believes that there is significant uncertainty as to
the reliability of Crescent Operating's estimates of the amounts related to the
foregoing that have been assumed in the liquidation analysis.
Liquidation After Giving Effect To Settlement Agreement
Between February 14 and March 22, 2002, Crescent Operating and Crescent
Real Estate consummated a number of transactions provided for in the Settlement
Agreement. These included, among other things, the transfers by Crescent
Operating and its affiliated entities of certain partnership and limited
liability company member interests and rights under various management contracts
to Crescent Real Estate or its designees. In exchange for these transfers,
Crescent Operating received, among other things, a credit on its indebtedness to
Crescent Real Estate in the sum of $40.1 million. In addition, Crescent Real
Estate agreed, on condition the plan were consummated, to fund an amount to
Crescent Operating sufficient to pay its unsecured creditors identified in the
original Settlement Agreement in full, and, under certain circumstances,
Crescent Real Estate common shares would be distributed to Crescent Operating's
stockholders.
Table 2 illustrates Crescent Operating's estimate of the results of a
liquidation after giving effect to the transfers and credits on Crescent Real
Estate's claims as provided for in the Settlement Agreement. Under these
circumstances Crescent Operating believes shareholders would receive nothing
since Crescent Real Estate's obligation to issue its common shares to Crescent
Operating's stockholders is conditioned, among other things, upon consummation
of the plan.
Distributions; Absolute Priority. Under a Chapter 7 liquidation, all
secured claims are required to be satisfied from the proceeds of the collateral
securing such claims before any such proceeds would be distributed to any other
claim holders. This liquidation analysis assumes the application of the rule of
absolute priority of distributions with respect to the remaining proceeds of
Crescent Operating. Under that rule, no junior creditor receives any
distribution until all senior creditors are paid in full. To the extent that
proceeds remain after satisfaction of all secured claims, Crescent Operating
believes the unsecured claimants would receive substantially less than pursuant
to the Crescent Operating bankruptcy plan.
77
Conclusion
Crescent Operating believes that liquidation under Chapter 7 would result
in no distribution being made to Crescent Operating stockholders and that
general unsecured creditors would receive substantially less recovery on their
claims than under the Crescent Operating bankruptcy plan. Crescent Operating
estimates that the amount of its indebtedness to Crescent Real Estate
substantially exceeds the value of the assets securing repayment of that debt.
Accordingly, in a Chapter 7 liquidation, it is likely that the trustee will
abandon Crescent Operating's interest in the pledged assets or agree that the
automatic stay be lifted so that Crescent Real Estate could proceed with
foreclosure. In such a foreclosure, Crescent Real Estate is not likely to
receive the amount of its claims. As a result, Crescent Real Estate could in
fact have a substantial unsecured claim against Crescent Operating. Likewise,
the collateral securing the Bank of America claim may have a value less than the
balance of the Bank of America debt plus the secured claim of Crescent Real
Estate. In a Chapter 7 liquidation, the trustee would probably abandon the
estate's interest in the collateral securing repayment of Crescent Operating's
debt to Bank of America.
EVENTS LEADING TO THE REORGANIZATION TRANSACTIONS
General
Crescent Operating was formed in 1997 to, among other things, participate
under the Intercompany Agreement with Crescent Real Estate in certain
investments. As a result, over a period of several years, Crescent Operating
became an investor in various entities in diverse business segments. This rapid
growth into diverse fields made it difficult for the general public to
understand and value Crescent Operating's structure. Thus, during 1999,
management of Crescent Operating and its Intercompany Evaluation Committee
commenced negotiations with Crescent Real Estate to sell the entities within
Crescent Operating's hospitality and land development segments to Crescent Real
Estate or one of its affiliates in order to focus upon a core business. Please
see "--Description of Meeting of Intercompany Evaluation Committee and Board of
Directors" for more information regarding the Intercompany Evaluation Committee
and the deliberations of the Committee and the Board of Directors. As part of
these negotiations, the Intercompany Evaluation Committee considered available
options, including a restructuring of Crescent Operating under bankruptcy
reorganization and liquidation under Chapter 7 of the Bankruptcy Code, and
determined that a successful asset sale transaction with Crescent Real Estate or
Crescent Partnership would be in the best interest of the stockholders of
Crescent Operating because it would provide adequate liquidity and allow
Crescent Operating to focus on its equipment sales and leasing business. Based
on that decision, negotiations continued. Crescent Operating's management and
the Intercompany Evaluation Committee established certain criteria that they
believed necessary for any transaction to be successful for Crescent Operating.
These criteria developed into the goals of Crescent Operating for the
transaction, the most significant of which were to (i) decrease Crescent
Operating's debt level to the lowest amount possible, (ii) simplify Crescent
Operating's structure so that it could be understood within the marketplace and
(iii) provide stability and potential growth opportunities to Crescent Machinery
following the transactions. To accomplish this, the Intercompany Evaluation
Committee determined that Crescent Machinery would need a significant amount of
additional funds in connection with any transaction to achieve the established
goals.
During the period of negotiations, Crescent Operating did not seek any
alternative offers for the purchase of its hospitality and land development
segments. The large amount of debt owed to Crescent Real Estate carried by
Crescent Operating made acquisition of Crescent Operating unattractive to other
third-party buyers. Furthermore, most of Crescent Operating's debt was secured
by liens in favor of Crescent Real Estate and these liens would have prevented
Crescent Operating from transferring its hospitality and land development assets
without the approval of Crescent Real Estate. Finally, Crescent Operating's
management believed that the price offered by Crescent Real Estate exceeded what
could reasonably be expected of a competing third-party offer.
Crescent Operating's management faced a number of issues that made the
transaction difficult to structure and delayed the finalization of a complete
plan. These issues included the evaluation of tax planning objectives of the
various parties to the restructuring transactions, the need for Crescent Real
Estate to maintain its status as a REIT for
78
federal income tax purposes and consideration of outstanding litigation related
to Charter Behavioral Health Systems, LLC and its bankruptcy. See "-- Legal
Proceedings" below for information on the CBHS bankruptcy. While Crescent
Operating's management was able to continue negotiations while seeking
structures to resolve these issues, complications such as these significantly
delayed the negotiation process. Certain tax and other specific structuring
issues were not resolved until 2002 and the provisions of the REIT Modernization
Act were not final until late 2000, both of which made it impossible for
Crescent Real Estate to consummate the transactions without jeopardizing its
REIT status. Due to the length of time the negotiations spanned, values of
Crescent Operating's investments had to be updated on several occasions to
encompass significant changes to certain of the Crescent Operating's assets and
business enterprises.
In December 2000, Crescent Operating identified SunTx Fulcrum Fund, L.P.
and its affiliates, a Dallas-based private equity fund focused on making
strategic investments in middle-market companies based primarily in, or with
significant corporations in the southern United States, as an investment group
interested in a potential investment opportunity in Crescent Machinery. Mr. Goff
and Mr. Stevens, on behalf of Crescent Operating's management, immediately began
discussions with SunTx representatives Ned N. Fleming, III and Mark R. Matteson
about making an investment related to Crescent Machinery. Based upon the
opportunities identified through these discussions, SunTx moved forward with its
due diligence process and the negotiation of a securities purchase agreement,
ultimately agreeing to invest $19.0 million of capital into Crescent Machinery.
In addition to the funds to be provided by SunTx, Crescent Operating's
management, along with the Intercompany Evaluation Committee, agreed that
additional equity would be required to achieve the goals which had been set for
Crescent Operating. At that point in time, Crescent Operating approached
Crescent Real Estate about making a similar equity contribution as part of the
overall transaction. After further negotiations between David M. Dean, on behalf
of Crescent Real Estate, and Crescent Operating, Crescent Real Estate agreed to
invest $10.0 million of capital into Crescent Machinery through an affiliate,
CRE Equipment Holdings, LLC.
On January 1, 2001, the REIT Modernization Act became effective. This
legislation allows Crescent Real Estate, through its subsidiaries, to operate or
lease certain of its investments that had been previously operated or leased by
Crescent Operating.
On June 28, 2001, Crescent Operating entered into an asset purchase
agreement with Crescent Real Estate as well as a securities purchase agreement
with SunTx and CRE Equipment Holdings, whereby SunTx and CRE Equipment Holdings
would invest capital in the amount of $19.0 million and $10.0 million,
respectively, into Crescent Machinery. Under the terms of the asset purchase
agreement, Crescent Partnership would pay to Crescent Operating approximately
$78.4 million, payable in cancellation of certain debt and rent obligation and
cash, in exchange for (i) all of the assets related to Crescent Operating's
hospitality business, (ii) all shares of voting common stock owned by Crescent
Operating and its subsidiaries and (iii) all of the membership interests of CR
License LLC owned by Crescent Operating. Also, Crescent Operating agreed not to
encourage or solicit any acquisition proposals by a third party, although
Crescent Operating's Board of Directors could entertain unsolicited offers if it
was concluded in good faith that consideration of such proposals were necessary
to comply with their fiduciary duties.
In connection with the securities purchase agreement, Crescent Machinery
would have been merged into Crescent Machinery, L.P., or CMC LP. In exchange for
CRE Equipment Holdings and SunTx's investment in CMC LP, CRE Equipment Holdings
would have received 10,000 Series A preferred partnership interests in CMC LP
and SunTx would have received 19,000 Series B preferred partnership interests.
In connection with the purchase of Series B preferred partnership interests,
SunTx would have received a warrant to purchase 2,800,000 shares of Crescent
Operating common stock for $.01 per share. Subject to certain restrictions, both
series of preferred partnership interests would have been exchangeable for
Crescent Operating common stock.
79
In October 2001, management of Crescent Operating, CRE Equipment Holdings
and SunTx amended the terms of the original securities purchase agreement. Since
the time the asset and securities purchase agreements had been entered into,
there had been a general deterioration of the United States economy and stock
markets, and a significant decline in the price of Crescent Operating's common
stock. As a result, the economic terms of the original securities purchase
agreement and the anticipated terms for the required Crescent Operating rights
offering were no longer acceptable to CRE Equipment Holdings and SunTx. CRE
Equipment Holdings and SunTx indicated that they would be unable to proceed to
consummate the purchase of the preferred partnership interests under the
economic terms of the original securities purchase agreement. Because each
transaction was dependent upon the completion of all other transactions, the
failure to complete the sale of the preferred partnership interests would have
also resulted in the failure to conclude all other transactions, including the
asset sale. As a result, in October 2001, management of Crescent Operating, CRE
Equipment Holdings and SunTx amended the securities purchase agreement,
primarily to revise the rate of exchange for the preferred partnership interests
into shares of Crescent Operating common stock, and in some cases the rate of
conversion for preferred partnership interests into common limited partnership
interests of CMC LP, so that such conversion rates would reflect changes in the
market price of Crescent Operating common stock. Similarly, it was also agreed
that the price to purchase shares of Crescent Operating common stock should be
changed to reflect the market price for Crescent Operating common stock at the
time of the rights offering.
Crescent Operating filed its definitive proxy statement for the annual
meeting on November 1, 2001, and sent its proxy statement for the annual meeting
to the stockholders on or about November 1, 2001.
On December 6, 2001, the stockholders of Crescent Operating approved the
reorganization transactions, which noted that Crescent Machinery did not make a
principal payment for October 2001 to four of its primary lenders holding
approximately 85% of its outstanding debt. Further, the closing of the
reorganization transactions required, among other things, for Crescent Machinery
to obtain consents from its lenders to the restructure transaction. At that
time, it was believed that an agreement could be reached with the lenders to
accommodate Crescent Machinery's needs and obtain the necessary consents.
Unfortunately, the overall equipment rental and sales industry was struggling
because of an economic downturn and the September 11 terrorist attacks. Crescent
Machinery was faced with excess inventory at a point when there was a
significant oversupply in the industry and a severe reduction in construction
activity.
Crescent Machinery was unable to reach satisfactory agreements with its
lenders regarding restructuring of the loans. As a result, Crescent Real Estate
advised Crescent Operating that it believed that substantial additional capital,
beyond the investment called for in the securities purchase agreement, would
have to be made to Crescent Machinery to adequately capitalize Crescent
Machinery and satisfy concerns of Crescent Machinery's lenders. Crescent Real
Estate announced that it was "unwilling to make this non-core investment."
Because all of the reorganization agreements were dependent upon each other,
Crescent Real Estate gave notice that it was terminating the asset purchase
agreement on January 23, 2002, and gave notice that it was terminating the
securities purchase agreement on February 4, 2002.
In November 2001, Mr. Stevens solely on behalf of Crescent Operating and
Mr. Goff and Mr. Dean, solely on behalf of Crescent Real Estate, entered into
discussions of an alternative plan to allow Crescent Real Estate to acquire
Crescent Operating's land development and hospitality assets. In January 2002,
Mr. Goff suggested an arrangement that would allow Crescent Real Estate to
obtain by agreement Crescent Operating's land development and hospitality assets
in an agreed foreclosure action and in lieu of foreclosure and Mr. Dean devised
a structure that would allow Crescent Real Estate shareholders to acquire the
temperature-control business from Crescent Operating. Once this structure was
proposed, Mr. Goff refrained from participating in any negotiations regarding
prices and consideration in order to avoid any potential conflicts of interest.
After Mr. Stevens examined numerous possible solutions that are more fully
described in "Analysis of Alternatives," he agreed to move forward with the
bankruptcy plan, subject to obtaining a fairness opinion from Houlihan Lokey.
Mr. Stevens, as the sole director independent from Crescent Real Estate,
consulted with independent financial and legal advisors during these
negotiations and believed that the proposed plan would satisfy all of Crescent
Operating's indebtedness to its creditors and leave value to the Crescent
80
Operating stockholders that he felt they would not receive in a bankruptcy
action that was not pre-negotiated. After the 2001 Annual Meeting of
shareholders, no director of Crescent Operating, other than Mr. Stevens acting
as an independent director, negotiated on behalf of Crescent Operating.
In this time period, Crescent Operating also began negotiations with Bank
of America in connection with Bank of America's approximately $15.5 million
potential claim against Crescent Operating for debt obligations, arising from an
unsecured loan originally funded in 1997. The indebtedness matured on December
31, 2001, but Crescent Operating was unable to pay at that time. Accordingly,
negotiations commenced shortly thereafter in which Crescent Operating, with the
consent of Crescent Real Estate, offered to grant to Bank of America a first
priority security interest in COPI Cold Storage in exchange for the Bank's
agreement to extend the maturity date of the loan to August 15, 2002. Pursuant
to the Settlement Agreement, Crescent Real Estate agreed to permit Crescent
Operating to grant this first priority security interest to Bank of America.
Bank of America agreed to Crescent Operating's proposal, and loan documents
reflecting the arrangement were executed on March 12, 2002, effective as of
December 31, 2001. During August 2002, Bank of America further extended the
maturity of this loan to January 15, 2003 and Crescent Operating prepaid
interest for that time period in the amount of $0.3 million. In January 2003,
Bank of America further extended the maturity of this loan to March 15, 2003 and
Crescent Operating agreed to prepay an additional two months of interest at the
loan's current rate.
Houlihan Lokey issued its fairness opinion regarding the proposed
transactions on February 14, 2002, and on February 14, 2002, Crescent Operating,
some of its operating subsidiaries, Crescent Real Estate and Crescent
Partnership entered into the original Settlement Agreement memorializing the
negotiations between Mr. Stevens and Mr. Dean.
Effective October 1, 2002, Crescent Operating and Crescent Real Estate
amended the Settlement Agreement. The amendment provides for, among other
things, a minimum value of Crescent Real Estate common shares to be issued in
connection with the bankruptcy plan if the bankruptcy plan is accepted by the
requisite vote of Crescent Operating stockholders and confirmed by the
bankruptcy court. For more information on the Settlement Agreement and the
Crescent Operating bankruptcy plan, see "The Plan of Reorganization."
Description of Meetings of Intercompany Evaluation Committee and Board of
Directors.
The Intercompany Evaluation Committee is a standing committee of the Board
of Directors of Crescent Operating established at the first meeting of the Board
of Directors held subsequent to Crescent Operating's becoming a public company
in June 1997. The Committee was formed originally for the purposes of reviewing,
evaluating, analyzing, negotiating the terms of, and making recommendations to
the Board of Directors regarding, business and investment opportunities
presented to Crescent Operating by Crescent Partnership under the Intercompany
Agreement. This review specifically included evaluating whether a transaction
opportunity was consistent with Crescent Operating's purpose and fair to
Crescent Operating. The Committee's scope expanded to include all proposed
transactions with or involving Crescent Partnership or Crescent Real Estate.
Because of its responsibility, the Committee was at all times composed entirely
of directors who were not officers or directors of Crescent Real Estate or
Crescent Partnership. Until March 1999, the sole members of the Committee were
Carl F. Thorne and Jeffrey L. Stevens; in March 1999, William A. Abney, became
the third member of the Committee. Messrs. Thorne and Abney served on the
Committee until the 2001 Annual Meeting of Shareholders held December 6, 2001,
when their terms as directors expired.
During 1999, 2000 and 2001, the Committee held ten separate meetings:
- On March 10 and 11, 1999, the Committee met to consider a proposal
for the restructuring of its temperature controlled logistics
investment. This proposal involved a complicated transaction that
would result in Crescent Operating's effectively surrendering an
investment in the real estate side of the temperature controlled
logistics business in exchange for a much larger investment in the
operational side of the business. The Committee negotiated with
Crescent Partnership the sale price for Crescent Operating's
interest in the controlled subsidiary and also negotiated a loan
from Crescent
81
Partnership to fund Crescent Operating's investment in the new
operational entity. When the Committee had obtained satisfactory
agreements on those two matters, it recommended to the Board of
Directors that Crescent Operating proceed with the transaction.
- On March 27, 1999, the Committee met to consider a request from
management of the operational entity for the temperature controlled
logistics business concerning expansion of two existing storage
facilities. The lessor of the facilities - an entity owned jointly
by Vornado Trust Realty and Crescent Partnership - had agreed to
fund the costs of expansion in return for increases in the rental
rates in the leases for those properties. The Committee recommended
to the Board of Directors that Crescent Operating proceed with the
transaction, which required no outlay of cash by Crescent Operating.
- On April 22, 1999, the Committee met to evaluate an opportunity
offered by Crescent Partnership for Crescent Operating to become the
new lessee of the Renaissance Hotel in Houston, Texas, pursuant to
the Intercompany Agreement. The Committee recommended to the Board
of Directors that Crescent Operating accept this opportunity.
- On November 8, 1999, the Committee met to consider engaging Sonoma
Management Corp. I, a company affiliated with Sonoma Management
Company, to provide asset management services for the hospitality
properties which Crescent Operating leased from Crescent
Partnership. At the time of the meeting, Crescent Operating was
receiving asset management services for certain of its hospitality
properties under contracts with The Varma Group, the principals of
which were Sanjay and Johanna Varma, but those contracts would
expire in 2000, leaving Crescent Operating unable to fulfill its
obligations as the lessee of those properties. The Varmas had formed
Sonoma Management Company, with the help of equity investment from
Crescent Partnership, to acquire hotel and resort properties, and
had also created Sonoma Management Corp. I to provide property
management and asset management services. The Varmas were interested
in providing Crescent Operating asset management services for its
hospitality properties through Sonoma Management Corp. I when the
existing asset management agreements expired. After examining the
proposed terms of the engagement, the Committee directed management
to renegotiate certain financial terms relating to the engagement.
- On July 26, 2000, the Committee met to consider a proposal for the
restructuring of its interest in the Transportal Network Venture, a
business venture within its temperature controlled logistics
segment. The restructuring proposal would relieve Crescent Operating
of its obligation for certain startup costs, while leaving it with a
reduced equity interest in the restructured Transportal by
transferring most of Crescent Operating's interest in Transportal to
a newly-formed company jointly owned by Crescent Operating and
Crescent Partnership. The Committee recommended to the Board of
Directors that Crescent Operating offer Crescent Partnership the
opportunity to acquire a portion of Crescent Operating's interest in
Transportal substantially on the terms presented to the Committee
for its consideration.
- On March 29, 2001, the Committee met to consider, with the
assistance of bankruptcy counsel from Thompson & Knight and a
bankruptcy analyses presentation prepared by Thompson & Knight,
whether the interests of Crescent Operating's creditor and
stockholder constituencies would be better served by reorganization
through Chapter 11 bankruptcy than by the proposed negotiated
restructuring with Crescent Partnership and SunTx. The Committee
concluded that it would not recommend to the Board of Directors the
course of bankruptcy.
- In May 2001, the Committee met to consider proposals made by Mr.
Goff for resolving two aspects of the proposed negotiated
restructuring with Crescent Partnership and SunTx in which Mr. Goff
was
82
personally interested: modifying Crescent Operating's $15.0 million
term loan from Bank of America, which was supported by credit
enhancement provided by Mr. Goff and Richard E. Rainwater, to
provide debt service relief to Crescent Operating; and liquidating
COPI Colorado, L.P., a limited partnership which held Crescent
Operating's investment in Crescent Development Management Corp.,
which later became Crescent Resort Development, Inc. and in which
Mr. Goff was a limited partner, to effect the transfer to Crescent
Partnership of that interest in Crescent Development Management
Corp. The Committee concluded that both proposals were fair and in
the best interest of Crescent Operating and recommended to the Board
of Directors that Crescent Operating undertake to implement both
proposals.
- On June 19, 2001, the Committee met to consider whether the terms
of the proposed negotiated restructuring with Crescent Partnership
and SunTx, as set forth in the current drafts of the transaction
agreements submitted to the Committee, was fair to and in the best
interests of Crescent Operating. The Committee concluded that
transaction agreements and the transactions contemplated thereby
were fair to and in the best interests of Crescent Operating and
recommended to the Board of Directors that those agreements and
transactions be approved and undertaken by Crescent Operating.
Subsequent to entering into the securities purchase agreement,
effective June 28, 2001, with SunTx, the Committee met twice to
discuss repricing of the securities to be issued pursuant to that
agreement, as continued declines in the market price of Crescent
Operating's common stock caused SunTx to renegotiate the pricing of
the securities. Agreement on repricing was reached in October 2001,
when the parties entered into an amended and restated securities
purchase agreement, effective October 31, 2001.
From 1999 through January 5, 2003, the Board of Directors of Crescent
Operating held eleven meetings and, in addition, acted by unanimous written
consent three times. At the following meetings and in the following consents,
the Board considered proposed transactions with Crescent Partnership, Crescent
Real Estate or their affiliates:
- At a meeting held March 1, 1999, the Board accepted the report and
recommendation of the Intercompany Evaluation Committee for a $17.5
million expansion and renovation program at Sonoma Mission Inn & Spa
to be funded entirely by Crescent Partnership, the owner of that
resort, in return for amendment of the rental rate paid by Wine
Country Hotel, LLC, the subsidiary of Crescent Operating that was
the lessee of Sonoma Mission Inn & Spa, and approved all actions
taken to effect that transaction. The Board also approved increases
in the base rentals for all of the hotels and resorts within the
hospitality segment and the giving by Crescent Operating of its
limited guaranty of its subsidiaries' obligations under the leases
in that segment in consideration of capital improvements funded by
Crescent Partnership, the elimination of certain capital maintenance
contractual restrictions on certain hospitality segment
subsidiaries, and the fixing of future monetary obligations of
Crescent Operating's hospitality subsidiaries upon the termination
of their respective leases and adopted the recommendations of the
Compensation Committee of the Board on compensation for the officers
of Crescent Operating, including Gerald W. Haddock as President and
Chief Executive Officer, who, at the time, held the same offices at
Crescent Real Estate.
- At a meeting held June 10, 1999, the Board considered the terms of
an agreement with Mr. Haddock relating to his resignation as an
officer and director of Crescent Operating. At the same time, Mr.
Haddock was also resigning as an officer and director of Crescent
Real Estate . The final agreement with Mr. Haddock was ratified at a
meeting of the Board held on June 17, 1999.
- At a meeting held August 27, 1999, the Board discussed and approved
the terms of an agreement with Magellan Health Services and Crescent
Partnership for the restructuring of Charter Behavioral Health
Systems, LLC or, CBHS, which was consummated in September 1999. At
the same meeting, the Board received the recommendation of the
Intercompany Evaluation Committee regarding lease of the
83
Renaissance Hotel in Houston and approved the lease of that hotel by
a subsidiary and guaranty of that lease by Crescent Operating. The
Board also ratified the March 1999 restructuring of its temperature
controlled logistics investment.
- At a meeting held February 11, 2000, the Board discussed the
imminent bankruptcy of CBHS, which did file a voluntary petition in
bankruptcy on February 16, 2000, and approved a proposal for a newly
formed subsidiary of Crescent Operating to offer to purchase the
core assets of CBHS out of bankruptcy using bank financing
guaranteed by Mr. Rainwater, Chairman of the Board of Directors and
Crescent Operating's largest stockholder. Crescent Operating's chief
financial officer, Richard P. Knight, and its President and Chief
Executive Officer, Mr. Goff, were appointed a special committee to
negotiate and approve the terms of an asset purchase agreement for
CBHS's core assets, to obtain from PricewaterhouseCoopers its
professional advice about a fair, arm's length fee to be paid to Mr.
Rainwater for guaranteeing the acquisition debt and to submit that
advice to the full Board for its approval, and to negotiate and
approve the other terms of an agreement with Mr. Rainwater to
procure his guaranty.
- At a meeting held March 6, 2000, the Board discussed various
restructuring alternatives with Crescent Partnership regarding
different assets of Crescent Operating made possible by the REIT
Modernization Act. The Board also approved the asset purchase
agreement for CBHS's core assets, a fee, within the range
recommended by PricewaterhouseCoopers, to be paid to Mr. Rainwater
for his guaranty of acquisition indebtedness, and the terms of an
agreement with Mr. Rainwater for his guaranty; and the engagement of
Sonoma Management to provide asset management and administrative
services to the subsidiaries in the hospitality segment, with a
guaranty by Crescent Operating of the obligations of its
subsidiaries, on the terms set forth in a global agreement presented
to the Board.
- At a meeting held November 6, 2000, management gave the Board a
detailed presentation on the current plan for restructuring Crescent
Operating through a transaction with Crescent Partnership and SunTx
, for the stated purpose of discerning whether the Board approved of
the restructuring strategy before management proceeded with
negotiating transaction agreements. In addition, the Board accepted
the recommendation of the Intercompany Evaluation Committee to
approve the restructuring of the Transportal Network Venture.
- At a meeting held March 8, 2001, the Board received a report on the
progress of the restructuring, received the report of Houlihan Lokey
concerning its fairness opinion on the restructuring transaction and
met with SunTx representatives. At this meeting, the Board
determined to investigate the probable consequences to Crescent
Operating and its constituencies, including its stockholders, of
pursuing reorganization through bankruptcy, as an alternative to the
restructuring transaction with Crescent Partnership and SunTx, and
decided to request from Crescent Operating's legal counsel, Thompson
& Knight, an analysis of the bankruptcy alternative. The Board also
considered whether, outside of bankruptcy, the proposed
restructuring represented the best of Crescent Operating's
alternatives.
- At a meeting held May 7, 2001, the Board listened to bankruptcy
counsel from Thompson & Knight repeat to the full Board the
bankruptcy analysis presentation which the counsel had given to the
Intercompany Evaluation Committee. The Board also approved the
retention of SunTx under a management agreement for Crescent
Machinery, and accepted and approved a proposal for Crescent
Partnership to be substituted for SunTx in the restructuring
transactions if SunTx failed to close its portion of the
transactions. In addition, the Board discussed the proposals,
described above, made by Mr. Goff regarding the modification of
Crescent Operating's $15.0 million term loan from Bank of America to
provide debt service relief to Crescent Operating and liquidating
COPI Colorado, L.P. to
84
effect the transfer to Crescent Partnership of that interest in
Crescent Development Management Corp., but made no decisions
regarding those proposals.
- At a meeting held June 22, 2001, the Board found it to be in the
best interests of Crescent Operating and its stockholders for
Crescent Operating to enter into and perform the transactions
contemplated by those agreements with Crescent Partnership and SunTx
for the restructuring of Crescent Operating, and approved Crescent
Operating's execution and delivery of those agreements and the
submission of those agreements and the restructuring transactions
contemplated thereby to the stockholders of Crescent Operating for
their consideration and approval at the 2001 annual meeting of
stockholders.
- Following the resignations on February 13, 2002, of all directors
other than Mr. Stevens, the Board, by written consent, found it to
be in the best interests of Crescent Operating, its stockholders and
other constituencies for Crescent Operating and certain subsidiaries
to enter into and perform the transactions contemplated by the
Settlement Agreement with Crescent Real Estate.
- At a meeting held on October 1, 2002, Mr. Stevens, as sole director
of Crescent Operating, approved and executed the amendment to the
Settlement Agreement.
- By written consent dated January 5, 2003, Mr. Stevens, as sole
director of Crescent Operating, called the special meeting of the
stockholders to be held on March 6, 2003, set a record date of
January 8, 2003 for the special meeting, and approved various other
matters related to the special meeting.
RECOMMENDATION OF THE SOLE DIRECTOR OF CRESCENT OPERATING
The sole director of Crescent Operating recommends that you vote in favor
of the Crescent Operating bankruptcy plan.
OPINION OF CRESCENT OPERATING'S FINANCIAL ADVISOR
The Crescent Operating Board of Directors retained Houlihan Lokey as its
financial advisor in connection with its evaluation of certain matters related
to the bankruptcy plan and the transactions contemplated by the Settlement
Agreement. On February 14, 2002, using publicly available information and
information provided by Crescent Operating or its entities, Houlihan Lokey
delivered to the Board of Directors its opinion that, as of such date and based
upon and subject to the various limitations, qualifications and assumptions
stated in its opinion, the aggregate consideration to be received by Crescent
Operating and its stockholders, taken as a whole, in connection with the
transactions contemplated by the bankruptcy plan and the Settlement Agreement is
fair to the public stockholders of Crescent Operating from a financial point of
view.
Houlihan Lokey was retained as an independent financial advisor to
assist the Board of Directors and the Intercompany Evaluation Committee of
Crescent Operating in evaluating, from a financial point of view, only those
aspects of the bankruptcy plan and the transactions contemplated by the
Settlement Agreement that involved related party considerations. Houlihan Lokey
was not requested to make evaluations regarding aspects of the contemplated
transactions that the Board of Directors of Crescent Operating believed it could
capably consider and evaluate and where such related party considerations were
absent. As a result, the opinion of Houlihan Lokey does not address Crescent
Operating's underlying business decision either to effect the transactions
contemplated by the bankruptcy plan and the Settlement Agreement or the
bankruptcy plan itself. Houlihan Lokey was not requested to, and did not,
solicit third party indications of interest in selling all or any part of
Crescent Operating. In addition, Houlihan Lokey did not evaluate, or include in
its analysis any value attributable to, the claims being waived and releases
being granted by Crescent Operating and the Crescent Operating stockholders,
although Houlihan Lokey made an assessment of the value of the assets
transferred to Crescent Real Estate under the bankruptcy plan. At the request of
the Board of Directors of Crescent Operating, Houlihan Lokey did not negotiate
or advise the Board of Directors of alternatives to the bankruptcy plan, the
Settlement Agreement or the transactions contemplated thereby. Houlihan Lokey
did not make, and was not requested by Crescent Operating to make, any
recommendations as to the form or amount of consideration to be paid to Crescent
Operating in connection with the bankruptcy plan and Settlement Agreement.
Houlihan Lokey was not requested to, and did not, opine as to the overall
fairness of the bankruptcy plan and
85
Settlement Agreement to the public stockholders of Crescent Operating.
Similarly, Houlihan Lokey was not requested to, and did not, evaluate the
fairness of the individual transactions contemplated by the bankruptcy plan and
Settlement Agreement. Instead, the Intercompany Evaluation Committee of the
Crescent Operating Board assessed the individual transactions contemplated by
the bankruptcy plan and the Settlement Agreement, and determined that, taken as
a whole, they were fair to the creditors and stockholders of Crescent Operating.
Issues and concerns related to the limited scope of Houlihan Lokey's opinion are
described in detail under the heading "Risk Factors - Risks Associated with the
Crescent Operating Bankruptcy Plan - Limitations on the scope of Houlihan
Lokey's fairness opinion could lead Crescent Operating's stockholders to assign
too much importance to the fairness opinion in making their decision on whether
to vote to approve the bankruptcy plan."
A copy of Houlihan Lokey's written opinion, which sets forth the
assumptions made, matters considered and limitations on the review undertaken in
connection with the opinion, is included as Annex B to this proxy
statement/prospectus. Among other things, the Houlihan Lokey fairness opinion
assumes that Crescent Operating's stockholders will receive shares of Crescent
Real Estate with a value of between $0.32 and $0.50 per share, but specifically
states that it would not necessarily change if Crescent Real Estate makes
available to Crescent Operating additional funds, as Crescent Real Estate agreed
to do in the October 2002 amendment to the Settlement Agreement and as described
in "The Reorganization Transactions - Summary of the Reorganization Transactions
- Payment by Crescent Real Estate of Crescent Operating Claims and Expenses,"
that reduce the value of Crescent Real Estate common shares to below $0.32. YOU
SHOULD READ HOULIHAN LOKEY'S OPINION CAREFULLY AND IN ITS ENTIRETY.
Houlihan Lokey is a nationally recognized investment-banking firm. The
board of directors of Crescent Operating selected Houlihan Lokey based on
Houlihan Lokey's reputation and experience in investment banking generally and
its recognized expertise in the valuation of assets and businesses related to
the real estate industry. In connection with the prior proposed sale of assets
and stock to Crescent Partnership and sale of preferred partnership interests to
CRE Equipment Holdings, LLC and SunTx, Houlihan Lokey performed various
analyses, including the issuance of a fairness opinion on October 1, 2000.
Houlihan Lokey received $380,000 for the fairness opinion. Other than the
fairness opinions delivered in connection with the previous reorganization
proposals, Houlihan Lokey has no material prior relations with Crescent
Operating or Crescent Operating's affiliates.
Houlihan Lokey based its opinion of the financial fairness to the public
stockholders of the transactions contemplated by the bankruptcy plan and the
Settlement Agreement on the analyses described below. No restrictions or
limitations were imposed on Houlihan Lokey with respect to its investigation of
Crescent Operating or the procedures followed by Houlihan Lokey in rendering its
opinion.
In connection with its opinion, Houlihan Lokey made such reviews, analyses
and inquiries as it deemed necessary and appropriate under the circumstances.
Among other things, Houlihan Lokey:
1. held discussions with management of Crescent Operating, Crescent
Real Estate and East West Partners;
2. reviewed historical operating statements for the hotel properties;
3. reviewed the hotel lease agreements between the affiliates of
Crescent Operating (as the lessees) and Crescent Real Estate (as the
lessors);
4. reviewed the balance sheet of RoseStar Management, LLC dated as of
November 30, 2001;
5. reviewed projections for the hotel properties, provided by Crescent
Operating, for the period of operation corresponding with the
remaining term of the lease;
6. reviewed a legal entity ownership chart provided by Crescent
Operating;
86
7. reviewed projections for the life of the CRDI land development
projects prepared by East West Partners;
8. reviewed the internally prepared consolidating balance sheets and
income statements for East West Resort Transportation LLC and East
West Resort Transportation II LLC for the period ended December 31,
2001;
9. reviewed historical operating statements and 2002 budgets for CDMC
Palm Beach;
10. reviewed projections for The Woodlands Land Development Company
provided by Crescent Operating for the periods ending December 31,
2002 through December 31, 2011;
11. reviewed projections for The Woodlands Operating Company provided by
Crescent Operating for the periods ending December 31, 2002 through
December 31, 2006;
12. reviewed projections for Desert Mountain provided by Crescent
Operating for the periods ending December 31, 2002 through December
31, 2010;
13. reviewed the publicly available Securities and Exchange Commission
filings of Crescent Operating, including the Form 10-K for the
fiscal year ended December 31, 2000 and the Form 10-Q for the period
ended September 30, 2001;
14. reviewed the internally prepared consolidating balance sheet for
CRDI for the period ended December 31, 2001;
15. reviewed the internally prepared consolidating balance sheet of
Crescent Operating for the periods ended November 30, 2000; December
31, 2000; and November 30, 2001;
16. reviewed the internally prepared liquidation analysis of Crescent
Operating, which is set forth in "The Reorganization Transactions -
Liquidation Analyses - Table 1 - Liquidation Before Giving Effect to
Settlement Agreement;"
17. reviewed the AmeriCold management package, including income
statement and balance sheet, for the fiscal year ended December 31,
2001;
18. reviewed the AmeriCold budget for the fiscal year ended December 31,
2002;
19. reviewed a draft Settlement Agreement dated February 14, 2002; and
20. conducted such other studies, analyses and inquiries as Houlihan
Lokey deemed appropriate.
The following chart indicates the relationship to Crescent Operating of
each of the entities listed above. As of February 13, 2002, Crescent Operating
had a direct or indirect interest in each of these entities:
RELATIONSHIP TO CRESCENT OPERATING AS REPRESENTED
ENTITY TO HOULIHAN LOKEY BY CRESCENT OPERATING MANAGEMENT
RoseStar Management, LLC Crescent Operating has an ownership interest
Crescent Resort Crescent Operating has an indirect ownership
Development, Inc. interest
CDMC Palm Beach Crescent Operating has an indirect ownership
interest
87
EastWest Resort Crescent Operating has an indirect ownership
Transportation LLC interest
EastWest Resort Crescent Operating has an indirect ownership
Transportation II LLC interest
CDMC Palm Beach Crescent Operating has an indirect ownership
interest
Woodlands Land Crescent Operating has an indirect ownership
Development Co., LP interest
The Woodlands Operating Crescent Operating has an indirect ownership
Company, LP interest
Desert Mountain Crescent Operating has an indirect ownership
Properties, LP interest
AmeriCold Crescent Operating has an indirect ownership
interest
Houlihan Lokey did not independently verify the accuracy and completeness
of, or assume any responsibility for, the information supplied to it with
respect to Crescent Operating and Crescent Operating's affiliates. Houlihan
Lokey did not make any physical inspection or independent appraisal of any of
the properties or assets of Crescent Operating and Crescent Operating's
affiliates. The opinion is based on business, economic, market and other
conditions that existed and could be evaluated by Houlihan Lokey at the date of
the opinion.
Houlihan Lokey prepared the opinion in order to provide information to the
Board of Directors in connection with its evaluation of the transactions
contemplated by the bankruptcy plan and Settlement Agreement. The opinion is not
a recommendation to Crescent Operating or any of its stockholders as to whether
to approve or take action in connection with the bankruptcy plan. A copy of the
opinion was delivered to the Board of Directors of Crescent Operating in
accordance with the requirements of Houlihan Lokey's engagement letter with
Crescent Operating. The opinion speaks only as of its date, and Houlihan Lokey
is under no obligation to update the opinion at any time after the date thereof.
Crescent Operating engaged Houlihan Lokey for total fees of approximately
$225,000 for its services in connection with the opinion, plus reasonable
out-of-pocket expenses incurred by Houlihan Lokey in connection therewith,
including reasonable fees and expenses of its legal counsel. Crescent Operating
paid Houlihan Lokey $225,000 upon execution of the engagement letter, and made
subsequent payments totaling $14,270 for expenses upon receipt of periodic
billings. No portion of the fees is or was contingent upon the consummation of
the bankruptcy plan, Settlement Agreement or the conclusions reached in the
opinion. Crescent Operating has not agreed to make any additional payments to
Houlihan Lokey, other than payments required to be made to cover any additional
expenses incurred by Houlihan Lokey in connection with the preparation of this
proxy statement/prospectus.
Valuation Methodology
Hotel/Resort Leases.
In assessing the range of value of the hotel and resort leases, which
include leases for the Denver Marriott, the Hyatt Beaver Creek, the Allegria Spa
at the Hyatt Beaver Creek, the Hyatt Albuquerque, the Sonoma Mission Inn and
Spa, the Ventana Inn and Spa, the Houston Renaissance, the Canyon Ranch Lenox,
the Canyon Ranch Tucson, and the WECCR GP, Houlihan Lokey utilized the
Discounted Cash Flow approach. In order to account for the risk of cash flows
and the time value of money, Houlihan Lokey discounted the projected cash flows
of each lease, as prepared by Crescent Partnership, at rates ranging from 13% to
18.5%, depending on specific qualitative and quantitative factors.
88
These factors included the location of the property, the historical performance
of the property, the implicit risk of the projected cash flows, the market in
which the property was located, the condition of the property, the competitive
position of the property, and the economic outlook in general. Houlihan Lokey
assessed a range of value of approximately $14.4 million to $15.4 million for
the hotel and resort leases, not including the WECCR GP, as discussed below.
Land Development Projects.
In assessing the range of value of the land development projects, which
include Desert Mountain, The Woodlands Land Development Company, and certain
projects of CRDI, Houlihan Lokey also utilized the Discounted Cash Flow
approach. In order to account for the risk of cash flows and the time value of
money, Houlihan Lokey discounted estimated cash flows expected to be received by
CRDI or Crescent Operating from the individual real estate project's projected
cash flows, as prepared by Crescent Partnership or East West Partners, at rates
ranging from 10% to 25%, depending on specific qualitative and quantitative
factors. These factors included the location of the property, the historical
performance of the property, the implicit risk of the projected cash flows, the
market in which the property was located, the phase of the project, the
applicable entitlement risk, construction risk, home building risk, financing
risk, or market risk, the competitive position of the property, and the economic
outlook in general.
For those projects in which Crescent Operating or CRDI had an ownership of
less than 100%, including Desert Mountain, The Woodlands Land Development
Company, The Woodlands Country Club and Convention Center, and the projects of
CRDI, Houlihan Lokey applied the respective ownership percentage to the
discounted cash flow value to assess the ultimate range of value to Crescent
Operating.
Houlihan Lokey assessed Crescent Operating's assessed range of value at
approximately $4.3 million to $4.6 million for Desert Mountain and approximately
$9.7 million to $10.8 million for The Woodlands Land Development Company. The
value of COPI Colorado and its interest in CRDI is summarized below.
Crescent Resort Development, Inc. (formerly Crescent Development
Management Corporation)/COPI Colorado.
In assessing the range of value of CRDI, as represented by Crescent
Operating's ownership of COPI Colorado, Houlihan Lokey summed the assessed value
of CRDI's interests in its land development projects, described above, and
going-concern businesses, described below. The assessed value of CRDI's
interests in its land development projects and going concern businesses was
between $122.591 and $151.123 million, including cash, and deducting the $180.4
million of debt owed to Crescent Partnership. Applying COPI Colorado's 10%
ownership percentage and then adding cash at the COPI Colorado level, Crescent
Operating common stock of 1.1 million shares, and a receivable from CRDI to COPI
Colorado resulted in the total value of COPI Colorado. Houlihan Lokey assessed
the range of value of COPI Colorado, which includes the 10% ownership in CRDI,
from approximately $12.3 million to $15.1 million. Houlihan Lokey assessed that
Crescent Operating's 60% ownership interest in COPI Colorado ranged in value
from approximately $8.0 to $9.8 million.
The valuation of CRDI included, without limitation, a valuation of the
following going-concern businesses in which CRDI has an interest:
East West Resort Transportation LLC and East West Resort Transportation II
LLC. In assessing the range of value of East West Resort Transportation LLC and
East West Resort Transportation II LLC, or collectively "East West Resort
Transportation," Houlihan Lokey utilized a variety of valuation methodologies,
including the Market Multiple Approach and the Gordon Growth Approach.
With respect to the Market Multiple Approach, Houlihan Lokey applied
market-based multiples of comparable public companies to representative
historical levels of East West Resort Transportation. Houlihan Lokey adjusted
that
89
value for debt to arrive at a minority equity value. A 25% control premium
was then applied to arrive at a control equity range of value, and debt was
added back for control enterprise range of value.
With respect to the Gordon Growth Approach, Houlihan Lokey capitalized a
projected level of earnings of East West Resort Transportation, as provided by
East West Transportation, utilizing discount rates ranging from 14% to 16%, to
consider the risk of the cash flows and the time value of money, and growth
rates ranging from 2% to 4%.
Utilizing the two approaches, based on a reasonable range of Control
Enterprise Value, adjusted for debt and cash, Houlihan Lokey arrived at a
control equity range of value of East West Resort Transportation. CRDI's 50%
ownership was applied to the control equity value to assess the ultimate range
of equity value to CRDI in East West Resort Transportation. Houlihan Lokey
assessed that CRDI's value in East West Resort Transportation ranged from
approximately $8.8 million to $9.8 million.
CRDI Palm Beach, Inc. In assessing the range of value of CRDI Palm Beach,
Houlihan Lokey utilized a Direct Capitalization Approach whereby Houlihan Lokey
applied market-based debt free capitalization rates to representative historical
and projected earnings levels of Manalapan Hotel Partners to arrive at a
minority enterprise range of value. Capitalization rates applied to earnings
levels of Manalapan Hotel Partners ranged from 8 to 10% for December 31, 2001
Earnings (loss) before interest expense, income taxes, depreciation and
amortization or EBITDA; 8 to 10% for 2002 expected EBITDA; and 10 to 13% for
"Normalized" EBITDA which was an average EBITDA of fiscal years ended December
31, 1998 through December 31, 2000.
Utilizing this approach, based on a reasonable range of Minority
Enterprise Value, adjusted for debt and cash, Houlihan Lokey arrived at a
minority equity range of value of Manalapan Hotel Partners. CRDI Palm Beach's
25% ownership was applied to the minority equity range of value to assess the
ultimate range of equity value to CRDI Palm Beach in Manalapan Hotel Partners.
Houlihan Lokey assessed that CRDI Palm Beach's value in Manalapan Hotel Partners
ranged from approximately $0.1 million to $4.0 million.
The Woodlands Operating Company, L.P. In assessing the range of value of
The Woodlands Operating Company, Houlihan Lokey utilized a variety of valuation
methodologies, including the Market Multiple Approach, and the Enterprise
Discounted Cash Flow approach.
With respect to the Market Multiple Approach, Houlihan Lokey applied
market-based multiples of comparable public companies, including Grubb & Ellis,
Co., Insignia Financial Group, Inc., Jones Lang LaSalle, Inc. and Trammell Crow
Company, to representative historical and projected earnings levels of The
Woodlands Operating Company and applied a 20% control premium to arrive at a
control equity range of value. The market-based multiples applied to the
Woodlands Operating Company earnings levels ranged from between 5.0x to 5.5x
December 31, 2001 EBITDA and from between 8.0x to 8.5x December 31, 2001
Earnings (loss) before interest expense and income taxes or EBIT. As there is no
debt or preferred stock, the control equity value equals the control enterprise
range of value.
With respect to the Enterprise Discounted Cash Flow Approach, Houlihan
Lokey discounted the projected cash flows of The Woodlands Operating Company, as
provided by Crescent Operating, at rates ranging from 12% to 16% to consider the
risk of the cash flows and the time value of money. A terminal multiple was then
applied to the terminal year earnings. The sum of the discounted interim cash
flows and the discounted terminal year cash flow represents the control
enterprise range of value.
Utilizing the two approaches, based on a reasonable range of Control
Enterprise Value, adjusted for debt and cash, Houlihan Lokey arrived at a
control equity range of value of The Woodlands Operating Company. Crescent
Operating's ownership percentage was applied to the control equity range of
value to assess the ultimate range of equity value of Crescent Operating's
interest in The Woodlands Operating Company. Crescent Operating's pro rata
assessed value in the WECCR GP was added to arrive at Crescent Operating's total
value in The Woodlands Operating
90
Company. Houlihan Lokey assessed that Crescent Operating's value in The
Woodlands Operating Company, including the WECCR GP, ranged from approximately
$9.9 million to $11.0 million.
CRL Investments, Inc. Houlihan Lokey applied an estimate of approximately
$1.2 million, as provided by the management of Crescent Operating, to assess the
range of value of Crescent Operating's investment in CRL.
Canyon Ranch Tucson - FF&E. Houlihan Lokey applied the book value of
approximately $6.9 million, as provided by the management of Crescent Operating,
to assess the range of value of the fixed assets of the Canyon Ranch - Tucson.
Valuation Summary
The following table summarizes the assessed range of value of Crescent
Operating's holdings in its hospitality and land development segments:
DERIVED VALUES (ROUNDED)
Low High
------- -------
(dollars in millions)
Hotel/Resort Leases $14.430 -- $15.439
Desert Mountain 4.299 -- 4.608
The Woodlands Land Co. 9.719 -- 10.820
COPI Colorado 8.040 -- 9.780
The Woodlands Operating Co. (includes WECCR GP) 9.900 -- 11.000
CRL Investments 1.200 -- 1.200
Canyon Ranch Tucson FF&E - Book Value 6.874 -- 6.874
Total Value of the Hospitality and Land Development Assets $54.462 -- $59.721
COPI Cold Storage LLC
Houlihan Lokey has been asked to rely upon the transaction value implied
by Crescent Spinco's acquisition of Crescent Operating's equity interest in
AmeriCold Logistics. This value was agreed upon based on negotiations between
Crescent Real Estate and Crescent Operating. Crescent Operating determined that
the price was fair in all respects based on its independent analysis of historic
operating results and future estimates of operating income and determined that
the price was sufficient and that it would be considered preemptive and in
excess of a price it could reasonably expect from any third party. Therefore
Crescent Operating did not deem it necessary to incur the expense of hiring
Houlihan Lokey to render a separate fairness opinion with regard to the value of
AmeriCold. No further conclusions have been reached by Houlihan Lokey.
The aforementioned analyses required studies of the overall market,
economic and industry conditions under which Crescent Operating and its entities
operate, and Crescent Operating's and its entities' operating results. Research
into, and consideration of, these conditions were incorporated into the
analyses.
In assessing the fairness of the aggregate consideration to be received by
Crescent Operating in connection with the transactions contemplated by the
bankruptcy plan and the Settlement Agreement, Houlihan Lokey analyzed the
reasonableness of the consideration offered by Crescent Real Estate, including
the debt and rent forgiveness, advances up to $10.5 million, between
approximately $0.32 and $0.50 per share of Crescent Real Estate stock and
repayment of the $15 million Bank of America obligation, in exchange for
transfer of Crescent Operating's hospitality and land development assets and
COPI Cold Storage. Based on its analysis, Houlihan Lokey is of the opinion that
the aggregate consideration to be received by Crescent Operating in connection
with the transactions contemplated by the bankruptcy plan and the Settlement
Agreement is fair, from a financial point of view, to the public stockholders of
91
Crescent Operating. Houlihan Lokey did not evaluate, and does not offer any
opinion relating to the other elements of the bankruptcy plan or Settlement
Agreement, individually or in the aggregate.
The opinion is based on the business, economic, market and other
conditions as they existed as of the date of the opinion. Houlihan Lokey relied
upon and assumed, without independent verification, the accuracy, completeness
and fairness of all of the financial and other information reviewed by it in
connection with rendering the opinion. Houlihan Lokey also assumed that the
financial results and projections provided by Crescent Operating and its
entities have been reasonably prepared and reflect the best current available
estimates of the financial results, condition, and prospects of Crescent
Operating. Houlihan Lokey did not independently verify the accuracy or
completeness of the information supplied to it with respect to Crescent
Operating and its affiliates and does not assume responsibility for such
information. Except as described above, Houlihan Lokey did not make any physical
inspection or independent appraisal of the specific properties, assets or
liabilities of Crescent Operating or its entities.
The preparation of a fairness opinion is a complex analytical process
involving various determinations as to the most appropriate and relevant methods
of financial analysis and application of those methods to the particular
circumstances and is therefore not readily susceptible to summary description.
In arriving at the opinion, Houlihan Lokey did not attribute any particular
weight to any one analysis or factor, but rather made qualitative judgments as
to the significance and relevance of each analysis and factor. Houlihan Lokey
believes its analyses and the summary set forth herein must be considered as a
whole and that selecting portions of its analyses or this summary, without
considering all factors and analyses, could create an incomplete view of the
processes underlying the analyses set forth in the opinion. Houlihan Lokey made
numerous assumptions with respect to Crescent Operating and its affiliates,
industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of Crescent
Operating and its affiliates. The estimates contained in such analyses are not
necessarily indicative of an actual range of values or predictive of future
results or values, which may be more or less favorable than suggested by such
analyses. Additionally, analyses relating to the range of value of businesses or
securities do not purport to be appraisals or to reflect the prices at which
businesses or securities actually may be sold. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty.
INTERESTS OF CERTAIN PERSONS IN THE REORGANIZATION TRANSACTIONS
Richard E. Rainwater, who serves as the Chairman of the Board of Crescent
Real Estate and served as the Chairman of the Board of Crescent Operating until
February 2002, and John C. Goff, who serves as Vice Chairman and Chief Executive
Officer of Crescent Real Estate and served as Vice Chairman, President and Chief
Executive Officer of Crescent Operating until February 2002, have financial
interests in the Crescent Operating bankruptcy plan. As of the record date, Mr.
Rainwater was the beneficial owner of approximately 11.5% of the outstanding
shares of Crescent Operating common stock and approximately 14.6% of the
outstanding Crescent Real Estate common shares, including in each case shares
underlying vested options. As of the same date, Mr. Goff was the beneficial
owner of approximately 6.6% of the outstanding shares of Crescent Operating
common stock and approximately 4.1% of the outstanding Crescent Real Estate
common shares, including in each case shares underlying vested options. As
beneficial owners of Crescent Real Estate common shares, Messrs. Rainwater and
Goff may have interests in the Crescent Operating bankruptcy plan that differ
from those of beneficial owners of Crescent Operating common stock who are not
also owners of Crescent Real Estate common shares. As beneficial owners of
Crescent Operating common stock, Mr. Rainwater and Mr. Goff will receive
Crescent Real Estate common shares if the Crescent Operating bankruptcy plan is
approved by the required vote of the shares of Crescent Operating common stock
and confirmed by the bankruptcy court.
Mr. Goff and Mr. Rainwater are also parties to a support agreement with
Crescent Operating and Bank of America relating to Crescent Operating's $15.0
million obligation, plus accrued interest, to Bank of America. At the time
Crescent Operating obtained the loan, Bank of America required, as a condition
to making the loan, that Mr. Rainwater, the Chairman of the Board of Trust
Managers of Crescent Real Estate and member of the strategic planning committee
of Crescent Real Estate Equities, Ltd., and John C. Goff, Vice Chairman of the
Board of Trust Managers and Chief Executive Officer of Crescent Real Estate and
sole director, Chief Executive Officer and President of
92
Crescent Real Estate Equities, Ltd., enter into a support agreement with
Crescent Operating and Bank of America, pursuant to which they agreed to make
additional equity investments in Crescent Operating if Crescent Operating
defaulted on payment obligations under its line of credit with Bank of America
and the net proceeds of an offering of Crescent Operating securities were
insufficient to allow Crescent Operating to pay Bank of America in full.
Effective December 31, 2001, Crescent Operating, in connection with
extending the maturity of its $15.0 million loan from Bank of America from
December 31, 2001 to August 15, 2002, agreed to modify the loan from an
unsecured to a secured credit facility. Crescent Operating, with the consent of
Crescent Partnership which agreed to subordinate its security interest in
Crescent Operating's 40% interest in AmeriCold Logistics in the Settlement
Agreement, pledged all of its interest in AmeriCold Logistics to Bank of America
to secure the loan. The amendment to the line of credit also waived Crescent
Operating's default under the line of credit, as a result of Crescent
Operating's failure to pay the principal balance in full on December 31, 2001.
During August 2002, Bank of America further extended the maturity of this loan
to January 15, 2003 and Crescent Operating prepaid interest for that time period
in the amount of $0.3 million. In January 2003, Bank of America further extended
the maturity of this loan to March 15, 2003 and Crescent Operating agreed to
prepay an additional two months of interest at the loan's current rate. These
modifications delay, but do not reduce, any liability that Mr. Rainwater and Mr.
Goff may have under the support agreement. Any future defaults by Crescent
Operating under the line of credit will revive the default that was waived under
the August 2002 amendment to the line of credit. In connection with the Crescent
Operating bankruptcy plan, it is expected that Crescent Operating's line of
credit with Bank of America will be fully repaid, and Messrs. Goff and Rainwater
will be relieved of their potential personal liability under the support
agreement. As of September 30, 2002, the aggregate amount outstanding under the
loan was $15.0 million, plus accrued interest.
In addition, Mr. Goff was subject to conflicts of interest as a result of
his participation in the initial proposal of the Crescent Operating bankruptcy
plan and related agreements while serving simultaneously as an executive officer
and trust manager of Crescent Real Estate and as an executive officer of
Crescent Operating, but he did not participate in negotiations of the terms of
the Settlement Agreement or bankruptcy plan.
Jeffrey L. Stevens, Crescent Operating's current Chief Executive Officer
and sole director, will serve as plan administrator of Crescent Operating's
contemplated Chapter 11 bankruptcy. For more information regarding the plan
administrator, see "The Plan of Reorganization - Implementation of the Plan of
Reorganization - The Plan Administrator."
Pursuant to the Crescent Operating bankruptcy plan, the current and former
directors and officers of Crescent Operating and the current and former trust
managers and officers of Crescent Real Estate will also receive certain
liability releases from the Crescent Operating stockholders as described in "The
Plan of Reorganization - Effects of the Confirmation of the Plan of
Reorganization - Releases."
In February and March 2002, pursuant to the terms of the Settlement
Agreement, Crescent Operating transferred to Crescent Real Estate, in lieu of
foreclosure, the interests in its hospitality segment and, pursuant to a strict
foreclosure, the assets of its land development segment. Crescent Real Estate
holds these assets and interests through two newly organized corporations and
one newly organized limited liability company that are wholly owned subsidiaries
of Crescent Real Estate, or taxable REIT subsidiaries. In addition, in
connection with the execution of the Settlement Agreement, Crescent Real Estate
and Crescent Operating exchanged mutual releases. In pertinent part, Crescent
Operating released any and all claims that it might have against Crescent Real
Estate and its current and former trust managers and officers and Crescent Real
Estate released any and all claims that it might have against Crescent Operating
and its current and former directors and officers arising at any time prior to
execution of the original Settlement Agreement. This release remains effective
regardless of whether the bankruptcy plan is accepted by Crescent Operating's
stockholders and/or confirmed by the bankruptcy court.
93
In addition, pursuant to the Crescent Operating bankruptcy plan, Crescent
Real Estate will receive certain liability releases from the Crescent Operating
stockholders as described in "The Plan of Reorganization - Effects of
Confirmation of the Plan of Reorganization - Releases."
RESTRICTIONS ON SALES OF CRESCENT REAL ESTATE COMMON SHARES BY AFFILIATES OF
CRESCENT OPERATING
All Crescent Real Estate common shares received by Crescent Operating
stockholders under the Crescent Operating bankruptcy plan will be freely
transferable, except that Crescent Real Estate common shares received by persons
who are deemed to be "affiliates" of Crescent Operating under the Securities Act
at the time of the special meeting may be resold by them only in transactions
permitted by Rule 145 or as otherwise permitted under the Securities Act.
Persons who may be deemed to be affiliates of Crescent Operating under the
Securities Act for such purposes generally include individuals or entities that
control, are controlled by, or are under common control with, Crescent Operating
and may include certain officers, former directors and the sole director and
principal stockholders of Crescent Operating. The Crescent Operating bankruptcy
plan requires Crescent Operating to use all reasonable efforts to cause each
person, who in Crescent Operating's reasonable judgment (subject to Crescent
Real Estate's counsel's reasonable satisfaction) may be deemed to be an
affiliate, to execute a written agreement to the effect that such person will
not offer or sell or otherwise dispose of any of the Crescent Real Estate common
shares issued to such person pursuant to the Crescent Operating bankruptcy plan
in violation of the Securities Act or the rules and regulations promulgated by
the Securities and Exchange Commission thereunder.
LISTING ON THE NEW YORK STOCK EXCHANGE OF CRESCENT REAL ESTATE COMMON SHARES TO
BE ISSUED IN THE REORGANIZATION TRANSACTIONS
Crescent Real Estate has agreed to cause the Crescent Real Estate common
shares to be issued under the Crescent Operating bankruptcy plan and to use its
reasonable best efforts to cause the Crescent Real Estate common shares to be
listed on the NYSE on or prior to the to the confirmation of the Crescent
Operating bankruptcy plan.
NO DISSENTERS' APPRAISAL RIGHTS
There are no dissenters' appraisal rights available under applicable state
corporate law with respect to the reorganization transactions. However, if a
stockholder opposes the bankruptcy plan, the stockholder may vote against it.
After the bankruptcy plan is filed with the bankruptcy court, a stockholder may
file pleadings with the bankruptcy court explaining why it believes the
bankruptcy plan should not be confirmed. The stockholder may hire an attorney to
argue its position to the court. If the Crescent Operating bankruptcy plan is
confirmed by the bankruptcy court, the Crescent Operating stockholders,
including the stockholders who do not vote to accept the Crescent Operating
bankruptcy plan, will be bound by all of the terms and conditions of the
Crescent Operating bankruptcy plan. However, stockholders who vote against the
bankruptcy plan, abstain or do not vote, and who do not receive or refuse to
accept any consideration under the bankruptcy plan, will not be bound by the
releases in the bankruptcy plan. Additionally, stockholders who sell their stock
before the voting record date will not be bound by the release.
THE PLAN OF REORGANIZATION
OVERVIEW AND INCORPORATION BY REFERENCE
CRESCENT OPERATING HAS NOT COMMENCED THE REORGANIZATION CASE UNDER THE
BANKRUPTCY CODE. HOWEVER, IF CRESCENT OPERATING OBTAINS THE REQUISITE VOTES
ACCEPTING THE BANKRUPTCY PLAN AS A RESULT OF THE SOLICITATION, CRESCENT
OPERATING WILL FILE A VOLUNTARY PETITION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
TO COMMENCE THE REORGANIZATION CASE.
94
IF THE BANKRUPTCY PLAN IS NOT ACCEPTED BY THE REQUIRED VOTE, CRESCENT
OPERATING WILL LIKELY STILL FILE THE CHAPTER 11 CASE AND REQUEST THAT THE
BANKRUPTCY COURT CONFIRM THE BANKRUPTCY PLAN UNDER THE "CRAMDOWN PROVISION" OF
THE BANKRUPTCY CODE. THIS PROVISION WOULD PERMIT CONFIRMATION OF THE BANKRUPTCY
PLAN IF THE COURT FINDS THAT THE BANKRUPTCY PLAN DOES NOT DISCRIMINATE UNFAIRLY
AND IS FAIR AND EQUITABLE TO CRESCENT OPERATING'S STOCKHOLDERS. THE BANKRUPTCY
PLAN PROVIDES THAT, IF THE BANKRUPTCY PLAN IS NOT ACCEPTED BY THE REQUIRED VOTE
OF THE CRESCENT OPERATING STOCKHOLDERS, AND THE BANKRUPTCY PLAN IS CONFIRMED BY
THE BANKRUPTCY COURT PURSUANT TO THE "CRAMDOWN PROVISION," THE CRESCENT
OPERATING STOCKHOLDERS WILL NOT RECEIVE THE CRESCENT REAL ESTATE COMMON SHARES
ISSUABLE TO THEM IF THE BANKRUPTCY PLAN IS ACCEPTED BY THE REQUIRED VOTE.
The following is a brief summary of the material provisions of the
Bankruptcy Code and material provisions of the Plan of Reorganization. The
following discussion of the material provisions of the Plan of Reorganization is
only a summary. For a complete and more detailed discussion of these provisions,
please read the Plan of Reorganization, a copy of which is attached as Annex A
to this proxy statement/prospectus and is incorporated herein by reference. The
term "Debtor," as used in this section, refers to Crescent Operating, Inc.
BRIEF EXPLANATION OF CHAPTER 11
Chapter 11 is the principal business reorganization chapter of the
Bankruptcy Code. Under Chapter 11, a debtor is authorized to operate its
business in the ordinary course while attempting to reorganize its business for
the benefit of its creditors and equity security holders. In addition to
facilitating the rehabilitation of the debtor, reorganization under Chapter 11
is intended to promote equality of treatment of creditors and equity security
holders of equal rank with respect to the distribution of the debtor's assets.
In furtherance of these goals, upon filing of a petition for reorganization
under Chapter 11, section 362 of the Bankruptcy Code generally provides for an
automatic stay of substantially all actions and proceedings against the debtor
and its properties, including attempts to collect debts or enforce liens that
arose prior to the commencement of the debtor's case under Chapter 11.
Consummation of a plan of reorganization is the principal objective of a
Chapter 11 reorganization case. In general, a Chapter 11 plan of reorganization:
- divides most claims and interests into classes;
- specifies the property, distribution or other treatment that each
member of a class is to receive under the bankruptcy plan on account
of its claim or interest, if any; and
- contains other provisions necessary or appropriate to the
reorganization of the debtor.
Confirmation of a plan of reorganization by a bankruptcy court makes the
bankruptcy plan binding upon the debtor, any issuer of securities under the
bankruptcy plan, any person acquiring property under the bankruptcy plan and any
creditor or interest holder of the debtor. Except as specifically provided in
the plan of reorganization or the order confirming the bankruptcy plan, the
order confirming the bankruptcy plan discharges the debtor from any debt that
arose prior to the date that the bankruptcy plan becomes effective to the
fullest extent authorized or provided for by the Bankruptcy Code or other
applicable law, and substitutes for such indebtedness the obligations specified
in the bankruptcy plan of reorganization.
CLASSIFICATION AND TREATMENT OF CLAIMS AND INTERESTS
The bankruptcy plan classifies claims against and interests in the Debtor
into eight (8) classes. Administrative claims, which are claims for costs and
expenses of administration of the bankruptcy case including (i) the costs of
preserving the Debtor's assets and operating its business after the filing date
and (ii) professional fees incurred in connection with the reorganization, are
not classified. These claims will be paid in full on the effective date (the
date on which all conditions to the effectiveness of the bankruptcy plan are
satisfied) of the bankruptcy plan or as soon
95
thereafter as practicable or when due in the ordinary course of the Debtor's
business. Certain priority tax claims are also not classified. These claims will
also be paid in full on or soon after the effective date.
Section 1122 of the Bankruptcy Code requires that a claim or interest may
be placed in a particular class only if it is substantially similar to all other
claims in that class. Creditors and interest holders may object to the
classification of claims or interests.
The bankruptcy plan includes two classes of secured claims; the Crescent
Real Estate secured claims and the Bank of America secured claims. The holders
of claims in these classes are impaired and are entitled to vote on the
bankruptcy plan. Class 1 is the allowed Crescent Real Estate secured claims.
Crescent Real Estate will retain its pre-petition liens and upon Crescent Real
Estate's request, reorganized Crescent Operating shall deliver and transfer to
Crescent Real Estate any and all Crescent Operating property pledged to Crescent
Real Estate. The parties anticipate that any and all remaining assets of
Crescent Operating, other than the 40% partnership interest of COPI Cold Storage
in AmeriCold Logistics, will be transferred to Crescent Real Estate prior to or
on the bankruptcy plan effective date on account of Crescent Real Estate's Class
1 secured claims. Class 2 is the Bank of America secured claims. Bank of
America's claim will either (i) be paid in full as soon after the effective date
as is practicable, or (ii) the Debtor will deliver the 40% partnership interest
of COPI Cold Storage in AmeriCold Logistics, Bank of America's collateral, to
Bank of America in full satisfaction of it's allowed secured claim.
Class 3 includes claims entitled to priority treatment under 11 U.S.C.
Section 507(a) other than administrative claims and pre-petition priority tax
claims. Class 3 is not impaired and is not entitled to vote on the bankruptcy
plan. These claims will be paid in full. Class 3 claims will consist primarily
of unpaid pre-petition salaries and benefits. Crescent Operating estimates that
Class 3 claims will be approximately $1.1 million.
Class 4 includes the claims of general unsecured creditors. Class 4 is not
impaired and is not entitled to vote on the bankruptcy plan. Because the Debtor
is essentially a holding company, it does not have significant general unsecured
claims. The holders of Class 4 unsecured claims will be paid in full as soon as
practicable after the later of (i) the effective date, (ii) the date on which
the claim is no longer disputed, or (iii) the date such payment becomes due in
the ordinary course of business. Crescent Operating estimates that the total
Class 4 claims will be approximately $0.5 million. This estimate does not
include the claims that the Crescent Machinery Committee has alleged in its
lawsuit against Crescent Operating. If the total obligations of Crescent
Operating to the unsecured creditors of Crescent Operating identified in the
original Settlement Agreement, plus newly asserted claims such as those of the
Crescent Machinery Committee, exceed the amount of funds that Crescent Real
Estate will make available to Crescent Operating for the payment of these
claims, there is a risk that the bankruptcy court will not confirm the
bankruptcy plan.
Class 5 includes the holders of certain promissory notes secured by assets
of Crescent Machinery, a Crescent Operating subsidiary that commenced a Chapter
11 bankruptcy case on February 6, 2001. Class 5 is impaired and the holders of
the allowed claims in Class 5 are entitled to vote on the bankruptcy plan.
Crescent Real Estate purchased the promissory notes from their original holders
in February 2002 for $1.7 million. This amount will be included as an expense
for purposes of determining the number of Crescent Real Estate common shares to
be distributed to the stockholders of Crescent Operating pursuant to the
bankruptcy plan. The amount of principal and interest outstanding on the Class 5
claims as of September 30, 2002 was $2.8 million. If the bankruptcy plan is
confirmed, Crescent Real Estate will not receive a distribution on account of
its Class 5 claim from Crescent Operating but will retain its liens on certain
assets of Crescent Machinery.
Class 6 includes Crescent Real Estate's unsecured claims. Class 6 is
impaired and Crescent Real Estate is entitled to vote on the bankruptcy plan.
Upon Crescent Real Estate's request, Crescent Operating shall deliver and
transfer to Crescent Real Estate any and all Crescent Operating property not
otherwise distributed under the bankruptcy plan; provided, however, that if the
bankruptcy plan is confirmed, whether consensually or over the objection of
other holders of allowed claims or interests, Crescent Real Estate agrees not to
object to confirmation on
96
the grounds that it may not receive a distribution under the bankruptcy plan on
account of its unsecured claim and that its unsecured claim is treated less
favorably than other unsecured claims. The treatment of Crescent Real Estate's
secured Class 1 and unsecured Class 6 claims leaves open the possibility that
Crescent Operating assets may be transferred to Crescent Real Estate after the
effective date of the bankruptcy plan. The vast majority of Crescent Operating's
assets have already been transferred to Crescent Real Estate and it is
contemplated that all assets of value, other than the interest in COPI Cold
Storage, will be transferred to Crescent Real Estate before the effective date.
Class 7 consists of the interests of holders of Crescent Operating common
stock. Class 7 is impaired and is entitled to vote on the bankruptcy plan. Class
7 is treated differently depending on whether or not Class 7 accepts the
bankruptcy plan. If Class 7 accepts the bankruptcy plan, Crescent Real Estate
will pay on the effective date of the bankruptcy plan or the date upon which the
bankruptcy plan becomes final, at Crescent Real Estate's election, or as soon
thereafter as practicable to each holder of Crescent Operating common stock, the
product of (i) (A) the number of shares of Crescent Operating common stock owned
by such holder on the confirmation date, divided by (B) the total number of
shares of Crescent Operating common stock outstanding on the confirmation date,
and (ii) the quotient of (A) the consideration amount, as described below, and
(B) the average of the daily closing prices per Crescent Real Estate common
share as reported on the New York Stock Exchange Composite Transaction reporting
system for the 10 consecutive NYSE trading days immediately preceding the date a
confirmation order is entered on the docket in the bankruptcy case. The
consideration amount will equal the greater of:
- approximately $2.16 million; or
- $16.0 million minus the total amount of payments made by Crescent
Real Estate or claims and expenses relating to the Crescent
Operating bankruptcy and the reorganization transactions including
expenses of Crescent Real Estate but excluding payments in
satisfaction of the Bank of America claim.
No certificate or scrip representing fractional Crescent Real Estate
common shares shall be issued, no cash shall be paid in lieu of fractional
shares, and all fractional shares shall be rounded up or down to the nearest
whole Crescent Real Estate common share. The Crescent Operating common stock
shall be cancelled. If Class 7 rejects the bankruptcy plan, and the bankruptcy
plan is still confirmed by the bankruptcy court, Class 7 will receive no
distribution under the bankruptcy plan, and the Crescent Operating stock shall
still be cancelled.
Class 8 consists of the holders of all warrants and stock options that are
still exercisable but that have not been exercised. Class 8 is impaired but it
is not entitled to vote on the bankruptcy plan because it is deemed to have
rejected the bankruptcy plan. Class 8 will receive no distribution under the
bankruptcy plan and the warrants and stock options shall be cancelled on the
effective date.
The creditors in Class 1 and Class 2 are Crescent Real Estate and Bank of
America. Each of these impaired creditors will be provided with this proxy
statement/prospectus in connection with solicitation of its pre-petition
approval of the bankruptcy plan. Crescent Operating anticipates that all voting
on the bankruptcy plan will be completed in the pre-petition period.
CONDITIONS TO OCCURRENCE OF THE EFFECTIVE DATE
The bankruptcy plan provides that, except as expressly waived by Debtor
with the consent of Crescent Real Estate, it is a condition to the effectiveness
of the bankruptcy plan that:
- the bankruptcy court has signed the confirmation order, and the
clerk of the bankruptcy court has duly entered the confirmation
order on the docket for the reorganization case in a form and
substance that is acceptable to Debtor;
- the confirmation order has become effective and has not been stayed,
modified, reversed or amended; and
97
- Crescent Real Estate has received all regulatory approvals and
authorizations necessary to create Crescent Spinco and effect the
related transaction.
EXECUTORY CONTRACTS AND UNEXPIRED LEASES
An executory contract generally is described as a contract on which
performance remains due from both parties to the contract. The bankruptcy plan
provides for the rejection of all executory contracts and unexpired leases to
which Debtor is a party as of the date of the confirmation of the bankruptcy
plan, except for any executory contract or unexpired lease that (i) has been
assumed or rejected pursuant to a final order or (ii) is the subject of a
pending motion for authority to assume the contract or lease filed by Debtor
prior to the date of the confirmation of the bankruptcy plan. Because Crescent
Operating is essentially a holding company, it is not a party to material
executory contracts, other than the Settlement Agreement, or unexpired leases.
Crescent Operating does not intend to reject the Settlement Agreement. If
Crescent Operating were to reject the Settlement Agreement, it would constitute
a breach of the Settlement Agreement. Crescent Real Estate would be relieved of
its obligation to pay Crescent Operating's creditors and to distribute Crescent
Real Estate common shares to Crescent Operating stockholders under the terms of
the bankruptcy plan. As a result, the bankruptcy plan would not be feasible.
Additionally, Crescent Operating would be liable for the damages, if any, that
its breach caused Crescent Real Estate. Rejection of the Settlement Agreement
would not affect or undo Crescent Operating's transfers of Crescent Real
Estate's collateral to it. Crescent Operating, however, would lose all of the
benefits it otherwise would have received under the Settlement Agreement
following any rejection of the Settlement Agreement.
The bankruptcy plan establishes a bar date for the filing of claims
arising out of the rejection of executory contracts and unexpired leases.
MODIFICATIONS OF PLAN OF REORGANIZATION; SEVERABILITY OF PROVISIONS
Crescent Operating reserves the right, in accordance with the Bankruptcy
Code, to amend or modify the bankruptcy plan prior to the entry of the
confirmation order. After the entry of the confirmation order, Crescent
Operating, as it is reorganized pursuant to the bankruptcy plan, may, upon order
of the bankruptcy court, amend or modify the bankruptcy plan in accordance with
section 1127(b) of the Bankruptcy Code, or remedy any defect or omission or
reconcile any inconsistency in the bankruptcy plan in such manner as may be
necessary to carry out the purpose and intent of the bankruptcy plan. Any
modifications of the bankruptcy plan, whether before or after confirmation,
requires the consent of Crescent Real Estate in its sole discretion.
If, prior to the confirmation of the bankruptcy plan, any term or
provision of the bankruptcy plan that does not govern the treatment of claims,
interests or the conditions of the effective date of the bankruptcy plan, is
held by the bankruptcy court to be invalid, void or unenforceable, the
bankruptcy court will have the power to alter and interpret such term or
provision to make it valid or enforceable to the maximum extent practicable,
consistent with the original purpose of the term or provision held to be
invalid, void or unenforceable, and such term or provision will then be
applicable as altered or interpreted. Notwithstanding any such holding,
alteration or interpretation, the remainder of the terms and provisions of the
bankruptcy plan will remain in full force and effect and will in no way be
affected, impaired or invalidated by such holding, alteration or interpretation.
The confirmation order shall constitute a judicial determination and will
provide that each term and provision of the bankruptcy plan, as it may have been
altered or interpreted in accordance with the foregoing, is valid and
enforceable pursuant to its terms.
CONFIRMATION OF THE PLAN OF REORGANIZATION
The Confirmation Hearing
Section 1128(a) of the Bankruptcy Code requires the bankruptcy court,
after notice, to hold a confirmation hearing at which Crescent Operating will
seek confirmation of the bankruptcy plan. Section 1128(b) of the Bankruptcy
98
Code provides that any party in interest may object to confirmation of a
bankruptcy plan. Even if the bankruptcy plan is accepted by the class of
Crescent Operating stockholders, an individual stockholder may object to
confirmation of the bankruptcy plan.
Notice of the confirmation hearing will be provided to all holders of
claims and interests, and to other parties in interest, in a notice to be
approved by the bankruptcy court at Crescent Operating's request. Crescent
Operating will seek approval of a confirmation notice providing that (1) the
confirmation hearing may be adjourned from time to time by the bankruptcy court
without further notice except for an announcement of the adjourned date made at
the confirmation hearing or any adjournment thereof, (2) objections to
confirmation must be made in writing, specifying in detail the name and address
of the person or entity objecting, the grounds for the objection, and the nature
and amount of the claim or interest held by the objector, if applicable, and (3)
objections must be filed with the bankruptcy court, together with proof of
service, and served upon the parties designated in the confirmation notice, on
or before the time and date designated in the confirmation notice as being the
last day for serving and filing objections to confirmation of the bankruptcy
plan. Objections to confirmation of the bankruptcy plan are governed by
bankruptcy rule 9014 and the local rules of the bankruptcy court. UNLESS AN
OBJECTION TO CONFIRMATION IS TIMELY SERVED AND FILED IT MAY NOT BE CONSIDERED BY
THE BANKRUPTCY COURT.
Requirements For Confirmation Under Section 1129(A) Of The Bankruptcy Code
In order for the bankruptcy plan to be confirmed, and regardless of
whether all impaired classes of claims and interests vote to accept the
bankruptcy plan, the Bankruptcy Code requires the bankruptcy court to determine
independently that the bankruptcy plan complies with the requirements of section
1129(a) of the Bankruptcy Code.
The requirements of section 1129(a) include, among others:
- that the bankruptcy plan complies, and Crescent Operating in
proposing the bankruptcy plan has complied, with the applicable
provisions of Chapter 11;
- that the bankruptcy plan is proposed in good faith and not by any
means forbidden by law;
- that any payment made or to be made by Crescent Operating or by a
person issuing securities or acquiring property under the bankruptcy
plan for services, costs or expenses in connection with the
reorganization case, or in connection with the bankruptcy plan and
incident to the reorganization case, has been approved by or is
subject to approval by the bankruptcy court as reasonable;
- as discussed more fully below, that, to the extent any holder of a
claim or interest in an impaired class under the bankruptcy plan has
not accepted the bankruptcy plan, the bankruptcy plan is in the
"best interests" of such holder; and
- as discussed more fully below, that the bankruptcy plan is
"feasible."
Crescent Operating believes that all applicable requirements of section
1129(a) of the Bankruptcy Code will be satisfied at the confirmation hearing.
Best Interests Test. Under the "best interests" test, a plan is
confirmable if, with respect to each impaired class of claims or interests, each
holder thereof either (1) accepts the bankruptcy plan or (2) will receive or
retain under the bankruptcy plan, on account of its claim or interest, property
of a value, as of the effective date of the bankruptcy plan that is not less
than the value such holder would receive or retain if the debtor were liquidated
under Chapter 7 of the Bankruptcy Code on the same date.
99
To determine what amount the holders in each impaired class of claims or
interests would receive if the debtor were liquidated on the effective date of
the bankruptcy plan , the bankruptcy court must determine the dollar amount that
would be generated from a liquidation of the assets and properties of the debtor
in the context of a hypothetical Chapter 7 liquidation case. The cash amount
that would be available for non-administrative priority and unsecured claims
against, and interests in, the debtor would consist of the proceeds from
disposition of the assets of the debtor, augmented by the cash held by the
debtor at the time of the commencement of the hypothetical Chapter 7 case. This
amount would be reduced by the amount of any secured claims, the costs and
expenses of the hypothetical Chapter 7 liquidation, unpaid administrative
expenses of the Chapter 11 case and additional administrative expense claims
resulting from the termination of the debtor's business in Chapter 7.
Liquidation costs under Chapter 7 would include fees payable to the
Chapter 7 trustee, fees payable to attorneys and other professionals that the
trustee might engage, asset disposition expenses, litigation costs and claims
arising from the operations of Crescent Operating's business during the Chapter
7 case. Administrative claims in the liquidation would also include unpaid
expenses incurred by the debtor during the Chapter 11 case, such as compensation
for attorneys, financial advisors and accountants, as well as costs and expenses
of members of any committee appointed in the Chapter 11 case. In addition,
administrative claims may arise by reason of the breach or rejection in the
hypothetical Chapter 7 case of executory contracts or unexpired leases entered
into or assumed by Crescent Operating during the pendency of the Chapter 11
case.
To determine if the bankruptcy plan is in the best interests of Crescent
Operating's stockholders, the value of the distributions to Crescent Operating's
stockholders from proceeds of a hypothetical Chapter 7 liquidation, less the
estimated costs and expenses attributable thereto, is compared to the value
offered under the bankruptcy plan to such stockholders. For a summary of the
liquidation analysis, and the material assumptions Crescent Operating relied
upon, see "The Reorganization Transactions - Liquidation Analyses." Crescent
Operating is not aware of any events subsequent to the liquidation analyses
dates that would materially impact the liquidation analyses. There can be no
assurance that the assumptions underlying the liquidation analyses would be made
or accepted by the bankruptcy court. However, as set forth below, Crescent
Operating believes that hypothetical liquidation under Chapter 7 would result in
no distributions being made to general unsecured creditors or Crescent
Operating's stockholders, compared to full payment of claims of general
unsecured creditors, and distributions of Crescent Real Estate common shares to
Crescent Operating's stockholders whose stock is being cancelled. Based upon the
liquidation analysis, Crescent Operating believes that the bankruptcy plan is in
the best interests of Crescent Operating's stockholders because such holders
will receive distributions under the bankruptcy plan of a value, as of the
effective date greater than the amount such holders would receive if the debtor
were liquidated under Chapter 7 of the Bankruptcy Code as of the same date.
Feasibility of the Plan of Reorganization.
The court may confirm the bankruptcy plan only if it finds that the
bankruptcy plan is feasible and is not likely to be followed by the liquidation
or further need for reorganization of the debtor. In this case, Crescent
Operating is liquidating and thus the bankruptcy plan is feasible if reorganized
Crescent Operating can make the distributions required by the bankruptcy plan.
The bankruptcy plan's feasibility is primarily dependent on Crescent Real
Estate's performance of its obligations under the Settlement Agreement. Pursuant
to the Settlement Agreement, Crescent Real Estate will make sufficient funds
available to Crescent Operating to pay in full or otherwise resolve those
creditor claims of Crescent Operating that Crescent Operating identified in the
original Settlement Agreement, other than the Crescent Real Estate claims, and
to cover budgeted expenses of implementing the Settlement Agreement and seeking
to confirm the bankruptcy plan. Specifically, Crescent Real Estate has committed
to pay up to $5.0 million of Crescent Operating's cash flow shortage from the
original execution of the Settlement Agreement through the entry of a final
decree in the bankruptcy case. These operating expenses include the anticipated
unsecured claims of parties with whom Crescent Operating does business on an
ordinary course basis as well as all the expense of consummating the Settlement
Agreement, including the transactions between Crescent Real Estate and Crescent
Operating affiliates, and the
100
expenses of the bankruptcy case. Crescent Operating believes that this amount is
sufficient to pay the designated expenses. However, if it is insufficient, the
bankruptcy plan may not be feasible unless Crescent Real Estate agrees to fund
any excess.
In connection with the Settlement Agreement and with the purpose of
facilitating confirmation of the bankruptcy plan, Crescent Real Estate has
agreed to subordinate its lien in the COPI Cold Storage equity interests to
allow Crescent Operating to pledge this asset to Bank of America. Crescent Real
Estate also will create a new subsidiary, Crescent Spinco, to purchase the COPI
Cold Storage equity interests and to thereby provide Crescent Operating with
funds to satisfy the Bank of America claim. If Crescent Real Estate is
unsuccessful in obtaining the requisite regulatory and other approvals for the
creation of Crescent Spinco, the bankruptcy plan will still be feasible as to
Bank of America since it will hold a first lien security interest on the COPI
Cold Storage equity interests, which have a value sufficient to satisfy Bank of
America's claim.
Finally, Crescent Real Estate has advanced or agreed to advance additional
amounts of up to $8.772 million to satisfy all other claims against Crescent
Operating. These amounts, and other amounts that Crescent Real Estate funds to
Crescent Operating, or to creditors on Crescent Operating's behalf, to make the
bankruptcy plan feasible, will reduce the value of the distribution to Crescent
Operating stockholders. However, if the bankruptcy plan is accepted by the
Crescent Operating stockholders and approved by the bankruptcy court, the
distribution to Crescent Operating will not be less than approximately $2.16
million, or $0.20 per share of Crescent Operating common stock, regardless of
the other amounts that Crescent Real Estate funds. Crescent Operating currently
estimates that Crescent Real Estate will need to advance funds sufficient to pay
in full or otherwise resolve total claims and expenses of between $10.6 million
to $13.8 million.
The most significant element of the bankruptcy plan's feasibility is
Crescent Real Estate's ability to perform its obligations under the Settlement
Agreement. Crescent Operating believes that Crescent Real Estate has the ability
to perform its obligations and will perform. There are no material uncertainties
regarding Crescent Real Estate's ability to perform. Crescent Real Estate will
use funds obtained primarily from cash flow provided by operating activities to
meet its obligations.
Crescent Real Estate has not agreed to pay all claims against Crescent
Operating, but has agreed to pay all claims that were identified by Crescent
Operating in the original Settlement Agreement. On December 19, 2002, the
Crescent Machinery Committee filed a lawsuit against Crescent Operating and
certain of its current and former officers and directors seeking an unspecified
amount of direct, consequential and punitive damages, as well as related
attorneys' fees, for alleged breaches of fiduciary duty, aiding and abetting
breaches of fiduciary duty, negligent misrepresentation, and gross negligence.
If a court determines that Crescent Operating has liability to Crescent
Machinery, the amount of Crescent Operating's liability to its unsecured
creditors may exceed the amounts that Crescent Real Estate will agree to make
available to Crescent Operating for payments on account of creditors' claims.
Because Crescent Operating has no other sources of funds to pay its creditors'
claims, the bankruptcy plan may not be feasible if Crescent Operating is found
liable to Crescent Machinery and the amount owed to all unsecured creditors
exceeds the amount that Crescent Real Estate will agree to pay under the
Settlement Agreement.
Crescent Real Estate has agreed that if the bankruptcy plan is confirmed,
Crescent Real Estate's administrative expense claim arising out of its funding
of Crescent Operating's post-petition operations and professional fees will be
satisfied in the same manner as its Class 1 claims and Crescent Real Estate will
not object to the bankruptcy plan on the grounds that its administrative expense
claim is not getting paid in full in cash on the effective date of the
bankruptcy plan.
101
IMPLEMENTATION OF THE PLAN OF REORGANIZATION
Funding of Obligations by Crescent Partnership and Crescent Real Estate under
Settlement Agreement.
On the effective date, to the extent that Crescent Operating has
insufficient funds to make the payments to holders of allowed administrative and
priority claims and Class 3, 4 and 5 Claims, Crescent Partnership shall provide
Crescent Operating with sufficient funds to pay such allowed claims in
accordance with, and as limited by, the terms of the Settlement Agreement.
Transfer of Crescent Real Estate Common Shares to Plan Administrator.
If Class 7 (the holders of Crescent Operating common stock) accepts the
bankruptcy plan, Crescent Real Estate shall deposit with the plan administrator,
in trust for the holders of Crescent Operating common stock whose shares are
being canceled under the bankruptcy plan, certificates representing the Crescent
Real Estate common shares issuable to the Crescent Operating common
stockholders.
Registration of Crescent Real Estate Common Shares
Prior to the effective date, Crescent Real Estate will have registered
under the Securities Act of 1933 all of the Crescent Real Estate common shares
issuable under the bankruptcy plan.
Purchase of COPI Cold Storage Interests by Crescent Spinco
Prior to the effective date, Crescent Real Estate shall spin-off to
Crescent Real Estate's shareholders Crescent Spinco, which will be capitalized
with at least $15.0 million. Crescent Spinco shall acquire all of Crescent
Operating's interest in COPI Cold Storage. The purchase price for the equity
interests in COPI Cold Storage shall be an amount to be agreed upon between
Crescent Partnership and Crescent Operating, which shall be not less than $15.0
million and not more than $15.5 million. Crescent Operating shall use all of the
proceeds as are necessary to repay the full principal balance (including accrued
and unpaid interest) of the Bank of America secured claims.
Issuance of New Crescent Operating Common Stock
On the effective date, pursuant to the confirmation order and without any
further action by the stockholders or directors of the Debtor or the reorganized
Crescent Operating, the reorganized Crescent Operating shall issue a single
share of Crescent Operating common stock which shall be held by the plan
administrator as nominee for the holders of allowed claims against Debtor.
Cancellation of Old Crescent Operating Common Stock
On the effective date, the Crescent Operating common stock shall be
canceled, and the statements of resolution governing such Crescent Operating
common stock shall be rendered void. Thereafter, the only outstanding share of
common stock of the reorganized Crescent Operating will be held by the plan
administrator, as nominee. If the bankruptcy plan is accepted by the
stockholders of Crescent Operating and confirmed by the bankruptcy court, the
holders of Crescent Operating common stock on the date of entry of the
confirmation order shall be entitled to receive common shares of Crescent Real
Estate as set forth elsewhere in this proxy statement.
Corporate Action
Upon entry of the confirmation order, the following shall be and be deemed
authorized and approved in all respects: (i) the filing by reorganized Crescent
Operating of the Amended Certificate of Incorporation, and (ii) the Amended
Bylaws. On the effective date, or as soon thereafter as is practicable, the
reorganized Crescent Operating
102
shall file with the Secretary of State of the State of Delaware, in accordance
with applicable state law, the Amended Certificate of Incorporation which shall
conform to the provisions of the bankruptcy plan and prohibit the issuance of
non-voting equity securities. On the effective date, the matters provided under
the bankruptcy plan involving the capital and corporate structures and
governance of the reorganized Crescent Operating shall be deemed to have
occurred and shall be in effect from and after the effective date pursuant to
applicable state laws without any requirement of further action by the
stockholders or directors of the Debtor or the reorganized Crescent Operating.
On the effective date, the reorganized Debtor shall be authorized and directed
to take all necessary and appropriate actions to effectuate the transactions
contemplated by the bankruptcy plan and this proxy statement/prospectus.
The Plan Administrator
On the effective date, the officers and board of directors of the Debtor
shall be deemed removed from office pursuant to the confirmation order and the
operation of the reorganized Debtor in accordance with the provisions of the
bankruptcy plan shall become the general responsibility of the plan
administrator pursuant to and in accordance with the provisions of the
bankruptcy plan and Plan Administration Agreement. Mr. Jeffrey L. Stevens,
Crescent Operating's current chief executive officer and sole director, will
serve as plan administrator. The primary responsibility of the plan
administrator is to make the distributions provided in the bankruptcy plan, to
wind up Crescent Operating's affairs and to prepare it for dissolution.
Responsibilities. The responsibilities of the plan administrator shall
include prosecuting objections to and estimations of claims; calculating and
making all distributions in accordance with the bankruptcy plan; filing all
required tax returns and paying taxes and all other obligations on behalf of the
reorganized Debtor; providing to Crescent Partnership on a monthly basis an
accounting of claims paid; an estimation of claims remaining to be paid; funds
held by reorganized Crescent Operating; and additional funds required from
Crescent Partnership to pay allowed claims and the expenses of reorganized
Crescent Operating, including the expenses of the plan administrator; and such
other responsibilities as may be vested in the plan administrator pursuant to
the bankruptcy plan, the bankruptcy plan Administration Agreement or bankruptcy
court order or as may be necessary and proper to carry out the provisions of the
bankruptcy plan.
Powers. The powers of the plan administrator shall, without bankruptcy
court approval in each of the following cases, include the power to invest funds
in, and withdraw, make distributions and pay taxes and other obligations owed by
the reorganized Debtor from the Debtor's bank accounts in accordance with the
plan; the power to engage employees and professional persons to assist the plan
administrator with respect to its responsibilities; the power to compromise and
settle claims and causes of action on behalf of or against the reorganized
Debtor; and such other powers as may be vested in or assumed by the plan
administrator pursuant to the plan, the Plan Administration Agreement, the
Amended Certificate of Incorporation, the Amended By-Laws or bankruptcy court
order or as may be necessary and proper to carry out the provisions of the plan.
Compensation. In addition to reimbursement for the actual out-of-pocket
expenses incurred, the plan administrator shall be entitled to reasonable
compensation for services rendered on behalf of the reorganized Debtor in an
amount and on such terms as may be agreed to by the Debtor as reflected in the
Plan Administration Agreement. Any dispute with respect to such compensation
shall be resolved by agreement among the parties or, if the parties are unable
to agree, determined by the bankruptcy court.
Information and Reporting. The plan administrator shall file reports with
the bankruptcy court no less often than as soon as practicable after the end of
every calendar quarter with respect to the status of the execution and
implementation of the bankruptcy plan, including amounts expended for
administrative expenses, amounts distributed to creditors and the amount of
unpaid or disputed claims.
103
Termination. The duties, responsibilities and powers of the plan
administrator shall terminate on the date following the entry of the final
decree in the bankruptcy case on which the reorganized Debtor is dissolved under
applicable state law in accordance with the bankruptcy plan.
MANNER OF DISTRIBUTION OF PROPERTY UNDER THE PLAN OF REORGANIZATION
Distribution Procedures
Except as otherwise provided in the bankruptcy plan, all distributions of
cash and other property shall be made by the reorganized Debtor or the plan
administrator on the latest of the effective date, the date a claim or interest
becomes an allowed claim or interest, or the date upon which the bankruptcy plan
becomes final, at Crescent Real Estate's election, or as soon thereafter as
practicable. Distributions required to be made on a particular date shall be
deemed to have been made on such date if actually made on such date or as soon
thereafter as practicable. No payments or other distributions of property shall
be made on account of any claim or portion thereof unless and until such claim
or portion thereof is allowed.
For purposes of applying this section, the holders of allowed interests
under or evidenced by Crescent Operating common stock shall, in the case of
Crescent Operating common stock held in "street name," mean the beneficial
holders thereof as of the confirmation date. The total number of Crescent Real
Estate shares to be distributed under the bankruptcy plan may not be determined
as of the date of the initial distribution.
If a subsequent distribution is required due to unresolved claims as of
the effective date, it may be made, at Crescent Real Estate's election, in cash
or in additional shares of Crescent Real Estate common shares. If the
distribution is in additional Crescent Real Estate shares, the number of shares
shall be determined using the same Crescent Real Estate stock price as is used
to determine the number of shares in the initial distribution.
Distribution of Crescent Real Estate Common Shares
The plan administrator shall distribute all of the Crescent Real Estate
common shares to be distributed under the bankruptcy plan. If Class 7 accepts
the bankruptcy plan and the bankruptcy plan is confirmed by the bankruptcy
court, the initial distribution of Crescent Real Estate common shares on account
of allowed interests shall be either on the effective date or, at Crescent Real
Estate's election, on the date upon which the order confirming the bankruptcy
plan became final, or as soon thereafter as practicable. The plan administrator
may employ or contract with other entities to assist in or perform the
distribution of Crescent Real Estate common shares.
Surrender and Cancellation of Old Securities
As a condition to receiving the Crescent Real Estate common shares, the
record holders of Crescent Operating common stock as of the confirmation date
shall surrender their Crescent Operating common stock, if held in certificate
form, to the plan administrator or its agent. As soon as practicable following
the effective date, the plan administrator shall mail to each record holder of
Crescent Operating common stock as of the confirmation date, a letter of
transmittal which shall specify that delivery shall be effected, and risk of
loss and title to the stock certificates shall pass only upon actual delivery of
the Crescent Operating common stock certificates to the plan administrator, and
shall contain instructions for surrendering such certificates. When a holder
surrenders its Crescent Operating common stock to Crescent Operating, Crescent
Operating shall hold the instrument in "book entry only" until such instruments
are canceled. Any holder of Crescent Operating common stock whose instrument has
been lost, stolen, mutilated or destroyed shall, in lieu of surrendering such
instrument, deliver to Crescent Operating: (a) evidence satisfactory to Crescent
Operating of the loss, theft, mutilation or destruction of such instrument, and
(b) such security or indemnity that may be reasonably required by Crescent
Operating to hold the Crescent Operating and Crescent Partnership harmless with
respect to any such representation of the holder. Upon compliance with the
preceding sentence, such holder shall, for all purposes under the bankruptcy
plan, be deemed to have surrendered such instrument. Any holder
104
of Crescent Operating common stock which has not surrendered or been deemed to
have surrendered its Crescent Operating common stock within two years after the
effective date shall have its interest as a holder of Crescent Operating common
stock disallowed, shall receive no distribution on account of its interest as a
holder of Crescent Operating common stock, and shall be forever barred from
asserting any interest on account of its Crescent Operating common stock.
As of the confirmation date, Crescent Operating shall close its stock
books and transfer ledgers. All Crescent Operating common stock shall represent
only the right to participate in the distributions provided in the bankruptcy
plan on account of such Crescent Operating common stock. If a certificate
representing Crescent Operating common stock is presented for transfer on or
after the confirmation date, a certificate representing the appropriate number
of whole Crescent Real Estate common shares will be issued in exchange therefor.
Disputed Claims
Notwithstanding any other provisions of the bankruptcy plan, no payments
or distributions shall be made on account of any disputed claim or interest
until such claim or interest becomes an allowed claim or interest, and then only
to the extent that it becomes an allowed claim or interest.
Manner of Payment Under the Plan
Cash payments made pursuant to the bankruptcy plan shall be in U.S.
dollars by checks drawn on a domestic bank selected by the reorganized Debtor,
or by wire transfer from a domestic bank, at the reorganized Debtor's option,
except that payments made to foreign trade creditors holding allowed claims may
be paid, at the option of reorganized Debtor in such funds and by such means as
are necessary or customary in a particular foreign jurisdiction.
Delivery of Distributions and Undeliverable or Unclaimed Distributions
Delivery of Distributions in General. Except as provided below for holders
of undeliverable distributions, distributions to holders of allowed claims shall
be distributed by mail as follows: (a) except in the case of the holders of
Crescent Operating common stock, (1) at the addresses set forth on the
respective proofs of claim filed by such holders; (2) at the addresses set forth
in any written notices of address changes delivered to the reorganized Debtor
after the date of any related proof of claim; or (3) at the address reflected on
the schedule of assets and liabilities filed by the Debtor if no proof of claim
or proof of interest is filed and the reorganized Debtor has not received a
written notice of a change of address; and (b) in the case of the holders of
Crescent Operating common stock, as provided in sections 6.3 and 6.4 of the
bankruptcy plan.
Undeliverable Distributions
Holding and Investment of Undeliverable Property. If the distribution to
the holder of any claim is returned to the reorganized Debtor as undeliverable,
no further distribution shall be made to such holder unless and until the
reorganized Debtor are notified in writing of such holder's then current
address. Subject to section 7.8(b)(ii) of the bankruptcy plan, undeliverable
distributions shall remain in the possession of the reorganized Debtor pursuant
to this section until such times as a distribution becomes deliverable.
Unclaimed cash (including interest) shall be held in trust in a segregated
bank account in the name of the reorganized Debtor, for the benefit of the
potential claimants of such funds, and shall be accounted for separately. For a
period of two years after the effective date, undeliverable Crescent Real Estate
common shares shall be held in trust for the benefit of the potential claimants
of such securities by the plan administrator in a number of shares sufficient to
provide for the unclaimed amounts of such securities, and shall be accounted for
separately.
105
Distribution of Undeliverable Property After it Becomes Deliverable and
Failure to Claim Undeliverable Property. Any holder of an allowed claim who does
not assert a claim for an undeliverable distribution held by the reorganized
Debtor within one (1) year after the effective date shall no longer have any
claim to or interest in such undeliverable distribution, and shall be forever
barred from receiving any distributions under the bankruptcy plan. In such
cases, any funds held in reserve for such claim shall become unrestricted cash
of the reorganized Debtor and, upon entry of the final decree and dissolution of
Crescent Operating, shall be delivered to Crescent Partnership.
De Minimis Distributions. No cash payment of less than twenty-five dollars
($25.00) shall be made to any holder on account of an allowed claim unless a
request therefor is made in writing to the reorganized Debtor.
Failure to Negotiate Checks. Checks issued in respect of distributions
under the bankruptcy plan shall be null and void if not negotiated within 60
days after the date of issuance. Any amounts returned to the reorganized Debtor
in respect of such checks shall be held in reserve by the reorganized Debtor.
Requests for reissuance of any such check may be made directly to the
reorganized Debtor by the holder of the allowed claim with respect to which such
check originally was issued. Any claim in respect of such voided check is
required to be made before the second anniversary of the effective date. All
claims in respect of void checks and the underlying distributions shall be
discharged and forever barred from assertion against the reorganized Debtor and
their property.
Compliance with Tax Requirements. In connection with the bankruptcy plan,
to the extent applicable, the reorganized Debtor shall comply with all
withholding and reporting requirements imposed on it by any governmental unit,
and all distributions pursuant to the bankruptcy plan shall be subject to such
withholding and reporting requirements.
Setoffs. Unless otherwise provided in a final order or in the bankruptcy
plan, the Debtor may, but shall not be required to, set off against any claim
and the payments to be made pursuant to the bankruptcy plan in respect of such
claim, any claims of any nature whatsoever the Debtor may have against the
holder thereof or its predecessor, but neither the failure to do so nor the
allowance of any claim hereunder shall constitute a waiver or release by the
Debtor of any such claims the Debtor may have against such holder or its
predecessor.
Fractional Interests. The calculation of the percentage distribution of
Crescent Real Estate common shares to be made to holders of Crescent Operating
common stock as provided elsewhere in the bankruptcy plan may mathematically
entitle a holder of Crescent Operating common stock to a fractional interest in
Crescent Real Estate common shares. The number of Crescent Real Estate common
shares to be received by a holder of Crescent Operating common stock shall be
rounded to the next higher or lower whole number of shares. No consideration
shall be provided in lieu of the fractional shares that are rounded down and not
issued. Accordingly, assuming a share price of $20.00 per Crescent Real Estate
common share, a payment by Crescent Real Estate of $13.8 million in expenses
relating to the Crescent Operating bankruptcy and a distribution of $0.20 per
share of Crescent Operating common stock, each Crescent Operating stockholder
must hold at least 50 shares of Crescent Operating common stock in order to
receive any Crescent Real Estate common shares.
EFFECTS OF CONFIRMATION OF THE PLAN OF REORGANIZATION
Discharge and Injunction
The bankruptcy plan will be binding upon all present and former holders of
claims and equity interests, and their respective successors and assigns,
including the reorganized Debtor. Except as otherwise provided in the bankruptcy
plan or by subsequent order of the bankruptcy court, the confirmation order will
provide, among other things, that from and after the confirmation of the
bankruptcy plan, all persons or entities who have held, hold, or may hold claims
against or equity interests in Debtor are permanently enjoined from taking any
of the following actions against the estate, the reorganized Crescent Operating,
the Creditors' Committee appointed in the Chapter 11 case, if any, Crescent
Partnership, Crescent Real Estate or any of their respective property on account
of any such claims or
106
equity interests: (i) commencing or continuing, in any manner or in any place,
any action or other proceeding; (ii) enforcing, attaching, collecting or
recovering in any manner any judgment, award, decree or order; (iii) creating,
perfecting or enforcing any lien or encumbrance; (iv) asserting a setoff, right
of subrogation or recoupment of any kind against any debt, liability or
obligation due to Debtor other than through a proof of claim or adversary
proceeding; and (v) commencing or continuing, in any manner or in any place, any
action that does not comply with or is inconsistent with the provisions of the
bankruptcy plan; provided, however, that nothing will preclude such persons from
exercising their rights pursuant to and consistent with the terms of the
bankruptcy plan.
Liquidation and Dissolution of Crescent Operating
The bankruptcy plan is a liquidating plan. Any assets that Crescent
Operating owns on the effective date of the bankruptcy plan will either be used
to satisfy creditor claims or will be transferred to Crescent Real Estate in
accordance with the treatment of the Class 1 and Class 6 claims. Upon
consummation of the bankruptcy plan, the plan administrator will wind up
Crescent Operating's affairs and Crescent Operating will be dissolved.
Releases
In addition to the releases granted by Crescent Operating to Crescent Real
Estate in connection with the Settlement Agreement, on the effective date of the
bankruptcy plan, the reorganized Debtor, on its own behalf and as representative
of Debtor's estate, will release unconditionally, and is deemed to release
unconditionally (i) each of Debtor's officers, directors, partners, employees,
consultants, attorneys, accountants and other representatives, (ii) Crescent
Partnership and each of Crescent Partnership's officers, directors,
shareholders, employees, consultants, attorneys, accountants, affiliates and
other representatives, (iii) Crescent Real Estate and each of Crescent Real
Estate's officers, directors, shareholders, employees, consultants, attorneys,
accountants, affiliates and other representatives, (iv) the creditors'
committee, if any, and, solely in their capacity as members and representatives
of the creditors' committee, each member, consultant, attorney, accountant or
other representative of the creditors' committee (the entities identified in
(i), (ii), (iii) and (iv) are referred to collectively as, the "releasees"),
from any and all claims, obligations, suits, judgments, damages, rights, causes
of action and liabilities whatsoever, whether known or unknown, foreseen or
unforeseen, existing or hereafter arising, in law, equity or otherwise, based in
whole or in part upon any act or omission, transaction, event or other
occurrence taking place on or prior to the effective date in any way relating to
the releasees, Debtor, the Chapter 11 case or the bankruptcy plan. A party who
believes it may have a claim should contact a lawyer to discuss the potential
value of its claim as compared to the value likely to be distributed to
stockholders under the bankruptcy plan.
On the effective date of the bankruptcy plan, each holder of a claim or
interest (i) who has accepted the bankruptcy plan, (ii) whose claim or interest
is in a class that has accepted or is deemed to have accepted the bankruptcy
plan pursuant to section 1126 of the Bankruptcy Code, or (iii) who may be
entitled to receive a distribution of property pursuant to the bankruptcy plan,
shall be deemed to have unconditionally released the releasees, from any and all
rights, claims, causes of action, obligations, suits, judgments, damages and
liabilities whatsoever which any such holder may be entitled to assert, whether
known or unknown, foreseen or unforeseen, existing or hereafter arising, in law,
equity or otherwise, based in whole or in part upon any act or omission,
transaction, event or other occurrence taking place on or before the effective
date of the bankruptcy plan in any way relating to Debtor, the Chapter 11 case
or the bankruptcy plan, provided however, that the foregoing shall not apply to
all rights, claims and obligations created by or arising under the bankruptcy
plan.
The release of Crescent Operating stockholder claims will not apply to the
claims, if any, of a person who sold its shares of Crescent Operating common
stock before the record date for voting on the bankruptcy plan or who voted
against the bankruptcy plan, abstained from voting or did not vote and
thereafter either did not receive or refused to accept a distribution of
Crescent Real Estate common shares. The release of Crescent Operating
stockholder claims also will not apply if the holders of Crescent Operating
common stock, voting as a class, vote against the bankruptcy plan. The release
of
107
Crescent Operating stockholder claims will apply to Crescent Operating
stockholders only in their capacity as Crescent Operating stockholders, and will
not affect their rights as holders of Crescent Real Estate common shares.
In the event that the bankruptcy court concludes that the bankruptcy plan
cannot be confirmed without excising any portion of the release of claims held
by creditors and stockholders, then, with the consent of Crescent Real Estate in
its sole discretion, the bankruptcy plan may be confirmed with the portion of
the releases that the bankruptcy court finds is a bar to confirmation excised so
as to give effect as much as possible to the foregoing releases without
precluding confirmation of the bankruptcy plan. If Crescent Real Estate does not
consent to modification of the release, the bankruptcy plan will not be
confirmed and Crescent Real Estate will not be obligated to pay in full or
otherwise resolve the claims of the creditors that Crescent Operating identified
in the original Settlement Agreement or to make a distribution to Crescent
Operating stockholders.
In substance, section 524(e) of the Bankruptcy Code provides that the
release of third party claims against a debtor such as Crescent Operating does
not release any other person. In addition to the release of Crescent Operating,
the bankruptcy plan includes releases of Crescent Real Estate and all current
and former officers and directors or trust managers of Crescent Operating or
Crescent Real Estate. It is the position of the Securities and Exchange
Commission that these additional releases violate section 524(e) unless separate
consideration is provided by the specific parties being released or the releases
are voluntary. Crescent Operating believes the releases contemplated by the
bankruptcy plan comply with section 524(e) of the Bankruptcy Code and applicable
law, both because Crescent Real Estate is paying substantial consideration to
Crescent Operating and its stockholders to obtain the releases provided under
the bankruptcy plan and because the releases are voluntary.
As discussed in this proxy statement, Crescent Real Estate is providing
sufficient funds both to pay in full or otherwise resolve the claims of those
creditors of Crescent Operating that Crescent Operating identified in the
original Settlement Agreement and to cover budgeted expenses of Crescent
Operating. In addition, Crescent Real Estate is providing a distribution to
Crescent Operating stockholders of Crescent Real Estate common shares if the
stockholders vote to accept the bankruptcy plan and the bankruptcy court
confirms the plan. Accordingly, the consideration is being provided, either
directly by the persons who receive the benefit of the releases provided in the
bankruptcy plan or on their behalf. Whether this consideration for the releases
is sufficient is an issue of fact that the bankruptcy court has authority to
determine.
Moreover, if the Crescent Operating stockholders vote for the bankruptcy
plan, the releases are voluntary. The release of Crescent Operating stockholder
claims will not apply to the claims, if any, of a person who sold their shares
of Crescent Operating common stock before the record date for voting on the
bankruptcy plan or who either voted against the bankruptcy plan, abstained from
voting on the bankruptcy plan or who did not vote on the bankruptcy plan and
thereafter either did not receive or refused to accept a distribution of
Crescent Real Estate common shares. The release of Crescent Operating
stockholder claims will also not apply if the holders of Crescent Operating
common stock, voting as a class, vote against the bankruptcy plan.
Limitation of Liability
Notwithstanding any other provision of the bankruptcy plan, Crescent
Operating, Crescent Real Estate, and the disbursing agent as well as each of
their respective stockholders, directors, officers, agents, employees, members,
accountants, attorneys, financial advisors and representatives, and affiliates
of Crescent Real Estate, or any one or more of the foregoing, will not be
liable, other than for willful misconduct, to any holder of a claim or interest
or any person or governmental authority, with respect to any action, omission,
forbearance from action, decision, or exercise of discretion taken at any time
prior to the effective date of the bankruptcy plan in connection with, but not
limited to:
- Crescent Operating's management or operation, or the discharge of
Crescent Operating's duties under the Bankruptcy Code or applicable
nonbankruptcy law;
- the filing of the petition for relief;
108
- the implementation of any of the transactions provided for, or
contemplated in, the bankruptcy plan or the collateral documents;
- any action taken in connection with either the enforcement of
Crescent Operating's rights against any person or the defense of
claims asserted against Crescent Operating with regard to the
reorganization case;
- any action taken in the negotiation, formulation, development,
proposal, disclosure, confirmation or implementation of the
bankruptcy plan, including, but not limited to, the Settlement
Agreement, any competing acquisition proposal or new agreement; or
- the administration of the bankruptcy plan or the assets and property
to be distributed pursuant to the bankruptcy plan.
Nothing in the limitation of liability will excuse performance or
nonperformance under the Settlement Agreement or any of the documents,
instruments, securities or agreements issued or executed to effectuate the
transactions contemplated by the bankruptcy plan or the Settlement Agreement;
and provided, further, that the liability of any person that solicits acceptance
or rejection of the bankruptcy plan, or that participates in the offer,
issuance, sale or purchase of a security offered or sold under the bankruptcy
plan, on account of such solicitation or participation, or violation of any
applicable law, rule, or regulation governing solicitation of acceptance or
rejection of the bankruptcy plan or the offer, issuance, sale or purchase of
securities, will be limited as set forth in section 1125(e) of the Bankruptcy
Code. Crescent Operating, Crescent Real Estate, and the disbursing agent, as
well as each of their respective shareholders, directors, officers, agents,
employees, members, accountants, attorneys, financial advisors and
representatives, or any one or more of the foregoing, may rely reasonably upon
the opinions of their respective counsel, accountants, and other experts or
professionals and such reliance, if reasonable, will conclusively establish good
faith and the absence of willful misconduct; provided, however, that a
determination that such reliance is unreasonable will not, by itself, constitute
a determination of willful misconduct. In any action, suit or proceeding by any
holder of a claim or interest or any other entity contesting any action by, or
non-action of Crescent Operating, Crescent Real Estate and the disbursing agent
or of their respective shareholders, directors, officers, agents, employees,
members, attorneys, accountants, financial advisors, and representatives, the
reasonable attorneys' fees and costs of the prevailing party will be paid by the
losing party, and as a condition to going forward with such action, suit, or
proceeding at the outset thereof, all parties thereto will be required to
provide appropriate proof and assurances of their capacity to make such payments
of reasonable attorneys' fees and costs in the event they fail to prevail. The
provisions of the limitation of liability are not intended to limit, and will
not limit, any defenses to liability otherwise available to any party in
interest in this reorganization case.
Notwithstanding the foregoing, in the event that the bankruptcy court
concludes that the bankruptcy plan cannot be confirmed without excising with any
portion of the foregoing limitation of liability provisions, then, with the
consent of Crescent Real Estate in its sole discretion, the bankruptcy plan may
be confirmed with that portion excised or modified, so as to give effect as much
as possible to the foregoing limitation of liability provisions without
precluding confirmation of the bankruptcy plan. The limitation of liability will
not apply to the claims, if any, of a person who sold their Crescent Operating
stock before the record date for voting on the bankruptcy plan or who voted
against the bankruptcy plan, abstained or did not vote, and thereafter either
did not receive or refused to accept a distribution of Crescent Real Estate
common shares. The limitation of liability will also not apply if less than
two-thirds of the shares of Crescent Operating common stock represented at the
special meeting are voted in favor of the bankruptcy plan.
Retention and Enforcement of Causes of Action
Except as provided in the bankruptcy plan or the confirmation order, any
and all claims, rights, or causes of action that constitute property of the
estate or of Crescent Operating, whether arising under the Bankruptcy Code or
under nonbankruptcy law, including all avoiding power actions under sections
544, 545, 547, 548, 549, and 550 of the Bankruptcy Code or under applicable
nonbankruptcy law as applied through section 544(b) of the Bankruptcy Code, (1)
are expressly retained and may be enforced by Crescent Operating and any
successors in interest, and (2) may be pursued, as appropriate, in accordance
with Crescent Operating's, or its successors', best interests.
109
To Crescent Operating's best knowledge, no preferential or fraudulent
transfers exist. Other than to the extent discussed in the answer to the
question "What happens if the Crescent stockholders vote AGAINST acceptance of
the Crescent Operating bankruptcy plan?", Crescent Operating has not
investigated whether any transfers of property that could constitute
preferential transfers or fraudulent transfers might have occurred, and
expressly reserves the right to make such an investigation and to pursue
preference and fraudulent transfer claims, if any, that Crescent Operating may
have to the extent permitted by applicable law. Any recoveries from preference
or fraudulent transfer claims would be distributed to Crescent Real Estate under
the bankruptcy plan.
Unclaimed Distributions
The bankruptcy plan provides that in the event that any distribution of
property remains unclaimed for a period of one year after it has been delivered,
or delivery has been attempted, or has otherwise been made available, such
unclaimed property will be forfeited by such holder, and the unclaimed property
will be distributed pro rata to the other holders of common stock, as
applicable, to whom distributions were made under the bankruptcy plan.
Further Assurances and Authorizations
Crescent Operating, Crescent Real Estate and all holders of claims or
interests receiving distributions under the bankruptcy plan and all other
parties in interest will, from time to time, if and to the extent necessary,
execute and deliver any agreements or documents and take any other actions as
may be necessary or advisable to effectuate the provisions and intent of the
bankruptcy plan, the Settlement Agreement and any collateral documents.
THE SOLICITATION; VOTING
Crescent Operating is soliciting votes on the bankruptcy plan only from
creditors with claims in classes 1, 2, 5 and 6 and holders of interests in Class
7 (holder of Crescent Operating common stock). Under the Bankruptcy Code,
holders of claims or interests in an unimpaired class are conclusively presumed
to have accepted the bankruptcy plan and are not entitled to vote on the
bankruptcy plan. Under the bankruptcy plan, Classes 1, 2, 5, 6 and 7 are
impaired. In addition, if holders of claims or interests do not receive or
retain any property under a Chapter 11 plan, the affected class is deemed not to
have accepted the bankruptcy plan. Class 8 which includes holder of Crescent
Operating warrants and stock options will be deemed not to have accepted the
bankruptcy plan on this basis.
Under the Bankruptcy Code, a class of claims or interests is considered to
be "unimpaired" if a Chapter 11 plan (1) does not alter the legal, equitable and
contractual rights of the holders of such claims or interests or (2)
notwithstanding any contractual or legal entitlement to accelerated payment of a
claim or interest upon default, cures any such default, reinstates the maturity
of such claim or interest, compensates the holder of such claim or interest for
any damages sustained by such holder's reasonable reliance on such contract or
law and does not otherwise alter the legal, equitable or contractual rights of
such holder. As indicated below, classes 3 and 4 are unimpaired under the
bankruptcy plan, and such classes are, therefore, conclusively presumed to have
accepted the bankruptcy plan and are not entitled to vote.
Holders of claims and interests in classes 1, 2, 5, 6 and 7 are impaired
and will receive or retain property under the bankruptcy plan and, therefore,
are entitled to vote on the bankruptcy plan. An impaired class of interests will
be determined to have accepted the bankruptcy plan if votes to accept the
bankruptcy plan are cast by the holders of at least two-thirds in amount of
allowed interests in such class that actually voted on the bankruptcy plan. As
of the voting record date, 10,828,497 shares of common stock were outstanding
and entitled to vote on the bankruptcy plan.
Pursuant to bankruptcy rule 3018(b), the bankruptcy court must determine
that the solicitation period prescribed to accept or reject the bankruptcy plan
is not unreasonably short. The bankruptcy court must also determine this
disclosure and proxy statement meets the requirements of the Bankruptcy Code.
Crescent Operating believes the
110
prescribed solicitation period is reasonable and that the court will determine
this disclosure and proxy statement meets applicable requirements. However,
there can be no assurance that the bankruptcy court will agree and, if the
bankruptcy court finds the solicitation to be unreasonably short or that the
disclosure is unsatisfactory, the votes cast will not be counted for purposes of
confirmation of the bankruptcy plan, and Crescent Operating will have to
re-solicit such votes.
BY VOTING TO ACCEPT THE BANKRUPTCY PLAN, YOU WILL EXPRESSLY WAIVE ANY
RIGHT YOU OR YOUR SUCCESSORS OR ASSIGNS MAY HAVE TO CHANGE OR WITHDRAW YOUR
ACCEPTANCE AFTER THE EXPIRATION DATE UNLESS THE BANKRUPTCY COURT DETERMINES THAT
(1) THE DISCLOSURE YOU RECEIVED WAS NOT ADEQUATE AS REQUIRED BY SECTION 1126(b)
OF THE BANKRUPTCY CODE OR (2) THE BANKRUPTCY PLAN OF REORGANIZATION HAS BEEN
MODIFIED IN A MANNER THAT MATERIALLY AND ADVERSELY CHANGES THE TREATMENT OF YOUR
INTEREST. If you execute and deliver a proxy card without checking either of the
boxes entitled "FOR" or "AGAINST", or if you check both of such boxes, the proxy
will be deemed to constitute acceptance of the bankruptcy plan. If you fail to
execute and deliver your proxy card, you will not be counted for purposes of
determining either acceptance or rejection of the bankruptcy plan by an impaired
class of claims or interests.
Under section 1126(b) of the Bankruptcy Code, if you accept or reject the
bankruptcy plan before the Chapter 11 case commences, you will be deemed to have
accepted or rejected the bankruptcy plan for purposes of confirmation of the
bankruptcy plan under Chapter 11 if the solicitation complied with any
applicable nonbankruptcy law, rule or regulation governing adequacy of
disclosure in connection with the solicitation, or, if no such law, rule or
regulation applies, the solicitation was made following disclosure of adequate
information as defined in the Bankruptcy Code. In addition, bankruptcy rule
3018(b) requires, in the case of a prepackaged plan of reorganization, that (1)
such plan be disseminated to substantially all holders in any impaired class
that is solicited, (2) with respect to securities held of record, votes be
solicited from the holders of record of such securities on the date specified in
the solicitation and (3) the time prescribed for voting on the bankruptcy plan
not be unreasonably short. Crescent Operating believes this proxy
statement/prospectus and the solicitation comply with the requirements of the
Bankruptcy Code and the bankruptcy rules, as well as the requirements of any
applicable nonbankruptcy laws.
If Crescent Operating receives the requisite acceptances of the bankruptcy
plan by the expiration date, Crescent Operating will commence the reorganization
case by filing a voluntary petition under Chapter 11 and will thereafter
continue to operate its business as a debtor in possession. You should be aware
Crescent Operating can extend the expiration date in its sole discretion.
Crescent Operating will then use the proxies received pursuant to the
solicitation to seek confirmation of the bankruptcy plan as promptly as
practicable.
ACCEPTANCE OR CRAMDOWN
Section 1129(b) of the Bankruptcy Code contains provisions for the
confirmation of a plan of reorganization even if the bankruptcy plan is not
accepted by the stockholders in Class 7 as long as the bankruptcy plan "does not
discriminate unfairly" and is "fair and equitable" with respect to such class.
This provision is commonly referred to as the "cramdown provision." Crescent
Operating anticipates that it would seek to utilize the "cramdown provision" of
section 1129(b) of the Bankruptcy Code if necessary to confirm the bankruptcy
plan. The bankruptcy plan provides that the stockholders of Crescent Operating
are entitled to receive common shares of Crescent Real Estate only if the
bankruptcy plan is accepted by the required vote of the Crescent Operating
stockholders. Accordingly, if the bankruptcy plan is confirmed pursuant to the
"cramdown provision" of section 1129(b) of the Bankruptcy Code, the stockholders
of Crescent Operating will receive nothing under the bankruptcy plan, and their
shares of Crescent Operating common stock will be cancelled.
A plan does not discriminate unfairly if no class receives more than it is
legally entitled to receive for its claims or equity interests. "Fair and
equitable," as defined in section 1129(b)(2) of the Bankruptcy Code, has
different meanings for secured claims, unsecured claims and interests. With
respect to a secured claim, "fair and equitable"
111
means either (i) the impaired secured creditor retains its liens to the extent
of its allowed claim and receives deferred cash payments at least equal to the
allowed amount of its claims with a present value as of the effective date of
the bankruptcy plan at least equal to the value of such creditor's interest in
the property securing its liens, (ii) property subject to the lien of the
impaired secured creditor is sold free and clear of that lien, with that lien
attaching to the proceeds of sale, and such lien proceeds must be treated in
accordance with clauses (i) and (iii) hereof, or (iii) the impaired secured
creditor realizes the "indubitable equivalent" of its claim under the bankruptcy
plan.
With respect to an unsecured claim, "fair and equitable" means either (i)
each impaired creditor receives or retains property of a value equal to the
amount of its allowed claim or (ii) the holders of claims and equity interests
that are junior to the claims of the dissenting class will not receive any
property under the bankruptcy plan.
With respect to interests, such as the holders of the common stock
interests in class 7, the condition that a reorganization plan be "fair and
equitable" includes the requirement that each class 7 interest holder receive or
retain property of a value equal to the greater of the allowed amount of any
fixed liquidation preference to which such holder is entitled, any fixed
redemption price to which such holder is entitled or the value of such interest.
Crescent Operating believes that the bankruptcy plan does not discriminate
unfairly against, and is fair and equitable with respect to, class 7, inasmuch
as holders of interests in class 7 would receive nothing in a liquidation of
Crescent Operating.
FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Crescent Real Estate's tax counsel, Shaw Pittman, LLP,
the discussion in " - Tax Consequences of the Crescent Operating Bankruptcy
Plan," which follows, summarizes the material federal income tax consequences to
Crescent Operating stockholders of the Crescent Operating bankruptcy plan. The
sections " - Taxation of Taxable U.S. Shareholders," " - Taxation of Tax-Exempt
U.S. Shareholders" and " - Taxation of Non-U.S. Shareholders" briefly describe
the opinion of Shaw Pittman, LLP, as to the material federal income tax
consequences to an investor of an investment in Crescent Real Estate. Because
this "Federal Income Tax Considerations" section is a summary, it does not
address all of the tax issues that may be important to you. In addition, this
section does not address the tax issues that may be important to certain types
of shareholders that are subject to special treatment under the federal income
tax laws, such as insurance companies, tax-exempt organizations (except to the
extent discussed in " - Taxation of Tax-Exempt U.S. Shareholders" below),
financial institutions and broker-dealers, and non-U.S. individuals and foreign
corporations (except to the extent discussed in " - Taxation of Non-U.S.
Shareholders" below).
The statements in this section are based on the current federal income tax
laws governing Crescent Real Estate's qualification as a REIT. Crescent Real
Estate cannot assure you that new laws, interpretations of laws or court
decisions, any of which may take effect retroactively, will not cause any
statement in this section to be inaccurate.
Crescent Real Estate urges you to consult your own tax advisor regarding
the specific federal, state, local, foreign and other tax consequences to you of
purchasing, owning and disposing of Crescent Real Estate's securities, Crescent
Real Estate's election to be taxed as a REIT and the effect of potential changes
in applicable tax laws.
TAX CONSEQUENCES OF THE CRESCENT OPERATING BANKRUPTCY PLAN
The distribution of Crescent Real Estate common shares to Crescent
Operating stockholders will be treated as a distribution in liquidation of
Crescent Operating. Stockholders of Crescent Operating will realize gain or loss
based on the difference between their basis in their shares of Crescent
Operating common stock and the fair market value of the Crescent Real Estate
common shares they receive. In general, a Crescent Operating stockholder who is
not a dealer in securities must treat this gain or loss as a long term capital
gain or loss if the stockholder held the shares of Crescent Operating common
stock for more than one year or, otherwise, as a short term capital gain or
loss. If a stockholder acquired shares of Crescent Operating common stock at
different times, the determination of gain or loss and the holding period is
made on the facts specific to each share. The stockholders'
112
basis in the Crescent Real Estate common shares they will receive will be the
fair market value of the Crescent Real Estate common shares at the time of
distribution.
TAXATION OF CRESCENT REAL ESTATE
Crescent Real Estate elected to be taxed as a REIT under the federal
income tax laws when it filed its 1994 tax return. Crescent Real Estate has
operated in a manner intended to qualify as a REIT and intends to continue to
operate in that manner. This section discusses the laws governing the federal
income tax treatment of a REIT and its shareholders. These laws are highly
technical and complex.
In the opinion of Crescent Real Estate's tax counsel, Shaw Pittman LLP,
(i) Crescent Real Estate qualified as a REIT under sections 856 through 859 of
the Internal Revenue Code for each of its taxable years beginning with its
taxable year ended on December 31, 1994, through its taxable year ended on
December 31, 2001; and (ii) it is organized in conformity with the requirements
for qualification as a REIT under the Internal Revenue Code, and its current
method of operation will enable it to meet the requirements for qualification as
a REIT for the current taxable year and for future taxable years, provided that
it has operated and continues to operate in accordance with various assumptions
and factual representations made by Crescent Real Estate concerning its
business, properties and operations. Crescent Real Estate may not, however, have
met or continue to meet such requirements. You should be aware that opinions of
counsel are not binding on the Internal Revenue Service or any court. Crescent
Real Estate's qualification as a REIT depends on its ability to meet, on a
continuing basis, certain qualification tests set forth in the federal tax laws.
Those qualification tests involve the percentage of income that Crescent Real
Estate earns from specified sources, the percentage of its assets that fall
within certain categories, the diversity of the ownership of its shares, and the
percentage of its earnings that it distributes. Accordingly, for the current
taxable year and for future taxable years, no assurance can be given that
Crescent Real Estate's actual operating results will satisfy the qualification
tests. For a discussion of the tax treatment of Crescent Real Estate and its
shareholders if it fails to qualify as a REIT, see " - Requirements for REIT
Qualification - Failure to Qualify."
If Crescent Real Estate qualifies as a REIT, it generally will not be
subject to federal income tax on the taxable income that it distributes to its
shareholders. The benefit of that tax treatment is that it avoids the "double
taxation" (i.e., at both the corporate and stockholder levels) that generally
results from owning stock in a corporation. However, Crescent Real Estate will
be subject to federal tax in the following circumstances:
- Crescent Real Estate will pay federal income tax on taxable income
(including net capital gain) that it does not distribute to its
shareholders during, or within a specified time period after, the
calendar year in which the income is earned;
- Crescent Real Estate may be subject to the "alternative minimum tax"
on any items of tax preference that it does not distribute or
allocate to its shareholders;
- Crescent Real Estate will pay income tax at the highest corporate
rate on (i) net income from the sale or other disposition of
property acquired through foreclosure that it holds primarily for
sale to customers in the ordinary course of business and (ii) other
non-qualifying income from foreclosure property;
- Crescent Real Estate will pay a 100% tax on net income from certain
sales or other dispositions of property (other than foreclosure
property) that it holds primarily for sale to customers in the
ordinary course of business ("prohibited transactions");
- if Crescent Real Estate fails to satisfy the 75% gross income test
or the 95% gross income test (as described below under " -
Requirements for REIT Qualification - Income Tests"), and
nonetheless continues to qualify as a REIT because it meets certain
other requirements, Crescent Real Estate will pay a
113
100% tax on (i) the gross income attributable to the greater of the
amount by which it fails the 75% or 95% gross income test,
multiplied by (ii) a fraction intended to reflect its profitability;
- if Crescent Real Estate fails to distribute during a calendar year
at least the sum of (i) 85% of its REIT ordinary income for such
year, (ii) 95% of its REIT capital gain net income for such year,
and (iii) any undistributed taxable income from prior periods, it
will pay a 4% excise tax on the excess of such required distribution
over the amount it actually distributed;
- if Crescent Real Estate acquires any asset from a C corporation
(i.e., a corporation generally subject to full corporate-level tax)
in a merger or other transaction in which Crescent Real Estate
acquires a "carryover" basis in the asset (i.e., basis determined by
reference to the C corporation's basis in the asset (or another
asset)), Crescent Real Estate will pay tax at the highest regular
corporate rate applicable if it recognizes gain on the sale or
disposition of such asset during the 10-year period after it
acquires such asset. The amount of gain on which Crescent Real
Estate will pay tax is the lesser of (i) the amount of gain that it
recognizes at the time of the sale or disposition and (ii) the
amount of gain that it would have recognized if it had sold the
asset at the time it acquired the asset. The rule described in this
paragraph will apply assuming that Crescent Real Estate makes an
election under section 1.337(d)-5T(b) of the Treasury Regulations
upon its acquisition of an asset from a C corporation; and
- Crescent Real Estate will incur a 100% excise tax on transactions
with a "taxable REIT subsidiary" to the extent that they are not
conducted on an arm's-length basis.
Requirements for REIT Qualification.
In order to qualify as a REIT, Crescent Real Estate must be a corporation,
trust or association and meet the following requirements:
- it is managed by one or more trustees or directors;
- its beneficial ownership is evidenced by transferable shares, or by
transferable certificates of beneficial interest;
- it would be taxable as a domestic corporation, but for sections 856
through 860 of the Internal Revenue Code;
- it is neither a financial institution nor an insurance company
subject to certain provisions of the Internal Revenue Code;
- at least 100 persons are beneficial owners of its shares or
ownership certificates;
- not more than 50% in value of its outstanding shares or ownership
certificates is owned, directly or indirectly, by five or fewer
individuals (as defined in the Internal Revenue Code to include
certain entities) during the last half of any taxable year (the
"5/50 Rule");
- it elects to be a REIT (or has made such election for a previous
taxable year) and satisfies all relevant filing and other
administrative requirements established by the Internal Revenue
Service that must be met to elect and maintain REIT status;
- it uses a calendar year for federal income tax purposes and complies
with the record keeping requirements of the Internal Revenue Code
and the related Treasury Regulations; and
114
- it meets certain other qualification tests, described below,
regarding the nature of its income and assets.
Crescent Real Estate must meet requirements 1 through 4 during its entire
taxable year and must meet requirement 5 during at least 335 days of a taxable
year of 12 months, or during a proportionate part of a taxable year of less than
12 months. Crescent Real Estate was not required to meet requirements 5 and 6
during 1994. If Crescent Real Estate complies with all the requirements for
ascertaining the ownership of its outstanding shares in a taxable year and has
no reason to know that it violated the 5/50 Rule, it will be deemed to have
satisfied the 5/50 Rule for such taxable year. For purposes of determining share
ownership under the 5/50 Rule, an "individual" generally includes a supplemental
unemployment compensation benefits plan, a private foundation, or a portion of a
trust permanently set aside or used exclusively for charitable purposes. An
"individual," however, generally does not include a trust that is a qualified
employee pension or profit sharing trust under Internal Revenue Code section
401(a), and beneficiaries of such a trust will be treated as holding its shares
in proportion to their actuarial interests in the trust for purposes of the 5/50
Rule.
Crescent Real Estate believes it has issued sufficient common shares with
sufficient diversity of ownership to satisfy requirements 5 and 6 set forth
above. In addition, its declaration of trust restricts the ownership and
transfer of the common shares so that Crescent Real Estate should continue to
satisfy requirements 5 and 6. The provisions of its declaration of trust
restricting the ownership and transfer of the common shares are described in
"Description of Shares of Beneficial Ownership - Restrictions on Ownership and
Transfer."
Crescent Real Estate currently has several wholly owned corporate
subsidiaries and may have additional corporate subsidiaries in the future. A
corporation that is a "qualified REIT subsidiary" is not treated as a
corporation separate from its parent REIT. All assets, liabilities, and items of
income, deduction, and credit of a qualified REIT subsidiary are treated as
assets, liabilities, and items of income, deduction, and credit of the REIT. A
qualified REIT subsidiary is a corporation, all of the capital stock of which is
owned by the parent REIT, which has not elected to be treated as a taxable REIT
subsidiary. Thus, in applying the requirements described herein, any qualified
REIT subsidiary of Crescent Real Estate's will be ignored, and all assets,
liabilities, and items of income, deduction, and credit of such subsidiary will
be treated as Crescent Real Estate's assets, liabilities, and items of income,
deduction, and credit. Crescent Real Estate believes its wholly owned corporate
subsidiaries that are not taxable REIT subsidiaries are qualified REIT
subsidiaries. Accordingly, they are not subject to federal corporate income
taxation, though they may be subject to state and local taxation.
A REIT is treated as owning its proportionate share of the assets of any
partnership in which it is a partner and as earning its allocable share of the
gross income of the partnership for purposes of the applicable REIT
qualification tests. Thus, Crescent Real Estate's proportionate share of the
assets, liabilities and items of income of Crescent Partnership and of any other
partnership (or limited liability company treated as a partnership) in which
Crescent Real Estate has acquired or will acquire an interest, directly or
indirectly (a "subsidiary partnership"), are treated as Crescent Real Estate's
assets and gross income for purposes of applying the various REIT qualification
requirements.
Tax legislation effective in 2001 allows a REIT to own up to 100% of the
outstanding capital stock of one or more taxable REIT subsidiaries, also
referred to as TRSs. A TRS is a fully taxable corporation that pays income tax
at regular corporate rates on its taxable income. A TRS may earn income that
would not be qualifying income if earned directly by the parent REIT. Both the
TRS and the REIT must jointly elect to treat the subsidiary as a TRS. Overall,
no more than 20% of the value of a REIT's assets may consist of securities of
one or more TRSs. In addition, the TRS rules may limit the deductibility of
interest paid or accrued by a TRS to its parent REIT to assure that the TRS is
subject to the appropriate level of corporate taxation. The rules also impose a
100% excise tax on transactions between a TRS and its parent REIT or the REIT's
tenants to the extent that they are not conducted on an arm's-length basis.
Crescent Real Estate currently owns interests in several TRSs, but the
collective value of Crescent Real Estate's
115
interests in the TRSs does not exceed 20% of the value of its assets. In
addition, Crescent Real Estate believes that all transactions between it and its
TRSs have been, and continue to be, conducted on an arm's-length basis.
Income Tests
Crescent Real Estate must satisfy two gross income tests annually to
maintain its qualification as a REIT:
- At least 75% of its gross income (excluding gross income from
prohibited transactions) for each taxable year must consist of
defined types of income that it derives, directly or indirectly,
from investments relating to real property or mortgages on real
property or temporary investment income (the "75% gross income
test"). Qualifying income for purposes of the 75% gross income test
includes "rents from real property," interest on debt secured by
mortgages on real property or on interests in real property, and
dividends or other distributions on and gain from the sale of shares
in other REITs; and
- At least 95% of its gross income (excluding gross income from
prohibited transactions) for each taxable year must consist of
income that is qualifying income for purposes of the 75% gross
income test, dividends, other types of interest, gain from the sale
or disposition of stock or securities, or any combination of the
foregoing (the "95% gross income test").
Application of Income Tests to Crescent Real Estate
Crescent Partnership's primary source of income is primarily derived from
leasing the office properties and the Crescent Real Estate hotel properties.
Rents under these leases will constitute "rents from real property," which is
qualifying income for purposes of the 75% and 95% gross income tests, only if
the following requirements are met:
- The rent is not based, in whole or in part, on the income or profits
of any person, although, generally, rent may be based on a fixed
percentage or percentages of receipts or sales.
- Neither Crescent Real Estate nor someone who owns 10% or more of
Crescent Real Estate's shares owns 10% or more of a tenant (other
than a TRS that is a tenant of one or more of the Crescent Real
Estate hotel properties) from which Crescent Partnership or one of
the subsidiary partnerships receives rent (a "related party
tenant"). Crescent Real Estate's ownership and the ownership of a
tenant is determined based on direct, indirect, and constructive
ownership.
- The rent attributable to any personal property leased in connection
with a lease of property is no more than 15% of the total rent
received under the lease.
- Neither Crescent Partnership nor any of the subsidiary partnerships
operates or manages its property or furnishes or renders services to
its tenants, other than through a TRS or through an "independent
contractor" that is adequately compensated and from which Crescent
Partnership and the subsidiary partnerships do not derive revenue.
Crescent Partnership and the subsidiary partnerships may provide
services directly if the services are "usually or customarily
rendered" in connection with the rental of space for occupancy only
and are not otherwise considered rendered to the occupant. In
addition, Crescent Partnership and the subsidiary partnerships may
render directly a de minimis amount of "non-customary" services to
the tenants of a property without disqualifying the income as "rents
from real property," as long as its income from the services does
not exceed 1% of its income from the property.
- The Crescent Real Estate hotel properties are either (a) leased to
unrelated tenants, or (b) leased to TRSs and are managed by
"eligible independent contractors," which are independent
contractors that, at the time they entered into management
agreements with the TRSs, were actively engaged in the business of
operating lodging facilities for people or entities not related to
Crescent Real Estate or the TRSs.
116
Crescent Real Estate, based in part upon opinions of its tax counsel or
other lawyers as to whether various tenants constitute related party tenants and
as to whether certain hotel managers constitute eligible independent
contractors, believes that the income it has received since 1994 and will
receive in subsequent taxable years from rent that does not satisfy the five
requirements set forth above will not cause it to fail to meet the gross income
tests.
Crescent Partnership will also receive fixed and contingent interest on
the mortgages on the Crescent Real Estate residential development properties.
Interest on mortgages secured by real property satisfies the 75% and 95% gross
income tests only if it does not include any amount that is based in whole or in
part upon the income of any person, except that (1) an amount is not excluded
from qualifying interest solely by reason of being based on a fixed percentage
or percentages of receipts or sales and (2) income derived from a shared
appreciation provision in a mortgage is treated as gain recognized from the sale
of the mortgaged property. Some of the residential development property
mortgages contain provisions for contingent interest based upon property sales.
Crescent Real Estate's tax counsel has opined that each of the residential
development property mortgages constitutes debt for federal income tax purposes,
any contingent interest derived therefrom will be treated as being based on a
fixed percentage of sales, and therefore all interest derived therefrom will
constitute interest received from mortgages for purposes of the 75% and 95%
gross income tests. If, however, the contingent interest provisions were instead
characterized as shared appreciation provisions, any resulting income would be
treated as income from prohibited transactions, because the underlying
properties are primarily held for sale to customers in the ordinary course. Such
income would not satisfy the 75% and 95% gross income tests and would be subject
to a 100% tax.
In applying the 95% and 75% gross income tests, Crescent Real Estate must
consider the form in which its assets are held, whether that form will be
respected for federal income tax purposes, and whether, in the future, such form
may change into a new form with different tax attributes. For example, the
Crescent Real Estate residential development properties are primarily held for
sale to customers in the ordinary course of business, and the income resulting
from such sales, if directly attributed to Crescent Real Estate, would not
qualify under the 75% and 95% gross income tests. In addition, such income would
be considered "net income from prohibited transactions" and thus would be
subject to a 100% tax. The income from such sales, however, will be earned by
the residential development corporations rather than by Crescent Partnership and
will be paid to Crescent Partnership in the form of interest and principal
payments on the residential development property mortgages or distributions with
respect to the stock in the residential development corporations held by
Crescent Partnership. In similar fashion, the income earned by the Crescent Real
Estate hotel properties, if directly attributed to Crescent Real Estate, would
not qualify under the 75% and 95% gross income tests because it would not
constitute "rents from real property." Such income is, however, earned by the
lessees of these Crescent Real Estate hotel properties and what Crescent
Partnership and the subsidiary partnerships receive from the lessees of these
Crescent Real Estate hotel properties is rent with respect to the leases.
Crescent Partnership may also receive distributions on its stock in the TRS
lessees. Crescent Real Estate's tax counsel has opined that:
- the Crescent Real Estate residential development properties or any
interest therein will be treated as owned by the residential
development corporations;
- amounts derived by Crescent Partnership from the residential
development corporations under the terms of the residential
development property mortgages will qualify as interest or
principal, as the case may be, paid on mortgages on real property
for purposes of the 75% and 95% gross income tests;
- amounts derived by Crescent Partnership with respect to the stock of
the residential development corporations will be treated as
distributions on stock for purposes of the 75% and 95% gross income
tests; and
- the leases of the Crescent Real Estate hotel properties will be
treated as leases for federal income tax purposes, and the rent
payable under the leases of the Crescent Real Estate hotel
properties will qualify as "rents from real property."
117
Investors should be aware that there are no controlling Treasury
Regulations, published rulings, or judicial decisions involving transactions
with terms substantially the same as those with respect to the residential
development corporations and the leases of the Crescent Real Estate hotel
properties. Therefore, the opinions of Crescent Real Estate's tax counsel with
respect to these matters are based upon all of the facts and circumstances and
upon rulings and judicial decisions involving situations that are considered to
be analogous. Opinions of counsel are not binding upon the Internal Revenue
Service or any court, and there can be no complete assurance that the Internal
Revenue Service will not assert successfully a contrary position. If one or more
of the leases of the Crescent Real Estate hotel properties is not a true lease,
part or all of the payments that Crescent Partnership or one of the subsidiary
partnerships receives from the respective lessee may not satisfy the various
requirements for qualification as "rents from real property," or Crescent
Partnership might be considered to operate the Crescent Real Estate hotel
properties directly. In that case, Crescent Real Estate likely would not be able
to satisfy either the 75% or 95% gross income tests and, as a result, likely
would lose its REIT status. Similarly, if the Internal Revenue Service were to
challenge successfully the arrangements with the residential development
corporations, Crescent Real Estate's qualification as a REIT could be
jeopardized.
If any of the Crescent Real Estate residential development properties were
to be acquired by Crescent Partnership as a result of foreclosure on any of the
residential development property mortgages, or if any of the Crescent Real
Estate hotel properties were to be operated directly by the Partnership or a
subsidiary partnership as a result of a default by the lessee under the lease,
such property would constitute foreclosure property for three years following
its acquisition (or for up to an additional three years if an extension is
granted by the Internal Revenue Service), provided that (i) Crescent Partnership
or its subsidiary partnership conducts sales or operations through an
independent contractor; (ii) Crescent Partnership or its subsidiary partnership
does not undertake any construction on the foreclosed property other than
completion of improvements which were more than 10% complete before default
became imminent; and (iii) foreclosure was not regarded as foreseeable at the
time Crescent Real Estate acquired the residential development property
mortgages or leased the Crescent Real Estate hotel properties. For so long as
any of these properties constitutes foreclosure property, the income from such
sales would be subject to tax at the maximum corporate rates and would qualify
under the 75% and 95% gross income tests. However, if any of these properties
does not constitute foreclosure property at any time in the future, income
earned from the disposition or operation of such property will not qualify under
the 75% and 95% gross income tests and, in the case of the Crescent Real Estate
residential development properties, will be subject to the 100% tax.
Crescent Real Estate anticipates that it will have certain income that
will not satisfy the 75% or the 95% gross income test. For example, income from
dividends on the stock of the residential development corporations or other TRSs
will not satisfy the 75% gross income test. It is also possible that certain
income resulting from the use of creative financing or acquisition techniques
would not satisfy the 75% or 95% gross income tests. Crescent Real Estate
believes, however, that the aggregate amount of nonqualifying income will not
cause it to exceed the limits on nonqualifying income under the 75% or 95% gross
income tests.
Relief from Consequences of Failing to Meet Income Tests
If Crescent Real Estate fails to satisfy one or both of the 75% and 95%
gross income tests for any taxable year, it nevertheless may qualify as a REIT
for such year if it qualifies for relief under certain provisions of the
Internal Revenue Code. Those relief provisions generally will be available if
Crescent Real Estate's failure to meet such tests is due to reasonable cause and
not due to willful neglect, Crescent Real Estate attaches a schedule of the
sources of its income to its tax return, and any incorrect information on the
schedule was not due to fraud with intent to evade tax. Crescent Real Estate may
not qualify for the relief provisions in all circumstances. In addition, as
discussed above in " - Taxation of Crescent Real Estate," even if the relief
provisions apply, Crescent Real Estate would incur a 100% tax on gross income to
the extent it fails the 75% or 95% gross income test (whichever amount is
greater), multiplied by a fraction intended to reflect its profitability.
118
Asset Tests
To maintain its qualification as a REIT, Crescent Real Estate also must
satisfy two asset tests at the close of each quarter of each taxable year:
- At least 75% of the value of its total assets must consist of cash
or cash items (including certain receivables), government
securities, "real estate assets," or qualifying temporary
investments (the "75% asset test").
- "Real estate assets" include interests in real property, interests
in mortgages on real property and stock in other REITs. "Interests
in real property" include an interest in mortgage loans or land and
improvements thereon, such as buildings or other inherently
permanent structures (including items that are structural components
of such buildings or structures), a leasehold of real property, and
an option to acquire real property (or a leasehold of real
property).
- Qualifying temporary investments are investments in stock or debt
instruments during the one-year period following Crescent Real
Estate's receipt of new capital that Crescent Real Estate raises
through equity or long-term (at least five-year) debt offerings.
- For investments not included in the 75% asset test, (A) the value of
Crescent Real Estate's interest in any one issuer's securities may
not exceed 5% of the value of its total assets (the "5% asset test")
and (B) Crescent Real Estate may not own more than 10% of the voting
power or value of any one issuer's outstanding securities (the "10%
asset test").
- As mentioned above, the collective value of Crescent Real Estate's
interests in TRSs cannot exceed 20% of the value of its assets.
For purposes of the second asset test, the term "securities" does not include
Crescent Real Estate's equity ownership in another REIT, its equity or debt
securities of a qualified REIT subsidiary or a TRS, or its equity interest in
any partnership. The term "securities," however, generally includes Crescent
Real Estate's debt securities issued by a partnership, except that
non-participating debt securities of a partnership are not treated as
"securities" for purposes of the value portion of the 10% asset test if Crescent
Real Estate owns at least a 20% profits interest in the partnership.
Crescent Real Estate intends to select future investments so as to comply
with the asset tests.
If Crescent Real Estate failed to satisfy the asset tests at the end of a
calendar quarter, it would not lose its REIT status if (i) it satisfied the
asset tests at the close of the preceding calendar quarter and (ii) the
discrepancy between the value of its assets and the asset test requirements
arose from changes in the market values of its assets and was not wholly or
partly caused by the acquisition of one or more nonqualifying assets. If
Crescent Real Estate did not satisfy the condition described in clause (ii) of
the preceding sentence, it still could avoid disqualification as a REIT by
eliminating any discrepancy within 30 days after the close of the calendar
quarter in which the discrepancy arose.
Crescent Partnership owns 100% of the outstanding stock of each
residential development corporation. In order to avoid violating the 10% asset
test, Crescent Real Estate has made a joint election with each residential
development corporation for it to be treated as a TRS. In addition, Crescent
Partnership owns the residential development property mortgages. As stated
above, Crescent Real Estate's tax counsel has opined that each of these
mortgages will constitute debt for federal income tax purposes and therefore
will be treated as a real estate asset; however, the Internal Revenue Service
could assert that such mortgages should be treated as equity interests in their
respective issuers, which would not qualify as real estate assets. By virtue of
Crescent Real Estate's ownership of partnership interests in Crescent
Partnership, Crescent Real Estate will be considered to own its pro rata share
of these assets. Crescent Real Estate also believes that the collective value of
its pro rata shares of the value of the securities of the residential
development corporations and its other TRSs does not exceed 20% of the value of
its assets. These beliefs are based in part upon Crescent Real Estate's analysis
of the estimated values of the various securities owned
119
by Crescent Partnership relative to the estimated value of the total assets
owned by Crescent Partnership. No independent appraisals will be obtained to
support this conclusion, and Crescent Real Estate's tax counsel, in rendering
its opinion as to Crescent Real Estate's qualification as a REIT, is relying on
Crescent Real Estate's conclusions as to the value of the various securities and
other assets. There can be no assurance, however, that the Internal Revenue
Service might not contend that the values of the various securities of the TRSs
held by Crescent Real Estate through Crescent Partnership in the aggregate
exceed the 20% value limitation. Finally, if Crescent Partnership were treated
for tax purposes as a corporation rather than as a partnership, Crescent Real
Estate would violate the 10% asset test and 5% of value limitation, and the
treatment of any of Crescent Partnership's subsidiary partnerships as a
corporation rather than as a partnership could also violate one or the other, or
both, of these limitations. In the opinion of Crescent Real Estate's tax
counsel, for federal income tax purposes Crescent Partnership and all the
subsidiary partnerships will be treated as partnerships and not as either
associations taxable as corporations or publicly traded partnerships. See " --
Tax Aspects of Crescent Real Estate's Investments in Crescent Partnership and
Subsidiary Partnerships" below.
The various percentage value requirements must be satisfied not only on
the date Crescent Real Estate first acquires corporate securities, but also each
time it increases its ownership of securities (including as a result of
increasing its interest in Crescent Partnership either with the proceeds of an
offering or by acquiring units of limited partnership interest from limited
partners upon the exercise of their rights to exchange units of limited
partnership interest for Crescent Real Estate common shares). Although Crescent
Real Estate plans to take steps to ensure that it satisfies the 5% and 25% value
tests for any quarter with respect to which retesting is to occur, there can be
no assurance that such steps (i) will always be successful; (ii) will not
require a reduction in Crescent Real Estate's overall interest in the various
corporations; or (iii) will not restrict the ability of the residential
development corporations to increase the sizes of their respective businesses,
unless the value of Crescent Real Estate's assets is increasing at a
commensurate rate.
Distribution Requirements
Each taxable year, Crescent Real Estate must distribute dividends (other
than capital gain dividends and deemed distributions of retained capital gain)
to its shareholders in an aggregate amount at least equal to (1) the sum of 90%
of (A) its "REIT taxable income" (computed without regard to the dividends paid
deduction and its net capital gain or loss) and (B) its net income (after tax),
if any, from foreclosure property, minus (2) certain items of non-cash income.
Crescent Real Estate must pay such distributions in the taxable year to
which they relate, or in the following taxable year if Crescent Real Estate
declares the distribution before it timely files its federal income tax return
for such year and pays the distribution on or before the first regular dividend
payment date after such declaration.
Crescent Real Estate will pay federal income tax on taxable income
(including net capital gain) that it does not distribute to shareholders.
Furthermore, Crescent Real Estate will incur a 4% nondeductible excise tax if it
fails to distribute during a calendar year (or, in the case of distributions
with declaration and record dates falling in the last three months of the
calendar year, by the end of January following such calendar year) at least the
sum of (1) 85% of its REIT ordinary income for such year, (2) 95% of its REIT
capital gain income for such year, and (3) any undistributed taxable income from
prior periods. The excise tax is on the excess of such required distribution
over the amounts Crescent Real Estate actually distributed. Crescent Real Estate
may elect to retain and pay income tax on the net long-term capital gain it
receives in a taxable year. See " - Taxation of Taxable U.S. Shareholders." For
purposes of the 4% excise tax, Crescent Real Estate will be treated as having
distributed any such retained amount.
Crescent Real Estate believes that it has made, and it intends to continue
to make, timely distributions sufficient to satisfy the annual distribution
requirements. In this regard, the Agreement of Limited Partnership of Crescent
Partnership (the "Partnership Agreement") authorizes the General Partner to take
such steps as may be necessary to cause Crescent Partnership to distribute to
its partners an amount sufficient to permit Crescent Real Estate to meet these
distribution requirements. It is possible, however, that, from time to time,
Crescent Real Estate may
120
experience timing differences between (i) the actual receipt of income and
actual payment of deductible expenses and (ii) the inclusion of such income and
deduction of such expenses in arriving at its "real estate investment trust
taxable income." Issues may also arise as to whether certain items should be
included in income. In addition, it is possible that certain creative financing
or creative acquisition techniques used by Crescent Partnership may result in
income (such as income from cancellation of indebtedness or gain upon the
receipt of assets in foreclosure the fair market value of which exceeds Crescent
Partnership's basis in the debt that was foreclosed upon) that is not
accompanied by cash proceeds. In this regard, the modification of a debt can
result in taxable gain equal to the difference between the holder's basis in the
debt and the principal amount of the modified debt. Based on the foregoing,
Crescent Real Estate may have less cash available for distribution in a
particular year than is necessary to meet its annual distribution requirement or
to avoid tax with respect to capital gain or the excise tax imposed on certain
undistributed income for such year. To meet the distribution requirement
necessary to qualify as a REIT or to avoid tax with respect to capital gain or
the excise tax imposed on certain undistributed income, Crescent Real Estate may
find it appropriate to arrange for borrowings through Crescent Partnership or to
pay distributions in the form of taxable share dividends.
Under certain circumstances, Crescent Real Estate may be able to correct a
failure to meet the distribution requirement for a year by paying deficiency
dividends to its shareholders in a later year. Crescent Real Estate may include
such deficiency dividends in its deduction for dividends paid for the earlier
year. Although Crescent Real Estate may be able to avoid income tax on amounts
distributed as deficiency dividends, it will be required to pay interest to the
Internal Revenue Service based upon the amount of any deduction it takes for
deficiency dividends.
Record Keeping Requirements
Crescent Real Estate must maintain certain records in order to qualify as
a REIT. In addition, to avoid a monetary penalty, Crescent Real Estate must
request on an annual basis certain information from its shareholders designed to
disclose the actual ownership of its outstanding stock. It has complied, and it
intends to continue to comply, with such requirements.
Failure to Qualify
If Crescent Real Estate failed to qualify as a REIT in any taxable year,
and no relief provision applied, it would be subject to federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. In calculating its taxable income in a year in which it
failed to qualify as a REIT, Crescent Real Estate would not be able to deduct
amounts paid out to shareholders. In fact, Crescent Real Estate would not be
required to distribute any amounts to shareholders in such year. In such event,
to the extent of Crescent Real Estate's current and accumulated earnings and
profits, all distributions to shareholders would be taxable as ordinary income.
Subject to certain limitations of the Internal Revenue Code, corporate
shareholders might be eligible for the dividends received deduction. Unless
Crescent Real Estate qualified for relief under specific statutory provisions,
it also would be disqualified from electing taxation as a REIT for the four
taxable years following the year during which it ceased to qualify as a REIT.
Crescent Real Estate cannot predict whether in all circumstances it would
qualify for such statutory relief.
TAXATION OF TAXABLE U.S. SHAREHOLDERS
As long as Crescent Real Estate qualifies as a REIT, a taxable "U.S.
shareholder" must take into account, as ordinary income, distributions out of
Crescent Real Estate's current or accumulated earnings and profits that Crescent
Real Estate does not designate as capital gain dividends or retained long-term
capital gain. A U.S. shareholder will not qualify for the dividends received
deduction generally available to corporations. As used herein, a U.S.
shareholder is a holder of common shares that for U.S. federal income tax
purposes is:
- a citizen or resident of the United States;
121
- a corporation, partnership, or other entity created or organized in
or under the laws of the United States or of a political subdivision
thereof;
- an estate whose income is subject to U.S. federal income taxation
regardless of its source; or
- any trust with respect to which (A) a U.S. court is able to exercise
primary supervision over the administration of such trust and (B)
one or more U.S. persons have the authority to control all
substantial decisions of the trust.
A U.S. shareholder will recognize distributions that Crescent Real Estate
designates as capital gain dividends as long-term capital gain, to the extent
they do not exceed its actual net capital gain for the taxable year, without
regard to the period for which the U.S. shareholder has held its common shares.
Subject to certain limitations, Crescent Real Estate will designate its capital
gain dividends as either 20% or 25% rate distributions. A corporate U.S.
shareholder, however, may be required to treat up to 20% of certain capital gain
dividends as ordinary income.
Crescent Real Estate may elect to retain and pay income tax on the net
long-term capital gain that it receives in a taxable year. In that case, a U.S.
shareholder would be taxed on its proportionate share of Crescent Real Estate's
undistributed long-term capital gain. The U.S. shareholder would receive a
credit or refund for its proportionate share of the tax Crescent Real Estate
paid. The U.S. shareholder would increase the basis in its stock by the amount
of its proportionate share of Crescent Real Estate's undistributed long-term
capital gain, minus its share of the tax Crescent Real Estate paid.
A U.S. shareholder will not incur tax on a distribution in excess of
Crescent Real Estate's current and accumulated earnings and profits if such
distribution does not exceed the adjusted basis of the U.S. shareholder's common
shares. Instead, such distribution will reduce the adjusted basis of such common
shares. A U.S. shareholder will recognize a distribution in excess of both
Crescent Real Estate's current and accumulated earnings and profits and the U.S.
shareholder's adjusted basis in its common shares as long-term capital gain, or
short-term capital gain if the common shares have been held for one year or
less, assuming the common shares are a capital asset in the hands of the U.S.
shareholder. In addition, if Crescent Real Estate declares a distribution in
October, November, or December of any year that is payable to a U.S. shareholder
of record on a specified date in any such month, such distribution shall be
treated as both paid by Crescent Real Estate and received by the U.S.
shareholder on December 31 of such year, provided that Crescent Real Estate
actually pays the distribution during January of the following calendar year.
Crescent Real Estate will notify U.S. shareholders after the close of its
taxable year as to the portions of the distributions attributable to that year
that constitute ordinary income or capital gain dividends.
Taxation of U.S. Shareholders on the Disposition of the Common Shares
In general, a U.S. shareholder who is not a dealer in securities must
treat any gain or loss realized upon a taxable disposition of the common shares
as long-term capital gain or loss if the U.S. shareholder has held the common
stock for more than one year and otherwise as short-term capital gain or loss.
However, a U.S. shareholder must treat any loss upon a sale or exchange of
common shares held by such shareholder for six months or less, after applying
certain holding period rules, as a long-term capital loss to the extent of
capital gain dividends and other distributions from Crescent Real Estate that
such U.S. shareholder treats as long-term capital gain. All or a portion of any
loss a U.S. shareholder realizes upon a taxable disposition of the common shares
may be disallowed if the U.S. shareholder purchases additional common shares
within 30 days before or after the disposition.
Capital Gains and Losses
A taxpayer generally must hold a capital asset for more than one year for
gain or loss derived from its sale or exchange to be treated as long-term
capital gain or loss. The highest marginal individual income tax rate is 38.6%.
On June 7, 2001, President Bush signed into law the Economic Growth and Tax
Relief Reconciliation Act of 2001. That
122
legislation reduces the highest marginal individual income tax rate of 38.6% to
37.6% for the period from January 1, 2004 to December 31, 2005, and to 35% for
the period from January 1, 2006 to December 31, 2010. The maximum tax rate on
long-term capital gain applicable to non-corporate taxpayers is 20% for sales
and exchanges of assets held for more than one year. The maximum tax rate on
long-term capital gain from the sale or exchange of "Section 1250 property"
(i.e., depreciable real property) is 25% to the extent that such gain would have
been treated as ordinary income if the property were "Section 1245 property."
With respect to distributions that Crescent Real Estate designates as capital
gain dividends and any retained capital gain that it is deemed to distribute,
Crescent Real Estate may designate, subject to certain limits, whether such a
distribution is taxable to its non-corporate shareholders at a 20% or 25% rate.
Thus, the tax rate differential between capital gain and ordinary income for
non-corporate taxpayers may be significant. A U.S. shareholder required to
include retained long-term capital gains in income will be deemed to have paid,
in the taxable year of the inclusion, its proportionate share of the tax paid by
Crescent Real Estate in respect of such undistributed net capital gains. U.S.
shareholders subject to these rules will be allowed a credit or a refund, as the
case may be, for the tax deemed to have been paid by such shareholders. U.S.
shareholders will increase their basis in their common shares by the difference
between the amount of such includible gains and the tax deemed paid by the U.S.
shareholder in respect of such gains. In addition, the characterization of
income as capital gain or ordinary income may affect the deductibility of
capital losses. A non-corporate taxpayer may deduct capital losses not offset by
capital gains against its ordinary income only up to a maximum annual amount of
$3,000. A non-corporate taxpayer may carry forward unused capital losses
indefinitely. A corporate taxpayer must pay tax on its net capital gain at
ordinary corporate rates. A corporate taxpayer can deduct capital losses only to
the extent of capital gains, with unused losses being carried back three years
and forward five years.
Information Reporting Requirements and Backup Withholding
Crescent Real Estate will report to its shareholders and to the Internal
Revenue Service the amount of distributions it pays during each calendar year,
and the amount of tax it withholds, if any. Under the backup withholding rules,
a shareholder may be subject to backup withholding at the rate of 30%, gradually
decreasing to 28% in 2006, with respect to distributions unless such holder (1)
is a corporation or comes within certain other exempt categories and, when
required, demonstrates this fact or (2) provides a taxpayer identification
number, certifies as to no loss of exemption from backup withholding, and
otherwise complies with the applicable requirements of the backup withholding
rules. A shareholder who does not provide Crescent Real Estate with its correct
taxpayer identification number also may be subject to penalties imposed by the
IRS. Any amount paid as backup withholding will be creditable against the
shareholder's income tax liability. In addition, it may be required to withhold
a portion of capital gain distributions to any shareholders who fail to certify
their non-foreign status to it.
TAXATION OF TAX-EXEMPT U.S. SHAREHOLDERS
Most tax-exempt employees' pension trusts are not subject to federal
income tax except to the extent of their receipt of "unrelated business taxable
income," or "UBTI." Distributions by Crescent Real Estate to a shareholder that
is a tax-exempt entity should not constitute UBTI, provided that the tax-exempt
entity has not financed the acquisition of Crescent Real Estate's shares with
"acquisition indebtedness" and the shares are not otherwise used in an unrelated
trade or business of the tax-exempt entity. In addition, certain pension trusts
that own more than 10% of a "pension-held REIT" must report a portion of the
dividends that they receive from such a REIT as UBTI. Crescent Real Estate has
not been and does not expect to be treated as a pension-held REIT for purposes
of this rule.
TAXATION OF NON-U.S. SHAREHOLDERS
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
shareholders (collectively, "non-U.S. shareholders") are complex. This section
is only a summary of such rules. Crescent Operating urges non-U.S. shareholders
to consult their own tax advisors to determine the impact of federal, state, and
local income tax laws on ownership of common shares, including any reporting
requirements.
123
Ordinary Dividends
A non-U.S. shareholder that receives a distribution that is not
attributable to gain from Crescent Real Estate's sale or exchange of U.S. real
property interests (as defined below) and that Crescent Real Estate does not
designate as a capital gain dividend or retained capital gain will recognize
ordinary income to the extent that Crescent Real Estate pays such distribution
out of its current or accumulated earnings and profits. A withholding tax equal
to 30% of the gross amount of the distribution ordinarily will apply to such
distribution unless an applicable tax treaty reduces or eliminates the tax.
However, if a distribution is treated as effectively connected with the non-U.S.
shareholder's conduct of a U.S. trade or business, the non-U.S. shareholder
generally will be subject to federal income tax on the distribution at graduated
rates, in the same manner as U.S. shareholders are taxed with respect to such
distributions (and also may be subject to the 30% branch profits tax in the case
of a non-U.S. shareholder that is a non-U.S. corporation). Crescent Real Estate
plans to withhold U.S. income tax at the rate of 30% on the gross amount of any
such distribution paid to a non-U.S. shareholder unless (i) a lower treaty rate
applies and the non-U.S. shareholder files IRS Form W-8BEN with Crescent Real
Estate evidencing eligibility for that reduced rate or (ii) the non-U.S.
shareholder files an IRS Form W-8ECI with Crescent Real Estate claiming that the
distribution is effectively connected income.
Return of Capital
A non-U.S. shareholder will not incur tax on a distribution in excess of
Crescent Real Estate's current and accumulated earnings and profits if such
distribution does not exceed the adjusted basis of its common shares. Instead,
such a distribution will reduce the adjusted basis of such common shares. A
non-U.S. shareholder will be subject to tax on a distribution that exceeds both
Crescent Real Estate's current and accumulated earnings and profits and the
adjusted basis of its common shares, if the non-U.S. shareholder otherwise would
be subject to tax on gain from the sale or disposition of its common shares, as
described below. Because Crescent Real Estate generally cannot determine at the
time it makes a distribution whether or not the distribution will exceed its
current and accumulated earnings and profits, Crescent Real Estate normally will
withhold tax on the entire amount of any distribution at the same rate as it
would withhold on a dividend. However, a non-U.S. shareholder may obtain a
refund of amounts that Crescent Real Estate withholds if Crescent Real Estate
later determines that a distribution in fact exceeded Crescent Real Estate's
current and accumulated earnings and profits.
Capital Gain Dividends
For any year in which Crescent Real Estate qualifies as a REIT, a non-U.S.
shareholder will incur tax on distributions that are attributable to gain from
Crescent Real Estate's sale or exchange of "U.S. real property interests" under
the provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). The term "U.S. real property interests" includes certain interests
in real property and stock in corporations at least 50% of whose assets consists
of interests in real property, but excludes mortgage loans and mortgage-backed
securities. Under FIRPTA, a non-U.S. shareholder is taxed on distributions
attributable to gain from sales of U.S. real property interests as if such gain
were effectively connected with a U.S. business of the non-U.S. shareholder. A
non-U.S. shareholder thus would be taxed on such a distribution at the normal
capital gain rates applicable to U.S. shareholders (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of a
nonresident alien individual). A non- U.S. corporate shareholder not entitled to
treaty relief or exemption also may be subject to the 30% branch profits tax on
distributions subject to FIRPTA. Crescent Real Estate must withhold 35% of any
distribution that it could designate as a capital gain dividend. However, if
Crescent Real Estate makes a distribution and later designates it as a capital
gain dividend, then (although such distribution may be taxable to a non-U.S.
shareholder) it is not subject to withholding under FIRPTA. Instead, Crescent
Real Estate must make-up the 35% FIRPTA withholding from distributions made
after the designation, until the amount of distributions withheld at 35% equals
the amount of the distribution designated as a capital gain dividend. A non-U.S.
shareholder may receive a credit against its FIRPTA tax liability for the amount
Crescent Real Estate withholds.
124
Distributions to a non-U.S. shareholder that Crescent Real Estate
designates at the time of distribution as capital gain dividends which are not
attributable to or treated as attributable to Crescent Real Estate's disposition
of a U.S. real property interest generally will not be subject to U.S. federal
income taxation, except as described below under " - Sale of Shares."
Sale of Shares
A non-U.S. shareholder generally will not incur tax under FIRPTA on gain
from the sale of its common shares as long as Crescent Real Estate is a
"domestically controlled REIT." A "domestically controlled REIT" is a REIT in
which at all times during a specified testing period non-U.S. persons held,
directly or indirectly, less than 50% in value of the stock. Crescent Real
Estate anticipates that it will continue to be a "domestically controlled REIT."
In addition, a non-U.S. shareholder that owns, actually or constructively, 5% or
less of outstanding common shares at all times during a specified testing period
will not incur tax under FIRPTA if the common shares are "regularly traded" on
an established securities market. If neither of these exceptions were to apply,
the gain on the sale of the common shares would be taxed under FIRPTA, in which
case a non-U.S. shareholder would be taxed in the same manner as U.S.
shareholders with respect to such gain (subject to applicable alternative
minimum tax, a special alternative minimum tax in the case of nonresident alien
individuals, and the possible application of the 30% branch profits tax in the
case of non-U.S. corporations).
A non-U.S. shareholder will incur tax on gain not subject to FIRPTA if (1)
the gain is effectively connected with the non-U.S. shareholder's U.S. trade or
business, in which case the non-U.S. shareholder will be subject to the same
treatment as U.S. shareholders with respect to such gain, or (2) the non-U.S.
shareholder is a nonresident alien individual who was present in the U.S. for
183 days or more during the taxable year, in which case the non-U.S. shareholder
will incur a 30% tax on its capital gains. Capital gains dividends not subject
to FIRPTA will be subject to similar rules.
Backup Withholding
Backup withholding tax (which generally is withholding tax imposed at the
rate of 30%, gradually decreasing to 28% in 2006, on certain payments to persons
that fail to furnish certain information under the United States information
reporting requirements) and information reporting will generally not apply to
distributions to a non-U.S. shareholder provided that the non-U.S. shareholder
certifies under penalty of perjury that the shareholder is a non-U.S.
shareholder, or otherwise establishes an exemption. As a general matter, backup
withholding and information reporting will not apply to a payment of the
proceeds of a sale of common shares effected at a foreign office of a foreign
broker. Information reporting (but not backup withholding) will apply, however,
to a payment of the proceeds of a sale of common shares by a foreign office of a
broker that:
- is a U.S. person;
- derives 50% or more of its gross income for a specified three year
period from the conduct of a trade or business in the U.S.;
- is a "controlled foreign corporation" (generally, a foreign
corporation controlled by U.S. shareholders) for U.S. tax purposes;
or
- that is a foreign partnership, if at any time during its tax year
50% or more of its income or capital interest are held by U.S.
persons or if it is engaged in the conduct of a trade or business in
the U.S.,
unless the broker has documentary evidence in its records that the holder or
beneficial owner is a non-U.S. shareholder and certain other conditions are met,
or the shareholder otherwise establishes an exemption. Payment of the proceeds
of a sale of common shares effected at a U.S. office of a broker is subject to
both backup withholding and information
125
reporting unless the shareholder certifies under penalty of perjury that the
shareholder is a non-U.S. shareholder, or otherwise establishes an exemption.
Backup withholding is not an additional tax. A non-U.S. shareholder may obtain a
refund of excess amounts withheld under the backup withholding rules by filing
the appropriate claim for refund with the IRS.
STATE AND LOCAL TAX CONSEQUENCES
Crescent Real Estate and/or you may be subject to state and local tax in
various states and localities, including those states and localities in which
Crescent Real Estate or you transact business, own property or reside. The state
and local tax treatment in such jurisdictions may differ from the federal income
tax treatment described above. Consequently, you should consult your own tax
advisor regarding the effect of state and local tax laws upon an investment in
Crescent Real Estate's securities.
TAX ASPECTS OF CRESCENT REAL ESTATE'S INVESTMENT IN CRESCENT PARTNERSHIP AND
SUBSIDIARY PARTNERSHIPS
The following discussion summarizes certain federal income tax
considerations applicable to Crescent Real Estate's direct or indirect
investments in Crescent Partnership and its subsidiaries. The discussion does
not cover state or local tax laws or any federal tax laws other than income tax
laws.
Classification as Partnerships
Crescent Real Estate's tax counsel has opined, based on the provisions of
Crescent Partnership Agreement and the partnership agreements and operating
agreements of the various subsidiary partnerships, and certain factual
assumptions and certain representations described in the opinion, that Crescent
Partnership and the subsidiary partnerships will each be treated as a
partnership and not an association taxable as a corporation for federal income
tax purposes, and that Crescent Partnership will not be treated as a "publicly
traded partnership" taxable as a corporation. Unlike a ruling from the Internal
Revenue Service, however, an opinion of counsel is not binding on the Internal
Revenue Service or the courts, and no assurance can be given that the Internal
Revenue Service will not challenge the status of Crescent Partnership and its
subsidiary partnerships as partnerships for federal income tax purposes. If for
any reason Crescent Partnership were taxable as a corporation rather than as a
partnership for federal income tax purposes, Crescent Real Estate would fail to
qualify as a REIT because it would not be able to satisfy the income and asset
requirements. See " -- Taxation of Crescent Real Estate," above. In addition,
any change in Crescent Partnership's status for tax purposes might be treated as
a taxable event, in which case Crescent Real Estate might incur a tax liability
without any related cash distributions. See " -- Taxation of Crescent Real
Estate," above. Further, items of income and deduction for Crescent Partnership
would not pass through to the respective partners, and the partners would be
treated as shareholders for tax purposes. Crescent Partnership would be required
to pay income tax at regular corporate tax rates on its net income, and
distributions to partners would constitute dividends that would not be
deductible in computing Crescent Partnership's taxable income. Similarly, if any
of the subsidiary partnerships were taxable as a corporation rather than as a
partnership for federal income tax purposes, such treatment might cause Crescent
Real Estate to fail to qualify as a REIT, and in any event such partnership's
items of income and deduction would not pass through to its partners, and its
net income would be subject to income tax at regular corporate rates.
Income Taxation of Crescent Partnership and its Partners
The partners of Crescent Partnership are subject to taxation. Crescent
Partnership itself is not a taxable entity for federal income tax purposes.
Rather, as a partner in Crescent Partnership, Crescent Real Estate is required
to take into account its allocable share of Crescent Partnership's income,
gains, losses, deductions and credits for any taxable year of Crescent
Partnership ending during Crescent Real Estate's taxable year, without regard to
whether Crescent Real Estate has received or will receive any distribution from
Crescent Partnership. Crescent Partnership's income, gains, losses, deductions
and credits for any taxable year will include its allocable share of such items
from its subsidiary partnerships.
126
Partnership Allocations
Although a partnership agreement generally will determine the allocation
of income and losses among partners, such allocations will be disregarded for
tax purposes if they do not comply with the provisions of section 704(b) of the
Internal Revenue Code and the Treasury regulations promulgated thereunder. If an
allocation is not recognized for federal income tax purposes, the item subject
to the allocation will be reallocated in accordance with the partners' interests
in the partnership, which will be determined by taking into account all of the
facts and circumstances relating to the economic arrangement of the partners
with respect to such item. Crescent Partnership's allocations of taxable income,
gain and loss are intended to comply with the requirements of section 704(b) of
the Internal Revenue Code and the Treasury regulations promulgated thereunder.
Tax Allocations With Respect to Contributed Properties
Pursuant to section 704(c) of the Internal Revenue Code, income, gain,
loss and deduction attributable to appreciated or depreciated property that is
contributed to a partnership in exchange for an interest in the partnership must
be allocated in a manner such that the contributing partner is charged with, or
benefits from, respectively, the unrealized gain or unrealized loss associated
with the property at the time of the contribution. The amount of such unrealized
gain or unrealized loss is generally equal to the difference between the fair
market value of contributed property at the time of contribution and the
adjusted tax basis of such property at the time of contribution (a "Book-Tax
Difference"). Such allocations are solely for federal income tax purposes and do
not affect the book capital accounts or other economic or legal arrangements
among the partners. Crescent Partnership was formed by way of contributions of
appreciated property and has received contributions of appreciated property
since its formation. In general, the fair market value of the properties
initially contributed to Crescent Partnership were substantially in excess of
their adjusted tax bases. The Partnership Agreement requires that allocations
attributable to each item of initially contributed property be made so as to
allocate the tax depreciation available with respect to such property first to
the partners other than the partner that contributed the property, to the extent
of, and in proportion to, such partners' share of book depreciation, and then,
if any tax depreciation remains, to the partner that contributed the property.
Accordingly, the depreciation deductions allocable will not correspond exactly
to the percentage interests of the partners. Upon the disposition of any item of
initially contributed property, any gain attributable to an excess at such time
of basis for book purposes over basis for tax purposes will be allocated for tax
purposes to the contributing partner and, in addition, the Partnership Agreement
provides that any remaining gain will be allocated for tax purposes to the
contributing partners to the extent that tax depreciation previously allocated
to the noncontributing partners was less than the book depreciation allocated to
them. These allocations are intended to be consistent with section 704(c) of the
Internal Revenue Code and with Treasury regulations thereunder. The tax
treatment of properties contributed to Crescent Partnership subsequent to its
formation is expected generally to be consistent with the foregoing.
In general, the partners who contribute property to Crescent Partnership
will be allocated depreciation deductions for tax purposes which are lower than
such deductions would be if determined on a pro rata basis. In addition, in the
event of the disposition of any of the contributed assets (including Crescent
Real Estate's properties) which have a Book-Tax Difference, all income
attributable to such Book-Tax Difference will generally be allocated to the
contributing partners, including Crescent Real Estate, and each partner will
generally be allocated only its share of capital gains attributable to
appreciation, if any, occurring after the closing of any offering of securities
hereunder. This will tend to eliminate the Book-Tax Difference over the life of
Crescent Partnership. However, the special allocation rules of section 704(c) do
not always entirely eliminate the Book-Tax Difference on an annual basis or with
respect to a specific taxable transaction such as a sale. Thus, the carryover
basis of the contributed assets in the hands Crescent Partnership will cause
Crescent Real Estate to be allocated lower depreciation and other deductions,
and possibly an amount of taxable income in the event of a sale of such
contributed assets in excess of the economic or book income allocated to it as a
result of such sale. This may cause Crescent Real Estate to recognize taxable
income in excess of cash proceeds, which might adversely affect its ability to
comply with the REIT distribution requirements. See " - Requirements for REIT
Qualification - Distribution Requirements." The foregoing principles also apply
in determining Crescent Real Estate's earnings and profits for purposes of
determining the portion of distributions taxable
127
as dividend income. The application of these rules over time may result in a
higher portion of distributions being taxed as dividends than would have
occurred had Crescent Real Estate purchased the contributed assets at their
agreed values.
Sale of Crescent Partnership's Property
Generally, any gain realized by Crescent Partnership on the sale of
property held by it for more than one year will be long-term capital gain,
except for any portion of such gain that is treated as depreciation or cost
recovery recapture. Any gain recognized by Crescent Partnership on the
disposition of contributed properties will be allocated first to its partners
under section 704(c) of the Internal Revenue Code to the extent of their
"built-in gain" on those properties for federal income tax purposes. The
partners' "built-in gain" on the contributed properties sold will equal the
excess of the partners' proportionate share of the book value of those
properties over the partners' tax basis allocable to those properties at the
time of the sale. Any remaining gain recognized by Crescent Partnership on the
disposition of the contributed properties, and any gain recognized by Crescent
Partnership on the disposition of the other properties, will be allocated among
the partners in accordance with their respective percentage interests in
Crescent Partnership.
Crescent Real Estate's share of any gain realized by Crescent Partnership
on the sale of any property held by Crescent Partnership as inventory or other
property held primarily for sale to customers in the ordinary course of Crescent
Partnership's trade or business will be treated as income from a prohibited
transaction that is subject to a 100% penalty tax. Such prohibited transaction
income also may have an adverse effect upon Crescent Real Estate's ability to
satisfy the income tests for REIT status. See " - Requirements for REIT
Qualification - Income Tests." Under existing law, whether property is held as
inventory or primarily for sale to customers in the ordinary course of Crescent
Partnership's business is a question of fact that depends on all the facts and
circumstances with respect to the particular transaction. Crescent Partnership
intends to hold its properties for investment with a view to long-term
appreciation, to engage in the business of acquiring, developing, owning and
operating the properties, and to make such occasional sales of properties as are
consistent with these investment objectives.
Taxation of the Residential Development Corporations and Other TRSs
A portion of the amounts to be used to fund distributions to shareholders
is expected to come from the residential development corporations and other TRSs
through dividends on non-voting stock thereof held by Crescent Partnership and
interest on the residential development property mortgages held by Crescent
Partnership. The residential development corporations and other TRSs will pay
federal, state and local income taxes on their taxable incomes at normal
corporate rates, which taxes will reduce the cash available for distribution by
Crescent Real Estate to its shareholders. Any federal, state or local income
taxes that the residential development corporations and other TRSs are required
to pay will reduce the cash available for distribution by Crescent Real Estate
to its shareholders.
DESCRIPTION OF CRESCENT OPERATING'S BUSINESS
In February and March of 2002, Crescent Operating transferred to Crescent
Real Estate, in lieu of foreclosure, the assets of its hospitality segment and,
pursuant to a strict foreclosure, the interests in its land development segment
pursuant to the terms of the Settlement Agreement described under "The
Reorganization Transactions - Summary of the Reorganization Transactions." As a
result, Crescent Operating no longer has operations in these two segments. In
addition, on February 6, 2002, Crescent Machinery, through which Crescent
Operating operates its equipment sales and leasing segment, filed for protection
under the federal bankruptcy laws.
OVERVIEW OF CRESCENT OPERATING
Crescent Operating, Inc., a Delaware corporation, was formed on April 1, 1997,
by Crescent Real Estate and its subsidiary Crescent Partnership. Effective June
12, 1997 Crescent Real Estate distributed shares of Crescent
128
Operating common stock to shareholders of Crescent Real Estate and unit holders
of Crescent Partnership, and, on that date, Crescent Operating became a public
company. Crescent Operating was formed to be the lessee and operator of certain
assets owned or to be acquired by Crescent Real Estate that could not be
operated directly or indirectly by Crescent Real Estate without jeopardizing its
status as a REIT. On January 1, 2001, however, the REIT Modernization Act became
effective. This legislation allows Crescent Real Estate, through its
subsidiaries, to operate or lease certain of its investments that had been
previously operated or leased by Crescent Operating.
Crescent Operating's charter provides that one of its purposes is to
perform the Intercompany Agreement between Crescent Operating and Crescent
Partnership. Under the terms of the Intercompany Agreement, both parties agree
to provide each other with rights to participate in certain transactions. In
addition, Crescent Operating's charter prohibits Crescent Operating from
engaging in activities or making investments that a REIT could make unless, in
accordance with the terms of the Intercompany Agreement, Crescent Partnership
was first given the opportunity but elected not to pursue such activities or
investments. To facilitate the review, evaluation and negotiation of the terms
of and making recommendations with respect to investment opportunities presented
to Crescent Operating by Crescent Partnership, Crescent Operating established
the Intercompany Evaluation Committee, which was composed entirely of directors
of Crescent Operating who were not also officers or directors of Crescent Real
Estate and Crescent Partnership. The scope of the committee eventually expanded
to include analysis of all proposed transaction involving Crescent Real Estate
or Crescent Partnership. Effective February 14, 2002, Crescent Operating entered
into the Settlement Agreement with Crescent Real Estate. The Settlement
Agreement provided for the cancellation of the Intercompany Agreement.
Crescent Operating was intended to function principally as an operating
company, in contrast to Crescent Real Estate's principal focus on investment in
real estate assets. The operating activities and operating assets made available
to Crescent Operating by Crescent Real Estate were designed to provide Crescent
Real Estate's existing shareholders with the long-term benefits of ownership in
an entity devoted to the conduct of operating business activities in addition to
their investment interest in Crescent Real Estate.
BUSINESS SEGMENTS
Immediately prior to the asset transfers made pursuant to the Settlement
Agreement on February 14, 2002, Crescent Operating, through various subsidiaries
and affiliates, had assets and operations comprising four business segments: (i)
equipment sales and leasing, (ii) hospitality, (iii) temperature-controlled
logistics and (iv) land development. Within these segments Crescent Operating
owned the following:
- The equipment sales and leasing segment consisted of a 100% interest
in Crescent Machinery and its subsidiary, a construction equipment
sales, leasing and service company with 14 locations in four states.
As of September 30, 2002, Crescent Machinery operated nine locations
in three states.
- The hospitality segment consisted of the following assets:
- Crescent Operating's lessee interests in three upscale
business class hotels owned by Crescent Real Estate. The
hotels are the Denver Marriott City Center, the Hyatt Regency
Albuquerque and the Renaissance Hotel in Houston, Texas;
- Lessee interests in three destination resort properties owned
by Crescent Real Estate. The properties are the Hyatt Regency
Beaver Creek, the Ventana Inn and Spa, Sonoma Mission Inn and
Spa (including the Sonoma Mission Inn golf and Country Club);
- Lessee interests in two destination fitness resort and spa
properties owned by Crescent Real Estate. The properties are
Canyon Ranch-Tucson and Canyon Ranch-Lenox and;
129
- A 5% economic interest in CRL, which has an investment in the
Canyon Ranch Day Spa in the Venetian Hotel in Las Vegas,
Nevada and participates in the future use of the "Canyon
Ranch" name. Crescent Real Estate owned the remaining 95%
economic interest.
- The temperature-controlled logistics segment consisted of a 40%
interest in the operations of AmeriCold Logistics, which operates
100 refrigerated storage properties with an aggregate storage
capacity of approximately 525 million cubic feet. Crescent Real
Estate has a 40% interest in AmeriCold Corporation, which owned 89
of the 100 properties.
- The land development segment consisted of the following assets:
- A 4.65% economic interest in Desert Mountain, a master
planned, luxury residential and recreational community in
northern Scottsdale, Arizona. Crescent Real Estate owned an
88.35% economic interest in Desert Mountain;
- A 52.5% general partner interest in The Woodlands Operating
Company;
- A 2.625% economic interest in The Woodlands Land Development
Company L.P. Crescent Real Estate owned a 49.875% economic
interest in this entity; and
- A 60% general partner interest in COPI Colorado, a company
that has a 10% economic interest in CRDI, formerly Crescent
Development Management Corp. Crescent Real Estate owned the
remaining 90% economic interest in CRDI.
Equipment Sales and Leasing
Crescent Machinery is engaged in the sale, leasing and service of
construction equipment and accessories to the construction industry located
primarily in three states as of September 30, 2002. Historically, construction
equipment businesses have been owned and operated primarily by individuals in a
localized area. Crescent Machinery has consolidated some of these businesses in
order to gain improvements in purchasing and operating efficiencies. All of the
Crescent Machinery locations represent major lines of equipment. This
differentiates Crescent Machinery from some of its pure rent-to-rent
competition. Crescent Machinery's locations offer new and used equipment for
sale and rent, have factory trained service personnel, and provide parts and
warranty service.
Effective February 6, 2001, Crescent Operating, Crescent Machinery and
SunTx entered into a Management Rights Agreement. Under the Management
Agreement, Crescent Operating and Crescent Machinery engaged SunTx to provide
general administrative and financial advice regarding all matters not otherwise
reserved for the board of directors for Crescent Machinery for a fee of $1.0
million. This Management Agreement terminated December 31, 2001.
Like many companies serving the construction industries, Crescent
Machinery was affected in 2001 by multiple factors negatively impacting the
industry. These factors include excess inventories of machines available for
sale or rental, severe price competition, a slowdown in many construction
markets, the reduction in the number of new projects, the general recessionary
economy, and the continued negative effects following the terrorist attacks of
September 11, 2001.
Beginning in the second quarter of 2001, Crescent Machinery's business
plan focused on right-sizing the business and creating liquidity. This plan
included the reduction of operating costs and excess or underutilized assets. As
of September 30, 2002, Crescent Machinery's net book value of its inventory and
rental fleet was reduced by approximately $48.1 million and operating expenses
have been reduced by $16.4 million since December 31, 2001. Crescent Machinery
also closed its branches in Beaumont, Texas; Van Wert, Ohio; Franklin, Indiana;
130
Honolulu, Hawaii; Santa Rosa, California; Sacramento, California; Sparks,
Nevada; Fresno, California; Tracy, California and Union City, California in
2002. Subsequent to September 30, 2002, Crescent Machinery closed its final West
Coast location leaving it with eight branches in two states.
As part of that business plan, Crescent Machinery continued reviewing key
factors to its business, including the business mix between the sale of
equipment and various rental and service programs; evaluating the suppliers
Crescent Machinery used or may add in the future to maximize the equipment
solutions Crescent Machinery offered its customers; standardizing best practices
across all branch locations; and implementing new compensation programs that
directly linked pay to performance.
An essential part of Crescent Machinery's plan involved restructuring its
existing lines of credit to provide debt service relief. Crescent Machinery
defaulted on certain major loans from commercial institutions due to Crescent
Machinery's decision not to pay the principal portion of payment installments
due from September through December 2001 in the total amount of approximately
$6.4 million. Outstanding principal amounts under default by Crescent Machinery
totaled $42.9 million at September 30, 2002. Crescent Machinery's lenders did
not exercise remedies available for Crescent Machinery's payment default.
Crescent Machinery was unable to reach satisfactory agreements with other
lenders, however, and on February 6, 2002, Crescent Machinery filed a voluntary
petition under Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy
Court for the Northern District of Texas in Fort Worth, Texas. Crescent
Machinery intends to continue its normal operations in the sale, rental and
servicing of construction equipment, while attempting to reorganize and
restructure its debt to emerge a financially stronger and more competitive
business. Crescent Machinery plans to continue with business as usual during
this process, but certain locations will be evaluated and may be sold or closed
to improve efficiency. Crescent Machinery did reach an agreement with one of its
lenders to take back the equipment it had financed and limit Crescent
Machinery's exposure to shortfall on the sale of the equipment to $500,000. The
lender further agreed to finance the $500,000 over three years at 1% over prime
interest rate. Completion of the return of equipment under this agreement would
eliminate approximately $11.5 million of indebtedness of Crescent Machinery. To
that effect, Crescent Machinery has closed all of its locations outside of Texas
and Oklahoma in 2002.
In addition to its equity claim as the sole shareholder of Crescent
Machinery, Crescent Operating is a creditor of Crescent Machinery, holding an
unsecured $10.0 million principal amount note receivable from Crescent
Machinery. Crescent Operating does not anticipate receiving a significant
repayment, if any, of this note receivable in the Crescent Machinery bankruptcy
case.
Crescent Operating is unable to predict as of the date of the filing of
this proxy statement/prospectus whether Crescent Machinery will be able to
successfully reorganize its debt and operations, or what the treatment of
creditors of Crescent Machinery and Crescent Operating, as the sole shareholder
of Crescent Machinery and as a creditor, will be under any proposed plan of
reorganization of Crescent Machinery. The payment rights and other entitlements
of pre-petition creditors of Crescent Machinery, including Crescent Operating,
and Crescent Operating, as Crescent Machinery's sole shareholder, may be
substantially altered by any plan of reorganization confirmed by the bankruptcy
court. Under a plan, pre-petition creditors may receive less than 100% of the
face value of their claims, and the ownership interest of Crescent Operating in
Crescent Machinery may be substantially diluted or cancelled in whole or in
part. Crescent Machinery has filed schedules of assets and liabilities in its
bankruptcy case. Those schedules indicate that virtually all of Crescent
Machinery's assets are subject to lien claims of certain secured lenders.
Moreover, the schedules indicate that the collateral securing the claims of
these creditors has a value at or below the amount owed to the lenders. In fact,
the only unencumbered assets owned by Crescent Machinery are several parcels of
real estate that Crescent Machinery estimates to have a fair market value of
approximately $3.0 million and miscellaneous inventory and accounts receivable
of undetermined value. The value of the real estate will need to be first used
to pay administrative expense claims in the bankruptcy case, after which it
might be available for distribution to unsecured creditors. There are
approximately $17.0 million of unsecured claims in the Crescent Machinery
bankruptcy case. Crescent Operating expects the Crescent Machinery creditors to
object to Crescent Operating receiving any distribution unless those creditors
are paid in full. Although there can be no assurance as to the outcome of the
Crescent Machinery bankruptcy case, Crescent Operating believes the prudent
course is to estimate that it would not receive a material distribution in
respect of either its unsecured note claim in the Crescent Machinery case or in
131
respect of its ownership of 100% of the Crescent Machinery common stock. There
can be no assurance given that a plan of reorganization of Crescent Machinery
will be approved by the creditors, or that the bankruptcy court will confirm any
such plan. If a plan of reorganization is not confirmed by the bankruptcy court,
there can be no assurance that Crescent Machinery will have sufficient funds to
continue as a going concern, to restructure its debt on acceptable terms or
continue its operations. If such a plan is not confirmed by the bankruptcy
court, Crescent Machinery may be forced to liquidate its assets under Chapter 7
of the U.S. Bankruptcy Code and to cease operations, in which case it is
unlikely that Crescent Operating would realize any significant value for its
ownership interest in Crescent Machinery.
Operational Information.
The following tables set forth operational statistics for the eight
remaining branch locations with continued operations on a same store basis for
the three and nine months ended September 30, 2002 and for the years ended
December 31, 1999 through December 31, 2001.
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2002 2001 2002 2001
Revenue:
New and used equipment ..... 30% 51% 37% 43%
Rental equipment ........... 43% 32% 40% 37%
Parts, service and supplies 27% 17% 23% 20%
---- ---- ---- ----
Total revenue ................ 100% 100% 100% 100%
Expenses:
Cost of sales:
New and used equipment .... 91% 96% 89% 92%
Rental equipment .......... 59% 67% 68% 67%
Parts, service and supplies 60% 64% 61% 65%
---- ---- ---- ----
Total cost of sales .......... 69% 81% 74% 78%
Gross profit ................. 31% 19% 26% 22%
Operating expenses ........... 53% 26% 47% 26%
---- ---- ---- ----
Loss from operations ......... (22%) (7%) (21%) (3%)
==== ==== ==== ====
For The Year Ended December 31,
--------------------------------
2001 2000 1999
---- ---- ----
Revenue:
New and used equipment ..... 47% 47% 59%
Rental equipment ........... 35% 34% 27%
Parts, service and supplies 18% 19% 14%
---- ---- ----
Total revenue ................ 100% 100% 100%
Expenses:
Cost of sales:
New and used equipment .... 93% 88% 83%
Rental equipment .......... 69% 61% 47%
Parts, service and supplies 64% 66% 85%
---- ---- ----
Total cost of sales .......... 80% 75% 73%
Gross profit ................. 20% 25% 27%
Operating expenses ........... 26% 23% 21%
---- ---- ----
Income (loss) from operations (5%) 2% 6%
==== ==== ====
132
Net operating loss for continuing operations for the year ended December
31, 2001 was $15.9 million as compared with net operating income of $1.3 million
for the year ended December 31, 2000. Equipment sales and leasing revenue
decreased $24.9 million, or 48.9%, to $26.0 million for the nine months ended
September 30, 2002, compared with $50.9 million for the nine months ended
September 30, 2001. Net operating loss for the nine months ended September 30,
2002 was $3.3 million as compared with net operating loss of $1.6 million for
the nine months ended September 30, 2001. Crescent Operating believes that the
results for the nine months ended September 30, 2002 are not necessarily
indicative of the operating results expected for the full year, due to the
closing of its West Coast branches in 2002 and to the seasonality of the
business.
Under the agreement relating to Crescent Real Estate's planned investment
in Crescent Machinery, which was terminated on February 4, 2002, Crescent
Operating agreed upon a value for its investment in Crescent Machinery. Such
agreed upon value served as an indicator to Crescent Operating that the
potential existed for the impairment of certain assets as it relates to its
current investment in Crescent Machinery. As required under Statement of
Financial Accounting Standards No. 121, using all information available,
Crescent Operating determined that certain assets within Crescent Machinery have
carrying values which exceed the estimated undiscounted cash flows of those
assets. As a result, Crescent Operating recorded an adjustment of $12.3 million
and $26.9 million as "impairment loss on assets" in Crescent Operating's results
from continuing operations and discontinued operations of closed branches,
respectively, for the year ended December 31, 2001 related to Crescent
Machinery. Crescent Operating will continue to evaluate the assets within
Crescent Machinery for impairment and adjust such carrying values as necessary.
Hospitality
Effect of the Reorganization Transactions.
In February 2002, in lieu of a foreclosure by Crescent Real Estate on the
Crescent Operating hotel operations, Crescent Operating caused the lessees of
these properties to transfer all of the leases, business contracts and licenses,
furniture, fixtures and equipment, cash and intellectual property to Crescent
Real Estate in exchange for cancellation of rental payments due to Crescent Real
Estate with an aggregate value equal to the agreed upon value of the transferred
assets, or $23.6 million. See "The Reorganization Transactions -- Summary of the
Reorganization Transactions" for a description of these transfers.
Overview.
Prior to the February 2002 transfer of Crescent Operating's hotel
operations to Crescent Partnership, the hospitality segment generally consisted
of the hotel operations. Each of such properties were owned by Crescent
Partnership or its affiliates and all were leased to subsidiaries of Crescent
Operating under long term leases. In addition to these properties, Crescent
Operating also had other investments in CRL.
The hotel operations were comprised of unique luxury resorts, business and
convention hotels and destination health and fitness resorts and made up a small
portion of the hospitality industry. Because Crescent Operating, for the most
part, relied on third-party operators such as Marriott and Hyatt, Crescent
Operating enjoyed the advantage of the third-party operators' nationwide
advertising, reservation services and strong management.
133
Each of the hotel operations was under lease with Crescent Real Estate,
with terms expiring from December 2004 to June 2009 and generally providing for
(i) base rent, with periodic rent increases, (ii) percentage rent based on a
percentage of gross hotel revenues less food and beverage revenues above a
specified amount and (iii) a percentage of gross food and beverage revenues
above a specified amount. Under the leases, Crescent Operating's subsidiaries
had assumed the rights and obligations of the property owner under the
respective management agreement with the hotel operators, including the property
management agreements with Sonoma Management Company for Sonoma Mission Inn and
Spa, Sonoma Mission Inn Golf and Country Club and Ventana Inn and Spa, as well
as the obligation to pay all property taxes and other charges against the
property. As part of each of the lease agreements for eight of the hotel
operations, Crescent Real Estate had agreed to fund all capital expenditures
relating to furniture, fixtures and equipment reserves required under the
applicable management agreements. The only exception was Canyon Ranch-Tucson, in
which instance Crescent Operating owned all furniture, fixtures and equipment
associated with the property and funded all related capital expenditures. With
the permission of Crescent Real Estate, Crescent Operating had deferred payment
of rent on the hotel operations. Rent expense accrued but deferred as of
December 31, 2001 was $41.2 million.
All of Crescent Operating's hotel operations, except for the Sonoma
Mission Inn and Spa, Sonoma Mission Inn Golf and Country Club and the Ventana
Inn and Spa, were managed by third party operators. Crescent Operating and its
hospitality subsidiaries had a Master Asset Management and Administrative
Services Agreement with Sonoma Management to manage the Hyatt Albuquerque, the
Renaissance Hotel Houston and the Denver City Center Marriott. In addition,
Crescent Operating's hospitality subsidiaries had accepted assignment from the
owners of the Sonoma Mission Inn and Spa, the Sonoma Mission Inn Golf and
Country Club and the Ventana Inn and Spa of its property management agreements
with Sonoma Management. The principals of Sonoma Management are Sanjay and
Johanna Varma and Crescent Real Estate is an equity owner in Sonoma Management.
Payment of obligations under the Master Asset Management and Administrative
Services Agreement was guaranteed by Crescent Operating. For each property for
which it provided asset management services, Sonoma Management was receive a
base fee equal to 0.85% of gross revenues of the property managed plus an
incentive fee of 50% of actual net income in excess of budgeted net income. For
each property for which it provided property management services, Sonoma
Management was entitled to receive a base fee equal to 2.0% of gross revenues of
the property plus an incentive fee of 20% of net operating income in excess of a
12% annual return on investment to owner.
As consideration for its services under the Master Asset Management and
Administrative Services Agreement, Sonoma Management received an annual base fee
(and no incentive fee) for 2001 of approximately $0.6 million, for its asset
management services related to the Hyatt Albuquerque, the Renaissance Houston
Hotel and the Denver City Center Marriott.
Crescent Operating had limited the potential impact of downturns in the
hospitality industry on Crescent Operating by limiting its guarantee of the rent
payment obligations of its hospitality segment subsidiaries. Crescent
Operating's guarantee related to rent payments was limited to cash generated by
the hospitality segment, i.e. cash flows from segments other than hospitality
would not be used to fund rent payments in the event cash flows of the hotel
operations were less than scheduled rent payments.
The individual hotel operations were affected by seasonality; however, the
seasonal fluctuations are varied and are determined by both location and the
nature of the business conducted on the property. The effects of seasonality of
the hotel operations are generally offsetting; however, March and October have
the greatest positive impact and November through January have the greatest
negative impact on Crescent Operating's consolidated results.
The hotel operations in Denver and Albuquerque are business and convention
center hotels that compete against other similar hotels in their markets.
Crescent Operating believes, however, that its destination health and fitness
resorts are unique properties that have very limited competition. In addition,
Crescent Operating believes that the other hotel operations experience limited
or no direct competition due to their high replacement costs and unique
134
concepts or locations. The hotel operations do compete, to a limited extent,
against business class hotels or middle-market resorts in their geographic
areas, as well as against luxury resorts nationwide and around the world.
Crescent Operating had a 5% economic interest, representing all of the
voting stock, in CRL. CRL has a 30% interest in CR License. CR License is the
entity which owns the rights to the future use of the "Canyon Ranch" name. CRL
also has an approximate 65% economic interest in the Canyon Ranch Spa Club
located in the Venetian Hotel in Las Vegas.
Operational Information.
The following table sets forth certain information about the hotel
operations, excluding the Sonoma Mission Inn Golf and Country Club, Houston
Center Athletic Club, or HCAC, CRL and the Four Seasons in Houston for the years
ended December 31, 2001 and 2000. As Crescent Operating only operated this
segment for one and one-half months in 2002, there is no information for the
three and nine months ended September 30, 2002. The information below is based
on available rooms, except for Canyon Ranch-Tucson and Canyon Ranch-Lenox, which
are destination health and fitness resorts that measure performance based on
available guest nights.
For the Year Ended December 31,
-----------------------------------------------------
Average Average Revenue
Occupancy Daily Per
Rate Rate Available Room
Lease ------------- -------------- --------------
Location Expiration Rooms 2001 2000 2001 2000 2001 2000
-------- ---------- ----- ---- ---- ---- ---- ---- ----
Upscale Business Class
Hotels:
Denver Marriott City Center.. Denver, CO June 2005 613 77% 84% $123 $120 $ 95 $101
Hyatt Regency Albuquerque.... Albuquerque, NM December 2005 395 69 69 108 106 74 73
Renaissance Houston.......... Houston, TX June 2009 389 64 59 113 95 73 56
------ --- --- ---- ---- ---- ----
Total/Weighted Average 1,397 71% 73% $116 $111 $ 83 $ 80
====== === === ==== ==== ==== ====
Luxury Resorts and Spas:
Hyatt Regency Beaver Avon, CO December 2004 276 57% 69% $278 $254 $159 $176
Creek(1).....................
Sonoma Mission Inn & Spa..... Sonoma, CA October 2006 228(2) 59 75 299 302 176 226
Ventana Inn & Spa............ Big Sur, CA December 2007 62 73 78 420 458 304 358
------ --- --- ---- ---- ---- ----
Total/Weighted Average 566 60% 72% $305 $298 $182 $216
====== === === ==== ==== ==== ====
Guest
Nights
------
Destination Fitness
Resorts and Spas:
Canyon Ranch-Tucson.......... Tucson, AZ July 2006 250(3)
Canyon Ranch-Lenox........... Lenox, MA December 2006 212(3)
------ --- --- ---- ---- ---- ----
Total/Weighted Average 462 81%(4) 86%(4) $469(5) $442(5) $318(6) $340(6)
====== === === ==== ==== ==== ====
Grand Total/Weighted Average 71% 75% $263 $256 $183 $191
====== === === ==== ==== ==== ====
(1) The hotel is undergoing $6.9 million renovation of all guest rooms. The
project is scheduled to be completed by the second quarter of 2002.
(2) In January 2000, 20 rooms, which were previously taken out of commission
for construction of a 30,000 square foot full-service spa in connection
with an approximately $21.0 million expansion of the hotel, were returned
to service. The expansion was completed in the second quarter of 2000. The
expansion also included 30 additional guest rooms. Rates were discounted
during the construction period, which resulted in a lower average daily
rate and revenue per available room for the year ended December 31, 1999,
as compared to December 31, 2000.
(3) Represents available guest nights, which is the maximum number of guests
that the resort can accommodate per night.
(4) Represents the number of paying and complimentary guests for the period,
divided by the maximum number of available guest nights for the period.
(5) Represents the average daily "all-inclusive" guest package charges for the
period, divided by the average daily number of paying guests for the
period.
(6) Represents the total "all-inclusive" guest package charges for the period,
divided by the maximum number of available guest nights for the period.
135
Temperature-Controlled Logistics
Effect of the Reorganization Transactions
On February 14, 2002, Crescent Operating agreed in the Settlement
Agreement that a Crescent Real Estate subsidiary, Crescent Spinco, upon the
effectiveness of its registration statement, will distribute its shares to the
holders of Crescent Real Estate common shares and the unitholders of Crescent
Partnership and will purchase Crescent Operating's entire membership interest in
COPI Cold Storage for between $15.0 million to $15.5 million. It is anticipated
that the interest in AmeriCold Logistics will be transferred in 2003. The
proceeds are intended to payoff the Bank of America loan for which Crescent
Operating's 40% interest in AmeriCold Logistics serves as collateral. The
distribution of the Crescent Spinco shares will be made to the holders of
Crescent Real Estate common shares prior to the issuance of Crescent Real Estate
common shares to the Crescent Operating stockholders. As a result, the holders
of Crescent Operating common stock will not receive any interest in Crescent
Spinco.
Overview
In October 1997, the Crescent/Vornado REIT partnership, in which Vornado
Realty Trust has a 60% interest and Crescent Real Estate has a 40% interest,
acquired each of AmeriCold Corporation and URS Logistics, Inc. The
Crescent/Vornado REIT partnership acquired the assets of Freezer Services, Inc.
in June 1998 and acquired the Carmar Group in July 1998. In March 1999, a new
partnership doing business under the name AmeriCold Logistics was formed.
Crescent Operating, through its wholly owned subsidiary COPI Cold Storage, has a
40% general partnership interest in AmeriCold Logistics and Vornado Operating
has the remaining 60% general partnership interest. Immediately following its
formation, AmeriCold Logistics purchased all of the non-real estate assets of
the Crescent/Vornado REIT partnership for $48.7 million. AmeriCold Logistics
then leased the real estate assets of the Crescent/Vornado REIT partnership from
that entity and continued to operate the temperature-controlled warehouse
business that was created by consolidating the businesses of AmeriCold
Corporation, URS Logistics, Freezer Services and the Carmar Group. AmeriCold
Logistics currently leases 89 temperature controlled warehouses from the
Crescent/Vornado REIT partnership, which continues to own the real estate, and
manages 11 additional warehouses. AmeriCold Logistics provides the frozen food
industry with refrigerated warehousing and transportation management services.
As of the date of this proxy statement/prospectus, Crescent Operating continues
to own and conduct its temperature-controlled logistics operations through its
wholly owned subsidiary, COPI Cold Storage.
The temperature-controlled logistics segment consists of a 40% interest in
the operations of AmeriCold Logistics. AmeriCold Logistics, headquartered in
Atlanta, Georgia, has 5,900 employees and operates 101 temperature controlled
storage facilities nationwide with an aggregate of approximately 538 million
cubic feet of refrigerated, frozen and dry storage space. Of the 101 warehouses,
AmeriCold Logistics leases 88 temperature controlled facilities with an
aggregate of approximately 442 million cubic feet from the
temperature-controlled logistics partnerships, and manages 13 additional
facilities containing approximately 96 million cubic feet of space. AmeriCold
Logistics provides the frozen food industry with refrigerated storage and
transportation management services.
AmeriCold Logistics leases 88 refrigerated storage facilities used in its
business. The leases, as amended, which commenced in March 1999, generally have
a 15-year term with two five-year renewal options and provide for the payment of
fixed base rent and percentage rent based on revenues AmeriCold Logistics
receives from its customers. Fixed base rent was approximately $136.0 million in
2000 and was and will be approximately $137.0 million per annum from 2001
through 2003, $139.0 million per annum from 2004 through 2008 and $141.0 million
per annum from 2009 through February 28, 2014. Percentage rent for each lease is
based on a specified percentage of revenues in excess of a specified base
amount. The aggregate base revenue amount under five of the six leases is
approximately $350.0 million and the weighted average percentage rate is
approximately 36% through 2003, approximately 38% for the period from 2004
through 2008 and approximately 40% for the period from 2009 through February 28,
2014. The aggregate base revenue amount under the sixth lease is approximately
$32.0 million through 2001, and approximately $26.0 million for the period from
2002 through February 28, 2014, and the percentage rate is 24% through 2001,
37.5% for the period from 2002 through 2006, 40% from 2007 through 2011 and 41%
from 2012 through February 28, 2014. AmeriCold Logistics recognized $156.3
million and $170.6 million of rent expense for the year ended December 31, 2001
and December 31, 2000, respectively, which includes, effects of straight-lining,
rent to
136
parties other than the landlord and is before the waiver of rent discussed
below. AmeriCold Logistics is required to pay for all costs arising from the
operation, maintenance and repair of the properties, including all real estate
taxes and assessments, utility charges, permit fees and insurance premiums, as
well as property capital expenditures in excess of $9.5 million annually.
AmeriCold Logistics has the right to defer the payment of 15% of the fixed base
rent and all percentage rent for up to three years beginning on March 11, 1999
to the extent that available cash, as defined in the leases, is insufficient to
pay such rent. AmeriCold Logistics deferred $25.5 million of rent payments for
the period ending December 31, 2001 and $19.0 million for the period ending
December 31, 2000.
On February 22, 2001, the AmeriCold Logistics leases were restructured to,
among other things, (i) reduce 2001's contractual rent to $146.0 million ($14.5
million less than 2000's contractual rent), (ii) reduce 2002's contractual rent
to $150.0 million, plus contingent rent in certain circumstances, (iii) increase
the Landlord's share of annual maintenance capital expenditures by $4.5 million
to $9.5 million effective January 1, 2000 and (iv) extend the deferred rent
period to December 31, 2003 from March 11, 2002.
In the fourth quarter ended December 31, 2001, AmeriCold Logistics
reversed $25.5 million of the rent expense recorded for 2001 resulting from
temperature-controlled logistics partnerships waiving of its rights to collect
this portion of the rent. Further, temperature-controlled logistics partnerships
waived $14.3 million of the rent expense recorded by AmeriCold Logistics for
2000 which AmeriCold Logistics recorded as income in the fourth quarter ended
December 31, 2001. The aggregate amount waived by the landlord of $39.8 million
represents a portion of the rent due under the leases which AmeriCold Logistics
deferred in such years.
Under the terms of the partnership agreement for AmeriCold Logistics,
Vornado Operating has the right to make all decisions relating to the management
and operations of AmeriCold Logistics other than certain major decisions that
require the approval of both Crescent Operating and Vornado Operating. Vornado
Operating must obtain Crescent Operating's approval for specified matters
involving AmeriCold Logistics, including approval of the annual budget,
requiring specified capital contributions, entering into specified new leases or
amending existing leases, selling or acquiring specified assets and any sale,
liquidation or merger of AmeriCold Logistics. If the partners fail to reach an
agreement on such matters during the period from November 1, 2000 through
October 30, 2007, Vornado Operating may set a price at which it commits to
either buy Crescent Operating's investment, or sell its own, and Crescent
Operating will decide whether to buy or sell at that price. If the partners fail
to reach agreement on such matters after October 30, 2007, either party may set
a price at which it commits to either buy the other party's investment, or sell
its own, and the other party will decide whether to buy or sell at that price.
Neither partner may transfer its rights or interest in the partnership without
the consent of the other partner. Vornado Operating has consented to Crescent
Operating's transfer of its membership interest in COPI Cold Storage, and thus
Crescent Operating's general partnership interest in AmeriCold Logistics, to a
subsidiary of Crescent Real Estate. The partnership will continue for a term
through October 30, 2027, except as the partners may otherwise agree.
As of December 31, 2001, Crescent Operating had not contributed its 40%
portion of a total $10.0 million expected contribution to AmeriCold Logistics.
Accordingly, AmeriCold Logistics cancelled its $4.0 million contribution
receivable in partners capital on December 31, 2001. In the first quarter of
2002, Vornado Operating's previous contribution of $6.0 million, representing
its 60% match of the $10.0 million total expected contribution, was reclassified
as a special equity contribution that: (i) has priority over the original equity
amounts, with voting rights of the partner not effected, (ii) is redeemable only
at AmeriCold Logistics' option, and (iii) accrues interest at 12% compounded
annually from March 7, 2000. The partner's ownership remains at 60%.
In addition, during 2001, AmeriCold Logistics recorded a charge of $8.9
million comprised of (i) severance and relocation costs associated with a
management restructuring and (ii) expenses arising from the consolidation of a
portion of the corporate office in Portland, Oregon into AmeriCold Logistics
Atlanta headquarters.
On May 1, 2001, Alec C. Covington became the President and Chief Executive
Officer of AmeriCold Logistics. Mr. Covington succeeded Daniel F. McNamara who
continues as Vice Chairman until May, 2002. Mr.
137
Covington, age 45, was formerly an Executive Vice President of SUPERVALU Inc.
(NYSE:SVU) and President and Chief Operating Officer of the SUPERVALU food
distribution companies division, which is the nation's largest distributor to
grocery retailers having $17.0 billion of revenue and 34 distribution centers.
Previously, Mr. Covington was the President and Chief Operating Officer of the
wholesale division of Richfood Holdings, Inc. when it was acquired by SUPERVALU
in the fall of 1999. He has more than 25 years of wholesale, retail and
supply-chain management experience in the food industry.
On October 22, 2001, Jonathan C. Daiker joined AmeriCold Logistics as
Chief Financial Officer. Most recently, Mr. Daiker served for five years as
Executive Vice President and Chief Financial Officer of the Simmons Company, a
manufacturer and distributor of mattresses. Prior thereto, from 1981-1995, he
held subsidiary and unit Chief Financial Officer positions with Phillips
Electronics N.V., a multibillion dollar consumer electronics company. Mr.
Daiker, a CPA, began his career with Price Waterhouse & Company.
AmeriCold Logistics is experiencing cash flow deficits which its
management is currently addressing through sales of non-core assets.
Recent Developments
On December 31, 2002, AmeriCold Logistics sold its interests in its
Carthage, Missouri and Kansas City, Kansas quarries to a joint venture owned 56%
by Crescent Real Estate Equities Company and 44% by Vornado Realty Trust for
approximately $20 million. AmeriCold Logistics will continue to manage these
assets on behalf of the new owners.
On November 5, 2002, AmeriCold Logistics issued a $6.0 million note to
Vornado Operating, effective March 11, 2002, in exchange for Vornado Operating's
$6.0 million special equity contribution. Certain of AmeriCold Logistics' trade
receivables collateralize the loan. The loan bears interest of 12% and requires
monthly interest payments until maturity on December 31, 2004.
On January 23, 2002, the leases with the temperature-controlled logistics
partnerships were restructured to consolidate four of the non-encumbered leases
into one non-encumbered lease. The restructuring did not affect total
contractual rent due under the combined leases.
During the first and second quarters of 2002, AmeriCold Logistics
exercised its right, pursuant to the terms of its leases, to defer payment of
rent. As of September 30, 2002, AmeriCold Logistics had deferred $20.6 million
of rent for 2002, bringing the total deferred rent to $30.7 million. For the
years ended December 31, 2001 and December 31, 2000, AmeriCold Logistics had
exercised its right, pursuant to the terms of its leases with the landlord, to
defer payment of $25.5 million and $19.0 million of rent, respectively, of which
Crescent Operating's share was $10.2 million and $7.6 million, respectively.
Effective December 31, 2001, Crescent Operating, in connection with
extending the maturity of its $15.0 million loan from Bank of America from
December 31, 2001 to August 15, 2002, agreed to modify the loan from an
unsecured to a secured credit facility. On August 14, 2002, Bank of America
further extended the maturity of this loan to January 15, 2003 and Crescent
Operating prepaid the interest for that time period in the amount of $0.3
million. Crescent Operating, with the consent of Crescent Partnership which
agreed to subordinate its security interest in Crescent Operating's 40% interest
in AmeriCold Logistics, pledged all of its interest in AmeriCold Logistics to
Bank of America to secure the loan. In January 2003, Bank of America further
extended the maturity of this loan to March 15, 2003 and Crescent Operating
agreed to prepay an additional two months of interest at the loan's current
rate.
Operational Information
As of the date of this proxy statement/prospectus, Crescent Operating
continues to hold a 40% economic interest in AmeriCold Logistics. Crescent
Operating's share of pretax loss from AmeriCold Logistics for the year ended
December 31, 2001 was $2.3 million. AmeriCold Logistics is experiencing cash
flow deficits which management of AmeriCold Logistics is currently addressing
through sales of non-core assets. Crescent Operating has written off its entire
investment in AmeriCold Logistics and does not anticipate recognizing any
additional AmeriCold Logistics losses for accounting purposes.
138
The following table shows the location and size of facility for each of
the properties operated by AmeriCold Logistics as of September 30, 2002:
Total Cubic Total Cubic
Number of Footage Number of Footage
State Properties (in millions) State Properties (in millions)
----- ---------- ------------- ----- ---------- -------------
Alabama 5 10.8 Missouri(1) 2 46.8
Arizona 1 2.9 Nebraska 2 4.4
Arkansas 6 33.1 New York 1 11.8
California 11 47.1 North Carolina 3 10.0
Colorado 1 2.8 Ohio 1 5.5
Florida 5 6.5 Oklahoma 2 2.1
Georgia 8 49.5 Oregon 6 40.4
Idaho 2 18.7 Pennsylvania 4 50.8
Illinois 2 11.6 South Carolina 1 1.6
Indiana 1 9.1 South Dakota 2 6.3
Iowa 2 12.5 Tennessee 3 10.6
Kansas 2 5.0 Texas 5 39.1
Kentucky 1 2.7 Utah 1 8.6
Maine 1 1.8 Virginia 3 13.8
Massachusetts 5 10.5 Washington 6 28.7
Minnesota 1 5.9 Wisconsin 3 17.4
Mississippi 1 4.7 Canada 1 4.8
--- -----
Total 101 537.9
=== =====
(1) Includes one underground facility of approximately 33.1 million cubic
feet.
Market Information.
AmeriCold Logistics provides frozen food manufacturers with refrigerated
warehousing and transportation management services. The temperature-controlled
logistics properties consist of production and distribution facilities.
Production facilities differ from distribution facilities in that they typically
serve one or a small number of customers located nearby. These customers store
large quantities of processed or partially processed products in the facility
until they are further processed or shipped to the next stage of production or
distribution. Distribution facilities primarily serve customers who store a wide
variety of finished products to support shipment to end-users, such as food
retailers and food service companies, in a specific geographic market.
Transportation management services include freight routing, dispatching,
freight rate negotiation, backhaul coordination, freight bill auditing, network
flow management, order consolidation and distribution channel assessment.
AmeriCold Logistics' temperature-controlled logistics expertise and access to
both the frozen food warehouses and distribution channels enable the customers
of AmeriCold Logistics to respond quickly and efficiently to time-sensitive
orders from distributors and retailers.
Customers consist primarily of national, regional and local frozen food
manufacturers, distributors, retailers and food service organizations, including
H.J. Heinz & Co., ConAgra, Inc., Sara Lee Corp., Tyson Foods, Inc. and McCain
Foods, Inc.
Consolidation among retail and food service channels has limited the
ability of manufacturers to pass along cost increases by raising prices. Because
of this, manufacturers have been forced in the recent past to focus more
intensely on supply chain cost, such as inventory management, transportation and
distribution, reduction initiatives in an effort to improve operating
performance.
AmeriCold Logistics is the largest operator of public refrigerated
warehouse space in the country. AmeriCold Logistics operated an aggregate of
approximately 18% of total public refrigerated warehouse space as of December
31, 2001. No other person or entity operated more than 8% of total public
refrigerated warehouse space as of December 31, 2001. As a result, AmeriCold
Logistics does not have any competitors of comparable size. AmeriCold Logistics
operates in an environment in which competition is national, regional and local
in nature and in which the range of service, temperature-controlled logistics
facilities, customer mix, service performance and price are the principal
competitive factors.
139
Land Development
Effect of the Reorganization Transactions.
In February 2002, a subsidiary of Crescent Real Estate acquired, through a
strict foreclosure under the terms of the Settlement Agreement, Crescent
Operating's land development entities other than The Woodlands Operating
Company. Crescent Operating's interest in The Woodlands Operating Company was
subsequently acquired, through a strict foreclosure under the terms of the
Settlement Agreement, by a subsidiary of Crescent Real Estate in March 2002. See
"The Reorganization Transactions - Summary of the Reorganization Transactions"
for a description of this acquisition by strict foreclosure.
Overview.
Prior to the transfer of Crescent Operating's land development interests
to Crescent Partnership in February and March 2002 pursuant to the Settlement
Agreement, the land development segment consisted primarily of:
- a 4.65% economic interest in Desert Mountain, a master planned,
luxury residential and recreational community in northern
Scottsdale, Arizona;
- a 52.5% general partner interest in The Woodlands Operating Company,
which provided management, advisory, landscaping and maintenance
services to The Woodlands, Texas, an approximately 27,000 acre
master-planned residential and commercial community, and was the
lessee of The Woodlands Resort and Conference Center;
- a 2.625% economic interest in The Woodlands Land Development
Company, which owned approximately 6,600 acres for commercial and
residential development as well as a realty office, an athletic
center, and interests in both a title company and a mortgage
company; and
- a 60% economic interest in COPI Colorado, an entity that had a 10%
economic interest in CRDI, formerly CDMC, which invests in entities
that develop or manage residential and resort properties (primarily
in Colorado) and provides support services to such properties.
The land development segment competed against a variety of other housing
alternatives including other planned developments, pre-existing single-family
homes, condominiums, townhouses and non-owner occupied housing, such as luxury
apartments.
Desert Mountain.
Desert Mountain is a master planned, mixed use residential and
recreational community located in northern Scottsdale, Arizona. The property
consists of 8,000 acres of land located in the high Sonoran Desert that is zoned
for the development of approximately 4,500 lots. Desert Mountain includes The
Desert Mountain Club, a private golf, tennis and fitness club which serves over
2,300 members and offers five Jack Nicklaus signature 18-hole golf courses and
four clubhouses. One of these courses is Cochise, the site of the Senior PGA
Tour's The Tradition golf tournament. Lyle Anderson, the original developer of
Desert Mountain, provides advisory services in connection with the operation and
development of Desert Mountain. Pursuant to the terms of a limited partnership
agreement, Desert Mountain Development is entitled to receive 93% of the net
cash flow of Desert Mountain after certain payments to the sole limited partner,
Sonora Partners Mountain Partnership which owns the remaining 7% interest, have
been made.
140
The Woodlands Operating Company.
The Woodlands, is an approximately 27,000-acre master-planned residential
and commercial community located approximately 27 miles north of Houston, Texas,
unique among developments in the Houston area because it functions as a
self-contained community. Amenities contained in the development, which are not
contained within other local developments, include a shopping mall, retail
centers, office buildings, a hospital, a community college, places of worship, a
conference center, 60 parks, 81 holes of golf, two man made lakes, a riverwalk
and a performing arts pavilion.
The Woodlands Operating Company was formed to provide management,
advisory, landscaping and maintenance services to entities affiliated with
Crescent Operating and Crescent Real Estate as well as to third parties.
Pursuant to the terms of service agreements, The Woodlands Operating Company
performed general management, landscaping and maintenance, construction, design,
sales, promotional and other marketing services for certain properties in which
Crescent Real Estate owns a direct or indirect interest. In addition, The
Woodlands Operating Company monitored certain of the real estate investments of,
and provides advice regarding real estate and development issues to, such
entities. As compensation for its management and advisory services, The
Woodlands Operating Company was paid a monthly advisory fee on a cost-plus
basis. As compensation for its landscaping and maintenance services, The
Woodlands Operating Company received a monthly fee on a cost-plus basis related
to performing the required landscaping and maintenance services.
The Woodlands Operating Company also leased The Woodlands Conference
Center and Country Club, an executive conference center with a private golf and
tennis club and certain related assets from The Woodlands Commercial Properties
Company, L.P., a partnership, the interests of which are owned by Crescent Real
Estate and certain Morgan Stanley Group funds. The Woodlands Operating Company
leased The Woodlands Conference Center and Country Club on a triple net basis,
with base rent in the amount of $0.75 million per month during the eight-year
term of the lease. The lease also provides for the payment of percentage rent
for each calendar year in which gross receipts from the operation of The
Woodlands Conference Center and Country Club exceed certain amounts.
The Woodlands Operating Company partnership agreement provided that
distributions be made to partners in accordance with specified payout
percentages subject to change based upon whether certain established cumulative
preferred returns were earned. As cumulative preferred returns reach certain
thresholds, distributions to Crescent Operating from The Woodlands Operating
Company increased from 42.5% to 49.5% and then from 49.5% to 52.5%. Beginning in
2000, both the 42.5% and the 49.5% thresholds were met by The Woodlands
Operating Company; therefore, the payout percentage to Crescent Operating
increased to 52.5%.
On March 22, 2002, a subsidiary of Crescent Real Estate acquired, through
a strict foreclosure which was agreed upon under the terms of the Settlement
Agreement, Crescent Operating's interest in The Woodlands Operating Company,
giving Crescent Real Estate an indirect 52.5% general partnership interest in
The Woodlands Operating Company. Prior to this transfer, neither Crescent Real
Estate or its affiliates owned any interest in The Woodlands Operating Company.
The Woodlands Land Company, Inc.
Crescent Operating owned all of the voting stock, representing a 5%
economic interest, of The Woodlands Land Company, a residential and commercial
development corporation which was formerly wholly owned by Crescent Partnership,
prior to the original Settlement Agreement on February 14, 2002. The Woodland's
Land Company holds a 52.5% general partner interest in, and is the managing
general partner of, The Woodlands Land Development Company, a Texas limited
partnership in which certain Morgan Stanley funds hold a 47.5% limited partner
interest. The Woodlands Land Development Company primarily owns (i)
approximately 4,900 acres of land capable of supporting the development of more
than 13,100 lots for single-family homes, (ii) approximately 1,700 acres capable
of supporting more than 13.3 million net rentable square feet of commercial
development, (iii) a realty office, (iv) contract rights relating to the
operation of its property, (v) an athletic center and (vi) a 50% interest in a
title company.
141
The Woodlands Land Development Company partnership agreement provided that
distributions be made to partners in accordance with specified payout
percentages subject to change based upon whether certain established cumulative
preferred returns were earned. As cumulative preferred returns reach certain
thresholds, distributions to The Woodlands Land Company from The Woodlands Land
Development Company increase from 42.5% to 49.5% and then from 49.5% to 52.5%.
In 2001, the 42.5% and 49.5% thresholds were met; therefore, the payout
percentage to Crescent Operating increased to 2.625%.
Crescent Resort Development, Inc. (formerly Crescent Development
Management Corp.).
CRDI's investments included direct and indirect economic interests that
vary from 25% to 64% consisting primarily of the following: (i) six residential
and commercial developments and eleven residential developments in Colorado,
South Carolina and California; (ii) a timeshare development in Colorado; (iii)
two transportation companies providing approximately 80% of the airport shuttle
service to Colorado resort areas; (iv) two private clubs consisting of various
recreational and social amenities in Colorado and California; and (v) an
interest in a partnership owning an interest in the Ritz Carlton Hotel in Palm
Beach, Florida. Until December 2000, CRDI had an indirect economic interest in a
real estate company specializing in the management of resort properties in
Colorado, Utah, South Carolina and Montana. That investment was transferred to
CDMC II, a newly formed entity having the same owners, board of directors and
officers as CRDI. In connection with that transfer, CDMC II assumed the
indebtedness of CRDI incurred in connection with that investment, all of which
is owed to Crescent Partnership. Effective March 30, 2001, CDMC II sold that
investment - a membership interest in East West Resorts, LLC - to a company
affiliated with the other owner of East-West Resorts, for cash and a secured
promissory note. CDMC II immediately transferred the cash and note to
Transportal Investment Corp. in exchange for its assumption of all of its
indebtedness and dissolved. Crescent Operating owned 1%, and Crescent
Partnership owned 99%, of Transportal Investment Corp., which owns an interest
in Transportal Network, LLC. Transportal Network is an abandoned venture that
had been planned to provide routing and load management services and facilitate
related purchases over the internet to independent truckers, shippers and
receivers. Transportal Network ceased operations in October 2000.
Effective September 11, 1998, Crescent Operating and Gerald W. Haddock,
John C. Goff and Harry H. Frampton, III entered into a partnership agreement to
form COPI Colorado. COPI Colorado was formed for the purpose of holding and
managing the voting stock of CRDI (and, consequently, to manage CRDI) and
investing in shares of Crescent Operating common stock. In September, 1998,
Crescent Operating contributed to COPI Colorado $9.0 million in cash in exchange
for a 50% general partner interest in COPI Colorado, and each of Mr. Haddock,
Mr. Goff and Mr. Frampton contributed to COPI Colorado approximately 667 shares
of CRDI voting stock, which each of Mr. Haddock, Mr. Goff and Mr. Frampton owned
individually, in exchange for an approximately 16.67% limited partner interest
in COPI Colorado; as a result and until January 2000, Crescent Operating owned a
50% managing interest in COPI Colorado and Mr. Haddock, Mr. Goff and Mr.
Frampton collectively owned a 50% investment interest in COPI Colorado. Mr.
Haddock assigned his 16.67% limited partner interest to COPI Colorado effective
January 2000, causing the Crescent Operating's general partner interest to
increase from 50% to 60%.
In forming COPI Colorado, Crescent Operating was able to obtain ownership
of CRDI while investing a portion of the cash otherwise payable to the former
owners of CRDI, two of whom were executive officers of Crescent Operating at the
time, in COPI Colorado, which used the cash to acquire shares of Crescent
Operating common stock.
COPI Colorado has purchased approximately 1.1 million shares of Crescent
Operating common stock at a total purchase price of $4.3 million. The average
price paid for such shares, excluding brokers' commissions, was $3.88 per share.
COPI Colorado has not purchased shares of Crescent Operating since August 1999.
Recent Developments.
On February 13, 2002, in anticipation of Crescent Operating's entering
into the Settlement Agreement, pursuant to which Crescent Operating transferred
its 60% general partnership interest in COPI Colorado to Crescent
142
Partnership, the partners of COPI Colorado caused it to distribute among its
partners, in accordance with their respective ownership percentage, all of the
shares of Crescent Operating's stock it held. Messrs. Goff and Frampton each
received 220,506 shares, while Crescent Operating received 661,518 shares.
Effective February 14, 2002, Crescent Operating transferred its equity
interests in the land development assets and related liabilities, other than
Crescent Operating's interest in The Woodlands Operating Company, as provided
for in the Settlement Agreement. Crescent Operating transferred its interest in
The Woodlands Operating Company to Crescent Real Estate on March 22, 2002.
Operational Information.
Net income for the land development segment was $2.7 million for the year
ended December 31, 2001. Crescent Operating's share of Desert Mountain
Development's net loss for the year ended December 31, 2001 was $0.3 million.
Crescent Operating's share of net income from both The Woodlands Land Company
and WOCOI Investment Company for the year ended December 31, 2001 was $2.6
million. Crescent Operating's share of COPI Colorado's net income for the year
ended December 31, 2001 was $0.2 million.
The following table sets forth certain information as of December 31, 2001
relating to the residential development properties. As Crescent Operating only
operated the land development segment for one and one-half months in 2002, there
is no information for the three and nine months ended September 30, 2002.
Total Total Average
Total Lots/Units Lots/Units Closed
Lots/ Developed Closed Sale Price
Units Since Since Per Lot/ Range of Proposed
Land Development Planned Inception Inception Unit(1) Sale Prices Per Lot(2)
---------------- ------- --------- --------- ------- ----------------------
Desert Mountain............ 2,665 2,338 2,195 $ 515,000 $400,000-$3,050,000(3)
The Woodlands.............. 37,554 26,027 24,472 $ 57,000 $16,000-$1,035,000
CRDI....................... 2,679 1,274 869 N/A $25,000-$4,600,000
------ ------ ------
Total Land Development..... 42,898 29,639 27,536
====== ====== ======
______________________
(1) Based on lots/units closed during Crescent Operating's ownership period.
(2) Based on existing inventory of developed lots and lots to be developed.
(3) Includes golf membership, which as of December 31, 2001, was $225,000.
Other Investments
Charter Behavioral Health Systems, LLC.
CBHS was the largest provider of behavioral health care treatment in the
United States. From September 9, 1999 to December 29, 2000, Crescent Operating
(which prior thereto had owned 50% of CBHS) owned a 25% common membership
interest and 100% of the preferred membership interests in CBHS, and a limited
partnership interest in COPI CBHS Holdings (controlled by individual officers of
Crescent Operating), in which Crescent Operating owned 100% of the economic
interests, and which owned 65% of the common interests of CBHS. In the fourth
quarter of 1999, CBHS began significant downsizing, including the closing of 18
facilities in December 1999 and 33 facilities in January 2000. Closure of those
facilities resulted in the filing by terminated employees of several lawsuits
against CBHS and others, including Crescent Operating, for alleged violation of
the WARN Act (see "- Legal Proceedings"). On February 16, 2000, CBHS petitioned
for relief under Chapter 11 of the United States Bankruptcy Code. Under the
protection of the bankruptcy court, CBHS has engaged in efforts to sell and
liquidate, in a controlled fashion, all of its ongoing business. On April 16,
2000, the asset purchase agreement to which a newly formed, wholly
143
owned subsidiary of Crescent Operating had agreed to acquire, for $24.5 million,
CBHS's core business assets used in the operation of 37 behavioral healthcare
facilities, subject to certain conditions, terminated by its own terms because
not all of the conditions precedent to closing had been met by that date.
Subsequent to the termination of the asset purchase agreement, CBHS sold or
closed all of its remaining facilities and is in the process of final
liquidation of any remaining assets.
As a result of the liquidation of CBHS through bankruptcy, the equity
investment in CBHS became worthless. On December 29, 2000 Crescent Operating
sold its 25% common interest and its 100% preferred membership interest in CBHS,
and COPI CBHS Holdings sold its 65% common interest in CBHS, to The Rockwood
Financial Group, Inc. for a nominal sum. The Rockwood Financial Group, Inc. is
wholly owned by Jeffrey L. Stevens, Crescent Operating's Chief Executive Officer
and sole director. The sale of CBHS to the Rockwood Financial Group, Inc. was
effected as part of Crescent Operating's tax planning strategy. For the year
2000, Crescent Operating was faced with a potentially large minimum tax
liability. Crescent Operating sold its interest in CBHS in order to trigger a
loss that would significantly reduce, if not eliminate this alternative minimum
tax liability.
Magellan Warrants.
In connection with the transaction in which Crescent Operating acquired
its interest in CBHS in 1997, Crescent Operating purchased, for $12.5 million,
warrants to acquire 1,283,311 shares of common stock of Magellan Health
Services, Inc. for an exercise price of $30.00 per share. The Magellan warrants
are exercisable in varying increments beginning on May 31, 1998 and ending on
May 31, 2009. As of December 31, 2001, the aggregate value of the Magellan
warrants was $4.1 million, calculated using the Black-Scholes method. As of
January 1, 2001, Crescent Operating was required to adopt SFAS No. 133, as
amended by SFAS No. 138. SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, provides that all derivative instruments be recognized as
either assets or liabilities depending on the rights or obligations under the
contract and that all derivative instruments be measured at fair value. Upon
adoption, Crescent Operating was required to record the net comprehensive loss
related to its investment in Magellan warrants as a charge in the statement of
operations. Based on the value of the warrants on December 31, 2000, Crescent
Operating expensed $9.5 million on January 1, 2001 as a cumulative effect of
change in accounting principle. From January 1, 2001 forward, Crescent Operating
records changes in the fair value of these warrants in the statement of
operations as investment income (loss).
Crescent Operating transferred the Magellan warrants to Crescent Machinery
in 1999 as a contribution to capital. On February 6, 2002, Crescent Machinery
filed for protection under the federal bankruptcy laws. With the commencement of
Crescent Machinery's bankruptcy proceedings, the Magellan warrants became part
of Crescent Machinery's estate, subject to the claims of creditors. The Magellan
warrants are not proposed to be treated in any manner in connection with the
Crescent Operating bankruptcy plan, and, instead, will be part of the resolution
of the Crescent Machinery bankruptcy.
Crescent Operating had previously written down its investment in the
warrants based on the estimated fair value of the warrants to $3.0 million at
December 31, 2000, using the Black-Scholes pricing model. For the year ended
December 31, 2001, Crescent Operating recorded changes in the fair value of
these warrants as investment income of $1.1 million in Crescent Operating's
statement of operations. For the six months ended June 30, 2002, Crescent
Operating recorded changes in the fair market value of the warrants as an
investment loss of $4.1 million in Crescent Operating's statement of
operations. As of June 30, 2002, the value of the warrants was zero. Crescent
Operating does not anticipate any future recognition of value relating to the
warrants.
For additional financial information related to Crescent Operating's
business segments, see Crescent Operating's notes to the consolidated financial
statements.
144
EMPLOYEES
As of December 31, 2001, Crescent Operating and its consolidated
subsidiaries had the number of employees indicated below:
Crescent Operating-corporate................. 5
Equipment sales and leasing segment.......... 337
Hospitality segment.......................... 635
Land development segment..................... 691
-----
1,668
=====
On May 1, 2001, Richard P. Knight resigned his position as Vice President
and Chief Financial Officer to pursue other interests.
Crescent Operating has excluded employees of The Woodlands Operating
Company, The Woodlands Land Development Company and AmeriCold Logistics, as
these subsidiaries represent equity investments for financial reporting
purposes.
PROPERTIES
Immediately prior to Crescent Operating's transfer to Crescent Partnership
on February 14, 2002, Crescent Operating, through its subsidiary, Crescent
Machinery, owned fee simple interests in four properties located in Dallas and
Austin, Texas, Tulsa, Oklahoma and Van Wert, Ohio. Crescent Operating, directly
or indirectly, also held leasehold interests in certain facilities, including
the hotel operations and other leased Crescent Machinery locations,
collectively, the leased properties. Crescent Operating transferred all of the
leasehold interests in the hotel operations to Crescent Partnership in February
2002. Crescent Machinery filed a voluntary petition in bankruptcy on February 6,
2002, and its properties and assets, including but not limited to these fee
simple interests and leaseholds, are subject to the claims of creditors.
Crescent Operating believes it will not likely receive any distribution in
respect of the bankruptcy proceeding. Management believes that, for so long as
it directly or indirectly owned or controlled fee simple interests and
leaseholds, each of such owned and leased properties was adequately maintained
and suitable for use in its respective capacity. Crescent Operating or certain
of its subsidiaries entered into lease agreements in respect of the leased
properties, pursuant to which each respective lessee was responsible for routine
maintenance of the subject property.
For further description as to the general character of Crescent
Operating's properties by segment, see "Description of Crescent Operating's
Business - Business Segments" above.
LEGAL PROCEEDINGS
CBHS became the subject of Chapter 11 bankruptcy proceedings by filing a
voluntary petition on February 16, 2000, in United States Bankruptcy Court for
the District of Delaware. Although CBHS is not a subsidiary of Crescent
Operating, Crescent Operating did own a majority (90%) economic interest in CBHS
until December 29, 2000.
As stated above under "Description of Crescent Operating Business -
Business Segments - Other Investments - Charter Behavioral Health Systems, LLC,"
as a result of the liquidation of CBHS through bankruptcy, the equity investment
in CBHS became worthless. On December 29, 2000, as part of Crescent Operating's
tax planning, Crescent Operating sold its 25% common interest and its 100%
preferred membership interest in CBHS, and COPI CBHS Holdings sold its 65%
common interest in CBHS to The Rockwood Financial Group, Inc. for a nominal sum.
145
Crescent Operating held no funded or liquidated claims against the estate
of CBHS. Crescent Operating filed proofs of claim against CBHS as a protective
matter for potential indemnification or contribution for third party lawsuits
and claims where Crescent Operating is a named defendant with CBHS, such as
lawsuits based upon alleged WARN Act violations purported to have been committed
by CBHS and/or its subsidiaries in closing behavioral health care facilities in
1999 and 2000. The only such lawsuits that have been brought against Crescent
Operating arise from WARN Act claims. In connection with a settlement entered
into among Crescent Operating, CBHS, the WARN Act plaintiffs, and others,
Crescent Operating's indemnification and contribution claims against CBHS based
on such lawsuits have been resolved. No other claims or lawsuits have been
asserted against Crescent Operating that would give rise to indemnification or
contribution claims by Crescent Operating against CBHS. In the event that, prior
to the bar date for asserting claims against Crescent Operating in its
bankruptcy case, no other claims or lawsuits are asserted against Crescent
Operating that would give rise to indemnification or contribution claims by
Crescent Operating against CBHS, Crescent Operating's claims for indemnification
or contribution in the CBHS case will be disallowed. If any such lawsuits or
claims are brought, Crescent Operating will pursue its indemnification and
contribution claims in the CBHS case as appropriate.
To date, several lawsuits, all of which seek class action certification,
have been filed against CBHS alleging violations of the WARN Act in the closing
of certain healthcare facilities in 1999 and 2000. Of those lawsuits, three also
named Crescent Operating as a defendant, but all three of those suits have since
been dismissed. An additional suit seeking similar relief was also filed against
Crescent Operating and Crescent Partnership, as well as CBHS.
A global Stipulation of Settlement of all WARN matters was reached and
filed with the United States District Court and Bankruptcy Court for the
District of Delaware by the WARN Act claimants, CBHS, Crescent Operating,
Crescent Partnership and the Creditors Committee in the CBHS case. The
settlement was approved by the District Court by order dated March 18, 2002. As
it applies to Crescent Operating, the settlement provides that either Crescent
Operating or Crescent Partnership was required to deposit into escrow $500,000
for the benefit of the WARN Act claimants and, upon the settlement becoming
final, Crescent Operating received a complete release for all WARN Act claims
and any other claims in the CBHS case other than potential claims from those
CBHS employees who have opted out of the settlement. It appears that a maximum
of three such employees have opted out and none have made claims against
Crescent Operating to date. Crescent Partnership has paid the $500,000 into
escrow. This payment will not be included as an expense for the purposes of
calculating the aggregate value of the Crescent Real Estate shares to be
distributed to the Crescent Operating stockholders.
In accordance with an agreement between Gerald Haddock and Crescent
Operating, COPI Colorado redeemed the limited partnership interest of Mr.
Haddock, Crescent Operating's former Chief Executive Officer and President, in
January 2000. COPI Colorado paid Mr. Haddock approximately $2.6 million for his
approximate 16.67% limited partner interest (determined from an independent
appraisal of the value of COPI Colorado). Mr. Haddock challenged the valuation
performed by the independent appraiser and the procedures followed by Crescent
Operating with respect to the redemption and valuation process. On February 7,
2001, Crescent Operating filed a lawsuit in the 141st Judicial Court of Tarrant
County, Texas seeking a declaratory judgment to assist in resolution of Crescent
Operating's dispute with Mr. Haddock. The parties settled their dispute, and the
lawsuit was dismissed effective as of January 2, 2002.
Crescent Machinery Company is a wholly owned subsidiary of Crescent
Operating. Crescent Machinery is a debtor in possession in a Chapter 11
reorganization case pending in the United States Bankruptcy Court for the
Northern District of Texas. On December 19, 2002, the Crescent Machinery
Committee commenced a lawsuit in the District Court of Tarrant County, Texas,
styled "The Estates of Crescent Machinery and E.L. Lester, Inc. v. Mark
Roberson, Jeffrey Stevens, Gerald Haddock, Rick Knight and Crescent Operating,
Inc." The lawsuit seeks an unspecified amount of direct, consequential and
punitive damages, as well as related attorneys fees, for alleged breaches of
fiduciary duty, aiding and abetting breaches of fiduciary duty, negligent
misrepresentation, and gross negligence. The creditors committee has alleged
that the creditors of Crescent Machinery have been damaged as a result of the
following:
- lack of experienced management;
- failure to have a written acquisition plan;
- withdrawal of acquisition funding by Crescent Operating;
- accounting misstatements; and
- failure to restructure Crescent Machinery.
Each of the named individual defendants was either an officer or director,
or both, of Crescent Machinery at the time the alleged breaches occurred.
Pursuant to the certificate of incorporation and bylaws of Crescent Operating,
each of the individual defendants may be entitled to indemnification by Crescent
Operating against some or all of the claims alleged in the lawsuit, including
reimbursement of reasonable attorney's fees incurred in defending the lawsuit.
Even if Crescent Operating were successful in defending against the claims in
the lawsuit, there is the possibility that the plaintiffs may be successful
against one or more of the individual defendants and that such defendant may
have a claim for indemnity against Crescent Operating. Crescent Operating has
director's and officer's liability insurance in the face amount of $3.0 million
that may afford coverage for these indemnity claims. Nonetheless, if any of the
Crescent Machinery Committee's claims against these officers and directors are
allowed in an amount in excess of any available insurance, then that claim will
have to be satisfied before any distribution could be made to Crescent
Operating's stockholders.
Crescent Operating intends to vigorously defend against the allegations
and claims in the lawsuit.
146
Crescent Operating will ask the Bankruptcy Court to estimate any claims by the
Crescent Machinery Committee at zero for purposes of distribution under Crescent
Operating's plan of reorganization. Crescent Operating believes that there is a
strong likelihood that the bankruptcy court having jurisdiction over its Chapter
11 case will estimate the claim at zero, and, therefore, the distributions that
would otherwise be made to Crescent Operating stockholders will not be
diminished by the assertion of such claim. There can be no assurance, however,
that the Crescent Machinery Committee's claim will be estimated at zero, or even
that the bankruptcy court would conduct an estimation hearing in lieu of the
normal trial procedures in bankruptcy court. Therefore, there is a risk that
substantial delays could result from the process in which the Crescent Machinery
Committee's claim is adjudicated. In addition, there is a risk that if the
Crescent Machinery Committee were ultimately successful in the prosecution of
its claim, or if Crescent Real Estate, pursuant to the Settlement Agreement,
offers to assume or settle any obligations under the Crescent Machinery
Committee's claim and Crescent Operating accepts the offer, the total value of
the Crescent Real Estate common shares that the Crescent Operating stockholders
will receive will be reduced and the Crescent Operating stockholders will
receive fewer Crescent Real Estate common shares. However, even if Crescent Real
Estate does offer to assume or settle obligations under the Crescent Machinery
Committee's claim and Crescent Operating accepts the offer, the total value of
the minimum number of Crescent Real Estate common shares that the Crescent
Operating stockholders will be entitled to receive if the bankruptcy plan is
accepted by the Crescent Operating stockholders and confirmed by the bankruptcy
court will be at least $2.16 million, or $0.20 per share of Crescent Operating
common stock.
DESCRIPTION OF CRESCENT REAL ESTATE'S BUSINESS
OVERVIEW OF CRESCENT REAL ESTATE
Crescent Real Estate operates as a REIT for federal income tax purposes,
and, together with its subsidiaries, provides management, leasing and
development services for some of its properties.
The direct and indirect subsidiaries of Crescent Real Estate at September
30, 2002 included:
- Crescent Real Estate Equities Limited Partnership, or Crescent
Partnership;
- Crescent Real Estate Equities Ltd., or the General Partner of
Crescent Partnership; and
- Subsidiaries of Crescent Partnership and the General Partner of
Crescent Partnership.
Crescent Real Estate conducts all of its business through Crescent
Partnership and its other subsidiaries. Crescent Real Estate is structured to
facilitate and maintain the qualification of Crescent Real Estate as a REIT.
INDUSTRY SEGMENTS
As of September 30, 2002, Crescent Real Estate's assets and operations
were composed of four investment segments:
- office segment;
- resort/hotel segment;
- residential development segment; and
147
- temperature-controlled logistics segment.
Within these segments, Crescent Real Estate owned or had an interest in
the following real estate assets as of September 30, 2002:
- Office segment consisted of 73 office properties located in 25
metropolitan submarkets in six states, with an aggregate of
approximately 28.5 million net rentable square feet (64 of the
office properties, including three retail properties, are wholly
owned and 10 are owned through joint ventures, seven of which are
consolidated and three of which are unconsolidated);
- Resort/hotel segment consisted of five luxury and destination
fitness resorts and spas with a total of 1,036 rooms/guest nights
and four upscale business-class hotel properties with a total of
1,771 rooms;
- Residential development segment consisted of Crescent Real Estate's
ownership of real estate mortgages and voting and non-voting common
stock representing interests ranging from 94% to 100% in five
residential development corporations, which in turn, through joint
venture or partnership arrangements, owned 21 upscale residential
development properties; and
- Temperature-controlled logistics segment consisted of the Crescent
Real Estate's 40% interest in a general partnership, which owns all
of the common stock, representing substantially all of the economic
interest, of AmeriCold Corporation, a REIT, which, as of September
30, 2002, directly or indirectly owned 88 temperature-controlled
logistics properties with an aggregate of approximately 441.5
million cubic feet (17.5 million square feet) of warehouse space.
See "Note 1. Organization and Basis of Presentation" included in Financial
Statements of Crescent Real Estate for the six months ended September 30, 2002
(unaudited) for a table that lists the principal subsidiaries of Crescent Real
Estate and the properties owned by such subsidiaries.
See "Note 7. Investments in Real Estate Mortgages and Equity of
Unconsolidated Companies" included in Financial Statements of Crescent Real
Estate for the nine months ended September 30, 2002 (unaudited) for a table that
lists Crescent Real Estate's ownership in significant unconsolidated companies
and equity investments as of September 30, 2002, including the three office
properties in which Crescent Real Estate owned an interest through
unconsolidated companies and equity investments and Crescent Real Estate's
ownership interests in the residential development segment and the
temperature-controlled logistics segment.
On February 14, 2002, Crescent Real Estate executed an agreement with
Crescent Operating pursuant to which Crescent Operating transferred to
subsidiaries of Crescent Real Estate Crescent Operating's lessee interests in
the eight Crescent Real Estate hotel properties leased to subsidiaries of
Crescent Operating in lieu of foreclosure and the voting common stock in three
of Crescent Real Estate's residential development corporations pursuant to a
strict foreclosure. Crescent Real Estate fully consolidated the operations of
the eight Crescent Real Estate hotel properties and the three residential
development corporations, beginning on the dates of the transfers of these
assets. See "Note 22. Subsequent Events" included in Financial Statements of
Crescent Real Estate for the year ended December 31, 2001 (audited) and "Note
16. COPI" included in the Financial Statement of Crescent Real Estate for the
nine months ended September 30, 2002, (unaudited) for additional information
regarding Crescent Real Estate's agreement with Crescent Operating.
See "Note 3. Segment Reporting" included in Financial Statements of
Crescent Real Estate for the year ended December 31, 2001 (audited) and "Note 6.
Segment Reporting" included in the Financial Statements of Crescent Real Estate
for the nine months ended September 30, 2002 (unaudited) for a table showing
total revenues, funds from operations, and equity in net income of
unconsolidated companies for each of these investment segments for the years
ended December 31, 2001, 2000 and 1999 and the three and nine months ended
September 30, 2002 and 2001 and identifiable assets for each of these investment
segments at December 31, 2001 and 2000 and at September 30, 2002.
148
Office Segment
Ownership Structure.
As of September 30, 2002, Crescent Real Estate owned or had an interest in
73 office properties located in 25 metropolitan submarkets in six states, with
an aggregate of approximately 28.5 million net rentable square feet. Sixty-four
of the office properties, including three retail properties, are wholly owned
and 10 are owned through joint ventures, seven of which are consolidated and
three of which are unconsolidated. Crescent Real Estate, as lessor, has retained
substantially all of the risks and benefits of ownership of the office
properties and accounts for its leases as operating leases. Additionally,
Crescent Real Estate provides management and leasing services for some of its
office properties.
See "Properties" below for more information about Crescent Real Estate's
office properties. In addition, see "Note 1. Organization and Basis of
Presentation" included in Financial Statements of Crescent Real Estate for the
nine months ended September 30, 2002 (unaudited) for a table that lists the
principal subsidiaries of Crescent Real Estate and the properties owned by such
subsidiaries and "Note 7. Investments in Real Estate Mortgages and Equity of
Unconsolidated Companies" included in Financial Statements of Crescent Real
Estate for the nine months ended September 30, 2002 (unaudited) for a table that
lists Crescent Real Estate's ownership in significant unconsolidated companies
or equity investments and the three office properties in which Crescent Real
Estate owned an interest through these unconsolidated companies or equity
investments.
Joint Venture Arrangements.
5 Houston Center
On June 4, 2001, Crescent Real Estate entered into a joint venture
arrangement with a pension fund advised by JP Morgan Investment Management,
Inc., or JPM, to construct the 5 Houston Center office property within Crescent
Real Estate's Houston Center mixed-use office property complex in Houston,
Texas. The Class A office property will consist of 577,000 net rentable square
feet. The joint venture is structured such that the fund holds a 75% equity
interest, and Crescent Real Estate holds a 25% equity interest in the property.
In addition, Crescent Real Estate is developing, and will manage and lease, the
property on a fee basis.
Four Westlake Park and Bank One Tower
On July 30, 2001, Crescent Real Estate entered into joint venture
arrangements with an affiliate of General Electric Pension Fund, or GE, for two
office properties, Four Westlake Park in Houston, Texas, and Bank One Tower in
Austin, Texas. The joint ventures are structured such that GE holds an 80%
equity interest in each of the office properties, Four Westlake Park, a 560,000
square foot Class A office property located in the Katy Freeway submarket of
Houston, and Bank One Tower, a 390,000 square foot Class A office property
located in downtown Austin. Crescent Real Estate continues to hold the remaining
20% equity interests in each office property. In addition, Crescent Real Estate
manages and leases the office properties on a fee basis.
Three Westlake Park
On August 21, 2002, Crescent Real Estate entered into a joint venture
arrangement with an affiliate of GE. In connection with the formation of the
venture, Crescent Real Estate contributed an office property, Three Westlake
Park in Houston, Texas, and GE made a cash contribution. GE holds an 80% equity
interest in Three Westlake Park, a 415,000 square foot Class A office property
located in the Katy Freeway submarket of Houston, and Crescent Real Estate
continues to hold the remaining 20% equity interest in the office property, with
Crescent Real Estate's interest accounted for under the equity method. Crescent
Real Estate will continue to manage and lease Three Westlake Park on a fee
basis.
149
Market Information.
The office properties reflect Crescent Real Estate's strategy of investing
in premier assets within markets that have significant potential for rental
growth. Within its selected submarkets, Crescent Real Estate has focused on
premier locations that management believes are able to attract and retain the
highest quality tenants and command premium rents. Consistent with its long-term
investment strategies, Crescent Real Estate has sought transactions where it was
able to acquire properties that have strong economic returns based on in-place
tenancy and also have a dominant position within the submarket due to quality
and/or location. Accordingly, management's long-term investment strategy not
only demands acceptable current cash flow return on invested capital, but also
considers long-term cash flow growth prospects. In selecting the office
properties, Crescent Real Estate analyzed demographic and economic data to focus
on markets expected to benefit from significant long-term employment growth as
well as corporate relocations.
Crescent Real Estate's office properties are located primarily in the
Dallas/Fort Worth and Houston, Texas, metropolitan areas, both of which are
projected to benefit from strong population and employment growth over the next
10 years. As indicated in the table below entitled "Projected Population Growth
and Employment Growth for all Company Markets," these core markets are projected
to outperform the 10-year averages for the United States. In addition, Crescent
Real Estate considers these markets "demand-driven" markets due to high levels
of in-migration by corporations, affordable housing costs, moderate cost of
living, and the presence of centrally located travel hubs, making all areas of
the country easily accessible.
Texas
As of December 2001, the Texas unemployment rate was 5.7%, slightly better
than the national unemployment rate of 5.8%. According to the Texas Economic
Update, Texas weathered the 2001 economic slowdown better than the nation as a
whole.
Dallas/Fort Worth
According to the Bureau of Labor Statistics, 2001 job growth slowed
considerably in the Dallas/Fort Worth area. As of December 2001, the Dallas/Fort
Worth unemployment rate was 5.6%, compared with the Texas unemployment rate of
5.7% and the national unemployment rate of 5.8%. As for Dallas/Fort Worth's 2001
commercial office market, according to CoStar data, citywide net economic
absorption, excluding space available for sublease, was approximately 1.0
million square feet, primarily represented by a positive 1.0 million square feet
of absorption in Class A space. The city's total net absorption, including space
available for sublease, was approximately negative 3.0 million square feet for
2001; however, Class A space represented only approximately negative 700,000
square feet of the negative 3.0 million total square feet.
Houston
Houston's employment data held steady through much of 2001, despite the
slowdown in the economy. Approximately 23,000 jobs were created in 2001, an
increase of approximately 1.1% over 2000. As of December 2001, the Houston
unemployment rate was 4.4%, compared with the Texas unemployment rate of 5.7%
and the national unemployment rate of 5.8%. As for Houston's 2001 commercial
office market, according to CoStar data, citywide net economic absorption,
excluding space available for sublease, was 2.0 million square feet, with 2.75
million square feet in Class A space. The city's total net absorption, including
space available for sublease, was negative 200,000 square feet for 2001;
however, Class A space had a positive total net absorption of 1.4 million square
feet.
150
The demographic conditions, economic conditions and trends, population
growth and employment growth, favoring the markets in which Crescent Real Estate
has invested are projected to continue to exceed the national averages, as
illustrated in the following table.
Projected Population Growth and Employment Growth for all Crescent Real
Estate Markets.
Population Employment
Growth Growth
Metropolitan Statistical Area 2002-2011 2002-2011
----------------------------- --------- ---------
Albuquerque, NM 22.05% 14.15%
Austin, TX 26.02 36.61
Colorado Springs, CO 27.48 15.83
Dallas, TX 15.89 20.92
Denver, CO 11.34 19.76
Fort Worth, TX 19.03 22.31
Houston, TX 15.61 22.43
Miami, FL 9.03 15.90
Phoenix, AZ 27.24 33.41
San Diego, CA 17.35 17.29
UNITED STATES 8.49 12.01
----------
SOURCE: COMPILED FROM INFORMATION PUBLISHED BY ECONOMY.COM, INC.
Crescent Real Estate does not depend on a single customer or a few major
customers within the office segment, the loss of which would have a material
adverse effect on Crescent Real Estate's financial condition or results of
operations. Based on rental revenues from office leases in effect as of December
31, 2001 and September 30, 2002, no single tenant accounted for more than 5% of
Crescent Real Estate's total office segment rental revenues for 2001 or the nine
months ended September 30, 2002.
Crescent Real Estate applies a well-defined leasing strategy in order to
capture the potential rental growth in Crescent Real Estate's portfolio of
office properties as occupancy and rental rates increase within the markets and
the submarkets in which Crescent Real Estate has invested. Crescent Real
Estate's strategy is based, in part, on identifying and focusing on investments
in submarkets in which weighted average full-service rental rates (representing
base rent after giving effect to free rent and scheduled rent increases that
would be taken into account under generally accepted accounting principles, or
GAAP, and including adjustments for expenses payable by or reimbursed from
tenants) are significantly less than weighted average full-service replacement
cost rental rates (the rate management estimates to be necessary to provide a
return to a developer of a comparable, multi-tenant building sufficient to
justify construction of new buildings) in that submarket. In calculating
replacement cost rental rates, management relies on available third-party data
and its own estimates of construction costs (including materials and labor in a
particular market) and assumes replacement cost rental rates are achieved at a
95% occupancy level. Crescent Real Estate believes that the difference between
the two rates is a useful measure of the additional revenue that Crescent Real
Estate may be able to obtain from a property, because the difference should
represent the amount by which rental rates would be required to increase in
order to justify construction of new properties. For Crescent Real Estate's
office properties, the weighted average full-service rental rate as of December
31, 2001 was $22.42 per square foot, compared to an estimated weighted average
full-service replacement cost rental rate of $30.23 per square foot.
Competition.
Crescent Real Estate's office properties, primarily Class A properties
located within the southwest, individually compete against a wide range of
property owners and developers, including property management companies and
other REITs, that offer space in similar classes of office properties - for
example, Class A and Class B
151
properties. A number of these owners and developers may own more than one
property. The number and type of competing properties in a particular market or
submarket could have a material effect on Crescent Real Estate's ability to
lease space and maintain or increase occupancy or rents in its existing office
properties. Crescent Real Estate's management believes, however, that the
quality services and individualized attention that Crescent Real Estate offers
its customers, together with its active preventive maintenance program and
superior building locations within markets, enhance Crescent Real Estate's
ability to attract and retain customers for its office properties. In addition,
as of December 31, 2001, on a weighted average basis, Crescent Real Estate owned
16% of the Class A office space in the 26 submarkets in which Crescent Real
Estate owned Class A office properties, and 24% of the Class B office space in
the two submarkets in which Crescent Real Estate owned Class B office
properties. Crescent Real Estate's management believes that ownership of a
significant percentage of office space in a particular market reduces property
operating expenses, enhances Crescent Real Estate's ability to attract and
retain customers and potentially results in increases in Crescent Real Estate's
net operating income.
Dispositions.
During the nine months ended September 30, 2002, Crescent Real Estate
disposed of five fully consolidated office properties. On January 18, 2002,
Crescent Real Estate completed the sale of Cedar Springs Plaza, a wholly owned
office property in Dallas, Texas. On May 29, 2002, Woodlands office Equities -
'95 Limited, or Woodlands Office Equities, owned by Crescent Real Estate and the
Woodlands Commercial Properties Company, L.P., sold two consolidated office
properties located within the Woodlands, Texas. On August 1, 2002, Crescent Real
Estate completed the sale of the 6225 North 24th Street office property in
Phoenix, Arizona. On September 20, 2002, Crescent Real Estate completed the sale
of the Reverchon Plaza office property in Dallas, Texas.
During the year ended December 31, 2001, five of Crescent Real Estate's
fully consolidated office properties were disposed of. On September 18, 2001,
Crescent Real Estate completed the sale of the two Washington Harbour office
properties. The Washington Harbour office properties were Crescent Real Estate's
only office properties in Washington, D.C. On September 28, 2001, the Woodlands
Office Equities sold two office properties located within The Woodlands, Texas.
On December 20, 2001, Woodlands Office Equities sold another office property
located within The Woodlands, Texas.
During the nine months ended September 30, 2002, The Woodlands Commercial
Properties Company, L.P., sold two unconsolidated office properties located
within The Woodlands, Texas.
During the year ended December 31, 2001, two of the unconsolidated
companies in which Crescent Real Estate has an equity interest, sold three
office properties and one retail property. On September 27, 2001, the Woodlands
Commercial Properties Company, owned by The Woodlands Lands Company, Inc. and an
affiliate of Morgan Stanley, sold one office/venture tech property and located
within The Woodlands, Texas. On November 9, 2001, The Woodlands Land Development
Company, L.P., owned by Crescent Real Estate and an affiliate of Morgan Stanley,
sold two office properties and one retail property located within The Woodlands,
Texas.
Acquisition.
------------
On August 29, 2002, Crescent Real Estate acquired John Manville Plaza, a
29-story, 675,000 square foot Class A office building located in Denver,
Colorado. Crescent Real Estate acquired the property for approximately $91,200.
The property is wholly owned by Crescent Real Estate and included in the office
segment.
152
Development.
Avallon IV Office Property
In May 2001, Crescent Real Estate completed the construction of the
Avallon IV office property in Austin, Texas. The property is a Class A office
property with 86,315 net rentable square feet. Construction of this property
commenced in September 2000.
5 Houston Center Office Property
Crescent Real Estate is currently developing the 5 Houston Center office
property in Houston, Texas. Construction of the planned 27-story, Class A office
property consisting of 577,000 net rentable square feet commenced in November
2000, and is expected to be completed in the fourth quarter of 2002. In June
2001, Crescent Real Estate entered into a joint venture arrangement with a
pension fund advised by JPM to construct this office property. The joint venture
is structured such that the fund holds a 75% equity interest, and Crescent Real
Estate holds a 25% equity interest in the property.
Joint Venture Arrangements.
Four Westlake Park and Bank One Tower
One July 30, 2001, Crescent Real Estate entered into joint venture
arrangements with an affiliate GE, in which Crescent Real Estate contributed
two office properties, Four Westlake Park in Houston, Texas, and Bank One Tower
in Austin, Texas into the joint ventures and GE made a cash contribution. The
joint ventures are structured such that GE holds an 80% equity interest in each
of Four Westlake Park. Crescent Real Estate continues to hold the remaining 20%
equity interests in each property. In addition, Crescent Real Estate manages
and leases the office properties on a fee basis.
Three Westlake Park
On August 21, 2002, Crescent Real Estate entered into a joint venture
arrangement with an affiliate of GE. In connection with the formation of the
venture, Crescent Real Estate contributed an office property, Three Westlake
Park in Houston, Texas, and GE made a cash contribution. GE holds an 80% equity
interest in the Three Westlake Park and Crescent Real Estate continues to hold
the remaining 20% equity interest in the office property. Crescent Real Estate
will continue to manage and lease Three Westlake Park on a fee basis.
Miami Center
On September 25, 2002, Crescent Real Estate entered into a joint venture
arrangement with an affiliate of a fund managed by JP Morgan Investment
Management, Inc., or JPM, in connection with which JPM purchased a 60% interest
in Crescent Miami Center, L.L.C. with a cash contribution. Crescent Miami
Center, L.L.C. owns an Office Property, Miami Center in Miami, Florida. The
joint venture is structured such that JPM holds a 60% equity interest in Miami
Center, and Crescent Real Estate holds the remaining 40% equity interest in the
office property.
Resort/Hotel Segment
Ownership Structure.
Prior to enactment of the REIT Modernization Act, Crescent Real Estate's
status as a REIT for federal income tax purposes prohibited it from operating
the Crescent Real Estate hotel properties. As of December 31, 2001, Crescent
Real Estate owned nine hotel properties, all of which, other than the Omni
Austin Hotel, were leased to subsidiaries of Crescent Operating pursuant to
eight separate leases. The Omni Austin Hotel was leased, under a separate lease,
to HCD Austin Corporation, an unrelated third party.
Under the leases, each having a term of 10 years, Crescent Real Estate
hotel property lessees assumed the rights and obligations of the property owner
under the respective management agreements with the hotel operators, as well as
the obligation to pay all property taxes and other costs related to the
properties.
The leases provided for the payment by Crescent Real Estate hotel property
lessees of all or a combination of the following:
- base rent, with periodic rent increases if applicable;
- percentage rent based on a percentage of gross hotel receipts or
gross room revenues, as applicable, above a specified amount; and
- a percentage of gross food and beverage revenues above a specified
amount.
On February 14, 2002, Crescent Real Estate executed an agreement with
Crescent Operating, pursuant to which Crescent Operating transferred to
subsidiaries of Crescent Real Estate, in lieu of foreclosure, Crescent
Operating's lessee interests in the eight Crescent Real Estate hotel properties
leased to subsidiaries of Crescent Operating. As a result, these subsidiaries of
Crescent Real Estate became the lessees of the eight Crescent Real Estate hotel
properties.
See "Note 22. Subsequent Events" included in Financial Statements of
Crescent Real Estate for the year ended December 31, 2001 (audited) for
additional information regarding Crescent Real Estate's agreement with Crescent
Operating.
Joint Venture Arrangement
Sonoma Mission Inn & Spa
153
On September 1, 2002, Crescent Real Estate entered into a joint venture
arrangement with a subsidiary of Fairmont Hotels & Resorts Inc., or FHR,
pursuant to which Crescent Real Estate contributed a resort/hotel property and
FHR purchased a 19.9% equity interest in the limited liability company that owns
Crescent Real Estate's Sonoma Mission Inn & Spa Resort/Hotel Property in Sonoma
County, California. Crescent Real Estate continues to own the remaining 80.1%
interest. Under Crescent Real Estate's agreement with FHR, Crescent Real Estate
will manage the limited liability company that owns the Sonoma Mission Inn &
Spa, and FHR will operate and manage the property under the Fairmont brand.
CR License, LLC and CRL Investments, Inc.
As of December 31, 2001, Crescent Real Estate had a 28.5% interest in CR
License, LLC, the entity which owns the right to the future use of the "Canyon
Ranch" name. Crescent Real Estate also had a 95% economic interest, representing
all of the non-voting common stock, in CRL Investments, Inc., which has an
approximately 65% economic interest in the Canyon Ranch Spa Club in the Venetian
Hotel in Las Vegas, Nevada.
On February 14, 2002, Crescent Real Estate executed an agreement with
Crescent Operating, pursuant to which Crescent Real Estate acquired, pursuant to
a strict foreclosure, Crescent Operating's 1.5% interest in CR License and 5.0%
interest, representing all of the voting stock, in CRL Investments.
Market Information.
Lodging demand is highly dependent upon the global economy and volume of
business travel. Prior to 2001, the hospitality industry enjoyed record profits.
However, the uncertainty surrounding the weak global economy and the costs and
fear resulting from the events of September 11, 2001 are expected to result in
weak performance for much of 2002. This is evidenced by declines in both
business and leisure travel in the United States.
Competition.
Most of Crescent Real Estate's upscale business class hotel properties in
Denver, Albuquerque, Austin and Houston are business and convention center
hotels that compete against other business and convention center hotels.
Crescent Real Estate believes, however, that its luxury and destination fitness
resorts and spas are unique properties that have no significant direct
competitors due either to their high replacement cost or unique concept and
location. However, the luxury and destination fitness resorts and spas do
compete against business-class hotels or middle-market resorts in their
geographic areas, as well as against luxury resorts nationwide and around the
world.
Residential Development Segment
Ownership Structure.
As of December 31, 2001, Crescent Real Estate owned economic interests in
five residential development corporations through the residential development
property mortgages and the non-voting common stock of these residential
development corporations. The residential development corporations in turn,
through joint ventures or partnership arrangements, own interests in 21
residential development properties. The residential development corporations are
responsible for the continued development and the day-to-day operations of the
Crescent Real Estate residential development properties.
On February 14, 2002, Crescent Real Estate executed an agreement with
Crescent Operating, pursuant to which Crescent Operating transferred to
subsidiaries of Crescent Real Estate, pursuant to a strict foreclosure, Crescent
Operating's voting interests in three of the residential development
corporations. These three residential development corporations, Desert Mountain
Development, The Woodlands Land Company and CRDI, own interests in 16 Crescent
Real Estate residential development properties.
154
See "Note 22. Subsequent Events" included in Financial Statements of
Crescent Real Estate for the year ended December 31, 2001 (audited) for
additional information regarding Crescent Real Estate's agreement with Crescent
Operating.
Market Information.
A slowing economy, combined with the events of September 11, 2001
contributed to the reduction in lot absorption, primarily at Desert Mountain.
CRDI, formerly Crescent Development Management Corp., was not significantly
impacted because most of its products were pre-sold. However, CRDI did change
its strategy by delaying the commencement of certain projects, which will impact
its performance in 2002. In addition, The Woodlands experienced a reduction in
lot absorption of its higher priced lots, including Carlton Woods, The
Woodlands' new upscale gated residential development. However, The Woodlands was
not significantly impacted due to the higher prices of the lots sold offsetting
lower lot sales.
Competition.
Crescent Real Estate's residential development properties compete against
a variety of other housing alternatives in each of their respective areas. These
alternatives include other planned developments, pre-existing single-family
homes, condominiums, townhouses and non-owner occupied housing, such as luxury
apartments. Crescent Real Estate's management believes that the Crescent Real
Estate properties owned by The Woodlands Land Company, CRDI and Desert Mountain,
representing Crescent Real Estate's most significant investments in residential
development properties, contain certain features that provide competitive
advantages to these developments.
The Woodlands, which is an approximately 27,000-acre, master-planned
residential and commercial community north of Houston, Texas, is unique among
developments in the Houston area, because it functions as a self-contained
community. Amenities contained in the development, which are not contained
within most other local developments, include a shopping mall, retail centers,
office buildings, a hospital, a community college, places of worship, a
conference center, 85 parks, 117 holes of golf, including a Tournament Players
Course and signature courses by Jack Nicklaus, Arnold Palmer, and Gary Player,
two man-made lakes and a performing arts pavilion. The Woodlands competes with
other master planned communities in the surrounding Houston market.
Desert Mountain, a luxury residential and recreational community in
Scottsdale, Arizona, which also offers five 18-hole Jack Nicklaus signature golf
courses and tennis courts, has few direct competitors due in part to the
superior environmental attributes and the types of amenities that it offers.
CRDI invests primarily in mountain resort residential real estate in
Colorado and California, and residential real estate in downtown Denver,
Colorado. Crescent Real Estate's management believes CRDI does not have any
direct competitors because the projects and project locations are unique and the
land is limited in most of these locations.
Temperature-Controlled Logistics Segment
Ownership Structure.
Effective March 12, 1999, Crescent Real Estate, Vornado Realty Trust,
Crescent Operating, the temperature-controlled logistics partnership and
AmeriCold Corporation (including all affiliated entities that owned any portion
of the business operations of the Crescent Real Estate temperature-controlled
logistics properties at that time) sold all of the non-real estate assets,
encompassing the business operations, for approximately $48.7 million to a
subsidiary of a newly formed partnership called AmeriCold Logistics, which is
owned 60% by Vornado Operating L.P. and 40% by a subsidiary of Crescent
Operating. Crescent Real Estate has no interest in AmeriCold Logistics.
155
As of September 30, 2002, Crescent Real Estate held a 40% interest in the
temperature-controlled logistics partnership, which owns the AmeriCold
Corporation, which directly or indirectly owns the 88 Crescent Real Estate
temperature-controlled logistics properties, with an aggregate of approximately
441.5 million cubic feet (17.5 million square feet) of warehouse space.
AmeriCold Logistics, as sole lessee of the Crescent Real Estate
temperature-controlled logistics properties, leases the Crescent Real Estate
temperature-controlled logistics properties from AmeriCold Corporation under
three triple-net master leases, as amended on January 23, 2002. On February 22,
2001, AmeriCold Corporation and AmeriCold Logistics agreed to restructure
certain financial terms of the leases, including the adjustment of the rental
obligation for 2001 to $146.0 million, the adjustment of the rental obligation
for 2002 to $150.0 million (plus contingent rent in certain circumstances), the
increase of the AmeriCold Corporation's share of capital expenditures for the
maintenance of the properties from $5.0 million to $9.5 million (effective
January 1, 2000) and the extension of the date on which deferred rent was
required to be paid to December 31, 2003.
AmeriCold Logistics deferred $20.6 million of the total $102.4 million of
rent payable for the nine months ended September 30, 2002. Crescent Real
Estate's share of the deferred rent was $8.2 million. Crescent Real Estate
recognizes rental income when earned and collected and has not recognized the
$8.2 million of deferred rent in equity in net income of the temperature
controlled logistics properties for the nine months ended September 30, 2002. In
addition, AmeriCold Logistics deferred $25.5 million of rent for the year ended
December 31, 2001, of which Crescent Real Estate's share was $10.2 million.
AmeriCold Logistics also deferred $19.0 million and $5.4 million of rent for the
years ended December 31, 2000 and 1999, respectively, of which Crescent Real
Estate's share was $7.5 million and $2.1 million, respectively. In December
2001, AmeriCold Corporation waived its rights to collect deferred rent of $39.8
million of the total $49.9 million of deferred rent, of which Crescent Real
Estate's share was $15.9 million. AmeriCold Corporation had recorded adequate
valuation allowances related to the waived deferred rental revenue during the
years ended December 31, 2000, and 2001; therefore, there was no financial
statement impact to AmeriCold Corporation or to Crescent Real Estate related to
AmeriCold Corporation's decision to waive collection of the deferred rent.
Business and Industry Information.
AmeriCold Logistics provides frozen food manufacturers with refrigerated
warehousing and transportation management services. The Crescent Real Estate
temperature-controlled logistics properties consist of production and
distribution facilities. Production facilities differ from distribution
facilities in that they typically serve one or a small number of customers
located nearby. These customers store large quantities of processed or partially
processed products in the facility until they are further processed or shipped
to the next stage of production or distribution. Distribution facilities
primarily serve customers who store a wide variety of finished products to
support shipment to end-users, such as food retailers and food service
companies, in a specific geographic market.
AmeriCold Logistics' transportation management services include freight
routing, dispatching, freight rate negotiation, backhaul coordination, freight
bill auditing, network flow management, order consolidation and distribution
channel assessment. AmeriCold Logistics' temperature-controlled logistics
expertise and access to both the frozen food warehouses and distribution
channels enable the customers of AmeriCold Logistics to respond quickly and
efficiently to time-sensitive orders from distributors and retailers.
156
AmeriCold Logistics' customers consist primarily of national, regional and
local frozen food manufacturers, distributors, retailers and food service
organizations. A breakdown of AmeriCold Logistics' largest customers include:
PERCENTAGE OF
2001 REVENUE
------------
H.J. Heinz & Co......................... 16%
Con-Agra, Inc........................... 8
Sara Lee Corp........................... 5
McCain Foods, Inc....................... 5
Tyson Foods, Inc........................ 4
General Mills........................... 4
J.R. Simplot............................ 3
Flowers Food, Inc....................... 3
Pro-Fac Cooperative, Inc................ 2
Farmland Industries, Inc................ 2
Other................................... 48
---
TOTAL 100%
===
Consolidation among retail and food service channels has limited the
ability of manufacturers to pass along cost increases by raising prices. Because
of this, manufacturers have been forced in the recent past to focus more
intensely on supply chain cost, such as inventory management, transportation and
distribution, reduction initiatives in an effort to improve operating
performance.
Competition.
AmeriCold Logistics is the largest operator of public refrigerated
warehouse space in North America and has more than twice the cubic feet of the
second largest operator. AmeriCold Logistics operated an aggregate of
approximately 18% of total cubic feet of public refrigerated warehouse space as
of December 31, 2001. No other person or entity operated more than 8% of total
public refrigerated warehouse space as of December 31, 2001. As a result,
AmeriCold Logistics does not have any competitors of comparable size. AmeriCold
Logistics operates in an environment in which competition is national, regional
and local in nature and in which the range of service, temperature-controlled
logistics facilities, customer mix, service performance and price are the
principal competitive factors.
Development.
AmeriCold Corporation completed the acquisition of one facility in the
first quarter of 2001 for $10.0 million and completed the construction of one
facility in the third quarter of 2001 for $15.8 million, representing in
aggregate approximately 8.5 million cubic feet (0.2 million square feet) of
additional warehouse space.
EMPLOYEES
As of September 30, 2002, Crescent Real Estate had 650 employees. None of
these employees are covered by collective bargaining agreements. Crescent Real
Estate considers its employee relations to be good.
PROPERTIES
Crescent Real Estate considers all of its properties to be in good
condition, well-maintained and suitable and adequate to carry on Crescent Real
Estate's business.
Office Properties
As of September 30, 2002, Crescent Real Estate owned or had an interest in
73 office properties located in 25 metropolitan submarkets in six states with an
aggregate of approximately 28.5 million net rentable square feet. The office
properties were, on a weighted average basis, 89% occupied at September 30,
2002, and are located approximately 43% in central business districts and
approximately 57% in urban markets. Crescent Real Estate's office properties are
located primarily in the Dallas and Houston, Texas, metropolitan areas. As of
September 30, 2002, Crescent Real
157
Estate's office properties in Dallas and Houston represented an aggregate of
approximately 73% of its office portfolio based on total net rentable square
feet (36% for Dallas and 37% for Houston). In addition, Crescent Real Estate
owns a 25% interest in the 5 Houston Center office property which was completed
in September 2002.
In pursuit of management's objective to dispose of non-strategic and
non-core assets, five of Crescent Real Estate's fully consolidated office
properties were disposed of during the nine months ended September 30, 2002.
158
Office Properties Tables.
The following table shows, as of September 30, 2002, certain information
about Crescent Real Estate's office properties. In the table below "CBD" means
central business district.
WEIGHTED
AVERAGE
FULL-SERVICE
NET RENTABLE RENTAL RATE
NO. OF YEAR AREA PERCENT PER LEASED
STATE, CITY, PROPERTY PROPERTIES SUBMARKET COMPLETED (SQ. FT.) LEASED SQ. FT.(1)
--------------------- ---------- --------- --------- --------- ------ ----------
TEXAS
DALLAS
Bank One Center(2) 1 CBD 1987 1,530,957 82% $23.03
Fountain Place 1 CBD 1986 1,200,266 99 20.90
The Crescent Office Towers 1 Uptown/Turtle Creek 1985 1,134,826 98 33.23
Trammell Crow Center(3) 1 CBD 1984 1,128,331 87 24.95
Stemmons Place 1 Stemmons Freeway 1983 634,381 85 17.71
Spectrum Center(4) 1 Far North Dallas 1983 598,250 82 23.72
Waterside Commons 1 Las Colinas 1986 458,906 85 18.43
125 E. John Carpenter Freeway 1 Las Colinas 1982 446,031 88 26.88
The Aberdeen 1 Far North Dallas 1986 320,629 100 19.50
MacArthur Center I & II 1 Las Colinas 1982/1986 298,161 94 23.41
Stanford Corporate Centre 1 Far North Dallas 1985 275,372 67 23.26
12404 Park Central 1 LBJ Freeway 1987 239,103 100 19.83
Palisades Central II 1 Richardson/Plano 1985 237,731 87 18.98
3333 Lee Parkway 1 Uptown/Turtle Creek 1983 233,543 49 22.39
Liberty Plaza I & II 1 Far North Dallas 1981/1986 218,813 99 16.15
The Addison 1 Far North Dallas 1981 215,016 99 20.14
Palisades Central I 1 Richardson/Plano 1980 180,503 95 21.73
The Crescent Atrium 1 Uptown/Turtle Creek 1985 164,696 99 30.77
Greenway II 1 Richardson/Plano 1985 154,329 100 22.56
Greenway I & IA 2 Richardson/Plano 1983 146,704 100 20.62
Addison Tower 1 Far North Dallas 1987 145,886 76 21.68
Las Colinas Plaza 1 Las Colinas 1987 134,953 96 21.23
5050 Quorum 1 Far North Dallas 1981 133,799 76 18.47
- ---------------- ---- ---------- --- -----
Subtotal/Weighted Average 24 10,231,186 89% $23.34
-- ---------- --- ------
FORT WORTH
Carter Burgess Plaza 1 CBD 1982 954,895 93%(5) $17.25
- --- ---- ---------- ------ ------
HOUSTON Richmond-Buffalo
Greenway Plaza Office Portfolio 10 Speedway 1969-1982 4,348,052 92% $21.05
Houston Center 3 CBD 1974-1983 2,764,417 90 22.27
Post Oak Central 3 West Loop/Galleria 1974-1981 1,279,759 85 19.91
Four Westlake Park(6) 1 Katy Freeway 1992 561,065 100 22.07
The Woodlands Office
Properties(7) 6 The Woodlands 1980-1996 462,775 93 18.48
Three Westlake Park(6) 1 Katy Freeway 1983 414,792 95(5) 23.74
1800 West Loop South 1 West Loop/Galleria 1982 399,777 62(5) 19.87
The Park Shops 1 CBD 1983 190,729 76 23.27
- --- ---- ---------- --- -----
Subtotal/Weighted Average(8) 26 10,421,366 90% $21.30
-- ---------- --- ------
AUSTIN
Frost Bank Plaza 1 CBD 1984 433,024 96% $25.26
301 Congress Avenue(9) 1 CBD 1986 418,338 83 26.44
Bank One Tower(6) 1 CBD 1974 389,503 93 25.15
Austin Centre 1 CBD 1986 343,664 83 29.19
The Avallon 3 Northwest 1993/1997 318,217 93(5) 24.87
Barton Oaks Plaza One 1 Southwest 1986 98,955 100 27.68
- --------- ---- ---------- --- -----
Subtotal/Weighted Average 8 2,001,701 90% $26.09
- ---------- --- ------
COLORADO
DENVER
Johns Manville Plaza(10) 1 CBD 1978 675,400 100% $20.21
MCI Tower 1 CBD 1982 550,805 47(5) 22.41
Ptarmigan Place 1 Cherry Creek 1984 418,630 96 20.14
Denver Technology
Regency Plaza One 1 Center 1985 309,862 84 24.48
55 Madison 1 Cherry Creek 1982 137,176 99 21.10
159
The Citadel 1 Cherry Creek 1987 130,652 99 25.11
44 Cook 1 Cherry Creek 1984 124,174 95 21.02
- ------------ ---- ---------- --- -----
Subtotal/Weighted Average 7 2,346,699 84% $21.47
- ---------- --- ------
COLORADO SPRINGS
Briargate Office and Research
Center 1 Colorado Springs 1988 258,766 74% $20.05
- ---------------- ---- ---------- --- ------
FLORIDA
MIAMI
Miami Center(11) 1 CBD 1983 782,211 92% $28.17
Datran Center 2 South Dade/Kendall 1986/1988 476,412 93 24.53
- ------------------ --------- ---------- --- -----
Subtotal/Weighted Average 3 1,258,623 92% $26.79
- --------- --- ------
ARIZONA
PHOENIX
Two Renaissance Square 1 Downtown/CBD 1990 476,373 98% $26.26
- ------------ ---- ---------- --- ------
NEW MEXICO
ALBUQUERQUE
Albuquerque Plaza 1 CBD 1990 366,236 87% $19.03
- --- ---- ---------- --- ------
CALIFORNIA
SAN DIEGO
Chancellor Park(12) 1 University Town Center 1988 195,733 81% $28.17
- ---------------------- ---- ---------- --- ------
TOTAL/WEIGHTED AVERAGE 73 28,511,578 89%(5) $22.58(13)
== ========== ====== =========
(1) Calculated based on base rent payable as of September 30, 2002, without
giving effect to free rent or scheduled rent increases that would be taken into
account under GAAP and including adjustments for expenses payable by or
reimbursable from customers.
(2) Crescent Real Estate has a 49.5% limited partner interest and a 0.5% general
partner interest in the partnership that owns Bank One Center.
(3) Crescent Real Estate owns the principal economic interest in Trammell Crow
Center through its ownership of fee simple title to the property (subject to a
ground lease and a leasehold estate regarding the building) and two mortgage
notes encumbering the leasehold interests in the land and building.
(4) Crescent Real Estate owns the principal economic interest in Spectrum Center
through an interest in Crescent Spectrum Center, L.P. which owns both the
mortgage notes secured by Spectrum Center and the ground lessor's interest in
the land underlying the office building.
(5) Leases have been executed at certain office properties but had not commenced
as of September 30, 2002. If such leases had commenced as of September 30, 2002,
the percent leased for all office properties would have been 91%. The total
percent leased for these properties would have been as follows: Carter Burgess
Plaza - 98%, Three Westlake - 100%, 1800 West Loop - 73%, The Avallon - 100%,
and MCI Tower - 60%.
(6) Crescent Real Estate has a 0.1% general partner interest and a 19.9% limited
partner interest in the partnerships that own Four Westlake Park, Three Westlake
Park and Bank One Tower.
(7) Crescent Real Estate has a 75% limited partner interest and an approximate
10% indirect general partner interest in the partnership that owns the six
office properties that comprise The Woodlands Office Properties.
(8) Excludes the 5 Houston Center office property, which was placed in service
on September 16, 2002. This office property will be included when it becomes
stabilized. At September 30, 2002, it was 34% leased. If executed leases at
September 30, 2002 had commenced, it would have been 88% leased.
(9) Crescent Real Estate has a 1% general partner interest and a 49% limited
partner interest in the partnership that owns 301 Congress Avenue.
(10) Johns Manville Plaza was acquired by Crescent Real Estate on August 29,
2002.
(11) Crescent Real Estate has a 40% member interest in the limited liability
company that owns Miami Center.
(12) Crescent Real Estate owns Chancellor Park through its ownership of a
mortgage note secured by the building and through its direct and indirect
interests in the partnership, which owns the building.
(13) The weighted average full-service rental rate per square foot calculated
based on base rent payable for Crescent Real Estate office properties as of
September 30, 2002, giving effect to free rent and scheduled rent increases that
are taken into consideration under GAAP and also including adjustments for
expenses payable by or reimbursed from customers is $22.71.
160
The following table shows, as of September 30, 2002, the principal
business conducted by the customers at Crescent Real Estate's office properties,
based on information supplied to Crescent Real Estate from the customers.
Percent of
Industry Sector Leased Sq. Ft.
--------------- --------------
Professional Services(1) 28%
Energy(2) 20
Financial Services(3) 19
Telecommunications 7
Technology 7
Other(4) 5
Manufacturing 4
Food Service 3
Government 3
Retail 2
Medical 2
------
TOTAL LEASED 100%
======
Average Square Footage
Per Customer 14,767
======
----------
(1) Includes legal, accounting, engineering, architectural and advertising
services.
(2) Includes oil and gas and utility companies.
(3) Includes banking, title and insurance and investment services.
(4) Includes construction, real estate, transportation and other industries.
161
Aggregate Lease Expirations of Office Properties.
The following tables show schedules of lease expirations for leases in
place as of September 30, 2002, for Crescent Real Estate's total office
properties and for Dallas, Houston and Austin, Texas, and Denver, Colorado,
individually, for each of the 10 years beginning with 2002, assuming that none
of the tenants exercises or has exercised renewal options.
Total Office Properties.
TOTAL OFFICE PROPERTIES
PERCENTAGE
NET RENTABLE PERCENTAGE OF TOTAL OF ANNUAL FULL-
AREA LEASED NET ANNUAL ANNUAL FULL- SERVICE RENT
NUMBER OF REPRESENTED RENTABLE AREA FULL-SERVICE SERVICE RENT PER SQUARE
TENANTS WITH BY EXPIRING REPRESENTED RENT UNDER REPRESENTED FOOT OF NET
YEAR OF LEASE EXPIRING LEASES BY EXPIRING EXPIRING BY EXPIRING RENTABLE AREA
EXPIRATION LEASES (SQUARE FEET) LEASES LEASES(1) LEASES EXPIRING(1)
------ ------------- ------ --------- ------ -----------
2002 233 1,667,335(2)(3) 6.7% $ 38,019,466 6.4% $22.80
2003 361 3,579,920(4)(5) 14.3 78,035,044 13.1 21.80
2004 298 4,374,255 17.4 101,227,128 17.0 23.14
2005 282 3,585,999 14.3 83,173,181 14.0 23.19
2006 180 2,611,299 10.4 63,952,207 10.7 24.49
2007 173 2,797,085 11.2 65,761,851 11.0 23.51
2008 54 1,071,904 4.3 25,569,531 4.3 23.85
2009 37 943,491 3.8 24,404,507 4.1 25.87
2010 32 1,535,400 6.1 42,578,335 7.1 27.73
2011 27 900,065 3.6 23,973,071 4.0 26.63
2012 and thereafter 32 2,006,355 7.9 49,397,995 8.3 24.62
----- ---------- ----- ------------ ----- ------
1,709 25,073,108(6) 100.0% $596,092,316 100.0% $23.77
===== ========== ===== ============ ===== ======
(1) Calculated based on base rent payable under the lease for net rentable
square feet expiring, without giving effect to free rent or scheduled rent
increases that would be taken into account under GAAP and including adjustments
for expenses payable by or reimbursable from tenants based on current expense
levels.
(2) Expirations by quarter are as follows: Q4: 1,667,335 sf.
(3) As of September 30, 2002 leases have been signed for 746,219 net rentable
square feet (representing approximately 45% of expiring square footage and
including renewed leases and leasing of previously vacant space) commencing in
2002.
(4) Expirations by quarter are as follows: Q1: 1,124,696 sf Q2: 986,832 sf Q3:
701,764 sf Q4: 766,628 sf.
(5) As of September 30, 2002 leases have been signed for 1,388,127 net rentable
square feet (representing approximately 39% of expiring square footage and rent
leases and leasing of previously vacant space) commencing in 2003.
(6) Reconciliation of Occupied Square Footage to Total Office NRA:
SQUARE
FEET
----
Occupied square footage 25,073,108
Non-revenue generating space 359,687
----------
Total occupied office square footage 25,432,795
Total vacant square footage 3,078,783
----------
Total office NRA
28,511,578
==========
162
Dallas Office Properties.
PERCENTAGE
NET RENTABLE PERCENTAGE OF TOTAL OF ANNUAL FULL-
AREA LEASED NET ANNUAL ANNUAL FULL- SERVICE RENT
NUMBER OF REPRESENTED RENTABLE AREA FULL-SERVICE SERVICE RENT PER SQUARE
TENANTS WITH BY EXPIRING REPRESENTED RENT UNDER REPRESENTED FOOT OF NET
YEAR OF LEASE EXPIRING LEASES BY EXPIRING EXPIRING BY EXPIRING RENTABLE AREA
EXPIRATION LEASES (SQUARE FEET) LEASES LEASES(1) LEASES EXPIRING(1)
---------- ------ ------------- ------ --------- ------ -----------
2002 59 508,984(2)(3) 5.6% $ 13,873,448 6.3% $27.26
2003 95 1,344,481(4)(5) 14.9 29,662,076 13.5 22.06
2004 87 1,235,599 13.7 32,070,950 14.6 25.96
2005 107 1,847,576 20.5 41,195,819 18.7 22.30
2006 43 680,220 7.5 17,394,448 7.9 25.57
2007 51 1,123,308 12.4 27,575,931 12.5 24.55
2008 15 516,780 5.7 12,796,529 5.8 24.76
2009 9 409,489 4.5 10,730,350 4.9 26.20
2010 12 670,634 7.4 19,877,588 9.0 29.64
2011 7 251,030 2.8 6,947,876 3.2 27.68
2012 and thereafter 12 440,292 5.0 7,869,961 3.6 17.87
--- --------- ----- ------------ ----- ------
497 9,028,393 100.0% $219,994,976 100.0% $24.37
=== ========= ===== ============ ===== ======
(1) Calculated based on base rent payable under the lease for net rentable
square feet expiring, without giving effect to free rent or scheduled rent
increases that would be taken into account under GAAP and including adjustments
for expenses payable by or reimbursable from tenants based on current expense
levels.
(2) Expirations by quarter are as follows: Q4 508,984 sf.
(3) As of September 30, 2002 leases have been signed for 189,931 net rentable
square feet (representing approximately 37% of expiring square footage and
including renewed leases and leasing of previously vacant space) commencing in
2002.
(4) Expirations by quarter are as follows: Q1: 592,840 sf Q2: 405,184 sf Q3:
136,951 sf Q4: 209,506 sf.
(5) As of September 30, 2002 leases have been signed for 492,560 net rentable
square feet (representing approximately 37% of expiring square footage and
including renewed leases and leasing of previously vacant space) commencing in
2003.
163
Houston Office Properties.
PERCENTAGE
NET RENTABLE PERCENTAGE OF TOTAL OF ANNUAL FULL-
AREA LEASED NET ANNUAL ANNUAL FULL- SERVICE RENT
NUMBER OF REPRESENTED RENTABLE AREA FULL-SERVICE SERVICE RENT PER SQUARE
TENANTS WITH BY EXPIRING REPRESENTED RENT UNDER REPRESENTED FOOT OF NET
YEAR OF LEASE EXPIRING LEASES BY EXPIRING EXPIRING BY EXPIRING RENTABLE AREA
EXPIRATION LEASES (SQUARE FEET) LEASES LEASES(1) LEASES EXPIRING(1)
---------- ------ ------------- ------ --------- ------ -----------
2002 104 829,555(2)(3) 9.0% $ 17,040,934 8.1% $20.54
2003 136 1,166,459(4)(5) 12.6 24,374,256 11.7 20.90
2004 117 1,898,176 20.6 39,572,871 18.9 20.85
2005 88 650,680 7.1 14,777,526 7.1 22.71
2006 64 1,124,218 12.2 25,394,927 12.1 22.59
2007 65 1,203,580 13.0 26,247,046 12.5 21.81
2008 16 350,636 3.8 7,469,410 3.6 21.30
2009 8 87,434 1.0 2,147,400 1.0 24.56
2010 11 591,928 6.4 14,602,679 7.0 24.67
2011 13 534,394 5.8 12,848,920 6.1 24.04
2012 and thereafter 6 796,770 8.5 24,763,651 11.9 31.08
--- --------- ----- ------------ ----- ------
628 9,233,830 100.0% $209,239,620 100.0% $22.66
=== ========= ===== ============ ===== ======
(1) Calculated based on base rent payable under the lease for net rentable
square feet expiring, without giving effect to free rent or scheduled rent
increases that would be taken into account under GAAP and including adjustments
for expenses payable by or reimbursable from tenants based on current expense
levels.
(2) Expirations by quarter are as follows: Q4: 829,555 sf.
(3) As of September 30, 2002 leases have been signed for 360,784 net rentable
square feet (representing approximately 43% of expiring square footage and
including renewed leases and leasing of previously vacant space) commencing in
2002.
(4) Expirations by quarter are as follows: Q1: 178,720 sf Q2: 443,970 sf Q3:
372,719 sf Q4: 171,050 sf.
(5) As of September 30, 2002 leases have been signed for 766,894 net rentable
square feet (representing approximately 66% of expiring square footage and
including renewed leases and leasing of previously vacant space) commencing in
2003.
Austin Office Properties.
PERCENTAGE
NET RENTABLE PERCENTAGE OF TOTAL OF ANNUAL FULL-
AREA LEASED NET ANNUAL ANNUAL FULL- SERVICE RENT
NUMBER OF REPRESENTED RENTABLE AREA FULL-SERVICE SERVICE RENT PER SQUARE
TENANTS WITH BY EXPIRING REPRESENTED RENT UNDER REPRESENTED FOOT OF NET
YEAR OF LEASE EXPIRING LEASES BY EXPIRING EXPIRING BY EXPIRING RENTABLE AREA
EXPIRATION LEASES (SQUARE FEET) LEASES LEASES(1) LEASES EXPIRING(1)
---------- ------ ------------- ------ --------- ------ -----------
2002 17 53,797(2)(3) 3.1% $1,664,541 3.6% $30.94
2003 33 249,460(4)(5) 14.4 6,226,323 13.6 24.96
2004 19 349,919 20.2 8,518,887 18.6 24.35
2005 25 529,901 30.6 13,812,528 30.1 26.07
2006 16 320,394 18.5 9,233,495 20.1 28.82
2007 10 84,278 4.9 2,432,875 5.3 28.87
2008 7 78,902 4.6 2,321,594 5.1 29.42
2009 2 29,935 1.7 833,259 1.8 27.84
2010 1 1,387 0.1 31,665 0.1 22.83
2011 -- -- 0.0 -- 0.0 --
2012 and thereafter 1 33,315 1.9 834,248 1.7 25.04
--- --------- ----- ----------- ----- ------
131 1,731,288 100.0% $45,909,415 100.0% $26.52
=== ========= ===== =========== ===== ======
(1) Calculated based on base rent payable under the lease for net rentable
square feet expiring, without giving effect to free rent or scheduled rent
increases that would be taken into account under GAAP and including adjustments
for expenses payable by or reimbursable from tenants based on current expense
levels.
(2) Expirations by quarter are as follows: Q4: 53,797 sf.
(3) As of September 30, 2002 leases have been signed for 5,057 net rentable
square feet (representing approximately 9% of expiring square footage and
including renewed leases and leasing of previously vacant space) commencing in
2002.
(4) Expirations by quarter are as follows: Q1: 93,914 sf Q2: 59,276 sf Q3:
76,759 sf Q4: 19,511 sf.
(5) As of September 30, 2002 leases have been signed for 31,762 net rentable
square feet (representing approximately 13% of expiring square footage and
including renewed leases and leasing of previously vacant space) commencing in
2003.
164
Denver Office Properties.
PERCENTAGE
NET RENTABLE PERCENTAGE OF TOTAL OF ANNUAL FULL-
AREA LEASED NET ANNUAL ANNUAL FULL- SERVICE RENT
NUMBER OF REPRESENTED RENTABLE AREA FULL-SERVICE SERVICE RENT PER SQUARE
TENANTS WITH BY EXPIRING REPRESENTED RENT UNDER REPRESENTED FOOT OF NET
YEAR OF LEASE EXPIRING LEASES BY EXPIRING EXPIRING BY EXPIRING RENTABLE AREA
EXPIRATION LEASES (SQUARE FEET) LEASES LEASES(1) LEASES EXPIRING(1)
---------- ------ ------------- ------ --------- ------ -----------
2002 18 98,070(2)(3) 5.0% $ 1,835,797 4.2% $18.72
2003 38 443,555(4)(5) 22.7 9,430,578 21.4 21.26
2004 25 397,378 20.3 8,138,678 18.5 20.48
2005 19 305,935 15.7 6,804,690 15.4 22.24
2006 11 152,776 7.8 3,804,720 8.6 24.90
2007 16 144,301 7.4 3,407,362 7.7 23.61
2008 6 53,787 2.8 1,180,878 2.7 21.95
2009 11 203,472 10.4 5,211,558 11.8 25.61
2010 3 91,074 4.7 2,631,070 6.0 28.89
2011 1 2,478 0.1 52,038 0.1 21.00
2012 and thereafter 1 61,080 3.1 1,599,197 3.6 26.18
--- --------- ----- ----------- ----- ------
149 1,953,906 100.0% $44,096,566 100.0% $22.57
=== ========= ===== =========== ===== ======
(1) Calculated based on base rent payable under the lease for net rentable
square feet expiring, without giving effect to free rent or scheduled rent
increases that would be taken into account under GAAP and including adjustments
for expenses payable by or reimbursable from tenants based on current expense
levels.
(2) Expirations by quarter are as follows: Q4: 98,070 sf.
(3) As of September 30, 2002 leases have been signed for 93,768 net rentable
square feet (representing approximately 96% of expiring square footage and
including renewed leases and leasing of previously vacant space) commencing in
2002.
(4) Expirations by quarter are as follows: Q1: 76,494 sf Q2: 25,845 sf Q3:
57,113 Q4: 284,103 sf.
(5) As of September 30, 2002 leases have been signed for 37,031 net rentable
square feet (representing approximately 8% of expiring square footage and
including renewed leases and leasing of previously vacant space) commencing in
2003.
165
Other Office Properties.
PERCENTAGE
NET RENTABLE PERCENTAGE OF TOTAL OF ANNUAL FULL-
AREA LEASED NET ANNUAL ANNUAL FULL- SERVICE RENT
NUMBER OF REPRESENTED RENTABLE AREA FULL-SERVICE SERVICE RENT PER SQUARE
TENANTS WITH BY EXPIRING REPRESENTED RENT UNDER REPRESENTED FOOT OF NET
YEAR OF LEASE EXPIRING LEASES BY EXPIRING EXPIRING BY EXPIRING RENTABLE AREA
EXPIRATION LEASES (SQUARE FEET) LEASES LEASES(1) LEASES EXPIRING(1)
---------- ------ ------------- ------ --------- ------ -----------
2002 35 176,929(2)(3) 5.7% $ 3,604,746 4.7% $20.37
2003 59 375,965(4)(5) 12.0 8,341,811 10.9 22.19
2004 50 493,183 15.8 12,925,742 16.8 26.21
2005 43 251,907 8.1 6,582,618 8.6 26.13
2006 46 333,691 10.7 8,124,617 10.6 24.35
2007 31 241,618 7.7 6,098,637 7.9 25.24
2008 10 71,799 2.3 1,801,120 2.3 25.09
2009 7 213,161 6.8 5,481,940 7.1 25.72
2010 5 180,377 5.8 5,435,333 7.1 30.13
2011 6 112,163 3.6 4,124,237 5.4 36.77
2012 and thereafter 12 674,898 21.5 14,330,938 18.6 21.23
--- --------- ----- ----------- ----- ------
304 3,125,691 100.0% $76,851,739 100.0% $24.59
=== ========= ===== =========== ===== ======
(1) Calculated based on base rent payable under the lease for net rentable
square feet expiring, without giving effect to free rent or scheduled rent
increases that would be taken into account under GAAP and including adjustments
for expenses payable by or reimbursable from tenants based on current expense
levels.
(2) Expirations by quarter are as follows: Q4: 176,929 sf.
(3) As of September 30, 2002 leases have been signed for 96,679 net rentable
square feet (representing approximately 55% of expiring square footage and
including renewed leases and leasing of previously vacant space) commencing in
2002.
(4) Expirations by quarter are as follows: Q1: 182,728 sf Q2: 52,557 sf Q3:
58,222 sf Q4: 82,458 sf.
(5) As of September 30, 2002 leases have been signed for 59,880 net rentable
square feet (representing approximately 16% of expiring square footage and
including renewed leases and leasing of previously vacant space) commencing in
2003.
166
Crescent Real Estate Hotel Properties
The following tables show certain information for the years ended December
31, 2001, and 2000, and the nine months ended September 30, 2002, and 2001,
respectively, with respect to Crescent Real Estate's hotel properties. The
information for the hotel properties is based on available rooms, except for
Canyon Ranch-Tucson and Canyon Ranch-Lenox, which measure their performance
based on available guest nights.
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
REVENUE
AVERAGE AVERAGE PER
OCCUPANCY DAILY AVAILABLE
YEAR RATE RATE ROOM/GUEST NIGHT
COMPLETED/ ROOMS/ ------------- ----------- ----------------
RESORT/HOTEL PROPERTY(1) LOCATION RENOVATED GUEST NIGHTS 2001 2000 2001 2000 2001 2000
----------------------------------- --------------- --------------- ------------ ----- ----- ---- ---- ---- ----
UPSCALE BUSINESS-CLASS HOTELS:
Denver Marriott City Center Denver, CO 1982/1994 613 77% 84% $123 $120 $ 95 $101
Hyatt Regency Albuquerque Albuquerque, NM 1990 395 69 69 108 106 74 73
Omni Austin Hotel Austin, TX 1986 372 68 81 124 133 84 108
Renaissance Houston Hotel Houston, TX 1975/2000 389 64 59 113 95 73 56
------------ ----- ----- ---- ---- ---- ----
TOTAL/WEIGHTED AVERAGE 1,769 71% 75% $118 $116 $ 83 $ 86
============ ===== ===== ==== ==== ==== ====
LUXURY RESORTS AND SPAS:
Park Hyatt Beaver Creek Resort Avon, CO 1989 276 57% 69% $278 $254 $159 $176
and Spa(2)
Sonoma Mission Inn & Spa Sonoma, CA 1927/1987/1997 228 59 75 299 302 176 226
Ventana Inn & Spa Big Sur, CA 1975/1982/1988 62 73 78 420 458 304 358
------------ ----- ----- ---- ---- ---- ----
TOTAL/WEIGHTED AVERAGE 566 60% 72% $305 $298 $182 $216
============ ===== ===== ==== ==== ==== ====
GUEST
DESTINATION FITNESS RESORTS & SPAS: NIGHTS
----------------------------------- ------
Canyon Ranch-Tucson Tucson, AZ 1980 250(3)
Canyon Ranch-Lenox Lenox, MA 1989 212(3)
------------
----- ----- ---- ---- ---- ----
TOTAL/WEIGHTED AVERAGE 462 81% 86% $622 $593 $482 $487
============ ===== ===== ==== ==== ==== ====
GRAND TOTAL/WEIGHTED AVERAGE
FOR RESORT/HOTEL PROPERTIES 70% 76% $245 $238 $170 $180
===== ===== ==== ==== ==== ====
(1) As of December 31, 2001, Crescent Real Estate had leased all of the
Crescent Real Estate hotel properties, except the Omni Austin Hotel, to
subsidiaries of Crescent Operating. As of December 31, 2001, the Omni
Austin Hotel was leased pursuant to a separate lease to HCD Austin
Corporation. On February 14, 2002, Crescent Real Estate executed the
Settlement Agreement with Crescent Operating, pursuant to which Crescent
Operating transferred to subsidiaries of Crescent Real Estate, in lieu of
foreclosure, Crescent Operating's lessee interests in the eight Crescent
Real Estate hotel properties.
(2) The hotel is undergoing a $6.9 million renovation of all guestrooms.
(3) Represents available guest nights, which is the maximum number of guests
that the resort can accommodate per night.
167
YEAR
COMPLETED/ ROOMS/
RESORT/HOTEL PROPERTY(1) LOCATION RENOVATED GUEST NIGHTS
------------------------ -------- --------- ------------
UPSCALE BUSINESS-CLASS HOTELS:
Denver Marriott City Center Denver, CO 1982/1994 613
Hyatt Regency Albuquerque Albuquerque, NM 1990 395
Omni Austin Hotel Austin, TX 1986 375
Renaissance Houston Hotel Houston, TX 1975/2000 388
-----------
TOTAL/WEIGHTED AVERAGE 1,771
===========
LUXURY RESORTS AND SPAS:
Park Hyatt Beaver Creek Resort
and Spa Avon Co Avon, CO 1989 275
Sonoma Mission Inn & Spa Sonoma, CA 1927/1987/1997 228
Ventana Inn & Spa Big Sur, CA 1975/1982/1988 62
-----------
TOTAL/WEIGHTED AVERAGE 565
===========
GUEST
DESTINATION FITNESS RESORTS & SPAS: NIGHTS
Canyon Ranch-Tucson Tucson, AZ 1980 259(2)
Canyon Ranch-Lenox Lenox, MA 1989 212(2)
-----------
TOTAL/WEIGHTED AVERAGE 471
===========
Luxury and Destination Fitness
Resorts combined
GRAND TOTAL/WEIGHTED AVERAGE
FOR RESORT/HOTEL PROPERTIES
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------
REVENUE
AVERAGE AVERAGE PER
OCCUPANCY DAILY AVAILABLE
RATE RATE ROOM/GUEST NIGHT
----------------- ---------------- ----------------
RESORT/HOTEL PROPERTY(1) 2002 2001 2002 2001 2002 2002
---- ---- ---- ---- ---- ----
UPSCALE BUSINESS-CLASS HOTELS:
Denver Marriott City Center 77% 81% $119 $124 $ 92 $100
Hyatt Regency Albuquerque 73 70 106 106 77 74
Omni Austin Hotel 70 69 117 126 82 87
Renaissance Houston Hotel 62 65 111 113 69 74
---- ---- ---- ---- ---- ----
TOTAL/WEIGHTED AVERAGE 71% 72% $114 $118 $ 81 $ 85
==== ==== ==== ==== ==== ====
LUXURY RESORTS AND SPAS:
Park Hyatt Beaver Creek Resort
and Spa Avon Co 61% 62% $294 $290 $180 $178
Sonoma Mission Inn & Spa 63 63 268 299 169 188
Ventana Inn & Spa 73 75 394 423 286 316
---- ---- ---- ---- ---- ----
TOTAL/WEIGHTED AVERAGE 63% 64% $296 $311 $187 $198
==== ==== ==== ==== ==== ====
DESTINATION FITNESS RESORTS & SPAS:
Canyon Ranch-Tucson
Canyon Ranch-Lenox
---- ---- ---- ---- ---- ----
TOTAL/WEIGHTED AVERAGE 80% 83% $628 $621 $478 $490
==== ==== ==== ==== ==== ====
Luxury and Destination Fitness
Resorts combined 71% 72% $463 $469 $319 $331
----
GRAND TOTAL/WEIGHTED AVERAGE
FOR RESORT/HOTEL PROPERTIES 71% 72% $244 $249 $172 $178
==== ==== ==== ==== ==== ====
(1) As of December 31, 2001, Crescent Real Estate had leased all of the
Crescent Real Estate hotel properties, except the Omni Austin Hotel, to
subsidiaries of Crescent Operating. As of December 31, 2001, the Omni
Austin Hotel was leased pursuant to a separate lease to HCD Austin
Corporation. On February 14, 2002, Crescent Real Estate executed the
Settlement Agreement with Crescent Operating, pursuant to which Crescent
Operating transferred to subsidiaries of Crescent Real Estate, in lieu of
foreclosure, Crescent Operating's lessee interests in the eight Crescent
Real Estate hotel properties previously leased to Crescent Operating.
(2) Represents available guest nights, which is the maximum number of guests
that the resort can accommodate per night.
168
Crescent Real Estate Residential Development Properties
The following table shows certain information as of September 30, 2002,
relating to the Crescent Real Estate residential development properties.
TOTAL TOTAL
RESIDENTIAL RESIDENTIAL TOTAL LOTS/UNITS LOTS/UNITS
RESIDENTIAL DEVELOPMENT DEVELOPMENT LOTS/ DEVELOPED CLOSED
DEVELOPMENT PROPERTIES TYPE OF CORPORATION'S UNITS SINCE SINCE
CORPORATION(1) (RDP) RDP(2) LOCATION OWNERSHIP% PLANNED INCEPTION INCEPTION
-------------- ----- ------ -------- ---------- ------- --------- ---------
Desert Mountain Desert Mountain SF Scottsdale, AZ 93.0% 2,665 2,354 2,234
Development ------- -------- ---------
Corporation
The Woodlands The Woodlands SF The Woodlands, TX 42.5%(6) 37,554 26,772 25,290
------------- -- ----------------- ------------ ------- -------- ---------
Land Company,
Inc.
Crescent Bear Paw Lodge CO Avon, CO 60.0% 53 53 53
Resort Eagle Ranch SF Eagle, CO 60.0% 1,100(6) 535 484
Development, Main Street
Inc. Junction CO Breckenridge, CO 30.0% 36 36 30
Main Street
Station CO Breckenridge, CO 30.0% 82 82 77
Main Street Station
Vacation Club TS Breckenridge, CO 30.0% 42 42 21
Riverbend SF Charlotte, NC 60.0% 650 205 205
Three Peaks
(Eagle's Nest) SF Silverthorne, CO 30.0% 391(6) 253 184
Park Place at
Riverfront CO Denver, CO 64.0% 70(6) 70 64
Park Tower at
Riverfront CO Denver, CO 64.0% 61(6) 61 49
Promenade Lofts
at Riverfront CO Denver, CO 64.0% 66(6) 66 60
Cresta TH/SFH Edwards, CO 60.0% 25(6) 20 18
Snow Cloud CO Avon, CO 64.0% 54 54 48
One Vendue Range CO Charleston, SC 62.0% 50(6) -- --
Tahoe Mountain
Resorts SF/CO/TH/TS Tahoe, CA 57.0% - 71.2% (7) (7) (7)
------- ----------- --------- ------------ ------- -------- ---------
TOTAL CRESCENT RESORT DEVELOPMENT, INC. 2,680 1,477 1,293
--------------------------------------- ------- -------- ---------
Mira Vista Mira Vista SF Fort Worth, TX 100.0% 740 740 707
Development The Highlands SF Breckenridge, CO 12.3% 750 503 456
Corp. ------- -------- ---------
TOTAL MIRA VISTA DEVELOPMENT CORP. 1,490 1,243 1,163
---------------------------------- ------- -------- ---------
Houston Area Falcon Point SF Houston, TX 100.0% 510 364 326
Development Falcon Landing SF Houston, TX 100.0% 623 566 539
Corp. Spring Lakes SF Houston, TX 100.0% 520 338 303
------------ -- ----------- ------------ ------- -------- ---------
TOTAL HOUSTON AREA DEVELOPMENT CORP. 1,653 1,268 1,168
------------------------------------ ------- -------- ---------
TOTAL 46,042 33,114 31,148
===== ======= ======== =========
169
AVERAGE
RESIDENTIAL CLOSED RANGE OF
RESIDENTIAL DEVELOPMENT SALE PRICE PROPOSED
DEVELOPMENT PROPERTIES TYPE OF PER LOT/ SALE PRICES
CORPORATION(1) (RDP) RDP(2) LOCATION UNIT($)(3) PER LOT/UNIT($)(4)
----- ------ -------- ---------- ------------------
Desert Mountain Desert Mountain SF Scottsdale, AZ 522,000 400,000 - 4,000,000(5)
Development
Corporation
The Woodlands The Woodlands SF The Woodlands, TX 58,000 16,000 - 2,160,000
Land Company,
Inc.
Crescent Bear Paw Lodge CO Avon, CO 1,450,000 665,000 - 2,025,000
Resort Eagle Ranch SF Eagle, CO 80,000 50,000 - 150,000
Development, Main Street
Inc. Junction CO Breckenridge, CO 460,000 300,000 - 580,000
Main Street
Station CO Breckenridge, CO 490,000 215,000 - 1,065,000
Main Street Station
Vacation Club TS Breckenridge, CO 1,129,000 380,000 - 4,600,000
Riverbend SF Charlotte, NC 30,000 25,000 - 38,000
Three Peaks
(Eagle's Nest) SF Silverthorne, CO 257,000 135,000 - 425,000
Park Place at
Riverfront CO Denver, CO 415,000 195,000 - 1,445,000
Park Tower at
Riverfront CO Denver, CO 640,000 180,000 - 2,100,000
Promenade Lofts
at Riverfront CO Denver, CO 426,000 180,000 - 2,100,000
Cresta TH/SFH Edwards, CO 1,874,000 1,230,000 - 3,434,000
Snow Cloud CO Avon, CO 1,714,000 840,000 - 4,545,000
One Vendue Range CO Charleston, SC N/A 450,000 - 3,100,000
Tahoe Mountain
Resorts SF/CO/TH/TS Tahoe, CA N/A N/A N/A
TOTAL CRESCENT RESORT DEVELOPMENT , INC.
Mira Vista Mira Vista SF Fort Worth, TX 99,000 50,000 - 265,000
Development The Highlands SF Breckenridge, CO 193,000 55,000 - 625,000
Corp.
TOTAL MIRA VISTA DEVELOPMENT CORP.
Houston Area Falcon Point SF Houston, TX 42,000 28,000 - 52,000
Development Falcon Landing SF Houston, TX 21,000 20,000 - 26,000
Corp. Spring Lakes SF Houston, TX 31,000 35,000 - 50,000
TOTAL HOUSTON AREA DEVELOPMENT CORP.
TOTAL
(1) As of December 31, 2001, Crescent Real Estate had an approximately 95%, 95%,
90%, 94%, and 94% ownership interest in Desert Mountain Development Corporation,
The Woodlands Land Company, Inc., Crescent Resort Development, Inc., Mira Vista
Development Corp. and Houston Area Development Corp., respectively, through
ownership of non-voting common stock in each of these Residential Development
Corporations. On February 14, 2002, Crescent Real Estate executed an agreement
with COPI, pursuant to which COPI transferred to subsidiaries of Crescent Real
Estate, in lieu of foreclosure, COPI's ownership interests, representing
substantially all of the voting stock, in Desert Mountain Development
Corporation, The Woodlands Land Company, Inc. and Crescent Resort Development,
Inc.
(2) SF (Single-Family Lots); CO (Condominium); TH (Townhome); SFH (Single-Family
Homes) and TS (Timeshare Equivalent Units).
(3) Based on lots/units close during Crescent Real Estate's ownership period.
(4) Based on existing inventory of developed lots and lots to be developed.
(5) Includes golf membership, which as of September 30, 2002, is $0.2 million.
(6) As of September 30, 2002, 65 golf course lots were under contract at Eagle
Ranch representing $4.6 million in sales; one unit was under contract at Park
Place at Riverfront representing $0.2 million in sales; three units were under
contract at Park Tower at Riverfront representing $2.4 million in sales; two
units were under contract at Promenade Lofts representing $0.8 million in sales;
one unit was under contract at Cresta representing $2.6 million in sales; four
lots were under contract at Three Peaks representing $1.2 million in sales and
45 units were under contract at One Vendue Range representing $53.9 million in
sales.
(7) This project is in the early stages of development, and this information is
not available as of September 30, 2002.
170
Crescent Real Estate Temperature-Controlled Logistics Properties
The following table shows the number and aggregate size of the Crescent
Real Estate temperature-controlled logistics properties by state as of September
30, 2002:
TOTAL CUBIC TOTAL
NUMBER OF FOOTAGE SQUARE FEET
STATE PROPERTIES(1) (IN MILLIONS) (IN MILLIONS)
----------------- ------------- ------------- -------------
Alabama 4 10.7 0.3
Arizona 1 2.9 0.1
Arkansas 6 33.1 1.0
California 8 24.9 0.9
Colorado 1 2.8 0.1
Florida 5 7.5 0.3
Georgia 8 49.5 1.7
Idaho 2 18.7 0.8
Illinois 2 11.6 0.4
Indiana 1 9.1 0.3
Iowa 2 12.5 0.5
Kansas 2 5.0 0.2
Kentucky 1 2.7 0.1
Maine 1 1.8 0.2
Massachusetts 5 10.5 0.5
Mississippi 1 4.7 0.2
Missouri(2) 2 46.8 2.8
Nebraska 2 4.4 0.2
New York 1 11.8 0.4
North Carolina 3 10.0 0.4
Ohio 1 5.5 0.2
Oklahoma 2 2.1 0.1
Oregon 6 40.4 1.7
Pennsylvania 2 27.4 0.9
South Carolina 1 1.6 0.1
South Dakota 1 2.9 0.1
Tennessee 3 10.6 0.4
Texas 2 6.6 0.2
Utah 1 8.6 0.4
Virginia 2 8.7 0.3
Washington 6 28.7 1.1
Wisconsin 3 17.4 0.6
------------- ------------- -------------
TOTAL 88(3) 441.5(3) 17.5(3)
============= ============= =============
(1) As of September 30, 2002, Crescent Real Estate held a 40% interest in the
temperature-controlled logistics partnership, which owns AmeriCold
Corporation, which directly or indirectly owns the 88
temperature-controlled logistics properties. The business operations
associated with the temperature-controlled logistics properties are owned
by AmeriCold Logistics, in which Crescent Real Estate has no interest.
AmeriCold Corporation is entitled to receive lease payments from AmeriCold
Logistics.
(2) Includes an underground storage facility, with approximately 33.1 million
cubic feet.
(3) As of September 30, 2002, AmeriCold Logistics operated 101
temperature-controlled logistics properties with an aggregate of
approximately 537.9 million cubic feet (20.6 million square feet).
LEGAL PROCEEDINGS
Currently, there are no material pending legal proceedings, other than
ordinary routine litigation incidental to Crescent Real Estate's business, to
which Crescent Real Estate is a party or to which any of its property is the
subject.
CRESCENT OPERATING MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The Settlement Agreement discussed above provides for a bankruptcy plan of
Crescent Operating to be implemented under Chapter 11 of the Bankruptcy Code. In
addition, all of Crescent Operating's assets in its hospitality and land
development segments were transferred to Crescent Real Estate pursuant to the
Settlement Agreement. See "The Reorganization Transactions - Summary of the
Reorganization Transactions" for more information about the Settlement
Agreement.
171
Crescent Operating is a diversified management company that, through
various subsidiaries and affiliates, operated, prior to the February 14 and
March 22, 2002 asset transfers, primarily in four business segments:
- equipment sales and leasing;
- hospitality;
- temperature-controlled logistics; and
- land development.
See "Description of Crescent Operating's Business" above for more
information about Crescent Operating's business segments. As of September 30,
2002, the only remaining operating assets of Crescent Operating were its 40%
interest in AmeriCold Logistics, LLC and its 100% equity interest in Crescent
Machinery.
The following discussion should be read in conjunction with the "Selected
Historical Financial Information of Crescent Operating" and the financial
statements and notes thereto, appearing elsewhere in this proxy
statement/prospectus. Historical results and percentage relationships set forth
below and in "Selected Historical Financial Information of Crescent Operating"
should not be taken as indicative of future operations of Crescent Operating.
The following table sets forth financial data for Crescent Operating for
the three and nine months ended September 30, 2002 and for the years ended
December 31, 2001, 2000 and 1999.
For the For the For the
Three Months Ended Nine Months Ended Year Ended
September 30, 2002 September 30, 2002 December 31, 2001
------------------ ------------------ -----------------
(dollars in thousands)
REVENUES
Equipment sales & leasing $ 7,757 $ 25,992 $ 67,521
Hospitality -- -- --
---------- ---------- ----------
Total Revenues 7,757 25,992 67,521
OPERATING EXPENSES
Equipment sales & leasing 8,624 29,340 71,113
Hospitality
Hospitality properties rent-CEI -- -- --
Land development -- -- --
Corporate general and administrative 451 2,677 6,969
Impairment of assets -- 34 12,332
---------- ---------- ----------
Total operating expenses 9,075 32,051 90,414
---------- ---------- ----------
(LOSS) INCOME FROM OPERATIONS (1,318) (6,059) (22,893)
---------- ---------- ----------
INVESTMENT (LOSS) INCOME -- (4,127) 1,135
EQUITY IN LOSS OF UNCONSOLIDATED
SUBSIDIARIES -- (2,142) (2,275)
OTHER EXPENSE (INCOME)
Interest expense 1,487 5,037 13,241
Interest income (5) (12) --
Gain on lease termination of
hotel and sale of club -- -- --
Other 47 221 1,417
---------- ---------- ----------
Total other expense (income) 1,529 5,246 14,658
---------- ---------- ----------
LOSS FROM CONTINUING OPERATIONS BEFORE
REORGANIZATION COSTS (2,847) (17,574) (38,691)
For the For the
Year Ended Year Ended
December 31, 2000 December 31, 1999
----------------- -----------------
(dollars in thousands)
REVENUES
Equipment sales & leasing $ 69,976 $ 62,311
Hospitality 32,615 35,304
---------- ----------
Total Revenues 102,591 97,615
OPERATING EXPENSES
Equipment sales & leasing 68,710 58,799
Hospitality 22,582 24,649
Hospitality properties rent-CEI 8,102 9,105
Land development -- 18
Corporate general and administrative 4,224 2,604
Impairment of assets -- --
---------- ----------
Total operating expenses 103,618 95,175
---------- ----------
(LOSS) INCOME FROM OPERATIONS (1,027) 2,440
---------- ----------
INVESTMENT (LOSS) INCOME 772 1,890
EQUITY IN LOSS OF
UNCONSOLIDATED SUBSIDIARIES (6,952) (3,472)
OTHER EXPENSE (INCOME)
Interest expense 14,123 11,993
Interest income (439) (458)
Gain on lease termination of
hotel and sale of club -- --
Other 762 19
---------- ----------
Total other expense (income) (5,406) 11,554
---------- ----------
LOSS FROM CONTINUING OPERATIONS BEFORE
REORGANIZATION COSTS (1,851) (10,696)
172
REORGANIZATION ITEMS
REORGANIZATION FEES 871 2,015 --
---------- ---------- ----------
LOSS FROM OPERATIONS AFTER
REORGANIZATION COSTS, BEFORE TAXES (3,718) (19,589) (38,691)
INCOME TAX BENEFIT (707) (2,710) (8,591)
---------- ---------- ----------
LOSS FROM CONTINUING OPERATIONS (3,011) (16,879) (30,100)
DISCONTINUED OPERATIONS
(LOSS) INCOME FROM OPERATIONS OF
DISCONTINUED HOSPITALITY
AND LAND DEVELOPMENT SEGMENTS (LESS
APPLICABLE INCOME TAX EXPENSE OF
$0, $2,502, $7,966, $14,664, AND $6,505,
AND MINORITY INTERESTS OF $0, $1,897,
$(13,588), $(26,018) AND $(14,112) -- 3,272 (5,817)
LOSS FROM OPERATIONS OF
DISCONTINUED EQUIPMENT
SALES AND LEASING BRANCHES
(LESS APPLICABLE INCOME TAX
BENEFIT OF $0, $0, $(1,968), $(1,988)
AND $(874) (553) (2,998) (32,707)
GAIN ON DISPOSAL OF HOSPITALITY AND
LAND DEVELOPMENT SEGMENTS (LESS
APPLICABLE INCOME TAX EXPENSE OF
$0, $17,876, $0, $0, AND $0) -- 26,813 --
---------- ---------- ----------
(LOSS) INCOME FROM DISCONTINUED
OPERATIONS (553) 27,087 (38,524)
INCOME (LOSS) BEFORE ACCOUNTING CHANGE (3,564) 10,208 (68,624)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE -- -- (9,509)
---------- ---------- ----------
NET INCOME (LOSS) $ (3,564) $ 10,208 $ (78,133)
========== ========== ==========
REORGANIZATION ITEMS
REORGANIZATION FEES -- --
---------- ----------
LOSS FROM OPERATIONS
AFTER REORGANIZATION COSTS,
BEFORE TAXES (1,851) (10,696)
INCOME TAX BENEFIT (929) (9,102)
---------- ----------
LOSS FROM CONTINUING OPERATIONS (922) (1,594)
DISCONTINUED OPERATIONS
(LOSS) INCOME FROM OPERATIONS OF
DISCONTINUED HOSPITALITY AND
LAND DEVELOPMENT SEGMENTS (LESS
APPLICABLE INCOME TAX EXPENSE OF
$0, $2,502, $7,966, $14,664 AND
$6,505 AND MINORITY INTERESTS OF
$0, $1,897, $(13,588), $(26,018)
AND $(14,112) 106 319
LOSS FROM OPERATIONS OF
DISCONTINUED EQUIPMENT
SALES AND LEASING BRANCHES
(LESS APPLICABLE INCOME TAX
BENEFIT OF $0, $0, $(1,968), $(1,988)
AND $(874) (2,874) (1,420)
GAIN ON DISPOSAL OF HOSPITALITY AND
LAND DEVELOPMENT SEGMENTS (LESS
APPLICABLE INCOME TAX EXPENSE OF
$0, $17,876, $0, $0, AND $0) -- --
---------- ----------
(LOSS) INCOME FROM DISCONTINUED
OPERATIONS (2,768) (1,101)
INCOME (LOSS) BEFORE ACCOUNTING CHANGE (3,690) (2,695)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE -- --
---------- ----------
NET INCOME (LOSS) $ (3,690) $ (2,695)
========== ==========
173
The following is a summary of Crescent Operating's estimated financial
information reported by segment for the three and nine months ended September
30, 2002, respectively. As Crescent Operating only operated its hospitality and
land development segments for one and one-half months in 2002, there is no
information available for these segments.
SEGMENT FINANCIAL INFORMATION FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
(DOLLARS IN THOUSANDS)
EQUIPMENT TEMPERATURE
SALES CONTROLLED
AND LEASING LOGISTICS OTHER TOTAL
----------- --------- ----- -----
Revenues ...................... $ 7,757 $ -- $ -- $ 7,757
Operating expenses ............ 8,624 -- 451 9,075
----------- ----------- ----------- -----------
Loss from operations .......... (867) -- (451) (1,318)
Investment loss ............... -- -- -- --
Equity in Earnings of
unconsolidated
Subsidiaries .................. -- -- -- --
Other (income) expense
Interest expense ........ 166 -- 1,321 1,487
Interest income ......... (2) -- (3) (5)
Other ................... 48 -- (1) 47
----------- ----------- ----------- -----------
Total other expense ........... 212 -- 1,317 1,529
----------- ----------- ----------- -----------
Loss from operations before
reorganization costs .......... (1,079) -- (1,768) (2,847)
Reorganization Costs
Professional fees ...... 871 -- -- 871
----------- ----------- ----------- -----------
Loss from operations before
income taxes .................. (1,950) -- (1,768) (3,718)
Income tax benefit ............ -- -- (707) (707)
----------- ----------- ----------- -----------
Loss from continuing operations $ (1,950) $ -- $ (1,061) $ (3,011)
=========== =========== =========== ===========
SEGMENT FINANCIAL INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(DOLLARS IN THOUSANDS)
EQUIPMENT TEMPERATURE
SALES CONTROLLED
AND LEASING LOGISTICS OTHER TOTAL
----------- --------- ----- -----
Revenues ...................... $ 25,992 $ -- $ -- $ 25,992
Operating expenses ............ 29,340 -- 2,711 32,051
----------- ----------- ----------- -----------
Loss from operations .......... (3,348) -- (2,711) (6,059)
Investment loss ............... -- -- (4,127) (4,127)
Equity in Earnings of
unconsolidated
Subsidiaries .................. -- (2,142) -- (2,142)
Other (income) expense
Interest expense ........ 1,074 -- 3,963 5,037
Interest income ......... (3) -- (9) (12)
Other ................... 217 -- 4 221
----------- ----------- ----------- -----------
Total other expense ........... 1,288 -- 3,958 5,246
----------- ----------- ----------- -----------
Loss from operations before
reorganization costs .......... (4,636) (2,142) (10,796) (17,574)
Reorganization Costs
Professional fees ...... 2,015 -- -- 2,015
----------- ----------- ----------- -----------
Loss from operations before
income taxes .................. (6,651) (2,142) (10,796) (19,589)
Income tax benefit ............ -- (283) (2,427) (2,710)
----------- ----------- ----------- -----------
Loss from continuing operations $ (6,651) $ (1,859) $ (8,369) $ (16,879)
=========== =========== =========== ===========
174
The following is a summary of Crescent Operating's estimated financial
information reported by segment for the year ended December 31, 2001:
SEGMENT FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
EQUIPMENT TEMPERATURE-
SALES CONTROLLED LAND
AND LEASING HOSPITALITY LOGISTICS DEVELOPMENT OTHER TOTAL
----------- ----------- --------- ----------- ----- -----
Revenues ..................................... $ 67,521 $ -- $ -- $ -- $ -- $ 67,521
Operating expenses ........................... 83,445 -- 21 -- 6,948 90,414
--------- --------- --------- --------- --------- ---------
Loss from operations ......................... 15,924 -- (21) -- (6,948) (22,893)
Investment loss .............................. -- -- -- -- 1,135 1,135
Equity in Losses of unconsolidated
subsidiaries .............................. -- -- (2,275) -- -- (2,275)
Other (income) expense
Interest expense ....................... 4,133 -- -- -- 9,070 13,203
Interest income ........................ (8) -- -- -- 46 38
Other .................................. 1,419 -- -- -- (2) 1,417
--------- --------- --------- --------- --------- ---------
Total other expense .......................... 5,544 -- -- -- 9,114 14,658
--------- --------- --------- --------- --------- ---------
Loss income before income taxes .............. (21,468) -- (2,296) -- (14,927) (38,691)
Income tax provision (benefit)................ 1,816 -- (919) -- (5,856) (8,591)
--------- --------- --------- --------- --------- ---------
Loss from continuing operations............... (19,652) -- (1,377) -- (9,071) (30,100)
Discounted operations (note 4 of Financial
Statements of Crescent Operating)
(Loss) income from operations
of discontinued Hospitality and Land
Development segments (less
applicable income tax expense of $7,966
and minority interests of $(13,588)........ -- (8,536) -- 2,719 -- (5,817)
Loss from operations of discontinued equipment
and sales and leasing branches less applicable
income tax benefit of $(1,968)................ (32,707) -- -- -- -- (32,707)
--------- --------- --------- --------- --------- ---------
(Loss) income from discontinued operations.... (32,707) (8,536) -- 2,719 -- (38,524)
--------- --------- --------- --------- --------- ---------
(Loss) income before accounting change ....... (52,359) (8,536) (1,377) 2,719 (9,071) (68,624)
Cumulative effect of change in
accounting principle ...................... -- -- -- -- (9,509) (9,509)
--------- --------- --------- --------- --------- ---------
Net (loss) income ........................... $ (52,359) $ (8,536) $ (1,377) $ 2,719 $ (18,580) $ (78,133)
========= ========= ========= ========= ========= =========
175
RECENT DEVELOPMENTS
For a description of events that have occurred subsequent to September 30,
2001, see "Summary - Other Crescent Operating Recent Developments" above.
RESULTS OF OPERATIONS
Three and Nine Months ended September 30, 2002, as Compared to Three and Nine
Months Ended September 30, 2001
Revenues.
Total revenue, which consists of equipment sales and leasing revenue,
decreased $11.2 million, or 58.9%, to $7.8 million for the three months ended
September 30, 2002, compared with $19.0 million for the three months ended
September 30, 2001. Total revenue decreased $24.9 million, or 48.9%, to $26.0
million for the nine months ended September 30, 2002, compared with $50.9
million for the nine months ended September 30, 2001. Significant components of
the decreases were:
- a net decrease of $7.3 million and $13.2 million in new and used
equipment sales for the three and nine months ended September 30,
2002 as compared to the corresponding periods in 2001 primarily due
to the slowing economy and the impact of the Chapter 11 bankruptcy
process on Crescent Machinery's business;
- a decrease of $0.9 million and $3.3 million in parts, service and
supplies revenue for the three and nine months ended September 30,
2002 as compared to the corresponding periods in 2001 primarily due
to decreased demand for maintenance and repair work and the impact
of the Chapter 11 bankruptcy process on Crescent Machinery's
business; and
- a decrease of $3.0 million and $8.4 million in rental revenue for
the three and nine months ended September 30, 2002 as compared to
the corresponding period in 2001 primarily due to the slowing
economy and the impact of the Chapter 11 bankruptcy process on
Crescent Machinery's business.
Operating Expenses.
Total operating expenses decreased $16.8 million, or 64.9%, to $9.1
million for the three months ended September 30, 2002, compared with $25.9
million for the three months ended September 30, 2001. Total operating expenses
decreased $38.7 million, or 54.7%, to $32.1 for the nine months ended September
30, 2002, compared with $70.8 million for the nine months ended September 30,
2001. The decreases in total operating expenses are attributable to the factors
discussed in the following paragraphs.
Equipment Sales and Leasing Segment
Equipment sales and leasing expenses decreased $11.7 million, or 57.6%, to
$8.6 million for the three months ended September 30, 2002, compared with $20.3
million for the three months ended September 30, 2001. Equipment sales and
leasing expenses decreased $23.1 million, or 44.1%, to $29.3 million for the
nine months ended September 30, 2002, compared with $52.4 million for the nine
months ended September 30, 2001. Significant components of the decreases were:
176
- a decrease of $7.2 million and $12.3 million in new and used
equipment expenses for the three and nine months ended September 30,
2002 as compared to the corresponding periods in 2001 directly
related to the decrease in new and used equipment revenue;
- a decrease of $0.6 million and $2.5 million in parts, service and
supplies expenses for the three and nine months ended September 30,
2002 as compared to the corresponding periods in 2001 primarily as a
result of the decrease in parts, service and supplies revenues for
the same periods;
- a $2.3 million and a $5.5 million decrease in rental expenses for
the three and nine months ended September 30, 2002 as compared to
the corresponding periods in 2001 primarily due to the decrease in
rental revenue for the three and nine months ended September 30,
2002; and
- a decrease of $1.6 million and $2.8 million in general and
administrative expenses for the three and nine months ended
September 30, 2002 as compared to the corresponding periods in 2001
primarily due to cost reduction measures put into place.
Corporate General and Administrative Expenses
Corporate general and administrative expenses totaled $0.5 million and
$2.7 million for the three and nine months ended September 30, 2002,
respectively, as compared to $0.5 million and $1.5 million for the three and
nine months ended September 30, 2001. The increases are primarily related to
increases in general corporate overhead costs, such as legal and accounting
costs, related to the Settlement Agreement and the proposed prepackaged
bankruptcy.
Investment Income (Loss).
There was no investment income (loss) for the three months ended September
30, 2002. Investment income (loss) decreased $10.1 million or 168%, to a $4.1
million loss for the nine months ended September 30, 2002, compared with income
of $6.0 million for the nine months ended September 30, 2001. The decreases are
attributable to the decreases in the fair value of Crescent Operating's Magellan
warrants resulting in investment losses as compared with income for the
corresponding period in 2001.
Equity in Earnings (Loss) of Unconsolidated Subsidiaries.
There was no equity in earnings (loss) of unconsolidated subsidiaries for
the three months ended September 30, 2002 due to Crescent Operating not
recording any additional losses related to its investment in AmeriCold Logistics
for the three months ended September 30, 2002 due to Crescent Operating's share
of historical losses being in excess of its investment balance.
Equity in earnings (loss) of unconsolidated subsidiaries decreased $2.3
million or 52.3%, to a loss of ($2.1) million for the nine months ended
September 30, 2002, compared with a loss of $4.4 million for the nine months
ended September 30, 2001. The nine month decrease was primarily due to equity in
loss of AmeriCold Logistics in the amount of ($0.7) million and to the
realization of other comprehensive income (loss) of ($1.4) million.
Other (Income) Expense.
Other (income) expense decreased $0.4 million, or 21.1%, to $1.5 million
for the three months ended September 30, 2002, compared with $1.9 million for
the three months ended September 30, 2001.
177
For the nine months ended September 30, 2002, other (income) expenses decreased
$2.5 million, or 32.5%, to $5.2 million, compared with $7.7 million for the nine
months ended September 30, 2001. Significant components of the decreases were
primarily attributable to net decreases in interest expense of $1.7 million for
the nine months ended September 30, 2002.
Reorganization Items
Crescent Operating incurred $0.9 million and $2.0 million in professional
fees for the three and nine months ended September 30, 2002 due to Crescent
Machinery Company's reorganization through bankruptcy that were not incurred
during the corresponding periods in 2001.
Income Tax Provision (Benefit).
Income tax benefit of $0.7 million for the three months ended September
30, 2002 represents a decrease of $0.5 million from the $1.2 million benefit
provided for the three months ended September 30, 2001. Income tax benefit of
$2.7 million for the nine months ended September 30, 2002 represents a decrease
of $1.7 million from the $4.4 million benefit provided for the nine months ended
September 30, 2001. Income tax provision attributable to discontinued operations
for the nine months ended September 30, 2002 was comprised of a $2.2 million
expense for the hospitality segment and a $0.3 million expense for the land
development segment. Income tax provision for the nine months ended September
30, 2002 of $17.9 was attributable to the gain from the disposal of discontinued
operations resulting primarily from the cancellation of corporate level
indebtedness pursuant to the Settlement Agreement.
Crescent Operating generally provides for taxes using a 40% effective rate
on Crescent Operating's share of income or loss. Management continues to
evaluate its ability to realize the deferred tax assets quarterly by assessing
the need for a valuation allowance. An inability of Crescent Operating to
execute business plans for certain of its segments could affect the ultimate
realization of the deferred tax assets.
Minority Interests.
Minority interests were eliminated as a result of the assignment of the
land development and hospitality segments to Crescent Real Estate pursuant to
the Settlement Agreement.
Discontinued Operations.
Pursuant to the Settlement Agreement, Crescent Operating transferred its
interests in the hospitality and land development segments as of February 14,
2002 and March 22, 2002. Crescent Operating had a deminimus loss from
discontinued operations related to the hospitality and land development segments
for the three months ending September 30, 2002. Crescent Operating realized
income from discontinued operations of $3.3 million, after minority interest of
$1.9 million and a $2.5 million income tax expense, related to the hospitality
and land development segments for the nine months ended September 30, 2002. The
gain on disposal of discontinued operations was zero for the three months ended
September 30, 2002 and $26.8 million, net of a $17.9 million income tax expense,
for the nine months ended September 30, 2002.
In December 2001, Crescent Operating adopted Statements of Financial
Accounting Standards SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 broadens the definition of what constitutes a
discontinued operation and how the results of a discontinued operation are to be
measured and presented. During the second and third quarters of 2002, Crescent
Machinery closed down six branch locations and is currently in the process of
closing one
178
additional branch location. Crescent Operating realized a $2.5 million decrease
in loss from discontinued operations related to the equipment sales and leasing
segment for the three months ended September 30, 2002 as compared to the
corresponding period in 2001. Crescent Operating realized a $2.4 million
decrease in loss from discontinued operations related to the equipment sales and
leasing segment for the nine months ended September 30, 2002 as compared to the
corresponding period in 2001. The decreases for the three and nine months ended
September 30, 2002 as compared to the three and nine months ended September 30,
2001 are primarily attributable to the timing of the closings of the
discontinued branch locations.
Cumulative Effect of Change in Accounting Principal.
Cumulative effect of change in accounting principle decreased $9.5
million, or 100%, for the nine months ended September 30, 2002 as compared to
the corresponding period in 2001. The change from the prior period was due to
the prior year's adoption of SFAS No. 133 on January 1, 2001, whereby Crescent
Operating realized a $9.5 million loss related to its investment in Magellan
warrants, calculated as the difference between the original cost of the Magellan
warrants of $12.5 million and their estimated fair value at December 31, 2001,
$3.0 million, as calculated using the Black-Scholes pricing model.
Year Ended December 31, 2001, as Compared to 2000
Revenues.
Total revenue decreased $35.1 million, or 34.2%, to $67.5 million for the
year ended December 31, 2001, compared with $102.6 million for the year ended
December 31, 2000. The decrease in total revenue is attributable to the
following:
Equipment Sales and Leasing Segment
Equipment sales and leasing revenue decreased $2.5 million, or 3.6%, to
$67.5 million for the year ended December 31, 2001, compared with $70.0 million
for the year ended December 31, 2000. The decrease in revenue is discussed
below. In addition, Crescent Operating believes that revenue was impacted
significantly and negatively by the general recession and additionally as a
consequence of the September 11, 2001 terrorist attacks against the United
States and the continuing threat of terrorism as certain industries reduce their
construction expenditures.
- a decrease of $1.3 million in new and used equipment sales due to
weaker market conditions and increased demand from customers for
rentals as compared to purchases; and
- a decrease in parts, service and supplies revenue of $1.6 million
for the current year primarily due to decreased demand for
maintenance and repair work; partially offset by
- an increase in rental revenue of $0.4 million during the year ended
December 31, 2001 primarily due to same store rental growth.
Hospitality Segment
Hospitality revenue from continuing operations decreased $32.6 million, or
100%, for the year ended December 31, 2001 as compared to hospitality revenue
from continuing operations of $32.6 million for the year ended December 31,
2000. The decrease in revenue was due to the sale of the Four Seasons Hotel in
Houston on November 3, 2000.
179
Operating Expenses.
Total operating expenses decreased $13.2 million, or 12.7%, to $90.4
million for the year ended December 31, 2001, compared with $103.6 million for
the year ended December 31, 2000. The increase in operating expenses is
attributable to the following:
Equipment Sales and Leasing Segment
Equipment sales and leasing expenses increased $14.7 million, or 21.4%, to
$83.4 million for the year ended December 31, 2001, compared with $68.7
million for the year ended December 31, 2000. Significant components of the
overall increase were:
- an adjustment of $12.3 million related to impairment of property,
equipment and goodwill at Crescent Machinery;
- a $2.1 million increase in rental expenses due mainly to an
increase in rental inventory resulting in increased depreciation
expense and maintenance costs for the year ended December 31, 2001;
partially offset by
- an increase of $1.0 million in general and administrative expenses
due primarily to increases in corporate payroll, insurance expenses
and professional fees; and
- a $0.5 million increase expenses in new and used equipment expenses;
partially offset by
- a $1.2 million decrease in parts, service and supplies expenses due
primarily to reductions in sales of new and used equipment.
Hospitality Segment
Hospitality expenses from continuing operations decreased $30.7 million,
or 100%, for the year ended December 31, 2001 as compared to hospitality
expenses from continuing operations of $30.7 million for the year ended December
31, 2000. The decrease was due to the sale of the Four Seasons Hotel in Houston
on November 3, 2000.
180
Corporate General and Administrative Expenses.
Corporate general and administrative expenses increased $2.8 million, or
66.7%, to $7.0 million for the year ended December 31, 2001, compared with $4.2
million for the year ended December 31, 2000. These expenses consisted of
general corporate overhead costs, such as legal and accounting costs, insurance
costs and corporate salaries. The increase over prior year is primarily
attributable to (i) a reserve recorded by Crescent Operating for amounts due
from Crescent Operating, Inc. Voluntary Employees' Beneficiary Association
Health Care Plan, (ii) management fees payable to SunTx under the Management
Agreement and (iii) professional fees incurred in connection with the proposed
restructuring of Crescent Operating.
Investment Income.
181
Investment income increased $0.4 million or 57.1%, to $1.1 million for the
year ended December 31, 2001, compared with $0.7 million for the year ended
December 31, 2000. Significant components of the overall increase were:
o an increase in investment income of Magellan warrants in the amount
of $1.1 million; partially offset by
o no gains on sales of investments in 2001 compared to gains on sale of
CS I and CS II in the amount of $0.7 million which occurred in 2000.
Equity in Losses of Unconsolidated Subsidiaries
Equity in losses of unconsolidated subsidiaries decreased $4.7 million or
67.1% to $(2.3) million for the year ended December 31, 2001, compared with loss
of $(7.0) million for the year ended December 31, 2000. Significant components
of the overall decrease were:
o no equity in income of Transportal Network as compared to income of
$0.4 million in 2000, partially offset by
o a decrease in equity in loss of AmeriCold Logistics in the amount of
$5.1 million.
Other Expense (Income)
Other expense (income) decreased $20.1 million to $14.7 million for the
year ended December 31, 2001, compared with income of $(5.4) million for the
year ended December 31, 2000. Significant components of the decrease were:
o no gain on sale of the Four Seasons Hotel in Houston of $18.3 million;
o no gain on sale of the Houston Center Athletic Club of $1.6 million;
o a decrease in interest expense of $0.9 million for the year ended
December 31, 2001 primarily due to lower debt balances as compared to
the year ended December 31, 2000; and
o a decrease in interest income in the amount of $0.4 million due to a
put option to sell Crescent Operating's remaining 20% of its 5%
interest in the temperature controlled logistics partnerships in 2000;
partially offset by
o an increase in other expense in the amount of $0.7 million due to
increases in bad debt expense within the equipment sales and leasing
segment.
Income Tax (Benefit) Provision.
Income tax benefit of $8.6 million for the year ended December 31, 2001
represents an increase of $7.7 million from the year ended December 31, 2000.
Income tax benefit consisted of a $5.9 million benefit at the corporate level, a
$1.8 million benefit for the Equipment Sales and Leasing segment, and a $0.9
million benefit for the Temperature Controlled Logistics segment.
Management continues to evaluate its ability to realize the deferred tax
assets quarterly by assessing the need for a valuation allowance. An inability
of Crescent Operating to execute business plans for certain of Crescent
Operating's segments could affect the ultimate realization of the deferred tax
assets.
Minority Interests
Minority interest s were eliminated as a result of the assignment of the
land development and hospitality segments to Crescent Real Estate pursuant to
the Settlement Agreement.
Discontinued Operations
On January 1, 2002, Crescent Operating adopted Statements of Financial
Accounting Standards SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No.144 broadens the definition of what constitutes a
discontinued operation and how the results of a discontinued operation are to be
measured and presented. Pursuant to the Settlement Agreement, Crescent Operating
transferred its interests in the hospitality and land development segments as of
February 14, 2002 and March 22, 2002. Crescent Operating has reclassed results
from operations for the hospitality and land development segments as
discontinued operations for the years ended December 31, 2001, 2000 and 1999.
Crescent Operating realized losses from discontinued operations of $5.8 million
after minority interest of $13.6 million and a $8.0 million income tax expense,
related to the hospitality and land development segments for the year ended
December 31, 2001, as compared to income from discontinued operations of $0.1
million after minority interest of $26.0 million and income tax expense of $14.7
million, for the year ended December 31, 2000. Significant components of the
$5.9 million decrease in discontinued operations related to the hospitality and
land development segments were:
o decrease in income from the hospitality segment due to decreases in
occupancy from weaker market conditions; and
o fewer home sales and member ships within the land development
segment due to weaker market conditions.
In addition, during 2002, Crescent Machinery closed down ten branch
locations. Crescent Operating realized a loss $32.7 million, net of income tax
benefit of $2.0 million, from discontinued operations related to the equipment
sales and leasing segment for the year ended December 31, 2001 as compared to a
loss of $2.9 million, net of income tax benefit of $2.0 million for the year
ended December 31, 2000. Significant components of the $29.8 million decrease
were:
o an adjustment of $26.9 million related to impairment of property;
equipment and goodwill at the closed branches; and
o decreases in new and used equipment income and parts, supplies and
service income due to weaker market conditions and increased demand
for rentals as compared to purchases.
Year Ended December 31, 2000, as Compared to 1999
Revenues.
182
Total revenue increased $5.0 million, or 5.1%, to $102.6 million for the
year ended December 31, 2000, compared with $97.6 million for the year ended
December 31, 1999. The increase in total revenue is attributable to the
following:
Equipment Sales and Leasing Segment
Equipment sales and leasing revenue increased $7.7 million, or 12.4%, to $70.0
million for the year ended December 31, 2000, compared with $62.3 million for
the year ended December 31, 1999. Significant components of the increase were:
o an increase in rental revenue of $6.4 million during the year ended
December 31, 2000 primarily due to acquisitions since January 1,
1999 and same store rental growth; and
o an increase in parts, service and supplies revenue of $4.7 million
for the current year primarily due to increased demand for
maintenance and repair work; partially offset by
o a decrease of $3.4 million in new and used equipment sales due to
increased demand from customers for rentals as compared to
purchases.
Hospitality Segment
Hospitality revenue from continuing operations decreased $2.7 million, or 7.6%,
to $32.6 million for the year ended December 31, 2000 as compared to hospitality
revenue from continuing operations of $35.3 million for the year ended December
31, 1999. The $2.7 million decrease in revenue was due to the sale of the Four
Seasons Hotel in Houston on November 3, 2000.
183
Operating Expenses.
Total operating expenses increased $8.4 million, or 8.8%, to $103.6
million for the year ended December 31, 2000, compared with $95.2 million for
the year ended December 31, 1999. The increase in operating expenses is
attributable to the following:
Equipment Sales and Leasing Segment
Equipment sales and leasing expenses increased $9.9 million, or 16.8%, to
$68.7 million for the year ended December 31, 2000, compared with $58.8 million
for the year ended December 31, 1999. Significant components of the overall
increase were:
- a $6.4 million increase in rental expenses due mainly to an
increase in rental inventory resulting in increased depreciation
expense for the year ended December 31, 2000;
- a $3.2 million increase in operating expenses due primarily to
acquisitions since January 1, 1999 and to the startup of the Fort
Worth location in late 1999; and
- a $1.4 million increase in parts, service and supplies expenses as a
result of an increase in parts, service and supplies revenue;
partially offset by
- a $1.1 million decrease in new and used equipment expenses as a
result of a decrease in new and used equipment sales.
184
Hospitality Segment
Hospitality expenses from continuing operations decreased $3.1 million, or
9.2%, to $30.7 million for the year ended December 31, 2000 as compared to
hospitality expenses from continuing operations of $33.8 million for the year
ended December 31, 1999. The decrease of $3.1 million was due to the sale of the
Four Seasons Hotel in Houston on November 3, 2000.
Corporate General and Administrative Expenses.
Corporate general and administrative expenses increased $1.6 million, or
61.5%, to $4.2 million for the year ended December 31, 2000, compared with $2.6
million for the year ended December 31, 1999. These expenses consisted of
general corporate overhead costs, such as legal and accounting costs, insurance
costs and corporate salaries. The increase over prior year is primarily
attributable to (i) costs of approximately $0.5 million incurred in connection
with proceedings in bankruptcy court and litigation outside of bankruptcy court
arising from Crescent Operating's ownership interest in CBHS, (ii) professional
fees of approximately $0.6 million incurred in connection with the proposed
restructuring of Crescent Operating and (iii) transaction costs of approximately
$0.5 million incurred by Crescent Operating in conjunction with the negotiation,
execution and termination of the asset purchase agreement with CBHS.
Investment Income.
Investment income decreased $1.2 million or 63.2%, to $0.7 million for the
year ended December 31, 2000, compared with $1.9 million for the year ended
December 31, 1999. Significant components of the overall decrease were:
- a decrease in gain on sale of CS I and CS II of $0.8 million to $0.7
million for the year ended December 31, 2000 as compared to a gain
of $1.5 million for the year ended December 31, 1999;
- no recognition of income of $0.2 million from the investment in
Hicks Muse as it was sold in 1999; and
- no gain on sale from the Corporate Arena of $0.2 million recognized
for the year ended December 31, 1999.
185
Equity in Income (Loss) of Unconsolidated Subsidiaries
Equity in income (loss) of unconsolidated subsidiaries increased $3.5
million or 100%, to $(7.0) million for the year ended December 31, 2000,
compared with losses of $3.5 million for the year ended December 31, 1999.
Significant components of the overall increase were:
- an increase in equity in loss of AmeriCold Logistics in the amount
of $3.7 million partially due to holding the investment for a full
year as compared to ten months in the prior year as well as
increased labor costs;
- a decrease in equity in income of HCAC in the amount of $0.3
million; and
- a decrease in equity in income of CS I and CS II in the amount of
$0.3 million; partially offset by
- a decrease in equity in loss of Transportal Network in the amount
of $0.8 million.
Other Expense (Income)
Other expense (income) decreased $17.0 million, or 147%, to $(5.4) million
for the year ended December 31, 2000, compared with $11.6 million for the year
ended December 31, 1999. Significant components of the decrease were:
- gain on lease termination resulting from sale of the Four Seasons
Hotel in Houston of $18.3 million; and
- gain on sale of the Houston Center Athletic Club of $1.6 million;
partially offset by
- an increase in interest expense in the amount of $2.1 million for
the year ended December 31, 2000, resulting from an increase in
outstanding indebtedness in connection with acquisitions; and
- to an increase in other expense in the amount of $0.8 million due to
increases in bad debt expense within the equipment sales and leasing
segment.
Income Tax Benefit
Income tax benefit of $0.9 million for the year ended December 31, 2000
represents a decrease of $8.2 million from the year ended December 31, 1999.
Income tax benefit consisted of a $4.4 million benefit at the corporate level,
a $1.8 million benefit for the equipment sales and leasing segment and a $3.0
million benefit for the temperature controlled logistics segment partially
offset by income tax expense for the hospitality segment of $8.2 million.
Management continues to evaluate its ability to realize the deferred tax
assets quarterly by assessing the need for a valuation allowance. An inability
of Crescent Operating to execute business plans for certain of the company's
segments could affect the ultimate realization of the deferred tax assets.
Minority Interests
Minority interest were eliminated as a result of the assignment of the
land development and hospitality segments to Crescent Equities pursuant to the
Settlement Agreement.
Discontinued Operations
On January 1, 2002, Crescent Operating adopted Statements of Financial
Accounting Standards SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No.144 broadens the definition of what constitutes a
discontinued operation and how the results of a discontinued operation are to be
measured and presented. Pursuant to the Settlement Agreement, Crescent Operating
transferred its interests in the hospitality and land development segments as of
February 14, 2002 and March 22, 2002. Crescent Operating has reclassed results
from operations for the hospitality and land development segments remaining at
December 31, 2001 as discontinued operations for the year ended December 31,
2001, 2000, and 1999. Crescent Operating realized income from discontinued
operations of $0.1 million after minority interest of $14.7 million and a $22.9
million income tax expense, related to the hospitality and land development
segments for the year ended December 31, 2000, as compared to income from
discontinued operations of $0.3 million after minority interest of $14.1 million
and income tax expense of $6.5 million, for the year ended December 31, 1999.
Significant components of the $0.2 million decrease were:
- decreased income from the land development segment due to fewer home
and lot sales as compared to the prior year; partially offset by
- increase income at Sonoma Mission Inn and Spa which can be
attributed to the 30 additional guest rooms completed in April 2000,
the return of 20 rooms in January 2000 which were taken out of
commission in February 1999 to house a temporary spa during the
construction of the 30,000 square foot full-service spa, as well as
increased rates in the current year as compared to discounted rates
used in the prior year during the construction period; and
- income from the Renaissance Hotel, which was first leased by the
Crescent Operating in June 1999;
- increased income from the hospitality segment due to increased rates
and occupancy as compared to 1999.
During 2002, Crescent Machinery closed down ten branch locations. Crescent
Operating realized a loss $2.9 million, net of income tax benefit of $2.0
million, from discontinued operations related to the equipment sales and leasing
segment for the year ended December 31, 2000 as compared to a loss of $1.4
million, net of income tax benefit of $0.9 million for the year ended December
31, 1999. Significant components of the $1.5 million increase were:
o an increase in loss during the year ended December 31, 2000 as
compared to the year ended December 31, 1999 primarily due to a full
year recognition of operations from acquisitions throughout 1999;
and
o a decrease in demand of new and used equipment due to increased
demand from customers for rentals as compared to purchases.
LIQUIDITY AND CAPITAL RESOURCES
Recognizing that cash flow from its assets would not provide Crescent
Operating with adequate capital to meet its requirements during 2000 and 2001,
Crescent Operating, during the first quarter of 2000, extended certain payment
obligations by reaching agreements with Crescent Real Estate to defer
186
until February 2001 payments on certain of Crescent Operating's obligations to
Crescent Real Estate otherwise scheduled to be made in 2000. During 2001,
Crescent Operating and Crescent Partnership agreed to modify certain debt
agreements, subject to the consummation of the proposed restructuring
transactions, to (i) defer principal and interest payments until the earlier of
December 31, 2001 or the close of the transaction contemplated by the Purchase
Agreement and (ii) cease the accrual of interest on certain debt instruments as
of May 1, 2001. Because the transactions contemplated by the Purchase Agreement
were not consummated, the condition was not met, and the modifications became
ineffective. In addition, in August 2001, November 2001 and again in March 2002,
with an effective date of December 2001, Crescent Operating modified the due
date of its line of credit with Bank of America to be August 15, 2002. On August
14, 2002, the maturity date of Crescent Operating's line of credit with Bank of
America was further extended to January 15, 2003, and Crescent Operating prepaid
interest for that time period in the amount of $0.3 million. Crescent Operating,
with the consent of Crescent Partnership which agreed to subordinate its
security interest in Crescent Operating's 40% interest in AmeriCold Logistics,
pledged all of its interest in AmeriCold Logistics to Bank of America to secure
the loan. In January 2003, Bank of America further extended the maturity of this
loan to March 15, 2003 and Crescent Operating agreed to prepay an additional two
months of interest at the loan's current rate.
In addition, the recession, magnified by the September 11, 2001 terrorist
attacks, has placed significant pressure on Crescent Operating's ability to meet
its obligations as they come due. Consequently, Crescent Operating and its
operating units have defaulted in the payment of their obligations owed to
Crescent Real Estate and Crescent Partnership. Based upon current and reasonably
forecasted operating results, Crescent Operating will not be able to pay all of
its obligations as they come due. In addition, Crescent Operating's auditors
report included on the consolidated financial statements included in its 2001
Annual Report on Form 10-K expressed substantial doubt about Crescent
Operating's ability to continue to operate as a going concern.
In February 2002, Crescent Operating was notified by Crescent Real Estate
that Crescent Operating's obligations to Crescent Real Estate were in default.
Moreover, Crescent Real Estate announced that it would seek to enforce
collection by foreclosure or otherwise of its claims against Crescent Operating
and its operating units as quickly as possible. Crescent Operating was unable to
repay the debts to Crescent Real Estate as to which a default had been declared.
Crescent Operating did not have sufficient liquidity to pay its liabilities on a
current basis. In light of these factors, Crescent Operating entered into the
Settlement Agreement with Crescent Real Estate.
The Settlement Agreement significantly restricts Crescent Operating's
ability to access capital resources. Among other things, the Settlement
Agreement limits Crescent Operating's ability to incur additional indebtedness,
incur liens, pay dividends or make certain other restrictive payments. Based on
these restrictions in the Settlement Agreement and Crescent Operating's current
financial condition, it is unlikely that Crescent Operating would have access to
any third-party financing. In connection with the Settlement Agreement, Crescent
Real Estate did provide Crescent Operating with a $8.6 million facility to
provide liquidity and payment of specific expenditures during the pendency of
the bankruptcy case. This facility was amended effective October 2002 to
decrease the availability of funds to $6.3 million. A second facility was
entered into effective October 2002 to provide $2.9 million of additional funds
to Crescent Operating through the pendency of the bankruptcy case which is
expected to occur in the first quarter of 2003. Pursuant to this facility,
Crescent Real Estate will fund only Crescent Operating's out-of-pocket operating
expenses through the bankruptcy. Even with this financing, it is unlikely that
Crescent Operating will be able to fund its working capital requirements.
Interest payments and rent payments due to Crescent Real Estate, accrued
but deferred as of September 30, 2002, totaled approximately $9.2 million and
$23.7 million, respectively, and as of December 31, 2001 totaled approximately
$6.4 million and $41.2 million, respectively.
Nine Months ended September 30, 2002
Cash Flows.
187
Cash and cash equivalents include amounts from all consolidated
subsidiaries, including subsidiaries not wholly owned. Changes, therefore, do
not necessarily represent increases or decreases in cash directly available to
Crescent Operating.
Cash and cash equivalents were $4.8 million and $13.9 million at September
30, 2002 and December 31, 2001, respectively. See "Note 1. Organization and
Basis of Presentation," included in the Financial Statements of Crescent
Operating for the nine months ended September 30, 2002. The 65% decrease is
attributable to $11.1 million and $3.5 million of cash used in investing and
financing activities, respectively, partially offset by $5.6 million of cash
provided by operating activities.
Operating Activities
Net cash flows provided by operating activities for the nine months ended
September 30, 2002 were $5.6 million compared with net cash used in operating
activities of $166.2 million for the nine months ended September 30, 2001.
Crescent Operating's inflow of cash provided by operating activities of $5.6
million was primarily attributable to inflows from:
- net income of $10.2 million;
- a decrease in accounts receivable of $6.1 million;
- a decrease in inventories of $4.0 million; and
- an increase in accounts payable and accrued expenses - Crescent Real
Estate of $3.2 million.
The inflow of cash provided by operating activities was partially offset
by outflows from:
- an increase in prepaid expenses and current assets of $0.8 million;
and
- a decrease in accounts payable of $1.5 million.
Investing Activities
Net cash flows used in investing activities for the nine months ended
September 30, 2002 were $11.1 million compared with net cash provided by
investing activities of $6.3 million for the nine months ended September 30,
2001. Crescent Operating's outflow of cash used in investing activities of $11.1
million was primarily attributable to outflows from disposition of business
interests, net of cash transferred of $15.8 million.
The outflow of cash used in investing activities was partially offset by
inflows from net proceeds from the sale of property and equipment of $4.8
million.
Financing Activities
Net cash flows used in financing activities for the nine months ended
September 30, 2002 were $3.5 million compared with net cash provided by
financing activities of $133.3 million for the nine
188
months ended September 30, 2001. Crescent Operating's outflow of cash used in
financing activities of $3.5 million was primarily attributable to outflow from
payments of all long-term debt of $7.1 million. The outflow of cash provided by
financing activities was partially offset by inflows from:
- proceeds of all long-term debt of $3.6 million.
Year ended December 31, 2001
Cash Flows
Cash and cash equivalents include amounts from all consolidated
subsidiaries, including subsidiaries not wholly owned. Changes, therefore, do
not necessarily represent increases or decreases in cash directly available to
Crescent Operating.
Cash and cash equivalents were $0.5 million and $1.0 million at December
31, 2001 and December 31, 2000, respectively. See "Note 1. Organization and
Basis of Presentation," included in the Financial Statements of Crescent
Operating for the year ended December 31, 2001. The 50.0% decrease is
attributable to $14.2 million and $118.7 million of cash provided by investing
and financing activities, respectively, partially offset by $133.4 million of
cash used in operating activities.
Operating Activities
Net cash flows used in operating activities for the year ended December
31, 2001 were $133.4 million compared with the net cash used in operating
activities of $46.4 million and $9.1 million for the years ended December 31,
2000 and 1999, respectively. Crescent Operating's outflow of cash used in
operating activities of $133.4 million was primarily attributable to outflows
from:
- net operating activities of discontinued operations of $136.7
million;
- net loss of $78.1 million; and
- a decrease in other assets of $0.5 million.
The outflow of cash used in operating activities was partially offset by:
- decrease in inventories of $15.8 million;
- decrease in accounts receivable of $11.2 million; and
- decrease in prepaid expenses and current assets of $0.6 million.
Investing Activities
Net cash flows provided by investing activities for the year ended
December 31, 2001 were $14.2 million compared with the net cash provided by
investing activities of $20.4 million and the net cash used in investing
activities of $34.5 million for the years ended December 31, 2000 and 1999,
respectively. Crescent Operating's inflow of cash provided by investing
activities of $14.2 million was primarily attributable to inflows from proceeds
from the sale of property and equipment of $22.4 million, and net investing
activities of discontinued operations of $13.0 million.
189
The inflow of cash provided by investing activities was partially offset
by purchases of property and equipment of $21.1 million.
Financing Activities.
Net cash flows provided by financing activities for the year ended
December 31, 2001 were $118.7 million compared with the net cash provided by
financing activities of $27.0 million and $40.1 million for the years ended
December 31, 2000 and 1999, respectively. Crescent Operating's inflow of cash
provided by financing activities of $118.7 million was primarily attributable to
inflows from net financing activities of discontinued operations of $156.2
million and proceeds of all long-term debt of $39.8 million.
The inflow of cash provided by financing activities was partially offset
by payments of all long-term debt of $77.4 million.
Financing Attributable to Corporate and Wholly Owned Subsidiaries.
As of December 31, 2001, financing instruments attributable to corporate
and wholly owned subsidiaries were as follows:
- During 2001, Bank of America extended the maturity date of Crescent
Operating's $15.0 million unsecured bank line of credit from Bank of
America, first from August 2001 to November 2001, then from November
2001 to the earlier of December 31, 2001 or the close of the
Purchase Agreement, then in March 2002, with an effective date of
December 31, 2001, from December 2001 to August 2002 and finally in
August 2002, from August 2002 to January 2003. Crescent Operating,
with the consent of Crescent Partnership which agreed to subordinate
its security interest in Crescent Operating's 40% interest in
AmeriCold Logistics, pledged all of its interest in AmeriCold
Logistics to Bank of America to secure the loan. The line of credit
bears interest at the bank's prime rate and all principal and unpaid
interest on the line of credit is payable January 15, 2003. In
January 2003, Bank of America further extended the maturity of this
loan to March 15, 2003 and Crescent Operating agreed to prepay an
additional two months of interest at the loan's current rate. The
$15.0 million available under the line of credit from Bank of
America is fully drawn.
- In connection with the formation and capitalization of Crescent
Operating in the second quarter of 1997, Crescent Operating received
approximately $14.1 million in cash from Crescent Partnership and
Crescent Partnership loaned Crescent Operating approximately $35.9
million pursuant to a five-year term loan, maturing on May 8, 2002,
of which approximately $16.2 million was outstanding as of December
31, 2001. The loan is a recourse loan that is collateralized, to the
extent not prohibited by pre-existing arrangements, by a first lien
on the assets which Crescent Operating now owns or may acquire in
the future. The loan bears interest at the rate of 12% per annum,
compounded quarterly, with required quarterly principal and interest
payments limited by quarterly cash flow of Crescent Operating as
defined in the applicable credit agreement.
- Effective March 12, 1999, Crescent Operating agreed to make a
permanent reduction in its $30.4 million 12% line of credit with
Crescent Partnership commensurate with the proceeds from the sale of
80% of Crescent Operating's 2% interest in the
temperature-controlled logistics partnerships. On March 12, 1999,
Crescent Operating received $13.2 million of proceeds and
correspondingly permanently reduced the availability under the line
of credit from $30.4 million
190
to $17.2 million. The line of credit bears interest at the rate of
12% per annum, compounded quarterly, payable on an interest-only
basis during its term, which expires on the later of (i) May 21,
2002 or (ii) five years after the last draw under the line of credit
(in no event shall the maturity date be later than June 2007). Draws
may be made under the line of credit until June 22, 2002. The line
of credit is a recourse obligation and amounts outstanding
thereunder are collateralized, to the extent not prohibited by
pre-existing arrangements, by a first lien on the assets which
Crescent Operating now owns or may acquire in the future. The line
of credit is cross-collateralized and cross-defaulted with Crescent
Operating's other borrowings from Crescent Partnership. As of
December 31, 2001, $20.2 million was outstanding under the line of
credit.
- Also effective March 12, 1999, Crescent Operating obtained from
Crescent Partnership a $19.5 million line of credit bearing interest
at a rate of 9% per annum. The line of credit is payable on an
interest-only basis during its term, which expires in May 2002. The
note is cross-collateralized and cross-defaulted with Crescent
Operating's other borrowings from Crescent Partnership. Upon
inception of this line of credit, Crescent Operating immediately
borrowed the full $19.5 million with which it contributed
approximately $15.5 million in connection with the formation of
AmeriCold Logistics and used the remaining $4.0 million of proceeds
to reduce the amount outstanding under the 12% line of credit with
Crescent Partnership. As of December 31, 2001, $22.0 million was
outstanding under the line of credit.
- Crescent Operating funded its contribution to COPI Colorado using
the proceeds from a $9.0 million term loan from Crescent
Partnership. The loan bears interest at 12% per annum, with interest
payable quarterly and the full original principal amount of $9.0
million, together with any accrued but unpaid interest, payable in
May 2002. Crescent Operating's interest in COPI Colorado secures the
loan, which is cross-collateralized and cross-defaulted with
Crescent Operating's other borrowings from Crescent Partnership. As
of December 31, 2001, $10.6 million was outstanding under the line
of credit.
- As a part of the acquisitions of E.L. Lester and Company and Harvey
Equipment Center, Inc., Crescent Operating issued notes payable in
the amount of $6.0 million and $1.2 million, respectively. The
Lester and Harvey notes are payable in semi-annual principal and
interest payments and bear interest at 7.5% and 8.0%, respectively.
All principal and unpaid interest on the Harvey and Lester notes are
due July 2002 and July 2003, respectively. The Lester note is
collateralized by stock of E.L. Lester and Company. As of December
31, 2001, the outstanding balances on the Lester and Harvey notes
were $2.5 million and $0.3 million, respectively.
- Crescent Machinery has various equipment notes payable and floor
plan notes under credit facilities which are collateralized by the
equipment financed. The equipment notes are payable in monthly
principal and interest payments and bear interest at 4.5% to 9.5%
per annum and mature in 2002 due to defaults in payments. The floor
plan notes do not bear interest, do not require monthly principal or
interest payments and generally have terms ranging from three to
twelve months. As of December 31, 2001, the outstanding balance on
the equipment notes was $80.7 million and on the floor plan notes
was $4.2 million. At December 31, 2001, Crescent Machinery was in
default on its loans from commercial institutions because of its
nonpayment of required principal payments with outstanding principal
amounts under default by Crescent Machinery of $84.9 million at
December 31, 2001.
Subsequent to December 31, 2001, the following events occurred involving
such financing instruments:
- On February 15, 2002, Crescent Partnership purchased the Lester and
Harvey notes from the note holders.
191
- Due to its bankruptcy filing and to non-payment of required
principal payments, Crescent Machinery is currently in default on
its equipment financing notes. Outstanding principal amounts under
default by Crescent Machinery totaled $84.9 million at December 31,
2001. On February 6, 2002, Crescent Machinery Company filed a
voluntary petition under Chapter 11 of the U.S. Bankruptcy Code with
the U.S. Bankruptcy Court in Fort Worth, Texas.
- On February 13, 2002, Crescent Operating received notice from
Crescent Partnership that it was in default on the 1997 term loan,
the 1997 revolving loan, the AmeriCold loan and the COPI Colorado
loan. On February 14, 2002, pursuant to the Settlement Agreement,
Crescent Partnership foreclosed on certain collateral securing such
loans, which had the effect of reducing the aggregate indebtedness
from $76.2 million to $36.1 million.
Financing Attributable to Non Wholly Owned Subsidiaries.
As of December 31, 2001, financing instruments attributable to non wholly
owned subsidiaries were as follows:
- Desert Mountain Properties has a credit agreement with Crescent
Partnership pursuant to which Crescent Partnership has advanced
funds to Desert Mountain Properties through a "Junior Note". The
Junior Note evidences a $60.0 million advance from Crescent
Partnership to Desert Mountain Properties and accrues interest at
14% per annum. The principal and interest on the Junior Note is
payable in quarterly installments, based on proceeds from the
operations of Desert Mountain Properties. As of December 31, 2001,
the outstanding balance of the Junior Note was $59.0 million.
- Desert Mountain Properties entered into a $50.0 million credit
facility with National Bank of Arizona in May 1998. The facility was
amended in December 2001. The facility is comprised of (i) a $40.0
million line of credit available for vertical financing related to
new home construction and bears an annual interest at the prime rate
and (ii) a $10.0 million line of credit available for borrowings
against certain notes receivable issued by Desert Mountain
Properties and bears an annual interest rate of prime plus 1%. The
credit facility expires November 2003 with interest payable monthly,
collateralized by land owned by Desert Mountain Properties, deeds of
trust on lots sold and home construction. As of December 31, 2001,
the outstanding balance on the line of credit with National Bank of
Arizona was $29.9 million.
- Desert Mountain Properties has an unsecured promissory note payable
to Crescent Partnership for $1.0 million. The note bears interest at
10%, with payments of interest due in quarterly installments.
Payment of principal is due at the note's expiration of December 31,
2002.
- CRDI has four lines of credit with Crescent Partnership. The first
line of credit of $56.2 million bears interest at 11.5% per annum,
compounded annually. Principal and interest payments are due as
distributions from projects are received, as defined by the
applicable agreement. The line of credit is due August 2004. As of
December 31, 2001, $48.4 million was outstanding on the $56.2
million line of credit. The second line of credit of $100.0 million
bears interest at 11.5% per annum, compounded annually. Principal
and interest payments are due as distributions from projects are
received, as defined by the applicable agreement. The line of credit
is due September 2008. As of December 31, 2001, $72.3 million was
outstanding on the $100.00 million line of credit. The third line of
credit with Crescent Partnership for $40.0 million bears interest at
11.5% per annum. Principal and interest payments are due as
distributions are received, as defined by the applicable credit
agreement. The line of credit is due December 2006. As of December
31, 2001, $23.4 million was outstanding on the $40.0 million line of
credit. The fourth line of credit with Crescent Partnership for
$70.0 million bears interest at 11.5% per annum. Principal and
interest payments are due as distributions are received, as defined
by the applicable credit
192
agreement. The line of credit is due December 2006. As of December
31, 2001, $36.6 million was outstanding on the $70.0 million line of
credit. The lines of credit are collateralized by CRDI's interests
in East West Resort Development partnerships, East West Resorts, LLC
and other CRDI property. Generally, CRDI's loans with Crescent
Partnership are cross-collateralized and cross-defaulted.
- The operating entities in which CRDI invests have various
construction loans for East West projects which are collateralized
by deeds of trust, security agreements and a first lien on the
assets conveyed. The notes are payable in monthly principal and
interest payments and bear interest at 4.4% to 11.3% per annum. The
notes mature between 2002 and 2003. As of December 31, 2001, the
outstanding balance on these construction notes was $136.6 million
in the aggregate.
- CRL has a line of credit with Crescent Partnership in the amount of
$7.0 million bearing interest at a rate of 12% per annum. The line
of credit is due August 2003. The principal and interest are payable
as CRL receives distributions pursuant to the CR License Operating
Agreement and the CR Las Vegas Operating Agreement. The $7.0 million
available under the line of credit was fully drawn as of December
31, 2001.
- In July 2000, CRL obtained from Crescent Partnership a $0.2 million
term note bearing interest at a rate of 12% per annum. The full
original principal amount of $0.2 million, together with any accrued
but unpaid interest is due August 2003. As of December 31, 2001,
$0.2 million was outstanding on the note.
In February and March 2002, in accordance with the Settlement Agreement,
Crescent Operating transferred its equity interest in each of the debtors to
Crescent Partnership.
On a consolidated basis, this had an impact of transferring debt of $414.3
million at December 31, 2001 back to Crescent Partnership.
CRITICAL ACCOUNTING POLICIES
Crescent Operating's discussion and analysis of financial condition and
results of operations is based on its consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
Crescent Operating to make estimates and judgments that affect the reported
amounts of assets, liabilities, and contingencies as of the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Crescent Operating evaluates its assumptions and
estimates on an on-going basis. Crescent Operating bases its estimates on
historical experience and on various other assumptions that it believes to be
reasonable under the circumstances, the results of which form the basis for
making judgments about carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. Crescent Operating believes
the following critical accounting policies affect the more significant judgments
and estimates used in the preparation of its consolidated financial statements.
Inventories
Inventories consist of new and used equipment held for sale and equipment
parts, all of which are stated at the lower of cost or market using the
first-in, first-out or specific identification methods.
Property and Equipment
Property and equipment is recorded at cost. Crescent Operating uses the
straight-line method of depreciation for financial statement purposes. The
estimated useful lives used in computing depreciation are as follows:
Rental Equipment................................... 2-10 years
Transportation equipment........................... 3-5 years
Furniture, fixtures, and other equipment.......... 5-10 years
From time-to-time, Crescent Machinery offers its rental customers the
opportunity to purchase rented equipment for a stated value at a future point in
time. In such instances, Crescent Machinery depreciates the specific rental item
in accordance with the contract. Expenditures for maintenance and repairs are
charged to expense as incurred. Expenditures for renewals or betterments are
capitalized. The cost of property replaced, retired, or otherwise disposed of is
removed from the asset account along with the related accumulated depreciation.
Long-lived assets are evaluated when indications of impairment are present, and
provisions from possible losses are recorded when undiscounted cash flows
estimated to be generated by those assets are less than the asset's carrying
value.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 2001, Crescent Operating had fixed and variable rate notes
payable and lines of credit subject to market risk related to changes in
interest rates, none of which were entered into for trading purposes. Crescent
Operating endeavored to manage its market risk by attempting to match
anticipated inflow of cash from its operating, investing and financing
activities with anticipated outflow of cash to fund debt payments, investments
and other cash requirements. Crescent Operating has not used derivative
financial instruments to manage interest rate risk.
As of December 31, 2001, Crescent Operating's subsidiaries had amounts
outstanding under variable rate notes payable and lines of credit totaling
$242.1 million, with a weighted average interest rate of 10.5% per annum. A
hypothetical 10% increase in the weighted average interest rate on Crescent
Operating's variable rate notes and lines of credit would cause a $2.5 million
increase in interest expense and a decrease in Crescent Operating's earnings and
cash flows of $0.7 million, based on the amount of variable rate debt
outstanding as of December 31, 2001. Crescent Operating ceased either to own or
to control such subsidiaries in February 2002 and thus ceased to have market
interest rate exposure with respect to those instruments.
As of December 31, 2001, Crescent Operating had amounts outstanding under
fixed rate notes payable and lines of credit totaling $345.0 million, with a
weighted average interest rate of 11.4% per annum. Hypothetically, if market
interest rates were substantially lower than the rates on Crescent Operating's
fixed rate notes and credit lines, Crescent Operating would be able to reduce
interest expense
193
if it were able to prepay and/or refinance those instruments. However, as
explained elsewhere in this proxy statement/prospectus, Crescent Operating is
unable to prepay or refinance any of those instruments, either because Crescent
Operating in February 2002 ceased either to own or to control subsidiaries
holding such instruments or because such instruments have matured due to
Crescent Operating's payment default.
Since December 31, 2001, there have been no material changes to the
information regarding market risk.
CRESCENT REAL ESTATE MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read this section in conjunction with the selected financial
data and the consolidated financial statements and the accompanying notes in the
Financial Statements of Crescent Real Estate, respectively, of this proxy
statement/prospectus. Historical results and percentage relationships set forth
in these Items and this section should not be taken as indicative of future
operations of Crescent Real Estate.
SEGMENT INFORMATION
The economic slowdown in the third quarter of 2001, combined with the
events of the September 11, 2001 have had an adverse impact on resort/hotel
operations and lot sales primarily at the Desert Mountain residential
development property. However, the office property portfolio, which represents
approximately 59% of total assets, continues to be stable with same-store
weighted average occupancy in excess of 90% and average remaining lease term of
approximately five years at September 30, 2002. Although management does not
expect full recovery of these investment segments in the near-term, Crescent
Real Estate remains committed to its fundamental investment segments.
The following sections include information for each of Crescent Real
Estate's investment segments for the three and nine months ended September 30,
2002 and the year ended December 31, 2001.
Office Segment
Crescent Real Estate owned or had an interest in 74 office properties as
of December 31, 2001 and 73 office properties (including three retail
properties) as of September 30, 2002.
The following tables show the same-store net operating income growth for
the approximately 25.4 million square feet of office property space owned as of
December 31, 2001 and the approximately 24.1 million square feet of office
property space owned as of September 30, 2002. These amounts exclude
approximately 1.5 million square feet of office property space at Bank One
Center, in which Crescent Real Estate owns a 50% equity interest, approximately
1.5 million square feet of office property space at Four Westlake Park, Bank One
Tower and Three Westlake Park, in each of which Crescent Real Estate has a 20%
equity interest, approximately 0.1 million square feet of office property space
at Avallon IV, which was completed during the year ended December 31, 2001,
approximately 0.8 million square
194
feet of office property space at Miami Center, in which Crescent Real Estate
owns a 40% equity interest, approximately 0.6 million square feet of office
property space at 5 Houston Center, which was completed on September 16, 2002
and in which Crescent Real Estate owns a 25% equity interest, and approximately
0.7 million square feet of office property space at Johns Manville Plaza, which
Crescent Real Estate acquired on August 29, 2002.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------- ---------------------------------------
PERCENTAGE/ PERCENTAGE/
POINT INCREASE POINT INCREASE
2002 2001 (DECREASE) 2002 2002 (DECREASE)
---- ---- ---------- ---- ---- ----------
(IN MILLIONS)
Same-store Revenues(1) $129.0 $132.5 (2.6)% $392.3 $395.0 (0.7)%
Same-store Expenses (58.9) (60.5) (2.6)% (181.5) (180.0) 0.8%
------ ------ ---- ------ ------ ----
Net Operating Income $ 70.1 $ 72.0 (2.6)% $210.8 $215.0 (2.0)%
====== ====== ==== ====== ====== ====
Weighted Average
Occupancy 89.7% 93.0% (3.3) pts 90.1% 93.2% (3.1) pts
------ ------ ---- ------ ------ ----
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
PERCENTAGE/
POINT INCREASE
2001 2000 (DECREASE)
---- ---- ----------
(IN MILLIONS)
Same-store Revenues $552.5 $519.9 6.3%
Same-store Expenses (250.1) (229.3) 9.1%
------ ------ ------
Net Operating Income $302.4 $290.6 4.1%
====== ====== ======
Weighted Average
Occupancy 92.3% 91.8% 0.5 pt
------ ------ ------
The following tables show renewed or re-leased leasing activity and the
percentage increase of leasing rates for signed leases compared to expiring
leases at Crescent Real Estate's office properties owned as of the three and
nine months ended September 30, 2002 and the year ended December 31, 2001.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002,
----------------------------------------------
EXPIRING PERCENTAGE
SIGNED LEASES LEASES INCREASES
------------- ------ ---------
Renewed or re-leased(1) 1,108,000 sq ft 1,108,000 sq ft N/A
Weighted average full-service
rental rate(2) $22.24 per sq ft $23.70 per sq ft (6)%
FFO annual net effective rental
rate(3) (4) $12.26 per sq ft $14.04 per sq ft (13)%
----------
(1) Excludes termination fees.
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2002,
--------------------------------------------
EXPIRING PERCENTAGE
SIGNED LEASES LEASES INCREASES
------------- ------ ---------
Renewed or re-leased(1) 2,165,000 sq ft 2,165,000 sq ft. N/A
Weighted average full-service
rental rate(2) $22.02 per sq ft $22.27 per sq ft (1)%
FFO annual net effective rental
rate(3) (4) $12.13 per sq ft $12.56 per sq ft (3)%
FOR THE YEAR ENDED DECEMBER 31, 2001
------------------------------------
EXPIRING PERCENTAGE
SIGNED LEASES LEASES INCREASES
------------- ------ ---------
Renewed or re-leased(1) 1,890,000 sq ft N/A N/A
Weighted average full-service
rental rate(2) $23.67 per sq ft $20.21 per sq ft 17%
FFO annual net effective rental
rate(3) (4) $14.70 per sq ft $11.21 per sq ft 31%
----------
(1) All of which have commenced or will commence during the next 12 months.
195
(2) Including free rent, scheduled rent increases taken into account under
GAAP and including adjustments for expenses payable by or reimbursable
from customers based on current expense levels. Crescent Real Estate
discloses 100% of the rental rate related to each tenant regardless of
Crescent Real Estate's ownership in the building.
(3) Calculated as weighted average full-service rental rate minus operating
expenses.
(4) Funds from operations, or FFO, based on the revised definition adopted by
the Board of Governors of the National Association of Real Estate
Investment Trusts, or NAREIT, effective January 1, 2000, and as used
herein, means net income (loss), determined in accordance with GAAP,
excluding gains (losses) from sales of depreciable operating property,
excluding extraordinary items, as defined by GAAP, plus depreciation and
amortization of real estate assets, and after adjustments for
unconsolidated partnerships and joint ventures. FFO is a non-GAAP measure
and should not be considered an alternative to GAAP measures, including
net income and cash generated from operating activities. For a more
detailed definition and description of FFO and comparisons to GAAP
measures, see " - Liquidity and Capital Resources - Funds from Operations"
below.
Resort/Hotel Segment
Crescent Real Estate owned nine hotel properties as of September 30, 2002
and December 31, 2001.
The following table shows same-store net operating income, weighted
average occupancy, average daily rate and revenue per available room/guest for
the Crescent Real Estate hotel properties for the three and nine months ended
September 30, 2002 and the years ended December 31, 2001 and 2000.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------- ---------------------------------------
PERCENTAGE/ PERCENTAGE/
POINT POINT
UPSCALE BUSINESS-CLASS HOTELS 2002 2001 DECREASE 2002 2001 CHANGE
----------------------------- ---- ---- -------- ---- ---- ------
Same-Store NOI (in thousands) ........ $ 3,714 $ 3,672 1% $13,676 $14,111 (3)%
Weighted average occupancy ........... 73% 72% 1 pts 71% 72% (1) pts
Average daily rate ................... $ 109 $ 111 (2)% $ 114 $ 118 (3)%
Revenue per available room/guest night $ 79 $ 80 (1)% $ 81 $ 859 (5)%
FOR THE THREE MONTHS ENDED SEPTEMBER 30, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------- ---------------------------------------
PERCENTAGE/ PERCENTAGE/
POINT POINT
LUXURY AND DESTINATION FITNESS 2002 2001 DECREASE 2001 2000 CHANGE
RESORTS AND SPAS ---- ---- -------- ---- ---- ------
Same-Store NOI (in thousands) ........ $ 6,185 $ 7,085 (13)% $22,707 $24,938 (9)%
Weighted average occupancy ........... 74% 72% 2 pts 71% 72% (1)pts
Average daily rate ................... $ 117 $ 418 --% $ 463 $ 469 (1)%
Revenue per available room/guest ..... $ 301 $ 294 2% $ 319 $ 331 (4)%
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
PERCENTAGE/
POINT
UPSCALE BUSINESS-CLASS HOTELS 2001 2000 CHANGE
----------------------------- ---- ---- ------
Same-Store NOI (in thousands)(1) ..... $20,165 $22,157 (9)%
Weighted average occupancy ........... 71% 75% (4) pts
Average daily rate ................... $ 118 $ 116 2%
Revenue per available room/guest night $ 83 $ 86 (3)%
----------
(1) Excludes the Four Seasons Hotel -- Houston, which was sold on November 3,
2000.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
PERCENTAGE/
LUXURY AND DESTINATION FITNESS POINT
RESORTS AND SPAS 2001 2000 DECREASE
---------------- ---- ---- --------
Same-Store NOI (in thousands) ........ $29,451 $36,837 (20)%
Weighted average occupancy ........... 69% 79% (10)pts
Average daily rate ................... $ 470 $ 442 6%
Revenue per available room/guest ..... $ 318 $ 340 (6)%
196
On February 14, 2002, Crescent Real Estate executed an agreement with Crescent
Operating, pursuant to which Crescent Operating transferred to subsidiaries of
Crescent Real Estate, in lieu of foreclosure, Crescent Operating's lessee
interests in the eight Crescent Real Estate hotel properties leased to
subsidiaries of Crescent Operating. As a result, the subsidiaries of Crescent
Real Estate became the lessees of these Crescent Real Estate hotel properties.
Crescent Real Estate fully consolidated the operations of the eight hotel
properties beginning on the date of the transfers.
CR License, LLC and CRL Investments, Inc.
As of December 31, 2001, Crescent Real Estate had a 28.5% interest in CR
License, LLC, the entity which owns the right to the future use of the "Canyon
Ranch" name. Crescent Real Estate also had a 95% economic interest, representing
all of the non-voting common stock, in CRL Investments, Inc., which has an
approximately 65% economic interest in the Canyon Ranch Spa Club in the Venetian
Hotel in Las Vegas, Nevada.
On February 14, 2002, Crescent Real Estate executed an agreement with
Crescent Operating, pursuant to which Crescent Operating transferred to
subsidiaries of Crescent Real Estate, pursuant to a strict foreclosure, Crescent
Operating's 1.5% interest in CR License and 5.0% interest, representing all of
the voting stock, in CRL Investments. As a result, as of September 30, 2002,
Crescent Real Estate had a 30.0% interest in CR License, the entity which owns
the right to the future use of the "Canyon Ranch" name. Crescent Real Estate
also had a 100% economic interest, representing all of the common stock in CRL
Investments, which has a approximately 65% economic interest in the Canyon Ranch
Spa Club in the Venetian Hotel in Las Vegas, Nevada.
Residential Development Segment
As of September 30, 2002, Crescent Real Estate owned or had economic
interests in five residential development corporations. The residential
development corporations in turn, through joint ventures or partnership
arrangements, own interests in 21 residential development properties. The
residential development corporations are responsible for the continued
development and the day to day operations of the residential development
properties.
On February 14, 2002, Crescent Real Estate executed an agreement with
Crescent Operating, pursuant to which Crescent Operating transferred to
subsidiaries of Crescent Real Estate, pursuant to a strict foreclosure, Crescent
Operating's voting interests in three of the residential development
corporations, specifically The Woodlands Land Company, Desert Mountain
Development Corporation and CRDI. Crescent Real Estate fully consolidated the
operations of the three residential development corporations beginning on the
dates of the asset transfers.
The Woodlands Land Development Company, L.P. and The Woodlands Commercial
Properties Company, The Woodlands, Texas
The following tables show residential lot sales at an average price per
lot and commercial land sales at an average price per acre for the three and
nine months ended September 30, 2002 and 2001 and the year ended December 31,
2001 and 2000.
197
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- -------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Residential lot sales 306 432 818 1,296
Average sales price per lot $ 78,000 $ 75,000 $ 69,000 $ 77,000
Commercial land sales 8 acres 6 acres 60 acres 83 acres
Average sales price per acre $384,000 $381,000 $346,000 $331,000
FOR THE YEAR ENDED
DECEMBER 31,
---------------------------
2001 2000
-------- --------
Residential lot sales 1,718 2,033
Average sales price per lot $ 72,000 $ 62,000
Commercial land sales 94 acres 124 acres
Average sales price per acre $337,000 $308,000
- Average sales price per lot decreased by $8,000, or 10% due to fewer
higher priced lots sold primarily from the Carlton Woods development
in the nine months ended September 30, 2002, compared to the same
period 2001. Average sales price per lot increased by $10,000, or
16%, due to a product mix of higher priced lots from the Carlton
Woods development in the year ended December 31, 2001, compared to
the same period in 2000.
- Carlton Woods is The Woodlands' new upscale residential development.
It is a gated community consisting of 491 lots located around a Jack
Nicklaus signature golf course. As of December 31, 2001, 213 lots
had sold at prices ranging from $0.1 million to $1.0 million per
lot, or an average price of $343,000 per lot. As of September 30,
2002, 233 lots had been sold at prices ranging from $0.1 million to
$2.2 million per lot, or an average price of $348,000 per lot.
Additional phases within Carlton Woods are expected to be marketed
to the public over the next two years.
- Future buildout of The Woodlands is estimated at approximately
12,264 residential lots and approximately 1,599 acres of commercial
land, of which approximately 1,671 residential lots and 972 acres
are currently in inventory.
Desert Mountain Properties Limited Partnership, Scottsdale, Arizona
The following tables show residential lot sales at an average price per lot for
the three and nine months ended September 30, 2002 and 2001 and the years ended
December 31, 2001 and 2000.
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Residential lot sales 6 17 54 59
Average sales price per lot(1) $831,000 $470,000 $746,000 $734,000
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------
2001 2000
-------- --------
Residential lot sales 86 178
Average sales price per lot (1) $688,000 $619,000
--------------------
(1) Including equity golf memberships.
- With the higher priced residential lots being completed during the
latter phases of development at Desert Mountain, the average sales
price per lot increased by $69,000, or 11%, for the year ended
198
December 31, 2001, as compared to the same period in 2000. As a
result of product mix and a decline in the economy combined with the
events of September 11, 2001, the number of lot sales decreased to
86 lots for the year ended December 31, 2001, as compared to 178
lots for the same period in 2000.
- Approved future buildout is estimated to be approximately 205
residential lots, of which approximately 120 are currently in
inventory.
Crescent Resort Development, Inc., formerly Crescent Development Management
Corp., Beaver Creek, Colorado
The following tables show total active projects, residential lot and
residential unit sales, commercial land sales and average sales price per lot
and unit.
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- --------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Active projects 14 13 14 13
Residential lot sales 30 34 189 108
Residential unit sales:
Townhome sales 1 1 3 9
Single-family home sales -- -- -- --
Residential equivalent timeshare unit sales 2 -- 10 --
Condominium sales 26 10 222 22
Commercial land sales -- -- -- --
Average sales price per residential lot $ 108,000 $ 86,000 $ 68,000 $ 64,000
Average sales price per residential unit $ 1.0 million $ 1.7 million $ 669,000 $1.6 million
Average sales price per residential
equivalent time share unit $ 1.1 million -- $ 1.2 million --
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------
2001 2000
----------- --------
Active projects 14 12
Residential lot sales 181 343
Residential unit sales:
Townhome sales 11 19
Single-family home sales -- 5
Equivalent timeshare unit sales 11 --
Condominium sales 109 26
Commercial land sales -- acres 9 acres
Average sale price per residential lot $ 73,000 $ 136,000
Average sale price per residential unit $ 1.0 million $ 1.6 million
Average sales price per time share unit N/A N/A
- Average sales price per lot decreased by $63,000, or 46%, and
average sales price per unit decreased $0.6 million, or 38%, due to
lower priced product mix sold in the year ended December 31, 2001,
as compared to the same period in 2000. Average sales price per unit
decreased $0.9 million, or 56%, due to lower priced product mix sold
in the nine months ended September 30, 2002, as compared to the same
period in 2001.
199
Temperature-Controlled Logistics Segment
As of September 30, 2002 Crescent Real Estate held a 40% interest in the
temperature-controlled logistics partnership, which owns AmeriCold Corporation,
which directly or indirectly owns the 88 Crescent Real Estate
temperature-controlled logistics properties, with an aggregate of approximately
441.5 million cubic feet, or 17.5 million square feet, of warehouse space. The
business operations associated with the Crescent Real Estate
temperature-controlled logistics properties are owned by AmeriCold Logistics,
which is owned 60% by Vornado Operating, L.P. and 40% by a subsidiary of
Crescent Operating. Crescent Real Estate has no interest in AmeriCold Logistics.
AmeriCold Logistics, as sole lessee of the Crescent Real Estate
temperature-controlled logistics properties, leases the temperature-controlled
logistics properties from AmeriCold Corporation under three triple-net master
leases, as amended. On February 22, 2001, AmeriCold Corporation and AmeriCold
Logistics agreed to restructure certain financial terms of the leases, including
the adjustment of the rental obligation for 2001 to $146.0 million, the
adjustment of the rental obligation for 2002 to $150.0 million (plus contingent
rent in certain circumstances), the increase of AmeriCold Corporation's share of
capital expenditures for the maintenance of the properties from $5.0 million to
$9.5 million (effective January 1, 2000) and the extension of the date on which
deferred rent was required to be paid to December 31, 2003.
In the first quarter of 2000, AmeriCold Logistics started to experience a
slowing in revenue growth from the previous year. This was primarily due to
customers focusing more interest on inventory management in an effort to improve
operating performance. Starting in 2000 and continuing into 2001, AmeriCold
Logistics has seen consolidation among retail and food service channels begin to
significantly limit the ability of manufacturers to pass along cost increases by
raising prices. Because of this, manufacturers are focused on supply chain cost
reduction initiatives (such as inventory management, transportation and
distribution) in an effort to improve operating performance. In the second and
third quarters of 2000, AmeriCold Logistics deferred a portion of its rent
payments in accordance with the terms of the leases of the
temperature-controlled logistics properties. For the three months ended June 30,
2000, AmeriCold Corporation recorded a valuation allowance for a portion of the
rent that had been deferred during that period, and for the three months ended
September 30, 2000 recorded a valuation allowance for 100% of the rent that had
been deferred during the three months ended September 30, 2000 and has continued
to record a valuation allowance for 100% of the deferred rent prospectively.
These valuation allowances resulted in a decrease in the equity in net income of
Crescent Real Estate in AmeriCold Corporation. AmeriCold Corporation had not
recorded a valuation allowance with respect to rent deferred by AmeriCold
Logistics prior to the quarter ended June 30, 2000, because the financial
condition of AmeriCold Logistics prior to that time did not indicate the
inability of AmeriCold Logistics ultimately to make the full rent payments. As a
result of continuing net losses and the increased amount of deferred rent,
AmeriCold Corporation determined that the collection of additional deferred rent
was doubtful.
AmeriCold Logistics deferred $25.5 million of rent for the year ended
December 31, 2001, of which Crescent Real Estate's share was $10.2 million.
AmeriCold Logistics also deferred $19.0 million and $5.4 million of rent for the
years ended December 31, 2000 and 1999, respectively, of which Crescent Real
Estate's share was $7.5 million and $2.1 million, respectively. In December
2001, AmeriCold Corporation waived its rights to collect $39.8 million of the
total $49.9 million of deferred rent, of which Crescent Real Estate's share was
$15.9 million. AmeriCold Corporation and Crescent Real Estate began to recognize
rental income when earned and collected during the year ended December 31, 2000
and continued this accounting treatment for the year ended December 31, 2001;
therefore, there was no financial statement impact to AmeriCold Corporation or
to Crescent Real Estate related to the AmeriCold Corporation's decision in
December 2001 to waive collection of deferred rent.
200
AmeriCold Logistics deferred $20.6 million of the total $102.4 million of
rent payable for the nine months ended September 30, 2002. Crescent Real
Estate's share of the deferred rent was $8.2 million. Crescent Real Estate
recognizes rental income when earned and collected and has not recognized the
$8.2 million of deferred rent in equity in net income of AmeriCold Corporation
for the nine months ended September 30, 2002.
The following table shows the total, and Crescent Real Estate's portion
of, deferred rent and valuation allowance rent at December 31, 2001, 2000 and
1999 and for the nine months ended September 30, 2002.
DEFERRED RENT VALUATION ALLOWANCE
---------------------------- ---------------------------
TOTAL COMPANY'S COMPANY'S
(in millions) PORTION PORTION TOTAL PORTION
------------- ------- ------- ----- -------
FOR THE YEAR
ENDED DECEMBER 31,
1999 $ 5.4 $ 2.1 $ -- $ --
2000 19.0 7.5 16.3 6.5
2001 25.5 10.2 25.5 10.2
------- --------- ------ --------
BALANCE AT
DECEMBER 31, 2001 $ 10.1 $ 3.9 $ -- $ --
------- --------- ------ --------
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30, 2002 $ 20.6 $ 8.2 $ 20.6 $ 8.2
------- --------- ------ --------
$ 30.7 $ 12.1 $ 20.6 $ 8.2
======= ========= ====== ========
(1) Represents the rental obligation (excluding the effect of
straight-lining rents and deferred rent) of AmeriCold Logistics.
AmeriCold Corporation completed the acquisition of one facility in the
first quarter of 2001 for $10.0 million and completed the construction of one
facility in the third quarter of 2001 for $15.8 million, representing a total of
approximately 8.5 million cubic feet (0.2 million square feet).
Behavioral Healthcare Segment
During 1999, Crescent Real Estate's investment segments included a
behavioral healthcare segment. As of December 31, 1999, the behavioral
healthcare segment consisted of 88 behavioral healthcare properties in 24
states, all of which were leased to Charter Behavioral Health Systems, or CBHS,
and its subsidiaries under a triple-net master lease. During the year ended
December 31, 1999, Crescent Real Estate received cash rental payments of
approximately $35.3 million from CBHS. However, during 1999, CBHS's business was
negatively affected by many factors, including adverse industry conditions, and
CBHS failed to perform in accordance with its operating budget. In the third
quarter of 1999 CBHS was unable to meet its rental obligation to Crescent Real
Estate. In the third quarter of 1999, Crescent Real Estate, Crescent Operating,
Magellan and CBHS commenced a recapitalization of CBHS. As part of this
recapitalization, Crescent Real Estate commissioned an independent public
accounting firm to assist in the evaluation of alternatives related to CBHS,
which included an appraisal of the behavioral healthcare properties.
201
The following financial statement charges were made with respect to
Crescent Real Estate's investment in the behavioral healthcare properties in the
third quarter of 1999:
- CBHS rent was reflected on a cash basis beginning in the third quarter of
1999 due to the uncertainty that CBHS would be able to fulfill its rental
obligations under the lease;
- Crescent Real Estate wrote-off the rent that was deferred according to the
CBHS lease agreement from the commencement of the lease in June of 1997
through June 30, 1999. The balance written-off totaled $25.6 million;
- Crescent Real Estate wrote-down its behavioral healthcare real estate
assets by approximately $103.8 million to a book value of $245.0 million;
- Crescent Real Estate wrote-off the book value of warrants to purchase
common shares of Magellan of $12.5 million;
- Crescent Real Estate recorded approximately $15.0 million of additional
expense to be used by CBHS as working capital; and
- Crescent Real Estate ceased recording depreciation expense in the
beginning of November of 1999 on the behavioral healthcare properties that
were classified as held for disposition.
On February 16, 2000, CBHS and all of its subsidiaries that were subject
to the master lease with Crescent Real Estate filed voluntary Chapter 11
bankruptcy petitions in the United States Bankruptcy Court for the District of
Delaware.
During the year ended December 31, 2000, payment and treatment of rent for
the behavioral healthcare properties was subject to a rent stipulation agreed to
by certain of the parties involved in the CBHS bankruptcy proceeding. Crescent
Real Estate received approximately $15.4 million in rent and interest from CBHS
during the year ended December 31, 2000. Crescent Real Estate also completed the
sale of 60 behavioral healthcare properties previously classified as held for
disposition during the year ended December 31, 2000 (contained in Net Investment
in Real Estate). The sales generated approximately $233.7 million in net
proceeds and a net gain of approximately $58.6 million for the year ended
December 31, 2000. During the year ended December 31, 2000, Crescent Real Estate
recognized an impairment loss of approximately $9.3 million on the behavioral
healthcare properties held for disposition. This amount represents the
difference between the carrying values and the estimated sales prices less the
costs of the sales. At December 31, 2000, the carrying value of the 28
behavioral healthcare properties classified as held for disposition was
approximately $68.5 million (contained in Net Investment in Real Estate).
Depreciation has not been recognized since the dates the behavioral healthcare
properties were classified as held for sale.
Crescent Real Estate received approximately $6.0 million in repayment of a
working capital loan from CBHS during the year ended December 31, 2001. Crescent
Real Estate also completed the sale of 18 behavioral healthcare properties
previously classified as held for disposition during the year ended December 31,
2001. The sales generated approximately $34.7 million in net proceeds and a net
gain of approximately $1.6 million for the year ended December 31, 2001. During
the year ended December 31, 2001, Crescent Real Estate recognized an impairment
loss of approximately $8.5 million on the behavioral healthcare properties held
for disposition. This amount represents the difference between the carrying
values and the estimated sales prices less the costs of the sales.
202
As of September 30, 2002, Crescent Real Estate owned 7 behavioral
healthcare properties, all of which were classified as held for sale. The
carrying value of the behavioral healthcare properties at September 30, 2002 was
approximately $21.0 million. During the nine months ended September 30, 2002,
Crescent Real Estate recognized an impairment charge of approximately $0.6
million on one of the behavioral healthcare properties held for sale. This
amount represents the difference between the carrying value and the estimated
sales price less costs of the sale for this property. Depreciation expense has
not been recognized since the dates the behavioral healthcare properties were
classified as held for sale. Crescent Real Estate has entered into contracts or
letters of intent to sell three behavioral healthcare properties and is actively
marketing for sale the remaining seven behavioral healthcare properties. The
sales of these behavioral healthcare properties are expected to close within the
year.
RESULTS OF OPERATIONS
The following tables show Crescent Real Estate's financial data as a
percentage of total revenues for the three and nine months ended September 30,
2002 and 2001 and the three years ended December 31, 2001, 2000 and 1999 and the
variance in dollars between the three and nine months ended September 30, 2002
and 2001 and between the years ended December 31, 2001 and 2000 and the years
ended December 31, 2000 and 1999. See "Note 9. Segment Reporting" included in
the Financial Statements of Crescent Real Estate for the nine months ended
September 30, 2002 (unaudited) and "Note 3. Segment Reporting" included in the
Financial Statements of Crescent Real Estate for the year ended December 31,
2001 (audited) for financial information about investment segments.
203
FINANCIAL DATA AS A PERCENTAGE OF TOTAL FINANCIAL DATA AS A PERCENTAGE OF TOTAL
REVENUES FOR THE THREE MONTHS ENDED REVENUES FOR THE NINE MONTHS ENDED
----------------------------------- ----------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
---- ---- ---- ----
REVENUES
Office properties 59.1% 87.2% 56.5% 84.9%
Resort/Hotel properties 22.6 7.2 19.5 8.3
Residential Development Property 17.6 -- 23.3 --
Interest and other income 0.7 5.6 0.7 6.8
----- ----- ----- -----
TOTAL REVENUES 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
EXPENSES
Office Property operating expenses 25.0% 37.5% 24.9% 36.5%
Resort/Hotel Property expense 17.9 -- 14.6 --
Residential Development Property expense 16.9 -- 21.2 --
Corporate general and administrative 3.3 3.6 2.6 3.4
Interest expense 18.9 25.9 17.9 25.9
Amortization of deferred financing costs 1.1 1.4 1.0 1.3
Depreciation and amortization 15.4 17.9 14.1 16.9
Impairment and other charges related to
real estate assets -- 2.1 -- 3.5
----- ----- ----- -----
TOTAL EXPENSES 98.5% 88.4% 96.3% 87.5%
----- ----- ----- -----
OPERATING INCOME 1.5% 11.6% 3.7% 12.5%
----- ----- ----- -----
OTHER INCOME AND EXPENSES
Equity in net income of unconsolidated
companies:
Office properties 0.4% 0.9% 0.5% 0.7%
Resort/Hotel properties -- -- -- --
Residential development properties 1.7 4.2 3.0 5.2
Temperature-controlled logistics properties (1.2) (1.2) (0.5) 0.4
Other (0.3) 1.0 (0.7) 0.5
----- ----- ----- -----
TOTAL EQUITY IN NET INCOME FROM
UNCONSOLIDATED COMPANIES 0.6% 4.9% 2.3% 6.8%
Gain on property sales, net 9.3 0.6 2.9 0.1
----- ----- ----- -----
TOTAL OTHER INCOME AND EXPENSE 9.9% 5.5% 5.2% 6.9%
----- ----- ----- -----
INCOME BEFORE MINORITY INTERESTS, INCOME
TAXES, DISCONTINUED OPERATIONS AND
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE 11.4% 17.1% 8.9% 19.4%
Minority interests (1.6) (4.6) (2.3) (4.8)
Income tax benefit 1.0 -- 0.9 --
----- ----- ----- -----
INCOME BEFORE DISCONTINUED OPERATIONS AND
CUMULATIVE EFFECT OF A CHANGE IN AN
ACCOUNTING PRINCIPAL 10.8% 12.5% 7.5% 14.6%
Discontinued operations - income and gain
on assets sold and held for sale 0.6 0.3 0.8 0.3
Cumulative effect of a change in
accounting principal -- -- (1.4) --
Extraordinary item - extinguishment of
debt -- (5.7) -- (2.0)
----- ----- ----- -----
NET INCOME 11.4% 7.1% 6.9% 12.9%
6 3/4% Series A Preferred Share
distributions (1.9) (2.0) (1.6) (1.9)
9 -1/2% Series B Share distributions (0.7) -- (0.4) --
----- ----- ----- -----
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS 8.8% 5.1% 4.9% 11.0%
===== ===== ===== =====
204
TOTAL VARIANCE IN DOLLARS BETWEEN
-------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30,
AND 2002 2001 AND 2002
-------- -------------
REVENUES
Office properties $ (4.5) $(27.0)
Resort/Hotel properties 43.7 103.7
Residential Development Property 43.8 176.9
Interest and other income (7.9) (30.6)
------ ------
TOTAL REVENUES $ 75.1 $223.0
------ ------
EXPENSES
Office Property operating expenses $ (2.8) $ (7.2)
Resort/Hotel Property expense 44.6 110.7
Residential Development Property expense 42.1 161.3
Corporate general and administrative 1.9 1.5
Interest expense 2.2 (3.3)
Amortization of deferred financing costs 0.3 0.5
Depreciation and amortization 7.3 16.0
Impairment and other charges related to real estate assets (3.6) (18.9)
------ ------
TOTAL EXPENSES $ 92.0 $260.6
------ ------
OPERATING INCOME $(16.9) $(37.6)
------ ------
OTHER INCOME
Equity in net income of unconsolidated companies:
Office properties $ (0.6) $ (0.1)
Resort/Hotel properties (0.1) (0.1)
Residential development properties (3.0) (4.8)
Temperature-controlled logistics properties (1.0) (6.1)
Other (2.5) (8.2)
------ ------
TOTAL EQUITY IN NET INCOME FROM UNCONSOLIDATED COMPANIES $ (7.2) $(19.3)
Gain on property sales, net 22.1 21.5
------ ------
TOTAL OTHER INCOME AND EXPENSE $ 14.9 $ 2.2
------ ------
INCOME BEFORE MINORITY INTERESTS, INCOME TAXES, DISCONTINUED
OPERATIONS AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE $ (2.0) $(35.4)
Minority interests 3.9 8.7
Income tax benefit 2.7 6.6
------ ------
INCOME BEFORE DISCONTINUED OPERATIONS AND CUMULATIVE EFFECT OF
A CHANGE IN AN ACCOUNTING PRINCIPAL $ 4.6 $(20.1)
Discontinued operations - income and gain on assets sold
and held for sale 0.9 4.7
Cumulative effect of a change in accounting principal -- (10.5)
Extraordinary item - extinguishment of debt -- 10.8
------ ------
NET INCOME $ 5.5 $(15.1)
6 3/4% Series A Preferred Share distributions (1.2) (2.0)
9 -1/2% Series B Preferred Share distributions (2.0) (3.0)
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 2.3 $(20.1)
====== ======
205
FINANCIAL DATA AS A PERCENTAGE OF
TOTAL REVENUES FOR THE YEAR ENDED TOTAL VARIANCE IN DOLLARS BETWEEN
DECEMBER 31, THE YEARS ENDED DECEMBER 31,
---------------------------------- ---------------------------------
(IN MILLIONS)
2001 2000 1999 2001 AND 2000 2000 AND 1999
---- ---- ---- ------------- -------------
REVENUES
Office properties 87.5% 84.1% 82.0% $ 5.2 $ (7.6)
Resort/Hotel properties 6.7 10.2 9.0 (26.4) 6.9
Interest and other income 5.8 5.7 9.0 (0.1) (26.3)
------ ------ ------ ------ ------
TOTAL REVENUES 100.0% 100.0% 100.0% $(21.3) $(27.0)
------ ------ ------ ------ ------
EXPENSES
Operating expenses 37.8% 34.6% 34.2% $ 13.6 $ (6.9)
Corporate general and administrative 3.5 3.4 2.2 0.1 7.8
Interest expense 26.4 28.7 26.1 (20.8) 11.2
Amortization of deferred financing costs 1.4 1.1 1.4 (0.2) (0.9)
Depreciation and amortization 18.0 17.2 17.6 2.1 (7.8)
Settlement of merger dispute -- -- 2.0 -- (15.0)
Impairment and other charges related to
real estate assets 3.7 2.5 24.3 7.5 (160.9)
Impairment and other charges related to
Crescent Operating 13.5 -- -- 92.8 --
------ ------ ------ ------ ------
TOTAL EXPENSES 104.5% 87.5% 107.8% 95.1 (172.5)
------ ------ ------ ------ ------
OPERATING (LOSS) INCOME (4.5)% 12.5% (7.9)% $(116.4) $145.5
OTHER INCOME
Equity in net income of unconsolidated companies:
Office properties 0.9 0.5 0.7 2.9 (2.1)
Residential development properties 6.0 7.6 5.8 (12.5) 10.6
Temperature-controlled logistics properties 0.2 1.0 2.0 (6.3) (7.6)
Other 0.4 1.6 0.7 (8.6) 6.5
------ ------ ------ ------ ------
TOTAL EQUITY IN NET INCOME FROM
UNCONSOLIDATED COMPANIES 7.5% 10.7% 9.2% $(24.5) $ 7.4
Gain on property sales, net 0.6 19.4 -- (133.1) 137.5
------ ------ ------ ------ ------
TOTAL OTHER INCOME AND EXPENSE 8.1% 30.1% 9.2% $(157.6) $144.9
------ ------ ------ ------ ------
(LOSS) INCOME BEFORE MINORITY INTERESTS,
EXTRAORDINARY ITEM AND DISCONTINUED
OPERATIONS 3.6% 42.6% 1.4% $(274.0) $290.4
Minority interests (3.1) (7.2) (0.3) 29.4 (48.7)
------ ------ ------ ------ ------
NET (LOSS) INCOME BEFORE EXTRAORDINARY
ITEM AND DISCONTINUED OPERATIONS 0.5% 35.4% 1.1% $(244.6) $241.7
Extraordinary item - extinguishment of
debt (1.6) (0.6) -- (6.9) (3.9)
Discontinued Operations 0.2 0.4 0.5 (1.4) (0.7)
------ ------ ------ ------ ------
NET (LOSS) INCOME (0.9)% 35.2% 1.6% $(252.9) $237.1
6 3/4% Series A Preferred Share
distributions (2.0) (1.9) (1.8) -- --
Share repurchase agreement return -- (0.4) (0.1) 2.9 (2.3)
Forward share purchase
agreement return -- -- (0.6) -- 4.3
------ ------ ------ ------ ------
NET (LOSS) INCOME AVAILABLE TO COMMON
SHAREHOLDERS (2.9)% 32.9% (0.9)% $(250.0) $239.1
====== ====== ====== ====== ======
Three Months Ended September 30, 2002 as Compared to Three Months Ended
September 30, 2001
Revenues.
206
Total revenues increased $75.1 million, or 43.3%, to $248.5 million for
the quarter ended September 30, 2002, as compared to $173.4 million for the
quarter ended September 30, 2001. The components of the increase are:
- an increase in residential development property revenue of $43.8 million
due to the consolidation of three residential development corporations
beginning on February 14, 2002, as a result of the Crescent Operating
transaction (previously Crescent Real Estate recorded its share of
earnings under the equity method); and
- an increase in hotel property revenue of $43.7 million due to the
consolidation of the operations of eight of the resort/hotel properties
beginning on February 14, 2002, as a result of the Crescent Operating
transaction (previously Crescent Real Estate recognized lease payments
related to these properties); partially offset by
- a decrease in interest and other income of $7.9 million primarily
attributable to the $5.1 million of income and gain recognized on the sale
of marketable securities and other income recognized in the third quarter
of 2001; and
- a decrease in Crescent Real Estate office property revenue of $4.5 million
primarily due to:
- a decrease of $7.9 million from the disposition of five office
properties in 2001;
- the contribution of two office properties to joint ventures in 2001;
- the contribution of two office properties to joint ventures in 2002;
- decreased expense recovery revenue of $1.6 million and decreased rental
revenues of $0.8 million, partially offset by
- net insurance proceeds of approximately $5.0 million received in
September 2002 as a result of an insurance claim on one of Crescent
Real Estate's office properties that had been damaged as a result of
a tornado and
- $1.3 million of rental revenue from the office property acquired in
the third quarter of 2002.
Expenses.
Total expense increased $92.0 million, or 60.1%, to $245.0 million for the
three months ended September 30, 2002, as compared to $153.0 million for the
three months ended September 30, 2001. The primary components of this increase
are:
- an increase in resort/hotel property expense of $44.6 million due to the
consolidation of the operations of eight of the resort/hotel properties
beginning February 14, 2002, as a result of the Crescent Operating
transaction (previously Crescent Real Estate recognized lease payments
related to these properties);
- an increase in residential development property expense of $42.1 million
due to the consolidation of three residential development corporations
beginning February 14, 2002, as a result of the
207
Crescent Operating transaction (previously Crescent Real Estate recorded
its share of earnings under the equity method); and
- an increase in depreciation and amortization expense of $7.3 million
primarily due to the consolidation of the operations of three residential
development corporations beginning February 14, 2002, as a result of the
Crescent Operating transaction partially offset by
- a decrease due to the recognition in the second quarter of 2001 of $3.6
million due to the impairment charges relating to the behavioral
healthcare properties; and
- a decrease in office property operating expense of $2.8 million
primarily due to the disposition of five office properties in 2001, the
contribution of two office properties to joint ventures in 2001 and the
contribution of two office properties to joint ventures in 2002.
Other Income and Expense.
Other income increased $14.9 million, or 156.8%, to $24.4 million for the
three months ended September 30, 2002, as compared to $9.5 million for the three
months ended September 30, 2001, as a result of:
- an increase due to the recognition in the third quarter of 2002 of a $23.2
million gain on two properties that were contributed to joint ventures and
the sale of Canyon Ranch - Tucson Land compared with the recognition of a
$1.1 million gain on property sales in the third quarter of 2001;
partially offset by
- a decrease in equity in net income of unconsolidated companies of $7.2
million, primarily due to the consolidation of three residential
development corporations beginning February 14, 2002, as a result of the
Crescent Operating transaction (previously Crescent Real Estate recorded
its interests in the residential development corporations under the equity
method).
Income Tax Benefit.
Crescent Real Estate recognized consolidated income tax benefit of $2.7
million for the three months ended September 30, 2002, primarily related to
hotel and residential development operations. Because these operations were not
consolidated for the three months ended September 30, 2001, no consolidated
income tax expense was recognized for that period.
Discontinued Operations.
The income from discontinued operations from assets sold and held for sale
increased $0.9 million, or 180%, to $1.4 million for the three months
ended September 30, 2002, compared to $0.5 million for the three months
ended September 30, 2001. This increase is primarily due to the gains on
disposals, net of minority interest, of two office properties sold during
the three months ended September 30, 2002.
208
SEGMENT ANALYSIS
Office Segment
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, VARIANCE
-------------------------- ----------------------
2002 2001 $ %
-------- -------- ---- ----
(IN MILLIONS)
Office Property Revenue $ 146.8 $ 151.3 (4.5) (3.0)
Office Property Operating Expense 62.2 64.9 (2.7) (4.2)
Equity in Earnings of Unconsolidated
office properties 0.9 1.5 (0.6) (40.0)
The primary components of the decrease in office property revenues are as
follows:
- decreased revenue of $7.9 million due to the disposition of five office
properties in 2001, the contribution of two office properties to joint
ventures in 2001 and the contribution of two office properties to joint
ventures in 2002;
- decreased recovery revenue of $1.6 million primarily due to lease
turnover; and
- decreased rental revenues of $0.8 million; partially offset by
- net insurance proceeds of $5.0 million received in September 2002 as a
result of an insurance claim on one of Crescent Real Estate's office
properties that had been damaged as a result of a tornado; and
- $1.3 million of rental revenue from the office property acquired in the
third quarter in 2002.
The components of the decrease in office property operating expense are as
follows:
- decreased expenses of $3.1 million due to the disposition of five office
properties in 2001, the contribution of two office Properties to joint
ventures in 2001 and the contribution of two office properties to joint
ventures in 2002;
- decreased office property utility expense of $2.4 million due to lower
rates as a result of a one-year energy contract effective beginning in
first quarter of 2002 for certain Texas properties; and
- decreased real estate taxes of $1.6 million; partially offset by
209
- increased operating expenses of $4.4 million attributable to $2.1 million
of security and insurance expense primarily related to the events of
September 11, 2001 and administration expense of $2.3 million including
legal fees, bad debt expense and payroll costs.
Resort/Hotel Segment
On February 14, 2002, Crescent Real Estate executed an agreement with
Crescent Operating, pursuant to which Crescent Operating transferred to
subsidiaries of Crescent Real Estate, in lieu of foreclosure, Crescent
Operating's lessee interests in the eight hotel properties leased to
subsidiaries of Crescent Operating. The financial statements reflect the
consolidation of the operations for these eight hotel properties for the period
February 14, 2002 through September 30, 2002. Revenues prior to February 14,
2002 represent lease payments to Crescent Real Estate.
FOR THE THREE MONTHS
ENDED SEPTEMBER 30, VARIANCE
--------------------------------------------------------------
2002 2001 $ %
------- ------- ----- ----
(IN MILLIONS)
Resort/Hotel Property Revenue $ 56.1 $ 12.4
Resort/Hotel Property Expense (44.6) --
------- ------- ----- ----
Net Operating Income $ 11.5 $ 12.4 $(0.9) (7.3)%
======= ======= ===== ====
The decrease in hotel property net operating income is primarily due to
the consolidation of the operations of eight of the hotel properties in 2002 as
compared to the recognition of lease payments from these properties in 2001.
Residential Development Segment
On February 14, 2002, Crescent Real Estate executed an agreement with
Crescent Operating, pursuant to which Crescent Operating transferred to
subsidiaries of Crescent Real Estate, in lieu of foreclosure, Crescent
Operating's voting interests in three of the residential development
corporations: The Woodlands Land Company, Desert Mountain Development Corp. and
CRDI. Crescent Real Estate fully consolidated the operations of the three
residential development corporations beginning on the dates of the asset
transfers.
FOR THE THREE MONTHS
ENDED SEPTEMBER 30, VARIANCE
--------------------------------------------------------------------
2002 2001 $ %
------- ------- ---- ----
(IN MILLIONS)
Residential Development Property Revenue $ 43.8 $ --
Residential Development Property Expense (42.1) --
Depreciation/Amortization (2.0) --
Equity in net income of Unconsolidated
Residential Development Properties 4.3 7.3
Minority Interests (0.4) --
Income Tax Benefit 0.2 --
-------- -------- -------- -----
Operating Results $ 3.8 $ 7.3 $ (3.5) (47.9)%
======== ======== ======== =====
The components of the decrease in residential development property net
operating income are:
- lower lot sales of $2.2 million at The Woodlands Land Company;
210
- lower gain recognized on disposition of properties of $1.7 million at The
Woodlands Land Company;
- a change in presentation of capitalized interest of $2.4 million, due to
consolidation of Desert Mountain Development Corp. and CRDI in 2002;
partially offset by
- higher unit sales and other operating revenues of $1.7 million at CRDI;
and
- higher average price per lot of $1.1 million at Desert Mountain
Development Corp.
Temperature-Controlled Logistics Segment
FOR THE THREE MONTHS
ENDED SEPTEMBER 30, VARIANCE
---------------------------- ------------------------
2002 2001 $ %
------- ------- ------- -----
(IN MILLIONS)
Equity in net (loss) of unconsolidated
Temperature-Controlled Logistics Properties $ (3.1) $ (2.1) $ (1.0) (47.6)%
The decrease in equity in earnings of unconsolidated
temperature-controlled logistics properties is primarily due to Crescent Real
Estate's $4.5 million portion of deferred rent recorded in the third quarter of
2002 compared with the Crescent Real Estate's $3.5 million portion of deferred
rent recorded in the third quarter of 2001.
Nine Months Ended September 30, 2002 as Compared to Nine Months Ended September
30, 2001
Revenues
Total revenues increased $223.0 million, or 41.5%, to $760.2 million for
the nine months ended September 30, 2002, as compared to $537.2 million for the
nine months ended September 30, 2001. The components of the increase are:
- an increase in residential development property revenue of $176.9 million
due to the consolidation of three residential development corporations
beginning February 14, 2002, as a result of the Crescent Operating
transaction (previously Crescent Real Estate recorded its share of
earnings under the equity method); and
- an increase in hotel property revenue of $103.7 million due to the
consolidation of the operations of eight of the hotel properties beginning
February 14, 2002, as a result of the Crescent Operating transaction
(previously Crescent Real Estate recognized lease payments related to
these properties); partially offset by
- a decrease in interest and other income of $30.6 million, primarily due
to:
- the collection of $6.5 million from CBHS in 2001 on a working capital
loan that was previously expensed in conjunction with the
recapitalization of CBHS;
- the income on marketable securities and the gain recognized on the sale
of marketable securities aggregating $11.9 million in the first nine
months of 2001;
- the recognition in 2001 of $2.8 million of interest income on Crescent
Operating notes;
211
- the recognition in 2001 of $2.3 million in lease commission and
development fee revenue for 5 Houston Center office property which was
under construction;
- a decrease in interest income of $1.8 million in 2002 related to lower
escrow balances for a plaza renovation at an office property that has
been completed;
- a decrease in interest income of $2.6 million on cash and certain notes
receivable as a result of reduced interest rates; and
- a decrease in office property revenue of $27.0 million primarily due to
the disposition of five office properties in 2001, the contribution of
two office properties to joint ventures in 2001 and the contribution of
two office properties to joint ventures in 2002 ($29.7 million), and
decreased lease termination fees of $2.5 million, partially offset by
net insurance proceeds of approximately $5.0 million received in
September 2002 as a result of an insurance claim on one of Crescent
Real Estate's office properties that had been damaged as a result of a
tornado.
Expenses.
Total expense increased $260.6 million, or 55.3%, to $731.5 million for
the nine months ended September 30, 2002, as compared to $470.9 million for the
nine months ended September 30, 2001. The primary components of this increase
are:
- an increase in residential development property expense of $161.3 million
due to the consolidation of three residential development corporations
beginning February 14, 2002, as a result of the Crescent Operating
transaction (previously Crescent Real Estate recorded its share of
earnings under the equity method); and
- an increase in hotel property expense of $110.7 million due to the
consolidation of the operations of eight of the hotel properties beginning
February 14, 2002, as a result of the Crescent Operating transaction
(previously Crescent Operating recognized lease payments related to these
properties); and
- an increase in depreciation and amortization expense of $16.0 million
primarily due to the consolidation of the operations of three residential
development corporations beginning February 14, 2002 as a result of the
Crescent Operating transaction; partially offset by
- a decrease due to the recognition in 2001 of $18.9 million in impairment
charges primarily relating to behavioral healthcare properties of $7.0
million and the impairment of $11.9 million relating to the conversion of
the Crescent Real Estate's preferred interest in Metropolitan Partners,
LLC into common shares of Reckson Associates Realty Corp.;
- a decrease in interest expense of $3.3 million primarily attributable to
capitalizing $5.7 million of interest expense in 2002, a decrease in the
weighted average interest rate of 19 basis points (from 7.93% to 7.74%),
or $4.2 million of interest expense, due to the debt refinancing in May of
2001 and lower LIBOR rates, partially offset by an increase of $6.6
million due to a $70.6 million increase in the average debt balance, from
$2,293 million to $2,408 million; and
212
- a decrease in office property operating expense of $7.2 million primarily
due to a decrease of $11.0 million from the disposition of five office
properties in 2001, the contribution of two office properties to joint
ventures in 2001 and the contribution of two office properties to joint
ventures in 2002, partially offset by increases in repairs and maintenance
of $3.6 million due to timing of expenses.
Other Income and Expense.
Other income increased $2.2 million, or 5.9%, to $39.6 million for the
nine months ended September 30, 2002, as compared to $37.5 million for the nine
months ended September 30, 2001, primarily as a result of:
- an increase in gain on property sales, net of $21.5 million, primarily due
to a gain of $17.0 million on the partial sale of the Three Westlake
Office Property, a gain of $5.5 million on the sale of Canyon Ranch -
Tucson Land and a gain of $4.6 million on the partial sale of Miami
Center, net of a loss of $4.9 million on the partial sale of Sonoma
Mission Inn & Spa and the sale of Washington Harbour Land; partially
offset by
- a decrease in equity in net income of unconsolidated companies of $19.3
million, primarily due to the $5.2 million impairment of an investment in
DBL Holdings, Inc. during 2002, and Crescent Real Estate's additional $3.1
million portion of AmeriCold Logistics' deferral of rent payable, $2.9
million due to the change in the base rent recognition method for the
temperature-controlled logistics segment from straight-line to cash basis
and $4.8 million due to the consolidation of three residential development
corporations beginning February 14, 2002, as a result of the Crescent
Operating transaction, (previously Crescent Real Estate recorded its
investment in the residential development corporations under the equity
method).
Income Tax Benefit.
Crescent Real Estate's $6.6 million total consolidated income tax expense
for the nine months ended September 30, 2002 includes tax expense related to the
operations of the hotel and residential development operations of $0.1 million,
offset by a tax benefit of $6.7 million. The $6.7 million benefit results from
the temporary difference between the financial reporting basis and the
respective tax basis of the hotel leases acquired as part of Crescent Real
Estate's agreement with Crescent Operating. This temporary difference will be
reversed over an estimated five-year period, which is the remaining lease term
of the hotel leases. Cash paid for income taxes totaled approximately $10.2
million for the nine months ended September 30, 2002.
Discontinued Operations.
The income from discontinued operations from assets held for sale
increased $4.7 million, or 276.5%, to $6.4 million for the nine months ended
September 30, 2002, compared to $1.7 million for the nine months ended September
30, 2001. This increase is primarily due to:
- a gain on disposals of $6.9 million, net of minority interest,
attributable to the sales of the five office properties in 2002; partially
offset by
- an impairment charge of $0.6 million in 2002, related to a behavioral
healthcare property. This amount represents the difference between the
carrying value and the estimated sales price less costs of the sale for
this property; and
213
- a decline in operating income of $1.8 million for the five office
properties sold in 2002 that contributed a full year of operating income
in 2001 and a partial year of operating income in 2002.
Cumulative Effect of a Change in Accounting Principle
In conjunction with the implementation of SFAS No. 142, "Goodwill and
Other Intangible Assets," Crescent Real Estate reported a cumulative effect of a
change in accounting principle for the nine months ended September 30, 2002,
which resulted in a charge of $10.5 million. This charge is due to an impairment
(net of minority interests and taxes) of the goodwill of AmeriCold Logistics and
CRDI. No such impairment charge was recognized for the nine months ended
September 30, 2001.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
The statement is effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years. The adoption of this statement did not materially affect Crescent Real
Estate's interim or annual financial statements; however, for the three and nine
months ended September 30, 2002, financial statement presentation was modified
to report the results of operations, including any gains or losses recognized in
accordance with this statement, and the financial position of Crescent Real
Estate's real estate assets sold or classified as held for sale, as discontinued
operations. As a result, Crescent Real Estate has reclassified certain amounts
in prior period financial statements to conform with the new presentation
requirements.
Extraordinary Item
In May 2001, $10.8 million of deferred financing costs were written off
due to the early extinguishment of Crescent Real Estate's credit facility with
UBS. The recognition of the write-off was treated as an Extraordinary Item for
the six months ended June 30, 2001. No such event or write-off occurred during
the nine months ended September 30, 2002.
Segment Analysis
Office Segment
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, VARIANCE
-------------------------- --------------------------
2002 2001 $ %
------- ------- ------- -------
(IN MILLIONS)
Office Property Revenue $ 429.3 $ 456.3 $ (27.0) (6.0)%
Office Property Operating Expense 189.1 196.3 (7.2) (3.7)
Equity in Earnings of
Unconsolidated Office Properties 3.7 3.8 (0.1) (2.6)
The primary components of the decrease in office property revenue are as
follows:
- decreased revenue of $29.7 million due to the disposition of five office
properties in 2001, the contribution of two office properties to joint
ventures in 2001 and the contribution of two office properties to joint
ventures in 2002; and
- decreased lease termination fees of $2.5 million; partially offset by
214
- net insurance proceeds of $5.0 million received in September 2002 as a
result of an insurance claim on one of Crescent Real Estate's office
properties that had been damaged as a result of a tornado.
The primary components of the decrease in office property operating
expense are as follows:
- decreased expenses of $11.0 million due to the disposition of five office
properties in 2001, the contribution of two office properties to joint
ventures in 2001 and the contribution of two office properties to joint
ventures in 2002; and
- decreased office property utility expense of $8.5 million due to lower
rates as a result of a one-year energy contract effective beginning in
first quarter of 2002 for certain Texas Properties; partially offset by
- increased operating expenses of $6.7 million attributable to security and
insurance expense primarily related to the events of September 11, 2001
and $5.6 million primarily attributable to the timing of repairs and
maintenance and increased administrative expenses, including legal fees,
bad debt expense, and payroll costs.
Resort/Hotel Segment
On February 14, 2002, Crescent Real Estate executed an agreement with
Crescent Operating, pursuant to which Crescent Operating transferred to
subsidiaries of Crescent Real Estate, in lieu of foreclosure, Crescent
Operating's lessee interests in the eight hotel properties leased to
subsidiaries of Crescent Operating. The financial statements reflect the
consolidation of the operations for these eight hotel properties for the period
February 14, 2002 through September 30, 2002. Revenues prior to February 14,
2002 represent lease payments to Crescent Real Estate.
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, VARIANCE
--------------------------- -----------------------
2002 2001 $ %
------- ------- ------- -------
(IN MILLIONS)
Resort/Hotel Property Revenue $ 148.1 $ 44.5
Resort/Hotel Property Expense (110.7) --
------- ------- ----- -----
Net Operating Income $ 37.4 $ 44.5 $(7.1) (16.0)%
======= ======= ===== =====
The decrease in hotel property net operating income is primarily due to
the consolidation of the operations of eight of the hotel properties in 2002 as
compared to the recognition of lease payments from these properties in 2001. In
addition, net operating income decreased as a result of the following:
- decreases in occupancy from 72% to 71% and decreases in revenue per
available room from $331 to $319 (3.6% decrease) at the luxury and
destination fitness resorts and spas; and
- decreases in occupancy from 72% to 71%, and revenue per available room
from $85 to $81 (4.7% decrease) at the business-class hotels.
Residential Development Segment
215
On February 14, 2002, Crescent Real Estate executed an agreement with
Crescent Operating, pursuant to which Crescent Operating transferred to
subsidiaries of Crescent Real Estate, pursuant to a strict foreclosure, Crescent
Operating's voting interests in three of the residential development
corporations: The Woodlands Land Company, Desert Mountain Development Corp. and
CRDI. Crescent Real Estate fully consolidated the operations of the three
residential development corporations beginning on the dates of the asset
transfers.
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, VARIANCE
---------------------------- -----------------------------
2002 2001 $ %
-------- -------- -------- --------
(IN MILLIONS)
Residential Development Property Revenue $ 176.9 $ --
Residential Development Property Expense (161.3) --
Depreciation/Amortization (4.9) --
Equity in net income of Unconsolidated
Residential Development Properties 22.9 27.7
Minority Interests (3.0) --
Income Tax Provision (3.4) --
Cumulative effect of a change in accounting
principle (1.4) --
-------- -------- -------- --------
Operating Results $ 25.8 $ 27.7 $ (1.9) (6.9)%
======== ======== ======== ========
The primary components of the decrease in residential development property
net operating income are:
- a decrease of $5.2 million resulting from a change in presentation of
capitalized interest due to the consolidation of Desert Mountain
Development Corp. and CRDI in 2002; and
- a decrease of $1.4 million resulting from the cumulative effect of a
change in accounting principle due to net goodwill impairment at CRDI
resulting from the adoption of SFAS No. 142 on January 1, 2002; partially
offset by higher lot and unit sales of $8.8 million at CRDI and Desert
Mountain Development Corp. and $4.3 million due to the gain recognized on
the disposition of two properties at The Woodlands; offset by lower lot
sales of $8.1 million at The Woodlands Land Company and Mira Vista
Development, Corp.
Temperature-Controlled Logistics Segment
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, VARIANCE
---------------------------- -----------------------------
2002 2001 $ %
-------- -------- -------- --------
(IN MILLIONS)
Equity in earnings (loss) of unconsolidated
Temperature-Controlled Logistics Properties $ (3.8) $ 2.3 $ (6.1) (265.2)
This decrease in equity in earning of unconsolidated
temperature-controlled logistics properties is primarily due to Crescent Real
Estate's $8.2 million portion of the deferred rent in the first nine months of
2002 compared with the Crescent Real Estate's $5.1 million portion of deferred
rent in the first nine months of 2001, and $2.9 million related to the change in
base rent recognition from straight-line to seasonal for the year, partially
offset by a decrease in interest expense of $0.8 million.
216
Year Ended December 31, 2001 as Compared to 2000
Revenues.
Total revenues decreased $21.3 million, or 3.1%, to $686.2 million for the
year ended December 31, 2001, as compared to $707.5 million for the year ended
December 31, 2000. The primary components of the decrease in total revenues are
discussed below.
The increase in office property revenues of $5.2 million, or 0.9%, for the
year ended December 31, 2001, as compared to the year ended December 31, 2000,
is attributable to:
- increased revenues of $32.1 million from the 69 consolidated office
properties that Crescent Real Estate owned or had an interest in as of
December 31, 2001, excluding the five office properties held for sale at
December 31, 2001, primarily as a result of increased full-service
weighted average rental rates (reflecting increases in both rental revenue
and operating expense recoveries), and increased occupancy; and
- increased other income of $4.2 million, primarily due to parking revenue;
partially offset by
- decreased revenues of $27.2 million due to the disposition of 11 office
properties and four retail properties during 2000, compared to the
disposition of five office properties and the joint ventures of two office
properties during 2001; and
- decreased lease termination fees (net of the write-off of deferred rent
receivables) of $3.9 million, from $12.0 million for the year ended
December 31, 2000, to $8.0 million for the year ended December 31, 2001.
The decrease in Crescent Real Estate hotel property revenues of $26.4
million, or 36.6%, for the year ended December 31, 2001, as compared to the year
ended December 31, 2000, is attributable to:
- decreased revenues from the upscale business-class hotels of $8.1 million,
due to the disposition of the Four Seasons Hotel -- Houston in November
2000;
- decreased revenues of $6.3 million due to a decrease in rental income
attributed to the softening of the economy and the events of September 11,
2001; and
- decreased revenues of $12.0 million due to not recognizing revenue during
the fourth quarter of 2001 under the leases with Crescent Operating.
Expenses.
Total expenses increased $95.1 million, or 15.3%, to $716.1 million for
the year ended December 31, 2001, as compared to $621.0 million for the year
ended December 31, 2000. The primary components of the increase in total
expenses are discussed below.
The increase in office property operating expenses of $13.6 million, or
5.6%, for the year ended December 31, 2001, as compared to the year ended
December 31, 2000, is attributable to:
- increased expenses of $24.7 million from the 69 consolidated office
properties that Crescent Real Estate owned or had an interest in as of
December 31, 2001, excluding the five office properties held for sale at
December 31, 2001, primarily as a result of increased operating expenses
for
217
utilities of $7.8 million, taxes of $3.6 million and other increased
operating expenses such as insurance, security, and technology initiatives
of $13.3 million during the year ended December 31, 2001, as compared to
the same period in 2000; partially offset by
- decreased expenses of $11.1 million due to the disposition of 11 office
properties and four retail properties during 2000, compared to the
disposition of five office properties and the joint ventures of two office
properties during 2001.
The decrease in interest expense of $20.8 million, or 10.2%, for the year
ended December 31, 2001, as compared to the same period in 2000, is primarily
attributable to a decrease in the weighted average interest rate of 0.61%, or
$14.0 million of interest expense, combined with a decrease in the average debt
balance of $104.0 million, or $8.0 million of interest expense.
The increase in impairment and other charges related to real estate assets
of $7.4 million is due to:
- the conversion of Crescent Real Estate's preferred member interest in
Metropolitan Partners, LLC, or Metropolitan, into common stock of Reckson
Associates Realty Corp., or Reckson, which resulted in an impairment
charge of $11.8 million; partially offset by
- a decrease in the impairment loss of $3.5 million, from $8.5 million in
2000 to $5.0 million in 2001, recognized on a fund which holds real estate
and marketable securities, in which Crescent Real Estate has an interest;
and
- a decrease in the impairment of the behavioral healthcare properties of
$0.9 million.
The increase in impairment and other charges related to Crescent Operating
of $92.8 million is due to the reduction in net assets of $74.8 million,
primarily attributable to the write-down of debt and rental obligations of
Crescent Operating to the estimated underlying collateral value of assets to be
received from Crescent Operating, and estimated Crescent Operating bankruptcy
costs to be funded by Crescent Real Estate of $18.0 million.
Other Income.
Other income decreased $157.5 million, or 73.9%, to $55.76 million for the
year ended December 31, 2001, as compared to $213.2 million for the year ended
December 31, 2000. This decrease is due to:
The decrease in equity in net income of unconsolidated companies of $24.5
million, or 32.4%, for the year ended December 31, 2001, as compared to the same
period in 2000, is primarily attributable to:
- a decrease in equity in net income of unconsolidated Crescent Real Estate
residential development properties of $12.5 million, or 24%, primarily
attributable to lower lot sales at Desert Mountain during the year ended
December 31, 2001, resulting in a decrease of $16.3 million; partially
offset by higher unit sales at CRDI, resulting in an increase of $4.5
million;
- a decrease in equity in net income of the Crescent Real Estate
temperature-controlled logistics properties of $6.3 million, or 85%, due
to the lease restructuring in 2001 and an increase in deferred rent of
$9.2 million; and
- a decrease in equity in net income of other unconsolidated properties of
$8.6 million, or 75.0%, primarily attributable to lower earnings of $3.8
million from Metropolitan due to the conversion of Crescent Real Estate's
preferred member interest into common stock of Reckson in May 2001,
218
the $1.0 million write-off of Crescent Real Estate's investment in a
retail distribution company and lower earnings from DBL Holdings, Inc., or
DBL, of $1.7 million, due to an approximate $12.2 million return of
investment received in March 2001; partially offset by
- an increase in equity in net income of the unconsolidated office
properties of $2.9 million, or 94.0%, primarily attributable to lower
interest expense at one unconsolidated office property.
The net decrease in gain on property sales of $133.1 million for the year
ended December 31, 2001, as compared to the same period in 2000, is attributable
to a decrease in net gains recognized primarily on office, hotel and behavioral
healthcare property sales for the year ended December 31, 2001, as compared with
the same period in 2000.
Discontinued Operations.
The income from discontinued operations from assets sold and held for sale
decreased $1.4 million, or 46.7%, to $1.6 million for the year ended December
31, 2001, compared to $3.0 million for the year ended December 31, 2000. This
decrease is primarily due to a decrease in net operating income of two office
properties held for sale of approximately $1.8 million, partially offset by the
increase in net operating income of two of the office properties held for sale
of approximately $0.2 million.
Extraordinary Items.
The increase in extraordinary items of $6.9 million, or 176.9%, is
attributable to the write-off of deferred financing costs related to the early
extinguishment of the UBS Facility in May 2001 of $10.8 million, compared with
the write-off of deferred financing costs related to the early extinguishment of
the BankBoston Facility in February 2000 of $3.9 million.
Year Ended December 31, 2000 as Compared to 1999
Revenues.
Total revenues decreased $27.0 million, or 3.7%, to $707.4 million for the
year ended December 31, 2000, as compared to $734.4 million for the year ended
December 31, 1999.
The decrease in office property revenues of $7.6 million, or 1.3%, for the
year ended December 31, 2000, as compared to the same period in 1999, is
attributable to:
- decreased revenues of $37.2 million due to the disposition of 11 office
properties and four retail properties during 2000, which contributed
revenues during the full year of 1999, as compared to a partial year in
2000; partially offset by
- increased revenues of $24.4 million from the 74 office properties owned as
of December 31, 2000, excluding the four office properties held for sale
at December 31, 2000, primarily as a result of increased weighted average
full-service rental rates at these properties; and
- increased revenues of $5.2 million from lease termination fees.
The increase in Crescent Real Estate hotel property revenues of $6.9
million, or 10.6%, for the year ended December 31, 2000, as compared to the same
period in 1999, is attributable to:
219
- increased revenues of $3.1 million at the luxury resorts and spas
primarily due to an increase in percentage rents resulting from increased
room revenue due to the 30-room expansion at the Sonoma Mission Inn & Spa
that opened in April 2000;
- increased revenues of $2.6 million at the business class hotels primarily
due to (i) the reclassification of the Renaissance Houston Hotel from the
office segment to the resort/hotel segment as a result of the
restructuring of its lease on July 1, 1999, which resulted in $2.4 million
of incremental revenues under the new lease and (ii) increased percentage
rents due to higher room and occupancy rates at the Omni Austin Hotel,
partially offset by (iii) decreased revenues of $1.2 million due to the
disposition of one Crescent Real Estate hotel property during the fourth
quarter of 2000, which contributed revenues during the full year of 1999,
as compared to a partial year in 2000; and
- increased revenues of $1.2 million at the destination fitness resorts and
spas primarily due to an increase in percentage rents at the Canyon Ranch
properties as a result of higher room rates.
The decrease in interest and other income of $26.3 million, or 39.7%, for
the year ended December 31, 2000, as compared to the same period in 1999, is
primarily attributable to the recognition of rent from Charter Behavioral Health
Systems, LLC, or CBHS, on a cash basis beginning in the third quarter of 1999,
the filing of voluntary bankruptcy petitions by CBHS and its subsidiaries on
February 16, 2000, and a rent stipulation agreed to by certain parties to the
bankruptcy proceedings, which resulted in a reduction in Crescent Real Estate
behavioral healthcare property revenues, which are included in interest and
other income, to $15.4 million for the year ended December 31, 2000 as compared
to $41.1 million for the same period in 1999.
Expenses.
Total expenses decreased $172.5 million, or 21.7%, to $621.0 million for
the year ended December 31, 2000, as compared to $793.5 million for the year
ended December 31, 1999.
The decrease in office property operating expenses of $6.9 million, or
2.7%, for the year ended December 31, 2000, as compared to the same period in
1999, is attributable to:
- decreased expenses of $17.0 million due to the disposition of 11 office
properties and four retail properties during 2000, which incurred expenses
during the full year of 1999, as compared to a partial year in 2000;
partially offset by
- increased expenses of $10.1 million from the 74 office properties owned as
of December 31, 2000, excluding the four office properties held for sale
at December 31, 2001, as a result of (i) increased general repair and
maintenance expenses at these properties of $5.6 million and (ii) an
increase in real estate taxes of $4.5 million.
The increase in corporate general and administrative expense of $7.8
million, or 47.9%, for the year ended December 31, 2000, as compared to the same
period in 1999, is primarily attributable to technology initiatives, employee
retention programs, incentive compensation, and additional personnel.
The increase in interest expense of $11.2 million, or 5.8%, for the year
ended December 31, 2000, as compared to the same period in 1999, is primarily
attributable to an increase in the weighted-average interest rate from 7.4% in
1999 to 8.4% in 2000, partially offset by a decrease in average debt balance
outstanding from $2.6 billion in 1999 to $2.4 billion in 2000.
220
The decrease in depreciation and amortization expense of $7.8 million, or
6.0%, for the year ended December 31, 2000, as compared to the same period in
1999, is primarily attributable to the cessation of the recognition of
depreciation expense on office properties and the Crescent Real Estate
behavioral healthcare properties from the dates they were classified as held for
disposition.
An additional decrease in expenses of $176.8 million is primarily attributable
to:
- non-recurring costs of $15.0 million in connection with the settlement of
litigation relating to the merger agreement entered into in January 1998
between Crescent Real Estate and Station Casinos, Inc. in the first
quarter of 1999; and
- a decrease of $169.5 million due to the $162.0 million impairment and
other charges related to the Crescent Real Estate behavioral healthcare
properties in the third quarter of 1999 and the $16.8 million impairment
charge in the fourth quarter of 1999 on one of the office properties held
for disposition as compared to the $9.3 million impairment related to the
behavioral healthcare properties in the year ended December 31, 2000;
partially offset by
- an impairment loss of $8.5 million recognized in 2000 on a fund which
primarily holds real estate investments and marketable securities, in
which Crescent Real Estate has an interest.
Other Income.
Other income increased $144.9 million, or 212.2%, to $213.2 million for
the year ended December 31, 2000, as compared to $68.3 million for the year
ended December 31, 1999. The components of the increase in other income are
discussed below.
The increase in equity in unconsolidated companies of $7.4 million, or
10.8%, for the year ended December 31, 2000, as compared to the same period in
1999 is attributable to:
- an increase in equity in net income of the residential development
corporations of $10.6 million, or 24.7%, attributable to (i) an increase
in average sales price per lot and an increase in membership conversion
revenue at Desert Mountain, partially offset by a decrease in lot
absorption, which resulted in an increase of $6.0 million in equity in net
income to Crescent Real Estate; (ii) an increase in residential lot and
commercial land sales and an increase in average sales price per lot at
The Woodlands Land Development Company, L.P., partially offset by a
decrease in average sales price per acre from commercial lands sales,
which resulted in an increase of $5.9 million in equity in net income to
Crescent Real Estate; and (iii) an increase in commercial acreage sales at
CRDI, partially offset by a decrease in single family home sales, which
resulted in an increase of $0.8 million in equity in net income to
Crescent Real Estate; partially offset by (iv) a decrease in commercial
land sales at Houston Area Development Corp., which resulted in a decrease
of $2.1 million in equity in net income to Crescent Real Estate; and
- an increase in equity in net income of the other unconsolidated companies
of $6.5 million, or 127.5%, primarily as a result of (i) the dividend
income attributable to the 7.5% per annum cash flow preference of Crescent
Real Estate's $85.0 million preferred member interest in Metropolitan,
which Crescent Real Estate purchased in May 1999; and (ii) an increase in
the equity in earnings from DBL as a result of its investment in G2
Opportunity Fund, L.P., or G2 Opportunity Fund, which was made in the
third quarter of 1999; partially offset by
221
- a decrease in equity in net income of the temperature-controlled logistics
partnership of $7.6 million, or 50.7%, resulting primarily from the
recognition of a rent receivable valuation allowance for the year ended
December 31, 2000 of $6.5 million; and
- a decrease in equity in net income of the unconsolidated office properties
of $2.1 million, or 39.6%, primarily attributable to an increase in
interest expense as a result of additional financing obtained in July 2000
and an increase in the average rate of debt at The Woodlands Commercial
Properties Company.
The increase in net gain on property sales of $137.5 million for the year
ended December 31, 2000, as compared to the same period in 1999, is attributable
to net gains primarily recognized on office, hotel and behavioral healthcare
property sales.
Discontinued Operations
The income from discontinued operations from assets sold and held for
sale decreased $0.7 million, or 18.9%, to $3.0 million for the year ended
December 31, 2002, as compared to $3.7 million for the year ended December 31,
1999. The decrease is primarily due to a decrease in net operating income of
three office properties held for sale of approximately $1.1 million, partially
offset by the increase in net operating income of one of the office properties
held for sale of approximately $0.4 million.
LIQUIDITY AND CAPITAL RESOURCES
Nine Months Ended September 30, 2002
Cash Flows.
FOR THE NINE MONTHS ENDED,
SEPTEMBER 30,
---------------------------
2002 2001 $ CHANGE
------- ------- -------
(IN MILLIONS)
Cash Provided by Operating Activities $ 152.7 $ 253.8 $(101.1)
Cash used in Investing Activities 106.0 166.6 (60.6)
Cash used in Financing Activities (212.4) (426.2) 213.8
------- ------- -------
Increase (Decrease) in Cash and Cash
Equivalents $ 46.3 $ (5.8) $ 52.1
Cash and Cash Equivalents, Beginning of Period 36.3 39.0 (2.7)
------- ------- -------
Cash and Cash Equivalents, End of Period $ 82.6 $ 33.2 $ 49.4
======= ======= =======
Operating Activities.
Crescent Real Estate's cash provided by operating activities of $152.7
million is attributable to property operations.
Investing Activities.
Crescent Real Estate's cash provided by investing activities of $106.0
million is attributable to:
- $164.1 million of proceeds from joint venture partners;
- $76.6 million of net sales proceeds primarily attributable to the sale of
five office properties, the sale of three behavioral healthcare
properties, and the sale of two other assets;
- $11.7 million from return of investment in unconsolidated residential
development properties and office properties;
222
- $38.2 million in cash resulting from Crescent Real Estate's February 14,
2002 transaction with Crescent Operating; and
- $12.7 million decrease in restricted cash.
The cash provided by investing activities is partially offset by:
- $97.4 million primarily for acquisition of one office property;
- $36.6 million for incremental and non-incremental revenue generating
tenant improvement and leasing costs for office properties;
- $28.4 million of additional investment in unconsolidated companies,
consisting primarily of investments in the upscale residential development
properties, particularly related to CRDI's investment in the Tahoe
Mountain Resorts from January 1 through February 14, 2002;
- $25.3 million for property improvements for rental properties, primarily
attributable to non-recoverable building improvements for the office
properties and replacement of furniture, fixtures and equipment for the
hotel properties;
- $7.8 million increase in notes receivable due to a $7.5 million promissory
note received in the sale of the Canyon Ranch - Tucson Land; and
- $1.7 million for development of investment properties.
Financing Activities.
Crescent Real Estate's use of cash for financing activities of $212.4
million is primarily attributable to:
- net payments under the Fleet Facility of $476.0 million;
- redemptions from GMAC Commercial Mortgage Corporation of preferred
interests in a subsidiary of Crescent Real Estate of $218.4 million;
- a decrease in notes payable of $171.5 million;
- distributions to common shareholders and unitholders of $132.5 million;
- residential development properties notes payments of $84.9 million;
- common share repurchase of $28.5 million;
- $8.9 million of deferred financing costs for $375 million senior,
unsecured notes;
- distributions to preferred shareholders of $15.2 million; and
- net capital distributions to joint venture partners of $8.5 million,
primarily due to distributions to joint venture preferred equity partners.
223
The use of cash for financing activities is partially offset by:
- gross proceeds of $375.0 from issuance of senior, unsecured notes:
- net proceeds of $81.9 from offering of Series B preferred shares;
- net proceeds of $48.2 from offering of Series A preferred shares;
- residential development properties notes borrowings of $54.7 million; and
- borrowings under the Fleet Facility of $372.0 million.
Liquidity Requirements.
As of September 30, 2002, Crescent Real Estate had unfunded capital
expenditures of approximately $40.9 million relating to capital investments. The
table below specifies Crescent Real Estate's total capital expenditures relating
to these projects, amounts funded as of September 30, 2002, amounts remaining to
be funded, and short-term and long-term capital requirements.
CAPITAL REQUIREMENTS
AMOUNT -----------------------------
FUNDED AS AMOUNT SHORT-TERM LONG-TERM
TOTAL OF REMAINING (NEXT 12 (12+
PROJECT Cost(1) 09/30/02 TO FUND MONTHS)(2) MONTHS)(2)
------- ------- -------- ------- ----------- ----------
(IN MILLIONS)
RESIDENTIAL DEVELOPMENT SEGMENT
Tahoe Mountain Resorts $110.0 $ 99.0 $ 11.0 $ 11.0 $ --
------ ------ ------ ------ ------
OTHER
SunTx (3) $ 19.0 $ 7.8 $ 11.2 $ 4.0 $ 7.2
------ ------ ------ ------ ------
Spinco (4) 15.5 -- 15.5 15.5 --
------ ------ ------ ------ ------
Canyon Ranch - Tucson Land -
Construction loan (5) 3.2 -- 3.2 1.6 1.6
------ ------ ------ ------ ------
$ 37.7 $ 7.8 $ 29.9 $ 21.1 $ 8.8
TOTAL $147.7 $106.8 $ 40.9 $ 32.1 $ 8.8
====== ====== ====== ====== ======
---------------------------------
(1) All amounts are approximate.
(2) Reflects Crescent Real Estate's estimate of the breakdown between
short-term and long-term capital expenditures.
(3) This commitment is related to Crescent Real Estate's investment in a
private equity fund.
(4) Crescent Real Estate expects to form and capitalize a separate entity to
be owned by Crescent Real Estate's shareholders and unitholders, and to
cause the new entity to commit to acquire Crescent Operating's entire
membership interest in AmeriCold Logistics.
(5) Crescent Real Estate committed to a construction loan to the purchaser of
the land which will be secured by 20 developed lots and a $0.6 million
letter of credit.
Crescent Real Estate expects to fund its short-term capital requirements
of approximately $32.1 million through a combination of cash, net cash flow from
operations, construction financing return of capital (investment) from the
residential development corporations and borrowings under the Fleet Facility.
Crescent Real Estate plans to meet its maturing debt obligations through
December 31, 2003 of approximately $185.7 million, primarily through additional
borrowings under the Fleet Facility and cash from operations of the residential
development segment.
Crescent Real Estate expects to meet its other short-term liquidity
requirements, consisting of normal recurring operating expenses, regular debt
service requirements (including debt service relating to additional and
replacement debt), additional interest expense related to the cash flow hedge
agreements,
224
recurring capital expenditures, non-recurring capital expenditures, such as
tenant improvement and leasing costs, distributions to shareholders and
unitholders, and unfunded expenses related to the Crescent Operating bankruptcy
of approximately $3.2 million to $6.4 million, primarily through cash flow
provided by operating activities. To the extent that Crescent Real Estate's cash
flow from operating activities is not sufficient to finance such short-term
liquidity requirements, Crescent Real Estate expects to finance such
requirements with borrowings under the Fleet Facility.
Crescent Real Estate's long-term liquidity requirements as of September
30, 2002 consist primarily of debt maturities after December 31, 2003, which
totaled approximately $2.2 billion as of September 30, 2002. Crescent Real
Estate also has $8.8 million of long-term capital requirements. Crescent Real
Estate expects to meet these long-term liquidity requirements primarily through
long-term secured and unsecured borrowings and other debt and equity financing
alternatives as well as cash proceeds received from the sale or joint venture of
properties.
Debt and equity financing alternatives currently available to Crescent
Real Estate to satisfy its liquidity requirements and commitments for material
capital expenditures include:
- Additional proceeds from the Fleet Facility, under which Crescent Real
Estate had up to $205.8 million of borrowing capacity as of September 30,
2002;
- Additional proceeds from the refinancing of existing secured and unsecured
debt;
- Additional debt secured by existing underleveraged investment properties;
- Issuance of additional unsecured debt;
- Equity offerings including preferred and/or convertible securities; and
- Proceeds from joint ventures and property sales.
The following factors could limit Crescent Real Estate's ability to
utilize these financing alternatives:
- The reduction in net operating income of the properties supporting the
Fleet Facility to a level that would further reduce the availability under
the line of credit.
- Crescent Real Estate may be unable to obtain debt or equity financing on
favorable terms, or at all, as a result of the financial condition of
Crescent Real Estate or market conditions at the time Crescent Real Estate
seeks additional financing;
- Restrictions on Crescent Real Estate's debt instruments or outstanding
equity may prohibit it from incurring debt or issuing equity at all, or on
terms available under then-prevailing market conditions; and
- Crescent Real Estate may be unable to service additional or replacement
debt due to increases in interest rates or a decline in the Crescent Real
Estate's operating performance.
In addition to Crescent Real Estate's liquidity requirements stated above,
as of September 30, 2002, Crescent Real Estate guaranteed or provided letters of
credit related to approximately $55.9 million of unconsolidated debt and had
obligations to potentially provide an additional $33.8 million in
225
guarantees, primarily related to construction loans. Crescent Real Estate also
guaranteed $15.2 million in letters of credit under its Fleet Facility at
September 30, 2002. See "Investments in Real Estate Mortgages and Equity of
Unconsolidated Companies" and "Debt Financing Arrangements" included in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for more information about Crescent Real Estate's unconsolidated
investments and the underlying debt related to these investments.
Year ended December 31, 2001
Cash and cash equivalents were $36.3 million and $39.0 million at December
31, 2001, and December 31, 2000, respectively. This 6.9% decrease is
attributable to $425.5 million used in financing activities, partially offset by
$210.0 million and $212.8 million provided by investing and operating
activities, respectively.
DECEMBER
31, 2001
-------------
(in millions)
Cash Provided by Operating Activities $212.8
Cash Provided by Investing Activities 210.0
Cash Used in Financing Activities (425.5)
------
Decrease in Cash and Cash Equivalents $ (2.7)
Cash and Cash Equivalents, Beginning of Period 39.0
------
Cash and Cash Equivalents, End of Period $ 36.3
======
Operating Activities.
Crescent Real Estate's cash provided by operating activities of $212.8
million is attributable to:
- $199.4 million from property operations; and
- $13.4 million representing distributions received in excess of equity in
earnings from unconsolidated companies.
Investing Activities.
Crescent Real Estate's cash provided by investing activities of $210.0
million is primarily attributable to:
- $200.4 million of net sales proceeds primarily attributable to the
disposition of the two Washington Harbour office properties, three
Woodlands office properties and 18 Crescent Real Estate behavioral
healthcare properties;
- $129.7 million of proceeds from joint venture partners, primarily as a
result of the proceeds of $116.7 million from the joint ventures of two
existing office properties, Bank One Tower in Austin, Texas and Four
Westlake Park in Houston, Texas and $12.9 million from the joint venture
of 5 Houston Center office property, which is currently being developed;
- $107.9 million of proceeds from the sale of marketable securities; and
226
- $32.0 million from return of investment in unconsolidated office
properties, residential development properties and other unconsolidated
companies.
Crescent Real Estate's cash provided by investing activities is partially
offset by:
- $124.6 million of additional investment in unconsolidated companies,
consisting of investments in (i) the upscale Crescent Real Estate
residential development properties of $89.0 million, primarily as a result
of CRDI's investment in Tahoe Mountain Resorts, (ii) Crescent Real Estate
temperature-controlled logistics properties of $10.8 million, (iii) office
properties of $16.4 million and (iv) other unconsolidated companies of
$8.4 million;
- $51.8 million for recurring and non-recurring tenant improvement and
leasing costs for the office properties;
- $46.4 million for capital expenditures for rental properties, primarily
attributable to non-recoverable building improvements for the office
properties and replacement of furniture, fixtures and equipment for the
Crescent Real Estate hotel properties;
- $23.7 million for the development of investment properties, including
$12.3 million for development of the 5 Houston Center office property and
expansions and renovations at the Crescent Real Estate hotel properties;
- a $11.2 million increase in notes receivable, primarily as a result of
approximately $10.0 million related to secured loans to AmeriCold
Logistics; and
- a $2.2 million increase in restricted cash and cash equivalents, primarily
related to the escrow of funds to purchase a parking garage in Denver,
Colorado, which was purchased during the first quarter of 2002, partially
offset by escrow reimbursements for capital expenditures at the Crescent
Real Estate hotel properties and the office properties.
Financing Activities.
Crescent Real Estate's use of cash for financing activities of $425.5
million is primarily attributable to:
- net repayment of the UBS Facility of $553.5 million;
- distributions to common shareholders and unitholders of $245.1 million;
- repayment and retirement of the iStar Financial Note of $97.1 million;
- repurchase of Crescent Real Estate's common shares for $77.4 million;
- repayment and retirement of the Deutsche Bank Short-term Loan of $75.0
million;
- net capital distributions to joint venture partners of $25.4 million,
primarily due to distributions to joint venture preferred equity partners;
- debt financing costs of $16.0 million; and
- distributions to preferred shareholders of $13.5 million.
227
The use of cash for financing activities is partially offset by:
- net borrowings under the Fleet Facility of $283.0 million;
- proceeds from notes payable of $393.3 million, primarily attributable to
the debt refinancing; and
- proceeds from the exercise of common share options of $9.8 million.
Crescent Operating.
In April 1997, Crescent Real Estate established a new Delaware
corporation, Crescent Operating. All of the outstanding common stock of Crescent
Operating, valued at $0.99 per share, was distributed, effective June 12, 1997,
to those persons who were limited partners of Crescent Partnership or
shareholders of Crescent Real Estate on May 30, 1997, in a spin-off.
Crescent Operating was formed to become a lessee and operator of various
assets to be acquired by Crescent Real Estate and to perform the intercompany
agreement between Crescent Operating and Crescent Real Estate, pursuant to which
each agreed to provide the other with rights to participate in certain
transactions. Crescent Real Estate was not permitted to operate or lease these
assets under the tax laws in effect and applicable to REITs at that time. In
connection with the formation and capitalization of Crescent Operating, and the
subsequent operations and investments of Crescent Operating since 1997, Crescent
Real Estate made loans to Crescent Operating under a line of credit and various
term loans.
On January 1, 2001, The REIT Modernization Act became effective. This
legislation allows Crescent Real Estate, through its subsidiaries, to operate or
lease certain of its investments that had been previously operated or leased by
Crescent Operating.
Crescent Operating and Crescent Real Estate entered into an asset and
stock purchase agreement on June 28, 2001, in which Crescent Real Estate agreed
to acquire the lessee interests in the eight Crescent Real Estate hotel
properties leased to subsidiaries of Crescent Operating, the voting interests
held by subsidiaries of Crescent Operating in three of Crescent Real Estate's
residential development corporations and other assets in exchange for $78.4
million. In connection with that agreement, Crescent Real Estate agreed that it
would not charge interest on its loans to Crescent Operating from May 1, 2001
and that it would allow Crescent Operating to defer all principal and interest
payments due under the loans until December 31, 2001.
Also on June 28, 2001, Crescent Real Estate entered into an agreement to
make a $10.0 million investment in Crescent Machinery, a wholly owned subsidiary
of Crescent Operating. This investment, together with capital from a third-party
investment firm, was expected to put Crescent Machinery on solid financial
footing.
Following the date of the agreements relating to the acquisition of
Crescent Operating assets and stock and the investment in Crescent Machinery,
the results of operations for the Crescent Operating hotel operations and the
Crescent Operating land development interests declined, due in part to the
slowdown in the economy after September 11. In addition, Crescent Machinery's
results of operations suffered because of the economic environment and the
overall reduction in national construction levels that has affected the
equipment rental and sale business, particularly post September 11. As a result,
Crescent Real Estate believes that a significant additional investment would
have been necessary to adequately capitalize Crescent Machinery and satisfy
concerns of Crescent Machinery's lenders.
228
Crescent Real Estate stopped recording rent from the leases of the eight
Crescent Real Estate hotel properties leased to subsidiaries of Crescent
Operating on October 1, 2001, and recorded impairment and other adjustments
related to Crescent Operating in the fourth quarter of 2001, based on the
estimated fair value of the underlying assets. See "Note 16. Crescent Operating"
included in Financial Statements of Crescent Real Estate for the year ended
December 31, 2001 (audited) for a description of these charges.
On January 22, 2002, Crescent Real Estate terminated the purchase
agreement pursuant to which Crescent Real Estate would have acquired the lessee
interests in the eight Crescent Real Estate hotel properties leased to
subsidiaries of Crescent Operating the voting interests held by subsidiaries of
Crescent Operating in three of the residential development corporations and
other assets. On February 4, 2002, Crescent Real Estate terminated the agreement
relating to its planned investment in Crescent Machinery.
On February 6, 2002, Crescent Machinery filed for protection under the
federal bankruptcy laws.
On February 12, 2002, Crescent Real Estate delivered default notices to
Crescent Operating relating to approximately $49.0 million of unpaid rent and
approximately $76.2 million of principal and accrued interest due to Crescent
Real Estate under certain secured loans.
On February 14, 2002, Crescent Real Estate executed the original
Settlement Agreement with Crescent Operating, pursuant to which Crescent
Operating transferred to subsidiaries of Crescent Real Estate, in lieu of
foreclosure, Crescent Operating's lessee interests in the eight Crescent Real
Estate hotel properties leased to subsidiaries of Crescent Operating and,
pursuant to a strict foreclosure, Crescent Operating's voting interests in three
of Crescent Real Estate's residential development corporations and other assets
and Crescent Real Estate agreed to assist and provide funding to Crescent
Operating for the implementation of a prepackaged bankruptcy of Crescent
Operating. In connection with the transfer, Crescent Operating's rent
obligations to Crescent Real Estate were reduced by $23.6 million, and its debt
obligations were reduced by $40.1 million. These amounts include $18.3 million
of value attributed to the lessee interests transferred by Crescent Operating to
Crescent Real Estate, however, in accordance with GAAP, Crescent Real Estate
assigned no value to these interests for financial reporting purposes.
Crescent Real Estate holds the lessee interests in the eight Crescent Real
Estate hotel properties and the voting interests in the three residential
development corporations through three newly organized entities that are each
wholly owned taxable REIT subsidiaries of Crescent Real Estate. Crescent Real
Estate included these assets in its resort/hotel segment and its residential
development segment, and fully consolidated the operations of the eight Crescent
Real Estate hotel properties and the three residential development corporations,
beginning on the date of the transfers of these assets.
The Settlement Agreement provides that Crescent Operating and Crescent
Real Estate will jointly seek to have a pre-packaged bankruptcy plan for
Crescent Operating, reflecting the terms of the Settlement Agreement, approved
by the bankruptcy court. Under the Settlement Agreement, Crescent Real Estate
agreed to provide approximately $14.0 million to Crescent Operating in the form
of cash and common shares of Crescent Real Estate to fund costs, claims and
expenses relating to the bankruptcy and related transactions, and to provide for
the distribution of Crescent Real Estate's common shares to the Crescent
Operating stockholders. Crescent Real Estate has also agreed, however, that it
will issue common shares with a minimum dollar value of approximately $2.16
million to the Crescent Operating stockholders, even if it would cause the total
costs, claims and expenses that it pays to exceed $14.0 million. Currently,
Crescent Real Estate estimates that the value of the common shares that will be
issued to the Crescent Operating stockholders will be approximately $2.16
million to $5.4 million. The actual value of the common shares issued to the
Crescent Operating stockholders will not be determined until
229
the confirmation of Crescent Operating's bankruptcy plan and could vary from the
estimated amounts, but will have a value of at least $2.16 million.
In addition, Crescent Real Estate has agreed to use commercially
reasonable efforts to assist Crescent Operating in arranging Crescent
Operating's repayment of its $15.0 million obligation to Bank of America,
together with accrued interest. Crescent Real Estate expects to form and
capitalize a new entity, called Crescent Spinco, to be owned by the shareholders
of Crescent Real Estate and the unitholders of Crescent Partnership. Crescent
Spinco would then purchase Crescent Operating's interest in AmeriCold Logistics
for between $15.0 million and $15.5 million. Crescent Operating has agreed that
it will use the proceeds of the sale of the AmeriCold Logistics interest to
repay Bank of America in full.
Crescent Operating obtained the loan primarily to participate in
investments with Crescent Real Estate. At the time Crescent Operating obtained
the loan, Bank of America required, as a condition to making the loan, that
Richard E. Rainwater, the Chairman of the Board, and John C. Goff, the Chief
Executive Officer of Crescent Real Estate, enter into a support agreement with
Crescent Operating and Bank of America, pursuant to which they agreed to make
additional equity investments in Crescent Operating if Crescent Operating
defaulted on payment obligations under its line of credit with Bank of America
and the net proceeds of an offering of Crescent Operating securities were
insufficient to allow Crescent Operating to pay Bank of America in full.
Effective December 31, 2001, the parties executed an amendment to the line of
credit providing that any defaults existing under the line of credit on or
before March 8, 2002 are temporarily cured unless and until a new default shall
occur.
Previously, Crescent Real Estate held a first lien security interest in
Crescent Operating's entire membership interest in AmeriCold Logistics. REIT
rules prohibit Crescent Real Estate from acquiring or owning the membership
interest that Crescent Operating owns in AmeriCold Logistics. Under the
Settlement Agreement, Crescent Real Estate agreed to allow Crescent Operating to
grant Bank of America a first priority security interest in the membership
interest and to subordinate its own security interest to Bank of America.
If the Crescent Operating bankruptcy plan is approved by the required vote
of the shares of Crescent Operating common stock and confirmed by the bankruptcy
court, the stockholders of Crescent Operating's common shares will receive
Crescent Real Estate's common shares. As stockholders of Crescent Operating, Mr.
Rainwater and Mr. Goff will also receive Crescent Real Estate's common shares.
Pursuant to the Crescent Operating bankruptcy plan, the current and former
directors and officers of Crescent Operating and the current and former
directors and officers of Crescent Real Estate also have received a release from
Crescent Operating of liability for any actions taken prior to February 14,
2002, and, depending on various factors, will receive certain liability releases
from Crescent Operating and its stockholders.
Completion and effectiveness of the bankruptcy plan for Crescent Operating
is contingent upon a number of conditions, including the vote of Crescent
Operating's stockholders, the approval of the bankruptcy plan by certain of
Crescent Operating's creditors and the approval of the bankruptcy court.
Investments in Real Estate Mortgages and Equity of Unconsolidated
Companies.
Investments in which Crescent Real Estate does not have a controlling
interest are accounted for under the equity method. The following is a summary
of Crescent Real Estate's ownership in significant unconsolidated joint ventures
or equity investments as of September 30, 2002:
230
CRESCENT REAL ESTATE'S
OWNERSHIP
ENTITY CLASSIFICATION AS OF SEPTEMBER 30, 2002
------ -------------- ------------------------
JOINT VENTURES
Main Street Partners, L.P. Office (Bank One Center) 50.0%(1)
Crescent Miami Center, L.L.C. Office (Miami Center) 40.0%(2)
Crescent 5 Houston Center, L.P. Office (5 Houston Center) 25.0%(3)
Austin PT BK One Tower Office Limited Partnership Office (Bank One Tower) 20.0%(4)
Houston PT Four Westlake Office Limited
Partnership Office (Four Westlake Park) 20.0%(4)
Houston PT Three Westlake Office Limited
Partnership Office (Three Westlake Park) 20.0%(4)
EQUITY INVESTMENTS
Mira Vista Development Corp. Residential Development Corporation 94.0%(5)
Houston Area Development Corp. Residential Development Corporation 94.0%(6)
The Woodlands Land Development
Company, L.P. (7) Residential Development Corporation 42.5%(8)(9)
Blue River Land Company, L.L.C. (7) Residential Development Corporation 31.8%(10)
Manalapan Hotel Partners L.L.C. (7) Resort/Hotel (Ritz Carlton Palm Beach) 24.0%(11)
Temperature-Controlled Logistics Partnership Temperature-Controlled Logistics 40.0%(12)
The Woodlands Commercial Properties Company, L.P. Office 42.5%%(8)(9)
DBL Holdings, Inc. Other 97.4%(13)
CR License, L.L.C. Other 30.0%(14)
Woodlands Operating Company, L.P. Other 42.5%(8)(9)
Canyon Ranch Las Vegas Other 65.0%(15)
SunTX Fulcrum Fund, L.P. Other 33.3%(16)
---------------------------
(1) The remaining 50.0% interest in Main Street Partners, L.P. is owned by
Trizec Properties, Inc.
(2) The remaining 60% interest in Crescent Miami Center, L.L.C. is owned by a
fund advised by JP Morgan Investment Management, Inc. Crescent Real Estate
will continue to manage Miami Center on a fee basis.
(3) The remaining 75% interest in Crescent 5 Houston Center, L.P. is owned by
a pension fund advised by JP Morgan Investment Management, Inc. Crescent
Real Estate recorded $1,142,000 in development, and leasing fees, related
to this investment during the nine months ended September 30, 2002. The 5
Houston Center Office Property was completed on September 16, 2002.
(4) The remaining 80% interest in Austin PT BK One Tower Office Limited
Partnership, Houston PT Three Westlake Office Limited Partnership and
Houston PT Four Westlake Office Limited Partnership is owned by an
affiliate of General Electric Pension Fund. Crescent Real Estate recorded
$473,000 in management and leasing fees for these office properties during
the nine months ended September 30, 2002.
(5) The remaining 6.0% interest in Mira Vista Development, Corp., or MVDC,
which represents 100% of the voting stock, is owned 4.0% by DBL Holdings,
Inc., or DBL, and 2.0% by third parties.
(6) The remaining 6.0% interest in Houston Area Development Corp., or HADC,
which represents 100% of the voting stock, is owned 4.0% by DBL and 2.0%
by a third party.
(7) On February 14, 2002, Crescent Real Estate executed an agreement with
Crescent Operating, pursuant to which Crescent Operating transferred to
subsidiaries of Crescent Real Estate, pursuant to a strict foreclosure,
Crescent Operating's interests in the voting stock in three of Crescent
Real Estate's residential development corporations (Desert Mountain
Development Corp., The Woodlands Land Company, Inc. and CRDI, and in CRL
Investments, Inc. Crescent Operating transferred its 60% general partner
interest in COPI Colorado, L.P. which owns 10% of the voting stock in
CRDI, which increased Crescent Real Estate's ownership interest in CRDI
from 90% to 96%. As a result, Crescent Real Estate fully consolidated the
operations of these entities beginning on the dates of the asset
transfers. The Woodlands Land
231
Development Company, L.P. is an unconsolidated equity investment of The
Woodlands Land Company. Blue River Land Company, L.L.C., and Manalapan
Hotel Partners, L.L.C., are unconsolidated equity investments of CRDI.
(8) The remaining 57.5% interest in The Woodlands Land Development Company
L.P., The Woodlands Commercial Properties Company, L.P. and The Woodlands
Operating Company, L.P. are owned by an affiliate of Morgan Stanley.
(9) Distributions are made to partners based on specified payout percentages.
During the nine months ended September 30, 2002, the payout percentage to
Crescent Real Estate was 52.5%.
(10) Of the remaining 68.2% interest in Blue River Land Company, L.L.C., 0.7%
is indirectly owned by John Goff, Vice-Chairman of the Board of Trust
Managers and Chief Executive Officer of Crescent Real Estate, through his
20% ownership of COPI Colorado, L.P. and 67.5% is owned by parties
unrelated to Crescent Real Estate.
(11) Of the remaining 76.0% interest in Manalapan Hotel Partners, L.L.C., 0.5%
is indirectly owned by John Goff, Vice-Chairman of the Board of Trust
Managers and Chief Executive Officer of Crescent Real Estate, through his
20% ownership of COPI Colorado, L.P. and 75.5% is owned by parties
unrelated to Crescent Real Estate.
(12) The remaining 60.0% interest in the Temperature-Controlled Logistics
Partnership is owned by Vornado Realty Trust, L.P.
(13) John Goff, Vice-Chairman of the Board of Trust Managers and Chief
Executive Officer of Crescent Real Estate, obtained the remaining 2.6%
economic interest in DBL (including 100% of the voting interest in DBL) in
exchange for his voting interests in MVDC and HADC, originally valued at
approximately $381,000, and approximately $63,000 in cash, or total
consideration valued at approximately $444,000. At September 30, 2002, Mr.
Goff's book value in DBL was approximately $401,000.
(14) The remaining 70% interest in CR License, L.L.C. is owned by an affiliate
of the management company of two of Crescent Real Estate's hotel
properties.
(15) The remaining 35% interest in Canyon Ranch Las Vegas is owned by an
affiliate of the management company of two of Crescent Real Estate's hotel
properties.
(16) The objective of the SunTX Fulcrum Fund, L.P., or the Fund, is to invest
in a portfolio of acquisitions that offer the potential for substantial
capital appreciation. The remaining 66.7% of the Fund is owned by a group
of individuals unrelated to Crescent Real Estate. Crescent Real Estate's
ownership percentage will decline by the closing date of the Fund as
capital commitments from third parties are secured. Crescent Real Estate's
projected ownership interest at the closing of the Fund is approximately
7.5% based on the Fund manager's expectations for the final Fund
capitalization. Crescent Real Estate accounts for its investment in the
Fund under the cost method. Crescent Real Estate's investment at September
30, 2002 was $7,800,000.
232
Unconsolidated Debt Analysis.
The significant terms of Crescent Real Estate's share of unconsolidated
debt financing arrangements existing as of September 30, 2002 are shown below:
COMPANY'S
COMPANY'S DEBT SHARE OF CURRENT FIXED/VARIABLE
OWNERSHIP % BALANCE BALANCE (4) RATE MATURITY SECURED/UNSECURED
----------- ------- ----------- ---- -------- -----------------
TEMPERATURE CONTROLLED
LOGISTICS SEGMENT:
AmeriCold Notes(1) 40% $ 541,326 216,530 7.0% 4/11/2008 Fixed/Secured
OFFICE SEGMENT:
Main Street Partners, L.P.
(2)(3)(4) 50% 133,403 66,702 5.9% 12/1/2004 Variable/Secured
Crescent 5 Houston Center,
L.P. (5) 25% 48,654 12,164 4.1% 5/31/2004 Variable/Secured
Austin PT Bk One Tower
Office Limited Partnership 20% 38,012 7,602 7.1% 8/1/2006 Fixed/Secured
Houston PT Four Westlake
Office Limited Partnership 20% 48,873 9,775 7.1% 8/1/2006 Fixed/Secured
Houston PT Three Westlake
Office Limited Partnership 20% 33,000 6,600 5.6% 9/1/2007 Fixed/Secured
Crescent Miami Center, LLC 40% 81,000 32,400 5.0% 9/1/2007 Fixed/Secured
The Woodlands Commercial
Properties Co. 42.5%
Bank Boston credit
facility(3) 64,861 27,566 4.3% 11/30/2002 Variable/Secured
Fleet National Bank(3) 3,398 1,444 3.8% 10/31/2003 Variable/Secured
451,201 164,253
RESIDENTIAL DEVELOPMENT
SEGMENT:
The Woodlands Land
Development Co. (6) 42.5%
Fleet credit
facility (3)(7)(8) 216,460 91,996 4.3% 11/30/2002 Variable/Secured
Fleet National Bank (3)(9) 6,971 2,963 3.8% 10/31/2003 Variable/Secured
Fleet National Bank (10) 24,531 10,426 4.6% 12/31/2005 Variable/Secured
Jack Eckerd Corp. 101 43 4.8% 7/1/2005 Variable/Secured
Mitchell Mortgage Company 2,734 1,162 5.8% 1/1/2004 Fixed/Secured
Mitchell Mortgage Company 1,257 534 6.3% 7/1/2005 Fixed/Secured
Mitchell Mortgage Company 1,962 834 5.5% 10/1/2005 Fixed/Secured
Mitchell Mortgage Company 3,548 1,508 8.0% 4/1/2006 Fixed/Secured
Mitchell Mortgage Company 1,405 597 7.0% 10/1/2006 Fixed/Secured
258,969 110,063
Resort Hotel Segment
Manalapan Hotel Partners
Dresdner Bank AG (11) 24% 65,470 15,713 9.8% 12/29/2002 Variable/Secured
TOTAL UNCONSOLIDATED DEBT $1,316,966 $506,559 6.0%
AVERAGE REMAINING TERM 3.4 years(12)
-----------------------
(1) Consists of several notes. Maturity date is based on largest debt
instrument. All interest rates are fixed.
(2) Senior Note - Note A: $84.0 million at variable interest rate, LIBOR + 189
basis points, $4.9 million at variable interest rate; LIBOR + 250 basis
points with a LIBOR floor of 2.50%. Note B: $24.7 million at variable
interest rate, LIBOR + 650 basis points with a LIBOR floor of 2.50%.
Mezzanine Note - $19.8 million at variable interest rate, LIBOR + 890
basis points with a LIBOR floor of 3.0%. Interest-rate cap agreement
maximum LIBOR of 4.52% on all notes. All notes are amortized on a 25-year
amortization schedule.
(3) This facility has two one-year extension options.
(4) Crescent Real Estate obtained a letter of credit to guarantee the
repayment of up to $4.3 million of principal of the Main Street Partners,
L.P. loan.
(5) Crescent Real Estate has made a full and unconditional guarantee of loan
from Fleet up to $82.5 million for the construction of 5 Houston Center.
At September 30, 2002, $48.7 million was outstanding.
(6) On February 14, 2002, Crescent Real Estate executed an agreement with
Crescent Operating to transfer, pursuant to a strict foreclosure, Crescent
Operating's 5% interest in The Woodlands Land Company. Therefore, as of
February 14, 2002, The Woodlands Land Company is fully consolidated. This
schedule reflects The Woodlands Land Company's 42.5% interest in The
Woodlands Land Development Company.
(7) There was an interest rate cap agreement executed with this agreement
which limits interest rate exposure on the notional amount of $145.0
million to a maximum LIBOR rate of 9.0%.
(8) To mitigate interest rate exposure, The Woodlands Land Development Company
has entered into an interest rate swap against the $50.0 million notional
amount to effectively fix the interest rate at 5.28%. The Woodlands Land
Development Company has also entered into an interest rate swap against
$50.0 million notional amount to effectively fix the interest rate at
4.855%.
(9) There was an interest rate cap agreement executed with this agreement
which limits interest rate exposure on the notional amount of $33.8
million to a maximum LIBOR rate of 9.0%.
(10) There was an interest rate cap agreement executed with this agreement
which limits interest rate exposure on the notional amount of $19.5
million to a maximum LIBOR rate of 8.5%.
(11) Crescent Real Estate guarantees $3.0 million of this facility.
233
The following table shows, as of September 30, 2002, information about
Crescent Real Estate's share of unconsolidated fixed and variable-rate debt and
does not take into account any extension options, hedge arrangements or the
entities' anticipated pay-off dates.
WEIGHTED
WEIGHTED AVERAGE
AMOUNT % OF DEBT AVERAGE RATE MATURITY(1)
------ --------- ------------ -----------
(IN THOUSANDS)
FIXED-RATE DEBT $ 277,542 55% 6.8% 5.4 years
VARIABLE RATE DEBT 229,017 45% 5.1% 1.0 years
------------ --- --- ---------
TOTAL DEBT $ 506,559 100% 6.0% 3.4 years
============ === === =========
--------------------
(1) Based on contractual maturities.
Listed below are Crescent Real Estate's share of aggregate principal
payments, year by year, required as of September 30, 2002 related to Crescent
Real Estate's unconsolidated debt. Scheduled principal installments and amounts
due at maturity are included.
SECURED DEBT(1)
---------------
(IN THOUSANDS)
2002 $ 136,063
2003 5,581
2004 78,944
2005 12,060
2006 18,381
Thereafter 255,530
----------
$ 506,559
==========
-------------------------------------
(1) These amounts do not represent the effect of two one-year extension
options on two of the Woodlands Fleet National Bank loans, totaling $95.0
million that have initial maturity dates of November 2002 and October
2003.
Joint Venture Arrangements.
5 Houston Center
On June 4, 2001, Crescent Real Estate entered into a joint venture
arrangement with a pension fund advised by JPM, to construct the 5 Houston
Center office property within Crescent Real Estate's Houston Center mixed-use
office property complex in Houston, Texas. The Class A office property will
consist of 577,000 net rentable square feet. The joint venture is structured
such that the fund holds a 75% equity interest, and Crescent Real Estate holds a
25% equity interest in the property, which is accounted for under the equity
method. Crescent Real Estate contributed approximately $8.5 million of land and
$12.3 million of development costs to the joint venture entity and received
$14.8 million in net proceeds. No gain or loss was recognized by Crescent Real
Estate on this transaction. In addition, Crescent Real Estate is developing, and
will manage and lease the property on a fee basis. During the year ended
December 31, 2001, Crescent Real Estate recognized $2.3 million for these
services.
During the second quarter of 2001, the joint venture entity obtained an
$82.5 million construction loan guaranteed by Crescent Real Estate, due May
2004, that bears interest at Prime (as defined in the loan agreement) plus 100
basis points or LIBOR plus 225 basis points, at the discretion of the borrower.
The interest rate on the loan at December 31, 2001, was 4.12%. The balance
outstanding on this construction loan at December 31, 2001, was $10.4 million.
Four Westlake Park and Bank One Tower
On July 30, 2001, Crescent Real Estate entered into joint venture
arrangements with an affiliate GE, in which Crescent Real Estate contributed two
office properties, Four Westlake Park in Houston, Texas, and Bank One Tower in
Austin, Texas into the joint ventures and GE made a cash contribution. The joint
ventures are structured such that GE holds an 80% equity interest in each of
Four Westlake Park, a 560,000 square foot Class A office property located in the
Katy Freeway submarket of Houston, and Bank One Tower, a 390,000 square foot
Class A office property located in downtown Austin.
234
Crescent Real Estate continues to hold the remaining 20% equity interests in
each property, which are accounted for under the equity method. The joint
ventures generated approximately $120.0 million in net cash proceeds to Crescent
Real Estate, including distributions to Crescent Real Estate resulting from the
sale of its 80% equity interest and from mortgage financing at the joint venture
level. None of the mortgage financing at the joint venture level is guaranteed
by Crescent Real Estate. Crescent Real Estate has no commitment to reinvest the
cash proceeds back into the joint ventures. The joint ventures were accounted
for as partial sales of these office properties, resulting in a gain of
approximately $7.6 million, net of a deferred gain of approximately $1.9
million. In addition, Crescent Real Estate manages and leases the office
properties on a fee basis. During the year ended December 31, 2001, Crescent
Real Estate recognized $0.2 million for these services.
Three Westlake Park
On August 21, 2002, Crescent Real Estate entered into a joint venture
arrangement with an affiliate of GE. In connection with the formation of the
venture, Crescent Real Estate contributed an office property, Three Westlake
Park in Houston, Texas, and GE made a cash contribution. GE holds an 80% equity
interest in the Three Westlake Park, a 415,000 square foot Class A Office
Property located in the Katy Freeway submarket of Houston, and Crescent Real
Estate continues to hold the remaining 20% equity interest in the office
property, with Crescent Real Estate's interest accounted for under the equity
method. The joint venture generated approximately $47.1 million in net cash
proceeds to Crescent Real Estate, including distributions resulting from the
sale of Crescent Real Estate's 80% equity interest and $6.6 million from
Crescent Real Estate's portion of mortgage financing at the joint venture level.
None of the mortgage financing at the joint venture level is guaranteed by
either Crescent Real Estate or GE. Crescent Real Estate has no commitment to
reinvest the cash proceeds back into the joint venture. The joint venture
formation transactions were accounted for a s partial sale of this office
property, resulting in an approximate $17.0 million gain, net of deferred gain
of approximately $4.3 million on interest sold. Crescent Real Estate will
continue to manage and lease Three Westlake Park on a fee basis. During the nine
months ended September 30, 2002, Crescent Real Estate recognized $32,000 for
these services.
Miami Center
On September 25, 2002, Crescent Real Estate entered into a joint venture
arrangement with an affiliate of a fund managed by JP Morgan Investment
Management, Inc., or JPM, in connection with which JPM purchased a 60% interest
in Crescent Miami Center, L.L.C. with a cash contribution. Crescent Miami
Center, L.L.C. owns an Office Property, Miami Center in Miami, Florida. The
joint venture is structured such that JPM holds a 60% equity interest in Miami
Center, and Crescent Real Estate holds the remaining 40% equity interest in the
office property, which is accounted for under the equity method. The joint
venture generated approximately $1.2 million in net cash proceeds to Crescent
Real Estate, including distributions to Crescent Real Estate resulting from the
sale of its 60% equity interest and $3.2 million from Crescent Real Estate 's
portion of mortgage financing at the joint venture level. None of the mortgage
financing at the joint venture level is guaranteed by Crescent Real Estate.
Crescent Real Estate has a remaining commitment for deferred maintenance items
of approximately $700,000. Crescent Real Estate otherwise has no commitment to
reinvest the cash proceeds back into the joint venture. The joint venture was
accounted for as a partial sale of this office property, resulting in a gain of
approximately $4.6 million, net of deferred gain of approximately $3.5 million.
Crescent Real Estate will continue to manage Miami Center on a fee basis.
235
Sonoma Mission Inn & Spa
On September 1, 2002, Crescent Real Estate entered into a joint venture
arrangement with a subsidiary of Fairmont Hotels & Resorts Inc., or FHR,
pursuant to which FHR purchased a 19.9% equity interest in the limited liability
company that owns Crescent Real Estate's Sonoma Mission Inn & Spa Resort/Hotel
Property in Sonoma County, California. Crescent Real Estate continues to own the
remaining 80.1% interest. The joint venture generated approximately $8.0 million
in net cash proceeds to Crescent Real Estate. Crescent Real Estate has loaned
$45.1 million to the joint venture at an interest rate of LIBOR plus 300 basis
points. The maturity date of the loan is the earlier of the date on which the
joint venture obtains third-party financing or one year. The joint venture has
the option to extend the loan for two successive 6-month periods by paying a
fee. Under Crescent Real Estate's agreement with FHR, Crescent Real Estate will
manage the limited liability company that owns the Sonoma Mission Inn & Spa, and
FHR will operate and manage the property under the Fairmont brand. The joint
venture transaction was accounted for as a partial sale of this resort/hotel
property, resulting in an approximate $4.0 million loss on interest sold.
In October 2002 in a series of transactions, Crescent Real Estate acquired
the remaining 75% interest in Manalapan Hotel Partners, L.L.C., which owns the
Ritz Carlton Palm Beach in Florida. Crescent Real Estate acquired the additional
interests in this partnership for $6.5 million, which was funded under the Fleet
Facility. Subsequently, Crescent Real Estate entered into a joint venture
arrangement with Westbrook Real Estate Fund IV, or Westbrook, pursuant to which
Westbrook purchased a 50% equity interest in Manalapan Hotel Partners, L.L.C.
Crescent Real Estate continues to hold the remaining 50% equity interest in the
Ritz Carlton Palm Beach. Simultaneously with admission of Westbrook into the
partnership, the Dresdner Bank AG loan of $65.2 million was repaid with proceeds
from a new, secured financing agreement with Corus Bank for $56 million and
additional equity contributions. The Corus Bank loan has an interest rate of
LIBOR plus 400 basis points with an initial three year term and containing two
one-year extension options. Crescent Real Estate has guaranteed $3 million of
the Corus Bank loan.
Unconsolidated Property Dispositions.
On September 27, 2001, the Woodlands Commercial Properties Company, owned
by Crescent Real Estate and an affiliate of Morgan Stanley, sold one
office/venture tech property located within The Woodlands, Texas. The sale
generated net proceeds, after the repayment of debt, of approximately $2.7
million, of which Crescent Real Estate's portion was approximately $1.3 million.
The sale generated a net gain of approximately $3.5 million, of which Crescent
Real Estate's portion was approximately $1.7 million. The net proceeds received
by Crescent Real Estate were used primarily to pay down variable-rate debt.
On November 9, 2001, The Woodlands Land Development Company owned by the
Woodlands Land Company and an affiliate of Morgan Stanley, sold two office
properties and one retail property located within The Woodlands, Texas. The
sales generated net proceeds, after the repayment of debt, of approximately
$41.8 million, of which Crescent Real Estate's portion was approximately $19.7
million. The sales generated a net gain of approximately $13.3 million, of which
Crescent Real Estate's portion was approximately $3.8 million. The net proceeds
received by Crescent Real Estate were used primarily to pay down variable-rate
debt.
During the nine months ended September 30, 2002, the Woodlands Commercial
Properties Company sold two office properties located within The Woodlands,
Texas. The sales generated net proceeds, after the repayment of debt, of
approximately $10.1 million, of which Crescent Real Estate's portion was
approximately $5.3 million. The sales generated a net gain of approximately
$11.8 million, of which the Crescent Real Estate's portion was approximately
$6.2 million. The proceeds received by Crescent Real Estate were used primarily
to pay down the Fleet Facility.
236
Consolidated Property Dispositions.
During the year ended December 31, 2001, Crescent Real Estate sold five
office properties, 18 behavioral healthcare properties and other assets. The
sales generated net proceeds of approximately $200.4 million and a net gain of
approximately $4.4 million. During the six months ended June 30, 2002, Crescent
Real Estate sold three office properties. The sales generated net proceeds of
approximately $15.2 million and a net gain of approximately $6.2 million.
Office Segment
On September 18, 2001, Crescent Real Estate completed the sale of the two
Washington Harbour office properties. The sale generated net proceeds of
approximately $153.0 million and a net loss of approximately $9.8 million. The
proceeds from the sale of the Washington Harbour office properties were used
primarily to pay down variable-rate debt and repurchase approximately 4.3
million of Crescent Real Estate's common shares. The Washington Harbour office
properties were Crescent Real Estate's only office properties in Washington,
D.C.
On September 28, 2001, The Woodlands Office Equities - `95 Limited, or
WOE, owned by Crescent Real Estate and the Woodlands Commercial Properties
Company, sold two office properties located within The Woodlands, Texas. The
sale generated net proceeds of approximately $11.3 million, of which Crescent
Real Estate's portion was approximately $9.9 million. The sale generated a net
gain of approximately $3.4 million, of which Crescent Real Estate's portion was
approximately $3.0 million. The proceeds received by Crescent Real Estate were
used primarily to pay down variable-rate debt.
On December 20, 2001, WOE sold one office property located within The
Woodlands, Texas. The sale generated net proceeds of approximately $2.0 million,
of which Crescent Real Estate's portion was approximately $1.8 million. The sale
generated a net gain of approximately $1.7 million, of which Crescent Real
Estate's portion was approximately $1.5 million. The proceeds received by
Crescent Real Estate were used primarily to pay down variable-rate debt.
On January 18, 2002, Crescent Real Estate completed the sale of the Cedar
Springs Plaza, a wholly owned office property in Dallas, Texas. The sale
generated net proceeds of approximately $12.0 million and a net gain of
approximately $4.5 million. The proceeds from the sale of the Cedar Springs
Plaza office property were used primarily to pay down the existing line of
credit. The operations for this property, as well as the gain recognized on the
sale of this property are included in "Discontinued Operations - Income and Gain
on Assets Sold or Held for Sale".
On May 29, 2002, Woodlands Office Equities, owned by Crescent Real Estate
and the Woodlands Commercial Properties, sold two consolidated office properties
located within The Woodlands, Texas. The sale generated net proceeds of
approximately $3.6 million of which Crescent Real Estate's portion was
approximately $3.2 million. The sale generated a net gain of approximately $2.1
million, of which Crescent Real Estate's portion was approximately $1.9 million.
The proceeds received by Crescent Real Estate were used primarily to pay down
the existing line of credit. These two properties were consolidated, joint
venture properties and were included in Crescent Real Estate's office segment.
The operations for this property, as well as the gain recognized on the sale of
this property are included in "Discontinued Operations - Income and Gain on
Assets Sold or Held for Sale".
On August 1, 2002, Crescent Real Estate completed the sale of the 6225
North 24th Street office property in Phoenix, Arizona. The sale generated net
proceeds of approximately $8.8 million and a net gain of approximately $1.3
million. The proceeds from the sale of the 6225 North 24th Street office
property were used to redeem Class A Units from GMACCM. This office property was
wholly owned by Crescent Real Estate and was included in Crescent Real Estate's
office segment. The operations for this
237
property, as well as the gain recognized on the sale of this property are
included in "Discontinued Operations - Income and Gain on Assets Sold or Held
for Sale".
On September 30, 2002, Crescent Real Estate completed the sale of the
Washington Harbour Phase II Land located in the Georgetown submarket of
Washington, D.C. The sale generated net proceeds of approximately $15.1 million
and a net loss of approximately $0.9 million. The proceeds from the sale of the
Washington Harbour Phase II Land were used to pay down the Fleet Facility.
On September 20, 2002, Crescent Real Estate completed the sale of the
Reverchon Plaza Office Property in Dallas, Texas. The sale generated net
proceeds of approximately $29.2 million and a net gain of approximately $0.5
million. The proceeds from the sale of the Reverchon Plaza office property were
used to pay down the Fleet Facility. This office property was wholly-owned by
Crescent Real Estate and was included in Crescent Real Estate's office segment.
On September 30, 2002, Crescent Real Estate completed the sale of the
Canyon Ranch - Tucson Land located in Tucson, Arizona to an affiliate of the
management company (unrelated to Crescent Real Estate) of Crescent Real Estate
's Canyon Ranch hotel property. The sales price of the land was approximately
$9.4 million, for which Crescent Real Estate received $1.9 million of net cash
proceeds and a promissory note in the amount of $7.5 million with an interest
rate of 6.50%, payable quarterly and maturing on October 1, 2007, and a net gain
of approximately $5.5 million recorded in the "Gain on Property Sales, net"
caption of Crescent Real Estate 's Consolidated Statements of Operations for the
three and nine months ended September 30, 2002. The net cash proceeds from the
sale of the Canyon Ranch - Tucson Land were used to pay down the Fleet Facility.
This land was wholly-owned by Crescent Real Estate and was included in Crescent
Real Estate 's hotel segment. Crescent Real Estate has committed to fund a $3.2
million construction loan to the purchaser which will be secured by 20 developed
lots and a $0.6 million letter of credit. Crescent Real Estate had not funded
any of the $3.2 million commitment as of September 30, 2002.
Crescent Real Estate Behavioral Healthcare Properties
During the year ended December 31, 2001, Crescent Real Estate completed
the sale of 18 Crescent Real Estate behavioral healthcare properties. The sales
generated approximately $34.7 million in net proceeds and a net gain of
approximately $1.6 million for the year ended December 31, 2001. The net
proceeds from the sale of the 18 Crescent Real Estate behavioral healthcare
properties sold during the year ended December 31, 2001 were used primarily to
pay down variable-rate debt. As of December 31, 2001, Crescent Real Estate owned
10 behavioral healthcare properties.
During the year ended December 31, 2001, Crescent Real Estate recognized
an impairment loss of $8.5 million on seven of the behavioral healthcare
properties held for disposition. This amount represents the difference between
the carrying values and the estimated sales prices less costs of the sales for
these seven properties.
238
As of September 30, 2002, Crescent Real Estate owned seven behavioral
healthcare properties, all of which were classified as held for sale. During the
nine months ended September 30, 2002, Crescent Real Estate recognized an
impairment charge of approximately $0.6 million on one of the behavioral
healthcare properties held for sale. This amount represents the difference
between the carrying value and the estimated sales price less costs of sale for
this property. After recognition of this impairment, the carrying value of the
behavioral healthcare properties at September 30, 2002 was approximately $21.0
million. Depreciation expense has not been recognized since the dates the
behavioral healthcare properties were classified as held for sale. Crescent Real
Estate is actively marketing for sale the remaining seven behavioral healthcare
properties. The sales of these behavioral healthcare properties are expected to
close within the next year. No rental revenues, operating expenses or
depreciation and amortization were recognized during the nine months ended
September 30, 2002 for the seven behavioral healthcare properties classified as
held for sale at September 30, 2002.
Property Acquisition.
On August 29, 2002, Crescent Real Estate acquired John Manville Plaza, a
29-story, 675,000 square foot Class A office building located in Denver,
Colorado. Crescent Real Estate acquired the property for approximately $91.2
million. The property is wholly owned by Crescent Real Estate and included in
the office segment.
Metropolitan.
On May 24, 2001, Crescent Real Estate converted its $85.0 million
preferred member interest in Metropolitan and $1.9 million of deferred
acquisition costs, into approximately $75.0 million of common stock of Reckson,
resulting in an impairment charge of approximately $11.9 million. Crescent Real
Estate subsequently sold the Reckson common stock on August 17, 2001, for
approximately $78.6 million, resulting in a gain of approximately $3.6 million.
The proceeds were used to pay down the Fleet Facility.
Related Party Disclosures.
DBL Holdings, Inc.
As of September 30, 2002, Crescent Real Estate owned 97.44% of DBL with
the remaining 2.56% economic interest in DBL (including 100% of the voting
interest in DBL) held by John Goff, Vice-Chairman of the Board of Trust Managers
and Chief Executive Officer of Crescent Real Estate. Originally, Mr. Goff
contributed his voting interests in MVDC and HADC originally valued at
approximately $0.4 million, and approximately $0.06 million in cash, or total
consideration valued at approximately $0.4 million for his interest in DBL.
DBL has two wholly owned subsidiaries, DBL-ABC, Inc., and DBL-CBO, Inc.,
the assets of which are described in the following paragraphs, and DBL directly
holds 66% of the voting stock in MVDC and HADC. At September 30, 2002, Mr.
Goff's book value in DBL was approximately $0.4 million.
Since June 1999, Crescent Real Estate has contributed approximately $23.8
million to DBL, in the form of cash and loans. These funds used by DBL to make
an equity contribution to DBL-ABC, Inc., which committed to purchase a limited
partnership interest representing a 12.5% interest in G2
239
Opportunity Fund. G2 Opportunity Fund was formed for the purpose of investing in
commercial mortgage backed securities and other commercial real estate
investments and is managed and controlled by an entity that is owned equally by
Goff-Moore Strategic Partners, LP, or GMSP, and GMAC Commercial Mortgage
Corporation, or GMACCM. The day-to-day operations of G2 are managed jointly by
an affiliate of GMACCM and a division of GMSP headquartered in Greenwich,
Connecticut and overseen by High Balloch, a principal of GMSP who is unrelated
to Crescent Real Estate. The ownership structure of GMSP consists of 50%
ownership by Darla Moore, who is married to Richard Rainwater, Chairman of the
Board of Trust Managers of Crescent Real Estate, and 50% by John Goff. Mr.
Rainwater is also a limited partner of GMSP. At September 30, 2002, DBL had an
approximately $14.4 million investment in G2 Opportunity Fund.
In March 1999, DBL-CBO, Inc. acquired $6.0 million aggregate principal
amount of Class C-1 Notes issued by Juniper CBO 1999-1 Ltd., a Cayman Island
limited liability company. Juniper 1999-1 Class C-1 is the privately placed
equity interest of a collateralized bond obligation. During the nine months
ended September 30, 2002, Crescent Real Estate recognized an impairment charge
related to this investment of $5.2 million. As a result of this impairment
charge, at September 30, 2002 this investment was valued at $0.
COPI Colorado, L. P.
On February 14, 2002, Crescent Real Estate executed an agreement with
Crescent Operating, pursuant to which Crescent Operating transferred to Crescent
Real Estate, in lieu of foreclosure, Crescent Operating's 60% general partner
interest in COPI Colorado. As a result, Crescent Real Estate increased its
ownership interest in CRDI from 90% to 96%. John Goff, Vice-Chairman of the
Board of Trust Managers and Chief Executive Officer of Crescent Real Estate owns
a 2.0% voting interest in CRDI with a cost basis of $0.4 million and the
remaining 2.0% interest is owned by a third party.
Loans to Employees and Trust Managers of Crescent Real Estate for Exercise
of Stock Options and Unit Options.
As of September 30, 2002, Crescent Real Estate had approximately $37.8
million of recourse loans outstanding (including approximately $4.4 million
loaned during the year ended December 31, 2001 and approximately $5.3 million
loaned during the nine months ended September 30, 2002) to certain employees and
trust managers of Crescent Real Estate on a full recourse basis pursuant to
Crescent Real Estate's stock incentive plans and unit incentive plans pursuant
to agreements approved by the Board of Directors and the Executive Compensation
Committee of Crescent Real Estate. The proceeds of these loans were used by the
employees and the trust managers to acquire common shares of Crescent Real
Estate pursuant to the exercise of vested stock and unit options. According to
the loan agreements, these loans may be repaid in full or in part at any time
without premium or penalty. John Goff, Vice-Chairman of the Board of Trust
Managers and Chief Executive Officer of Crescent Real Estate, had a loan
comprising $26.3 million of the $32.9 million total outstanding loans at
December 31, 2001 and $26.3 million of the $37.8 million total outstanding at
September 30, 2002. As of September 30, 2002, approximately $0.3 million of
current interest was outstanding related to these loans. No conditions exist at
September 30, 2002 which would cause any of the loans to be in default.
Every month, federal short-term, mid-term and long-term rates (Applicable
Federal Rates) are determined and published by the IRS based upon average market
yields of specified maturities. Crescent Real Estate granted loans through July
29, 2002, with Applicable Federal Rate of 2.70% and 2.81%, which reflects a
below prevailing market interest rate, therefore, Crescent Real Estate recorded
compensation expense. On July 29, 2002, the loans made pursuant to Crescent Real
Estate's stock incentive plans and unit incentive plans were amended to extend
the remaining terms of the loans until July 2012 and to stipulate that every
three years the interest rate on the loans will be adjusted to the AFR
applicable at that time for a three-year loan reflecting a below prevailing
market interest rate.
240
Additionally, the employees and trust managers have been given the option, at
any time, to fix the interest rate for each of the loans to the AFR applicable
at that time for a loan with a term equal to the remaining term of the loan. The
July 29, 2002 amendment resulted in $1.9 million additional compensation expense
for the three and nine months ended September 30, 2002, recorded in the
"Corporate General and Administrative" caption of Crescent Real Estate's
Consolidated Statements of Operations. Effective July 29, 2002, Crescent Real
Estate no longer offers to its employees and trust managers loans pursuant to
Crescent Real Estate's stock and unit incentive plans.
Other.
On June 28, 2002, Crescent Real Estate purchased and is holding for sale,
the home of an executive officer of Crescent Real Estate for approximately $2.7
million which approximates fair market value of the home. This purchase was part
of the officer's relocation agreement with Crescent Real Estate.
Debt Offering.
On April 15, 2002, Crescent Real Estate completed a private offering of
$375.0 million in senior, unsecured notes due 2009, $50.0 million of which were
purchased by Richard E. Rainwater, Chairman of the Board of Trust Managers of
Crescent Real Estate, and his affiliates and family members, or the Rainwater
Group. The notes bear interest at 9.25% and were issued at 100% of issue price.
Crescent Real Estate has registered the notes issued to the Rainwater Group for
resale. See "Description of Indebtedness - Debt Offering" below for additional
information regarding the offering and the notes.
Shelf Registration Statement.
On October 29, 1997, Crescent Real Estate filed a shelf registration
statement with the Securities and Exchange Commission relating to the future
offering of up to an aggregate of $1.5 billion of common shares, preferred
shares and warrants exercisable for common shares. Crescent Real Estate's
management believes the shelf registration statement will provide Crescent Real
Estate with more efficient and immediate access to capital markets when
considered appropriate. As of September 30, 2002, approximately $647.3 million
was available under the shelf registration statement for the issuance of
securities.
Sale of Preferred Equity Interests in Subsidiary.
During the year ended December 31, 2000, Crescent Real Estate formed
Crescent Real Estate Funding IX, L.P., or Funding IX, and contributed seven
office properties and two Crescent Real Estate hotel property to Funding IX. As
of June 30 2002, Funding IX held seven office properties and one Crescent Real
Estate hotel property. Crescent Real Estate owns 100% of the common voting
interests in Funding IX, 0.1% in the form of a general partnership interest and
99.9% in the form of a limited partnership interest.
Also during the year ended December 31, 2000, GMACCM purchased $275
million of non-voting, redeemable preferred Class A Units in Funding IX. The
Class A Units are redeemable at the option of Crescent Real Estate at the
original purchase price. As of December 31, 2000, approximately $56.6 million of
the Class A Units had been redeemed from GMACCM by Crescent Real Estate and
GMACCM held $218.4 million of Class A Units. No redemptions occurred during the
year ended December 31, 2001.
Funding IX loaned the net proceeds of the sale of Class A Units in Funding
IX and a portion of the net proceeds from the sale of one of the hotel
properties held by Funding IX, through an intracompany
241
loan to Crescent SH IX, Inc., or SH IX, for the purchase of common shares of
Crescent Real Estate. See "Share Repurchase Program" below. This intracompany
loan is eliminated in consolidation.
All of the Class A Units outstanding at December 31, 2001 were redeemed by
Funding IX during the nine months ended September 30, 2002. As a result of the
redemption, GMACCM ceased to be a partner of Funding IX or to have any rights or
obligations as a partner and Crescent Real Estate became the sole partner of
Funding IX. In connection with the transaction, SH IX transferred the 14,468,623
common shares of Crescent Real Estate held by SH IX to Crescent Real Estate,
which holds these common shares as treasury shares and the intercompany loan
between Funding IX and SH IX was repaid.
Following the redemption of all of the outstanding Class A Units, Funding
IX distributed two of its office properties, 44 Cook Street, and 55 Madison, and
all the equity interests in the limited liability companies that own two other
office properties, Miami Center and Chancellor Park, to Crescent Partnership.
Crescent Partnership then contributed 44 Cook Street and 55 Madison to another
of Crescent Partnership's subsidiaries, Crescent Real Estate Funding VIII, L.P.
and entered into a joint venture arrangement for Miami Center.
Series A Preferred Offering.
On April 26, 2002, Crescent Real Estate completed an institutional
placement of an additional 2,800,000 shares of Series A Convertible Cumulative
Preferred Shares at an $18.00 per share price and with a liquidation preference
of $25.00 per share for aggregate total offering proceeds of approximately $50.4
million. The Series A Preferred Shares are convertible at any time, in whole or
in part, at the option of the holders thereof into common shares of Crescent
Real Estate at a conversion price of $40.86 per common share (equivalent to a
conversion rate of 0.6119 common shares per Series A Preferred Share), subject
to adjustment in certain circumstances. The Series A Preferred Shares have no
stated maturity, are not subject to sinking fund or mandatory redemption and may
not be redeemed before February 18, 2003, except in order to preserve Crescent
Real Estate's status as a REIT. On or after February 13, 2003, the Series A
Preferred Shares may be redeemed, at Crescent Real Estate's option, by paying
$25.00 per share plus any accumulated accrued and unpaid distribution. Dividends
on the Series A Preferred Shares are cumulative from the date of original
issuance and are payable quarterly in arrears on the fifteenth of February, May,
August and November, commencing May 15, 2002. The annual fixed dividend is
$1.6875 per share.
Net proceeds to Crescent Real Estate from the April 2002 Series A
Preferred Offering after underwriting discounts and other offering costs of
approximately $2.2 million were approximately $48.2 million. Crescent Real
Estate used the net proceeds to redeem Class A Units from GMACCM.
Series B Preferred Offering.
On May 17, 2002, Crescent Real Estate completed an offering of 3,000,000
shares of Series B Cumulative Redeemable Preferred Shares with a liquidation
preference of $25.00 per share for aggregate total offering proceeds of
approximately $75.0 million. The Series B Preferred Shares have no stated
maturity, are not subject to sinking fund or mandatory redemption, are not
convertible into any other securities of Crescent Real Estate and may not be
redeemed before May 17, 2007, except in order to preserve the Crescent Real
Estate's status as a REIT. On or after May 17, 2007, the Series B Preferred
Shares may be redeemed, at the Crescent Real Estate's option, by paying $25.00
per share plus any accumulated, accrued and unpaid distributions. Dividends on
the Series B Preferred Shares are cumulative from the date of original issuance
and are payable quarterly in arrears on the fifteenth of February, May, August
and November, commencing August 15, 2002. The annual fixed dividend is $2.375
per share.
242
Net proceeds to Crescent Real Estate from the May 2002 Series B Preferred
Offering after underwriting discounts and other offering costs of approximately
$2.8 million were approximately $72.3 million. Crescent Real Estate used the net
proceeds to redeem Class A Units issued by its subsidiary, Funding IX, to
GMACCM.
On June 6, 2002, an additional 400,000 Series B Preferred Shares were
sold, resulting in gross proceeds to Crescent Real Estate of approximately $10.0
million. Net proceeds to Crescent Real Estate after underwriting discounts and
other offering costs of approximately $0.4 million were approximately $9.6
million. As with the May 2002 Series B Preferred Offering, Crescent Real Estate
used the net proceeds to redeem Class A Units issued by its subsidiary, Funding
IX, to GMACCM.
Employee Stock Purchase Plan
On June 25, 2001, the shareholders of Crescent Real Estate approved a new
Employee Stock Purchase Plan, or the ESPP, that is intended to qualify as an
"employee stock purchase plan" under Section 423 of the Internal Revenue Code of
1986, as amended. The ESPP is regarded as a noncompensatory plan under APB No.
25, because it meets the qualifications under Internal Revenue Code 423. Under
the terms of the ESPP, eligible employees may purchase common shares of Crescent
Real Estate at a price that is equal to 90% of the lower of the common shares'
fair market value at the beginning or the end of a quarterly period. The fair
market value of a common share is equal to the last sale price of the common
shares on the NYSE. Eligible employees may purchase the common shares through
payroll deductions of up to 10% of eligible compensation. The ESPP is not
subject to the provisions of ERISA. The ESPP was effective October 1, 2001, and
will terminate on May 14, 2011.
The 1,000,000 common shares that may be issued pursuant to the purchase of
common shares under the ESPP represent less than 0.95% of Crescent Real Estate's
outstanding common shares at September 30, 2002.
Share Repurchase Program
Crescent Real Estate commenced its Share Repurchase Program in March 2000.
On October 15, 2001, Crescent Real Estate's Board of Trust Managers increased
from $500.0 million to $800.0 million the amount of outstanding common shares
that can be repurchased from time to time in the open market or through
privately negotiated transactions, or the Share Repurchase Program. As of June
30, 2002, Crescent Real Estate had repurchased 20,256,423 common shares, at an
aggregate cost of approximately $386.6 million, resulting in an average
repurchase price of $19.09 per common share.
The following table shows a summary of Crescent Real Estate's common
repurchases by year, as of September 30, 2002.
AVERAGE PRICE
PER COMMON
SHARES TOTAL AMOUNT SHARE
------ ------------ -----
(IN MILLIONS)
2000 14,468,623 $ 281.0 $ 19.44
2001 4,287,800 77.1 17.97
NINE MONTHS ENDED SEPTEMBER 30,
2002 1,500,000 28.5 19.00
------------ --------- -----------
TOTAL 20,256,423(1) $ 386.9 $ 19.10
============ ========= ===========
(1) Additionally, 15,230 of Crescent Real Estate's common shares were
repurchased outside of the Share Repurchase Program as part of an
executive incentive program, and Crescent Real Estate contributed 11,354
treasury shares to Crescent Real Estate's scholarship fund during the
three months ended September 30, 2002.
243
Crescent Real Estate expects the Share Repurchase Program to continue to
be funded through a combination of debt, equity, joint venture capital and
selected asset disposition alternatives available to Crescent Real Estate. The
amount of common shares that Crescent Real Estate will actually purchase will be
determined from time to time in its reasonable judgment, based on market
conditions and the availability of funds, among other factors. There can be no
assurance that any number of common shares will actually be purchased within any
particular time period.
Share Repurchase Agreement.
On November 19, 1999, Crescent Real Estate entered into an agreement, or
the Share Repurchase Agreement, with UBS to purchase a portion of its common
shares from UBS. Crescent Real Estate had the option to settle the Share
Repurchase Agreement in cash or common shares. During the year ended December
31, 2000, Crescent Real Estate purchased the 5,809,180 common shares from UBS at
an average cost of $17.62 per common share for an aggregate of approximately
$102.3 million under the Share Repurchase Agreement with UBS.
The share repurchase agreement was accounted for under EITF 96-13 and was
considered an equity instrument similar to a preferred stock instrument with a
cumulative fixed dividend, the forward accretion component or guaranteed return
to UBS was accounted for like a preferred dividend. Additionally, the common
shares actually issued and outstanding were considered in both the basic and
diluted weighted-average shares calculations. The diluted earnings per share
calculation also included any contingently issuable common shares.
Crescent Real Estate has no further obligation under the Share Repurchase
Agreement. The purchases were funded primarily through the sale of Class A Units
in Funding IX. See "Sale of Preferred Equity Interests in Subsidiary" above.
Broadband.
In 2000, Crescent Real Estate made an equity investment in Broadband
Office, Inc., or "Broadband", a facilities-based provider of broadband data,
video and voice communication services delivered over fiber optic networks, and
related entities. In May 2001, Broadband filed for Chapter 11 bankruptcy
protection, and Crescent Real Estate's investment in Broadband was approximately
$7.2 million. Yipes Communications Group, Inc., or Yipes, another telecom
provider, has received approval from the federal bankruptcy court to acquire
certain rights formerly owned by Broadband. In addition, Yipes has executed
agreements with nine major real estate entities, including Crescent Real Estate,
to assume telecom licensing agreements, in modified formats. As part of this
transaction, Crescent Real Estate acquired ownership of certain telecom assets
previously owned by Broadband and located within office properties in
consideration for conveyance of its equity interest in Broadband to Yipes. These
244
telecom assets were independently appraised and valued in excess of Crescent
Real Estate's equity interest in Broadband. As a result, Crescent Real Estate
reclassified its investment in Broadband of approximately $7.2 million from
Other Assets to Building Improvements during the year ended December 31, 2001.
Therefore, Broadband's bankruptcy did not have a material effect on the Crescent
Real Estate's results of operations for the year ended December 31, 2001 or its
financial position as of December 31, 2001.
Station Casinos, Inc.
As of April 14, 1999, Crescent Real Estate and Station entered into a
settlement agreement for the mutual settlement and release of all claims
between Crescent Real Estate and Station arising out of the agreement and plan
of merger between Crescent Real Estate and Station, which Crescent Real Estate
terminated in August 1998. As part of that settlement agreement, Crescent Real
Estate paid $15.0 million to Station on April 22, 1999.
Change in Crescent Real Estate's Certifying Accountant.
On June 24, 2002, Crescent Real Estate terminated the engagement of Arthur
Andersen LLP as Crescent Real Estate's independent public accountants. Crescent
Real Estate has engaged Ernst & Young LLP to serve as Crescent Real Estate's
independent public accountants for the fiscal year ending December 31, 2002.
Ernst & Young LLP has completed a re-audit of Crescent Real Estate's financial
statements for the years ended December 31, 2001, 2000 and 1999.
Critical Accounting Policies.
Crescent Real Estate's discussion and analysis of financial condition and
results of operations is based on Crescent Real Estate's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires Crescent Real Estate to make estimates and judgments that
affect the reported amounts of assets, liabilities, and contingencies as of the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Crescent Real Estate evaluates its
assumptions and estimates on an on-going basis. Crescent Real Estate bases its
estimates on historical experience and on various other assumptions that
Crescent Real Estate believes to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions. Crescent Real Estate believes the following critical accounting
policies affect our more significant judgments and estimates used in the
preparation of our consolidated financial statements.
Net Investments in Real Estate.
Real estate and leasehold improvements are classified as long-lived assets
to be held and used or held for sale. Properties to be held and used are carried
at cost, net of accumulated depreciation. Properties held for sale are recorded
at the lower cost or fair value less cost to sell. In accordance with SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the
properties are periodically evaluated on an individual basis to determine if any
value impairment has occurred. With regard to properties to be held and used, an
impairment charge is recognized to the extent the sum of undiscounted future
operating cash flows is less than the carrying value of the property. For
properties held for sale an impairment charge is recognized when the fair value
of the property less the estimated cost to sell is less than the carrying value
of the property as of the date Crescent Real Estate has a commitment to sell the
property or is actively marketing the property for sale. See "Adoption of New
245
Accounting Standards" below for a discussion of impairment losses recognized for
the nine months ended September 30, 2002.
Depreciation on buildings and improvements is computed using the straight-line
method over the estimated useful life of the asset, as follows:
Buildings and Improvements 5 to 40 years
Tenant Improvements Terms of leases
Furniture, Fixture and Equipment 3 to 5 years
Depreciation is not computed on land and land held for investment or
development, nor is depreciation computed on property held for sale subsequent
to the date the property is classified as held for sale.
Expenditures for ordinary repairs and maintenance are charged to
operations as incurred. Significant renovations and improvements, which improve
or extend the useful life of the property are capitalized and subject to the
depreciation guidelines discussed above. When a property is sold, its cost and
related accumulated depreciation are removed from the books and any resulting
gain or loss reflected in net income for the appropriate period.
Developments in process are carried at cost, which includes land
acquisition cost, architectural fees, general contractor fees, construction
interest, internal costs related directly to the development and other costs
related directly to the construction of the property. Depreciation expense is
not recognized until the property is placed in service, which occurs shortly
after the building receives a certificate of occupancy.
Derivative Financial Instruments.
Crescent Real Estate uses derivative financial debt instruments to convert
a portion of its variable-rate debt to fixed-rate debt and to manage its fixed
to variable-rate ratio. As of September 30, 2002, Crescent Real Estate had
entered into six cash flow hedge agreements which are accounted for under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133, as amended, by SFAS No. 138, "Accounting for Certain Hedging
Activities," establishes accounting and reporting standards for derivative
instruments. Specifically, it requires an entity to recognize all derivatives as
either assets or liabilities in the statement of financial position and to
measure these instruments at fair value. Changes in fair value will effect
either shareholders' equity or net income depending on whether the derivative
instrument qualifies as a hedge for accounting purposes. Derivatives that do not
qualify as hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the particular nature of the hedge, changes
in fair value will either be offset against the change in fair value of the
hedged assets or liabilities through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings.
Crescent Real Estate uses cash flow hedges to mitigate the variability of
cash flows by effectively converting or capping floating rate debt to a fixed
rate basis. On a monthly basis, the cash flow hedge is market to fair value
through comprehensive income and the cash flow hedge's gain or loss is reported
in earnings when the interest on the underlying debt affects earnings. Any
ineffective portion of the hedges is immediately reported in Crescent Real
Estate's earnings.
246
In connection with the debt refinancing in May 2001, Crescent Real
Estate entered into a LIBOR interest rate cap, and simultaneously sold a LIBOR
interest rate cap with the same terms. These instruments do not qualify as
hedges and changes to their respective fair values, which offset each other, are
charged to earnings monthly.
Stock Option and Unit Plans.
Crescent Real Estate applies APB No. 25 in accounting for options
granted pursuant to the 1994 Crescent Real Estate Equities, Inc. Stock
Incentive Plan, the 1995 Crescent Real Estate Equities, Inc. Stock Incentive
Plan and the 1996 Crescent Real Estate Equities Limited Partnership Unit
Incentive plans. Accordingly, no compensation costs are recognized for any of
these plans. All options granted subsequent to December 31, 2002, will be
accounted for under SFAS No. 123.
Revenue Recognition.
Office Properties.
Crescent Real Estate, as a lessor, has retained substantially all of
the risks and benefits of ownership of the office properties and accounts for
its leases as operating leases. Crescent Real Estate recognizes income on leases
on a straight-line basis over the term of the lease. Certain leases provide for
abated rent periods and/or scheduled rental rate increases during the term of
the lease. Accordingly, a receivable from tenants, deferred rent receivable, is
recorded for the excess of rental revenue recognized on a straight-line basis
over the rent that is contractually due from the tenant under the terms of the
lease.
Hotel Properties.
Prior to the February 14, 2002 transaction with Crescent Operating,
Crescent Real Estate had leased all of the hotel properties, except the Omni
Austin Hotel, to subsidiaries of Crescent Operating pursuant to eight separate
leases. The Omni Austin hotel had been leased under a separate lease to HCD
Austin Corporation. The leases provided for the payment by the lessee of the
hotel property of (i) base rent, with periodic rent increases if applicable,
(ii) percentage rent based on a percentage of gross receipts or gross room
revenues, as applicable, above a specified amount, and (iii) a percentage of
gross food and beverage revenues above a specified amount for certain hotel
properties. Base rental income under these leases was recognized on a
straight-line basis over the terms of the respective leases. Contingent revenue
was recognized when the thresholds upon which it is based had been met. On
February 14, 2002, Crescent Real Estate executed an agreement with Crescent
Operating, pursuant to which Crescent Operating transferred to subsidiaries of
Crescent Real Estate, in lieu of foreclosure, Crescent Operating's lessee
interests in the eight hotel properties previously leased to Crescent Operating.
Revenue from operations of the hotel properties subsequent to the Crescent
Operating transaction is recognized when the services are provided.
Residential Development Properties.
Revenue from real estate sales is recognized after closing has taken
place, title has been transferred, sufficient cash is received to demonstrate
the buyer's commitment to pay for the property and collection of the balance of
the sales price, if any, is reasonably assured. The cost of real estate sold is
determined using the relative sales value method.
Revenue from real estate is recognized using the percentage of
completion method. Under the percentage of completion method, the percentage of
revenue applicable to costs incurred to date, as compared to the total estimated
development costs, is recognized in the period of sale. Deferred income related
to future development activity at September 30, 2002 is included in accrued
liabilities. If real estate is sold prior to completion of all related
infrastructure construction, and such uncompleted costs are not significant in
relation to total costs, the full accrual method is utilized whereby 100% of the
associated revenue is recognized and a commitment liability is established to
reflect the allocated estimated future costs to complete the development of such
real estate.
247
Club initiation fees and membership conversion fees are recorded, when
sold, as deferred revenue and recognized as membership fee revenue on a
straight-line basis over the number of months remaining until the estimated
turnover date, 2010. The partnership is required to sell the club assets to the
members no later than the turnover date. Upon formation of Desert Mountain
Properties, L.P., the partnership allocated a portion of the fair value of the
assets of Desert Mountain to the remaining club memberships and recorded the
amount as an intangible asset. Direct costs and an applicable portion of the
intangible associated with deferred membership revenue are also deferred and
recognized under the same method as the related revenue. These deferred club
initiation and membership conversion fees, net of the related deferred costs,
are presented on the balance sheets as deferred income. Membership fees included
in revenues are net of the related costs. Monthly club dues and transfer fees
are recorded as club revenue when earned.
Income Taxes.
Crescent Real Estate intends to maintain its qualification as a REIT
under Section 856 of the Code. As a REIT, Crescent Real Estate generally will
not be subject to corporate federal income taxes as long as it satisfies certain
technical requirements of the Code, including the requirement to distribute 90%
of its REIT taxable income to its shareholders. Accordingly, Crescent Real
Estate does not believe that it will be liable for current income taxes on its
REIT taxable income at the federal level or in most of the states in which it
operates. Additionally, in conjunction with Crescent Real Estate's agreement
with Crescent Operating, Crescent Real Estate consolidated certain taxable REIT
subsidiaries, which are subject to federal and state income tax.
Adoption of New Accounting Pronouncements.
In June 2001, the Financial Accounting Standards Board, or FASB, issued
SFAS No. 141, "Business Combinations," which provides that all business
combinations in the scope of the statement are to be accounted for under the
purchase method. This statement is effective for all business combinations
initiated after June 30, 2001, as well as all business combinations accounted
for using the purchase method for which the date of acquisition is July 1, 2001,
or later. Since Crescent Real Estate currently accounts for its acquisitions
under the purchase method, Crescent Real Estate's management does not believe
that the adoption of this statement will have a material effect on its interim
or annual financial statements.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets," (effective January 1, 2002) which addresses financial
accounting and reporting for acquired goodwill and other intangible assets. SFAS
142 specifies that goodwill and some other intangible assets may no longer be
amortized, but instead are subject to periodic impairment testing. If an
impairment charge is required, the charge is reported as a change in accounting
principle and is included in operating results as a Cumulative Effect of a
Change in Accounting Principle. SFAS No. 142 provides for a transitional period
of up to 12 months. In prior periods, Crescent Real Estate tested goodwill for
impairment under the provisions of SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets," under which an impairment loss is recognized when
expected undiscounted future cash flows are less than the carrying value of the
asset. For the year ended December 31, 2001, the expected future operating cash
flows of AmeriCold Corporation on an undiscounted basis exceeded the carrying
amounts of the properties and other long-lived assets, including goodwill.
Accordingly, no impairment was recognized. Upon the adoption of SFAS 142,
AmeriCold Corporation compared the fair value of the temperature-controlled
logistics properties based on discounted cash flows to the carrying value of the
temperature-controlled logistics properties and the related goodwill. Based on
this test, the fair value did not exceed the carrying value of the assets and,
accordingly, the goodwill was impaired. Any need for impairment must be assessed
within the first six months and the amount of impairment must be determined
within the next six months. Any additional impairment taken in subsequent
interim periods during 2002 related to the initial adoption of this statement
will require the first quarter financial statements to be restated. During the
three months ended March 31, 2002, Crescent Real Estate recognized a goodwill
impairment charge of approximately $9.2 million due to the initial application
of this statement. This charge was due to impairments (net of minority interests
and taxes) of the goodwill at AmeriCold Corporation. This charge was reported as
a change in accounting principle and was included in Crescent Real Estate's
consolidated statements of Operations as a "Cumulative Effect of a Change in
Accounting Principle" for the three months ended March 31, 2002.
Subsequent to March 31, 2002, Crescent Real Estate determined that an
additional impairment charge of $1.3 million (net of minority interests and
taxes) was required for the goodwill of one of the residential development
corporations, bringing to $10.5 million the total impairment charge to be
recognized for the nine months
248
ended September 30, 2002 related to the initial application of SFAS No. 142. In
accordance with SFAS No. 142, the financial statements for the quarter ended
March 31, 2002 were restated to include the additional impairment charge of $1.3
million. Accordingly, the entire $10.5 million impairment charge against the
goodwill of the AmeriCold Corporation and one of the residential development
corporations has been included in Crescent Real Estate's consolidated statements
of operations as a "Cumulative Effect of a Change in Accounting Principle" for
the nine months ended September 30, 2002.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This statement is effective for fiscal years
beginning after June 15, 2002. Crescent Real Estate has determined that SFAS No.
143 will have no material effect on its interim and annual financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 requires that the results of operations, including any gains or
losses recognized, be disclosed separately on the consolidated statements of
operations. Crescent Real Estate adopted SFAS No. 144 on January 1, 2002. From
January 1, 2002 through September 30, 2002, Crescent Real Estate sold five
office properties. Crescent Real Estate also owns seven behavioral healthcare
properties which are held for sale. In accordance with SFAS No. 144, the results
of operations of these assets have been presented as "Discontinued Operations --
Income on Assets Sold and Held for Sale" in the accompanying consolidated
statements of operations. The carrying values of the assets held for sale have
been reflected as "Properties Held for Disposition, Net" in the accompanying
consolidated balance sheets. As a result of the adoption, Crescent Real Estate
has reclassified certain amounts in prior period financial statements to conform
with the new presentation requirements.
REIT Qualification.
Crescent Real Estate intends to maintain its qualification as a REIT
under Section 856 of the Code. As a REIT, Crescent Real Estate generally will
not be subject to corporate federal income taxes as long as it satisfies certain
technical requirements of the Code, including the requirement to distribute 90%
of its REIT taxable income to its shareholders.
Funds from Operations.
FFO, as used in this document, means:
- Net Income (Loss) - determined in conformity with GAAP;
- excluding gains (or losses) from sales of depreciable
operating property;
- excluding extraordinary items (as defined by GAAP);
- plus depreciation and amortization of real estate assets; and
- after adjustments for unconsolidated partnerships and joint
ventures.
249
The National Association of Real Estate Investment Trusts ("NAREIT")
developed FFO as a relative measure of performance and liquidity of an equity
REIT to recognize that income-producing real estate historically has not
depreciated on the basis determined under GAAP. Crescent Real Estate considers
FFO an appropriate measure of performance for an equity REIT, and for its
investment segments. However, FFO:
- does not represent cash generated from operating activities
determined in accordance with GAAP (which, unlike FFO,
generally reflects all cash effects of transactions and other
events that enter into the determination of net income);
- is not necessarily indicative of cash flow available to fund
cash needs;
- should not be considered as an alternative to net income
determined in accordance with GAAP as an indication of the
Crescent Real Estate's operating performance, or to cash flow
from operating activities determined in accordance with GAAP
as a measure of either liquidity or the Crescent Real Estate's
ability to make distributions; and
- Crescent Real Estate's measure of FFO may not be comparable to
similarly titled measures of other REITs because these REITs
may apply the definition of FFO in a difference manner than
Crescent Real Estate.
Crescent Real Estate has historically distributed an amount less than
FFO, primarily due to reserves required for capital expenditures, including
leasing costs. The aggregate cash distributions paid to shareholders and
unitholders for the nine months ended September 30, 2002 and 2001 were $132.7
and $200.6 million, respectively.
An increase or decrease in FFO does not necessarily result in an
increase or decrease in aggregate distributions because Crescent Real Estate's
Board of Trust Managers is not required to increase distributions on a quarterly
basis unless necessary for Crescent Real Estate to maintain REIT status.
However, Crescent Real Estate must distribute 90% of its REIT taxable income (as
defined in the Code). Therefore, a significant increase in FFO will generally
require an increase in distributions to shareholders and unitholders although
not necessarily on a proportionate basis.
Accordingly, Crescent Real Estate believes that to facilitate a clear
understanding of the consolidated historical operating results of Crescent Real
Estate, FFO should be considered in conjunction with the Crescent Real Estate's
net income and cash flows reported in the consolidated financial statements and
notes to the financial statements. However, Crescent Real Estate's measure of
FFO may not be comparable to similarly titled measures of other REITs because
these REITs may apply the definition of FFO in a different manner than Crescent
Real Estate.
250
STATEMENTS OF FUNDS FROM OPERATIONS
(DOLLARS AND SHARES/UNITS IN THOUSANDS)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------ ------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(unaudited) (unaudited)
Net income $ 27,749 $ 22,459 $ 53,661 $ 68,669
Adjustments to reconcile net income to
funds from operations:
Depreciation and amortization of real estate assets 36,419 30,840 102,088 89,859
Gain on property sales, net (19,311) (1,032) (24,500) (570)
Cumulative effect of change in accounting principle -- -- 10,465 --
Extraordinary item - extinguishment of debt -- -- 10,802
Impairment and other adjustments related to
real estate assets and assets held for sale -- (19) 600 15,305
Adjustment for investments in real estate mortgages
and equity of unconsolidated companies:
Office Properties 1,946 2,663 5,997 6,718
Resort Properties 370 -- 370 --
Residential Development Properties (615) 3,015 2,339 9,224
Temperature-Controlled Logistics Properties 6,777 5,687 18,278 16,800
Other 96 -- 5,872 --
Unitholder minority interest 3,156 2,712 7,348 9,903
Series A Preferred Share distributions (4,556) (3,375) (12,146) (10,125)
Series B Preferred Share distributions (2,019) -- (3,028) --
--------- --------- --------- ---------
Funds from operations(1) $ 50,012 $ 62,950 $ 167,344 $ 216,585
========= ========= ========= =========
Investment Segments:
Office Segment $ 88,045 $ 91,237 $ 249,119 $ 273,134
Resort/Hotel Properties 13,593 12,374 47,140 44,142
Residential Development Properties 4,319 10,278 32,354 36,927
Temperature-Controlled Logistics Properties 3,675 3,621 14,450 19,085
Other:
Corporate general and administrative (8,121) (6,221) (19,846) (18,374)
Corporate and other adjustments:
Interest expense (47,149) (44,908) (135,871) (139,189)
Series A Preferred Share distributions (4,556) (3,375) (12,146) (10,125)
Series B Preferred Share distributions (2,019) -- (3,028) --
Other(2)(3) 2,225 (56) (4,828) 10,985
--------- --------- --------- ---------
Funds from operations(1) $ 50,012 $ 62,950 $ 167,344 $ 216,585
========= ========= ========= =========
Basic weighted average shares 103,766 108,748 104,527 108,170
========= ========= ========= =========
Diluted weighted average shares/units(4) 117,070 123,828 118,225 123,484
========= ========= ========= =========
(1) To calculate basic funds from operations, deduct Unitholder minority
interest.
(2) Includes interest and other income, preferred return paid to GMACCM,
other unconsolidated companies, less depreciation and amortization of
non-real estate assets and amortization of deferred financing costs.
(3) For purposes of this schedule, the behavioral healthcare properties'
financial information has been included in this line item.
(4) See calculations for the amounts presented in the reconciliation
following this table.
251
The following schedule reconciles Crescent Real Estate's basic weighted
average shares to the diluted weighted average shares/units presented above:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2002 2001 2002 2001
------- ------- ------- -------
(SHARES/UNITS IN THOUSANDS)
Basic weighted average shares: 103,766 108,748 104,527 108,170
Add: Weighted average units 13,183 13,205 13,183 13,473
Share and unit options 121 1,875 515 1,841
------- ------- ------- -------
Diluted weighted average shares/units 117,070 123,828 118,225 123,184
======= ======= ======= =======
RECONCILIATION OF FUNDS FROM OPERATIONS TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
(DOLLARS IN THOUSANDS)
For the Nine Months
Ended September 30,
------------------------
2002 2001
--------- ---------
Funds from operations $ 167,344 $ 216,585
Adjustments:
Depreciation and amortization of non-real estate assets 4,758 2,423
Amortization of deferred financing costs 7,722 7,171
Net capitalized residential development costs 26,171 --
Discontinued Operations 2,180 2,107
Gain on undeveloped land (5,466) (157)
Minority interest in joint ventures profit and
depreciation and amortization 9,919 14,664
Adjustment for investments in real estate mortgages
and equity of unconsolidated companies (32,856) (32,742)
Change in deferred rent receivable 4,508 4,687
Change in current assets and liabilities (52,605) 18,032
Distributions received in excess of earnings from
unconsolidated companies -- 10,908
Equity in (earnings) loss net of distributions
received from unconsolidated companies 3,867 (105)
6 3/4% Series A Preferred Share distributions 12,146 10,125
9 1/2% Series B Preferred Share distributions 3,028 --
Non cash compensation 1,990 119
--------- ---------
Net cash provided by operating activities $ 152,706 $ 253,817
========= =========
252
The aggregate cash distributions paid to shareholders and unitholders
for the year ended December 31, 2001, and 2000, were $245.1 and $281.2 million,
respectively.
STATEMENTS OF FUNDS FROM OPERATIONS
(DOLLARS AND SHARES/UNITS IN THOUSANDS)
FOR THE YEAR
ENDED DECEMBER 31,
-------------------------
2001 2000
---------- ----------
Net (loss) income $ (4,659) $ 248,122
Adjustments to reconcile net (loss) income to
funds from operations:
Depreciation and amortization of real estate assets 122,033 119,999
Gain on rental property sales, net (2,835) (136,880)
Impairment and other charges related to real estate assets 21,705 17,874
Extraordinary item - extinguishment of debt 10,802 3,928
Adjustment for investments in real estate mortgages
and equity of unconsolidated companies:
Office Properties 6,955 4,973
Residential Development Properties 13,037 25,130
Temperature-Controlled Logistics Properties 22,671 26,131
Other 144 --
Unitholder minority interest 765 31,120
6 3/4% Series A Preferred Share distributions (13,501) (13,500)
--------- ---------
Funds from operations(1) $ 177,117 $ 326,897
Investment Segments:
Office Segment $ 358,349 $ 361,574
Resort/Hotel Segment 45,282 71,446
Residential Development Segment 54,051 78,600
Temperature-Controlled Logistics Segment 23,806 33,563
Corporate and other adjustments:
Interest expense (182,410) (203,197)
6 3/4% Series A Preferred Share distributions (13,501) (13,500)
Other(2)(3) 8,571 22,484
Corporate general & administrative (24,249) (24,073)
Impairment and other charges related to Crescent Operating (92,782) --
--------- ---------
Funds from operations(1) $ 177,117 $ 326,897
========= =========
Basic weighted average shares 107,613 113,524
========= =========
Diluted weighted average shares/units(4) 122,544 128,732
========= =========
---------
(1) To calculate basic funds from operations, deduct Unitholder minority
interest.
(2) Includes interest and other income, preferred return paid to GMACCM,
other unconsolidated companies, less depreciation and amortization of
non-real estate assets and amortization of deferred financing costs.
(3) For purposes of this schedule, the behavioral healthcare properties'
financial information has been included in this line item. (4) See
calculations for the amounts presented in the reconciliation following
this table.
(4) See calculations for the amounts presented in the reconciliation
following this table.
253
The following schedule reconciles Crescent Real Estate's basic weighted
average shares to the diluted weighted average shares/units presented above:
FOR THE YEAR
ENDED DECEMBER 31,
2001 2000
------- -------
(SHARES/UNITS IN THOUSANDS)
Basic weighted average shares: 107,613 113,524
Add: Weighted average units 13,404 14,011
Share and unit options 1,527 1,197
------- -------
Diluted weighted average shares/units 122,544 128,732
======= =======
RECONCILIATION OF FUNDS FROM OPERATIONS TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
(DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2001 2000
---------- ----------
Funds from operations
Adjustments: $ 177,117 $ 326,897
Depreciation and amortization of non-real estate assets 2,934 2,646
Impairment and other charges related to real estate assets 96,412 --
Amortization of deferred financing costs 9,327 9,497
Gain on undeveloped land (1,590) (577)
Increase in receivables from Crescent Operating (20,458) --
Minority interest in joint ventures profit and depreciation
and amortization 21,854 21,076
Adjustment for investments in real estate mortgages
and equity of unconsolidated companies (42,807) (56,234)
Change in deferred rent receivable 3,744 (8,504)
Change in current assets and liabilities (60,768) (25,956)
Distributions received in excess of earnings from
unconsolidated companies 13,874 3,897
Equity in earnings in excess of distributions received from
unconsolidated companies (476) (10,641)
6 3/4% Series A Preferred Share distributions 13,501 13,500
Non cash compensation 149 114
--------- ---------
Net cash provided by operating activities $ 212,813 $ 275,715
========= =========
254
Historical Recurring Office Property Capital Expenditures, Tenant Improvement
and Leasing Costs.
The following table sets forth annual and per square foot recurring
capital expenditures (excluding those expenditures which are recoverable from
tenants) and tenant improvement and leasing costs for the years ended December
31, 2001, 2000 and 1999, attributable to signed leases, all of which have
commenced or will commence during the next 12 months (i.e., the renewal or
replacement tenant began or will begin to pay rent) for the office properties
consolidated in Crescent Real Estate's financial statements during each of the
periods presented. Tenant improvement and leasing costs for signed leases during
a particular period do not necessarily equal the cash paid for tenant
improvement and leasing costs during such period due to timing of payments.
2001 2000 1999
---------- ---------- ----------
CAPITAL EXPENDITURES:
Capital Expenditures (in thousands) $ 15,672 $ 9,199 $ 6,048
Per square foot $ 0.58 $ 0.33 $ 0.19
TENANT IMPROVEMENT AND LEASING COSTS:(1)
Replacement Tenant Square Feet 1,099,868 1,126,394 1,259,660
Renewal Tenant Square Feet 790,203 1,490,930 1,385,911
Tenant Improvement Costs (in thousands) $ 12,154 $ 16,541 $ 14,339
Per square foot leased $ 6.43 $ 6.32 $ 5.42
Tenant Leasing Costs (in thousands) $ 7,238 $ 11,621 $ 7,804
Per square foot leased $ 3.83 $ 4.44 $ 2.95
Total (in thousands) $ 19,392 $ 28,162 $ 22,143
Total per square foot $ 10.26 $ 10.76 $ 8.37
Average lease term 5.2 years 5.1 years 4.5 years
Total per square foot per year $ 1.97 $ 2.10 $ 1.87
----------
(1) Excludes leasing activity for leases that have less than a one-year
term (i.e., storage and temporary space).
Capital expenditures may fluctuate in any given period subject to the
nature, extent and timing of improvements required to be made in Crescent Real
Estate's office property portfolio. Crescent Real Estate maintains an active
preventive maintenance program in order to minimize required capital
improvements. In addition, certain capital improvement costs are recoverable
from customers.
Tenant improvement and leasing costs also may fluctuate in any given
year depending upon factors such as the property, the term of the lease, the
type of lease (renewal or replacement tenant), the involvement of external
leasing agents and overall competitive market conditions. Crescent Real Estate's
management believes that future recurring tenant improvements and leasing costs
for Crescent Real Estate's existing office properties will approximate on
average for "renewal tenants", $6.00 to $10.00 per square foot, or $1.20 to
$2.00 per square foot per year based on an average five-year lease term, and, on
average for "replacement tenants," $12.00 to $16.00 per square foot, or $2.40 to
$3.20 per square foot per year based on an average five-year lease term.
255
DEBT FINANCING ARRANGEMENTS
The significant terms of Crescent Real Estate's primary debt financing
arrangements existing as of September 30, 2002, are shown below (dollars in
thousands).
Balance Interest
Outstanding Rate at Expected
Maximum at September September Payoff
Description(1) Borrowings 30, 2002 30, 2002 Maturity Date Date
SECURED FIXED RATE DEBT:
AEGON Partnership Note $ 266,417 $ 266,417 7.53% July 2009 July 2009
LaSalle Note I 238,742 238,742 7.83 August 2027 August 2007
JP Morgan Mortgage Note 196,514 196,514 8.31 October 2016 September 2006
LaSalle Note II 161,000 161,000 7.79 March 2028 March 2006
CIGNA Note 63,500 63,500 7.47 December 2002 December 2002
Metropolitan Life Note V 38,274 38,274 8.49 December 2005 December 2005
Northwestern Life Note 26,000 26,000 7.66 January 2004 January 2004
Woodmen of the World Note 8,500 8,500 8.20 April 2009 April 2009
Nomura Funding VI Note 8,069 8,069 10.07 July 2020 July 2010
Mitchell Mortgage Note 1,743 1,743 7.00 September 2003(2) September 2003
Rigney Promissory Note 621 621 8.50 November 2012 November 2002
Construction, Acquisition and
other obligations for various
CRDI projects 21,557 21,509 2.9 to 10.0 Nov 02 to July 07 Nov 02 to July 07
Subtotal/Weighted Average $1,030,937 $1,030,889 7.83%
UNSECURED FIXED RATE DEBT:
Notes due 2009 $ 375,000 $ 375,000 9.25% April 2009 April 2009
Notes due 2007 250,000 250,000 7.50 September 2007 September 2007
Other obligations 541 541 8.0 to 12.0 Nov 02 to Jan 04 Nov 02 to Jan 04
Subtotal/Weighted Average $ 625,541 $ 625,541 8.55%
SECURED VARIABLE RATE DEBT:
Fleet Fund I and II Term Loan $ 275,000 $ 275,000 5.09% May 2005 May 2005
Deutsche Bank - CMBS Loan(2) 220,000 220,000 5.84 May 2004 May 2006
National Bank of Arizona 50,000 29,426 5.00 November 2003 November 2003
Construction, Acquisition
and other obligations for
various CRDI projects 86,682 47,688 4.31 to 5.75 Oct 02 to Feb 04 Oct 02 to Feb 04
Subtotal/Weighted Average $ 631,682 $ 572,114 5.31%
UNSECURED VARIABLE RATE DEBT:
Credit Facility(3) $ 400,000 $ 179,000(5) 3.85% May 2004 May 2005
JPMorgan Loan Sales
Facility(4) 50,000 5,000 3.25 -- --
---------- ------------ ----------------- ---------------
Subtotal/Weighted Average $ 450,000 $ 184,000 3.83%
========== ============
TOTAL/WEIGHTED AVERAGE $2,738,160 $2,412,544 7.11%(6)
========== ============
AVERAGE REMAINING TERM 7.5 years 4.0 years
----------
(1) For more information regarding the terms of Crescent Real Estate's debt
financing arrangements, including the amounts payable at maturity for
non-amortizing loans, properties securing Crescent Real Estate's
secured debt and the method of calculation of the interest rate for
Crescent Real Estate's variable rate debt, see "Note 11. Notes Payable
and Borrowings under the Credit Facility" included in the Financial
Statements of Crescent Real Estate for the nine months ended September
30, 2002 (unaudited).
(2) This loan has two one-year extension options.
(3) This facility has a one-year extension option.
(4) This is an uncommitted facility.
(5) The outstanding balance excludes Letters of Credit issued under the
facility of $15.2 million.
(6) The overall weighted average interest rate does not include the effect
of Crescent Real Estate's cash flow hedge agreements. Including the
effect of these agreements, the overall weighted average interest rate
would have been 7.88%.
256
The following table shows information about Crescent Real Estate's
consolidated fixed and variable-rate debt and does not take into account any
extension options, hedging arrangements or Crescent Real Estate's anticipated
pay-off dates.
WEIGHTED
% OF WEIGHTED AVERAGE
AMOUNT DEBT(1) AVERAGE RATE MATURITY(3)
------------ ------- ------------ -------------
(DOLLARS IN THOUSANDS)
FIXED-RATE DEBT $ 1,656,430 69% 8.1% 11.3 years
VARIABLE RATE DEBT 756,114 31% 4.7% 1.7 years
------------ --- ----- ----------
TOTAL DEBT $ 2,412,544 100%(1) 7.1%(2) 7.5 years(3)
============ === ===== ==========
----------
(1) Including the $530.3 million of hedged variable rate debt, the
percentages for fixed-rate debt and variable-rate debt are 91% and 9%,
respectively.
(2) Including the effect of hedge arrangements the overall weighted average
interest rate would have been 7.88%.
(3) Based on contractual maturities. The overall weighted average maturity
is 4.0 years based on Crescent Real Estate's expected payoff dates.
Below are the aggregate principal payments required by year as of
September 30, 2002 under indebtedness of Crescent Real Estate. Scheduled
principal installments and amounts due at maturity are included.
UNSECURED DEBT
SECURED UNSECURED LINE OF CREDIT TOTAL(1)
---------- --------- -------------- ----------
(DOLLARS IN THOUSANDS)
2002 $ 76,509 $ 5,416 $ -- $ 81,925
2003 103,730 -- -- 103,730
2004 264,713 125 179,000 443,838
2005 329,339 -- -- 329,339
2006 18,938 -- -- 18,938
Thereafter 809,744 625,000 -- 1,434,744
---------- -------- -------- ----------
$1,603,003 $630,541 $179,000 $2,412,544
========== ======== ======== ==========
----------
(1) These amounts do not represent the effect of a one-year extension
option of the Fleet Facility and two one-year extension options on the
Deutsche Bank -- CMBS Loan, as noted above.
As of September 30, 2002, Crescent Real Estate had $185.7 million of
secured and unsecured debt maturing through December 31, 2003, consisting
primarily of the Cigna Note, and debt related to the residential development
segment. Borrowings under the revolving line of credit are expected to be used
to repay the $63.5 million CIGNA Note due in December 2002, and the $122.2
million of debt maturing in 2002 and 2003 is primarily related to the
residential development segment and will be repaid with cash from operations of
the residential development segment.
Crescent Real Estate's policy with regard to the incurrence and
maintenance of debt is based on a review and analysis of the following:
- investment opportunities for which capital is required and the cost of
debt in relation to such investment opportunities;
- the type of debt available (secured or unsecured);
- the effect of additional debt on existing coverage ratios;
257
- the maturity of the proposed debt in relation to maturities of existing
debt; and
- exposure to variable-rate debt and alternatives such as interest-rate
swaps and cash flow hedges to reduce this exposure.
Debt service coverage ratios for a particular period are generally
calculated as net income plus depreciation and amortization, plus interest
expense, plus extraordinary or non-recurring losses, minus extraordinary or
non-recurring gains, divided by debt service (including principal and interest
payable during the period of calculation). The calculation of the debt service
coverage ratio for the Fleet Facility is calculated using the method described
above, including certain pro forma adjustments.
Some of Crescent Real Estate's debt restricts its activities, including
its ability to pledge assets, create liens, incur additional debt, enter into
transactions with affiliates and make some types of payments, issuances of
equity and distributions on equity.
Any uncured or unwaived events of default on Crescent Real Estate's
loans can trigger an acceleration of payment on the loan in default. In
addition, a default by Crescent Real Estate or any of its subsidiaries with
respect to any indebtedness in excess of $5.0 million generally will result in a
default under the Fleet Facility and the Fleet I and II Term Loan after the
notice and cure periods for the other indebtedness have passed. As of September
30, 2002, Crescent Real Estate was in compliance with all of its debt service
coverage ratios and other covenants related to its outstanding debt. Crescent
Real Estate's debt facilities generally prohibit loan pre-payment for an initial
period, allow pre-payment with a penalty during a following specified period and
allow pre-payment without penalty after the expiration of that period. During
the nine months ended September 30, 2002 and the year ended December 31, 2001,
there were no circumstances that would require pre-payment penalties or
increased collateral related to Crescent Real Estate's existing debt.
Debt Offering.
On April 15, 2002, Crescent Real Estate completed a private offering of
$375.0 million in senior, unsecured notes due 2009. On October 15, 2002,
Crescent Real Estate completed an exchange offer pursuant to which it exchanged
notes registered with the Securities and Exchange Commission for $325.0 million
of the privately issued notes. In addition, Crescent Real Estate registered for
resale the remaining $50.0 million of privately issued notes, which were issued
to Richard E. Rainwater, the Chairman of the Board of Trust Managers, and
certain of his affiliates and family members. The notes bear interest at an
annual rate of 9.25% and were issued at 100% of issue price. The notes are
callable after April 15, 2006. Interest is payable on April 15 and October 15 of
each year, beginning October 15, 2002.
The net proceeds from the offering of notes were approximately $366.5
million. Approximately $309.5 million of the proceeds were used to pay down
amounts outstanding under the Fleet Facility, and the remaining proceeds were
used to pay down $5.0 million of short-term indebtedness and redeem
approximately $52.0 million of Class A Units in Funding IX from GMACCM. See
"Sale of Preferred Equity Interests in Subsidiary" for a description of the
Class A Units in Funding IX held by GMACCM.
Debt Refinancing and Fleet Facility
In May 2001, Crescent Real Estate (i) repaid and retired the UBS
Facility which consisted of the UBS Line of Credit, the UBS Term Loan I and the
UBS Term Loan II; (ii) repaid and retired the iStar Financial Note; and (iii)
modified and replaced the Fleet Term Note II with proceeds from a $970.0 million
debt refinancing. In May 2001, Crescent Real Estate wrote off $10.8 million of
deferred
258
financing costs related to the early extinguishment of the UBS Facility which is
included in "Extraordinary Item -- Extinguishment of Debt."
New Debt Resulting from Refinancing
DESCRIPTION MAXIMUM INTEREST MATURITY
BORROWING RATE DATE
--------------------------------- ------------- --------------------------- ---------
(dollars in millions)
Fleet Facility $ 400.0(1) LIBOR + 187.5 basis points 2004(2)
Fleet Fund I and II Term Loan $ 275.0 LIBOR + 325 basis points 2005
Deutsche Bank -- CMBS Loan $ 220.0 LIBOR + 234 basis points 2004(3)
Deutsche Bank Short-Term Loan $ 75.0 LIBOR + 300 basis points 2001(4)
----------
(1) The $400.0 million Fleet Facility is an unsecured revolving line of
credit. The weighted average interest rate from the origination of the
loan in May 2001 through December 31, 2001 is 5.38%.
(2) One-year extension option.
(3) Two one-year extension options.
(4) Repaid September 19, 2001.
Debt Repaid or Modified by Refinancing
MAXIMUM INTEREST MATURITY BALANCE
DESCRIPTION BORROWING RATE DATE REPAID/MODIFIED(1)
----------------------- --------- ------------------------ -------- ------------------
(dollars in millions)
UBS Line of Credit $300.0 LIBOR + 250 basis points 2003 $165.0
UBS Term Loan I $146.8 LIBOR + 250 basis points 2003 $146.8
UBS Term Loan II $326.7 LIBOR + 275 basis points 2004 $326.7
Fleet Term Note II $200.0 LIBOR + 400 basis points 2003 $200.0
iStar Financial Note $97.1 LIBOR + 175 basis points 2001 $ 97.1
----------
(1) All the amounts listed, other than the Fleet Term Note II, were repaid.
In May 2001, the Fleet Term Note II was modified and replaced by the
Fleet Fund I and II Term Loan.
Cash Flow Hedges
Crescent Real Estate uses derivative financial instruments to convert a
portion of its variable-rate debt to fixed-rate debt and to manage its fixed to
variable-rate debt ratio. As of September 30, 2002, Crescent Real Estate had
entered into six cash flow hedge agreements which are accounted for under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities -- an Amendment of FASB Statement No. 133".
259
The following table shows information regarding Crescent Real Estate's
cash flow hedge agreements as of September 30, 2002 and additional interest
expense and unrealized gains for the nine months ended September 30, 2002
(dollars in millions):
ADDITIONAL
INTEREST EXPENSE
FOR THE NINE UNREALIZED GAINS
MONTHS ENDED (LOSSES) IN OTHER
ISSUE NOTIONAL MATURITY REFERENCE FAIR SEPTEMBER 30, COMPREHENSIVE INCOME
DATE(1) AMOUNT DATE RATE MARKET VALUE 2002 AT SEPTEMBER 30, 2002
--------- -------- -------- --------- ------------ ---------------- ------------------------
7/21/99 $ 200.0 9/2/03 6.183% $(9.2) $6.4 $ 2.3
5/15/01 200.0 2/3/03 7.11% (4.2) 8.0 6.9
4/14/00 100.0 4/18/04 6.76% (7.8) 3.6 (0.5)
9/02/03 200.0 9/01/06 3.723% (3.0) -- (3.0)
2/15/03 100.0 2/15/06 3.253% (1.5) -- (1.5)
2/15/03 100.0 2/15/06 3.255% (1.5) -- (1.5)
(1) During the nine months ended September 30, 2002, Crescent Real Estate
entered into agreements for three additional cash flow hedges that will
be issued in 2003, and will replace the three existing cash flow
hedges.
Crescent Real Estate has designated its six cash flow hedge agreements
as cash flow hedges of LIBOR-based monthly interest payments on a designated
pool of variable rate LIBOR indexed debt that reprices closest to the reset
dates of each cash flow hedge agreement. For retrospective effectiveness
testing, Crescent Real Estate uses the cumulative dollar offset approach as
described in DIG Issue E8. The DIG is a task force designed to assist the FASB
in answering questions that companies have resulting from implementation of SFAS
No. 133 and SFAS 138. Crescent Real Estate uses the change in variable cash
flows method as described in DIG Issue G7 for prospective testing as well as for
the actual recording of ineffectiveness, if any. Under this method, Crescent
Real Estate will compare the changes in the floating rate portion of each cash
flow hedge to the floating rate of the hedged items. The cash flow hedges have
been and are expected to remain highly effective. Changes in the fair value of
these highly effective hedging instruments are recorded in accumulated other
comprehensive income. The effective portion that has been deferred in
accumulated other comprehensive income will be reclassified to earnings as
interest expense when the hedged items impact earnings. If a cash flow hedge
falls outside 80%-125% effectiveness for a quarter, all changes in the fair
value of the cash flow hedge for the quarter will be recognized in earnings
during the current period. If it is determined based on prospective testing that
it is no longer likely a hedge will be highly effective on a prospective basis,
the hedge will no longer be designated as a cash flow hedge and no longer
qualify for accounting in conformity with SFAS Nos. 133 and 138.
Over the next twelve months, an estimated $19.0 million to $20.7
million will be reclassified from accumulated other comprehensive income to
interest expense and charged against earnings related to the effective portions
of the cash flow hedge agreements.
Additionally, CRDI, a consolidated subsidiary of Crescent Real Estate,
also uses derivative financial instruments to convert a portion of its
variable-rate debt to fixed-rate debt. As of September 30, 2002, CRDI had
entered into three cash flow hedge agreements, which are accounted for in
conformity with SFAS Nos. 133 and 138.
260
The following table shows information regarding CRDI's cash flow hedge
agreements as of September 30, 2002 and additional capitalized interest for the
nine months ended September 30, 2002. Unlike the additional interest on Crescent
Real Estate's cash flow hedges which was expensed, the additional interest on
CRDI's cash flow hedges was capitalized, as it is related to debt for projects
that are currently under development. Capitalized interest is related to debt
for projects that are currently under development.
UNREALIZED GAINS (LOSSES)
ADDITIONAL INTEREST IN OTHER COMPREHENSIVE
FAIR EXPENSE FOR THE NINE INCOME FOR THE NINE
ISSUE NOTIONAL MATURITY REFERENCE MARKET MONTHS ENDED MONTHS ENDED SEPTEMBER
DATE AMOUNT DATE RATE VALUE SEPTEMBER 30, 2002 30, 2002
-------- -------- ---------- --------- ------ -------------------- -------------------------
1/2/2001 $15,538 11/16/2002 4.34% $(134) $366 $347
9/4/2001 5,350 9/4/2003 5.09% (125) 109 (5)
9/4/2001 3,700 9/4/2003 5.09% (94) 80 (7)
CRDI uses the shortcut method described in SFAS No. 133, which
eliminates the need to consider ineffectiveness of the hedges, and instead
assumes that the hedges are highly effective.
Interest Rate Caps
In connection with the closing of the Deutsche Bank-CMBS Loan in May
2001, Crescent Real Estate entered into a LIBOR interest rate cap struck at
7.16% for a notional amount of $220.0 million, and simultaneously sold a LIBOR
interest rate cap with the same terms. Since these instruments do not reduce
Crescent Real Estate's net interest rate risk exposure, they do not qualify as
hedges and changes to their respective fair values are charged to earnings. As
the significant terms of these arrangements are substantially the same, the
effects of a revaluation of these instruments are expected to substantially
offset each other.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Crescent Real Estate's use of financial instruments, such as debt
instruments, subject Crescent Real Estate to market risk which may affect
Crescent Real Estate's future earnings and cash flows as well as the fair value
of its assets. Market risk generally refers to the risk of loss from changes in
interest rates and market prices. Crescent Real Estate manages its market risk
by attempting to match anticipated inflow of cash from its operating, investment
and financing activities with anticipated outflow of cash to fund debt payments,
distributions to shareholders, investments, capital expenditures and other cash
requirements. Crescent Real Estate also enters into derivative financial
instruments such as interest rate swaps to mitigate its interest rate risk on a
related financial instrument or to effectively lock the interest rate on a
portion of its variable-rate debt.
The following discussion of market risk is based solely on hypothetical
changes in interest rates related to Crescent Real Estate's variable-rate debt.
This discussion does not purport to take into account all of the factors that
may affect the financial instruments discussed in this section.
Interest Rate Risk
Crescent Real Estate's interest rate risk is most sensitive to
fluctuations in interest rates on its short-term variable-rate debt. Crescent
Real Estate had total outstanding debt of approximately $2.4 billion at
September 30, 2002, of which approximately $225.8 million, or approximately
9.4%, was unhedged variable-rate debt. The weighted average interest rate on
such variable-rate debt was 4.00% as of September 30, 2002. A 10% (40.0 basis
point) increase in the weighted average interest rate on such variable-rate debt
would result in an annual decrease in net income and cash flows of approximately
$0.9 million based on the unhedged variable-rate debt outstanding as of
September 30, 2002, as a result of the increased interest expense associated
with the change in rate. Conversely, a 10% (40.0 basis point) decrease in the
weighted average interest rate on such unhedged variable-rate debt would result
in an annual increase in net income and cash flows of approximately $0.9 million
based on the unhedged variable rate debt outstanding as of September 30, 2002,
as a result of the decreased interest expense associated with the change in
rate.
261
Cash Flow Hedges
Crescent Real Estate uses derivative financial instruments to convert a
portion of its variable-rate debt to fixed-rate debt and to manage its fixed to
variable-rate debt ratio. As of September 30, 2002, Crescent Real Estate had
entered into six cash flow hedge agreements which are accounted for under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities - an Amendment of FASB Statement No. 133."
The following table shows information regarding Crescent Real Estate's
cash flow hedge agreements as of September 30, 2002, and additional interest
expense and unrealized gains for the nine months ended September 30, 2002
(dollars in millions):
ADDITIONAL
INTEREST
EXPENSE UNREALIZED GAINS
FOR THE NINE (LOSSES)
MONTHS ENDED IN OTHER COMPREHENSIVE
ISSUE NOTIONAL MATURITY REFERENCE FAIR SEPTEMBER 30, INCOME AT SEPTEMBER 30,
DATE(1) AMOUNT DATE RATE MARKET VALUE 2002 2002
------- -------- -------- --------- ------------ ------------- -----------------------
7/21/99 $200.0 9/2/03 6.183% $(9.2) $6.4 $ 2.3
5/15/01 200.0 2/3/03 7.11% (4.2) 8.0 7.0
4/14/00 100.0 4/18/04 6.76% (7.8) 3.6 (0.5)
9/02/03 200.0 9/01/06 3.723% (3.0) -- (3.0)
2/15/03 100.0 2/15/06 3.253% (1.5) -- (1.5)
2/15/03 100.0 2/15/06 3.255% (1.5) -- (1.5)
(1) During the nine months ended September 30, 2002, Crescent Real Estate
entered into agreements for three additional cash flow hedges that will be
issued in 2003, and will replace the three existing cash flow hedges.
Crescent Real Estate has designated its three cash flow hedge
agreements as cash flow hedges of LIBOR-based monthly interest payments on a
designated pool of variable-rate LIBOR indexed debt that reprices closest to the
reset dates of each cash flow hedge agreement. For retrospective effectiveness
testing, Crescent Real Estate uses the cumulative dollar offset approach as
described in Derivatives Implementation Group, or DIG, Issue E8. The DIG is a
task force designed to assist the FASB in answering questions that companies
have resulting from implementation of SFAS No. 133 and 138. Crescent Real Estate
uses the change in variable cash flows method as described in DIG Issue G7 for
prospective testing as well as for the actual recording of ineffectiveness, if
any. Under this method, Crescent Real Estate will compare the changes in the
floating rate portion of each cash flow hedge to the floating rate of the hedged
items. The cash flow hedges have been and are expected to remain highly
effective. Changes in the fair value of these highly effective hedging
instruments are recorded in accumulated other comprehensive income. The
effective portion that has been deferred in accumulated other comprehensive
income will be reclassified to earnings as interest expense when the hedged
items impact earnings. If a cash flow hedge falls outside 80%-125% effectiveness
for a quarter, all changes in the fair value of the cash flow hedge for the
quarter will be recognized in earnings during the current period. If it is
determined based on prospective testing that it is no longer likely a hedge will
be highly effective on a prospective basis, the hedge will no longer be
designated as a cash flow hedge and no longer qualify for accounting in
accordance with SFAS Nos. 133 and 138.
Over the next twelve months, an estimated $19.0 million to $20.7
million will be reclassified from accumulated other comprehensive income to
interest expense and charged against earnings related to the effective portions
of the cash flow hedge agreements.
262
Additionally, CRDI, one of Crescent Real Estate's consolidated
subsidiaries, also uses derivative financial instruments to convert a portion of
its variable-rate debt to fixed-rate debt. As of September 30, 2002, CRDI had
entered into three cash flow hedge agreements, which are accounted for in
conformity with SFAS Nos. 133 and 138.
The following table shows information regarding CRDI's cash flow hedge
agreements as of June 30, 2002 and additional capitalized interest for the nine
months ended September 30, 2002. Capitalized interest is related to debt for
projects that are currently under development.
ADDITIONAL
CAPITALIZED
INTEREST UNREALIZED GAINS (LOSSES)
EXPENSE FOR THE NINE IN OTHER COMPREHENSIVE
FAIR MONTHS INCOME FOR THE NINE
ISSUE NOTIONAL MATURITY REFERENCE MARKET ENDED SEPTEMBER 30, MONTHS ENDED SEPTEMBER
DATE AMOUNT DATE RATE VALUE 2002 30, 2002
-------- -------- ---------- --------- ------ -------------------- -------------------------
1/2/2001 $18,868 11/16/2002 4.34% $(134) $366 $347
9/4/2001 5,350 9/4/2003 5.09% (125) $109 (5)
9/4/2001 3,700 9/4/2003 5.09% $ (94) $ 80 (7)
CRDI uses the shortcut method described in SFAS No. 133, which
eliminates the need to consider ineffectiveness of the hedges, and instead
assumes that the hedges are highly effective.
PRICE RANGE OF CRESCENT OPERATING COMMON
STOCK, DIVIDENDS AND RELATED STOCKHOLDER
MATTERS
Effective June 12, 1997, shares of Crescent Operating's common stock
were distributed to shareholders of Crescent Real Estate and unit holders of
Crescent Partnership of record on May 30, 1997. For Crescent Real Estate
shareholders, the distribution was made on the basis of one share of Crescent
Operating common stock for every 10 common shares of beneficial interest of
Crescent Real Estate held on the record date, and for limited partners of
Crescent Partnership, the distribution was made on the basis of one share of
Crescent Operating common stock for every 5 units of limited partnership
interest held on the record date. Crescent Operating's common stock, $0.01 par
value per share, began trading on the OTC Bulletin Board on June 13, 1997.
Effective September 8, 1997, Crescent Operating's common stock was listed on the
NASDAQ National Market under the symbol "COPI" and effective April 27, 2000,
Crescent Operating's shares again began trading on the OTC Bulletin Board
because Crescent Operating's shares became ineligible for continued NASDAQ
listing.
263
The following table reflects the high and low bid prices of Crescent
Operating's common stock for each calendar quarter indicated.
PRICE
---------------------
HIGH LOW
-------- --------
2003
First Quarter
(through January 14) $ 0.19 $ 0.19
2002
First Quarter $ 0.43 $ 0.01
Second Quarter 0.45 0.35
Third Quarter 0.41 0.18
Fourth Quarter 0.28 0.18
2001
First Quarter $ 1.63 $ 0.63
Second Quarter 1.25 0.65
Third Quarter 0.73 0.25
Fourth Quarter 0.26 0.03
2000
First Quarter $ 3.69 $ 2.06
Second Quarter 2.75 1.25
Third Quarter 1.75 1.19
Fourth Quarter 1.13 0.45
As of December 31, 2002, there were approximately 180 holders of
record of Crescent Operating's common stock. No cash dividends have been
declared or paid in respect of Crescent Operating's common stock. In addition,
the Settlement Agreement limits Crescent Operating's ability to incur additional
indebtedness, incur liens, pay dividends or make certain other restrictive
payments.
264
PRICE RANGE OF CRESCENT REAL ESTATE COMMON
SHARES, DIVIDENDS AND RELATED SHAREHOLDER
MATTERS
Crescent Real Estate's common shares have been traded on the New York
Stock Exchange under the symbol "CEI" since the completion of its initial public
offering at a price of $12.50 per share in May 1994. For each calendar quarter
indicated, the following table reflects the high and low sales prices during the
quarter for the common shares and the distributions per share declared by
Crescent Real Estate with respect to each quarter.
PRICE
--------------------------
HIGH LOW DISTRIBUTIONS
--------- --------- -------------
2003
First Quarter
(through January 14) $ 17.00 $ 16.11 --
2002
First Quarter $ 19.60 $ 16.87 $ 0.375
Second Quarter 20.01 18.50 0.375
Third Quarter 18.96 14.25 0.375
Fourth Quarter 17.14 13.18 0.375
2001
First Quarter $ 23.56 $ 20.90 $ 0.55
Second Quarter 25.24 22.26 0.55
Third Quarter 25.09 18.75 0.375 (1)
Fourth Quarter 21.58 16.30 0.375 (1)
2000
First Quarter $ 19.75 $ 15.75 $ 0.55
Second Quarter 22.19 16.94 0.55
Third Quarter 23.19 20.69 0.55
Fourth Quarter 23.44 19.50 0.55
----------
(1) On October 17, 2001, Crescent Real Estate announced that its quarterly
distribution would be reduced from $0.55 per common share, or an annualized
distribution of $2.20 per common share, to $0.375 per common share, or an
annualized distribution of $1.50 per common share.
As of December 31, 2002, there were approximately 937 holders of record of the
common shares.
DISTRIBUTION POLICY
The actual results of operations of Crescent Real Estate and the
amounts actually available for distribution will be affected by a number of
factors, including:
- the operating and interest expenses of Crescent Real Estate;
- the ability of tenants to meet their rent obligations;
- general leasing activity in the markets in which the office
properties are located;
- consumer preferences relating to the Crescent Real Estate
hotel properties;
- cash flows from unconsolidated entities;
- the general condition of the United States economy;
- federal, state and local taxes payable by Crescent Real
Estate;
- capital expenditure requirements; and
- the adequacy of cash reserves.
Future distributions by Crescent Real Estate will be at the discretion
of the Board of Trust Managers. The Board of Trust Managers has indicated that
it will review the adequacy of Crescent Real Estate's distribution rate on a
quarterly basis.
Under the Internal Revenue Code, REITs are subject to numerous
organizational and operational requirements, including the requirement to
distribute at least 90% of REIT taxable income each year
265
(95% in 2000 and prior years). Pursuant to this requirement, Crescent Real
Estate was required to distribute $111.7 million and $166.1 million for 2001 and
2000, respectively. Actual distributions by Crescent Real Estate were $245.1
million and $281.2 million for 2001 and 2000, respectively.
Distributions by Crescent Real Estate to the extent of its current and
accumulated earnings and profits for federal income tax purposes generally will
be taxable to a shareholder as ordinary dividend income. Distributions in excess
of current and accumulated earnings and profits will be treated as a nontaxable
reduction of the shareholder's basis in such shareholder's shares, to the extent
thereof, and thereafter as a capital gain. Distributions that are treated as a
reduction of the shareholder's basis in its shares will have the effect of
deferring taxation until the sale of the shareholder's shares. No assurances can
be given regarding what portion, if any, of distributions in 2002 or subsequent
years will constitute a return of capital for federal income tax purposes.
On October 17, 2001, Crescent Real Estate announced that its quarterly
distribution would be reduced from $0.55 per common share, or an annualized
distribution of $2.20 per common share, to $0.375 per common share, or an
annualized distribution of $1.50 per common share.
Following is the income tax status of distributions paid during the
years ended December 31, 2001 and 2000 to common shareholders:
2001 2000
------ ------
Ordinary dividend 50.3% 51.5%
Capital gain -- 6.4%
Return of capital 49.7% 35.9%
Unrecaptured Section 1250 Gain -- 6.2%
Distributions on the 8,000,000 6-3/4% Series A Convertible Cumulative
Preferred Shares issued by Crescent Real Estate in February 1998 are payable at
the rate of $1.6875 per annum per Series A Convertible Cumulative Preferred
Share, prior to distributions on the common shares.
Following is the income tax status of distributions paid during the
years ended December 31, 2001 and 2000 to preferred shareholders:
2001 2000
------ ------
Ordinary dividend 100.0% 83.7%
Capital gain -- 8.2%
Unrecaptured Section 1250 Gain -- 8.1%
266
SHARE OWNERSHIP BY PRINCIPAL STOCKHOLDERS,
MANAGEMENT AND DIRECTORS OF CRESCENT
OPERATING
The following table sets forth, as of December 31, 2002, unless
otherwise indicated, information regarding beneficial ownership of shares of
Crescent Operating common stock by (i) the sole director of Crescent Operating,
(ii) the sole executive officer of Crescent Operating, (iii) each person known
by Crescent Operating to beneficially own more than 5% of the Crescent Operating
common stock, and (iv) all directors and executive officers of Crescent
Operating as a group. Unless otherwise noted below, each person or entity named
in the table has sole voting power and sole investment power with respect to
each of the shares beneficially owned by such person or entity.
BENEFICIAL OWNERSHIP
Name and Address of Beneficial Owner Number of Shares Percent of Outstanding Shares (8)
------------------------------------ ---------------- ---------------------------------
Jeffrey L. Stevens (1)(2) 207,800(3) 1.9%
777 Main Street, Suite 1240
Fort Worth, Texas 76102
Richard E. Rainwater 1,253,714(4) 11.5%
777 Main Street, Suite 2250
Fort Worth, Texas 76102
Performance Capital Group, LLC 1,073,339(5) 9.9%
14 Wall Street, 27th Floor
New York, New York 10005
John C. Goff 748,121(6) 6.6%
777 Main Street, Suite 2100
Fort Worth, Texas 76102
Magten Asset Management Corp. 670,300(7) 6.2%
35 East 21st Street
New York, New York 10010
All Directors and Executive Officers 207,800(3) 1.9%
As a Group (one person)
----------
(1) Indicates a director of Crescent Operating.
(2) Indicates an executive officer of Crescent Operating.
(3) Includes 5,000 restricted shares issued pursuant to Crescent
Operating's Amended Stock Incentive Plan, all of which have vested,
that is, the restrictions on the shares have lapsed. Also includes
202,800 shares underlying stock options issued pursuant to the Amended
Plan or the Management Stock Incentive Plan, all of which are vested.
(4) Includes 45,178 shares beneficially owned by Ms. Darla D. Moore, who is
Mr. Rainwater's spouse. However, Mr. Rainwater disclaims beneficial
ownership with respect to all shares owned by his spouse. Includes
854,146 shares owned indirectly by Mr. Rainwater, including (i) 10,520
shares owned by Rainwater, Inc., a Texas corporation, of which Mr.
Rainwater is a director and the sole owner; (ii) 624,224 shares owned
by Office Towers LLC, a Nevada limited liability company, of which Mr.
Rainwater and Rainwater, Inc. own an aggregate 100% interest; and (iii)
219,402 shares owned by The Richard E. Rainwater 1995 Charitable
Remainder Unitrust No. 1, of which Mr. Rainwater is the sole trustee.
Also includes 116,562 shares underlying a stock option which have
vested.
(5) Based on the Form 4 filed by Performance Capital Group, LLC, on October
1, 2002 and correspondence with Performance Capital Group and its
representatives. Crescent Operating learned in August 2002 that
Performance Capital Group had acquired more than 10% of Crescent
Operating's common stock, as reflected in the Schedule 13G filed by
Performance Capital Group on August 9, 2002. Ownership of more than 10%
of Crescent Operating common stock exceeds the "poison pill" threshold
found in Crescent Operating's Preferred Share Purchase Rights
Agreement, and triggers certain events under that Agreement. Upon
inquiry, it became immediately clear that Performance Capital Group had
inadvertently exceeded the poison pill threshold and Performance
Capital Group promptly undertook to sell down below the 10% threshold,
as evidenced by the Form 4 filed by Performance Capital Group, LLC, on
October 1, 2002. Accordingly, the board of directors of COPI, acting in
accordance with the Preferred Share Purchase Rights Agreement, has
determined that Performance Capital Group's acquisitions did not
trigger any events under that Agreement.
(6) Based solely on the Schedule 13D as amended through the amendment dated
January 6, 2003, filed by John C. Goff, includes 15,256 shares owned by
Goff Family, L.P., a Delaware limited partnership, of which Mr. Goff is
a general partner, and 61 shares held for Mr. Goff's benefit in
Crescent Operating's 401(k) plan. Mr. Goff disclaims beneficial
ownership with respect to all shares owned by Goff Family, L.P. in
excess of his pecuniary interest in the partnership. Also includes
549,190 shares underlying stock options all of which are vested.
(7) Based solely on the Schedule 13G as amended through the amendment dated
February 8, 2002, filed by Magten Asset Management Corp., it is
Crescent Operating's understanding that (i) Magten is an investment
advisor; and (ii) Magten has shared, but no sole, voting power and
dispositive power with respect to all of the reported shares.
(8) Except where specifically noted, the percentage of Crescent Operating
common stock a person beneficially owns is based on 10,828,497
outstanding shares and assumes that (i) as to any person listed in this
table, all stock options exercisable and (ii) as to all other persons,
no stock options are exercised.
267
CRESCENT REAL ESTATE MANAGEMENT AND
ADDITIONAL INFORMATION
Crescent Real Estate's Board of Trust Managers and executive officers
will not change as a result of consummation of the reorganization transactions.
The Board of Trust Managers currently consists of nine members, divided into
three classes serving staggered three-year terms.
Set forth below is information with respect to the current nine trust
managers of Crescent Real Estate and the executive officers of Crescent Real
Estate.
Name Term Expires Age Position
Richard E. Rainwater 2003 58 Chairman of the Board of Trust Managers
of Crescent Real Estate
John C. Goff 2005 47 Vice Chairman of the Board of Trust
Managers of Crescent Real Estate, Chief
Executive Officer of Crescent Real
Estate and the General Partner, and
Sole Director of the General Partner
Dennis H. Alberts 2004 53 Trust Manager of Crescent Real Estate
and President and Chief Operating
Officer of Crescent Real Estate and the
General Partner
Anthony M. Frank 2003 71 Trust Manager of Crescent Real Estate
William F. Quinn 2003 54 Trust Manager of Crescent Real Estate
Paul E. Rowsey, III 2005 48 Trust Manager of Crescent Real Estate
David M. Sherman 2004 45 Trust Manager of Crescent Real Estate
Robert W. Stallings 2005 53 Trust Manager of Crescent Real Estate
Terry N. Worrell 2004 58 Trust Manager of Crescent Real Estate
David M. Dean N/A 42 Executive Vice President, Law and
Administration and Secretary of
Crescent Real Estate and the General
Partner
Jane E. Mody N/A 51 Executive Vice President, Capital
Markets of Crescent Real Estate and the
General Partner
268
Kenneth S. Moczulski N/A 50 President of Investments and Chief
Investment Officer of Crescent Real
Estate and the General Partner
Jerry R. Crenshaw, Jr. N/A 39 Executive Vice President, Chief Financial
and Accounting Officer of Crescent Real
Estate and Senior Vice President and
Chief Financial Officer of the General
Partner
Jane B. Page N/A 42 Senior Vice President, Asset Management
and Leasing, Houston Region of the
General Partner
John L. Zogg, Jr. N/A 39 Senior Vice President, Asset Management
and Leasing, Dallas Region, of the
General Partner
Christopher T. Porter N/A 36 Vice President and Treasurer of
Crescent Real Estate and the General
Partner
The following is a summary of the experience of the current trust
managers and the current executive officers.
Richard E. Rainwater has been an independent investor since 1986. From 1970 to
July 1986, he served as the chief investment advisor to the Bass family, whose
overall wealth increased dramatically during his tenure. During that time, Mr.
Rainwater was principally responsible for numerous major corporate and real
estate acquisitions and dispositions. Upon beginning his independent investment
activities, he founded ENSCO International Incorporated, an oil field service
and offshore drilling company, in December 1986. Additionally, in June 1988 he
co-founded Columbia Hospital Corporation, and in March 1989 he participated in a
management-led buy out of HCA-Hospital Corporation of America. In November 1992,
Mr. Rainwater co-founded Mid Ocean Limited, a provider of casualty re-insurance.
In February 1994, he assisted in the merger of Columbia Hospital Corporation and
HCA-Hospital Corporation of America that created Columbia/HCA Healthcare
Corporation. Mr. Rainwater also served as Chairman of the Board of Directors of
Crescent Operating from June 1997 until February 2002. Mr. Rainwater is a
graduate of the University of Texas at Austin and the Graduate School of
Business at Stanford University. Mr. Rainwater has served as the Chairman of the
Board of Trust Managers since Crescent Real Estate's inception in 1994.
John C. Goff co-founded Crescent Real Estate with Mr. Richard Rainwater while
serving as principal of Rainwater, Inc. Mr. Goff served as Chief Executive
Officer and as a trust manager from Crescent Real Estate's inception in February
1994 through December 1996, when he became Vice Chairman. In June 1999, Mr. Goff
returned as Chief Executive Officer of Crescent Real Estate and remains as Vice
Chairman. Mr. Goff served as Vice Chairman of the Board of Directors of Crescent
Operating from its inception in June 1997 until February 2002. He became the
Chief Executive Officer of Crescent Operating in June 1999. Mr. Goff has served
as the managing Principal of Goff Moore Strategic Partners, L.P., a private
investment partnership since its formation in February 1998. From June 1987 to
May 1994, Mr. Goff was Vice President of Rainwater, Inc. Prior to joining
Rainwater Inc., Mr. Goff was employed by KPMG Peat Marwick, with Mr. Rainwater
as one of his principal clients. Mr. Goff also serves on the boards of Gainsco,
Inc., The Staubach Company, OpenConnect Systems, Inc., Texas Capital Bancshares,
Inc. and The National Association of Real Estate Investment Trusts. Mr. Goff is
a graduate of the University of Texas and is a Certified Public Accountant.
269
Dennis H. Alberts, prior to joining Crescent Real Estate, served as President
and Chief Executive Officer of Pacific Retail Trust, a privately held retail
shopping center REIT, which he founded in 1993. While at Pacific Retail Trust,
Mr. Alberts directed all aspects the company, including acquisition, development
and operational activities, from 1993 until 1999 when Pacific Retail Trust
merged into Regency Realty, Inc., a publicly traded REIT. In 1999, Mr. Alberts
also served as a consultant to Regency Realty, Inc. Prior to founding Pacific
Retail Trust, Mr. Alberts served as President and Chief Operating Officer of
First Union Real Estate Investments, a publicly held retail, multi-family and
office REIT, in 1992. From 1987 to 1991, Mr. Alberts served as President and
Chief Executive Officer of Rosewood Property Company where he focused on asset
management and leasing of Rosewood's office portfolio. Before joining Rosewood
Property Company, he served as President and Managing Partner of Trammell Crow
Residential Companies of Dallas from 1984 to 1987. Mr. Alberts holds a Bachelor
of Science degree and Master of Business Administration degree from the
University of Missouri. Mr. Alberts joined Crescent Real Estate in April 2000 as
President and Chief Operating Officer. In May 2002, Mr. Alberts was elected to
serve as a trust manager by the six members of the Board of Trust Managers then
comprising the Board.
Anthony M. Frank currently serves as Chairman of Belvedere Capital Partners,
general partner of the California Community Financial Institutions Fund LP. From
March 1988 to March 1992, he served as Postmaster General of the United States.
From April 1992 until June 1993, he served as the founding chairman of
Independent Bancorp of Arizona. Mr. Frank has also served as a Director of:
Temple Inland, Inc., a manufacturer of paper and timber products, since May
1992; Bedford Property Investors, Inc., an office and commercial property REIT
investing primarily on the West Coast, since May 1992; Charles Schwab & Co., one
of the nation's largest discount brokerages, since July 1993; Cotelligent, Inc.,
a provider of temporary office support services, since May 1995; and Crescent
Operating from June 1997 until February 2002. Mr. Frank received a Bachelor of
Arts degree from Dartmouth College and a Master of Business Administration
degree from the Amos Tuck School of Business at Dartmouth.
William F. Quinn has served as President of AMR Investment Services, Inc., the
investment services affiliate of American Airlines, with responsibility for the
management of pension and short-term fixed income assets, since November 1986.
Prior to being named to his current positions in 1986, Mr. Quinn held several
management positions with American Airlines and its subsidiaries. He has served
as Chairman of the Board of American Airlines Federal Credit Union since
November 1989, President and Trustee of the American AAdvantage Funds since July
1987, and has served on the advisory board for Southern Methodist University's
Endowment Fund since September 1996. Mr. Quinn holds a Bachelor of Science
degree in accounting from Fordham University and is a Certified Public
Accountant.
Paul E. Rowsey, III, has served as President of Eiger, Inc., a private real
estate investment management and investment firm, and the manager of Eiger Fund
I, L.P., a real estate equity investment fund, since their formation in January
1999. He was formerly President and a member of the Board of Directors of
Rosewood Property Company, a real estate investment company, a position he held
from February 1988 until December 1998. Mr. Rowsey has served as a member of the
Board of Directors of ENSCO International Incorporated, an offshore drilling
company, since January 2000 and of Crescent Operating from June 1997 until
February 2002. Mr. Rowsey began his career in 1980 as an attorney specializing
in commercial real estate. Mr. Rowsey holds a Bachelor of Arts degree from Duke
University and a Juris Doctor degree from Southern Methodist University School
of Law.
David M. Sherman serves as President of D. Sherman & Company, Inc., a firm
founded and wholly owned by Mr. Sherman which provides services to public real
estate companies. In addition, he is as an adjunct professor of real estate at
Columbia University Graduate School of Business Administration. Prior to being
named to his current positions in February 2000 and beginning in 1995, Mr.
Sherman was the Managing Director, Senior Analyst and Head of the REIT Equity
Research Team at Salomon Smith
270
Barney, Inc. In addition, Mr. Sherman has served on the Board of Trustees, as
well as the audit committee, for Keystone Property Trust, a fully integrated
REIT and one of the largest owners and developers of industrial properties in
the Eastern United States, since June 2000. He also has served as a member of
the advisory committee for the Primus Fund, a REIT fund. Mr. Sherman holds a
Bachelor of Arts degree in Math/Economics from Brown University and a Master of
Business Administration degree in Finance from Columbia University Graduate
School of Business Administration.
Robert W. Stallings currently serves as Chairman and President of Stallings
Capital Group, Inc., a Dallas-based merchant banking firm specializing in the
financial services industry. In addition, he is non-executive Chairman of
Gainsco, Inc., for whom he also provides consulting services. Mr. Stallings also
serves as a director of Texas Capital Bank. He is the recently-retired Chairman
and founder of ING Pilgrim Capital Corporation, a $20 billion asset management
firm which was acquired by ING Group in September 2000 and with which he had
been associated since 1991. Mr. Stallings received a Bachelor of Arts degree in
Business from Johnson & Wales University. Mr. Stallings was elected to serve as
a trust manager in June 2002.
Terry N. Worrell has been a private investor in commercial properties and other
business ventures with Worrell Investments since 1989. From 1974 to 1989, he
served as President and Chief Executive Officer of Sound Warehouse of Dallas,
Inc. prior to its purchase by Shamrock Holdings. Mr. Worrell serves as a
director of Regency Centers Corp., a developer/operator of shopping centers and
Tremont Corp., a holding company with operations conducted primarily through NL
Industries and Titanium Metals. Mr. Worrell received a Master of Business
Administration degree from the University of North Texas. In May 2002, Mr.
Worrell was elected to serve as a trust manager by the six members of the Board
of Trust Managers comprising the Board.
David M. Dean, prior to joining Crescent Real Estate, was an attorney for
Burlington Northern Railroad Company from 1992 to 1994, and he served as
Assistant General Counsel in 1994. At Burlington Northern, he was responsible
for the majority of that company's transactional and general corporate legal
work. Mr. Dean was previously engaged in the private practice of law from 1986
to 1990 with Kelly, Hart & Hallman, and from 1990 to 1992 with Jackson & Walker,
L.L.P., where he worked primarily on acquisition, financing and venture capital
transactions for Mr. Rainwater and related investor groups. Mr. Dean graduated
with honors from Texas A&M University with Bachelor of Arts degrees in English
and philosophy in 1983. He also holds a Juris Doctor degree and a Master of Laws
degree in taxation from Southern Methodist University School of Law. Mr. Dean
served as Senior Vice President, Law, and Secretary from the time he joined
Crescent Real Estate in August 1994 to September 1999 when he became Senior Vice
President, Law and Administration and Secretary, a position which he held until
January 2001. Since January 2001, Mr. Dean has served as Executive Vice
President, Law and Administration and Secretary.
Jane E. Mody, prior to joining Crescent Real Estate, served as Vice President of
Goldman, Sachs & Co. from February 2000 to February 2001. While at Goldman,
Sachs & Co., Ms. Mody worked with the real estate merchant banking division and
was responsible for fund reporting for nine real estate opportunity funds. She
served as Managing Director and Chief Financial Officer of Pacific Retail Trust,
a private real estate investment trust, which she co-founded, from December 1993
until February 1999 when Pacific Retail Trust merged into Regency Realty, Inc.,
a publicly traded REIT. From February 1999 to August 1999 Ms. Mody served as a
consultant to Regency Realty, Inc. Prior to co-founding Pacific Retail Trust,
Ms. Mody served as Executive Vice President of Rosewood Property Company, a real
estate investment company, from April 1988 to December 1993. Ms. Mody graduated
from Austin College with a Bachelor of Arts degree and holds a Masters of
Business Administration degree in International Business from the University of
Dallas. Ms. Mody has served as Executive Vice President, Capital Markets of
Crescent Real Estate and the General Partner since February 2001.
271
Kenneth S. Moczulski, prior to joining Crescent Real Estate, served as President
of Transworld Properties, Inc., a subsidiary of a privately held international
oil company, which he founded in January 1992. While at Transworld Properties,
Inc., Mr. Moczulski was responsible for the formation and implementation of real
estate investment strategy, as well as management of on-going real estate
development, asset management, and dispositions. Prior to founding Transworld
Properties, Inc., Mr. Moczulski served as Vice President of Jaymont Properties
in New York from April 1987 to December 1991, where he was responsible, on a
national basis, for all acquisition and disposition activities. From February
1979 to March 1987, Mr. Moczulski served as Development Manager for a number of
commercial developments for Gerald D. Hines Interests. Mr. Moczulski holds a
Bachelor of Science degree in Civil Engineering from the University of
Cincinnati and a Master of Business Administration degree from Harvard Graduate
School of Business. Mr. Moczulski has served as President of Investments and
Chief Investment Officer since November 2000.
Jerry R. Crenshaw, Jr., prior to joining Crescent Real Estate, was the
Controller of Carrington Laboratories, Inc., a pharmaceutical and medical device
company, from 1991 until February 1994. From 1986 until 1991, Mr. Crenshaw was
an audit senior in the real estate services group of Arthur Andersen LLP. Mr.
Crenshaw holds a Bachelor of Business Administration degree in accounting from
Baylor University and is a Certified Public Accountant. Mr. Crenshaw served as
Controller from Crescent Real Estate's inception in 1994 to March 1997 when he
became Vice President and served as Vice President, Controller until December
1998 and Vice President, Finance until September 1999. In addition, Mr. Crenshaw
served as Interim Co-Chief Financial Officer from August 1998 until April 1999.
From September 1999 until October 2002 Mr. Crenshaw served as Senior Vice
President and Chief Financial Officer. Since October 2002, Mr. Crenshaw has
served as Executive Vice President and Chief Financial Officer.
Jane B. Page, prior to joining Crescent Real Estate, was employed by
Metropolitan Life Real Estate Investments from July 1984 to January 1998,
holding positions of director of corporate property management and regional
asset manager of Metropolitan's institutional portfolio in Houston, Austin and
New Orleans. Ms. Page's 14-year tenure at Metropolitan also included membership
on Metropolitan's Investment Committee, which reviewed and approved all
significant transactions on a national basis. Ms. Page serves on the Boards of
the Greater Houston Partnership, Central Houston, Inc. and the Downtown Houston
Management District. Ms. Page graduated with a Bachelor of Arts degree from
Point Loma College in San Diego and with a Master of Business Administration
degree from the University of San Francisco. She also holds Certified Commercial
Investments Manager and Certified Property Manager designations. Ms. Page served
as Director of Asset Management, Houston Region from the time she joined
Crescent Real Estate in January 1998 to December 1998, when she became Vice
President, Houston Region Asset Management and served in that capacity until
September 1999 when she became Vice President, Asset Management, Houston Region.
Since May 2000, Ms. Page has served as Senior Vice President, Asset Management
and Leasing, Houston Region.
John L. Zogg, Jr. served as Vice President of the commercial real estate group
of Rosewood Property Company, responsible for marketing and leasing office space
in the Dallas and Denver areas, from January 1989 to May 1994. For three years
prior to joining Rosewood Property Company, Mr. Zogg worked as Marketing Manager
of Gerald D. Hines Interests, responsible for office leasing in the Dallas
metropolitan area from June 1985 to January 1988. He graduated from the
University of Texas at Austin with a Bachelor of Arts degree in economics and
holds a Master of Business Administration degree from the University of Dallas.
Mr. Zogg joined Crescent Real Estate as a Vice President in May 1994 and served
as Vice President, Leasing and Marketing, from June 1997 to September 1999 when
he became Vice President, Leasing/Marketing, Southwest Region. Since May 2000,
Mr. Zogg has served as Senior Vice President, Asset Management and Leasing,
Dallas Region.
272
Christopher T. Porter, prior to joining Crescent Real Estate, held the office of
Senior Vice President, Investor Relations, for Associates First Capital
Corporation, a leading financial services firm, from January 1999 through
October 1999. Prior to 1999, Mr. Porter served as Vice President and Assistant
Treasurer in banking relations and cash management at Associates First Capital
Corporation from November 1991 through January 1998. Mr. Porter received a
Bachelor of Science degree in economics from the University of Texas at Austin
and a Master of Business Administration degree in finance from the University of
North Texas and is a certified cash manager. Mr. Porter has served as Vice
President and Treasurer since December 1999
Certain information regarding the executive compensation, various
benefit plans (including stock option plans), voting securities and the
principal holders thereof, certain relationships and related transactions and
other matters related to Crescent Real Estate is incorporated by reference or
set forth in Crescent Real Estate's Annual Report on Form 10-K for the year
ended December 31, 2000. Stockholders of Crescent Operating desiring copies of
these documents may obtain them free of charge by contacting Crescent Real
Estate at its address or telephone number indicated under the section entitled
"Where You Can Find More Information."
DESCRIPTION OF CAPITAL STOCK OF CRESCENT
REAL ESTATE
DESCRIPTION OF CRESCENT REAL ESTATE COMMON SHARES
General
The declaration of trust of Crescent Real Estate authorizes the
Crescent Real Estate Board of Trust Managers to issue up to 250,000,000 Crescent
Real Estate common shares, as well as 250,000,000 excess shares, par value $0.01
per share, issuable in exchange for Crescent Real Estate common shares as
described below at " -- Ownership Limits and Restrictions on Transfer." The
Crescent Real Estate common shares are listed on the NYSE under the symbol
"CEI." Subject to such preferential rights as may be granted by the Crescent
Real Estate Board of Trust Managers in connection with the future issuance of
preferred shares, holders of Crescent Real Estate common shares are entitled to
one vote per share on all matters to be voted on by shareholders and are
entitled to receive ratably such distributions as may be declared on the
Crescent Real Estate common shares by the Crescent Real Estate Board of Trust
Managers in its discretion from funds legally available therefore. In the event
of the liquidation, dissolution or winding up of Crescent Real Estate, holders
of Crescent Real Estate common shares are entitled to share ratably in all
assets remaining after payment of all debts and other liabilities and any
liquidation preference of the holders of preferred shares. Holders of Crescent
Real Estate common shares have no subscription, redemption, conversion or
preemptive rights. Matters submitted for shareholder approval generally require
a majority vote of the shares present and voting thereon.
Ownership Limits and Restrictions on Transfer
For Crescent Real Estate to qualify as a REIT under the Internal
Revenue Code (i) not more than 50% in value of outstanding equity shares may be
owned, directly or indirectly, by five or fewer individuals (as defined in the
Internal Revenue Code to include certain entities) during the last half of a
taxable year; (ii) the equity shares must be beneficially owned by 100 or more
persons during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year; and (iii) certain percentages of
Crescent Real Estate's gross income must come from certain activities.
273
To ensure that five or fewer individuals do not own more than 50% in
value of the outstanding equity shares, the declaration of trust provides
generally that no holder may own, or be deemed to own by virtue of certain
attribution provisions of the Internal Revenue Code, more than the common share
ownership limit of 8.0% of the outstanding common shares or more than the
preferred shares Ownership Limit of 9.9% of the outstanding preferred shares. In
addition, the declaration of trust separately provides that Mr. Rainwater, the
Chairman of the Crescent Real Estate Board of Trust Managers, and certain
related persons together may own, or be deemed to own, by virtue of certain
attribution provisions of the Internal Revenue Code, up to the existing holder
Ownership Limit of 8.0% of the outstanding shares. The Crescent Real Estate
Board of Trust Managers, upon receipt of a ruling from the Internal Revenue
Service, an opinion of counsel, or other evidence satisfactory to the Crescent
Real Estate Board of Trust Managers, in its sole discretion, may waive or
change, in whole or in part, the application of the Ownership Limit with respect
to any person that is not an individual (as defined in section 542(a)(2) of the
Internal Revenue Code). In connection with any such waiver or change, the
Crescent Real Estate Board of Trust Managers may require such representations
and undertakings from such person or affiliates and may impose such other
conditions, as the Crescent Real Estate Board of Trust Managers deems necessary,
advisable or prudent, in its sole discretion, to determine the effect, if any,
of the proposed transaction or ownership of equity shares on Crescent Real
Estate's status as a REIT for federal income tax purposes.
In addition, the Crescent Real Estate Board of Trust Managers, from
time to time, may increase the common shares Ownership Limit or the existing
holder Ownership Limit, except that (i) neither the common shares Ownership
Limit nor the existing holder Ownership Limit may be increased and no additional
limitations may be created if, after giving effect thereto, Crescent Real Estate
would be "closely held" within the meaning of section 856(h) of the Internal
Revenue Code, (ii) the common shares Ownership Limit may not be increased to a
percentage that is greater than 9.9%, and (iii) the existing holder limit may
not be increased to a percentage that is greater than 9.5%. Under the
declaration of trust, the preferred shares Ownership Limit may not be increased.
The Crescent Real Estate Board of Trust Managers may reduce the existing holder
Ownership Limit, with the written consent of Mr. Rainwater, after any transfer
permitted by the declaration of trust. Prior to any modification of the common
share Ownership Limit or the existing holder Ownership Limit, the Crescent Real
Estate Board of Trust Managers will have the right to require such opinions of
counsel, affidavits, undertakings or agreements as it may deem necessary,
advisable or prudent, in its sole discretion, in order to determine or ensure
Crescent Real Estate's status as a REIT.
Under the declaration of trust, the Ownership Limits will not be
automatically removed even if the REIT provisions of the Internal Revenue Code
are changed so as to no longer contain any ownership concentration limitation or
if the ownership concentration limit is increased.
In addition to preserving Crescent Real Estate's status as a REIT for
federal income tax purposes, the Ownership Limit may prevent any person or small
group of persons from acquiring control of Crescent Real Estate.
The declaration of trust of Crescent Real Estate also provides that if
an issuance, transfer or acquisition of equity shares (i) would result in a
holder exceeding the Ownership Limit, (ii) would cause Crescent Real Estate to
be beneficially owned by less than 100 persons, (iii) would result in Crescent
Real Estate being "closely held" within the meaning of section 856(h) of the
Internal Revenue Code or (iv) would otherwise result in Crescent Real Estate
failing to qualify as a REIT for federal income tax purposes, such issuance,
transfer or acquisition shall be null and void to the intended transferee or
holder, and the intended transferee or holder will acquire no rights to the
shares. Pursuant to the declaration of trust, equity shares owned, transferred
or proposed to be transferred in excess of the Ownership Limit or which would
otherwise jeopardize Crescent Real Estate's status as a REIT under the Internal
Revenue
274
Code will automatically be converted to excess shares. A holder of excess shares
is not entitled to distributions, voting rights and other benefits with respect
to such shares except the right to payment of the purchase price for the shares
and the right to certain distributions upon liquidation. Any dividend or
distribution paid to a proposed transferee on excess shares pursuant to Crescent
Real Estate's declaration of trust will be required to be repaid to Crescent
Real Estate upon demand. Excess shares will be subject to repurchase by Crescent
Real Estate at its election. The purchase price of any excess shares will be
equal to the lesser of (i) the price in such proposed transaction or (ii) either
(a) if the shares are then listed on the NYSE, the fair market value of such
shares reflected in the average closing sales prices for the shares on the 10
trading days immediately preceding the date on which Crescent Real Estate or its
designee determines to exercise its repurchase right; or (b) if the shares are
not then so listed, such price for the shares on the principal exchange
(including the Nasdaq National Market) on which such shares are listed; or (c)
if the shares are not then listed on a national securities exchange, the latest
quoted price for the shares; or (d) if not quoted, the average of the high bid
and low asked prices if the shares are then traded over-the-counter, as reported
by the Nasdaq Stock Market; or (e) if such system is no longer in use, the
principal automated quotation system then in use; or (f) if the shares are not
quoted on such system, the average of the closing bid and asked prices as
furnished by a professional market maker making a market in the shares; or (g)
if there is no such market maker or such closing prices otherwise are
unavailable, the fair market value, as determined by the Crescent Real Estate
Board of Trust Managers in good faith, on the last trading day immediately
preceding the day on which notice of such proposed purchase is sent by Crescent
Real Estate. The declaration of trust also establishes certain restrictions
relating to transfers of any exchange shares that may be issued. If such
transfer restrictions are determined to be void or invalid by virtue of any
legal decision, statute, rule or regulation, then Crescent Real Estate will have
the option to deem the intended transferee of any excess shares to have acted as
an agent on behalf of Crescent Real Estate in acquiring such excess shares and
to hold such excess shares on behalf of Crescent Real Estate. Under the
declaration of trust, Crescent Real Estate has the authority at any time to
waive the requirement that excess shares be issued or be deemed outstanding in
accordance with the provisions of the declaration of trust if the issuance of
such excess shares or the fact that such excess shares is deemed to be
outstanding would, in the opinion of nationally recognized tax counsel,
jeopardize the status of Crescent Real Estate as a REIT for federal income tax
purposes.
All certificates issued by Crescent Real Estate representing equity
shares will bear a legend referring to the restrictions described above.
The declaration of trust of Crescent Real Estate also provides that all
persons who own, directly or by virtue of the attribution provisions of the
Internal Revenue Code, more than 5.0% of the outstanding equity shares (or such
lower percentage as may be set by the Crescent Real Estate Board of Trust
Managers), must file an affidavit with Crescent Real Estate containing
information specified in the declaration of trust no later than January 31 of
each year. In addition, each shareholder, upon demand, shall be required to
disclose to Crescent Real Estate in writing such information with respect to the
direct, indirect and constructive ownership of shares as the trust managers deem
necessary to comply with the provisions of the Internal Revenue Code, as
applicable to a REIT, or to comply with the requirements of an authority or
governmental agency.
The Ownership Limitations described above may have the effect of
precluding acquisitions of control of Crescent Real Estate by a third party. See
"Comparison of Rights of Holders of Crescent Operating Common Stock and Crescent
Real Estate Common Shares -- Anti-Takeover Provisions."
Registrar and Transfer Agent
The registrar and transfer agent for the Crescent Real Estate common
shares is Equiserve Trust Company.
275
DESCRIPTION OF SERIES A PREFERRED SHARES
General
Crescent Real Estate's Board of Trust Managers is authorized to issue
up to 100,000,000 preferred shares, par value $0.01 per share, in one or more
series, with such designations, powers, preferences and rights of the shares of
such series, and with such qualifications, limitations or restrictions on the
shares of such series, if any, as Crescent Real Estate's Board of Trust Managers
may determine, without any further vote or action by the shareholders. The
designations, powers, preferences and rights of, and the qualifications,
limitations or restrictions on, such shares may include, but are not limited to,
distribution rights, distribution rates, conversion rights, voting rights, terms
of redemption (including sinking fund provisions), redemption prices, and
liquidation preferences.
The Series A Preferred Shares were issued pursuant to two statements of
designation that set forth the terms of a series of preferred shares, designated
6-3/4% Series A Convertible Cumulative Preferred Shares.
The following sections summarize the terms and provisions of the Series
A Preferred Shares. The following sections are not necessarily complete and are
qualified in their entirety by reference to the pertinent sections of Crescent
Real Estate's declaration of trust and the statement of designation designating
the Series A Preferred Shares, each of which is available from Crescent Real
Estate.
The registrar, transfer agent and distributions disbursing agent for
the Series A Preferred Shares is Equiserve Trust Company.
The Series A Preferred Shares are listed on the New York Stock Exchange
under the symbol "CEIPrA".
Ranking
The Series A Preferred Shares rank senior to the common shares as to
rights to receive distributions and to participate in distributions or payments
upon Crescent Real Estate's liquidation, dissolution or winding up.
Distributions
Holders of the Series A Preferred Shares are entitled to receive, when
and as authorized by the Board of Trust Managers, out of funds legally available
for the payment of distributions, cumulative cash distributions at the rate of
6-3/4% of the liquidation preference per year (equivalent to $1.6875 per year
per Series A preferred share). Distributions on the Series A Preferred Shares
will accrue and be cumulative from the date of original issue and will be
payable quarterly in arrears on the fifteenth day of February, May, August and
November of each year or, if not a business day, the next succeeding business
day. Each such date is referred to below as a "Distribution Payment Date".
Any distribution, including any distribution payable on the Series A
Preferred Shares for any partial distribution period, will be computed on the
basis of a 360-day year consisting of twelve 30-day months. Distributions are
payable to holders of record as they appear in Crescent Real Estate's share
records at the close of business on the applicable record date, which will be
the date that the Board of Trust Managers designates for the payment of
distributions that is not more than 30 nor less than 10 days prior to such
distribution payment date. Such date is also referred to as a "Distribution
Payment Record Date."
276
The Board of Trust Managers will not authorize, pay or set apart for
payment by Crescent Real Estate any distribution on the Series A Preferred
Shares at any time that:
- the terms and provisions of any agreement of Crescent Real
Estate, including any agreement relating to Crescent Real
Estate's indebtedness, prohibits such authorization, payment
or setting apart for payment;
- the terms and provisions of any agreement of Crescent Real
Estate, including any agreement relating to Crescent Real
Estate's indebtedness, provides that such authorization,
payment or setting apart for payment would constitute a breach
of, or a default under, such agreement; or
- the law restricts or prohibits such authorization or payment.
Notwithstanding the foregoing, distributions on the Series A Preferred
Shares will accrue whether or not:
- Crescent Real Estate has earnings;
- there are funds legally available for the payment of such
distributions; and
- such distributions are authorized.
Accrued but unpaid distributions on the Series A Preferred Shares will
not bear interest. Holders of the Series A Preferred Shares will not be entitled
to any distributions in excess of full cumulative distributions, as described
above.
Crescent Real Estate intends to contribute or otherwise transfer the
net proceeds of the sale of the Series A Preferred Shares to Crescent
Partnership in exchange for 6-3/4% Series A Preferred Units in Crescent
Partnership, the economic terms of which will be substantially identical to
those of the Series A Preferred Shares. Crescent Partnership will be required to
make all required distributions on the Series A Preferred Units (which will
mirror the payments of distributions, including accrued and unpaid distributions
upon redemption, and of the liquidation preference amount on the Series A
Preferred Shares) prior to any distribution of cash or assets to the holders of
the units or to the holders of any other interests in Crescent Partnership,
except for any other series of preferred units ranking on a parity with the
Series A Preferred Units as to distributions or liquidation rights, and except
for distributions required to enable Crescent Real Estate to maintain its
qualification as a REIT.
Any distribution payment made on the Series A Preferred Shares will
first be credited against the earliest accrued but unpaid distribution due with
respect to such shares which remains payable.
If, for any taxable year, Crescent Real Estate elects to designate as
"capital gain distributions" (as defined in section 857 of the Internal Revenue
Code) any portion, referred to below as the "Capital Gains Amount", of the
distributions paid or made available for the year to the holders of all classes
of shares, referred to below as the "Total Distributions", then the portion of
the Capital Gains Amount that will be allocable to the holders of Series A
Preferred Shares will be the Capital Gains Amount multiplied by a fraction, the
numerator of which will be the total distributions (within the meaning of the
Internal Revenue Code) paid or made available to the holders of the Series A
Preferred Shares for the year and the denominator of which will be the Total
Distributions.
277
Liquidation Preference
In the event of Crescent Real Estate's liquidation, dissolution or
winding up of affairs, the holders of the Series A Preferred Shares are entitled
to be paid, out of the assets of Crescent Real Estate legally available for
distribution to Crescent Real Estate's shareholders, liquidating distributions
in cash or property at its fair market value as determined by the Board of Trust
Managers. Such liquidating distributions will be paid to the holders of the
Series A Preferred Shares in the amount of a liquidation preference of $25.00
per share, plus an amount equal to any accrued and unpaid distributions to the
date of such liquidation, dissolution or winding up. Such liquidating
distributions will be paid to the holders of the Series A Preferred Shares
before any distribution of assets is made to holders of common shares or any
other capital shares of beneficial interest that rank junior to the Series A
Preferred Shares as to liquidation rights. After payment of the full amount of
the liquidating distributions to which they are entitled, the holders of Series
A Preferred Shares will have no right or claim to any of Crescent Real Estate's
remaining assets.
Crescent Real Estate's consolidation or merger with or into any other
entity or the sale, lease, transfer or conveyance of all or substantially all of
Crescent Real Estate's property or business will not be deemed to constitute a
liquidation, dissolution or winding up of Crescent Real Estate. The Series A
Preferred Shares will rank senior to the common shares as to priority for
receiving liquidating distributions.
Redemption
The Series A Preferred Shares are not redeemable prior to February 18,
2003, except under the circumstances described below. On and after February 18,
2003, the Series A Preferred Shares may be redeemed at Crescent Real Estate's
option, in whole or in part, from time to time, at a redemption price of $25.00
per share, plus all distributions accrued and unpaid on the Series A Preferred
Shares up to the date of such redemption, upon the giving of notice, as provided
below.
If fewer than all of the outstanding Series A Preferred Shares are to
be redeemed, the shares to be redeemed will be determined pro rata, by lot or in
such other manner as prescribed by the Board of Trust Managers. In the event
that such redemption is to be by lot, and if as a result of such redemption any
holder of Series A Preferred Shares would own, or be deemed by virtue of certain
attribution provisions of the Internal Revenue Code to own, in excess of 9.9% of
the issued and outstanding Series A Preferred Shares (because such holder's
Series A Preferred Shares were not redeemed, or were only redeemed in part),
then, except in certain instances, Crescent Real Estate will redeem the
requisite number of Series A Preferred Shares of such shareholder such that the
shareholder will not own or be deemed by virtue of certain attribution
provisions of the Internal Revenue Code to own, in excess of 9.9% of the Series
A Preferred Shares issued and outstanding subsequent to such redemption.
Notice of redemption will be mailed not less than 30 nor more than 60
days prior to the date fixed for redemption. Notice of redemption will be mailed
to each holder of record of Series A Preferred Shares that is to be redeemed.
Such notice will notify the holder of Crescent Real Estate's election to redeem
such shares and will state at least the following:
- the date fixed for redemption thereof, or the Series A
Preferred Shares Redemption Date;
- the redemption price;
- the number of shares to be redeemed and, if fewer than all the
Series A Preferred Shares are to be redeemed, the number of
shares to be redeemed from such holder; and
278
- the place(s) where the certificates representing the Series A
Preferred Shares are to be surrendered for payment.
On or after the Series A Preferred Shares Redemption Date, each holder
of Series A Preferred Shares to be redeemed must present and surrender the
certificates representing the Series A Preferred Shares to Crescent Real Estate
at the place designated in the notice of redemption. The redemption price of the
shares will then be paid to or on the order of the person whose name appears on
such certificates as the owner thereof. Each surrendered certificate will be
canceled. In the event that fewer than all the Series A Preferred Shares are to
be redeemed, a new certificate will be issued representing the unredeemed
shares.
From and after the Series A Preferred Shares Redemption Date, unless
Crescent Real Estate defaults in payment of the redemption price:
- all distributions on the Series A Preferred Shares designated
for redemption in such notice will cease to accrue;
- all rights of the holders of such shares, except the right to
receive the redemption price thereof, including all accrued
and unpaid distributions up to the Series A Preferred Shares
Redemption Date, will cease and terminate;
- such shares will not thereafter be transferred, except with
Crescent Real Estate's consent, on Crescent Real Estate's
books; and
- such shares will not be deemed to be outstanding for any
purpose whatsoever.
At Crescent Real Estate's election, Crescent Real Estate, prior to the
Series A Preferred Shares Redemption Date, may irrevocably deposit the
redemption price, including accrued and unpaid distributions, of the Series A
Preferred Shares so called for redemption in trust with a bank or trust company
for the holders thereof. In that case, such notice to holders of the Series A
Preferred Shares to be redeemed will:
- state the date of such deposit;
- specify the office of such bank or trust company as the place
of payment of the redemption price; and
- call upon such holders to surrender the certificates
representing such Series A Preferred Shares at such place on
or about the date fixed in such redemption notice, which may
not be later than the Series A Preferred Shares Redemption
Date, against payment of the redemption price, including all
accrued and unpaid distributions up to the Series A Preferred
Shares Redemption Date.
The bank or trust company will return to Crescent Real Estate any
moneys that Crescent Real Estate so deposits that remain unclaimed by the
holders of the Series A Preferred Shares at the end of two years after the
Series A Preferred Shares Redemption Date.
Notwithstanding the foregoing, unless full cumulative distributions on
all outstanding Series A Preferred Shares have been paid or declared and a sum
sufficient for the payment of such distributions has been set apart for payment
for all past distribution periods and the then-current distribution period, no
Series A Preferred Shares will be redeemed unless all outstanding Series A
Preferred Shares are
279
simultaneously redeemed. However, the foregoing will not prevent the purchase or
acquisition of Series A Preferred Shares pursuant to a purchase or exchange
offer made on the same terms to holders of all outstanding Series A Preferred
Shares. Unless full cumulative distributions on all outstanding Series A
Preferred Shares have been paid or declared and a sum sufficient for the payment
of such distributions has been set apart for payment for all past distribution
periods and the then-current distribution period, Crescent Real Estate will not
purchase or otherwise acquire directly or indirectly any Series A Preferred
Shares, except by conversion into or exchange for shares of beneficial interest
of Crescent Real Estate ranking junior to the Series A Preferred Shares as to
distribution rights and liquidation preference.
Notwithstanding any other provision relating to redemption of the
Series A Preferred Shares, Crescent Real Estate may redeem Series A Preferred
Shares at any time, whether or not prior to February 18, 2003, if the Board of
Trust Managers determines that such redemption:
- is necessary or advisable to preserve Crescent Real Estate's
status as a REIT; or
- is reasonable or appropriate in order to comply with any laws,
rules or regulations of any gaming authority.
The Series A Preferred Shares have no stated maturity date and will not
be subject to any sinking fund or mandatory redemption provisions.
Voting Rights
If distributions on the Series A Preferred Shares are in arrears for
six or more quarterly periods, whether or not these quarterly periods are
consecutive, holders of Series A Preferred Shares, voting separately as a class
with all other series of preferred shares upon which like voting rights have
been conferred and are exercisable, will be entitled to vote, at a special
meeting called by the holders of record of at least 10% of any series of
preferred shares as to which distributions are so in arrears or at the next
annual meeting of shareholders, for the election of two additional trust
managers to serve on the Board of Trust Managers until all distribution
arrearages have been paid.
In addition, certain changes that would be materially adverse to the
rights of holders of the Series A Preferred Shares cannot be made without the
affirmative vote of two-thirds of the Series A Preferred Shares voting
separately as a class with all other series of preferred shares upon which like
voting rights have been conferred and are exercisable.
In any matter in which the Series A Preferred Shares are entitled to
vote, as expressly provided in Crescent Real Estate's declaration of trust,
statement of designation or as may be required by law, including any action by
written consent, each Series A Preferred Share will be entitled to one vote.
Conversion Rights
Subject to the restrictions on transfer and ownership described below
in "-- Ownership Limits and Restrictions on Transfer" and above in "Description
of Common Shares -- Ownership Limits and Restrictions on Transfer," Series A
Preferred Shares are convertible at any time, at the option of the holders
thereof, into common shares at a conversion price of $40.86 per common share
(equivalent to a conversion rate of .6119 common shares per Series A preferred
share), subject to adjustment as described below. The price at which the Series
A Preferred Shares are convertible into Crescent Real Estate common shares is
called the "conversion price". The right to convert Series A Preferred Shares
called for redemption will terminate at the close of business on the applicable
Series A Preferred Shares Redemption Date.
280
Conversion of Series A Preferred Shares, or a specified portion
thereof, may be effected by delivering certificates representing the Series A
Preferred Shares to be converted together with written notice of conversion and
a proper assignment of such certificates to the office of the transfer agent.
Currently, the principal corporate trust office of the transfer agent is
EquiServe Trust Company, attn: Corporate Reorganization, 150 Royall Street,
Canton, Massachusetts 02021.
Each conversion is deemed to be effected immediately prior to the close
of business on the date on which:
- the certificates were surrendered;
- Crescent Real Estate received notice; and
- if applicable, Crescent Real Estate received payment of any
amount equal to the distribution payable on such Series A
Preferred Shares surrendered for conversion, as described
below).
The conversion will be at the conversion price in effect at such time
and on such date.
Holders of Series A Preferred Shares at the close of business on a
Distribution Payment Record Date will be entitled to receive the distribution
payable on such shares on the corresponding Distribution Payment Date, even if
the holder converted the shares after such Distribution Payment Record Date and
prior to such Distribution Payment Date.
However, if the holder surrenders its Series A Preferred Shares for
conversion between the close of business on any Distribution Payment Record Date
and the opening of business on the corresponding Distribution Payment Date,
except those shares converted after the issuance of a notice of redemption with
respect to a Series A Preferred Shares Redemption Date occurring during such
period or coinciding with such Distribution Payment Date, which will be entitled
to such distribution, the shares must be accompanied by payment of an amount
equal to the distribution payable on such shares on such Distribution Payment
Date.
A holder of Series A Preferred Shares on a Distribution Payment Record
Date who, or whose transferee, tenders any such shares for conversion into
common shares on such Distribution Payment Date will receive the distribution
payable by Crescent Real Estate on such Series A Preferred Shares on such date.
The converting holder need not include payment of the amount of such
distribution upon surrender of certificates for conversion.
Except as provided above, Crescent Real Estate will make no payment or
allowance for unpaid distributions, whether or not in arrears, on converted
shares or for distributions on the common shares that are issued upon such
conversion.
Crescent Real Estate will not issue fractional common shares upon
conversion. Instead, Crescent Real Estate will pay a cash adjustment based on
the current market price of the common shares on the trading day immediately
prior to the conversion date.
For a further discussion of the common shares to be received upon
conversion of Series A Preferred Shares, see "Description of Common Shares"
above.
281
Conversion Price Adjustments
The conversion price is subject to adjustment upon certain events,
including the following:
- the payment of distributions payable in common shares on any
class of shares of beneficial interest of Crescent Real
Estate;
- the issuance to all holders of common shares of certain
rights, options or warrants entitling them to subscribe for or
purchase common shares at a price per share less than the fair
market value per share of common shares;
- subdivisions, combinations and reclassifications of common
shares;
- the payment of distributions to all holders of common shares
of any shares of beneficial interest of Crescent Real Estate,
other than common shares;
- the distribution to all holders of common shares or evidences
of indebtedness of Crescent Real Estate or assets, excluding
cash distributions paid out of equity, including revaluation
equity, applicable to common shares, less stated capital
attributable to common shares; and
- the distribution to all holders of common shares of rights,
options or warrants to subscribe for or purchase any of
Crescent Real Estate's securities, excluding those rights,
options and warrants referred to above.
In addition to the foregoing adjustments, Crescent Real Estate will be
permitted to make such reductions in the conversion price as Crescent Real
Estate considers to be advisable in order that any event treated for federal
income tax purposes as a dividend of stock or stock rights will not be taxable
to the holders of the common shares.
Crescent Real Estate may be a party to certain transactions, including,
without limitation, mergers, consolidations, statutory share exchanges, tender
offers for all or substantially all of the common shares, or sales of all or
substantially all of Crescent Real Estate's assets. If Crescent Real Estate is a
party to any transaction, including but not limited to those listed above, and
as a result of such transaction common shares will be converted into the right
to receive shares of beneficial interest, securities or other property,
including cash or any combination thereof, each Series A preferred share, if
convertible after the consummation of the transaction, will be convertible into
the kind and amount of shares of stock and other securities and property
receivable, including cash or any combination thereof, upon the consummation of
such transaction by a holder of that number of common shares or fraction thereof
into which one Series A preferred share was convertible immediately prior to
such transaction, assuming such holder of common shares failed to exercise any
rights of election and received for each common share the kind and amount of
shares, stock, securities and other property, including cash, receivable for
each common share by a plurality of non-electing common shares. Crescent Real
Estate may not become a party to any such transaction unless the terms thereof
are consistent with the foregoing.
Crescent Real Estate is not required to adjust the conversion price
until cumulative adjustments amount to 1% or more of the conversion price. Any
adjustments that Crescent Real Estate is not required to make will be carried
forward and taken into account in subsequent adjustments.
Ownership Limits and Restrictions on Transfer
In order to maintain Crescent Real Estate's qualification as a REIT for
federal income tax purposes, Crescent Real Estate's declaration of trust
restricts ownership by any person of Crescent Real Estate's outstanding shares
of beneficial interest. For further information regarding restrictions on
ownership and transfer of the Series A Preferred Shares, see "Description of
Preferred Shares -- Restrictions on Ownership" above. Crescent Real Estate's
declaration of trust also provides certain
282
restrictions on the ownership and transfer of the shares of beneficial interest
of Crescent Real Estate which will apply to conversions of the Series A
Preferred Shares, as well as the ownership and transfer of Series A Preferred
Shares. See "Description of Common Shares -- Ownership Limits and Restrictions
on Transfer" above.
DESCRIPTION OF COMMON SHARE WARRANTS
Crescent Real Estate may issue common share warrants for the purchase
of Crescent Real Estate common shares. Common share warrants may be issued
independently or together with any other securities and may be attached to or
separate from such securities. Each series of Common Share Warrants will be
issued under a separate warrant agreement to be entered into between Crescent
Real Estate and a specified warrant agent. The warrant agent will act solely as
an agent of Crescent Real Estate in connection with the common share warrants of
such series and will not assume any obligation or relationship of agency or
trust for or with any holders or beneficial owners of common share warrants. The
following sets forth certain general terms and provisions of the common share
warrants. Further terms of the common share warrants will be set forth in the
applicable warrant agreements.
The applicable warrant agreement will describe the terms of the common
share warrants, including, where applicable, the following: (i) the title of
such common share warrants; (ii) the aggregate number of such common share
warrants; (iii) the price or prices at which such common share warrants will be
issued; (iv) the number of shares of Crescent Real Estate common shares
purchasable upon exercise of such common share warrants; (v) the designation and
terms of any other Securities offered thereby with which such common share
warrants are to be issued and the number of such common share warrants issued
with each such security offered thereby; (vi) the date, if any, on and after
which such common share warrants and the related Crescent Real Estate common
shares will be separately transferable; (vii) the price at which the Crescent
Real Estate common shares purchasable upon exercise of such common share
warrants may be purchased; (viii) the date on which the right to exercise such
common share warrants shall commence and the date on which such right shall
expire; (ix) the minimum or maximum number of such common share warrants which
may be exercised at any one time; (x) information with respect to book entry
procedures, if any; (xi) any limitations on the acquisition or ownership of such
common share warrants which may be required in order to maintain the status of
Crescent Real Estate as a REIT; (xii) a discussion of certain federal income tax
considerations; and (xiii) any other terms of such common share warrants,
including terms, procedures and limitations relating to the exchange and
exercise of such common share warrants.
Reference is made to the section captioned "-- Description of Crescent
Real Estate Common Shares" for a general description of the Crescent Real Estate
common shares to be acquired upon the exercise of the common share warrants,
including a description of certain restrictions on the ownership of Crescent
Real Estate common shares.
COMPARISON OF RIGHTS OF HOLDERS OF CRESCENT OPERATING COMMON
STOCK AND CRESCENT REAL ESTATE COMMON SHARES
A discussion of the material similarities and differences between the
rights of Crescent Operating stockholders and Crescent Real Estate shareholders
appears below. This discussion does not address each difference between Delaware
and Texas law, but focuses on those differences that the sole director believes
are most relevant to existing stockholders. This discussion is not intended to
be complete and is qualified in its entirety by the relevant provisions of
Delaware and Texas law.
283
FORM OF ENTITY
Crescent Operating
Crescent Operating is a corporation organized under the laws of the
state of Delaware. As such, the rights, duties and obligations of its
shareholders are governed by the Delaware General Corporation Law.
Crescent Real Estate
Crescent Real Estate is a Texas REIT. The rights, duties and
obligations of its shareholders are governed by the Texas REIT Act, as amended,
or the TRA. The TRA was amended effective September 1, 1995, to conform
substantially to modern corporation statutes based upon the Model Business
Corporation Act. Accordingly, the rights of shareholders are very similar to a
corporation. If the TRA does not specifically address a situation, the question
is governed by the Texas Business Corporation Act, as amended, and related
caselaw.
CAPITALIZATION
Crescent Operating
Crescent Operating's First Amended and Restated Certificate of
Incorporation currently authorizes the issuance of 10,000,000 shares of
preferred stock, par value $0.01 per share, and 22,500,000 shares of common
stock, par value $0.01.
Crescent Real Estate
Crescent Real Estate's declaration of trust authorizes the Board of
Trust Managers to issue up to 250,000,000 common shares, as well as 250,000,000
excess shares, par value $0.01 per share, issuable in exchange for Crescent Real
Estate's common stock. The declaration of trust also authorizes the Board of
Trust Managers to issue up to 100,000,000 preferred shares, as well as the
issuance of up to an aggregate of 100,000,000 excess shares issuable in exchange
for preferred shares.
CLASSIFIED BOARD OF DIRECTORS/TRUST MANAGERS; NUMBER OF DIRECTORS/TRUST MANAGERS
Crescent Operating
The Crescent Operating Board of Directors currently consists of one
director.
Crescent Real Estate
The Crescent Real Estate Board of Trust Managers consists of 9 trust
managers, divided into three classes, each of whom serves a staggered three-year
term.
REMOVAL OF DIRECTORS/TRUST MANAGERS
Crescent Operating
Delaware law provides that any director or the entire Board of
Directors may be removed, with or without cause, by the holders of a majority of
the shares then entitled to vote at an election of directors unless the
certificate of incorporation otherwise provides. Delaware law also provides
that, in the case of
284
a corporation whose board is divided into classes serving staggered terms,
stockholders may effect the removal of directors only for cause, unless the
certificate of incorporation otherwise provides.
Crescent Operating's charter and bylaws provide that, subject to any
rights of holders of Crescent Operating preferred shares, directors may be
removed only for cause upon the affirmative vote of holders of at least 80% of
the entire voting power of all the then-outstanding shares of stock entitled to
vote generally in the election of directors, voting together as a single class.
Crescent Real Estate
Crescent Real Estate's declaration of trust and Crescent Real Estate
bylaws provide that, subject to any rights of holders of Crescent Real Estate
preferred shares, trust managers may be removed only for cause upon the
affirmative vote of holders of at least 80% of the entire voting power of all
the then-outstanding shares entitled to vote generally in the election of trust
managers, voting together as a single class.
FILLING VACANCIES ON THE BOARD OF DIRECTORS/TRUST MANAGERS
Crescent Operating
Delaware law provides that vacancies and newly created directorships
resulting from any increase in the authorized number of directors elected by all
of the stockholders having the right to vote as a single class may be filled by
a majority of the directors then in office or a sole remaining director (even
though less than a quorum) unless otherwise provided in the certificate of
incorporation or bylaws.
Crescent Operating's bylaws provide that, subject to any rights of
holders of Crescent Operating preferred shares, and unless Crescent Operating's
Board of Directors otherwise determines, any vacancies (other than vacancies
created by an increase in the total number of directors) will be filled by the
affirmative vote of a majority of the remaining directors, though less than a
quorum, and any vacancies created by an increase in the total number of
directors may be filled by a majority of Crescent Operating's entire Board of
Directors.
Crescent Real Estate
Under Crescent Real Estate's bylaws, vacancies resulting from death,
resignation, retirement, disqualification, or other cause may be filled by the
affirmative vote of a majority of the remaining trust managers, though less than
a quorum, and vacancies due to an increase in the size of the Board of Trust
Managers may be filled by the affirmative vote of a majority of the entire Board
of Trust Managers. Trust managers selected by the Board of Trust Managers to
fill vacancies serve until the next annual meeting of shareholders and until
their successors are elected and qualified. Vacancies on the Board of Trust
Managers may be filled by the shareholders at an annual or special meeting
called for that purpose.
LIMITS ON STOCKHOLDER ACTION BY WRITTEN CONSENT
Crescent Operating
Under Delaware law, unless otherwise provided in a corporation's
certificate of incorporation, stockholders may act by written consent signed by
the holders of outstanding share shaving not less than the minimum number of
votes necessary to take such action at a meeting. Crescent Operating's charter
and bylaws provide that any action required or permitted to be taken by the
stockholders of Crescent
285
Operating must be effected at a duly called annual or special meeting of such
holders and may not be effected in writing by such holders.
Crescent Real Estate
Under the TRA, unless otherwise provided by the declaration of trust or
bylaws, any action required or permitted to be taken at a meeting of the
shareholders of a real estate investment trust may be taken without a meeting if
a consent in writing, setting forth the action so taken, shall be signed by all
of the shareholders entitled to vote with respect to the subject matter thereof.
Crescent Real Estate's bylaws permit shareholder action by unanimous written
consent setting forth the action taken and signed by each shareholder entitled
to vote thereon, if a written waiver of any right to dissent is signed by each
shareholder, if any, entitled to notice of the meeting but not entitled to vote
at the meeting.
ABILITY TO CALL SPECIAL MEETINGS
Crescent Operating
Under Delaware law, the stockholders may not call a special meeting of
stockholders unless such a right is provided for in the corporation's
certificate of incorporation or bylaws. Crescent Operating's charter does not
grant stockholders the right to call special meetings. Except as otherwise
required by law and subject to the rights of the holders of any preferred stock,
special meetings of stockholders of Crescent Operating for any purpose or
purposes may be called only by the Chairman, Vice Chairman, President or the
Crescent Operating Board of Directors pursuant to a resolution stating the
purpose or purposes thereof and approved by a majority of the total number of
directors which the corporation would have if there were no vacancies. Any power
of stockholders to call a special meeting is specifically denied. No business
other than that stated in the notice shall be transacted at any special meeting.
Crescent Real Estate
Under the TRA, special meetings of shareholders of a Texas real estate
investment trust may be called by or at the direction of the trust managers or
any officer or other person as provided in the declaration of trust or by-laws.
Under Crescent Real Estate's bylaws, subject to the rights of preferred
shareholders to elect additional trust managers under specific circumstances,
the Chairman of the Board, the Vice Chairman of the Board, the Chief Executive
Officer, the President, the Secretary, the Crescent Real Estate Board of Trust
Managers (by resolution adopted by a majority of the total number of trust
managers) or, subject to certain conditions, the holders of not less than 25% of
all of the shares then outstanding and entitled to vote at the proposed special
meeting, may call a special meeting of shareholders.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND PROPOSALS
Crescent Operating
Crescent Operating's bylaws establish an advance notice procedure for
stockholders to make nominations of candidates for directors or bring other
business before an annual meeting of stockholders of Crescent Operating. This is
otherwise referred to as the "Stockholder Notice Procedure". The Stockholder
Notice Procedure provides that (i) only persons who are nominated by, or at the
direction of, the Crescent Operating Board of Directors, or by a stockholder who
has given timely written notice containing specified information to the
Secretary of Crescent Operating prior to the meeting at which directors are to
be elected, will be eligible for election as directors of Crescent Operating and
(ii) at an annual meeting, only such business may be conducted as has been
brought before the meeting by, or at
286
the direction of the Chairman or the Crescent Operating Board of Directors or by
a stockholder who has given timely written notice to the Secretary of Crescent
Operating of such stockholder's intention to bring such business before such
meeting. In general, for notice of stockholder nominations or proposed business
to be conducted at an annual meeting to be timely, such notice must be received
by Crescent Operating not less than 70 days nor more than 90 days prior to the
first anniversary of the previous year's annual meeting. Notice of stockholder
nominations must set forth all information relating to the nominee that is
required to be disclosed in solicitations of proxies for the election of
directors pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended.
Crescent Real Estate
Crescent Real Estate's bylaws provide for an advance notice procedure
for shareholders to make nominations of candidates for trust manager or bring
other business before an annual meeting of shareholders of Crescent Real Estate.
This is otherwise referred to as the "Shareholder Notice Procedure". Pursuant to
the Shareholder Notice Procedure (i) only persons who are nominated by, or at
the direction of, the Crescent Real Estate Board of Trust Managers, or by a
shareholder who has given timely written notice containing specified information
to the Secretary of Crescent Real Estate prior to the meeting at which trust
managers are to be elected, will be eligible for election as trust managers of
Crescent Real Estate and (ii) at an annual meeting, only such business may be
conducted as has been brought before the meeting by, or at the direction of, the
Chairman or the Crescent Real Estate Board of Trust Managers or by a shareholder
who has given timely written notice to the Secretary of Crescent Real Estate of
such shareholder's intention to bring such business before such meeting. In
general, for notice of shareholder nominations or proposed business to be
conducted at an annual meeting to be timely, such notice must be received by
Crescent Real Estate not less than 70 days nor more than 90 days prior to the
first anniversary of the previous year's annual meeting. Notice of shareholder
nominations must set forth all information relating to the nominee that is
required to be disclosed in solicitations of proxies for the election of
directors pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended.
VOTE REQUIRED FOR CERTAIN STOCKHOLDER ACTIONS
Crescent Operating
Delaware law provides that in all matters other than the election of
directors, the affirmative vote of the majority of the shares present or
represented by proxy at a meeting where a quorum is present and entitled to vote
on the subject matter shall be the act of the stockholders, unless the vote of a
greater number is required by law, or the certificate of incorporation or
bylaws. Charter matters requiring a vote greater than a majority of the
outstanding shares entitled to vote are set forth below.
Crescent Real Estate
The TRA provides that in all matters other than the election of trust
managers, the affirmative vote of the holders of a majority of the shares
entitled to vote on, and that voted for or against or expressly abstained with
respect to that matter at a meeting where a quorum is present and entitled to
vote on the subject matter shall be the act of the shareholders, unless the vote
of a greater number is required by law, the declaration of trust or the bylaws.
Matters requiring a vote greater than a majority of the outstanding shares
entitled to vote are set forth below.
287
AMENDMENT OF CERTIFICATE OF INCORPORATION/DECLARATION OF TRUST
Crescent Operating
Under Delaware law, the certificate of incorporation may be amended,
altered or repealed by resolution of the Board of Directors and the affirmative
vote of the majority of the outstanding stock entitled to vote on the amendment
as a class, and a majority of the outstanding stock of each class entitled to
vote thereon as a class, unless the vote of a greater number is required by the
certificate of incorporation.
Crescent Operating's charter provides that the affirmative vote of the
holders of at least 80% of the stock entitled to vote generally in the election
of directors, collectively referred to as the "voting stock", voting together as
a single class, is required to amend, alter or adopt provisions relating to
stockholder action without a meeting; the calling of special meetings; the
number, election, power and term of Crescent Operating's directors; the filling
of vacancies; and the removal of directors. In all cases, amendments to the
charter require that Crescent Operating's Board of Directors determine that the
proposed amendment is advisable.
Crescent Real Estate
In accordance with the TRA, Crescent Real Estate's declaration of trust
provides that it may be amended altered, changed or repealed only by resolution
of the trust managers and the affirmative vote of the holders of not less than
two-thirds of the votes entitled to be cast, except that the provisions of the
declaration of trust relating to "business combinations" or "control shares" (as
described below under " -- Restrictions on Business Combinations" and " --
Control Share Acquisitions") may be amended only with the affirmative vote of
the holders of 80% of the votes entitled to be cast, voting together as a single
class.
AMENDMENT OF BYLAWS
Crescent Operating
Delaware law also provides that the power to amend the bylaws resides
in the stockholders entitled to vote, provided that the corporation may, in its
certificate of incorporation, confer the power to amend the bylaws upon the
directors. The fact that such power has been conferred on the directors does not
divest or limit the power of the stockholders to amend the bylaws.
Crescent Operating's charter provides that the bylaws relating to the
call of special meetings, the prohibition on shareholder action through a
written consent, the categories, term and election of officers, the removal and
filling of vacancies of officers, and the Stockholder Notice Procedure may be
amended only by Crescent Operating's Board of Directors or by the affirmative
vote of the holders of at least 80% of the voting power of the outstanding
shares of voting stock, voting together as a single class. All other Crescent
Operating bylaw provisions may be amended, altered or repealed and new bylaws
may be adopted, by the affirmative vote of the holders of a majority of the
outstanding stock entitled to vote thereon.
Crescent Real Estate
Under the TRA, the power to adopt, amend or repeal bylaws is vested in
the trust managers unless the declaration of trust confers such power to the
shareholders, or unless the shareholders, in amending a particular bylaw
provision, expressly provide that the trust managers may not amend that bylaw.
Unless the declaration of trust provides otherwise, the shareholders may amend,
alter, repeal or
288
adopt bylaws even though the bylaws may also be amended, altered, repealed or
adopted by the trust managers. Under Crescent Real Estate's declaration of
trust, the Board of Trust Managers retains sole power to amend, alter or repeal
Crescent Real Estate's bylaws. Accordingly, the shareholders of Crescent Real
Estate are not able to amend any provision of the bylaws unless they first amend
the declaration of trust.
RESTRICTIONS ON BUSINESS COMBINATIONS
Crescent Operating
Delaware Law prohibits transactions between a corporation and an
interested stockholder for three years following the time such stockholder
became an interested stockholder, unless certain conditions are met. Generally,
an interested stockholder is any person, including such person's affiliates and
associates, who owns 15.0% or more of the outstanding voting stock of a
corporation. If the interested stockholder does not get prior approval of the
business combination from the Board of Directors or the holders of 85.0% of the
voting stock of the corporation outstanding at the time the transaction
commenced, the stockholder cannot engage in a business combination for three
years, unless the business combination is approved by the directors and the
holders of two-thirds of the voting stock of the corporation not owned by the
interested stockholder. Crescent Operating's charter provides that the above
restrictions shall not apply to any transaction with Crescent Real Estate,
Crescent Partnership or any of their affiliates.
Crescent Real Estate
Crescent Real Estate's declaration of trust establishes special
requirements with respect to business combinations, including a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities, between Crescent Real
Estate and any person who beneficially owns, directly or indirectly, 10% or more
of the voting power of Crescent Real Estate's shares, or an "Interested
Shareholder", subject to certain exemptions. In general, the declaration of
trust provides that an Interested Shareholder or any affiliate thereof may not
engage in a business combination with Crescent Real Estate for a period of five
years following the date such person becomes an Interested Shareholder.
Thereafter, pursuant to the declaration of trust, such transactions must be (i)
approved by the Crescent Real Estate's Board of Trust Managers; (ii) approved by
the affirmative vote of at least 80% of the votes entitled to be cast by holders
of voting shares, voting together as a single group; and (iii) approved by
two-thirds of the votes entitled to be cast by the holders of voting shares
other than voting shares held by the Interested Shareholder with whom the
business combination is to be effected, unless certain conditions are met.
CONTROL SHARE ACQUISITION
Crescent Operating
Although Delaware has no control share acquisition statute, Crescent
Operating's charter provides that "control shares" of Crescent Operating
acquired in a control share acquisition have no voting rights or powers except
to the extent approved by a vote of two-thirds of the votes entitled to be cast
by stockholders, excluding shares owned by the acquiror, officers of Crescent
Operating and employees of Crescent Operating who are also directors.
Accordingly, "control shares" are shares which, if aggregated with all other
shares previously acquired which the person is entitled to vote, would entitle
the acquiror to vote (i) 20% or more but less than one-third of all voting
power, (ii) one-third or more but less than a majority of all voting power, or
(iii) a majority of all voting power. Control shares do not
289
include shares that the acquiring person is entitled to vote on the basis of
prior stockholder approval. A "control share acquisition" means the acquisition
of control shares subject to certain exceptions.
Crescent Operating's charter provides that a person who has made or
proposes to make a control share acquisition and who has obtained a definitive
financing agreement with a responsible financial institution providing for any
amount of financing not to be provided by the acquiring person may compel
Crescent Operating's Board of Directors to call a special meeting of
stockholders, to be held not sooner than 30 days and no more than 50 days after
the demand to consider the voting rights of the shares. If no request for a
meeting is made, the charter permits Crescent Operating itself to present the
question at any stockholders' meeting.
Pursuant to Crescent Operating's charter, if voting rights are not
approved at a stockholders' meeting or if the acquiring person does not deliver
an acquiring person's statement, which discloses certain information about the
particular control share acquisition, as required by the charter, then, subject
to certain conditions and limitations set forth in the charter, Crescent
Operating may redeem any or all of the control shares, except those for which
voting rights have previously been approved, for fair value determined, without
regard to the absence of voting rights, as of the date of the last control share
acquisition or as of the date of any meeting of stockholders at which the voting
rights of such shares are considered and not approved. Under the charter, if
voting rights for control shares are approved at a stockholders' meeting and, as
a result, the acquiror would be entitled to exercise or direct the exercise of a
majority or more of all voting power, all other stockholders will have the
rights of dissenting stockholders under Delaware law. The charter provides that
the fair value of the shares for purposes of such appraisal rights may not be
less than the highest price per share paid by the acquiror in the control share
acquisition, and that certain limitations and restrictions of Delaware law
otherwise applicable to the exercise of dissenters' rights do not apply. There
is no requirement that the dissenting stockholder shall not have voted in favor
of the action.
The control share acquisition provision does not apply to shares
acquired (i) under the laws of descent and distribution; (ii) under satisfaction
of a pledge or other security interest created in good faith, (iii) in a merger,
consolidation or share exchange if Crescent Operating is a party to the
transaction; or (iv) if the acquisition is approved or excepted by the charter
or bylaws prior to a control share acquisition. The control share provisions in
the charter do not apply to Crescent Real Estate and its affiliates.
Crescent Real Estate
The TRA does not contain a control share acquisition statute. However,
Crescent Real Estate's declaration of trust provides that "control shares" of
Crescent Real Estate acquired in a control share acquisition have no voting
rights or powers except to the extent approved by a vote of two-thirds of the
votes entitled to be cast by the holders of all equity shares, excluding shares
as to which the acquiror, officers of Crescent Real Estate and employees of
Crescent Real Estate who are also trust managers have the right to vote or
direct the vote. "Control shares" are equity shares which, if aggregated with
all other equity shares previously acquired which the person is entitled to
vote, would entitle the acquiror to vote (i) 20% or more but less than one-third
of all voting power; (ii) one-third or more but less than a majority of all
voting power; or (iii) a majority of all voting power of Crescent Real Estate.
Control shares do not include equity shares that the acquiring person is
entitled to vote on the basis of prior shareholder approval. A "control share
acquisition" is defined as the acquisition of control shares, subject to certain
exemptions enumerated in the declaration of trust.
The declaration of trust provides that a person who has made or
proposed to make a control share acquisition and who has obtained a definitive
financing agreement with a responsible financial institution providing for any
amount of financing not to be provided by the acquiring person may compel the
Board
290
of Trust Managers of Crescent Real Estate to call a special meeting of
shareholders, to be held not sooner than 30 days and no more than 50 days after
the demand to consider the voting rights of the equity shares. If no request for
a meeting is made, the declaration of trust permits Crescent Real Estate itself
to present the question at any shareholders' meeting.
Pursuant to the declaration of trust, if voting rights are not approved
at a shareholders' meeting or if the acquiring person does not deliver an
acquiring person statement as permitted by the declaration of trust, then,
subject to certain conditions and limitations set forth in the declaration of
trust, Crescent Real Estate will have the right to redeem any or all of the
control shares, except those for which voting rights have previously been
approved, for fair value determined, without regard to the absence of voting
rights of the control shares, as of the date of the last control share
acquisition or as of the date of any meeting of shareholders at which the voting
rights of such shares are considered and not approved. Under the declaration of
trust, if voting rights for control shares are approved at a shareholders'
meeting and, as a result, the acquiror would be entitled to vote a majority of
the equity shares entitled to vote, all other shareholders will have the rights
of dissenting shareholders under the TRA. The declaration of trust provides that
the fair value of the equity shares for purposes of such appraisal rights may
not be less than the highest price per share paid by the acquiring person in the
control share acquisition, and that certain limitations and restrictions of the
TRA otherwise applicable to the exercise of dissenters' rights do not apply.
There is no requirement that the dissenting shareholder shall not have voted in
favor of the action.
These provisions of the declaration of trust do not apply to equity
shares acquired (i) under the laws of descent and distribution; (ii) under
satisfaction of a pledge or other security interest created in good faith; (iii)
in a merger, consolidation or share exchange if Crescent Real Estate is a party
to the transaction; or (iv) if the acquisition is approved or excepted by the
declaration of trust or Crescent Real Estate's bylaws prior to a control share
acquisition.
DIVIDENDS
Crescent Operating
Upon declaration by the Board of Directors and subject to any
restrictions contained in the certificate of incorporation, a Delaware
corporation may pay dividends out of surplus. If there is no surplus, dividends
may be declared out of net profits for the current or preceding fiscal year
unless the capital of the corporation has been decreased to an amount less than
the aggregate amount of the capital represented by the issued and outstanding
stock having a preference on the distribution of assets. Crescent Operating's
charter provides that the holders of Crescent Operating common stock shall be
entitled to receive such dividends as may be declared by the Board of Directors
out of funds legally available therefor.
Crescent Real Estate
In order to qualify as a REIT, Crescent Real Estate is required to
distribute dividends, other than capital gain dividends, to its shareholders in
an amount equal to at least (A) the sum of (i) 95% of the "real estate
investment trust taxable income" of Crescent Real Estate (computed without
regard to the dividends paid deduction and Crescent Real Estate's net capital
gain) and (ii) 95% of the net income (after tax), if any, from foreclosure
property, minus (B) certain excess noncash income. Such distributions must be
paid in the taxable year to which they relate, or in the following taxable year
if declared before Crescent Real Estate timely files its tax return for such
year, and if paid on or before the date of the first regular dividend payment
after such declaration. To the extent that Crescent Real Estate does not
distribute all of its net capital gain or distributes at least 95%, but less
than 100%, of its "real estate investment trust taxable income," as adjusted, it
will be subject to tax thereon at regular capital
291
gains and ordinary corporate tax rates. Furthermore, if Crescent Real Estate
should fail to distribute, during each calendar year, at least the sum of (i)
85% of its "real estate investment trust ordinary income" for such year; (ii)
95% of its "real estate investment trust capital gain income" for such year; and
(iii) any undistributed taxable income from prior periods, Crescent Real Estate
would be subject to a 4% excise tax on the excess of such required distribution
over the amounts actually distributed.
APPRAISAL RIGHTS
Crescent Operating
Under Delaware law, stockholders of a corporation who do not vote in
favor of or consent to certain major corporate transactions may, under varying
circumstances, be entitled to dissenters' or appraisal rights pursuant to which
such stockholders may receive cash in the amount of the fair market value of
their shares in lieu of the consideration which otherwise would have been
received in the transaction. Unless the corporation's certificate of
incorporation provides otherwise, such appraisal rights are not available in
certain circumstances, including without limitation, (a) with respect to the
sale, lease, or exchange of all or substantially all of the assets of a
corporation, (b) with respect to a merger or consolidation by a corporation the
shares of which are either listed on a national securities exchange, or the
NASDAQ National Market, or are held of record by more than 2,000 holders, if
such stockholders receive only shares of the surviving corporation or shares of
any other corporation which are either listed on a national securities exchange
or the NASDAQ National Market, or held of record by more than 2,000 holders, or
depository receipts in respect of the surviving corporation or of any other
corporation whose shares are listed on a national securities exchange or the
NASDAQ National Market, or held of record by more than 2000 holders, plus cash
in lieu of fractional shares, or (c) to stockholders of a corporation surviving
a merger if no vote of the stockholders of the surviving corporation is required
to approve the merger because the merger agreement does not amend the existing
certificate of incorporation, each share of the surviving corporation
outstanding prior to the merger is an identical outstanding or treasury share
after the merger, and the number of shares to be issued in the merger does not
exceed 20.0% of the shares of the surviving corporation outstanding immediately
prior to the merger and if certain other conditions are met. As discussed above,
if voting rights of an acquiror in a control share acquisition are approved at a
stockholders' meeting, all other stockholders will have rights as dissenting
shareholders, subject to certain conditions.
Crescent Real Estate
The TRA provides that shareholders of a REIT have the right, in certain
circumstances, to dissent from certain reorganization transactions affecting the
real estate investment trust and instead demand payment of the fair value of
their shares in cash, together with interest commencing 91 days after the date
on which the action from which the shareholder dissented was taken. A
shareholder may not dissent from any plan of merger in which there is a single
surviving or new domestic or foreign entity or from any plan of exchange, if (i)
the shares held by the shareholder are part of a class or series listed on a
national securities exchange, designated as a national market system security on
an interdealer quotation system by the National Association of Securities
Dealers, Inc., or held of record by not less than 2,000 holders, and (ii) the
consideration to be paid to the shareholders is in the form of shares of a class
or series listed on a national securities exchange, approved for quotation as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc., or held of record by not less
than 2,000 holders, cash in lieu of fractional shares, or a combination of the
securities and cash described above. Neither the declaration of trust nor the
Crescent Real Estate bylaws contain provisions regarding appraisal or
dissenters' rights.
292
LIMITATION OF PERSONAL LIABILITY OF DIRECTORS/TRUST MANAGERS AND OFFICERS
Crescent Operating
Crescent Operating's charter states that directors shall not be
personally liable to Crescent Operating or its stockholders for monetary damages
for breach of fiduciary duty as a director, except, if required under Delaware
law, for liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
section 174 of the Delaware General Corporation Law, which concerns unlawful
payments of dividends and stock purchases or redemptions, or (iv) for any
transaction from which the director derived an improper personal benefit.
Crescent Real Estate
The TRA provides that a trust manager shall not be liable for any
claims or damages that result from the trust manager's acts in the discharge of
any duty imposed or power conferred upon him by the REIT if, in the exercise of
ordinary care, the trust manager acted in good faith and in reliance upon
information, opinions, reports, or statements, including financial statements
and other financial data concerning the REIT or another person that were
prepared or presented by specified persons, generally including officers or
employees of the REIT, counsel, accountants, investment bankers, other experts
and committees of the Board of Trust Managers. In addition, the TRA and the
declaration of trust provide that no trust manager shall be liable to Crescent
Real Estate for any act, omission, loss, damage, or expense arising the
performance of the trust manager's duty except in the case of the trust
manager's own willful misfeasance, malfeasance or gross negligence. Crescent
Real Estate's declaration of trust provides that the liability of each trust
manager shall be limited to the fullest extent permitted by law, subject to
certain conditions.
INDEMNIFICATION OF DIRECTORS/TRUST MANAGERS AND OFFICERS
Crescent Operating
Delaware law provides that a corporation may indemnify directors and
officers as well as other employees and individuals against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement in connection
with specified actions, suits or proceedings, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
corporation, which is a "derivative action") if the persons acted in good faith
and in a manner reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, if they had no reasonable cause to believe their conduct was
unlawful. A similar standard is applicable in the case of derivative actions,
except that indemnification only extends to expenses (including attorneys' fees)
incurred in connection with the defense or settlement of such actions, and the
statute requires court approval before there can be any indemnification where
the person seeking indemnification has been found liable to the corporation. To
the extent that a director or officer has been successful in defense of any such
action, suit or proceeding, such director or officer must be indemnified against
expenses, including attorney's fees, actually and reasonably incurred therewith.
The statute provides that it is not exclusive of other indemnification that may
be granted by a corporation's bylaws, disinterested director vote, stockholder
vote, agreement or otherwise.
Crescent Operating's charter provides that each person who was or is
made a party or is threatened to be made a party to or is involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such person, or a person of whom such
person is the legal representative, is or was a director or officer of Crescent
Operating or is or was serving at the
293
request of Crescent Operating as a director, officer, employee or agent of
another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, whether
the basis of such proceeding is alleged action in an official capacity as a
director, officer, employee or agent or in any other capacity while serving as a
director, officer, employee or agent, will be indemnified and held harmless by
Crescent Operating to the fullest extent authorized by Delaware law, as the same
exists or may hereafter be amended (but, in the case of any such amendment, only
to the extent that such amendment permits Crescent Operating to provide broader
indemnification rights than said law permitted Crescent Operating to provide
prior to such amendment), against all expense, liability and loss reasonably
incurred or suffered by such person in connection therewith. Such right to
indemnification includes the right to have Crescent Operating pay the expenses
incurred in defending any such proceeding in advance of its final disposition,
subject to the provisions of Delaware law. Such rights are not exclusive of any
other right which any person may have or thereafter acquire under any statute,
provision of the charter, bylaws, agreement, vote of stockholders or
disinterested directors or otherwise. No repeal or modification of such
provision will in any way diminish or adversely affect the rights of any
director, officer, employee or agent of Crescent Operating thereunder in respect
of any occurrence or matter arising prior to any such repeal or modification.
Crescent Operating's charter also specifically authorizes Crescent Operating to
maintain insurance and to grant similar indemnification rights to employees or
agents of Crescent Operating.
Delaware law permits a corporation to provide in its certificate of
incorporation that a director of the corporation shall not be personally liable
to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability for (i) any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) payments of unlawful dividends or unlawful stock
repurchases or redemptions, or (iv) any transaction from which the director
derived an improper personal benefit. Crescent Operating's charter provides that
a director will not be personally liable to Crescent Operating or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except, if required by Delaware law, for liability (i) for any breach of the
director's duty of loyalty to Crescent Operating or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under section 174 of the Delaware General
Corporation Law, which concerns unlawful payments of dividends and stock
purchases or redemptions, or (iv) for any transaction from which the director
derived an improper personal benefit. Neither the amendment nor repeal of such
provision will eliminate or reduce the effect of such provision in respect of
any matter occurring, or any cause of action, suit or claim that, but for such
provision, would accrue or arise prior to such amendment or repeal.
Crescent Real Estate
Crescent Real Estate's declaration of trust provides that no trust
manager shall be liable to Crescent Real Estate for any act, omission, loss,
damage, or expense arising from the performance of such trust manager's duties
to Crescent Real Estate save only for such trust manager's own willful
misfeasance or willful malfeasance or gross negligence. In addition to, but in
no respect whatsoever in limitation of the foregoing, the liability of each
trust manager for monetary damages shall be eliminated to the fullest extent
permitted by applicable law. The declaration of trust also provides that no
amendment thereto may limit or eliminate this limitation of liability with
respect to events occurring prior to the effective date of such amendment. The
declaration of trust provides that the trust managers and officers shall be
indemnified to the maximum extent permitted by Texas law.
Crescent Real Estate's bylaws and the TRA provide that Crescent Real
Estate will indemnify a person who was, is, or is threatened to be made a named
defendant or respondent in a proceeding because the person is or was a trust
manager or officer if it is determined that (i) the person's conduct was in good
294
faith; (ii) the person reasonably believed: (a) in the case of conduct in the
person's official capacity as a trust manager or officer of the REIT, that the
person's conduct was in the REIT's best interests; and (b) in all other cases,
that the person's conduct was at least not opposed to the REIT's best interests;
and (iii) in the case of any criminal proceeding, the person had no reasonable
cause to believe that the person's conduct was unlawful. Except to the extent
provided in the following sentence, a trust manager or officer may not be
indemnified (i) in respect of a proceeding in which the person is found liable
on the basis that personal benefit was improperly received by the person,
whether or not the benefit resulted from an action taken in the person's
official capacity; or (ii) in which the person is found liable to Crescent Real
Estate. Notwithstanding the foregoing, a person may be indemnified against
judgments, penalties (including excise and similar taxes), fines, settlements,
and reasonable expenses actually incurred by the person in connection with the
proceeding; provided that if the person is found liable to the REIT or is found
liable on the basis that personal benefit was improperly received by the person,
the indemnification (i) is limited to reasonable expenses actually incurred by
the person in connection with the proceeding, and (ii) shall not be made in
respect of any proceeding in which the person shall have been found liable for
willful or intentional misconduct in the performance of the person's duty to the
REIT.
In addition, the declaration of trust and Crescent Real Estate's bylaws
require it to pay or reimburse, in advance of the final disposition of a
proceeding, reasonable expenses incurred by a present or former trust manager or
officer made a party to a proceeding by reason of the person's status as a trust
manager or officer, provided that Crescent Real Estate shall have received (i) a
written affirmation by the trust manager or officer of the person's good faith
belief that the person has met the standard of conduct necessary for
indemnification by Crescent Real Estate as authorized by Crescent Real Estate's
bylaws and (ii) a written undertaking by or on the person's behalf to repay the
amount paid or reimbursed by Crescent Real Estate if it shall ultimately be
determined that the standard of conduct was not met. The declaration of trust
and the Crescent Real Estate's bylaws also permit Crescent Real Estate to
provide indemnification, payment or reimbursement of expenses to any employee or
agent of Crescent Real Estate in such capacity. Crescent Real Estate's
declaration of trust also allows Crescent Real Estate to enter into agreements
with any person which provides for indemnification greater or different from
that provided in the declaration of trust.
The declaration of trust and Crescent Real Estate's bylaws also permit
Crescent Real Estate to indemnify a person who was or who agreed to appear as a
witness or other participant in a proceeding at a time when the person is not
named a defendant or respondent in the proceeding. Any indemnification, payment
or reimbursement of the expenses permitted by the declaration of trust and
Crescent Real Estate's bylaws shall be furnished in accordance with the
procedures provided for indemnification and payment or reimbursement of expenses
under TRA for trust managers.
EXCESS SHARE PROVISIONS
Crescent Operating
Delaware law and Crescent Operating's charter and bylaws place no
restrictions on the number of shares of Crescent Operating common stock any
individual or group of individuals may own at any one time.
Crescent Real Estate
To remain qualified as a REIT for federal income tax purposes, not more
than 50% in value of Crescent Real Estate's outstanding shares may be owned,
directly or indirectly, by five or fewer individuals (as defined in the federal
income tax laws applicable to REITs) at any time during the last half of any
taxable year, and Crescent Real Estate's outstanding shares must be beneficially
owned by 100 or
295
more persons at least 335 days of a taxable year. To facilitate maintenance of
Crescent Real Estate's REIT qualification, Crescent Real Estate's declaration of
trust, subject to certain exceptions, prohibits ownership by any single
shareholder of more than 8.0% of Crescent Real Estate's issued and outstanding
common shares or more than 9.9% the outstanding shares of a particular series of
Crescent Real Estate preferred stock. In addition, the declaration of trust
prohibits ownership by Mr. Rainwater, the Chairman of the Board of Trust
managers of Crescent Real Estate, together with certain of his affiliates and
relatives, of more than 8.0% of Crescent Real Estate's issued and outstanding
common shares. These limits are referred to collectively as the "Ownership
Limit." Under certain circumstances, Crescent Real Estate's declaration of trust
permits the Board of Trust Managers to increase the Ownership Limit with respect
to any common shareholder, other than Mr. Rainwater, together with his
affiliates and relatives. Further, any transfer of shares may be null and void
if it causes a person to violate the Ownership Limit, and the intended
transferee or holder will acquire no rights in the shares. Those shares will
automatically convert into excess shares of Crescent Real Estate, and the
shareholder's rights to distributions and to vote will terminate. The
shareholder would have the right to receive payment of the purchase price for
the shares and certain distributions upon liquidation of Crescent Real Estate.
Excess shares are not transferable. Upon meeting certain conditions, the
purported record holder of excess shares may designate a beneficiary of such
record holder's interest in the excess shares. Such excess shares may be
exchanged for equity shares if the excess shares would not constitute excess
shares in the hands of the transferee and if certain other conditions are met.
Excess shares will be subject to repurchase by Crescent Real Estate at its
election.
ANTI-TAKEOVER PROVISIONS
Crescent Operating
As set forth in greater detail above, the charter, bylaws and
applicable sections of the Delaware General Corporation Law contain several
provisions that may make more difficult the acquisition of control of Crescent
Operating without the approval of the Crescent Operating Board of Directors.
Certain provisions of Crescent Operating's charter and bylaws, among other
things: (i) classify the Crescent Operating Board of Directors into three
classes, each of which serves for staggered three-year terms; (ii) provide that
a director of Crescent Operating may be removed by the stockholders only for
cause upon the affirmative vote of the holders of at least 80% of the entire
voting power of all outstanding shares of stock entitled to vote in the election
of directors; (iii) provide that only the Chairman, Vice-Chairman, President or
the Crescent Operating Board of Directors may call special meetings of the
stockholders; (iv) provide that the stockholders may take action only at a
meeting of Crescent Operating stockholders, not by written consent; (v) provide
that stockholders must comply with certain advance notice procedures in order to
nominate candidates for election to Crescent Operating's Board of Directors or
to place stockholders' proposals on the agenda for consideration at meetings of
the stockholders; (vi) provide that, under certain circumstances, the
affirmative vote of the holders of two-thirds of Crescent Operating's common
stock is required to approve any merger or similar business combination
involving Crescent Operating; (vii) provide that the stockholders may amend or
repeal any of the foregoing provisions of the charter or the bylaws only by a
vote of 80% of the stock entitled to vote generally in the election of
directors; and (viii) place limitations and restrictions on the voting rights of
Control Shares.
In addition, Crescent Operating's Board of Directors has also adopted a
Share Purchase Rights Plan. Pursuant to the Rights Plan, the Crescent Operating
Board of Directors will cause to be issued one preferred share purchase right,
or a Right, for each outstanding share of Crescent Operating common stock. Each
Right will entitle the registered holder to purchase from Crescent Operating
one-hundredth of a share of a new series of junior preferred stock, par value
$.01 per share, or the Junior Preferred Shares, of Crescent Operating at a price
of $5, or the Purchase Price, subject to adjustment. The description and
296
terms of the Rights are set forth in a Rights Agreement, between Crescent
Operating and a designated Rights Agent. The description set forth below is
intended as a summary only.
Until the earlier to occur of (i) 10 days following a public
announcement that a person or group of affiliated or associated persons, each an
"Acquiring Person", has acquired beneficial ownership of 10% or more of the
outstanding shares of Crescent Operating common stock or (ii) 10 business days
(or such later date as may be determined by action of the Crescent Operating
Board of Directors prior to such time as any person becomes an Acquiring Person)
following the commencement of, or announcement of an intention to make, a tender
offer or exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 10% or more of such outstanding shares of
Crescent Operating common stock. The earlier of such dates is called the "Rights
Distribution Date." The Rights will be evidenced by the certificates
representing the Crescent Operating common stock. The Rights Agreement provides
that, until the Rights Distribution Date, or earlier redemption or expiration of
the Rights, the Rights will be transferred with and only with the transfer of
Crescent Operating common stock. Until the Rights Distribution Date, or earlier
redemption or expiration of the Rights, the Crescent Operating common stock
certificates will contain a notation incorporating the Rights Agreement by
reference. As soon as practicable following the Rights Distribution Date,
separate certificates evidencing the Rights, or Right Certificates, will be
mailed to holders of record of the Crescent Operating common stock as of the
close of business on the Rights Distribution Date and such separate Right
Certificates alone will evidence the Rights. The Rights will not be exercisable
until the Rights Distribution Date. The Rights will expire on the 10th
anniversary of the date of issuance, or the "Final Expiration Date", unless the
Final Expiration Date is extended or unless the Rights are earlier redeemed or
exchanged by Crescent Operating, in each case, as summarized below.
In the event that any person or group of affiliated or associated
persons becomes an Acquiring Person, proper provision shall be made so that each
holder of a Right, other than Rights beneficially owned by the Acquiring Person
(which will thereafter be void), will thereafter have the right to receive upon
exercise that number of shares of Crescent Operating common stock having a
market value of two times the exercise price of the Right. In the event that
Crescent Operating is acquired in a merger or other business combination
transaction, or 50% or more of Crescent Operating's and its subsidiaries
consolidated assets or earning power, taken as a whole, are sold after a person
or group of affiliated or associated persons becomes an Acquiring Person, proper
provision will be made so that each holder of a Right will thereafter have the
right to receive, upon the exercise thereof at the then-current exercise price
of the Right, that number of shares of common stock of the acquiring company
which at the time of such transaction will have a market value of two times the
exercise price of the Right. At any time after the acquisition by a person or
group of affiliated or associated persons of beneficial ownership of 10% or more
of the outstanding shares of Crescent Operating common stock and prior to the
acquisition by such person or group of 50% or more of the outstanding shares of
Crescent Operating common stock, Crescent Operating's Board of Directors may
exchange the Rights (other than Rights owned by such person or group which have
become void), in whole or in part, at an exchange ratio of one share of Crescent
Operating common stock, or one-hundredth of a Junior Preferred Share (or of a
share of a class or series of the Preferred Stock having equivalent rights,
preference and privileges) per Right (subject to adjustment). At any time prior
to the acquisition by a person or group of affiliated or associated persons of
beneficial ownership of 10% or more of the outstanding shares of Crescent
Operating common stock, Crescent Operating's Board of Directors may redeem the
Rights in whole, but not in part, at a price of $.01 per Right, subject to
adjustment, or the Redemption Price. The redemption of the Rights may be made
effective at such time on such basis and with such conditions as Crescent
Operating's Board of Directors, in its sole discretion, may establish.
Immediately upon any redemption of the Rights, the right to exercise the Rights
will terminate and the holders of the Rights then will be eligible to receive
only the Redemption Price. The terms of the Rights may be amended by Crescent
Operating's Board of Directors without the consent of the holders of the Rights;
provided, however, that from and after such time as any
297
person or group of affiliated or associated persons becomes an Acquiring Person,
no such amendment may adversely affect the interests of the holders of the
Rights. Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of Crescent Operating, including, without limitation,
the right to vote or to receive dividends. The number of outstanding Rights and
the number of one-hundredths of a Junior Preferred Share issuable upon exercise
of each Right also will be subject to adjustment in the event of a split of
Crescent Operating's common stock, or a stock dividend on the Crescent Operating
common stock payable in Crescent Operating common stock or subdivisions,
consolidations or combinations of the Crescent Operating common stock occurring,
in any such case, prior to the Rights Distribution Date. The Purchase Price
payable, and the number of Junior Preferred Shares or other securities or
property issuable, upon exercise of the Rights will be subject to adjustment
from time to time to prevent dilution (i) in the event of a stock dividend on,
or a subdivision, combination or reclassification of, the Junior Preferred
Shares, (ii) upon the grant to holders of the Junior Preferred Shares of certain
rights or warrants to subscribe for or purchase Junior Preferred Shares at a
price, or securities convertible into Junior Preferred Shares with a conversion
price, less than the then-current market price of the Junior Preferred Shares or
(iii) upon the distribution to holders of the Junior Preferred Shares of
evidences of indebtedness or assets (excluding regular periodic cash dividends
paid out of earnings or retained earnings or dividends payable in Junior
Preferred Shares) or of subscription rights or warrants (other than those
referred to above). With certain exceptions, no adjustment in the Purchase Price
will be required until cumulative adjustments require an adjustment of at least
one percent in such Purchase Price. No fractional Junior Preferred Shares will
be issued (other than fractions which are integral multiples of one-hundredth of
a Junior Preferred Share, which may, at the election of Crescent Operating, be
evidenced by depositary receipts) and in lieu thereof, an adjustment in cash
will be made based on the market price of the Junior Preferred Shares on the
last trading day prior to the date of exercise.
Junior Preferred Shares purchasable upon exercise of the Rights will
not be redeemable. Each Junior Preferred Share will be entitled to a minimum
preferential quarterly dividend payment equal to the greater of $1 per share or
100 times the dividend declared per share of Crescent Operating common stock,
subject to adjustment. In the event of liquidation, the holders of the Junior
Preferred Shares will be entitled to a minimum preferential liquidation payment
of $100 per share but will be entitled to an aggregate payment of 100 times the
payment made per share of Crescent Operating common stock, subject to
adjustment. Each Junior Preferred Share will have 100 votes voting together with
the Crescent Operating common stock. Finally, in the event of any merger,
consolidation or other transaction in which shares of Crescent Operating common
stock are exchanged, each Junior Preferred Share will be entitled to receive 100
times the amount received per share of Crescent Operating common stock. These
rights are protected by customary anti-dilution provisions. Due to the nature of
the Junior Preferred Shares' dividend, liquidation and voting rights, the value
of the one-hundredth interest in a Junior Preferred Share purchasable upon
exercise of each Right should approximate the value of one share of Crescent
Operating common stock. The Rights have certain anti-takeover effects. The
Rights will cause substantial dilution to a person or group of persons that
attempts to acquire Crescent Operating on terms not approved by Crescent
Operating's Board of Directors. The Rights should not interfere with any merger
or other business combination approved by Crescent Operating's Board of
Directors prior to the time that a person or group has acquired beneficial
ownership of 10% or more of Crescent Operating's common stock since the Rights
may be redeemed by Crescent Operating at the Redemption Price until such time.
The Rights contain certain provisions to exclude Crescent Real Estate and its
affiliates from the operative provisions thereof.
Crescent Real Estate
Crescent Real Estate's declaration of trust and bylaws contain
provisions similar to those applicable to Crescent Operating that may delay or
prevent a change in control of Crescent Real Estate or
298
other transactions that could provide the shareholders with a premium over the
then-prevailing market price of their shares or which might otherwise be in the
best interest of Crescent Real Estate's security holders. These include
provisions that (i) provide for the classification of the Crescent Real Estate
Board of Trust Managers into three classes, each of which serves for staggered
three-year terms; (ii) provide that a trust manager of Crescent Real Estate may
be removed by the shareholders only for cause upon the affirmative vote of the
holders of at least 80% of the equity shares entitled to vote generally in the
election of trust managers; (iii) provide that shareholders must comply with
certain advance notice procedures in order to nominate candidates for election
to Crescent Real Estate's Board of Trust Managers or to place shareholders'
proposals on the agenda for consideration at meetings of the shareholders; (vi)
provide that, under certain circumstances, the affirmative vote of the holders
of two-thirds of Crescent Real Estate's common stock is required to approve any
merger or similar business combination involving Crescent Real Estate; (vii)
provide that the shareholders may amend or repeal any of the provisions of the
declaration of trust relating to "business combinations" or "control shares"
only by a vote of 80% of the stock entitled to vote generally in the election of
trust managers; and (viii) provide that shareholders of Crescent Real Estate do
not have cumulative voting rights in the election of trust managers. As
discussed above, federal income tax laws and Crescent Real Estate's declaration
of trust impose share ownership restrictions that effectively prevent
acquisition of a controlling ownership interest in Crescent Real Estate. In
addition, any future series of preferred shares may have certain voting
provisions that could delay or prevent a change of control or other transaction
that might involve a premium price or otherwise be good for Crescent Real
Estate's security holders.
Crescent Real Estate does not currently have a shareholders rights
plan. However, the declaration of trust permits the issuance of share purchase
rights entitling holders to purchase from Crescent Real Estate securities or
property.
MATERIAL CONTACTS BETWEEN CRESCENT REAL
ESTATE AND CRESCENT OPERATING
The following describes agreements between Crescent Real Estate and
Crescent Operating.
INTERCOMPANY AGREEMENT
Historically, Crescent Operating generally was involved with Crescent
Real Estate in two types of transactions: lessee transactions and controlled
subsidiary transactions.
- Lessee transactions were those in which Crescent Operating entered into
a transaction to lease and operate real property owned by Crescent Real
Estate but which could not, under prior law applicable to REITs, be
operated by Crescent Real Estate due to Crescent Real Estates' status
as a REIT. Lessee transactions included Crescent Operating's leases of
the hotel operations.
- Controlled subsidiary transactions were those in which Crescent
Operating invested alongside Crescent Real Estate in acquisitions where
Crescent Operating owned all of the voting stock, and Crescent Real
Estate owned all of the non-voting stock of a corporate acquisition
vehicle which in turn acquired a target business which could not be
operated by Crescent Real Estate due to Crescent Real Estate's status
as a REIT. The voting stock represented the controlling interest of the
entity being purchased. Controlled subsidiary transactions include
investments in CRL, Desert Mountain and The Woodlands Land Development
Company.
Upon the formation of Crescent Operating in 1997, Crescent Operating
and Crescent Real Estate entered into the Intercompany Agreement to provide each
other with rights to participate in certain
299
transactions. Under the terms of the Intercompany Agreement, Crescent Real
Estate was required, subject to conditions, to provide Crescent Operating with a
right of first refusal to become the lessee of any real property acquired by
Crescent Real Estate if Crescent Real Estate determined that its status as a
REIT required it to enter into a "master" lease arrangement. For example, until
the passage of the REIT Modernization Act, Crescent Real Estate could not have
owned the operations of any of its hotel properties. Crescent Real Estate was
required, in order to maintain its status as a REIT, to enter into a master
lease, which is a lease of an entire property or group of related properties to
a single lessee.
Crescent Operating's ability to become lessee of such properties under
a master lease was subject to Crescent Operating and Crescent Real Estate
negotiating a mutually satisfactory lease arrangement and Crescent Real Estate
determining, in its sole discretion, that Crescent Operating would have been
qualified to become the lessee. The Intercompany Agreement required that
Crescent Real Estate give Crescent Operating written notice when such leasing
opportunities became available. During the 30 days following such notice,
Crescent Operating had a right of first refusal with regard to becoming lessee
and had the right to negotiate a lease with Crescent Real Estate on an exclusive
basis. Upon expiration of the 30 day period, Crescent Real Estate could offer
the leasing opportunity to third parties for a period of one year before
Crescent Real Estate would have been required to again offer the opportunity
Crescent Operating.
Under restrictions contained in the Intercompany Agreement, Crescent
Operating agreed not to acquire or make (i) investments in real estate, which,
for purposes of the agreement, included the provision of services related to
real estate and investment in hotel properties, real estate mortgages, real
estate derivatives or entities that invest in real estate assets or (ii) any
other investments that could be entered into by a REIT unless Crescent Operating
provided written notice to Crescent Real Estate as to the material terms and
conditions of the investment, and Crescent Real Estate did not give written
notice of its desire to participate in the investment within 10 days. Crescent
Operating also agreed to notify Crescent Real Estate of any investment
opportunities developed by Crescent Operating or of which Crescent Operating was
aware but unable or unwilling to pursue.
The Settlement Agreement provided for the termination of the
Intercompany Agreement.
LEGAL MATTERS
The validity of the Crescent Real Estate common shares to be issued in
connection with the Crescent Operating bankruptcy plan and certain federal
income tax matters relating to the restructuring will be passed upon for
Crescent Real Estate by Shaw Pittman LLP, counsel to Crescent Real Estate.
Haynes and Boone, LLP, advised Crescent Operating as to certain matters
regarding the reorganization transactions.
EXPERTS
The consolidated financial statements and schedule of Crescent Real
Estate Equities Company and subsidiaries as of December 31, 2001 and 2000, and
for each of the three years in the period ended December 31, 2001, included in
this proxy statement/prospectus have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report appearing elsewhere herein,
which is based in part on the report of Deloitte & Touche LLP, independent
auditors of AmeriCold Corporation and subsidiaries. The consolidated financial
statements of AmeriCold Corporation and subsidiaries, not presented separately
herein, have been audited by Deloitte & Touche LLP, independent auditors, as set
forth in their report appearing elsewhere herein. The consolidated financial
statements of Crescent Real Estate Equities Company and subsidiaries are
included herein in reliance upon such reports given on the authority of such
firms as experts in accounting and auditing.
300
The consolidated financial statements and schedule of Crescent
Operating, Inc. and subsidiaries (Crescent Operating) as of December 31, 2001
and 2000, and for each of the three years in the period ended December 31, 2001,
included in this proxy statement/prospectus have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report (which contains an
explanatory paragraph describing conditions that raise substantial doubt about
Crescent Operating's ability to continue as a going concern as described in the
Notes to the consolidated financial statements) appearing elsewhere herein,
which is based in part on the reports of Deloitte & Touche LLP and Arthur
Andersen LLP, independent auditors. The consolidated financial statements of
Vornado Crescent Logistics Operating Partnership and subsidiary as of December
31, 2001 and 2000 and for the years ended December 31, 2001 and 2000 and the
period from March 11, 1999 (date of inception) to December 31, 1999 included in
this proxy statement/prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing elsewhere herein.
These consolidated financial statements are included herein in reliance upon
such reports given on the authority of such firms as experts in accounting and
auditing. The financial statements of The Woodlands Land Development Company,
L.P., The Woodlands Operating Company, L.P. and Crescent Resort Development,
Inc. and subsidiaries at December 31, 2001 and 2000, and for each of the three
years ended December 31, 2001, have been audited by Arthur Andersen LLP,
independent public accountants, as stated in such firm's respective reports, and
are included in reliance on the reports of Arthur Andersen LLP.
As described in more detail below in the "Notice Regarding Arthur
Andersen LLP," Crescent Operating has been unable to obtain, after reasonable
efforts, the consent of Arthur Andersen LLP to being named as an expert or as
the auditor of the referenced financial statements for The Woodlands Land
Development Company, L.P., The Woodlands Operating Company, L.P. and Crescent
Resort Development, Inc. and subsidiaries, which will limit your ability to
recover damages from Arthur Andersen LLP under the Securities Act.
NOTICE REGARDING ARTHUR ANDERSEN LLP
Section 11(a) of the Securities Act of 1933, as amended, provides that
if any part of a registration statement at the time it becomes effective
contains an untrue statement of a material fact or an omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, any person acquiring a security pursuant to the
registration statement (unless it is proved that at the time of the acquisition
the person knew of the untruth or omission) may sue, among others, every
accountant who has consented to be named as having prepared or certified any
part of the registration statement or as having prepared or certified any report
or valuation which is used in connection with the registration statement with
respect to the statement in the registration statement, report or valuation
which purports to have been prepared or certified by the accountant.
Prior to the date of this prospectus, the Arthur Andersen partners who
reviewed the audited financial statements of The Woodlands Operating Company,
L.P., The Woodlands Land Development Company, L.P. and Crescent Resort
Development, Inc. and subsidiaries, at December 31, 2001 and 2000 and for each
of the three years in the period ended December 31, 2001, resigned from Arthur
Andersen. As a result, after reasonable efforts, Crescent Real Estate and
Crescent Operating have been unable to obtain Arthur Andersen's written consent
to the inclusion in the registration statement of which this proxy
statement/prospectus is a part of its audit reports with respect to such
financial statements.
Under these circumstances, Rule 437a under the Securities Act permits
Crescent Real Estate to file the registration statement without a written
consent from Arthur Andersen. Accordingly, Arthur Andersen will not be liable to
you under Section 11(a) of the Securities Act because it has not consented to
being named as an expert in the registration statement.
STATEMENTS REGARDING FORWARD-LOOKING
INFORMATION
This proxy statement/prospectus, and the documents incorporated by
reference, contain forward-looking statements within the meaning of Section 27A
of the Securities Act and Section 21E of the Exchange Act, which reflect
Crescent Operating's and Crescent Real Estate's current views with respect to
future events, which may impact their results of operations and financial
condition. In this proxy statement/prospectus, and the documents incorporated by
reference, the words "anticipates," "believes," "expects," "intends," "future,"
"may," "will," "should," "plans," "estimates," "potential," or "continue," or
the negative of these terms, or other similar expressions, identify
forward-looking statements. These forward-looking statements are only
predictions and are subject to risks and uncertainties and other
301
factors, including those set forth in the section entitled "Risk Factors" and
elsewhere in this proxy statement/prospectus and the documents incorporated by
reference herein which could cause actual future results to differ materially
from historical results or those described in the forward-looking statements.
The forward-looking statements contained in this proxy statement/prospectus
should be considered in light of these factors. You are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date hereof. Except as required under the federal securities laws and the rules
and regulations of the Securities and Exchange Commission, neither Crescent
Operating non Crescent Real Estate has any intention or obligation to update
publicly any forward-looking statements after the distribution of this proxy
statement/prospectus, whether as a result of new information, further events or
otherwise.
CRESCENT OPERATING, INC.
Although Crescent Operating believes that the expectations reflected in
such forward-looking statements are based upon reasonable assumptions, Crescent
Operating's actual results could differ materially from those Crescent Operating
expects to achieve. Crescent Operating's auditors report included on the
financial statements included in this proxy statement/prospectus has expressed
substantial doubt about Crescent Operating's ability to continue to operate as a
going concern. Some of the other factors that might cause material variation
from the expectations reflected in the forward-looking statements include:
- the current inability of Crescent Operating to pay its
deferred rent obligations to Crescent Partnership, the
operating partnership of Crescent Real Estate;
- the ability of Crescent Operating to generate income from the
assets remaining after the transfers of its hospitality and
land development businesses pursuant to the Settlement
Agreement;
- Crescent Operating's inability to complete the transactions
contemplated by the Settlement Agreement with Crescent
Partnership, including but not limited to, holding a
shareholders' meeting to approve the prepackaged bankruptcy
plan contemplated by the Settlement Agreement; obtaining
shareholder approval for that plan; or filing that plan in the
form contemplated;
- the possibility that the Settlement Agreement would be
terminated and Crescent Operating would, therefore, be unable
to confirm the bankruptcy plan;
- even if the Crescent Operating bankruptcy plan is accepted by
the Crescent Operating stockholders, the bankruptcy court may
not confirm the bankruptcy plan and, in that case, the
Crescent Operating stockholders will receive nothing;
- failure of Crescent Real Estate to provide assistance and
funding to Crescent Operating of substantially all the costs
of performing the steps required under the Settlement
Agreement for implementation of the prepackaged bankruptcy
plan, which funding is expected to provide for the preparation
of this proxy statement/prospectus for a stockholders' meeting
to approve the prepackaged bankruptcy plan, the solicitation
of proxies for that meeting, and all other expenses associated
therewith; the expenses of operating Crescent Operating from
the date of the original Settlement Agreement through the
commencement of the prepackaged bankruptcy; and the settlement
or satisfaction of all of Crescent Operating's known
creditors;
302
- Crescent Operating's inability, after the commencement of
bankruptcy proceedings, to control the course or outcome of
the proceedings or its business operations, as federal
bankruptcy law places the ultimate control over the bankrupt
debtor into the discretion of the bankruptcy court;
- the unpredictable nature of the course or outcome of Crescent
Machinery's bankruptcy proceedings;
- the assertion by the Official Unsecured Creditors' Committee
of Crescent Machinery of various claims against Crescent
Operating and present and former officers and directors of
Crescent Operating which Crescent Operating intends to
vigorously defend but which, if successfully prosecuted
against Crescent Operating and certain of its current and
former officers and directors, may result in Crescent
Operating being unable to obtain confirmation of the
bankruptcy plan or make any distribution to the Crescent
Operating stockholders;
- Crescent Operating's inability to assure that the Crescent
Operating bankruptcy plan will be confirmed by the bankruptcy
court, which is a condition to the distribution of Crescent
Real Estate common shares to Crescent Operating stockholders;
- even if the prepackaged bankruptcy plan is confirmed as
contemplated, Crescent Operating's inability to control the
issuance of Crescent Real Estate common shares to Crescent
Operating stockholders, following confirmation of the
prepackaged bankruptcy plan;
- the reduction of the value of the Crescent Real Estate common
shares to be distributed to Crescent Operating's stockholders
(but not below $0.20 per Crescent Operating share) by all
payments by Crescent Real Estate for claims and expenses
relating to the Crescent Operating bankruptcy and the
reorganization transactions, including the expenses of
Crescent Real Estate but excluding payments in satisfaction of
the Bank of America claim, in excess of $5.2 million;
- Crescent Operating's inability to make any forecast regarding
stockholders' recovery in bankruptcy if the prepackaged
bankruptcy plan is not approved by the stockholders prior to
Crescent Operating's filing for bankruptcy protection, as
Crescent Operating's debts far exceed its assets, and its
creditors, including Crescent Real Estate, may not be paid in
full, and, consequently, it is probable that if the
stockholders do not approve the prepackaged bankruptcy plan,
the stockholders would receive no distributions with respect
to their stock ownership in the Crescent Operating;
- Crescent Operating's inability to sell its interest in the
tenant of the AmeriCold temperature controlled logistics
properties to a new entity that will be owned by the Crescent
Real Estate shareholders, proceeds of which sale would be
applied by Crescent Operating to the repayment of Crescent
Operating's $15.0 million obligation to Bank of America;
- the high levels of debt that Crescent Operating maintains and
Crescent Operating's current inability to generate revenue
sufficient to meet debt service payments, other obligations
and operating expenses;
- the availability of the financing that likely will be
necessary to maintain Crescent Operating's operations and
investments;
303
- the current and continuing underperformance or non-performance
of Crescent Operating's existing business investments;
- Crescent Operating's inability to reach an agreement with its
creditors which may result in Crescent Operating losing
control of its remaining assets or operations or both either
through foreclosure or bankruptcy;
- any unfavorable resolution of issues that relate to the
bankruptcy petition of Charter Behavioral Health Systems, LLC,
including, but not limited to, judgments against Crescent
Operating in respect of lawsuits instituted in connection with
the closure of certain CBHS facilities prior to CBHS's filing
bankruptcy;
- the impact of changes in the industries in which Crescent
Operating's businesses and investments operate, including
equipment sales and leasing and temperature controlled
logistics, and the economic, demographic and other competitive
conditions affecting those industries, Crescent Operating's
cash flows and the value of Crescent Operating's investments,
and
- the impact of terrorism acts on the industries in which
Crescent Operating's businesses and investments operate,
including equipment sales and leasing and temperature
controlled logistics.
Given these uncertainties, readers are cautioned not to place undue
reliance on such forward-looking statements. Crescent Operating is not obligated
to update these forward-looking statements to reflect any future events or
circumstances.
CRESCENT REAL ESTATE EQUITIES COMPANY
Although Crescent Real Estate believes that the expectations reflected
in its forward-looking statements are based upon reasonable assumptions, actual
results could differ materially from those described in the forward-looking
statements.
The following factors might cause such a difference:
- Crescent Real Estate's inability to obtain the confirmation of
the Crescent Operating bankruptcy plan binding all creditors
and Crescent Operating stockholders;
- The inability of Crescent to integrate successfully the lessee
interests in the hotel operations or the land development
interests with its current business and operations;
- The inability of Crescent Real Estate to complete the
distribution to its shareholders of the shares of a new entity
to purchase the AmeriCold tenant interest from Crescent
Operating;
- Further deterioration in the resort/business-class hotel
markets or in the market for residential land or luxury
residences, including single-family homes, townhomes and
condominiums, or in the economy generally;
- Crescent Real Estate's ability, at its office properties, to
timely lease unoccupied square footage and timely re-lease
occupied square footage upon expiration on favorable terms,
which may be adversely affected by changes in real estate
conditions (including rental rates
304
and competition from other properties and new development of
competing properties or a general downturn in the economy);
- Financing risks, such as the ability to generate revenue
sufficient to service and repay existing or additional debt,
the ability to meet applicable debt covenants, the ability to
fund the share repurchase program, increases in debt service
associated with increased debt and with variable-rate debt,
and the ability to consummate financings and refinancings on
favorable terms and within any applicable time frames;
- Further adverse conditions in the temperature-controlled
logistics business (including both industry-specific
conditions and a general downturn in the economy) which may
further jeopardize the ability of the tenant of the Crescent
Real Estate temperature-controlled logistics properties to pay
all current and deferred rent due and the resulting adverse
impact on the value of Crescent Real Estate's investment in
the owner of the properties;
- Adverse changes in the financial condition of existing
tenants;
- The concentration of a significant percentage of Crescent Real
Estate's assets in Texas;
- Crescent Real Estate's ability to find acquisition and
development opportunities which meet Crescent Real Estate's
investment strategy;
- The existence of complex regulations relating to Crescent Real
Estate's status as a REIT, the effect of future changes in
REIT requirements as a result of new legislation and the
adverse consequences of the failure to qualify as a REIT; and
- Other risks detailed from time to time in Crescent Real
Estate's filings with the Securities and Exchange Commission.
Given these uncertainties, readers are cautioned not to place undue
reliance on such statements. Crescent Real Estate is not obligated to update
these forward-looking statements to reflect any future events or circumstances.
ADDITIONAL INFORMATION
For a more complete discussion of these and other risk factors, please
see each of Crescent Operating's and Crescent Real Estate's Securities and
Exchange Commission reports, including their respective proxy statements, annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and Registration Statements on Forms S-1 and S-4.
305
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS FOR CRESCENT REAL ESTATE EQUITIES
COMPANY AS OF SEPTEMBER 30, 2002 (UNAUDITED)
Consolidated Balance Sheets at September 30, 2002 and
December 31, 2001......................................... F-3
Consolidated Statements of Operations for the three and nine
months ended September 30, 2002 and 2001.................. F-4
Consolidated Statements of Shareholders' Equity for the nine
months ended September 30, 2002........................... F-5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2002 and 2001......................... F-6
Notes to Unaudited Consolidated Financial Statements........ F-8
FINANCIAL STATEMENTS FOR CRESCENT REAL ESTATE EQUITIES
COMPANY AS OF DECEMBER 31, 2001 (AUDITED)
Reports of Independent Auditors............................. F-47
Consolidated Balance Sheets as of December 31, 2001 and
2000...................................................... F-49
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999.......................... F-50
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 2001, 2000 and 1999.............. F-51
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999.......................... F-52
Notes to Audited Consolidated Financial Statements.......... F-53
Schedule III Consolidated Real Estate Investments and
Accumulated Depreciation.................................. F-101
FINANCIAL STATEMENTS FOR CRESCENT OPERATING, INC. AS OF
SEPTEMBER 30, 2002 (UNAUDITED)
Consolidated Balance Sheets................................. F-105
Consolidated Statements of Operations....................... F-106
Consolidated Statements of Changes in Shareholders'
Deficit................................................... F-107
Consolidated Statements of Cash Flows....................... F-108
Notes to Unaudited Consolidated Financial Statements........ F-109
FINANCIAL STATEMENTS FOR CRESCENT OPERATING, INC. AS OF
DECEMBER 31, 2001 (AUDITED)
Reports of Independent Auditors............................. F-122
Consolidated Balance Sheets................................. F-126
Consolidated Statements of Operations....................... F-127
Consolidated Statements of Changes in Shareholders'
Deficit................................................... F-128
Consolidated Statements of Cash Flows....................... F-129
Notes to Audited Consolidated Financial Statements.......... F-130
Financial Statement Schedule of Crescent Operating, Inc. and
its subsidiaries in response to Item 14(a)2: Schedule
I -- Condensed Financial Information of Crescent
Operating, Inc. .......................................... F-162
FINANCIAL STATEMENTS FOR VORNADO CRESCENT LOGISTICS
OPERATING PARTNERSHIP AND SUBSIDIARY (AUDITED)
Independent Auditors' Report................................ F-166
Consolidated Balance Sheets................................. F-167
Consolidated Statements of Operations....................... F-168
Consolidated Statements of Partners' Capital................ F-169
Consolidated Statements of Cash Flows....................... F-170
Notes to Consolidated Financial Statements.................. F-171
FINANCIAL STATEMENTS FOR THE WOODLANDS OPERATING COMPANY,
L.P. AND SUBSIDIARY (AUDITED)
Report of Independent Public Accountants.................... F-181
Consolidated Balance Sheets................................. F-182
Consolidated Statements of Earnings......................... F-183
F-1
Consolidated Statements of Changes in Partners' Equity
(Deficit)................................................. F-184
Consolidated Statements of Cash Flows....................... F-185
Notes to Consolidated Financial Statements.................. F-186
FINANCIAL STATEMENTS FOR THE WOODLANDS LAND DEVELOPMENT
COMPANY, L.P. AND SUBSIDIARY (AUDITED)
Report of Independent Public Accountants.................... F-189
Consolidated Balance Sheets................................. F-190
Consolidated Statements of Earnings......................... F-191
Consolidated Statements of Changes in Partners' Equity...... F-192
Consolidated Statements of Cash Flows....................... F-193
Notes to Consolidated Financial Statements.................. F-194
PRO FORMA FINANCIAL STATEMENTS FOR CRESCENT REAL ESTATE
EQUITIES COMPANY (UNAUDITED).............................. F-202
Pro Forma Consolidated Balance Sheet as of September 30,
2002 and notes thereto.................................... F-203
Pro Forma Consolidated Statement of Operations for the nine
months ended September 30, 2002 and notes thereto......... F-205
Pro Forma Consolidated Statement of Operations for the year
ended December 31, 2001 and notes thereto................. F-208
F-2
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(DOLLARS IN THOUSANDS)
(UNAUDITED) (AUDITED)
ASSETS
Investments in real estate:
Land...................................................... $ 307,406 $ 246,416
Land held for investment or development................... 471,440 108,274
Building and improvements................................. 2,955,237 2,910,822
Furniture, fixtures and equipment......................... 110,475 72,246
Properties held for disposition, net...................... 20,997 76,309
Less -- accumulated depreciation.......................... (714,867) (634,144)
---------- ----------
Net investment in real estate...................... 3,150,688 2,779,923
Cash and cash equivalents................................. 82,642 36,285
Restricted cash and cash equivalents...................... 104,060 115,531
Accounts receivable, net.................................. 42,605 28,654
Deferred rent receivable.................................. 60,850 66,362
Investments in real estate mortgages and equity of
unconsolidated companies................................ 553,743 838,317
Notes receivable, net..................................... 117,590 132,065
Income tax asset-current and deferred, net................ 37,123 --
Other assets, net......................................... 191,810 145,012
---------- ----------
Total assets....................................... $4,341,111 $4,142,149
========== ==========
LIABILITIES
Borrowings under credit facility.......................... $ 179,000 $ 283,000
Notes payable............................................. 2,233,544 1,931,094
Accounts payable, accrued expenses and other
liabilities............................................. 362,633 220,068
---------- ----------
Total liabilities.................................. 2,775,177 2,434,162
---------- ----------
Commitments and Contingencies:
Minority Interests:
Operating partnership, 6,541,234 and 6,594,521 units,
respectively.............................................. 61,792 69,910
Consolidated real estate partnerships....................... 72,203 232,137
---------- ----------
Total minority interests........................... 133,995 302,047
---------- ----------
Shareholders' equity:
Preferred shares, $.01 par value, authorized 100,000,000
shares:
Series A Convertible Cumulative Preferred Shares,
liquidation preference $25.00 per share, 10,800,000 and
8,000,000 shares issued and outstanding at September 30,
2002 and December 31, 2001, respectively................ 248,160 200,000
Series B Cumulative Preferred Shares, liquidation
preference of $25.00 per share, 3,400,000 shares issued
and outstanding at September 30, 2002................... 81,923 --
Common shares, $.01 par value, authorized 250,000,000
shares, 124,147,297 and 123,396,017 shares issued and
outstanding at September 30, 2002 and December 31, 2001,
respectively............................................ 1,235 1,227
Additional paid-in capital................................ 2,241,831 2,234,360
Deferred compensation on restricted shares................ (5,253) --
Accumulated deficit....................................... (717,667) (638,435)
Accumulated other comprehensive income.................... (30,215) (31,484)
---------- ----------
1,820,014 1,765,668
Less -- shares held in treasury, at cost, 20,260,299 and
18,770,418 common shares at September 30, 2002 and
December 31, 2001, respectively........................... (388,075) (359,728)
---------- ----------
Total shareholders' equity......................... 1,431,939 1,405,940
---------- ----------
Total liabilities and shareholders' equity......... $4,341,111 $4,142,149
========== ==========
The accompanying notes are an integral part of these financial statements.
F-3
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
(UNAUDITED) (UNAUDITED)
Revenue:
Office property........................................... $146,773 $151,253 $429,297 $456,311
Resort/Hotel property..................................... 56,110 12,449 148,157 44,523
Residential Development property.......................... 43,837 -- 176,887 --
Interest and other income................................. 1,781 9,710 5,850 36,347
-------- -------- -------- --------
Total revenue....................................... 248,501 173,412 760,191 537,181
-------- -------- -------- --------
Expense:
Office property real estate taxes......................... 17,897 20,720 59,215 64,916
Office property operating expenses........................ 44,278 44,149 129,931 131,424
Resort/Hotel property expense............................. 44,599 -- 110,701 --
Residential Development property expense.................. 42,110 -- 161,319 --
Corporate general and administrative...................... 8,121 6,221 19,846 18,374
Interest expense.......................................... 47,149 44,908 135,871 139,189
Amortization of deferred financing costs.................. 2,701 2,439 7,722 7,171
Depreciation and amortization............................. 38,314 31,004 106,936 90,940
Impairment and other charges related to real estate
assets.................................................. -- 3,608 -- 18,932
-------- -------- -------- --------
Total expense....................................... 245,169 153,049 731,541 470,946
-------- -------- -------- --------
Operating income.................................... 3,332 20,363 28,650 66,235
-------- -------- -------- --------
Other income and expense:
Equity in net income (loss) of unconsolidated companies:
Office properties....................................... 874 1,520 3,655 3,841
Resort/Hotel Properties................................. (91) -- (91) --
Residential development properties...................... 4,272 7,263 22,934 27,703
Temperature-controlled logistics properties............. (3,101) (2,066) (3,828) 2,285
Other................................................... (755) 1,686 (5,281) 2,896
-------- -------- -------- --------
Total equity in net income of unconsolidated companies.... 1,199 8,403 17,389 36,725
-------- -------- -------- --------
Gain on property sales, net............................... 23,162 1,099 22,238 727
-------- -------- -------- --------
Total other income and expense...................... 24,361 9,502 39,627 37,452
-------- -------- -------- --------
Income before minority interests, income taxes, discontinued
operations, extraordinary item and cumulative effect of a
change in accounting principle............................ 27,693 29,865 68,277 103,687
Minority interests.................................. (4,075) (7,955) (17,177) (25,909)
Income tax benefit.................................. 2,731 -- 6,596 --
-------- -------- -------- --------
Income before discontinued operations, extraordinary item
and cumulative effect of a change in accounting
principle................................................. 26,349 21,910 57,696 77,778
Discontinued operations -- income and gain on assets sold
and held for sale....................................... 1,400 549 6,430 1,693
Extraordinary item -- extinguishment of debt.............. -- -- -- (10,802)
Cumulative effect of a change in accounting principle..... -- -- (10,465) --
-------- -------- -------- --------
Net income.................................................. 27,749 22,459 53,661 68,669
Series A Preferred Share distributions...................... (4,556) (3,375) (12,146) (10,125)
Series B Preferred Share distributions...................... (2,019) -- (3,028) --
-------- -------- -------- --------
Net income available to common shareholders................. $ 21,174 $ 19,084 $ 38,487 $ 58,544
======== ======== ======== ========
Basic earnings per share data:
Net income before discontinued operations, extraordinary
item and cumulative effect of a change in accounting
principle............................................... $ 0.19 $ 0.17 $ 0.41 $ 0.63
Discontinued operations -- income and gain on assets sold
and held for sale....................................... 0.01 0.01 0.06 0.01
Extraordinary item -- extinguishment of debt.............. -- -- -- (0.10)
Cumulative effect of a change in accounting principle..... -- -- (0.10) --
-------- -------- -------- --------
Net income -- basic....................................... $ 0.20 $ 0.18 $ 0.37 $ 0.54
======== ======== ======== ========
Diluted earnings per share data:
Net income before discontinued operations, extraordinary
item and cumulative effect of a change in accounting
principle............................................... $ 0.19 $ 0.17 $ 0.41 $ 0.62
Discontinued operations -- income and gain on assets sold
and held for sale....................................... 0.01 -- 0.06 0.01
Extraordinary item -- extinguishment of debt.............. -- -- -- (0.10)
Cumulative effect of a change in accounting principle..... -- -- (0.10) --
-------- -------- -------- --------
Net income -- diluted..................................... $ 0.20 $ 0.17 $ 0.37 $ 0.53
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-4
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SERIES A SERIES B
PREFERRED SHARES PREFERRED SHARES COMMON SHARES
--------------------- ------------------- TREASURY SHARES -------------------- ADDITIONAL
NET NET ---------------------- PAR PAID-IN
SHARES VALUE SHARES VALUE SHARES NET VALUE SHARES VALUE CAPITAL
---------- -------- --------- ------- ---------- --------- ----------- ------ ----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Shareholders' equity,
December 31, 2001.. 8,000,000 $200,000 -- $ -- 18,770,418 $(359,728) 123,396,017 $1,227 $2,234,360
Issuance of Preferred
Shares............. 2,800,000 48,160 3,400,000 81,923 -- -- -- -- --
Issuance of Common
Shares............. -- -- -- -- -- -- 6,656 -- 124
Exercise of Common
Share Options...... -- -- -- -- -- -- 338,050 4 287
Extension on employee
stock option
notes.............. -- -- -- -- -- -- -- 1,691
Deferred
Compensation....... -- -- -- -- -- -- 300,000 3 5,250
Issuance of Shares in
Exchange for
Operating
Partnership
Units.............. -- -- -- -- -- -- 106,574 1 119
Share Repurchases.... -- -- -- -- 1,489,881 (28,347) -- -- --
Dividends Paid....... -- -- -- -- -- -- -- -- --
Net Income........... -- -- -- -- -- -- -- -- --
Unrealized Loss on
Marketable
Securities......... -- -- -- -- -- -- -- -- --
Unrealized Net Gain
on Cash Flow
Hedges............. -- -- -- -- -- -- -- -- --
---------- -------- --------- ------- ---------- --------- ----------- ------ ----------
Shareholders' equity,
September 30,
2002............... 10,800,000 $248,160 3,400,000 $81,923 20,260,299 $(388,075) 124,147,297 $1,235 $2,241,831
========== ======== ========= ======= ========== ========= =========== ====== ==========
DEFERRED ACCUMULATED
COMPENSATION OTHER
ON RESTRICTED ACCUMULATED COMPREHENSIVE
SHARES (DEFICIT) INCOME TOTAL
------------- ----------- ------------- ----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Shareholders' equity,
December 31, 2001.. $ -- $(638,435) $(31,484) $1,405,940
Issuance of Preferred
Shares............. -- -- -- 130,083
Issuance of Common
Shares............. -- -- -- 124
Exercise of Common
Share Options...... -- -- -- 291
Extension on employee
stock option
notes.............. -- -- -- 1,691
Deferred
Compensation....... (5,253) -- -- --
Issuance of Shares in
Exchange for
Operating
Partnership
Units.............. -- -- -- 120
Share Repurchases.... -- -- -- (28,347)
Dividends Paid....... -- (117,719) -- (117,719)
Net Income........... -- 38,487 -- 38,487
Unrealized Loss on
Marketable
Securities......... -- -- (1,814) (1,814)
Unrealized Net Gain
on Cash Flow
Hedges............. -- -- 3,083 3,083
------- --------- -------- ----------
Shareholders' equity,
September 30,
2002............... $(5,253) $(717,667) $(30,215) $1,431,939
======= ========= ======== ==========
The accompanying notes are an integral part of these financial statements.
F-5
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2002 2001
----------- -----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Cash flows from operating activities:
Net income.................................................. $ 53,661 $ 68,669
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 114,658 98,111
Amortization of capitalized residential development
costs.................................................. 114,039 --
Expenditures for capitalized residential development
costs.................................................. (87,868) --
Discontinued operations................................... 2,180 2,107
Extraordinary item -- extinguishment of debt.............. -- 10,802
Impairment and other charges related to real estate
assets................................................. -- 18,932
Gain on property sales, net............................... (29,366) (727)
Minority interests........................................ 17,177 25,909
Cumulative effect of a change in accounting principle..... 10,465 --
Non-cash compensation..................................... 1,990 119
Distributions received in excess of earnings from
unconsolidated companies:
Residential development properties..................... -- 2,945
Temperature-controlled logistics....................... -- 7,811
Other.................................................. -- 152
Equity in (earnings) loss net of distributions received
from unconsolidated companies:
Office properties...................................... (990) (105)
Residential development properties..................... (9,642) --
Temperature-controlled logistics....................... 7,828 --
Resort/Hotel........................................... 416 --
Other.................................................. 6,255 --
Change in assets and liabilities, net of effects of COPI
transaction:
Restricted cash and cash equivalents...................... 2,771 (3,158)
Accounts receivable....................................... 11,709 (25,557)
Deferred rent receivable.................................. 4,508 4,687
Income tax asset-current and deferred..................... (15,339) --
Other assets.............................................. 5,382 91,516
Accounts payable, accrued expenses and other
liabilities............................................ (57,128) (48,396)
--------- ---------
Net cash provided by operating activities......... 152,706 253,817
--------- ---------
Cash flows from investing activities:
Net cash impact of COPI transaction....................... 38,226 --
Proceeds from property sales.............................. 76,582 184,449
Proceeds from joint venture partner....................... 164,067 129,651
Acquisition of rental properties.......................... (97,373) --
Development of investment properties...................... (1,669) (14,088)
Property improvements -- office properties................ (11,619) (17,178)
Property improvements -- hotel properties................. (13,720) (15,835)
Tenant improvement and leasing costs -- office
properties............................................. (36,602) (34,514)
F-6
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2002 2001
----------- -----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Decrease in restricted cash and cash equivalents.......... 12,668 4,994
Return of investment in unconsolidated companies:
Office properties...................................... 1,660 2,008
Residential development properties..................... 10,011 16,522
Other.................................................. -- 11,975
Investment in unconsolidated companies:
Office................................................. -- (3,236)
Residential development properties..................... (27,732) (72,380)
Temperature-controlled logistics....................... (242) (9,405)
Other.................................................. (425) (1,584)
Increase in notes receivable.............................. (7,820) (14,786)
--------- ---------
Net cash provided by investing activities......... 106,012 166,593
--------- ---------
Cash flows from financing activities:
Debt financing costs...................................... (8,915) (15,964)
Borrowings under UBS Facility............................. -- 105,000
Payments under UBS Facility............................... -- (658,452)
Borrowings under Credit Facility.......................... 372,000 480,000
Payments under Credit Facility............................ (476,000) (325,000)
Notes Payable proceeds.................................... 375,000 386,386
Notes Payable payments.................................... (171,549) (175,899)
Residential development properties note payable
borrowings............................................. 54,698 --
Residential development properties note payable
payments............................................... (84,856)
Redemption of GMAC preferred partner...................... (218,423) --
Capital distributions -- joint venture preferred equity... (6,967) (15,849)
Capital distributions -- joint venture partner............ (1,540) (4,526)
Proceeds from exercise of share options................... 353 9,212
Treasury share repurchases................................ (28,522) (381)
Issuance of preferred shares -- Series A.................. 48,160 --
Issuance of preferred shares -- Series B.................. 81,923 --
Series A Preferred Share distributions.................... (12,146) (10,125)
Series B Preferred Share Distributions.................... (3,028) --
Dividends and unitholder distributions.................... (132,549) (200,615)
--------- ---------
Net cash used in financing activities............. (212,361) (426,213)
--------- ---------
Increase (decrease) in cash and cash equivalents............ 46,357 (5,803)
Cash and cash equivalents,
Beginning of period....................................... 36,285 38,966
--------- ---------
Cash and cash equivalents,
End of period............................................. $ 82,642 $ 33,163
========= =========
The accompanying notes are an integral part of these financial statements.
F-7
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
Crescent Real Estate Equities Company ("Crescent Equities") operates as a
real estate investment trust for federal income tax purposes (a "REIT") and,
together with its subsidiaries, provides management, leasing and development
services for some of its properties.
The term "Company" includes, unless the context otherwise indicates,
Crescent Equities, a Texas REIT, and all of its direct and indirect
subsidiaries.
The direct and indirect subsidiaries of Crescent Equities at September 30,
2002 included:
- Crescent Real Estate Equities Limited Partnership. The "Operating
Partnership."
- Crescent Real Estate Equities, Ltd. The "General Partner" of the
Operating Partnership.
- Subsidiaries of the operating partnership and the general partner.
Crescent Equities conducts all of its business through the Operating
Partnership and its other subsidiaries. The Company is structured to facilitate
and maintain the qualification of Crescent Equities as a REIT.
The following table shows the consolidated subsidiaries of the Company that
owned or had an interest in real estate assets (the "Properties") and the
Properties that each subsidiary owned or had an interest in as of September 30,
2002.
Operating Partnership Wholly-owned assets -- The Avallon IV,
Chancellor Park, Datran Center (two office
properties), Houston Center (three office
properties) and The Park Shops at Houston
Center. These Properties are included in the
Company's Office Segment.
Joint Venture assets, consolidated -- 301
Congress Avenue (50% interest) and The
Woodlands Office Properties (85.6% interest)
(six office properties). These Properties are
included in the Company's Office Segment.
Sonoma Mission Inn (80.1%). This Property is
included in the Company's Hotel/Resort Segment.
Equity Investments, unconsolidated -- Bank One
Center (50% interest), Bank One Tower (20%
interest), Three Westlake Park (20% interest),
Four Westlake Park (20% interest), Miami Center
(40% interest) and 5 Houston Center (25%).
These Properties are included in the Company's
Office Segment. Mira Vista (94% interest), The
Highlands (11.6% interest), Falcon Point (94%
interest), Falcon Landing (94% interest) and
Spring Lakes (94% interest). These Properties
are included in the Company's Residential
Development Segment.
Crescent TRS Holding Corp. Equity Investments, consolidated -- Desert
Mountain Development Corporation (93% interest)
and The Woodlands Land Company (42.5%
interest). These Properties are included in the
Company's Residential Development Segment.
F-8
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
COPI Colorado, L.P. Equity Investments, consolidated -- Bear Paw
Lodge (60% interest), Eagle Ranch (60%
interest), Main Street Junction (30% interest),
Main Street Station (30% interest), Main Street
Station Vacation Club (30% interest), Riverbend
(60% interest), Three Peaks (Eagle's Nest) (30%
interest), Park Place at Riverfront (64%
interest), Park Tower at Riverfront (64%
interest), Promenade Lofts at Riverfront (64%
interest), Cresta (60% interest), Snow Cloud
(64% interest), One Vendue Range (62%
interest), Tahoe Mountain Resorts (57% -- 71.2%
interest). These Properties are included in the
Company's Residential Development Segment.
Crescent Real Estate Funding
I, L.P.
("Funding I") Wholly-owned assets -- The Aberdeen, The
Avallon I, II & III, Carter Burgess Plaza, The
Citadel, The Crescent Atrium, The Crescent
Office Towers, Regency Plaza One, Waterside
Commons and 125 E. John Carpenter Freeway.
These Properties are included in the Company's
Office Segment.
Crescent Real Estate Funding
II, L.P.
("Funding II") Wholly owned assets -- Albuquerque Plaza,
Barton Oaks Plaza, Briargate Office and
Research Center, Las Colinas Plaza, Liberty
Plaza I & II, MacArthur Center I & II,
Ptarmigan Place, Stanford Corporate Center, Two
Renaissance Square and 12404 Park Central.
These Properties are included in the Company's
Office Segment. Also, the Hyatt Regency
Albuquerque and the Park Hyatt Beaver Creek
Resort & Spa, both of which are included in the
Company's Resort/Hotel Segment.
Crescent Real Estate Funding
III, IV
and V, L.P. ("Funding III, IV
and
V")(1) Wholly-owned assets -- Greenway Plaza Office
Properties (ten office properties), included in
the Company's Office Segment, and Renaissance
Houston Hotel, included in the Company's
Resort/ Hotel Segment.
Crescent Real Estate Funding
VI, L.P.
("Funding VI") Wholly-owned asset -- Canyon Ranch -- Lenox,
included in the Company's Resort/Hotel Segment.
Crescent Real Estate Funding
VII,
L.P. ("Funding VII") Wholly-owned assets -- seven behavioral
healthcare properties, all of which are
classified as Properties Held for Disposition.
Crescent Real Estate Funding
VIII,
L.P. ("Funding VIII") Wholly-owned assets -- The Addison, Addison
Tower, Austin Centre, The Avallon V, Frost Bank
Plaza, Greenway I & IA (two office properties),
Greenway II, Johns Manville Plaza, Palisades
Central I, Palisades Central II, Stemmons
Place, Trammell Crow Center(3), 3333 Lee
Parkway, 1800 West Loop South, 5050 Quorum, 44
Cook Street and 55 Madison. These Properties
are included in the Company's Office Segment.
Also, the Canyon Ranch -- Tucson, Omni Austin
Hotel, and Ventana Inn & Spa, which are
included in the Company's Resort/Hotel Segment.
Crescent Real Estate Funding
IX, L.P.
("Funding IX") Wholly-owned assets -- MCI Tower. This Property
is included in the Company's Office Segment.
Also, the Denver Marriott City Center, which is
included in the Company's Resort/Hotel Segment.
F-9
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Crescent Real Estate Funding
X, L.P.
("Funding X") Wholly-owned assets -- Fountain Place and Post
Oak Central (three Office Properties), all of
which are included in the Company's Office
Segment.
Crescent Spectrum Center,
L.P.(2) Wholly-owned assets -- Spectrum Center,
included in the Company's Office Segment.
---------------
(1) Funding III owns nine of the ten office properties in the Greenway Plaza
office portfolio and the Renaissance Houston Hotel; Funding IV owns the
central heated and chilled water plant building located at Greenway Plaza;
and Funding V owns 9 Greenway, the remaining office property in the Greenway
Plaza office portfolio.
(2) Crescent Spectrum Center, L.P. holds its interest in Spectrum Center through
its ownership of the underlying land and notes and a mortgage on the
Property.
(3) The Company owns the principal economic interest in Trammell Crow Center
through its ownership of a fee simple title to the Property (subject to a
ground lease and a leasehold estate regarding the building) and two mortgage
notes encumbering the leasehold interests in the land and the building.
See "Note 10. Investments in Real Estate Mortgages and Equity of
Unconsolidated Companies" for a table that lists the Company's ownership in
significant unconsolidated joint ventures and equity investments as of September
30, 2002.
See "Note 11. Notes Payable and Borrowings under Credit Facility" for a
list of certain other subsidiaries of the Company, all of which are consolidated
in the Company's financial statements and were formed primarily for the purpose
of obtaining secured debt or joint venture financing.
On February 14, 2002, the Company executed an agreement with Crescent
Operating, Inc. ("COPI"), pursuant to which COPI transferred to subsidiaries of
the Company, in lieu of foreclosure, COPI's lessee interests in the eight
Resort/Hotel Properties leased to subsidiaries of COPI and, pursuant to a strict
foreclosure, COPI's voting common stock in three of the Company's Residential
Development Corporations. See "Note 19. COPI" for additional information related
to the Company's agreement with COPI.
SEGMENTS
The assets and operations of the Company were divided into four investment
segments at September 30, 2002;
- the Office Segment;
- the Resort/Hotel Segment;
- the Residential Development Segment; and
- the Temperature-Controlled Logistics Segment.
F-10
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The assets owned in whole or in part by the Company as of September 30,
2002 are classified by investment segment as follows:
- Office Segment consisted of 73 office properties, including three retail
properties (collectively referred to as the "Office Properties"), located
in 25 metropolitan submarkets in six states, with an aggregate of
approximately 28.5 million net rentable square feet. Sixty-one of the
Office Properties, including the three retail properties, are wholly
owned and 12 are owned through joint ventures, seven of which are
consolidated and five of which are unconsolidated. In addition, the
Company owns a 25% interest in the 5 Houston Center Office Property which
was completed in September 2002.
- Resort/Hotel Segment consisted of five luxury and destination fitness
resorts and spas with a total of 1,036 rooms/guest nights and four
upscale business-class hotel properties with a total of 1,771 rooms
(collectively referred to as the "Resort/Hotel Properties"). Eight of the
Resort/Hotel Properties are wholly owned and one of the luxury and
destination fitness resorts and spas is owned through a joint venture
that is consolidated.
- Residential Development Segment consisted of the Company's ownership of
real estate mortgages and voting and non-voting common stock representing
interests of 94% to 100% in five residential development corporations
(collectively referred to as the "Residential Development Corporations"),
which in turn, through joint venture or partnership arrangements, owned
in whole or in part 21 upscale residential development properties
(collectively referred to as the "Residential Development Properties").
- Temperature-Controlled Logistics Segment consisted of the Company's 40%
interest in a general partnership (the "Temperature-Controlled Logistics
Partnership"), which owns all of the common stock, representing
substantially all of the economic interest, of AmeriCold Corporation (the
"Temperature-Controlled Logistics Corporation"), a real estate investment
trust, which, as of September 30, 2002, directly or indirectly owned 88
temperature-controlled logistics properties (collectively referred to as
the "Temperature-Controlled Logistics Properties") with an aggregate of
approximately 441.5 million cubic feet (17.5 million square feet) of
warehouse space.
See "Note 9. Segment Reporting" for a table showing total revenues,
operating expenses, equity in net income (loss) of unconsolidated companies and
funds from operations for each of these investment segments for the three and
nine months ended September 30, 2002 and 2001, and identifiable assets for each
of these investment segments at September 30, 2002 and December 31, 2001.
For purposes of segment reporting as defined in Statement of Financial
Accounting Standard ("SFAS") No. 131, "Disclosures About Segments of an
Enterprise and Related Information" and this Quarterly Report on Form 10-Q, the
Resort/Hotel Properties, the Residential Development Properties and the
Temperature-Controlled Logistics Properties are considered three separate
reportable segments, as described above. However, for purposes of investor
communications, the Company classifies its luxury and destination fitness
resorts and spas and Residential Development Properties as a single group
referred to as the "Resort and Residential Development Sector" due to the
similar characteristics of targeted customers. This group does not contain the
four business-class hotel properties. Instead, for investor communications, the
four business-class hotel properties are classified with the
Temperature-Controlled Logistics Properties as the Company's "Investment
Sector."
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
conformity with generally accepted accounting principles in the United States
("GAAP") for interim financial information, as well as in accordance with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the
information and footnotes required by GAAP for complete financial statements are
not included. In
F-11
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
management's opinion, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of the unaudited
interim financial statements are included. Operating results for interim periods
reflected do not necessarily indicate the results that may be expected for a
full fiscal year. You should read these financial statements in conjunction with
the financial statements and the accompanying notes included in the Company's
Form 10-K, as amended, for the year ended December 31, 2001.
Certain amounts in prior period financial statements have been reclassified
to conform with current period presentation.
2. ADOPTION OF NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 142, "Goodwill and Other Intangible Assets" (effective January 1, 2002).
SFAS No. 142 specifies that goodwill and certain other types of intangible
assets may no longer be amortized, but instead are subject to periodic
impairment testing. If an impairment charge is required, the charge is reported
as a change in accounting principle and is included in operating results as a
Cumulative Effect of a Change in Accounting Principle. SFAS No. 142 provides for
a transitional period of up to 12 months. Any need for impairment must be
assessed within the first six months and the amount of impairment must be
determined within the next six months. Any additional impairment taken in
subsequent interim periods during 2002 related to the initial adoption of this
statement will require the first quarter financial statements to be restated.
During the three months ended March 31, 2002 the Company recognized a
goodwill impairment charge of approximately $9,200 due to the initial
application of this statement. This charge was due to an impairment (net of
minority interests) of the goodwill at the Temperature-Controlled Logistics
Corporation. This charge was reported as a change in accounting principle and
was included in the Company's consolidated statements of operations as a
"Cumulative Effect of a Change in Accounting Principle" for the three months
ended March 31, 2002.
Subsequent to March 31, 2002 the Company determined that an impairment
charge of $1,300, net of minority interest and taxes, was required for the
goodwill at one of the Residential Development Corporations, bringing the total
impairment charge to be recognized for the nine months ended September 30, 2002
to $10,500 related to initial application of SFAS No. 142. In accordance with
SFAS No. 142, the financial statements for the quarter ended March 31, 2002 were
restated to include the additional impairment charge of $1,300. Accordingly, the
entire $10,500 impairment charge against the goodwill of the Temperature-
Controlled Logistics Corporation and one of the Residential Development
Corporations has been included in the Company's consolidated statements of
operations as a "Cumulative Effect of a Change in Accounting Principle" for the
nine months ended September 30, 2002.
In prior periods, the Company tested goodwill for impairment under the
provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets," under which an impairment loss is recognized when expected undiscounted
future cash flows are less than the carrying value of the assets. For the year
ended December 31, 2001, the expected future operating cash flows of the
Temperature-Controlled Logistics Corporation on an undiscounted basis exceeded
the carrying amounts of the properties and other long-lived assets, including
goodwill. Accordingly, no impairment was recognized under SFAS No. 121. However,
upon the adoption of SFAS No. 142 on January 1, 2002, the Temperature-Controlled
Logistics Corporation compared the fair value of the Temperature-Controlled
Logistics Properties based on discounted cash flows to the carrying value of the
Temperature-Controlled Logistics Properties and the related goodwill. Based on
this test, the fair value did not exceed the carrying value of the
Temperature-Controlled Logistics assets and, accordingly, the goodwill was
impaired.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived
F-12
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
assets. SFAS No. 144 requires that the results of operations, including any
gains or losses recognized, be disclosed separately on the Company's
consolidated statements of operations. The Company adopted SFAS No. 144 on
January 1, 2002. Subsequent to January 1, 2002, the Company sold five Office
Properties. The Company also sold three behavioral healthcare properties
subsequent to January 1, 2002 and owned seven behavioral healthcare properties
as of September 30, 2002, which were classified as held for sale. In accordance
with SFAS No. 144, the results of operations of these assets and any gain or
loss on sale have been presented as "Discontinued Operations -- Income and Gain
on Assets Sold and Held for Sale" in the accompanying consolidated statements of
operations. The carrying value of the assets held for sale has been reflected as
"Properties Held for Disposition, net" in the accompanying consolidated balance
sheet as of September 30, 2002 and December 31, 2001. (See "Note 4. Discontinued
Operations"). The adoption of this statement did not materially affect the
Company's interim financial statements for the nine months ended September 30,
2002. The Company has reclassified certain amounts in prior period financial
statements to conform with the new presentation requirements.
3. ACQUISITION
On August 29, 2002, the Company acquired Johns Manville Plaza, a 29-story,
675,000 square foot Class A office building located in Denver, Colorado. The
Company acquired the Office Property for approximately $91,200, funded by a draw
on the Company's credit facility. The Office Property is wholly-owned by the
Company and included in the Company's Office Segment.
4. DISCONTINUED OPERATIONS
OFFICE SEGMENT
On January 18, 2002, the Company completed the sale of the Cedar Springs
Plaza Office Property in Dallas, Texas. The sale generated net proceeds of
approximately $12,000 and a net gain of approximately $4,500. The proceeds from
the sale of the Cedar Springs Plaza Office Property were used primarily to pay
down the Company's credit facility. This Property was wholly-owned by the
Company and was included in the Company's Office Segment.
On May 29, 2002, the Woodlands Office Equities -- '95 Limited ("WOE"),
owned by the Company and the Woodlands Commercial Properties Company, L.P. (the
"Woodlands CPC"), sold two Office Properties located within The Woodlands,
Texas. The sale generated net proceeds of approximately $3,600, of which the
Company's portion was approximately $3,200, and generated a net gain of
approximately $2,100, of which the Company's portion was approximately $1,900.
The proceeds received by the Company were used primarily to pay down the
Company's credit facility. These two Properties were consolidated joint venture
properties and were included in the Company's Office Segment.
On August 1, 2002, the Company completed the sale of the 6225 North 24th
Street Office Property in Phoenix, Arizona. The sale generated net proceeds of
approximately $8,800 and a net gain of approximately $1,300. The proceeds from
the sale of the 6225 North 24th Street Office Property were used to redeem
preferred Class A Units in Funding IX from GMAC Commercial Mortgage Corporation
("GMACCM"). This Office Property was wholly-owned by the Company and was
included in the Company's Office Segment.
On September 20, 2002, the Company completed the sale of the Reverchon
Plaza Office Property in Dallas, Texas. The sale generated net proceeds of
approximately $29,200 and a net gain of approximately $500. The proceeds from
the sale of the Reverchon Plaza Office Property were used to pay down the
Company's credit facility. This Office Property was wholly-owned by the Company
and was included in the Company's Office Segment.
The operations for these Office Properties, as well as the gains recognized
on the sales of these Office Properties, are included in "Discontinued
Operations -- Income and Gain on Assets Sold and Held for Sale."
F-13
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OTHER
As of September 30, 2002, the Company owned seven behavioral healthcare
properties, all of which were classified in the Company's financial statements
as "Properties Held for Disposition, Net." During the nine months ended
September 30, 2002, the Company recognized an impairment charge of approximately
$600 on one of the behavioral healthcare properties held for sale. This charge
was recognized in the Company's consolidated statements of operations as
"Discontinued Operations -- Income and Gain on Assets Sold and Held for Sale."
The charge represents the difference between the carrying value of the property
and the estimated sales price less costs of sale. After recognition of this
impairment, the carrying value of the behavioral healthcare properties at
September 30, 2002 was approximately $20,997. Depreciation expense has not been
recognized since the dates the behavioral healthcare properties were classified
as held for sale. The Company is actively marketing for sale the remaining seven
behavioral healthcare properties. The sales of these behavioral healthcare
properties are expected to close within the next year. No rental revenues,
operating expenses or depreciation and amortization were recognized during the
nine months ended September 30, 2002 for the seven behavioral healthcare
properties classified as held for sale at September 30, 2002.
OFFICE SEGMENT
The following table indicates the rental revenue, operating expenses,
depreciation and amortization and net income for the nine months ended September
30, 2002 and 2001 for the Office Properties sold during the nine months ended
September 30, 2002.
DEPRECIATION
RENTABLE RENTAL OPERATING AND
SQUARE FEET REVENUE EXPENSES AMORTIZATION NET INCOME
----------- ------- --------- ------------ ----------
September 30, 2002.............. 670,753 $4,320 $2,841 $1,369 $ 110
======= ====== ====== ====== ======
September 30, 2001.............. 670,753 $7,864 $4,064 $1,878 $1,922
======= ====== ====== ====== ======
OFFICE SEGMENT AND OTHER
The following table indicates the major classes of assets of the Properties
held for sale as of September 30, 2002 and December 31, 2001.
AS OF
--------------------------------------
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
Land................................................ $ 8,697 $ 19,178
Buildings and improvements.......................... 14,039 69,294
Furniture, fixture and equipment.................... 1,820 2,527
Accumulated depreciation............................ (3,559) (14,690)
------- --------
Net investment in real estate....................... $20,997 $ 76,309
======= ========
5. OTHER ASSET DISPOSITIONS
OFFICE SEGMENT
On September 30, 2002, the Company completed the sale of the Washington
Harbour Phase II Land located in the Georgetown submarket of Washington, D.C.
The sale generated net proceeds of approximately $15,100 and a net loss of
approximately $900. The proceeds from the sale of the Washington Harbour Phase
II Land were used to pay down the Company's credit facility. This land was
wholly-owned by the Company and was included in the Company's Office Segment.
F-14
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
RESORT/HOTEL SEGMENT
On September 30, 2002, the Company completed the sale of land adjacent to
the Company's Canyon Ranch -- Tucson Resort/Hotel Property (the
"Canyon-Ranch -- Tucson Land") located in Tucson, Arizona to an affiliate of the
management company (unrelated to the Company) of the Company's Canyon Ranch
Resort/Hotel Properties. The sales price of the land was approximately $9,400,
for which the Company received $1,900 of net cash proceeds and a promissory note
in the amount of $7,520 with an interest rate of 6.50%, payable quarterly and
maturing on October 1, 2007, and a net gain of approximately $5,500 recorded in
the "Gain on Property Sales, net" caption of the Company's Consolidated
Statements of Operations for the three and nine months ended September 30, 2002.
The net cash proceeds from the sale of the Canyon-Ranch -- Tucson Land were used
to pay down the Company's credit facility. This land was wholly-owned by the
Company and was included in the Company's Resort/Hotel Segment. The Company has
committed to fund a $3,200 construction loan to the purchaser which will be
secured by 20 developed lots and a $640 letter of credit. The Company had not
funded any of the $3,200 commitment as of September 30, 2002.
6. JOINT VENTURES
CONSOLIDATED
Sonoma Mission Inn & Spa
On September 1, 2002, the Company entered into a joint venture arrangement
with a subsidiary of Fairmont Hotels & Resorts, Inc. ("FHR"), pursuant to which
the Company contributed a Resort/Hotel Property, the Sonoma Mission Inn & Spa in
Sonoma County, California and FHR purchased a 19.9% equity interest in the
limited liability company that owns the Resort/Hotel Property. The Company
continues to own the remaining 80.1% interest. The joint venture generated
approximately $8,000 in net cash proceeds to the Company that were used to pay
down the Company's credit facility. The Company has loaned $45,100 to the
limited liability company that owns Sonoma Mission Inn & Spa at an interest rate
of LIBOR plus 300 basis points. The maturity date of the loan is the earlier of
the date on which the limited liability company obtains third-party financing or
one year. The limited liability company has the option to extend the loan for
two successive six-month periods by paying a fee. Under the agreement with FHR,
the Company will manage the limited liability company that owns Sonoma Mission
Inn & Spa and FHR will operate and manage the property under the Fairmont brand.
The joint venture transaction was accounted for as a partial sale of this
Resort/Hotel Property, resulting in an approximately $4,000 loss on the interest
sold.
UNCONSOLIDATED
Three Westlake Park
On August 21, 2002, the Company entered into a joint venture arrangement
with an affiliate of General Electric Pension Fund ("GE") in connection with
which the Company contributed an Office Property, Three Westlake Park in
Houston, Texas and GE made a cash contribution. The joint venture is structured
such that GE holds an 80% equity interest in Three Westlake Park, a 415,000
square foot Office Property located in the Katy Freeway submarket of Houston,
and the Company continues to hold the remaining 20% equity interest in the
Office Property, which is accounted for under the equity method. The joint
venture generated approximately $47,100 in net cash proceeds to the Company,
including distributions to the Company resulting from the sale of its 80% equity
interest and $6,600 from the Company's portion of mortgage financing at the
joint venture level. None of the mortgage financing at the joint venture level
is guaranteed by the Company. The Company has no commitment to reinvest the cash
proceeds back into the joint venture. The joint venture was accounted for as a
partial sale of this Office Property, resulting in a gain of $17,000, net of
deferred gain of approximately $4,300. In addition, the Company manages and
leases the Office Property on a fee basis. During the nine months ended
September 30, 2002, the Company recognized $32 for these services.
F-15
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Miami Center
On September 25, 2002, the Company entered into a joint venture arrangement
with an affiliate of a fund managed by JP Morgan Investment Management, Inc.
("JPM") in connection with which JPM purchased a 60% interest in Crescent Miami
Center, L.L.C. with a cash contribution. Crescent Miami Center, L.L.C. owns an
Office Property, Miami Center in Miami, Florida. The joint venture is structured
such that JPM holds a 60% equity interest in Miami Center, and the Company holds
the remaining 40% equity interest in the Office Property, which is accounted for
under the equity method. The joint venture generated approximately $117,000 in
net cash proceeds to the Company, including distributions to the Company
resulting from the sale of its 60% equity interest and $32,400 from the
Company's portion of mortgage financing at the joint venture level. None of the
mortgage financing at the joint venture level is guaranteed by the Company. The
Company has a remaining commitment for deferred maintenance items of
approximately $700. The Company otherwise has no commitment to reinvest the cash
proceeds back into the joint venture. The joint venture was accounted for as a
partial sale of this Office Property, resulting in a gain of approximately
$4,600, net of deferred gain of approximately $3,500. The Company will continue
to manage Miami Center on a fee basis.
7. EARNINGS PER SHARE
SFAS No. 128 "Earnings Per Share" ("EPS") specifies the computation,
presentation and disclosure requirements for earnings per share. Basic EPS
excludes all dilution while Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common shares were
exercised or converted into common shares.
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------
2002 2001
------------------------------- -------------------------------
WTD. AVG. PER SHARE WTD. AVG. PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------- --------- --------- ------- --------- ---------
Basic EPS --
Income before discontinued
operations........................... $26,349 103,766 $21,910 108,748
Series A Preferred Share
distributions........................ (4,556) -- (3,375) --
Series B Preferred Share
distributions........................ (2,019) -- -- --
------- ------- ----- ------- ------- -----
Income available to common shareholders
before discontinued operations....... $19,774 103,766 $0.19 $18,535 108,748 $0.17
Discontinued operations................ 1,400 -- 0.01 549 -- 0.01
------- ------- ----- ------- ------- -----
Net income available to common
shareholders......................... $21,174 103,766 $0.20 $19,084 108,748 $0.18
======= ======= ===== ======= ======= =====
Diluted EPS --
Income available to common shareholders
before discontinued operations....... $19,774 103,766 $18,535 108,748
Effect of dilutive securities:
Share and unit options............... -- 121 -- 1,875
------- ------- ----- ------- ------- -----
Income available to common shareholders
before discontinued operations....... $19,774 103,887 $0.19 $18,535 110,623 $0.17
Discontinued operations................ 1,400 0.01 549 -- --
------- ------- ----- ------- ------- -----
Net income available to common
shareholders......................... $21,174 103,887 $0.20 $19,084 110,623 $0.17
======= ======= ===== ======= ======= =====
F-16
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE NINE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
-------------------------------- --------------------------------
WTD. AVG. PER SHARE WTD. AVG. PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
-------- --------- --------- -------- --------- ---------
Basic EPS --
Income before discontinued
operations, extraordinary item and
cumulative effect of a change in
accounting principle............... $ 57,696 104,527 $ 77,778 108,170
Series A Preferred Share
distributions...................... (12,146) -- (10,125) --
Series B Preferred Share
distributions...................... (3,028) -- -- --
-------- ------- ------ -------- ------- ------
Income available to common
shareholders before discontinued
operations, extraordinary item and
cumulative effect of a change in
accounting principle............... $ 42,522 104,527 $ 0.41 $ 67,653 108,170 $ 0.63
Discontinued operations.............. 6,430 -- 0.06 1,693 -- 0.01
Extraordinary item -- extinguishment
of debt............................ -- -- -- (10,802) -- (0.10)
Cumulative effect of a change in
accounting principle............... (10,465) -- (0.10) -- -- --
-------- ------- ------ -------- ------- ------
Net income available to common
shareholders....................... $ 38,487 104,527 $ 0.37 $ 58,544 108,170 $ 0.54
======== ======= ====== ======== ======= ======
Diluted EPS --
Income available to common
shareholders before discontinued
operations, extraordinary item and
cumulative effect of a change in
accounting principle............... $ 42,522 104,527 $ 67,653 108,170
Effect of dilutive securities:
Share and unit options............. -- 514 -- 1,841
-------- ------- ------ -------- ------- ------
Income available to common
shareholders before discontinued
operations, extraordinary item and
cumulative effect of a change in
accounting principle............... $ 42,522 105,041 $ 0.41 $ 67,653 110,011 $ 0.62
Discontinued operations.............. 6,430 -- 0.06 1,693 -- 0.01
Extraordinary item -- extinguishment
of debt............................ -- -- -- (10,802) -- (0.10)
Cumulative effect of a change in
accounting principle............... (10,465) -- (0.10) -- -- --
-------- ------- ------ -------- ------- ------
Net income available to common
shareholders....................... $ 38,487 105,041 $ 0.37 $ 58,544 110,011 $ 0.53
======== ======= ====== ======== ======= ======
The effect of the conversion of the Series A Convertible Cumulative
Preferred Shares is not included in the computation of Diluted EPS for the three
and nine months ended September 30, 2002 or 2001, since the effect of their
conversion would be antidilutive.
F-17
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
2002 2001
--------- --------
Supplemental disclosures of cash flow information:
Interest paid on debt..................................... $ 106,969 $143,908
Interest capitalized -- Office............................ 118 --
Interest capitalized -- Resort/Hotel...................... -- 507
Interest capitalized -- Residential Development........... 9,591 --
Additional interest paid resulting from cash flow hedge
agreements............................................. 18,028 7,150
--------- --------
Total interest paid....................................... $ 134,706 $151,565
========= ========
Interest expense.......................................... $ 135,871 $139,189
========= ========
Cash paid for income taxes................................ $ 10,200 $ --
========= ========
Supplemental schedule of noncash investing and financing
activities:
Conversion of Operating Partnership units to common shares
with resulting reduction in minority interest and
increases in common shares and additional paid-in
capital................................................ $ 120 $ 2,759
Impairment related to an investment in an unconsolidated
company................................................ (5,302) --
Sale of marketable securities............................. -- (8,642)
Unrealized net loss on available-for-sale securities...... (1,814) --
Adjustment of cash flow hedges to fair value.............. 3,083 (19,649)
Impairment related to real estate assets held for sale.... 600 --
Noncash compensation...................................... 1,900 --
Acquisition of ownership of certain assets previously
owned by Broadband in consideration for conveyance of
the Company's equity interest in Broadband............. -- 7,200
Financed sale of land parcel.............................. 7,520 --
--------- --------
$ 6,107 $(18,332)
========= ========
Supplemental schedule of transfer of assets and assumptions
of liabilities pursuant to the February 14, 2002 agreement
with COPI:
Net investment in real estate............................. $ 570,175
Restricted cash and cash equivalents...................... 3,968
Accounts receivable, net.................................. 23,338
Investments in real estate mortgages and equity of
unconsolidated companies............................... (309,103)
Notes receivable -- net................................... (29,816)
Income tax asset -- current and deferred, net............. 21,784
Other assets, net......................................... 63,263
Notes payable............................................. (129,157)
Accounts payable -- accrued expenses and other
liabilities............................................ (201,159)
Minority Interest -- Consolidated real estate
partnerships........................................... (51,519)
---------
Increase in cash resulting from the COPI agreement..... $ (38,226) N/A
=========
F-18
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. SEGMENT REPORTING
For purposes of segment reporting as defined in SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information," the Company currently
has four major investment segments based on property type: the Office Segment;
the Resort/Hotel Segment; the Residential Development Segment; and the
Temperature-Controlled Logistics Segment. Management utilizes this segment
structure for making operating decisions and assessing performance.
The Company uses funds from operations ("FFO") as the measure of segment
profit or loss. FFO, as used in this document, means:
- Net Income (Loss) -- determined in conformity with GAAP;
- excluding gains (or losses) from sales of depreciable operating
property;
- excluding extraordinary items (as defined by GAAP);
- plus depreciation and amortization of real estate assets; and
- after adjustments for unconsolidated partnerships and joint ventures.
The National Association of Real Estate Investment Trusts ("NAREIT")
developed FFO as a relative measure of performance and liquidity of an equity
REIT to recognize that income-producing real estate historically has not
depreciated on the basis determined under GAAP. The Company considers FFO an
appropriate measure of performance for an equity REIT and for its investment
segments. However, FFO:
- does not represent cash generated from operating activities determined
in accordance with GAAP (which, unlike FFO, generally reflects all cash
effects of transactions and other events that enter into the
determination of net income);
- is not necessarily indicative of cash flow available to fund cash needs;
- should not be considered as an alternative to net income determined in
accordance with GAAP as an indication of the Company's operating
performance, or to cash flow from operating activities determined in
accordance with GAAP as a measure of either liquidity or the Company's
ability to make distributions; and
- the Company's measure of FFO may not be comparable to similarly titled
measures of other REITs because these REITs may apply the definition of
FFO in a different manner than the Company.
F-19
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Selected financial information related to each segment for the three and
nine months ended September 30, 2002 and 2001, and identifiable assets for each
of the segments at September 30, 2002 and December 31, 2001, are presented
below.
SELECTED FINANCIAL INFORMATION
TEMPERATURE-
RESORT/ RESIDENTIAL CONTROLLED
OFFICE HOTEL DEVELOPMENT LOGISTICS CORPORATE
SEGMENT SEGMENT SEGMENT SEGMENT AND OTHER(1) TOTAL
---------- -------- ----------- ------------ ------------ ----------
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2002
Property revenues.............. $ 146,773(2) $ 56,110 $ 43,837 $ -- $ -- $ 246,720
Other income................... -- -- -- -- 1,781 1,781
---------- -------- -------- -------- --------- ----------
Total revenue......... $ 146,773 $ 56,110 $ 43,837 $ -- $ 1,781 $ 248,501
========== ======== ======== ======== ========= ==========
Property operating expenses.... $ 62,175 $ 44,599 $ 42,110 $ -- $ -- $ 148,884
Other operating expenses....... -- -- -- -- 96,285 96,285
---------- -------- -------- -------- --------- ----------
Total expenses........ $ 62,175 $ 44,599 $ 42,110 $ -- $ 96,285 $ 245,169
========== ======== ======== ======== ========= ==========
Equity in net income (loss) of
unconsolidated companies..... $ 874 $ (91) $ 4,272 $ (3,101) $ (755) $ 1,199
========== ======== ======== ======== ========= ==========
Funds from operations(3)....... $ 88,045 $ 13,593 $ 4,319 $ 3,675 $ (59,620) $ 50,012(4)
========== ======== ======== ======== ========= ==========
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2002
Property revenues.............. $ 151,253 $ 12,449 $ -- $ -- $ -- $ 163,702
Other income................... -- -- -- -- 9,710 9,710
---------- -------- -------- -------- --------- ----------
Total revenue......... $ 151,253 $ 12,449 $ -- $ -- $ 9,710 $ 173,412
========== ======== ======== ======== ========= ==========
Property operating expenses.... $ 64,869 $ -- $ -- $ -- $ -- $ 64,869
Other operating expenses....... -- -- -- -- 88,180 88,180
---------- -------- -------- -------- --------- ----------
Total expenses........ $ 64,869 $ -- $ -- $ -- $ 88,180 $ 153,049
========== ======== ======== ======== ========= ==========
Equity in net income (loss) of
unconsolidated companies..... $ 1,520 $ -- $ 7,263 $ (2,066) $ 1,686 $ 8,403
========== ======== ======== ======== ========= ==========
Funds from operations(3)....... $ 91,237 $ 12,374 $ 10,278 $ 3,621 $ (54,560) $ 62,950(4)
========== ======== ======== ======== ========= ==========
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002
Property revenues.............. $ 429,297(2) $148,157 $176,887 $ -- $ -- $ 754,341
Other income................... -- -- -- -- 5,850 5,850
---------- -------- -------- -------- --------- ----------
Total revenues........ $ 429,297 $148,157 $176,887 $ -- $ 5,850 $ 760,191
========== ======== ======== ======== ========= ==========
Property operating expenses.... $ 189,146 $110,701 $161,319 $ -- $ -- $ 461,166
Other operating expenses....... -- -- -- -- 270,375 270,375
---------- -------- -------- -------- --------- ----------
Total expenses........ $ 189,146 $110,701 $161,319 $ -- $ 270,375 $ 731,541
========== ======== ======== ======== ========= ==========
Equity in net income (loss) of
unconsolidated companies..... $ 3,655 $ (91) $ 22,934 $ (3,828) $ (5,281) $ 17,389
========== ======== ======== ======== ========= ==========
Funds from operations.......... $ 249,119 $ 47,140 $ 32,354 $ 14,450 $(175,719)(3) $ 167,344(4)
========== ======== ======== ======== ========= ==========
F-20
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
TEMPERATURE-
RESORT/ RESIDENTIAL CONTROLLED
OFFICE HOTEL DEVELOPMENT LOGISTICS CORPORATE
SEGMENT SEGMENT SEGMENT SEGMENT AND OTHER(1) TOTAL
---------- -------- ----------- ------------ ------------ ----------
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2001
Property revenues.............. $ 456,311 $ 44,523 $ -- $ -- $ -- $ 500,834
Other income................... -- -- -- -- 36,347 36,347
---------- -------- -------- -------- --------- ----------
Total revenues........ $ 456,311 $ 44,523 $ -- $ -- $ 36,347 $ 537,181
========== ======== ======== ======== ========= ==========
Property operating expenses.... $ 196,340 $ -- $ -- $ -- $ -- $ 196,340
Other operating expenses....... -- -- -- -- 274,606 274,606
---------- -------- -------- -------- --------- ----------
Total expenses........ $ 196,340 $ -- $ -- $ -- $ 274,606 $ 470,946
========== ======== ======== ======== ========= ==========
Equity in net income (loss) of
unconsolidated companies..... $ 3,841 $ -- $ 27,703 $ 2,285 $ 2,896 $ 36,725
========== ======== ======== ======== ========= ==========
Funds from operations.......... $ 273,134 $ 44,142 $ 36,927 $ 19,085 $(156,703)(3) $ 216,585(4)
========== ======== ======== ======== ========= ==========
Identifiable assets:
Balance at September 30,
2002......................... $2,543,589 $500,784 $762,018 $290,515 $ 244,205 $4,341,111
========== ======== ======== ======== ========= ==========
Balance at December 31, 2001... $2,739,727 $444,887 $372,539 $308,427 $ 276,569 $4,142,149
========== ======== ======== ======== ========= ==========
---------------
(1) For purposes of this Note, the behavioral healthcare properties' financial
information has been included in this column.
(2) Includes approximately $5,000 of net insurance proceeds received in
September 2002 as a result of an insurance claim on one of the Company's
Office Properties that had been damaged as a result of a tornado.
(3) Includes interest and other income, behavioral healthcare property income,
preferred return paid to GMACCM, other unconsolidated companies, less
depreciation and amortization of non-real estate assets and amortization of
deferred financing costs, corporate general and administrative expense,
interest expense and preferred dividends.
(4) Reconciliation of Funds From Operations to Net Income.
F-21
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED
ENDED SEPTEMBER 30, SEPTEMBER 30,
--------------------- -------------------------
2002 2001 2002 2001
--------- --------- ----------- ----------
Consolidated funds from operations....... $ 50,012 $ 62,950 $ 167,344 $216,585
Adjustments to reconcile Funds from
Operations to Net Income:
Depreciation and amortization of real
estate assets....................... (36,419) (30,840) (102,088) (89,859)
Gain (Loss) on property sales, net..... 19,311 1,032 24,500 570
Impairment and other adjustments
related to real estate assets....... -- 19 (600) (15,305)
Extraordinary Item -- extinguishment of
debt................................ -- -- -- (10,802)
Cumulative effect of change in
accounting principle................ -- -- (10,465) --
Adjustment for investments in real
estate mortgages and equity of
unconsolidated companies:
Office Properties.............. (1,946) (2,663) (5,997) (6,718)
Hotel/Resort Properties........ (370) -- (370) --
Residential Development
Properties................... 615 (3,015) (2,339) (9,224)
Temperature-Controlled
Logistics Properties......... (6,777) (5,687) (18,278) (16,800)
Other.......................... (96) -- (5,872)(a) --
Unitholder minority interest........ (3,156) (2,712) (7,348) (9,903)
Series A Preferred share
distribution...................... 4,556 3,375 12,146 10,125
Series B Preferred share
distribution...................... 2,019 -- 3,028 --
-------- -------- --------- --------
Net Income............................... $ 27,749 $ 22,459 $ 53,661 $ 68,669
======== ======== ========= ========
---------------
(a) These amounts primarily represent impairment of the Company's investment in
DBL Holdings, Inc., related to the Class C-1 Notes issued by Juniper CBO
1999-1 Ltd., a privately-placed equity interest of a collateralized bond
obligation. (See "Note 10. Investments in Real Estate Mortgages and Equity
of Unconsolidated Companies" for further discussion).
SIGNIFICANT LESSEES
See "Note 10. Investments in Real Estate Mortgages and Equity of
Unconsolidated Companies -- Temperature-Controlled Logistics Properties" for a
description of the sole lessee of the Temperature-Controlled Logistics
Properties.
10. INVESTMENTS IN REAL ESTATE MORTGAGES AND EQUITY OF UNCONSOLIDATED COMPANIES
The Company has investments of 20% to 50% in six unconsolidated joint
ventures that own six Office Properties. The Company does not have control of
these partnerships, and therefore, these investments are accounted for using the
equity method of accounting.
The Company has other unconsolidated equity investments with interests
ranging from 24% to 97.4%. The Company does not have control of these entities
due to ownership interests of 50% or less or the
F-22
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ownership of non-voting interests only, and therefore, these investments are
also accounted for using the equity method of accounting.
The following is a summary of the Company's ownership in significant
unconsolidated joint ventures and equity investments.
COMPANY'S OWNERSHIP
ENTITY CLASSIFICATION AS OF SEPTEMBER 30, 2002
------ -------------- ------------------------
Joint Ventures
Main Street Partners, L.P. ..... Office (Bank One 50.0 %(1)
Center -- Dallas)
Crescent Miami Center,
L.L.C. ....................... Office (Miami Center -- Miami) 40.0 %(2)
Crescent 5 Houston Center,
L.P. ......................... Office (5 Houston Center -- 25.0 %(3)
Houston)
Austin PT BK One Tower Office
Limited Partnership........... Office (Bank One 20.0 %(4)
Tower -- Austin)
Houston PT Four Westlake Office
Limited Partnership........... Office (Four Westlake Park -- 20.0 %(4)
Houston)
Houston PT Three Westlake Office
Limited Partnership........... Office (Three Westlake Park -- 20.0 %(4)
Houston)
Equity Investments
Mira Vista Development Corp. ... Residential Development 94.0 %(5)
Houston Area Development
Corp. ........................ Residential Development 94.0 %(6)
The Woodlands Land Development
Company, L.P.(7).............. Residential Development 42.5 %(8)(9)
Blue River Land Company,
L.L.C.(7)..................... Residential Development 31.8 %(10)
Manalapan Hotel Partners,
L.L.C.(7)..................... Resort/Hotel (Ritz Carlton Palm 24.0 %(11)
Beach)
Temperature-Controlled Logistics
Partnership................... Temperature-Controlled Logistics 40.0 %(12)
The Woodlands Commercial
Properties Company, L.P. ..... Office 42.5 %(8)(9)
DBL Holdings, Inc. ............. Other 97.4 %(13)
CR License, L.L.C. ............. Other 30.0 %(14)
Woodlands Operating Company,
L.P. ......................... Other 42.5 %(8)(9)
Canyon Ranch Las Vegas.......... Other 65.0 %(15)
SunTX Fulcrum Fund, L.P. ....... Other 33.3 %(16)
---------------
(1) The remaining 50.0% interest in Main Street Partners, L.P. is owned by
Trizec Properties, Inc.
(2) The remaining 60% interest in Crescent Miami Center, L.L.C. is owned by a
fund advised by JP Morgan Investment Management, Inc. The Company will
continue to manage Miami Center on a fee basis.
(3) The remaining 75% interest in Crescent 5 Houston Center, L.P. is owned by a
pension fund advised by JP Morgan Investment Management, Inc. The Company
recorded $1,142 in development, and leasing
F-23
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
fees, related to this investment during the nine months ended September 30,
2002. The 5 Houston Center Office Property was completed on September 16,
2002.
(4) The remaining 80% interest in Austin PT BK One Tower Office Limited
Partnership, Houston PT Three Westlake Office Limited Partnership and
Houston PT Four Westlake Office Limited Partnership is owned by an
affiliate of General Electric Pension Fund. The Company recorded $473 in
management and leasing fees for these Office Properties during the nine
months ended September 30, 2002.
(5) The remaining 6.0% interest in Mira Vista Development, Corp. ("MVDC"),
which represents 100% of the voting stock, is owned 4.0% by DBL Holdings,
Inc. ("DBL") and 2.0% by third parties.
(6) The remaining 6.0% interest in Houston Area Development Corp. ("HADC"),
which represents 100% of the voting stock, is owned 4.0% by DBL and 2.0% by
a third party.
(7) On February 14, 2002, the Company executed an agreement with COPI, pursuant
to which COPI transferred to subsidiaries of the Company, pursuant to a
strict foreclosure, COPI's interests in the voting stock in three of the
Company's Residential Development Corporations (Desert Mountain Development
Corporation ("DMDC"), The Woodlands Land Company, Inc. ("TWLC") and
Crescent Resort Development, Inc. ("CRDI"), and in CRL Investments, Inc.
("CRLI"). COPI transferred its 60% general partner interest in COPI
Colorado, L.P. which owns 10% of the voting stock in CRDI, which increased
the Company's ownership interest in CRDI from 90% to 96%. As a result, the
Company fully consolidated the operations of these entities beginning on
the dates of the asset transfers. The Woodlands Land Development Company,
L.P. is an unconsolidated equity investment of TWLC. Blue River Land
Company, L.L.C., and Manalapan Hotel Partners, L.L.C., are unconsolidated
equity investments of CRDI. See "Note 20. Subsequent Event" for a
description of the Company's acquisition of the remaining 75% interest in
the Manalapan Hotel Partners, L.L.C.
(8) The remaining 57.5% interest in The Woodlands Land Development Company,
L.P., The Woodlands Commercial Properties Company, L.P. (the "Woodlands
CPC") and The Woodlands Operating Company, L.P. are owned by an affiliate
of Morgan Stanley.
(9) Distributions are made to partners based on specified payout percentages.
During the nine months ended September 30, 2002, the payout percentage to
the Company was 52.5%.
(10) Of the remaining 68.2% interest in Blue River Land Company, L.L.C., 0.7% is
indirectly owned by John Goff, Vice-Chairman of the Board of Trust Managers
and Chief Executive Officer of the Company, through his 20% ownership of
COPI Colorado, L.P. and 67.5% is owned by parties unrelated to the Company.
(11) Of the remaining 76.0% interest in Manalapan Hotel Partners, L.L.C., 0.5%
is indirectly owned by John Goff, Vice-Chairman of the Board of Trust
Managers and Chief Executive Officer of the Company, through his 20%
ownership of COPI Colorado, L.P. and 75.5% is owned by parties unrelated to
the Company. See "Note 20 Subsequent Event" for discussion of Manalapan
Hotel Partners, L.L.C.
(12) The remaining 60.0% interest in the Temperature-Controlled Logistics
Partnership is owned by Vornado Realty Trust, L.P.
(13) John Goff, Vice-Chairman of the Board of Trust Managers and Chief Executive
Officer of the Company, obtained the remaining 2.6% economic interest in
DBL (including 100% of the voting interest in DBL) in exchange for his
voting interests in MVDC and HADC, originally valued at approximately $381,
and approximately $63 in cash, or total consideration valued at
approximately $444. At September 30, 2002, Mr. Goff's book value in DBL was
approximately $401.
(14) The remaining 70% interest in CR License, L.L.C. is owned by an affiliate
of the management company of two of the Company's Resort/Hotel Properties.
(15) The remaining 35% interest in Canyon Ranch Las Vegas is owned by an
affiliate of the management company of two of the Company's Resort/Hotel
Properties.
F-24
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(16) The SunTX Fulcrum Fund, L.P's (the "Fund") objective is to invest in a
portfolio of acquisitions that offer the potential for substantial capital
appreciation. The remaining 66.7% of the Fund is owned by a group of
individuals unrelated to the Company. The Company's ownership percentage
will decline by the closing date of the Fund as capital commitments from
third parties are secured. The Company's projected ownership interest at
the closing of the Fund is approximately 7.5% based on the Fund manager's
expectations for the final Fund capitalization. The Company accounts for
its investment in the Fund under the cost method. The Company's investment
at September 30, 2002 was $7,800.
SUMMARY FINANCIAL INFORMATION
The Company reports its share of income and losses based on its ownership
interest in its respective equity investments, adjusted for any preference
payments. As a result of the Company's transaction with COPI on February 14,
2002, certain entities that were reported as unconsolidated entities as of
December 31, 2001 and for the nine months ended September 30, 2001 are
consolidated in the September 30, 2002 financial statements. Additionally,
certain unconsolidated subsidiaries of the newly consolidated entities are now
shown separately as unconsolidated entities of the Company. The unconsolidated
entities that are included under the headings on the following tables are
summarized below.
Balance Sheets as of September 30, 2002:
- The Woodlands Land Development Company, L.P. ("TWLDC") -- This is an
unconsolidated investment of TWLC;
- Other Residential Development Corporations -- This includes the Blue
River Land Company, L.L.C, an unconsolidated investment of CRDI, MVDC and
HADC;
- Resort/Hotel -- This includes Manalapan Hotel Partners, L.L.C., an
unconsolidated investment of CRDI;
- Temperature-Controlled Logistics ("TCL"); and
- Office -- This includes Main Street Partners, L.P., Houston PT Three
Westlake Office Limited Partnership, Houston PT Four Westlake Office
Limited Partnership, Austin PT BK One Tower Office Limited Partnership,
Crescent 5 Houston Center, L.P., Crescent Miami Center, L.L.C., and
Woodlands CPC.
Balance Sheets as of December 31, 2001:
- Crescent Resort Development, Inc. -- This Residential Development
Corporation was consolidated beginning February 14, 2002 as a result of
the COPI transaction. Its unconsolidated investments, the Blue River Land
Company, L.L.C. and Manalapan Hotel Partners, L.L.C., are included under
"Other Residential Development Corporations" in the following Balance
Sheets as of September 30, 2002;
- The Woodlands Land Company, Inc. -- This Residential Development
Corporation was consolidated beginning February 14, 2002 as a result of
the COPI transaction. Its unconsolidated subsidiary is included under
"The Woodlands Land Development Company, L.P." in the following Balance
Sheets as of September 30, 2002;
- Other Residential Development Corporations -- This includes DMDC, MVDC
and HADC. DMDC was consolidated beginning February 14, 2002 as a result
of the COPI transaction;
- TCL; and
- Office -- This includes Main Street Partners, L.P., Houston PT Four
Westlake Office Limited Partnership, Austin PT BK One Tower Office
Limited Partnership, Crescent 5 Houston Center, L.P. and Woodlands CPC.
F-25
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Summary Statement of Operations for the nine months ended September 30,
2002:
- The Woodlands Land Development Company, L.P. -- This includes TWLDC's
operating results for the period February 15 through September 30, 2002
and TWLC's operating results for the period January 1 through February
14, 2002. TWLDC is an unconsolidated subsidiary of TWLC;
- Other Residential Development Corporations -- This includes the operating
results of DMDC and CRDI for the period January 1 through February 14,
2002; the operating results of the Blue River Land Company, L.L.C. for
the period February 15 through September 30, 2002; and the operating
results of MVDC and HADC for the nine months ended September 30, 2002;
- Resort/Hotel -- This includes Manalapan Hotel Partners, L.L.C., an
unconsolidated investment of CRDI;
- Temperature-Controlled Logistics -- This includes the operating results
for TCL for the nine months ended September 30, 2002; and
- Office -- This includes the operating results for Main Street Partners,
L.P., Houston PT Three Westlake Office Limited Partnership, Houston PT
Four Westlake Office Limited Partnership, Austin PT BK One Tower Office
Limited Partnership, Crescent 5 Houston Center, L.P., Crescent Miami
Center L.L.C., and Woodlands CPC for the nine months ended September 30,
2002.
Summary Statement of Operations for the nine months ended September 30,
2001:
- Crescent Resort Development, Inc. -- This includes the operating results
of CRDI for the nine months ended September 30, 2001;
- The Woodlands Land Company, LP -- This includes the operating results of
TWLC and TWLDC for the nine months ended September 30, 2001;
- Other Residential Development Corporations -- This includes the operating
results of DMDC, MVDC and HADC for the nine months ended September 30,
2001;
- Temperature-Controlled Logistics -- This includes the operating results
for TCL for the nine months ended September 30, 2001; and
- Office -- This includes the operating results for Main Street Partners, 5
Houston Center, Four Westlake Plaza, Bank One Tower and Woodlands CPC,
for the nine months ended September 30, 2001.
F-26
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
BALANCE SHEETS
THE
WOODLANDS OTHER
LAND RESIDENTIAL TEMPERATURE-
DEVELOPMENT DEVELOPMENT RESORT/ CONTROLLED
COMPANY, L.P. CORPORATIONS HOTEL LOGISTICS OFFICE OTHER
------------- ------------ -------- ------------ -------- -------
AS OF SEPTEMBER 30, 2002
Real estate, net......... $387,440 $ 47,440 $ 64,516 $1,227,449 $773,185
Cash..................... 1,816 2,825 2,364 15,089 33,919
Other assets............. 39,768 2,503 3,164 99,757 27,822
-------- -------- -------- ---------- --------
Total assets... $429,024 $ 52,768 $ 70,044 $1,342,295 $834,926
======== ======== ======== ========== ========
Notes payable............ $258,969 $ -- $ 65,470 $ 541,326 $451,202
Notes payable to the
Company................ 10,625 -- 8,849 -- --
Other liabilities........ 53,389 17,077 18,189 66,715 41,995
Equity................... 106,041 35,691 (22,464) 734,254 341,729
-------- -------- -------- ---------- --------
Total
liabilities
and equity... $429,024 $ 52,768 $ 70,044 $1,342,295 $834,926
======== ======== ======== ========== ========
Company's share of
unconsolidated debt.... $110,063 $ -- $ 15,713 $ 216,530 $164,253
======== ======== ======== ========== ========
Company's investments in
real estate mortgages
and equity of
unconsolidated
companies.............. $ 45,995 $ 55,997 $ (716) $ 290,514 $125,185 $36,768
======== ======== ======== ========== ======== =======
AS OF SEPTEMBER 30, 2001
Real estate, net......... $393,784 $365,636 $173,991 $1,271,809 $553,147
Cash..................... 17,570 2,688 7,973 23,979 28,224
Other assets............. 31,749 32,244 94,392 83,424 31,654
-------- -------- -------- ---------- --------
Total assets... $443,103 $400,568 $276,356 $1,379,212 $613,025
======== ======== ======== ========== ========
Notes payable............ $136,621 $225,263 $ 29,910 $ 558,951 $324,718
Notes payable to the
Company................ 180,827 -- 60,000 4,831 --
Other liabilities........ 96,146 74,271 138,761 46,945 29,394
Equity................... 29,509 101,034 47,685 768,485 258,913
-------- -------- -------- ---------- --------
Total
liabilities
and equity... $443,103 $400,568 $276,356 $1,379,212 $613,025
======== ======== ======== ========== ========
Company's share of
unconsolidated debt.... $ 65,303 $ 90,949 $ 26,425 $ 223,580 $126,580
======== ======== ======== ========== ========
Company's investments in
real estate mortgages
and equity of
unconsolidated
companies.............. $222,082 $ 29,046 $120,407 $ 308,427 $121,423 $36,932
======== ======== ======== ========== ======== =======
F-27
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SUMMARY STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
----------------------------------------------------------------------------
THE WOODLANDS OTHER
LAND RESIDENTIAL TEMPERATURE-
DEVELOPMENT DEVELOPMENT RESORT/ CONTROLLED
COMPANY, LP. CORPORATIONS HOTEL LOGISTICS OFFICE(1) OTHER
------------- ------------ ------- ------------ --------- -------
Total revenue................. $98,128 $82,944 $26,599 $81,762 $70,250
Expense:
Operating expense........... 54,919 76,798 22,534 12,492(2) 32,082
Interest expense............ 3,578 399 4,080 32,324 13,584
Depreciation and
amortization............. 2,591 1,268 2,667 44,140 16,733
Tax (benefit) expense....... 406 (78) -- -- --
Other (income) expense...... -- -- -- 2,377 --
------- ------- ------- ------- -------
Total expense................. $61,494 $78,387 $29,281 $91,333 $62,399
------- ------- ------- ------- -------
Net income.................... $36,634 $ 4,557 $(2,682) $(9,571)(3) $ 7,851
======= ======= ======= ======= =======
Company's equity in net income
of unconsolidated
companies................... $19,018 $ 3,916 $ (91) $(3,828) $ 3,655 $(5,281)(4)
======= ======= ======= ======= ======= =======
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
------------------------------------------------------------------------------------
THE WOODLANDS RESIDENTIAL TEMPERATURE-
CRESCENT RESORT LAND DEVELOPMENT CONTROLLED
DEVELOPMENT, INC. COMPANY, INC. CORPORATIONS LOGISTICS OFFICE(5) OTHER
----------------- ------------- ------------ ------------ --------- ------
Total revenues............ $93,581 $148,823 $61,875 $107,287 $61,945
Expenses:
Operating expense....... 78,850 83,066 50,162 22,662(2) 25,668
Interest expense........ 1,233 4,099 1,697 43,888 14,955
Depreciation and
amortization......... 2,576 4,221 4,592 34,350 13,335
Taxes................... 334 10,840 3,636 -- --
------- -------- ------- -------- -------
Total expenses............ $82,993 $102,226 $60,087 $100,900 $53,958
------- -------- ------- -------- -------
Net income................ $10,588 $ 46,597 $ 1,788 $ 6,387 $ 7,987
======= ======== ======= ======== =======
Company's equity in net
income of unconsolidated
companies............... $ 9,952 $ 17,039 $ 712 $ 2,285 $ 3,841 $2,896
======= ======== ======= ======== ======= ======
---------------
(1) This column includes information for Three Westlake Park, which was
contributed by the Company to a joint venture on August 21, 2002 and Miami
Center, which was contributed by the Company to a joint venture on September
25, 2002. Therefore, net income for 2002 includes only 10 days of August and
the month of September for Three Westlake Park and only five days of
September for Miami Center.
(2) Inclusive of the preferred return paid to Vornado Realty Trust (1% per annum
of the Total Combined Assets).
(3) Excludes the goodwill write-off for Temperature-Controlled Logistics
Segment, which is recorded on the accompanying financial statements as a
cumulative change in accounting principle.
(4) Includes impairment of DBL-CBO of $5,200.
F-28
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) This column includes information for Four Westlake and Bank One Tower, which
were contributed by the Company to a joint venture on July 30, 2001.
Therefore, net income for 2001 includes only the months of August and
September for these properties.
UNCONSOLIDATED PROPERTY DISPOSITIONS
During the nine months ended September 30, 2002, the Woodlands CPC sold
three office properties located within The Woodlands, Texas. The sales generated
net proceeds, after the repayment of debt, of approximately $10,100, of which
the Company's portion was approximately $5,300. The sales generated a net gain
of approximately $11,800, of which the Company's portion was approximately
$6,200. The proceeds received by the Company were primarily used to pay down the
Company's credit facility.
TEMPERATURE-CONTROLLED LOGISTICS PROPERTIES
As of September 30, 2002, the Company held a 40% interest in the
Temperature-Controlled Logistics Partnership, which owns the
Temperature-Controlled Logistics Corporation, which directly or indirectly owns
the 88 Temperature-Controlled Logistics Properties, with an aggregate of
approximately 441.5 million cubic feet (17.5 million square feet) of warehouse
space.
The Temperature-Controlled Logistics Corporation leases the
Temperature-Controlled Logistics Properties to a partnership ("AmeriCold
Logistics") owned 60% by Vornado Operating L.P. and 40% by a subsidiary of COPI.
The Company has no interest in AmeriCold Logistics.
AmeriCold Logistics, as sole lessee of the Temperature-Controlled Logistics
Properties, leases the Temperature-Controlled Logistics Properties from the
Temperature-Controlled Logistics Corporation under three triple-net master
leases, as amended. On February 22, 2001, the Temperature-Controlled Logistics
Corporation and AmeriCold Logistics agreed to restructure certain financial
terms of the leases, including the adjustment of the rental obligation for 2001
to $146,000, the adjustment of the rental obligation for 2002 to $150,000 (plus
contingent rent in certain circumstances), the increase of the
Temperature-Controlled Logistics Corporation's share of capital expenditures for
the maintenance of the properties from $5,000 to $9,500 (effective January 1,
2000) and the extension of the date on which deferred rent is required to be
paid to December 31, 2003.
In December 2001, the Temperature Controlled Logistics Corporation waived
its right to collect $39,800 (the Company's share of which was $15,900) of the
total $49,900 of deferred rent. The Temperature-Controlled Logistics Corporation
and the Company began to recognize rental income when earned and collected
during the year ended December 31, 2000 and continued this accounting treatment
for the year ended December 31, 2001; therefore, there was no financial
statement impact to the Temperature-Controlled Logistics Corporation or to the
Company related to the Temperature-Controlled Logistics Corporation's decision
in December, 2001 to waive collection of deferred rent.
AmeriCold Logistics deferred $20,600 of the total $102,400 of rent payable
for the nine months ended September 30, 2002. The Company's share of the
deferred rent was $8,200. The Company recognizes rental income when earned and
collected and has not recognized the $8,200 of deferred rent in equity in net
income of the Temperature-Controlled Logistics Properties for the nine months
ended September 30, 2002.
F-29
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table shows the total, and the Company's portion of, deferred
rent and valuation allowance at December 31, 2001 and for the nine months ended
September 30, 2002.
DEFERRED RENT VALUATION ALLOWANCE
------------------- -------------------
COMPANY'S COMPANY'S
TOTAL PORTION TOTAL PORTION
------- --------- ------- ---------
Balance at December 31, 2001................. $10,100 $ 3,900 $ -- $ --
For the nine months ended September 30,
2002....................................... 20,600 8,200 20,600 8,200
------- ------- ------- ------
Total........................................ $30,700 $12,100 $20,600 $8,200
======= ======= ======= ======
OTHER
DBL-CBO, Inc.
In March 1999, DBL-CBO, Inc., a wholly owned subsidiary of DBL Holdings,
Inc., acquired an aggregate of $6,000 in principal amount of Class C-1 Notes
issued by Juniper CBO 1999-1 Ltd., a Cayman Island limited liability company.
Juniper 1999-1 Class C-1 is the privately-placed equity interest of a
collateralized bond obligation. During the nine months ended September 30, 2002,
the Company recognized an impairment charge related to this investment of
$5,200. As a result of this impairment charge, at September 30, 2002 this
investment was valued at $0.
F-30
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
UNCONSOLIDATED DEBT ANALYSIS
The significant terms of the Company's share of unconsolidated debt
financing arrangements existing as of September 30, 2002 are shown below.
COMPANY'S
SHARE OF
BALANCE DEBT BALANCE INTEREST
OUTSTANDING AT AT RATE AT
COMPANY'S SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, FIXED/VARIABLE
NOTE % OWNERSHIP 2002 2002 2002 MATURITY SECURED/UNSECURED
---- ----------- -------------- ------------- ------------- -------------- -----------------
Temperature control logistics
segment:
AmeriCold Notes(1).......... 40% $ 541,326 $216,530 7.0% April 2008 Fixed/Secured
---------- --------
Office segment:
Main Street Partners,
L.P.(2)(3)(4)............. 50% 133,403 66,702 5.9% December 2004 Variable/Secured
Crescent 5 Houston Center,
L.P.(5)................... 25% 48,654 12,164 4.1% May 2004 Variable/Secured
Austin PT Bk One Tower
Office Limited
Partnership............... 20% 38,012 7,602 7.1% August 2006 Fixed/Secured
Houston PT Four Westlake
Office Limited
Partnership............... 20% 48,873 9,775 7.1% August 2006 Fixed/Secured
Houston PT Three Westlake
Office Limited
Partnership............... 20% 33,000 6,600 5.6% September 2007 Fixed/Secured
Crescent Miami Center,
LLC....................... 40% 81,000 32,400 5.0% September 2007 Fixed/Secured
The Woodlands Commercial
Properties Co............. 42.5%
Fleet credit
facility(3)............. 64,861 27,566 4.3% November 2002 Variable/Secured
Fleet National Bank(3).... 3,398 1,444 3.8% October 2003 Variable/Secured
---------- --------
451,201 164,253
---------- --------
Residential development
segment:
The Woodlands Land
Development Co.(6)........ 42.5%
Fleet credit
facility(3)(7)(8)....... 216,460 91,996 4.3% November 2002 Variable/Secured
Fleet National
Bank(3)(9).............. 6,971 2,963 3.8% October 2003 Variable/Secured
Fleet National Bank(10)... 24,531 10,426 4.6% December 2005 Variable/Secured
Jack Eckerd Corp.......... 101 43 4.8% July 2005 Variable/Secured
Mitchell Mortgage
Company................. 2,734 1,162 5.8% January 2004 Fixed/Secured
Mitchell Mortgage
Company................. 1,257 534 6.3% July 2005 Fixed/Secured
Mitchell Mortgage
Company................. 1,962 834 5.5% October 2005 Fixed/Secured
Mitchell Mortgage
Company................. 3,548 1,508 8.0% April 2006 Fixed/Secured
Mitchell Mortgage
Company................. 1,405 597 7.0% October 2006 Fixed/Secured
---------- --------
258,969 110,063
---------- --------
Resort/hotel segment:
Manalapan Hotel Partners
Dresdner Bank AG(11)........ 24% 65,470 15,713 9.8% December 2002 Variable/Secured
---------- --------
Total/weighted average........ $1,316,966 $506,559 6.0% 3.4 years
========== ========
---------------
(1) Consists of several notes. Maturity date is based on largest debt
instrument. All interest rates are fixed.
(2) Senior Note -- Note A: $83,995 at variable interest rate, LIBOR + 189 basis
points, $4,941 at variable interest rate, LIBOR + 250 basis points with a
LIBOR floor of 2.50% . Note B: $24,704 at variable
F-31
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
interest rate, LIBOR + 650 basis points with a LIBOR floor of 2.50%. Mezzanine
Note -- $19,800 at variable interest rate, LIBOR + 890 basis points with a LIBOR
floor of 3.0%. Interest-rate cap agreement maximum LIBOR of 4.52% on all
notes. All notes are amortized on a 25-year amortization schedule.
(3) This facility has two one-year extension options.
(4) The Company obtained a letter of credit to guarantee the repayment of up to
$4,250 of principal of the Main Street Partners, L.P. loan.
(5) The Company has made a full and unconditional guarantee of loan from Fleet
up to $82,500 for the construction of 5 Houston Center. At September 30,
2002, $48,654 was outstanding.
(6) On February 14, 2002, the Company executed an agreement with COPI to
transfer, pursuant to a strict foreclosure, COPI's 5% interest in TWLC.
Therefore, as of February 14, 2002, TWLC is fully consolidated. This
schedule reflects TWLC's 42.5% interest in TWLDC.
(7) There was an interest rate cap agreement executed with this agreement which
limits interest rate exposure on the notional amount of $145,000 to a
maximum LIBOR rate of 9.0%.
(8) To mitigate interest rate exposure, TWLDC has entered into an interest rate
swap against the $50,000 notional amount to effectively fix the interest
rate at 5.28%. TWLDC has also entered into an interest rate swap against
$50,000 notional amount to effectively fix the interest rate at 4.855%.
(9) There was an interest rate cap agreement executed with this agreement which
limits interest rate exposure on the notional amount of $33,750 to a
maximum LIBOR rate of 9.0%.
(10) There was an interest rate cap agreement executed with this agreement which
limits interest rate exposure on the notional amount of $19,500 to a
maximum LIBOR rate of 8.5%.
(11) The Company guarantees $2,970 of this facility.
The following table shows, as of September 30, 2002, information about the
Company's share of unconsolidated fixed and variable-rate debt and does not take
into account any extension options, hedge arrangements or the entities'
anticipated pay-off dates.
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT % OF DEBT RATE MATURITY(1)
-------- --------- -------- -----------
Fixed-Rate Debt............................ $277,542 55% 6.8% 5.4 years
Variable-Rate Debt......................... 229,017 45 5.1 1.0 years
-------- --- ---
Total Debt................................. $506,559 100% 6.0% 3.4 years
======== === ===
---------------
(1) Based on contractual maturities. The overall weighted average maturity would
be 3.7 years assuming the Company's election of extension options on its
debt instruments.
F-32
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Listed below are the Company's shares of aggregate principal payments, by
year, required as of September 30, 2002 related to the Company's unconsolidated
debt. Scheduled principal installments and amounts due at maturity are included.
SECURED
DEBT(1)
--------
2002........................................................ $136,063
2003........................................................ 5,581
2004........................................................ 78,944
2005........................................................ 12,060
2006........................................................ 18,381
Thereafter.................................................. 255,530
--------
$506,559
========
---------------
(1) These amounts do not represent the effect of two one-year extension options
on TWLDC's Fleet credit facility and one Fleet National Bank loan, totaling
$95,000, that have maturity dates of November 2002 and October 2003.
11. NOTES PAYABLE AND BORROWINGS UNDER CREDIT FACILITY
The following is a summary of the Company's debt financing at September 30,
2002:
BALANCE
OUTSTANDING AT
SEPTEMBER 30, 2002
------------------
Secured Debt
Fleet Fund I and II Term Loan due May 2005, bears interest
at LIBOR plus 325 basis points (at September 30, 2002,
the interest rate was 5.09%), with a four-year
interest-only term, secured by equity interests in
Funding I and II....................................... $ 275,000
AEGON Partnership Note(1) due July 2009, bears interest at
7.53% with monthly principal and interest payments
based on a 25-year amortization schedule, secured by
the Funding III, IV and V Properties................... 266,417
LaSalle Note I(2) bears interest at 7.83% with an initial
seven-year interest-only term (through August 2002),
followed by principal amortization based on a 25-year
amortization schedule through maturity in August 2027,
secured by the Funding I Properties.................... 238,742
Deutsche Bank-CMBS Loan(3) due May 2004, bears interest at
the 30-day LIBOR rate plus 234 basis points (at
September 30, 2002, the interest rate was 5.84%), with
a three-year interest-only term and two one-year
extension options, secured by the Funding X Properties
and Spectrum Center.................................... 220,000
JP Morgan Mortgage Note(4) bears interest at a fixed rate
of 8.31% with principal amortization based on a 15-year
amortization schedule through maturity in October 2016,
secured by the Houston Center mixed-use Office Property
complex................................................ 196,514
LaSalle Note II(5) bears interest at 7.79% with an initial
seven-year interest-only term (through March 2003),
followed by principal amortization based on a 25-year
amortization schedule through maturity in March 2028,
secured by the Funding II Properties................... 161,000
F-33
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
BALANCE
OUTSTANDING AT
SEPTEMBER 30, 2002
------------------
CIGNA Note due December 2002, bears interest at 7.47% with
an interest-only term, secured by the MCI Tower Office
Property and Denver Marriott City Center Resort/Hotel
Property............................................... 63,500
Metropolitan Life Note V(6) due December 2005, bears
interest at 8.49% with monthly principal and interest
payments based on a 25-year amortization schedule,
secured by the Datran Center Office Property........... 38,274
National Bank of Arizona Revolving Line of Credit (7) due
November 2003, secured by certain DMDC assets.......... 29,426
Northwestern Life Note due January 2004, bears interest at
7.66% with an interest-only term, secured by the 301
Congress Avenue Office Property........................ 26,000
Woodmen of the World Note(8) due April 2009, bears
interest at 8.20% with an initial five-year
interest-only term (through April 2006), followed by
principal amortization based on a 25-year amortization
schedule, secured by the Avallon IV Office Property.... 8,500
Nomura Funding VI Note(9) bears interest at 10.07% with
monthly principal and interest payments based on a
25-year amortization schedule through maturity in July
2020, secured by the Funding VI Property............... 8,069
Mitchell Mortgage Note due September 2003, bears interest
at 7.00% with an interest-only term, secured by one of
The Woodlands Office Properties........................ 1,743
Rigney Promissory Note due November 2012(10), bears
interest at 8.50% with quarterly principal and interest
payments based on a 15-year amortization schedule,
secured by a parcel of land............................ 621
Construction, acquisition and other obligations, bearing
fixed and variable interest rates ranging from 2.90% to
10.00% at September 30, 2002, with maturities ranging
between October 2002 and July 2007, secured by various
CRDI projects.......................................... 69,197
Unsecured Debt
2009 Notes(11) bear interest at a fixed rate of 9.25% with
a seven-year interest-only term, due April 2009........ 375,000
2007 Notes(12) bear interest at a fixed rate of 7.50% with
a ten-year interest-only term, due September 2007...... 250,000
Other obligations, with fixed interest rates ranging from
3.25% to 12.00% and variable interest rates ranging
from the Fed Funds rate plus 150 basis points to LIBOR
plus 375 basis points and with maturities ranging
between October 2002 and January 2004.................. 5,541
Unsecured Debt -- Revolving Line of Credit
Credit Facility(13) interest only due May 2004, bears
interest at LIBOR plus 187.5 basis points (at September
30, 2002, the interest rate was 3.85%), with a one-year
extension option....................................... 179,000(14)
----------
Total Notes Payable.................................... $2,412,544
==========
---------------
(1) The outstanding principal balance of this note at maturity will be
approximately $224,100.
(2) In August 2007, the interest rate will increase, and the Company is
required to remit, in addition to the monthly debt service payment, excess
property cash flow, as defined, to be applied first against principal
F-34
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
and thereafter against accrued excess interest, as defined. It is the
Company's intention to repay the note in full at such time (August 2007) by
making a final payment of approximately $220,500.
(3) This includes both a Deutsche Bank-CMBS note and a Fleet-Mezzanine note.
The notes are due May 2004 and bear interest at the 30-day LIBOR rate plus
a spread of (i) 164.7 basis points for the CMBS note (at September 30,
2002, the interest rate was 5.15%), and (ii) 600 basis points for the
Mezzanine note (at September 30, 2002, the interest rate was 9.50%). The
blended rate at September 30, 2002 for the two notes was 5.84%. Both notes
have a LIBOR floor of 3.50%. The notes have three-year interest only terms
and two one-year extension options, and are secured by the Office
Properties owned by Funding X and the Company's interest in Spectrum
Center. The Fleet-Mezzanine note is also secured by the Company's interests
in Funding X and Crescent Spectrum Center, L.P. and the Company's interest
in their general partner.
(4) At the end of seven years (October 2006), the interest rate will also
adjust based on current interest rates at that time. It is the Company's
intention to repay the note in full at such time (October 2006) by making a
final payment of approximately $177,800.
(5) In March 2006, the interest rate will increase, and the Company is required
to remit, in addition to the monthly debt service payment, excess property
cash flow, as defined, to be applied first against principal and
thereafter, against accrued excess interest, as defined. It is the
Company's intention to repay the note in full at such time (March 2006) by
making a final payment of approximately $154,100.
(6) The outstanding principal balance of this loan at maturity will be
approximately $29,100.
(7) This facility is a $50,000 line of credit secured by certain DMDC land and
improvements ("vertical facility"), club facilities ("club loan"), and
notes receivable ("warehouse facility"). The line restricts the vertical
facility and club loan to a maximum outstanding amount of $40,000 and is
subject to certain borrowing base limitations and bears interest at Prime
(at September 30, 2002, the interest rate was 4.75%). The warehouse
facility bears interest at Prime plus 100 basis points (at September 30,
2002, the interest rate was 5.75%) and is limited to $10,000. The blended
rate at September 30, 2002 for the vertical facility and club loan and the
warehouse facility was 5.00%.
(8) The outstanding principal balance of this loan at maturity will be
approximately $8,200.
(9) In July 2010, the interest rate due under the note will change to a 10-year
Treasury yield plus 500 basis points or, if the Company so elects, it may
repay the note without penalty at that date by making a final payment of
$6,135.
(10) It is the Company's intention to repay the note in full in November 2002.
(11) For a description of the 2009 Notes, see "Debt Offering" section below.
(12) The notes were issued in an offering registered with the Securities and
Exchange Commission ("SEC").
(13) The $400,000 credit facility with Fleet is an unsecured revolving line of
credit to Funding VIII and guaranteed by the Operating Partnership.
Availability under the line of credit is subject to certain covenants
including total leverage based on trailing twelve months net operating
income from the Properties, debt service coverage, specific mix of office
and hotel assets and average occupancy of Office Properties. At September
30, 2002, the maximum borrowing capacity under the credit facility was
approximately $400,000.
(14) The outstanding balance excludes letters of credit issued under the
Company's credit facility of $15,200 which reduces the Company's maximum
borrowing capacity.
F-35
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table shows information about the Company's consolidated
fixed and variable-rate debt and does not take into account any extension
options, hedging arrangements or the Company's anticipated pay-off dates.
WEIGHTED WEIGHTED AVERAGE
AMOUNT % OF DEBT(1) AVERAGE RATE MATURITY
---------- ------------ ------------ ----------------
Fixed Rate Debt............. $1,656,430 69% 8.1% 11.3 years
Variable Rate Debt.......... 756,114 31 4.7 1.7 years
---
---------- --- ----
Total Debt.................. $2,412,544 100% 7.1%(2) 7.5 years(3)
---
-----
========== === ====
---------------
(1) Including the $530,300 of hedged variable rate debt, the percentages for
fixed rate debt and variable rate debt are 91% and 9%, respectively.
(2) Including the effect of hedge arrangements, the overall weighted average
interest rate would have been 7.88%.
(3) Based on contractual maturities. The overall weighted average maturity is
4.0 years based on the Company's expected payoff dates.
Listed below are the aggregate principal payments by year required as of
September 30, 2002 under indebtedness of the Company. Scheduled principal
installments and amounts due at maturity are included.
SECURED UNSECURED UNSECURED DEBT
DEBT DEBT LINE OF CREDIT TOTAL(1)
---------- --------- -------------- ----------
2002................................ $ 76,509 $ 5,416 $ -- $ 81,925
2003................................ 103,730 -- -- 103,730
2004................................ 264,713 125 179,000 443,838
2005................................ 329,339 -- -- 329,339
2006................................ 18,938 -- -- 18,938
Thereafter.......................... 809,774 625,000 -- 1,434,774
---------- -------- -------- ----------
$1,603,003 $630,541 $179,000 $2,412,544
========== ======== ======== ==========
---------------
(1) These amounts do not represent the effect of a one-year extension option on
the credit facility and two one-year extension options on the Deutsche Bank
-- CMBS Loan, as noted above.
The Company has $185,655 of secured and unsecured debt maturing through
December 31, 2003, consisting primarily of the Cigna Note, and debt related to
the Residential Development Segment. Borrowings under the Company's credit
facility are expected to be used to repay the $63,500 Cigna Note maturing in
2002, and the $122,155 of debt maturing in 2002 and 2003 is primarily related to
the Residential Development Segment and will be repaid with cash from operations
of the Residential Development Segment.
Any uncured or unwaived events of default on the Company's loans can
trigger an acceleration of payment on the loan in default. In addition, a
default by the Company or any of its subsidiaries with respect to any
indebtedness in excess of $5,000 generally will result in a default under the
credit facility and the Fleet Fund I and II Term Loan after the notice and cure
periods for the other indebtedness have passed. As of September 30, 2002, the
Company was in compliance with all of its debt service coverage ratios and other
covenants related to its outstanding debt. The Company's debt facilities
generally prohibit loan pre-payment for an initial period, allow pre-payment
with a penalty during a following specified period and allow pre-payment without
penalty after the expiration of that period. During the nine months ended
September 30, 2002, there were no circumstances that required pre-payment
penalties or increased collateral related to the Company's existing debt.
F-36
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In addition to the subsidiaries listed in "Note 1. Organization and Basis
of Presentation," certain other subsidiaries of the Company were formed
primarily for the purpose of obtaining secured and unsecured debt or joint
venture financings. These entities, all of which are consolidated and are
grouped based on the Properties to which they relate are: Funding I and Funding
II Properties (CREM Holdings, LLC, Crescent Capital Funding, LLC, Crescent
Funding Interest, LLC, CRE Management I Corp., CRE Management II Corp.); Funding
III Properties (CRE Management III Corp.); Funding IV Properties (CRE Management
IV Corp.); Funding V Properties (CRE Management V Corp.); Funding VI Properties
(CRE Management VI Corp.); Funding VIII Properties (CRE Management VIII, LLC);
Funding IX Properties (CRE Management IX, LLC); Funding X Properties (CREF X
Holdings Management, LLC, CREF X Holdings, L. P., CRE Management X, LLC);
Spectrum Center (Spectrum Center Partners, L.P., Spectrum Mortgage Associates,
L. P., CSC Holdings Management, LLC, Crescent SC Holdings, L.P., CSC Management,
LLC); and Crescent Finance Company.
DEBT OFFERING
On April 15, 2002, the Company completed a private offering of $375,000 in
senior, unsecured notes due 2009. On October 15, 2002, the Company completed an
exchange offer pursuant to which it exchanged notes registered with the
Securities and Exchange Commission for $325,000 of the privately issued notes.
In addition, the Company registered for resale the remaining $50,000 of the
privately issued notes, which were issued to Richard E. Rainwater, the Chairman
of the Board of Trust Managers, and certain of his affiliates and family
members. The notes bear interest at an annual rate of 9.25% and were issued at
100% of issue price. The notes are callable after April 15, 2006. Interest is
payable on April 15 and October 15 of each year, beginning October 15, 2002.
The net proceeds from the offering of notes were approximately $366,500.
Approximately $309,500 of the proceeds were used to pay down amounts outstanding
under the Company's credit facility, and the remaining proceeds were used to pay
down $5,000 of short-term indebtedness and redeem approximately $52,000 of
preferred Class A Units in Funding IX from GMACCM. See "Note 16. Sale of
Preferred Equity Interests in Subsidiary" for a description of the Class A Units
in Funding IX previously held by GMACCM.
12. INTEREST RATE CAPS
In connection with the closing of the Deutsche Bank -- CMBS Loan in May
2001, the Company entered into a LIBOR interest rate cap at 7.16% for a notional
amount of $220,000, and simultaneously sold a LIBOR interest rate cap with the
same terms. Since these instruments do not reduce the Company's net interest
rate risk exposure, they do not qualify as hedges and changes to their
respective fair values are charged to earnings as the changes occur. As the
significant terms of these arrangements are substantially the same, the effects
of a revaluation of these instruments are expected to substantially offset each
other.
13. CASH FLOW HEDGES
The Company uses derivative financial instruments to convert a portion of
its variable rate debt to fixed-rate debt and to manage its fixed to variable
rate debt ratio. As of September 30, 2002, the Company had entered into six cash
flow hedge agreements, which are accounted for in conformity with SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended by
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities -- an Amendment of FASB Statement No. 133."
F-37
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table shows information regarding the Company's cash flow
hedge agreements as of September 30, 2002, additional interest expense and
unrealized gains recorded for the nine months ended September 30, 2002:
UNREALIZED GAINS
ADDITIONAL INTEREST (LOSSES) IN OTHER
EXPENSE FOR THE NINE COMPREHENSIVE INCOME FOR
ISSUE NOTIONAL MATURITY REFERENCE FAIR MARKET MONTHS ENDED THE NINE MONTHS ENDED
DATE(1) AMOUNT DATE RATE VALUE SEPTEMBER 30, 2002 SEPTEMBER 30, 2002
------- -------- -------- --------- ------------ -------------------- ------------------------
7/21/99 $200,000 9/2/03 6.183% $(9,151) $6,418 $ 2,344
5/15/01 200,000 2/3/03 7.11 (4,246) 7,989 6,932
4/14/00 100,000 4/18/04 6.76 (7,817) 3,636 (549)
9/2/03 200,000 9/1/06 3.723 (2,992) -- (2,992)
2/15/03 100,000 2/15/06 3.253 (1,490) -- (1,490)
2/15/03 100,000 2/15/06 3.255 (1,497) -- (1,497)
---------------
(1) During the nine months ended September 30, 2002, the Company entered into
agreements for three additional cash flow hedges that will be issued in
2003, and will replace the three existing cash flow hedges.
The Company has designated its six cash flow hedge agreements as cash flow
hedges of LIBOR-based monthly interest payments on a designated pool of
variable-rate LIBOR indexed debt that reprices closest to the reset dates of
each cash flow hedge agreement. For retrospective effectiveness testing, the
Company uses the cumulative dollar offset approach as described in DIG Issue E8.
The DIG is a task force designed to assist the FASB in answering questions that
companies have resulting from implementation of SFAS No. 133 and SFAS No. 138.
The Company uses the change in variable cash flows method as described in DIG
Issue G7 for prospective testing as well as for the actual recording of
ineffectiveness, if any. Under this method, the Company will compare the changes
in the floating rate portion of each cash flow hedge to the floating rate of the
hedged items. The cash flow hedges have been and are expected to remain highly
effective. Changes in the fair value of these highly effective hedging
instruments are recorded in accumulated other comprehensive income. The
effective portion that has been deferred in accumulated other comprehensive
income will be reclassified to earnings as interest expense when the hedged
items impact earnings. If a cash flow hedge falls outside 80%-125% effectiveness
for a quarter, all changes in the fair value of the cash flow hedge for the
quarter will be recognized in earnings during the current period. If it is
determined based on prospective testing that it is no longer likely a hedge will
be highly effective on a prospective basis, the hedge will no longer be
designated as a cash flow hedge and no longer qualify for accounting in
conformity with SFAS Nos. 133 and 138.
Over the next twelve months, an estimated $19,000 to $20,700 will be
reclassified from accumulated other comprehensive income to interest expense and
charged against earnings related to the effective portions of the cash flow
hedge agreements.
CRDI, a consolidated subsidiary of the Company, also uses derivative
financial instruments to convert a portion of its variable-rate debt to
fixed-rate debt. As of September 30, 2002, CRDI had entered into three cash flow
hedge agreements, which are accounted for in conformity with SFAS Nos. 133 and
138.
The following table shows information regarding CRDI's cash flow hedge
agreements as of September 30, 2002 and additional capitalized interest
recognized for the nine months ended September 30, 2002. Unlike the additional
interest on the Company's cash flow hedges which was expensed, the additional
interest
F-38
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
on CRDI's cash flow hedges was capitalized, as it is related to debt incurred
for projects that are currently under development.
UNREALIZED GAINS (LOSSES)
ADDITIONAL CAPITALIZED IN OTHER COMPREHENSIVE
INTEREST FOR THE NINE INCOME FOR THE NINE
ISSUE NOTIONAL MATURITY REFERENCE FAIR MARKET MONTHS ENDED MONTHS ENDED
DATE AMOUNT DATE RATE VALUE SEPTEMBER 30, 2002 SEPTEMBER 30, 2002
------ -------- -------- --------- ------------ ---------------------- -------------------------
1/2/01.. $18,868 11/16/02 4.34% $(134) $366 $347
9/4/01.. 5,350 9/4/03 5.09% (125) 109 (5)
9/4/01.. 3,700 9/4/03 5.09% (94) 80 (7)
CRDI uses the shortcut method described in SFAS No. 133, which eliminates
the need to consider ineffectiveness of the hedges, and instead assumes that the
hedges are highly effective.
14. INCOME TAXES
The Company intends to maintain its qualification as a REIT under Section
856 of the U.S. Internal Revenue Code of 1986, as amended (the "Code"). As a
REIT, the Company generally will not be subject to corporate federal income
taxes as long as it satisfies certain technical requirements of the Code,
including the requirement to distribute 90% of REIT taxable income to its
shareholders. Accordingly, the Company does not believe that it will be liable
for current income taxes on its REIT taxable income at the Federal level or in
most of the states in which it operates. Additionally, in conjunction with the
Company's agreement with COPI, the Company consolidated certain taxable REIT
subsidiaries (the "TRS"), which are subject to federal and state income tax. The
Company's $6,600 total consolidated income tax benefit at September 30, 2002
includes tax expense related to the operations of the TRS of $100, offset by a
tax benefit of $6,700. The $6,700 benefit results from the temporary difference
between the financial reporting basis and the respective tax basis of the hotel
leases acquired as part of the Company's agreement with COPI. This temporary
difference will be reversed over an estimated five-year period, which is the
remaining lease term of the hotel leases. Cash paid for income taxes totaled
approximately $10,200 for the nine months ended September 30, 2002.
The Company's total net tax asset of approximately $37,100 includes $26,000
of net deferred tax assets and an $11,100 net current tax asset at September 30,
2002. The tax effects of each type of temporary difference that give rise to a
significant portion of the $26,000 deferred tax asset are as follows:
Deferred recognition of DMDC club membership revenue........ $ 31,900
Recognition of development land cost of sales at DMDC and
TWLC...................................................... (10,500)
Recognition of hotel lease buyout........................... 6,700
Other....................................................... (2,100)
--------
Total deferred tax asset.................................... $ 26,000
========
The Company recognizes deferred tax assets only to the extent that it is
more likely than not that they will be realized based on consideration of
available evidence, including tax planning strategies and other factors. As of
September 30, 2002, no valuation allowances have been recorded.
The $11,100 net current tax asset results primarily from anticipated tax
refunds related to recognition of a net operating loss carryback and 2001
overpayments of $6,600 for DMDC and cash paid for income taxes of $10,200.
F-39
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
15. MINORITY INTEREST
Minority interest in the Operating Partnership represents the limited
partners' proportionate share of the equity in the Operating Partnership. The
limited partners' ownership share is evidenced by Operating Partnership units.
The Operating Partnership pays a regular quarterly distribution to the holders
of common and preferred Operating Partnership units. Income in the real estate
partnerships is allocated to minority interest based on weighted average
percentage ownership during the year.
Each Operating Partnership unit may be exchanged for either two common
shares of the Company or, at the election of the Company, cash equal to the fair
market value of two common shares at the time of the exchange. When a unitholder
exchanges a unit, Crescent Equities' percentage interest in the Operating
Partnership increases. During the nine months ended September 30, 2002, there
were 53,287 units exchanged for 106,574 common shares of Crescent Equities.
Minority interest in real estate partnerships represents joint venture or
preferred equity partners' proportionate share of the equity in certain real
estate partnerships. The Operating Partnership holds a controlling interest in
the real estate partnerships and thus, consolidates the accounts into the
Operating Partnership. Income in the real estate partnerships is allocated to
minority interest based on weighted average percentage ownership during the
year.
16. SALE OF PREFERRED EQUITY INTERESTS IN SUBSIDIARY
During the year ended December 31, 2000, the Company formed Funding IX and
contributed seven Office Property and two Resort/Hotel Properties to Funding IX.
As of September 30, 2002, Funding IX held one Office Properties and one
Resort/Hotel Property. The Company owns 100% of the common voting interests in
Funding IX, 0.1% in the form of a general partner interest and 99.9% in the form
of a limited partner interest.
Also during the year ended December 31, 2000, GMACCM purchased $275,000 of
non-voting, redeemable preferred Class A Units in Funding IX (the "Class A
Units"). The Class A Units were redeemable at the option of the Company at the
original purchase price. As of December 31, 2000, approximately $56,600 of the
Class A Units had been redeemed from GMACCM by the Company. No redemptions
occurred during the year ended December 31, 2001.
All of the Class A Units outstanding at December 31, 2001, were redeemed by
Funding IX during the nine months ended September 30, 2002. As a result of the
redemption, GMACCM ceased to be a partner of Funding IX or to have any rights or
obligations as a partner and the Company became the sole partner of Funding IX.
In connection with the final redemption of Class A Units, Crescent SH IX, Inc.
("SH IX") transferred the 14,468,623 common shares of the Company held by SH IX
to the Company which holds these common shares as treasury shares, and the
intracompany loan between Funding IX and SH IX was repaid.
Following the redemption of all the outstanding Class A Units, Funding IX
distributed two of its Office Properties, 44 Cook Street and 55 Madison, and all
the equity interests in the limited liability companies that own two other
Office Properties, Miami Center and Chancellor Park, to the Operating
Partnership. The Operating Partnership then contributed 44 Cook Street and 55
Madison to another Operating Partnership subsidiary, Funding VIII, and entered
into a joint venture arrangement for Miami Center.
17. SHAREHOLDERS' EQUITY
SHARE REPURCHASE PROGRAM
The Company commenced its Share Repurchase Program in March 2000. On
October 15, 2001, the Company's Board of Trust Managers increased from $500,000
to $800,000 the amount of outstanding common shares that can be repurchased from
time to time in the open market or through privately negotiated
F-40
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
transactions (the "Share Repurchase Program"). As of September 30, 2002, the
Company had repurchased 20,256,423 common shares, at an aggregate cost of
approximately $386,615, resulting in an average repurchase price of $19.09 per
common share.
The following table shows a summary of the Company's common share
repurchases by year, as of September 30, 2002.
AVERAGE
TOTAL PRICE PER
SHARES AMOUNT COMMON SHARE
---------- -------- ------------
($ IN THOUSANDS)
2000........................................... 14,468,623 $281,307 $19.44
2001........................................... 4,287,800 77,054 17.97
Nine months ended September 30, 2002........... 1,500,000 28,500 19.00
---------- -------- ------
Total.......................................... 20,256,423(1) $386,861 $19.10
========== ======== ======
---------------
(1) Additionally, 15,230 of the Company's common shares were repurchased outside
of the Share Repurchase Program as part of an executive incentive program,
and the Company contributed 11,354 treasury shares to the Company's
scholarship fund during the three months ended September 30, 2002.
The Company expects the Share Repurchase Program to continue to be funded
through a combination of debt, equity, joint venture capital and selected asset
disposition alternatives available to the Company. The amount of common shares
that the Company will actually purchase will be determined from time to time, in
its reasonable judgment, based on market conditions and the availability of
funds, among other factors. There can be no assurance that any number of common
shares will actually be purchased within any particular time period.
SERIES A PREFERRED OFFERING
On April 26, 2002, the Company completed an institutional placement (the
"April 2002 Series A Preferred Offering") of an additional 2,800,000 shares of
Series A Convertible Cumulative Preferred Shares (the "Series A Preferred
Shares") at an $18.00 per share price and with a liquidation preference of
$25.00 per share for aggregate total offering proceeds of approximately $50,400.
The Series A Preferred Shares are convertible at any time, in whole or in part,
at the option of the holders thereof into common shares of the Company at a
conversion price of $40.86 per common share (equivalent to a conversion rate of
..6119 common shares per Series A Preferred Share), subject to adjustment in
certain circumstances. The Series A Preferred Shares have no stated maturity,
are not subject to sinking fund or mandatory redemption and may not be redeemed
before February 18, 2003, except in order to preserve the Company's status as a
REIT. On or after February 13, 2003, the Series A Preferred Shares may be
redeemed, at the Company's option, by paying $25.00 per share plus any
accumulated accrued and unpaid distribution. Dividends on the Series A Preferred
Shares are cumulative from the date of original issuance and are payable
quarterly in arrears on the fifteenth of February, May, August and November,
commencing May 15, 2002. The annual fixed dividend is $1.6875 per share.
Net proceeds to the Company from the April 2002 Series A Preferred Offering
after underwriting discounts and other offering costs of approximately $2,240
were approximately $48,160. The Company used the net proceeds to redeem Class A
Units issued by its subsidiary, Funding IX, to GMACCM.
SERIES B PREFERRED OFFERING
On May 17, 2002, the Company completed an offering (the "May 2002 Series B
Preferred Offering") of 3,000,000 shares of Series B Cumulative Redeemable
Preferred Shares (the "Series B Preferred Shares")
F-41
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
with a liquidation preference of $25.00 per share for aggregate total offering
proceeds of approximately $75,000. The Series B Preferred Shares have no stated
maturity, are not subject to sinking fund or mandatory redemption, are not
convertible into any other securities of the Company and may not be redeemed
before May 17, 2007, except in order to preserve the Company's status as a REIT.
On or after May 17, 2007, the Series B Preferred Shares may be redeemed, at the
Company's option, by paying $25.00 per share plus any accumulated, accrued and
unpaid distributions. Dividends on the Series B Preferred Shares are cumulative
from the date of original issuance and are payable quarterly in arrears on the
fifteenth of February, May, August and November, commencing August 15, 2002. The
annual fixed dividend is $2.375 per share.
Net proceeds to the Company from the May 2002 Series B Preferred Offering
after underwriting discounts and other offering costs of approximately $2,713
were approximately $72,287. The Company used the net proceeds to redeem Class A
Units issued by its subsidiary, Funding IX, to GMACCM.
On June 6, 2002, an additional 400,000 Series B Preferred Shares were sold
(the "June 2002 Series B Preferred Offering") resulting in gross proceeds to the
Company of approximately $10,000. Net proceeds to the Company after underwriting
discounts and other offering costs of approximately $365 were approximately
$9,635. As with the May 2002 Series B Preferred Offering, the Company used the
net proceeds to redeem Class A Units issued by its subsidiary, Funding IX, to
GMACCM.
DISTRIBUTIONS
The following table summarizes the distributions paid or declared to common
shareholders, unitholders and preferred shareholders during the nine months
ended September 30, 2002.
ANNUAL
DIVIDEND/ TOTAL RECORD PAYMENT DIVIDEND/
SECURITY DISTRIBUTION AMOUNT DATE DATE DISTRIBUTION
-------- ------------ ------- ------- ------- ------------
Common Shares/Units(1).......... $0.375 $49,706 1/31/02 2/15/02 $ 1.50
Common Shares/Units(1).......... 0.375 49,826 4/30/02 5/15/02 1.50
Common Shares/Units(1).......... 0.375 49,295 7/31/02 8/15/02 1.50
Series A Preferred Shares....... 0.422 3,375 1/31/02 2/15/02 1.6875
Series A Preferred Shares(2).... 0.422 4,556 4/30/02 5/15/02 1.6875
Series A Preferred Shares....... 0.422 4,556 7/31/02 8/15/02 1.6875
Series B Preferred Shares(3).... 0.587(4) 1,996 7/31/02 8/15/02 2.375
---------------
(1) Represents one-half the amount of the distribution per unit because each
unit is exchangeable for two common shares.
(2) See "Series A Preferred Offering" above for a description of the issuance of
additional shares.
(3) See "Series B Preferred Offering" above for a description of this offering.
(4) Amount represents distribution for a partial quarter for shares issued May
17, 2002.
18. RELATED PARTY TRANSACTIONS
DBL HOLDINGS, INC.
As of September 30, 2002, the Company owned 97.44% of DBL with the
remaining 2.56% economic interest in DBL (including 100% of the voting interest
in DBL) held by John Goff, Vice-Chairman of the Board of Trust Managers and
Chief Executive Officer of the Company. Originally, Mr. Goff contributed his
voting interests in MVDC and HADC, originally valued at approximately $381, and
approximately $63 in cash, or total consideration valued at approximately $444
for his interest in DBL.
F-42
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DBL has two wholly owned subsidiaries, DBL-ABC, Inc. and DBL-CBO, Inc., the
assets of which are described in the following paragraphs, and DBL directly
holds 66% of the voting stock in MVDC and HADC. At September 30, 2002, Mr.
Goff's book value in DBL was approximately $401.
Since June 1999, the Company has contributed approximately $23,800 to DBL,
in the form of cash and loans. These funds were used by DBL to make an equity
contribution to DBL-ABC, Inc., which committed to purchase a limited partnership
interest representing a 12.5% interest in G2 Opportunity Fund, LP ("G2"). G2 was
formed for the purpose of investing in commercial mortgage backed securities and
other commercial real estate investments and is managed and controlled by an
entity that is owned equally by Goff-Moore Strategic Partners, LP ("GMSP") and
GMACCM. The day-to-day operations of G2 are managed jointly by an affiliate of
GMACCM and a division of GMSP headquartered in Greenwich, Connecticut and
overseen by Hugh Balloch, a principal of GMSP, who is unrelated to the Company.
The ownership structure of the entity that ultimately controls GMSP consists of
50% ownership by Darla Moore, who is married to Richard Rainwater, Chairman of
the Board of Trust Managers of the Company, and 50% by John Goff. Mr. Rainwater
is also a limited partner of GMSP. At September 30, 2002, DBL had an
approximately $14,407 investment in G2 and had repaid in full the loans from the
Company.
In March 1999, DBL-CBO, Inc. acquired an aggregate of $6,000 in principal
amount of Class C-1 Notes issued by Juniper CBO 1999-1 Ltd., a Cayman Island
limited liability company. Juniper 1999-I Class C-I is the privately placed
equity interest of a collateralized bond obligations. During the nine months
ended September 30, 2002, the Company recognized an impairment charge related to
this investment of $5,200. As a result of this impairment charge, at September
30, 2002 this investment was valued at $0.
COPI COLORADO, L. P.
On February 14, 2002, the Company executed an agreement with COPI, pursuant
to which COPI transferred to the Company, pursuant to a strict foreclosure,
COPI's 60% general partner interest in COPI Colorado, L.P. which owns 10%
(representing all of the voting stock) of CRDI. As a result, the Company
increased its ownership interest in CRDI from 90% to 96%. John Goff,
Vice-Chairman of the Board of Trust Managers and Chief Executive Officer of the
Company, owns a 20% general partner interest in COPI Colorado and, accordingly,
a 2.0% interest in CRDI, with a cost basis of $410. The remaining 20% general
partner interest in COPI Colorado, and 2.0% interest in CRDI, is owned by a
third party.
LOANS TO EMPLOYEES AND TRUST MANAGERS OF THE COMPANY FOR EXERCISE OF STOCK
OPTIONS AND UNIT OPTIONS
As of September 30, 2002, the Company had approximately $37,768 of recourse
loans outstanding (including approximately $5,299 loaned during the nine months
ended September 30, 2002) to certain employees and trust managers of the Company
on a full recourse basis under the Company's stock and unit incentive plans
pursuant to agreements approved by the Board of Trust Managers and the Executive
Compensation Committee of the Company. The proceeds of these loans were used by
the employees and the trust managers to acquire common shares of the Company
pursuant to the exercise of vested stock and unit options. According to the loan
agreements, these loans may be repaid in full or in part at any time without
premium or penalty. John Goff, Vice-Chairman of the Board of Trust Managers and
Chief Executive Officer of the Company, had a loan representing $26,273 of the
$37,768 total outstanding loans at September 30, 2002. As of September 30, 2002,
approximately $300 of current interest was outstanding related to these loans.
No conditions exist at September 30, 2002 which would cause any of the loans to
be in default.
Every month, Federal short-term, mid-term and long-term rates (Applicable
Federal Rates) are determined and published by the IRS based upon average market
yields of specified maturities. The Company granted loans through July 29, 2002,
with Applicable Federal Rates of 2.70% and 2.81%, which reflects a below
prevailing market interest rate, therefore, the Company recorded compensation
expense. On July 29,
F-43
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2002, the loans made pursuant to the Company's stock incentive plans and unit
incentive plans were amended to extend the remaining terms of the loans until
July 2012 and to stipulate that every three years the interest rate on the loans
will be adjusted to the AFR applicable at that time for a three-year loan
reflecting a below prevailing market interest rate. Additionally, the employees
and trust managers have been given the option, at any time, to fix the interest
rate for each of the loans to the AFR applicable at that time for a loan with a
term equal to the remaining term of the loan. The July 29, 2002 amendment
resulted in $1,900 additional compensation expense for the three and nine months
ended September 30, 2002, recorded in the "Corporate General and Administrative"
caption of the Company's Consolidated Statements of Operations. Effective July
29, 2002, the Company no longer offers to its employees and trust managers loans
pursuant to the Company's stock and unit incentive plans.
DEBT OFFERING
On April 15, 2002, the Company completed a private offering of $375,000 in
senior, unsecured notes due 2009, $50,000 of which were purchased by Richard E.
Rainwater, Chairman of the Board of Trust Managers of the Company, and certain
of his affiliates and family members (the "Rainwater Group"). The notes bear
interest at 9.25% and were issued at 100% of issue price. The Company registered
for resale the notes issued to the Rainwater Group. See "Note 11. Notes Payable
and Borrowings under Credit Facility" for additional information regarding the
offering and the notes.
OTHER
On June 28, 2002, the Company purchased and is holding for sale, the home
of an executive officer of the Company for approximately $2,650 which
approximates fair market value of the home. This purchase was part of the
officer's relocation agreement with the Company.
19. COPI
In April 1997, the Company established a new Delaware corporation, COPI.
All of the outstanding common stock of COPI, valued at $0.99 per share, was
distributed in a spin-off, effective June 12, 1997, to those persons who were
limited partners of the Operating Partnership or shareholders of the Company on
May 30, 1997.
COPI was formed to become a lessee and operator of various assets to be
acquired by the Company and to perform the intercompany agreement between COPI
and the Company, pursuant to which each party agreed to provide the other with
rights to participate in certain transactions. The Company was not permitted to
operate or lease these assets under the tax laws in effect and applicable to
REITs at that time. In connection with the formation and capitalization of COPI,
and the subsequent operations and investments of COPI since 1997, the Company
made loans to COPI under a line of credit and various term loans.
On January 1, 2001, The REIT Modernization Act became effective. This
legislation allows the Company, through its subsidiaries, to operate or lease
certain of its investments that had previously been operated or leased by COPI.
On February 14, 2002, the Company entered into an agreement (the
"Agreement") with COPI, pursuant to which COPI transferred to subsidiaries of
the Company, in lieu of foreclosure, COPI's lessee interests in the eight
Resort/Hotel Properties leased to subsidiaries of COPI and, pursuant to a strict
foreclosure, substantially all of COPI's voting interests in three of the
Company's Residential Development Corporations and other assets. The Company
agreed to assist and provide funding to COPI for the implementation of a pre-
packaged bankruptcy of COPI. In connection with the transfer, COPI's rent
obligations to the Company were reduced by $23,600 and its debt obligations were
reduced by $40,100. These amounts include $18,300 of value
F-44
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
attributed to the lessee interests transferred by COPI to the Company; however,
in conformity with GAAP, the Company assigned no value to these interests for
financial reporting purposes.
The Company holds the lessee interests in the eight Resort/Hotel Properties
and the voting interests in the three Residential Development Corporations
through three newly organized entities that are wholly owned taxable REIT
subsidiaries of the Company. The Company has included these assets in its
Resort/Hotel Segment and its Residential Development Segment, and fully
consolidated the operations of the eight Resort/ Hotel Properties and the three
Residential Development Corporations, beginning on the dates of the transfers of
these assets.
The Agreement provides that COPI and the Company will jointly seek to have
a pre-packaged bankruptcy plan for COPI, reflecting the terms of the Agreement,
approved by the bankruptcy court. Under the Agreement, the Company has agreed to
provide approximately $14,000 to COPI in the form of cash and common shares of
the Company to fund costs, claims and expenses relating to the bankruptcy and
related transactions, and to provide for the distribution of the Company's
common shares to the COPI stockholders. The Company also agreed, however, that
it will issue common shares with a minimum dollar value of approximately $2,200
to the COPI stockholders, even if it would cause the total costs, claims and
expenses that it pays to exceed $14,000. Currently, the Company estimates that
the value of the common shares that will be issued to the COPI stockholders will
be between approximately $2,200 and $5,400. The actual value of the common
shares issued to the COPI stockholders will not be determined until the
confirmation of COPI's bankruptcy plan and could vary from the estimated
amounts, but will have a value of at least $2,200.
In addition, the Company has agreed to use commercially reasonable efforts
to assist COPI in arranging COPI's repayment of its $15,000 obligation to Bank
of America, together with any accrued interest. The Company expects to form and
capitalize a new entity ("Crescent Spinco"), to be owned by the shareholders and
unitholders of the Company. Crescent Spinco then would purchase COPI's interest
in AmeriCold Logistics for between $15,000 and $15,500. COPI has agreed that it
will use the proceeds of the sale of the AmeriCold Logistics interest to repay
Bank of America in full.
COPI obtained the loan from Bank of America primarily to participate in
investments with the Company. At the time COPI obtained the loan, Bank of
America required, as a condition to making the loan, that Richard E. Rainwater,
the Chairman of the Board of Trust Managers of the Company, and John C. Goff,
Vice-Chairman of the Board of Trust Managers and Chief Executive Officer of the
Company, enter into a support agreement with COPI and Bank of America. Pursuant
to the support agreement, Messrs. Rainwater and Goff agreed to make additional
equity investments in COPI if COPI defaulted on payment obligations under its
line of credit with Bank of America and if the net proceeds of an offering of
COPI securities were insufficient to allow COPI to repay Bank of America in
full. Effective December 31, 2001, the parties executed an amendment to the line
of credit providing that any defaults existing under the line of credit on or
before March 8, 2002 are temporarily cured unless and until a new default
occurs.
Previously, the Company held a first lien security interest in COPI's
entire membership interest in AmeriCold Logistics. REIT rules prohibit the
Company from acquiring or owning the membership interest that COPI owns in
AmeriCold Logistics. Under the Agreement, the Company agreed to allow COPI to
grant Bank of America a first priority security interest in the membership
interest and to subordinate its own security interest to that of Bank of
America.
If the COPI bankruptcy plan is approved by the required vote of the shares
of COPI common stock and approved by the bankruptcy court, the holders of COPI's
common stock will receive the Company's common shares. As stockholders of COPI,
Mr. Rainwater and Mr. Goff will also receive the Company's common shares.
Pursuant to the COPI bankruptcy plan, the current and former directors and
officers of COPI and the current and former directors and officers of the
Company also have received a release from COPI of liability
F-45
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
for any actions taken prior to February 14, 2002, and, depending on various
factors, will receive certain liability releases from COPI and its stockholders.
Completion and effectiveness of the pre-packaged bankruptcy for COPI is
contingent upon a number of conditions, including the vote of COPI's
stockholders, the approval of the plan by certain of COPI's creditors and the
approval of the bankruptcy court.
20. SUBSEQUENT EVENT
RESORT/HOTEL SEGMENT
In October 2002 in a series of transactions, the Company acquired the
remaining 75% interest in Manalapan Hotel Partners, L.L.C., which owns the Ritz
Carlton Palm Beach in Florida. The Company acquired the additional interests in
this partnership for $6,500, which was funded under the Company's credit
facility. Subsequently, the Company entered into a joint venture arrangement
with Westbrook Real Estate Fund IV ("Westbrook"), pursuant to which Westbrook
purchased a 50% equity interest in Manalapan Hotel Partners, L.L.C. The Company
continues to hold the remaining 50% equity interest in the Ritz Carlton Palm
Beach. Simultaneously with admission of Westbrook into the partnership, the
Dresdner Bank AG loan of $65,220 was repaid with proceeds from a new, secured
financing agreement with Corus Bank for $56,000 and additional equity
contributions. The Corus Bank loan has an interest rate of LIBOR plus 400 basis
points with an initial three year term and containing two one-year extension
options. The Company has guaranteed $3,000 of the Corus Bank loan.
F-46
REPORT OF INDEPENDENT AUDITORS
Board of Trust Managers and Shareholders
Crescent Real Estate Equities Company and subsidiaries
We have audited the accompanying consolidated balance sheets of Crescent
Real Estate Equities Company and subsidiaries as of December 31, 2001 and 2000,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 2001.
Our audits also included the financial statement schedule listed in the index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits. We did not audit the
financial statements of AmeriCold Corporation, which statements reflect total
assets constituting 7.44% and 6.78%, respectively, of consolidated assets as of
December 31, 2001 and 2000. Those statements were audited by other auditors
whose reports have been furnished to us, and our opinion, insofar as it relates
to data included for AmeriCold Corporation, is based solely on the reports of
the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Crescent Real Estate Equities Company and
subsidiaries at December 31, 2001 and 2000, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ ERNST & YOUNG LLP
Dallas, Texas,
September 1, 2002,
except for Note 23,
as to which the date
is December 19, 2002
F-47
INDEPENDENT AUDITORS' REPORT
To AmeriCold Corporation:
We have audited the accompanying consolidated balance sheets of AmeriCold
Corporation (the "Company") as of December 31, 2001 and 2000 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the consolidated financial position of the Company at December 31,
2001 and 2000, and the consolidated results of its operations and its
consolidated cash flows for each of the three years in the period ended December
31, 2001, in conformity with accounting principles generally accepted in the
United States of America.
/s/ DELOITTE & TOUCHE LLP
Atlanta, Georgia
February 19, 2002
F-48
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------
2001 2000
---------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Investments in real estate:
Land...................................................... $ 246,416 $ 292,100
Land held for investment or development................... 108,274 116,480
Building and improvements................................. 2,910,822 3,135,165
Furniture, fixtures and equipment......................... 72,246 60,419
Properties held for disposition, net...................... 76,309 74,604
Less -- accumulated depreciation.......................... (634,144) (552,658)
---------- ----------
Net investment in real estate..................... $2,779,923 $3,126,110
Cash and cash equivalents................................. $ 36,285 $ 38,966
Restricted cash and cash equivalents...................... 115,531 94,568
Accounts receivable, net.................................. 28,654 42,200
Deferred rent receivable.................................. 66,362 82,775
Investments in real estate mortgages and equity of
unconsolidated companies............................... 838,317 845,317
Notes receivable, net..................................... 132,065 141,407
Other assets, net......................................... 145,012 171,975
---------- ----------
Total assets...................................... $4,142,149 $4,543,318
========== ==========
LIABILITIES
Borrowings under credit facility.......................... $ 283,000 $ 553,452
Notes payable............................................. 1,931,094 1,718,443
Accounts payable, accrued expenses and other
liabilities............................................ 220,068 202,591
---------- ----------
Total liabilities................................. $2,434,162 $2,474,486
---------- ----------
Commitments and contingencies:
Minority interests
Operating partnership, 6,594,521 and 6,995,823 units,
respectively........................................... $ 69,910 $ 100,586
Investment in joint ventures.............................. 232,137 236,919
---------- ----------
Total minority interests.......................... $ 302,047 $ 337,505
---------- ----------
Shareholders' equity:
Preferred shares, $.01 par value, authorized 100,000,000
shares:
6 3/4% Series A Convertible Cumulative Preferred Shares,
liquidation preference $25.00 per share, 8,000,000
shares issued and outstanding at December 31, 2001 and
2000................................................... $ 200,000 $ 200,000
Common shares, $.01 par value, authorized 250,000,000
shares, 123,396,017, and 121,818,653 shares issued and
outstanding at December 31, 2001 and 2000,
respectively........................................... 1,227 1,211
Additional paid-in capital................................ 2,234,360 2,221,531
Retained deficit.......................................... (638,435) (402,337)
Accumulated other comprehensive income.................... (31,484) (6,734)
---------- ----------
$1,765,668 $2,013,671
Less -- shares held in treasury, at cost, 18,770,418 and
14,468,623 common shares at December 31, 2001 and 2000,
respectively........................................... (359,728) (282,344)
---------- ----------
Total shareholders' equity........................ $1,405,940 $1,731,327
---------- ----------
Total liabilities and shareholders' equity........ $4,142,149 $4,543,318
========== ==========
The accompanying notes are an integral part of these financial statements.
F-49
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED
DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
Revenues:
Office properties......................................... $600,256 $595,115 $602,662
Resort/Hotel properties................................... 45,748 72,114 65,237
Interest and other income................................. 40,190 40,251 66,549
-------- -------- --------
Total revenues...................................... $686,194 $707,480 $734,448
-------- -------- --------
Expenses:
Real estate taxes......................................... $ 82,726 $ 82,135 $ 82,504
Repairs and maintenance................................... 39,247 39,024 44,024
Other rental property operating........................... 136,401 123,654 125,169
Corporate general and administrative...................... 24,249 24,073 16,274
Interest expense.......................................... 182,410 203,197 192,033
Amortization of deferred financing costs.................. 9,327 9,497 10,283
Depreciation and amortization............................. 123,643 121,502 129,386
Settlement of merger dispute.............................. -- -- 15,000
Impairment and other charges related to the real estate
assets.................................................. 25,332 17,874 178,838
Impairment and other charges related to COPI.............. 92,782 -- --
-------- -------- --------
Total expenses...................................... $716,117 $620,956 $793,511
-------- -------- --------
Operating (loss) income............................. $(29,923) $ 86,524 $(59,063)
Other income and expense:
Equity in net income of unconsolidated companies:
Office properties....................................... 6,124 3,164 5,265
Residential development properties...................... 41,014 53,470 42,871
Temperature-controlled logistics properties............. 1,136 7,432 15,039
Other................................................... 2,957 11,645 5,122
-------- -------- --------
Total equity in net income of unconsolidated companies.... $ 51,231 $ 75,711 $ 68,297
Gain on property sales, net............................... 4,425 137,457 --
-------- -------- --------
Total other income and expense...................... $ 55,656 $213,168 $ 68,297
-------- -------- --------
Income before minority interests, extraordinary item and
discontinued operations................................... $ 25,733 $299,692 $ 9,234
Minority interests........................................ (21,218) (50,632) (1,937)
-------- -------- --------
Income before extraordinary item and discontinued
operations................................................ $ 4,515 $249,060 $ 7,297
Extraordinary item -- extinguishment of debt.............. (10,802) (3,928) --
Discontinued operations -- income on assets sold and held
for sale................................................ 1,628 2,990 3,662
-------- -------- --------
Net (loss) income........................................... $ (4,659) $248,122 $ 10,959
6 3/4% Series A Preferred Share distributions............. (13,501) (13,500) (13,500)
Share repurchase agreement return......................... -- (2,906) (583)
Forward share purchase agreement return................... -- -- (4,317)
-------- -------- --------
Net (loss) income available to common shareholders.......... $(18,160) $231,716 $ (7,441)
======== ======== ========
Basic earnings per share data:
Net (loss) income before extraordinary item and
discontinued operations................................. $ (0.08) $ 2.05 $ (0.09)
Extraordinary item -- extinguishment of debt.............. (0.10) (0.03) --
Discontinued operations -- income on assets sold and held
for sale................................................ 0.01 0.03 0.03
-------- -------- --------
Net (loss) income -- basic................................ $ (0.17) $ 2.05 $ (0.06)
======== ======== ========
Diluted earnings per share data:
Net (loss) income before extraordinary item and
discontinued operations................................. $ (0.08) $ 2.02 $ (0.09)
Extraordinary item -- extinguishment of debt.............. (0.10) (0.03) --
Discontinued operations -- income on assets sold and held
for sale................................................ 0.01 0.03 0.03
-------- -------- --------
Net (loss) income -- diluted.............................. $ (0.17) $ 2.02 $ (0.06)
======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-50
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
PREFERRED SHARES TREASURY SHARES COMMON SHARES DEFERRED
-------------------- ---------------------- -------------------- ADDITIONAL COMPENSATION
NET PAR PAR PAID-IN ON RESTRICTED
SHARES VALUE SHARES VALUE SHARES VALUE CAPITAL SHARES
--------- -------- ---------- --------- ----------- ------ ---------- -------------
(DOLLARS IN THOUSANDS)
SHAREHOLDERS' EQUITY, DECEMBER
31, 1998....................... 8,000,000 $200,000 -- $ -- 124,555,447 $1,245 $2,336,621 $(88)
Issuance of Common Shares....... -- -- -- -- 168,140 1 3,850 --
Exercise of Common Share
Options........................ -- -- -- -- 2,899,960 24 32,610 --
Cancellation of Restricted
Shares......................... -- -- -- -- (216) -- (6) 6
Amortization of Deferred
Compensation................... -- -- -- -- -- -- -- 41
Issuance of Common Shares in
Exchange for Operating
Partnership Units.............. -- -- -- -- 453,828 4 1,935 --
Preferred Share Conversion
Adjustment..................... -- -- -- -- 12,356 -- -- --
Forward Share Purchase
Agreement...................... -- -- -- -- 747,598 7 -- --
Settlement of Forward Share
Purchase Agreement............. -- -- -- -- (7,299,760) (73) (145,330) --
Dividends Paid.................. -- -- -- -- -- -- -- --
Net Loss........................ -- -- -- -- -- -- -- --
Unrealized Net Gain on
Available-For-Sale
Securities..................... -- -- -- -- -- -- -- --
Unrealized Net Gain on Cash Flow
Hedges......................... -- -- -- -- -- -- -- --
--------- -------- ---------- --------- ----------- ------ ---------- ----
SHAREHOLDERS' EQUITY, DECEMBER
31, 1999....................... 8,000,000 $200,000 -- $ -- 121,537,353 $1,208 $2,229,680 $(41)
Issuance of Common Shares....... -- -- -- -- 5,762 -- 114 --
Exercise of Common Share
Options........................ -- -- -- -- 208,700 2 1,490 --
Preferred Equity Issuance
Cost........................... -- -- -- -- -- -- (10,006) --
Issuance of Shares in Exchange
for Operating Partnership
Units.......................... -- -- -- -- 87,124 1 608 --
Share Repurchases............... -- -- 8,700,030 (180,723) -- -- -- --
Share Repurchase Agreement...... -- -- 5,788,879 (101,976) -- -- -- --
Retirement of Treasury Shares... -- -- (20,286) 355 (20,286) -- (355) --
Retirement of Restricted
Shares......................... -- -- -- -- -- -- -- 41
Dividends Paid.................. -- -- -- -- -- -- -- --
Net Income...................... -- -- -- -- -- -- -- --
Unrealized Net Loss on
Available-for-Sale
Securities..................... -- -- -- -- -- -- -- --
Unrealized Net Loss on Cash Flow
Hedges......................... -- -- -- -- -- -- -- --
--------- -------- ---------- --------- ----------- ------ ---------- ----
SHAREHOLDERS' EQUITY, DECEMBER
31, 2000....................... 8,000,000 $200,000 14,468,623 $(282,344) 121,818,653 $1,211 $2,221,531 $ --
Issuance of Common Shares....... -- -- -- -- 6,610 1 148 --
Exercise of Common Share
Options........................ -- -- -- -- 768,150 7 9,832 --
Issuance of Shares in Exchange
for Operating Partnership
Units.......................... -- -- -- -- 802,604 8 2,849 --
Share Repurchases............... -- -- 4,301,795 (77,384) -- -- -- --
Dividends Paid.................. -- -- -- -- -- -- -- --
Net Loss........................ -- -- -- -- -- -- -- --
Sale of/Unrealized Gain on
Marketable Securities.......... -- -- -- -- -- -- -- --
Unrealized Net Loss on Cash Flow
Hedges......................... -- -- -- -- -- -- -- --
--------- -------- ---------- --------- ----------- ------ ---------- ----
SHAREHOLDERS' EQUITY, DECEMBER
31, 2001....................... 8,000,000 $200,000 18,770,418 $(359,728) 123,396,017 $1,227 $2,234,360 $ --
========= ======== ========== ========= =========== ====== ========== ====
ACCUMULATED
RETAINED OTHER
EARNINGS COMPREHENSIVE
(DEFICIT) INCOME TOTAL
--------- ------------- ----------
(DOLLARS IN THOUSANDS)
SHAREHOLDERS' EQUITY, DECEMBER
31, 1998....................... $(110,196) $ (5,037) $2,422,545
Issuance of Common Shares....... -- -- 3,851
Exercise of Common Share
Options........................ -- -- 32,634
Cancellation of Restricted
Shares......................... -- -- --
Amortization of Deferred
Compensation................... -- -- 41
Issuance of Common Shares in
Exchange for Operating
Partnership Units.............. -- -- 1,939
Preferred Share Conversion
Adjustment..................... -- -- --
Forward Share Purchase
Agreement...................... -- -- 7
Settlement of Forward Share
Purchase Agreement............. (3,981) -- (149,384)
Dividends Paid.................. (269,814) -- (269,814)
Net Loss........................ (2,541) -- (2,541)
Unrealized Net Gain on
Available-For-Sale
Securities..................... -- 17,216 17,216
Unrealized Net Gain on Cash Flow
Hedges......................... -- 280 280
--------- -------- ----------
SHAREHOLDERS' EQUITY, DECEMBER
31, 1999....................... $(386,532) $ 12,459 $2,056,774
Issuance of Common Shares....... -- -- 114
Exercise of Common Share
Options........................ -- -- 1,492
Preferred Equity Issuance
Cost........................... -- -- (10,006)
Issuance of Shares in Exchange
for Operating Partnership
Units.......................... -- -- 609
Share Repurchases............... -- -- (180,723)
Share Repurchase Agreement...... -- -- (101,976)
Retirement of Treasury Shares... -- -- --
Retirement of Restricted
Shares......................... -- -- 41
Dividends Paid.................. (250,427) -- (250,427)
Net Income...................... 234,622 -- 234,622
Unrealized Net Loss on
Available-for-Sale
Securities..................... -- (7,584) (7,584)
Unrealized Net Loss on Cash Flow
Hedges......................... -- (11,609) (11,609)
--------- -------- ----------
SHAREHOLDERS' EQUITY, DECEMBER
31, 2000....................... $(402,337) $ (6,734) $1,731,327
Issuance of Common Shares....... -- -- 149
Exercise of Common Share
Options........................ -- -- 9,839
Issuance of Shares in Exchange
for Operating Partnership
Units.......................... -- -- 2,857
Share Repurchases............... -- -- (77,384)
Dividends Paid.................. (217,938) -- (217,938)
Net Loss........................ (18,160) -- (18,160)
Sale of/Unrealized Gain on
Marketable Securities.......... -- (7,522) (7,522)
Unrealized Net Loss on Cash Flow
Hedges......................... -- (17,228) (17,228)
--------- -------- ----------
SHAREHOLDERS' EQUITY, DECEMBER
31, 2001....................... $(638,435) $(31,484) $1,405,940
========= ======== ==========
The accompanying notes are an integral part of these financial statements.
F-51
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
2001 2000 1999
--------- ---------- ---------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net (loss) income........................................... $ (4,659) $ 248,122 $ 10,959
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization.............................. 132,970 130,999 139,669
Extraordinary item -- extinguishment of debt............... 10,802 3,928 --
Impairment and other charges related to real estate
assets................................................... 25,332 17,874 120,573
Impairment and other charges related to COPI............... 92,782 -- --
Increase in COPI hotel accounts receivable................. (20,458) -- --
Gain on property sales, net................................ (4,425) (137,457) --
Minority interests......................................... 21,218 50,632 1,937
Discontinued operations.................................... 2,725 2,707 2,718
Non cash compensation...................................... 149 114 118
Distributions received in excess of earnings from
unconsolidated companies:
Office properties........................................ -- 1,589 3,757
Residential development properties....................... 3,392 -- --
Temperature-controlled logistics......................... 10,392 2,308 25,404
Other.................................................... 90 -- 1,128
Equity in earnings in excess of distributions received from
unconsolidated companies:
Office properties........................................ (476) -- --
Residential development properties....................... -- (6,878) (7,808)
Other.................................................... -- (3,763) --
Decrease (increase) in accounts receivable................. 845 (4,996) (4,474)
Decrease (increase) in deferred rent receivable............ 3,744 (8,504) (636)
(Increase) decrease in other assets........................ (22,301) (19,672) 30,857
Increase in restricted cash and cash equivalents........... (18,759) (12,570) (9,682)
(Increase) decrease in accounts payable, accrued expenses
and other liabilities.................................... (20,550) 11,282 21,540
--------- ---------- ---------
Net cash provided by operating activities................ $ 212,813 $ 275,715 $ 336,060
--------- ---------- ---------
Cash flows from investing activities:
Acquisition of land held for investment or development..... -- (22,021) (500)
Proceeds from property sales............................... 200,389 627,775 --
Proceeds from joint venture transactions................... 129,651 -- --
Proceeds from sale of marketable securities................ 107,940 -- --
Development of investment properties....................... (23,723) (41,938) (27,781)
Capital expenditures -- rental properties.................. (46,427) (26,559) (20,254)
Tenant improvement and leasing costs -- rental
properties............................................... (51,810) (68,461) (58,462)
(Increase) decrease in restricted cash and cash
equivalents.............................................. (2,204) 5,941 (31,416)
Return of investment in unconsolidated companies:
Office properties........................................ 349 12,359 --
Residential development properties....................... 19,251 61,641 78,542
Other.................................................... 12,359 1,858 --
Investment in unconsolidated companies:
Office properties........................................ (16,360) -- (262)
Residential development properties....................... (89,000) (91,377) (52,514)
Temperature-controlled logistics......................... (10,784) (17,100) (40,791)
Other.................................................... (8,418) (3,947) (104,805)
(Increase) decrease in notes receivable.................... (11,219) (9,865) 52,432
--------- ---------- ---------
Net cash provided by (used in) investing activities...... $ 209,994 $ 428,306 $(205,811)
--------- ---------- ---------
Cash flows from financing activities:
Debt financing costs....................................... (16,061) (18,628) (16,665)
Settlement of Forward Share Purchase Agreement............. -- -- (149,384)
Borrowings under Fleet Boston Credit Facility.............. -- -- 51,920
Payments under Fleet Boston Credit Facility................ -- (510,000) (201,920)
Borrowings under UBS Facility.............................. 105,000 1,017,819 --
Payments under UBS Facility................................ (658,452) (464,367) --
Borrowings under Fleet Facility............................ 618,000 -- --
Payments under Fleet Facility.............................. (335,000) -- --
Notes payable proceeds..................................... 393,336 -- 929,700
Notes payable payments..................................... (180,685) (370,486) (498,927)
Capital proceeds -- joint venture preferred equity
partner.................................................. -- 275,000 --
Preferred equity issuance costs............................ -- (10,006) --
Capital distributions -- joint venture preferred equity
partner.................................................. (19,897) (72,297) --
Capital distributions -- joint venture partner............. (5,557) (10,312) (3,190)
Proceeds from exercise of share options.................... 9,839 1,492 32,634
Treasury share repurchases................................. (77,384) (281,462) --
6 3/4% Series A Preferred Share distributions.............. (13,501) (13,500) (13,500)
Dividends and unitholder distributions..................... (245,126) (281,234) (298,283)
--------- ---------- ---------
Net cash used in financing activities.................... $(425,488) $ (737,981) $(167,615)
--------- ---------- ---------
Decrease in cash and cash equivalents....................... $ (2,681) $ (33,960) $ (37,366)
Cash and cash equivalents, Beginning of period.............. 38,966 72,926 110,292
--------- ---------- ---------
End of period.............................................. $ 36,285 $ 38,966 $ 72,926
========= ========== =========
The accompanying notes are an integral part of these financial statements.
F-52
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
Crescent Real Estate Equities Company ("Crescent Equities") operates as a
real estate investment trust for federal income tax purposes (a "REIT"), and,
together with its subsidiaries, provides management, leasing and development
services for some of its properties.
The term "Company" includes, unless the context otherwise indicates,
Crescent Equities, a Texas REIT, and all of its direct and indirect
subsidiaries.
The direct and indirect subsidiaries of Crescent Equities at December 31,
2001, included:
- Crescent Real Estate Equities Limited Partnership. The "Operating
Partnership."
- Crescent Real Estate Equities, Ltd. The "General Partner" of the
Operating Partnership.
- Subsidiaries of the operating partnership and the general partner.
Crescent Equities conducts all of its business through the Operating
Partnership and its other subsidiaries. The Company is structured to facilitate
and maintain the qualification of Crescent Equities as a REIT.
The following table shows the subsidiaries of the Company that owned or had
an interest in Properties (as defined below) as of December 31, 2001:
Operating Partnership:(1) The Avallon IV, Bank One Center, Bank One Tower, Datran
Center (two Office Properties), Four Westlake Park,
Houston Center (three Office Properties), The Park Shops
at Houston Center, The Woodlands Office Properties
(eight Office Properties) and 301 Congress Avenue
Crescent Real Estate Funding I, L.P.: The Aberdeen, The Avallon I, II & III, Carter Burgess
("Funding I") Plaza, The Citadel, The Crescent Atrium, The Crescent
Office Towers, Regency Plaza One, Waterside Commons and
125 E. John Carpenter Freeway
Crescent Real Estate Funding II, L.P.: Albuquerque Plaza, Barton Oaks Plaza One, Briargate
("Funding II") Office and Research Center, Hyatt Regency Albuquerque,
Park Hyatt Beaver Creek Resort and Spa, Las Colinas
Plaza, Liberty Plaza I & II, MacArthur Center I & II,
Ptarmigan Place, Stanford Corporate Centre, Two
Renaissance Square and 12404 Park Central
Crescent Real Estate Funding III, IV and Greenway Plaza Office Properties (ten Office Properties)
V, L.P.: ("Funding III, IV and V")(2) and Renaissance Houston Hotel
Crescent Real Estate Funding VI, L.P.: Canyon Ranch -- Lenox
("Funding VI")
Crescent Real Estate Funding VII, L.P.: 10 behavioral healthcare properties
("Funding VII")
F-53
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Crescent Real Estate Funding VIII, L.P.: The Addison, Addison Tower, Austin Centre, The Avallon
("Funding VIII") V, Canyon Ranch -- Tucson, Cedar Springs Plaza, Frost
Bank Plaza, Greenway I & IA (two Office Properties),
Greenway II, Omni Austin Hotel, Palisades Central I,
Palisades Central II, Sonoma Mission Inn & Spa, Stemmons
Place, Three Westlake Park, Trammell Crow Center, 3333
Lee Parkway, Ventana Inn & Spa, 1800 West Loop South and
5050 Quorum
Crescent Real Estate Funding IX, L.P.: Chancellor Park, Denver Marriott City Center, MCI Tower,
("Funding IX")(3) Miami Center, Reverchon Plaza, 44 Cook Street, 55
Madison and 6225 N. 24th Street
Crescent Real Estate Funding X, L.P. Fountain Place and Post Oak Central (three Office
("Funding X") Properties)
Crescent Spectrum Center, L.P.(4): Spectrum Center
---------------
(1) The Operating Partnership has a 50% interest in Bank One Center, a 20%
interest in Bank One Tower and a 20% interest in Four Westlake Park. See
"Note 4. Investments in Real Estate Mortgages and Equity of Unconsolidated
Companies" for a description of the ownership structure of these Properties.
(2) Funding III owns nine of the 10 Office Properties in the Greenway Plaza
Office portfolio and the Renaissance Houston Hotel; Funding IV owns the
central heated and chilled water plant building located at Greenway Plaza;
and Funding V owns Coastal Tower, the remaining Office Property in the
Greenway Plaza Office portfolio.
(3) Funding IX holds its interests in Chancellor Park and Miami Center through
its 100% membership interests in the owners of the Properties, Crescent
Chancellor Park, LLC and Crescent Miami Center, LLC.
(4) Crescent Spectrum Center, L.P. holds its interest in Spectrum Center through
its ownership of the underlying land and notes and a mortgage on the
Property.
As of December 31, 2001, Crescent SH IX, Inc. ("SH IX"), a subsidiary of
the Company, owned 14,468,603 common shares of beneficial interest in Crescent
Equities.
See "Note 6. Notes Payable and Borrowings under Fleet Facility" for a list
of certain other subsidiaries of the Company, all of which are consolidated in
the Company's financial statements and were formed primarily for the purpose of
obtaining secured debt or joint venture financing.
See "Note 4. Investments in Real Estate Mortgages and Equity of
Unconsolidated Companies" for a table that lists the Company's ownership in
significant unconsolidated subsidiaries and equity investments as of December
31, 2001, including the four Office Properties in which the Company owned an
interest through these unconsolidated subsidiaries and equity investments and
the Company's ownership interests in the Residential Development Segment and the
Temperature-Controlled Logistics Segment.
SEGMENTS
As of December 31, 2001, the Company's assets and operations were composed
of four major investment segments:
- Office Segment;
- Resort/Hotel Segment;
- Residential Development Segment; and
- Temperature-Controlled Logistics Segment.
F-54
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Within these segments, the Company owned or had an interest in the
following real estate assets (the "Properties") as of December 31, 2001:
- Office Segment consisted of 74 office properties (collectively referred
to as the "Office Properties") located in 26 metropolitan submarkets in
six states, with an aggregate of approximately 28.0 million net rentable
square feet.
- Resort/Hotel Segment consisted of five luxury and destination fitness
resorts and spas with a total of 1,028 rooms/guest nights and four
upscale business-class hotel properties with a total of 1,769 rooms
(collectively referred to as the "Resort/Hotel Properties").
- Residential Development Segment consisted of the Company's ownership of
real estate mortgages and non-voting common stock representing interests
ranging from 90% to 95% in five unconsolidated residential development
corporations (collectively referred to as the "Residential Development
Corporations"), which in turn, through joint venture or partnership
arrangements, owned 21 upscale residential development properties
(collectively referred to as the "Residential Development Properties").
- Temperature-Controlled Logistics Segment consisted of the Company's 40%
interest in a general partnership (the "Temperature-Controlled Logistics
Partnership"), which owns all of the common stock, representing
substantially all of the economic interest, of AmeriCold Corporation (the
"Temperature-Controlled Logistics Corporation"), a REIT, which, as of
December 31, 2001, directly or indirectly owned 89 temperature-controlled
logistics properties (collectively referred to as the
"Temperature-Controlled Logistics Properties") with an aggregate of
approximately 445.2 million cubic feet (17.7 million square feet) of
warehouse space.
On February 14, 2002, the Company executed an agreement with Crescent
Operating, Inc. ("COPI"), pursuant to which COPI transferred to subsidiaries of
the Company, in lieu of foreclosure, COPI's lessee interests in the eight
Resort/Hotel Properties leased to subsidiaries of COPI and, pursuant to a strict
foreclosure, COPI's voting common stock in three of the Company's Residential
Development Corporations. See "Note 22. Subsequent Events" for additional
information regarding the Company's agreement with COPI.
For purposes of investor communications, the Company classifies its luxury
and destination fitness resorts and spas and upscale Residential Development
Properties as a single group referred to as the "Resort and Residential
Development Sector" due to their similar targeted customer characteristics. This
group does not contain the four upscale business-class hotel properties.
Additionally, for investor communications, the Company classifies its
Temperature-Controlled Logistics Properties and its upscale business-class hotel
properties as the "Investment Sector." However, for purposes of segment
reporting as defined in Statement of Financial Accounting Standard ("SFAS") No.
131, "Disclosures About Segments of an Enterprise and Related Information" and
this Annual Report on Form 10-K, the Resort/Hotel Properties, including the
upscale business-class hotel properties, the Residential Development Properties
and the Temperature-Controlled Logistics Properties are considered three
separate reportable segments.
See "Note 3. Segment Reporting" for a table showing total revenues, funds
from operations, and equity in net income of unconsolidated companies for each
of these investment segments for the years ended December 31, 2001, 2000 and
1999 and identifiable assets for each of these investment segments at December
31, 2001 and 2000.
F-55
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Company include
all direct and indirect subsidiary entities. The equity interests in those
direct and indirect subsidiaries the Company does not own are reflected as
minority interests. All significant intercompany balances and transactions have
been eliminated.
Certain amounts in prior year financial statements have been reclassified
and restated to conform with current year presentation. See "Note 2. Summary of
Significant Accounting Policies -- New Accounting Pronouncements" for a
description of the reclassified items.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NET INVESTMENTS IN REAL ESTATE
Real estate is carried at cost, net of accumulated depreciation.
Betterments, major renovations, and certain costs directly related to the
acquisition, improvements and leasing of real estate are capitalized.
Expenditures for maintenance and repairs are charged to operations as incurred.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, as follows:
Buildings and Improvements.................................. 5 to 40 years
Tenant Improvements......................................... Terms of leases
Furniture, Fixtures and Equipment........................... 3 to 5 years
An impairment loss is recognized on a property by property basis on
Properties classified as held for use, when expected undiscounted cash flows are
less than the carrying value of the Property. In cases where the Company does
not expect to recover its carrying costs on a Property, the Company reduces its
carrying costs to fair value, and for Properties held for disposition, the
Company reduces its carrying costs to the fair value less costs to sell. See
"Note 17. Dispositions" for a description of impairment losses recognized during
2001, 2000 and 1999.
Depreciation expense is not recognized on Properties classified as held for
disposition.
CONCENTRATION OF REAL ESTATE INVESTMENTS
The Company's Office Properties are located primarily in the Dallas/Fort
Worth and Houston, Texas metropolitan areas. As of December 31, 2001, the
Company's Office Properties in Dallas/Fort Worth and Houston represented an
aggregate of approximately 77% of its office portfolio based on total net
rentable square feet. The Dallas/Fort Worth Office Properties accounted for
approximately 41% of that amount and the Houston Office Properties accounted for
the remaining 36%. As a result of the geographic concentration, the operations
of the Company could be adversely affected by a recession or general economic
downturn in the areas where these Properties are located.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of 90 days or less to be cash and cash equivalents.
RESTRICTED CASH AND CASH EQUIVALENTS
Restricted cash includes escrows established pursuant to certain mortgage
financing arrangements for real estate taxes, insurance, security deposits,
ground lease expenditures, capital expenditures and monthly interest carrying
costs paid in arrears and capital requirements related to cash flow hedges.
F-56
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER ASSETS
Other assets consist principally of leasing costs, deferred financing costs
and marketable securities. Leasing costs are amortized on a straight-line basis
during the terms of the respective leases, and unamortized leasing costs are
written off upon early termination of lease agreements. Deferred financing costs
are amortized on a straight-line basis (when it approximates the effective
interest method) over the terms of the respective loans. The effective interest
method is used to amortize deferred financing costs on loans where the straight-
line basis does not approximate the effective interest method, over the terms of
the respective loans. Marketable securities are considered available-for-sale
and are marked to market value on a monthly basis. The corresponding unrealized
gains and losses are included in accumulated other comprehensive income. When a
decline in the fair value of marketable securities is determined to be other
than temporary, the cost basis is written down to fair value and the amount of
the write-down is included in earnings for the applicable period. A decline in
the fair value of a marketable security is deemed nontemporary if its cost basis
has exceeded its fair value for a period of six to nine months.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments to convert a portion of
its variable-rate debt to fixed-rate debt and to manage its fixed to
variable-rate debt ratio. As of December 31, 2001, the Company has entered into
three cash flow hedge agreements which are accounted for under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities."
Under SFAS No. 133, the Company's cash flow hedges are used to mitigate the
variability of cash flows. On a monthly basis, the cash flow hedge is marked to
fair value through comprehensive income and the cash flow hedge's gain or loss
is reported in earnings when the interest on the underlying debt affects
earnings. Any ineffective portion of the hedges is reported in earnings
immediately.
In connection with the debt refinancing in May 2001, the Company entered
into a LIBOR interest rate cap, and simultaneously sold a LIBOR interest rate
cap with the same terms. These instruments do not qualify as hedges and changes
to their respective fair values are charged to earnings monthly.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents and short-term investments
are reasonable estimates of their fair values because of the short maturities of
these instruments. The fair value of notes receivable, which approximates
carrying value, is estimated based on year-end interest rates for receivables of
comparable maturity. Notes payable and borrowings under the Company's prior line
of credit with UBS (the "UBS Facility") and the Company's line of credit (the
"Fleet Facility") have aggregate carrying values which approximate their
estimated fair values based upon the current interest rates for debt with
similar terms and remaining maturities, without considering the adequacy of the
underlying collateral. Disclosure about fair value of financial instruments is
based on pertinent information available to management as of December 31, 2001
and 2000.
REVENUE RECOGNITION
Office Properties. The Company, as a lessor, has retained substantially
all of the risks and benefits of ownership of the Office Properties and accounts
for its leases as operating leases. Income on leases, which includes scheduled
increases in rental rates during the lease term and/or abated rent payments for
various periods following the tenant's lease commencement date, is recognized on
a straight-line basis. Deferred rent receivable represents the excess of rental
revenue recognized on a straight-line basis over cash received pursuant to the
applicable lease provisions.
F-57
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Resort/Hotel Properties. Prior to the enactment of the REIT Modernization
Act, the Company's status as a REIT for federal income tax purposes prohibited
it from operating the Resort/Hotel Properties. As of December 31, 2001, the
Company had leased all of the Resort/Hotel Properties, except the Omni Austin
Hotel, to subsidiaries of Crescent Operating, Inc. ("COPI") pursuant to eight
separate leases. The Omni Austin Hotel had been leased under a separate lease to
HCD Austin Corporation. During 2001 and 2000, the leases provided for the
payment by the lessee of the Resort/Hotel Property of (i) base rent, with
periodic rent increases if applicable, (ii) percentage rent based on a
percentage of gross receipts or gross room revenues, as applicable, above a
specified amount, and (iii) a percentage of gross food and beverage revenues
above a specified amount for certain Resort/Hotel Properties. Base rental income
under these leases was recognized on a straight-line basis over the terms of the
respective leases. Contingent revenue was recognized when the thresholds upon
which it is based had been met. On February 14, 2002, the Company executed an
agreement with COPI, pursuant to which COPI transferred to subsidiaries of the
Company, in lieu of foreclosure, COPI's lessee interests in the eight
Resort/Hotel Properties previously leased to COPI.
Investments in Real Estate Mortgages and Equity of Unconsolidated
Companies. Investments in which the Company does not have a controlling
interest are accounted for under the equity method. See "Note 4. Investments in
Real Estate Mortgages and Equity in Unconsolidated Companies" for a list of the
unconsolidated entities and the Company's ownership of each.
Behavioral Healthcare Properties. During 1999, Charter Behavioral Health
Systems' ("CBHS") business was negatively affected by many factors, including
adverse industry conditions, and CBHS failed to perform in accordance with its
operating budget. As a result, in the third quarter of 1999, the Company began
to recognize rent from CBHS on a cash basis, due to the uncertainty that CBHS
would be able to fulfill its rental obligations under the lease.
INCOME TAXES
A REIT will generally not be subject to federal income taxation on that
portion of its income that qualifies as REIT taxable income to the extent that
it distributes such taxable income to its shareholders and complies with certain
requirements (including distribution of at least 90% of its REIT taxable
income). As a REIT, the Company is allowed to reduce REIT taxable income by all
or a portion of its distributions to shareholders. Because distributions have
exceeded REIT taxable income, no federal income tax provision (benefit) has been
reflected in the accompanying consolidated financial statements. State income
taxes are not significant.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
EARNINGS PER SHARE
SFAS No. 128 "Earnings Per Share" ("EPS") specifies the computation,
presentation and disclosure requirements for earnings per share. Basic EPS
excludes all dilution while Diluted EPS reflects the potential
F-58
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
dilution that could occur if securities or other contracts to issue common
shares were exercised or converted into common shares.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
2001 2000
-------------------------------- --------------------------------
INCOME WTD. AVG. PER SHARE WTD. AVG. PER SHARE
(LOSS) SHARES AMOUNT INCOME SHARES AMOUNT
-------- --------- --------- -------- --------- ---------
Basic EPS --
Net income before extraordinary item and
discontinued operations.................... $ 4,515 107,613 $249,060 113,524
6 3/4% Series A Preferred Share
distributions.............................. (13,501) (13,500)
Share repurchase agreement return........... -- (2,906)
Forward share purchase agreement return..... -- --
-------- ------- ------ -------- ------- ------
Net (loss) income available to common
shareholders before extraordinary item and
discontinued operations.................... $ (8,986) 107,613 $(0.08) $232,654 113,524 $ 2.05
Extraordinary item -- extinguishment of
debt....................................... (10,802) (0.10) (3,928) (0.03)
Discontinued operations..................... 1,628 0.01 2,990 0.03
-------- ------- ------ -------- ------- ------
Net (loss) income available to common
shareholders............................... $(18,160) 107,613 $(0.17) $231,716 113,524 $ 2.05
======== ======= ====== ======== ======= ======
Diluted EPS --
Net (loss) income before extraordinary item
and discontinued operations................ $ (8,986) 107,613 $232,654 113,524
Effect of dilutive securities:
Additional common shares obligation
relating to:
Share and unit options................... -- 1,527 -- 1,197
Forward share purchase agreement......... -- -- -- --
-------- ------- ------ -------- ------- ------
Net (loss) income available to common
shareholders before extraordinary item and
discontinued operations.................... $ (8,986) 109,140 $(0.08) $232,654 114,721 $ 2.02
Extraordinary item -- extinguishment of
debt....................................... (10,802) (0.10) (3,928) (0.03)
Discontinued operations..................... 1,628 0.01 2,990 0.03
-------- ------- ------ -------- ------- ------
Net (loss) income available to common
shareholders............................... $(18,160) 109,140 $(0.17) $231,716 114,721 $ 2.02
======== ======= ====== ======== ======= ======
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1999
--------------------------------
INCOME WTD. AVG. PER SHARE
(LOSS) SHARES AMOUNT
-------- --------- ---------
Basic EPS --
Net income before extraordinary item and
discontinued operations.................... $ 7,297 122,876
6 3/4% Series A Preferred Share
distributions.............................. (13,500)
Share repurchase agreement return........... (583)
Forward share purchase agreement return..... (4,317)
-------- ------- ------
Net (loss) income available to common
shareholders before extraordinary item and
discontinued operations.................... $(11,103) 122,876 $(0.09)
Extraordinary item -- extinguishment of
debt....................................... -- --
Discontinued operations..................... 3,662 0.03
-------- ------- ------
Net (loss) income available to common
shareholders............................... $ (7,441) 122,876 $(0.06)
======== ======= ======
Diluted EPS --
Net (loss) income before extraordinary item
and discontinued operations................ $(11,103) 122,876
Effect of dilutive securities:
Additional common shares obligation
relating to:
Share and unit options................... -- 1,674
Forward share purchase agreement......... -- 263
-------- ------- ------
Net (loss) income available to common
shareholders before extraordinary item and
discontinued operations.................... $(11,103) 124,813 $(0.09)
Extraordinary item -- extinguishment of
debt....................................... -- --
Discontinued operations..................... 3,662 0.03
-------- ------- ------
Net (loss) income available to common
shareholders............................... $ (7,441) 124,813 $(0.06)
======== ======= ======
The effect of the conversion of the Series A Convertible Cumulative
Preferred Shares is not included in the computation of Diluted EPS for the years
ended December 31, 2001, 2000 and 1999, since the effect of their conversion is
antidilutive.
F-59
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
Supplemental Disclosures of Cash Flow Information:
Interest paid on debt................................ $174,584 $202,478 $188,475
Additional interest paid in conjunction with cash
flow hedges........................................ 11,036 1,042 344
-------- -------- --------
Total Interest Paid.................................. $185,620 $203,520 $188,819
======== ======== ========
Supplemental Schedule of Noncash Investing and
Financing Activities:
Conversion of Operating Partnership units to common
shares with resulting reduction in minority
interest and increases in common shares and
additional paid-in capital......................... $ 2,857 $ 609 $ 1,939
Issuance of Operating Partnership units in
conjunction with settlement of an obligation....... -- 2,125 1,786
Acquisition of partnership interests................. -- -- 3,774
Sale of marketable securities........................ (8,118) -- --
Unrealized gain (loss) on available-for-sale
securities......................................... 596 (7,584) 17,216
Forward Share Purchase Agreement Return.............. -- -- 4,317
Share Repurchase Agreement Return.................... -- 2,906 583
Impairment and other charges related to real estate
assets............................................. 25,332 17,874 178,838
Adjustment of cash flow hedge to fair value.......... (17,228) (11,609) 280
Equity investment in a tenant in exchange for office
space/other investment ventures.................... -- 4,485 --
Acquisition of ownership of certain assets previously
owned by Broadband Office, Inc. ................... 7,200 -- --
Impairment and other charges related to COPI......... 92,782 -- --
Additional compensation expense related to employee
notes receivable................................... 750 -- --
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations," which provides that all business combinations
in the scope of the statement are to be accounted for under the purchase method.
This statement is effective for all business combinations initiated after June
30, 2001, as well as all business combinations accounted for using the purchase
method for which the date of acquisition is July 1, 2001, or later. Since the
Company currently accounts for its acquisitions under the purchase method,
management does not believe that the adoption of this statement will have a
material effect on its interim or annual financial statements.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 142, "Goodwill and Other Intangible Assets" (effective January 1, 2002).
SFAS No. 142 specifies that goodwill and certain other types of intangible
assets may no longer be amortized, but instead are subject to periodic
impairment testing. If an impairment charge is required, the charge is reported
as a change in accounting principle and is included in operating results as a
Cumulative Effect of a Change in Accounting Principle. SFAS No. 142 provides for
a transitional period of up to 12 months. In prior periods, Crescent tested
goodwill for impairment under the provisions SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets," under which an impairment loss is recognized
when expected undiscounted future cash flows are less than the carrying value
F-60
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the asset. For the year ended December 31, 2001, the expected future
operating cash flows of the Temperature-Controlled Logistics Corporation on an
undiscounted basis exceeded the carrying amounts of the properties and other
long-lived assets, including goodwill. Accordingly, no impairment was
recognized. Upon the adoption of SFAS 142, the Temperature-Controlled Logistics
Corporation compared the fair value of the Temperature-Controlled Logistics
Properties based on discounted cash flows to the carrying value of the
Temperature-Controlled Logistics Properties and the related goodwill. Based on
this test, the fair value did not exceed the carrying value of the assets and,
accordingly, the goodwill was impaired. Any need for impairment must be assessed
within the first six months and the amount of impairment must be determined
within the next six months. Any additional impairment taken in subsequent
interim periods during 2002 related to the initial adoption of this statement
will require the first quarter financial statements to be restated. During the
three months ended March 31, 2002, the Company recognized a goodwill impairment
charge of approximately $10,500 due to the initial application of this
statement. This charge was due to impairments (net of minority interests and
taxes) of the goodwill at the Temperature-Controlled Logistics Corporation of
$9,200 and one of the Residential Development Corporations of $1,300. This
charge was reported as a change in accounting principle and was included in the
Company's consolidated statements of operations as a "Cumulative Effect of a
Change in Accounting Principle" for the three months ended March 31, 2002.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This statement is effective for fiscal years
beginning after June 15, 2002. The Company has determined that SFAS No. 143 will
have no material effect on its interim and annual financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," ("SFAS No. 144") which addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS No. 144 requires that the results of operations, including any
gains or losses recognized, be disclosed separately on the Company's
consolidated statements of operations. The Company adopted SFAS No. 144 on
January 1, 2002. From January 1, 2002 through September 30, 2002, the Company
sold five Office Properties. The Company also owns nine behavioral healthcare
properties which are held for sale. In accordance with SFAS No. 144, the results
of operations of these assets have been presented as "Discontinued
Operations -- Income on Assets Sold and Held for Sale" in the accompanying
consolidated statements of operations. The carrying value of the assets held for
sale have been reflected as "Properties Held for Disposition, Net" in the
accompanying consolidated balance sheet as of December 31, 2001. As a result of
the adoption, the Company has reclassified certain amounts in prior period
financial statements to conform with the new presentation requirements.
3. SEGMENT REPORTING
The Company currently has four major investment segments: the Office
Segment; the Resort/Hotel Segment; the Residential Development Segment; and the
Temperature-Controlled Logistics Segment. Management organizes the segments
within the Company based on property type for making operating decisions and
assessing performance. Investment segments for SFAS No. 131 are determined on
the same basis.
The Company uses funds from operations ("FFO") as the measure of segment
profit or loss. FFO, based on the revised definition adopted by the Board of
Governors of the National Association of Real Estate Investment Trusts
("NAREIT"), effective January 1, 2000, and as used in this document, means:
- Net Income (Loss) -- determined in accordance with generally accepted
accounting principles ("GAAP");
- excluding gains (or losses) from sales of depreciable operating
property;
F-61
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- excluding extraordinary items (as defined by GAAP);
- plus depreciation and amortization of real estate assets; and
- after adjustments for unconsolidated partnerships and joint ventures.
NAREIT developed FFO as a relative measure of performance and liquidity of
an equity REIT to recognize that income-producing real estate historically has
not depreciated on the basis determined under GAAP. The Company considers FFO an
appropriate measure of performance for an equity REIT, and for its investment
segments. However FFO:
- does not represent cash generated from operating activities determined in
accordance with GAAP (which, unlike FFO, generally reflects all cash
effects of transactions and other events that enter into the
determination of net income);
- is not necessarily indicative of cash flow available to fund cash needs;
- should not be considered as an alternative to net income determined in
accordance with GAAP as an indication of the Company's operating
performance, or to cash flow from operating activities determined in
accordance with GAAP as a measure of either liquidity or the Company's
ability to make distributions; and
- the Company's measure of FFO may not be comparable to similarly titled
measures of other REITs because these REITs may apply the definition of
FFO in a different manner than the Company.
Selected financial information related to each segment for the years ended
December 31, 2001, 2000 and 1999 is presented below.
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
Revenues:
Office Segment(1)............................... $ 600,256 $ 595,115 $ 602,662
Resort/Hotel Segment............................ 45,748 72,114 65,237
Residential Development Segment................. -- -- --
Temperature-Controlled Logistics Segment........ -- -- --
Corporate and Other(2).......................... 40,190 40,251 66,549
--------- --------- ---------
Total revenue..................................... $ 686,194 $ 707,480 $ 734,448
========= ========= =========
Funds from operations:
Office Segment.................................. $ 358,349 $ 361,574 $ 367,830
Resort/Hotel Segment............................ 45,282 71,446 64,079
Residential Development Segment................. 54,051 78,600 74,597
Temperature-Controlled Logistics Segment........ 23,806 33,563 37,439
Corporate and other adjustments:
Interest expense............................. (182,410) (203,197) (192,033)
6 3/4% Series A Preferred Share
distributions.............................. (13,501) (13,500) (13,500)
Other(3)..................................... 8,571 22,484 33,639
Corporate general & administrative........... (24,249) (24,073) (16,274)
F-62
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
Impairment and other charges related to
COPI....................................... (92,782) -- --
Settlement of merger dispute................. -- -- (15,000)
--------- --------- ---------
Total funds from operations..................... $ 177,117 $ 326,897 $ 340,777
Adjustments to reconcile funds from operations to
net income:
Depreciation and amortization of real estate
assets....................................... (122,033) (119,999) (128,403)
Gain on rental property sales, net.............. 2,835 136,880 (16,361)
Impairment and other charges related to real
estate assets................................ (21,705) (17,874) (136,435)
Extraordinary item -- extinguishment of debt.... (10,802) (3,928) --
Adjustment for investments in real estate
mortgages and equity of unconsolidated
companies:
Office Properties............................ (6,955) (4,973) (6,110)
Residential Development Properties........... (13,037) (25,130) (31,725)
Temperature-Controlled Logistics
Properties................................. (22,671) (26,131) (22,400)
Other........................................ (144) -- (611)
Unitholder minority interests................... (765) (31,120) (1,273)
6 3/4% Series A Preferred Share distributions... 13,501 13,500 13,500
--------- --------- ---------
Net (loss) income................................. $ (4,659) $ 248,122 $ 10,959
========= ========= =========
Equity in net income of unconsolidated companies:
Office Properties............................... $ 6,124 $ 3,164 $ 5,265
Resort/Hotel Properties......................... -- -- --
Residential Development Properties.............. 41,014 53,470 42,871
Temperature-Controlled Logistics Properties..... 1,136 7,432 15,039
Other(3)........................................ 2,957 11,645 5,122
--------- --------- ---------
Total equity in net income of unconsolidated
companies....................................... $ 51,231 $ 75,711 $ 68,297
========= ========= =========
BALANCE AT DECEMBER 31,
-----------------------
2001 2000
---------- ----------
Identifiable assets:
Office Segment............................................ $2,727,939 $3,088,653
Resort/Hotel Segment...................................... 442,724 468,286
Residential Development Segment........................... 371,535 305,187
Temperature-Controlled Logistics Segment.................. 308,427 308,035
Other(3).................................................. 291,524 373,157
---------- ----------
Total identifiable assets................................... $4,142,149 $4,543,318
========== ==========
---------------
(1) Excludes financial information for the four Office Properties included in
"Equity of Net Income of Unconsolidated Companies."
F-63
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) For purposes of this Note, the behavioral healthcare properties' financial
information has been included in this line item.
(3) Includes interest and other income, behavioral healthcare property income,
preferred return paid to GMAC Commercial Mortgage Corporation ("GMACCM"),
other unconsolidated companies, less depreciation and amortization of
non-real estate assets and amortization of deferred financing costs.
At December 31, 2001, COPI was the Company's largest lessee in terms of
total revenues. COPI was the lessee of eight of the Resort/Hotel Properties for
the year ended December 31, 2001. Total revenues recognized from COPI for the
year ended December 31, 2001 were approximately 6% of the Company's total
revenues. On February 14, 2002, the Company executed an agreement with COPI,
pursuant to which COPI transferred to subsidiaries of the Company, in lieu of
foreclosure, COPI's lessee interests in the eight Resort/ Hotel Properties
previously leased to COPI.
See "Note 4. Investments in Real Estate Mortgages and Equity of
Unconsolidated Companies -- Temperature-Controlled Logistics Properties" for a
description of the sole lessee of the Temperature-Controlled Logistics
Properties.
4. INVESTMENTS IN REAL ESTATE MORTGAGES AND EQUITY OF UNCONSOLIDATED COMPANIES
Investments in which the Company does not have a controlling interest are
accounted for under the equity method. The following is a summary of the
Company's ownership in significant joint ventures or equity investments:
COMPANY'S
OWNERSHIP AS OF
ENTITY CLASSIFICATION DECEMBER 31, 2001
------ -------------- -----------------
Desert Mountain Development Corporation(1)........ Residential Development Corporation 95.0%(2)(3)
The Woodlands Land Company, Inc.(1)............... Residential Development Corporation 95.0%(2)(4)
Crescent Resort Development, Inc.(1).............. Residential Development Corporation 90.0%(2)(5)
Mira Vista Development Corp....................... Residential Development Corporation 94.0%(2)(6)
Houston Area Development Corp..................... Residential Development Corporation 94.0%(2)(7)
Temperature-Controlled Logistics Partnership...... Temperature-Controlled Logistics 40.0%(8)
The Woodlands Commercial Properties Company,
L.P............................................. Office 42.5%(9)(10)
Main Street Partners, L.P......................... Office (Bank One Center) 50.0%(11)
Crescent 5 Houston Center, L.P.................... Office (5 Houston Center) 25.0%(12)
Austin PT BK One Tower Office Limited
Partnership..................................... Office (Bank One Tower) 20.0%(13)
Houston PT Four Westlake Office Limited
Partnership..................................... Office (Four Westlake Park) 20.0%(13)
DBL Holdings, Inc................................. Other 97.4%(14)
CRL Investments, Inc.(1).......................... Other 95.0%(15)
CR License, LLC(1)................................ Other 28.5%(16)
---------------
(1) On February 14, 2002, the Company executed an agreement with COPI, pursuant
to which COPI transferred to subsidiaries of the Company, pursuant to a
strict foreclosure, COPI's interest in these entities. The Company will
fully consolidate the operations of these entities, other than CR License,
LLC, beginning on the dates of the asset transfers.
(2) See the Residential Development Properties Table included in "Item 2.
Properties" for the Residential Development Corporation's ownership
interest in the Residential Development Properties.
(3) The remaining 5.0% interest in Desert Mountain Development Corporation,
which represents 100% of the voting stock, was owned by COPI as of December
31, 2001.
F-64
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) The remaining 5.0% interest in The Woodlands Land Company, Inc., which
represents 100% of the voting stock, was owned by COPI as of December 31,
2001.
(5) The remaining 10.0% interest in Crescent Resort Development, Inc., which
represents 100% of the voting stock, was owned by COPI Colorado, L. P., of
which 60.0% was owned by COPI as of December 31, 2001, with 20% owned by
John Goff, Vice-Chairman of the Board of Trust Managers and Chief Executive
Officer of the Company, and 20% owned by a third party.
(6) The remaining 6.0% interest in Mira Vista Development, Corp. ("MVDC"),
which represents 100% of the voting stock, is owned 4.0% by DBL Holdings,
Inc. ("DBL") and 2.0% by third parties.
(7) The remaining 6.0% interest in Houston Area Development Corp. ("HADC"),
which represents 100% of the voting stock, is owned 4.0% by DBL Holdings,
Inc. ("DBL") and 2.0% by a third party.
(8) The remaining 60.0% interest in the Temperature-Controlled Logistics
Partnership is owned by Vornado Realty Trust, L.P.
(9) The remaining 57.5% interest in The Woodlands Commercial Properties
Company, L. P. is owned by Morgan Stanley Real Estate Fund II, L. P.
("Morgan Stanley").
(10) Distributions are made to partners based on specified payout percentages.
During the year ended December 31, 2001, the payout percentage to the
Company was 49.5%.
(11) The remaining 50.0% interest in Main Street Partners, L.P. is owned by
TrizecHahn Corporation.
(12) See "5 Houston Center" below.
(13) See "Four Westlake Park and Bank One Tower" below.
(14) John Goff, Vice-Chairman of the Board of Trust Managers and Chief Executive
Officer of the Company, obtained the remaining 2.6% economic interest in
DBL (including 100% of the voting interest in DBL) in exchange for his
voting interests in MVDC and HADC, originally valued at approximately $380,
and approximately $63 in cash, or total consideration valued at
approximately $443. At December 31, 2001, Mr. Goff's interest in DBL was
approximately $554.
(15) The remaining 5.0% interest in CRL Investments, Inc., which represents 100%
of the voting stock, was owned by COPI as of December 31, 2001.
(16) Of the remaining 71.5% interest in CR License, LLC, 70.0% is owned by a
group of individuals unrelated to the Company, and 1.5% was owned by COPI,
as of December 31, 2001.
JOINT VENTURE ARRANGEMENTS
5 Houston Center
On June 4, 2001, the Company entered into a joint venture arrangement with
a pension fund advised by JP Morgan Investment Management, Inc. ("JPM") to
construct the 5 Houston Center Office Property within the Company's Houston
Center mixed-use Office Property complex in Houston, Texas. The Class A Office
Property will consist of 577,000 net rentable square feet. The joint venture is
structured such that the fund holds a 75% equity interest, and the Company holds
a 25% equity interest in the Property, which is accounted for under the equity
method. The Company contributed approximately $8,500 of land and $12,300 of
development costs to the joint venture entity and received a distribution of
$14,800 of net proceeds. No gain or loss was recognized by the Company on this
transaction. In addition, the Company is developing, and will manage and lease
the Property on a fee basis. During the year ended December 31, 2001, the
Company recognized $2,300 for these services.
During the second quarter of 2001, the joint venture entity obtained an
$82,500 construction loan guaranteed by the Company, due May 2004, that bears
interest at Prime (as defined in the loan agreement) plus 100 basis points or
LIBOR plus 225 basis points, at the discretion of the borrower. The interest
rate on
F-65
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the loan at December 31, 2001 was 4.12%. The balance outstanding on this
construction loan at December 31, 2001, was $10,429.
Four Westlake Park and Bank One Tower
On July 30, 2001, the Company entered into joint venture arrangements with
an affiliate of General Electric Pension Fund ("GE") in which the Company
contributed two Office Properties, Four Westlake Park in Houston, Texas, and
Bank One Tower in Austin, Texas into the joint ventures and GE made a cash
contribution. The joint ventures are structured such that GE holds an 80% equity
interest in each of Four Westlake Park, a 560,000 square foot Class A Office
Property located in the Katy Freeway submarket of Houston, and Bank One Tower, a
390,000 square foot Class A Office Property located in downtown Austin. The
Company continues to hold the remaining 20% equity interests in each Property,
which are accounted for under the equity method. The joint ventures generated
approximately $120,000 in net cash proceeds to the Company, including
distributions to the Company resulting from the sale of its 80% equity interest
and from mortgage financing at the joint venture level. None of the mortgage
financing at the joint venture level is guaranteed by the Company. The Company
has no commitment to reinvest the cash proceeds back into the joint ventures.
The joint ventures were accounted for as partial sales of these Office
Properties, resulting in a gain of approximately $7,577, net of a deferred gain
of approximately $1,894. In addition, the Company manages and leases the Office
Properties on a fee basis. During the year ended December 31, 2001, the Company
recognized $227 for these services.
METROPOLITAN
On May 24, 2001, the Company converted its $85,000 preferred member
interest in Metropolitan Partners, LLC ("Metropolitan") and $1,900 of deferred
acquisition costs, into approximately $75,000 of common stock of Reckson
Associates Realty Corp. ("Reckson"), resulting in an impairment charge of
approximately $11,900. The Company subsequently sold the Reckson common stock on
August 17, 2001 for approximately $78,600, resulting in a gain of approximately
$3,600. The proceeds were used to pay down the Fleet Facility.
DISPOSITIONS
On September 27, 2001, the Woodlands Commercial Properties Company, L.P.,
("Woodlands CPC"), owned by the Company and an affiliate of Morgan Stanley, sold
one office/venture tech property located within The Woodlands, Texas. The sale
generated net proceeds, after the repayment of debt, of approximately $2,700, of
which the Company's portion was approximately $1,300. The sale generated a net
gain of approximately $3,500, of which the Company's portion was approximately
$1,700. The net proceeds received by the Company were used primarily to pay down
variable-rate debt.
On November 9, 2001, The Woodlands Land Development Company, L.P., owned by
the The Woodlands Land Company, Inc. and an affiliate of Morgan Stanley, sold
two office properties and one retail property located within The Woodlands,
Texas. The sales generated net proceeds, after the repayment of debt, of
approximately $41,800, of which the Company's portion was approximately $19,700.
The sale generated a net gain of approximately $13,300, of which the Company's
portion was approximately $3,800. The net proceeds received by the Company were
used primarily to pay down variable-rate debt.
During the year ended December 31, 2000, the Woodlands CPC also sold four
office/venture tech properties located within The Woodlands, Texas. The sale
generated net proceeds of approximately $51,800, of which the Company's portion
was approximately $22,000. The sale generated a net gain of approximately
$11,800, of which the Company's portion was approximately $5,000. The proceeds
received by the Company were used primarily for working capital purposes.
F-66
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TEMPERATURE-CONTROLLED LOGISTICS PROPERTIES
Effective March 12, 1999, the Company, Vornado Realty Trust, COPI, the
Temperature-Controlled Logistics Partnership and the Temperature-Controlled
Logistics Corporation (including all affiliated entities that owned any portion
of the business operations of the Temperature-Controlled Logistics Properties at
that time) sold all of the non-real estate assets, encompassing the business
operations, for approximately $48.7 million to a newly formed partnership
("AmeriCold Logistics") owned 60% by Vornado Operating L.P. and 40% by a newly
formed subsidiary of COPI. The Company has no interest in AmeriCold Logistics.
As of December 31, 2001, the Company held a 40% interest in the
Temperature-Controlled Logistics Partnership, which owns the
Temperature-Controlled Logistics Corporation, which directly or indirectly owns
the 89 Temperature-Controlled Logistics Properties, with an aggregate of
approximately 445.2 million cubic feet (17.7 million square feet) of warehouse
space.
AmeriCold Logistics, as sole lessee of the Temperature-Controlled Logistics
Properties, leases the Temperature-Controlled Logistics Properties from the
Temperature-Controlled Logistics Corporation under three triple-net master
leases, as amended on January 23, 2002. On February 22, 2001, the Temperature-
Controlled Logistics Corporation and AmeriCold Logistics agreed to restructure
certain financial terms of the leases, including the adjustment of the rental
obligation for 2001 to $146,000, the adjustment of the rental obligation for
2002 to $150,000 (plus contingent rent in certain circumstances), the increase
of the Temperature-Controlled Logistics Corporation's share of capital
expenditures for the maintenance of the properties from $5,000 to $9,500
(effective January 1, 2000) and the extension of the date on which deferred rent
was required to be paid to December 31, 2003.
In the first quarter of 2000, AmeriCold Logistics started to experience a
slowing in revenue growth from the previous year. This was primarily due to
customers focusing more interest on inventory management in an effort to improve
operating performance. Starting in 2000 and continuing into 2001, AmeriCold
Logistics has seen consolidation among retail and food service channels begin to
significantly limit the ability of manufacturers to pass along cost increases by
raising prices. Because of this, manufacturers are focused on supply chain cost
(such as inventory management, transportation and distribution) reduction
initiatives in an effort to improve operating performance. In the second and
third quarters of 2000, AmeriCold Logistics deferred a portion of its rent
payments in accordance with the terms of the leases of the Temperature-
Controlled Logistics Properties. For the three months ended June 30, 2000, the
Temperature-Controlled Logistics Corporation recorded a valuation allowance for
a portion of the rent that had been deferred during that period, and for the
three months ended September 30, 2000 recorded a valuation allowance for 100% of
the rent that had been deferred during the three months ended September 30, 2000
and has continued to record a valuation allowance for 100% of the deferred rent
prospectively. These valuation allowances resulted in a decrease in the equity
in net income of the Company in the Temperature-Controlled Logistics
Corporation. The Temperature-Controlled Logistics Corporation had not recorded a
valuation allowance with respect to rent deferred by Americold Logistics prior
to the quarter ended June 30, 2000, because the financial condition of Americold
Logistics prior to that time did not indicate the inability of Americold
Logistics ultimately to make the full rental payments. As a result of continuing
net losses and the increased amount of deferred rent, the Temperature-Controlled
Logistics Corporation determined that the collection of additional deferred rent
was doubtful.
AmeriCold Logistics deferred $25,500 of rent for the year ended December
31, 2001, of which the Company's share was $10,200. AmeriCold Logistics also
deferred $19,000 and $5,400 of rent for the years ended December 31, 2000 and
1999, respectively, of which the Company's share was $7,500 and $2,100,
respectively. In December 2001, the Temperature Controlled Logistics Corporation
waived its right to collect $39,800 of the total $49,900 of deferred rent, of
which the Company's share was $15,900. The Temperature-Controlled Logistics
Corporation and the Company began to recognize rental income when earned and
collected during the year ended December 31, 2000 and continued this accounting
treatment for the year
F-67
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ended December 31, 2001; therefore, there was no financial statement impact to
the Temperature-Controlled Logistics Corporation or to the Company related to
the Temperature-Controlled Logistics Corporation's decision to waive collection
of deferred rent.
The following table shows the total, and the Company's portion of the
total, deferred rent, valuation allowance and waived rent at December 31, 2001.
DEFERRED RENT VALUATION ALLOWANCE WAIVED RENT
------------------- ------------------- -------------------
COMPANY'S COMPANY'S COMPANY'S
TOTAL PORTION TOTAL PORTION TOTAL PORTION
------- --------- ------- --------- ------- ---------
For the year ended December
31,
1999........................ $ 5,400 $ 2,100 $ -- $ -- $ -- $ --
2000........................ 19,000 7,500 16,300 6,500 -- --
2001........................ 25,500 10,200 25,500 10,200 39,800 15,900
------- ------- ------- ------- ------- -------
Balance at December 31,
2001........................ $49,900 $19,800 $41,800 $16,700 $39,800 $15,900
======= ======= ======= ======= ======= =======
OTHER
During the year ended December 31, 2001, the Company recognized an
impairment loss of $5,000, which is included in Impairment and Other Charges
Related to Real Estate Assets, on a fund which primarily holds real estate
investments and marketable securities, in which the Company has an interest.
During the year ended December 31, 2000, the Company recognized an
impairment loss of $8,525, which is included in Impairment and Other Charges
Related to Real Estate Assets, on a fund which primarily holds real estate
investments and marketable securities, in which the Company has an interest.
The Company reports its share of income and losses based on its ownership
interest in its respective equity investments, adjusted for any preference
payments. The following summarized information for all unconsolidated companies
is presented below with significant subsidiaries identified under the captions
"Desert Mountain Development Corporation," "Crescent Resort Development, Inc."
and "The Woodlands Land Company, Inc.," and all other unconsolidated Companies
presented on an aggregate basis classified under the captions "Other Residential
Development Corporations," "Temperature-Controlled Logistics," "Office" and
"Other," as applicable, as of December 31, 2001, 2000 and 1999.
F-68
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BALANCE SHEETS
BALANCE AT DECEMBER 31, 2001
-------------------------------------------------------------------------------
CRESCENT THE OTHER
RESORT WOODLANDS RESIDENTIAL TEMPERATURE-
DEVELOPMENT, LAND DEVELOPMENT CONTROLLED
INC. COMPANY, INC. CORPORATIONS LOGISTICS OFFICE OTHER
------------ ------------- ------------ ------------ -------- -------
Real estate, net............. $393,784 $365,636 $173,991 $1,271,809 $553,147
Cash......................... 17,570 2,688 7,973 23,979 28,224
Other assets................. 31,749 32,244 94,392 83,424 31,654
-------- -------- -------- ---------- --------
Total assets....... $443,103 $400,568 $276,356 $1,379,212 $613,025
======== ======== ======== ========== ========
Notes payable................ $ -- $225,263 $ -- $ 558,951 $324,718
Notes payable to the
Company.................... 180,827 -- 60,000 4,831 --
Other liabilities............ 232,767 74,271 168,671 46,945 29,394
Equity....................... 29,509 101,034 47,685 768,485 258,913
-------- -------- -------- ---------- --------
Total liabilities
and equity....... $443,103 $400,568 $276,356 $1,379,212 $613,025
======== ======== ======== ========== ========
Company's share of
unconsolidated debt(1)..... $ -- $ 90,949 $ -- $ 223,580 $126,580
======== ======== ======== ========== ========
Company's investments in real
estate mortgages and equity
of unconsolidated
companies.................. $222,082 $ 29,046 $120,407 $ 308,427 $121,423 $36,932
======== ======== ======== ========== ======== =======
SUMMARY STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
---------------------------------------------------------------------------------
CRESCENT THE OTHER
RESORT WOODLANDS RESIDENTIAL TEMPERATURE-
DEVELOPMENT, LAND DEVELOPMENT CONTROLLED
INC. COMPANY, INC. CORPORATIONS LOGISTICS OFFICE(2) OTHER
------------ ------------- ------------ ------------ --------- ------
Total revenues.............. $195,163 $188,178 $93,462 $127,033 $88,835
Expenses:
Operating expense......... 175,424 104,486 83,074 20,350(3) 37,128
Interest expense.......... 1,373 4,967 1,641 44,988 19,184
Depreciation and
amortization........... 2,726 5,599 6,185 58,855 19,387
Taxes..................... 641 14,676 (4,222) -- --
-------- -------- ------- -------- -------
Total expenses.............. 180,164 129,728 86,678 124,193 75,699
-------- -------- ------- -------- -------
Net income.................. $ 14,999 $ 58,450 $ 6,784 $ 2,840(3) $13,136
======== ======== ======= ======== =======
Company's equity in net
income of unconsolidated
companies................. $ 14,944 $ 20,943 $ 5,127 $ 1,136 $ 6,124 $2,957
======== ======== ======= ======== ======= ======
---------------
(1) The Company has guarantees or letters of credit related to approximately
$89,300, or 17% of its maximum borrowings available under its unconsolidated
debt. At December 31, 2001, the Company had guarantees or letters of credit
related to approximately $17,000, or 4% of its total outstanding
unconsolidated debt.
F-69
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) This column includes information for Four Westlake Park and Bank One Tower.
These Office Properties were contributed by the Company to joint ventures on
July 30, 2001. Therefore, net income for 2001 includes only the months of
August through December for these Properties.
(3) Inclusive of the preferred return paid to Vornado Realty Trust (1% per annum
of the Total Combined Assets).
BALANCE SHEETS
BALANCE AT DECEMBER 31, 2000
----------------------------------------------------------------------------------------------
DESERT CRESCENT THE OTHER
MOUNTAIN RESORT WOODLANDS RESIDENTIAL TEMPERATURE-
DEVELOPMENT DEVELOPMENT, LAND DEVELOPMENT CONTROLLED
CORPORATION INC. COMPANY, INC. CORPORATIONS LOGISTICS OFFICE OTHER
----------- ------------ ------------- ------------ ------------ -------- --------
Real estate, net....... $147,484 $232,920 $406,660 $16,739 $1,303,810 $394,724
Cash................... 5,733 37,148 10,739 6,450 19,606 34,599
Other assets........... 70,503 81,679 37,930 4,662 82,883 34,897
-------- -------- -------- ------- ---------- --------
Total
assets...... 223,720 $351,747 $455,329 $27,851 $1,406,299 $464,220
======== ======== ======== ======= ========== ========
Notes payable.......... $ -- $ -- $255,356 $ -- $ 581,807 $251,785
Notes payable to the
Company.............. 59,000 130,727 -- -- 11,333 --
Other liabilities...... 130,834 183,013 96,533 2,774 57,556 46,054
Equity................. 33,886 38,007 103,440 25,077 755,603 166,381
-------- -------- -------- ------- ---------- --------
Total
liabilities
and
equity...... $223,720 $351,747 $455,329 $27,851 $1,406,299 $464,220
======== ======== ======== ======= ========== ========
Company's share of
unconsolidated
debt................. $ -- $ -- $103,100 $ -- $ 232,723 $118,485
======== ======== ======== ======= ========== ========
Company's investments
in real estate
mortgages and equity
of unconsolidated
companies............ $109,092 $150,118 $ 24,525 $21,452 $ 308,035 $ 98,308 $133,787
======== ======== ======== ======= ========== ======== ========
F-70
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUMMARY STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
--------------------------------------------------------------------------------------------
DESERT CRESCENT THE OTHER
MOUNTAIN RESORT WOODLANDS RESIDENTIAL TEMPERATURE-
DEVELOPMENT DEVELOPMENT, LAND DEVELOPMENT CONTROLLED
CORPORATION INC. COMPANY, INC. CORPORATIONS LOGISTICS OFFICE OTHER
----------- ------------ ------------- ------------ ------------ ------- -------
Total revenues.......... $153,680 $180,038 $180,670 $30,404 $154,341 $89,841
Expenses:
Operating expense..... 127,589 158,860 105,231 10,897 21,982(1) 34,261
Interest expense...... 916 3,157 2,986 164 46,637 25,359
Depreciation and
amortization........ 4,966 6,430 4,479 436 57,848 20,673
Taxes................. 3,812 979 27,188 1,235 7,311 --
Other (income)
expense............. -- -- -- -- (2,886) --
-------- -------- -------- ------- -------- -------
Total expenses.......... $137,283 $169,426 $139,884 $12,732 $130,892 $80,293
-------- -------- -------- ------- -------- -------
Net income.............. $ 16,397 $ 10,612 $ 40,786 $17,672 $ 23,449(1) $ 9,548
======== ======== ======== ======= ======== =======
Company's equity in net
income of
unconsolidated
companies............. $ 16,109 $ 10,407 $ 16,466 $10,488 $ 7,432 $ 3,164 $11,645
======== ======== ======== ======= ======== ======= =======
---------------
(1) Inclusive of the preferred return paid to Vornado Realty Trust (1% per annum
of the Total Combined Assets).
SUMMARY STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------------------
DESERT CRESCENT THE OTHER
MOUNTAIN RESORT WOODLANDS RESIDENTIAL TEMPERATURE-
DEVELOPMENT DEVELOPMENT, LAND DEVELOPMENT CONTROLLED
CORPORATION INC. COMPANY, INC. CORPORATIONS LOGISTICS OFFICE OTHER
----------- ------------ ------------- ------------ ------------ ------- ------
Total revenues................ $192,094 $134,411 $134,781 $41,297 $264,266 $78,534
Expenses:
Operating expense........... 167,848 116,717 80,357 22,022 127,516(1) 27,008
Interest expense............ 10,582 2,709 2,174 37 47,273 19,321
Depreciation and
amortization.............. 6,435 3,131 4,386 343 54,574 19,273
Taxes....................... (2,668) 1,963 19,146 1,440 (6,084) --
-------- -------- -------- ------- -------- -------
Total expenses................ $182,197 $124,520 $106,063 $23,842 $223,279 $65,602
-------- -------- -------- ------- -------- -------
Net income.................... $ 9,897 $ 9,891 $ 28,718 $17,455 $ 40,987(1) $12,932
======== ======== ======== ======= ======== =======
Company's equity in net income
of unconsolidated
companies................... $ 10,097 $ 9,561 $ 15,548 $ 7,665 $ 15,039 $ 5,265 $5,122
======== ======== ======== ======= ======== ======= ======
---------------
(1) Inclusive of the preferred return paid to Vornado Realty Trust (1% per annum
of the Total Combined Assets).
F-71
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. OTHER ASSETS, NET
BALANCE AT DECEMBER 31,
-----------------------
2001 2000
---------- ----------
Leasing costs............................................... $142,440 $123,036
Deferred financing costs.................................... 46,305 48,645
Prepaid expenses............................................ 9,444 3,690
Marketable securities....................................... 10,832 50,321
Other....................................................... 33,272 23,927
-------- --------
$242,293 $249,619
Less -- Accumulated amortization............................ (97,281) (77,644)
-------- --------
$145,012 $171,975
======== ========
6. NOTES PAYABLE AND BORROWINGS UNDER FLEET FACILITY
The following is a summary of the Company's debt financing at December 31,
2001 and 2000:
BALANCE AT DECEMBER 31,
-----------------------
2001 2000
---------- ----------
Secured Debt
UBS Term Loan II,(1) secured by the Funding VIII Properties
and the Washington Harbour Office Properties.............. $ -- $ 326,677
Fleet Fund I and II Term Loan(2)(5) due May 2005, bears
interest at LIBOR plus 325 basis points (at December 31,
2001, the interest rate was 5.39%), with a four-year
interest-only term, secured by equity interests in Funding
I and II with a combined book value of $275,000 at
December 31, 2001......................................... 275,000 200,000
AEGON Note(3) due July 2009, bears interest at 7.53% with
monthly principal and interest payments based on a 25-year
amortization schedule, secured by the Funding III, IV and
V Properties with a combined book value of $263,456 at
December 31, 2001......................................... 269,930 274,320
LaSalle Note I(4) bears interest at 7.83% with an initial
seven-year interest-only term (through August 2002),
followed by principal amortization based on a 25-year
amortization schedule through maturity in August 2027,
secured by the Funding I Properties with a combined book
value of $262,672 at December 31, 2001.................... 239,000 239,000
Deutsche Bank-CMBS Loan due May 2004, bears interest at the
30-day LIBOR rate plus 234 basis points (at December 31,
2001, the interest rate was 5.84%), with a three-year
interest-only term and two one-year extension options,
secured by the Funding X Properties and Spectrum Center
with a combined book value of $304,699.................... 220,000 --
JP Morgan Mortgage Note(6) due October 2016, bears interest
at a fixed rate of 8.31% with a two-year interest-only
term (through October 2001), followed by principal
amortization based on a 15-year amortization schedule
through maturity in October 2016, secured by the Houston
Center mixed-use Office Property complex with a combined
book value of $268,978 at December 31, 2001............... 199,386 200,000
F-72
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BALANCE AT DECEMBER 31,
-----------------------
2001 2000
---------- ----------
LaSalle Note II(7) bears interest at 7.79% with an initial
seven-year interest-only term (through March 2003),
followed by principal amortization based on a 25-year
amortization schedule through maturity in March 2028,
secured by the Funding II Properties with a combined book
value of $308,145 at December 31, 2001.................... 161,000 161,000
UBS Term Loan I,(1) secured by the Funding VIII Properties
and the Washington Harbour Office Properties.............. -- 146,775
iStar Financial Note due September 2001, bears interest at
30-day LIBOR plus 1.75% (at December 31, 2000, the rate
was 8.57%) with an interest-only term, secured by the
Fountain Place Office Property with a book value of
$112,332 at December 31, 2000............................. -- 97,123
UBS Line of Credit,(1) secured by the Funding VIII
Properties and the Washington Harbour Properties.......... -- 80,000
CIGNA Note due December 2002, bears interest at 7.47% with
an interest-only term, secured by the MCI Tower Office
Property and Denver Marriott City Center Resort/Hotel
Property with a combined book value of $103,773 at
December 31, 2001......................................... 63,500 63,500
Metropolitan Life Note V due December 2005, bears interest
at 8.49% with monthly principal and interest payments
based on a 25-year amortization schedule, secured by the
Datran Center Office Properties with a combined book value
of $68,653 at December 31, 2001........................... 38,696 39,219
Northwestern Life Note due January 2004, bears interest at
7.66% with an interest-only term, secured by the 301
Congress Avenue Office Property with a book value of
$36,234 at December 31, 2001.............................. 26,000 26,000
Metropolitan Life Note I due September 2001, bears interest
at 8.88% with monthly principal and interest payments
based on a 20-year amortization schedule, secured by five
of The Woodlands Office Properties with a combined book
value of $12,464 at December 31, 2000..................... -- 9,263
Nomura Funding VI Note(8) bears interest at 10.07% with
monthly principal and interest payments based on a 25-year
amortization schedule through maturity in July 2020,
secured by the Funding VI Property with a book value of
$35,043 at December 31, 2001.............................. 8,187 8,330
Woodmen of the World Note(9) due April 2009, bears interest
at 8.20% with an initial five-year interest-only term
(through April 2006), followed by principal amortization
based on a 25-year amortization schedule, secured by the
Avallon IV Office Property with a book value of $12,858... 8,500 --
Mitchell Mortgage Note(10) due August 2002, bears interest
at 7.00% with an interest-only term, secured by three of
The Woodlands Office Properties with a combined book value
of $9,167................................................. 6,244 --
Rigney Promissory Note due November 2012, bears interest at
8.50% with quarterly principal and interest payments based
on a 15-year amortization schedule, secured by a parcel of
land with a book value of $17,123 at December 31, 2001.... 651 688
F-73
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BALANCE AT DECEMBER 31,
-----------------------
2001 2000
---------- ----------
Unsecured Debt
Fleet Facility(2) due May 2004, bears interest at LIBOR plus
187.5 basis points (at December 31, 2001, the interest
rate was 3.92%), with a three-year interest-only term and
a one year extension option............................... 283,000 --
2007 Notes(11) bear interest at a fixed rate of 7.50% with a
ten-year interest-only term, due September 2007........... 250,000 250,000
2002 Notes(11) bear interest at a fixed rate of 7.00% with a
five-year interest-only term, due September 2002.......... 150,000 150,000
Short-Term Borrowings
Short-term borrowings (12); variable interest rates ranging
from the Fed Funds rate plus 150 basis points to LIBOR
plus 375 basis points, with maturities up to August
2002...................................................... 15,000 --
---------- ----------
Total Notes Payable....................................... $2,214,094 $2,271,895
========== ==========
---------------
(1) The UBS Facility was entered into effective January 31, 2000 and amended on
May 10, 2000 and May 18, 2000. As amended, the UBS Facility consisted of
three tranches: the UBS Line of Credit, the UBS Term Loan I and the UBS
Term Loan II. In May 2001, the Company repaid and retired the UBS Facility
with proceeds from a $970,000 debt refinancing. The interest rate on the
UBS Line of Credit and the UBS Term Loan I was equal to LIBOR plus 250
basis points. The interest rate on the UBS Term Loan II was equal to LIBOR
plus 275 basis points. As of December 31, 2000, the interest rate on the
UBS Line of Credit and UBS Term Loan I was 9.20%, and the interest rate on
the UBS Term Loan II was 9.46%. The weighted average interest rate on the
UBS Line of Credit for the year ended December 31, 2000 was 8.91%. As of
December 31, 2000, the UBS Facility was secured by 25 Office Properties and
four Resort/Hotel Properties with a combined book value of $1,042,207.
(2) For a description of the Fleet Fund I and II Term Loan and the Fleet
Facility, see "Debt Refinancing and Fleet Facility" section below.
(3) The outstanding principal balance of this note at maturity will be
approximately $224,100.
(4) In August 2007, the interest rate will increase, and the Company is
required to remit, in addition to the monthly debt service payment, excess
property cash flow, as defined, to be applied first against principal until
the note is paid in full and thereafter, against accrued excess interest,
as defined. It is the Company's intention to repay the note in full at such
time (August 2007) by making a final payment of approximately $220,500.
(5) The Fleet Fund I and II Term Loan, entered into in May 2001, modified and
replaced the previously outstanding Fleet Term Note II. Prior to the
modification and replacement, the Fleet Term Note II was due August 31,
2003, bore interest at the 30-Day LIBOR rate plus 234 basis points (at
December 31, 2000, the interest rate was 10.63%) with a four-year
interest-only term, secured by equity interests in Funding I and II with a
combined value of $200,000 at December 31, 2000.
(6) At the end of seven years (October 2006), the interest rate will adjust
based on current interest rates at that time. It is the Company's intention
to repay the note in full at such time (October 2006) by making a final
payment of approximately $177,800.
(7) In March 2006, the interest rate will increase, and the Company is required
to remit, in addition to the monthly debt service payment, excess property
cash flow, as defined, to be applied first against principal until the note
is paid in full and thereafter, against accrued excess interest, as
defined. It is the
F-74
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's intention to repay the note in full at such time (March 2006) by
making a final payment of approximately $154,100.
(8) In July 2010, the interest rate due under the note will change to a 10-year
Treasury yield plus 500 basis points or, if the Company so elects, it may
repay the note without penalty at that date.
(9) The outstanding principal balance of this loan at maturity will be
approximately $8,200.
(10) In August 2002, the Mitchell Mortgage Note was extended through September
2003.
(11) The notes were issued in an offering registered with the SEC.
(12) Short-term borrowings include the unsecured JP Morgan Loan Sales Facility,
a $50,000 credit facility, and the $50,000 unsecured Fleet Bridge Loan. The
lender under the JP Morgan Loan is not required to fund draws under the
loan unless certain conditions not within the control of the Company are
met. As a result, the Company maintains sufficient availability under the
Fleet Facility to repay the JP Morgan Loan Sales Facility at any time. At
December 31, 2001, $10,000 was outstanding on the JP Morgan Loan Sales
Facility and $5,000 was outstanding on the Fleet Bridge Loan.
Below are the aggregate principal payments required as of December 31, 2001
under indebtedness of the Company by year. Scheduled principal installments and
amounts due at maturity are included.
SECURED UNSECURED TOTAL
---------- --------- ----------
2002.......................................... $ 80,157 $165,000 $ 245,157
2003.......................................... 15,060 -- 15,060
2004.......................................... 262,857(1) 283,000(1) 545,857
2005.......................................... 329,339 -- 329,339
2006.......................................... 347,207 -- 347,207
Thereafter.................................... 481,474 250,000 731,474
---------- -------- ----------
$1,516,094 $698,000 $2,214,094
========== ======== ==========
---------------
(1) These amounts do not represent the effect of a one-year extension option on
the Fleet Facility and two one-year extension options on the Deutsche
Bank -- CMBS Loan.
The Company has approximately $245,157 of secured and unsecured debt
payments due during 2002, consisting primarily of the Cigna Note, the Mitchell
Mortgage Note and the 2002 Notes which are expected to be funded through
replacement debt financing.
Any uncured or unwaived events of default on the Company's loans can
trigger an acceleration of payment on the loan in default. In addition, a
default by the Company or any of its subsidiaries with respect to any
indebtedness in excess of $5,000 generally will result in a default under the
Fleet Facility and the Fleet I and II Term Loan after the notice and cure
periods for the other indebtedness have passed. As of December 31, 2001, the
Company was in compliance with all of its debt service coverage ratios and other
covenants related to its outstanding debt. The Company's debt facilities
generally prohibit loan pre-payment for an initial period, allow pre-payment
with a penalty during a following specified period and allow pre-payment without
penalty after the expiration of that period. During the year ended December 31,
2001, there were no circumstances that would require pre-payment penalties or
increased collateral related to the Company's existing debt.
In addition to the subsidiaries listed in "Note 1. Organization and Basis
of Presentation," certain other subsidiaries of the Company were formed
primarily for the purpose of obtaining secured and unsecured debt or joint
venture financings. The following lists these entities, all of which are
consolidated and are grouped based on the Properties to which they relate:
Funding I and Funding II Properties (CREM Holdings, LLC, Crescent Capital
Funding, LLC, Crescent Funding Interest, LLC, CRE Management I Corp.,
F-75
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CRE Management II Corp.); Funding III Properties (CRE Management III Corp.);
Funding IV Properties (CRE Management IV Corp.); Funding V Properties
(CRE Management V Corp.); Funding VI Properties (CRE Management VI Corp.);
Funding VIII Properties (CRE Management VIII, LLC); Funding IX Properties
(CRE Management IX, LLC); Funding X Properties (CREF X Holdings Management, LLC,
CREF X Holdings, L.P., CRE Management X, LLC); Spectrum Center Partners, L.P.,
Spectrum Mortgage Associates, L.P., CSC Holdings Management, LLC, Crescent SC
Holdings, L.P., CSC Management, LLC); and 5 Houston Center (Development
Property) (C5HC Management, LLC, Crescent 5 Houston Center, L.P.).
DEBT REFINANCING AND FLEET FACILITY
In May 2001, the Company (i) repaid and retired the UBS Facility which
consisted of the UBS Line of Credit, the UBS Term Loan I and the UBS Term Loan
II; (ii) repaid and retired the iStar Financial Note; and (iii) modified and
replaced the Fleet Term Note II with proceeds from a $970,000 debt refinancing.
In May 2001, the Company wrote off $10,800 of deferred financing costs related
to the early extinguishment of the UBS Facility which is included in
Extraordinary Item -- Extinguishment of Debt.
New Debt Resulting from Refinancing
MAXIMUM MATURITY
DESCRIPTION BORROWING INTEREST RATE DATE
----------- --------- ------------- --------
Fleet Facility...................... $400,000(1) LIBOR + 187.5 basis points 2004(2)
Fleet Fund I and II Term Loan....... $275,000 LIBOR + 325 basis points 2005
Deutsche Bank -- CMBS Loan.......... $220,000 LIBOR + 234 basis points 2004(3)
Deutsche Bank Short-Term Loan....... $ 75,000 LIBOR + 300 basis points 2001(4)
---------------
(1) The $400,000 Fleet Facility is an unsecured revolving line of credit. The
weighted average interest rate from the origination of the note in May 2001
through December 31, 2001 is 5.38%.
(2) One-year extension option.
(3) Two one-year extension options.
(4) Repaid September 19, 2001.
Debt Repaid or Modified and Replaced by Refinancing
MAXIMUM MATURITY BALANCE
DESCRIPTION BORROWING INTEREST RATE DATE REPAID/MODIFIED(1)
----------- --------- ------------- -------- ------------------
UBS Line of Credit..... $300,000 LIBOR + 250 basis points 2003 $165,000
UBS Term Loan I........ $146,775 LIBOR + 250 basis points 2003 $146,775
UBS Term Loan II....... $326,677 LIBOR + 275 basis points 2004 $326,677
Fleet Term Note II..... $200,000 LIBOR + 400 basis points 2003 $200,000
iStar Financial Note... $ 97,123 LIBOR + 175 basis points 2001 $ 97,123
---------------
(1) All the amounts listed, other than the Fleet Term Note II, were repaid. In
May 2001, the Fleet Term Note II was modified and replaced by the Fleet Fund
I and II Term Loan.
7. INTEREST RATE CAPS
In connection with the closing of the Deutsche Bank -- CMBS Loan in May
2001, the Company entered into a LIBOR interest rate cap struck at 7.16% for a
notional amount of $220,000, and simultaneously sold a LIBOR interest rate cap
with the same terms. Since these instruments do not reduce the Company's net
F-76
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest rate risk exposure, they do not qualify as hedges and changes to their
respective fair values are charged to earnings. As the significant terms of
these arrangements are substantially the same, the effects of a revaluation of
these instruments are expected to substantially offset each other.
8. CASH FLOW HEDGES
The Company uses derivative financial instruments to convert a portion of
its variable-rate debt to fixed-rate debt and to manage its fixed to
variable-rate debt ratio. As of December 31, 2001, the Company had entered into
three cash flow hedge agreements which are accounted for under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended by
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities -- an Amendment of FASB Statement No. 133."
The following table shows information regarding the Company's cash flow
hedge agreements as of December 31, 2001, and interest expense for the year
ended December 31, 2001:
ADDITIONAL INTEREST
ISSUE NOTIONAL MATURITY REFERENCE FAIR MARKET EXPENSE FOR THE YEAR
DATE AMOUNT DATE RATE VALUE ENDED DECEMBER 31, 2001
----- -------- --------- --------- ------------ -----------------------
9/1/1999............. $200,000 9/2/2003 6.183% $(10,800) $3,500
2/4/2000............. $200,000 2/3/2003 7.11% $(10,800) $6,000
4/18/2000............ $100,000 4/18/2004 6.76% $ (7,200) $2,700
The Company has designated its three cash flow hedge agreements as cash
flow hedges of LIBOR-based monthly interest payments on a designated pool of
variable-rate LIBOR indexed debt that reprices closest to the reset dates of
each cash flow hedge agreement. For retrospective effectiveness testing, the
Company uses the cumulative dollar offset approach as described in Derivatives
Implementation Group ("DIG") Issue E8. The DIG is a task force designed to
assist the FASB in answering questions that companies have resulting from
implementation of SFAS No. 133 and 138. The Company uses the change in variable
cash flows method as described in DIG Issue G7 for prospective testing as well
as for the actual recording of ineffectiveness, if any. Under this method, the
Company will compare the changes in the floating rate portion of each cash flow
hedge to the floating rate of the hedged items. The cash flow hedges have been
and are expected to remain highly effective. Changes in the fair value of these
highly effective hedging instruments are recorded in accumulated other
comprehensive income. The effective portion that has been deferred in
accumulated other comprehensive income will be reclassified to earnings as
interest expense when the hedged items impact earnings. If a cash flow hedge
falls outside 80%-125% effectiveness for a quarter, all changes in the fair
value of the cash flow hedge for the quarter will be recognized in earnings
during the current period. If it is determined based on prospective testing that
it is no longer likely a hedge will be highly effective on a prospective basis,
the hedge will no longer be designated as a cash flow hedge and no longer
qualify for accounting in accordance with SFAS Nos. 133 and 138.
Over the next twelve months, an estimated $16,400 to $18,400 will be
reclassified from accumulated other comprehensive income to interest expense and
charged against earnings related to the effective portions of the cash flow
hedge agreements.
9. RENTALS UNDER OPERATING LEASES
During 2001, the Company received rental income from the lessees of Office
Property and Resort/Hotel Property space under operating leases. On February 14,
2002, the Company executed an agreement with COPI, pursuant to which the Company
acquired, in lieu of foreclosure, COPI's lessee interests in the eight
Resort/Hotel Properties previously leased to COPI. Therefore, no future rental
income from the operating lessee will be recognized for these Resort/Hotel
Properties. The Company recognized percentage rental
F-77
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
income from the Resort/Hotel Properties of approximately $14,665, $24,622 and
$19,648 for the years ended December 31, 2001, 2000 and 1999, respectively.
For noncancelable operating leases for consolidated Office Properties owned
as of December 31, 2001, future minimum rentals (base rents) during the next
five years and thereafter (excluding tenant reimbursements of operating expenses
for Office Properties) are as follows:
OFFICE
PROPERTIES
----------
2002........................................................ $ 410,459
2003........................................................ 350,022
2004........................................................ 268,891
2005........................................................ 213,334
2006........................................................ 165,175
Thereafter.................................................. 482,383
----------
$1,890,264
==========
Generally, the Office Property leases also require that each customer
reimburse the Company for increases in operating expenses above operating
expenses during the base year of the customer's lease. These amounts totaled
$98,816, $91,735 and $92,865, for the years ended December 31, 2001, 2000 and
1999, respectively. These increases are generally payable in equal installments
throughout the year, based on estimated increases, with any differences adjusted
at year end based upon actual expenses.
See "Note 2. Summary of Significant Accounting Policies," for further
discussion of revenue recognition, and "Note 3. Segment Reporting," for further
discussion of significant tenants.
10. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company has 12 Properties located on land that is subject to long-term
ground leases, which expire between 2015 and 2080. The Company also leases
parking spaces in a parking garage adjacent to one of its Properties pursuant to
a lease expiring in 2021. Lease expense associated with these leases during each
of the three years ended December 31, 2001, 2000, and 1999 was $2,766, $2,869
and $2,642, respectively. Future minimum lease payments due under such leases as
of December 31, 2001, are as follows:
LEASES
COMMITMENTS
-----------
2002........................................................ $ 2,121
2003........................................................ 2,129
2004........................................................ 2,136
2005........................................................ 2,143
2006........................................................ 2,155
Thereafter.................................................. 107,219
--------
$117,903
========
COPI COMMITMENTS
See "Note 22. Subsequent Events," for a description of the Company's
commitments related to the agreement with COPI, executed on February 14, 2002.
F-78
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONTINGENCIES
Environmental Matters
All of the Properties have been subjected to Phase I environmental
assessments, and some Properties have been subjected to Phase II soil and ground
water sampling as part of the Phase I assessments. Such assessments have not
revealed, nor is management aware of, any environmental liabilities that
management believes would have a material adverse effect on the financial
position or results of operations of the Company.
11. STOCK AND UNIT BASED COMPENSATION
STOCK OPTION PLANS
Crescent Equities has two stock incentive plans, the 1995 Stock Incentive
Plan (the "1995 Plan") and the 1994 Stock Incentive Plan (the "1994 Plan"). Due
to the approval of the 1995 Plan, additional options and restricted shares will
no longer be granted under the 1994 Plan. Under the 1994 Plan, Crescent Equities
had granted, net of forfeitures, 2,509,800 options and no restricted shares. The
maximum number of options and/or restricted shares that Crescent Equities was
able to initially grant at inception under the 1995 Plan was 2,850,000 shares.
The maximum aggregate number of shares available for grant under the 1995 Plan
increases automatically on January 1 of each year by an amount equal to 8.5% of
the increase in the number of common shares and units outstanding since January
1 of the preceding year, subject to certain adjustment provisions. As of January
1, 2001, the number of shares Crescent Equities may grant under the 1995 Plan is
9,677,794. Under the 1995 Plan, Crescent Equities had granted, net of
forfeitures, options and restricted shares of 8,546,700 and 23,715 respectively,
through December 31, 2001. Under both Plans, options are granted at a price not
less than the market value of the shares on the date of grant and expire ten
years from the date of grant. The options that have been granted under the 1995
Plan vest over five years, with the exception of 500,000 options that vest over
two years, 250,000 options that vest over three and a half years and 60,000
options that vest six months from the initial date of grant. The options that
have been granted under the 1994 Plan vest over periods ranging from one to five
years.
STOCK OPTIONS PLANS
A summary of the status of Crescent Equities' 1994 and 1995 Plans as of
December 31, 2001, 2000 and 1999 and changes during the years then ended is
presented in the table below:
2001 2000 1999
---------------------- ---------------------- ----------------------
OPTIONS TO WTD. AVG. OPTIONS TO WTD. AVG. OPTIONS TO WTD. AVG.
ACQUIRE EXERCISE ACQUIRE EXERCISE ACQUIRE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- --------- ---------- --------- ---------- ---------
Outstanding as of January
1,.......................... 7,966 $21 6,661 $21 6,967 $21
Granted....................... 559 22 1,665 20 3,489 16
Exercised..................... (747) 17 (209) 15 (2,900) 13
Forfeited..................... (803) 20 (151) 20 (895) 30
Expired....................... -- -- -- -- -- --
----- --- ----- --- ------ ---
Outstanding/Wtd. Avg. as of
December 31,................ 6,975 $21 7,966 $21 6,661 $21
----- --- ----- --- ------ ---
Exercisable/Wtd. Avg. as of
December 31,................ 3,127 $24 2,630 $23 1,721 $24
F-79
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about the options outstanding
and exercisable at December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ----------------------------
NUMBER WTD. AVG. YEARS NUMBER
RANGE OF OUTSTANDING REMAINING WTD. AVG. EXERCISABLE WTD. AVG.
EXERCISE PRICES AT 12/31/01 BEFORE EXPIRATION EXERCISE PRICE AT 12/31/01 EXERCISE PRICE
--------------- ----------- ----------------- -------------- ----------- --------------
$11 to 19............ 3,258 7.4 years $16 1,252 $16
$19 to 27............ 2,221 8.3 22 599 22
$27 to 39............ 1,496 6.1 32 1,276 32
----- --------- --- ----- ---
$11 to 39............ 6,975 7.4 years $21 3,127 $24
===== ========= === ===== ===
UNIT PLANS
The Operating Partnership has two unit incentive plans, the 1995 Unit
Incentive Plan (the "1995 Unit Plan") and the 1996 Unit Incentive Plan (the
"1996 Unit Plan"). The 1995 Unit Plan is designed to reward persons who are not
trust managers, officers or 10% shareholders of the Company. An aggregate of
100,000 common shares are reserved for issuance upon the exchange of 50,000
units available for issuance to employees and advisors under the 1995 Unit Plan.
As of December 31, 2001, an aggregate of 7,012 units had been distributed under
the 1995 Unit Plan. The 1995 Unit Plan does not provide for the grant of
options. There was no activity in the 1995 Unit Plan in 2001, 2000 or 1999. The
1996 Unit Plan provides for the grant of options to acquire up to 2,000,000
units. Through December 31, 2001, the Operating Partnership had granted, net of
forfeitures, options to acquire 1,778,571 units. Forfeited options are available
for grant. The unit options granted under the 1996 Unit Plan were priced at fair
market value on the date of grant, generally vest over seven years, and expire
ten years from the date of grant. Pursuant to the terms of the unit options
granted under the 1996 Unit Plan, because the fair market value of the Company's
common shares equaled or exceeded $25 for each of ten consecutive trading days,
the vesting of an aggregate of 500,000 units was accelerated and such units
became immediately exercisable in 1996. In addition, 100,000 unit options vest
50% after three years and 50% after five years. Under the 1996 Unit Plan, each
unit that may be purchased is exchangeable, as a result of shareholder approval
in June 1997, for two common shares or, at the option of the Company, an
equivalent amount of cash.
F-80
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's 1996 Unit Plan as of December 31,
2001, 2000 and 1999, and changes during the years then ended is presented in the
table below (assumes each unit is exchanged for two common shares):
1996 UNIT INCENTIVE OPTION PLAN
2001 2000 1999
----------------------------- ----------------------------- -----------------------------
SHARES WTD. AVG. SHARES WTD. AVG. SHARES WTD. AVG.
UNDERLYING EXERCISE PRICE UNDERLYING EXERCISE PRICE UNDERLYING EXERCISE PRICE
UNIT OPTIONS PER SHARE UNIT OPTIONS PER SHARE UNIT OPTIONS PER SHARE
------------ -------------- ------------ -------------- ------------ --------------
Outstanding as of January
1,.......................... 2,414 $17 2,414 $17 4,000 $18
Granted....................... -- -- -- -- 200 16
Exercised..................... (20) 18 -- -- (1,143) 18
Forfeited..................... -- -- -- -- (643) 18
Expired....................... -- -- -- -- -- --
----- --- ----- --- ------ ---
Outstanding/Wtd. Avg. as of
December 31,................ 2,394 $17 2,414 $17 2,414 $17
----- --- ----- --- ------ ---
Exercisable/Wtd. Avg. as of
December 31,................ 1,766 $18 1,571 $18 1,143 $18
Effective March 5, 2001, the Operating Partnership granted options to
acquire 150,000 Units to Dennis H. Alberts, in connection with his employment as
the Chief Operating Officer of the General Partner and the Company. The 300,000
common share equivalents were priced at $21.84 per share, which equals the fair
market value of the Company's common shares at the date of grant.
STOCK OPTION AND UNIT PLANS
The Company applies APB No. 25 in accounting for options granted pursuant
to the 1995 Plan, the 1994 Plan and the 1996 Unit Plan (collectively, the
"Plans"). Accordingly, no compensation cost has been recognized for the Plans.
Had compensation cost for the Plans been determined based on the fair value at
the grant dates for awards under the Plans, consistent with SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the
following pro forma amounts:
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
2001 2000 1999
----------------------- ----------------------- -----------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- --------- ----------- ---------
Basic EPS:
Net (Loss) Income available to
common shareholders............... $(18,160) $(23,301) $231,716 $226,112 $(7,441) $(12,998)
Diluted EPS:
Net (Loss) Income available to
common shareholders............... (18,160) (23,301) 231,716 226,112 (7,441) (12,998)
Basic (Loss) Earnings per Share....... (0.17) (0.22) 2.05 1.99 (0.06) (0.11)
Diluted (Loss) Earnings per Share..... (0.17) (0.22) 2.02 1.97 (0.06) (0.11)
F-81
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 2001, 2000 and 1999, the weighted average fair value of
options granted was $2.73, $2.46 and $2.80, respectively. The fair value of each
option is estimated at the date of grant using the Black-Scholes option-pricing
model using the following expected weighted average assumptions in the
calculation.
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
Life of options........................................ 10 years 10 years 10 years
Risk-free interest rates............................... 4.4% 8.0% 8.0%
Dividend yields........................................ 8.3% 10.0% 12.0%
Stock price volatility................................. 25.7% 26.0% 27.0%
12. SALE OF PREFERRED EQUITY INTERESTS IN SUBSIDIARY
During the year ended December 31, 2000, the Company formed Funding IX and
contributed seven Office Properties and two Resort/Hotel Properties to Funding
IX. As of December 31, 2001, Funding IX held seven Office Properties and one
Resort/Hotel Property. The Company owns 100% of the common voting interests in
Funding IX, 0.1% in the form of a general partner interest and 99.9% in the form
of a limited partner interest.
Also, during the year ended December 31, 2000, GMAC Commercial Mortgage
Corporation ("GMACCM") purchased $275,000 of non-voting, redeemable preferred
Class A Units in Funding IX (the "Class A Units"). The Class A Units in Funding
IX were redeemable at the Company's option at the original purchase price. As of
December 31, 2000, the Company had redeemed approximately $56,600 million of the
Class A Units in Funding IX from GMACCM and GMACCM held $218,400 of Class A
Units. No redemption occurred during the year ended December 31, 2001.
The Class A Units received a preferred variable-rate dividend calculated at
LIBOR plus 450 basis points, or approximately 6.6% per annum, as of December 31,
2001, and increasing to LIBOR plus 550 basis points beginning March 15, 2002.
Funding IX loaned the net proceeds of the sale of Class A Units in Funding
IX through an intracompany loan to Crescent SH IX, Inc. ("SH IX"), for the
purchase of common shares of the Company. See "Share Repurchase Program" below.
This intracompany loan is eliminated in consolidation.
13. SHAREHOLDERS' EQUITY
EMPLOYEE STOCK PURCHASE PLAN
On June 25, 2001, the shareholders of the Company approved a new Employee
Stock Purchase Plan (the "ESPP") that is intended to qualify as an "employee
stock purchase plan" under Section 423 of the Internal Revenue Code ("IRC") of
1986, as amended. The ESPP is regarded as a noncompensatory plan under APB No.
25, because it meets the qualifications under IRC 423. Under the terms of the
ESPP, eligible employees may purchase common shares of the Company at a price
that is equal to 90% of the lower of the common shares' fair market value at the
beginning or the end of a quarterly period. The fair market value of a common
share is equal to the last sale price of the common shares on the New York Stock
Exchange. Eligible employees may purchase the common shares through payroll
deductions of up to 10% of eligible compensation. The ESPP is not subject to the
provisions of ERISA. The ESPP was effective October 1, 2001, and will terminate
on May 14, 2011.
The 1,000,000 common shares that may be issued pursuant to the purchase of
common shares under the ESPP represent less than 0.96% of the Company's
outstanding common shares at December 31, 2001.
F-82
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FORWARD SHARE PURCHASE AGREEMENT
On August 12, 1997, the Company entered into two transactions with
affiliates of the predecessor of UBS AG ("UBS"). In one transaction, the Company
sold 4,700,000 common shares to UBS for approximately $148,000 and received
approximately $145,000 in net proceeds. In the other transaction, the Company
entered into a forward share purchase agreement (the "Forward Share Purchase
Agreement") with UBS. The Company had the right to settle the Forward Share
Purchase Agreement in cash or common shares. On August 11, 1998, the Company
paid a fee of approximately $3,000 to UBS in connection with the exercise by the
Company and UBS of the right to extend the term of the Forward Share Purchase
Agreement until August 12, 1999.
The Forward Share Purchase Agreement was accounted for under the Emerging
Issues Task Force (the "EITF") Issue No. 96-13. The Forward Share Purchase
Agreement and the related common stock was accounted for together as an equity
instrument, similar to a preferred stock instrument with a cumulative fixed
dividend, the forward accretion component or the guaranteed return to UBS was
accounted for like a preferred dividend. Additionally, the common shares
actually issued and outstanding were considered in both the basic and diluted
weighted-average shares calculations. The diluted EPS calculation also included
any contingently issuable common shares.
On June 30, 1999, the Company settled the Forward Share Purchase Agreement
with affiliates of the predecessor of UBS. At settlement of the Forward Share
Purchase Agreement, the Company made a cash payment of approximately $149,000
(the "Settlement Price") to UBS in exchange for the return by UBS to the Company
of 7,299,760 common shares.
The number of common shares returned to the Company is equal to the
4,700,000 common shares originally issued to UBS plus 2,599,760 common shares
subsequently issued by the Company, because of a decline in its stock price. The
additional shares were issued as collateral for the Company's obligation to
purchase 4,700,000 common shares from UBS by August 12, 1999. The Settlement
Price was calculated based on the gross proceeds the Company received from the
original issuance of 4,700,000 common shares to UBS, plus a forward accretion
component equal to 90-day LIBOR plus 75 basis points, minus an adjustment for
the Company's distributions paid to UBS. The forward accretion component
represented a guaranteed rate of return to UBS.
SHARE REPURCHASE PROGRAM
On October 15, 2001, the Company's Board of Trust Managers authorized an
increase in the amount of outstanding common shares that can be repurchased from
time to time in the open market or through privately negotiated transactions
(the "Share Repurchase Program") from $500,000 to $800,000.
The Company commenced its Share Repurchase Program in March 2000. As of
December 31, 2001, the Company had repurchased 18,756,423 common shares, 20,286
of which have been retired, at an average price of $19.09 per common share for
an aggregate of approximately $358,115. As of December 31, 2001, the Company
held 14,468,623 of the repurchased common shares in SH IX, a wholly-owned
subsidiary. The 14,468,623 common shares were repurchased with the net proceeds
of the sale of Class A Units in Funding IX and with a portion of the net
proceeds from the sale of one of the Properties held by Funding IX. See "Note
12. Sale of Preferred Equity Interests in Subsidiary." These common shares are
consolidated as treasury shares in accordance with GAAP.
The Company expects the Share Repurchase Program to continue to be funded
through a combination of debt, equity, joint venture capital and selected asset
disposition alternatives available to the Company. The amount of common shares
that the Company will actually purchase will be determined from time to time, in
its reasonable judgment, based on market conditions and the availability of
funds, among other factors. There
F-83
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
can be no assurance that any number of common shares will actually be purchased
within any particular time period.
SHARE REPURCHASE AGREEMENT
On November 19, 1999, the Company entered into an agreement (the "Share
Repurchase Agreement") with UBS to purchase a portion of its common shares from
UBS. The Company had the option to settle the Share Repurchase Agreement in cash
or common shares. During the year ended December 31, 2000, the Company purchased
the 5,809,180 common shares from UBS at an average cost of $17.62 per common
share for an aggregate of approximately $102,333 under the Share Repurchase
Agreement with UBS.
The Share Repurchase Agreement was accounted for under EITF 96-13 and was
considered an equity instrument similar to a preferred stock instrument with a
cumulative fixed dividend, the forward accretion component or guaranteed return
to UBS was accounted for like a preferred dividend. Additionally, the common
shares actually issued and outstanding were considered in both the basic and
diluted weighted-average shares calculations. The diluted EPS calculation also
included any contingently issuable common shares.
The Company has no further obligation under the Share Repurchase Agreement.
The purchases were funded primarily through the sale of Class A Units in Funding
IX. See "Note 12. Sale of Preferred Equity Interests in Subsidiary."
DISTRIBUTIONS
On October 17, 2001, the Company announced that due to its revised cash
flow expectations in the uncertain economic environment and measuring its payout
ratios to those of the Company's peer group, the Company was reducing its
quarterly distribution from $0.55 per common share, or an annualized
distribution of $2.20 per common share, to $0.375 per common share, or an
annualized distribution of $1.50 per common share.
The following table summarizes the distributions paid or declared to common
shareholders, unitholders and preferred shareholders during the year ended
December 31, 2001.
ANNUAL
DIVIDEND/ TOTAL RECORD PAYMENT DIVIDEND/
SECURITY DISTRIBUTION AMOUNT DATE DATE DISTRIBUTION
-------- ------------ ------- -------- -------- ------------
Common Shares/Units(1)............ $0.550 $74,697(2) 1/31/01 2/15/01 $2.20
Common Shares/Units(1)............ $0.550 $74,789(2) 4/30/01 5/15/01 $2.20
Common Shares/Units(1)............ $0.550 $74,986(2) 7/31/01 8/15/01 $2.20
Common Shares/Units(1)............ $0.375(3) $49,937(2) 10/31/01 11/15/01 $1.50(3)
Common Shares/Units(1)............ $0.375(3) $49,706(2) 1/31/02 2/15/02 $1.50(3)
6 3/4% Series A Preferred
Shares.......................... $0.422 $ 3,375 1/31/01 2/15/01 $1.69
6 3/4% Series A Preferred
Shares.......................... $0.422 $ 3,375 4/30/01 5/15/01 $1.69
6 3/4% Series A Preferred
Shares.......................... $0.422 $ 3,375 7/31/01 8/15/01 $1.69
6 3/4% Series A Preferred
Shares.......................... $0.422 $ 3,375 10/31/01 11/15/01 $1.69
6 3/4% Series A Preferred
Shares.......................... $0.422 $ 3,375 1/31/02 2/15/02 $1.69
---------------
(1) Represents one-half the amount of the distribution per unit because each
unit is exchangeable for two common shares.
(2) These distribution amounts include $7,958 for each of the distributions paid
on February 15, 2001, May 15, 2001, August 15, 2001, and $5,426 for each of
the distributions paid on November 15, 2001 and
F-84
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
February 15, 2002, which were paid on common shares held by the Company in
Crescent SH IX, and which are eliminated in consolidation.
(3) On October 17, 2001, the Company announced a reduction in its quarterly
distribution from $0.55 per common share, or an annualized distribution of
$2.20 per common share, to $0.375 per common share, or an annualized
distribution of $1.50 per common share.
The distributions to common shareholders and unitholders paid during the
year ended December 31, 2000, were $298,547, or $2.20 per common share and
equivalent unit. As of December 31, 2000, the Company was holding 14,468,623 of
its common shares in Crescent SH IX. The distribution amounts above include
$17,313 of distributions for the year ended December 31, 2000, which were paid
for common shares held by the Company, and which are eliminated in
consolidation. The distributions to common shareholders and unitholders paid
during the year ended December 31, 1999, were $298,125, or $2.20 per common
share and equivalent unit.
The distributions to preferred shareholders during the year ended December
31, 2000, were $13,500, or $1.6875 per preferred share.
Common Shares
Following is the income tax status of distributions paid on common shares
and equivalent units during the years ended December 31, 2001, and 2000 to
common shareholders:
2001 2000
---- ----
Ordinary dividend........................................... 50.3% 51.5%
Capital gain................................................ -- 6.4%
Return of capital........................................... 49.7% 35.9%
Unrecaptured Section 1250 gain.............................. -- 6.2%
Preferred Shares
Following is the income tax status of distributions paid during the years
ended December 31, 2001 and 2000 to preferred shareholders:
2001 2000
---- ----
Ordinary dividend........................................... 100% 83.7%
Capital gain................................................ -- 8.2%
Unrecaptured Section 1250 gain.............................. -- 8.1%
14. MINORITY INTEREST
Minority interest represents (i) the limited partner interests owned by
limited partners in the Operating Partnership ("units"), and (ii) joint venture
and preferred equity interests held by third parties in other consolidated
subsidiaries. Each unit may be exchanged for either two common shares or, at the
election of the Company, cash equal to the fair market value of two common
shares at the time of the exchange. When a unitholder exchanges a unit, Crescent
Equities' percentage interest in the Operating Partnership increases. During the
year ended December 31, 2001, there were 401,302 units exchanged for 802,604
common shares of Crescent Equities.
F-85
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. RELATED PARTY DISCLOSURES
DBL HOLDINGS, INC. ("DBL")
As of December 31, 2001, the Company owned 97.44% of DBL with the remaining
2.56% economic interest in DBL (including 100% of the voting interest in DBL)
held by John Goff, Vice-Chairman of the Board of Trust Managers and Chief
Executive Officer of the Company. Originally, Mr. Goff contributed his voting
interests in MVDC and HADC, originally valued at approximately $380, and
approximately $63 in cash, or total consideration valued at approximately $443
for his interest in DBL.
DBL has two wholly owned subsidiaries, DBL-ABC, Inc. and DBL-CBO, Inc., the
assets of which are described in the following paragraphs, and DBL directly
holds 66% of the voting stock in Mira Vista and HADC. At December 31, 2001, Mr.
Goff's interest in DBL was approximately $554.
Since June 1999, the Company contributed approximately $23,800 to DBL. The
contribution was used by DBL to make an equity contribution to DBL-ABC, Inc.,
which committed to purchase a limited partnership interest representing a 12.5%
interest in G2 Opportunity Fund, LP ("G2"). G2 was formed for the purpose of
investing in commercial mortgage backed securities and other commercial real
estate investments and is managed and controlled by an entity that is owned
equally by Goff-Moore Strategic Partners, LP ("GMSP") and GMACCM. The ownership
structure of GMSP consists of 50% ownership by Darla Moore, who is married to
Richard Rainwater, Chairman of the Board of Trust Managers of the Company and
50% by John Goff. Mr. Rainwater is also a limited partner of GMSP. At December
31, 2001, DBL had an approximately $14,100 investment in G2.
In March 1999, DBL-CBO, Inc. acquired $6,000 aggregate principal amount of
Class C-1 Notes issued by Juniper CBO 1999-1 Ltd., a Cayman Island limited
liability company. At December 31, 2001 this investment was valued at
approximately $5,400.
COPI COLORADO, L.P.
As of December 31, 2001, Crescent Resort Development, Inc. ("CRD") was
owned 90% by the Company and the remaining 10%, representing 100% of the voting
stock, was owned by COPI Colorado, L. P., of which 60% was owned by COPI, with
20% owned by John Goff, Vice-Chairman of the Board of Trust Managers and Chief
Executive Officer of the Company and 20% owned by a third party.
On February 14, 2002, the Company executed an agreement with COPI, pursuant
to which COPI transferred to the Company, in lieu of foreclosure, COPI's 60%
general partner interest in COPI Colorado. As a result, the Company indirectly
owns a 96% interest in CRD, John Goff, Vice-Chairman of the Board of Trust
Managers and Chief Executive Officer of the Company, owns a 2.0% interest and
the remaining 2.0% interest is owned by a third party. The Company will fully
consolidate the operations of CRD beginning on the date of the asset transfer.
LOANS TO EMPLOYEES AND TRUST MANAGERS OF THE COMPANY FOR EXERCISE OF STOCK
OPTIONS AND UNIT OPTIONS
As of December 31, 2001, the Company had approximately $32,900 of loans
outstanding (including approximately $4,378 loaned during the year ended
December 31, 2001) to certain employees and trust managers of the Company on a
full recourse basis pursuant to the Company's stock incentive plans and unit
incentive plans pursuant to an agreement approved by the Board of Directors and
the Executive Compensation Committee of the Company. The proceeds of these loans
were used by the employees and the trust managers to acquire common shares of
the Company pursuant to the exercise of vested stock and unit options. Pursuant
to the loan agreements, these loans may be repaid in full or in part at any time
without premium or penalty.
F-86
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
John Goff, Vice-Chairman of the Board of Trust Managers and Chief Executive
Officer of the Company, had a loan representing $26,300 of the $32,900 total
outstanding loans at December 31, 2001.
Every month, federal short-term, mid-term and long-term rates (Applicable
Federal Rates) are determined and published by the IRS based upon average market
yields of specified maturities. Effective November 1, 2001, these loans were
amended to reduce the interest rates for their remaining terms to the Applicable
Federal Rates. As a result, the interest rates on loans with remaining terms of
three years or less at November 1, 2001 were reduced to approximately 2.7% per
year and the interest rates on loans with remaining terms greater than three
years as of November 1, 2001 were reduced to approximately 4.07% per year. These
amended interest rates reflect below prevailing market interest rates;
therefore, the Company recorded $750 of compensation expense for the year ended
December 31, 2001. Approximately $466 of interest was outstanding related to
these loans as of December 31, 2001.
16. COPI
In April 1997, the Company established a new Delaware corporation, Crescent
Operating, Inc. or COPI. All of the outstanding common stock of COPI, valued at
$0.99 per share, was distributed, effective June 12, 1997, to those persons who
were limited partners of the Operating Partnership or shareholders of the
Company on May 30, 1997, in a spin-off.
COPI was formed to become a lessee and operator of various assets to be
acquired by the Company and to perform the intercompany agreement between COPI
and the Company, pursuant to which each agreed to provide the other with rights
to participate in certain transactions. The Company was not permitted to operate
or lease these assets under the tax laws, in effect at that time, applicable to
REITs. In connection with the formation and capitalization of COPI, and the
subsequent operations and investments of COPI since 1997, the Company made loans
to COPI under a line of credit and various term loans.
On January 1, 2001, The REIT Modernization Act became effective. This
legislation allows the Company, through its subsidiaries, to operate or lease
certain of its investments that had been previously operated or leased by COPI.
COPI and the Company entered into an asset and stock purchase agreement on
June 28, 2001, in which the Company agreed to acquire the lessee interests in
the eight Resort/Hotel Properties leased to subsidiaries of COPI, the voting
interests held by subsidiaries of COPI in three of the Company's Residential
Development Corporations and other assets in exchange for $78,400. In connection
with that agreement, the Company agreed that it would not charge interest on its
loans to COPI from May 1, 2001 and that it would allow COPI to defer all
principal and interest payments due under the loans until December 31, 2001.
Also on June 28, 2001, the Company entered into an agreement to make a
$10,000 investment in Crescent Machinery Company ("Crescent Machinery"), a
wholly owned subsidiary of COPI. This investment, together with capital from a
third-party investment firm, was expected to put Crescent Machinery on solid
financial footing.
Following the date of the agreements relating to the acquisition of COPI
assets and stock and the investment in Crescent Machinery, the results of
operations for the COPI hotel operations and the COPI land development interests
declined, due in part to the slowdown in the economy after September 11. In
addition, Crescent Machinery's results of operations suffered because of the
economic environment and the overall reduction in national construction levels
that has affected the equipment rental and sale business, particularly post
September 11. As a result, the Company believes that a significant additional
investment would have been necessary to adequately capitalize Crescent Machinery
and satisfy concerns of Crescent Machinery's lenders.
F-87
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company stopped recording rent from the leases of the eight
Resort/Hotel Properties leased to subsidiaries of COPI on October 1, 2001, and
recorded the following impairment and other adjustments related to COPI in the
fourth quarter of 2001, based on the estimated fair value of the underlying
collateral.
IMPAIRMENT AND OTHER ADJUSTMENTS RELATED TO COPI
Resort/Hotel Accounts Receivable, net of allowance.......... $ 33,200
Resort/Hotel Straight-Line Rent............................. 12,700
Notes Receivable and Accrued Interest....................... 71,500
Asset transaction costs..................................... 2,800
--------
$120,200
Less estimated collateral value to be received from COPI:
Estimated Fair Value of Resort/Hotel FF&E................... $ 6,900
Estimated Fair Value of Voting Stock of Residential
Development Corporations.................................. $ 38,500
--------
$ 45,400
--------
Impairment of assets........................................ $ 74,800
Plus Estimated Costs Related to COPI Bankruptcy............. 18,000
--------
Impairment and other charges related to COPI................ $ 92,800
========
For a description of the COPI assets transferred to subsidiaries of the
Company subsequent to December 31, 2001, see "Note 22. Subsequent Events."
17. DISCONTINUED OPERATIONS
OFFICE SEGMENT
On September 18, 2001, the Company completed the sale of the two Washington
Harbour Office Properties. The sale generated net proceeds of approximately
$153,000 and a net loss of approximately $9,800. The proceeds from the sale of
the Washington Harbour Office Properties were used primarily to pay down
variable-rate debt and repurchase approximately 4.3 million of the Company's
common shares. The Washington Harbour Office Properties were the Company's only
Office Properties in Washington, D.C.
On September 28, 2001, the Woodlands Office Equities -- '95 Limited
("WOE"), owned by the Company and the Woodlands CPC, sold two Office Properties
located within The Woodlands, Texas. The sale generated net proceeds of
approximately $11,281, of which the Company's portion was approximately $9,857.
The sale generated a net gain of approximately $3,418, of which the Company's
portion was approximately $2,987. The proceeds received by the Company were used
primarily to pay down variable-rate debt.
On December 20, 2001, WOE sold one Office Property located within The
Woodlands, Texas. The sale generated net proceeds of approximately $2,016, of
which the Company's portion was approximately $1,761. The sale generated a net
gain of approximately $1,688, of which the Company's portion was approximately
$1,475. The proceeds received by the Company were used primarily to pay down
variable-rate debt.
F-88
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the condensed results of operations for the
years ended December 31, 2001, 2000 and 1999 for the five Office Properties sold
during 2001.
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
-------- -------- --------
Revenue............................................... $16,673 $22,751 $20,683
Operating Expenses.................................... 5,998 7,460 6,588
------- ------- -------
Net Operating Income.................................. $10,675(1) $15,291 $14,095
======= ======= =======
---------------
(1) Net operating income for 2001 only includes the period for which the
disposition Properties were held during the year.
During the year ended December 31, 2000, the Company completed the sale of
11 wholly-owned Office Properties. The sale of the 11 Office Properties
generated approximately $268,233 of net proceeds. The proceeds were used
primarily to pay down variable-rate debt. The Company recognized a net gain,
which is included in Gain on Property Sales, net, of approximately $35,841
related to the sale of the 11 Office Properties during the year ended December
31, 2000. During the year ended December 31, 1999, the Company recognized an
impairment loss of approximately $16,800 on one of the 11 Office Properties sold
during the year ended December 31, 2000. The Company also recognized a loss of
approximately $5,000, which is included in Gain on Property Sales, net, during
the year ended December 31, 2000 on one of the 11 Office Properties sold. The
losses represented the differences between the carrying values of the Office
Properties and the sales prices less costs of the sales.
During the year ended December 31, 2000, the Woodlands Retail
Equities -- '96 Limited, owned by the Company and The Woodlands CPC, completed
the sale of its retail portfolio, consisting of the Company's four retail
properties located in The Woodlands, Texas. The sale generated approximately
$42,700 of net proceeds, of which the Company's portion was approximately
$32,000. The sale generated a net gain of approximately $6,500, of which the
Company's portion was approximately $4,900. The proceeds received by the Company
were used primarily to pay down variable-rate debt. The net operating income for
the years ended December 31, 2000 and 1999 for the four retail properties was
$15 and $3,792, respectively. Net operating income for the year ended 2000 only
includes the periods for which these properties were held during the year.
The following table indicates the rental revenue, operating expenses,
depreciation and amortization and net income for the years ended December 31,
2001, 2000 and 1999 for the five Office Properties sold during the nine months
ended September 30, 2002.
DEPRECIATION
RENTAL OPERATING AND MINORITY NET
REVENUE EXPENSES AMORTIZATION INTEREST INCOME
------- --------- ------------ -------- ------
December 31, 2001................... $ 9,862 $5,507 $2,515 (212) $1,628
------- ------ ------ ---- ------
December 31, 2000................... $10,925 $5,228 $2,337 (370) $2,990
------- ------ ------ ---- ------
December 31, 1999................... $11,831 $5,451 $2,271 (447) $3,662
------- ------ ------ ---- ------
F-89
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table indicates the major classes of assets of the Properties
held for disposition as of December 31, 2001 and 2000.
AS OF
---------------------------
DECEMBER 31, DECEMBER 31,
2001 2000
------------ ------------
Land........................................................ $ 19,178 $ 18,201
Buildings and improvements.................................. 69,294 66,167
Furniture, fixture and equipment............................ 2,527 2,383
Accumulated depreciation.................................... (14,690) (12,147)
-------- --------
Net investment in real estate............................... $ 76,309 $ 74,604
======== ========
RESORT/HOTEL SEGMENT
On November 3, 2000, the Company completed the sale of the Four Seasons
Hotel -- Houston for a sales price of approximately $105,000. The Company used
approximately $19,700 of the proceeds to buy out the Property lease with COPI
and the asset management contract, and for other transaction costs. The sale
generated net proceeds of approximately $85,300. The Company also used
approximately $56,600 of the net proceeds to redeem Class A Units in Funding IX,
through which the Company owned the Property, from GMACCM. See "Note 12. Sale of
Preferred Equity Interests in Subsidiary" for a description of the ownership
structure of Funding IX. The sale generated a net gain, which is included in
Gain on Property Sales, net, of approximately $28,715. The Company's net
operating income for the years ended December 31, 2000 and 1999 for the Four
Seasons Hotel -- Houston was $8,048 and $9,237, respectively. The operating
results of this property are included in operating income for 2000 only for the
periods for which this Property was held during the year.
F-90
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
2001 2000
--------------------------------------------------- ------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
--------- -------- ------------- ------------ --------- -------- -------------
Revenues................... $176,080 $187,689 $173,455 $148,970 $172,894 $172,320 $174,696
Income before minority
interests, extraordinary
item and discontinued
operations............... 40,286 33,537 29,906 (77,996) 61,198 43,847 100,088
Minority interests......... (9,670) (8,272) (7,980) 4,704 (6,948) (8,569) (17,613)
Extraordinary item......... -- (10,802) -- -- (3,928) -- --
Discontinued operations.... 632 499 533 (36) 801 784 700
Net income available to
common shareholders
-- basic................. 27,873 11,587 19,084 (76,704) 45,671 31,969 83,175
-- diluted............... 27,873 11,587 19,084 (76,704) 45,671 31,969 83,175
Per share data:
Basic Earnings Per Common
Share
-- Income before
extraordinary item
and discontinued
operations......... 0.25 0.21 0.18 (0.72) 0.41 0.27 0.71
-- Extraordinary
item............... -- (0.10) -- -- (0.03) -- --
-- Discontinued
operations......... 0.01 -- -- -- 0.01 0.01 --
-- Net income.......... 0.26 0.11 0.18 (0.72) 0.39 0.28 0.71
Diluted Earnings Per
Common Share
-- Income before
extraordinary item
and discontinued
operations......... 0.25 0.20 0.17 (0.72) 0.41 0.26 0.70
-- Extraordinary
item................. -- (0.10) -- -- (0.03) -- --
-- Discontinued
operations......... 0.01 -- -- -- 0.01 0.01 --
-- Net income.......... 0.26 0.10 0.17 (0.72) 0.39 0.27 0.70
2000
------------
DECEMBER 31,
------------
Revenues................... $187,570
Income before minority
interests, extraordinary
item and discontinued
operations............... 94,559
Minority interests......... (17,502)
Extraordinary item......... --
Discontinued operations.... 705
Net income available to
common shareholders
-- basic................. 70,901
-- diluted............... 70,901
Per share data:
Basic Earnings Per Common
Share
-- Income before
extraordinary item
and discontinued
operations......... 0.66
-- Extraordinary
item............... --
-- Discontinued
operations......... 0.01
-- Net income.......... 0.67
Diluted Earnings Per
Common Share
-- Income before
extraordinary item
and discontinued
operations......... 0.65
-- Extraordinary
item................. --
-- Discontinued
operations......... 0.01
-- Net income.......... 0.66
19. BEHAVIORAL HEALTHCARE PROPERTIES
As of December 31, 1999, the behavioral healthcare segment consisted of 88
behavioral healthcare properties in 24 states, all of which were leased to CBHS
and its subsidiaries under a triple-net master lease. During the year ended
December 31, 1999, the Company received cash rental payments of approximately
$35,300 from CBHS, which is included in Interest and Other Income. However,
during 1999, CBHS's business was negatively affected by many factors, including
adverse industry conditions, and CBHS failed to perform in accordance with its
operating budget. In the third quarter of 1999 CBHS was unable to meet its
rental obligation to the Company. In the third quarter of 1999, the Company,
COPI, Magellan Health Services, Inc. ("Magellan") and CBHS commenced a
recapitalization of CBHS. As part of this recapitalization, the Company
commissioned an independent public accounting firm to assist in the evaluation
of alternatives related to CBHS, which included an appraisal of the behavioral
healthcare properties.
The following financial statement charges were made with respect to the
Company's investment in the behavioral healthcare properties in the third
quarter of 1999:
- CBHS rent was reflected on a cash basis beginning in the third quarter of
1999 due to the uncertainty that CBHS would be able to fulfill its rental
obligations under the lease;
F-91
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- The Company wrote-off the rent that was deferred according to the CBHS
lease agreement from the commencement of the lease in June of 1997
through June 30, 1999. The balance written-off totaled $25,600;
- The Company wrote-down its behavioral healthcare real estate assets by
approximately $103,800 to a book value of $245,000;
- The Company wrote-off Magellan warrants of $12,500;
- The Company recorded approximately $15,000 of additional expense to be
used by CBHS as working capital; and
- The Company ceased recording depreciation expense beginning in November
of 1999 on the behavioral healthcare properties that were classified as
held for disposition.
On February 16, 2000, CBHS and all of its subsidiaries that are subject to
the master lease with the Company filed voluntary Chapter 11 bankruptcy
petitions in the United States Bankruptcy Court for the District of Delaware.
During the year ended December 31, 2000, payment and treatment of rent for
the behavioral healthcare properties was subject to a rent stipulation agreed to
by certain of the parties involved in the CBHS bankruptcy proceeding. The
Company received approximately $15,400 in rent and interest from CBHS during the
year ended December 31, 2000, which is included in Interest and Other Income.
The Company also completed the sale of 60 behavioral healthcare properties
previously classified as held for disposition during the year ended December 31,
2000 (contained in Net Investment in Real Estate). The sales generated
approximately $233,700 in net proceeds and a net gain of approximately $58,600
for the year ended December 31, 2000. The net proceeds from the sale of the 60
behavioral healthcare properties sold during the year ended December 31, 2000
were used primarily to pay down variable-rate debt. During the year ended
December 31, 2000, the Company recognized an impairment loss of approximately
$9,300 on the behavioral healthcare properties held for disposition, which is
included in Impairment and Other Charges Related to Real Estate Assets. This
amount represents the difference between the carrying values and the estimated
sales prices less the costs of the sales. At December 31, 2000, the carrying
value of the 28 behavioral healthcare properties classified as held for
disposition was approximately $68,500 (contained in Net Investment in Real
Estate). Depreciation has not been recognized since the dates the behavioral
healthcare properties were classified as held for sale.
The Company received approximately $6,000 in repayments of a working
capital loan from CBHS during the year ended December 31, 2001, which is
included in Interest and Other Income. The Company also completed the sale of 18
behavioral healthcare properties previously classified as held for disposition
during the year ended December 31, 2001 (contained in Net Investment in Real
Estate). The sales generated approximately $34,700 in net proceeds and a net
gain of approximately $1,600 for the year ended December 31, 2001. The net
proceeds from the sale of the 18 behavioral healthcare properties sold during
the year ended December 31, 2001 were used primarily to pay down variable-rate
debt.
During the year ended December 31, 2001, the Company recognized an
impairment loss of approximately $8,500 on the behavioral healthcare properties
held for disposition, which is included in Impairment and Other Charges Related
to Real Estate Assets. This amount represents the difference between the
carrying values and the estimated sales prices less the costs of the sales. At
December 31, 2001, the carrying value of the 10 behavioral healthcare properties
classified as held for disposition was approximately $27,900 (contained in Net
Investment in Real Estate). Depreciation has not been recognized since the dates
the behavioral healthcare properties were classified as held for sale.
F-92
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. BROADBAND
In 2000, the Company made an equity investment in Broadband Office, Inc.
("Broadband"), (a facilities-based provider of broadband data, video and voice
communication services delivered over fiber optic networks), and related
entities. In May 2001, Broadband filed for Chapter 11 bankruptcy protection, and
the Company's investment in Broadband was approximately $7,200. Yipes
Communications Group, Inc. ("Yipes"), another telecom provider, has received
approval from the federal bankruptcy court to acquire certain rights formerly
owned by Broadband. In addition, Yipes has executed agreements with nine major
real estate entities, including the Company, to assume telecom licensing
agreements, in modified formats. As part of this transaction, the Company
acquired ownership of certain telecom assets previously owned by Broadband and
located within office properties in consideration for conveyance of its equity
interest in Broadband to Yipes. These telecom assets were independently
appraised and valued in excess of the Company's equity interest in Broadband. As
a result, the Company reclassified its investment in Broadband of approximately
$7,200 from Other Assets to Building Improvements during the year ended December
31, 2001. Therefore, Broadband's bankruptcy did not have a material effect on
the Company's results of operations for the year ended December 31, 2001 or its
financial position as of December 31, 2001.
21. SETTLEMENT OF MERGER DISPUTE
STATION CASINOS, INC. ("STATION")
As of April 14, 1999, the Company and Station entered into a settlement
agreement for the mutual settlement and release of all claims between the
Company and Station arising out of the agreement and plan of merger between the
Company and Station, which the Company terminated in August 1998. As part of the
settlement agreement, the Company paid $15,000 to Station on April 22, 1999.
22. SUBSEQUENT EVENTS
OFFICE PROPERTY DISPOSITIONS
On January 18, 2002, the Company completed the sale of the Cedar Springs
Office Property located in Dallas, Texas. The sale generated net proceeds of
approximately $12,000 and a net gain of approximately $4,500. The proceeds from
the sale of Cedar Springs were used primarily to pay down variable-rate debt.
On August 1, 2002, the Company completed the sale of 6225 North 24th Street
Office Property in Phoenix, Arizona. The sale generated net proceeds of
approximately $9,000 and a net gain of approximately $1,300. The proceeds from
the sale of the 6225 North 24th Street Office Property were used to redeem Class
A Units from GMACCM. This Office Property was wholly-owned by the Company and
was included in the Company's Office Segment.
COPI
On January 22, 2002, the Company terminated the purchase agreement pursuant
to which the Company would have acquired the lessee interests in the eight
Resort/Hotel Properties leased to subsidiaries of COPI, the voting interests
held by subsidiaries of COPI in three of the Residential Development
Corporations and other assets. On February 4, 2002, the Company terminated the
agreement relating to its planned investment in Crescent Machinery.
On February 6, 2002, Crescent Machinery filed for protection under the
federal bankruptcy laws.
On February 12, 2002, the Company delivered default notices to COPI
relating to approximately $49,000 of unpaid rent and approximately $76,200 of
principal and accrued interest due to the Company under certain secured loans.
F-93
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On February 14, 2002, the Company executed an agreement (the "Agreement")
with COPI, pursuant to which COPI transferred to subsidiaries of the Company, in
lieu of foreclosure, COPI's lessee interests in the eight Resort/Hotel
Properties leased to subsidiaries of COPI and, pursuant to a strict foreclosure,
COPI's voting interests in three of the Company's Residential Development
Corporations and other assets and the Company agreed to assist and provide
funding to COPI for the implementation of a prepackaged bankruptcy of COPI. In
connection with the transfer, COPI's rent obligations to the Company were
reduced by $23,600, and its debt obligations were reduced by $40,100. These
amounts include $18,300 of value attributed to the lessee interests transferred
by COPI to the Company; however, in accordance with GAAP, the Company assigned
no value to these interests for financial reporting purposes.
The Company holds the lessee interests in the eight Resort/Hotel Properties
and the voting interests in the three Residential Development Corporations
through three newly organized limited liability companies that are wholly owned
taxable REIT subsidiaries of the Company. The Company will include these assets
in its Resort/Hotel Segment and its Residential Development Segment, and will
fully consolidate the operations of the eight Resort/Hotel Properties and the
three Residential Development Corporations, beginning on the date of the
transfers of these assets.
The Agreement provides that the Company and COPI will jointly seek to have
a pre-packaged bankruptcy plan for COPI, reflecting the terms of the Agreement,
approved by the bankruptcy court. Under the Agreement, the Company agreed to
provide approximately $14,000 to COPI in the form of cash and common shares of
the Company to fund costs, claims and expenses relating to the bankruptcy and
related transactions, and to provide for the distribution of the Company's
common shares to the COPI stockholders. The Company has also agreed, however,
that it will issue common shares with a minimum dollar value of approximately
$2,200 to the COPI stockholders, even if it would cause the total costs, claims
and expenses that it pays to exceed $14,000. Currently, the Company estimates
that the value of the common shares that will be issued to the COPI stockholders
will be approximately $2,200 to $5,400. The actual value of the common shares
issued to the COPI stockholders will not be determined until the confirmation of
COPI's bankruptcy plan and could vary from the estimated amounts, but will have
a value of at least $2,200.
In addition, the Company has agreed to use commercially reasonable efforts
to assist COPI in arranging COPI's repayment of its $15,000 obligation to Bank
of America, together with any accrued interest. COPI obtained the loan primarily
to participate in investments with the Company. At the time COPI obtained the
loan, Bank of America required, as a condition to making the loan, that Richard
E. Rainwater, the Chairman of the Board of Trust Managers of the Company, and
John C. Goff, Vice-Chairman of the Board of Trust Managers and Chief Executive
Officer of the Company, enter into a support agreement with COPI and Bank of
America, pursuant to which they agreed to make additional equity investments in
COPI if COPI defaulted on payment obligations under its line of credit with Bank
of America and the net proceeds of an offering of COPI securities were
insufficient to allow COPI to pay Bank of America in full. Effective December
31, 2001, the parties executed an amendment to the line of credit providing that
any defaults existing under the line of credit on or before March 8, 2002 are
temporarily cured unless and until a new default shall occur.
Previously, the Company held a first lien security interest in COPI's
entire membership interest in Americold Logistics. REIT rules prohibit the
Company from acquiring or owning the membership interest that COPI owns in
Americold Logistics. Under the Agreement, the Company agreed to allow COPI to
grant Bank of America a first priority security interest in the membership
interest and to subordinate its own security interest to Bank of America. In
addition, the Company expects to form and capitalize a separate entity to be
owned by the Company's shareholders and unitholders, and to cause the new entity
to commit to acquire COPI's entire membership interest in the tenant for between
$15,000 and $15,500. Under the Agreement, COPI has agreed that it will use the
proceeds of the sale of the membership interest to repay Bank of America in
full.
F-94
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
If the COPI bankruptcy plan is approved by the required vote of the shares
of COPI common stock, the stockholders of COPI will receive the Company's common
shares. As stockholders of COPI, Mr. Rainwater and Mr. Goff will also receive
the Company's common shares.
Pursuant to the COPI bankruptcy plan, the current and former directors and
officers of COPI and the current and former trust managers and officers of the
Company also have received a release from COPI of liability for any actions
taken prior to February 14, 2002, and, depending on various factors, will
receive certain liability releases from COPI and its stockholders.
Completion and effectiveness of the plan of reorganization for COPI is
contingent upon a number of conditions, including the vote of COPI's
stockholders, the approval of the plan by certain of COPI's creditors and the
approval of the bankruptcy court.
The following Unaudited Condensed Consolidated Pro Forma Financial
Statements are based upon the historical financial statements of the Company and
of the assets being transferred to the Company from COPI under the Agreement.
The Unaudited Condensed Consolidated Pro Forma Balance Sheet as of December 31,
2001 is presented as if principal transactions contemplated by the Agreement had
been completed as of December 31, 2001. The Unaudited Condensed Consolidated Pro
Forma Statements of Operations for the years ended December 31, 2001 and 2000
are presented as if these transactions had occurred on January 1, 2001 and
January 1, 2000, respectively.
The Unaudited Condensed Consolidated Pro Forma Financial Statements have
been prepared based on a number of assumptions, estimates and uncertainties
including, but not limited to, estimates of the fair values of assets received
and liabilities assumed and estimated transaction costs. As a result of these
assumptions, estimates and uncertainties, the accompanying Unaudited Condensed
Consolidated Pro Forma Financial Statements do not purport to predict the actual
financial condition had the principal transactions contemplated by the Agreement
been completed as of December 31, 2001 or results of operations that would have
been achieved had the principal transactions contemplated by the Agreement been
completed on January 1, 2001 or January 1, 2000.
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET
AS OF
DECEMBER 31,
2001
------------
Real estate, net............................................ $3,362,342
Cash........................................................ 191,128
Other assets................................................ 1,011,741
----------
Total assets.............................................. $4,565,211
==========
Notes payable............................................... $2,396,290
Other liabilities........................................... 442,467
Minority interests.......................................... 353,012
Total shareholders' equity.................................. 1,373,442
----------
Total liabilities and shareholders' equity............. $4,565,211
==========
F-95
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------
2001 2000
---------- ----------
Total revenues.............................................. $1,138,968 $1,198,956
Total expenses.............................................. 1,154,369 1,093,686
---------- ----------
Operating Income............................................ (15,401) 105,270
Total other income and expense.............................. 53,161 203,874
---------- ----------
Income before minority interests, income taxes,
extraordinary items, discontinued operations and
cumulative effect of a change in accounting principle..... $ 37,760 $ 309,144
========== ==========
Net income (loss) to common shareholders before
extraordinary items, discontinued operations and
cumulative effect of a change in accounting principle..... $ (12,982) $ 233,466
========== ==========
Basic Earnings per share(1)................................. $ (0.12) $ 2.05
Diluted Earnings per share(1)............................... $ (0.12) $ 2.03
---------------
(1) Represents earnings per share for income before extraordinary item,
discontinued operations and cumulative effect of change in accounting
principle.
The Unaudited Condensed Consolidated Pro Forma Balance Sheet combines the
Company's consolidated historical balance sheet for the year ended December 31,
2001 with the following adjustments:
- Reflects the inclusion of the assets and liabilities of the eight
Hotel/Resort Properties as of December 31, 2001;
- Eliminates the eight Hotel/Resort Properties' initial working capital
receivable on the Company's balance sheet with the offsetting net working
capital payable;
- Adjusts the historical balance sheet to consolidate the balance sheets of
Desert Mountain Development Corporation ("DMDC"), The Woodlands Land
Company ("TWLC"), other entities and COPI Colorado (which, as the owner
of 100% of the voting stock of CRD, consolidates the balance of CRD), as
a result of the Company's retention of voting stock of DMDC, TWLC and
other entities, and the Company's retention of the 60% general
partnership interest in COPI Colorado;
- Eliminates the Company's equity investment in the historical December 31,
2001 balance sheet for DMDC, TWLC, CRD and other entities;
- Eliminates the intercompany loans and associated accrued interest and
capitalized interest between the Company and DMDC, CRD and other
entities;
- Reflects the Company's capitalization of a new entity to be owned by
shareholders that will be committed to acquire COPI's membership interest
in AmeriCold Logistics; and
- Reflects the issuance of $5,000 of the Company's shares to COPI
stockholders.
The Unaudited Condensed Consolidated Pro Forma Statements of Operations
combine the Company's consolidated historical statements of operations for the
years ended December 31, 2001 and 2000 with the following adjustments:
- Includes the operating results for the eight Hotel/Resort Properties
after deducting the amount of the lessee rent payments due under the
respective leases;
- Eliminates hotel lessees' rent expense to the Company and the Company's
rental revenue from the hotel lessees;
F-96
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- Reflects the consolidation of the operations of DMDC, TWLC, other
entities and COPI Colorado with the Company's historical Statements of
Operations, as a result of the Company's retention of voting stock for
DMDC, TWLC and other entities, and the Company's retention of the 60%
general partnership interest in COPI Colorado;
- Eliminates the Company's historical equity in net income for DMDC, TWLC,
CRD and other entities;
- Eliminates intercompany interest expense on the loans from the Company to
DMDC and CRD;
- Reflects income tax benefit for the hotel business, calculated as 40% of
the net loss for the hotel lessees;
- Reflects the additional shares issued to COPI shareholders, valued at
$5,000, using the Company's current share price of $17.91; and
- The December 31, 2001, Unaudited Condensed Consolidated Pro Forma
Statement of Operations includes impairment and other charges related to
COPI assets of $92,782 contained in the Company's 2001 Consolidated
Statement of Operations.
DEBT OFFERING
On April 15, 2002, the Company completed a private offering of $375,000 in
senior, unsecured notes due 2009. The notes bear interest at an annual rate of
9.25% and were issued 100% of issue price. The notes are callable after April
15, 2006. Interest will be payable in cash on April 15, and October 15 of each
year, beginning October 15, 2002. In connection with the offering, on September
13, 2002, the Company commenced an exchange offer of $325,000 of its registered
9.25% senior notes due 2009 for outstanding senior notes due 2009. The offer
expires October 11, 2002. In the event that the exchange offer or resale
registration is not completed on or before October 15, 2002, the interest rate
on the notes will increase to 9.75% and increase to 10.25% after another 90
days, in each case until the exchange offer or resale registration is completed.
The net proceeds from the offering of notes were approximately $366,500.
Approximately $309,500 of the proceeds were used to pay down amounts outstanding
under the Fleet Facility, and the remaining proceeds were used to pay down
$5,000 of short-term indebtedness and redeem approximately $52,000 of Class A
Units in Funding IX from GMACCM. See "Note 12. Sale of Preferred Equity
Interests in Subsidiary" for a description of the Class A Units in Funding IX
held by GMACCM. In that offering the Company also issued, in addition to the
2009 private notes and on the same terms and conditions, an additional $50,000
of the Company's 9.25% senior unsecured notes due 2009 to Richard E. Rainwater,
the Chairman of the Board of Trust Managers of the Company, and certain of his
affiliates and family members. The exchange offer is not being made with respect
to the affiliate notes. The Company has agreed to register the resale of the
affiliate notes.
SERIES A PREFERRED OFFERING
On April 26, 2002, the Company completed an institutional placement (the
"April 2002 Series A Preferred Offering") of an additional 2,800,000 shares of
Series A Convertible Cumulative Preferred Shares (the "Series A Preferred
Shares") at an $18.00 per share price and with a liquidation preference of
$25.00 per share for aggregate total offering proceeds of approximately $50,400.
The Series A Preferred Shares are convertible at any time, in whole or in part,
at the option of the holders thereof into common shares of the Company at a
conversion price of $40.86 per common share (equivalent to a conversion rate of
..6119 common shares per Series A Preferred Share), subject to adjustment in
certain circumstances. The Series A Preferred Shares have no stated maturity,
are not subject to sinking fund or mandatory redemption and may not be redeemed
before February 18, 2003, except in order to preserve the Company's status as a
REIT. On or after
F-97
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
February 13, 2003, the Series A Preferred shares may be redeemed, at the
Company's option, by paying $25.00 per share plus any accumulated accrued and
unpaid distribution. Dividends on the Series A Preferred shares are cumulative
from the date of original issuance and are payable quarterly in arrears on the
fifteenth of February, May, August and November, commencing May 15, 2002. The
annual fixed dividend is $1.6875 per share.
Net proceeds to the Company from the April 2002 Series A Preferred Offering
after underwriting discounts and other offering costs of approximately $2,240
were approximately $48,160. The Company used the net proceeds to redeem Class A
Units issued by its subsidiary, Funding IX, to GMACCM.
SERIES B PREFERRED OFFERING
On May 17, 2002, the Company completed an offering (the "May 2002 Series B
Preferred Offering") of 3,000,000 shares of 9.50% Series B Cumulative Redeemable
Preferred Shares (the "Series B Preferred Shares") with a liquidation preference
of $25.00 per share for aggregate total offering proceeds of approximately
$75,000. The Series B Preferred Shares have no stated maturity, are not subject
to sinking fund or mandatory redemption, are not convertible into any other
securities of the Company and may not be redeemed before May 17, 2007, except in
order to preserve the Company's status as a REIT. On or after May 17, 2007, the
Series B Preferred Shares may be redeemed, at the Company's option, by paying
$25.00 per share plus any accumulated, accrued and unpaid distribution.
Dividends on the Series B Preferred Shares are cumulative from the date of
original issuance and are payable quarterly in arrears on the fifteenth of
February, May, August and November, commencing August 15, 2002. The annual fixed
dividend is $2.375 per share.
Net proceeds to the Company from the May 2002 Series B Preferred Offering
after underwriting discounts and other offering costs of approximately $2,713
were approximately $72,287. The Company used the net proceeds to redeem Class A
Units issued by its subsidiary, Funding IX, to GMACCM.
On June 6, 2002, the Company completed the June 2002 Series B Preferred
Offering of an additional 400,000 Series B Preferred Shares (the "June 2002
Series B Preferred Offering") resulting in gross proceeds to the Company of
approximately $10,000. Net proceeds to the Company after underwriting discounts
and other offering costs of approximately $365 were approximately $9,635. As
with the May 2002 Series B Preferred Offering, the Company used the net proceeds
to redeem Class A Units issued by its subsidiary, Funding IX, to GMACCM.
RELATED PARTY DISCLOSURES
On June 28, 2002, the Company purchased and is holding for sale, the home
of an executive officer of the Company for approximately $2,650 which
approximates fair market value of the home. This purchase was part of the
officer's relocation agreement with the Company.
LOANS TO EMPLOYEES AND TRUST MANAGERS OF THE COMPANY FOR EXERCISE OF STOCK
OPTIONS AND UNIT OPTIONS
On July 29, 2002, the loans made pursuant to the Company's stock incentive
plans and unit incentive plans were amended to extend the remaining terms of the
loans until July 2012 and to stipulate that every three years the interest rate
on the loans will be adjusted to the AFR applicable at that time for a
three-year loan. Additionally, the employees and trust managers have been given
the option, at any time, to fix the interest rate for each of the loans to the
AFR applicable at that time for a loan with a term equal to the remaining term
of the loan. The Company estimates that the one-time compensation expense
related to these amendments to the loans is approximately $1,800. Effective July
29, 2002, the Company will no longer make available to its employees and trust
managers loans pursuant to the Company's stock and unit incentive plans.
F-98
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Three Westlake Park
On August 21, 2002, the Company entered into a joint venture arrangement
with an affiliate of GE. In connection with the formation of the venture, the
Company contributed an Office Property, Three Westlake Park in Houston, Texas,
and GE made a cash contribution. GE holds an 80% equity interest in Three
Westlake Park, a 415,000 square foot Class A Office Property located in the Katy
Freeway submarket of Houston, and the Company continues to hold the remaining
20% equity interest in the Office Property, with the Company's interest
accounted for under the equity method. The joint venture generated approximately
$47,100 in net cash proceeds to the Company, including distributions resulting
from the sale of the Company's 80% equity interest and from $33,000 of third
party mortgage financing at the joint venture level. None of the mortgage
financing at the joint venture level is guaranteed by either the Company or GE.
The Company has no commitment to reinvest the cash proceeds back into the joint
venture. The joint venture formation transactions were accounted for as a
partial sale of this Office Property, resulting in an approximate $17,100 gain,
on interest sold. The Company will continue to manage and lease Three Westlake
Park on a fee basis.
REDEMPTION OF PREFERRED UNITS FROM GMACCM
On August 29, 2002, Funding IX used approximately $22,700 to redeem from
GMACCM all the Class A Units in Funding IX that remained outstanding on that
date. As a result of the redemption, GMACCM ceased to be a partner of Funding IX
or to have any rights or obligations as a partner and the Company became the
sole partner of Funding IX. In connection with the transaction, SH IX
transferred the 14,468,623 common shares of the Company held by SH IX to the
Company, which holds these common shares as treasury shares and the intracompany
loan between Funding IX and SH IX was repaid.
Following the redemption of all of the outstanding Class A Units, Funding
IX distributed two of its Office Properties, 44 Cook Street, and 55 Madison, and
all the equity interests in the limited liability companies that own two other
Office Properties, Miami Center and Chancellor Park, to the Operating
Partnership. The Operating Partnership then contributed 44 Cook Street and 55
Madison to another of the Operating Partnership's subsidiaries, Crescent Real
Estate Funding VIII, L.P.
PROPERTY ACQUISITION
On August 29, 2002, the Company acquired John Manville Plaza, a 29-story,
675,000 square foot Class A office building located in Denver, Colorado. The
Company acquired the property for approximately $91,200. The property is
wholly-owned by the Company and included in the office segment.
Sonoma Mission Inn & Spa
On September 1, 2002, the Company entered into a joint venture arrangement
with a subsidiary of Fairmont Hotels & Resorts Inc., or ("FHR"), pursuant to
which the Company contributed a Resort/Hotel property and FHR purchased a 19.9%
equity interest in the limited liability company that owns the Company's Sonoma
Mission Inn & Spa Resort/Hotel Property in Sonoma County, California. The
Company continues to own the remaining 80.1% interest. The joint venture
generated approximately $8,000 in net cash proceeds to the Company. The Company
has loaned $45,120 to the joint venture at an interest rate of LIBOR plus 300
basis points. The maturity date of the loan is the earlier of the date on which
the joint venture obtains third-party financing or one year. The joint venture
has the option to extend the loan for two successive 6-month periods by paying a
fee. Under the Company's agreement with FHR, the Company will manage the limited
liability company that owns the Sonoma Mission Inn & Spa, and FHR will operate
and manage the property under the Fairmont brand. The joint venture transaction
was accounted for as a partial sale of this Resort/ Hotel Property, resulting in
an approximate $4,000 loss, on interest sold.
F-99
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
23. SUBSEQUENT EVENT -- REVERCHON PLAZA
On September 20, 2002, the Company completed the sale of the Reverchon
Plaza Office Property in Dallas, Texas. The sale generated net proceeds of
approximately $29,200 and a net gain of approximately $500. The proceeds from
the sale of the Reverchon Plaza Office Property were used to pay down the
Company's credit facility. This Office Property was wholly-owned by the Company
and was included in the Company's Office Segment.
Financial information for the Reverchon Plaza Office Property has been
reflected in Properties Held for Disposition in the Consolidated Balance Sheet
at December 31, 2001 and 2000 and Consolidated Statements of Operations for the
years ended December 31, 2001, 2000 and 1999. Certain amounts in these financial
statements have been reclassified to reflect the operations of the Reverchon
Plaza Office Property as discontinued operations in accordance with SFAS No.
144. In addition, the following financial information has been reclassified to
reflect the Reverchon Plaza Office Property as discontinued operations: earnings
per share information included in "Note 2. Summary of Significant Accounting
Policies," revenues included in "Note 3. Segment Reporting," and financial
information included in "Note 17. Discontinued Operations."
F-100
SCHEDULE III
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2001
COSTS
CAPITALIZED
SUBSEQUENT TO IMPAIRMENT TO
INITIAL COSTS ACQUISITIONS CARRYING
------------------------ ------------- VALUE
LAND, -------------
BUILDINGS, BUILDINGS, BUILDINGS,
IMPROVEMENTS, IMPROVEMENTS, IMPROVEMENTS
BUILDINGS FURNITURE, FURNITURE, FURNITURE,
AND FIXTURES AND FIXTURES AND FIXTURES AND
DESCRIPTION LAND IMPROVEMENTS EQUIPMENT EQUIPMENT LAND EQUIPMENT TOTAL
----------- --------- ------------ ------------- ------------- -------- ------------ ----------
(DOLLARS IN THOUSANDS)
The Citadel, Denver, CO... $ 1,803 $ 17,259 $ 4,782 $ -- $ 1,803 $ 22,041 $ 23,844
Las Colinas Plaza, Irving,
TX....................... 2,576 7,125 1,965 -- 2,581 9,085 11,666
Carter Burgess Plaza, Fort
Worth, TX................ 1,375 66,649 39,131 -- 1,375 105,780 107,155
The Crescent Office
Towers, Dallas, TX....... 6,723 153,383 83,870 -- 6,723 237,253 243,976
MacArthur Center I & II,
Irving, TX............... 704 17,247 5,007 -- 880 22,078 22,958
125. E. John Carpenter
Freeway, Irving, TX...... 2,200 48,744 2,903 -- 2,200 51,647 53,847
Regency Plaza One, Denver,
CO....................... 950 31,797 2,664 -- 950 34,461 35,411
The Avallon, Austin, TX... 475 11,207 723 -- 475 11,930 12,405
Waterside Commons, Irving,
TX....................... 3,650 20,135 7,445 -- 3,650 27,580 31,230
Two Renaissance Square,
Phoenix, AZ.............. -- 54,412 10,290 -- -- 64,702 64,702
Liberty Plaza I & II,
Dallas, TX............... 1,650 15,956 538 -- 1,650 16,494 18,144
6225 North 24th Street,
Phoenix, AZ(2)........... 719 6,566 3,433 -- 719 9,999 10,718
Denver Marriott City
Center, Denver, CO....... -- 50,364 6,981 -- -- 57,345 57,345
MCI Tower, Denver, CO..... -- 56,593 3,267 -- -- 59,860 59,860
Spectrum Center, Dallas,
TX....................... 2,000 41,096 8,009 -- 2,000 49,105 51,105
Ptarmigan Place, Denver,
CO....................... 3,145 28,815 5,437 -- 3,145 34,252 37,397
Stanford Corporate Centre,
Dallas, TX............... -- 16,493 6,507 -- -- 23,000 23,000
Barton Oaks Plaza One,
Austin, TX............... 900 8,207 2,032 -- 900 10,239 11,139
The Aberdeen, Dallas,
TX....................... 850 25,895 409 -- 850 26,304 27,154
12404 Park Central,
Dallas, TX............... 1,604 14,504 4,933 -- 1,604 19,437 21,041
Briargate Office and
Research Center, Colorado
Springs, CO.............. 2,000 18,044 1,603 -- 2,000 19,647 21,647
Hyatt Regency Beaver
Creek, Avon, CO.......... 10,882 40,789 19,698 -- 10,882 60,487 71,369
Albuquerque Plaza,
Albuquerque, NM.......... -- 36,667 2,689 -- 101 39,255 39,356
Hyatt Regency Albuquerque,
Albuquerque, NM.......... -- 32,241 4,840 -- -- 37,081 37,081
LIFE ON WHICH
DEPRECIATION IN
LATEST INCOME
ACCUMULATED DATE OF ACQUISITION STATEMENT IS
DESCRIPTION DEPRECIATION CONSTRUCTION DATE COMPUTED
----------- ------------ ------------ ----------- ---------------
(DOLLARS IN THOUSANDS)
The Citadel, Denver, CO... $ (15,092) 1987 1987 (1)
Las Colinas Plaza, Irving,
TX....................... (4,739) 1989 1989 (1)
Carter Burgess Plaza, Fort
Worth, TX................ (47,594) 1982 1990 (1)
The Crescent Office
Towers, Dallas, TX....... (159,434) 1985 1993 (1)
MacArthur Center I & II,
Irving, TX............... (8,354) 1982/1986 1993 (1)
125. E. John Carpenter
Freeway, Irving, TX...... (10,614) 1982 1994 (1)
Regency Plaza One, Denver,
CO....................... (7,139) 1985 1994 (1)
The Avallon, Austin, TX... (2,125) 1986 1994 (1)
Waterside Commons, Irving,
TX....................... (5,193) 1986 1994 (1)
Two Renaissance Square,
Phoenix, AZ.............. (14,627) 1990 1994 (1)
Liberty Plaza I & II,
Dallas, TX............... (3,173) 1981/1986 1994 (1)
6225 North 24th Street,
Phoenix, AZ(2)........... (2,891) 1981 1995 (1)
Denver Marriott City
Center, Denver, CO....... (13,117) 1982 1995 (1)
MCI Tower, Denver, CO..... (9,457) 1982 1995 (1)
Spectrum Center, Dallas,
TX....................... (11,103) 1983 1995 (1)
Ptarmigan Place, Denver,
CO....................... (8,294) 1984 1995 (1)
Stanford Corporate Centre,
Dallas, TX............... (4,807) 1985 1995 (1)
Barton Oaks Plaza One,
Austin, TX............... (2,343) 1986 1995 (1)
The Aberdeen, Dallas,
TX....................... (6,357) 1986 1995 (1)
12404 Park Central,
Dallas, TX............... (4,043) 1987 1995 (1)
Briargate Office and
Research Center, Colorado
Springs, CO.............. (3,655) 1988 1995 (1)
Hyatt Regency Beaver
Creek, Avon, CO.......... (10,104) 1989 1995 (1)
Albuquerque Plaza,
Albuquerque, NM.......... (6,271) 1990 1995 (1)
Hyatt Regency Albuquerque,
Albuquerque, NM.......... (8,041) 1990 1995 (1)
F-101
COSTS
CAPITALIZED
SUBSEQUENT TO IMPAIRMENT TO
INITIAL COSTS ACQUISITIONS CARRYING
------------------------ ------------- VALUE
LAND, -------------
BUILDINGS, BUILDINGS, BUILDINGS,
IMPROVEMENTS, IMPROVEMENTS, IMPROVEMENTS
BUILDINGS FURNITURE, FURNITURE, FURNITURE,
AND FIXTURES AND FIXTURES AND FIXTURES AND
DESCRIPTION LAND IMPROVEMENTS EQUIPMENT EQUIPMENT LAND EQUIPMENT TOTAL
----------- --------- ------------ ------------- ------------- -------- ------------ ----------
(DOLLARS IN THOUSANDS)
The Woodlands Office
Properties, Houston,
TX(2)(3)................. 12,007 35,856 (12,417) -- 8,735 26,720 35,455
Sonoma Mission Inn & Spa,
Sonoma, CA............... 10,000 44,922 36,444 -- 10,000 81,366 91,366
Bank One Tower, Austin,
TX(4).................... 3,879 35,431 (39,310) -- -- -- --
Canyon Ranch, Tucson,
AZ....................... 14,500 43,038 5,842 -- 17,846 45,534 63,380
3333 Lee Parkway, Dallas,
TX....................... 1,450 13,177 3,881 -- 1,468 17,040 18,508
Greenway I & IA,
Richardson, TX........... 1,701 15,312 523 -- 1,701 15,835 17,536
Three Westlake Park,
Houston, TX.............. 2,920 26,512 3,114 -- 2,920 29,626 32,546
Frost Bank Plaza, Austin,
TX....................... -- 36,019 5,427 -- -- 41,446 41,446
301 Congress Avenue,
Austin, TX............... 2,000 41,735 7,716 -- 2,000 49,451 51,451
Chancellor Park, San
Diego, CA................ 8,028 23,430 (5,202) -- 2,328 23,928 26,256
Canyon Ranch, Lenox, MA... 4,200 25,218 12,941 -- 4,200 38,159 42,359
Greenway Plaza Office
Portfolio, Houston, TX... 27,204 184,765 105,498 -- 27,204 290,263 317,467
The Woodlands Office
Properties, Houston,
TX....................... 2,393 8,523 -- -- 2,393 8,523 10,916
1800 West Loop South,
Houston, TX.............. 4,165 40,857 2,945 -- 4,165 43,802 47,967
55 Madison, Denver, CO.... 1,451 13,253 1,325 -- 1,451 14,578 16,029
Miami Center, Miami, FL... 13,145 118,763 7,726 -- 13,145 126,489 139,634
44 Cook, Denver, CO....... 1,451 13,253 2,516 -- 1,451 15,769 17,220
Trammell Crow Center,
Dallas, TX............... 25,029 137,320 13,596 -- 25,029 150,916 175,945
Greenway II, Richardson,
TX....................... 1,823 16,421 1,105 -- 1,823 17,526 19,349
Fountain Place, Dallas,
TX....................... 10,364 103,212 8,825 -- 10,364 112,037 122,401
Behavioral Healthcare
Facilities(2)(5)......... 89,000 301,269 (235,137) (122,202) 12,785 20,145 32,930
Houston Center, Houston,
TX....................... 52,504 224,041 15,366 -- 47,406 244,505 291,911
Ventana Country Inn, Big
Sur, CA.................. 2,782 26,744 3,941 -- 2,782 30,685 33,467
5050 Quorum, Dallas, TX... 898 8,243 846 -- 898 9,089 9,987
Addison Tower, Dallas,
TX....................... 830 7,701 663 -- 830 8,364 9,194
Cedar Springs Plaza,
Dallas, TX(2)............ 700 6,549 1,281 -- 700 7,830 8,530
Palisades Central I,
Dallas, TX............... 1,300 11,797 1,513 -- 1,300 13,310 14,610
Palisades Central II,
Dallas, TX............... 2,100 19,176 5,803 -- 2,100 24,979 27,079
Reverchon Plaza, Dallas,
TX....................... 2,850 26,302 2,198 -- 2,850 28,500 31,350
Stemmons Place, Dallas,
TX....................... -- 37,537 3,686 -- -- 41,223 41,223
The Addison, Dallas, TX... 1,990 17,998 790 -- 1,990 18,788 20,778
LIFE ON WHICH
DEPRECIATION IN
LATEST INCOME
ACCUMULATED DATE OF ACQUISITION STATEMENT IS
DESCRIPTION DEPRECIATION CONSTRUCTION DATE COMPUTED
----------- ------------ ------------ ----------- ---------------
(DOLLARS IN THOUSANDS)
The Woodlands Office
Properties, Houston,
TX(2)(3)................. (8,813) 1980-1993 1995 (1)
Sonoma Mission Inn & Spa,
Sonoma, CA............... (10,734) 1927 1996 (1)
Bank One Tower, Austin,
TX(4).................... -- 1974 1996 (1)
Canyon Ranch, Tucson,
AZ....................... (6,626) 1980 1996 (1)
3333 Lee Parkway, Dallas,
TX....................... (3,330) 1983 1996 (1)
Greenway I & IA,
Richardson, TX........... (2,045) 1983 1996 (1)
Three Westlake Park,
Houston, TX.............. (3,765) 1983 1996 (1)
Frost Bank Plaza, Austin,
TX....................... (6,590) 1984 1996 (1)
301 Congress Avenue,
Austin, TX............... (8,701) 1986 1996 (1)
Chancellor Park, San
Diego, CA................ (3,542) 1988 1996 (1)
Canyon Ranch, Lenox, MA... (7,317) 1989 1996 (1)
Greenway Plaza Office
Portfolio, Houston, TX... (52,175) 1969-1982 1996 (1)
The Woodlands Office
Properties, Houston,
TX....................... (1,805) 1995-1996 1996 (1)
1800 West Loop South,
Houston, TX.............. (4,966) 1982 1997 (1)
55 Madison, Denver, CO.... (2,229) 1982 1997 (1)
Miami Center, Miami, FL... (13,615) 1983 1997 (1)
44 Cook, Denver, CO....... (2,723) 1984 1997 (1)
Trammell Crow Center,
Dallas, TX............... (20,323) 1984 1997 (1)
Greenway II, Richardson,
TX....................... (2,074) 1985 1997 (1)
Fountain Place, Dallas,
TX....................... (12,580) 1986 1997 (1)
Behavioral Healthcare
Facilities(2)(5)......... (4,995) 1850-1992 1997 (1)
Houston Center, Houston,
TX....................... (28,034) 1974-1983 1997 (1)
Ventana Country Inn, Big
Sur, CA.................. (4,270) 1975-1988 1997 (1)
5050 Quorum, Dallas, TX... (1,202) 1980/1986 1997 (1)
Addison Tower, Dallas,
TX....................... (1,184) 1980/1986 1997 (1)
Cedar Springs Plaza,
Dallas, TX(2)............ (1,309) 1980/1986 1997 (1)
Palisades Central I,
Dallas, TX............... (1,916) 1980/1986 1997 (1)
Palisades Central II,
Dallas, TX............... (3,532) 1980/1986 1997 (1)
Reverchon Plaza, Dallas,
TX....................... (3,760) 1980/1986 1997 (1)
Stemmons Place, Dallas,
TX....................... (5,486) 1980/1986 1997 (1)
The Addison, Dallas, TX... (2,215) 1980/1986 1997 (1)
F-102
COSTS
CAPITALIZED
SUBSEQUENT TO IMPAIRMENT TO
INITIAL COSTS ACQUISITIONS CARRYING
------------------------ ------------- VALUE
LAND, -------------
BUILDINGS, BUILDINGS, BUILDINGS,
IMPROVEMENTS, IMPROVEMENTS, IMPROVEMENTS
BUILDINGS FURNITURE, FURNITURE, FURNITURE,
AND FIXTURES AND FIXTURES AND FIXTURES AND
DESCRIPTION LAND IMPROVEMENTS EQUIPMENT EQUIPMENT LAND EQUIPMENT TOTAL
----------- --------- ------------ ------------- ------------- -------- ------------ ----------
(DOLLARS IN THOUSANDS)
Sonoma Golf Course,
Sonoma, CA............... 14,956 -- 2,139 -- 11,795 5,300 17,095
Austin Centre, Austin,
TX....................... 1,494 36,475 2,675 -- 1,494 39,150 40,644
Omni Austin Hotel, Austin,
TX....................... 2,409 56,670 3,280 -- 2,409 59,950 62,359
Washington Harbour,
Washington, D.C.(6)...... 16,100 146,438 (162,538) -- -- -- --
Four Westlake Park,
Houston, TX(4)........... 3,910 79,190 (79,190) -- 3,910 -- 3,910
Post Oak Central, Houston,
TX....................... 15,525 139,777 8,492 -- 15,525 148,269 163,794
Datran Center, Miami,
FL....................... -- 71,091 3,528 -- -- 74,619 74,619
Avallon Phase II, Austin,
TX....................... 1,102 -- 23,365 -- 1,236 23,231 24,467
Plaza Park Garage......... 2,032 14,125 570 -- 2,032 14,695 16,727
Washington Harbour Phase
II, Washington,
D.C.(2).................. 15,279 411 283 -- 15,322 651 15,973
5 Houston Center, Houston,
TX....................... 7,598 -- (7,598) -- -- -- --
Houston Center Land,
Houston, TX.............. 14,642 -- 22 -- 14,515 149 14,664
Crescent Real Estate
Equities L.P............. -- -- 29,648 -- -- 29,648 29,648
Other..................... 23,270 2,874 17,059 -- 29,602 13,594 43,201
Land held for development
or sale, Dallas, TX...... 27,288 -- (7,474) -- 19,670 144 19,814
--------- ---------- --------- --------- -------- ---------- ----------
Subtotal.................. $ 492,475 $3,031,622 $ 26,862 $(122,202) $373,868 $3,054,889 $3,428,757
Properties held for
disposition, net(7)...... (107,822) (320,142) 230,140 122,202 (31,651) (43,973) (75,624)
--------- ---------- --------- --------- -------- ---------- ----------
$ 384,653 $2,711,480 $ 257,002 $ -- $342,217 $3,010,916 $3,417,827
========= ========== ========= ========= ======== ========== ==========
LIFE ON WHICH
DEPRECIATION IN
LATEST INCOME
ACCUMULATED DATE OF ACQUISITION STATEMENT IS
DESCRIPTION DEPRECIATION CONSTRUCTION DATE COMPUTED
----------- ------------ ------------ ----------- ---------------
(DOLLARS IN THOUSANDS)
Sonoma Golf Course,
Sonoma, CA............... (1,063) 1929 1998 (1)
Austin Centre, Austin,
TX....................... (4,195) 1986 1998 (1)
Omni Austin Hotel, Austin,
TX....................... (8,618) 1986 1998 (1)
Washington Harbour,
Washington, D.C.(6)...... -- 1986 1998 (1)
Four Westlake Park,
Houston, TX(4)........... -- 1992 1998 (1)
Post Oak Central, Houston,
TX....................... (14,478) 1974-1981 1998 (1)
Datran Center, Miami,
FL....................... (6,940) 1986-1992 1998 (1)
Avallon Phase II, Austin,
TX....................... (2,055) 1997 -- (1)
Plaza Park Garage......... (1,020) 1998 -- (1)
Washington Harbour Phase
II, Washington,
D.C.(2).................. -- 1998 -- (1)
5 Houston Center, Houston,
TX....................... -- -- -- (1)
Houston Center Land,
Houston, TX.............. (18) -- -- (1)
Crescent Real Estate
Equities L.P............. (9,202) -- -- (1)
Other..................... (822) -- -- (1)
Land held for development
or sale, Dallas, TX...... -- -- -- --
---------
Subtotal.................. $(648,834)
Properties held for
disposition, net(7)...... 10,930
---------
$(637,904)
=========
---------------
(1) Depreciation of the real estate assets is calculated over the following
estimated useful lives using the straight-line method:
Building and improvements................................... 5 to 40 years
Tenant improvements......................................... Terms of leases
Furniture, fixtures, and equipment.......................... 3 to 5 years
(2) The carrying values of the assets held for disposition at December 31, 2001,
have been reflected as "Properties held for Disposition, Net."
(3) During the year ended December 31, 2001, The Woodlands Office
Equities -- '95 Limited, owned by the Company and the Woodlands Commercial
Properties Company, L.P., sold three of The Woodlands Office Properties.
(4) On July 30, 2001, the Company entered into joint venture arrangements with
GE for these Office Properties. The gross amount at which land is carried
for Four Westlake Park includes $3,910 of land, which was not joint
ventured.
(5) Depreciation on behavioral healthcare properties held for sale ceased from
11/11/99 through 12/31/01 (the period over which these properties were held
for sale).
(6) These Office Properties were sold on September 18, 2001.
(7) See Note 2 of Item 8. Financial Statements and Supplementary Data.
F-103
A summary of combined real estate investments and accumulated depreciation
is as follows:
2001 2000 1999
---------- ---------- ----------
Real estate investments:
Balance, beginning of year..................... $3,681,601 $4,087,347 $4,122,069
Acquisitions................................ -- 22,170 --
Improvements................................ 98,946 108,950 95,210
Dispositions................................ (352,646) (526,430) (8,435)
Reclassification for properties held for
disposition(1)............................ (5,376) (3,920) (2,855)
Impairments................................. (8,458) (9,349) (120,573)
---------- ---------- ----------
Balance, end of year........................... $3,414,067 $3,678,768 $4,085,416
========== ========== ==========
Accumulated Depreciation:
Balance, beginning of year..................... $ 555,491 $ 499,293 $ 380,154
Depreciation................................ 111,086 123,839 120,745
Reclassification for properties held for
disposition(1)............................ (5,376) (3,920) (2,855)
Dispositions................................ (27,057) (66,554) (682)
---------- ---------- ----------
Balance, end of year........................... $ 634,144 $ 552,658 $ 497,362
========== ========== ==========
---------------
(1) See Note 2 of Item 8. Financial Statements and Supplementary Data.
F-104
CRESCENT OPERATING, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
(AMOUNTS IN THOUSANDS)
(UNAUDITED) (SEE NOTE 1)
ASSETS
Current assets
Cash and cash equivalents................................. $ 4,849 $ 492
Accounts receivable, net.................................. 8,434 14,581
Inventories............................................... 6,045 18,965
Notes receivable.......................................... 54 58
Prepaid expenses and other current assets................. 1,487 1,875
Current assets to be transferred pursuant to Settlement
Agreement.............................................. -- 94,161
-------- ---------
Total current assets.............................. 20,869 130,132
-------- ---------
Property and equipment, net................................. 31,746 70,094
Investments................................................. -- 4,833
Other assets
Deferred tax assets....................................... 8,706 24,715
Other assets.............................................. 227 636
Long-term assets to be transferred pursuant to Settlement
Agreement.............................................. -- 714,994
-------- ---------
Total other assets................................ 8,933 740,345
-------- ---------
Total assets................................................ $ 61,548 $ 945,404
======== =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Liabilities not subject to compromise
Current liabilities
Accounts payable and accrued expenses..................... $ 4,984 $ 15,525
Accounts payable and accrued expenses -- CEI.............. 33,576 48,875
Current portion of long-term debt -- CEI.................. 35,578 69,041
Current portion of long-term debt......................... 15,000 101,870
Deferred revenue.......................................... -- 641
Current liabilities to be transferred pursuant to
Settlement Agreement................................... -- 554,356
-------- ---------
Total current liabilities......................... 89,138 790,308
Long-term debt, net of current portion.................... -- 790
Long-term liabilities to be transferred pursuant to
settlement agreement................................... -- 88,805
Liabilities subject to compromise........................... 52,432 --
-------- ---------
Total liabilities................................. 141,570 879,903
Minority interests to be transferred pursuant to settlement
agreement................................................. -- 158,889
Commitments and Contingencies
Shareholders' Deficit
Preferred stock, $.01 par value, 10,000 shares authorized,
no shares issued or outstanding........................... -- --
Common stock, $.01 par value, 22,500 shares authorized,
11,490 shares issued...................................... 115 115
Additional paid-in capital.................................. 17,781 17,781
Accumulated other comprehensive loss........................ -- (1,436)
Accumulated deficit......................................... (95,334) (105,542)
Treasury stock at cost, 662 and 1,103 shares,
respectively.............................................. (2,584) (4,306)
-------- ---------
Total shareholders' deficit....................... (80,022) (93,388)
-------- ---------
Total liabilities and shareholders' deficit................. $ 61,548 $ 945,404
======== =========
See accompanying notes to the consolidated financial statements.
F-105
CRESCENT OPERATING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FOR THE FOR THE FOR THE
THREE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001 SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
------------------ ------------------ ------------------ ------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA, UNAUDITED)
(SEE NOTE 1) (SEE NOTE 1)
Revenues
Equipment sales & leasing................ $ 7,757 $ 19,001 $25,992 $ 50,884
------- -------- ------- --------
Total revenues........................... 7,757 19,001 25,992 50,884
------- -------- ------- --------
Operating Expenses
Equipment sales & leasing................ 8,624 20,358 29,340 52,458
Corporate general and administrative..... 451 503 2,677 1,461
Impairment of assets..................... -- 5,052 34 16,902
------- -------- ------- --------
Total operating expenses......... 9,075 25,913 32,051 70,821
------- -------- ------- --------
Loss from operations....................... (1,318) (6,912) (6,059) (19,937)
Investment (loss) income................... -- (1,779) (4,127) 6,035
Equity in loss of unconsolidated
subsidiaries............................. -- -- (2,142) (4,417)
Other expense (income)
Interest expense......................... 1,487 1,188 5,037 6,719
Interest income.......................... (5) (6) (12) 10
Other.................................... 47 723 221 999
------- -------- ------- --------
Total other expense.............. 1,529 1,905 5,246 7,728
------- -------- ------- --------
Loss from operations before reorganization
costs.................................... (2,847) (10,596) (17,574) (26,047)
Reorganization items
Professional Fees........................ 871 -- 2,015 --
------- -------- ------- --------
Loss from operations after reorganization
costs, before taxes...................... (3,718) (10,596) (19,589) (26,047)
Income tax benefit......................... (707) (1,183) (2,710) (4,371)
------- -------- ------- --------
Loss from continuing operations............ (3,011) (9,413) (16,879) (21,676)
Discontinued operations (NOTE 3)
(Loss) income from operations of
discontinued hospitality and land
development segments (less applicable
income tax expense of $0, $1,041,
$2,502 and $8,682 and minority
interests of $0, $(330), $1,897 and
$5,564)............................... -- (4,604) 3,272 (6,855)
Loss from operations of discontinued
equipment sales and leasing branches
(less applicable income tax benefit of
$0, $(1,552) $0, $0).................. (553) (3,080) (2,998) (5,399)
Gain on disposal of hospitality and land
development segments (less applicable
income tax expense of $0, $0, $17,876
and $0)............................... -- -- 26,813 --
------- -------- ------- --------
(Loss) income from discontinued
operations.......................... (553) (7,684) 27,087 (12,254)
(Loss) income before accounting change..... (3,564) (17,097) 10,208 (33,930)
Cumulative effect of change in accounting
principle................................ -- -- -- (9,509)
------- -------- ------- --------
Net (loss) income.......................... $(3,564) $(17,097) $10,208 $(43,439)
======= ======== ======= ========
Basic and diluted earnings (loss) per share
Loss before discontinued operations
and accounting change............... $ (0.28) $ (0.91) $ (1.57) $ (2.10)
Discontinued operations............... (0.05) (0.74) 2.52 (1.18)
Change in accounting principle........ -- -- -- (0.92)
------- -------- ------- --------
Net (loss) earnings per share............ $ (0.33) $ (1.65) $ 0.95 $ (4.20)
======= ======== ======= ========
See accompanying notes to the consolidated financial statements.
F-106
CRESCENT OPERATING, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
ACCUMULATED
OTHER
COMMON STOCK TREASURY STOCK ADDITIONAL COMPREHENSIVE
--------------- ---------------- PAID-IN INCOME ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL (LOSS) DEFICIT TOTAL
------ ------ ------ ------- ---------- ------------- ----------- --------
(AMOUNTS IN THOUSANDS, UNAUDITED)
BALANCE AT DECEMBER 31, 2001........ 11,490 $115 (1,103) $(4,306) $17,781 $(1,436) $(105,542) $(93,388)
Comprehensive income (loss):
Net income........................ -- -- -- -- -- -- 10,208 10,208
Realized losses of comprehensive
income............................ -- -- -- -- -- 1,436 -- 1,436
--------
Comprehensive income (loss)......... 11,644
Issuance of treasury stock.......... -- -- 441 1,722 -- -- -- 1,722
------ ---- ------ ------- ------- ------- --------- --------
BALANCE AT SEPTEMBER 30, 2002....... 11,490 $115 (662) $(2,584) $17,781 $ -- $ (95,334) $(80,022)
====== ==== ====== ======= ======= ======= ========= ========
See accompanying notes to the consolidated financial statements.
F-107
CRESCENT OPERATING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FOR THE
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
------------------ ------------------
(AMOUNTS IN THOUSANDS, UNAUDITED)
(SEE NOTE 1)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 10,208 $ (43,439)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation........................................... 8,149 14,180
Amortization........................................... -- 363
Provision for deferred income taxes.................... 17,154 (8,596)
Equity in loss of unconsolidated subsidiaries.......... 2,142 4,417
Investment loss (income) of Magellan warrants.......... 4,127 (6,035)
Impairment of assets................................... 38 16,902
Cumulative effect of change in accounting principle.... -- 9,509
Minority interests..................................... 1,897 5,564
Gain on sale of property and equipment................. (570) (1,134)
Gain on discontinued operations........................ (44,689) --
Deferred compensation.................................. -- 177
Net current assets (liabilities) of discontinued
operations............................................ (4,217) (175,445)
Changes in assets and liabilities, net of effects from
transfers:
Accounts receivable.................................. 6,126 5,361
Inventories.......................................... 3,998 12,031
Prepaid expenses and current assets.................. (758) (2,267)
Other assets......................................... 397 (62)
Accounts payable and accrued expenses................ (1,371) 167
Accounts payable and accrued expenses -- CEI......... 3,209 2,253
Deferred revenue, current and noncurrent............. (269) (67)
Other liabilities.................................... -- (108)
-------- ---------
Net cash provided by (used in) operating
activities...................................... 5,571 (166,229)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Disposition of business interests, net of cash
surrendered............................................ (15,793) --
Purchases of property and equipment....................... (8) (17,609)
Proceeds from sale of property and equipment.............. 4,802 14,274
Net investing activities of discontinued operations....... (80) 9,628
-------- ---------
Net cash (used in) provided by investing
activities...................................... (11,079) 6,293
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of long-term debt................................ -- 29,836
Payments on long-term debt................................ (7,050) (61,960)
Proceeds of long-term debt -- CEI......................... 3,631 --
Net financing activities of discontinued operations....... (87) 165,405
-------- ---------
Net cash (used in) provided by financing
activities...................................... (3,506) 133,281
-------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (9,014) (26,655)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 13,863 62,078
-------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 4,849 $ 35,423
======== =========
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING
ACTIVITIES
Reduction in Notes Payable for Property and Equipment
Returned to Vendors.................................... $ 35,121 $ --
======== =========
See accompanying notes to the consolidated financial statements.
F-108
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Crescent Operating, Inc. was formed on April 1, 1997 by Crescent Real
Estate Equities Company ("CEI", "Crescent Real Estate" or "Crescent Equities")
and its subsidiary Crescent Real Estate Equities Limited Partnership ("Crescent
Partnership"). Effective June 12, 1997, CEI distributed shares of Crescent
Operating, Inc. common stock to shareholders of CEI and unit holders of Crescent
Partnership of record on May 30, 1997.
Crescent Operating, Inc. ("Crescent Operating" or the "Company") is a
diversified management company that, through various subsidiaries and affiliates
(collectively with Crescent Operating), operates primarily in two business
segments: Equipment Sales and Leasing and Temperature Controlled Logistics.
Prior to February 14, 2002 the Company operated two other business segments:
Hospitality, and Land Development. Crescent Operating's segments either do or
have done business throughout the United States.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States (GAAP) for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by GAAP for complete financial
statements. These financial statements should be read in conjunction with the
audited consolidated financial statements and related footnotes of the Company
for the fiscal year ended December 31, 2001 included in the Company's Form 10-K,
as well as, in conjunction with the Company's previously filed Form 10-Qs. The
Company's consolidated financial statements included in its 2001 Annual Report
on Form 10-K included an auditors report which expressed substantial doubt about
the Company's ability to continue to operate as a going concern. In management's
opinion, all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation of the consolidated unaudited interim
financial statements have been included and all significant intercompany
balances and transactions have been eliminated. Certain prior period information
has been reclassified to conform to current period presentation. Due to seasonal
fluctuations, operating results for interim periods are not necessarily
indicative of the results that may be expected for a full fiscal year.
The financial results of the Company primarily include the following (see
Note 2):
- Subsidiaries which are wholly owned and consolidated:
- Crescent Machinery Company ("Crescent Machinery") (in bankruptcy);
- Rosestar Management LLC ("Rosestar") through February 14, 2002; and
- COI Hotel Group, Inc. ("COI Hotel") through February 14, 2002.
- Subsidiaries which are not wholly owned but the Company controlled
through February 14, 2002 and therefore consolidated ("Controlled
Subsidiaries"):
- A 5% economic interest, representing 100% of the voting common stock,
in:
- The Woodlands Land Company, Inc. ("LandCo") which has a 52.5% general
partner interest (49.5% through November 2001) in The Woodlands Land
Development Company, L.P. ("Landevco");
- Desert Mountain Development Corporation ("Desert Mountain
Development") which consolidates its 93% general partner interest in
Desert Mountain Properties Limited Partnership ("DMPLP"); and
- CRL Investments, Inc. ("CRL"), which beneficially owns 65% of CR Las
Vegas, LLC ("CR Las Vegas") and 30% of CR License, LLC ("CR License").
F-109
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- A 60% general partner interest in COPI Colorado, L.P. ("COPI Colorado")
which owns 10% of Crescent Resort Development, Inc. ("CRDI"), formerly
Crescent Development Management Corp. ("CDMC"). The 10% interest in CRDI
represents 100% of the voting stock, and therefore, CRDI was
consolidated into COPI Colorado.
- Subsidiaries which the Company reports on the equity method of
accounting:
- A 52.5% interest in The Woodlands Operating Company, L.P. ("Woodlands
Operating" or "TWOC") which is controlled by a four member committee of
which the Company controls two positions, through March 22, 2002;
- A 40% interest in Vornado Crescent Logistics Operating Partnership
("AmeriCold Logistics")
The December 31, 2001 and September 30, 2001 financial statements have been
restated to show discontinued operations pursuant to the Settlement Agreement
described below.
2. RECENT DEVELOPMENTS
SETTLEMENT AGREEMENT
On February 14, 2002, Crescent Operating and Crescent Real Estate entered
into a Settlement Agreement, which was amended effective as of October 1, 2002
(as amended, the "Settlement Agreement"). The Settlement Agreement provided the
basis for Crescent Operating to file a prepackaged bankruptcy plan that the
Company believes will provide for a limited recovery to its stockholders.
Pursuant to the Settlement Agreement, Crescent Operating has transferred the
following assets (and related indebtedness) to Crescent Real Estate:
- all of its hotel operations, in lieu of foreclosure, on February 14, 2002
in exchange for a $23.6 million reduction in its rent obligations to
Crescent Real Estate; and
- all of its land development interests, through a strict foreclosure, on
February 14, 2002, and March 22, 2002, in exchange for a $40.1 million
reduction of its debt obligations to Crescent Real Estate.
In addition, the Settlement Agreement provides as follows:
- Crescent Real Estate will make sufficient funds available to Crescent
Operating to pay in full or otherwise resolve the claims of the creditors
that Crescent Operating identified in the original Settlement Agreement,
other than the Crescent Real Estate claims, and to cover the budgeted
expenses of implementing the Settlement Agreement and seeking to confirm
the bankruptcy plan. To facilitate Crescent Operating's repayment of
$15.0 million, plus interest, that it owes to Bank of America, Crescent
Real Estate has allowed Crescent Operating to secure the Bank of America
debt with a pledge of Crescent Operating's interest in AmeriCold
Logistics, LLC. The Settlement Agreement and the bankruptcy plan
contemplate that a Crescent Real Estate affiliate will purchase Crescent
Operating's interest in AmeriCold Logistics for between $15.0 to $15.5
million.
- If Crescent Operating's stockholders accept the bankruptcy plan by the
requisite vote and the bankruptcy court confirms the bankruptcy plan,
then Crescent Real Estate will issue common shares of Crescent Real
Estate to the Crescent Operating stockholders pursuant to the formula
contained in the bankruptcy plan. If so issued, the value of the common
shares of Crescent Real Estate to be issued is currently estimated to be
$0.20 to $0.50 per share of Crescent Operating common stock. If the
stockholders of Crescent Operating do not accept the bankruptcy plan,
they will not receive a distribution of common shares of Crescent Real
Estate.
- Crescent Operating stockholders receiving Crescent Real Estate shares,
regardless of the value of the shares they receive, will be deemed to
have released all claims they may have against Crescent
F-110
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Operating and Crescent Real Estate and those acting on their behalf that
arose before the effective date of the bankruptcy plan. The release of
Crescent Operating stockholder claims will apply to Crescent Operating
stockholders only in their capacity as Crescent Operating stockholders,
and will not affect their rights as shareholders of Crescent Real Estate.
- Crescent Operating will cancel all outstanding shares of its common
stock.
- Crescent Operating and Crescent Real Estate exchanged mutual releases.
Pursuant to the Settlement Agreement, Crescent Operating and Crescent
Real Estate and the directors, officers, agents and employees of each
will be released from all liabilities and claims arising prior to the
effective date of the bankruptcy plan.
- Pursuant to both the Settlement Agreement and the bankruptcy plan,
Crescent Operating will transfer the remaining assets of Crescent
Operating at the direction of Crescent Real Estate.
- If Crescent Real Estate, in its sole discretion, offers to settle or
assume unsecured claims that were not identified by Crescent Operating in
the original Settlement Agreement and that are asserted by third parties,
and Crescent Operating accepts the offer, then the total value of the
Crescent Real Estate common shares paid to Crescent Operating
stockholders will be reduced (but not below a value of $0.20 per share of
Crescent Operating common stock) by the amount agreed to by Crescent Real
Estate and Crescent Operating, and approved by the bankruptcy court, as
compensation to Crescent Real Estate for assuming the claims. If Crescent
Real Estate and Crescent Operating are not able to agree to Crescent Real
Estate's assumption of any such unresolved third party claims that were
not identified by Crescent Operating in the original Settlement Agreement
and that are an obstacle to confirmation of the Crescent Operating
bankruptcy plan, then it is possible that the bankruptcy plan will not be
confirmed.
ADDITIONAL RECENT DEVELOPMENTS
Effective December 31, 2001, the Company, in connection with extending the
maturity of its $15.0 million loan from Bank of America from December 31, 2001
to August 15, 2002, agreed to modify the loan from an unsecured to a secured
credit facility. The Company, with the consent of Crescent Partnership which
agreed to subordinate its security interest in the Company's 40% interest in
AmeriCold Logistics, pledged all of its interest in AmeriCold Logistics to Bank
of America to secure the loan. On August 14, 2002, the Company further extended
the maturity of this loan to January 15, 2003 and prepaid the interest for that
time period in the amount of $0.3 million.
3. DISCONTINUED OPERATIONS
Pursuant to the Settlement Agreement discussed in Note 2, Crescent
Operating has transferred the following assets to Crescent Real Estate:
- all of its hotel operations, in lieu of foreclosure, on February 14, 2002
in exchange for a $23.6 million reduction in its rent obligations to
Crescent Real Estate; and
- all of its land development interests, through a strict foreclosure, on
February 14, 2002, and March 22, 2002, in exchange for a $40.1 million
reduction of its debt obligations to Crescent Real Estate.
As a result of these transfers, the Company recognized Income from
Discontinued Operations for the nine months ended September 30, 2002 of $3.3
million, after minority interest of $1.9 million and a $2.5 million income tax
expense, related to its Hospitality and Land Development segments. The gain
associated with the discontinuance of the operations from these segments and the
reduction of the Company's rent and debt obligations is $26.8 million, net of a
$17.9 million income tax expense.
F-111
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The carrying amounts of the major classes of asset and liabilities for the
Hospitality and Land Development segments as of the transfer date, February 14,
2002, were (in thousands):
LAND
HOSPITALITY DEVELOPMENT TOTAL
----------- ----------- --------
Current Assets...................................... $38,466 $ 60,744 $ 99,210
Long-Term Assets.................................... 12,607 663,030 675,637
Current Liabilities................................. 43,978 483,562 527,540
Long-Term Liabilities............................... 4,750 70,549 75,299
In December 2001, the Company adopted Statements of Financial Accounting
Standards SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (See Note 12). SFAS No. 144 broadens the definition of what constitutes a
discontinued operation and how the results of a discontinued operation are to be
measured and presented. During the second and third quarters of 2002, Crescent
Machinery closed down six branch locations and is currently in the process of
closing one additional branch location. The results from these branch operations
are reflected in discontinued operations, net of tax. Accordingly, the September
30, 2001 financial statements have been restated to show discontinued operations
for these branch locations.
4. INVESTMENTS
Investments consisted of the following (in thousands):
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
Investment in Landevco.............................. $ -- $ 43,577
Investment in Magellan warrants..................... -- 4,127
Investment in CRDI projects......................... -- 8,124
Investment in CR License............................ -- 5,012
Investment in CR Las Vegas.......................... -- 450
Investment in AmeriCold Logistics................... -- 706
----- --------
$ -- $ 61,996
Less assets to be transferred pursuant to the
Settlement Agreement.............................. -- (57,163)
----- --------
$ -- $ 4,833
===== ========
Investment loss consisted of the following (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2002
------------------ ------------------
Change in fair value of Magellan warrants......... $ (--) $(4,127)
Equity in loss of unconsolidated subsidiaries consisted of the following
(in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2002
------------------ ------------------
Equity in loss of AmeriCold Logistics............. $ (--) $(2,142)
Less equity in loss of entities to be transferred
pursuant to Settlement Agreement................ -- (2,046)
------ -------
$ (--) $(4,188)
====== =======
F-112
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT
The Company's long-term debt facilities are composed of (i) corporate and
wholly owned debt, and (ii) non wholly owned debt. Corporate and wholly owned
debt relates to debt facilities at the Crescent Operating level or owed by
entities which are owned 100% by Crescent Operating. Non wholly owned debt
represents non-recourse debt owed by entities which are consolidated in the
Company's financial statements but are not 100% owned by the Company; the
Company's economic investment in these entities is 6% or less. The non wholly
owned debt is secured by the operations of each individual subsidiary and is not
guaranteed by Crescent Operating. Following is a summary of the Company's debt
financing (in thousands):
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
LONG-TERM DEBT -- CORPORATE AND WHOLLY OWNED
SUBSIDIARIES
Equipment notes payable to finance companies, bear
interest from 4.5% to 9.5%, due 2001 through 2011
(Crescent Machinery) (in default).................. $42,862 $ 80,683
Floor plan debt payable, three to twelve month terms
at 0% interest (Crescent Machinery) (in default)... -- 4,190
Line of credit in the amount of $15.0 million payable
to Bank of America, interest at the banks prime
rate, 4.75% at September 30, 2002, due January 2003
(COPI)............................................. 15,000 15,000
Line of credit payable to Crescent Partnership,
interest at 9%, due May 2002 (COPI)(in default).... 9,552 22,025
Line of credit payable to Crescent Partnership,
interest at 12%, due May 2002 or five years after
the last draw (COPI) (in default).................. 8,495 20,205
Note payable to Crescent Partnership, interest at
12%, due through May 2002 (COPI) (in default)...... 6,827 16,238
Note payable to Crescent Partnership, interest at
12%, due May 2002 (COPI) (in default).............. 4,445 10,572
Notes payable to Crescent Partnership (previously the
sellers of equipment companies), weighted average
interest of 12.0% and 7.6% at September 30, 2002
and December 31, 2001, due 2002 through 2003 (COPI)
(in default)....................................... 2,628 2,787
Notes payable to Crescent Partnership, interest at
2.75%, due February 2003 (COPI).................... 3,631 --
Notes payable to Crescent Partnership, weighted
average interest of 10.2% at December 31, 2001, due
2003 through 2006 (Rosestar)....................... -- 1,143
------- --------
Total debt -- corporate and wholly owned
subsidiaries............................. 93,440 172,843
------- --------
F-113
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
LONG-TERM DEBT -- NON WHOLLY OWNED SUBSIDIARIES
Construction loans for various East West Resort
Development projects, interest at 4.4% to 11.3%,
due through 2003 (CRDI)............................ -- 136,620
Line of credit in the amount of $100.0 million
payable to Crescent Partnership, interest at 11.5%,
due September 2008 (CRDI).......................... -- 72,250
Junior note payable to Crescent Partnership, interest
at 14%, due December 2010 (DMPLP).................. -- 59,000
Line of credit in the amount of $56.2 million payable
to Crescent Partnership, interest at 11.5%, due
August 2004 (CRDI)................................. -- 48,354
Line of credit in the amount of $70.0 million payable
to Crescent Partnership, interest at 11.5%, due
December 2006 (CRDI)............................... -- 36,571
Line of credit in the amount of $50.0 million payable
to National Bank of Arizona, interest at prime to
prime plus 1%, due November 2003 (DMPLP)........... -- 29,910
Line of credit in the amount of $40.0 million payable
to Crescent Partnership, interest at 11.5%, due
December 2006 (DMPLP).............................. -- 23,396
Line of credit in the amount of $7.0 million payable
to Crescent Partnership, interest at 12%, due
August 2003 (CRL).................................. -- 7,000
Note payable to Crescent Partnership maturing
December 2002, interest at 10% (DMPLP)............. -- 1,000
Term note in the amount of $0.2 million payable to
Crescent Partnership, interest at 12%, due August
2003 (CRL)......................................... -- 166
------- --------
Total debt -- non wholly owned
subsidiaries............................. -- 414,267
------- --------
Total long-term debt....................... $93,440 $587,110
======= ========
Current portion of long-term debt -- CEI............. $35,578 $ 69,041
Current portion of long-term debt.................... 15,000 101,870
Current debt subject to compromise................... 42,862 --
Long-term debt -- CEI, net of current portion........ -- --
Long-term debt, net of current portion............... -- 790
Current and Long-term debt of assets to be
transferred pursuant to the Settlement Agreement... -- 415,409
------- --------
Total debt................................. $93,440 $587,110
======= ========
On February 6, 2002, Crescent Machinery Company filed a voluntary petition
under Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court in
Fort Worth, Texas. Outstanding principal amounts under default by Crescent
Machinery totaled $42.9 million at September 30, 2002.
On February 13, 2002, the Company received notice from Crescent Partnership
that the Company was in default on the 1997 Term Loan, the 1997 Revolving Loan,
the AmeriCold Loan and the COPI Colorado Loan. On February 14, 2002, pursuant to
the Settlement Agreement, Crescent Partnership foreclosed on
F-114
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
certain collateral securing such loans, which had the effect of reducing the
aggregate indebtedness from $76.2 million to $36.1 million.
As a part of the acquisitions of E.L. Lester and Company ("Lester") and
Harvey Equipment Center, Inc. ("Harvey"), Crescent Operating issued notes
payable in the amount of $6.0 million and $1.2 million, respectively (the
"Equipment Acquisition Notes"). On February 15, 2002, Crescent Partnership
purchased the Equipment Acquisition Notes from the note holders. As of July 1,
2002 and July 31, 2002, Crescent Operating defaulted on payment of principal and
interest on these notes.
6. SUMMARY OF LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise consisted of the following (in
thousands):
SEPTEMBER 30, 2002
------------------
Secured Debt -- Notes Payable............................... $39,862
Secured Debt -- Other....................................... 2,413
Priority Debt............................................... 1,427
Unsecured Debt -- Notes Payable............................. 3,000
Unsecured Debt -- Other..................................... 5,730
-------
Total............................................. $52,432
=======
Additional intercompany liabilities that are subject to compromise in the
amount of $10.5 million are not included as they are eliminated for consolidated
financial purposes.
F-115
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. COMPANY SUBSIDIARIES IN REORGANIZATION
On February 6, 2002, Crescent Machinery filed a voluntary petition under
Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the
Northern District of Texas in Fort Worth, Texas. The carrying amounts of the
major classes of asset and liabilities and shareholders' deficit for Crescent
Machinery as of September 30, 2002 were as follows (in thousands):
SEPTEMBER 30, 2002
------------------
Current assets
Cash and cash equivalents................................. $ 3,981
Accounts receivable....................................... 7,399
Inventories............................................... 6,045
Other current assets...................................... 1,644
--------
Total current assets.............................. 19,069
Property and equipment, net................................. 31,705
Other assets................................................ 227
--------
Total assets................................................ $ 51,001
========
Liabilities
Accounts payable and accrued expenses..................... $ 13,402
Debt...................................................... 42,862
Other..................................................... 5,011
--------
Total Liabilities................................. 61,275
Shareholders' deficit
Common stock.............................................. 6,007
Additional paid-in capital................................ 63,770
Accumulated deficit....................................... (80,051)
--------
Total shareholders' deficit....................... (10,274)
--------
Total liabilities and shareholders' deficit................. $ 51,001
========
F-116
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. EARNINGS PER SHARE
Earnings per share ("EPS") is calculated as follows (in thousands, except
per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------------- ---------------------------------------
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001 SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
------------------ ------------------ ------------------ ------------------
Weighted average shares
(basic)...................... 10,828 10,340 10,757 10,340
Effect of Dilutive Securities:
Stock Options.................. -- -- -- --
------- -------- -------- --------
Weighted average shares
(diluted).................... 10,828 10,340 10,757 10,340
======= ======== ======== ========
Loss from Continuing
Operations................... $(3,011) $ (9,413) $(16,879) $(21,676)
======= ======== ======== ========
Basic and diluted EPS before
discontinued operations and
accounting change............ (0.28) (0.91) (1.57) (2.10)
======= ======== ======== ========
Income (loss) from Discontinued
Operations................... (553) (7,684) 27,087 (12,254)
Basic and diluted EPS from
Discontinued Operations...... (0.05) (0.74) 2.52 (1.18)
======= ======== ======== ========
Accounting Change.............. -- -- -- (9,509)
Basic and diluted EPS from
Accounting Change............ -- -- -- (0.92)
======= ======== ======== ========
Net loss (income).............. (3,564) (17,097) 10,208 (43,439)
======= ======== ======== ========
Diluted EPS.................... $ (0.33) $ (1.65) $ 0.95 $ (4.20)
======= ======== ======== ========
The Company had 1,270,624 options for its common stock outstanding for each
of the three and nine months ended September 30, 2002 and 2001, which were not
included in the calculation of diluted EPS as they were anti-dilutive.
9. INCOME TAXES
The table below shows the reconciliation of the federal statutory income
tax rate to the effective tax rate for income from continuing operations.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2002
------------------ ------------------
Federal statutory income tax rate................. 35.0% 35.0%
State income taxes, net of federal tax benefit.... 5.0 5.0
Minority interests................................ -- (3.3)
Change in valuation allowance..................... (23.4) 21.4
Other, net........................................ -- 1.3
----- ----
Effective tax rate...................... 16.6% 59.4%
===== ====
F-117
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Provision (benefit) for income taxes is comprised of the following (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2002
------------------ ------------------
Income from continuing operations
Deferred........................................ $(707) $(2,710)
Discontinued operations
From Operations
Deferred..................................... $ (--) $ 2,502
Gain on disposal of discontinued operations
Current...................................... $ -- $ 176
Deferred..................................... -- 17,700
----- -------
Total........................................ $(707) $17,668
===== =======
The Company generally provides for taxes using a 40% effective rate on the
Company's share of income or loss. The Company increased its valuation allowance
related to its consolidated tax group by $1.0 million in the third quarter of
2002 to offset a portion of the deferred tax assets for which the ultimate
realization in future years is uncertain. Management believes that the remaining
deferred tax asset will be realized due to tax planning strategies associated
with the Settlement Agreement (see Note 2).
10. BUSINESS SEGMENT INFORMATION
Crescent Operating's assets and operations are located entirely within the
United States and are comprised primarily of two business segments: (i)
Equipment Sales and Leasing and (ii) Temperature Controlled Logistics. The
Company also previously operated in the Hospitality and Land Development
segments. Pursuant to the Settlement Agreement, the Company transferred all of
its interests in the Hospitality and Land Development segments to Crescent
Equities in February and March 2002 (see Note 2). In addition to these two
business segments, the Company has grouped its investment in Magellan warrants,
interest expense on corporate debt and general corporate overhead costs such as
legal and accounting costs, insurance costs and corporate salaries as "Other"
for segment reporting purposes. The Company uses net income as the measure of
segment profit or loss. Business segment information is summarized as follows
(in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------------- ---------------------------------------
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001 SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
------------------ ------------------ ------------------ ------------------
Revenues:
Equipment Sales and
Leasing................... $ 7,757 $19,001 $ 25,992 $ 50,884
------- ------- -------- --------
Total revenues............... $ 7,757 $19,001 $ 25,992 $ 50,884
======= ======= ======== ========
Net loss from continuing
operations:
Equipment Sales and
Leasing................... $(1,950) $(6,882) $ (6,651) $(18,664)
Temperature Controlled
Logistics................. -- -- (1,859) (4,438)
Other........................ (1,061) (2,531) (8,369) 1,426
------- ------- -------- --------
Total net (loss) from
continuing operations..... $(3,011) $(9,413) $(16,879) $(21,676)
======= ======= ======== ========
F-118
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
Identifiable assets:
Equipment Sales and Leasing....................... $51,001 $ 93,647
Temperature Controlled Logistics.................. 5,591 6,015
Hospitality....................................... -- 40,416
Land Development.................................. -- 761,984
Other............................................. 4,956 43,342
------- --------
Total identifiable assets......................... $61,548 $945,404
======= ========
11. LITIGATION
Charter Behavioral Health Systems, LLC ("CBHS") became the subject of
Chapter 11 bankruptcy proceedings by filing a voluntary petition on February 16,
2000, in United States Bankruptcy Court for the District of Delaware. Although
CBHS is not a subsidiary of Crescent Operating, Crescent Operating did own a
majority (90%) economic interest in CBHS, until December 29, 2000.
As a result of the liquidation of CBHS through bankruptcy, the equity
investment in CBHS became worthless. On December 29, 2000, as part of Crescent
Operating's tax planning, Crescent Operating sold its 25% common interest and
its 100% preferred membership interest in CBHS, and COPI CBHS Holdings sold its
65% common interest in CBHS to The Rockwood Financial Group, Inc. for a nominal
sum.
Crescent Operating held no funded or liquidated claims against the estate
of CBHS. Crescent Operating filed proofs of claim against CBHS as a protective
matter for potential indemnification or contribution for third party lawsuits
and claims where Crescent Operating is a named defendant with CBHS, such as
lawsuits based upon alleged WARN Act violations purported to have been committed
by CBHS and/or its subsidiaries in closing behavioral health care facilities in
1999 and 2000. The only such lawsuits that have been brought against Crescent
Operating arise from WARN Act claims. In connection with a settlement entered
into among Crescent Operating, CBHS, the WARN Act plaintiffs, and others,
Crescent Operating's indemnification and contribution claims against CBHS based
on such lawsuits have been resolved.
To date, several lawsuits, seeking class action certification, have been
filed against CBHS alleging violations of the WARN Act in the closing of certain
healthcare facilities in 1999 and 2000. Of those lawsuits, three also named
Crescent Operating as a defendant, but all three of those suits have since been
dismissed. An additional suit seeking similar relief was also filed against
Crescent Operating and Crescent Partnership, as well as CBHS.
A global Stipulation of Settlement of all WARN matters was reached and
filed with the United States District Court and Bankruptcy Court for the
District of Delaware by the WARN Act claimants, CBHS, Crescent Operating,
Crescent Partnership and the Creditors Committee in the CBHS case. The
settlement was approved by the District Court by order dated March 18, 2002. As
it applies to Crescent Operating, the settlement provides that either Crescent
Operating or Crescent Partnership was required to deposit into escrow $500,000
for the benefit of the WARN Act claimants and, upon the settlement becoming
final, Crescent Operating received a complete release for all WARN Act claims
and any other claims in the CBHS case other than potential claims from those
CBHS employees who have opted out of the settlement. It appears that a maximum
of three such employees have opted out and none have made claims against
Crescent Operating to date. Crescent Partnership has paid the $500,000 into
escrow. This payment will not be included as an expense for the purposes of
calculating the aggregate value of the Crescent Real Estate shares to be
distributed to the Crescent Operating shareholders.
F-119
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In accordance with an agreement between Gerald Haddock and Crescent
Operating, COPI Colorado redeemed the limited partnership interest of Mr.
Haddock, Crescent Operating's former Chief Executive Officer and President, in
January 2000. COPI Colorado paid Mr. Haddock approximately $2.6 million for his
approximate 16.67% limited partner interest (determined from an independent
appraisal of the value of COPI Colorado). Mr. Haddock challenged the valuation
performed by the independent appraiser and the procedures followed by Crescent
Operating with respect to the redemption and valuation process. On February 7,
2001, Crescent Operating filed a lawsuit in the 141st Judicial Court of Tarrant
County, Texas seeking a declaratory judgment to assist in resolution of Crescent
Operating's dispute with Mr. Haddock. The parties settled their dispute, and the
lawsuit was dismissed effective as of January 2, 2002.
On June 10, 2002, the attorneys for the Official Unsecured Creditors
Committee of Crescent Machinery Company delivered a letter to Crescent Operating
and to certain of its current and former officers and directors. In the letter,
the creditors committee alleges that Crescent Operating and others have
substantial liability for certain actions and failures to act by Crescent
Operating and certain of its officers and directors that caused damage to
Crescent Machinery. If a lawsuit is filed by the creditors committee, Crescent
Operating intends to vigorously defend any claims asserted. Crescent Operating
does not believe the claims asserted in the creditors committee's letter have
any merit. However, there is a risk that substantial delays could result from
the process whereby the creditors committee's claim is adjudicated and there is
further risk that if the creditors committee were ultimately successful in the
prosecution of its claim, Crescent Operating may be unable to make any
distribution to its stockholders.
The Company is a party to legal actions related to certain of its
investments. Material losses related to such cases have not been deemed probable
by management after consultation with outside counsel, and no financial
statement accruals have been made. Based on the status of the cases, the Company
is unable to determine a range of possible losses, if any, that might be
incurred in connection with this litigation. The Company believes it is not
probable that the ultimate resolution of this litigation will have a material
adverse effect on its financial position and results of operations.
12. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives. The Company applied the new
rules on accounting for goodwill and other intangible assets beginning in the
first quarter 2002.
In August 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. It
also supersedes the accounting and reporting provisions of APB Opinion No. 30,
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions. SFAS No. 144 retains
the fundamental provisions of SFAS No. 121 for recognition and measurement of
the impairment of long-lived assets to be held and used and measurement of the
long-lived assets to be disposed of by sale, but broadens the definition of what
constitutes a discontinued operation and how the results of a discontinued
operation are to be measured and presented. SFAS No. 144 is effective for fiscal
years beginning after December 15, 2001. The Company adopted SFAS No. 144 on
January 1, 2002 and it did not have a material impact on their results of
operations or financial position; however, due to the Settlement Agreement
discussed in this Item 1, the Hospitality and Land Development segments are
presented as discontinued operations. In addition, during the nine months ended
September 30,
F-120
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2002, Crescent Machinery closed six branch locations and is currently in the
process of closing one additional branch location. The results from these branch
operations are reflected in discontinued operations, net of tax.
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections. In
general, SFAS 145 will require gains and losses on extinguishments of debt to be
classified as income or loss from continuing operations rather than as
extraordinary items as previously required under Statement 4. While gains or
losses from extinguishments of debt for fiscal years beginning after May 15,
2002 shall not be reported as extraordinary items unless the extinguishment
qualifies as an extraordinary item under the provisions of APB Opinion No. 30,
Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, management has elected to adopt SFAS No. 145 early. The
impact of adopting SFAS No. 145 resulted in a gain on disposal of discontinued
operations of $26.8 million, net of applicable income tax expense of $17.9
million.
F-121
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Crescent Operating, Inc.
We have audited the accompanying consolidated balance sheets of Crescent
Operating, Inc. and subsidiaries (the Company) as of December 31, 2001 and 2000,
and the related consolidated statements of operations, shareholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 2001. Our audits also included the financial statement schedule
listed in the index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits. We
did not audit the financial statements of The Woodlands Land Development
Company, L.P., The Woodlands Operating Company, L.P., Crescent Resort
Development, Inc. and subsidiaries or Vornado Crescent Logistics Operating
Partnership and Subsidiary, which statements reflect total assets constituting
51.9% and 44.6%, respectively, of consolidated assets as of December 31, 2001
and 2000, and (loss) from continuing operations of $(1.4) million, $(4.4)
million, $(2.2) million of consolidated net (loss) from continuing operations of
$(30.1) million, $(0.9) million and $(1.6) million, and income from discontinued
operations of $3.0 million, $3.2 million, and $0.8 million of consolidated net
(loss) from discontinued operations of $(38.5) million, $(2.8) million and
$(1.1) million for years 2001, 2000 and 1999, respectively. Those statements
were audited by other auditors whose reports have been furnished to us, and our
opinion, insofar as it relates to data included for The Woodlands Land
Development Company, L.P., The Woodlands Operating Company, L.P., Crescent
Resort Development, Inc. and subsidiaries and Vornado Crescent Logistics
Operating Partnership, is based solely on the reports of the other auditors. The
financial statements for The Woodlands Land Development Company, L.P., The
Woodlands Operating Company, L.P. and Crescent Resort Development, Inc. and
subsidiaries, were audited by auditors who have ceased operations.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Crescent Operating, Inc. and subsidiaries
at December 31, 2001 and 2000, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001, in conformity with accounting principles generally accepted in the
United States. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
The accompanying financial statements have been prepared assuming that
Crescent Operating, Inc. will continue as a going concern. The Company has
incurred recurring net losses, has a net capital deficiency and has debts in
default and other liabilities which it is unable to liquidate in the normal
course of business. In addition, as more fully discussed in Note 3, the Company
has entered into an agreement with Crescent Equities (CEI) in which
substantially all of the assets and operations which comprise the hospitality
and land development segments of the Company have been transferred to CEI
subsequent to December 31, 2001. This agreement also provides for the Company to
file a prepackaged bankruptcy plan. On February 6, 2002, Crescent Machinery
Company, a wholly owned subsidiary of the Company, filed for bankruptcy
protection under Chapter 11 of the federal bankruptcy laws. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. The consolidated financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
As discussed in Note 15 of the financial statements, in 2001, the Company
changed its method of accounting for warrants.
/s/ ERNST & YOUNG LLP
Dallas, Texas
April 19, 2002, except for Note 4,
as to which the date is December 19, 2002
F-122
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Executive Committee of
The Woodlands Operating Company, L.P.:
We have audited the consolidated balance sheets of The Woodlands Operating
Company, L.P. (a Texas limited partnership) and subsidiary as of December 31,
2001 and 2000 and the related consolidated statements of earnings, changes in
partners' deficit and cash flows for each of the three years ended December 31,
2001 not presented separately herein). These financial statements are the
responsibility of The Woodlands Operating Company, L.P.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Woodlands Operating
Company, L.P. and subsidiary as of December 31, 2001 and 2000 and the results of
their operations and their cash flows for each of the three years ended December
31, 2001 in conformity with accounting principles generally accepted in the
United States.
/s/ ARTHUR ANDERSEN LLP
Houston, Texas
January 25, 2002
THIS REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS IS A COPY OF THE REPORT
PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP. THE REPORT HAS NOT BEEN REISSUED BY
ARTHUR ANDERSEN LLP.
F-123
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Executive Committee of
The Woodlands Land Development Company, L.P.:
We have audited the consolidated balance sheets of The Woodlands Land
Development Company, L.P. (a Texas limited partnership) and subsidiaries as of
December 31, 2001 and 2000 and the related consolidated statements of earnings
and comprehensive income, changes in partners' equity and cash flows for each of
the three years ended December 31, 2001 (not presented separately herein). These
financial statements are the responsibility of The Woodlands Land Development
Company, L.P.'s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Woodlands Land
Development Company, L.P. and subsidiaries as of December 31, 2001 and 2000 and
the results of their operations and their cash flows for each of the three years
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Houston, Texas
January 25, 2002
THIS REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS IS A COPY OF THE REPORT
PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP. THE REPORT HAS NOT BEEN REISSUED BY
ARTHUR ANDERSEN LLP.
F-124
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Crescent Resort Development, Inc.
We have audited the consolidated balance sheets of CRESCENT RESORT
DEVELOPMENT, INC. (a Delaware corporation and formerly known as Crescent
Development Management Corp.) AND SUBSIDIARIES as of December 31, 2001 and 2000
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 2001.
These financial statements referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Crescent Resort Development,
Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado,
January 25, 2002.
THIS REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS IS A COPY OF THE REPORT
PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP. THE REPORT HAS NOT BEEN REISSUED BY
ARTHUR ANDERSEN LLP.
F-125
CRESCENT OPERATING, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- -----------------
(AMOUNTS IN THOUSANDS)
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 492 $ 1,000
Accounts receivable, net.................................. 14,581 25,797
Inventories............................................... 18,965 37,429
Notes receivable.......................................... 58 122
Prepaid expenses and other current assets................. 1,875 4,595
Current assets to be transferred pursuant to Settlement
Agreement............................................... 94,161 123,719
-------- --------
Total current assets.................................... 130,132 192,662
-------- --------
PROPERTY AND EQUIPMENT, NET................................. 70,094 110,939
INVESTMENTS................................................. 4,833 7,409
OTHER ASSETS
Intangible assets, net.................................... -- 14,011
Deferred tax assets....................................... 24,715 10,115
Other assets.............................................. 636 156
Long-term assets to be transferred pursuant to Settlement
Agreement............................................... 714,994 575,236
-------- --------
Total other assets...................................... 740,345 599,518
-------- --------
TOTAL ASSETS................................................ $945,404 $910,528
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
LIABILITIES NOT SUBJECT TO COMPROMISE CURRENT LIABILITIES
Accounts payable and accrued expenses..................... $ 15,525 $ 15,360
Accounts payable and accrued expenses -- CEI.............. 48,875 15,964
Current portion of long-term debt -- CEI.................. 69,041 8,578
Current portion of long-term debt......................... 101,870 53,953
Deferred revenue.......................................... 641 626
Current liabilities to be transferred pursuant to
Settlement Agreement.................................... 554,356 208,246
-------- --------
Total current liabilities............................... 790,308 302,727
LONG-TERM DEBT -- CEI, NET OF CURRENT PORTION............. -- 52,620
LONG-TERM DEBT, NET OF CURRENT PORTION.................... 790 93,352
LONG-TERM LIABILITIES TO BE TRANSFERRED PURSUANT TO
SETTLEMENT AGREEMENT.................................... 88,805 310,834
-------- --------
Total liabilities....................................... 879,903 759,533
MINORITY INTERESTS TO BE TRANSFERRED PURSUANT TO SETTLEMENT
AGREEMENT................................................. 158,889 174,528
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT
Preferred stock, $.01 par value, 10,000 shares authorized,
no shares issued or outstanding........................... -- --
Common stock, $.01 par value, 22,500 shares authorized,
11,490 and 11,443 shares issued, respectively............. 115 114
Additional paid-in capital.................................. 17,781 17,754
Deferred compensation on restricted shares.................. -- (177)
Accumulated other comprehensive loss........................ (1,436) (9,509)
Accumulated deficit......................................... (105,542) (27,409)
Treasury stock at cost, 662 and 1,103 shares,
respectively.............................................. (4,306) (4,306)
-------- --------
Total shareholders' deficit............................. (93,388) (23,533)
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT................. $945,404 $910,528
======== ========
See accompanying notes to the consolidated financial statements.
F-126
CRESCENT OPERATING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999
----------------- ----------------- -----------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUES
Equipment sales & leasing........................... $ 67,521 $ 69,976 $ 62,311
Hospitality......................................... -- 32,615 35,304
-------- -------- --------
Total revenues.................................... 67,521 102,591 97,615
-------- -------- --------
OPERATING EXPENSES
Equipment sales & leasing........................... 71,113 68,710 58,799
Hospitality......................................... -- 22,582 24,649
Hospitality properties rent-CEI..................... -- 8,102 9,105
Land development.................................... -- -- 18
Corporate general and administrative................ 6,969 4,224 2,604
Impairment of assets................................ 12,332 -- --
-------- -------- --------
Total operating expenses.......................... 90,414 103,618 95,175
-------- -------- --------
(LOSS) INCOME FROM OPERATIONS......................... (22,893) (1,027) 2,440
INVESTMENT INCOME..................................... 1,135 722 1,890
EQUITY IN LOSS OF UNCONSOLIDATED SUBSIDIARIES......... (2,275) (6,952) (3,472)
OTHER EXPENSE (INCOME)
Interest expense.................................... 13,241 14,123 11,993
Interest income..................................... -- (439) (458)
Gain on lease termination of hotel and sale of
club.............................................. -- (19,852) --
Other............................................... 1,417 762 19
-------- -------- --------
Total other expense (income)...................... 14,658 (5,406) 11,554
-------- -------- --------
LOSS FROM CONTINUING OPERATIONS BEFORE TAXES.......... (38,691) (1,851) (10,696)
INCOME TAX BENEFIT.................................... (8,591) (929) (9,102)
-------- -------- --------
LOSS FROM CONTINUING OPERATIONS....................... (30,100) (922) (1,594)
DISCONTINUED OPERATIONS (NOTE 4)
(Loss) income from operations of discontinued
Hospitality and Land Development segments (less
applicable income tax expense of $7,966, $14,664
and $6,505 and minority interests of $(13,588),
$(26,018), and $(14,112))......................... (5,817) 106 319
Loss from operations of discontinued Equipment Sales
and Leasing branches (less applicable income tax
benefit of $(1,968), $(1,988), $(874))............ (32,707) (2,874) (1,420)
-------- -------- --------
LOSS FROM DISCONTINUED OPERATIONS................... (38,524) (2,768) (1,101)
-------- -------- --------
LOSS BEFORE ACCOUNTING CHANGE......................... (68,624) (3,690) (2,695)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE... (9,509) -- --
-------- -------- --------
NET LOSS.............................................. $(78,133) $ (3,690) $ (2,695)
======== ======== ========
BASIC AND DILUTED LOSS PER SHARE
Loss before discontinued operations and accounting
change............................................ $ (2.91) $ (0.09) $ (0.15)
Discontinued operations............................. (3.72) (0.27) (0.11)
Change in accounting principle...................... (0.92) -- --
-------- -------- --------
Net loss per share.................................. $ (7.55) $ (0.36) $ (0.26)
======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic............................................... 10,344 10,326 10,363
======== ======== ========
Diluted............................................. 10,344 10,326 10,363
======== ======== ========
See accompanying notes to the consolidated financial statements.
F-127
CRESCENT OPERATING, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
DEFERRED
COMMON STOCK TREASURY STOCK COMPENSATION
---------------- ---------------- ADDITIONAL ON RESTRICTED
SHARES AMOUNT SHARES AMOUNT PAID-IN CAPITAL SHARES
------- ------ ------ ------- --------------- -------------
(AMOUNTS IN THOUSANDS)
DECEMBER 31, 1998........ 11,402 $114 (700) $(2,852) $17,667 $(210)
Comprehensive income
(loss):
Net loss............... -- -- -- -- -- --
Unrealized loss on
Magellan warrants.... -- -- -- -- -- --
Comprehensive income
(loss).................
Stock options
exercised.............. 7 -- -- -- 7 --
Issuance of restricted
common stock........... 6 -- -- -- 40 (40)
Amortization of
restricted common
stock.................. -- -- -- -- -- 52
Purchase of treasury
stock.................. -- -- (403) (1,454) -- --
------- ---- ------ ------- ------- -----
DECEMBER 31, 1999........ 11,415 114 (1,103) (4,306) 17,714 (198)
Comprehensive income
(loss):
Net loss............... -- -- -- -- -- --
Unrealized gain on
Magellan warrants.... -- -- -- -- -- --
Comprehensive income
(loss).................
Issuance of restricted
common stock........... 28 -- -- -- 40 --
Amortization of
restricted common
stock.................. -- -- -- -- -- 21
------- ---- ------ ------- ------- -----
DECEMBER 31, 2000........ 11,443 $114 (1,103) $(4,306) $17,754 $(177)
Comprehensive income
(loss):
Net loss............... -- -- -- -- -- --
Proportionate share of
other comprehensive
loss of equity method
investee entity...... -- -- -- -- -- --
Cumulative effect of
change in accounting
principle............ -- -- -- -- -- --
Comprehensive income
(loss).................
Issuance of restricted
common stock........... 47 1 -- -- 27 --
Amortization of
restricted common
stock.................. -- -- -- -- -- 177
------- ---- ------ ------- ------- -----
DECEMBER 31, 2001........ 11,490 $115 (1,103) $(4,306) $17,781 $ --
======= ==== ====== ======= ======= =====
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME ACCUMULATED
(LOSS) DEFICIT TOTAL
------------- ----------- --------
(AMOUNTS IN THOUSANDS)
DECEMBER 31, 1998........ $ (9,763) $ (21,024) $(16,068)
Comprehensive income
(loss):
Net loss............... -- (2,695) (2,695)
Unrealized loss on
Magellan warrants.... (364) -- (364)
--------
Comprehensive income
(loss)................. (3,059)
Stock options
exercised.............. -- -- 7
Issuance of restricted
common stock........... -- -- --
Amortization of
restricted common
stock.................. -- -- 52
Purchase of treasury
stock.................. -- -- (1,454)
-------- --------- --------
DECEMBER 31, 1999........ (10,127) (23,719) (20,522)
Comprehensive income
(loss):
Net loss............... -- (3,690) (3,690)
Unrealized gain on
Magellan warrants.... 618 -- 618
--------
Comprehensive income
(loss)................. (3,072)
Issuance of restricted
common stock........... -- -- 40
Amortization of
restricted common
stock.................. -- -- 21
-------- --------- --------
DECEMBER 31, 2000........ $ (9,509) $ (27,409) $(23,533)
Comprehensive income
(loss):
Net loss............... -- (78,133) (78,133)
Proportionate share of
other comprehensive
loss of equity method
investee entity...... (1,436) -- (1,436)
Cumulative effect of
change in accounting
principle............ 9,509 -- 9,509
--------
Comprehensive income
(loss)................. (70,060)
Issuance of restricted
common stock........... -- -- 28
Amortization of
restricted common
stock.................. -- -- 177
-------- --------- --------
DECEMBER 31, 2001........ $ (1,436) $(105,542) $(93,388)
======== ========= ========
See accompanying notes to the consolidated financial statements.
F-128
CRESCENT OPERATING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 1999
------------ ------------ ------------
(AMOUNTS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (78,133) $ (3,690) $ (2,695)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation........................................... 26,636 25,863 21,388
Amortization........................................... 4,585 11,962 12,354
Provision for deferred income taxes.................... (6,646) (12,198) (24,636)
Equity in net income of unconsolidated subsidiaries.... (31,080) (25,980) (18,963)
Investment income...................................... (1,135) (722) --
Impairment of assets................................... 40,178 -- --
Cumulative effect of change in accounting principle.... 9,509 -- --
Minority interests..................................... 13,588 26,018 14,113
Gain on sale of property and equipment................. (1,398) (3,421) (4,491)
Gain on sale of investments............................ (201) -- (2,308)
Gain on lease termination of hotel and sale of club.... -- (19,852) --
Changes in assets and liabilities, net of effects from
transfers:
Accounts receivable.................................. 11,216 (7,433) (512)
Inventories.......................................... 15,822 6,785 (8,162)
Prepaid expenses and current assets.................. 522 (871) 601
Other assets......................................... (480) 97 41
Accounts payable and accrued expenses................ 165 (177) 2,059
Accounts payable and accrued expenses -- CEI......... 119 4,771 (351)
Deferred revenue, current and noncurrent............. 15 291 --
Net assets/liabilities of discontinued operations.... (136,682) (47,860) 2,418
--------- --------- --------
Net cash (used in) operating activities........... (133,400) (46,417) (9,144)
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business interests, net of cash acquired... -- -- (28,511)
Purchases of property and equipment....................... (21,084) (48,265) (58,158)
Proceeds from sale of investments......................... -- 17,848 22,691
Proceeds from sale of property and equipment.............. 22,370 34,527 30,492
Net distributions from (contributions to) investments..... -- 441 (184)
Net investing activities of discontinued operations....... 12,954 15,879 (847)
--------- --------- --------
Net cash provided by (used in) investing
activities...................................... 14,240 20,430 (34,517)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of long-term debt................................ 31,946 104,495 103,776
Payments on long-term debt................................ (77,374) (102,786) (70,617)
Proceeds of long-term debt -- CEI......................... 7,842 1,675 37,628
Payments on long-term debt -- CEI......................... -- -- (39,480)
Net financing activities of discontinued operations....... 156,238 23,603 8,799
--------- --------- --------
Net cash provided by financing activities......... 118,652 26,987 40,106
--------- --------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (508) 1,000 (3,555)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 1,000 -- 3,555
--------- --------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 492 $ 1,000 $ --
========= ========= ========
See accompanying notes to the consolidated financial statements.
F-129
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS
Crescent Operating, Inc. ("Crescent Operating") was formed on April 1,
1997, by Crescent Real Estate Equities Company ("Crescent Equities" or "CEI")
and its subsidiary Crescent Real Estate Equities Limited Partnership ("Crescent
Partnership") to be the lessee and operator of certain assets owned or to be
acquired by Crescent Partnership and perform an agreement ("Intercompany
Agreement") between Crescent Operating and Crescent Partnership, pursuant to
which each has agreed to provide the other with rights to participate in certain
transactions. On May 8, 1997, Crescent Partnership contributed $14.1 million in
cash to Crescent Operating. Effective June 12, 1997, Crescent Equities
distributed shares of Crescent Operating common stock to shareholders of
Crescent Equities and unit holders of Crescent Partnership of record on May 30,
1997.
Crescent Operating is a diversified management company that, through
various subsidiaries and affiliates (collectively with Crescent Operating, the
"Company"), in 2001 operated primarily in four business segments: Equipment
Sales and Leasing, Hospitality, Temperature Controlled Logistics and Land
Development. Through these segments, Crescent Operating does business throughout
the United States. In February 2002, Crescent Operating transferred all of its
hotel operations and all of its land development interests to Crescent Equities
pursuant to the Settlement Agreement (See Note 3 -- Settlement Agreement).
Accordingly, the December 31, 2001, December 31, 2000 and December 31, 1999
financial statements have been restated to show discontinued operations for the
Hospitality and Land Development segments pursuant to the Settlement Agreement
described below and to show discontinued operations for the closed branch
locations of the Equipment Sales and Leasing segment (see Note 4).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements of Crescent Operating
include the accounts of the Company and all subsidiaries controlled by the
Company after elimination of material intercompany accounts and minority
interests. Subsidiaries not controlled by the Company, but for which the Company
has the ability to exercise significant influence, are accounted for on the
equity method.
The financial results of the Company include the following (see -- Notes 3
and 4):
- Subsidiaries which are wholly owned and consolidated:
- Crescent Machinery Company ("Crescent Machinery" or "CMC");
- Rosestar Management LLC ("Rosestar"); and
- COI Hotel Group, Inc. ("COI Hotel").
- Subsidiaries which are not wholly owned but the Company controls and
therefore consolidates ("Controlled Subsidiaries"):
- A 5% economic interest, representing 100% of the voting stock, in:
-- The Woodlands Land Company, Inc. ("LandCo") which has a 52.5% (49.5%
through November 2001) general partner interest in The Woodlands Land
Development Company, L.P. ("Landevco");
-- Desert Mountain Development Corporation ("Desert Mountain
Development") which consolidates its 93% general partner interest in
Desert Mountain Properties Limited Partnership ("DMPLP"); and
F-130
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
-- CRL Investments, Inc. ("CRL"), which beneficially owns approximately
65% of CR Las Vegas, LLC ("CR Las Vegas") and 30% of CR License, LLC
("CR License").
- A 60% general partner interest in COPI Colorado, L.P. ("COPI Colorado")
which owns 10% of Crescent Resort Development, Inc. ("CRDI"), formerly
Crescent Development Management Corp. ("CDMC"). The 10% interest in CRDI
represents 100% of the voting stock, and therefore, CRDI is consolidated
into COPI Colorado.
- Subsidiaries which the Company reports on the equity method of
accounting:
- A 52.5% (42.5% in 2000 and 1999) non-controlling interest in the
Woodlands Operating Company, L.P. ("Woodlands Operating" or "TWOC")
which is controlled by a four member committee of which the Company
controls two positions;
- A 40% interest in Vornado Crescent Logistics Operating Partnership
("AmeriCold Logistics");
- A direct 25% common membership interest in Charter Behavioral Health
Systems, LLC ("CBHS") (sold in 2000);
- An indirect 65% common membership interest in CBHS held through a
limited partner interest in COPI CBHS Holdings, L.P. (sold in 2000); and
- A 1% interest in each of Crescent CS Holdings Corporation ("CS I") and
Crescent CS Holdings II Corporation ("CS II"), (collectively,
"Temperature Controlled Logistics Partnerships" or "TCLP") (sold in
2000).
- A 15.8% common and 21.1% preferred interest in Transportal Network, Inc.
("Transportal Holding"), which has a 76% interest in Transportal Network
LLC ("Transportal"), all of which the Company reports on the cost method
of accounting (abandoned during 2000).
USE OF ESTIMATES
The financial statements include estimates and assumptions made by
management that affect the carrying amounts of assets and liabilities, reported
amounts of revenues and expenses and the disclosure of contingent assets and
liabilities. Actual results may differ from these estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less to be cash equivalents.
INVENTORIES
Inventories consist of new and used equipment held for sale, equipment
parts, food, beverages and supplies, all of which are stated at the lower of
cost or market using the first-in, first-out (FIFO) or specific identification
methods.
F-131
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. The Company uses the
straight-line method of depreciation for financial statement purposes. The
estimated useful lives used in computing depreciation are as follows:
Land improvements........................................... 10-15 years
Rental equipment............................................ 2-10 years
Building and improvements................................... 30 years
Transportation equipment.................................... 3-5 years
Furniture, fixtures, and other equipment.................... 5-10 years
From time-to-time, Crescent Machinery offers its rental customers the
opportunity to purchase rented equipment for a stated value at a future point in
time. In such instances, Crescent Machinery depreciates the specific rental item
in accordance with the contract. Expenditures for maintenance and repairs are
charged to expense as incurred. Expenditures for renewals or betterments are
capitalized. The cost of property replaced, retired, or otherwise disposed of is
removed from the asset account along with the related accumulated depreciation.
Long-lived assets are evaluated when indications of impairment are present,
and provisions for possible losses are recorded when undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
value. Under the Capital Agreement, which terminated January 22, 2002, the
Company agreed upon a value for its investment in CMC. Such agreed upon value
served as an indicator to the Company that the potential existed for the
impairment of certain assets as it relates to its current investment in Crescent
Machinery. As required under Statement of Financial Accounting Standards No.
121, using all information available, the Company determined that certain assets
within Crescent Machinery have carrying values which exceed the estimated
undiscounted cash flows of those assets. The Company estimated the undiscounted
cash flow of these assets using all available information including: (i)
industry knowledge of asset values, (ii) recent results in auctions of Crescent
Machinery's equipment and (iii) return of equipment to creditors in exchange for
debt credit as part of the bankruptcy process. As a result, the Company recorded
an adjustment of $8.7 million and $16.9 million as impairment of assets in the
Company's results from continuing operations and discontinued operations,
respectively, for the year ended December 31, 2001 related to property and
equipment. The Company did not recognize any losses from impairment during 1999
or 2000.
The Company will continue to evaluate the assets within Crescent Machinery
for impairment and adjust such carrying values as necessary.
REAL ESTATE
Real estate (included in Long-term assets to be transferred pursuant to
Settlement Agreement) represents raw land, developed land, homes constructed or
under construction, repurchased lots, applicable capitalized interest, and
applicable capitalized general and administrative costs. Real estate is recorded
at cost.
Interest was capitalized based on the estimated average yearly interest
rate applied to cumulative capital expenditures for property under development.
Approximately $15.3 million and $11.3 million of interest was capitalized for
the years ended December 31, 2001 and 2000, respectively. Payroll and related
costs associated with the development of a specific subdivision of land are
capitalized. Once sales of property begin in a specific subdivision, capitalized
costs are expensed as cost of sales.
INTANGIBLE ASSETS
Intangible assets consisted of goodwill and membership intangibles.
Goodwill represented the excess of the acquisition costs over the fair value of
net identifiable assets of businesses acquired and was amortized on a
F-132
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
straight-line basis over 6-30 years. Membership intangibles represent the
purchase price values allocated to club memberships to be sold. Intangibles are
evaluated periodically as events or circumstances indicate a possible inability
to recover their carrying amounts. Such evaluation is based on various analyses,
including cash flow and profitability projections. The analyses involve
significant management judgment to evaluate the capacity of an acquired
operation to perform within projections.
As required under Statement of Financial Accounting Standards No. 121,
using all information available, the Company determined that certain assets
within Crescent Machinery, and Rosestar had carrying values which exceed the
estimated undiscounted cash flows of those assets. Goodwill impairment on
Crescent Machinery is due to the recent bankruptcy filing and to the closure of
certain locations. Goodwill impairment on Rosestar is due to the transfer of the
hospitality properties to Crescent Partnership pursuant to the February 14, 2002
Settlement Agreement. As a result, the Company recorded an adjustment of $3.6
million and $10.0 million as impairment of assets in the Company's results from
continuing operations and discontinued operations, respectively, for the year
ended December 31, 2001 related to intangible assets at Crescent Machinery. A
$1.0 million impairment adjustment for Rosestar is included in loss from
discontinued operations for the year ended December 31, 2001. The Company will
continue to evaluate the assets for impairment and adjust such carrying values
as necessary.
DEFERRED COMPENSATION ON RESTRICTED SHARES
Deferred compensation on restricted shares issued to employees is being
amortized to expense over the vesting period of the restricted shares.
REVENUE RECOGNITION
Revenues from equipment rentals under operating leases are recognized as
the revenue becomes earned according to the provisions of the lease. Revenues
from full-service hotels and luxury health resorts are recognized as services
are provided. Club initiation fees and membership conversion fees at Desert
Mountain Development are deferred and recognized on a straight-line basis over
the number of months remaining until the Turnover Date as defined in the year
2010. Deposits for future services are deferred and recognized as revenue in the
period services are provided. Revenues related to discontinued operations have
been included in the net loss from discontinued operations.
ADVERTISING AND MARKETING COSTS
Advertising and marketing costs are expensed as incurred. Advertising and
marketing costs expensed for the years ended December 31, 2001, 2000 and 1999
were approximately $13.7 million, $14.9 million and $13.0 million.
MINORITY INTERESTS
Prior to February 14, 2002, Minority Interests represented the non-voting
interests owned by shareholders in LandCo, Desert Mountain Development, and CRL,
as well as the limited partners of COPI Colorado.
INCOME TAX PROVISION
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the treatment of certain items for
financial statement purposes and the treatment of those items for tax purposes.
The deferred tax assets and liabilities represent the future tax return
consequences of those differences, which will either be taxable or deductible
when the assets and liabilities are recovered or settled.
F-133
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK BASED COMPENSATION
The Company measures compensation costs associated with the issue of share
options using the intrinsic method under which compensation costs related to
share options issued pursuant to compensatory plans are measured based on the
difference between the quoted market price of the shares at the measurement date
(originally the date of grant) and the exercise price and charged to expense
over the periods during which the grantee performs the related services. All
share options issued to date by the Company have exercise prices equal to the
market price of the shares at the dates of grant.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and No.
142, Goodwill and other Intangible Assets, effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be subject
to annual impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives. The Company
applied the new rules on accounting for goodwill and other intangible assets
beginning in the first quarter 2002. The Company performed the first of the
required impairment test of goodwill and indefinite lived intangible assets in
2002 which had no material effect on the earnings and financial position of the
Company.
As of January 1, 2001, the Company was required to adopt SFAS No. 133, as
amended by SFAS No. 138. SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, provides that all derivative instruments be recognized as
either assets or liabilities depending on the rights or obligations under the
contract and that all derivative instruments be measured at fair value. Upon
adoption, the Company was required to record the net accumulated comprehensive
loss related to its investment in Magellan warrants as a charge in the statement
of operations. Based on the value of the warrants on December 31, 2000, the
Company expensed $9.5 million on January 1, 2001 as a cumulative effect of
change in accounting principle. From January 1, 2001 forward, the Company
records changes in the fair value of these warrants in the statement of
operations as investment income (loss). For the year ended December 31, 2001,
the Company recorded changes in the fair value of these warrants, as calculated
using the Black-Scholes pricing model, as investment income of $1.1 million in
the Company's statement of operations. See Note 15.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144 Accounting for the Impairment or Disposal of Long-Lived Assets which
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of. It also supersedes the accounting and
reporting provisions of APB Opinion No. 30, Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions. SFAS No. 144 retains the fundamental provisions of SFAS
No. 121 for recognition and measurement of the impairment of long-lived assets
to be held and used and measurement of the long-lived assets to be disposed of
by sale, but broadens the definition of what constitutes a discontinued
operation and how the results of a discontinued operation are to be measured and
presented. SFAS No. 144 is effective for fiscal years beginning after December
15, 2001. The Company has presented the results from branch locations that were
closed during 2002 in discontinued operations, net of tax. Accordingly, prior
year results have been restated to show discontinued operations for these branch
locations. In addition, due to the Settlement Agreement discussed in Note 3, the
Land Development and Hospitality segments remaining at December 31, 2001 are
presented as discontinued operations in these financial statements.
3. SETTLEMENT AGREEMENT
On June 28, 2001, Crescent Operating and Crescent Equities entered into an
asset and stock purchase agreement (the "Purchase Agreement") in which Crescent
Equities agreed to acquire the Company's hotel
F-134
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operations, land development interests and other assets in exchange for $78.4
million. Crescent Equities also entered into an agreement, subsequently amended
and restated as of October 31, 2001, the Capital Agreement, to make a $10.0
million investment in Crescent Machinery, which, along with capital from a
third-party investment firm, was expected to put Crescent Machinery on solid
financial footing. The transactions contemplated by the Purchase Agreement and
Capital Agreement, called the "Restructuring Proposal" and described in the
Company's Proxy Statement dated October 29, 2001, relating to its 2001 Annual
Meeting of Stockholders, also included the future sale of the Company's 40%
interest in AmeriCold Logistics. The Restructuring Proposal was approved by the
stockholders of the Company on December 6, 2001.
Following the date of the agreements, the results of operations for the
Company's hotel operations and land development interests declined due to the
slowdown in the economy. In addition, Crescent Machinery's results of operations
suffered because of the economic environment and the overall reduction in
national construction levels that has affected the equipment rental and sale
business, particularly post September 11, 2001.
As disclosed in the Annual Meeting Proxy Statement and also in the
Company's quarterly report on Form 10-Q filed November 14, 2001, Crescent
Machinery was in payment default on certain major loans from commercial lending
institutions. Among the conditions to the closing of the transactions included
in the Restructuring Proposal was the consent of Crescent Machinery's secured
lenders, including those institutions. As the Company stated in its press
release regarding the results of the stockholders' meeting, Crescent Machinery
was negotiating with these lenders regarding these defaults and the possible
restructuring of the loans, but the differences in the positions of the lenders
and Crescent Machinery were significant and, as a result, management was not
optimistic that an agreement would be reached with these lenders. Without the
consent of the lenders, it was unlikely that the Restructuring Proposal would be
consummated, and any failure by the Company to consummate the transactions
included in the Restructuring Proposal would greatly impair the Company's
prospects to continue to operate as a going concern.
Crescent Machinery was unable to reach satisfactory agreements with its
lenders regarding restructuring of the loans. As a result, Crescent Real Estate
advised the Company that it believed that substantial additional capital, beyond
the investment called for in the Capital Agreement, would have to be made to
Crescent Machinery to adequately capitalize Crescent Machinery and satisfy
concerns of Crescent Machinery's lenders. Crescent Real Estate announced that it
was "unwilling to make this non-core investment."
On January 23, 2002, Crescent Real Estate terminated the Purchase Agreement
pursuant to which Crescent Real Estate would have acquired the Crescent
Operating hotel operations, the Crescent Operating land development interests
and other assets. On February 4, 2002, Crescent Real Estate terminated the
Capital Agreement relating to its planned investment in Crescent Machinery.
On February 6, 2002, Crescent Machinery Company filed a voluntary petition
under Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for
the Northern District of Texas in Fort Worth, Texas.
On February 13, 2002, Crescent Real Estate delivered default notices to
Crescent Operating relating to approximately $49.0 million of unpaid rent and
approximately $76.2 million of principal and accrued interest due to Crescent
Real Estate under certain secured loans.
On February 14, 2002, Crescent Operating entered into a Settlement
Agreement (the "Settlement Agreement") with Crescent Real Estate. The Settlement
Agreement also provided the basis for Crescent Operating to file a prepackaged
bankruptcy plan that the Company believes will provide for a limited recovery
F-135
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to its stockholders. Pursuant to the Settlement Agreement, Crescent Operating
has transferred the following assets to Crescent Real Estate:
- all of its hotel operations, in lieu of foreclosure, on February 14, 2002
in exchange for a $23.6 million reduction in its rent obligations to
Crescent Real Estate;
- all of its land development interests, through a strict foreclosure, on
February 14, 2002, and March 22, 2002, in exchange for a $40.1 million
reduction of its debt obligations to Crescent Real Estate.
In addition, the Settlement Agreement provides as follows:
- Crescent Real Estate will make sufficient funds available to Crescent
Operating to pay all of Crescent Operating's creditors, other than
Crescent Real Estate, in full and to cover the expenses of implementing
the Settlement Agreement and seeking to confirm the bankruptcy plan. To
facilitate repayment of $15.0 million, plus interest, owed to Bank of
America, Crescent Real Estate has allowed Crescent Operating to secure
the Bank of America debt with a pledge of Crescent Operating's interest
in AmeriCold Logistics, LLC. The bankruptcy plan contemplates that the
AmeriCold Logistics interest will be purchased by a Crescent Real Estate
affiliate for a sufficient amount to repay the Bank of America debt.
- If Crescent Operating's stockholders approve the bankruptcy plan at a
special meeting of stockholders called for that purpose, Crescent Real
Estate will issue common shares of Crescent Equities to the Crescent
Operating stockholders pursuant to the formula contained in the
bankruptcy plan. If the stockholders of Crescent Operating do not accept
the bankruptcy plan, they will not receive a distribution of common
shares of Crescent Real Estate. If the total amount of claims and
expenses paid by Crescent Real Estate in connection with the Crescent
Operating bankruptcy and reorganization transactions equals or exceeds
$16.0 million, the stockholders of Crescent Operating will receive no
common shares of Crescent Real Estate and will not be entitled to
reconsider their approval of the bankruptcy plan. Crescent Operating
stockholders receiving Crescent Real Estate shares will be deemed to have
released all claims they may have against Crescent Operating and Crescent
Real Estate and those acting on their behalf that arose before the
effective date of the plan. If the Crescent Operating stockholders do not
approve the Crescent Operating bankruptcy plan, Crescent Operating will
still seek to have that bankruptcy plan confirmed by the bankruptcy
court. If the bankruptcy court confirms the plan, Crescent Operating
stockholders will not receive common shares of Crescent Equities and will
still cease to be stockholders of Crescent Operating on the date the plan
becomes effective.
- Crescent Operating will cancel all outstanding shares of its common
stock.
- Pursuant to both the Settlement Agreement and the bankruptcy plan,
Crescent Operating will transfer the remaining assets of Crescent
Operating at the direction of Crescent Real Estate.
4. DISCONTINUED OPERATIONS
Pursuant to the Settlement Agreement discussed in Note 3, Crescent
Operating has transferred the following assets to Crescent Real Estate:
- all of its hotel operations, in lieu of foreclosure, on February 14, 2002
in exchange for a $23.6 million reduction in its rent obligations to
Crescent Real Estate; and
- all of its land development interests, through a strict foreclosure, on
February 14, 2002, and March 22, 2002, in exchange for a $40.1 million
reduction of its debt obligations to Crescent Real Estate.
F-136
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The carrying amounts of the major classes of asset and liabilities for the
Hospitality and Land Development segments included in Current and Long-Term
Assets or Liabilities to be transferred pursuant to Settlement Agreement on the
balance sheet as of December 31, 2001, were (in thousands):
LAND
HOSPITALITY DEVELOPMENT TOTAL
----------- ----------- --------
Current Assets...................................... $31,782 $ 62,379 $ 94,161
Long-Term Assets.................................... 12,827 702,167 714,994
Current Liabilities................................. 42,394 511,962 554,356
Long-Term Liabilities............................... 4,750 84,055 88,805
The carrying amounts of the major classes of asset and liabilities for the
Hospitality and Land Development segments included in Current and Long-Term
Assets or Liabilities to be transferred pursuant to Settlement Agreement on the
balance sheet as of December 31, 2000, were (in thousands):
LAND
HOSPITALITY DEVELOPMENT TOTAL
----------- ----------- --------
Current Assets...................................... $33,268 $ 90,451 $123,719
Long-Term Assets.................................... 21,067 554,169 575,236
Current Liabilities................................. 38,897 169,349 208,246
Long-Term Liabilities............................... 11,945 298,889 310,834
On January 1, 2002, the Company adopted Statements of Financial Accounting
Standards SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (See Note 2). SFAS No. 144 broadens the definition of what constitutes a
discontinued operation and how the results of a discontinued operation are to be
measured and presented. The Company has presented the results from branch
locations that were closed during 2002 in discontinued operations, net of tax.
Accordingly, prior year results have been restated to show discontinued
operations for these branch locations. All significant assets and liabilities
were transferred to other branch locations or returned to secured creditors when
the branches were closed.
5. ACQUISITIONS AND DISPOSITIONS
EQUIPMENT SALES & LEASING
Effective March 4, 1999, the Company acquired certain assets of Westco
Tractor & Equipment, Inc. ("Westco"), a company engaged in equipment sales,
leasing and servicing, located in Santa Rosa, California. The purchase price of
approximately $2.6 million was comprised of $0.5 million cash and the assumption
of liabilities of $2.1 million.
Effective July 1, 1999, the Company acquired all of the stock of E. L.
Lester and Company ("Lester"), a company engaged in equipment sales, leasing and
servicing, located in Houston, Texas. The purchase price of approximately $17.2
million was comprised of $8.9 million cash, the issuance of notes payable by
Crescent Operating in the amount of $6.0 million and the assumption of
liabilities of $2.3 million.
Effective July 1, 1999, the Company acquired all of the stock of Solveson
Crane Rental, Inc. ("Solveson"), a company engaged in equipment sales, leasing
and servicing, located in Tracy, California. The purchase price of approximately
$7.3 million was comprised of $3.0 million cash and the assumption of
liabilities of $4.3 million.
In 2002, the Franklin, Indiana, Van Wert, Ohio and Beaumont, Texas Crescent
Machinery locations were closed and their assets were transferred to other
locations for utilization.
F-137
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On February 6, 2002, Crescent Machinery Company filed a voluntary petition
under Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court in
Fort Worth, Texas. CMC intends to continue its normal operations in the sale,
rental and servicing of construction equipment, while attempting to reorganize
and restructure its debt to emerge a financially stronger and more competitive
business. CMC plans to continue with business as usual during this process, but
certain locations will be evaluated and may be sold or closed to improve
efficiency. Crescent Machinery has already moved to close four of its west coast
branches immediately and, subject to Bankruptcy Court approval, plans to close
all its locations outside of Texas and Oklahoma in 2002.
HOSPITALITY
Effective June 19, 1999, the Company entered into a lease with Crescent
Real Estate Funding III, L.P. ("Funding III") for the 389-room Renaissance Hotel
located in Houston, Texas. The lease is for a term of 10 years and provides for
base rent and percentage rent. Under the lease, Funding III may terminate the
lease, at its option, for a period of one year under certain conditions. The
other terms of the lease are generally consistent with those in hospitality
leases with Crescent Partnership.
Effective January 31, 2000, Houston Center Athletic Club Venture ("HCAC")
sold substantially all of its assets to an unrelated party. Through a wholly
owned subsidiary, the Company received proceeds from the sale of $2.4 million
resulting in an approximate $1.5 million gain which was recognized by Crescent
Operating in the first quarter of 2000.
On November 3, 2000, Crescent Equities completed the sale of the Four
Seasons Hotel in Houston and, in connection therewith, exercised its right under
the lease agreement to terminate the lease. As required under the lease
agreement, Crescent Equities paid the Company the fair market value of the
remaining term of the lease in the fourth quarter of 2000 which was agreed to be
$16.6 million and resulted in a gain of $18.3 million (the difference primarily
consisting of the elimination of the straight-line rent liability related to the
lease).
On February 14, 2002, the Company transferred all of its interest in the
Hospitality assets and related liabilities to Crescent Equities as provided in
the Settlement Agreement.
TEMPERATURE CONTROLLED LOGISTICS
Effective March 12, 1999, the Company sold 80% of its 5% interest in the
Temperature Controlled Logistics Partnerships to Crescent Partnership for $13.2
million and received the right to require Crescent Partnership to purchase the
remaining 20% for approximately $3.4 million at any time during the next two
years, subject to compliance with certain regulatory matters. This 5% interest
represented a 2% interest in various corporations and limited liability
companies owned by the Temperature Controlled Logistics Partnerships. Crescent
Operating, through a wholly owned limited liability company, then became a 40%
partner of AmeriCold Logistics, a newly formed partnership, the remaining 60% of
which is owned by Vornado Operating, Inc. ("Vornado Operating"). This
transaction required a capital contribution of approximately $15.5 million from
Crescent Operating. As a result of the restructuring transaction, the operations
formerly associated with the Temperature Controlled Logistics Partnerships are
now conducted by AmeriCold Logistics.
AmeriCold Logistics leases the refrigerated storage facilities used in its
business. The leases, as amended, which commenced in March 1999, generally have
a 15-year term with two five-year renewal options and provide for the payment of
fixed base rent and percentage rent based on revenues AmeriCold Logistics
receives from its customers. Fixed base rent is approximately $137.0 million per
annum through 2003, $139.0 million per annum from 2004 through 2008 and $141.0
million per annum from 2009 through February 28, 2014. Percentage rent for each
lease is based on a specified percentage of revenues in excess of a
F-138
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
specified base amount. The aggregate base revenue amount under five of the six
leases is approximately $350.0 million and the weighted average percentage rate
is approximately 36% through 2003, approximately 38% for the period from 2004
through 2008 and approximately 40% for the period from 2009 through February 28,
2014. The aggregate base revenue amount under the sixth lease is approximately
$32.0 million through 2001, and approximately $26.0 million for the period from
2002 through February 28, 2014, and the percentage rate is 24% through 2001,
37.5% for the period from 2002 through 2006, 40% from 2007 through 2011 and 41%
from 2012 through February 28, 2014. AmeriCold Logistics recognized $156.3
million, $170.6 million and $135.8 million of rent expense for the years ended
December 31, 2001, December 31, 2000 and from March 11, 1999 (acquisition date)
through December 31, 1999, respectively, which includes, effects of
straight-lining, rent to parties other than the Landlord and is before the
waiver of rent discussed below. AmeriCold Logistics is required to pay for all
costs arising from the operation, maintenance and repair of the properties,
including all real estate taxes and assessments, utility charges, permit fees
and insurance premiums, as well as property capital expenditures in excess of
$5.0 million annually. AmeriCold Logistics has the right to defer the payment of
15% of the fixed base rent and all percentage rent for up to three years
beginning on March 11, 1999 to the extent that available cash, as defined in the
leases, is insufficient to pay such rent. AmeriCold Logistics deferred rent
obligations were $25.4 million, $19.0 million and $5.4 million as of December
31, 2001, December 31, 2000 and December 31, 1999, respectively.
Under the terms of the partnership agreement for AmeriCold Logistics,
Vornado Operating, Inc. ("Vornado Operating") has the right to make all
decisions relating to the management and operations of AmeriCold Logistics other
than certain major decisions that require the approval of both the Company and
Vornado Operating. Vornado Operating must obtain Crescent Operating's approval
for specified matters involving AmeriCold Logistics, including approval of the
annual budget, requiring specified capital contributions, entering into
specified new leases or amending existing leases, selling or acquiring specified
assets and any sale, liquidation or merger of AmeriCold Logistics. If the
partners fail to reach an agreement on such matters during the period from
November 1, 2000 through October 30, 2007, Vornado Operating may set a price at
which it commits to either buy Crescent Operating's investment, or sell its own,
and Crescent Operating will decide whether to buy or sell at that price. If the
partners fail to reach agreement on such matters after October 30, 2007, either
party may set a price at which it commits to either buy the other party's
investment, or sell its own, and the other party will decide whether to buy or
sell at that price. Neither partner may transfer its rights or interest in the
partnership without the consent of the other partner. The partnership will
continue for a term through October 30, 2027, except as the partners may
otherwise agree.
During the second quarter of 2000, the Company restructured its business
venture with Vornado Operating, Inc. and Crescent Equities to pursue a
business-to-business internet opportunity relating to the Temperature Controlled
Logistics business. As a result of the restructuring, the Company was relieved
of its previously reported obligation to fund initial startup costs previously
reported, which resulted in net investment income of $1.2 million during the
second quarter of 2000 and left no basis in the investment. In October 2000,
operations were ceased after Transportal failed to secure outside funding. The
closure has no impact on the financial statements of Crescent Operating, and the
Company has no obligation for future cash funding.
On December 1, 2000, the Company exercised a preexisting put option to sell
the remaining 20% of its 5% interest in the Temperature Controlled Logistics
Partnerships to Crescent Partnership for $4.1 million, which resulted in a gain
of $0.7 million recognized in the fourth quarter of 2000.
On February 22, 2001, the AmeriCold Logistics leases were restructured to,
among other things, (i) reduce 2001's contractual rent to $146.0 million ($14.5
million less than 2000's contractual rent), (ii) reduce 2002's contractual rent
to $150.0 million (plus contingent rent in certain circumstances), (iii)
increase the Landlord's share of annual maintenance capital expenditures by $4.5
million to $9.5 million effective January 1, 2000 and (iv) extend the deferred
rent period to December 31, 2003 from March 11, 2002.
F-139
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In the fourth quarter ended December 31, 2001, AmeriCold Logistics reversed
$25.5 million of the rent expense recorded for 2001 resulting from Temperature
Controlled Logistics Partnerships waiving of its rights to collect this portion
of the rent. Further, Temperature Controlled Logistics Partnerships waived $14.3
million of the rent expense recorded by AmeriCold Logistics for 2000 which
AmeriCold Logistics recorded as income in the fourth quarter ended December 31,
2001. The aggregate amount waived by the Landlord of $39.8 million represents a
portion of the rent due under the leases which AmeriCold Logistics deferred in
such years.
On January 23, 2002, the leases with Temperature Controlled Logistics
Partnerships were restructured to consolidate four of the non-encumbered leases
into one non-encumbered lease. The restructuring did not affect total
contractual rent due under the combined leases.
On February 14, 2002, the Company agreed in the Settlement Agreement to
sell its interest in AmeriCold Logistics to an affiliate of Crescent Equities
for approximately $15.0 million to $15.5 million. It is anticipated that the
interest in AmeriCold Logistics will be transferred during 2002.
LAND DEVELOPMENT
Effective September 11, 1998, the Company and Gerald W. Haddock, John C.
Goff and Harry H. Frampton, III (collectively, the "CRDI Sellers") entered into
a partnership agreement (the "Partnership Agreement") to form COPI Colorado.
COPI Colorado's purpose is to hold and manage the voting stock of CRDI (and,
consequently, to manage CRDI) and to invest in shares of Crescent Operating
common stock. In September, 1998, the Company contributed to COPI Colorado $9.0
million in cash in exchange for a 50% general partner interest in COPI Colorado,
and each CRDI Seller contributed to COPI Colorado approximately 667 shares of
CRDI voting stock, which the CRDI Sellers owned individually, in exchange for an
approximately 16.67% limited partner interest in COPI Colorado; as a result and
until January 2000, the Company owned a 50% managing interest in COPI Colorado
and the CRDI Sellers collectively owned a 50% investment interest in COPI
Colorado.
In accordance with an agreement between Gerald Haddock and the Company,
COPI Colorado redeemed the limited partnership interest of Mr. Haddock, the
Company's former Chief Executive Officer and President, in January 2000. COPI
Colorado paid Mr. Haddock approximately $2.8 million for his approximate 16.67%
limited partner interest (determined from an independent appraisal of the value
of COPI Colorado). See Note 16.
On April 29, 1999, a partnership in which CRDI has a 64% economic interest
finalized the purchase of Riverfront Park (previously known as "The Commons"), a
master planned residential development on 23 acres in the Central Platte Valley
near downtown Denver, Colorado, for approximately $25.0 million. The acreage is
in close proximity to several major entertainment and recreational facilities,
including, Coors Field (home to the Major League Baseball's Colorado Rockies),
Elitch Gardens (an amusement park), the new Pepsi Center (home to the National
Hockey League's Colorado Avalanche and the National Basketball Association's
Denver Nuggets) and the new downtown Commons Park. An adjacent 28 acres is
expected to be commercially developed by another company, thus providing a major
mixed-use community adjacent to the lower downtown area of Denver.
On August 27, 1999 and October 27, 1999, the Company sold its investments
in Hillwood and Corporate Arena, respectively, for an aggregate sales price of
approximately $1.4 million. Together, the sales resulted in an approximate $0.2
million gain in 1999.
On September 22, 2000, a limited partnership in which CRDI is a majority
limited partner acquired a majority interest in the Northstar-at-Tahoe resort, a
premier, up-scale ski resort located in North Lake Tahoe, California. The
development is expected to span ten years and include an enhanced core village
with new
F-140
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
restaurants and retail shops, hotels and spas, and an extensive residential
product mix of over 2,000 condominium and townhome units.
In December 2000, CRDI transferred its investment in a real estate company
that specializes in the management of resort properties in Colorado, Utah, South
Carolina and Montana to CDMC II. CDMC II is a newly formed entity having the
same owners, board of directors and officers as CRDI. In connection with that
transfer, CDMC II assumed the indebtedness of CRDI incurred in connection with
that investment, all of which is owed to Crescent Partnership.
On February 14, 2002, the Company transferred all of its interest in the
Land Development assets and related liabilities to Crescent Equities as provided
in the Settlement Agreement.
HEALTHCARE
On September 9, 1999, Crescent Operating, Magellan, Crescent Partnership
and CBHS completed a recapitalization of CBHS and restructuring of the
relationships among the parties. In connection with the restructuring, Magellan
transferred its remaining hospital-based assets (including Charter Advantage,
Charter Franchise Services, LLC, the call center assets, the Charter name and
related intellectual property and certain other assets) to CBHS, and released
CBHS from all accrued and future franchise fees. As a result of the transfer,
Magellan is no longer obligated to provide franchise services to CBHS. Magellan
also transferred 80% of its CBHS common membership interest and all of its CBHS
preferred membership interest to CBHS, leaving Magellan with a 10% common
membership interest. Simultaneously, Crescent Operating reorganized its holdings
leaving Crescent Operating with a 25% common membership interest and 100% of the
preferred membership interest in CBHS, and a limited partnership controlled by
individual officers of Crescent Operating and in which Crescent Operating owns
100% of the economic interests, with a 65% common membership interest in CBHS.
Prior to the restructuring, Crescent Operating and Magellan each held a 50%
common membership interest, and a 50% preferred membership interest in CBHS.
On February 16, 2000, CBHS petitioned for relief under Chapter 11 of the
United States Bankruptcy Code. Under the protection of the bankruptcy court,
CBHS is engaged in efforts to sell and liquidate, in a controlled fashion, all
of its ongoing business. On April 16, 2000, the asset purchase agreement to
which a newly formed, wholly-owned subsidiary of Crescent Operating had agreed
to acquire, for $24.5 million, CBHS's core business assets used in the operation
of 37 behavioral healthcare facilities, subject to certain conditions,
terminated by its own terms because not all of the conditions precedent to
closing had been met by that date.
On December 29, 2000 the Company sold its 25% common interest and its 100%
preferred membership interest in CBHS, and COPI CBHS Holdings sold its 65%
common interest in CBHS, to The Rockwood Financial Group, Inc. ("Rockwood") for
a nominal sum. The Rockwood Financial Group, Inc. is wholly owned by Jeffrey L.
Stevens, Crescent Operating's Chief Executive Officer, Chief Operating Officer
and sole director. The sale of CBHS to the Rockwood was effected as part of the
Company's tax planning strategy. For the year 2000, the Company was faced with a
potentially large minimum tax liability. The Company sold its interest in CBHS
in order to trigger a loss that would significantly reduce, if not eliminate any
minimum tax liability, as CBHS was in bankruptcy and liquidation and the
interest held by the Company was worthless.
OTHER
On March 31, 1999, the Company sold its investment in Hicks-Muse Tate &
Furst II, LP for $8.1 million to an unrelated party. The sale resulted in a $0.3
million gain which was recognized in the first quarter of 1999.
All of the acquisitions were accounted for as purchases and operations have
been included in the consolidated financial statements of the Company from the
date that management took over the operational control of the acquired entity.
F-141
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY & EQUIPMENT, NET
Property and equipment consisted of the following (in thousands):
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- -----------------
Rental equipment (Crescent Machinery)............... $ 88,929 $124,818
Land and improvements............................... 5,193 5,380
Furniture, fixtures, and other equipment............ 2,268 3,327
Transportation equipment............................ 3,438 4,601
-------- --------
99,828 138,126
Less accumulated depreciation....................... (29,734) (27,187)
-------- --------
$ 70,094 $110,939
======== ========
7. INVESTMENTS
Investments consisted of the following (in thousands):
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- -----------------
Investment in Landevco.............................. $ 43,577 $ 44,027
Investment in CRDI projects......................... 8,124 8,170
Investment in CR License............................ 5,012 5,485
Investment in Magellan warrants..................... 4,127 2,992
Investment in AmeriCold Logistics................... 706 4,417
Investment in CR Las Vegas.......................... 450 5,305
-------- --------
61,996 70,396
Less assets to be transferred pursuant to the
Settlement Agreement.............................. (57,163) (62,987)
-------- --------
$ 4,833 $ 7,409
======== ========
Investment income (loss) consisted of the following (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999
----------------- ----------------- -----------------
Change in fair value of Magellan
warrants.......................... $1,135 $ -- $ --
Gain on sale of CSI and CSII........ -- 722 1,493
Hicks-Muse income................... -- -- 239
Gain on sale of Corporate Arena..... -- -- 158
------ ---- ------
$1,135 $722 $1,890
====== ==== ======
F-142
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Equity in earnings (loss) of unconsolidated subsidiaries consisted of the
following (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999
----------------- ----------------- -----------------
Equity in income of Landevco........ $ 35,706 $ 28,250 $ 19,351
Equity in income of TWOC............ 2,494 4,485 886
Equity in income (loss) of
Transportal Network............... -- 375 (395)
Equity in income of TCLP............ -- 40 325
Equity in income of HCAC............ -- 7 296
Equity in income (loss) of CRDI
Projects.......................... (297) 2,217 3,431
Equity in loss of CR License........ (473) (311) (203)
Equity in loss of AmeriCold
Logistics......................... (2,275) (7,374) (3,698)
Equity in loss of CR Las Vegas,
LLC............................... (4,075) (1,709) (944)
-------- -------- --------
31,080 25,980 19,049
Less equity in earnings of entities
to be transferred pursuant to
Settlement Agreement.............. (33,355) (32,932) (22,521)
-------- -------- --------
$ (2,275) $ (6,952) $ (3,472)
======== ======== ========
8. INTANGIBLE ASSETS
Intangible assets, net of accumulated amortization, consisted of the
following (in thousands):
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- -----------------
Goodwill, net -- Crescent Machinery................. $ -- $ 14,011
Goodwill, net -- Rosestar........................... -- 1,202
Goodwill, net -- COPI Colorado/CDMC................. 14,664 45,077
Membership intangible, net -- DMPLP................. 27,488 28,550
-------- --------
42,152 88,840
Less assets to be transferred pursuant to the
Settlement Agreement.............................. (42,152) (74,829)
-------- --------
$ -- $ 14,011
======== ========
Accumulated amortization as of December 31, 2001 and 2000 was $36,344 and
$39,135, respectively.
F-143
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following (in
thousands):
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- -----------------
Accounts payable.................................... $11,103 $11,106
Accrued taxes....................................... 2,008 2,126
Accrued interest.................................... 806 665
Accrued salaries and bonuses........................ 1,144 865
Deferred liabilities................................ -- --
Property management payable......................... -- --
Land development construction accrual............... -- --
Other accrued expenses.............................. 464 598
------- -------
$15,525 $15,360
======= =======
10. LONG-TERM DEBT
The Company's long-term debt facilities are composed of (i) corporate and
wholly owned debt, and (ii) non wholly owned debt. Corporate and wholly owned
debt relates to debt facilities at the Crescent Operating level or owed by
entities which are owned 100% by Crescent Operating. Non wholly owned debt
represents non-recourse debt owed by entities which are consolidated in the
Company's financial statements but are not 100% owned by the Company; the
Company's economic investment in these entities is 6% or less. Following is a
summary of the Company's debt financing (amounts in thousands):
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- -----------------
LONG-TERM DEBT -- CORPORATE AND WHOLLY OWNED SUBSIDIARIES
Equipment notes payable to finance companies due
2002, payments of principal and interest due
monthly, bear interest from 4.5% to 9.5%,
collateralized by equipment (Crescent Machinery)
(in default)...................................... $ 80,683 $115,091
Floor plan debt payable, three to twelve month terms
at 0% interest (Crescent Machinery) (in
default).......................................... 4,190 12,632
Line of credit in the amount of $19.5 million
payable to Crescent Partnership due May 2002,
bears interest at 9%, payments of interest only
due quarterly, cross collateralized and
cross-defaulted with the Company's other borrowing
from Crescent Partnership (Crescent Operating) (in
default).......................................... 22,025 19,949
Line of credit in the amount of $17.2 million
payable to Crescent Partnership due the later of
May 2002 or five years after the last draw (in no
event shall the maturity date be later than June
2007), bears interest at 12%, payments of interest
only due quarterly, collateralized, to the extent
not prohibited by pre-existing arrangements, by a
first lien on the assets which the Company now
owns or may acquire in the future (Crescent
Operating) (in default)........................... 20,205 17,727
F-144
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- -----------------
Note payable to Crescent Partnership due May 2002,
bears interest at 12%, payments of principal and
interest due quarterly, collateralized, to the
extent not prohibited by pre-existing
arrangements, by a first lien on the assets which
the Company now owns or may acquire in the future
(Crescent Operating) (in default)................. 16,238 14,247
Line of credit in the amount of $15.0 million
payable to Bank of America due August 2002, bears
interest at LIBOR plus 1% (3.4% and 7.0% at
December 31, 2001 and December 31, 2000,
respectively), payments of interest only due
monthly (Crescent Operating)...................... 15,000 15,000
Note payable to Crescent Partnership due May 2002,
bears interest at 12%, payments of interest only
due quarterly, collateralized by a first lien on
the assets which the Company now owns or may
acquire in the future (Crescent Operating) (in
default).......................................... 10,572 9,276
Notes payable to the sellers of E. L. Lester and
Company due July 1, 2003, bear interest at 7.5%,
payments of principal and interest due
semi-annually, collateralized by stock of Lester
(Crescent Operating).............................. 2,463 3,957
Note payable to Crescent Partnership maturing August
2003, bears interest at 10.75%, payments of
principal and interest due monthly, collateralized
by a deed of trust for certain personal property
and certain real property (Rosestar).............. 749 1,106
Notes payable to the sellers of Harvey Equipment due
July 31, 2002, bear interest at 8%, payments of
principal and interest due semi-annually (Crescent
Operating)........................................ 324 625
Note payable to Crescent Partnership maturing August
2003, bears interest at 10.75%, payments of
principal and interest due monthly, collateralized
by a deed of trust in certain real property and
certain personal property (Rosestar).............. 203 299
Note payable to Crescent Partnership due November
2006, bears interest at 7.5%, payments of interest
only due annually (Rosestar)...................... 191 191
-------- --------
Total debt -- corporate and wholly owned
subsidiaries................................. 172,843 210,100
-------- --------
LONG-TERM DEBT -- NON WHOLLY OWNED SUBSIDIARIES
Construction loans for various East West Resort
Development partnership projects, maturing through
2003, bear interest from 4.4% to 11.3%, payments
of principal and interest or interest only payable
monthly, collateralized by deeds of trust,
security agreements and a first lien on the
related assets (CRDI)............................. 136,620 62,316
F-145
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- -----------------
Line of credit in the amount of $100.0 million
payable to Crescent Partnership, due September
2008, bearing interest at 11.5%, principal and
interest payments due as distributions are
received, collateralized by CRDI's interests in
East West Resort Development partnerships, East
West Resorts LLC, and other CRDI property
(CRDI)............................................ 72,250 32,155
Junior note payable to Crescent Partnership maturing
December 2010, bears interest at 14%, payments of
principal and interest due quarterly based on
sales proceeds from DMPLP, collateralized by land,
improvements and equipment owned by DMPLP
(DMPLP)........................................... 59,000 59,000
Line of credit in the amount of $56.2 million
payable to Crescent Partnership due August 2004,
bears interest at 11.5% with principal and
interest payments due as distributions from
projects are received, as defined by the
applicable credit agreement, collateralized by
CRDI's interests in East West Resort Development
partnerships, East West Resorts, LLC, and other
CRDI property (CRDI).............................. 48,354 39,342
Line of credit in the amount of $70.0 million
payable to Crescent Partnership due December 2006,
bears interest at 11.5% with principal and
interest payments due as distributions from
projects are received, as defined by the
applicable credit agreement, collateralized by
CRDI's interests in East West Resort Development
partnerships, East West Resorts, LLC, and other
CRDI property (CRDI).............................. 36,571 --
Line of credit in the amount of $50.0 million
payable to National Bank of Arizona due November
2003, bears interest at rates from prime to prime
plus 1% (4.75% to 5.75% and 9.5% to 10.5% at
December 31, 2001 and 2000, respectively),
payments of interest only due monthly,
collateralized by certain land owned by DMPLP,
deeds of trusts on lots sold and home construction
(DMPLP)........................................... 29,910 9,808
Line of credit in the amount of $40.0 million
payable to Crescent Partnership due December 2006,
bears interest at 11.5% with principal and
interest payments due as distributions from
projects are received, as defined by the
applicable credit agreement, collateralized by
CRDI's interests in East West Resort Development
partnerships, East West Resorts LLC, and other
CRDI property (CRDI).............................. 23,396 33,903
Line of credit in the amount of $7.0 million payable
to Crescent Partnership due August 2003, bears
interest at 12% with principal and interest
payments due as distributions are received,
collateralized by a first lien on the assets which
the Company now owns or may acquire in the future
(CRL)............................................. 7,000 7,000
F-146
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- -----------------
Note payable to Crescent Partnership maturing
December 2002, bears interest at 10%, payments of
interest due quarterly (DMPLP).................... 1,000 --
Term note in the amount of $0.2 million payable to
Crescent Partnership, due August 2003, bears
interest at 12% with principal and interest
payments due as distributions are received,
collateralized by a first lien on the assets which
the Company now owns or may acquire in the future
(CRL)............................................. 166 166
Line of credit in the amount of $22.9 million
payable to Crescent Partnership due January 2003,
bears interest at 12.0%, principal and interest
payments due as distributions from projects are
received, as defined by the applicable credit
agreement, collateralized by CRDI's interests in
East West Resort Development partnerships, East
West Resorts LLC, and other CRDI property
(CRDI)............................................ -- 17,379
Note payable to Crescent Partnership maturing June
2005, bears interest at 12%, with payments of
interest only due quarterly and payments of
principal payable annually in accordance with an
increasing amortization schedule, collateralized
by CRDI's interests in East West Resort
Development partnerships, East West Resorts LLC
and other CRDI property (CRDI).................... -- 2,348
-------- --------
Total debt -- non wholly owned subsidiaries.... 414,267 263,417
-------- --------
Total long-term debt........................... $587,110 $473,517
======== ========
Current portion of long-term debt -- CEI............ $ 69,041 $ 8,578
Current portion of long-term debt................... 101,870 53,953
Long-term debt -- CEI, net of current portion....... -- 52,620
Long-term debt, net of current portion.............. 790 93,352
Current and long-term debt to be transferred
pursuant to the Settlement Agreement.............. 415,409 265,014
-------- --------
Total long-term debt................................ $587,110 $473,517
======== ========
The weighted average interest rate on long-term debt at December 31, 2001
was approximately 11.0%. Substantially all of the Company's assets are pledged
as collateral under various debt agreements. Payment of dividends on Crescent
Operating common stock is prohibited under certain of the debt agreements. The
debt agreements contain certain reporting requirements and financial covenants,
including requirements that the Company maintain certain financial ratios. As of
December 31, 2001, the Company had not complied with all debt covenants. The
Company has modified certain debt agreements with Crescent Equities extending
the timing of principal and interest payments until December 31, 2001. Interest
payments accrued but deferred as of December 31, 2001 of $6.4 million is
included in Accounts payable and accrued expenses -- CEI within the Company's
consolidated financial statements. On February 13, 2002, the Company received
notice from CEI that it was in default of its loan agreements covering
approximately $76.2 million of principal and accrued interest. On February 14,
2002, the Company entered into the Settlement Agreement whereby the Company
transferred to Crescent Equities its assets related to the hospitality business
for extinguishment of $23.6 million in deferred rent and allowed CEI to
foreclose on its equity interests in the residential land development entities
for extinguishment of indebtedness of $40.1 million in notes payable. Along with
the transfer of the
F-147
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
equity interests in land development, all non wholly owned debt, totaling $414.3
million at December 31, 2001, will no longer be reported in the Company's
financial statements -- (See Note 3 -- Settlement Agreement).
As of December 31, 2001, combined aggregate principal maturities of all
long-term debt, excluding debt transferred pursuant to the Settlement Agreement,
were as follows (in thousands):
2002........................................................ $170,911
2003........................................................ 790
--------
Total............................................. $171,701
========
11. SHAREHOLDERS' EQUITY
COMMON STOCK
The Company's authorized capital stock consists of 10.0 million shares of
preferred stock, par value $0.01 per share and 22.5 million shares of common
stock, par value $0.01 per share. As of December 31, 2001, there were 11,490,015
shares of common stock issued and no shares of preferred stock issued.
PREFERRED SHARE PURCHASE RIGHTS
The Board of Directors has adopted a rights plan that provides that each
holder of Crescent Operating common stock also receives a right to purchase from
the Company one-hundredth of a share of Series A Junior Preferred Stock, par
value $0.01, at a price of $5.00 per share, subject to adjustment. These rights
can only be exercised in certain events and are intended to provide the Company
certain anti-takeover protection. The Company had reserved 225,000 shares of
Series A Junior Preferred Stock for this plan.
WARRANTS
In conjunction with the acquisition of a 50% member interest in CBHS, the
Company issued warrants to acquire 282,508 shares of Crescent Operating common
stock at an exercise price of $18.29 per share.
TREASURY STOCK
As of December 31, 2001, COPI Colorado had purchased 1,102,530 million
shares of Crescent Operating common stock, which has been recorded as treasury
stock, at a total purchase price of approximately $4.3 million. The average
price paid, including broker commissions, was $3.88 per share.
On February 13, 2002, in anticipation of the Company's entering into the
Settlement Agreement (See Note 3 -- Settlement Agreement) -- pursuant to which
the Company transferred its 60% general partnership interest in COPI Colorado to
Crescent Partnership -- the partners of COPI Colorado caused it to distribute
among its partners, in accordance with their respective ownership percentage,
all of the shares of the Company's stock it held. Messrs. Goff and Frampton each
received 220,506 shares, while the Company received 661,518 shares.
12. STOCK OPTION PLANS
The Company has two stock incentive plans, the 1997 Amended Stock Incentive
Plan (the "Amended Plan") and the 1997 Management Stock Incentive Plan (the
"Management Plan").
The Amended Plan, effective May 8, 1997, initially established the maximum
number of options and/or shares of restricted stock that the Company may grant
at 1.0 million shares. The maximum aggregate number of shares issuable under the
Amended Plan shall increase automatically on January 1 of each year by an amount
equal to 8.5% of the increase in the number of shares of common stock
outstanding since January 1 of
F-148
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the preceding year, subject to certain adjustment provisions. As of December 31,
2001, the number of shares the Company may have outstanding under the Amended
Plan is 1,019,694. All stock options granted by the Company are out-of-the-money
and will not have value under the Settlement Agreement or in bankruptcy.
On May 13, 1997, each holder of shares of restricted stock in Crescent
Equities or options in Crescent Equities or Crescent Partnership was granted an
equivalent number of shares of restricted stock or options in Crescent
Operating, based on a ratio of one share of restricted stock or option to
purchase Crescent Operating common stock for each 10 shares of restricted stock
in Crescent Equities or options for Crescent Equities common shares, and one
option to purchase Crescent Operating common stock for each 5 options for units
in Crescent Partnership. Under the Amended Plan, the Company has granted 857,185
options and 10,000 restricted shares, net of forfeitures, through December 31,
2001.
The Management Plan provides that the maximum number of options and/or
shares of restricted stock that the Company may grant to employees, officers,
directors or consultants is 1.0 million shares. Under the Management Plan, the
Company has granted 485,000 options and 81,328 restricted shares, net of
forfeitures through December 31, 2001.
Under both Plans, options are granted at a price no less than the market
value of the shares on the date of grant, vest over a period determined by the
Board of Directors, and expire ten years from the date of grant. The Company has
reserved 586,181 shares for future options, warrants and restricted shares.
A summary of the stock option status of the Company's Amended and
Management Plans as of December 31, 2001 and changes during the periods then
ended is presented in the table below:
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
--------- ----------------
Outstanding as of December 31, 1998....................... 864,344 $2.52
Granted................................................. 615,400 3.13
Exercised............................................... (7,210) 0.99
Forfeited............................................... (126,342) 2.20
--------- -----
Outstanding as of December 31, 1999....................... 1,346,192 2.84
Granted................................................. -- --
Exercised............................................... -- --
Forfeited............................................... (26,358) 3.92
--------- -----
Outstanding as of December 31, 2000....................... 1,319,834 2.81
Granted................................................. -- --
Exercised............................................... -- --
Forfeited............................................... (49,210) 3.82
--------- -----
Outstanding as of December 31, 2001....................... 1,270,624 $2.77
========= =====
Exercisable as of December 31, 2001....................... 1,270,624 $2.77
Exercise prices, number of shares and the weighted-average remaining
contractual life ("Average Life") at December 31, 2001 were as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------- ----------------------
EXERCISE PRICE NUMBER AVERAGE LIFE NUMBER AVERAGE LIFE
-------------- ------- ------------ ------- ------------
$0.99...................................... 717,034 3 years 717,034 3 years
$2.50 - 5.44............................... 485,000 8 years 485,000 8 years
$15.50 - 20.50............................. 68,600 6 years 68,600 6 years
F-149
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company applies APB No. 25 in accounting for options granted pursuant
to the Amended Plan and the Management Plan (collectively, the "Plans").
Accordingly, no compensation cost has been recognized for the Plans. Had
compensation cost for the Plans been determined based on the fair market value
at the grant dates for awards under the Plans consistent with SFAS No. 123, the
Company's net income (loss) and earning (loss) per share would have been the
following pro forma amounts (in thousands). The following pro forma amounts may
not be representative of the effects on reported net income for future years.
AS REPORTED PRO FORMA
----------- ----------------------------
2001 2001 2000 1999
----------- -------- ------- -------
Net loss (in thousands)..................... $(78,133) $(78,906) $(3,924) $(3,004)
Loss per share.............................. $ (7.55) $ (7.63) $ (0.38) $ (0.29)
The Company did not grant any options during the years ended December 31,
2001 and 2000. For the year ended December 31, 1999, the weighted average grant
date fair value of each option granted was $2.29.
The fair value of each option was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions for 1999: risk-free interest rates of 5.6%; expected volatility of
91.6%; expected dividend yields of 0%; expected lives of five years.
13. EARNINGS PER SHARE:
Earnings (loss) per share ("EPS") is calculated as follows (in thousands,
except per share data):
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999
------------------ ------------------ ------------------
Weighted average shares (basic).... 10,344 10,326 10,363
Effect of Dilutive Securities:
Stock Options...................... -- -- --
-------- ------- -------
Weighted average shares
(diluted)........................ 10,344 10,326 10,363
======== ======= =======
Loss from Continuing Operations.... $(30,100) $ (922) $(1,594)
-------- ------- -------
Basic and diluted EPS before
discontinued operations and
accounting change................ $ (2.91) $ (0.09) $ (0.15)
-------- ------- -------
Loss from Discontinued
Operations....................... $(38,524) $(2,768) $(1,101)
Basic and diluted EPS from
Discontinued Operations.......... $ (3.72) $ (0.27) $ (0.11)
-------- ------- -------
Accounting Change.................. $ (9,509) $ -- $ --
Basic and diluted EPS from
Accounting Change................ $ (0.92) $ -- $ --
-------- ------- -------
Net loss........................... $(78,133) $(3,690) $(2,695)
======== ======= =======
Diluted EPS........................ $ (7.55) $ (0.36) $ (0.26)
======== ======= =======
The Company had 1,270,624, 1,319,834 and 1,344,792 options in 2001, 2000
and 1999, respectively, which were not included in the calculation of diluted
EPS as they were anti-dilutive.
F-150
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. INCOME TAXES
The components of the Company's income tax provision (benefit) were as
follows (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999
----------------- ----------------- -----------------
CONTINUING OPERATIONS
Current:
Federal........................... $ -- $ -- $ 247
State............................. -- -- 35
------- -------- --------
-- -- 282
------- -------- --------
Deferred:
Federal........................... (7,517) (813) (8,211)
State............................. (1,074) (116) (1,173)
------- -------- --------
(8,591) (929) (9,384)
------- -------- --------
Total income tax benefit....... $(8,591) $ (929) $ (9,102)
======= ======== ========
DISCONTINUED OPERATIONS
Current:
Federal........................... $ 3,547 $ 21,394 $ 18,460
State............................. 506 2,551 2,423
------- -------- --------
4,053 23,945 20,883
------- -------- --------
Deferred:
Federal........................... 1,701 (9,860) (13,345)
State............................. 244 (1,409) (1,907)
------- -------- --------
1,945 (11,269) (15,252)
------- -------- --------
Total income tax provision..... $ 5,998 $ 12,676 $ 5,631
======= ======== ========
COMBINED
Current:
Federal........................... $ 3,547 $ 21,394 $ 18,707
State............................. 506 2,551 2,458
------- -------- --------
4,053 23,945 21,165
------- -------- --------
Deferred:
Federal........................... (5,816) (10,673) (21,556)
State............................. (830) (1,525) (3,080)
------- -------- --------
(6,646) (12,198) (24,636)
------- -------- --------
Total income tax provision
(benefit).................... $(2,593) $ 11,747 $ (3,471)
======= ======== ========
F-151
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reconciliations of the federal statutory income tax rate to the effective
tax rate were as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999
-------------------- -------------------- --------------------
Federal statutory income tax rate..... 35.0% 35.0% 35.0%
State income taxes, net of federal tax
benefit............................. 5.0 5.0 5.0
Minority interests.................... 4.1 (6.8) (23.1)
Change in valuation allowance......... (34.2) -- (47.1)
Impairment/amortization............... (7.2) -- --
Net operating loss benefit............ -- -- (8.5)
Other, net............................ 1.2 1.3 (5.0)
----- ---- -----
Effective tax rate.................. 3.9% 34.5% (43.7)%
===== ==== =====
Significant components of the Company's deferred tax assets and liabilities
were as follows (in thousands):
DECEMBER 31, 2001
------------------------------------
CONTINUED DISCONTINUED
OPERATIONS OPERATIONS COMBINED
---------- ------------ --------
Deferred tax assets:
Equity in losses of subsidiaries.................. $ -- $ 1,009 $ 1,009
Deferred revenue/rentals.......................... (167) 29,868 29,701
Accrued expenses.................................. (330) 1,085 755
Inventories....................................... (700) 1,981 1,281
Net operating loss carryforwards.................. 44,683 4,478 49,161
Other............................................. 3,756 516 4,272
-------- -------- --------
Deferred tax assets............................ 47,242 38,937 86,179
-------- -------- --------
Deferred tax liabilities:
Prepaid expenses.................................. 1,108 (2,216) (1,108)
Depreciable property and equipment................ (5,009) (5,498) (10,507)
Real estate....................................... -- (10,981) (10,981)
-------- -------- --------
Deferred tax liabilities....................... (3,901) (18,695) (22,596)
-------- -------- --------
Valuation allowance................................. (18,626) (4,328) (22,954)
-------- -------- --------
Net deferred tax assets........................ $ 24,715 $ 15,914 $ 40,629
======== ======== ========
F-152
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000
------------------------------------
CONTINUED DISCONTINUED
OPERATIONS OPERATIONS COMBINED
---------- ------------ --------
Deferred tax assets:
Equity in losses of subsidiaries.................. $ (63) $ 880 $ 817
Deferred revenue/rentals.......................... 2,926 30,754 33,680
Accrued expenses.................................. -- 3,559 3,559
Inventories....................................... -- 894 894
Net operating loss carryforwards.................. 24,458 1,823 26,281
Other............................................. 75 8 83
-------- -------- --------
Deferred tax assets............................ 27,396 37,918 65,314
-------- -------- --------
Deferred tax liabilities:
Prepaid expenses.................................. 3,306 (4,400) (1,094)
Depreciable property and equipment................ (20,181) -- (20,181)
Real estate....................................... -- (9,650) (9,650)
-------- -------- --------
Deferred tax liabilities....................... (16,875) (14,050) (30,925)
-------- -------- --------
Valuation allowance................................. (406) -- (406)
-------- -------- --------
Net deferred tax assets........................ $ 10,115 $ 23,868 $ 33,983
======== ======== ========
At December 31, 2001, the Company had net operating loss carryforwards
("NOL") of approximately $122.0 million, which will expire after years 2002
through 2021. A portion of this NOL was acquired subject to restrictive tax
limitations. Due to the anticipated restructuring of the Company (See Note
3 -- Settlement Agreement), significant amounts of taxable income are
anticipated to be realized in future years due to cancellation of indebtedness
and other transactions. Management has not been able to conclude that it is more
likely than not that all of the deferred tax asset will be realized.
Accordingly, management has established a $23.0 million valuation reserve for
that portion of the deferred tax asset which may not be realized upon completion
of the anticipated restructuring or may be subject to capital loss or other
limitations. The investments held by the Company that are considered to be
Controlled Subsidiary Transactions have entered into agreements to elect to
become Taxable REIT Subsidiaries ("TRS") of Crescent Equities for federal income
tax reporting purposes effective January 1, 2001.
15. MAGELLAN WARRANTS
In connection with the transaction in which Crescent Operating acquired its
50% membership interest in CBHS, the Company purchased, for $12.5 million,
warrants to acquire 1,283,311 shares of Magellan common stock for an exercise
price of $30.00 per share. The Magellan warrants are exercisable in varying
increments over the period which began on May 31, 1998 and ends on May 31, 2009.
Prior to January 1, 2001, the fair value of theses warrants, using the
Black-Scholes pricing model, would be determined and the resulting difference
between the cost and the estimated fair value of the warrants was included in
the consolidated financial statements as accumulated comprehensive income (loss)
for the period ended. As of January 1, 2001, the Company was required to adopt
SFAS No. 133, as amended by SFAS No. 138. Upon adoption, the Company was
required to record the net accumulated comprehensive loss related to its
investment in Magellan warrants as a charge in the statement of operations.
Based on the value of the warrants on
F-153
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2000, the Company expensed $9.5 million on January 1, 2001 as a
cumulative effect of change in accounting principle. From January 1, 2001
forward, the Company recorded changes in the fair value of these warrants in the
statement of operations as investment income (loss). For the year ended December
31, 2001, the Company recorded changes in the fair value of these warrants, as
calculated using the Black-Scholes pricing model, as investment income of $1.1
million in the Company's statement of operations. See Note 2 for the discussion
of the change in accounting for the Magellan warrants effective January 1, 2001
as required under SFAS No. 133.
The Company transferred the Magellan warrants to Crescent Machinery in 1999
as a contribution to capital. On February 6, 2002, Crescent Machinery filed for
protection under the federal bankruptcy laws. With the commencement of Crescent
Machinery's bankruptcy proceedings, the Magellan warrants became part of
Crescent Machinery's estate, subject to the claims of creditors. The Magellan
warrants are not proposed to be treated in any manner in connection with the
Company's bankruptcy plan, and, instead, will be part of the resolution of the
Crescent Machinery bankruptcy.
16. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
Prior to February 14, 2002, the Hospitality segment leased eight hotel and
resort properties (the "Hospitality Properties") from Crescent Equities.
Generally, the leases were on a triple net basis during 120-month terms and
expire from December 2004 to June 2009. The leases provide for the payment to
Crescent Partnership or its subsidiaries of (i) base rent, with periodic rent
increases, (ii) percentage rent based on a percentage of gross room revenues
above a specified amount, and (iii) a percentage of gross food and beverage
revenues above a specified amount. Base rental expense under the leases is
recognized on a straight-line basis over the terms of the respective leases. The
Land Development segment leases office space, model homes, housekeeping and
laundry facilities and certain equipment. Pursuant to the Settlement Agreement,
the Company transferred its hospitality assets and equity interests in land
development to Crescent Equities in February and March 2002, therefore the
future lease obligations related to these assets and interest are eliminated
(See Note 3 -- Settlement Agreement). The Equipment Sales and Leasing segment
leases rental delivery and service trucks and land and buildings at various
locations.
Total lease expense for all segments, including lease expense for
Hospitality and Land Development segments which are reflected in discontinued
operations, during the periods ended December 31, 2001, 2000 and 1999 was
approximately $66.6 million, $74.2 million and $62.5 million, respectively.
Included in lease expense was percentage rent for the Hospitality Properties for
the periods ended December 31, 2001, 2000 and 1999 of $14.2 million, $19.0
million and $14.7 million, respectively. Future minimum lease payments due under
such remaining leases as of December 31, 2001, not including discontinued
operations, were as follows (in thousands):
2002...................................................... $ 3,695
2003...................................................... 3,155
2004...................................................... 2,734
2005...................................................... 1,215
2006...................................................... 303
Thereafter................................................ 450
-------
$11,552
=======
F-154
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONTINGENCIES
CBHS became the subject of Chapter 11 bankruptcy proceedings by filing a
voluntary petition on February 16, 2000, in United States Bankruptcy Court for
the District of Delaware. Although CBHS is not a subsidiary of Crescent
Operating, Crescent Operating did own a majority (90%) economic interest in
CBHS, until December 29, 2000.
As stated above under "Charter Behavioral Health Systems, LLC", as a result
of the liquidation of CBHS through bankruptcy, the equity investment in CBHS
became worthless. On December 29, 2000, as part of Crescent Operating's tax
planning, Crescent Operating sold its 25% common interest and its 100% preferred
membership interest in CBHS, and COPI CBHS Holdings sold its 65% common interest
in CBHS to The Rockwood Financial Group, Inc. for a nominal sum.
Crescent Operating held no funded or liquidated claims against the estate
of CBHS. Crescent Operating filed proofs of claim against CBHS as a protective
matter for potential indemnification or contribution for third party lawsuits
and claims where Crescent Operating is a named defendant with CBHS, such as
lawsuits based upon alleged WARN Act violations purported to have been committed
by CBHS and/or its subsidiaries in closing behavioral health care facilities in
1999 and 2000. The only such lawsuits that have been brought against Crescent
Operating arise from WARN Act claims. In connection with a settlement entered
into among Crescent Operating, CBHS, the WARN Act plaintiffs, and others,
Crescent Operating's indemnification and contribution claims against CBHS based
on such lawsuits have been resolved. No other claims or lawsuits have been
asserted against Crescent Operating that would give rise to indemnification or
contribution claims by Crescent Operating against CBHS. In the event that, prior
to the bar date for asserting claims against Crescent Operating in its
bankruptcy case, no other claims or lawsuits are asserted against Crescent
Operating that would give rise to indemnification or contribution claims by
Crescent Operating against CBHS, Crescent Operating's claims for indemnification
or contribution in the CBHS case will be disallowed. If any such lawsuits or
claims are brought, Crescent Operating will pursue its indemnification and
contribution claims in the CBHS case as appropriate.
To date, several lawsuits, all of which seek class action certification,
have been filed against CBHS alleging violations of the WARN Act in the closing
of certain healthcare facilities in 1999 and 2000. Of those lawsuits, three also
named Crescent Operating as a defendant, but all three of those suits have since
been dismissed. An additional suit seeking similar relief was also filed against
Crescent Operating and Crescent Partnership, as well as CBHS.
A global Stipulation of Settlement of all WARN matters was reached and
filed with the United States District Court and Bankruptcy Court for the
District of Delaware by the WARN Act claimants, CBHS, Crescent Operating,
Crescent Partnership and the Creditors Committee in the CBHS case. The
settlement was approved by the District Court by order dated March 18, 2002. As
it applies to Crescent Operating, the settlement provides that either Crescent
Operating or Crescent Partnership was required to deposit into escrow $500,000
for the benefit of the WARN Act claimants and, upon the settlement becoming
final, Crescent Operating will receive a complete release for all WARN Act
claims and any other claims in the CBHS case other than potential claims from
those CBHS employees who have opted out of the Settlement. It appears that a
maximum of three such employees have opted out and none have made claims against
Crescent Operating to date. Crescent Partnership has paid the $500,000 into
escrow. This payment will not be included as an expense for the purposes of
calculating the aggregate value of the Crescent Real Estate shares to be
distributed to the Crescent Operating shareholders.
In accordance with an agreement between Gerald Haddock and the Company,
COPI Colorado redeemed the limited partnership interest of Mr. Haddock, the
Company's former Chief Executive Officer and President, in January 2000, COPI
Colorado paid Mr. Haddock approximately $2.6 million for his approximate 16.67%
limited partner interest (determined from an independent appraisal of the value
of COPI Colorado).
F-155
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Mr. Haddock has challenged the valuation performed by the independent appraiser
and the procedures followed by the Company with respect to the redemption and
valuation process. The Company believes that it has complied with all terms of
the agreement as it relates to the liquidation of Mr. Haddock from the
partnership. In February 2001, the Company filed a lawsuit seeking a declaratory
judgment to assist in resolution of the Company's dispute with Mr. Haddock. This
lawsuit has been settled and the order dismissing the suit was filed on January
2, 2002.
The Company is a party to other legal actions related to certain of its
investments. Material losses related to such cases have not been deemed probable
by management after consultation with outside counsel, and no financial
statement accruals have been made. Based on the status of the cases, the Company
is unable to determine a range of possible losses, if any, that might be
incurred in connection with this litigation. The Company believes it is not
probable that the ultimate resolution of this litigation will have a material
adverse effect on its financial position and results of operations.
17. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is summarized as follows (in thousands):
DECEMBER 31,
----------------------------
2001 2000 1999
------- ------- --------
Interest paid, net of amounts capitalized.............. $28,564 $29,729 $ 27,422
======= ======= ========
Income taxes paid...................................... $19,468 $17,293 $ 24,755
======= ======= ========
Non-cash investing and financing activities:
In conjunction with the acquisitions by the Company,
liabilities were assumed as follows:
Fair value of assets acquired..................... $ -- $ -- $ 43,178
Stock issued for the acquisitions................. -- -- --
Notes payable issued for acquisitions............. -- -- (6,000)
Cash paid for the acquisitions.................... -- -- (28,511)
------- ------- --------
Liabilities assumed............................. $ -- $ -- $ 8,667
======= ======= ========
Decrease in intangible and deferred income for amount
associated with sales of club memberships............ $ 1,062 $ 6,387 $ 7,172
======= ======= ========
18. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable,
inventories, notes receivable, prepaid expenses and other current assets, and
accounts payable and accrued expenses approximates fair value as of December 31,
2001 because of the short maturity of these instruments. Similarly, the carrying
value of line of credit borrowings approximates fair value as of that date
because the applicable interest rates fluctuate based on published market rates.
In the opinion of management, without consideration of the financial position of
the Company, the interest rates associated with the long-term debt approximates
the market interest rates for this type of instrument, and as such, the carrying
values approximate fair value at December 31, 2001.
19. BUSINESS SEGMENT INFORMATION
Crescent Operating's assets and operations are located entirely within the
United States and are comprised of four business segments: (i) Equipment Sales
and Leasing, (ii) Hospitality, (iii) Temperature Controlled Logistics and (iv)
Land Development. In addition to these four business segments, the Company
F-156
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
has grouped its investment in Magellan warrants, its previous investment in
CBHS, interest expense on corporate debt and general corporate overhead costs
such as legal and accounting costs, insurance costs and corporate salaries as
"Other" for segment reporting purposes. Because the Company sold its investment
in CBHS in 2000 and did not recognize income or loss from CBHS in 1999 or 2000,
the Company no longer reports its operations related to CBHS as a separate
segment. The Company uses net income as the measure of segment profit or loss.
The Equipment Sales and Leasing segment is engaged in the sale, leasing and
service of construction equipment and accessories to the construction and
utility industries located primarily in seven states. Crescent Machinery's
leasing activities consist principally of leasing construction equipment and
accessories under various leases, which are primarily short-term operating
leases.
Prior to February 14, 2002, the Hospitality segment generally consisted of
the operations of the Hospitality Properties. Each of such properties is owned
by Crescent Partnership or its affiliates and all were leased to subsidiaries of
the Company under long term leases. In addition to these properties, the Company
also has other investments in CRL.
The Temperature Controlled Logistics segment consists primarily of a 40%
interest in the operations of AmeriCold Logistics. Prior to reorganization of
this segment effective March 12, 1999, this segment consisted of a 2% economic
interest in the operations of The Temperature Controlled Logistics Partnerships.
AmeriCold Logistics is the largest operator of public refrigerated storage space
in the country in terms of public storage space operated.
Prior to February 14, 2002, the Land Development segment consisted of (i) a
4.65% economic interest in Desert Mountain, a master planned, luxury residential
and recreational community in northern Scottsdale, Arizona, (ii) a 52.5% general
partner interest in Woodlands Operating, which provides management, advisory,
landscaping and maintenance services to entities affiliated with Crescent
Operating and Crescent Equities, (iii) a 2.625% economic interest in Landevco,
which owns approximately 6,600 acres for commercial and residential development
as well as a realty office, an athletic center, and an interest in a title
company and (iv) a 6% economic interest in CRDI, whose operations consist
principally of investing in partnerships and other entities that directly or
indirectly develop and manage residential and resort properties (primarily in
Colorado) or provide related services.
In February and March 2002, pursuant to the Settlement Agreement, the
Company's Hospitality and Land Development segments were transferred to Crescent
Partnership. Accordingly, their results are reflected in discontinued operations
as well as the operations of the CMC branches closed in 2002. The Company's
remaining business segments' information is summarized as follows (in
thousands):
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999
----------------- ----------------- -----------------
Revenues:
Equipment Sales and Leasing....... $ 67,521 $ 69,976 $ 62,311
Hospitality....................... -- 32,615 35,304
Temperature Controlled
Logistics...................... -- -- --
Other............................. -- -- --
-------- -------- --------
Total revenues............ $ 67,521 $102,591 $ 97,615
F-157
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999
----------------- ----------------- -----------------
======== ======== ========
Income (loss) from operations:
Equipment Sales and Leasing....... $(15,924) $ 1,266 $ 3,512
Hospitality....................... -- 1,931 1,550
Land Development.................. -- -- (18)
Temperature Controlled
Logistics...................... (21) (27) (2)
Other............................. (6,948) (4,197) (2,602)
-------- -------- --------
Total (loss) income from
operations.............. $(22,893) $ (1,027) $ 2,440
======== ======== ========
Depreciation and amortization:
Equipment Sales and Leasing....... $ 19,193 $ 18,254 $ 15,041
Temperature Controlled
Logistics...................... -- -- --
Other............................. (75) (71) (133)
-------- -------- --------
Total depreciation and
amortization............ $ 19,118 $ 18,183 $ 14,908
======== ======== ========
Investment income (loss):
Equipment Sales and Leasing....... $ -- $ -- $ --
Land Development.................. -- -- 158
Temperature Controlled
Logistics...................... -- 722 1,493
Other............................. 1,135 -- 239
-------- -------- --------
Total investment income
(loss).................. $ 1,135 $ 722 $ 1,890
======== ======== ========
Equity in (loss) income of
unconsolidated subsidiaries:
Equipment Sales and Leasing....... $ -- $ -- $ --
Hospitality....................... -- 7 296
Temperature Controlled
Logistics...................... (2,275) (6,959) (3,768)
Other............................. -- -- --
-------- -------- --------
Total investment income
(loss).................. $ (2,275) $ (6,952) $ (3,472)
======== ======== ========
Interest expense, net:
Equipment Sales and Leasing....... $ 4,125 $ 5,672 $ 3,497
Temperature Controlled
Logistics...................... -- -- --
Other............................. 9,116 8,012 8,038
-------- -------- --------
Total interest expense,
net..................... $ 13,241 $ 13,684 $ 11,535
F-158
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999
----------------- ----------------- -----------------
======== ======== ========
Income tax expense (benefit)
Equipment Sales and Leasing....... $ (1,816) $ (1,775) $ (207)
Hospitality....................... -- 8,234 739
Temperature Controlled
Logistics...................... (919) (2,960) (1,480)
Other............................. (5,856) (4,428) (8,154)
-------- -------- --------
Total income tax
(benefit)............... $ (8,591) $ (929) $ (9,102)
======== ======== ========
Capital expenditures:
Equipment Sales and Leasing....... $ 21,064 $ 48,228 $ 58,107
Temperature Controlled
Logistics...................... -- -- --
Other............................. 20 37 51
-------- -------- --------
Total capital
expenditures............ $ 21,084 $ 48,265 $ 58,158
======== ======== ========
Investment in unconsolidated
subsidiaries:
Equipment Sales and Leasing....... $ -- $ -- $ --
Temperature Controlled
Logistics...................... 706 4,417 14,859
Other............................. 4,127 2,992 2,374
-------- -------- --------
Total investment in
unconsolidated
subsidiaries............ $ 4,833 $ 7,409 $ 17,233
======== ======== ========
Identifiable assets:
Equipment Sales and Leasing....... $ 93,647 $192,151 $184,964
Temperature Controlled
Logistics...................... 6,015 8,829 16,337
Hospitality....................... 40,416 44,810 44,805
Land Development.................. 761,984 643,514 535,911
Other............................. 43,342 21,224 13,636
-------- -------- --------
Total identifiable
assets.................. $945,404 $910,528 $795,653
======== ======== ========
20. RELATED PARTY TRANSACTIONS
INTERCOMPANY AGREEMENT
Generally, Crescent Operating is involved with Crescent Equities in two
types of transactions: "Lessee Transactions" and "Controlled Subsidiary
Transactions". Lessee Transactions are those in which Crescent Operating enters
into a transaction to lease and operate real property that is owned by Crescent
Partnership but which cannot be operated by Crescent Partnership due to Crescent
Equities status as a REIT. Controlled Subsidiary Transactions are those in which
Crescent Operating invests alongside Crescent Partnership in acquisitions where
Crescent Operating owns all of the voting stock, and Crescent Partnership owns
all of the non-voting stock of a corporate acquisition vehicle which in turn
acquires a target business which cannot be operated by Crescent Partnership due
to Crescent Equities' status as a REIT. The voting stock represents the control
of the entity being purchased and due to its status as a REIT, up until the REIT
Modernization Act which became effective January 1, 2001, Crescent Equities
could not have such ownership.
F-159
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Crescent Operating and Crescent Partnership have entered into the
Intercompany Agreement to provide each other with rights to participate in the
types of transactions mentioned above. The Intercompany Agreement provides,
subject to certain terms, that Crescent Partnership will provide Crescent
Operating with a right of first refusal to become the lessee of any real
property acquired by Crescent Partnership if Crescent Partnership determines
that, consistent with Crescent Equities' status as a REIT, it is required to
enter into a "master" lease arrangement. Crescent Operating's right of first
refusal under the Intercompany Agreement is conditioned upon the ability of
Crescent Operating and Crescent Partnership to negotiate a mutually satisfactory
lease arrangement and the determination of Crescent Partnership, in its sole
discretion, that Crescent Operating is qualified to be the lessee. In general, a
master lease arrangement is an arrangement pursuant to which an entire property
or project (or a group of related properties or projects) is leased to a single
lessee. If a mutually satisfactory agreement cannot be reached within a 30-day
period (or such longer period to which Crescent Operating and Crescent
Partnership may agree), Crescent Partnership may offer the opportunity to
others.
Under the Intercompany Agreement, Crescent Operating has agreed not to
acquire or make (i) investments in real estate which, for purposes of the
Intercompany Agreement, includes the provision of services related to real
estate and investment in hotel properties, real estate mortgages, real estate
derivatives or entities that invest in real estate assets or (ii) any other
investments that may be structured in a manner that qualifies under the federal
income tax requirements applicable to REITs. Crescent Operating has agreed to
notify Crescent Partnership of, and make available to Crescent Partnership,
investment opportunities developed by Crescent Operating, or of which Crescent
Operating becomes aware but is unable or unwilling to pursue.
Effective February 14, 2002, the Company entered into the Settlement
Agreement with Crescent Equities. The Settlement Agreement provided for the
cancellation of the Intercompany Agreement.
OTHER TRANSACTIONS
Prior to February 14, 2002, the Company leased full service hotels and
destination health and fitness resorts from Crescent Partnership, or other
subsidiaries of Crescent Equities, under operating leases. Crescent Partnership
has agreed to fund all capital expenditures relating to furniture, fixtures and
equipment reserves required under applicable management agreements on all
properties except for Canyon Ranch-Tucson. Total rent expense related to these
leases totaled approximately $55.7 million, $63.3 million and $54.0 million for
the years ended December 31, 2001, 2000 and 1999, respectively.
The Company had various debt instruments payable to Crescent Partnership
with an aggregate amount outstanding at December 31, 2001 and 2000 of $317.9
million and $259.7 million, respectively. See Note 10 for additional
information.
Included in notes receivable is a note from Landevco payable to LandCo in
the amount of $10.6 million as of December 31, 2001. The note bears interest at
15.0% per annum with quarterly interest payments and principal due upon maturity
of July 2007. Interest income recognized for the years ended December 31, 2001,
2000 and 1999 was $1.9 million, $1.6 million and $1.7 million, respectively.
Effective February 1, 2000, The Varma Asset Management Agreements were
terminated by mutual agreement of the parties; at the same time, Crescent
Operating and its hospitality subsidiaries entered into a Master Asset
Management and Administrative Services Agreement with the Sonoma Management
Company ("SMC") to manage the Hyatt Albuquerque, the Four Seasons Hotel Houston,
the Renaissance Hotel Houston and the Denver City Center Marriott. At the same
time, the Company's hospitality subsidiaries accepted assignment from the owners
of the Sonoma Mission Inn and Spa, the Sonoma Mission Inn Golf and Country Club
and the Ventana Inn and Spa of its property management agreements with SMC. The
principals of SMC are Sanjay and Johanna Varma and Crescent Equities is an
equity owner in SMC.
F-160
CRESCENT OPERATING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Payment of obligations under the Master Asset Management and Administrative
Services Agreement (the "SMC Management Agreement") are guaranteed by the
Company. For each property for which it provides asset management services, SMC
will receive a base fee equal to 0.85% of gross revenues of the property managed
plus an incentive fee of 50% of actual net income in excess of budgeted net
income. For each property for which it provides property management services,
SMC will receive a base fee equal to 2.0% of gross revenues of the property plus
an incentive fee of 20% of net operating income in excess of 12% annual return
on investment to owner. As consideration for its services under the SMC
Management Agreement, Sonoma Management received an annual base fee (and no
incentive fee) for 2001 of approximately $0.6 million, for its asset management
services related to the Hyatt Albuquerque, the Renaissance Houston Hotel and the
Denver City Center Marriott. Pursuant to the Settlement Agreement, the Company's
obligations under the SMC Management Agreement with SMC were transferred to
Crescent Equities (See Note 3 -- Settlement Agreement).
21. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Amounts in thousands, except per share amounts:
YEAR ENDED DECEMBER 31, 2001
----------------------------------------
FIRST SECOND THIRD FOURTH
------- -------- -------- --------
Revenues.................................... $17,062 $ 14,821 $ 19,001 $ 16,637
Loss from continuing operations before
taxes, discontinued operations and
accounting change......................... (1,092) (14,358) (10,597) (12,644)
Income tax benefit.......................... (2,142) (1,046) (1,183) (4,220)
------- -------- -------- --------
Loss from continuing operations............. 1,050 (13,312) (9,414) (8,424)
Loss from discontinued operations........... (661) (3,910) (7,683) (26,270)
Loss from accounting change................. (9,509) -- -- --
Net (loss).................................. (9,120) (17,222) (17,097) (34,694)
Basic and Diluted (loss) per share
Income (Loss) before discontinued operations
and accounting change..................... 0.10 (1.29) (0.91) (0.81)
Discontinued operations..................... (0.06) (0.38) (0.74) (2.54)
Change in accounting........................ (0.92) -- -- --
------- -------- -------- --------
Net loss per share.......................... $ (0.88) $ (1.67) $ (1.65) $ (3.35)
YEAR ENDED DECEMBER 31, 2000
-------------------------------------
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
Revenues....................................... $29,311 $27,772 $25,855 $19,653
Loss from continuing operations before taxes,
discontinued operations and accounting
change....................................... (3,802) (4,337) (5,019) 11,307
Income tax provision (benefit)................. (1,528) (1,744) (2,028) 4,371
------- ------- ------- -------
Loss from continuing operations................ (2,274) (2,593) (2,991) 6,936
(Loss) Income from discontinued operations..... 292 (819) (1,179) (1,062)
Loss from accounting change.................... -- -- -- --
Net (loss) income.............................. (1,982) (3,412) (4,170) 5,874
Basic and Diluted (loss) per share
(Loss) before discontinued operations and
accounting change............................ (0.22) (0.25) (0.29) (0.67)
Discontinued operations........................ 0.03 (0.08) (0.11) (0.11)
Change in accounting........................... -- -- -- --
------- ------- ------- -------
Net (loss) income per share.................... $ (0.19) $ (0.33) $ (0.40) $ 0.56
F-161
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CRESCENT OPERATING, INC. (PARENT COMPANY)
CONDENSED BALANCE SHEETS
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- -----------------
(AMOUNTS IN THOUSANDS)
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 383 $ 760
Accounts receivable....................................... 10,606 641
Intercompany.............................................. 13,737 13,608
Prepaid expenses and other current assets................. 10 601
--------- --------
Total current assets................................... 24,736 15,610
--------- --------
PROPERTY AND EQUIPMENT, NET................................. 56 66
INVESTMENTS................................................. (42,712) 43,959
OTHER ASSETS................................................ 19,461 5,548
--------- --------
TOTAL ASSETS................................................ $ 1,541 $ 65,183
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses..................... $ 1,133 $ 1,086
Accounts payable and accrued expenses -- CEI.............. 6,968 6,849
Current portion of long-term debt -- CEI.................. 69,041 8,578
Current portion of long-term debt......................... 16,997 16,033
--------- --------
Total current liabilities.............................. 94,139 32,546
LONG-TERM DEBT, NET OF CURRENT PORTION...................... 790 56,170
--------- --------
Total liabilities...................................... 94,929 88,716
--------- --------
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.01 par value, 10,000 shares authorized,
no shares issued or outstanding........................ -- --
Common stock, $.01 par value, 22,500 shares authorized,
11,443 and 11,415 shares issued, respectively.......... 115 114
Additional paid-in capital................................ 17,781 17,754
Deferred compensation on restricted shares................ -- (177)
Accumulated comprehensive income (loss)................... (1,436) (9,509)
Accumulated deficit....................................... (105,542) (27,409)
Treasury Stock at cost, 1,103 shares...................... (4,306) (4,306)
--------- --------
Total shareholders' equity (deficit)................... (93,388) (23,533)
--------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)........ $ 1,541 $ 65,183
========= ========
See accompanying notes to the condensed financial statements.
F-162
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CRESCENT OPERATING, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
DECEMBER 31, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999
----------------- ----------------- -----------------
(AMOUNTS IN THOUSANDS)
COSTS AND EXPENSES
General and administrative expenses....... $ 6,947 $ 4,197 $ 2,602
Interest expense.......................... 9,070 8,427 8,429
Interest income........................... 46 (416) (391)
Other..................................... (3) 2 --
-------- ------- --------
Total costs and expenses............. 16,060 12,210 10,640
INVESTMENT INCOME........................... -- 2,721 1,890
EQUITY IN (LOSS) EARNINGS OF UNCONSOLIDATED
SUBSIDIARIES.............................. (58,218) 1,371 (2,098)
-------- ------- --------
LOSS BEFORE INCOME TAXES, MINORITY INTERESTS
AND ACCOUNTING CHANGE..................... (74,278) (8,118) (10,848)
INCOME TAX BENEFIT.......................... (5,654) (4,428) (8,153)
-------- ------- --------
LOSS BEFORE ACCOUNTING CHANGE............... (68,624) (3,690) (2,695)
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE................... (9,509) -- --
-------- ------- --------
NET LOSS.................................... $(78,133) $(3,690) $ (2,695)
======== ======= ========
See accompanying notes to the condensed financial statements.
F-163
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CRESCENT OPERATING, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999
----------------- ----------------- -----------------
(AMOUNTS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................... $(78,133) $(3,690) $(2,695)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation.................................... 27 32 22
Amortization.................................... (103) (103) (155)
Intercompany.................................... (129) (6,538) (1,942)
Loss on sale of equipment....................... 2 4 2
Gain on sale of investments..................... -- (722) (1,963)
Investment (income) loss........................ 60,631 (3,370) 2,171
Impairment of assets............................ -- -- --
Change in accounting method..................... 9,509 -- --
Deferred compensation........................... 205 60 53
Deferred taxes.................................. (5,355) 1,744 (6,909)
Changes in assets and liabilities, net of
effects of acquisitions:
Accounts receivable........................... (9,965) (996) (127)
Prepaid expenses and current assets........... 591 (511) 634
Other assets.................................. (2,703) 101 (27)
Accounts payable and accrued expenses......... 47 1,240 (315)
Accounts payable and accrued
expenses -- CEI............................ 119 4,771 480
-------- ------- -------
Net cash provided by (used in) operating
activities............................... (25,257) (7,978) (10,771)
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business interests -- net of cash
acquired........................................ -- -- (15,489)
Purchases of property and equipment............... (19) (36) (51)
Proceeds from sale of property and equipment...... -- 4,060 --
Proceeds from sale of investments................. -- -- 22,691
Net distribution from investments................. 18,852 7,028 7,097
-------- ------- -------
Net cash provided by (used in) investing
activities............................... 18,833 11,052 14,248
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of long-term debt -- CEI................. 7,842 1,675 37,628
Payments of long-term debt -- CEI................. -- -- (39,480)
Payments of long-term debt........................ (1,795) (2,673) (5,942)
Other............................................. -- -- 7
-------- ------- -------
Net cash provided by (used in) financing
activities............................... 6,047 (998) (7,787)
-------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS....................................... (377) 2,076 (4,310)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD...... 760 (1,316) 2,994
-------- ------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD............ $ 383 $ 760 $(1,316)
======== ======= =======
See accompanying notes to the condensed financial statements.
F-164
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CRESCENT OPERATING, INC. (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Crescent Operating, Inc.'s (the "Company") investment in subsidiaries is
stated at cost plus or minus equity in undistributed earnings (losses) of
subsidiaries since the date of acquisition. The Company's share of net income
(loss) of its unconsolidated subsidiaries is included in consolidated income
(loss) using the equity method. The parent company-only financial statements
should be read in conjunction with the Company's consolidated financial
statements.
F-165
INDEPENDENT AUDITORS' REPORT
To the Partners
Vornado Crescent Logistics Operating Partnership and Subsidiary:
We have audited the accompanying consolidated balance sheets of Vornado
Crescent Logistics Operating Partnership and Subsidiary (the "Partnership") as
of December 31, 2001 and 2000, and the related consolidated statements of
operations, partners' capital, and cash flows for the years ended December 31,
2001 and 2000 and for the period from March 11, 1999 (date of inception) to
December 31, 1999. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the consolidated financial position of Vornado Crescent Logistics
Operating Partnership and Subsidiary at December 31, 2001 and 2000, and their
consolidated results of operations and cash flows for the years ended December
31, 2001 and 2000 and for the period from March 11, 1999 (date of inception) to
December 31, 1999, in conformity with accounting principles generally accepted
in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Atlanta, Georgia
February 20, 2002
(March 11, 2002 as to Note 4)
F-166
VORNADO CRESCENT LOGISTICS OPERATING PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2001 AND 2000
2001 2000
---------- ----------
(AMOUNTS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 28,189 $ 6,215
Restricted cash........................................... 21,388 14,736
Trade accounts receivable, net of allowance for doubtful
accounts of $2,442 and $3,502, respectively............ 67,415 79,780
Other current assets...................................... 4,559 4,930
Working capital to be collected on behalf of AmeriCold
Corporation............................................ (5,358) (7,507)
-------- --------
Total current assets.............................. 116,193 98,154
Property, Plant, and Equipment:
Land...................................................... 14,794 16,831
Buildings and improvements................................ 2,880 2,476
Machinery and equipment................................... 49,270 44,131
-------- --------
66,944 63,438
Less accumulated depreciation............................. (19,574) (10,722)
-------- --------
Property, plant, and equipment, net.................... 47,370 52,716
Other assets................................................ 11,544 12,988
-------- --------
$175,107 $163,858
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable.......................................... $ 14,039 $ 23,277
Accrued expenses.......................................... 50,006 36,017
Current portion of long-term debt......................... 1,906 577
Current portion of capitalized lease obligations.......... 967 398
Unearned revenue.......................................... 8,373 9,242
Due to AmeriCold Corporation.............................. 32,216 27,074
-------- --------
Total current liabilities......................... 107,507 96,585
-------- --------
Long-term debt.............................................. 22,840 6,360
Long-term capitalized lease obligations..................... 4,449 1,351
Deferred rent obligations to Americold Corporation.......... 8,335 24,411
Straight-line rent liability to Americold Corporation....... 10,811 6,762
Other liabilities........................................... 13,399 12,176
-------- --------
Total liabilities................................. 167,341 147,645
Commitments
Partners' capital:
Partners' capital......................................... 44,723 48,723
Accumulated deficit....................................... (33,368) (27,680)
Accumulated other comprehensive loss -- minimum pension
charge................................................. (3,589) (830)
-------- --------
Less: capital contribution receivable....................... -- (4,000)
-------- --------
Total partners' capital........................... 7,766 16,213
-------- --------
$175,107 $163,858
======== ========
See notes to consolidated financial statements.
F-167
VORNADO CRESCENT LOGISTICS OPERATING PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 AND
FOR THE PERIOD FROM MARCH 11, 1999 (DATE OF INCEPTION)
TO DECEMBER 31, 1999
2001 2000 1999
-------- -------- --------
(AMOUNTS IN THOUSANDS)
Revenues.................................................... $647,259 $676,158 $557,708
Operating expenses:
Cost of operations (not including depletion, depreciation,
and amortization)...................................... 474,663 478,809 399,615
Rent expense on leases with AmeriCold Corporation, net of
$25,469 in reduction in 2001 contractual rents......... 130,807 170,640 135,811
Reduction in 2000 contractual rents....................... (14,343) -- --
General and administrative................................ 37,691 35,933 26,542
Severance and other charges............................... 8,895 -- --
Depletion, depreciation, and amortization................. 11,477 7,803 4,789
-------- -------- --------
Total operating expenses.......................... 649,190 693,185 566,757
-------- -------- --------
Operating loss.............................................. (1,931) (17,027) (9,049)
Other income (expense):
Interest expense.......................................... (4,702) (2,136) (534)
Other..................................................... 945 727 339
-------- -------- --------
Net loss.................................................... $ (5,688) $(18,436) $ (9,244)
======== ======== ========
See notes to consolidated financial statements.
F-168
VORNADO CRESCENT LOGISTICS OPERATING PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 AND
FOR THE PERIOD FROM MARCH 11, 1999 (DATE OF INCEPTION)
TO DECEMBER 31, 1999
ACCUMULATED
OTHER
COMPREHENSIVE CAPITAL
PARTNERS' ACCUMULATED LOSS -- MINIMUM CONTRIBUTION
CAPITAL DEFICIT PENSION CHARGE RECEIVABLE TOTAL
--------- ----------- --------------- ------------ --------
(AMOUNTS IN THOUSANDS)
Capital contribution................. $38,723 $ -- $ -- $ -- $ 38,723
Net loss........................... -- (9,244) -- -- (9,244)
------- -------- ------- ------- --------
Balance -- December 31, 1999......... 38,723 (9,244) -- -- 29,479
Capital contribution................. 10,000 -- -- (4,000) 6,000
Comprehensive loss:
Net loss........................... -- (18,436) -- -- (18,436)
Adjustment for minimum pension
liability....................... -- -- (830) -- (830)
--------
Total comprehensive loss........... -- -- -- -- (19,266)
------- -------- ------- ------- --------
Balance -- December 31, 2000......... 48,723 (27,680) (830) (4,000) 16,213
Cancellation of capital
commitment...................... (4,000) -- -- 4,000 --
Comprehensive loss:
Net loss........................... -- (5,688) -- -- (5,688)
Adjustment for minimum pension
liability....................... -- -- (2,759) -- (2,759)
--------
Total comprehensive loss........... -- -- -- -- (8,447)
------- -------- ------- ------- --------
Balance -- December 31, 2001......... $44,723 $(33,368) $(3,589) $ -- $ 7,766
======= ======== ======= ======= ========
See notes to consolidated financial statements.
F-169
VORNADO CRESCENT LOGISTICS OPERATING PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 AND
FOR THE PERIOD FROM MARCH 11, 1999 (DATE OF INCEPTION)
TO DECEMBER 31, 1999
2001 2000 1999
-------- -------- --------
(AMOUNTS IN THOUSANDS)
Operating activities:
Net loss.................................................. $ (5,688) $(18,436) $ (9,244)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Provision for bad debts................................ 2,653 1,645 1,685
Depletion, depreciation and amortization............... 11,477 7,803 4,789
Straight line rent expense............................. 4,049 3,673 3,089
Reduction in 2000 contractual rent..................... (14,343) -- --
Gain on settlement and curtailment of benefit plan..... -- -- (1,363)
Changes in assets and liabilities, net of acquisitions:
Restricted cash...................................... (6,652) 2,151 --
Trade accounts receivable............................ 10,843 (2,524) 239
Other assets......................................... (522) (9) (6,420)
Accounts payable and accrued expenses................ 2,071 (8,081) (1,493)
Due to AmeriCold Corporation......................... 7,028 (2,158) 29,232
Deferred rent obligations............................ (1,733) 19,011 5,400
Other liabilities.................................... 354 (69) (11)
-------- -------- --------
Net cash provided by operating activities......... 9,537 3,006 25,903
Investing activities:
Purchase of non-real estate assets........................ -- -- (38,723)
Additions to property, plant, and equipment............... (2,368) (12,302) (9,666)
-------- -------- --------
Net cash provided by investing activities......... (2,368) (12,302) (48,389)
Financing activities:
Proceeds from issuance of long-term debt.................. 18,940 7,014 --
Repayment of long-term debt............................... (1,131) (47) --
Repayment of capital lease obligation..................... (855) -- --
Repayment of due to AmeriCold Corporation................. (2,149) (5,444) (8,249)
Capital contributions..................................... -- 6,000 38,723
-------- -------- --------
Net cash provided by financing activities......... 14,805 7,523 30,474
-------- -------- --------
Net change in cash and cash equivalents..................... 21,974 (1,773) 7,988
Cash and cash equivalents:
Beginning of period....................................... 6,215 7,988 --
-------- -------- --------
End of period............................................. $ 28,189 $ 6,215 $ 7,988
======== ======== ========
Supplemental disclosures:
Interest paid............................................. $ 2,787 $ 753 $ 331
======== ======== ========
Supplemental information about noncash activities:
Acquisition of fixed assets under capital leases.......... $ 4,522 -- --
======== ======== ========
Liabilities assumed in connection with acquisition of
non-real estate assets................................. -- -- $ 13,198
======== ======== ========
Initial working capital to be collected on behalf of
AmeriCold Corporation.................................. -- -- $ 21,200
======== ======== ========
See notes to consolidated financial statements.
F-170
VORNADO CRESCENT LOGISTICS OPERATING PARTNERSHIP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000 AND FOR THE YEARS ENDED DECEMBER 31, 2001 AND
2000 AND FOR THE PERIOD FROM MARCH 11, 1999
(DATE OF INCEPTION) TO DECEMBER 31, 1999
1. ORGANIZATION AND BUSINESS
Vornado Crescent Logistics Operating Partnership (the "Partnership") was
formed on March 11, 1999. The Partnership holds its assets and conducts its
business through its wholly owned subsidiary AmeriCold Logistics, LLC
(collectively "the Company" or "AmeriCold Logistics"). At December 31, 2001,
AmeriCold Logistics, headquartered in Atlanta, Georgia, has 5,900 employees and
operates 100 temperature controlled warehouse facilities nationwide with an
aggregate of approximately 525 million cubic feet of refrigerated, frozen, and
dry storage space. Of the 100 warehouses, AmeriCold Logistics leases 89
temperature controlled warehouses with an aggregate of approximately 445 million
cubic feet from the Vornado REIT/Crescent REIT Partnership ("AmeriCold
Corporation"), and manages 11 additional warehouses containing approximately 80
million cubic feet of space. AmeriCold Logistics provides the frozen food
industry with refrigerated warehousing and transportation management services.
Refrigerated warehouses are comprised of production and distribution facilities.
Production facilities typically serve one or a small number of customers,
generally food processors, located nearby. These customers store large
quantities of processed or partially processed products in the facility until
they are shipped to the next stage of production or distribution. Distribution
facilities primarily warehouse a wide variety of customers' finished products
until future shipment to end-users. Each distribution facility generally
services the surrounding regional market. AmeriCold Logistics' transportation
management services include freight routing, dispatching, freight rate
negotiation, backhaul coordination, freight bill auditing, network flow
management, order consolidation, and distribution channel assessment.
Additionally, AmeriCold Logistics mines limestone at two of its locations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- The consolidated financial statements of the
Partnership include the accounts of the Partnership and its subsidiary. The
Partnership is owned 60% by Vornado Operating L.P. ("Vornado") and 40% by COPI
Cold Storage L.L.C. (an affiliate of Crescent Operating Inc.) ("Crescent"). The
partnership agreement provides that net income and losses are allocated to each
partner's account in relation to their ownership interests. Subject to certain
provisions, the Partnership continues for a term through October 2027. Vornado's
$6,000,000 contribution to the Partnership in March 2000 was unmatched by
Crescent, who recently filed for bankruptcy protection. Accordingly, the
$4,000,000 contribution receivable shown in partner's capital was cancelled at
December 31, 2001. During the first quarter of 2002, Vornado's $6,000,000 became
a special equity contribution that: (i) has priority over the original equity
amounts, with voting rights of Vornado not effected, (ii) is redeemable only at
the Partnership's option, and (iii) accrues interest at 12% compounded annually
from March 7, 2000. Vornado's share of the Partnership remains at 60%.
Estimates -- Management has made estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Subject to shareholder approval, Crescent Operating agreed to transfer its
interest in AmeriCold Logistics to an entity that will be owned by the
shareholders of Crescent Real Estate Equities. It is uncertain at this time
whether or when this plan will be approved and what effect, if any, this will
have on the operation and management of AmeriCold Logistics.
Cash and Cash Equivalents -- Cash and cash equivalents consist of highly
liquid investments with maturities when purchased of three months or less.
F-171
VORNADO CRESCENT LOGISTICS OPERATING PARTNERSHIP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Restricted Cash -- Cash restricted for uses related to payment of rent
($7,229,000 at December 31, 2001 and 2000) and settlement of certain
self-insured liabilities ($14,159,000 and $7,507,000 at December 31, 2001 and
2000, respectively) are classified as restricted cash.
Property, Plant, and Equipment -- Depreciation and amortization are
computed on the straight-line method over the estimated useful lives of the
respective assets. Depreciation and amortization begin the month in which the
asset is placed into service.
The Company's long-lived assets are reviewed for impairment if events or
changes in circumstances indicate that the carrying amounts may not be
recoverable. In such an event, a comparison is made of the expected future
operating cash flows of the long-lived assets on an undiscounted basis to the
carrying amounts of long-lived assets. If the carrying amounts of the long-lived
assets exceed the sum of the expected undiscounted cash flows, an impairment
charge is recognized in an amount equal to the excess of the carrying amount
over the estimated fair value of the long-lived assets. The Company also
periodically reviews the appropriateness of the estimated useful lives of its
long-lived assets.
Capitalized Leases -- Capitalized leases are recorded at the lower of the
present value of future lease payments or the fair market value of the property.
Capitalized leases are depreciated on a straight-line basis over the estimated
asset life or lease term for equipment, whichever is shorter. Depreciation
expense on capital leases is included in depreciation and amortization expense.
Revenue Recognition -- Revenues include storage, transportation and
handling fees, and management fees for locations managed on behalf of third
parties. Storage revenues are recognized as services are provided.
Transportation fees and expenses are recognized upon tender of product to common
carriers, which is not materially different than if such revenues and expenses
were recognized upon delivery. Management fees are recognized when AmeriCold
Logistics is contractually entitled to such fees. Costs related to managed
facilities are included in operating expenses. AmeriCold Logistics charges
customers for both inbound and outbound handling in advance but defers the
outbound handling revenue until the product has been shipped. Revenues from the
sale of limestone are recognized upon delivery to customers.
Significant Customer -- During 2001 and 2000, H.J. Heinz & Co. accounted
for approximately 16% and 18% of total revenue, respectively.
Income Taxes -- AmeriCold Logistics has elected to be treated as a
partnership for income tax purposes. Taxable income or loss of AmeriCold
Logistics is reported in the income tax returns of the partners. Accordingly, no
provision for income taxes is made in the financial statements of AmeriCold
Logistics.
Fair Value of Financial Instruments -- All financial instruments of the
Company are reflected in the accompanying consolidated balance sheets at
historical cost which, in management's estimation, based upon an interpretation
of available market information and valuation methodologies, reasonably
approximates their fair values. Such fair values are not necessarily indicative
of the amounts that would be realized upon disposition of the Company's
financial instruments.
Collective Bargaining Agreements -- At December 31, 2001, approximately 21%
of the Company's labor force was covered by collective bargaining agreements.
Collective bargaining agreements covering approximately 7% of the labor force
will expire in 2002.
Derivatives -- In June 1998, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended in June
2000 by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities. SFAS No. 133, as amended, requires the Company to recognize
all derivatives on the balance sheet at fair value. The Company adopted SFAS No.
133, as amended, on January 1, 2001. The adoption of these standards did not
have a material impact on the Company's consolidated financial statements, as
the Company does not use derivatives.
F-172
VORNADO CRESCENT LOGISTICS OPERATING PARTNERSHIP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Recent Accounting Pronouncement -- In August 2001, the FASB issued SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets. This
Statement supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of. SFAS No. 144 also supercedes
previous guidance for segments of a business to be disposed. The Company is
required to adopt SFAS No. 144 on January 1, 2002. The Company does not expect
SFAS No. 144 to have a significant effect on its consolidated financial position
or results of operations.
Reclassifications -- Certain reclassifications have been made to the 2000
and 1999 balances to conform with the 2001 presentation.
3. ACCRUED EXPENSES
Detail of accrued expenses as of December 31, 2001 and 2000 is as follows:
2001 2000
------- -------
(AMOUNTS IN
THOUSANDS)
Accrued payroll and related expense......................... $10,127 $ 9,854
Accrued workers' compensation............................... 8,580 8,443
Severance and other charges................................. 6,764 --
Other accrued expenses...................................... 24,535 17,720
------- -------
$50,006 $36,017
======= =======
4. LONG-TERM DEBT
2001 2000
------- ------
(AMOUNTS IN
THOUSANDS)
Notes payable to Vornado:
12% promissory note payable............................... $ 3,000 $3,000
12% promissory note payable............................... 3,840 --
14% promissory note payable............................... 4,856 --
Notes payable to Crescent:
12% promissory note payable............................... 2,000 2,000
12% promissory note payable............................... 3,500 --
14% promissory note payable............................... 6,190 --
Note payable to bank........................................ 1,360 1,937
------- ------
24,746 6,937
Less: current maturities.................................... (1,906) (577)
------- ------
$22,840 $6,360
======= ======
The 12% promissory notes payable to Vornado and Crescent, as amended, are
due December 31, 2004 and may be repaid at any time prior to their maturity.
Until the notes are paid, aggregate interest-only payments of $123,000 are due
on a monthly basis. These notes are secured by certain property and equipment
with a net book value of approximately $15,606,000.
The 14% promissory notes payable to Vornado and Crescent, as amended, are
payable in aggregate monthly installments of principal and interest of $224,999
with a maturity date of December 31, 2004. The notes are secured by certain
property and equipment with a net book value of approximately $22,483,000.
F-173
VORNADO CRESCENT LOGISTICS OPERATING PARTNERSHIP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective March 11, 2002, the Vornado and Crescent notes were amended to
extend maturity dates to December 31, 2004.
The note payable to the bank due January 2003 is payable in equal monthly
installments of principal and interest and may be repaid prior to its maturity
date, subject to certain prepayment penalties. This loan bears interest at the
rate of 10.72% per annum. The note is secured by certain equipment with a net
book value of approximately $1,287,000.
5. TRANSACTIONS WITH AMERICOLD CORPORATION AND OWNERS
During 2001 and 2000 and 1999, AmeriCold Logistics received a management
fee of $268,000 and $255,000 and $201,000, respectively, from AmeriCold
Corporation for administrative services performed.
During 2001 and 2000 and 1999, AmeriCold Logistics recorded a management
fee of $487,000 and $487,000 and $329,000, respectively, to Vornado Realty L.P.
At December 31, 2001 and 2000, other accrued liabilities included
$1,303,000 and $816,000, respectively, owed to Vornado Realty L.P.
At December 31, 2001 and 2000, $1,131,000 and $1,061,000, respectively,
were receivable from Crescent for expenditures made on its behalf for a new
business venture. Due to the uncertainty of collection, the Company established
a reserve for this amount at December 31, 2001. Such amounts are included in
other assets.
6. LEASE COMMITMENTS
AmeriCold Logistics has operating leases with the AmeriCold Corporation
covering the warehouses used in this business. The leases, as amended, generally
have a 15-year term with two five-year renewal options and provide for the
payment of fixed base rent and percentage rent based on revenues AmeriCold
Logistics receives from its customers. Fixed base rent is approximately
$137,000,000 per annum through 2003, $139,000,000 per annum from 2004 through
2008, and $141,000,000 per annum from 2009 through 2014. Percentage rent for
each lease is based on a specified percentage of revenues in excess of a
specified base amount. The aggregate base revenue amount under five of the six
leases is approximately $350 million, and the weighted-average percentage rate
is approximately 36% for the initial five-year period, approximately 38% for the
period from 2004 through 2008, and approximately 40% for the period from 2009
through February 28, 2014. The aggregate base revenue amount under the sixth
lease is approximately $32,000,000 through 2001, and approximately $26,000,000
for the period from 2002 through February 28, 2014, and the percentage rate is
24% through 2001, 37.5% for the period from 2002 through 2006, 40% from 2007
through 2011, and 41% from 2012 through February 28, 2014.
The fixed base rent for each of the two five-year renewal options is equal,
generally, to the greater of the then fair market value rent or the fixed base
rent for the immediately preceding lease year plus 5%.
AmeriCold Logistics has the right to defer the payment of 15% of fixed base
rent and all percentage rent for the period March 1999 to December 31, 2003 to
the extent that available cash, as defined in the leases, is insufficient to pay
such rent. Pursuant to the agreement, AmeriCold Logistics exercised its deferral
rights and deferred approximately $25,469,000 and $19,011,000 in 2001 and 2000,
respectively, in fixed and percentage rent.
As part of the February 2001 lease amendments, contractual rents due to
AmeriCold Corporation were reduced to $146,000,000 for 2001 and $150,000,000
(plus additional contingent rent in certain circumstances) for 2002.
F-174
VORNADO CRESCENT LOGISTICS OPERATING PARTNERSHIP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On December 27, 2001, the leases were amended to reduce fixed and
percentage rent under the four non-encumbered leases by $25,469,000 to
$17,918,000 for 2001 and by $14,343,000 to $38,223,000 for 2000.
On January 23, 2002, the leases with AmeriCold Corporation were
restructured to consolidate the four non-encumbered leases into one
non-encumbered lease. The restructuring did not affect total contractual rent
due under the combined leases.
The Company anticipates that AmeriCold Corporation may further restructure
the leases with the Company to provide additional cash flow to the Company.
AmeriCold Logistics is also required to pay for all costs arising from the
operation, maintenance and repair of the properties, including all real estate
taxes and assessments, utility charges, permit fees, and insurance premiums, as
well as property capital expenditures in excess of $9,500,000 annually.
AmeriCold Logistics also has both operating and capital lease agreements
for equipment and other facilities. AmeriCold Logistics pays taxes, insurance,
and maintenance costs on substantially all of the leased property. Lease terms
generally range from five to 20 years with renewal or purchase options.
At December 31, 2001, future minimum fixed lease payments under the leases
with AmeriCold Corporation and future minimum lease payments under operating
leases other than leases with AmeriCold Corporation were as follows:
AMERICOLD OTHER
CORPORATION LESSORS TOTAL
----------- ------- ----------
(AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
2002............................................... $ 137,340 $ 7,255 $ 144,595
2003............................................... 137,327 5,220 142,547
2004............................................... 139,729 3,932 143,661
2005............................................... 138,920 3,546 142,466
2006............................................... 138,920 3,545 142,465
Thereafter......................................... 1,011,241 2,748 1,013,989
---------- ------- ----------
$1,703,477 $26,246 $1,729,723
========== ======= ==========
Rent expense under leases with AmeriCold Corporation for 2001 was
$115,780,000 for fixed rent, net of a $25,469,000 contractual rent adjustment,
and $15,027,000 for percentage rent. Rent expense under leases with AmeriCold
Corporation for 2000 was $139,723,000 for fixed rent and $30,917,000 for
percentage rent. Rent expense under leases with AmeriCold Corporation for 1999
was $109,031,000 for fixed rent and $26,780,000 for percentage rent.
Rent expense under leases with other lessors was $8,068,000, $6,407,000,
and $4,739,000 for 2001, 2000, and 1999, respectively.
F-175
VORNADO CRESCENT LOGISTICS OPERATING PARTNERSHIP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 2001, future minimum lease payments under capital leases
are as follows:
(AMOUNTS IN
THOUSANDS)
YEAR ENDED DECEMBER 31,
2002........................................................ $ 1,407
2003........................................................ 1,284
2004........................................................ 1,201
2005........................................................ 1,199
2006........................................................ 1,069
Thereafter.................................................. 638
-------
Total minimum obligations................................... 6,798
Less interest portion....................................... (1,382)
-------
Present value of net minimum payments....................... 5,416
Less current portion........................................ (967)
-------
Long term portion........................................... $ 4,449
=======
At December 31, 2001 and 2000, property leased under capital leases had a
total cost of $7,974,000 and $2,751,000 and total accumulated depreciation of
$2,976,000 and $1,171,000, respectively.
7. SEVERANCE AND OTHER CHARGES
During the year ended December 31, 2001, the Company recorded a charge of
$8,895,000 comprised of (i) severance and relocation costs associated with a
management restructuring, and (ii) expenses arising from the consolidation of a
portion of the corporate office in Portland, Oregon into the Company's Atlanta
headquarters. Severance related charges of $7,725,000 are for the termination of
199 employees, located primarily in the Atlanta and Portland offices. Through
December 31, 2001, the Company had terminated 30 of the employees. The remaining
charges of $1,170,000 consist primarily of a signing bonus, recruitment and
other exit costs.
These charges and the related liability at December 31, 2001 are summarized
below:
SEVERANCE OTHER TOTAL
--------- ------- -------
(AMOUNTS IN THOUSANDS)
Charges................................................. $7,725 $ 1,170 $ 8,895
Expenditures............................................ (961) (1,170) (2,131)
------ ------- -------
Severance Liability..................................... $6,764 $ -- $ 6,764
====== ======= =======
8. CONTINGENCIES
In the normal course of business, the Company is party to a number of
lawsuits. The Company does not believe that the resolution of these lawsuits
will have a material effect on its financial position, results of operations or
cash flows.
9. EMPLOYEE BENEFIT PLANS
Defined Benefit Pension and Postretirement Plans -- AmeriCold Logistics has
defined benefit pension plans that cover substantially all employees, other than
union employees covered by union pension plans under collective bargaining
agreements. Benefits under AmeriCold Logistics' plans are based on years of
credited
F-176
VORNADO CRESCENT LOGISTICS OPERATING PARTNERSHIP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
service and compensation during the years preceding retirement, or on years of
credited service and established monthly benefit levels. The Company also has
postretirement health care plans that provide medical and life insurance
coverage to eligible retired employees.
Actuarial information regarding the defined benefit pension plans and
postretirement benefits other than pensions as of December 31, 2001 and 2000 is
as follows:
2001
-------------------------------------------
PENSION BENEFITS
--------------------------
NATIONAL OTHER
RETIREMENT SERVICE POSTRETIREMENT
INCOME PLAN RELATED PLAN BENEFITS
----------- ------------ --------------
(AMOUNTS IN THOUSANDS)
Change in benefit obligation
Benefit obligation at beginning of year......... $ 35,424 $8,633 $ 1,289
Service cost.................................... 2,977 223 55
Interest cost................................... 2,562 632 126
Participant contributions....................... -- -- 7
Actuarial (gain) loss........................... 2,090 (327) 292
Settlements..................................... -- -- --
Plan amendments................................. -- 187 --
Benefits paid................................... (4,777) (524) (37)
-------- ------ -------
Benefit obligation at end of year............... $ 38,276 $8,824 $ 1,732
======== ====== =======
Change in plan assets
Fair value of plan assets at beginning of
year.......................................... $ 26,218 $9,377 $ --
Actual return on plan assets.................... (122) (81) --
Employer contributions.......................... 4,650 115 30
Participant contributions....................... -- -- 7
Benefits paid................................... (4,777) (524) (37)
-------- ------ -------
Fair value of plan assets at end of year........ $ 25,969 $8,887 $ --
======== ====== =======
Funded status................................... $(12,307) $ 63 $(1,732)
Unrecognized actuarial (gain) loss.............. 7,423 1,830 18
Unrecognized prior service cost................. 1,182 332 (518)
Minimum liability adjustment.................... (4,771) -- --
-------- ------ -------
(Accrued) prepaid benefit cost.................. $ (8,473) $2,225 $(2,232)
======== ====== =======
Amounts recognized in the consolidated balance
sheet consist of:
Accrued benefit liability..................... $ (8,473) $ -- $(2,232)
Prepaid asset................................. -- 2,225 --
Intangible asset.............................. 1,182 -- --
Accumulated other comprehensive loss.......... 3,589 -- --
-------- ------ -------
Net amount recognized........................... $ (3,702) $2,225 $(2,232)
======== ====== =======
Weighted-average assumptions as of December 31,
2001:
Discount rate................................. 7.25% 7.25% 7.25%
Expected return............................... 9.50% 9.50% N/A
Rate of compensation increase................. 4.00% N/A N/A
F-177
VORNADO CRESCENT LOGISTICS OPERATING PARTNERSHIP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2000
-------------------------------------------
PENSION BENEFITS
--------------------------
NATIONAL OTHER
RETIREMENT SERVICE POSTRETIREMENT
INCOME PLAN RELATED PLAN BENEFITS
----------- ------------ --------------
(AMOUNTS IN THOUSANDS)
Change in benefit obligation
Benefit obligation at beginning of year......... $33,710 $ 9,351 $ 1,920
Service cost.................................... 1,641 211 45
Interest cost................................... 2,518 707 106
Actuarial (gain) loss........................... 2,826 (1,168) (257)
Settlements..................................... -- -- (521)
Benefits paid................................... (5,271) (468) (4)
------- ------- -------
Benefit obligation at end of year............... $35,424 $ 8,633 $ 1,289
======= ======= =======
Change in plan assets
Fair value of plan assets at beginning of
year.......................................... $28,774 $ 9,635 $ --
Actual return on plan assets.................... 1,475 (38) --
Employer contributions.......................... 1,240 248 4
Benefits paid................................... (5,271) (468) (4)
------- ------- -------
Fair value of plan assets at end of year........ $26,218 $ 9,377 $ --
======= ======= =======
Funded status................................... $(9,205) $ 743 $(1,289)
Unrecognized actuarial (gain) loss.............. 2,805 1,283 (260)
Unrecognized prior service cost................. 1,264 152 (582)
Minimum liability adjustment.................... (2,091) -- --
------- ------- -------
(Accrued) prepaid benefit cost.................. $(7,227) $ 2,178 $(2,131)
======= ======= =======
Amounts recognized in the consolidated balance
sheet consist of:
Accrued benefit liability..................... $(7,227) $ -- $(2,131)
Prepaid asset................................. -- 2,178 --
Intangible asset.............................. 1,261 -- --
Accumulated other comprehensive loss.......... 830 -- --
------- ------- -------
Net amount recognized........................... $(5,136) $ 2,178 $(2,131)
======= ======= =======
Weighted-average assumptions as of December 31,
2000:
Discount rate................................... 7.75% 7.75% 7.50%
Expected return................................. 9.50% 9.50% N/A
Rate of compensation increase................... 4.00% N/A N/A
F-178
VORNADO CRESCENT LOGISTICS OPERATING PARTNERSHIP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2001
-------------------------------------------
PENSION BENEFITS
--------------------------
NATIONAL OTHER
RETIREMENT SERVICE POSTRETIREMENT
INCOME PLAN RELATED PLAN BENEFITS
----------- ------------ --------------
(AMOUNTS IN THOUSANDS)
Components of net periodic benefit cost:
Service cost.................................. $ 2,977 $ 223 $ 55
Interest cost................................. 2,562 632 126
Expected return on plan assets................ (2,591) (876) --
Recognized net actuarial loss (gain).......... 186 84 15
Amortization of prior service cost............ 81 6 (65)
------- ----- ----
$ 3,215 $ 69 $131
======= ===== ====
2000
-------------------------------------------
PENSION BENEFITS
--------------------------
NATIONAL OTHER
RETIREMENT SERVICE POSTRETIREMENT
INCOME PLAN RELATED PLAN BENEFITS
----------- ------------ --------------
(AMOUNTS IN THOUSANDS)
Components of net periodic benefit cost:
Service cost.................................. $ 1,641 $ 211 $ 45
Interest cost................................. 2,518 707 106
Expected return on plan assets................ (3,153) (1,094) --
Recognized net actuarial loss (gain).......... (119) 90 --
Amortization of prior service cost............ 80 6 (65)
------- ------- ----
$ 967 $ (80) $ 86
======= ======= ====
1999
-------------------------------------------
PENSION BENEFITS
--------------------------
NATIONAL OTHER
RETIREMENT SERVICE POSTRETIREMENT
INCOME PLAN RELATED PLAN BENEFITS
----------- ------------ --------------
(AMOUNTS IN THOUSANDS)
Components of net periodic benefit cost:
Service cost.................................. $ 1,297 $ 254 $147
Interest cost................................. 2,461 576 346
Expected return on plan assets................ (2,531) (820) --
Recognized net actuarial loss (gain).......... 338 18 67
Amortization of prior service cost............ 104 5 (56)
------- ----- ----
$ 1,669 $ 33 $504
======= ===== ====
The medical plan for retirees provides a fixed dollar benefit for each year
that the retiree is receiving benefits. All increases in medical costs are paid
by the retiree; thus, there is no assumed health care cost trend.
Multiemployer Plans -- Americold Logistics contributes to defined benefit
multiemployer plans that cover substantially all union employees. Amounts
charged to pension cost and contributed to the plans in 2001, 2000, and 1999
were approximately $1,235,000, $1,252,000, and $1,211,000, respectively.
F-179
VORNADO CRESCENT LOGISTICS OPERATING PARTNERSHIP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Profit Sharing -- AmeriCold Logistics has defined contribution employee
benefit plans, which cover all eligible employees. The plans also allow
contributions by plan participants in accordance with Section 401(k) of the
Internal Revenue Code. Profit sharing expense for 2001 and 2000 and 1999 was
approximately $5,403,000 and $3,084,000 and $4,060,000, respectively.
Deferred Compensation -- AmeriCold Logistics has deferred compensation and
supplemental retirement plan agreements with certain of its executives. The
agreements provide for certain benefits at retirement or disability, and also
provide for survivor benefits in the event of death of the employee. AmeriCold
Logistics charges expense for the accretion of the liability each year.
The net (income) expense for all deferred compensation and supplemental
retirement plans for 2001 and 2000 and 1999 was approximately ($12,000) and
$123,000 and $164,000, respectively.
10. SUBSEQUENT EVENT -- UNAUDITED
On November 5, 2002, the Company issued a $6,000,000 note to Vornado,
effective March 11, 2002, in exchange for Vornado's $6,000,000 special equity
contribution, described in Note 2. Certain of the Company's trade receivables
collateralize the loan. The loan bears interest of 12% and requires monthly
interest payments until maturity on December 31, 2004.
On December 31, 2002, the Company sold its interest in its Carthage,
Missouri and Kansas City, Kansas quarries to a joint venture owned 56% by
Crescent Real Estate Equities Company and 44% by Vornado Realty Trust for
approximately $20 million. The Company will continue to manage these assets on
behalf of the new owners.
F-180
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Executive Committee of
The Woodlands Operating Company, L.P.:
We have audited the accompanying consolidated balance sheets of The
Woodlands Operating Company, L.P. (a Texas limited partnership) and subsidiary
as of December 31, 2000 and 1999 and the related consolidated statements of
earnings, changes in partners' equity and cash flows for each of the three years
ended December 31, 2000. These financial statements are the responsibility of
The Woodlands Operating Company, L.P.'s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
The Woodlands Operating Company, L.P. and subsidiary as of December 31, 2000 and
1999 and the consolidated results of their operations and cash flows for each of
the three years ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Houston, Texas
January 15, 2001
THIS REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS IS A COPY OF THE REPORT
PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP. THE REPORT HAS NOT BEEN REISSUED BY
ARTHUR ANDERSEN LLP.
F-181
THE WOODLANDS OPERATING COMPANY, L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and cash equivalents................................... $ 3,817 $ 1,677
Trade receivables, net of allowance for doubtful accounts of
$295 and $302............................................. 6,071 6,839
Inventory................................................... 1,217 1,046
Prepaid and other current assets............................ 432 264
Property and equipment, at cost less accumulated
depreciation of $1,172 and $673........................... 2,430 2,109
Other assets................................................ 738 1,200
------- -------
$14,705 $13,135
======= =======
LIABILITIES AND EQUITY
Liabilities
Accounts payable.......................................... $10,857 $ 8,113
Accrued liabilities....................................... 2,636 2,273
Deferred revenue.......................................... 7,045 5,300
Other liabilities......................................... 336 468
------- -------
20,874 16,154
Commitments and contingencies (Note 2)
Partners' deficit (Note 3).................................. (6,169) (3,019)
------- -------
$14,705 $13,135
======= =======
F-182
THE WOODLANDS OPERATING COMPANY, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
------- ------- -------
(DOLLARS IN THOUSANDS)
Revenues
Conference Center and Country Club operations............. $53,355 $47,945 $47,609
Management fees and other................................. 29,394 26,690 27,151
------- ------- -------
82,749 74,635 74,760
------- ------- -------
Operating Expenses
Conference Center and Country Club operations............. 52,166 47,325 46,162
Operating, general and administrative..................... 26,712 24,531 25,246
Depreciation and Amortization............................... 1,035 863 751
------- ------- -------
79,913 72,719 72,159
------- ------- -------
Operating Earnings.......................................... 2,836 1,916 2,601
Other Income................................................ (14) (28) (37)
------- ------- -------
Net Earnings................................................ $ 2,850 $ 1,944 $ 2,638
======= ======= =======
F-183
THE WOODLANDS OPERATING COMPANY, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
WOCOI MS/TWC
INVESTMENT JOINT MS/TWC,
COMPANY VENTURE INC. TOTAL
---------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Balance, December 31, 1997......................... $ 594 $ 790 $ 15 $ 1,399
Distributions...................................... (2,550) (3,390) (60) (6,000)
Earnings........................................... 1,121 1,491 26 2,638
------- ------- ---- -------
Balance, December 31, 1998......................... (835) (1,109) (19) (1,963)
Distributions...................................... (1,275) (1,695) (30) (3,000)
Earnings........................................... 826 1,098 20 1,944
------- ------- ---- -------
Balance, December 31, 1999......................... (1,284) (1,706) (29) (3,019)
Distributions...................................... (3,266) (2,679) (55) (6,000)
Earnings........................................... 1,927 900 23 2,850
------- ------- ---- -------
Balance, December 31, 2000......................... $(2,623) $(3,485) $(61) $(6,169)
======= ======= ==== =======
F-184
THE WOODLANDS OPERATING COMPANY, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
------- ------- -------
(DOLLARS IN THOUSANDS)
Operating Activities
Net earnings................................................ $ 2,850 $ 1,944 $ 2,638
Adjustments to reconcile net earnings to cash provided by
(used for) operating activities
Depreciation and amortization............................. 1,035 863 751
Deferred Country Club initiation fees, net................ 1,745 2,468 2,062
Other..................................................... (671) (329) (113)
------- ------- -------
4,959 4,946 5,338
Changes in operating assets and liabilities
Trade receivables, inventory and prepaid assets........ 429 (2,167) 656
Other assets........................................... 462 522 (1,687)
Accounts payable....................................... 2,744 (3,826) 6,388
Accrued liabilities.................................... 363 458 (2,360)
------- ------- -------
Cash provided by (used for) operating activities............ 8,957 (67) 8,335
------- ------- -------
Investing Activities
Capital expenditures........................................ (817) (1,106) (519)
------- ------- -------
Financing Activities
Distributions to partners................................... (6,000) (3,000) (6,000)
------- ------- -------
Increase (Decrease) in Cash and Cash Equivalents............ 2,140 (4,173) 1,816
Cash and Cash Equivalents, beginning of year................ 1,677 5,850 4,034
------- ------- -------
Cash and Cash Equivalents, end of year...................... $ 3,817 $ 1,677 $ 5,850
======= ======= =======
F-185
THE WOODLANDS OPERATING COMPANY, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Control. The Woodlands Operating Company, L.P. ("Woodlands Operating"),
The Woodlands Land Development Company, L.P. ("Woodlands Development") and The
Woodlands Commercial Properties Company, L.P. ("Woodlands Commercial") are owned
by entities controlled by Crescent Real Estate Equities Limited Partnership or
Crescent Operating, Inc. (together "Crescent") and Morgan Stanley Real Estate
Fund II, L.P. ("Morgan Stanley"). Woodlands Development and Woodlands Commercial
are successors to The Woodlands Corporation. Prior to July 31, 1997, The
Woodlands Corporation was a wholly owned subsidiary of Mitchell Energy &
Development Corp. On July 31, 1997 The Woodlands Corporation was acquired by
Crescent and Morgan Stanley and merged into Woodlands Commercial, a Texas
limited partnership. Woodlands Commercial was then divided into two
partnerships: Woodlands Commercial and Woodlands Development. WECCR General
Partnership ("WECCR GP") is a wholly owned subsidiary of Woodlands Operating.
Woodlands Operating manages assets owned by Woodlands Commercial and Woodlands
Development.
Principles of consolidation. The consolidated financial statements include
the accounts of Woodlands Operating and WECCR GP. All significant intercompany
transactions and accounts are eliminated in consolidation.
Business. Woodlands Operating's activities are concentrated in The
Woodlands, a planned community located north of Houston, Texas. Consequently,
these operations and the associated credit risks may be affected, either
positively or negatively, by changes in economic conditions in this geographical
area. Woodlands Operating provides services to Woodlands Development and
Woodlands Commercial under management and advisory services agreements. These
agreements are automatically renewed annually. Woodlands Development and
Woodlands Commercial pay Woodlands Operating an advisory fee equal to 3% above
cost. In addition, they reimburse Woodlands Operating for all cost and expenses
incurred on their behalf. For the years ended December 31, 2000, 1999 and 1998,
Woodlands Operating recorded revenues of $12,606,000, $10,597,000 and
$11,050,000 for services provided to Woodlands Development and $6,398,000,
$7,480,000 and $7,343,000 for services provided to Woodlands Commercial.
WECCR GP leases The Woodlands Conference Center, Resort and Country Club
("the Facilities") from Woodlands Commercial. This agreement has an eight-year
term ending July 31, 2005. WECCR GP operates the Facilities and pays Woodlands
Commercial a base rent of $750,000 per month and a quarterly percentage rent
based on the gross receipts of the Facilities. For the years ended December 31,
2000, 1999 and 1998, rent under the lease agreement totaled $14,349,000,
$13,011,000 and $12,799,000.
Depreciation. Depreciation of property and equipment is provided on the
straight-line method over the estimated useful lives of the assets, which range
from three to ten years.
Inventory. Inventory is carried at replacement cost and consists of
golf-related clothing and equipment sold at golf course pro shops in The
Woodlands.
Income taxes. No provision for Federal income taxes is included in the
accompanying financial statements since Woodlands Operating is not a tax-paying
entity and all income and expenses are reported by the partners for tax
reporting purposes.
The tax returns, the qualification of Woodlands Operating for tax purposes
and the amount of distributable partnership income or loss are subject to
examination by Federal taxing authorities. If such examinations result in
changes with respect to partnership qualification or in changes to distributable
partnership income or loss, the tax liability of the partners could be changed
accordingly.
F-186
THE WOODLANDS OPERATING COMPANY, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Statements of cash flows. Short-term investments with maturities of three
months or less are considered to be cash equivalents. There were no significant
non-cash investing or financing activities for the years ended December 31,
2000, 1999 and 1998.
Revenue recognition. Country club initiation fees are deferred and
recognized over the estimated life of membership, which is approximately nine
years.
Use of estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
Recent accounting pronouncements. Staff Accounting Bulletin No. 101 ("SAB
101") provides interpretive guidance on the proper revenue recognition,
presentation and disclosure in financial statements. Woodlands Operating has
reviewed its revenue recognition policies and determined that it is in
compliance with generally accepted accounting principles and the related
interpretive guidance set forth in SAB 101.
(2) COMMITMENTS AND CONTINGENCIES
Legal actions. Woodlands Operating is a party to claims and legal actions
arising in the ordinary course of business and to recurring examinations by the
Internal Revenue Service and other regulatory agencies. Management believes,
after consultation with outside counsel, that adequate financial statement
accruals have been provided for all known litigation contingencies where losses
are deemed probable. Woodlands Operating believes it is not probable that the
ultimate resolution of this litigation will have a material adverse effect on
its financial position and results of operations.
Leases. Woodlands Operating has various facility and equipment lease
agreements including the Facility lease described in Note 1. Rental expenses for
operating leases for the years ended December 31, 2000, 1999 and 1998 total
$15,419,000, $14,364,000 and $13,898,000. Lease terms extend to 2009 and have an
average remaining term of seven years. Minimum rentals for the five years
subsequent to December 31, 2000 total approximately $10,032,000; $9,950,000;
$9,571,000; $9,442,000, $5,712,000 and $1,739,000 thereafter.
Incentive plan. Woodlands Operating instituted an incentive compensation
plan for certain employees effective January 1, 1998. The plan is unfunded and
while certain payments are made currently, a portion of the payment is deferred
and paid only upon the occurrence of certain future events. Woodlands
Development and Woodlands Commercial will reimburse any incentive plan payments
made in the future.
(3) PARTNERS' DEFICIT
Crescent's ownership interest in Woodlands Operating is WOCOI Investment
Company, which holds a 42.5% general partner interest. Morgan Stanley's
ownership interests are MS/TWC Joint Venture, which holds a 56.5% limited
partner interest, and MS TWC, Inc., which holds a 1% general partner interest.
The partnership agreement provides, among other things, the following:
(i) Woodlands Operating is governed by an Executive Committee composed
of equal representation from its respective general partners.
(ii) Net income and losses from operations are currently allocated so
that partners' capital accounts stand in the ratio of the percentage
interest listed above.
(iii) Distributions are made to partners based on specified payout
percentages and include cumulative preferred returns to Morgan Stanley's
affiliates. The payout percentage to Morgan Stanley's affiliates is 57.5%
until the affiliates receive distributions equal to their capital
contributions and a 12%
F-187
THE WOODLANDS OPERATING COMPANY, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
cumulative preferred return compounded quarterly. Then, the payout
percentage to Morgan Stanley's affiliates is 50.5% until the affiliates
receive distributions equal to their capital contributions and an 18%
cumulative preferred return compounded quarterly. Thereafter, the payout
percentage to Morgan Stanley's affiliates is 47.5%.
(iv) Woodlands Operating will continue to exist until December 31,
2040 unless terminated earlier due to specified events.
(v) No additional partners may be admitted to Woodlands Operating
unless specific conditions in the partnership agreements are met.
Partnership interests may be transferred to affiliates of Crescent or
Morgan Stanley. Crescent has the right of first refusal to buy the
partnership interests of the Morgan Stanley affiliates at the same terms
and conditions offered to a third party purchaser, or sell its affiliates'
interests to the same third party purchaser.
(vi) Crescent and Morgan Stanley have the right to offer to purchase
the other partner's affiliates' partnership interests in the event of
failure to make specified capital contributions or a specified default by
the other. Specified defaults include bankruptcy, breach of partnership
covenants, transfer of partnership interests except as permitted by the
partnership agreements, and fraud or gross negligence.
(4) EMPLOYEE SAVINGS PLAN
Woodlands Operating has a 401(k) defined contribution plan that is
available to all full-time employees who meet specified service requirements.
The plan is administered by a third party. Contributions to the plan are based
on a match of employee contributions up to a specified limit. For the years
ended December 31, 2000, 1999 and 1998 Woodlands Operating contributions totaled
$634,000, $547,000 and $582,000.
F-188
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Executive Committee of
The Woodlands Land Development Company, L.P.:
We have audited the accompanying consolidated balance sheets of The
Woodlands Land Development Company, L.P. (a Texas limited partnership) and
subsidiary as of December 31, 2000 and 1999 and the related consolidated
statements of earnings, changes in partners' equity and cash flows for each of
the three years ended December 31, 2000. These financial statements are the
responsibility of The Woodlands Land Development Company, L.P.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
The Woodlands Land Development Company, L.P. and subsidiary as of December 31,
2000 and 1999 and the consolidated results of their operations and cash flows
for each of the three years ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Houston, Texas
January 15, 2001
THIS REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS IS A COPY OF THE REPORT
PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP. THE REPORT HAS NOT BEEN REISSUED BY
ARTHUR ANDERSEN LLP.
F-189
THE WOODLANDS LAND DEVELOPMENT COMPANY, L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and cash equivalents................................... $ 10,739 $ 486
Trade receivables........................................... 989 465
Inventory................................................... 56 36
Prepaid and other current assets............................ 2,072 727
Notes and contracts receivable (Notes 2 and 10)............. 30,471 35,787
Real estate (Notes 3 and 4)................................. 395,940 375,663
Other assets................................................ 4,342 4,391
-------- --------
$444,609 $417,555
======== ========
LIABILITIES AND EQUITY
Liabilities
Accounts payable.......................................... $ 27,935 $ 19,264
Accrued liabilities....................................... 3,598 3,148
Credit facility (Notes 5 and 10).......................... 217,000 237,000
Other debt (Notes 5 and 10)............................... 38,356 3,285
Deferred revenue.......................................... 6,272 1,603
Other liabilities......................................... 7,128 8,250
Note payable to affiliated company (Note 8)............... 15,880 23,303
Notes payable to partners (Notes 6 and 10)................ 25,000 25,000
-------- --------
341,169 320,853
Commitments and contingencies (Notes 4 and 7)
Partners' equity (Note 9)................................... 103,440 96,702
-------- --------
$444,609 $417,555
======== ========
F-190
THE WOODLANDS LAND DEVELOPMENT COMPANY, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
Revenues
Residential lot sales..................................... $127,435 $ 92,904 $ 77,824
Commercial land sales..................................... 39,486 24,820 43,778
Other (Notes 3 and 4)..................................... 9,963 13,135 10,349
-------- -------- --------
176,884 130,859 131,951
-------- -------- --------
Costs and Expenses
Residential lot cost of sales............................. 64,269 51,352 45,203
Commercial land cost of sales............................. 15,411 10,024 17,533
Operating expenses (Note 8)............................... 25,249 18,705 19,471
Depreciation and amortization............................. 1,267 753 464
-------- -------- --------
106,196 80,834 82,671
-------- -------- --------
Operating Earnings.......................................... 70,688 50,025 49,280
-------- -------- --------
Other (Income) Expense
Interest expense (Notes 5, 6 and 8)....................... 29,424 23,833 24,000
Interest capitalized...................................... (26,438) (21,659) (22,106)
Amortization of debt costs................................ 1,083 1,211 1,243
Other..................................................... 149 226 329
-------- -------- --------
4,218 3,611 3,466
-------- -------- --------
Earnings before Extraordinary Charge and Cumulative Effect
of a Change in Accounting Principle....................... 66,470 46,414 45,814
Extraordinary Charge (Note 5)............................... -- 883 --
Cumulative Effect of a Change in Accounting Principle (Note
11)....................................................... -- -- 639
-------- -------- --------
Net Earnings................................................ $ 66,470 $ 45,531 $ 45,175
======== ======== ========
F-191
THE WOODLANDS LAND DEVELOPMENT COMPANY, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
THE
WOODLANDS MS/TWC
LAND JOINT MS/TWC,
COMPANY, INC. VENTURE INC. TOTAL
------------- -------- ------- --------
(DOLLARS IN THOUSANDS)
Balance, December 31, 1997...................... $ 31,405 $ 41,748 $ 739 $ 73,892
Contributions................................... 2,575 3,423 60 6,058
Distributions................................... (15,299) (20,338) (360) (35,997)
Net earnings.................................... 19,199 25,524 452 45,175
-------- -------- ------ --------
Balance, December 31, 1998...................... 37,880 50,357 891 89,128
Contributions................................... 2,550 3,390 60 6,000
Distributions................................... (18,682) (24,836) (439) (43,957)
Net earnings.................................... 19,351 25,725 455 45,531
-------- -------- ------ --------
Balance, December 31, 1999...................... 41,099 54,636 967 96,702
Contributions................................... 2,550 3,390 60 6,000
Distributions................................... (27,947) (37,129) (656) (65,732)
Net earnings.................................... 28,260 37,547 663 66,470
-------- -------- ------ --------
Balance, December 31, 2000...................... $ 43,962 $ 58,444 $1,034 $103,440
======== ======== ====== ========
F-192
THE WOODLANDS LAND DEVELOPMENT COMPANY, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
-------- --------- --------
(DOLLARS IN THOUSANDS)
Operating Activities
Net earnings................................................ $ 66,470 $ 45,531 $ 45,175
Adjustments to reconcile net earnings to cash provided by
operating activities
Cost of land sold......................................... 79,680 61,376 62,736
Depreciation and amortization............................. 1,267 753 464
Gain on sale of property.................................. -- (4,239) (699)
Partnership distributions greater (less) than earnings.... 184 365 (61)
(Increase) decrease in notes and contracts receivable..... 5,316 (5,747) (9,108)
Other..................................................... 5,301 4,750 (4,697)
-------- --------- --------
158,218 102,789 93,810
Land development capital expenditures..................... (58,060) (71,969) (50,035)
Changes in operating assets and liabilities
Trade receivables, inventory and prepaid assets........ (1,889) (1,075) 1
Other assets........................................... 49 (2,383) 1,855
Accounts payable and accrued liabilities............... 9,610 7,153 (1,118)
-------- --------- --------
Cash provided by operating activities....................... 107,928 34,515 44,513
-------- --------- --------
Investing Activities
Capital expenditures........................................ (45,591) -- --
Acquisition of commercial property.......................... -- -- (10,100)
Proceeds from sale of property.............................. -- 5,398 4,819
-------- --------- --------
Cash provided by (used for) investing activities............ (45,591) 5,398 (5,281)
-------- --------- --------
Financing Activities
Contributions from partners................................. 6,000 6,000 6,058
Distributions to partners................................... (65,732) (43,957) (35,997)
Debt borrowings............................................. 3,513 252,438 3,263
Debt repayments............................................. (20,169) (251,308) (30,250)
Repayment of affiliated company note........................ (7,423) (2,697) --
Subsidiary debt financing................................... 31,727 -- --
-------- --------- --------
Cash used for financing activities.......................... (52,084) (39,524) (56,926)
-------- --------- --------
Increase (Decrease) in Cash and Cash Equivalents............ 10,253 389 (17,694)
Cash and Cash Equivalents, beginning of year................ 486 97 17,791
-------- --------- --------
Cash and Cash Equivalents, end of year...................... $ 10,739 $ 486 $ 97
======== ========= ========
F-193
THE WOODLANDS LAND DEVELOPMENT COMPANY, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Control. The Woodlands Land Development Company, L.P. ("Woodlands
Development"), The Woodlands Commercial Properties Company, L.P. ("Woodlands
Commercial"), WECCR General Partnership ("WECCR GP"), and The Woodlands
Operating Company, L.P. ("Woodlands Operating") are owned by entities controlled
by Crescent Real Estate Equities Limited Partnership or Crescent Operating, Inc.
(together "Crescent") and Morgan Stanley Real Estate Fund II, L.P. ("Morgan
Stanley"). Woodlands Development and Woodlands Commercial are successors to The
Woodlands Corporation. Prior to July 31, 1997, The Woodlands Corporation was a
wholly owned subsidiary of Mitchell Energy & Development Corp. On July 31, 1997
The Woodlands Corporation was acquired by Crescent and Morgan Stanley and merged
into Woodlands Commercial, a Texas limited partnership. Woodlands Commercial was
then divided into two partnerships: Woodlands Commercial and Woodlands
Development. Woodlands Operating manages assets owned by Woodlands Development
as described in Note 8. In July 2000, Woodlands Development and Woodlands
Commercial established Woodlands VTO 2000 Land, LP ("VTO Land"), a subsidiary of
Woodlands Development, and Woodlands VTO 2000 Commercial, LP ("VTO Commercial"),
a subsidiary of Woodlands Commercial. These subsidiaries purchased certain
commercial properties owned by Woodlands Development and Woodlands Commercial.
Principles of consolidation. The consolidated financial statements include
the accounts of Woodlands Development and its subsidiary. All significant
intercompany transactions and accounts are eliminated in consolidation.
Business. Woodlands Development's real estate activities are concentrated
in The Woodlands, a planned community located north of Houston, Texas.
Consequently, these operations and the associated credit risks may be affected,
either positively or negatively, by changes in economic conditions in this
geographical area. Activities associated with The Woodlands include residential
and commercial land sales and the construction of commercial buildings.
Real estate. Costs associated with the acquisition and development of real
estate, including holding costs consisting principally of interest and ad
valorem taxes, are capitalized as incurred. Capitalization of such holding costs
is limited to properties for which active development continues. Capitalization
ceases upon completion of a property or cessation of development activities.
Where practicable, capitalized costs are specifically assigned to individual
assets; otherwise, costs are allocated based on estimated values of the affected
assets.
Land sales. Earnings from sales of real estate are recognized when a
third-party buyer has made an adequate cash down payment and has attained the
attributes of ownership. Notes received in connection with land sales are
discounted when the stated purchase prices are significantly different from
those that would have resulted from similar cash transactions. The cost of land
sold is generally determined as a specific percentage of the sales revenues
recognized for each land development project. These percentages are based on
total estimated development costs and sales revenues for each project.
Depreciation. Depreciation of operating assets is provided on the
straight-line method over the estimated useful lives of the assets, which range
from three to fifty years.
Income taxes. No provision for Federal income taxes is included in the
accompanying financial statements since the Woodlands Development is not a
tax-paying entity and all income and expenses are reported by the partners for
tax reporting purposes.
The tax returns, the qualification of Woodlands Development for tax
purposes and the amount of distributable partnership income or loss are subject
to examination by Federal taxing authorities. If such
F-194
THE WOODLANDS LAND DEVELOPMENT COMPANY, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
examinations result in changes with respect to partnership qualification or in
changes to distributable partnership income or loss, the tax liability of the
partners could be changed accordingly.
Statements of cash flows. Short-term investments with original maturities
of three months or less are considered to be cash equivalents. The reported
amounts for proceeds from issuance of debt and debt repayments exclude the
impact of borrowings with initial terms of three months or less. For the years
ended December 31, 2000, 1999 and 1998, Woodlands Development paid interest
totaling $30,018,000, $22,541,000 and $25,361,000 related to debt described in
Notes 5, 6 and 8.
Use of estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
Recent accounting pronouncements. On January 1, 2001, Woodlands
Development adopted SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" as amended by SFAS No. 138 "Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an amendment of FASB
Statement No. 133". These standards establish accounting and reporting standards
for derivative instruments and hedging activities. In particular, they require a
company to record derivative instruments on the balance sheet at fair value and
recognize changes in fair value currently in earnings unless specific hedge
accounting criteria are satisfied. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally document
and assess the effectiveness of transactions that receive hedge accounting. The
adoption of these standards will result in a reduction of its derivative
instruments by $206,000. See Note 5 for additional information regarding the
Woodlands Development's derivative instruments and hedging activities.
Staff Accounting Bulletin No. 101 ("SAB 101") provides interpretive
guidance on the proper revenue recognition, presentation and disclosure in
financial statements. Woodlands Development has reviewed its revenue recognition
policies and determined that it is in compliance with generally accepted
accounting principles and the related interpretive guidance set forth in SAB
101.
(2) NOTES AND CONTRACTS RECEIVABLE
Notes receivable are carried at cost, net of discounts. At December 31,
2000 and 1999, Woodlands Development held utility district receivables totaling
$30,471,000 and $33,559,000. Utility district receivables, the collection of
which is dependent on the ability of utility districts in The Woodlands to sell
bonds, have a market interest rate of approximately 5.5% at December 31, 2000.
In December 2000, Woodlands Development sold its remaining notes receivable
to a financial institution for $5,560,000. During 2000, Woodlands Development
sold $27,200,000 of its utility district receivables to a financial institution
under a factoring agreement. There was no gain or loss recognized.
F-195
THE WOODLANDS LAND DEVELOPMENT COMPANY, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) REAL ESTATE
The following is a summary of real estate at December 31, 2000 and 1999 (in
thousands):
2000 1999
-------- --------
Land........................................................ $320,110 $344,140
Commercial properties....................................... 68,811 27,285
Equity investments (Note 4)................................. 8,406 1,682
Other assets................................................ 453 3,579
-------- --------
397,780 376,686
Accumulated depreciation.................................... (1,840) (1,023)
-------- --------
$395,940 $375,663
======== ========
Land. The principal land development is The Woodlands, a mixed-use,
master-planned community located north of Houston, Texas. Residential land is
divided into seven villages in various stages of development. Each village has
or is planned to contain a variety of housing, neighborhood retail centers,
schools, parks and other amenities. Woodlands Development controls the
development of the residential communities and produces finished lots for sale
to qualified builders. Housing is constructed in a wide choice of pricing and
product styles.
Commercial land is divided into distinct centers that serve or are planned
to serve as locations for office buildings, retail and entertainment facilities,
industrial and warehouse facilities, research and technology facilities, and
college and training facilities. Woodlands Development produces finished sites
for third parties or its own building development activities.
Commercial properties. Commercial properties owned by Woodlands
Development are leased to third-party tenants. At December 31, 2000, the net
book value of assets under operating leases totaled $55,304,000. Other
commercial properties are under development at December 31, 2000. Lease terms
range from five to nine years with an average term of six years. Leases are
accounted for under the operating method. Minimum future lease revenues from
operating leases exclude contingent rentals that may be received. Tenant rents
include rent for noncancelable operating leases. For the years ending December
31, 2000, 1999 and 1998, tenant rents totaled $2,589,000, $1,938,000 and
$1,470,000 and are included in other revenues. Contingent rents include
pass-throughs of incremental operating costs. For the years ending December 31,
2000, 1999 and 1998, contingent rents totaled $63,000, $144,000 and $155,000.
Minimum future lease revenues for the five years subsequent to December 31, 2000
are $5,785,000; $5,805,000; $5,934,000; $6,083,000; and $6,113,000.
(4) EQUITY INVESTMENTS
During 2000, Woodlands Development's principal partnership and corporation
interests included the following:
OWNERSHIP NATURE OF OPERATIONS
--------- --------------------
Sterling Ridge Retail 2000 (completed 50% Retail property in The Woodlands
December 2000)...........................
Stewart Title of Montgomery County, Inc.... 50% Title company
Woodlands Development's net investment in these entities is included in the
real estate caption on the balance sheets and its share of these entities'
pretax earnings is included in other revenues on the statements of
F-196
THE WOODLANDS LAND DEVELOPMENT COMPANY, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
earnings. A summary of the net investment as of December 31, 2000 and the share
of pre-tax earnings for the year then ended follows (in thousands):
EQUITY IN
NET INVESTMENT PRE-TAX EARNINGS
-------------- ----------------
Sterling Ridge Retail 2000.............................. $6,953 $ --
Stewart Title of Montgomery County, Inc. ............... 1,368 555
Other................................................... 85 (130)
------ -----
$8,406 $ 425
====== =====
In September 1999, Woodlands Development completed a sale of its 49%
interest in Mitchell Mortgage Company, LLC for $5,398,000 and recognized as
other revenue a $4,239,000 gain on the sale.
Summarized financial statement information for partnerships and a
corporation in which Woodlands Development has an ownership interest at December
31, 2000 and for the year then ended follows (in thousands):
Assets...................................................... $19,308
Debt payable to third parties
Woodlands Development's proportionate share
(nonrecourse).......................................... 1,837
Other parties' proportionate share........................ 1,836
Accounts payable and deferred credits....................... 1,275
Owners' equity.............................................. 14,360
Revenues.................................................... $ 4,938
Operating earnings.......................................... 1,912
Pre-tax earnings............................................ 1,597
Woodlands Development's proportionate share of pre-tax
earnings.................................................. 425
(5) DEBT
A summary of Woodlands Development's outstanding debt at December 31, 2000
and 1999 follows (in thousands):
2000 1999
-------- --------
Bank credit agreement....................................... $217,000 $237,000
Subsidiary's credit agreement............................... 31,727 --
Mortgages payable, at an average interest rate of 8.4%...... 6,629 3,285
-------- --------
$255,356 $240,285
======== ========
Bank credit agreement. In November 1999, Woodlands Development and
Woodlands Commercial replaced their existing bank credit agreement and
construction loan agreement with a new facility, consisting of a $300,000,000
term loan and a $100,000,000 revolving loan. The transaction resulted in an
extraordinary charge of $883,000 for Woodlands Development. The charge consisted
of the write-off of previously deferred financing costs. The new bank credit
agreement has a three-year term expiring in November 2002 with two one-year
extension options. The interest rate, based on the London Interbank Offered Rate
plus a margin, is approximately 9.8% at December 31, 2000. Interest is paid
monthly. Commitment fees, based on .25% of the unused commitment, total $18,000,
$9,000 and $52,000 for the years ended December 31, 2000, 1999 and 1998. The
credit agreement contains certain restrictions which, among other things,
require the maintenance of specified financial ratios, restrict indebtedness and
sale, lease or transfer of certain assets, and limit the right
F-197
THE WOODLANDS LAND DEVELOPMENT COMPANY, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of Woodlands Development to merge with other companies and make distributions to
its partners. At December 31, 2000, Woodlands Development was in compliance with
its debt covenants. Certain assets of Woodlands Development, including cash,
receivables, commercial properties and equity investments in joint ventures and
partnerships, secure the credit agreement. Mandatory debt maturities are
$18,000,000 in 2001 and $199,000,000 in 2002. Payments may be made by Woodlands
Development or Woodlands Commercial or both at their option. Beginning in 2001,
additional principal payments are required based on distributions to Crescent
and Morgan Stanley. Additional prepayments can also be made at the discretion of
Woodlands Development. Prepayments on the term loan are subject to a prepayment
penalty of up to 2%.
Woodlands Development and Woodlands Commercial entered into an interest
rate cap agreement with a commercial bank to reduce the impact of increases in
interest rates on their bank credit agreement. The interest cap agreement
effectively limits their interest rate exposure on a notional amount to a
maximum LIBOR rate of 9%. The notional amount is $134,000,000 at December 31,
2000 and will reduce to $121,000,000 in December 2001. The interest cap
agreement matures at the same time as the bank credit agreement. Woodlands
Development is exposed to credit loss in the event of nonperformance by the
other party with respect to the interest cap agreement. However, management does
not anticipate nonperformance by the other party.
Subsidiary's credit agreement. VTO Land and VTO Commercial entered into a
$67,500,000 credit agreement that has a three-year term expiring in October 2003
with two one-year extension options. The interest rate, based on the London
Interbank Offered Rate plus a margin, is approximately 8.8% at December 31,
2000. Interest is paid monthly. The credit agreement contains certain
restrictions which, among other things, require the maintenance of specified
financial ratios and restrict indebtedness and leasing. At December 31, 2000,
VTO Land was in compliance with its debt covenants. Certain assets of the VTO
Land and VTO Commercial secure the agreement. Debt maturities for the three
years subsequent to December 31, 2000 are $82,000, $490,000 and $31,155,000. VTO
Land, VTO Commercial, or both may make payments at their option.
VTO Land and VTO Commercial entered into an interest rate cap agreement
with a commercial bank to reduce the impact of increases in interest rates on
their credit agreement. The interest cap agreement effectively limits their
interest rate exposure on a notional amount to a maximum LIBOR rate of 9%. The
notional amount is $33,750,000. The interest cap agreement matures at the same
time as the credit agreement. VTO Land is exposed to credit loss in the event of
nonperformance by the other party with respect to the interest cap agreement.
However, management does not anticipate nonperformance by the other party.
Mortgages payable. The mortgages payable have debt maturities for the five
years subsequent to December 31, 2000 totaling $356,000; $530,000; $577,000;
$3,017,000; $2,007,000 and $142,000 thereafter. Mortgages payable are secured by
certain tracts of land.
(6) NOTES PAYABLE TO PARTNERS
Woodlands Development has notes payable to its partners totaling
$25,000,000. The notes bear interest at 15%. Interest is payable beginning in
October 1998 and quarterly thereafter. All outstanding balances are due in 2007.
These notes are subordinate to the bank credit agreement and mortgages payable
described above.
(7) COMMITMENTS AND CONTINGENCIES
Contingent liabilities. At December 31, 2000 and 1999, Woodlands
Development had contingent liabilities totaling approximately $11,000,000 and
$4,600,000, consisting of letters of credit and commitments to complete certain
improvements in The Woodlands. Under the terms of a land sales agreement,
Woodlands Development has committed to construct, or cause to be constructed,
certain improvements in The
F-198
THE WOODLANDS LAND DEVELOPMENT COMPANY, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Woodlands and is contingently liable for up to $3,100,000 in liquidating damages
if the improvements are not complete by certain dates.
Leases. Rental expense for operating leases for the years ended December
31, 2000, 1999 and 1998 totaled $56,000, $19,000 and $14,000.
Legal actions. The 221st Judicial District Court of Montgomery County,
Texas entered a judgment against Woodlands Development in October 1999 awarding
a total of $1,433,000 in damages to the plaintiffs. In addition to these
damages, the judgment also awards attorneys' fees to the plaintiff for
preparation, trial and subsequent appeals. The total present amount of the
judgment, including actual damages and attorneys' fees through the time of
trial, is approximately $1,468,000. The judgment awards postjudgment interest of
10% per annum. Woodlands Development appealed the ruling. Oral arguments have
been set by the Court of Appeals for February 2001.
During 2000, Woodlands Development settled outstanding litigation, related
to flooding in the North Houston area in 1994, brought against it by various
homeowners in The Woodlands. No additional losses were incurred as a result of
this settlement.
Woodlands Development is also a party to other claims and legal actions
arising in the ordinary course of their business and to recurring examinations
by the Internal Revenue Service and other regulatory agencies.
Management believes, after consultation with outside counsel, that adequate
financial statement accruals have been provided for all known litigation
contingencies where losses are deemed probable. Since the ultimate cost will
depend on the outcomes of the uncertainties discussed in this note, it is
possible, however, that additional future charges might be required that would
be significant to the operating results of a particular period. Based on the
status of the cases, Woodlands Development is unable to determine a range of
such possible additional losses, if any, that might be incurred in connection
with this litigation. Woodlands Development believes it is not probable that the
ultimate resolution of this litigation will have a material adverse effect on
its financial position.
Incentive plan. Woodlands Operating instituted an incentive compensation
plan for certain employees effective January 1, 1998. The plan is unfunded and
while certain payments are made currently, a portion of the payment is deferred
and paid only upon the occurrence of certain future events. Woodlands
Development will reimburse a portion of any incentive plan payments made in the
future.
(8) RELATED PARTY TRANSACTIONS
Woodlands Operating provides services to Woodlands Development under
management and advisory services agreements. These agreements are automatically
renewed annually. Woodlands Development pays Woodlands Operating an advisory fee
equal to cost plus 3%. In addition, Woodlands Development reimburses Woodlands
Operating for all cost and expenses incurred on their behalf. For the years
ended December 31, 2000, 1999 and 1998, Woodlands Development recorded expenses
of $12,606,000, $10,597,000 and $11,050,000 for services provided by Woodlands
Operating.
In July 1999, Woodlands Development purchased approximately 1,000 acres of
land in The Woodlands from Woodlands Commercial for $33,090,000, the then
current fair market value which approximated the carrying cost. The transaction
consisted of cash and a $26,000,000 note. The note bears interest at 8.5% and
matures in August 2009. Principal and interest payments are due quarterly and
additional principal payments are due when a portion of the land is conveyed to
a third party or built upon. The note is unsecured and subordinate to the bank
credit agreement described in Note 5.
F-199
THE WOODLANDS LAND DEVELOPMENT COMPANY, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) PARTNERS' EQUITY
Crescent's ownership interest in Woodlands Development is The Woodlands
Land Company, Inc., which holds a 42.5% general partner interest. Morgan
Stanley's ownership interests are MS/TWC Joint Venture, which holds a 56.5%
limited partner interest, and MS/TWC, Inc., which holds a 1% general partner
interest.
The partnership agreement provides, among other things, the following:
(i) Woodlands Development is governed by an Executive Committee
composed of equal representation from their respective general partners.
(ii) Net income and losses from operations are currently allocated so
that partners' capital accounts stand in the ratio of the percentage
interest listed above.
(iii) Distributions are made to partners based on specified payout
percentages and include cumulative preferred returns to Morgan Stanley's
affiliates. The payout percentage to Morgan Stanley's affiliates is 57.5%
until the affiliates receive distributions on a combined basis with
Woodlands Commercial equal to their capital contributions and a 12%
cumulative preferred return compounded quarterly. Then, the payout
percentage to Morgan Stanley's affiliates is 50.5% until the affiliates
receive distributions equal to their capital contributions and an 18%
cumulative preferred return compounded quarterly. Thereafter, the payout
percentage to Morgan Stanley's affiliates is 47.5%.
(iv) Woodlands Development will continue to exist until December 31,
2040 unless terminated earlier due to specified events.
(v) No additional partners may be admitted to Woodlands Development
unless specific conditions in the partnership agreements are met.
Partnership interests may be transferred to affiliates of Crescent or
Morgan Stanley. Crescent has the right of first refusal to buy the
partnership interests of the Morgan Stanley affiliates at the same terms
and conditions offered to a third party purchaser, or sell its affiliates'
interests to the same third party purchaser.
(vi) Crescent and Morgan Stanley have the right to offer to purchase
the other partner's affiliates' partnership interests in the event of
failure to make specified capital contributions or a specified default by
the other. Specified defaults include bankruptcy, breach of partnership
covenants, transfer of partnership interests except as permitted by the
partnership agreements, and fraud or gross negligence.
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of Woodlands Development's
financial instruments as of December 31, 2000 follows (in thousands):
CARRYING ESTIMATED
AMOUNTS FAIR VALUES
-------- -----------
Notes and contracts receivable.............................. $ 30,471 $ 30,471
Note payable to affiliated company.......................... 15,880 15,880
Debt........................................................ 255,356 255,175
Notes payable to partners................................... 25,000 31,524
Fair values of notes and contracts receivable were estimated by discounting
future cash flows using interest rates at which similar loans currently could be
made for similar maturities to borrowers with comparable credit ratings. Fair
values of fixed-rate, long-term debt were based on current interest rates
offered to Woodlands Development for debt with similar remaining maturities. For
floating-rate debt obligations, carrying amounts and fair values were assumed to
be equal because of the nature of these obligations. The carrying amounts of
Woodlands Development's other financial instruments approximate their fair
values.
F-200
THE WOODLANDS LAND DEVELOPMENT COMPANY, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1998 Woodlands Development changed its method of
accounting for organization costs to conform to Statement of Position 98-5
"Reporting on the Costs of Start-Up Activities." In 1998, Woodlands Development
expensed previously capitalized costs that totaled $639,000.
F-201
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial statements are
based upon Crescent Real Estate's historical financial statements and give
effect to:
- the transfer to some of Crescent Real Estate's subsidiaries of
Crescent Operating's lessee interests in Crescent Real Estate's
eight resort/hotel properties, Crescent Operating's voting interests
in three of our residential development corporations and other
assets owned by Crescent Operating;
- the capitalization of Spinco, which will be committed to purchase
Crescent Operating's interest in COPI Cold Storage L.L.C., which
owns a 40% partnership interest in the owner of Americold Logistics,
and the distribution of the common stock of Spinco to Crescent Real
Estate's shareholders and unitholders of the Operating Partnership;
- the issuance of Crescent Real Estate's common shares to the
stockholders of Crescent Operating in connection with a prepackaged
bankruptcy plan of Crescent Operating;
- Crescent Real Estate's April 2002 offering of its 9.25% Senior Notes
due 2009 and the application of $366.5 million in net proceeds
thereof;
- Crescent Real Estate's April 2002 offering of its Series A
Convertible Cumulative Preferred Shares and the application of $49.1
million in net proceeds thereof; and
- Crescent Real Estate's May 2002 offering of its Series B Cumulative
Redeemable Preferred Shares and the application of $81.9 million in
net proceeds thereof.
The unaudited pro forma consolidated balance sheet as of September 30, 2002
is presented as if these transactions had been completed on September 30, 2002.
The unaudited pro forma consolidated statements of operations for the nine
months ended September 30, 2002 and the year ended December 31, 2001 are
presented as if these transactions had occurred as of January 1, 2001.
F-202
CRESCENT REAL ESTATE EQUITIES COMPANY
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2002
CRESCENT
OPERATING
CRESCENT(A) AGREEMENT CONSOLIDATED
----------- --------- ------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Assets:
Investments in real estate:
Land.............................................. $ 307,406 $ -- $ 307,406
Land held for investment or development........... 471,440 -- 471,440
Building and improvements......................... 2,955,237 -- 2,955,237
Furniture, fixtures and equipment................. 110,475 -- 110,475
Properties held for disposition, Net.............. 20,997 -- 20,997
Less -- accumulated depreciation.................. (714,867) -- (714,867)
---------- -------- ----------
Net investment in real estate................ 3,150,688 -- 3,150,688
Cash and cash equivalents......................... 82,642 -- 82,642
Restricted cash and cash equivalents.............. 104,060 -- 104,060
Accounts receivable, net.......................... 42,605 -- 42,605
Deferred rent receivable.......................... 60,850 -- 60,850
Investments in real estate mortgages and equity of
unconsolidated companies........................ 553,743 -- 553,743
Notes receivable, net............................. 117,590 -- 117,590
Deferred income tax asset......................... 37,123 -- 37,123
Other assets, net................................. 191,810 -- 191,810
---------- -------- ----------
Total assets................................. $4,341,111 $ -- $4,341,111
========== ======== ==========
Liabilities:
Borrowings under Credit Facility..................... $ 179,000 $ 15,500(B) $ 194,500
Notes payable........................................ 2,233,544 -- 2,233,544
Accounts payable, accrued expenses and other
liabilities....................................... 362,633 (2,156)(C) 360,477
---------- -------- ----------
Total liabilities............................ 2,775,177 13,344 2,788,521
---------- -------- ----------
Minority interests:
Operating partnership................................ 61,792 -- 61,792
Investment in joint ventures......................... 72,203 -- 72,203
---------- -------- ----------
Total minority interests..................... 133,995 -- 133,995
---------- -------- ----------
Shareholders' equity:
Preferred shares..................................... 330,083 -- 330,083
Common shares........................................ 1,235 -- 1,235
Additional paid-in capital........................... 2,241,831 1(C) 2,241,832
Deferred compensation on restricted shares........... (5,253) 2,155(C) (3,098)
Retained earnings (deficit).......................... (717,667) (15,500)(B) (733,167)
Accumulated other comprehensive income............... (30,215) -- (30,215)
---------- -------- ----------
1,820,014 (13,344) 1,806,670
Less -- shares held in treasury, at cost............. (388,075) -- (388,075)
---------- -------- ----------
Total shareholders' equity................... 1,431,939 (13,344) 1,418,595
---------- -------- ----------
Total liabilities and shareholders' equity... $4,341,111 $ -- $4,341,111
========== ======== ==========
See accompanying notes to pro forma consolidated balance sheet.
F-203
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
The following describes the pro forma adjustments to the unaudited pro
forma consolidated balance sheet as of September 30, 2002 as if the transactions
described under the first paragraph of "Pro Forma Financial Information" were
completed as of September 30, 2002.
(A) Reflects our unaudited consolidated historical balance sheet as of
September 30, 2002.
(B) Reflects our capitalization of Spinco.
(C) Reflects the issuance of our common shares to the Crescent
Operating stockholders, computed as follows:
Number of COPI Common Shares Outstanding............... 10,781,273
Value for COPI Shares.................................. $ 0.20
-----------
Dollar Value to Convert................................ 2,156,255
Crescent's Share Price................................. $ 15.00
Shares to be issued.................................... 143,750
Cash Settlement in Lieu of Fractional Shares........... --
F-204
CRESCENT REAL ESTATE EQUITIES COMPANY
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
CRESCENT REAL CRESCENT
ESTATE OPERATING
EQUITIES COPI OTHER AGREEMENT
COMPANY(A) HOTELS(B) COLORADO(C) DMDC(C) TWLC(C) ENTITIES(C) ELIMINATIONS
------------- --------- ----------- ------- ------- ----------- ------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Revenues:
Office properties................. $ 429,297 $ -- $ -- $ -- $ -- $ -- $ --
Resort/Hotel properties........... 148,157 28,201 -- -- -- -- (5,587)(D)
Land Development properties....... 176,887 -- 65,303 5,404 202 -- --
Interest and other income......... 5,850 -- -- -- -- -- --
------------ ------- ------- ------- ------ ----- -------
Total revenues............... 760,191 28,201 65,303 5,404 202 -- (5,587)
Expenses:
Office properties................. 59,215 -- -- -- -- -- --
Resort/Hotel properties........... 129,931 22,519 -- -- -- -- --
Rent Expense -- CEI............... 110,701 8,015 -- -- -- -- (8,015)(E)
Land Development properties....... 161,319 -- 60,976 5,961 116 -- (158)(F)
Corporate general and
administrative.................. 19,846 -- -- -- -- -- --
Interest expense.................. 135,871 -- 1,233 390 -- -- (1,339)(F)
Amortization of deferred financing
costs........................... 7,722 -- -- -- -- -- --
Depreciation and amortization..... 106,936 -- 198 736 -- -- --
COPI reorganization charge........ -- -- -- -- -- -- --
Impairment and other charges
related to real estate assets... -- -- -- -- -- -- --
------------ ------- ------- ------- ------ ----- -------
Total expenses............... 731,541 30,534 62,407 7,087 116 -- (9,512)
------------ ------- ------- ------- ------ ----- -------
Operating income............. 28,650 (2,333) 2,896 (1,683) 86 -- 3,925
Other income and expense:
Equity in net income of
unconsolidated companies:
Office and retail properties.... 3,564 -- -- -- -- -- --
Residential development
properties..................... 22,934 -- 124 -- 929 -- (3,023)(G)
Temperature-controlled logistics
properties..................... (3,828) -- -- -- -- -- --
Other........................... (5,281) -- -- -- -- -- --
------------ ------- ------- ------- ------ ----- -------
Total equity in net income of
unconsolidated companies........ 17,389 -- 124 -- 929 -- (3,023)
Gain on property sales, net....... 22,238 -- -- -- -- -- --
------------ ------- ------- ------- ------ ----- -------
Total other income and
expense..................... 39,627 -- 124 -- 929 -- (3,023)
------------ ------- ------- ------- ------ ----- -------
Income before income taxes,
minority interests, discontinued
operations, and cumulative effect
of a change in accounting
principle......................... 68,277 (2,333) 3,020 (1,683) 1,015 -- 902
Minority interests................ (17,177) -- (2,239) (209) -- -- 1,018(H)
Income tax benefit................ 6,596 -- (689) 757 (406) -- 933(I)
------------ ------- ------- ------- ------ ----- -------
Income before discontinued
operations and cumulative effect
of a change in accounting
principle......................... 57,696 (2,333) 92 (1,135) 609 -- 2,853
Series A Preferred Share
distributions..................... (12,146) -- --
Series B Preferred Share
distributions..................... (3,028) -- -- -- -- -- --
------------ ------- ------- ------- ------ ----- -------
Net income available to common
shareholders before discontinued
operations and cumulative effect
of a change in accounting
principle......................... $ 42,522 $(2,333) $ 92 $(1,135) $ 609 $ -- $ 2,853
============ ======= ======= ======= ====== ===== =======
Basic earnings per share data:
Income before discontinued
operations and cumulative effect
of a change in accounting
principle....................... $ 0.41
Diluted earnings per share data:
Income before discontinued
operations and cumulative effect
of a change in accounting
principle....................... $ 0.41
Weighted average shares
outstanding -- basic.............. 104,526,572
============
Weighted average shares
outstanding -- diluted............ 105,041,173
============
APRIL 2002 MAY 2002
APRIL 2002 SERIES A SERIES B
NOTES PREFERRED PREFERRED
OFFERING OFFERING OFFERING CONSOLIDATED
---------- ---------- --------- ------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Revenues:
Office properties................. $ -- $ -- $ -- $ 429,297
Resort/Hotel properties........... -- -- -- 170,771
Land Development properties....... -- -- -- 247,796
Interest and other income......... -- -- -- 5,250
------- ------- ------- ------------
Total revenues............... -- -- -- 853,714
Expenses:
Office properties................. -- -- -- 59,215
Resort/Hotel properties........... -- -- -- 152,450
Rent Expense -- CEI............... -- -- -- 110,701
Land Development properties....... -- -- -- 228,214
Corporate general and
administrative.................. -- -- -- 19,846
Interest expense.................. 6,444(J) -- -- 142,599
Amortization of deferred financing
costs........................... 351(K) -- -- 8,073
Depreciation and amortization..... -- -- -- 107,870
COPI reorganization charge........ -- -- -- --
Impairment and other charges
related to real estate assets... -- -- -- --
------- ------- ------- ------------
Total expenses............... 6,795 -- -- 828,968
------- ------- ------- ------------
Operating income............. (6,795) -- -- 24,746
Other income and expense:
Equity in net income of
unconsolidated companies:
Office and retail properties.... -- 3,564
Residential development
properties..................... -- 20,964
Temperature-controlled logistics
properties..................... -- (3,828)
Other........................... -- -- -- (5,281)
------- ------- ------- ------------
Total equity in net income of
unconsolidated companies........ -- -- -- 15,419
Gain on property sales, net....... -- -- -- 22,238
------- ------- ------- ------------
Total other income and
expense..................... -- -- -- 37,657
------- ------- ------- ------------
Income before income taxes,
minority interests, discontinued
operations, and cumulative effect
of a change in accounting
principle......................... (6,795) -- -- 62,403
Minority interests................ 1,113(L) 1,178(M) 2,255(O) (14,061)
Income tax benefit................ -- -- -- 7,191
------- ------- ------- ------------
Income before discontinued
operations and cumulative effect
of a change in accounting
principle......................... (5,682) 1,178 2,255 55,533
Series A Preferred Share
distributions..................... -- (1,181)(N) -- (13,327)
Series B Preferred Share
distributions..................... -- -- (4,038)(P) (7,066)
------- ------- ------- ------------
Net income available to common
shareholders before discontinued
operations and cumulative effect
of a change in accounting
principle......................... $(5,682) $ (3) $(1,783) $ 35,140
======= ======= ======= ============
Basic earnings per share data:
Income before discontinued
operations and cumulative effect
of a change in accounting
principle....................... $ 0.34
Diluted earnings per share data:
Income before discontinued
operations and cumulative effect
of a change in accounting
principle....................... $ 0.34
Weighted average shares
outstanding -- basic.............. 104,670,322(Q)
============
Weighted average shares
outstanding -- diluted............ 105,184,923(Q)
============
See accompanying notes to pro forma consolidated statement of operations.
F-205
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
The following describes the pro forma adjustments to the unaudited pro
forma consolidated statement of operations for the nine months ended September
30, 2002 as if the transactions described under the first paragraph of "Pro
Forma Financial Information" were completed on January 1, 2002.
(A) Reflects our unaudited consolidated historical statement of
operations for the nine months ended September 30, 2002.
(B) Represents the operating results for the eight resort/hotel
properties leased to Crescent Operating and Crescent Operating's lessee
rental obligation to us for the period January 1, 2002 through February 14,
2002.
(C) Represents the consolidation of net income for COPI Colorado,
DMDC, TWLC and Other Entities for the period January 1, 2002 through
February 14, 2002.
(D) Eliminates our rental revenue for the period January 1, 2002
through February 14, 2002.
(E) Eliminates the hotel lessees' rent expense to us for the period
January 1, 2002 through February 14, 2002.
(F) Eliminates the intercompany interest expense (inclusive of the
amortization of capitalized interest in the land development property
expense) on the loans from us to DMDC and CRDI.
PERIOD
JANUARY 1, 2002 --
FEBRUARY 14, 2002
------------------
DMDC................................................. $ (337)
CRDI................................................. (1,160)
-------
$(1,497)
=======
(G) Eliminates our equity in net income (inclusive of the interest
income on the intercompany loans to DMDC and CRDI) for the period January
1, 2002 through February 14, 2002.
PERIOD
JANUARY 1, 2002 --
FEBRUARY 14, 2002
------------------
DMDC................................................. $ 735
TWLC................................................. (549)
CRDI................................................. (3,209)
-------
$(3,023)
=======
(H) Eliminates minority interest in COPI Colorado and adjusts for the
40% interest of other partners in COPI Colorado.
(I) Represents the income tax benefit for the hotel business for the
period January 1, 2002 through February 14, 2002, calculated as 40% of the
net loss of the hotel lessee.
F-206
(J) Net increase of interest cost as a result of the April 2002 notes
offering, capitalization of Spinco and repayment of debt, assuming each had
occurred as of January 1, 2002.
April 2002 notes offering.................. 375,000 9.25% $34,688
Less: Historical interest expense
Bridge loan........................... 5,000 5.61% (281)
Credit Facility....................... 257,154 3.75% (9,643)
Operating Partnership public notes due
2002............................... 52,408 7.00% (3,669)
-------
Annual Net Interest Expense................ $21,095
=======
Prorated Interest Expense for January 1 to
April 15, 2002........................... $ 6,153
=======
Capitalization of Spinco (6 months of
interest costs).......................... 15,500 3.75% $ 291
=======
(K) Net increase in amortization of deferred financing cost as a
result of the April 2002 notes offering, as if it had occurred as of
January 1, 2002.
April 2002 notes offering costs............................ $8,434
Years outstanding.......................................... 7
Annual deferred financing costs............................ $1,205
======
Prorated Deferred financing costs for January 1 to April
15, 2002................................................. $ 351
======
(L) Decrease in minority interest for the redemption of $52,000
preferred units of one of our subsidiaries with an average preferred return
rate of 7.34% in 2002, for the period of January 1 to April 15, 2002,
equals $1,113.
(M) Decrease in minority interest for the redemption of $48,160
preferred units of one of our subsidiaries with an average preferred return
rate of 7.34% in 2002, for the period of January 1 to April 26, 2002,
equals $1,178.
(N) Reflects distributions that would have been paid on 2,800,000
Series A preferred shares issued, at $1.6875 per Series A preferred share,
for the first quarter of 2002.
(O) Decrease in minority interest for the redemption of $81,922
preferred units of one of our subsidiaries with an average preferred return
rate of 7.34% in 2002, for the period of January 1 to May 17, 2002, equals
$2,255.
(P) Reflects distributions that would have been paid on 3,400,000
Series B preferred shares issued, at $2.375 per Series B preferred share,
for the nine months ended September 30, 2002.
(Q) Reflects the additional shares issued of 143,750, as calculated in
footnote (C) of the Notes to Unaudited Pro Forma Consolidated Balance
Sheet.
F-207
CRESCENT REAL ESTATE EQUITIES COMPANY
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
CRESCENT CRESCENT
REAL ESTATE OPERATING
EQUITIES COPI OTHER AGREEMENT
COMPANY(A) HOTELS(B) COLORADO(C) DMDC(C) TWLC(C) ENTITIES(C) ELIMINATIONS
------------ --------- ----------- -------- ------- ----------- ------------
(DOLLARS IN THOUSANDS)
Revenues:
Office properties................ $ 600,256 $ -- $ -- $ -- $ -- $ -- $ --
Resort/Hotel properties.......... 45,748 226,647 -- -- -- -- (39,575)(D)
Land Development properties...... -- -- 187,521 73,478 -- -- --
Interest and other income........ 40,190 -- 1,794 966 1,917 26 --
------------ -------- -------- -------- ------- ------- --------
Total revenues............. 686,194 226,647 189,315 74,444 1,917 26 (39,575)
Expenses:
Office properties................ 258,374 -- -- -- -- -- --
Resort/Hotel properties.......... -- 180,491 -- -- -- -- --
Rent Expense -- CEI.............. -- 55,817 -- -- -- -- (55,817)(E)
Land Development properties...... -- -- 171,567 75,154 940 -- (1,662)(F)
Corporate general and
administrative................. 24,249 -- -- -- -- 15 --
Interest expense................. 182,410 -- 9,638 3,071 -- 880 (10,453)(F)
Amortization of deferred
financing costs................ 9,327 -- -- -- -- -- --
Depreciation and amortization.... 123,643 -- 2,953 5,658 -- -- --
Crescent Operating reorganization
charge......................... 92,782 -- -- -- -- -- --
Impairment and other charges
related to real estate
assets......................... 25,332 -- -- -- -- -- --
------------ -------- -------- -------- ------- ------- --------
Total expenses............. 716,117 236,308 184,158 83,883 940 895 (67,932)
------------ -------- -------- -------- ------- ------- --------
Operating income........... (29,923) (9,661) 5,157 (9,439) 977 (869) 28,357
Other income and expense:
Equity in net income of
unconsolidated companies:
Office and retail properties... 6,124 -- -- -- -- -- --
Residential development
properties................... 41,014 -- (297) -- 35,707 -- (35,665)(G)
Temperature-controlled
logistics properties......... 1,136 -- -- -- -- -- --
Other.......................... 2,957 -- -- -- -- (2,045) (195)(G)
------------ -------- -------- -------- ------- ------- --------
Total equity in net income of
unconsolidated companies....... 51,231 -- (297) -- 35,707 (2,045) (35,860)
Gain on property sales, net...... 4,425 -- -- -- -- -- --
------------ -------- -------- -------- ------- ------- --------
Total other income and
expense.................. 55,656 -- (297) -- 35,707 (2,045) (35,860)
------------ -------- -------- -------- ------- ------- --------
Income before minority
interests........................ 25,733 (9,661) 4,860 (9,439) 36,684 (2,914) (7,503)
Minority interests............... (21,218) -- (5,490) (1,274) -- -- 660(H)
------------ -------- -------- -------- ------- ------- --------
Income before income taxes........ 4,515 (9,661) (630) (10,713) 36,684 (2,914) (6,843)
Income tax provision (benefit)... -- -- 641 (4,285) 14,674 2,753 (3,864)(I)
------------ -------- -------- -------- ------- ------- --------
Income (loss) from continuing
operations....................... 4,515 (9,661) (1,271) (6,428) 22,010 (5,667) (2,979)
--
Preferred share distributions..... (13,501) -- -- -- -- --
Share repurchase agreement
return........................... -- -- -- -- -- -- --
------------ -------- -------- -------- ------- ------- --------
Net loss to common shareholders
before extraordinary items,
discontinued operations and
cumulative effect of a change in
accounting principle............. $ (8,986) $ (9,661) $ (1,271) $(6,428) $22,010 $(5,667) $ (2,979)
============ ======== ======== ======== ======= ======= ========
Basic earnings per share data:
Loss before extraordinary items,
discontinued operations and
cumulative effect of a change
in accounting principle........ $ (0.08)
Diluted earnings per share data:
Loss before extraordinary items,
discontinued operations and
cumulative effect of a change
in accounting principle........ $ (0.08)
Weighted average shares
outstanding -- basic............. 107,613,171
============
Weighted average shares
outstanding -- diluted........... 109,139,987
============
APRIL 2002 MAY 2002
APRIL 2002 SERIES A SERIES B
NOTES PREFERRED PREFERRED
OFFERING OFFERING OFFERING CONSOLIDATED
---------- ---------- --------- ------------
(DOLLARS IN THOUSANDS)
Revenues:
Office properties................ $ -- $ -- $ -- $ 600,256
Resort/Hotel properties.......... -- -- -- 232,820
Land Development properties...... -- -- -- 260,999
Interest and other income........ -- -- -- 44,893
-------- ------- ------- ------------
Total revenues............. -- -- -- 1,138,968
Expenses:
Office properties................ -- -- -- 258,374
Resort/Hotel properties.......... -- -- -- 180,491
Rent Expense -- CEI.............. -- -- -- --
Land Development properties...... -- -- -- 245,999
Corporate general and
administrative................. -- -- -- 24,264
Interest expense................. 20,109(J) -- -- 205,655
Amortization of deferred
financing costs................ 1,205(K) -- -- 10,532
Depreciation and amortization.... -- -- -- 132,254
Crescent Operating reorganization
charge......................... -- -- -- 92,782
Impairment and other charges
related to real estate
assets......................... -- -- -- 25,332
-------- ------- ------- ------------
Total expenses............. 21,314 -- -- 1,175,683
-------- ------- ------- ------------
Operating income........... (21,314) -- -- (36,715)
Other income and expense:
Equity in net income of
unconsolidated companies:
Office and retail properties... -- -- -- 6,124
Residential development
properties................... -- -- -- 40,759
Temperature-controlled
logistics properties......... -- -- -- 1,136
Other.......................... -- -- -- 717
-------- ------- ------- ------------
Total equity in net income of
unconsolidated companies....... -- -- -- 48,736
Gain on property sales, net...... -- -- -- 4,425
-------- ------- ------- ------------
Total other income and
expense.................. -- -- -- 53,161
-------- ------- ------- ------------
Income before minority
interests........................ (21,314) -- -- 16,446
Minority interests............... 4,274(L) 3,959(M) 6,734(O) (12,355)
-------- ------- ------- ------------
Income before income taxes........ (17,040) 3,959 6,734 4,091
Income tax provision (benefit)... -- -- -- 9,919
-------- ------- ------- ------------
Income (loss) from continuing
operations....................... (17,040) 3,959 6,734 (5,828)
-- (4,725)(N) (8,075)(P) (26,301)
Preferred share distributions.....
Share repurchase agreement
return........................... -- -- -- --
-------- ------- ------- ------------
Net loss to common shareholders
before extraordinary items,
discontinued operations and
cumulative effect of a change in
accounting principle............. $(17,040) $ (766) $(1,341) $ (32,129)
======== ======= ======= ============
Basic earnings per share data:
Loss before extraordinary items,
discontinued operations and
cumulative effect of a change
in accounting principle........ $ (0.30)
Diluted earnings per share data:
Loss before extraordinary items,
discontinued operations and
cumulative effect of a change
in accounting principle........ $ (0.30)
Weighted average shares
outstanding -- basic............. 107,756,921(Q)
============
Weighted average shares
outstanding -- diluted........... 109,283,737(Q)
============
See accompanying notes to pro forma consolidated statement of operations.
F-208
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
The following describes the pro forma adjustments to the unaudited pro
forma consolidated statement of operations as of December 31, 2001 as if the
transactions described under the first paragraph of "Pro Forma Financial
Information" were completed on January 1, 2001.
(A) Reflects our audited consolidated historical statement of
operations for the year ended December 31, 2001.
(B) Represents the operating results for the eight resort/hotel
properties leased to Crescent Operating and Crescent Operating's lessee
rental obligation to us for the year ended December 31, 2001.
(C) Represents the consolidation of net income for COPI Colorado,
DMDC, TWLC and Other Entities for the year ended December 31, 2001.
(D) Eliminates our rental revenue for the year ended December 31,
2001.
(E) Eliminates the hotel lessees' rent expense to us for the year
ended December 31, 2001.
(F) Eliminates the intercompany interest expense (inclusive of the
amortization of capitalized interest in the land development property
expense) on the loans from us to DMDC, CRD and Other Entities.
DECEMBER 31,
2001
------------
DMDC................................................... $ 5,265
CRD.................................................... 7,244
Other Entities......................................... (394)
-------
$12,115
=======
(G) Eliminates our equity in net income (inclusive of the interest
income on the intercompany loans we made to DMDC, CRD and Other Entities)
for the year ended December 31, 2001.
DECEMBER 31,
2001
------------
DMDC................................................... $ 222
TWLC................................................... (20,943)
CRD.................................................... (14,944)
Other Entities......................................... (195)
--------
$(35,860)
========
(H) Eliminates minority interest in COPI Colorado and adjusts for the
40% partner interest in COPI Colorado.
(I) Represents the income tax benefit for the hotel business for the
year ended December 31, 2001, calculated as 40% of the net loss for the
hotel lessee.
F-209
(J) Net increase of interest costs as a result of the April 2002 notes
offering, capitalization of Spinco and repayment of debt, assuming each had
occurred as of January 1, 2001.
April 2002 notes offering................ $375,000 @ 9.25% $ 34,688
Less: Historical interest expense
Bridge loan......................... 5,000 @ 5.59% (280)
Credit facility..................... 190,154 @ 5.59% (10,630)
Operating Partnership's public notes
due 2002......................... 52,408 @ 7.00% (3,669)
--------
Net interest expense..................... $ 20,109
========
(K) Net increase in amortization of deferred financing costs as a
result of the April 2002 notes offering, as if it had occurred as of
January 1, 2001.
April 2002 notes offering costs............................ $8,438
Years outstanding.......................................... 7
------
Annual deferred financing costs............................ $1,205
======
(L) Decrease in minority interest for the redemption of $52,000
preferred units of one of our subsidiaries with an average preferred return
rate of 8.22% in 2001, equals $4,274.
(M) Decrease in minority interest for the redemption of $48,160
preferred units of one of our subsidiaries with an average preferred return
rate of 8.22% in 2001, equals $3,959.
(N) Reflects distributions that would have been paid on 2,800,000
Series A preferred shares issued, at $1.6875 per Series A preferred share.
(O) Decrease in minority interest for the redemption of $81,922
preferred units of one of our subsidiaries with an average preferred return
rate of 8.22% in 2001, equals $6,734.
(P) Reflects distributions that would have been paid on 3,400,000
Series B preferred shares issued, at $2.375 per Series B preferred share.
(Q) Reflects the 143,750 additional shares issued, as calculated in
footnote (C) of the notes to unaudited pro forma consolidated balance
sheet.
F-210
ANNEX A
IMPORTANT: CRESCENT OPERATING, INC. HAS NOT COMMENCED A BANKRUPTCY CASE AS OF
THE DATE OF THE PROXY STATEMENT TO WHICH THIS PLAN IS AN EXHIBIT. AS DISCLOSED
IN THE PROXY STATEMENT, YOUR ACCEPTANCE OF THIS PLAN IS BEING SOUGHT IN ADVANCE
OF THE COMMENCEMENT OF A BANKRUPTCY CASE.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
IN RE: ) Chapter 11
)
CRESCENT OPERATING, INC. ) CASE NO. _________
)
)
Debtor. )
---------------------------------------------
DEBTOR'S PLAN OF REORGANIZATION,
DATED _______________, 2003
---------------------------------------------
ANNEX A
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
IN RE: ) Chapter 11
)
CRESCENT OPERATING, INC. ) CASE NO. __________
)
Debtor. )
DEBTOR'S PLAN OF REORGANIZATION,
DATED _______________, 2003
Crescent Operating, Inc., as debtor and debtor-in-possession, proposes
this Plan of Reorganization (the "Plan") pursuant to section 1121(a) of Title 11
of the United States Code for the resolution of the Debtor's outstanding
creditor claims and equity interests. Reference is made to the Proxy
Statement/Disclosure Statement (the "Proxy Statement/Disclosure Statement") for
a discussion of the Debtor's history, business, properties and results of
operations, and for a summary of this Plan and certain related matters.
All holders of Claims and Interests are encouraged to read the Plan and
the Proxy Statement/Disclosure Statement in their entirety before voting to
accept or reject this Plan. No materials, other than the Proxy
Statement/Disclosure Statement and any exhibits and schedules attached thereto
or referenced therein, have been approved by the Debtor for use in soliciting
acceptances or rejections of this Plan.
ARTICLE 1
DEFINITIONS
Rules of Interpretation. As used herein, the following terms have the
respective meanings specified below, and such meanings shall be equally
applicable to both the singular and plural, and masculine and feminine, forms of
the terms defined. The words "herein," "hereof," "hereto," "hereunder" and
others of similar import, refer to the Plan as a whole and not to any particular
section, subsection or clause contained in the Plan. Captions and headings to
articles, sections and exhibits are inserted for convenience of reference only
and are not intended to be part of or to affect the interpretation of the Plan.
The rules of construction set forth in section 102 of the Bankruptcy Code shall
apply. In computing any period of time prescribed or allowed by the Plan, the
provisions of Bankruptcy Rule 9006(a) shall apply. Any capitalized
DEBTOR'S PLAN OF REORGANIZATION
DATED_______, 2003 A-2
ANNEX A
term used herein that is not defined herein but is defined in the Bankruptcy
Code shall have the meaning ascribed to such term in the Bankruptcy Code. In
addition to such other terms as are defined in other sections of the Plan, the
following terms (which appear in the Plan as capitalized terms) have the
following meanings as used in the Plan.
1.1 "Administrative Expense Claim" means a Claim for costs and expenses
of administration allowed under section 503(b) of the Bankruptcy Code and
referred to in section 507(a)(1) of the Bankruptcy Code, including, without
limitation: (a) the actual and necessary costs and expenses incurred after the
Petition Date of preserving the Estates and operating the business of the Debtor
(such as wages, salaries or payments for goods and services); (b) compensation
for legal, financial advisory, accounting and other services and reimbursement
of expenses awarded or allowed under sections 330(a) or 331 of the Bankruptcy
Code; and (c) all fees and charges assessed against the Estates under 28 U.S.C.
Section 1930. Administrative Expense Claim includes any Claim of an employee or
officer of the Debtor arising out of a Court-approved contract.
1.2 "Affiliate" means (a) with respect to a Debtor, (i) an entity that
directly or indirectly owns, controls or holds with power to vote, twenty
percent or more of the outstanding voting securities of a Debtor, other than an
entity that holds such securities (A) in a fiduciary or agency capacity without
sole discretionary power to vote such securities or (B) solely to secure a debt,
if such entity has not in fact exercised such power to vote, or (ii) a
corporation twenty percent or more of whose outstanding voting securities are
directly or indirectly owned, controlled or held with power to vote, by a
Debtor, or by an entity that directly or indirectly owns, controls or holds with
power to vote, twenty percent or more of the outstanding voting securities of a
Debtor, other than an entity that holds such securities (A) in a fiduciary or
agency capacity without sole discretionary power to vote such securities or (B)
solely to secure a debt, if such entity has not in fact exercised such power to
vote, or (b) with respect to Crescent or Crescent REIT, any Person controlling,
controlled by or under common control with Crescent or Crescent REIT.
1.3 "Allowed" means, with respect to any Claim, proof of which has been
timely, properly Filed or, if no proof of claim was so Filed, which was or
hereafter is listed on the Schedules as liquidated in amount and not disputed or
contingent, and, in either case, a Claim which is not a Disputed Claim.
1.4 "Allowed Claim" means that portion of a Claim which is not a
Disputed Claim.
1.5 "Allowance Date" means the date that a Claim becomes an Allowed
Claim.
1.6 "Allowed Secured Claim" means an Allowed Claim, or that portion
thereof, of any creditor of the Debtor who holds a lien or security interest, as
those terms are defined in Section 101 of the Code, which Claim has been
properly perfected as required by law and determined in accordance with Section
506 of the Code with respect to properties owned by the Debtor. Such Allowed
Secured Claim is secured only to the extent of the value of the Debtor's
property which the Court finds is subject to a valid security interest of the
creditor enforceable against property of the Estate.
DEBTOR'S PLAN OF REORGANIZATION
DATED_______, 2003 A-3
ANNEX A
1.7 "Allowed Unsecured Claim" means an Allowed Claim, or that portion
thereof, which is not entitled to priority or to secured status under the Code,
and includes, but is not limited to, any claim arising as a result of a Debtor's
execution of a guaranty agreement, promissory note, negotiable instrument, or
other similar written instrument, whether as maker, endorser, guarantor, or
otherwise.
1.8 "Amended Bylaws" means the Bylaws of Reorganized COPI, in effect as
of the Petition Date, as amended, substantially in the form included in the Plan
Supplement.
1.9 "Amended Certificate of Incorporation" means the amended and
restated certificate of incorporation of COPI effective as of the Effective
Date, substantially in the form included in the Plan Supplement.
1.10 "Americold Logistics Interest" means the 40% partnership interest
of COPI Cold Storage in Vornado Crescent Logistics Operating Partnership.
1.11 [Intentionally omitted]
1.12 [Intentionally omitted]
1.13 "Bank of America Claim" means the claim of Bank of America for the
repayment of all outstanding amounts under the Credit Agreement dated August 27,
1997, as amended, between COPI and Bank of America, N.A. and the related
promissory note. The Bank of America claim is secured by COPI's equity interest
in COPI Cold Storage.
1.14 "Bankruptcy Code" or "Code" means Title 11 of the United States
Code as now in effect or hereafter amended.
1.15 "Bankruptcy Court" means the United States Bankruptcy Court for
the District of Delaware, which presides over this proceeding, or if necessary,
the United States District Court for said District having original jurisdiction
over this case.
1.16 "Bankruptcy Rules" means, collectively (a) the Federal Rules of
Bankruptcy Procedure, and (b) the local rules of the Bankruptcy Court, as
applicable from time to time in the Reorganization Case.
1.17 "Business Day" means any day, other than a Saturday, Sunday or
"legal holiday" (as defined in Bankruptcy Rule 9006(a)).
1.18 "Cash" means cash, wire transfer, certified check, cash
equivalents and other readily marketable securities or instruments, including,
without limitation, readily marketable direct obligations of
DEBTOR'S PLAN OF REORGANIZATION
DATED_______, 2003 A-4
ANNEX A
the United States of America, certificates of deposit issued by banks, and
commercial paper of any Person, including interests accrued or earned thereon,
or a check from Reorganized Debtor.
1.19 "CEI/COPI Payments" means all amounts paid, pre-paid, advanced,
incurred or accrued up to and including the Confirmation Date by or on behalf of
Crescent, Crescent REIT or their Affiliates in connection with the preparation
of the Settlement Agreement and Operative Agreements (as defined in the
Settlement Agreement which is Annex B to the Proxy Statement/Disclosure
Statement) and the consummation of the transactions contemplated by the
Settlement Agreement, including, without limitation, all amounts paid, advanced,
incurred or accrued by Crescent or Crescent REIT pursuant to Sections 2.07,
2.08, 2.09, and/or 2.15 of the Settlement Agreement (generally relating to the
Seller Notes, an alleged claim by Vornado Operating, Inc. for a capital
contribution, payment of COPI's cash flow shortage, and unknown or unliquidated
unsecured claims) and all fees and expenses of agents, representatives, counsel
and accountants employed by Crescent, Crescent REIT or any of their Affiliates.
Notwithstanding any of the foregoing, CEI/COPI Payments shall be reduced by the
total amount of all optional or mandatory payments or prepayments, if any,
whether applied to accrued interest or principal, on the original COPI Budget
Note, the Revised COPI Budget Note or the Second COPI Budget Note made by COPI.
1.20 "CEI/COPI Claim Resolution Payments Estimate" is $12 million.
1.21 "Claim" means any right to payment from the Debtor arising before
the Confirmation Date, whether or not such right is reduced to judgment,
liquidated, unliquidated, fixed, contingent, matured, unmatured, contested,
uncontested, legal, equitable, secured, or unsecured; or any right to an
equitable remedy for breach of performance if such breach gives rise to a right
of payment from the Debtor, whether or not such right to an equitable remedy is
reduced to judgment, fixed, contingent, matured, unmatured, contested,
uncontested, secured or unsecured.
1.22 "Class" means one of the classes of Claims or Interests defined in
Article III hereof.
1.23 "Company" or "COPI" means Crescent Operating, Inc., a Delaware
Corporation.
1.24 "Confirmation" means the entry of a Confirmation Order confirming
the Plan at or after a hearing pursuant to section 1129 of the Bankruptcy Code.
1.25 "Confirmation Date" means the date the Confirmation Order is
entered on the docket by the Clerk of the Bankruptcy Court.
1.26 "Confirmation Order" means the order entered by the Bankruptcy
Court determining that the Plan meets the requirements of Chapter 11 of the
Bankruptcy Code and is entitled to Confirmation pursuant to Section 1129 of the
Bankruptcy Code.
1.27 [Intentionally omitted]
DEBTOR'S PLAN OF REORGANIZATION
DATED_______, 2003 A-5
ANNEX A
1.28 "COPI Cold Storage" means COPI Cold Storage, LLC, a wholly-owned
subsidiary of COPI that owns the Americold Logistics Interest.
1.29 "Creditors' Committee" means the Official Committee of Unsecured
Creditors appointed in the Chapter 11 case by the United States Trustee pursuant
to Section 1102 of the Bankruptcy Code, as constituted by the addition or
removal of members from time to time.
1.30 "Crescent" means Crescent Real Estate Equities Limited
Partnership.
1.31 "Crescent REIT" means Crescent Real Estate Equities Company, a
Texas real estate investment trust.
1.32 "Crescent REIT Common Shares" means the common shares of
beneficial interest, par value $.01, of Crescent REIT being distributed to
holders of Old COPI Common Stock pursuant to the terms of this Plan and the
Settlement Agreement.
1.33 "Crescent Spinco" means the entity created by Crescent REIT for
the benefit of its shareholders which will be capitalized by Crescent or
Crescent REIT with at least $15 million.
1.34 "Debtor" means COPI.
1.35 "Disputed Claim" means a Claim as to which a proof of claim has
been Filed or deemed Filed under applicable law, as to which an objection has
been or may be timely Filed and which objection, if timely Filed, has not been
withdrawn on or before any date fixed for Filing such objections by the Plan or
Order of the Bankruptcy Court and has not been overruled or denied by a Final
Order. Prior to the time that an objection has been or may be timely Filed, for
the purposes of the Plan, a Claim shall be considered a Disputed Claim to the
extent that: (i) the amount of the Claim specified in the proof of claim exceeds
the amount of any corresponding Claim Scheduled by the Debtor in its Schedules
of Assets and Liabilities to the extent of such excess; or (ii) no corresponding
Claim has been Scheduled by the Debtor in its Schedules of Assets and
Liabilities.
1.36 "Distribution Date" means the date the Reorganized Debtor
commences distributions under the Plan.
DEBTOR'S PLAN OF REORGANIZATION
DATED_______, 2003 A-6
ANNEX A
1.37 "Distributions" means the properties or interests in property to
be paid or distributed hereunder to the holders of Allowed Claims.
1.38 "Docket" means the docket in the Reorganization Case maintained by
the Clerk.
1.39 "Effective Confirmation Order" means the Confirmation Order
rendered by the Bankruptcy Court or other court of competent jurisdiction that
has been entered on the docket and (unless otherwise ordered by such court) as
to which (i) both (a) the time to seek reconsideration, rehearing, or new trial
by the rendering court (hereinafter, a ("Post-Trial Motion"), and (b) the time
(including time resulting from a timely filed motion under Rule 8002(c) under
the Federal Rules of Bankruptcy Procedure) to appeal or to seek a petition for
review or certiorari (hereinafter, an "Appellate Court Review"), has expired
(without regard to whether time to seek relief of a judgment under Rule 60(b) of
the Federal Rules of Civil Procedure or Rule 9024 of the Federal Rules of
Bankruptcy Procedure has expired); and (ii) either (a) no Post-Trial Motion or
request for Appellate Court Review is pending, or (b) a Post-Trial Motion or a
request for Appellate Court Review is pending but the subject order of judgment
has not been stayed, amended, modified or reversed by a court of competent
jurisdiction or, if stayed, such stay has been vacated or is no longer in
effect. Without limiting the foregoing, the pendency of, or request for, a
Post-Trial Motion or an Appellate Court Review shall not prevent an order from
becoming final and being implemented, absent the entry of a stay by a court of
competent jurisdiction and the continuation thereof.
1.40 "Effective Date" means the date selected by the Debtor on which
all of the conditions required in Section 9.1 have occurred, except as expressly
waived as provided in Section 9.2 of the Plan.
1.41 "Employee Claim" means a Claim based on salaries, wages, sales
commissions, expense reimbursements, accrued vacation pay, health-related
benefits, incentive programs, employee compensation guarantees, severance or
similar employee benefits.
1.42 "Estates" means the estates created in these reorganization cases
under section 541 of the Bankruptcy Code.
1.43 "Executory Contract" means any unexpired lease and/or executory
contract as set forth in section 365 of the Bankruptcy Code.
1.44 "File" or "Filed" means filed with the Bankruptcy Court in the
Reorganization Case.
1.45 "Final Order" means an order or judgment of the Bankruptcy Court,
or other court of competent jurisdiction, as entered on the Docket in the
Reorganization Case, which has not been reversed, stayed, modified or amended,
and as to which (i) the time to appeal or seek certiorari has expired and no
appeal or petition for certiorari has been timely filed, or (ii) any appeal that
has been or may be taken or any petition for certiorari that has been or may be
filed has been resolved by the highest court to which the order or judgment was
appealed or from which certiorari was sought.
DEBTOR'S PLAN OF REORGANIZATION
DATED_______, 2003 A-7
ANNEX A
1.46 "Impaired" means that class of Claims or Interests that is
impaired within the meaning of 11 U.S.C. Section 1124.
1.47 "Interest" means the rights of the owners and/or holders of
outstanding share or shares of the Company's Common Stock with respect of such
Interest as of the date immediately preceding the Petition Date.
1.48 "New COPI Common Stock" means the stock of Reorganized COPI.
1.49 "Old COPI Common Stock" means the issued and outstanding common
stock of COPI on the Petition Date.
1.50 "Old Warrants and Stock Options" means all warrants and stock
options issued by COPI and still exercisable prior to the Effective Date.
1.51 "Order" means an order or judgment of the Bankruptcy Court as
entered on the Docket.
1.52 "Person" means any individual, corporation, general partnership,
limited partnership, association, joint stock company, joint venture, estate,
trust, indenture trustee, government or any political subdivision, governmental
unit (as defined in the Bankruptcy Code), official committee appointed by the
United States Trustee, unofficial committee of creditors or equity holders or
other entity.
1.53 "Petition Date" means _______, 2003, the date on which COPI filed
its voluntary Chapter 11 petition.
1.54 "Plan" means this Plan of Reorganization in its present form, or
as it may be amended, modified, and/or supplemented from time to time in
accordance with the Code, or by agreement of all affected parties, or by order
of the Bankruptcy Court, as the case may be, all with the consent of Crescent.
1.55 "Plan Administrator" means the person designated by COPI and
retained, as of the Effective Date, by Reorganized COPI with approval of the
Bankruptcy Court, as the fiduciary responsible for, among other things, holding
and distributing consideration to be distributed to holders of Claims and
implementing the Plan pursuant to the terms of the Plan, the Plan Administration
Agreement, the Confirmation Order or any other order entered by the Bankruptcy
Court.
1.56 "Pre-Petition Priority Tax Claim" means an Unsecured Allowed Claim
of a governmental entity as provided by section 507(a)(8) of the Bankruptcy
Code.
DEBTOR'S PLAN OF REORGANIZATION
DATED_______, 2003 A-8
ANNEX A
1.57 "Pre-Petition Secured Tax Claim" means an Allowed Secured Claim of
a governmental entity whose claim would be a Priority Claim under section
507(a)(8) of the Bankruptcy Code if it was not a Secured Claim.
1.58 "Priority Claim" means any Claim against any of the Debtor
entitled to priority under 11 U.S.C. Section 507(a) of the Bankruptcy Code,
other than an Administrative Expense Claim or a Pre-Petition Priority Tax Claim.
1.59 "Pro Rata" means proportionately, based on the percentage of the
distribution made on account of a particular Allowed Claim bears to the
distributions made on account of all Allowed Claims of the Class in which the
Allowed Claim is included.
1.60 "Proxy Statement/Disclosure Statement" means the Proxy
Statement/Disclosure Statement Filed by the Debtor, submitted to holders of
Claims and Interests in connection with the pre-Petition Date solicitation of
acceptances of the Plan, as it may have been amended or supplemented from time
to time.
1.61 "Rejection Claim" means a Claim resulting from the rejection of a
lease or executory contract by the Debtor.
1.62 "Reorganization Case or Bankruptcy Case" means the Debtor's case
under Chapter 11 of the Bankruptcy Code.
1.63 "Reorganized COPI" or "Reorganized Debtor" means COPI as it shall
exist after the Effective Date of this Plan.
1.64 "Schedules" means the Schedules of Assets and Liabilities,
Statement of Financial Affairs and Statement of Executory Contracts which have
been filed by the Debtor with the Bankruptcy Court as amended or supplemented on
or before the Confirmation Date, listing the liabilities and assets of Debtor.
1.65 "Secured Claim" means any Claim that is secured by a lien on
property in which the Estate has an interest or that is subject to setoff under
section 553 of the Bankruptcy Code, to the extent of the value of the claim
holder's interest in the Estate's interest in such property or to the extent of
the amount subject to setoff, as applicable, as determined pursuant to section
506(a) of the Bankruptcy Code.
1.66 "Security Agreement" means the documentation evidencing a lien
against property.
1.67 "Seller Notes" means the following promissory notes:
(a) Note dated July 1, 1999 in the original principal amount of
$3,528,000 payable to Earl L. Lester, Jr.;
DEBTOR'S PLAN OF REORGANIZATION
DATED_______, 2003 A-9
ANNEX A
(b) Note dated July 1, 1999 in the original principal amount of
$618,000 payable to Howard T. Tellepsen, Jr.;
(c) Note dated July 1, 1999 in the original principal amount of
$618,000 payable to Karen Tellepsen;
(d) Note dated July 1, 1999 in the original principal amount of
$618,000 payable to Tom Tellepsen, Jr.;
(e) Note dated July 1, 1999 in the original principal amount of
$618,000 payable to Linda Lester Griffin;
(f) Note dated July 31, 1998 in the original principal amount of
$648,804 payable to William J. Harvey;
(g) Note dated July 31, 1998 in the original principal amount of
$81,100 payable to Betty J. Harvey; and
(h) Note dated July 31, 1998 in the original principal amount of
$428,674 payable to Roy E. Harvey, Jr., all which were purchased by and assigned
to Crescent prior to the Petition Date.
1.68 "Settlement Agreement" means the Settlement Agreement dated as of
February 14, 2002, as amended by the First Amendment to the Settlement Agreement
dated as of October 1, 2002, by and among Crescent, Crescent REIT and COPI,
Rosestar Management, LLC, Canyon Ranch Leasing, LLC, Wine Country Hotel, LLC,
Rosestar Southwest, LLC and COI Hotel Group, Inc. settling the obligations of
COPI and the identified subsidiaries to Crescent and Crescent REIT, all of which
were in default in their obligations to Crescent and Crescent REIT at the time
of the execution of the Settlement Agreement.
1.69 "Tax Claim" means an Unsecured Allowed Claim of a governmental
entity as provided by Section 507(a)(8) of the Code.
1.70 "Unsecured Claim" means any Claim that is not an Administrative
Expense Claim, Tax Claim or Secured Claim.
1.71 "Voting Record Date" means January 8, 2003.
DEBTOR'S PLAN OF REORGANIZATION
DATED_______, 2003 A-10
ANNEX A
ARTICLE 2
DESIGNATION OF
CLAIMS AND INTERESTS
2.1 SUMMARY. The following is a designation of the classes of Claims
and Interests under the Plan. In accordance with section 1123(a)(1) of the
Bankruptcy Code, Administrative Expense Claims and Tax Claims described in
Article 3 of the Plan have not been classified and are excluded from the
following classes. A Claim or Interest is classified in a particular class only
to the extent that the Claim or Interest qualifies within the description of
that class, and is classified in another class or classes to the extent that any
remainder of the Claim or Interest qualifies within the description of such
other class or classes. A Claim or Interest is classified in a particular class
only to the extent that the Claim or Interest is an Allowed Claim or Allowed
Interest in that class and has not been paid, released or otherwise satisfied
before the Effective Date; a Claim or Interest which is not an Allowed Claim or
Interest is not in any Class. Notwithstanding anything to the contrary contained
in the Plan, no distribution shall be made on account of any Claim or Interest
which is not an Allowed Claim or Allowed Interest.
Class Status
----- ------
A. SECURED CLAIMS
Class 1: Crescent Secured Claims Impaired - entitled to vote
Class 2: Bank of America Claims Impaired- entitled to vote
B. UNSECURED CLAIMS
Class 3: Priority Claims Unimpaired - not entitled to vote
Class 4: General Unsecured Claims Unimpaired - not entitled to vote
Class 5: Seller Notes Claims Impaired - entitled to vote
Class 6: Crescent Unsecured Claims Impaired - entitled to vote
C. INTERESTS
Class 7: Old COPI Common Stock Impaired - entitled to vote
Class 8: Old Warrants and Stock Impaired-deemed to have rejected
Options
DEBTOR'S PLAN OF REORGANIZATION
DATED_______, 2003 A-11
ANNEX A
ARTICLE 3
TREATMENT OF UNCLASSIFIED CLAIMS
3.1 ADMINISTRATIVE EXPENSE CLAIMS.
(a) GENERAL. Subject to the bar date provisions herein, unless
otherwise agreed to by the parties, each holder of an Allowed Administrative
Expense Claim shall receive either (i) Cash equal to the unpaid portion of such
Allowed Administrative Expense Claim or (ii) such other payments as are agreed
by the holder of such Allowed Administrative Expense Claim and the Debtor or on
the later of (x) the Effective Date or as soon as practicable thereafter, (y)
the Allowance Date, and (z) such other date as is mutually agreed upon by the
Debtor and the holder of such Claim; provided, however, that, unless the holder
objects prior to the Confirmation Hearing Date, Administrative Expense Claims
that represent liabilities incurred by the Debtor in the ordinary course of
their business during the Reorganization Case shall be paid by Reorganized
Debtor in the ordinary course of business and in accordance with any terms and
conditions of any agreements relating thereto. Payments on Administrative
Expense Claims shall be made by the Reorganized Debtor.
(b) PAYMENT OF STATUTORY FEES. All fees payable pursuant to 28
U.S.C. Section 1930 shall be paid in Cash equal to the amount of such
Administrative Expense Claim when due.
(c) BAR DATE FOR ADMINISTRATIVE EXPENSE CLAIMS.
(i) GENERAL PROVISIONS. Except as provided below in
Sections 3.1(c)(iii), 3.1(c)(iv) and 3.1(c)(v) of the Plan, requests for payment
of Administrative Expense Claims must be Filed no later than forty-five (45)
days after the Effective Date. Holders of Administrative
Expense Claims (including, without limitation, professionals requesting
compensation or reimbursement of expenses and the holders of any Claims for
federal, state or local taxes) that are required to File a request for payment
of such Claims and that do not File such requests by the applicable bar date
shall be forever barred from asserting such Claims against the Debtor, any of
its Affiliates or any of their respective property.
(ii) PROFESSIONALS. All professionals or other
entities requesting compensation or reimbursement of expenses pursuant to
sections 327, 328, 330, 331, 503(b) and 1103 of the Bankruptcy Code for services
rendered before the Effective Date (including, without limitation, any
compensation requested by any professional or any other entity for making a
substantial contribution in the Reorganization Case) shall File and serve on the
Reorganized Debtor and [the Creditors' Committee] an application for final
allowance of compensation and reimbursement of expenses no later than forty-five
(45) days after the Effective Date. Objections to applications of professionals
for compensation or
DEBTOR'S PLAN OF REORGANIZATION
DATED_______, 2003 A-12
ANNEX A
reimbursement of expenses must be Filed and served on Debtor and the
professionals to whose application the objections are addressed no later than
seventy (70) days after the Effective Date. Any professional fees and
reimbursements or expenses incurred by the Reorganized Debtor subsequent to the
Effective Date may be paid without application to the Bankruptcy Court.
(iii) ORDINARY COURSE LIABILITIES. Holders of
Administrative Expense Claims based on liabilities incurred in the ordinary
course of the Debtor's business (other than Claims of governmental units for
taxes or Claims and/or penalties related to such taxes) shall not be required to
File any request for payment of such Claims. Such liabilities shall be paid by
the Reorganized Debtor as they become due in the ordinary course of business
after the Effective Date.
(iv) CONTRACTUAL EMPLOYEE CLAIMS. Holders of Claims
under employment contracts approved by the Court shall not be required to File
any request for payment of such Claims and such Claims shall be paid in full on
the Effective Date.
(v) TAX CLAIMS. All requests for payment of
Administrative Expense Claims and other Claims by a governmental unit for taxes
(and for interest and/or penalties related to such taxes) for any tax year or
period, all or any portion of which occurs or falls within the period from and
including the Petition Date through and including the Effective Date
("Post-Petition Tax Claims") and for which no bar date has otherwise been
previously established, must be Filed on or before the later of (i) 45 days
following the Effective Date; and (ii) 90 days following the filing with the
applicable governmental unit of the tax return for such taxes for such tax year
or period. Any holder of any Post-Petition Tax Claim that is required to File a
request for payment of such taxes and does not File such a Claim by the
applicable bar date shall be forever barred from asserting any such
Post-Petition Tax Claim against the Debtor or its property, whether any such
Post-Petition Tax Claim is deemed to arise prior to, on, or subsequent to the
Effective Date. To the extent that the holder of a Post-Petition Tax Claim holds
a lien to secure its Claim under applicable state law, the holder of such Claim
shall retain its lien until its Allowed Claim has been paid in full.
3.2 TREATMENT OF CRESCENT REIT ADMINISTRATIVE CLAIM. To the extent that
Crescent or Crescent REIT has an Administrative Expense Claim arising out of its
post-petition loans to the Debtor, Reorganized COPI shall deliver and transfer
to Crescent or Crescent REIT any and all COPI property not otherwise distributed
under the Plan; provided, however, that if the Plan is confirmed, whether
consensually or over the objection of other holders of Allowed Claims or
Interests, Crescent and Crescent REIT agree not to object to confirmation on the
grounds that it will not receive a distribution under the Plan on account of its
Administrative Expense Claim.
3.3 TREATMENT OF PRE-PETITION PRIORITY AND SECURED TAX CLAIMS. Each
holder of an Allowed Pre-Petition Tax Claim or Secured Tax Claim shall be paid
by the Reorganized Debtor, within twenty (20) days after the later to occur of
the Allowance Date or the Effective Date. The liens of each holder of a
Pre-Petition Secured Tax Claim shall remain in full force and effect until the
Pre-Petition
DEBTOR'S PLAN OF REORGANIZATION
DATED_______, 2003 A-13
ANNEX A
Secured Tax Claim is paid in full. Failure by the Reorganized Debtor to timely
make a payment on an Allowed Pre-Petition Priority Tax Claim or Secured Tax
Claim shall be an event of default. If the Reorganized Debtor fails to cure a
default within twenty (20) days after service of written notice of default from
the holder of the Allowed Pre-Petition Secured Tax Claim, then the holder of
such Allowed Pre-Petition Priority Claim or Secured Tax Claim may enforce the
total amount of its Claim, plus interest as provided in the Plan, against the
Reorganized Debtor in accordance with applicable state or federal laws.
ARTICLE 4
CLASSIFICATION AND TREATMENT OF
CLASSIFIED CLAIMS AND INTERESTS
4.1 CLASS 1 - CRESCENT SECURED CLAIMS.
(a) Classification: Class 1 consists of the Allowed Crescent
Secured Claims.
(b) Treatment: Class 1 is impaired and is entitled to vote on
the Plan. Crescent will retain its pre-petition liens and upon Crescent's
request, Reorganized COPI shall deliver and transfer to Crescent any and all
COPI property pledged to Crescent.
4.2 CLASS 2 - BANK OF AMERICA SECURED CLAIM.
(a) Classification: Class 2 consists of the Allowed Bank of
America Claim.
(b) Treatment: Class 2 is impaired and the holder of the
allowed Claim in Class 2 is entitled to vote on the Plan. The Allowed Class 2
Claim will (i) be paid in full as soon after the Effective Date as is
practicable, or (ii) the Debtor will deliver its equity interest in COPI Cold
Storage to Bank of America in full satisfaction of its Allowed Secured Claim, or
(iii) be satisfied on such other terms which are mutually agreed upon by Bank of
America and the Debtor.
4.3 CLASS 3 - PRIORITY CLAIMS.
(a) Classification: Class 3 consists of all non-tax Priority
Claims.
(b) Treatment: Class 3 is unimpaired and the holders of
Allowed Claims in Class 3 are not entitled to vote on the Plan. Unless otherwise
agreed to by the parties, each holder of an Allowed Claim in Class 3 will be
paid the Allowed amount of such Claim in full in cash by the Reorganized Debtor
on or before the later of (a) the first practicable date after the Effective
Date, (b) the Allowance Date, and (c) such other date as is mutually agreed upon
by the Reorganized Debtor and the holder of such Claim.
DEBTOR'S PLAN OF REORGANIZATION
DATED_______, 2003 A-14
ANNEX A
4.4 CLASS 4 - GENERAL UNSECURED CLAIMS.
(a) Classification: Class 4 consists of Allowed Unsecured
Claims that are not Class 3, Class 5 or Class 6 Claims.
(b) Treatment: Class 4 is unimpaired and the holders of
Allowed Claims in Class 4 are not entitled to vote on the Plan. Each holder of
an Allowed Class 4 Claim will be paid the full amount of its Allowed Claim, or
as otherwise agreed upon, as soon as practicable after the later of (i) the
Effective Date, (ii) the Allowance Date, or (iii) the date such payment becomes
due in the ordinary course of business, or shall be paid on such other terms as
are agreed between the holder of such Allowed Class 4 Claim and the Debtor.
4.5 CLASS 5 - SELLER NOTES CLAIMS.
(a) Classification: Class 5 consists of the Allowed Claims of
the holders of the Seller Notes.
(b) Treatment: Class 5 is impaired and the holders of the
Allowed Claims in Class 5 are entitled to vote on the Plan. If the Plan is
confirmed, Crescent REIT agrees not to receive a distribution on its Class 5
Claim from COPI but Crescent REIT will retain the liens that secure the Seller
notes.
4.6 CLASS 6 - CRESCENT UNSECURED CLAIMS.
(a) Classification: Class 6 consists of the Allowed Unsecured
Claims of Crescent and Crescent REIT.
(b) Treatment: Class 6 is impaired and is entitled to vote on
the Plan. Upon Crescent's request, Reorganized COPI shall deliver and transfer
to Crescent any and all COPI property not otherwise distributed under the Plan;
provided, however, that if the Plan is confirmed, whether consensually or over
the objection of other holders of Allowed Claims or Interests, Crescent agrees
not to object to confirmation on the grounds that it may not receive a
distribution under the Plan on account of its Unsecured Claim.
4.7 CLASS 7 - OLD COPI COMMON STOCK.
(a) Classification: Class 7 consists of all Interests in Old
COPI Common Stock.
(b) Treatment: If Class 7 accepts the Plan, each holder of Old
COPI Common Stock on the Confirmation Date shall receive, through distribution
on the Effective Date or as soon thereafter as practicable, or, at the election
of Crescent, through distribution when the Confirmation Order becomes a Final
Order, the number of Crescent REIT Common Shares equal to the product of (i) (A)
the number of shares of COPI Common Stock owned by
DEBTOR'S PLAN OF REORGANIZATION
DATED_______, 2003 A-15
ANNEX A
such holder on the Confirmation Date, divided by (B) the total number of shares
of COPI Common Stock outstanding on the Confirmation Date and (ii) the quotient
of (A) the Consideration Amount (as defined below) and (B) the average of the
daily closing prices per Crescent REIT Common Share as reported on the New York
Stock Exchange Composite Transactions reporting system for the 10 consecutive
trading days immediately preceding the Confirmation Date. For purposes of this
section, the Consideration Amount shall be $10,828,497, less an amount, if any,
equal to the amount by which the CEI/COPI payments exceed $5,200,000, but in no
event less than $2,165,699.40. No certificate or scrip representing fractional
Crescent REIT Common Shares shall be issued, and all fractional shares shall be
rounded up or down to the nearest whole Crescent REIT Common Share. The Old COPI
Common Stock shall be cancelled. If Class 7 rejects the Plan, Class 7 will
receive no distribution under the Plan.
4.8 CLASS 8 - OLD WARRANTS AND STOCK OPTIONS.
(a) Classification: Class 8 consists of Old Warrants and Stock
Options.
(b) Treatment: Class 8 will receive no distribution under the
Plan and the Old Warrants and Stock Options shall be cancelled on the Effective
Date.
ARTICLE 5
ACCEPTANCE OR REJECTION OF THE PLAN
5.1 VOTING CLASSES. The holders of Claims in Classes 1, 2, 5 and 6 and
Interests in Class 7 are impaired and shall be entitled to vote to accept or
reject the Plan.
5.2 PRESUMED ACCEPTANCE. The holders of the Class 3 and Class 4 Claims
are unimpaired, are not being solicited to accept or reject the Plan and are
presumed to have accepted the Plan.
5.3 DEEMED REJECTION. The holders of the Class 8 Interests are impaired
and receive no distribution under the Plan. As a result, Class 8 is deemed to
have rejected the Plan.
ARTICLE 6
MANNER OF DISTRIBUTION OF PROPERTY UNDER THE PLAN
6.1 DISTRIBUTION PROCEDURES. Except as otherwise provided in the Plan,
all distributions of Cash and other property shall be made by the Reorganized
Debtor or the Plan Administrator on the later of the Effective Date or the
Allowance Date, or as soon thereafter as practicable. Distributions required to
be made on a particular date shall be deemed to have been made on such date if
actually made on such date or as
DEBTOR'S PLAN OF REORGANIZATION
DATED_______, 2003 A-16
ANNEX A
soon thereafter as practicable; provided, however, that at Crescent's election,
a distribution to shareholders may not occur until the Confirmation Order
becomes a Final Order . No payments or other distributions of property shall be
made on account of any Claim or portion thereof unless and until such Claim or
portion thereof is Allowed.
For purposes of applying this Section 6, the holders of Allowed
Interests under or evidenced by Old COPI Common Stock shall, in the case of Old
COPI Common Stock held in street name, mean the beneficial holders thereof as of
the Confirmation Date.
6.2 DISTRIBUTION OF CRESCENT REIT COMMON SHARES. The Plan Administrator
or its agent shall distribute all of the Crescent REIT Common Shares to be
distributed under the Plan. Distribution of Crescent REIT Common Shares shall be
made to those persons who are record holders of Old COPI Common Stock on the
Confirmation Date. If Class 7 accepts the Plan, the initial distribution of
Crescent REIT Common Shares on account of Allowed Interests shall be on the
Effective Date or as soon thereafter as practicable; provided, however, that at
Crescent's election, a distribution to shareholders may not occur until the
Confirmation Order becomes a Final Order. The Plan Administrator may employ or
contract with other entities to assist in or perform the distribution of
Crescent REIT Common Shares. The total number of Crescent REIT Common Shares to
be distributed under the Plan may not be finally determined as of the date of
the initial distribution. If a subsequent distribution is required, it may be
made, at Crescent Real Estate's election, in cash or in additional shares of
Crescent Real Estate common stock. If the distribution is in additional Crescent
Real Estate shares, the number of shares shall be determined using the same
Crescent Real Estate stock price as used to determine the number of shares in
the initial distribution.
6.3 SURRENDER AND CANCELLATION OF OLD SECURITIES.
As a condition to receiving the Crescent REIT Common Shares,
the record holders of Old COPI Common Stock as of the Confirmation Date shall
surrender their Old COPI Common Stock, if held in certificated form, to the Plan
Administrator or its agent. As soon as practicable following the Effective Date,
the Plan Administrator shall mail to each record holder of Old COPI Common Stock
on the Confirmation Date, a letter of transmittal which shall specify that
delivery shall be effected, and risk of loss and title to the stock certificates
shall pass, only upon actual delivery of the Old COPI Common Stock certificates
to the Plan Administrator, and shall contain instructions for use in effecting
the surrender of the Old COPI Common Stock Certificates. When a holder
surrenders its Old COPI Common Stock to COPI, COPI shall hold the instrument in
"book entry only" until such instruments are canceled. Upon surrender to the
Plan Administrator of an Old COPI Common Stock Certificate, together with such
letter of transmittal, duly executed, the holder of such Old COPI Common Stock
Certificate shall be entitled to a certificate representing the number of
Crescent REIT Common Shares to which such holder of Old COPI Common Stock is
entitled under the Plan. Any holder of Old COPI Common Stock whose instrument
has been lost, stolen, mutilated or destroyed shall, in lieu of surrendering
such instrument, deliver to COPI: (a) evidence satisfactory to COPI of the loss,
theft, mutilation or destruction of such instrument, and (b) such security or
indemnity that may be reasonably required by COPI to hold COPI and Crescent
harmless with respect to any such representation of the holder. Upon compliance
with the preceding sentence, such holder shall, for all
DEBTOR'S PLAN OF REORGANIZATION
DATED_______, 2003 A-17
ANNEX A
purposes under the Plan, be deemed to have surrendered such instrument. Any
holder of Old COPI Common Stock that has not surrendered or been deemed to have
surrendered its Old COPI Common Stock within two years after the Effective Date,
shall have its Interest as a holder of Old COPI Common Stock disallowed, shall
receive no distribution on account of its Interest as a holder of Old COPI
Common Stock, and shall be forever barred from asserting any Interest on account
of its Old COPI Common Stock.
On the Confirmation Date of the COPI bankruptcy, COPI will
close its stock transfer books, and no further transfers of COPI common stock
will be possible. On the Effective Date, all shares of Old COPI Common Stock
shall automatically be canceled and retired and shall cease to exist. Each
holder of a stock certificate shall cease to have any rights with respect
thereto, except the right to receive certificates representing the Crescent REIT
Common Shares to which such holder is entitled under the Plan. If a certificate
representing Old COPI Common Stock is presented for transfer on or after the
Confirmation Date, a certificate representing the appropriate number of whole
Crescent REIT Common Shares will be issued in exchange therefor. In no event
will fractional Crescent REIT Common Shares be issued, and any fractional share
amounts shall be rounded up or down to the closest number of whole Crescent REIT
Common Shares.
6.4 DISPUTED CLAIMS. Notwithstanding any other provisions of the Plan,
no payments or distributions shall be made on account of any Disputed Claim or
Interest until such Claim or Interest becomes an Allowed Claim or Interest, and
then only to the extent that it becomes an Allowed Claim or Interest.
6.5 MANNER OF PAYMENT UNDER THE PLAN. Cash payments made pursuant to
the Plan shall be in U.S. dollars by checks drawn on a domestic bank selected by
the Reorganized Debtor, or by wire transfer from a domestic bank, at Reorganized
Debtor's option, except that payments made to foreign trade creditors holding
Allowed Claims may be paid, at the option of Reorganized Debtor in such funds
and by such means as are necessary or customary in a particular foreign
jurisdiction.
6.6 DELIVERY OF DISTRIBUTIONS AND UNDELIVERABLE OR UNCLAIMED
DISTRIBUTIONS.
(a) DELIVERY OF DISTRIBUTIONS IN GENERAL. Except as provided
below in Section 6.7(b) for holders of undeliverable distributions,
distributions to holders of Allowed Claims shall be distributed by mail as
follows: (a) except in the case of the holders of Old COPI Common Stock, (1) at
the addresses set forth on the respective proofs of claim filed by such holders;
(2) at the addresses set forth in any written
DEBTOR'S PLAN OF REORGANIZATION
DATED_______, 2003 A-18
ANNEX A
notices of address changes delivered to the Reorganized Debtor after the date of
any related proof of claim; or (3) at the address reflected on the Schedule of
Assets and Liabilities Filed by the Debtor if no proof of claim or proof of
interest is Filed and the Reorganized Debtor have not received a written notice
of a change of address; and (b) in the case of the holders of Old COPI Common
Stock, as provided in Sections 6.3 and 6.4 of the Plan.
(b) UNDELIVERABLE DISTRIBUTIONS.
(i) HOLDING AND INVESTMENT OF UNDELIVERABLE
PROPERTY. If the distribution to the holder of any Claim is returned to the
Reorganized Debtor as undeliverable, no further distribution shall be made to
such holder unless and until the Reorganized Debtor are notified in writing of
such holder's then current address. Subject to Section 7.8(b)(ii) of the Plan,
undeliverable distributions shall remain in the possession of the Reorganized
Debtor pursuant to this Section until such times as a distribution becomes
deliverable.
Unclaimed Cash (including interest) shall be held
in trust in a segregated bank account in the name of the Reorganized Debtor, for
the benefit of the potential claimants of such funds, and shall be accounted for
separately. For a period of two years after the Effective Date, Undeliverable
Crescent REIT Common Shares shall be held in trust for the benefit of the
potential claimants of such securities by the Plan Administrator in a number of
shares sufficient to provide for the unclaimed amounts of such securities, and
shall be accounted for separately.
(ii) DISTRIBUTION OF UNDELIVERABLE PROPERTY AFTER
IT BECOMES DELIVERABLE AND FAILURE TO CLAIM UNDELIVERABLE PROPERTY. Any holder
of an Allowed Claim who does not assert a claim for an undeliverable
distribution held by the Reorganized Debtor within one (1) year after the
Effective Date shall no longer have any claim to or interest in such
undeliverable distribution, and shall be forever barred from receiving any
distributions under the Plan. In such cases, any funds held in reserve for such
claim shall become unrestricted cash of the Reorganized Debtor and, upon entry
of the Final Decree and dissolution of COPI, shall be delivered to Crescent.
6.7 DE MINIMIS DISTRIBUTIONS. No Cash payment of less than twenty-five
dollars ($25.00) shall be made to any holder on account of an Allowed Claim
unless a request therefor is made in writing to the Reorganized Debtor.
6.8 FAILURE TO NEGOTIATE CHECKS. Checks issued in respect of
distributions under the Plan shall be null and void if not negotiated within 60
days after the date of issuance. Any amounts returned to the Reorganized Debtor
in respect of such checks shall be held in reserve by the Reorganized Debtor.
Requests for reissuance of any such check may be made directly to the
Reorganized Debtor by the holder of the Allowed Claim with respect to which such
check originally was issued. Any claim in respect of such voided check is
required to be made before the second anniversary of the Effective Date. All
Claims in respect of void checks and the underlying distributions shall be
discharged and forever barred from assertion against the Reorganized Debtor and
their property.
DEBTOR'S PLAN OF REORGANIZATION
DATED_______, 2003 A-19
ANNEX A
6.9 COMPLIANCE WITH TAX REQUIREMENTS. In connection with the Plan, to
the extent applicable, the Reorganized Debtor shall comply with all withholding
and reporting requirements imposed on it by any governmental unit, and all
distributions pursuant to the Plan shall be subject to such withholding and
reporting requirements.
6.10 SETOFFS. Unless otherwise provided in a Final Order or in the
Plan, the Debtor may, but shall not be required to, set off against any Claim
and the payments to be made pursuant to the Plan in respect of such Claim, any
claims of any nature whatsoever the Debtor may have against the holder thereof
or its predecessor, but neither the failure to do so nor the allowance of any
Claim hereunder shall constitute a waiver or release by the Debtor of any such
Claims the Debtor may have against such holder or its predecessor.
6.11 FRACTIONAL INTERESTS. The calculation of the percentage
distribution of Crescent REIT Common Shares to be made to holders of Old COPI
Common Stock as provided elsewhere in the Plan may mathematically entitle the
holder of such an Allowed Interest to a fractional interest in such Crescent
REIT Common Shares. The number of shares of Crescent REIT Common Shares to be
received by a holder of an Allowed Interest shall be rounded to the next lower
whole number of shares. No consideration shall be provided in lieu of the
fractional shares that are rounded down and not issued.
ARTICLE 7
TREATMENT OF EXECUTORY CONTRACTS
AND UNEXPIRED LEASES
7.1 REJECTION OF ALL EXECUTORY CONTRACTS AND LEASES NOT ASSUMED. The
Plan constitutes and incorporates a motion by the Debtor to reject, as of the
Confirmation Date, all pre-petition executory contracts and unexpired leases to
which the Debtor is a party, except for any executory contract or unexpired
lease that (i) has been assumed or rejected pursuant to a Final Order, or (ii)
is the subject of a pending motion for authority to assume the contract or lease
Filed by the Debtor prior to the Confirmation Date.
7.2 BAR DATE FOR FILING OF REJECTION CLAIMS. Any Claim for damages
arising from the rejection under the Plan of an executory contract or unexpired
lease must be Filed within thirty (30) days after the mailing of notice of
Confirmation or be forever barred and unenforceable against the Debtor, the
Estate, any of Debtor's Affiliates and Debtor's properties and barred from
receiving any distribution under the Plan.
DEBTOR'S PLAN OF REORGANIZATION
DATED_______, 2003 A-20
ANNEX A
ARTICLE 8
MEANS FOR EXECUTION AND IMPLEMENTATION
OF THE PLAN
8.1 FUNDING OF OBLIGATIONS BY CRESCENT AND CRESCENT REIT UNDER
SETTLEMENT AGREEMENT. On the Effective Date, to the extent that COPI has
insufficient funds to make the payments to holders of Allowed Administrative and
Priority Claims and Class 3, 4 and 5 Claims, Crescent shall provide COPI with
sufficient funds to pay such Allowed Claims in accordance with, and as limited
by, the terms of the Settlement Agreement.
8.2 TRANSFER OF CRESCENT REIT COMMON SHARES TO PLAN ADMINISTRATOR. If
Class 7 accepts the Plan and the Plan is confirmed, Crescent shall deposit with
the Plan Administrator, in trust for the holders of Old COPI Common Stock whose
shares are being canceled under the Plan, certificates representing the Crescent
REIT Common Shares issuable in exchange for the Old COPI Common Stock and cash
or other property to pay or make any dividends or distributions on account of
the Crescent REIT Common Shares. The Crescent REIT Common Shares and cash
delivered to the Plan Administrator shall be the Exchange Fund. The Plan
Administrator shall invest any cash included in the Exchange Fund as directed by
Crescent REIT, on a daily basis. Any interest or other income resulting from
such investments shall be paid to Crescent REIT.
8.3 REGISTRATION OF CRESCENT REIT COMMON SHARES BEING DISTRIBUTED UNDER
PLAN. Prior to the Effective Date, Crescent REIT will have registered under the
Securities Act of 1933 all of the Crescent REIT Common Shares issuable under the
Plan.
8.4 PURCHASE OF COPI COLD STORAGE INTERESTS BY CRESCENT SPINCO. Prior
to the Effective Date and in accordance with the terms of the Settlement
Agreement, Crescent REIT shall spin-off to Crescent REIT's shareholders and
Crescent's limited partners, Crescent Spinco, which will be capitalized with at
least an amount necessary to purchase COPI'S equity interests in COPI Cold
Storage and not less than $15 million. Crescent Spinco shall acquire all of
COPI's interest in COPI Cold Storage. The purchase price for the equity
interests in COPI Cold Storage shall be an amount to be agreed upon between
Crescent and COPI, which shall be not less than $15,000,000 and not more than
$15,500,000. COPI shall use all of the proceeds as are necessary to repay the
full principal balance (including accrued and unpaid interest) of the Bank of
America Secured Claims.
8.5 NEW COPI COMMON STOCK. On the Effective Date, pursuant to the
Confirmation Order and without any further action by the stockholders or
directors of the Debtor or the Reorganized COPI, the Reorganized COPI shall
issue a single share of New COPI Common Stock which shall be held by the Plan
Administrator as nominee for the holders of Allowed Claims against Debtor.
8.6 CANCELLATION OF OLD COPI COMMON STOCK. On the Confirmation Date,
DEBTOR'S PLAN OF REORGANIZATION
DATED_______, 2003 A-21
ANNEX A
COPI will close its stock transfer books, and no further transfers of COPI
common stock will be possible. On the Effective Date, all shares of COPI common
stock shall automatically be canceled and retired and shall cease to exist. Each
holder of a stock certificate shall cease to have any rights with respect
thereto, except the right to receive certificates representing the Crescent REIT
Common Shares to which such holder is entitled under the Plan. If a certificate
representing Old COPI Common Stock is presented for transfer on or after the
Confirmation Date, a certificate representing the appropriate number of whole
Crescent REIT Common Shares will be issued in exchange therefor. In no event
will fractional Crescent REIT Common Shares be issued, and any fractional share
amounts shall be rounded up or down to the closest number of whole Crescent REIT
Common Shares.
8.7 CHARTER AND BYLAWS. The certificate of incorporation of the
Reorganized Debtor shall read substantially as set forth in the Amended
Certificate of Incorporation. The Bylaws of the Reorganized Debtor shall read
substantially as set forth in the Amended Bylaws.
8.8 CORPORATE ACTION. Upon entry of the Confirmation Order, the
following shall be and be deemed authorized and approved in all respects: (i)
the filing by Reorganized COPI of the Amended Certificate of Incorporation, and
(ii) the Amended Bylaws. On the Effective Date, or as soon thereafter
as is practicable, the Reorganized COPI shall file with the Secretary of State
of the State of Delaware, in accordance with applicable state law, the Amended
Certificate of Incorporation which shall conform to the provisions of the Plan
and prohibit the issuance of non-voting equity securities. On the Effective
Date, the matters provided under the Plan involving the capital and corporate
structures and governance of the Reorganized COPI shall be deemed to have
occurred and shall be in effect from and after the Effective Date pursuant to
applicable state laws without any requirement of further action by the
stockholders or directors of the Debtor or the Reorganized COPI. On the
Effective Date, the Reorganized Debtor shall be authorized and directed to take
all necessary and appropriate actions to effectuate the transactions
contemplated by the Plan and the Proxy Statement/Disclosure Statement.
8.9 THE PLAN ADMINISTRATOR. On the Effective Date, the officers and
boards of directors of the Debtor shall be deemed removed from office pursuant
to the Confirmation Order and the operation of the Reorganized Debtor in
accordance with the provisions of the Plan shall become the general
responsibility of the Plan Administrator pursuant to and in accordance with the
provisions of the Plan and the Plan Administration Agreement.
(a) RESPONSIBILITIES. The responsibilities of the Plan
Administrator shall include prosecuting objections to and estimations of Claims;
calculating and making all distributions in accordance with the Plan; filing all
required tax returns and paying taxes and all other obligations on behalf of the
Reorganized Debtor; providing to Crescent on a monthly basis an accounting of
claims paid; an estimation of claims remaining to be paid; funds held by
Reorganized COPI; and additional funds required from Crescent to pay Allowed
Claims and the expenses of Reorganized COPI, including the expenses of the Plan
Administrator; and such other responsibilities as may be vested in the Plan
Administrator pursuant to the Plan, the Plan Administration Agreement or
Bankruptcy Court order or as may be necessary and proper to carry out the
provisions of the Plan.
DEBTOR'S PLAN OF REORGANIZATION
DATED_______, 2003 A-22
ANNEX A
(b) POWERS. The powers of the Plan Administrator shall,
without Bankruptcy Court approval in each of the following cases, include the
power to invest funds in, and withdraw, make distributions and pay taxes and
other obligations owed by the Reorganized Debtor from the Debtor's bank accounts
in accordance with the Plan; the power to engage employees and professional
persons to assist the Plan Administrator with respect to its responsibilities;
the power to compromise and settle claims and causes of action on behalf of or
against the Reorganized Debtor; and such other powers as may be vested in or
assumed by the Plan Administrator pursuant to the Plan, the Plan Administration
Agreement, the Amended Certificate of Incorporation, the Amended By-Laws or
Bankruptcy Court order or as may be necessary and proper to carry out the
provisions of the Plan.
(c) COMPENSATION. In addition to reimbursement for the actual
out-of-pocket expenses incurred, the Plan Administrator shall be entitled to
reasonable compensation for services rendered on behalf of the Reorganized
Debtor in an amount and on such terms as may be agreed to by the Debtor as
reflected in the Plan Administration Agreement. Any dispute with respect to such
compensation shall be resolved by agreement among the parties or, if the parties
are unable to agree, determined by the Bankruptcy Court.
(d) INFORMATION AND REPORTING. The Plan Administrator shall
file reports with the Bankruptcy Court no less often than as soon as practicable
after the end of every calendar quarter with respect to the status of the
execution and implementation of the Plan, including amounts expended for
administrative expenses, amounts distributed to creditors and the amount of
unpaid or Disputed Claims.
(e) TERMINATION. The duties, responsibilities and powers of
the Plan Administrator shall terminate on the date following the entry of the
Final Decree in the Bankruptcy case on which the Reorganized Debtor is dissolved
under applicable state law in accordance with the Plan.
8.10 RELEASES.
(a) On the Effective Date, the Reorganized Debtor, on its own
behalf and as representative of the Debtor's estate, releases unconditionally,
and hereby is deemed to release unconditionally (i) each of the Debtor's
officers, directors, shareholders, employees, consultants, attorneys,
accountants and other representatives, (ii) Crescent and each of Crescent's
officers, directors, partners, shareholders, employees, consultants, attorneys,
accountants, Affiliates and other representatives, (iii) Crescent REIT and each
of Crescent REIT's officers, directors, shareholders, employees, consultants,
attorneys, accountants, Affiliates and other representatives, (iv) the
Creditors' Committee, if any, and, solely in their capacity as members and
representatives of the Creditors' Committee , each member, consultant, attorney,
accountant or other representative of the Creditors' Committee (the entities
identified in (i), (ii), (iii) and (iv) are referred to collectively as, the
"Releasees"), from any and all claims, obligations, suits, judgments, damages,
rights, causes of action and liabilities whatsoever, whether known or unknown,
foreseen or unforeseen, existing or hereafter arising, in law, equity or
otherwise, based in whole or in part upon any act or omission, transaction,
event or other occurrence taking place on or prior to the Effective Date in any
way relating to the Releasees, the Debtor, the Chapter 11 Case or the Plan.
DEBTOR'S PLAN OF REORGANIZATION
DATED_______, 2003 A-23
ANNEX A
(b) On the Effective Date, each holder of a Claim or Interest
(i) who has accepted the Plan, (ii) whose Claim or Interest is in a Class that
has accepted or is deemed to have accepted the Plan pursuant to section 1126 of
the Bankruptcy Code or (iii) who may be entitled to receive a distribution of
property pursuant to the Plan, shall be deemed to have unconditionally released
the Releasees, from any and all rights, claims, causes of action, obligations,
suits, judgments, damages and liabilities whatsoever which any such holder may
be entitled to assert, whether known or unknown, foreseen or unforeseen,
existing or hereafter arising, in law, equity or otherwise, based in whole or in
part upon any act or omission, transaction, event or other occurrence taking
place on or before the Effective Date in any way relating to the Debtor, the
Chapter 11 Case or the Plan, provided however, that the foregoing shall not
apply to all rights, claims and obligations created by or arising under the
Plan.
(c) Notwithstanding the foregoing, if and to the extent that
the Bankruptcy Court concludes that the Plan cannot be confirmed with any
portion of the releases set forth in 8.10(b), then, with the consent of Crescent
in its sole discretion, the Plan may be confirmed with that portion excised so
as to give effect as much as possible to the foregoing releases without
precluding confirmation of the Plan. The release of COPI shareholder claims will
not apply to the claims, if any, of a person who sold their Old COPI Common
Stock before the Voting Record Date or who (i) either voted to reject the Plan,
abstained from voting on the Plan or did not vote on the Plan and thereafter
(ii) either did not receive or refused the distribution of Crescent REIT Common
Shares provided for in the Plan. The release of COPI shareholder claims will not
apply if Class 7 rejects the Plan. The releases provided herein do not diminish,
alter or affect in any way the releases provided in the Settlement Agreement.
8.11 PRESERVATION OF RIGHTS OF ACTION. Except as otherwise provided in
the Plan, or in any contract, instrument, release, or other agreement entered
into in connection with the Plan, in accordance with section 1123(b) of the
Bankruptcy Code, the Reorganized Debtor shall retain and may enforce any claims,
rights and causes of action that the Debtor or the Estate may hold against any
entity, including, without limitation, any claims, rights or causes of action
arising under Chapter 5 of the Bankruptcy Code or any similar provisions of
state law, or any other statute or legal theory. The Reorganized Debtor may
pursue those rights of action, as appropriate, in accordance with what is in the
best interests of the Reorganized Debtor.
8.12 OBJECTIONS TO CLAIMS. Except as otherwise ordered by the
Bankruptcy Court after notice and a hearing, objections to Claims, including
Administrative Expense Claims, shall be Filed and served upon the holder of such
Claim or Administrative Expense Claim not later than the later of (a) one
hundred twenty (120) days after the Effective Date, and (b) one hundred twenty
(120) days after a proof of claim or request for payment of such Administrative
Expense Claim is Filed, unless this period is extended by the Court. Such
extension may occur ex parte. After the Effective Date, Reorganized COPI shall
have the exclusive right to object to Claims.
8.13 EXEMPTION FROM STAMP AND SIMILAR TAXES. The issuance and transfer
of the COPI New
DEBTOR'S PLAN OF REORGANIZATION
DATED_______, 2003 A-24
ANNEX A
Common Stock as provided in the Plan shall not be taxed under any law imposing
a stamp tax or similar tax in accordance with 11 U.S.C. Section 1146(c).
ARTICLE 9
CONDITIONS TO EFFECTIVENESS OF THE PLAN
9.1 CONDITIONS TO EFFECTIVENESS. Except as expressly waived by the
Debtor with the consent of Crescent, the following conditions must occur and be
satisfied on or before the Effective Date:
(a) the Confirmation Order shall have been signed by the Court
and duly entered on the docket for the Reorganization Case by the clerk of the
Court in form and substance acceptable to the Debtor;
(b) the Confirmation Order shall have become an Effective
Confirmation Order and not have been stayed, modified, reversed or amended; and
(c) Crescent REIT shall have received all necessary regulatory
approvals and authorizations necessary for the creation of Crescent Spinco and
Crescent Spinco shall have been capitalized with at least $15 million.
9.2 WAIVER OF CONDITIONS. The Debtor, with the consent of Crescent, may
waive any condition set forth in Article 9 of the Plan at any time, without
notice, without leave of or order of the Court, and without any formal action
other than proceeding to consummate the Plan.
9.3 NO REQUIREMENT OF FINAL ORDER. So long as no stay is in effect, the
Debtor's Effective Date of the Plan will occur notwithstanding the pendency of
an appeal of the Confirmation Order or any Order related thereto. In that event,
the Debtor or Reorganized Debtor may seek dismissal of any such appeal as moot
following the Effective Date of the Plan.
ARTICLE 10
EFFECTS OF PLAN CONFIRMATION
10.1 BINDING EFFECT. The Plan shall be binding upon all present and
former holders of Claims and Equity Interests, and their respective successors
and assigns, including the Reorganized Debtor.
10.2 MORATORIUM, INJUNCTION AND LIMITATION OF RECOURSE FOR PAYMENT.
Except as otherwise provided in the Plan or by subsequent order of the
Bankruptcy Court, the Confirmation Order shall provide,
DEBTOR'S PLAN OF REORGANIZATION
DATED_______, 2003 A-25
ANNEX A
Common Stock as provided in the Plan shall not be taxed under any law imposing a
stamp tax or similar tax in accordance with 11 U.S.C. Section 1146(c). among
other things, that from and after the Confirmation Date, all Persons or entities
who have held, hold, or may hold Claims against or Equity Interests in the
Debtor are permanently enjoined from taking any of the following actions against
the Estates and the Reorganized Debtor, the Creditors' Committee, Crescent,
and Crescent REIT or any of their property on account of any such Claims or
Equity Interests: (i) commencing or continuing, in any manner or in any place,
any action or other proceeding; (ii) enforcing, attaching, collecting or
recovering in any manner any judgment, award, decree or order; (iii) creating,
perfecting or enforcing any lien or encumbrance; (iv) asserting a setoff, right
of subrogation or recoupment of any kind against any debt, liability or
obligation due to the Debtor other than through a proof of claim or adversary
proceeding; and (v) commencing or continuing, in any manner or in any place, any
action that does not comply with or is inconsistent with the provisions of the
Plan; provided, however, that nothing contained herein shall preclude such
persons from exercising their rights pursuant to and consistent with the terms
of the Plan.
10.3 EXCULPATION AND LIMITATION OF LIABILITY. Notwithstanding any other
provision of the Plan of Reorganization, COPI, Crescent, Crescent REIT, and the
Plan Administrator as well as each of their respective stockholders, directors,
officers, agents, employees, members, accountants, attorneys, financial advisors
and representatives, or any one or more of the foregoing, will not be liable to
any holder of a Claim or Interest or any person or governmental authority, with
respect to any action, omission, forbearance from action, decision, or exercise
of discretion taken at any time prior to the effective date of the Plan of
Reorganization, other than for gross negligence or willful misconduct, in
connection with, but not limited to:
o COPI's management or operation, or the discharge of COPI's
duties under the Bankruptcy Code or applicable nonbankruptcy
law; the filing of the petition for relief; the implementation
of any of the transactions provided for, or contemplated in,
the plan or the collateral documents;
o any action taken in connection with either the enforcement of
COPI's rights against any person or the defense of claims
asserted against COPI with regard to the reorganization case;
o any action taken in the negotiation, formulation, development,
proposal, disclosure, confirmation or implementation of the
Plan of Reorganization, including, but not limited to, the
Settlement Agreement; or
o the administration of the Plan of Reorganization or the assets
and property to be distributed pursuant to the Plan of
Reorganization.
Nothing in the limitation of liability will excuse performance or
nonperformance under the Settlement Agreement or any of the documents,
instruments, securities or agreements issued or executed to effectuate the
transactions contemplated by the Plan of Reorganization or the Settlement
Agreement; and provided, further, that the liability of any person that solicits
acceptance or rejection of the Plan of Reorganization, or
DEBTOR'S PLAN OF REORGANIZATION
DATED_______, 2003 A-26
ANNEX A
that participates in the offer, issuance, sale or purchase of a security offered
or sold under the Plan of Reorganization, on account of such solicitation or
participation, or violation of any applicable law, rule, or regulation governing
solicitation of acceptance or rejection of the Plan of Reorganization or the
offer, issuance, sale or purchase of securities, will be limited as set forth in
section 1125(e) of the bankruptcy code. COPI, Crescent, Crescent REIT, and the
Plan Administrator, as well as each of their respective shareholders, directors,
officers, agents, employees, members, accountants, attorneys, financial advisors
and representatives, or any one or more of the foregoing, may rely reasonably
upon the opinions of their respective counsel, accountants, and other experts or
professionals and such reliance, if reasonable, will conclusively establish good
faith and the absence of willful misconduct; provided, however, that a
determination that such reliance is unreasonable will not, by itself, constitute
a determination of willful misconduct. In any action, suit or proceeding by any
holder of a claim or interest or any other entity contesting any action by, or
non-action of COPI, Crescent, Crescent REIT and the Plan Administrator or of
their respective shareholders, directors, officers, agents, employees, members,
attorneys, accountants, financial advisors, and representatives, the reasonable
attorneys' fees and costs of the prevailing party will be paid by the losing
party, and as a condition to going forward with such action, suit, or proceeding
at the outset thereof, all parties thereto will be required to provide
appropriate proof and assurances of their capacity to make such payments of
reasonable attorneys' fees and costs in the event they fail to prevail. The
provisions of the limitation of liability are not intended to limit, and will
not limit, any defenses to liability otherwise available to any party in
interest in this reorganization case.
Notwithstanding the foregoing, if and to the extent that the Bankruptcy
Court concludes that the Plan of Reorganization cannot be confirmed with any
portion of the foregoing limitation of liability provisions, then, with the
consent of Crescent in its sole discretion, the Plan may be confirmed with that
portion excised or modified, without the consent of the entity that would
otherwise receive the benefit from the limitation of liability, other than
Crescent, so as to give effect as much as possible to the foregoing limitation
of liability provisions without precluding confirmation of the Plan of
Reorganization.
10.4 REVESTING. On the Effective Date, the Reorganized Debtor will be
vested with all the property of the respective estates of the Debtor free and
clear of all Claims and other interests of creditors and equity holders, except
as provided herein; provided, however, that the Debtor shall continue as Debtor
in possession under the Bankruptcy Code until the Effective Date, and,
thereafter, the Reorganized Debtor may conduct their business free of any
restrictions imposed by the Bankruptcy Code or the Court.
10.5 OTHER DOCUMENTS AND ACTIONS. The Debtor, the Debtor-In-Possession,
and Reorganized Debtor may execute such documents and take such other action as
is necessary to effectuate the transactions provided for in the Plan.
10.6 POST-CONSUMMATION EFFECT OF EVIDENCES OF CLAIMS OR INTERESTS. Old
COPI Common Stock certificates shall, effective upon the Effective Date,
represent only the right to participate in the distributions contemplated by the
Plan.
DEBTOR'S PLAN OF REORGANIZATION
DATED_______, 2003 A-27
ANNEX A
10.7 TERM OF INJUNCTIONS OR STAYS. Unless otherwise provided, all
injunctions or stays provided for in the Reorganization Cases pursuant to
sections 105 or 362 of the Bankruptcy Code or otherwise and in effect on the
Confirmation Date shall remain in full force and effect until the Effective
Date.
ARTICLE 11
CONFIRMABILITY OF PLAN AND CRAMDOWN
The Debtor requests Confirmation under section 1129(b) of the
Bankruptcy Code if any impaired class does not accept the Plan pursuant to
section 1126 of the Bankruptcy Code. In that event, the Debtor reserves the
right to modify the Plan to the extent, if any, that Confirmation of the Plan
under section 1129(b) of the Bankruptcy Code requires modification.
ARTICLE 12
RETENTION OF JURISDICTION
Notwithstanding the entry of the Confirmation Order or the occurrence
of the Effective Date, the Bankruptcy Court shall retain such jurisdiction over
the Reorganization Case after the Effective Date as is legally permissible,
including, without limitation, jurisdiction to:
12.1 Allow, disallow, determine, liquidate, classify or establish the
priority or secured or unsecured status of or estimate any Claim or Interest,
including, without limitation, the resolution of any request for payment of any
Administrative Expense Claim and the resolution of any and all objections to the
allowance or priority of Claims or Interests;
12.2 Grant or deny any and all applications for allowance of
compensation or reimbursement of expenses authorized pursuant to the Bankruptcy
Code or the Plan, for periods ending on or before the Effective Date;
12.3 Resolve any motions pending on the Effective Date to assume,
assume and assign or reject any executory contract or unexpired lease to which
the Debtor are parties or with respect to which the Debtor may be liable and to
hear, determine and, if necessary, liquidate, any and all Claims arising
therefrom;
12.4 Ensure that distributions to holders of Allowed Claims and Allowed
Interests are accomplished pursuant to the provisions of the Plan;
12.5 Decide or resolve any and all applications, motions, adversary
proceedings, contested or litigated matters and any other matters or grant or
deny any applications involving the Debtor that
DEBTOR'S PLAN OF REORGANIZATION
DATED_______, 2003 A-28
ANNEX A
may be pending on the Effective Date or that may be brought by the Reorganized
Debtor after the Effective Date, including Claims arising under Chapter 5 of the
Bankruptcy Code;
12.6 Enter such Orders as may be necessary or appropriate to implement,
enforce or consummate the provisions of the Plan and all contracts, instruments,
releases, and other agreements or documents created in connection with the Plan
or the Proxy Statement/Disclosure Statement;
12.7 Resolve any and all controversies, suits or issues that may arise
in connection with the consummation, interpretation or enforcement of the Plan
or any entity's rights or obligations incurred in connection with the Plan;
12.8 Modify the Plan before or after the Effective Date pursuant to
section 1127 of the Bankruptcy Code, or to modify the Proxy Statement/Disclosure
Statement or any contract, instrument, release, or other agreement or document
created in connection with the Plan or the Proxy Statement/Disclosure Statement;
or remedy any defect or omission or reconcile any inconsistency in any
Bankruptcy Court Order, the Plan, the Proxy Statement/Disclosure Statement or
any contract, instrument, release, or other agreement or document created in
connection with the Plan or the Proxy Statement/Disclosure Statement, in such
manner as may be necessary or appropriate to consummate the Plan, to the extent
authorized by the Bankruptcy Code;
12.9 Issue injunctions, enter and implement other orders or take such
other actions as may be necessary or appropriate to restrain interference by any
entity with consummation or enforcement of the Plan;
12.10 Enter and implement such orders as are necessary or appropriate
if the Confirmation Order is for any reason modified, stayed, reversed, revoked
or vacated;
12.11 To hear and determine such other matters as may be provided for
in the Plan the Confirmation Order confirming the Plan or as may be permitted
under the Bankruptcy Code and to issue such orders in aid of execution of the
Plan to the extent authorized by section 1142 of the Bankruptcy Code, including
using Bankruptcy Rule of Procedure 7070; and
12.12 Determine any other matters that may arise in connection with or
relate to the Plan, the Proxy Statement/Disclosure Statement, the Confirmation
Order or any contract, instrument, release, or other agreement or document
created in connection with the Plan or the Proxy Statement/Disclosure Statement;
12.13 Enter an order concluding the Reorganization Case.
If the Bankruptcy Court abstains from exercising jurisdiction or is otherwise
without jurisdiction over any matter arising out of the Reorganization Case,
including, without limitation, the matters set forth in this Article, this
Article shall have no effect upon and shall not control, prohibit, or limit the
exercise of jurisdiction by any other court having competent jurisdiction with
respect to such matter.
DEBTOR'S PLAN OF REORGANIZATION
DATED_______, 2003 A-29
ANNEX A
ARTICLE 13
MISCELLANEOUS PROVISIONS
13.1 MODIFICATION OF PLAN. The Debtor, with the consent of Crescent,
reserves the right, in accordance with the Bankruptcy Code, to amend or modify
the Plan prior to the entry of the Confirmation Order. After the entry of the
Confirmation Order, Reorganized COPI may, upon order of the Court, amend or
modify the Plan in accordance with section 1127(b) of the Bankruptcy Code, or
remedy any defect or omission or reconcile any inconsistency in the Plan in such
manner as may be necessary to carry out the purpose and intent of the Plan.
13.2 WITHDRAWAL OF PLAN. The Debtor reserves the right, at any time
prior to entry of the Confirmation Order, to revoke or withdraw the Plan. If the
Debtor revokes or withdraws the Plan under Section 13.2 of the Plan or if the
Effective Date does not occur, then the Plan shall be deemed null and void. In
that event, nothing contained in the Plan shall be deemed to constitute a waiver
or release of any Claims by or against the Debtor or any other person, or to
prejudice in any manner the rights of the Debtor or any other person in any
further proceedings involving the Debtor.
13.3 GOVERNING LAW. Except to the extent the Bankruptcy Code, the
Bankruptcy Rules or the Delaware General Corporation Law are applicable, the
rights and obligations arising under the Plan shall be governed by, and
construed and enforced in accordance with the laws of the State of Texas,
without giving effect to the principles of conflicts of law thereof.
13.4 TIME. In computing any period of time prescribed or allowed by the
Plan, the day of the act, event, or default from which the designated period of
time begins to run shall not be included. The last day of the period so computed
shall be included, unless it is not a Business Day or, when the act to be done
is the filing of a paper in court, a day on which weather or other conditions
have made the clerk's office inaccessible, in which event the period runs until
the end of the next day which is not one of the aforementioned days. When the
period of time prescribed or allowed is less than eight days, intermediate days
that are not Business Days shall be excluded in the computation.
13.5 PAYMENT DATES. Whenever any payment to be made under the Plan is
due on a day other than a Business Day, such payment will instead be made,
without interest, on the next Business Day.
13.6 HEADINGS. The headings used in the Plan are inserted for
convenience only and neither constitute a portion of the Plan nor in any manner
affect the provisions of the Plan.
13.7 SUCCESSORS AND ASSIGNS. The rights, benefits and obligations of
any entity named or referred to in the Plan shall be binding on, and shall inure
to the benefit of, any heir, executor, administrator, successor or assign of
such entity.
DEBTOR'S PLAN OF REORGANIZATION
DATED_______, 2003 A-30
ANNEX A
13.8 SEVERABILITY OF PLAN PROVISIONS. If prior to Confirmation any term
or provision of the Plan which does not govern the treatment of Claims or
Interests or the conditions of the Effective Date, is held by the Bankruptcy
Court to be invalid, void, or unenforceable, the Bankruptcy Court shall have the
power to alter and interpret such term or provision to make it valid or
enforceable to the maximum extent practicable, consistent with the original
purpose of the term or provision held to be invalid, void, or unenforceable, and
such term or provision shall then be applicable as altered or interpreted.
Notwithstanding any such holding, alteration or interpretation, the remainder of
the terms and provisions of the Plan will remain in full force and effect and
will in no way be affected, impaired, or invalidated by such holding,
alteration, or interpretation. The Confirmation Order shall constitute a
judicial determination and shall provide that each term and provision of the
Plan, as it may have been altered or interpreted in accordance with the
foregoing, is valid and enforceable pursuant to its terms.
13.9 NO ADMISSIONS. Notwithstanding anything herein to the contrary,
nothing contained in the Plan shall be deemed as an admission by the Debtor with
respect to any matter set forth herein, including, without limitation, liability
on any Claim or the propriety of any Claims classification.
DEBTOR'S PLAN OF REORGANIZATION
DATED_______, 2003 A-31
ANNEX A
Dated:
----------------------
CRESCENT OPERATING, INC.
Debtor and Debtor-In-Possession
------------------------------
Jeffrey L. Stevens
President and Chief Executive Officer
HAYNES AND BOONE, LLP
901 Main Street, Suite 3100
Dallas, Texas 75202
Tel. No. (214) 651-5000
Fax No. (214) 651-5940
------------------------------
Robert D. Albergotti
State Bar No. 00969800
Sarah B. Foster
State Bar No. 07297500
COUNSEL TO THE DEBTOR AND THE DEBTOR-IN-POSSESSION
DEBTOR'S PLAN OF REORGANIZATION
DATED_______, 2003 A-32
ANNEX B
SETTLEMENT AGREEMENT
dated as of February 14, 2002
by and among
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP,
CRESCENT REAL ESTATE EQUITIES COMPANY
and
CRESCENT OPERATING, INC.,
ROSESTAR MANAGEMENT LLC,
CANYON RANCH LEASING, L.L.C.,
WINE COUNTRY HOTEL, LLC,
ROSESTAR SOUTHWEST, LLC, and
COI HOTEL GROUP, INC.
TABLE OF CONTENTS
This Table of Contents is not part of the Agreement to which it is attached but
is inserted for convenience only.
ARTICLE I DEFINITIONS .............................................................................. B-1
1.01 Defined Terms ............................................................................... B-1
1.02 Cross References ............................................................................ B-6
1.03 Usage ....................................................................................... B-7
ARTICLE II AGREEMENTS .............................................................................. B-8
2.01 Transfer of Hotel-Related Assets ............................................................ B-8
2.02 Retention of Collateral in Partial Satisfaction of Obligations .............................. B-14
2.03 Prepackaged Bankruptcy ...................................................................... B-16
2.04 COPI Stockholder Acceptance and Filing of Proxy Statement ................................... B-16
2.05 Distribution of COPI Common Stock by COPI Colorado .......................................... B-17
2.06 Bank of America Loan ........................................................................ B-18
2.07 Seller Notes ................................................................................ B-19
2.08 Vornado Claim ............................................................................... B-19
2.09 Payment of Cash Flow Shortage ............................................................... B-19
2.10 Issuance of Common Shares of Crescent REIT to COPI Stockholders and Filing
of Registration Statement ................................................................. B-20
2.11 Crescent and Crescent REIT Consent .......................................................... B-21
2.12 Cooperation ................................................................................. B-21
2.13 Mutual Release .............................................................................. B-21
2.14 Termination Agreement ....................................................................... B-21
ARTICLE III REPRESENTATIONS AND WARRANTIES OF TRANSFERORS .......................................... B-21
3.01 Organization and Qualification of COPI ...................................................... B-21
3.02 Organization and Qualification of Transferring Subsidiaries ................................. B-22
3.03 COPI Authority .............................................................................. B-22
3.04 Transferring Subsidiary Authority ........................................................... B-22
3.05 Ownership of CRL Voting Common Stock ........................................................ B-23
3.06 Ownership of CR License Membership Interests ................................................ B-23
3.07 Ownership of WOCOI Common Stock ............................................................. B-23
3.08 Ownership of TWLC Voting Common Stock ....................................................... B-23
3.09 Ownership of DMDC Voting Common Stock ....................................................... B-24
3.10 Ownership of CRE Diversified Voting Common Stock ............................................ B-24
3.11 Ownership of COPI Colorado GP Interests ..................................................... B-24
3.12 Claims Against COPI ......................................................................... B-24
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF CRESCENT AND CRESCENT REIT ............................ B-25
4.01 Organization ................................................................................ B-25
4.02 Authority ................................................................................... B-25
4.03 Crescent REIT Common Share Issuance ......................................................... B-25
ARTICLE V COVENANTS OF TRANSFERORS ................................................................. B-26
5.01 Regulatory and Other Approvals .............................................................. B-26
5.02 Investigation by Crescent ................................................................... B-26
5.03 No Solicitation ............................................................................. B-26
5.04 Conduct of Business ......................................................................... B-27
5.05 Certain Restrictions ........................................................................ B-28
5.06 Delivery of Books and Records, etc.; Removal of Property .................................... B-29
5.07 Resignations ................................................................................ B-30
5.08 Fulfillment of Conditions ................................................................... B-30
ARTICLE VI CRESCENT AND CRESCENT REIT COVENANTS .................................................... B-30
6.01 Regulatory and Other Approvals .............................................................. B-30
6.02 Fulfillment of Conditions ................................................................... B-31
ARTICLE VII SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS
AND AGREEMENTS ................................................................................... B-31
7.01 Survival of Representations, Warranties, Covenants and Agreements ......................... B-31
ARTICLE VIII INDEMNIFICATION ....................................................................... B-31
8.01 Indemnification ........................................................................... B-31
8.02 Exclusivity ............................................................................... B-33
ARTICLE IX TERMINATION ............................................................................. B-33
9.01 Termination ............................................................................... B-33
9.02 Effect of Termination ..................................................................... B-34
ARTICLE X MISCELLANEOUS ............................................................................ B-34
10.01 Notices.................................................................................... B-34
10.02 Bulk Sales Act ............................................................................ B-35
10.03 Entire Agreement .......................................................................... B-35
10.04 Public Announcements ...................................................................... B-36
10.05 Confidentiality ........................................................................... B-36
10.06 Waiver .................................................................................... B-36
10.07 Amendment ................................................................................. B-37
10.08 No Third Party Beneficiary ................................................................ B-37
10.09 No Assignment; Binding Effect ............................................................. B-37
10.10 Headings .................................................................................. B-37
10.11 Invalid Provisions ........................................................................ B-37
10.12 Governing Law ............................................................................. B-37
10.13 Counterparts .............................................................................. B-38
EXHIBITS
EXHIBIT A General Assignment and Conveyance
EXHIBIT B Assignment, Assumption and Amendment of Lease
EXHIBIT C Assumption Agreement
EXHIBIT D Foreclosure Agreement
EXHIBIT E Plan
EXHIBIT F Mutual Release
EXHIBIT G Termination Agreement
EXHIBIT H Promissory Note -- COPI Budget
ANNEXES
ANNEX A Credit Documents
ANNEX B Hotel Property Leases
ANNEX C Canyon Ranch -- Tucson Assets
ANNEX D Allocation of Initial Rent Reduction Amount
ANNEX E Seller Notes
This SETTLEMENT AGREEMENT dated as of February 14, 2002 is made and
entered into by and among CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP, a
Delaware limited partnership ("Crescent"), CRESCENT REAL ESTATE EQUITIES
COMPANY, a Texas real estate investment trust ("Crescent REIT"), CRESCENT
OPERATING, INC., a Delaware corporation ("COPI"), ROSESTAR MANAGEMENT LLC, a
Texas limited liability company, CANYON RANCH LEASING, L.L.C., an Arizona
limited liability company, WINE COUNTRY HOTEL, LLC d/b/a VINTAGE RESORTS, LLC, a
Delaware limited liability company, ROSESTAR SOUTHWEST, LLC, a Texas limited
liability company, and COI HOTEL GROUP, INC., a Texas corporation, all of which
are direct or indirect wholly owned subsidiaries of COPI (the "Transferring
Subsidiaries", and together with COPI, the "Transferors," and each individually,
a "Transferor"). Capitalized terms not otherwise defined herein have the
respective meanings set forth in Section 1.01.
WHEREAS, COPI is in default of its payment obligations under various
loan agreements with Crescent and/or promissory notes made in favor of Crescent;
WHEREAS, the Transferring Subsidiaries are in default of their rental
payment obligations under various lease agreements for hotel properties owned by
Crescent and its subsidiaries;
WHEREAS, COPI has guaranteed the Transferring Subsidiaries' obligations
under the various lease agreements for hotel properties owned by Crescent and
its subsidiaries; and
WHEREAS, in settlement of certain of the Transferors' obligations to
Crescent and its subsidiaries, the parties hereto desire to make various
agreements contained herein.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I
DEFINITIONS
1.01 Defined Terms.
As used in this Agreement, the following defined terms have the
meanings indicated below. The meanings of other defined terms are set forth
elsewhere in this Agreement.
"Actions or Proceedings" means any action, suit, proceeding,
arbitration or Governmental or Regulatory Authority investigation or audit.
"Affiliate" means any Person that directly, or indirectly through one
of more intermediaries, controls or is controlled by or is under common control
with the Person specified. For purposes of this definition, control of a Person
means the power, direct or indirect, to direct or cause the direction of the
management and policies of such Person whether by Contract or otherwise. In
addition, any Person owning ten percent (10%) or more of the voting securities
of another Person shall be deemed to control that Person.
B-1
"Agreement" means this Settlement Agreement, together with the Exhibits
and the Annexes hereto, as any or all of the same shall be amended from time to
time.
"Asset Transfer Date" means (i) as soon as practicable after the day on
which the last of the consents, approvals, actions, filings, notices or waiting
periods necessary for any Transferring Subsidiary to transfer, and Crescent to
receive, the Assets owned by such Transferring Subsidiary has been obtained,
made or given or has expired, as applicable, or (ii) such other date as Crescent
shall choose, provided that (x) Crescent shall have provided the Transferors
with three Business Days notice of such date, and (y) the Transferring
Subsidiary will not be required to consummate the transfer of the Assets (other
than the Hotel Property Leases) on such date if the consents, approvals,
actions, filings, notices or waiting periods necessary for such Transferring
Subsidiary to transfer such Assets have not yet been obtained, made or given or
have not yet expired, as applicable.
"Asset Transfer Date Rent Payment" means the total net operating
income, before unpaid rental payment obligations, of the Hospitality Business
for the period from January 1, 2002 through the Asset Transfer Date, up to the
total amount of the unpaid rental payment obligations under the Hotel Property
Leases for such period, which net operating income shall be applied in full or
partial satisfaction, as the case may be, of such unpaid rental payment
obligations.
"Asset Transfer Date Working Capital" means the total value of all
funds used in the day-to-day operations of the Hospitality Business, including,
without limitation, amounts sufficient for the maintenance of change and petty
cash funds, amounts deposited in operating bank accounts, receivables, amounts
deposited in payroll accounts, prepaid expenses and funds required to maintain
inventories, less accounts payable and accrued current liabilities, as
determined using the Asset Transfer Date Financial Statements, but excluding the
Asset Transfer Date Rent Payment.
"Assets and Properties" of any Person means all assets and properties
of every kind, nature, character and description (whether real, personal or
mixed, whether tangible or intangible, whether absolute, accrued, contingent,
fixed or otherwise and wherever situated), including the goodwill related
thereto, operated, owned or leased by such Person, including without limitation
cash, cash equivalents, Investment Assets, accounts, notes receivable, chattel
paper, documents, instruments, general intangibles, real estate, equipment,
inventory, goods and Intellectual Property.
"Associate" means, with respect to any Person, any corporation or other
business organization of which such Person is an officer or partner or is the
beneficial owner, directly or indirectly, of ten percent (10%) or more of any
class of equity securities, any trust or estate in which such Person has a
substantial beneficial interest or as to which such Person serves as a trustee
or in a similar capacity and any relative or spouse of such Person, or any
relative of such spouse, who has the same home as such Person.
"Books and Records" of any Person means all files, documents,
instruments, papers, books and records relating to the business, operations and
condition of such Person, including without limitation financial statements, Tax
Returns and related work papers and letters from accountants, budgets, pricing
guidelines, ledgers, journals, deeds, title policies, minute books, stock
B-2
certificates and books, stock transfer ledgers, Contracts, Licenses, customer
lists, computer files and programs, retrieval programs, operating data and plans
and environmental studies and plans.
"Business Day" means a day other than Saturday, Sunday or any day on
which banks located in the State of Texas are authorized or obligated to close.
"Business Combination" means with respect to any Person (i) any merger,
consolidation or combination to which such Person is a party, (ii) any sale,
dividend, split or other disposition of capital stock or other equity interests
of such Person or (iii) any sale, dividend or other disposition of all or
substantially all of the Assets and Properties of such Person.
"CEI/COPI Payments" means all amounts paid, advanced, incurred or
accrued for out-of-pocket expenses by or on behalf of Crescent, Crescent REIT or
their Affiliates in connection with the preparation of this Agreement, the
Operative Agreements and the consummation of the transactions contemplated
hereby and thereby, or relating hereto or thereto, including, without
limitation, all such amounts paid, advanced, incurred or accrued by Crescent or
Crescent REIT pursuant to Sections 2.07 through 2.09, and all fees and expenses
of agents, representatives, counsel and accountants employed by Crescent,
Crescent REIT or any of their Affiliates.
"Code" means the Internal Revenue Code of 1986, as amended, and the
rules and regulations promulgated thereunder.
"Condition" means, with respect to any Person, the business, condition
(financial or otherwise), results of operations, Assets and Properties and
prospects of such Person.
"Contract" means any agreement, lease, license, evidence of
Indebtedness, mortgage, indenture, security agreement or other contract (whether
written or oral).
"Decontrolled Business" means the business and operations of the
Decontrolled Entities and their Subsidiaries.
"Equity Rights" means, with respect to any entity, any options,
warrants, calls, rights of conversion or exchange, or agreements, arrangements,
commitments or undertakings of any kind (whether or not in writing) to which the
entity is either a party or is bound, obligating the entity (with or without
consideration and whether or not presently exercisable or convertible) to issue,
deliver or sell, or cause to be issued, delivered or sold, shares of capital
stock of such entity or obligating such entity to issue, grant, extend or enter
into any such option, warrant, call, right of conversion or exchange, or
agreement, arrangement, commitment or undertaking.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means United States generally accepted accounting principles,
consistently applied throughout the specified period and in the immediately
prior comparable period.
"Governmental or Regulatory Authority" means any court, tribunal,
arbitrator, authority, agency, commission, official or other instrumentality of
the United States, any foreign country or any domestic or foreign state, county,
city or other political subdivision.
B-3
"Hospitality Business" means the business and operations of the
Transferring Subsidiaries.
"Indebtedness" of any Person means all obligations of such Person (i)
for borrowed money, (ii) evidenced by notes, bonds, debentures or similar
instruments, (iii) for the deferred purchase price of goods or services (other
than trade payables or accruals incurred in the ordinary course of business and
due within 30 days after the date on which incurred), (iv) under capital leases
and (v) in the nature of guarantees of the obligations described in clauses (i)
through (iv) above of any other Person.
"Intellectual Property" means all patents and patent rights, trademarks
and trademark rights, trade names and trade name rights, service marks and
service mark rights, service names and service name rights, brand names,
inventions, processes, formulae, copyrights and copyright rights, trade dress,
business and product names, logos, slogans, trade secrets, industrial models,
processes, designs, methodologies, computer programs (including all source
codes) and related documentation, technical information, manufacturing,
engineering and technical drawings, know-how and all pending applications for
and registrations of patents, trademarks, service marks and copyrights.
"Investment Assets" means all debentures, notes and other evidences of
Indebtedness, stocks, securities (including rights to purchase and securities
convertible into or exchangeable for other securities), interests in joint
ventures and general and limited partnerships, mortgage loans and other
investment or portfolio assets owned of record or beneficially by Transferor
(other than trade receivables generated in the ordinary course of business of
the Transferor).
"Knowledge" or "Known" means, (i) with respect to any entity other
than the Transferors, the actual knowledge of any officer, director or employee
of such entity, or any officer or director of the managing member or general
partner of such entity, or (ii) with respect to the Transferors, the actual
knowledge of Jeffrey L. Stevens and Jason Phinney.
"Laws" means any and all laws, statutes, rules, regulations, ordinances
and other pronouncements having the effect of law of the United States, any
foreign country or any domestic or foreign state, county, city or other
political subdivision or of any Governmental or Regulatory Authority.
"Liabilities" means all Indebtedness, obligations and other liabilities
of a Person (whether absolute, accrued, contingent, fixed or otherwise, whether
known or unknown, or whether due or to become due).
"Licenses" means all licenses, permits, certificates of authority,
authorizations, approvals, registrations, franchises and similar consents
granted or issued by any Governmental or Regulatory Authority.
"Liens" means any mortgage, pledge, assessment, security interest,
lease, lien, adverse claim, levy, charge or other encumbrance of any kind, or
any conditional sale Contract, title retention Contract or other Contract to
give any of the foregoing.
"Loss" or "Losses" means any and all damages, liabilities, fines, fees,
penalties, deficiencies, losses and expenses (including without limitation
interest, court costs, fees of attorneys,
B-4
accountants and other experts or other expenses of, relating to or arising from,
(i) litigation, (ii) other proceedings or (iii) any claim, default or
assessment).
"Mutual Release" means the Mutual Release, of even date herewith, made
by the Transferors, Crescent and Crescent REIT, and attached hereto as Exhibit
F.
"Operative Agreements" means, collectively, (i) the General Assignment
Agreement (in substantially the form of Exhibit A), (ii) the Assignments,
Assumptions and Amendments of Lease (in substantially the form of Exhibit B) and
the other Assignment Instruments, (iii) the Assumption Agreement (in
substantially the form of Exhibit C) and the other Assumption Instruments, (iv)
the Foreclosure Agreement (in substantially the form of Exhibit D), (v) the Plan
(in substantially the form of Exhibit E), (vi) the Mutual Release (attached
hereto as Exhibit F), (vii) the Termination Agreement (attached hereto as
Exhibit G), (viii) the Promissory Note (in substantially the form of Exhibit H),
(ix) all documents evidencing cancellation and extinguishment of the rental
payment obligations under the Hotel Property Leases and (x) any other agreements
to be entered into in connection with the transaction.
"Order" means any writ, judgment, decree, injunction or similar order
of any Governmental or Regulatory Authority (in each such case whether
preliminary or final).
"Person" means any natural person, corporation, general partnership,
limited partnership, limited liability company, proprietorship, other business
organization, trust, union, association or Governmental or Regulatory Authority.
"Representatives" means, for any Person, their officers, directors,
employees, agents, counsel, accountants, financial advisors, consultants and
other representatives.
"Securities Act" means the Securities Act of 1933, as amended.
"Subsidiary" means, with respect to any Person, any corporation,
partnership, limited liability company, joint venture, trust or other legal
entity of which such Person owns (either directly or indirectly) either (i) a
general partner, managing member or other similar interest, or (ii) 50% or more
of the outstanding voting capital stock of the corporation.
"Tax" (including, with correlative meaning, the terms "Taxes" and
"Taxable") shall mean all forms of taxation, whenever created or imposed,
whether imposed by a local, municipal, state, foreign, federal or other
governmental body or authority, and, without limiting the generality of the
foregoing, shall include income, gross receipts, ad valorem, excise,
value-added, sales, use, amusement, transfer, franchise, license, stamp,
occupation, withholding, employment, payroll, property, unclaimed property,
escheat and other taxes, together with any interest, penalty, addition to tax or
additional amount imposed by any Taxing Authority.
"Taxing Authority" means any Governmental or Regulatory Authority
responsible for the imposition of any Tax.
"Tax Return" shall mean any return, report, statement, information
statement and the like filed or required to be filed with any Taxing Authority,
including any amendment thereof.
B-5
"Termination Agreement" means the Termination Agreement entered into by
and between Crescent and COPI of even date herewith and attached hereto as
Exhibit G.
1.02 Cross References.
Each of the following terms shall have the meaning assigned thereto in
the Section of this Agreement set forth opposite such term:
Term Section
---- -------
Americold Logistics.................................................................................. 2.08(a)
Asset Transfer Date Financial Statements............................................................. 2.01(h)(i)
Assets............................................................................................... 2.01(b)
Assignment Instruments............................................................................... 2.01(i)(iii)
Assignment, Assumption and Amendment of Lease........................................................ 2.01(i)(iii)
Assumed Liabilities.................................................................................. 2.01(d)
Assumption Agreement................................................................................. 2.01(i)(iii)
Assumption Instruments............................................................................... 2.01(i)(iii)
Bankruptcy Code...................................................................................... 2.03(a)
Bankruptcy Court..................................................................................... 2.03(a)
BofA Credit Agreement................................................................................ 2.06(b)
Business Contracts................................................................................... 2.01(b)(ii)
Business License..................................................................................... 2.01(b)(iii)
Canyon Ranch - Tucson Assets......................................................................... 2.01(b)(v)
CMC.................................................................................................. 2.02(f)
Confirmation Date.................................................................................... 2.10(a)
Consideration Amount................................................................................. 2.10(a)
COPI................................................................................................. Forepart
COPI Budget Note..................................................................................... 2.09(a)
COPI Cold Storage.................................................................................... 2.06(a)
COPI Colorado........................................................................................ 2.02(a)(vii)
COPI Colorado GP Interest............................................................................ 2.02(a)(vii)
COPI Common Stock.................................................................................... 2.05
COPI Stockholder Acceptances......................................................................... 2.04(b)
COPI Stockholders Meeting............................................................................ 2.04(b)
CR License........................................................................................... 2.02(a)(ii)
CR License Membership Interest....................................................................... 2.02(a)(ii)
CRE Diversified...................................................................................... 2.02(a)(vi)
CRE Diversified Voting Common Stock.................................................................. 2.02(a)(vi)
Credit Documents..................................................................................... 2.01(a)
Crescent............................................................................................. Forepart
Crescent REIT........................................................................................ Forepart
Crescent REIT Common Shares.......................................................................... 2.10(a)
CRL.................................................................................................. 2.02(a)(i)
CRL Voting Common Stock.............................................................................. 2.02(a)(i)
Decontrolled Entities................................................................................ 2.02(b)
DMDC................................................................................................. 2.02(a)(v)
DMDC Voting Common Stock............................................................................. 2.02(a)(v)
B-6
Effective Date....................................................................................... 2.06(c)
Equipment Sellers.................................................................................... 2.07(a)
Excluded Assets...................................................................................... 2.01(c)
Excluded Liabilities................................................................................. 2.01(e)
Foreclosure.......................................................................................... 2.02(a)
Foreclosure Agreement................................................................................ 2.02(a)
Foreclosure Date..................................................................................... 2.02(e)
General Assignment Agreement......................................................................... 2.01(i)(iii)
Hotel Properties..................................................................................... 2.01(b)(i)
Hotel Property Leases................................................................................ 2.01(b)(i)
Indemnified Party.................................................................................... 8.01(d)
Indemnifying Party................................................................................... 8.01(d)
Initial Rent Reduction Amount........................................................................ 2.01(f)
Investment Company Act............................................................................... 2.06(b)(i)
Newco................................................................................................ 2.06(b)(i)
Newco Registration Statement......................................................................... 2.06(b)(i)
Other Assets......................................................................................... 2.01(b)(x)
Plan................................................................................................. 2.03(a)
Proxy Statement...................................................................................... 2.04(a)
Registration Statement............................................................................... 2.10(b)
SEC.................................................................................................. 2.04(a)
Seller Notes......................................................................................... 2.07(a)
Stock................................................................................................ 2.02(b)
Transferor........................................................................................... Forepart
Transferring Subsidiaries............................................................................ Forepart
TWLC................................................................................................. 2.02(a)(iv)
TWLC Voting Common Stock............................................................................. 2.02(a)(iv)
VOO.................................................................................................. 2.08
WOCOI................................................................................................ 2.02(a)(iii)
WOCOI Common Stock................................................................................... 2.02(a)(iii)
1.03 Usage.
Unless the context of this Agreement otherwise requires, (i) words of
any gender include each other gender; (ii) words using the singular or plural
number also include the plural or singular number, respectively; (iii) the terms
"hereof," "herein," "hereby" and derivative or similar words refer to this
entire Agreement; (iv) the terms "Article" or "Section" refer to the specified
Article or Section of this Agreement; and (v) the phrases "ordinary course of
business" and "ordinary course of business consistent with past practice" refer
to the customary and usual business and practice of Transferors in connection
with the operation of the Hospitality Business. Whenever this Agreement refers
to a number of days, such number shall refer to calendar days unless Business
Days are specified. All accounting terms used herein and not expressly defined
herein shall have the meanings given to them under GAAP.
B-7
ARTICLE II
AGREEMENTS
The parties hereby agree as follows.
2.01 Transfer of Hotel-Related Assets.
(a) Default Acknowledgement. COPI acknowledges that it is in default of
its payment and other obligations under the agreements between COPI and Crescent
listed on Annex A hereto (collectively, the "Credit Documents"), and each of the
Transferring Subsidiaries acknowledges that it is in default of its rental
payment obligations under the Hotel Property Leases (as defined below). COPI
acknowledges that it has guaranteed the Transferring Subsidiaries' obligations
under the Hotel Property Leases. COPI and the Transferring Subsidiaries
acknowledge that Crescent has the right to foreclose on certain assets of COPI,
including the stock, partnership interests or membership interests in the
Transferring Subsidiaries and the Stock (as defined in Section 2.02(b)). COPI
and the Transferring Subsidiaries also acknowledge that Crescent has the right
to terminate the Hotel Property Leases.
(b) Assets Transferred. In lieu of a foreclosure or a termination of
the Hotel Property Leases by Crescent and for valuable consideration, on the
terms and subject to the conditions set forth in this Agreement, each
Transferring Subsidiary will transfer, convey, assign and deliver to Crescent,
and Crescent will accept delivery of, on the Asset Transfer Date, all of the
Transferring Subsidiary's right, title and interest in, to, and under the
following Assets and Properties of the Transferring Subsidiary used or held for
use in connection with the Hospitality Business, except as otherwise provided in
Section 2.01(c) (collectively, the "Assets"):
(i) Hotel Property Leases. The leases and subleases of real
property described in Annex B hereto (the "Hotel Properties") as to
which the Transferring Subsidiary is the lessee or sublessee, together
with any options to purchase the underlying property and leasehold
improvements thereon, and in each case all other rights, subleases,
licenses, permits, deposits and profits appurtenant to or related to
such leases and subleases ("Hotel Property Leases");
(ii) Business Contracts. All Contracts (other than the Hotel
Property Leases) to which the Transferring Subsidiary is a party and
which are utilized in the conduct of the Hospitality Business,
including without limitation Contracts relating to property and asset
management (the "Business Contracts");
(iii) Licenses. All Licenses (including applications therefor)
utilized in the conduct of the Hospitality Business (the "Business
Licenses");
(iv) Books and Records. All Books and Records used or held for
use in the conduct of the Hospitality Business or otherwise relating to
the Assets, other than the minute books, stock or membership interest
transfer books and seal of the Transferring Subsidiary;
B-8
(v) Canyon Ranch - Tucson Assets. With respect to Canyon Ranch
Leasing, L.L.C. only, the assets listed on Annex C (the "Canyon Ranch
-Tucson Assets");
(vi) Cash. Cash, commercial paper, certificates of deposit and
other bank deposits, treasury bills and other cash equivalents of the
Transferring Subsidiary;
(vii) Litigation Claims. Any rights (including
indemnification), claims and recoveries under litigation of the
Transferring Subsidiary against third parties arising out of or
relating to events prior to the Asset Transfer Date;
(viii) Tax Refunds. Any refunds or credits, if any, of Taxes
due to the Transferring Subsidiary.
(ix) Intellectual Property. All Intellectual Property used or
held for use by the Transferring Subsidiary in the operation of the
Hospitality Business (including the Transferring Subsidiary's goodwill
therein); and
(x) Other Assets and Properties. All other Assets and
Properties of the Transferring Subsidiary used or held for use in
connection with the Hospitality Business except as otherwise provided
in Section 2.01(c) (the "Other Assets").
(c) Excluded Assets. Notwithstanding anything in this Agreement to the
contrary, the following Assets and Properties of each Transferring Subsidiary
(the "Excluded Assets") shall be excluded from and shall not constitute Assets:
(i) Insurance. Life insurance policies on officers and other
employees of the Transferring Subsidiary, directors and officers
liability insurance policies of the Transferring Subsidiary and all
other insurance policies relating to the Assets and Properties and
operation of the Hospitality Business, and all refunds or credits, if
any, with respect to such insurance;
(ii) Corporate or Limited Liability Company Records. The
minute books, stock or membership interest transfer books and seal of
the Transferring Subsidiary; and
(iii) Certain Contract Rights. The Transferring Subsidiary's
rights under this Agreement and the Operative Agreements.
(d) Assumed Liabilities. In connection with the transfer, conveyance,
assignment and delivery of the Assets pursuant to this Agreement, on the Asset
Transfer Date, except for the Excluded Liabilities listed in Section 2.01(e)
below, Crescent will assume and agree to pay, perform and discharge when due any
and all obligations of each Transferring Subsidiary arising in connection with
the operation of the Hospitality Business (the "Assumed Liabilities"),
including, but not limited to:
(i) Future Hotel Property Lease Obligations. All obligations
of the Transferring Subsidiary under the Hotel Property Leases
occurring or arising from and after the Asset Transfer Date;
B-9
(ii) Future Obligations under Contracts and Licenses. All
obligations of the Transferring Subsidiary under the Business Contracts
and Business Licenses occurring or arising from and after the Asset
Transfer Date; and
(iii) Certain Existing Obligations under Contracts and
Licenses. All obligations of the Transferring Subsidiary under the
Business Contracts and Business Licenses incurred in the ordinary
course of business and arising prior to the Asset Transfer Date, which
are accurately reflected on the Books and Records of the Transferring
Subsidiary as an account payable.
(e) Excluded Liabilities. Notwithstanding the foregoing, Crescent shall
not assume by virtue of this Agreement or the transactions contemplated hereby,
and shall have no liability for, the following Liabilities of the Transferring
Subsidiaries (the "Excluded Liabilities"):
(i) Existing Hotel Property Lease Obligations. All obligations
of the Transferring Subsidiaries under the Hotel Property Leases
occurring or arising prior to the Asset Transfer Date, provided that
Crescent acknowledges that the obligations of the Transferring
Subsidiaries' under the Hotel Property Leases are reduced by the Rent
Reduction Amount;
(ii) Other Existing Obligations under Contracts and Licenses.
Except as provided in Section 2.01(d)(iii) above, all other obligations
of the Transferring Subsidiaries under the Business Contracts and
Business Licenses occurring or arising prior to the Asset Transfer
Date;
(iii) Tax Obligations. All liabilities and obligations with
respect to the payment of Taxes attributable to periods or events on or
after the Asset Transfer Date; and
(iv) Covered Obligations. All liabilities and obligations
known as of the Asset Transfer Date to the extent that such liabilities
and obligations are covered by the Transferring Subsidiaries' insurance
(the amount of any such liability or obligation ultimately exceeding
such insurance coverage shall not be deemed an Excluded Liability).
(f) Initial Rent Reduction Amount. The aggregate amount of initial
rental payment obligations under the Hotel Property Leases to be cancelled and
extinguished on the Asset Transfer Date is $23,582,000 (the "Initial Rent
Reduction Amount") (subject to adjustment as provided in paragraph (h) below).
Such amounts shall be cancelled and extinguished in the manner provided in
Section 2.01(i)(ii).
(g) Allocation of Initial Rent Reduction Amount.
(i) Annex D sets forth the allocation of the Initial Rent
Reduction Amount, as agreed upon by Crescent and the Transferors.
(ii) The Transferors, on the one hand, and Crescent and
Crescent REIT, on the other hand, hereto agree (i) that such allocation
shall be consistent with the requirements of Section 1060 of the Code
and the regulations thereunder, (ii) to complete jointly and to file
separately Form 8594 with its federal income Tax Return consistent with
such
B-10
allocation for the tax year in which the Asset Transfer Date occurs and
(iii) that neither the Transferors, on the one hand, and Crescent and
Crescent REIT, on the other hand will take a position on any income,
transfer or gains Tax Return, before any Governmental or Regulatory
Authority charged with the collection of any such Tax or in any
judicial proceeding, that is in any manner inconsistent with the terms
of any such allocation without the consent of the other.
(h) Post-Closing Adjustment of Initial Rent Reduction Amount.
(i) Within thirty (30) days after the Asset Transfer Date,
Crescent shall cause to be delivered to COPI and the Transferring
Subsidiaries the financial statements of the Hotel Properties as of the
Asset Transfer Date, which financial statements shall be prepared on
the same basis as the monthly unaudited balance sheets and income
statements of the Hotel Properties previously prepared by COPI and the
Transferring Subsidiaries (the "Asset Transfer Date Financial
Statements"), together with Crescent's calculation of the Asset
Transfer Date Working Capital and the Asset Transfer Date Rent Payment.
COPI, the Transferring Subsidiaries and their Representatives shall
have the right to inspect the Books and Records used to prepare the
Asset Transfer Date Financial Statements. If COPI or any Transferring
Subsidiary disagrees in any respect with the Asset Transfer Date
Financial Statements, COPI or such Transferring Subsidiary shall notify
Crescent within ten (10) Business Days after receipt of the Asset
Transfer Date Financial Statements specifying the areas of
disagreement. If COPI, the Transferring Subsidiary and Crescent are
unable to resolve all such disagreements within a ten (10) Business Day
period, the dispute shall be resolved by the COPI's and Crescent's
respective accounting firms within ten (10) Business Days thereafter.
If such accounting firms cannot agree within such ten (10) Business Day
period, COPI and the Transferring Subsidiary, on the one hand, and
Crescent, on the other hand, shall advise each other in writing of
their position with respect to the Asset Transfer Date Working Capital
or the Asset Transfer Date Rent Payment, as the case may be, and the
dispute shall be resolved by an independent accounting firm mutually
selected by COPI and Crescent. The determination of the independent
accounting firm shall be made as promptly as practicable and shall be
binding and conclusive on the parties hereto for all purposes. Each
party shall be responsible for the expenses of their respective
accountants. The party whose written position on the Asset Transfer
Date Working Capital or the Asset Transfer Date Rent Payment, as the
case may be, deviates in the greatest degree, in the opinion of the
independent accounting firm, from the determination made by the
independent accounting firm shall pay all expenses relating to the
engagement of the independent accounting firm.
(ii) Crescent shall provide COPI and the Transferring
Subsidiaries copies of the Books and Records related to the Hotel
Properties necessary to enable COPI and the Transferring Subsidiaries'
accountants to timely and efficiently review the Asset Transfer Date
Financial Statements. After Closing, Crescent shall provide reasonable
access to COPI, the Transferring Subsidiaries and their Representatives
to the Books and Records necessary for purposes of permitting COPI and
the Transferring Subsidiaries to pay those liabilities of COPI and the
Transferring Subsidiaries that are not Assumed Liabilities.
B-11
(iii) If the Asset Transfer Date Working Capital is a positive
number, then the Initial Rent Reduction Amount shall be increased by
such positive number on the date of confirmation of the Asset Transfer
Date Working Capital pursuant to this Section 2.01(h)(iii). If the
Asset Transfer Date Working Capital is a negative number, then the
Initial Rent Reduction Amount shall be reduced by such negative number
on the date of confirmation of the Asset Transfer Date Working Capital
pursuant to this Section 2.01(h)(iii). If the Asset Transfer Date
Working Capital is zero, then there shall be no adjustment to the
Initial Rent Reduction Amount under this Section 2.01(h)(iii). If the
Asset Transfer Date Working Capital is a positive or negative number,
Crescent or COPI, as the case may be, shall deliver to the other party
such documents as are necessary to evidence the adjustment of (i) the
Initial Rent Reduction Amount and (ii) the Initial Rent Reduction
Amount previously cancelled and extinguished.
(i) Asset Transfer Date.
(i) The transfer of Assets will take place at the offices of
Shaw Pittman LLP, 2300 N Street, N.W., Washington, DC 20037, or at such
other place as Crescent and the Transferors mutually agree, at 10:00
A.M. local time, on the Asset Transfer Date. The parties acknowledge
that the transfer of the Assets may take place on one or more dates,
each being an Asset Transfer Date, and that the parties shall agree to
take all actions and execute such documents necessary to effectuate
such transfers on such Asset Transfer Dates consistent with the terms
of this Agreement. Notwithstanding anything herein to the contrary, in
the event that not all of the Assets are transferred on a single Asset
Transfer Date, the amount of rental payment obligations to be cancelled
and extinguished at such time shall equal the total of the amounts set
forth on Annex D opposite the name of the Hotel Property or Hotel
Properties to which the Asset or Assets being transferred relates.
(ii) On the Asset Transfer Date, Crescent shall cancel and
extinguish rental payment obligations of each Transferring Subsidiary
under the Hotel Property Leases in the amounts set forth on Annex D
hereto, representing, in the aggregate, the Initial Rent Reduction
Amount. On the Asset Transfer Date, Crescent will deliver to COPI such
documents as are necessary to evidence cancellation and extinguishment
of the Initial Rent Reduction Amount; provided that such amounts shall
not exceed the Initial Rent Reduction Amount with respect to the Assets
being transferred.
(iii) Simultaneously with Crescent's deliveries specified in
Section 2.01(h)(ii) above, (i) each Transferring Subsidiary will assign
and transfer to Crescent all of its right, title and interest in and to
its Assets by delivery of (A) a General Assignment and Conveyance
substantially in the form of Exhibit A hereto (the "General Assignment
Agreement"), duly executed by the Transferring Subsidiary, (B) an
Assignment, Assumption and Amendment of Lease substantially in the form
of Exhibit B hereto (the "Assignment, Assumption and Amendment of
Lease") duly executed by the Transferring Subsidiary and (C) such other
good and sufficient instruments of conveyance, assignment and transfer,
in form and substance reasonably acceptable to Crescent's counsel, as
shall be effective to vest in Crescent all of its rights, title and
interest in and to the Assets (the General Assignment Agreement,
Assignment of Leases and the other instruments referred to in clause
B-12
(C) being collectively referred to herein as the "Assignment
Instruments"), and (ii) Crescent will assume from each Transferring
Subsidiary the due payment, performance and discharge of the Assumed
Liabilities by delivery of (A) the Assumption Agreement substantially
in the form of Exhibit C hereto (the "Assumption Agreement"), duly
executed by Crescent, and (B) such other good and sufficient
instruments of assumption, in form and substance reasonably acceptable
to COPI's counsel, as shall be effective to cause Crescent to assume
the Assumed Liabilities as and to the extent provided in Section
2.01(d) (the Assumption Agreement and such other instruments referred
to in clause (B) being collectively referred to herein as the
"Assumption Instruments").
(j) Further Assurances; Post-Asset Transfer Date Cooperation.
(i) At any time or from time to time after the Asset Transfer
Date, at Crescent's request and without further consideration, each
Transferring Subsidiary shall execute and deliver to Crescent such
other instruments of transfer, conveyance, assignment and confirmation,
provide such materials and information and take such other actions as
Crescent may reasonably deem necessary or desirable in order more
effectively to transfer, convey and assign to Crescent, and to confirm
Crescent's title to, all of the Assets, and, to the full extent
permitted by Law, to put Crescent in actual possession and operating
control of the Hospitality Business and the Assets, and to assist
Crescent in exercising all rights with respect thereto, and otherwise
to cause each Transferring Subsidiary to fulfill its obligations under
this Agreement and the Operative Agreements.
(ii) Following the Asset Transfer Date, each of the parties
will afford to the other parties and its Representatives during normal
business hours, access to the Books and Records relating to the
Hospitality Business and in its possession with respect to periods
prior to the Asset Transfer Date and the right to make copies and
extracts therefrom, to the extent that such access may be reasonably
required by the Representatives in connection with (i) the preparation
of Tax Returns, (ii) the determination or enforcement of rights and
obligations under this Agreement, (iii) compliance with the
requirements of any Governmental or Regulatory Authority, (iv) the
determination or enforcement of the rights and obligations of any
Indemnified Party or (v) in connection with any actual or threatened
Action or Proceeding. Further, each party to the Agreement agrees for a
period extending six (6) years after the Asset Transfer Date not to
destroy or otherwise dispose of any such Books and Records unless such
party shall first offer in writing to surrender such Books and Records
to the other party and such other party shall not agree in writing to
take possession thereof during a period of 10 Business Days after such
offer is made.
(iii) If, in order properly to prepare its Tax Returns, other
documents or reports required to be filed with Governmental or
Regulatory Authorities or its financial statements or to fulfill its
obligations hereunder, it is necessary that a party hereto be furnished
with additional information, documents or records relating to the
Hospitality Business not referred to in paragraph (ii) above, and such
information, documents or records are in the possession or control of
the other party, such other party shall use its commercially reasonable
efforts to furnish or make available such information, documents or
records (or copies thereof) at the recipient's request, cost and
expense. Any information obtained by
B-13
any party hereto in accordance with this paragraph shall be held
confidential by the requesting party in accordance with Section 10.05.
(k) Third-Party Consents.
To the extent that any Contract (including any Business Contract) or
License (including any Business License) is not assignable without the consent
of another party, this Agreement shall not constitute an assignment or an
attempted assignment of such Contract or License if such assignment or attempted
assignment would constitute a breach thereof. Each Transferor and Crescent shall
use its commercially reasonable efforts to obtain the consent of such other
party to the assignment of any such Contract or License to Crescent in all cases
in which such consent is or may be required for such assignment. If any such
consent shall not be obtained, each Transferor shall cooperate with Crescent in
any arrangement designed to provide for Crescent the benefits intended to be
assigned to Crescent under the relevant Contract or License, including
enforcement at the cost and for the account of Crescent of any and all rights of
Transferor against the other party thereto arising out of the breach or
cancellation thereof by such other party or otherwise. If and to the extent that
such arrangement cannot be made, Crescent shall have no obligation pursuant to
Section 2.01(d) or otherwise with respect to any such Business Contract or
Business License, and assuming COPI and the Transferring Subsidiaries are not in
breach under this Agreement, they shall have no liability to Crescent or
Crescent REIT for the inability to make such assignment or arrangement.
(l) COPI Consent.
(i) As the sole stockholder of COI Hotel Group, Inc. and as
the sole stockholder of all of the members of the other Transferring
Subsidiaries, COPI hereby consents to the transfer, conveyance,
assignment and delivery to Crescent of all of each Transferring
Subsidiary's right, title and interest in, to, and under, the Assets in
accordance with this Section 2.01.
(ii) COPI acknowledges that Crescent may transfer all or a
portion of its rights, including the right to receive rental payments,
under the Hotel Property Leases to one or more directly or indirectly
owned Subsidiaries prior to each Asset Transfer Date. COPI acknowledges
that such transfer may require the consent of COPI under various
agreements, including the Hotel Property Leases, to which COPI is a
party. Therefore, COPI hereby consents to the sale, transfer,
conveyance, assignment and delivery to any such Subsidiaries of such
rights, provided that no such assignment shall relieve Crescent of its
obligations hereunder or thereunder.
2.02 Retention of Collateral in Partial Satisfaction of Obligations.
(a) On the terms and subject to the conditions set forth in this
Agreement, COPI shall execute one or more Foreclosure Agreements, substantially
in the form of Exhibit D hereto (a "Foreclosure Agreement") pursuant to which
Crescent will retain the following assets in satisfaction of $40,100,000 (which
amount includes $1,600,000 attributable to the tenant interest in The Woodlands
Conference Center owned by a Subsidiary of WOCOI (as defined below)) of
principal
B-14
and accrued and unpaid interest, representing a portion of the obligations of
COPI to Crescent under the Credit Documents (the "Foreclosure"):
(i) 500 shares of voting common stock ("CRL Voting Common
Stock"), $.01 par value, of CRL Investments, Inc., a Texas corporation
("CRL"), representing 100% of the issued and outstanding voting capital
stock and 5% of the issued and outstanding capital stock of CRL;
(ii) a 1.5% membership interest ("CR License Membership
Interest") in CR License LLC, an Arizona limited liability company ("CR
License");
(iii) 100 shares of common stock ("WOCOI Common Stock"), $.01
par value, of WOCOI Investment Company, a Texas corporation ("WOCOI"),
representing 100% of the issued and outstanding capital stock of WOCOI;
(iv) 500 shares of voting common stock ("TWLC Voting Common
Stock"), $.01 par value, of The Woodlands Land Company, Inc., a Texas
corporation ("TWLC"), representing 100% of the issued and outstanding
voting capital stock and 5% of the issued and outstanding capital stock
of TWLC;
(v) 50 shares of voting common stock ("DMDC Voting Common
Stock"), $.01 par value, of Desert Mountain Development Corporation, a
Delaware corporation ("DMDC"), representing 100% of the issued and
outstanding voting capital stock and 5% of the issued and outstanding
capital stock of DMDC;
(vi) 10 shares of voting common stock ("CRE Diversified Voting
Common Stock"), $.01 par value, of CRE Diversified Holdings, Inc., a
Delaware corporation ("CRE Diversified"), representing 100% of the
issued and outstanding voting capital stock and 1% of the issued and
outstanding capital stock of CRE Diversified; and
(vii) COPI's general partner interest ("COPI Colorado GP
Interest") in COPI Colorado, L.P., a Delaware limited partnership
("COPI Colorado"), representing a 60% economic interest in COPI
Colorado.
(b) The shares of CRL Voting Common Stock, WOCOI Common Stock, TWLC
Voting Common Stock, DMDC Voting Common Stock and CRE Diversified Voting Common
Stock, the COPI Colorado GP Interest and the CR License Membership Interest to
be obtained by Crescent pursuant to paragraph (a) above are collectively
referred hereto as the "Stock". CRL, CRL License, WOCOI, TWLC, DMDC, CRE
Diversified and COPI Colorado are collectively referred to herein as the
"Decontrolled Entities."
(c) COPI, as managing general partner of COPI Colorado, will vote in
favor of the transfer of the COPI Colorado GP Interest to Crescent and shall use
commercially reasonable efforts to obtain consents to the transfer from each
limited partner of COPI Colorado. COPI shall take any and all commercially
reasonable actions necessary to amend the limited partnership agreement of COPI
Colorado to reflect the transfer of the COPI Colorado GP Interest to Crescent.
B-15
(d) COPI acknowledges that Crescent may transfer all or a portion of
its rights, including the right to receive debt payments, under the Credit
Documents to one or more directly or indirectly owned Subsidiaries prior to the
Foreclosure. COPI acknowledges that such transfer may require the consent of
COPI under certain documents, including some or all of the Credit Documents, to
which COPI is a party. Therefore, COPI hereby consents to the sale, transfer,
conveyance, assignment and delivery to any such Subsidiaries of such rights,
provided that no such assignment shall relieve Crescent of its obligations
hereunder or thereunder.
(e) COPI will cooperate with Crescent and shall execute and deliver all
documents and perform all actions necessary to assist Crescent with the
Foreclosure, provided that the Foreclosure is performed in accordance with the
terms of the Foreclosure Agreement. Any date on which a Foreclosure of some or
all of the Stock takes place shall be referred to as a "Foreclosure Date." The
Foreclosure Date, if any, shall occur on such date as Crescent determines in its
sole discretion.
(f) At Crescent's request, COPI shall also execute a Foreclosure
Agreement pursuant to which Crescent will retain COPI's entire equity interest
in Crescent Machinery Company, a Delaware corporation and a wholly-owned
subsidiary of COPI ("CMC"), in satisfaction of an amount of principal and
accrued and unpaid interest to be mutually agreed upon by Crescent and COPI,
representing a portion of the obligations of COPI to Crescent under the Credit
Documents.
2.03 Prepackaged Bankruptcy.
(a) As soon as practicable following the COPI Stockholders Meeting (as
defined below), regardless of whether the COPI Stockholder Acceptances have been
obtained, and in no event later than five days after the COPI Stockholders
Meeting (as defined herein), COPI shall file a petition under Chapter 11 of the
United States Bankruptcy Code (the "Bankruptcy Code") in the United States
Bankruptcy Court, the District of Delaware or such other jurisdiction as the
parties shall agree (the "Bankruptcy Court"), along with such other documents,
resolutions and motions as COPI deems necessary to effectuate and administer a
bankruptcy case under the Bankruptcy Code. On such date, COPI shall file a Plan
of Reorganization (the "Plan"), in substantially the form attached hereto as
Exhibit E, and the disclosure statement and solicitation materials described in
Section 2.04 below.
(b) Prior to the filing of the petition, COPI shall seek acceptance of
the Plan pursuant to 11 U.S.C. 1126(b) from its stockholders and creditors in
accordance with Section 2.04 below and from its creditors. In the event
acceptance is obtained from less than all classes of claimants and interest
holders under the Plan, COPI shall seek confirmation of the Plan over the
objection of the dissenting class of claimants or interest holders pursuant to
11 U.S.C. 1129.
(c) COPI shall use commercially reasonable efforts to obtain approval
of the disclosure and solicitation materials and the confirmation of the Plan by
the Bankruptcy Court within 45 days of the date of filing of the petition.
2.04 COPI Stockholder Acceptance and Filing of Proxy Statement.
(a) As promptly as practicable after execution of this Agreement, COPI
shall prepare and file with the Securities and Exchange Commission (the "SEC")
under the Exchange Act, one or
B-16
more proxy statements and forms of proxies (such proxy statement(s) together
with any amendments to supplements thereto, the "Proxy Statement") relating to
the COPI Stockholders Meeting and the COPI Stockholder Acceptances (as defined
below). COPI will cause the Proxy Statement to comply as to form in all material
respects with the applicable provisions of the Securities Act, the Exchange Act
and the rules and regulations thereunder. Crescent shall furnish all information
about itself and its business and operations and all necessary financial
information to COPI as COPI may reasonably request in connection with the
preparation of the Proxy Statement. COPI and Crescent agree to correct promptly
any information provided by it for use in the Proxy Statement if and to the
extent that such information shall have become false or misleading in any
material respect, and COPI further agrees to take all steps necessary to amend
or supplement the Proxy Statement and to cause the Proxy Statement as so amended
or supplemented to be filed with the SEC and to be disseminated to its
stockholders to the extent required by applicable federal and state securities
laws. COPI and Crescent agree that the information provided by them for
inclusion in the Proxy Statement and each amendment or supplement thereto, at
the time of mailing thereof and at the time of the COPI Stockholders Meeting,
will not include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. COPI will advise and deliver copies (if any) to Crescent, promptly
after it receives notice thereof, of any request by the SEC for amendment of the
Proxy Statement or comments thereon and responses thereto or requests by the SEC
for additional information (regardless whether such requests relate to COPI or
Crescent). COPI shall use commercially reasonable efforts to timely mail the
Proxy Statement to its stockholders.
(b) COPI will duly call and as soon as practicable following the date
of this Agreement (but in no event sooner than 45 days following the date the
Proxy Statement is mailed to the stockholders of COPI), give notice of, convene
and hold a meeting of its stockholders (the "COPI Stockholders Meeting") for the
purpose of obtaining the COPI Stockholder Acceptances. COPI will, through its
Board of Directors, recommend to its stockholders acceptance of the Plan, and
shall use commercially reasonable efforts to obtain the affirmative vote of the
holders of at least two-thirds of the shares of COPI Common Stock voted at the
COPI Stockholders Meeting (the "COPI Stockholder Acceptances") for acceptance of
the Plan. The COPI Stockholders Meeting shall be held on a day not later than 60
days after the date the Proxy Statement is mailed, unless otherwise agreed to by
COPI and Crescent.
2.05 Distribution of COPI Common Stock by COPI Colorado.
Prior to the Foreclosure Date relating to the COPI Colorado GP
Interest, COPI, as managing general partner of COPI Colorado, shall take any and
all commercially reasonable actions to amend the limited partnership agreement
of COPI Colorado to allow COPI Colorado to make distributions in kind and shall
cause COPI Colorado to distribute all shares of common stock, par value $.01 per
share, of COPI (the "COPI Common Stock") owned by COPI Colorado to its partners
pro rata in accordance with their relative partnership interests. COPI shall
file a Certificate of Cancellation with the Secretary of State of Delaware to
cancel the shares of COPI Common Stock received by COPI in the COPI Colorado
distribution and to add such shares into the authorized but unissued shares of
COPI Common Stock.
B-17
2.06 Bank of America Loan.
(a) Crescent consents to COPI's grant to Bank of America, N.A. of a
first priority security interest in COPI's equity interest in COPI Cold Storage,
LLC, a Delaware limited liability company and a wholly owned subsidiary of COPI
("COPI Cold Storage"). In connection therewith, Crescent shall execute any and
all documents reasonably necessary for Crescent to subordinate its rights with
respect to COPI's equity interest in COPI Cold Storage under the Credit
Agreements to Bank of America, N.A.
(b) Crescent and Crescent REIT shall use commercially reasonable
efforts to work with COPI to arrange for the repayment in full of all
outstanding amounts (including accrued and unpaid interest) under the Credit
Agreement dated August 27, 1997, as amended, between COPI and Bank of America,
N.A. (the "BofA Credit Agreement") and cancellation of the related promissory
note. In addition, it is anticipated that all outstanding amounts under the BofA
Credit Agreement will be repaid through the following arrangement, if available.
(i) As soon as practicable following the date hereof, Crescent
REIT shall prepare and file with the SEC under the Securities Act a
registration statement on Form S-1 (the "Newco Registration Statement")
relating to the spin-off to Crescent REIT's shareholders and Crescent's
limited partners of a new company ("Newco"). Crescent or Crescent REIT
shall capitalize Newco at the time of the spin-off with at least an
amount necessary to purchase all of COPI's equity interests in COPI
Cold Storage. Crescent REIT will cause the Newco Registration Statement
to comply as to form in all material respects with the applicable
provisions of the Securities Act and the rules and regulations
thereunder. Crescent REIT agrees to correct promptly any information
provided by it for use in the Newco Registration Statement if and to
the extent that such information shall have become false or misleading
in any material respect, and Crescent REIT further agrees to take all
steps necessary to amend or supplement the Newco Registration Statement
and to cause the Registration Statement as so amended or supplemented
to be filed with the SEC. Crescent REIT agrees that the information
provided by Crescent REIT for inclusion in the Newco Registration
Statement and each amendment or supplement thereto will not include an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Crescent REIT will respond to any comments of the SEC and
will use its reasonable efforts to have the Newco Registration
Statement declared effective under the Securities Act as promptly as
practicable after filing. Crescent REIT acknowledges that Newco may be
deemed an "investment company" under the Investment Company Act of
1940, as amended (the "Investment Company Act"). In the event that
Newco is deemed to be an "investment company," Crescent and Crescent
REIT will use its reasonable efforts to make all necessary filings with
the SEC to consummate the spin-off in accordance with the Securities
Act and the Investment Company Act.
(ii) In connection with the spin-off, Crescent REIT and
Crescent shall cause Newco to acquire, and COPI shall sell, all of
COPI's equity interests in COPI Cold Storage. The purchase price for
the equity interests in COPI Cold Storage shall be an amount to be
agreed upon between Crescent and COPI, which shall be not less than
$15,000,000
B-18
and not more than $15,500,000. COPI shall use all of the proceeds as
are necessary to repay the full principal balance (including accrued
and unpaid interest) under the BofA Credit Agreement.
(c) Notwithstanding the foregoing, Crescent and Crescent REIT shall
have no obligations to consummate any of the arrangements referred to in this
Section until the date the confirmation order entered by the Bankruptcy Court
shall have become final and non-appealable (the "Effective Date")
2.07 Seller Notes.
(a) Crescent shall use commercially reasonable efforts to arrange for
the satisfaction or resolution of the notes payable by COPI to various persons
(the "Equipment Sellers") with a current aggregate principal amount of
$2,627,989 and listed on Annex E hereto (the "Seller Notes"). Crescent shall
work with COPI and negotiate in good faith with the Equipment Sellers for the
payment or, as appropriate, the purchase of the Seller Notes, at an appropriate
discount. Crescent shall work with COPI and shall undertake to purchase or
resolve the Seller Notes.
(b) Notwithstanding the foregoing, Crescent and Crescent REIT shall
have no obligations to consummate any of the arrangements referred to in this
Section until the Effective Date.
2.08 Vornado Claim.
(a) COPI acknowledges that Vornado Operating, Inc., a Delaware
corporation ("VOO") has asserted a claim against it or COPI Cold Storage, LLC in
the amount of $4,000,000. COPI acknowledges that it disputes such claim and that
it shall vigorously defend against such claim. Crescent shall cooperate with
COPI in connection with the dispute of any claims by VOO, including a claim that
COPI or COPI Cold Storage is obligated to make a $4,000,000 capital contribution
to Vornado Crescent Logistics Operating Partnership, a Delaware general
partnership ("Americold Logistics"). Crescent shall work with COPI to negotiate
a resolution of the claim with VOO in good faith, and absent a resolution with
COO, in the event that the Bankruptcy Court ultimately determines that any such
claim by COO is valid either in whole or in part, Crescent shall work with COPI
to determine the best method for seeking confirmation of the Plan over the
objection of VOO.
(b) Notwithstanding the foregoing, Crescent and Crescent REIT shall
have no obligations to consummate any of the arrangements referred to in this
Section until the Effective Date.
2.09 Payment of Cash Flow Shortage.
(a) Subject to Section 5.05, Crescent agrees to advance funds to COPI
sufficient for COPI to pay the reasonable and necessary documented out-of-pocket
operating expenses of COPI and its Subsidiaries (other than expenses attributed
to, related to or incurred by CMC and its Subsidiaries), to the extent COPI and
such Subsidiaries are unable to do so from their own resources, in accordance
with a promissory note in the form attached as Exhibit H, in the original
principal amount of up to $3,200,000 (the "COPI Budget Note").
B-19
(b) Crescent also agrees to advance additional funds to COPI of up to
$5,375,000 in accordance with the COPI Budget Note for the purposes, and in the
amounts, specified therein.
(c) COPI shall seek the approval of the Bankruptcy Court to provide
Crescent with a priority claim and lien under 11 U.S.C. 364 for any funds
advanced by Crescent under this Section after the filing of the petition with
the Bankruptcy Court.
(d) The provisions of (i) this Section 2.09 and the COPI Budget Note,
and (ii) Section 2.01(e) are mutually exclusive.
2.10 Issuance of Common Shares of Crescent REIT to COPI Stockholders and
Filing of Registration Statement.
(a) In the event that the COPI Stockholder Acceptances are obtained,
then on the Effective Date, each person who is a holder of shares of COPI Common
Stock on the date the confirmation order has been entered by the Bankruptcy
Court (the "Confirmation Date") shall be entitled to receive the number of
common shares of beneficial interest, par value $.01 per share, of Crescent REIT
(the "Crescent REIT Common Shares"), equal to the product of (i) (A) the number
of shares of COPI Common Stock owned by such holder on the Confirmation Date,
divided by (B) the total number of shares of COPI Common Stock outstanding on
the Confirmation Date, and (ii) the quotient of (A) the Consideration Amount (as
defined below), and (B) the average of the daily closing prices per Crescent
REIT Common Share as reported on the New York Stock Exchange Composite
Transactions reporting system for the 10 consecutive trading days immediately
preceding the Confirmation Date. For purposes of this section, the
"Consideration Amount" shall be $10,828,497, less an amount, if any, equal to
the amount by which the CEI/COPI Payments exceed $5,200,000. No certificate or
scrip representing fractional Crescent REIT Common Shares shall be issued, and
all fractional shares shall be rounded up or down to the nearest whole Crescent
REIT Common Share.
(b) As promptly as practicable after the execution of this Agreement,
Crescent REIT shall prepare and file with the SEC under the Securities Act a
registration statement on Form S-4 relating to the issuance of the Crescent REIT
Common Shares (the "Registration Statement"), in which the Proxy Statement will
be included as a prospectus, provided that Crescent REIT may delay the filing of
the Registration Statement until approval of the Proxy Statement by the SEC.
Crescent REIT will cause the Registration Statement to comply as to form in all
material respects with the applicable provisions of the Securities Act and the
rules and regulations thereunder. COPI shall furnish all information about
itself and its business and operations and all necessary financial information
to Crescent REIT as Crescent REIT may reasonably request in connection with the
preparation of the Registration Statement. COPI and Crescent REIT agree to
correct promptly any information provided by it for use in the Registration
Statement if and to the extent that such information shall have become false or
misleading in any material respect, and Crescent REIT further agrees to take all
steps necessary to amend or supplement the Registration Statement and to cause
the Registration Statement as so amended or supplemented to be filed with the
SEC. COPI and Crescent REIT agree that the information provided by them for
inclusion in the Registration Statement and each amendment or supplement
thereto, at the time of the COPI Stockholders Meeting , will not include an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of
B-20
the circumstances under which they were made, not misleading. Crescent REIT will
advise and deliver copies (if any) to COPI, promptly after it receives notice
thereof, of any request by the SEC for amendment of the Registration Statement
or comments thereon and responses thereto or requests by the SEC for additional
information (regardless whether such requests relate to COPI or Crescent REIT).
Each of COPI and Crescent REIT will respond to any comments of the SEC and will
use its respective reasonable efforts to have the Registration Statement
declared effective under the Securities Act as promptly as practicable after
filing.
(c) COPI agrees that, as of the Confirmation Date, it shall close the
stock books and stock transfer ledgers of COPI.
2.11 Crescent and Crescent REIT Consent.
Each of Crescent and Crescent REIT hereby consent to the transactions
contemplated by this Agreement and the Operative Agreements and hereby waives
compliance with any and all conditions, covenants or agreements of the
Transferors contained in any and all agreements (other than this Agreement or
the Operative Agreements) by and between any of the Transferors, on the one
hand, and Crescent and/or Crescent REIT, on the other hand, that are affected by
the transactions contemplated by this Agreement or the Operative Agreements.
2.12 Cooperation.
Each party shall fully cooperate with the other parties hereto and
shall take all actions and do all things reasonably necessary, proper and
advisable in order for the other parties to satisfy their obligations hereto.
2.13 Mutual Release.
The Transferors, Crescent and Crescent REIT acknowledge that they have
executed the Mutual Release in the form of Exhibit F attached hereto
2.14 Termination Agreement.
COPI and Crescent acknowledge that they have executed the Termination
Agreement in the form of Exhibit G attached hereto.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF TRANSFERORS
COPI, on behalf of itself and each of the Transferring Subsidiaries,
and each Transferring Subsidiary, on behalf of itself where applicable, hereby
represent and warrant to Purchaser as follows:
3.01 Organization and Qualification of COPI.
COPI is a corporation duly organized, validly existing and in good
standing under the Laws of the State of Delaware and has full corporate power
and authority to conduct its business
B-21
as and to the extent now conducted. COPI is duly qualified or licensed to do
business as a foreign corporation and is in good standing in each jurisdiction
in which the nature of its business (including acting as general partner of COPI
Colorado) makes such qualification or licensing necessary, except where the
failure to be so qualified or licensed, individually or in the aggregate, would
not have a material adverse effect on the Condition of COPI.
3.02 Organization and Qualification of Transferring Subsidiaries.
Transferring Subsidiary is either a corporation, limited liability
company or limited partnership, as the case may be, duly organized, validly
existing and in good standing under the Laws of its respective state of
incorporation or organization and has full power and authority to conduct its
business as and to the extent now conducted. Transferring Subsidiary is duly
qualified or licensed to do business as a foreign corporation, limited liability
company or limited partnership, as the case may be, and, if a corporation, is in
good standing in each jurisdiction in which the nature of its business makes
such qualification or licensing necessary, except where the failure to be so
qualified or licensed, individually or in the aggregate, would not have a
material adverse effect on the Condition of the Transferring Subsidiary.
3.03 COPI Authority.
COPI has requisite corporate power and authority to execute and deliver
this Agreement and the Operative Agreements to which it is a party, to perform
its obligations hereunder and thereunder and to consummate the transactions
contemplated hereby. The execution and delivery by COPI of this Agreement and
the Operative Agreements to which it is a party, and the performance by COPI of
its obligations hereunder and thereunder, have been duly and validly authorized
by the Board of Directors of COPI and no other corporate action on the part of
COPI or its stockholders is necessary, other than confirmation by the Bankruptcy
Court. This Agreement has been duly and validly executed and delivered by COPI
and constitutes, and upon the execution and delivery by COPI of the Operative
Agreements to which it is a party, such Operative Agreements will constitute,
legal, valid and binding obligations of COPI enforceable against COPI in
accordance with their terms.
3.04 Transferring Subsidiary Authority.
Transferring Subsidiary has requisite corporate or limited liability
company power and authority to execute and deliver this Agreement and the
Operative Agreements to which it is a party, to perform its obligations
hereunder and thereunder and to consummate the transactions contemplated hereby
and thereby, including without limitation to sell and transfer (pursuant to this
Agreement) the Assets. The execution and delivery by Transferring Subsidiary of
this Agreement and the Operative Agreements to which it is a party, and the
performance by Transferring Subsidiary of its obligations hereunder and
thereunder, have been duly and validly authorized by the Board of Directors,
managing member or general partner of Transferring Subsidiary, as the case may
be, no other corporate or limited liability company action on the part of
Transferring Subsidiary or its stockholders, members or partners, as the case
may be, being necessary. This Agreement has been duly and validly executed and
delivered by Transferring Subsidiary and constitutes, and upon the execution and
delivery by Transferring Subsidiary of the Operative Agreements to which it is a
party, such Operative Agreements will constitute, legal, valid and binding
obligations
B-22
of Transferring Subsidiary enforceable against Transferring Subsidiary in
accordance with their terms.
3.05 Ownership of CRL Voting Common Stock.
The authorized capital stock of CRL consists of 500 shares of CRL
Voting Common Stock and 9,500 shares of nonvoting common stock, $.01 par value.
500 shares of CRL Voting Common Stock, representing 100% of the issued and
outstanding shares of CRL Voting Common Stock, are owned beneficially and of
record by COPI free and clear of any Liens, other than Liens in favor of
Crescent or any of its Affiliates or Associates. All of the issued and
outstanding shares of CRL Voting Common Stock have been duly and validly issued,
are fully paid and nonassessable, and are not subject to any preemptive rights.
No Person (other than COPI, Crescent or any of Crescent's Affiliates or
Associates) holds any Equity Rights in CRL. There are no voting trusts,
stockholder agreements, proxies or other similar agreements in effect with
respect to the voting or transfer of the CRL Voting Common Stock. There is no
liability for dividends declared or accumulated but unpaid with respect to any
shares of CRL Voting Common Stock.
3.06 Ownership of CR License Membership Interests.
Membership interests representing a 1.5% ownership interest in CR
License are owned beneficially and of record by COPI free and clear of any
Liens, other than Liens in favor of Crescent or any of its Affiliates or
Associates.
3.07 Ownership of WOCOI Common Stock.
The authorized capital stock of WOCOI consists of 1,000 shares of WOCOI
Common Stock. 100 shares of WOCOI Common Stock, representing 100% of the issued
and outstanding shares of WOCOI Common Stock, are owned beneficially and of
record by COPI free and clear of any Liens, other than Liens in favor of
Crescent or any of its Affiliates or Associates. All of the issued and
outstanding shares of WOCOI Common Stock have been duly and validly issued, are
fully paid and nonassessable, and are not subject to any preemptive rights. No
Person (other than COPI) holds any Equity Rights in WOCOI. There are no voting
trusts, stockholder agreements, proxies or other similar agreements in effect
with respect to the voting or transfer of the WOCOI Common Stock. There is no
liability for dividends declared or accumulated but unpaid with respect to any
shares of WOCOI Common Stock.
3.08 Ownership of TWLC Voting Common Stock.
The authorized capital stock of TWLC consists of 500 shares of TWLC
Voting Common Stock and 9,500 shares of nonvoting common stock, $.01 par value.
500 shares of TWLC Voting Common Stock, representing 100% of the issued and
outstanding shares of TWLC Voting Common Stock, are owned beneficially and of
record by COPI free and clear of any Liens, other than Liens in favor of
Crescent or any of its Affiliates or Associates. All of the issued and
outstanding shares of TWLC Voting Common Stock have been duly and validly
issued, are fully paid and nonassessable, and are not subject to any preemptive
rights. No Person (other than COPI, Crescent or any of Crescent's Affiliates or
Associates) holds any Equity Rights in TWLC. There are no voting trusts,
stockholder agreements, proxies or other similar agreements in effect with
respect to the voting or transfer of the TWLC Voting Common Stock. There is no
liability for
B-23
dividends declared or accumulated but unpaid with respect to any shares of TWLC
Voting Common Stock.
3.09 Ownership of DMDC Voting Common Stock.
The authorized capital stock of DMDC consists of 50 shares of DMDC
Voting Common Stock and 950 shares of nonvoting common stock, $.01 par value. 50
shares of DMDC Voting Common Stock, representing 100% of the issued and
outstanding shares of DMDC Voting Common Stock, are owned beneficially and of
record by COPI free and clear of any Liens, other than Liens in favor of
Crescent or any of its Affiliates or Associates. All of the issued and
outstanding shares of DMDC Voting Common Stock have been duly and validly
issued, are fully paid and nonassessable, and are not subject to any preemptive
rights. No Person (other than COPI, Crescent or any of Crescent's Affiliates or
Associates) holds any Equity Rights in DMDC. There are no voting trusts,
stockholder agreements, proxies or other similar agreements in effect with
respect to the voting or transfer of the DMDC Voting Common Stock. There is no
liability for dividends declared or accumulated but unpaid with respect to any
shares of DMDC Voting Common Stock.
3.10 Ownership of CRE Diversified Voting Common Stock.
The authorized capital stock of CRE Diversified consists of 10 shares
of CRE Diversified Voting Common Stock and 990 shares of nonvoting common stock,
$.01 par value. 10 shares of CRE Diversified Voting Common Stock, representing
100% of the issued and outstanding shares of CRE Diversified Voting Common
Stock, are owned beneficially and of record by COPI free and clear of any Liens,
other than Liens in favor of Crescent or any of its Affiliates or Associates.
All of the issued and outstanding shares of CRE Diversified Voting Common Stock
have been duly and validly issued, are fully paid and nonassessable, and are not
subject to any preemptive rights. No Person (other than COPI, Crescent or any of
Crescent's Affiliates or Associates) holds any Equity Rights in CRE Diversified.
There are no voting trusts, stockholder agreements, proxies or other similar
agreements in effect with respect to the voting or transfer of the CRE
Diversified Voting Common Stock. There is no liability for dividends declared or
accumulated but unpaid with respect to any shares of CRE Diversified Voting
Common Stock.
3.11 Ownership of COPI Colorado GP Interests.
Partnership interests representing an 100% general partner interest and
a 60% ownership interest in COPI Colorado are owned beneficially and of record
by COPI free and clear of any Liens, other than Liens in favor of Crescent or
any of its Affiliates or Associates. No Person (other than COPI, John C. Goff
and Harry H. Frampton III) holds any Equity Rights in COPI Colorado. Other than
the limited partnership agreement of COPI Colorado, there are no voting trusts,
stockholder agreements, proxies or other similar agreements in effect with
respect to the voting or transfer of the COPI Colorado GP Interest.
3.12 Claims Against COPI.
Other than the claims referred to in Sections 2.06 through 2.09, to
COPI's Knowledge, there are no obligations or claims existing or assertable
against COPI.
B-24
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF CRESCENT AND CRESCENT REIT
Crescent and Crescent REIT hereby represents and warrants to COPI and
each of the Transferring Subsidiaries as follows:
4.01 Organization.
(a) Crescent is a limited partnership duly organized, validly existing
and in good standing under the Laws of the State of Delaware.
(b) Crescent REIT is a real estate investment trust duly organized and
validly existing under the Laws of the State of Texas.
4.02 Authority.
(a) Crescent has requisite partnership power and authority to enter
into this Agreement and the Operative Agreements to which it is a party, to
perform its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby. The execution and delivery by
Crescent of this Agreement and the Operative Agreements to which it is a party,
and the performance by Crescent of its obligations hereunder and thereunder,
have been duly and validly authorized by the general partner of Purchaser, no
other action on the part of Crescent or its partners being necessary. This
Agreement has been duly and validly executed and delivered by Crescent and
constitutes, and upon the execution and delivery by Crescent of the Operative
Agreements to which it is a party, such Operative Agreements will constitute,
legal, valid and binding obligations of Crescent enforceable against Crescent in
accordance with their terms.
(b) Crescent REIT has full trust power and authority to enter into this
Agreement and the Operative Agreements to which it is a party, to perform its
obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby. The execution and delivery by Crescent REIT of
this Agreement and the Operative Agreements to which it is a party, and the
performance by Crescent REIT of its obligations hereunder and thereunder, have
been duly and validly authorized by the Board of Trust Managers of Crescent
REIT, no other action on the part of Crescent REIT being necessary. This
Agreement has been duly and validly executed and delivered by Crescent REIT and
constitutes, and upon the execution and delivery by Crescent REIT of the
Operative Agreements to which it is a party, such Operative Agreements will
constitute, legal, valid and binding obligations of Crescent REIT enforceable
against Crescent REIT in accordance with their terms.
4.03 Crescent REIT Common Share Issuance.
The Crescent REIT Common Shares to be issued pursuant to Section 2.10
hereof have been duly authorized for issuance and sale to the COPI stockholders
pursuant to this Agreement and, when issued and delivered by Crescent REIT in
consideration of the execution and delivery of this Agreement and the Operative
Agreements by the Transferors, will be validly issued, fully paid and
non-assessable. Upon delivery of the Crescent REIT Common Shares, the COPI
B-25
stockholders will receive good, valid and marketable title to the Crescent REIT
Common Shares, free and clear of any Liens.
ARTICLE V
COVENANTS OF TRANSFERORS
Each Transferor covenants and agrees with Crescent that it will comply
with all covenants and provisions of this Article V from the date hereof until
the last Asset Transfer Date or Foreclosure Date, except to the extent Crescent
may otherwise consent in writing.
5.01 Regulatory and Other Approvals.
Each Transferor will (i) proceed diligently and in good faith and use
its commercially reasonable efforts to obtain all consents, approvals or actions
of, to make all filings with and to give all notices to Governmental or
Regulatory Authorities or any other Person required to consummate the
transactions contemplated hereby and by the Operative Agreements, (ii) provide
such other information and communications to such Governmental or Regulatory
Authorities or other Persons as Crescent or such Governmental or Regulatory
Authorities or other Persons may reasonably request in connection therewith and
(iii) cooperate with Crescent as promptly as practicable in obtaining all
consents, approvals or actions of, making all filings with and giving all
notices to Governmental or Regulatory Authorities or other Persons required of
Crescent to consummate the purchase of the Assets and the Foreclosure
contemplated hereby and by the Operative Agreements. Each Transferor will
provide prompt notification to Crescent when any such consent, approval, action,
filing or notice referred to in clause (i) above is obtained, taken, made or
given, as applicable, and will advise Crescent of any communications (and,
unless precluded by Law, provide copies of any such communications that are in
writing) with any Governmental or Regulatory Authority or other Person regarding
any of the transactions contemplated by this Agreement or any of the Operative
Agreements.
5.02 Investigation by Crescent.
Each Transferor will (i) provide Crescent and its Representatives with
full access, upon reasonable prior notice and during normal business hours, to
such officers, employees and agents of Transferor who have any responsibility
for the conduct of the Hospitality Business and the Decontrolled Business, to
Transferor's accountants and to the Assets and the Stock, and (ii) furnish
Crescent and such other Persons with all such information and data (including
without limitation copies of Contracts, Licenses and other Books and Records)
concerning the Hospitality Business, the Decontrolled Business, the Assets, the
Stock and the Assumed Liabilities as Crescent or any of its Representatives may
reasonably request in connection with such investigation.
5.03 No Solicitation.
(a) No Transferor will take, nor will it permit any Affiliate of
Transferor (or authorize or permit any investment banker, financial advisor,
attorney, accountant or other Person retained by or acting for or on behalf of
Transferor or any such Affiliate) to take, directly or indirectly, any action to
initiate, assist, solicit, receive, negotiate, encourage or accept any offer or
inquiry from any Person (i) to reach any agreement or understanding (whether or
not such agreement or
B-26
understanding is absolute, revocable, contingent or conditional) for, or
otherwise attempt to consummate, the sale of any portion of the Hospitality
Business, the Decontrolled Business, the Assets or the Stock to any Person,
other than Crescent or its Affiliates or (ii) to furnish or cause to be
furnished any information with respect to the Hospitality Business, the
Decontrolled Business, the Assets or the Stock to any Person (other than
Crescent or its Affiliates) who Transferor or such Affiliate (or any such Person
acting for or on their behalf) knows or has reason to believe is in the process
of considering any acquisition of any portion of the Hospitality Business, the
Decontrolled Business, the Assets or the Stock. If the Transferor or any such
Affiliate (or any such Person acting for or on their behalf) receives from any
Person (other than Crescent or its Affiliates) any offer, inquiry or
informational request referred to above, the Transferor will promptly advise
such Person, by written notice, of the terms of this Section 5.03 and will
promptly, orally and in writing, advise Crescent of such offer, inquiry or
request and deliver a copy of such notice to Crescent.
5.04 Conduct of Business.
Except as otherwise contemplated by this Agreement or as reasonably
necessary in connection with the COPI bankruptcy case, each Transferor will, and
COPI will cause the Decontrolled Entities and their Subsidiaries to,
(a) operate the Hospitality Business and the Decontrolled Business only
in the ordinary course consistent with past practice;
(b) use commercially reasonable efforts to (i) preserve intact the
present business organization and reputation of the Hospitality Business and the
Decontrolled Business, (ii) keep available (subject to dismissals and
retirements in the ordinary course of business consistent with past practice)
the services of the employees of the Decontrolled Business, (iii) maintain the
Assets in good working order and condition, ordinary wear and tear excepted,
(iv) maintain the good will of customers, suppliers, lenders and other Persons
to whom Transferor sells goods or provides services or with whom Transferor
otherwise has significant business relationships in connection with the
Hospitality Business and the Decontrolled Business, and (v) continue all
reasonable current asset and property management, real estate development,
sales, marketing and promotional activities relating to the Hospitality Business
and the Decontrolled Business, unless Crescent reasonably requests otherwise;
(c) except to the extent required by applicable Law, (i) cause the
Books and Records to be maintained in the usual, regular and ordinary manner
(and, for COPI, in accordance with GAAP consistently applied and not change in
any material manner any of its methods, principles or practices of accounting in
effect as of December 31, 2001, except as may be required by the SEC, applicable
law or GAAP), and (ii) not permit any material change in any pricing,
investment, accounting, financial reporting, inventory, credit, allowance or Tax
practice or policy of Transferor that would materially adversely affect the
Hospitality Business, the Decontrolled Business, the Assets, the Stock or the
Assumed Liabilities;
(d) comply, in all material respects, with all Laws and Orders
applicable to the Hospitality Business and the Decontrolled Business, and
promptly following receipt thereof to give Crescent
B-27
copies of any notice received from any Governmental or Regulatory Authority or
other Person alleging any violation of any such Law or Order;
(e) promptly notify Crescent of any material emergency or other
material change in the Condition of the Transferor, the Hospitality Business or
the Decontrolled Business, or of any material governmental complaints,
investigations or hearings (or communications indicating that the same may be
contemplated);
(f) promptly notify Crescent of (i) any material action, suit,
proceeding, arbitration or Governmental or Regulatory Authority investigation or
audit commenced or, to the Knowledge of Transferor, threatened against, relating
to or affecting the Transferor with respect to the Hospitality Business, the
Decontrolled Business, the Assets or the Stock, or (ii) any facts or
circumstances which become Known to the Transferor that could reasonably be
expected to give rise to any material action, suit, proceeding, arbitration or
Governmental or Regulatory Authority investigation or audit that would be
required to be disclosed pursuant to clause (i) above; and
(g) duly and timely file all reports, Tax Returns and other documents
required to be filed with Governmental or Regulatory Authorities, subject to
extensions permitted by law, provided Transferor notifies Crescent that it is
availing itself of such extension.
5.05 Certain Restrictions.
Except as otherwise contemplated by this Agreement or provided for in
the COPI Budget, without Crescent's prior written consent, each Transferor will,
and will cause the Decontrolled Entities and their Subsidiaries to, refrain
from:
(a) acquiring or disposing of any Assets and Properties used or held
for use in the conduct of the Hospitality Business or the Decontrolled Business,
other than in the ordinary course of business consistent with past practice, or
creating or incurring any Lien, other than a Lien in favor of Crescent or any of
its Affiliates or Associates or created in the ordinary course of business
consistent with past practice, on any Assets and Properties used or held for use
in the conduct of the Hospitality Business or the Decontrolled Business;
(b) entering into, amending, modifying, terminating (partially or
completely), granting any waiver under or giving any consent with respect to any
material Contract or any material License, other than in the ordinary course of
business consistent with past practice;
(c) violating, breaching or defaulting under, or taking or failing to
take any action that (with or without notice or lapse of time or both) would
constitute a violation or breach of, or default under, any term or provision of
any material Contract (to which Crescent or any of its Affiliates or Associates
is not a party) or any material License;
(d) incurring, purchasing, canceling, prepaying or otherwise providing
for a complete or partial discharge in advance of a scheduled payment date with
respect to, or waiving any right of Transferor, any Decontrolled Entity or any
Subsidiary of a Decontrolled Entity under, any Liability owing to Transferor,
any Decontrolled Entity or any Subsidiary of a Decontrolled Entity in connection
with the Hospitality Business, other than in the ordinary course of business
consistent with past practice;
B-28
(e) engaging with any Person (other than with Crescent, CEI and any of
their Affiliates) in any Business Combination, unless such Person agrees in a
written instrument in form and substance reasonably satisfactory to Crescent to
adopt and comply with the terms and conditions of this Agreement as though such
Person was an original signatory hereto;
(f) engaging in any transaction with respect to the Hospitality
Business or the Decontrolled Business with any officer, director, Affiliate or
Associate of Transferor (other than Crescent or any Affiliate or Associate
thereof), or any Associate of any such officer, director or Affiliate, either
outside the ordinary course of business consistent with past practice or other
than on an arm's-length basis;
(g) amending the certificate or articles of incorporation, certificate
or articles of organization or operating agreement, or certificate or articles
of limited partnership or limited partnership agreement, as the case may be, of
any Decontrolled Entity or Subsidiary of any Decontrolled Entity;
(h) selling, transferring, disposing, pledging or otherwise encumbering
the Stock, or agreeing to any restrictions on transfer of the Stock;
(i) increasing the salary, bonus or other compensation of any employee
of COPI or its Subsidiaries;
(j) other than in the ordinary course of business consistent with past
practice, borrowing money and/or issuing evidences of Indebtedness, including
increases in any Indebtedness;
(k) guaranteeing any obligations of any Person or assuming any
liability or other obligation of any Person;
(l) making capital expenditures or commitments for additions to
property, plant or equipment constituting capital assets on behalf of the
Hospitality Business in an aggregate amount exceeding $75,000;
(m) making any payments or commitments to any Person not provided for
in the COPI Budget if the amount of such payments or commitments exceed
$100,000; or
(n) entering into any Contract to do or engage in any of the foregoing.
5.06 Delivery of Books and Records, etc.; Removal of Property.
(a) On each Asset Transfer Date, the Transferor will deliver or make
available to Crescent at the locations at which the Hospitality Business is
conducted all of the Books and Records related to the Hospitality Business and
such other Assets as are in Transferor's possession at other locations, and if
at any time after each Asset Transfer Date, Transferor discovers in its
possession or under its control any other Books and Records or other Assets, it
will forthwith deliver such Books and Records or other Assets to Crescent.
(b) On any Foreclosure Date, COPI will deliver or make available to
Crescent at the locations at which the Decontrolled Business relating to the
foreclosed Stock is conducted all of the
B-29
Books and Records related to the Decontrolled Business relating to the
foreclosed Stock, and if at any time after the Foreclosure Date, COPI discovers
in its possession or under its control any other Books and Records relating to
the foreclosed Stock or the Decontrolled Business, it will forthwith deliver
such Books and Records to Crescent.
5.07 Resignations.
On any Foreclosure Date, COPI shall cause Jeffrey L. Stevens and any
other COPI officer, director or employee (other than John C. Goff) to resign,
effective as of such date, from all director and officer positions of the
Decontrolled Entity or Entities, of which the Stock is being retained in
satisfaction of obligations, as well as of any Subsidiaries of such Decontrolled
Entity or Entities.
5.08 Fulfillment of Conditions.
Transferor will execute and deliver at each Asset Transfer Date each
Operative Agreement that Transferor is required hereby to execute and deliver as
a condition to each Asset Transfer Date, will take all commercially reasonable
steps necessary or desirable and proceed diligently and in good faith to satisfy
each other condition to the obligations of Crescent contained in this Agreement
and will not take or fail to take any action that could reasonably be expected
to result in the nonfulfillment of any such condition.
ARTICLE VI
CRESCENT AND CRESCENT REIT COVENANTS
Each of Crescent and Crescent REIT covenants and agrees with each of
the Transferors that it will comply with all covenants and provisions of this
Article VI, except to the extent that the Transferors may otherwise consent in
writing.
6.01 Regulatory and Other Approvals.
Crescent and Crescent REIT will (i) proceed diligently and in good
faith and use its commercially reasonable efforts, as promptly as practicable to
obtain all consents, approvals or actions of, to make all filings with and to
give all notices to Governmental or Regulatory Authorities or any other Person
required of Crescent or Crescent REIT to consummate the transactions
contemplated hereby and by the Operative Agreements, (ii) provide such other
information and communications to such Governmental or Regulatory Authorities or
other Persons as the Transferors or such Governmental or Regulatory Authorities
or other Persons may reasonably request in connection therewith and (iii)
cooperate with the Transferors as promptly as practicable in obtaining all
consents, approvals or actions of, making all filings with and giving all
notices to Governmental or Regulatory Authorities or other Persons required of
the Transferors to consummate the transactions contemplated hereby and by the
Operative Agreements. Crescent and Crescent REIT will provide prompt
notification to COPI when any such consent, approval, action, filing or notice
referred to in clause (i) above is obtained, taken, made or given, as
applicable, and will advise COPI of any communications (and, unless precluded by
Law, provide copies of any such communications that are in writing) with any
Governmental or Regulatory Authority or other Person regarding any of the
transactions contemplated by this Agreement or any of the Operative Agreements.
B-30
6.02 Fulfillment of Conditions.
Crescent will execute and deliver at each Asset Transfer Date each
Operative Agreement that Crescent is hereby required to execute and deliver as a
condition to each Asset Transfer Date, will take all commercially reasonable
steps necessary or desirable and proceed diligently and in good faith to satisfy
each other condition to the obligations of the Transferors contained in this
Agreement and will not take or fail to take any action that could reasonably be
expected to result in the nonfulfillment of any such condition.
ARTICLE VII
SURVIVAL OF REPRESENTATIONS, WARRANTIES,
COVENANTS AND AGREEMENTS
7.01 Survival of Representations, Warranties, Covenants and Agreements.
Subject to the provisions of Section 8.01 below, each Transferor,
Crescent and Crescent REIT have the right to rely fully upon the
representations, warranties, covenants and agreements of the other contained in
this Agreement. The representations, warranties, covenants and agreements of
each Transferor, Crescent and Crescent REIT will survive indefinitely.
ARTICLE VIII
INDEMNIFICATION
8.01 Indemnification.
(a) Subject to paragraph (e) of this Section and the other Sections of
this Article VIII, each Transferor shall indemnify Crescent, Crescent REIT and
their respective officers, directors, employees, agents and Affiliates in
respect of, and hold each of them harmless from and against, any and all Losses
suffered, incurred or sustained by any of them or to which any of them becomes
subject, resulting from, arising out of or relating to (i) any misrepresentation
or breach of warranty contained in this Agreement, (ii) any nonfulfillment of or
failure to perform any covenant or agreement on the part of such Transferor
contained in this Agreement if such Transferor has failed to use commercially
reasonable efforts to fulfill or perform such covenants or agreements, or (iii)
an Excluded Liability.
(b) Subject to paragraph (e) of this Section and the other Sections of
this Article VIII, Crescent shall indemnify each Transferor and its officers,
directors, employees, agents and Affiliates in respect of, and hold each of them
harmless from and against, any and all Losses suffered, incurred or sustained by
any of them or to which any of them becomes subject, resulting from, arising out
of or relating to (i) any misrepresentation or breach of warranty contained in
this Agreement, (ii) any nonfulfillment of or failure to perform any covenant or
agreement on the part of Crescent contained in this Agreement if Crescent has
failed to use commercially reasonable efforts to fulfill or perform such
covenants or agreements, or (iii) all Assumed Liabilities.
(c) Subject to paragraph (e) of this Section and the other Sections of
this Article VIII, Crescent REIT shall indemnify COPI and its officers,
directors, employees, agents and Affiliates
B-31
in respect of, and hold each of them harmless from and against, any and all
Losses suffered, incurred or sustained by any of them or to which any of them
becomes subject, resulting from, arising out of or relating to (i) any
misrepresentation or breach of warranty contained in this Agreement or (ii) any
nonfulfillment of or failure to perform any covenant or agreement on the part of
Crescent REIT contained in this Agreement if Crescent REIT has failed to use
commercially reasonable efforts to fulfill or perform such covenants or
agreements.
(d) In the event that any claim is asserted against any party hereto,
or any party hereto is made a party defendant in any Action or Proceeding, and
such claim, Action or Proceeding involves a matter which is the subject of a
claim for indemnification under Sections 8.01(a) through (c), then such party
(an "Indemnified Party") shall give written notice to Crescent, Crescent REIT or
Transferor, as the case may be (the "Indemnifying Party"), of such claim, Action
or Proceeding, and such Indemnifying Party shall have the right to join in the
defense of said claim, Action or Proceeding at such Indemnifying Party's own
cost and expense and, if the Indemnifying Party agrees in writing to be bound by
and to promptly pay the full amount of any final judgment from which no further
appeal may be taken and if the Indemnified Party is reasonably assured of the
Indemnifying Party's ability to satisfy such agreement, then at the option of
the Indemnifying Party, such Indemnifying Party may take over the defense of
such claim, Action or Proceeding, except that, in such case, the Indemnified
Party shall have the right to join in the defense of said claim, Action or
Proceeding at its own cost and expense, provided, however, that the Indemnifying
Party shall not agree to settle any claim, Action or Proceeding relating to
Taxes if such settlement could aversely affect the Tax liability of the
Indemnified Party or an Affiliate thereof and such adverse effect would not be
included in the Indemnified Party's entitlement to indemnification pursuant to
this Article VIII, without the prior written consent of the Indemnified Party,
which consent shall not be unreasonably withheld.
(e) The indemnification obligations of each Transferor pursuant to this
Article VIII shall be subject to the following limitations and other provisions:
(i) The amount of any Losses required to be paid by Transferor
to indemnify any Indemnified Party pursuant to this Article VIII as a
result of any indemnity claim shall be reduced to the extent of any
amounts actually received by such Indemnified Party pursuant to the
terms of any insurance policies (if any) covering such claim.
(ii) The amount of any Losses required to be paid by
Transferor to indemnify any Indemnified Party pursuant to this Article
VIII as a result of any indemnity claim shall be reduced by the amount
of any federal, state or local tax benefit actually realized by the
Indemnified Party as a result of such claim.
(iii) The indemnification obligations of the parties pursuant
to this Article VIII shall be limited to actual damages, losses,
liabilities and expenses and shall not include incidental,
consequential, indirect, punitive or exemplary damages, losses,
liabilities and expenses.
B-32
8.02 Exclusivity.
The parties hereto agree that, in relation to any breach, default or
nonperformance of any representation, warranty, covenant or agreement made or
entered into by a party hereto pursuant to this Agreement or any instrument or
document delivered pursuant hereto, the sole and only relief and remedy
available to the other party hereto in respect of said breach, default or
nonperformance shall be:
(a) termination, but only if said termination is expressly permitted
under the provisions of Article IX;
(b) Losses, but only to the extent properly claimable hereunder and as
limited pursuant to this Article VIII;
(c) specific performance if a court of competent jurisdiction in its
discretion grants the same; or
(d) injunctive or declaratory relief if a court of competent
jurisdiction in its discretion grants the same.
ARTICLE IX
TERMINATION
9.01 Termination.
This Agreement may be terminated, and the transactions contemplated
hereby and not yet commenced may be abandoned:
(a) by mutual written agreement of each Transferor, Crescent and
Crescent REIT; or
(b) by each Transferor, Crescent or Crescent REIT, in the event (i) of
a material breach hereof by a non-terminating party if such non-terminating
party fails to cure such breach within 10 Business Days following notification
thereof by the terminating party or (ii) upon notification to all
non-terminating parties by the terminating party that the satisfaction of any
condition to the terminating party's obligations under this Agreement becomes
impossible or impracticable with the use of commercially reasonable efforts if
the failure of such condition to be satisfied is not caused by a breach hereof
by the terminating party; provided, however that (x) no Transferor shall have
the right to terminate this Agreement pursuant to clause (i) of this paragraph
if the non-terminating party is another Transferor, and not Crescent or Crescent
REIT, (y) neither Crescent nor Crescent REIT shall have the right to terminate
this Agreement pursuant to clause (i) of this paragraph if the non-terminating
party is either Crescent or Crescent REIT, and (z) Crescent and/or Crescent REIT
shall not have the unilateral right to terminate this Agreement pursuant to
clause (ii) of this subsection if Crescent or Crescent REIT has received any or
all of the Assets or Stock. Notwithstanding the continuation of this Agreement
after the occurrence of an event specified in clause (ii) of this subsection,
the nonperforming party shall have no further obligation to satisfy any such
impossible or impracticable conditions.
B-33
9.02 Effect of Termination.
(a) If this Agreement is validly terminated pursuant to Section 9.01,
this Agreement will forthwith become null and void, and there will be no
liability or obligation on the part of any Transferor, Crescent or Crescent REIT
(or any of their respective officers, directors, employees, agents or other
representatives or Affiliates), except as provided in the following paragraph
and except that the provisions with respect to confidentiality in Section 10.05
will continue to apply following any such termination.
(b) Notwithstanding any other provision in this Agreement to the
contrary, upon termination of this Agreement pursuant to Section 9.01(b), each
Transferor will remain liable to Crescent and Crescent REIT for any willful
breach of this Agreement by Transferor existing at the time of such termination,
and Crescent or Crescent REIT will remain liable to Transferor for any willful
breach of this Agreement by Crescent or Crescent REIT, respectively, existing at
the time of such termination, and Transferor, Crescent or Crescent REIT may seek
such remedies, including damages and fees of attorneys, against the other with
respect to any such breach as are provided in this Agreement or as are otherwise
available at Law or in equity.
ARTICLE X
MISCELLANEOUS
10.01 Notices.
All notices, requests and other communications hereunder must be in
writing and will be deemed to have been duly given only if delivered personally
or by facsimile transmission or mailed (first class postage prepaid) to the
parties at the following addresses or facsimile numbers:
If to Crescent or Crescent REIT, to:
Crescent Real Estate Equities Limited Partnership
777 Main Street, Suite 2100
Fort Worth, Texas 76102
Facsimile No.: (817) 321-2000
Attn: David M. Dean, Executive Vice President,
Law and Administration
with a copy to:
Shaw Pittman LLP
2300 N Street, N.W.
Washington, DC 20037
Facsimile No.: (202) 663-8007
Attn: Sylvia M. Mahaffey
B-34
If to the Transferors, to:
Crescent Operating, Inc.
777 Taylor Street, Suite 1050
Fort Worth, Texas 76102
Facsimile No.: (817) 339-1001
Attn: Jeffrey L. Stevens, Chief Operating Officer
with a copy to:
Haynes and Boone, LLP
901 Main Street
Suite 3100
Dallas, Texas 75202
Facsimile No.: (214) 651-5940
Attn: Robert Albergotti
All such notices, requests and other communications will (i) if delivered
personally to the address as provided in this Section, be deemed given upon
delivery, (ii) if delivered by facsimile transmission to the facsimile number as
provided in this Section, be deemed given upon receipt by the sender of
confirmation of delivery (including confirmation by electronic means), and (iii)
if delivered by mail in the manner described above to the address as provided in
this Section, be deemed given upon receipt (in each case regardless of whether
such notice, request or other communication is received by any other Person to
whom a copy of such notice is to be delivered pursuant to this Section). Any
party from time to time may change its address, facsimile number or other
information for the purpose of notices to that party by giving notice in
accordance with this Section 10.01 specifying such change to the other party
hereto.
10.02 Bulk Sales Act.
The parties hereby waive compliance with the bulk sales act or
comparable statutory provisions of each applicable jurisdiction. Each Transferor
shall indemnify Crescent and its officers, directors, employees, agents and
Affiliates in respect of, and hold each of them harmless from and against, any
and all Losses suffered, occurred or sustained by any of them or to which any of
them becomes subject, resulting from, arising out of or relating to the failure
of each Transferor to comply with the terms of any such provisions applicable to
the transactions contemplated by this Agreement.
10.03 Entire Agreement.
This Agreement and the Operative Agreements supersede all prior
discussions and agreements between the parties with respect to the subject
matter hereof and thereof, and contain the sole and entire agreement between the
parties hereto with respect to the subject matter hereof and thereof.
B-35
10.04 Public Announcements.
At all times at or before the Effective Date, each Transferor, Crescent
and Crescent REIT will not issue or make any reports, statements or releases to
the public with respect to this Agreement or the transactions contemplated
hereby without the consent of the other, which consent shall not be unreasonably
withheld, unless required by Law.
10.05 Confidentiality.
Each party hereto will hold, and will use its best efforts to cause its
Affiliates, and their respective Representatives to hold, in strict confidence
from any Person (other than any such Affiliate or Representative), unless (i)
compelled to disclose by judicial or administrative process (including without
limitation in connection with obtaining the necessary approvals of this
Agreement and the transactions contemplated hereby of Governmental or Regulatory
Authorities) or by other requirements of Law or (ii) disclosed in an Action or
Proceeding brought by a party hereto in pursuit of its rights or in the exercise
of its remedies hereunder, all documents and information concerning the other
parties or any of its Affiliates furnished to it by the other parties or such
other parties' Representatives in connection with this Agreement or the
transactions contemplated hereby, except to the extent that such documents or
information can be shown to have been (i) previously known by the party
receiving such documents or information, (ii) in the public domain (either prior
to or after the furnishing of such documents or information hereunder) through
no fault of such receiving party or (iii) later acquired by the receiving party
from another source if the receiving party is not aware that such source is
under an obligation to another party hereto to keep such documents and
information confidential; provided that (y) following each Asset Transfer Date
the foregoing restrictions will not apply to Crescent's use of documents and
information concerning the Hospitality Business, the Assets or the Assumed
Liabilities furnished by any Transferor hereunder and (z) following any
Foreclosure Date the foregoing restrictions will not apply to Crescent's use of
documents and information concerning the Decontrolled Business relating to any
foreclosed Stock furnished by COPI hereunder. In the event the transactions
contemplated hereby are not consummated, upon the request of a party, each other
party hereto will, and will cause its Affiliates and their respective
Representatives to, promptly redeliver or cause to be redelivered all copies of
documents and information furnished by the other party in connection with this
Agreement or the transactions contemplated hereby and destroy or cause to be
destroyed all notes, memoranda, summaries, analyses, compilations and other
writings related thereto or based thereon prepared by the party furnished such
documents and information or its Representatives.
10.06 Waiver.
Any term or condition of this Agreement may be waived at any time by
the party that is entitled to the benefit thereof, but no such waiver shall be
effective unless set forth in a written instrument duly executed by or on behalf
of the party waiving such term or condition. No waiver by any party of any term
or condition of this Agreement, in any one or more instances, shall be deemed to
be or construed as a waiver of the same or any other term or condition of this
Agreement on any future occasion. All remedies, either under this Agreement or
by Law or otherwise afforded, will be cumulative and not alternative.
B-36
10.07 Amendment.
This Agreement may be amended, supplemented or modified only by a
written instrument duly executed by or on behalf of each party hereto.
10.08 No Third Party Beneficiary.
The terms and provisions of this Agreement are intended solely for the
benefit of each party hereto and their respective successors or permitted
assigns, and it is not the intention of the parties to confer third-party
beneficiary rights upon any other Person other than any Person entitled to
indemnity under Article VIII.
10.09 No Assignment; Binding Effect.
Neither this Agreement nor any right, interest or obligation hereunder
may be assigned by any party hereto without the prior written consent of the
other parties hereto and any attempt to do so will be void, except (i) for
assignments and transfers by operation of Law and (ii) that Crescent may assign
any or all of its rights, interests and obligations hereunder (including without
limitation its rights under Article VII) to (A) one or more Subsidiaries of
Crescent (who may make the subsequent assignment referred to in (B)), or (B) any
future purchaser of the Hospitality Business, the Decontrolled Business, any of
the Stock or a substantial part of the Assets, but no such assignment shall
relieve Crescent of its obligations hereunder. Subject to the preceding
sentence, this Agreement is binding upon, inures to the benefit of and is
enforceable by the parties hereto and their respective successors and assigns.
10.10 Headings.
The headings used in this Agreement have been inserted for convenience
of reference only and do not define or limit the provisions hereof.
10.11 Invalid Provisions.
If any provision of this Agreement is held to be illegal, invalid or
unenforceable under any present or future Law, and if the rights or obligations
of any party hereto under this Agreement will not be materially and adversely
affected thereby, (i) such provision will be fully severable, (ii) this
Agreement will be construed and enforced as if such illegal, invalid or
unenforceable provision had never comprised a part hereof, (iii) the remaining
provisions of this Agreement will remain in full force and effect and will not
be affected by the illegal, invalid or unenforceable provision or by its
severance herefrom and (iv) in lieu of such illegal, invalid or unenforceable
provision, there will be added automatically as a part of this Agreement a
legal, valid and enforceable provision as similar in terms to such illegal,
invalid or unenforceable provision as may be possible.
10.12 Governing Law.
This Agreement shall be governed by and construed in accordance with
the Laws of the State of Texas applicable to a contract executed and performed
in such State, without giving effect to the conflicts of laws principles
thereof.
B-37
10.13 Counterparts.
This Agreement may be executed in any number of counterparts, each of
which will be deemed an original, but all of which together will constitute one
and the same instrument.
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered
by the duly authorized officer of each party as of the date first above written.
CRESCENT REAL ESTATE EQUITIES
LIMITED PARTNERSHIP
By: Crescent Real Estate Equities, Ltd.,
its general partner
By: /s/ DAVID M. DEAN
-------------------------------------
Name: David M. Dean
Title: Executive Vice President, Law
and Administration
CRESCENT REAL ESTATE EQUITIES COMPANY
By: /s/ DAVID M. DEAN
-------------------------------------
Name: David M. Dean
Title: Executive Vice President, Law
and Administration
CRESCENT OPERATING, INC.
By: /s/ JEFFREY L. STEVENS
-------------------------------------
Name: Jeffrey L. Stevens
Title: Executive Vice President
ROSESTAR MANAGEMENT LLC
By: /s/ JEFFREY L. STEVENS
-------------------------------------
Name: Jeffrey L. Stevens
Title: Manager
B-38
CANYON RANCH LEASING, L.L.C.
By: Rosestar Management, LLC, its manager
By: /s/ JEFFREY L. STEVENS
------------------------------
Name: Jeffrey L. Stevens
Title: Manager
WINE COUNTRY HOTEL, LLC
By: /s/ JEFFREY L. STEVENS
-------------------------------------
Name: Jeffrey L. Stevens
Title: Manager
ROSESTAR SOUTHWEST, LLC
By: RSSW Corp., its manager
By: /s/ JEFFREY L. STEVENS
------------------------------
Name: Jeffrey L. Stevens
Title: President
COI HOTEL GROUP, INC.
By: /s/ JEFFREY L. STEVENS
-------------------------------------
Name: Jeffrey L. Stevens
Title: Chairman
B-39
FIRST AMENDMENT
TO SETTLEMENT AGREEMENT
This First Amendment to Settlement Agreement (the "First Amendment") is made and
entered into as of this 1st day of October by and among Crescent Real Estate
Equities Limited Partnership ("Crescent"), Crescent Real Estate Equities Company
("Crescent REIT"), Crescent Operating, Inc. ("COPI"), Rosestar Management LLC,
Canyon Ranch Leasing, L.L.C., Wine Country Hotel, LLC d/b/a Vintage Resorts,
LLC, Rosestar Southwest, LLC and COI Hotel Group (collectively, the
"Transferring Subsidiaries").
WHEREAS, the parties hereto previously entered into that certain Settlement
Agreement, dated as of February 14, 2002, relating to the various agreements
among the parties that are documented therein (the "Effective Agreement");
WHEREAS, the parties have consummated certain of the transactions provided for
in the Effective Agreement and have commenced performance of other transactions;
WHEREAS, COPI has requested that, in addition to the funds Crescent has already
advanced to COPI under the COPI Budget Note for specified budgeted expenses,
Crescent advance additional funds to COPI for additional operating expenses, and
Crescent is willing to advance these funds to COPI in accordance with specified
terms;
WHEREAS, the parties have determined that they wish to change certain of the
provisions of the Effective Agreement relating to transactions that have not yet
been performed, to clarify certain provisions of the Effective Agreement and to
enter into additional or revised agreements as to various matters; and
WHEREAS, the parties desire to amend the Effective Agreement, in accordance with
Section 10.07 of the Effective Agreement, to reflect such changes;
NOW, THEREFORE, in consideration of the mutual covenants and agreements herein
contained and other good and valuable consideration, the receipt, adequacy and
sufficiency of which are hereby acknowledged, the parties hereto, intending
legally to be bound, hereby agree as follows.
1. CLARIFICATION AND AMENDMENT OF DEFINED TERM. The defined term
"CEI/COPI Payments" contained in Section 1.01 is hereby deleted in its entirety
and replaced with the following:
"CEI/COPI Payments" means all amounts paid, pre-paid,
advanced, incurred or accrued up to and including the
Confirmation Date by or on behalf of Crescent, Crescent REIT
or their Affiliates in connection with the preparation of this
Agreement, the Operative Agreements and the consummation of
the transactions contemplated hereby and thereby, or relating
hereto or thereto, including, without limitation, all such
amounts paid, advanced, incurred or accrued by Crescent or
Crescent REIT pursuant to, and in accordance with, Sections
2.07, 2.08, 2.09 and/or 2.15, and all fees and expenses of
agents, representatives, counsel and accountants employed by
Crescent,
B-40
Crescent REIT or any of their Affiliates. Notwithstanding any
of the foregoing, CEI/COPI Payments shall be reduced by the
total amount of all optional or mandatory payments or
prepayments, if any, whether applied to accrued interest or
principal, on the Revised COPI Budget Note or the Second
COPI Budget Note made by COPI.
In connection with the foregoing clarification and amendment, the parties hereto
agree and acknowledge that the deletion of the phrase "for out-of-pocket
expenses," which was set forth immediately following the phrase "means all
amounts paid, advanced, incurred or accrued" in the Effective Agreement
constitutes a clarification of the original intent of the parties to the
Effective Agreement as to the meaning of the defined term "CEI/COPI Payments,"
and not an amendment, change or other alteration of the meaning of such defined
term.
2. AMENDMENT OF SECTION 1.02. Section 1.02 of the Effective Agreement
is hereby amended to include, from and after the effective date of this First
Amendment, the cross-references set forth below.
A. On the line immediately following the line containing the
term "Registration Statement" and the reference to Section 2.10(b), the
following shall be added to the list contained in Section 1.02 as a new
line:
Revised COPI Budget Note 2.09(a)
with the term "Revised COPI Budget Note" included under the column
designated "Term" and the number "2.09(a)" inserted under the column
designated "Section".
B. On the line immediately following the line containing the
term "SEC" and the reference to Section 2.04(a), the following shall be
added to the list contained in Section 1.02 as a new line:
Second COPI Budget Note 2.09(c)
with the term "Second COPI Budget Note" included under the column
designated "Term" and the number "2.09(c)" inserted under the column
designated "Section".
3. REPLACEMENT OF EXHIBIT E AND AMENDMENT OF SECTION 2.03(A). From and
after the date hereof, (i) the Plan of Reorganization attached to the Effective
Agreement as Exhibit E is hereby superseded and replaced in its entirety by the
new Exhibit E attached hereto, and (ii) all references to the "Plan" shall refer
to such new Exhibit E.
4. AMENDMENT OF SECTION 2.09.
A. Section 2.09 of the Effective Agreement is hereby amended
to include, prior to subparagraph (a) of Section 2.09 the following:
B-41
Pursuant to advances made by Crescent to COPI pursuant to the
original "COPI Budget Note" attached hereto as Exhibit H,
Crescent has advanced the principal amount of $3,631,000 as of
September 30, 2002.
B. Section 2.09(a) of the Effective Agreement is hereby
deleted in its entirety and replaced with the following:
(a) Subject to Section 5.05, Crescent has advanced
funds to COPI sufficient for COPI to pay the reasonable and
necessary budgeted and documented out-of-pocket operating
expenses of COPI and its Subsidiaries (other than expenses
attributed to, related to or incurred by CMC and its
Subsidiaries), to the extent COPI and such Subsidiaries were
unable to do so from their own resources, in accordance with
the original "COPI Budget Note," which is that certain
promissory note in the form attached as Exhibit H, in the
original principal amount of up to $8,575,000. From and after
the date hereof, the promissory note attached hereto as
Exhibit H is superseded and replaced in its entirety by the
amended and restated promissory note attached hereto as
Exhibit H-1 (the "Revised COPI Budget Note").
C. Section 2.09(b) of the Effective Agreement is hereby
deleted in its entirety and replaced with the following:
(b) Crescent also has advanced funds to COPI in
accordance with the COPI Budget Note for the purposes, and in
the amounts, specified in the Revised COPI Budget Note. In
addition, Crescent agrees to advance funds to COPI in
accordance with the Revised COPI Budget Note for the purposes,
and in the amounts, specified therein.
D. Section 2.09(c) of the Effective Agreement is hereby
redesignated as Section 2.09(d), and a new Section 2.09(c), in the form
set forth below, is hereby inserted in substitution of Section 2.09(c)
of the Effective Agreement.
(c) Subject to Section 5.05, Crescent agrees (i) to
advance funds to COPI sufficient for COPI to pay the
reasonable and necessary documented out-of-pocket operating
expenses of COPI and its Subsidiaries (other than expenses
attributed to, related to or incurred by CMC and its
Subsidiaries), to the extent COPI and such Subsidiaries are
unable to do so from their own resources, and (ii) to advance
additional funds of up to $641,000.00 to COPI, in each case in
accordance with a promissory note in the form attached as
Exhibit H-2, in the original principal amount of up to
$2,900,000 (the "Second COPI Budget Note"). The Second COPI
Budget Note will be secured by a security interest in the
claim, thing in action, general intangible and other
collateral described in that certain Security Agreement of
even date herewith made by COPI in favor of Crescent, on the
terms set forth in such Security Agreement.
B-42
E. Section 2.09(d) of the Effective Agreement is hereby
deleted in its entirety and replaced with the following, which shall be
designated as Section 2.09(e).
(e) The provisions of (i) this Section 2.09, the COPI
Budget Note, the Revised COPI Budget Note and the Second COPI
Budget Note, on the one hand, and (ii) Section 2.01(e), on the
other, are mutually exclusive.
5. AMENDMENT OF SECTION 2.10(A). Section 2.10(a) of the Effective
Agreement is hereby deleted in its entirety and replaced with the following:
(a) In the event that the COPI Stockholder
Acceptances are obtained, then on the Effective Date, each
person who is a holder of shares of COPI Common Stock on the
date the confirmation order has been entered by the Bankruptcy
Court (the "Confirmation Date") shall be entitled to receive
the number of common shares of beneficial interest, par value
$.01 per share, of Crescent REIT (the "Crescent REIT Common
Shares"), equal to the product of (i) (A) the number of shares
of COPI Common Stock owned by such stockholder on the
Confirmation Date, divided by (B) the total number of shares
of COPI Common Stock outstanding on the Confirmation Date, and
(ii) the quotient of (A) the Consideration Amount (as defined
below), and (B) the average of the daily closing prices per
Crescent REIT Common Share as reported on the New York Stock
Exchange Composite Transactions reporting system for the 10
consecutive trading days immediately preceding the
Confirmation Date. For purposes of this section, the
"Consideration Amount" shall be an amount equal to the greater
of (x) $10,828,497, less an amount, if any, equal to the
amount by which the CEI/COPI Payments exceed $5,200,000, and
(y) $2,165,699.40. No certificate or scrip representing
fractional Crescent REIT Common Shares shall be issued, and
all fractional shares shall be rounded up or down to the
nearest whole Crescent REIT Common Share.
6. ADDITION OF NEW SECTION 2.15. A new Section 2.15, which shall read
as follows, is hereby inserted immediately following Section 2.14 of the
Effective Agreement:
2.15 Claims of Unsecured Creditors.
(a) The parties hereby acknowledge that, after the
execution of the Effective Agreement, the Official Committee
of Unsecured Creditors of CMC established in connection with
the bankruptcy of CMC has advised COPI, and COPI subsequently
advised Crescent, that such Committee has asserted certain
claims against COPI and that it may assert additional or
supplemental claims against COPI and certain of COPI's current
and former directors and officers. COPI has also advised
Crescent that it disputes these claims and believes they are
without merit.
B-43
(b) The parties further acknowledge that other
unsecured creditors not currently Known to COPI may in the
future make claims in connection with the COPI bankruptcy.
(c) In connection with any claim or claims that
either are specified or are of the type specified in
subsections (a) or (b) of this Section 2.15, Crescent shall
have the right, but no obligation, to offer, and COPI shall
have the right to permit Crescent, to settle or assume any one
or more of such claims on such terms, including the value of
the settlement or assumption, as shall be agreed by and among
COPI, Crescent and Crescent REIT on or before the Effective
Date.
7. AMENDMENT OF SECTION 3.12. Section 3.12 of the Effective Agreement
is hereby deleted in its entirety and replaced with the following:
3.12 Claims Against COPI.
Other than the claims referred to in Sections 2.06 through
2.09 and in Section 2.15(a), to COPI's Knowledge, there are no
obligations or claims existing or assertable against COPI.
8. AUTHORITY. Each party to this First Amendment represents that such
party has full power and authority to enter into this First Amendment, and that
this First Amendment constitutes a legal, valid and binding obligation of such
party, enforceable against such party in accordance with its terms.
9. DEFINED TERMS CONTAINED IN EFFECTIVE AGREEMENT. Except as the
context may otherwise require, any terms used in this First Amendment which are
defined in the Effective Agreement shall have the same meaning for purposes of
this First Amendment as in the Effective Agreement.
10. EFFECTIVE DATE OF FIRST AMENDMENT. This Amendment will become
effective as of the date first above written. From and after the effective date
of this First Amendment, each reference in the Agreement to "this Agreement,"
"hereunder," "hereof," "herein" or words of like import, and each reference in
the Operative Agreements or any other documents entered into in connection with
the Agreement, shall mean and be a reference to the Effective Agreement as
amended by this First Amendment.
11. REMAINDER OF EFFECTIVE AGREEMENT NOT AFFECTED. Except as
specifically amended by this First Amendment, the Effective Agreement is hereby
ratified, confirmed, and reaffirmed for all purposes and in all respects.
12. COUNTERPARTS. This First Amendment may be executed in one or more
counterparts, each of which will be deemed to be an original, but all of which
will constitute one and the same agreement.
B-44
IN WITNESS WHEREOF, the undersigned have executed this First Amendment as of the
date first written above.
CRESCENT REAL ESTATE EQUITIES
LIMITED PARTNERSHIP
By: Crescent Real Estate Equities, Ltd.,
its general partner
By:
--------------------------------------
Name:
Title:
CRESCENT REAL ESTATE EQUITIES COMPANY
By:
--------------------------------------
Name:
Title:
CRESCENT OPERATING, INC.
By:
--------------------------------------
Name: Jeffrey L. Stevens
Title: Executive Vice President
ROSESTAR MANAGEMENT LLC
By:
--------------------------------------
Name: Jeffrey L. Stevens
Title: Manager
CANYON RANCH LEASING, L.L.C.
By: Rosestar Management, LLC, its
manager
By:
---------------------------------
Name: Jeffrey L. Stevens
Title: Manager
B-45
WINE COUNTRY HOTEL, LLC
By:
--------------------------------------
Name: Jeffrey L. Stevens
Title: Manager
ROSESTAR SOUTHWEST, LLC
By: RSSW Corp., its manager
By:
---------------------------------
Name: Jeffrey L. Stevens
Title: President
COI HOTEL GROUP, INC.
By:
--------------------------------------
Name: Jeffrey L. Stevens
Title: Chairman
B-46
ANNEX C
[HOULIHAN LOKEY HOWARD & ZUKIN LOGO]
[HOULIHAN LOKEY HOWARD & ZUKIN LETTERHEAD]
FINANCIAL ADVISORS
February 14, 2002
To the Board of Directors
Crescent Operating, Inc.
777 Taylor Street, Suite 1050
Fort Worth, TX 76102
Dear Gentlemen:
We understand that Crescent Operating, Inc. ("COPI" hereinafter) has put forth a
pre-packaged Chapter 11 bankruptcy plan of COPI. As part of the COPI bankruptcy
plan, COPI has entered into an agreement with Crescent Real Estate Equities
Company ("CEI" hereinafter) whereby substantially all of the assets and related
liabilities associated with COPI's hotel operations will be transferred to CEI
in lieu of a foreclosure by CEI on these assets and CEI, in exchange, will
cancel $23.6 million in unpaid rental payments due to CEI (the "Hotel
Transaction"). COPI will also execute one or more Foreclosure Agreements
pursuant to which Crescent will retain the real estate development interests in
satisfaction of $40.1 million of principal and accrued and unpaid interest,
representing a portion of the debt obligations of COPI to Crescent (the "Real
Estate Transaction"). Pursuant to COPI's agreement with CEI, CEI has also agreed
that it will form and capitalize Crescent Spinco which will acquire COPI's
entire membership interest in COPI Cold Storage, LLC ("COPI Cold Storage") for
approximately $15 to $15.5 million (the "Cold Storage Transaction"). CEI has
also agreed to fund up to $8.6 million (the "Advances") for (i) advances to COPI
sufficient for COPI to pay out-of-pocket operating expenses until the COPI
bankruptcy plan is approved up to $3.2 million and (ii) the remaining $5.4
million will cover claims and other expenses relating to the COPI bankruptcy and
any other amounts paid, advanced or accrued by or on behalf of CEI relating to
the COPI bankruptcy. COPI's management has indicated that the amount of Advances
is based on reasonable assumptions, however, funds paid by CEI above $8.6
million will reduce the amount of CEI Stock Consideration (as defined below). At
the request of COPI's management, we have assumed that Advances by CEI could be
as much as $10.5 million. For each share of COPI common stock, CEI will issue to
all COPI stockholders approximately $0.50 of CEI common stock (the "CEI Stock
Consideration"), or in the event CEI advances $10.5 million CEI will issue $0.32
of CEI Common Stock, in exchange for a release of all of the COPI shareholders'
claims against CEI or any of its officers, directors, employees, agents or
representatives. The CEI Stock Consideration is subject to adjustment should the
total amount of claims and expenses paid by CEI in connection with the COPI
bankruptcy are equal to or greater than $5.2 million. Additionally, it is our
understanding that certain and former officers and directors of COPI are also
officers and directors of CEI and own 19.0% of COPI's common stock. The balance
of COPI's common stock is held by unrelated parties (the "Public Stockholders").
The Hotel Transaction, Real Estate Transaction, Cold Storage Transaction, CEI
Stock Consideration and Advances are referred to collectively herein as the
"Transactions".
C-1
Board of Directors
Crescent Operating, Inc.
February 14, 2002
You have requested our opinion (the "Opinion") as to the matters set forth
below. The Opinion addresses the aggregate consideration to be received by COPI
and the aggregate consideration to be received by the Public Stockholders, taken
as a whole, in connection with the Transactions and specifically does not
address the consideration to be received in each of the separate transactions.
The Opinion does not address COPI's underlying business decision to effect the
Transactions. Additionally, you have advised us that the Board of Directors of
COPI has indicated that it has no intention of selling its shares in COPI or
engaging in any alternative to the Transactions. We have not been requested to,
and did not, solicit third party indications of interest in acquiring all or any
part of COPI, the hotel operations and land development entities or COPI Cold
Storage. Furthermore, at your request, we have not negotiated the Transactions
or advised you with respect to alternatives to it.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Attached as Appendix A is a list of documents reviewed and due diligence
conducted.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of COPI, the hotel and land development entities and COPI
Cold Storage, and that there has been no material change in the assets,
financial condition, business or prospects of COPI, the hotel and land
development entities and COPI Cold Storage since the date of the most recent
financial statements made available to us. We have also been asked to rely upon
the Cold Storage Transaction price as accurately reflecting the fair market
value of COPI's interest in COPI Cold Storage. Our Opinion does not consider
Advances over $10.5 million; however, additional funds paid by CEI over that
amount would not necessarily change our Opinion.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to COPI, the hotel and land development
entities and COPI Cold Storage and do not assume any responsibility with respect
to them. We have not made any physical inspection or independent appraisal of
any of the properties or assets of COPI, the hotel and land development entities
and COPI Cold Storage. Our opinion is necessarily based on business, economic,
market and other conditions as they exist and can be evaluated by us at the date
of this letter.
Based upon the foregoing, and in reliance thereon, it is our opinion that the
aggregate consideration to be received by COPI and the aggregate consideration
to be received by the Public Stockholders, taken as a whole, in connection with
the Transactions is fair to the Public Stockholders of COPI from a financial
point of view.
/s/ HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS INC.
C-2
APPENDIX A
In connection with its opinion, Houlihan Lokey made such reviews, analyses and
inquiries as it deemed necessary and appropriate under the circumstances. Among
other things, Houlihan Lokey:
1. held discussions with management of COPI, CEI and East West Partners;
2. reviewed historical operating statements for the hotel properties;
3. reviewed the hotel lease agreements between the Affiliates of COPI (as
the lessees) and CEI (as the lessors);
4. reviewed the balance sheet of RoseStar Management, LLC dated as of
November 30, 2001;
5. reviewed projections for the hotel properties, provided by COPI, for
the period of operation corresponding with the remaining term of the
lease;
6. reviewed a legal entity ownership chart provided by COPI;
7. reviewed projections for the life of the CRDI land development projects
prepared by East West Partners;
8. reviewed the internally prepared consolidating balance sheets and
income statements for East West Resort Transportation LLC and East West
Resort Transportation II LLC for the period ended December 31, 2001;
9. reviewed historical operating statements and 2002 budgets for CDMC Palm
Beach;
10. reviewed projections Woodlands Land Development provided by COPI for
the periods ending December 31, 2002 through December 31, 2011;
11. reviewed projections for the Woodlands Operating Company provided by
COPI for the periods ending December 31, 2002 through December 31,
2006;
12. reviewed projections for Desert Mountain provided by COPI for the
periods ending December 31, 2002 through December 31, 2010;
13. reviewed the publicly available SEC filings of COPI, including the Form
10K for the fiscal year ended December 31, 2000 and the Form 10Q for
the period ended September 30, 2001;
14. reviewed the internally prepared consolidating balance sheet for CRDI
for the period ended December 31, 2001;
15. reviewed the internally prepared consolidating balance sheet of COPI
for the periods ended November 30, 2000; December 31, 2000; and
November 30, 2001;
16. reviewed the internally prepared liquidation analysis of COPI;
17. reviewed the Americold management package, including income statement
and balance sheet, for the fiscal year ended December 31, 2001;
18. reviewed the Americold budget for the fiscal year ended December 31,
2002;
19. reviewed a draft of the Settlement Agreement dated February 14, 2002;
and
20. conducted such other studies, analyses and inquiries as we have deemed
appropriate.
C-3
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Crescent Real Estate's declaration of trust provides that no trust
manager shall be liable to Crescent Real Estate for any act, omission, loss,
damage, or expense arising from the performance of his duties to Crescent Real
Estate save only for his own willful misfeasance or willful malfeasance or gross
negligence. In addition to, but in no respect whatsoever in limitation of the
foregoing, the liability of each trust manager for monetary damages shall be
eliminated to the fullest extent permitted by applicable law. The declaration of
trust also provides that no amendment thereto may limit or eliminate this
limitation of liability with respect to events occurring prior to the effective
date of such amendment.
Crescent Real Estate's declaration of trust provides that the trust
managers and officers shall be indemnified to the maximum extent permitted by
Texas law. Under current Texas law, the trust will indemnify a person who was,
is, or is threatened to be made a named defendant or respondent in a proceeding
because the person is or was a trust manager or officer if it is determined that
the person (i) conducted himself in good faith; (ii) reasonably believed: (a) in
the case of conduct in his official capacity as a trust manager or officer of
the real estate investment trust, that his conduct was in the real estate
investment trust's best interests; and (b) in all other cases, that his conduct
was at least not opposed to the real estate investment trust's best interests;
and (iii) in the case of any criminal proceeding, had no reasonable cause to
believe that his conduct was unlawful. Except to the extent provided in the
following sentence, a trust manager or officer may not be indemnified (i) in
respect of a proceeding in which the person is found liable on the basis that
personal benefit was improperly received by him, whether or not the benefit
resulted from an action taken in the person's official capacity; or (ii) in
which the person is found liable to the real estate investment trust.
Notwithstanding the foregoing, a person may be indemnified against judgments,
penalties (including excise and similar taxes), fines, settlements, and
reasonable expenses actually incurred by the person in connection with the
proceeding; provided that if the person is found liable to the real estate
investment trust or is found liable on the basis that personal benefit was
improperly received by the person, the indemnification (i) is limited to
reasonable expenses actually incurred by the person in connection with the
proceeding, and (ii) shall not be made in respect of any proceeding in which the
person shall have been found liable for willful or intentional misconduct in the
performance of his duty to the real estate investment trust. In addition,
Crescent Real Estate's declaration of trust and bylaws require it to pay or
reimburse, in advance of the final disposition of a proceeding, reasonable
expenses incurred by a present or former trust manager or officer made a party
to a proceeding by reason of his status as a trust manager or officer, provided
that Crescent Real Estate shall have received (i) a written affirmation by the
trust manager or officer of his good faith belief that he has met the standard
of conduct necessary for indemnification by Crescent Real Estate as authorized
by the bylaws and (ii) a written undertaking by or on his behalf to repay the
amount paid or reimbursed by Crescent Real Estate if it shall ultimately be
determined that the standard of conduct was not met. Crescent Real Estate's
declaration of trust and bylaws also permit Crescent Real Estate to provide
indemnification, payment or reimbursement of expenses to any employee or agent
of Crescent Real Estate in such capacity. Crescent Real Estate's declaration of
trust and bylaws also permit Crescent Real Estate to indemnify a person who was
or who agreed to appear as a witness or other participant in a proceeding at a
time when he is not named a defendant or respondent in the proceeding. Any
indemnification, payment or reimbursement of the expenses permitted by the
declaration of trust and bylaws shall be furnished in accordance with the
procedures provided for indemnification and payment or reimbursement of expenses
under Texas Real Estate Investment Trust Act for trust managers.
II - 1
The limited partnership agreement of Crescent Partnership contains
indemnification provisions comparable to those contained in the declaration of
trust.
Crescent Real Estate carries insurance that purports to insure officers
and trust managers of Crescent Real Estate against certain liabilities incurred
by them in the discharge of their official functions.
Crescent Real Estate has entered into indemnification agreements with
each of Crescent Real Estate's executive officers and trust managers. The
indemnification agreements require, among other things, that Crescent Real
Estate indemnify such officers and trust managers to the fullest extent
permitted by law, and advance to the officers and directors all related
expenses, subject to reimbursement if it is subsequently determined that
indemnification is not permitted. Crescent Real Estate also must indemnify and
advance expenses incurred by officers and directors seeking to enforce their
rights under the indemnification agreements and cover officers and directors
under Crescent Real Estate's directors' and officers' liability insurance, if
any. Although the indemnification agreements offer substantially the same scope
of coverage afforded by provisions in the declaration of trust and Crescent Real
Estate's bylaws, they provide greater assurance to directors and executive
officers that indemnification will be available, because, as contracts, they
cannot be modified unilaterally in the future by the Board of Trust Managers or
by the stockholders to alter, limit or eliminate the rights they provide.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
2.01 Plan of Reorganization of Crescent Operating, Inc. (included as Annex
A to the proxy statement/prospectus that constitutes Part I of this
Registration Statement)
2.02 Settlement Agreement, dated February 14, 2002, by and between Crescent
Real Estate Equities Limited Partnership , Crescent Real Estate
Equities Company, Crescent Operating, Inc., RoseStar Management, LLC,
Canyon Ranch Leasing, L.L.C., Wine Country Hotel, LLC, RoseStar
Southwest, LLC and COI Hotel Group, Inc., as amended (included as
Annex B to the proxy statement/prospectus that constitutes Part I of
this Registration Statement)
3.01 Restated Declaration of Trust of Crescent Real Estate Equities
Company, as amended (filed as Exhibit No. 3.1 on the Registrant's
Current Report on Form 8-K filed April 25, 2002 (the "April 2002 8-K")
and incorporated herein by reference)
3.02 Amended and Restated Bylaws of Crescent Real Estate Equities Company,
as amended (filed as Exhibit No. 3.02 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998 and
incorporated herein by reference)
4.01 Form of Common Share Certificate (filed as Exhibit No. 4.03 to the
Registrant's Registration Statement on Form S-3 (File No. 333-21905)
and incorporated herein by reference)
4.02 Statement of Designation of 6 -3/4% Series A Convertible Cumulative
Preferred Shares of Crescent Real Estate Equities Company dated
February 13, 1997 (filed as Exhibit No. 4.07 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997
(the "1997 10-K") and incorporated herein by reference)
II - 2
4.03 Form of Certificate of 6-3/4% Series A Convertible Cumulative
Preferred Shares of Crescent Real Estate Equities Company (filed as
Exhibit No. 4 to the Registrant's Registration Statement on Form 8A/A
filed on February 18, 1998 and incorporated herein by reference)
4.04 Statement of Designation of 6-3/4% Series A Convertible Cumulative
Preferred Shares of Crescent Real Estate Equities Company dated April
25, 2002 (filed as Exhibit No. 4.1 to the Registrant's April 2002 8-K
and incorporated herein by reference)
4.05 Statement of Designation of 9.50% Series B Cumulative Redeemable
Preferred Shares of Crescent Real Estate Equities Company dated May
13, 2002 (filed as Exhibit No. 2 to the Registrant's Form 8-A dated
May 14, 2002 (the "Form 8-A"), and incorporated herein by reference)
4.06 Form of Certificate of 9.50% Series B Cumulative Redeemable Preferred
Shares of Crescent Real Estate Equities Company (filed as Exhibit No.
4 to the Form 8-A and incorporated herein by reference)
4 Pursuant to Regulation S-K Item 601(b)(4)(iii), the Registrant by this
filing agrees, upon request, to furnish to the Securities and Exchange
Commission a copy of other instruments defining the rights of holders
of long-term debt of the Registrant
5.01 Opinion of Shaw Pittman regarding the validity of the securities
registered hereby+
8.01 Opinion of Shaw Pittman regarding qualification of Crescent Real
Estate as a real estate investment trust+
8.02 Opinion of Sullivan and Cromwell regarding qualification of Americold
Corporation as a real estate investment trust++
10.01 Second Amended and Restated Agreement of Limited Partnership of
Crescent Real Estate Equities Limited Partnership, dated as of
November 1, 1997, as amended (filed as Exhibit 10.02 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 2002 (the "2Q 2002 10-Q") and incorporated herein by reference)
10.02 Noncompetition Agreement of Richard E. Rainwater, as assigned to
Crescent Real Estate Equities Limited Partnership on May 5, 1994
(filed as Exhibit No. 10.02 to the Registrant's 1997 10-K and
incorporated herein by reference)
10.03 Noncompetition Agreement of John C. Goff, as assigned to Crescent Real
Estate Equities Limited Partnership on May 5, 1994 (filed as Exhibit
No. 10.03 to the 1997 10-K and incorporated herein by reference)
10.04 Employment Agreement by and between Crescent Real Estate Equities
Limited Partnership, Crescent Real Estate Equities Company and John C.
Goff, dated as of February 19, 2002 (filed as Exhibit No. 10.01 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
31, 2002 (the "1Q 2002 10-Q") and incorporated herein by reference)
10.05 Employment Agreement of Jerry R. Crenshaw, Jr. dated as of December
14, 1998 (filed as Exhibit 10.08 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999 (the "1999
10-K") and incorporated herein by reference)
II - 3
10.06 Form of Officer's and Trust Managers' Indemnification Agreement as
entered into between the Registrant and each of its executive officers
and trust managers (filed as Exhibit No. 10.07 to the Registration
Statement on Form S-4 (File No. 333-42293) of Crescent Real Estate
Equities Limited Partnership and incorporated herein by reference)
10.07 Crescent Real Estate Equities Company 1994 Stock Incentive Plan (filed
as Exhibit No. 10.07 to the Registrant's Registration Statement on
Form S-11 (File No. 33-75188) (the "Form S-11") and incorporated
herein by reference)
10.08 Third Amended and Restated 1995 Crescent Real Estate Equities Company
Stock Incentive Plan (filed as Exhibit No. 10.01 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 and
incorporated herein by reference)
10.09 Amendment dated as of November 4, 1999 to Crescent Real Estate
Equities Company 1994 Stock Incentive Plan and the Second Amended and
Restated 1995 Crescent Real Estate Equities Company Stock Incentive
Plan (filed as Exhibit No. 10.10 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000 (the "2000
10-K") and incorporated herein by reference)
10.10 Amendment, dated as of November 1, 2001 to the Crescent Real Estate
Equities Company 1994 Stock Incentive Plan and the Third Amended and
Restated 1995 Crescent Real Estate Equities Company Stock Incentive
Plan (filed as Exhibit 10.11 to the Registrants Annual Report on Form
10-K for the fiscal year ended December 31, 2001 (the "2001 10-K") and
incorporated herein by reference)
10.11 Amended and Restated 1995 Crescent Real Estate Equities Limited
Partnership Unit Incentive Plan (filed as Exhibit No. 99.01 to the
Registrant's Registration Statement on Form S-8 (File No. 333-3452)
and incorporated herein by reference)
10.12 1996 Crescent Real Estate Equities Limited Partnership Unit Incentive
Plan, as amended (filed as Exhibit No. 10.14 to the 1999 10-K and
incorporated herein by reference)
10.13 Amendment dated as of November 5, 1999 to the 1996 Crescent Real
Estate Equities Limited Partnership Unit Incentive Plan (filed as
Exhibit No. 10.13 to the Registrant's 2000 10-K and incorporated
herein by reference)
10.14 Crescent Real Estate Equities, Ltd. Dividend Incentive Unit Plan
(filed as Exhibit No. 10.14 to the Registrant's 2000 10-K and
incorporated herein by reference)
10.15 Annual Incentive Compensation Plan for select Employees of Crescent
Real Estate Equities, Ltd. (filed as Exhibit No. 10.15 to the 2000
10-K and incorporated herein by reference)
10.16 Crescent Real Estate Equities, Ltd. First Amended and Restated 401(k)
Plan, as amended (filed as Exhibit No. 10.12 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998
and incorporated herein by reference)
10.17 Form of Registration Rights, Lock-Up and Pledge Agreement (filed as
Exhibit No. 10.05 to the Form S-11 and incorporated herein by
reference)
10.18 Restricted Stock Agreement by and between Crescent Real Estate
Equities Company and John C. Goff, dated as of February 19, 2002
(filed as Exhibit No. 10.02 to the Registrant's 1Q 2002 10-Q and
incorporated herein by reference)
II - 4
10.19 Unit Option Agreement Pursuant to the 1996 Plan by and between
Crescent Real Estate Equities Limited Partnership and John C. Goff,
dated as of February 19, 2002 (filed as Exhibit No. 10.01 to the
Registrant's 2Q 2002 10-Q and incorporated herein by reference)
10.20 Unit Option Agreement by and between Crescent Real Estate Equities
Limited Partnership and John C. Goff, dated as of February 19, 2002
(filed as Exhibit No. 10.04 to the Registrant's 1Q 2002 10-Q and
incorporated herein by reference)
10.21 Unit Option Agreement by and between Crescent Real Estate Equities
Limited Partnership and Dennis H. Alberts, dated as of February 19,
2002 (filed as Exhibit No. 10.05 to the Registrant's 1Q 2002 10-Q and
incorporated herein by reference)
10.22 Unit Option Agreement by and between Crescent Real Estate Equities
Limited Partnership and Kenneth S. Moczulski, dated as of February 19,
2002 (filed as Exhibit No. 10.06 to the Registrant's 1Q 2002 10-Q and
incorporated herein by reference)
10.23 Unit Option Agreement by and between Crescent Real Estate Equities
Limited Partnership and David M. Dean, dated as of February 19, 2002
(filed as Exhibit No. 10.07 to the Registrant's 1Q 2002 10-Q and
incorporated herein by reference)
10.24 Unit Option Agreement by and between Crescent Real Estate Equities
Limited Partnership and Jane E. Mody, dated as of February 19, 2002
(filed as Exhibit No. 10.08 to the Registrant's 1Q 2002 10-Q and
incorporated herein by reference)
10.25 Unit Option Agreement by and between Crescent Real Estate Equities
Limited Partnership and Jerry R. Crenshaw, Jr., dated as of February
19, 2002 (filed as Exhibit No. 10.09 to the Registrant's 1Q 2002 10-Q
and incorporated herein by reference)
10.26 Unit Option Agreement by and between Crescent Real Estate Equities
Limited Partnership and Jane B. Page, dated as of February 19, 2002
(filed as Exhibit No. 10.10 to the Registrant's 1Q 2002 10-Q and
incorporated herein by reference)
10.27 Unit Option Agreement by and between Crescent Real Estate Equities
Limited Partnership and John L. Zogg, Jr., dated as of February 19,
2002 (filed as Exhibit No. 10.11 to the Registrant's 1Q 2002 10-Q and
incorporated herein by reference)
10.28 Unit Option Agreement by and between Crescent Real Estate Equities
Limited Partnership and Dennis H. Alberts, dated as of March 5, 2001
(filed as Exhibit No. 10.12 to the Registrant's 1Q 2002 10-Q and
incorporated herein by reference)
21.01 List of Subsidiaries (filed as Exhibit No. 21.01 to the Registrant's
2001 10-K and incorporated herein by reference)
23.01 Consent of Ernst & Young LLP+
II - 5
23.02 Consent of Deloitte & Touche LLP+
23.03 Consent of Ernst & Young LLP+
23.04 Consent of Deloitte & Touche LLP+
23.05 Consent of Shaw Pittman LLP (included in its opinions filed as
Exhibits 5.01 and 8.01 hereto)
23.06 Consent of Sullivan and Cromwell (included in its opinion filed as
Exhibit 8.02 hereto)
24.01 Power of Attorney (included on page II-9)
99.01 Proxy Card of Crescent Operating, Inc.+
99.02 Letter to stockholders of Crescent Operating, Inc.+
----------
+ Filed herewith
++ To be filed by amendment.
(B) FINANCIAL STATEMENT SCHEDULES
Schedule III - Crescent Real Estate Equities Company Consolidated
Real Estate Investments and Accumulated Depreciation at December 31, 2001.
All other schedules have been omitted either because they are not
applicable or because the required information has been disclosed in the
Financial Statements and related notes included in the consolidated and
combined statements.
(C) REPORTS, OPINIONS AND APPRAISALS
The opinion of Houlihan Lokey Howard & Zukin Financial Advisors is
included as Annex C to the proxy statement/prospectus that constitutes Part I of
this Registration Statement.
ITEM 22. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the Registration Statement shall be
deemed to be a new Registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(b) The undersigned Registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the
prospectus/information statement pursuant to Item 4, 10(b), 11, or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the effective
date of the Registration Statement through the date of responding to the
request.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II - 6
(d) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement: (i)
to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933; (ii) to reflect in the prospectus any facts
or events arising after the effective date of the registration
statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental
change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from
the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That for the purpose of determining liability under the
Securities Act of 1933, each such post effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
(e) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other times of the applicable form.
(f) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (e) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(g) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II - 7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the city of Fort Worth, State of
Texas on January 16, 2003.
CRESCENT REAL ESTATE EQUITIES COMPANY
By: /s/ JOHN C. GOFF
------------------------
Name: John C. Goff
Title: Chief Executive Officer
II - 8
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints John C.
Goff and David M. Dean his or her true and lawful attorney-in-fact and agent,
each acting alone, with full power of substitution and resubstitution, for him
or her and in his or her name, place and stead, in any and all capacities, to
sign any or all amendments (including post-effective amendments) to this
Registration Statement, and any registration statement to be filed pursuant to
Rule 462(b), and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, each acting alone, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, each acting alone, or his
or her substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on the dates and
in the capacities indicated below:
Signature Title Date
/s/ Richard E. Rainwater Trust Manager and Chairman of the Board January 15, 2003
------------------------------------
Richard E. Rainwater
/s/ John C. Goff Trust Manager and Chief Executive Officer January 15, 2003
------------------------------------ (Principal Executive Officer)
John C. Goff
/s/ Jerry R. Crenshaw, Jr. Executive Vice President, Chief Financial January 15, 2003
------------------------------------ and Accounting Officer
Jerry R. Crenshaw, Jr. (Principal Financial and Accounting Officer)
/s/ Dennis H. Alberts Trust Manager, President and Chief January 15, 2003
------------------------------------ Operating Officer
Dennis H. Alberts
/s/ Anthony M. Frank Trust Manager January 7, 2003
------------------------------------
Anthony M. Frank
/s/ William F. Quinn Trust Manager January 15, 2003
------------------------------------
William F. Quinn
/s/ Paul E. Rowsey, III Trust Manager January 15, 2003
------------------------------------
Paul E. Rowsey, III
/s/ David M. Sherman Trust Manager January 15, 2003
------------------------------------
David M. Sherman
II - 9
Signature Title Date
/s/ Robert W. Stallings Trust Manager January 15, 2003
------------------------------------
Robert W. Stallings
/s/ Terry N. Worrell Trust Manager January 15, 2003
------------------------------------
Terry N. Worrell
II - 10
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
2.01 Plan of Reorganization of Crescent Operating, Inc. (included as Annex
A to the proxy statement/prospectus that constitutes Part I of this
Registration Statement)
2.02 Settlement Agreement, dated February 14, 2002, by and between Crescent
Real Estate Equities Limited Partnership , Crescent Real Estate
Equities Company, Crescent Operating, Inc., RoseStar Management, LLC,
Canyon Ranch Leasing, L.L.C., Wine Country Hotel, LLC, RoseStar
Southwest, LLC and COI Hotel Group, Inc., as amended (included as
Annex B to the proxy statement/prospectus that constitutes Part I of
this Registration Statement)
3.01 Restated Declaration of Trust of Crescent Real Estate Equities
Company, as amended (filed as Exhibit No. 3.1 on the Registrant's
Current Report on Form 8-K filed April 25, 2002 (the "April 2002 8-K")
and incorporated herein by reference)
3.02 Amended and Restated Bylaws of Crescent Real Estate Equities Company,
as amended (filed as Exhibit No. 3.02 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998 and
incorporated herein by reference)
4.01 Form of Common Share Certificate (filed as Exhibit No. 4.03 to the
Registrant's Registration Statement on Form S-3 (File No. 333-21905)
and incorporated herein by reference)
4.02 Statement of Designation of 6 -3/4% Series A Convertible Cumulative
Preferred Shares of Crescent Real Estate Equities Company dated
February 13, 1997 (filed as Exhibit No. 4.07 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997
(the "1997 10-K") and incorporated herein by reference)
4.03 Form of Certificate of 6 -3/4% Series A Convertible Cumulative
Preferred Shares of Crescent Real Estate Equities Company (filed as
Exhibit No. 4 to the Registrant's Registration Statement on Form 8A/A
filed on February 18, 1998 and incorporated herein by reference)
4.04 Statement of Designation of 6 -3/4% Series A Convertible Cumulative
Preferred Shares of Crescent Real Estate Equities Company dated April
25, 2002 (filed as Exhibit No. 4.1 to the Registrant's April 2002 8-K
and incorporated herein by reference)
4.05 Statement of Designation of 9.50% Series B Cumulative Redeemable
Preferred Shares of Crescent Real Estate Equities Company dated May
13, 2002 (filed as Exhibit No. 2 to the Registrant's Form 8-A dated
May 14, 2002 (the "Form 8-A"), and incorporated herein by reference)
4.06 Form of Certificate of 9.50% Series B Cumulative Redeemable Preferred
Shares of Crescent Real Estate Equities Company (filed as Exhibit No.
4 to the Form 8-A and incorporated herein by reference)
4 Pursuant to Regulation S-K Item 601(b)(4)(iii), the Registrant by this
filing agrees, upon request, to furnish to the Securities and Exchange
Commission a copy of other instruments defining the rights of holders
of long-term debt of the Registrant
5.01 Opinion of Shaw Pittman regarding the validity of the securities
registered hereby+
8.01 Opinion of Shaw Pittman regarding qualification of Crescent Real
Estate as a real estate investment trust+
8.02 Opinion of Sullivan and Cromwell regarding qualification of Americold
Corporation as a real estate investment trust++
10.01 Second Amended and Restated Agreement of Limited Partnership of
Crescent Real Estate Equities Limited Partnership, dated as of
November 1, 1997, as amended (filed as Exhibit 10.02 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 2002 (the "2Q 2002 10-Q") and incorporated herein by reference)
10.02 Noncompetition Agreement of Richard E. Rainwater, as assigned to
Crescent Real Estate Equities Limited Partnership on May 5, 1994
(filed as Exhibit No. 10.02 to the Registrant's 1997 10-K and
incorporated herein by reference)
10.03 Noncompetition Agreement of John C. Goff, as assigned to Crescent Real
Estate Equities Limited Partnership on May 5, 1994 (filed as Exhibit
No. 10.03 to the 1997 10-K and incorporated herein by reference)
10.04 Employment Agreement by and between Crescent Real Estate Equities
Limited Partnership, Crescent Real Estate Equities Company and John C.
Goff, dated as of February 19, 2002 (filed as Exhibit No. 10.01 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
31, 2002 (the "1Q 2002 10-Q") and incorporated herein by reference)
10.05 Employment Agreement of Jerry R. Crenshaw, Jr. dated as of December
14, 1998 (filed as Exhibit 10.08 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999 (the "1999
10-K") and incorporated herein by reference)
10.06 Form of Officer's and Trust Managers' Indemnification Agreement as
entered into between the Registrant and each of its executive officers
and trust managers (filed as Exhibit No. 10.07 to the Registration
Statement on Form S-4 (File No. 333-42293) of Crescent Real Estate
Equities Limited Partnership and incorporated herein by reference)
10.07 Crescent Real Estate Equities Company 1994 Stock Incentive Plan (filed
as Exhibit No. 10.07 to the Registrant's Registration Statement on
Form S-11 (File No. 33-75188) (the "Form S-11") and incorporated
herein by reference)
10.08 Third Amended and Restated 1995 Crescent Real Estate Equities Company
Stock Incentive Plan (filed as Exhibit No. 10.01 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 and
incorporated herein by reference)
10.09 Amendment dated as of November 4, 1999 to Crescent Real Estate
Equities Company 1994 Stock Incentive Plan and the Second Amended and
Restated 1995 Crescent Real Estate Equities Company Stock Incentive
Plan (filed as Exhibit No. 10.10 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000 (the "2000
10-K") and incorporated herein by reference)
10.10 Amendment, dated as of November 1, 2001 to the Crescent Real Estate
Equities Company 1994 Stock Incentive Plan and the Third Amended and
Restated 1995 Crescent Real Estate Equities Company Stock Incentive
Plan (filed as Exhibit 10.11 to the Registrants Annual Report on Form
10-K for the fiscal year ended December 31, 2001 (the "2001 10-K") and
incorporated herein by reference)
10.11 Amended and Restated 1995 Crescent Real Estate Equities Limited
Partnership Unit Incentive Plan (filed as Exhibit No. 99.01 to the
Registrant's Registration Statement on Form S-8 (File No. 333-3452)
and incorporated herein by reference)
10.12 1996 Crescent Real Estate Equities Limited Partnership Unit Incentive
Plan, as amended (filed as Exhibit No. 10.14 to the 1999 10-K and
incorporated herein by reference)
10.13 Amendment dated as of November 5, 1999 to the 1996 Crescent Real
Estate Equities Limited Partnership Unit Incentive Plan (filed as
Exhibit No. 10.13 to the Registrant's 2000 10-K and incorporated
herein by reference)
10.14 Crescent Real Estate Equities, Ltd. Dividend Incentive Unit Plan
(filed as Exhibit No. 10.14 to the Registrant's 2000 10-K and
incorporated herein by reference)
10.15 Annual Incentive Compensation Plan for select Employees of Crescent
Real Estate Equities, Ltd. (filed as Exhibit No. 10.15 to the 2000
10-K and incorporated herein by reference)
10.16 Crescent Real Estate Equities, Ltd. First Amended and Restated 401(k)
Plan, as amended (filed as Exhibit No. 10.12 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998
and incorporated herein by reference)
10.17 Form of Registration Rights, Lock-Up and Pledge Agreement (filed as
Exhibit No. 10.05 to the Form S-11 and incorporated herein by
reference)
10.18 Restricted Stock Agreement by and between Crescent Real Estate
Equities Company and John C. Goff, dated as of February 19, 2002
(filed as Exhibit No. 10.02 to the Registrant's 1Q 2002 10-Q and
incorporated herein by reference)
10.19 Unit Option Agreement Pursuant to the 1996 Plan by and between
Crescent Real Estate Equities Limited Partnership and John C. Goff,
dated as of February 19, 2002 (filed as Exhibit No. 10.01 to the
Registrant's 2Q 2002 10-Q and incorporated herein by reference)
10.20 Unit Option Agreement by and between Crescent Real Estate Equities
Limited Partnership and John C. Goff, dated as of February 19, 2002
(filed as Exhibit No. 10.04 to the Registrant's 1Q 2002 10-Q and
incorporated herein by reference)
10.21 Unit Option Agreement by and between Crescent Real Estate Equities
Limited Partnership and Dennis H. Alberts, dated as of February 19,
2002 (filed as Exhibit No. 10.05 to the Registrant's 1Q 2002 10-Q and
incorporated herein by reference)
10.22 Unit Option Agreement by and between Crescent Real Estate Equities
Limited Partnership and Kenneth S. Moczulski, dated as of February 19,
2002 (filed as Exhibit No. 10.06 to the Registrant's 1Q 2002 10-Q and
incorporated herein by reference)
10.23 Unit Option Agreement by and between Crescent Real Estate Equities
Limited Partnership and David M. Dean, dated as of February 19, 2002
(filed as Exhibit No. 10.07 to the Registrant's 1Q 2002 10-Q and
incorporated herein by reference)
10.24 Unit Option Agreement by and between Crescent Real Estate Equities
Limited Partnership and Jane E. Mody, dated as of February 19, 2002
(filed as Exhibit No. 10.08 to the Registrant's 1Q 2002 10-Q and
incorporated herein by reference)
10.25 Unit Option Agreement by and between Crescent Real Estate Equities
Limited Partnership and Jerry R. Crenshaw, Jr., dated as of February
19, 2002 (filed as Exhibit No. 10.09 to the Registrant's 1Q 2002 10-Q
and incorporated herein by reference)
10.26 Unit Option Agreement by and between Crescent Real Estate Equities
Limited Partnership and Jane B. Page, dated as of February 19, 2002
(filed as Exhibit No. 10.10 to the Registrant's 1Q 2002 10-Q and
incorporated herein by reference)
10.27 Unit Option Agreement by and between Crescent Real Estate Equities
Limited Partnership and John L. Zogg, Jr., dated as of February 19,
2002 (filed as Exhibit No. 10.11 to the Registrant's 1Q 2002 10-Q and
incorporated herein by reference)
10.28 Unit Option Agreement by and between Crescent Real Estate Equities
Limited Partnership and Dennis H. Alberts, dated as of March 5, 2001
(filed as Exhibit No. 10.12 to the Registrant's 1Q 2002 10-Q and
incorporated herein by reference)
21.01 List of Subsidiaries (filed as Exhibit No. 21.01 to the Registrant's
2001 10-K and incorporated herein by reference)
23.01 Consent of Ernst & Young LLP+
23.02 Consent of Deloitte & Touche LLP+
23.03 Consent of Ernst & Young LLP+
23.04 Consent of Deloitte & Touche LLP+
23.05 Consent of Shaw Pittman LLP (included in its opinions filed as
Exhibits 5.01 and 8.01 hereto)
23.06 Consent of Sullivan and Cromwell (included in its opinion filed as
Exhibit 8.02 hereto)
24.01 Power of Attorney (included on page II-9)
99.01 Proxy Card of Crescent Operating, Inc.+
99.02 Letter to stockholders of Crescent Operating, Inc.+
----------
+ Filed herewith
++ To be filed by amendment