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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 17, 1998
REGISTRATION NO. 333-42293
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
PRE-EFFECTIVE
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
(Exact Name of Registrant as Specified in Its Charter)
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DELAWARE 6512/6513 75-2531304
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification Number)
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777 MAIN STREET, SUITE 2100
FORT WORTH, TEXAS 76102
TELEPHONE: (817) 878-0477
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
---------------------
GERALD W. HADDOCK
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
777 MAIN STREET, SUITE 2100
FORT WORTH, TEXAS 76102
TELEPHONE: (817) 878-0477
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
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Copies to:
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ROBERT B. ROBBINS, ESQ. DAVID M. DEAN, ESQ.
SYLVIA M. MAHAFFEY, ESQ. CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
SHAW PITTMAN POTTS & TROWBRIDGE 777 MAIN STREET, SUITE 2100
2300 N STREET, N.W. FORT WORTH, TEXAS 76102
WASHINGTON, D.C. 20037
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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 statement 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. [ ]
---------------------
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.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS
SUBJECT TO COMPLETION, DATED APRIL 17, 1998
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
OFFER TO EXCHANGE
6 5/8% NOTES DUE 2002 FOR ANY AND ALL OUTSTANDING 6 5/8% NOTES DUE 2002
7 1/8% NOTES DUE 2007 FOR ANY AND ALL OUTSTANDING 7 1/8% NOTES DUE 2007
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON ,
1998 UNLESS EXTENDED.
Crescent Real Estate Equities Limited Partnership, a Delaware limited
partnership (the "Operating Partnership"), is making this exchange offer (the
"Exchange Offer") to provide holders of its outstanding 6 5/8% Notes due 2002
and its outstanding 7 1/8% Notes due 2007 the opportunity to exchange those
Notes (collectively, the "Private Notes"), which are not freely transferable,
for the 6 5/8% Notes due 2002 and the 7 1/8% Notes due 2007 offered hereby
(collectively, the "Exchange Notes"), which will be subject to fewer
restrictions on transfer, as discussed below. The Private Notes and the Exchange
Notes are sometimes collectively referred to as the "Notes."
There are risks associated with continued investment in the Operating
Partnership's securities, which generally could adversely affect the financial
condition and results of operations of the Operating Partnership (and
potentially the Operating Partnership's ability to satisfy its obligations under
the Notes) or otherwise reduce the value of the Notes. The material risks
include:
- By not exchanging their Private Notes, investors risk holding on to an
investment that is subject to restrictions on sale that will not apply to
the Exchange Notes, but unless a public market develops (which cannot be
guaranteed) it also may be difficult to sell the Exchange Notes.
- The Exchange Notes, like the Private Notes, are subordinated to secured
debt of the Operating Partnership and its subsidiaries totaling
approximately $768.2 million at December 31, 1997, and will be
subordinated to future liabilities of the subsidiaries and certain
additional secured debt of the Operating Partnership and its
subsidiaries.
- A significant portion of the Operating Partnership's assets are located
in, and revenues are derived from, the Dallas/Fort Worth and Houston
metropolitan areas, either or both of which could experience an economic
decline that would adversely affect the financial condition and results
of operations of the Operating Partnership.
- The Operating Partnership does not control the operation of certain
properties from which it derives a substantial amount of revenue
(including its hotels, residential development properties, behavioral
healthcare facilities and investment in refrigerated warehouses) or the
real estate investments that it owns jointly with unrelated persons. As a
result, the Operating Partnership is unable to control the timing or
amount of revenues it receives from these investments and is dependent on
the ability of its tenants or co-owners to manage the properties
successfully.
- The Operating Partnership will be subject to particular risks for each
type of real estate asset in which it invests, including risks specific
to the office, healthcare, hotel and refrigerated warehouse industries.
- Conflicts of interest exist or may arise due to relationships or
contractual arrangements between or among the Operating Partnership,
persons and entities related to the Operating Partnership and management
of the Operating Partnership and the related persons. These conflicts of
interests may lead to decisions that are not exclusively in the interest
of the Operating Partnership.
- There can be no assurance that the Operating Partnership will be able to
continue to manage its rapid growth effectively, and the failure to do so
could have an adverse effect on its financial condition and results of
operations.
SEE "RISK FACTORS" COMMENCING ON PAGE 12 FOR MATERIAL RISKS THAT SHOULD BE
CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER AND AN INVESTMENT IN THE
EXCHANGE NOTES.
The 6 5/8% Exchange Notes due 2002 will mature on September 15, 2002, and
the 7 1/8% Exchange Notes due 2007 will mature on September 15, 2007. The
Exchange Notes may be redeemed, at the option of the
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS APRIL , 1998
[Cover page continued on next page]
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[Cover page continued from prior page]
Operating Partnership, at any time, at a redemption price equal to the sum of
the unpaid principal amounts, accrued interest and an additional amount
described in "Description of the Exchange Notes -- Optional Redemption."
Interest on the Exchange Notes will be payable semi-annually in arrears on each
September 15 and March 15, commencing March 15, 1998. The interest rate on each
series of the Exchange Notes is subject to a temporary or permanent increase of
37.5 basis points in the event that the Notes in that series do not obtain and
retain an investment grade rating (generally, one of the top four ratings
assigned by certain rating agencies) from two rating agencies by September 22,
1998. The interest rate on the Private Notes increased by 50 basis points,
effective March 22, 1998, to 7 1/8% for the Private Notes due 2002 and 7 5/8%
for the Private Notes due 2007. This interest rate increase will remain in
effect until consummation of the Exchange Offer. Upon consummation of the
Exchange Offer, the interest rate increase will be eliminated and the Exchange
Notes and the Private Notes that remain outstanding will bear interest at their
stated rates at 6 5/8% for the Notes due 2002 and 7 1/8% for the Notes due 2007.
The Operating Partnership will accept for exchange any and all validly
tendered Private Notes not withdrawn prior to 5:00 p.m., New York City time, on
, 1998 (the "Expiration Date"), unless the Exchange Offer is
extended by the Operating Partnership in its sole discretion. The Operating
Partnership believes that the Exchange Notes issued pursuant to the Exchange
Offer in exchange for the Private Notes may be offered for resale, resold and
otherwise transferred by a holder thereof (other than (i) a broker-dealer who
purchased the Private Notes directly from the Operating Partnership or (ii) a
person that is an affiliate of the Operating Partnership within the meaning of
Rule 405 under the Securities Act) without compliance with the registration and
prospectus delivery requirements of the Securities Act, provided that the holder
is acquiring Exchange Notes in the ordinary course of its business and is not
participating, does not intend to participate and has no arrangement or
understanding with any person to participate, in the distribution of the
Exchange Notes. Holders of Private Notes wishing to accept the Exchange Offer
must represent to the Operating Partnership that such conditions have been met.
This Prospectus, as it may be amended or supplemented from time to time, also
may be used by a broker-dealer in connection with any resale of the Exchange
Notes received for Private Notes where such Private Notes were acquired by a
broker-dealer as a result of market-making or other trading activities. The
Operating Partnership has agreed that for a period of 120 days after the
Expiration Date, it will make this Prospectus available to any broker-dealer for
use in connection with any such resales. See "The Exchange Offer -- Resale of
the Exchange Notes" and "Plan of Distribution."
Any beneficial owner whose Private Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender such Private Notes in the Exchange Offer should contact such
registered holder promptly and instruct such registered holder to tender on the
beneficial owner's behalf. Any such beneficial owner that wishes to tender on
its own behalf must, prior to completing and executing the letter of transmittal
delivered herewith and delivering its Private Notes, either make appropriate
arrangements to register ownership of the Private Notes in its own name or
obtain a properly completed bond power from the registered holder. The transfer
of registered ownership may take considerable time, and it may not be possible
to complete the transfer prior to the Expiration Date.
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TABLE OF CONTENTS
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PAGE
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SUMMARY............................... 1
The Operating Partnership........... 1
Summary Risk Factors................ 4
Conflicts of Interest............... 4
The Exchange Offer.................. 6
The Exchange Notes.................. 8
No Cash Proceeds to the Operating
Partnership...................... 9
Summary Selected Financial Data..... 10
RISK FACTORS.......................... 12
Restrictions on Transfer Continue
After Failure to Comply with
Exchange Procedures.............. 12
No Current Public Market for
Exchange Notes Which Could Make
Sale of Exchange Notes More
Difficult........................ 12
Notes Subordinate to Certain Other
Operating Partnership
Indebtedness..................... 12
Regional Concentration of Assets
Increases Effects of Adverse
Trends in Certain Markets........ 13
Operating Partnership Does Not Fully
Control Certain Investments and
Consequently has No Control Over
Revenues from the Investments.... 13
Revenues from Hotels Dependent on
Third-Party Operators and
Hospitality Industry........... 13
Lack of Control of Residential
Development Corporations and
Dividends...................... 13
Americold and URS Partnerships
Controlled by Third Parties.... 14
Revenues from Proposed
Casino/Hotel Investment
Dependent on Third-Party
Operators and Casino/Hotel
Industry....................... 14
Real Estate Risks Specific to the
Operating Partnership's
Business......................... 15
Risks Related to Investment
Strategy....................... 15
Joint Ownership of Assets Limits
Operating Partnership's
Flexibility with Investments... 15
Risks that Adequate Financing
will not be Available to
Refinance Station Debt......... 15
Conflicts of Interest............... 16
Common Management and Ownership.. 16
Relationship with Crescent
Operating...................... 16
Relationship with Magellan Health
Services, Inc. ................ 17
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PAGE
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Joint Investments................ 17
Competition for Management
Time........................... 17
Legal Representation............. 17
Risk of Inability to Manage Rapid
Growth and Acquisition of
Substantial New Assets
Effectively...................... 17
General Real Estate Risks Affecting
the Operating Partnership........ 17
Operating Partnership's Inability
to Control Certain Factors
Affecting Performance and
Value.......................... 18
Real Estate Investments are
Illiquid....................... 18
Risk of Environmental
Liability...................... 18
Financially Distressed Properties
Are Riskier Investments than
Other Properties................. 19
Noteholders Cannot Control Changes
in Policies...................... 19
Operating Partnership's Success
Depends on Key Personnel......... 19
Limited Restrictions on Increases in
Debt............................. 19
THE OPERATING PARTNERSHIP............. 20
Investment Strategy................. 21
Operating Strategy.................. 22
Financing Strategy.................. 23
CONFLICTS OF INTEREST................. 24
Common Management, Ownership and
Investments...................... 24
Relationship with Crescent
Operating........................ 25
Joint Investments................... 25
Competition for Management Time..... 25
Legal Representation................ 25
Conflicts Resolution Procedures..... 26
RECENT DEVELOPMENTS................... 26
Pending Transaction with Station
Casinos, Inc..................... 26
Proposed Merger with Station..... 26
Station Properties and
Performance.................... 28
Station Competition.............. 28
Station Environmental Matters.... 29
Station Litigation............... 30
Station Government Regulation.... 32
NO CASH PROCEEDS TO THE OPERATING
PARTNERSHIP......................... 32
CAPITALIZATION........................ 33
THE EXCHANGE OFFER.................... 34
Purpose of the Exchange Offer....... 34
Terms of the Exchange Offer......... 34
Expiration Date; Extensions;
Amendments....................... 35
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PAGE
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Interest on the Exchange Notes and
Accrued Interest on the Private
Notes............................ 35
Resale of the Exchange Notes........ 36
Procedures for Tendering............ 36
Return of Private Notes............. 38
Book-Entry Transfer................. 39
Guaranteed Delivery Procedures...... 39
Withdrawal of Tenders............... 39
Termination of Certain Rights....... 40
Exchange Agent...................... 40
Fees and Expenses................... 40
Consequence of Failure to
Exchange......................... 41
Accounting Treatment................ 41
DESCRIPTION OF THE EXCHANGE NOTES..... 41
General............................. 41
Principal and Interest.............. 42
Optional Redemption................. 43
Rating.............................. 43
Certain Covenants................... 43
Merger, Consolidation or Sale....... 46
Global Securities................... 46
Events of Default, Notice and
Waiver........................... 48
Modification of the Indenture....... 49
Satisfaction and Discharge.......... 50
No Conversion Rights................ 50
Payment............................. 51
Governing Law....................... 51
SELECTED FINANCIAL DATA............... 52
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF THE OPERATING
PARTNERSHIP......................... 55
Liquidity and Capital Resources..... 56
Funds from Operations............... 62
RATIOS OF EARNINGS TO FIXED CHARGES... 65
BUSINESS AND PROPERTIES............... 66
Office Properties................... 66
Lease Expirations of Office
Properties....................... 71
Office Property Market
Information...................... 72
Behavioral Healthcare Facilities.... 73
Hotel Properties.................... 74
Refrigerated Warehouse Investment... 74
Residential Development
Properties....................... 75
Retail Properties................... 76
Recent Acquisitions................. 76
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Competition......................... 76
Interest Rates...................... 78
Year 2000 Compliance................ 78
Employees........................... 78
Insurance........................... 79
Legal Proceedings................... 79
Environmental Matters............... 79
CERTAIN POLICIES...................... 80
Investment Policies................. 80
Financing Policies.................. 81
Working Capital Reserves............ 82
Other Policies...................... 82
MANAGEMENT............................ 83
Management of the Operating
Partnership...................... 83
Executive Compensation.............. 86
Option Grants in 1997............... 88
Option Exercises and Values at
December 31, 1997................ 88
Employment Agreements............... 88
Agreements Not To Compete........... 89
Compensation Policies............... 89
PRINCIPAL SHAREHOLDERS................ 90
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS........................ 93
STRUCTURE OF THE OPERATING
PARTNERSHIP......................... 98
U.S. FEDERAL INCOME TAX
CONSEQUENCES........................ 99
Exchange Offer...................... 99
PLAN OF DISTRIBUTION.................. 100
AVAILABLE INFORMATION................. 100
EXPERTS............................... 101
LEGAL MATTERS......................... 101
GLOSSARY.............................. 102
INDEX TO FINANCIAL STATEMENTS......... F-1
APPENDIX A............................ A-1
Completed Investments............... A-1
Recent Developments................. A-1
APPENDIX B............................ B-1
Nevada Gaming Regulations........... B-1
Nevada Liquor Regulations........... B-5
Missouri Gaming Regulations......... B-5
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SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial data, including
the financial statements and notes thereto, appearing elsewhere in this
Prospectus. The offer by the Operating Partnership to exchange the 6 5/8% Notes
due 2002 (the "2002 Exchange Notes") and 7 1/8% Notes due 2007 (the "2007
Exchange Notes" and, together with the 2002 Exchange Notes, the "Exchange
Notes"), which have been registered under the Securities Act of 1933, as amended
(the "Securities Act"), for an equal principal amount of its outstanding 6 5/8%
Notes due 2002 (the "2002 Private Notes") and its outstanding 7 1/8% Notes due
2007 (the "2007 Private Notes" and, together with the 2002 Private Notes, the
"Private Notes") is referred to as the "Exchange Offer." The Private Notes and
the Exchange Notes are sometimes collectively referred to as the "Notes." All
references to the "Operating Partnership" include Crescent Real Estate Equities
Limited Partnership, a Delaware limited partnership, and those entities in which
Crescent Real Estate Equities Limited Partnership has a substantial ownership
interest or control, unless the context indicates otherwise. The Operating
Partnership is controlled by Crescent Real Estate Equities Company (the
"Company"), a self-administered and self-managed equity real estate investment
trust, through the Company's ownership of all of the outstanding stock of
Crescent Real Estate Equities, Ltd., a Delaware corporation (the "General
Partner"), which is the sole general partner of the Operating Partnership. The
Company, which is based in Fort Worth, Texas, operates as a real estate
investment trust for federal income tax purposes (a "REIT").
THE OPERATING PARTNERSHIP
The Operating Partnership owns a portfolio of real estate assets (the
"Properties") consisting primarily of 86 office properties (the "Office
Properties") located in 30 metropolitan submarkets in Texas, Colorado, Arizona,
Louisiana, Nebraska, New Mexico, California, Washington, D.C. and Florida, 90
behavioral healthcare facilities (the "Behavioral Healthcare Facilities"), seven
full-service hotels with a total of 2,276 rooms and two destination health and
fitness resorts that can accommodate up to 452 guests daily (collectively, the
"Hotel Properties"), real estate mortgages relating to and non-voting common
stock in five residential development corporations (the "Residential Development
Corporations") which own interests in 12 residential development properties (the
"Residential Development Properties"), and seven retail properties with an
aggregate of approximately 771,000 net rentable square feet (the "Retail
Properties"). In addition, the Operating Partnership owns an indirect 38%
interest in each of two corporations that currently own and operate
approximately 80 refrigerated warehouses with an aggregate of approximately 394
million cubic feet, one of which has also entered into an agreement to purchase
the assets of a company that operates nine additional refrigerated warehouses
(the "Refrigerated Warehouse Investment"). See "Business and Properties" for a
more detailed description of the Operating Partnership's business and assets,
and "Recent Developments" for a detailed description of the Operating
Partnership's proposed acquisition of a corporation that owns primarily four
full-service casino/hotels and two riverboat casinos (collectively, the
"Casino/Hotel Properties").
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INVESTMENT STRATEGY
The Operating Partnership believes that it will be able to identify
substantial opportunities for future real estate investments from a variety of
sources, including life insurance companies and pension funds seeking to reduce
their direct real estate investments, public and private real estate companies,
corporations divesting of nonstrategic real estate assets, public and private
sellers requiring complex disposition structures and other domestic and
international sources. The Operating Partnership intends to continue utilizing
its extensive network of relationships, its ability to identify underperforming
assets, its market reputation and its ready access to capital to achieve
favorable returns on invested capital and growth in cash flow by:
- acquiring high-quality office properties at prices significantly below
their estimated replacement cost in selected core markets and submarkets
that management expects to experience above-average population and
employment growth; and
- employing the corporate, transactional and financial skills of the
Operating Partnership's management team to structure innovative
investments in other types of real estate assets (such as its recent
Refrigerated Warehouse Investment, its acquisition of the Behavioral
Healthcare Facilities and its Pending Investment in the Casino/Hotel
Properties).
See "The Operating Partnership -- Investment Strategy."
OPERATING AND FINANCING STRATEGIES
The Operating Partnership seeks to enhance its operating performance and
financial position by:
- applying well-defined leasing strategies in order to capture the
potential rental growth in the Operating Partnership's existing portfolio
of Office Properties as occupancy and rental rates increase with the
recovery of the markets and submarkets in which the Operating Partnership
has invested;
- achieving a high tenant retention rate at the Operating Partnership's
Office Properties through quality service, individualized attention to
its tenants and active preventive maintenance programs;
- empowering management and employing compensation formulas linked directly
with enhanced operating performance of the Operating Partnership and its
Properties; and
- optimizing the use of debt and other sources of financing to create a
flexible and conservative capital structure that will allow the Operating
Partnership to continue its investment strategy.
See "The Operating Partnership -- Operating Strategy" and "The Operating
Partnership -- Financing Strategy."
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PROPERTIES
The following table sets forth, for the year ended December 31, 1997, the
Operating Partnership's earnings before interest expense, depreciation,
amortization and minority interest ("EBIDA"), on a percentage basis, by type of
Property, after giving effect to investments completed after January 1, 1997, as
if they had occurred on January 1, 1997.
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PERCENT
OF
PROPERTY TYPE EBIDA
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Office Properties........................................... 60%
Behavioral Healthcare Facilities............................ 12
Hotel Properties............................................ 11
Refrigerated Warehouse Investment........................... 8
Residential Development Properties.......................... 8
Retail Properties........................................... 1
---
100%
===
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The following table sets forth, for the year ended December 31, 1997, the
EBIDA of the Operating Partnership, on a percentage basis, by type of Property,
after giving effect to the Pending Investment in the Casino/Hotel Properties and
investments completed after January 1, 1997, as if they had occurred on January
1, 1997.
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PERCENT
OF
PROPERTY TYPE EBIDA
------------- -------
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Office Properties........................................... 43%
Casino/Hotel Properties..................................... 27
Behavioral Healthcare Facilities............................ 9
Hotel Properties............................................ 8
Refrigerated Warehouse Investment........................... 6
Residential Development Properties.......................... 6
Retail Properties........................................... 1
---
100%
===
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RECENT DEVELOPMENTS
The following briefly summarizes the Operating Partnership's Pending
Investment as of the date of this Prospectus. A more detailed description of
this proposed investment is contained in "Recent Developments."
Station Casinos, Inc. On January 16, 1998, the Company entered into an
agreement and plan of merger under which Station Casinos, Inc. ("Station") will
merge with and into the Company. Station is an established multi-jurisdictional
gaming company that owns and operates, through wholly-owned subsidiaries, six
distinctly-themed casino/hotel properties, four of which are located in Las
Vegas, Nevada, one of which is located in Kansas City, Missouri and one of which
is located in St. Charles, Missouri.
As a result of the merger, the Operating Partnership will acquire the real
estate and other assets of Station, except to the extent operating assets are
transferred immediately prior to the merger, as described below. It is presently
anticipated that, immediately prior to the merger, certain operating assets and
the employees of Station will be transferred to a limited liability company to
be owned 50% by Crescent Operating, Inc. or another entity designated by the
Company, 24.9% by a newly formed entity owned by three of the existing directors
of Station (including its Chairman, President and Chief Executive Officer) and
25.1% by a separate newly formed entity owned by other members of Station
management. The newly formed limited liability company, as lessee, will operate
the six Casino/Hotel Properties currently operated by Station pursuant to a
lease with the Operating Partnership. The Operating Partnership also will enter
into a right of first refusal and non-competition agreement with the lessee. See
"Recent Developments -- Pending Transaction with Station Casinos, Inc."
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<PAGE> 9
In order to effect the merger, the Company will issue .466 of its common
shares of beneficial interest ("Common Shares") for each share of common stock
of Station (including each restricted share) that is issued and outstanding
immediately prior to the merger. In addition, the Company will create a new
class of preferred shares (the "Preferred Shares") which will be exchanged, upon
consummation of the merger, for the shares of $3.50 Convertible Preferred Stock
of Station outstanding immediately prior to the merger.
The merger transaction, including the Company's issuance of Common Shares
and Preferred Shares in connection with consummation of the merger and the
Operating Partnership's assumption and/or refinancing of approximately $919
million in existing indebtedness of Station and its subsidiaries, is currently
valued at approximately $1,745 million.
In connection with the merger, the Company also has agreed to purchase up
to $115 million of a new class of convertible preferred stock of Station prior
to consummation of the merger. The purchase will be made in increments, or in a
single transaction, upon call by Station subject to certain conditions, whether
or not the merger is consummated.
It is anticipated that the Merger and the associated transactions will be
consummated in the fourth quarter of 1998, although there can be no assurances
that the Merger will be consummated on the terms described herein.
SUMMARY RISK FACTORS
The "Risk Factors" section discusses in detail the more important risks
associated with an investment in the debt of the Operating Partnership,
including risks associated with exchanging or not exchanging Private Notes in
the Exchange Offer, risks associated with the manner in which the Operating
Partnership conducts its business and risks associated with the Operating
Partnership's investment in real estate such as the Properties. These risks,
which generally could adversely affect the financial condition and results of
operations of the Operating Partnership (and potentially the Operating
Partnership's ability to satisfy its obligations under the Notes) or otherwise
reduce the value of the Notes, include:
- Risks that holders of Private Notes who do not exchange those Notes will
hold an investment subject to restrictions on transfer not applicable to
the Exchange Notes and that it also may be difficult to sell the Exchange
Notes unless a public market for the Exchange Notes develops, which
cannot be guaranteed.
- Risks that payments due under the Exchange Notes are subordinated to the
liabilities of the Operating Partnership's subsidiaries and are
effectively subordinated to the Operating Partnership's existing secured
indebtedness.
- Risks that the Operating Partnership's assets are concentrated in the
Dallas/Fort Worth and Houston metropolitan areas and that the Operating
Partnership's financial condition and results of operations could be
adversely affected by an economic decline in either of these areas.
- Risks related to the fact that the Operating Partnership does not control
the operation of certain of the Properties from which it derives
substantial revenue, which means that the Operating Partnership is unable
to control the timing or amount of revenue it receives from those
investments and is dependent on the ability of its tenants or co-owners
to manage the Properties successfully.
- Risks related to the different types of assets in which the Operating
Partnership invests, including risks specific to the office, healthcare,
hotel and refrigerated warehouse industries.
- Risks that conflicts of interest that exist or may arise due to
relationships or contractual arrangements between the Operating
Partnership, affiliates of the Operating Partnership and management of
the Operating Partnership and such affiliates may lead to decisions that
are not exclusively in the interest of the Operating Partnership.
- Risks related to the Operating Partnership's ability to manage its rapid
growth effectively.
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<PAGE> 10
CONFLICTS OF INTEREST
The following summarizes the principal conflicts of interest to which the
Operating Partnership is subject. A more detailed description is contained in
"Risk Factors -- Conflicts of Interest" and "Conflicts of Interest."
Common Ownership by Senior Management. In April 1997, the Operating
Partnership established a new Delaware corporation, Crescent Operating, Inc.
("Crescent Operating"). All of the outstanding common stock of Crescent
Operating 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. Richard E. Rainwater, John C. Goff and Gerald W. Haddock, together
with the other management of the Company and the General Partner with a rank of
Vice President or higher appearing in the management chart in the "Management"
section below, beneficially owned, as of April 13, 1998, an approximately 14.3%
equity interest in the Operating Partnership, both directly through their
ownership of 9,529,030 Units in the Operating Partnership and indirectly through
their ownership of 9,190,948 Common Shares of the Company, and approximately the
same percentage of the outstanding common stock of Crescent Operating through
their ownership of 1,712,251 shares of Crescent Operating common stock. The
common management and ownership among these entities may lead to the conflicts
of interest described below in connection with transactions between or among the
Operating Partnership, the Company and Crescent Operating, because, due to the
conflicts, management of the Operating Partnership may not have the same
financial interests as the other shareholders or investors in the Operating
Partnership.
Relationship with Crescent Operating. Crescent Operating and the Operating
Partnership have entered into an agreement which provides, subject to certain
terms, that the Operating Partnership will provide Crescent Operating with a
right of first refusal to become the lessee of any real property acquired by the
Operating Partnership if the Operating Partnership determines that, consistent
with the Company's status as a REIT, it is required to enter into a "master"
lease arrangement, provided that Crescent Operating and the Operating
Partnership negotiate a mutually satisfactory lease arrangement and the
Operating Partnership determines, in its sole discretion, that Crescent
Operating is qualified to be the lessee. As to opportunities for Crescent
Operating to become the lessee of any assets under a master lease arrangement,
the agreement provides that the Operating Partnership must provide Crescent
Operating with written notice of the lessee opportunity. During the 30 days
following such notice, Crescent Operating has a right of first refusal with
regard to the offer to become a lessee and the right to negotiate with the
Operating Partnership on an exclusive basis regarding the terms and conditions
of the lease. If a mutually satisfactory agreement cannot be reached within the
30-day period (or such longer period to which Crescent Operating and the
Operating Partnership may agree), the Operating Partnership may offer the
opportunity to others, on terms not more favorable than those offered to
Crescent Operating, for a period of one year thereafter before it must again
offer the opportunity to Crescent Operating in accordance with the procedures
specified above. The Operating Partnership may, in its discretion, offer any
investment opportunity other than a lessee opportunity to Crescent Operating
upon such notice and other terms as the Operating Partnership may determine.
Subsidiaries of Crescent Operating are the lessees of each of the Hotel
Properties. Crescent Operating also owns a 50% interest in the lessee and
operator of the Behavioral Healthcare Facilities, which is the Operating
Partnership's largest tenant in terms of base rental revenues. On March 5, 1998,
Crescent Operating entered into a definitive agreement to acquire from a
subsidiary of Magellan Health Services, Inc. the remaining 50% interest in such
lessee that Crescent Operating does not already own. Richard E. Rainwater and
John C. Goff are, respectively, the Chairman of the Board and the Vice Chairman
of the Board of both the Company and Crescent Operating, and Gerald W. Haddock
serves as the President, Chief Executive Officer and a director of Crescent
Operating, the General Partner and the Company. Due to the common management and
ownership between the Operating Partnership and Crescent Operating, management
of the Operating Partnership could experience conflicts of interest in the event
of a dispute relating to any of the leases of which Crescent Operating is the
lessee or if there were a default by Crescent Operating under a lease. Conflicts
of interest also could arise in connection with the renegotiation or renewal of
any lease or other agreement with Crescent Operating.
-5-
<PAGE> 11
Relationship with Magellan Health Services, Inc. Mr. Rainwater, along with
certain affiliates and members of his family, owns approximately 19% of the
outstanding common stock of Magellan Health Services, Inc., a subsidiary of
which is a 50% owner (along with Crescent Operating) of the lessee of the
Behavioral Healthcare Facilities. Mr. Rainwater's spouse, Darla D. Moore, is a
member of the board of directors of Magellan Health Services, Inc. Through these
relationships, Mr. Rainwater may have the ability to influence decisions of
Magellan in a manner that may benefit Magellan to the detriment of Crescent
Operating or the Operating Partnership, or vice versa.
THE EXCHANGE OFFER
The following is a summary of the principal terms of the Exchange Offer. A
more detailed description is contained in "The Exchange Offer."
THE EXCHANGE OFFER AND
CERTAIN
REGISTRATION RIGHTS The Operating Partnership is hereby offering to
exchange 2002 Exchange Notes and 2007 Exchange
Notes for an equal aggregate principal amount of
2002 Private Notes and 2007 Private Notes,
respectively, that are properly tendered and
accepted.
Holders of Private Notes whose Private Notes are
not tendered and accepted in the Exchange Offer
will continue to hold such Private Notes and will
continue to be subject to the rights and
limitations applicable thereto, including existing
restrictions upon transfer thereof. Further, the
Operating Partnership will have no further
obligation to holders of Private Notes which were
eligible to participate in the Exchange Offer to
provide for the registration under the Securities
Act of any offering of the Private Notes held by
them. See "The Exchange Offer -- Consequences of
Failure to Exchange."
Based on interpretations set forth in no-action
letters issued to third parties by the staff of the
Securities and Exchange Commission (the
"Commission"), the Operating Partnership believes
that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Private Notes may be
offered for resale, resold and otherwise
transferred by a holder thereof without compliance
with the registration and prospectus delivery
provisions of the Securities Act, provided that the
holder is acquiring Exchange Notes in the ordinary
course of its business, is not participating, does
not intend to participate and has no arrangement or
understanding with any person to participate in the
distribution of the Exchange Notes and is not an
"affiliate" of the Operating Partnership within the
meaning of Rule 405 under the Securities Act. See
"The Exchange Offer -- Resale of the Exchange
Notes."
EXPIRATION DATE The Exchange Offer will expire at 5:00 p.m., New
York City time, on , 1998 (the
"Expiration Date"), unless the Exchange Offer is
extended by the Operating Partnership in its sole
discretion, in which case the term "Expiration
Date" shall mean the latest date and time to which
the Exchange Offer is extended. See "The Exchange
Offer -- Expiration Date; Extensions; Amendments."
PROCEDURES FOR TENDERING
PRIVATE NOTES Each holder of Private Notes wishing to accept the
Exchange Offer must complete, sign and date the
letter of transmittal accompanying this Prospectus
(the "Letter of Transmittal"), or a facsimile
thereof, in accordance with the instructions
contained herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such
facsimile, together with such Private Notes and any
other required documentation
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<PAGE> 12
to State Street Bank and Trust Company of Missouri,
N.A., as exchange agent (the "Exchange Agent"), at
the address set forth under "The Exchange
Offer -- Exchange Agent." By executing the Letter
of Transmittal, the holder will represent to and
agree with the Operating Partnership that, among
other things, (i) any Exchange Notes acquired in
exchange for Private Notes tendered thereby are
being acquired in the ordinary course of business
of the person receiving such Exchange Notes, (ii)
the person receiving such Exchange Notes is not
engaging in and does not intend to engage in a
distribution of the Exchange Notes, (iii) the
person receiving such Exchange Notes does not have
an arrangement or understanding with any person to
participate in the distribution of such Exchange
Notes and (iv) neither the holder nor any other
person receiving the Exchange Notes is an
"affiliate," as defined in Rule 405 under the
Securities Act, of the Operating Partnership. See
"The Exchange Offer -- Procedures for Tendering."
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS Any beneficial owner whose Private Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and
who wishes to tender such Private Notes in the
Exchange Offer should contact such registered
holder promptly and instruct such registered holder
to tender on such beneficial owner's behalf. Any
such beneficial owner that wishes to tender on its
own behalf must, prior to completing and executing
the Letter of Transmittal and delivering its
Private Notes, either make appropriate arrangements
to register ownership of the Private Notes in its
own name or obtain a properly completed bond power
from the registered holder. The transfer of
registered ownership may take considerable time,
and it may not be possible to complete the transfer
prior to the Expiration Date. See "The Exchange
Offer -- Procedures for Tendering."
GUARANTEED DELIVERY
PROCEDURES Holders of Private Notes who wish to tender their
Private Notes and whose Private Notes are not
immediately available or who cannot deliver their
Private Notes, the Letter of Transmittal or any
other documentation required by the Letter of
Transmittal to the Exchange Agent prior to the
Expiration Date must tender their Private Notes
according to the guaranteed delivery procedures
described under "The Exchange Offer -- Guaranteed
Delivery Procedures."
ACCEPTANCE OF THE PRIVATE
NOTES AND DELIVERY OF
THE EXCHANGE NOTES
Subject to the satisfaction or waiver of the
conditions to the Exchange Offer, the Operating
Partnership will accept for exchange any and all
Private Notes that are properly tendered in the
Exchange Offer prior to the Expiration Date. The
Exchange Notes issued pursuant to the Exchange
Offer will be delivered on the earliest practicable
date following the Expiration Date. See "The
Exchange Offer -- Terms of the Exchange Offer."
WITHDRAWAL RIGHTS Tenders of Private Notes may be withdrawn at any
time prior to the Expiration Date by delivering a
notice of withdrawal to the Exchange Agent prior to
the Expiration Date. Any such notice of withdrawal
must (i) specify the name of the person who
deposited the Private Notes to be withdrawn, (ii)
identify the Private Notes to be withdrawn
(including the certificate number or numbers) and
(iii) be signed by the holder in the same manner as
the original signature on the Letter of Transmittal
by which such Private Notes were tendered
(including any required
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<PAGE> 13
signature guarantees). See "The Exchange
Offer -- Withdrawal of Tenders."
FEDERAL INCOME TAX
CONSEQUENCES
There will be no federal income tax consequences to
holders exchanging the Private Notes for the
Exchange Notes pursuant to the Exchange Offer, and
the federal income tax consequences of holding and
disposing of the Exchange Notes will be the same as
the federal income tax consequences of holding and
disposing of the Private Notes. See "U.S. Federal
Income Tax Consequences."
EXCHANGE AGENT State Street Bank and Trust Company of Missouri,
N.A. is serving as the Exchange Agent in connection
with the Exchange Offer. State Street Bank and
Trust Company of Missouri, N.A. also serves as
trustee (the "Trustee") under the indenture
relating to the Notes.
THE EXCHANGE NOTES
The Exchange Offer applies to the $150 million aggregate principal amount
of the 2002 Private Notes and to the $250 million aggregate principal amount of
the 2007 Private Notes. The form and terms of the 2002 Exchange Notes and the
2007 Exchange Notes are identical in all material respects to the form and terms
of the 2002 Private Notes and the 2007 Private Notes, respectively, except that
the Exchange Notes will not bear legends restricting the transfer thereof and
the holders of the Exchange Notes will not be entitled to any of the
registration rights of holders of the Private Notes under a registration rights
agreement, which rights will terminate upon consummation of the Exchange Offer.
The 2002 Exchange Notes and the 2007 Exchange Notes will evidence the same
indebtedness as the 2002 Private Notes and the 2007 Private Notes, respectively
(which they replace), and will be issued under, and be entitled to the benefits
of, an indenture, dated as of September 22, 1997 (the "Indenture"), between the
Operating Partnership and the Trustee. For further information and for
definitions of certain capitalized terms, see "Description of the Exchange
Notes."
ISSUER Crescent Real Estate Equities Limited Partnership
EXCHANGE NOTES $150 million aggregate principal amount of 6 5/8%
Notes due 2002, and $250 million aggregate
principal amount of 7 1/8% Notes due 2007.
MATURITY The 2002 Exchange Notes will mature on September
15, 2002, and the 2007 Exchange Notes will mature
on September 15, 2007.
INTEREST PAYMENT DATES Interest on the Exchange Notes is payable
semi-annually in arrears on each September 15 and
March 15, commencing March 15, 1998, through
maturity. The Exchange Notes will bear interest
from the later of September 22, 1997 or the
Interest Payment Date immediately preceding the
date of issuance of the Exchange Notes (currently
expected to be the Interest Payment Date on March
15, 1998). In the Letter of Transmittal, holders of
Private Notes whose Private Notes are accepted for
exchange will waive the right to receive any
payment in respect of interest on the Private Notes
accrued from the later of September 22, 1997 or the
Interest Payment Date immediately preceding the
date of issuance of the Exchange Notes (currently
expected to be the Interest Payment Date on March
15, 1998) to the date of the issuance of the
Exchange Notes. In certain circumstances, the
interest rate on the Exchange Notes is subject to
adjustment. See "-- Rating," below. The interest
rate on the Private Notes increased by 50 basis
points, effective March 22, 1998, to 7 1/8% for the
2002 Private Notes and 7 5/8% for the 2007 Private
Notes. This interest rate increase will remain in
effect until consummation of the Exchange Offer.
Upon consummation of the Exchange Offer, the
interest rate increase will be eliminated
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<PAGE> 14
and the Exchange Notes and the Private Notes that
remain outstanding will bear interest at their
stated rates of 6 5/8 for the Notes due 2002 and
7 1/8 for the Notes due 2007.
RANKING The Exchange Notes are unsecured obligations of the
Operating Partnership and will have equal priority
of security with each other and with all other
unsecured and unsubordinated obligations of the
Operating Partnership, including Private Notes that
remain outstanding following the Exchange Offer.
The Exchange Notes will be effectively subordinated
to the claims of any secured mortgage lender to the
extent of the value of the property securing such
indebtedness. The Exchange Notes also will be
effectively subordinated to all existing and future
third-party indebtedness and other liabilities of
the Subsidiaries. As of December 31, 1997, after
giving pro forma effect to investments completed
after December 31, 1997, the Pending Investment and
related financing, the Operating Partnership and
its Subsidiaries collectively had total
indebtedness of $3,065 million, which consisted of
$768 million of secured indebtedness (of which $206
million was secured indebtedness of the Operating
Partnership and $562 million was secured
indebtedness of its Subsidiaries) and $2,297
million of unsecured and unsubordinated
indebtedness (all of which was unsecured and
unsubordinated indebtedness of the Operating
Partnership). See "Capitalization."
LIMITATIONS ON INCURRENCE
OF DEBT The Indenture contains various covenants, including
covenants limiting the ability of the Operating
Partnership and its Subsidiaries to incur
additional secured and unsecured debt unless
certain financial standards are satisfied. See
"Description of the Exchange Notes -- Certain
Covenants."
OPTIONAL REDEMPTION The Exchange Notes are redeemable at any time at
the option of the Operating Partnership, in whole
or in part, at a redemption price equal to the sum
of (i) the principal amount of the Exchange Notes
being redeemed plus accrued and unpaid interest, if
any, to the redemption date and (ii) the Make-Whole
Amount, if any. For a description of this
calculation, including the calculation of the
Make-Whole Amount, as well as information relating
to redemption procedures, see "Description of the
Exchange Notes -- Optional Redemption."
RATING The Operating Partnership has agreed to obtain a
rating of the Private Notes and/or the Exchange
Notes from Standard & Poor's Rating Services, a
division of the McGraw-Hill Companies, and Moody's
Investors Services, Inc. (each a "Rating Agency,"
and together, the "Rating Agencies"). Under certain
circumstances in which, prior to September 22,
1998, a series of the Private Notes or the Exchange
Notes does not have a rating that is in one of such
Rating Agency's generic rating categories which
signifies investment grade (an "Investment Grade
Rating"), which are generally accepted to be the
four highest rating categories for corporate debt,
the interest rate for such series shall increase by
37.5 basis points (the "Rating Adjustment"). Any
Rating Adjustment applicable to a series may be
eliminated for periods prior to September 22, 1998
during which the series has an Investment Grade
Rating, but the interest rate in effect for each
series of Private Notes or Exchange Notes, as the
case may be, will be fixed on September 22, 1998
for the remainder of the term of such series. See
"Description of the Exchange Notes -- Rating."
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<PAGE> 15
NO CASH PROCEEDS TO THE OPERATING PARTNERSHIP
The Operating Partnership will not receive any proceeds from the issuance
of the Exchange Notes offered hereby and has agreed to pay the expenses of the
Exchange Offer. In consideration of its issuance of the 2002 Exchange Notes and
the 2007 Exchange Notes as contemplated in this Prospectus, the Operating
Partnership will receive 2002 Private Notes and 2007 Private Notes,
respectively, representing an equal aggregate principal amount. The Private
Notes surrendered in exchange for Exchange Notes will be retired and canceled
and cannot be reissued. Accordingly, issuance of the Exchange Notes will not
result in any increase in the outstanding indebtedness of the Operating
Partnership. The proceeds from the issuance of the Private Notes were used to
fund the acquisition of Houston Center, repay amounts outstanding under the
Credit Facility and to repay additional short-term indebtedness, as described in
the pro forma financial statements presented in "Summary Selected Financial
Data" and "Selected Financial Data."
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<PAGE> 16
SUMMARY SELECTED FINANCIAL DATA
The following table sets forth certain summary financial information for
the Operating Partnership on a pro forma and historical basis and for the
Rainwater Property Group (the Operating Partnership's predecessor) on a combined
historical basis, which consists of the combined financial statements of the
entities that contributed Properties in exchange for Units or Common Shares of
the Company in connection with the formation of the Company and the Operating
Partnership. Such information should be read in conjunction with "Selected
Financial Data."
The pro forma information for the year ended December 31, 1997 and 1996
assumes completion, in each case as of January 1, 1996 in determining operating
and other data, of (i) the Company's public offering of its Common Shares that
closed on October 2, 1996 (the "October 1996 Offering") and the additional
public offering of 450,000 Common Shares that closed on October 9, 1996 and the
contribution of the net proceeds to the Operating Partnership, which used the
net proceeds to repay approximately $168 million of indebtedness and to fund
approximately $289 million of Property acquisitions in the fourth quarter of
1996 and the first quarter of 1997, (ii) the Company's public offering of its
Common Shares in April 1997 (the "April 1997 Offering") and the additional
public offering of 500,000 Common Shares that closed on May 14, 1997 and the
contribution of the net proceeds to the Operating Partnership, which used the
net proceeds to fund approximately $593.5 million of Property acquisitions and
other investments in the second quarter of 1997, (iii) the Company's offering of
4,700,000 Common Shares to an affiliate of Union Bank of Switzerland (the "UBS
Offering") and the contribution of the net proceeds to the Operating
Partnership, which used the net proceeds to repay approximately $145 million of
indebtedness under the Credit Facility, (iv) the Operating Partnership's
offering of the Private Notes in an aggregate principal amount of $400 million
(the "September Note Offering") and the use of the net proceeds therefrom to
fund approximately $337.6 million of the purchase price of two Properties and to
repay approximately $57.2 million of indebtedness incurred under the Credit
Facility and other short-term indebtedness, (v) the Company's public offering of
its Common Shares in October 1997 (the "October 1997 Offering") and the
contribution of the net proceeds to the Operating Partnership, which used the
net proceeds to fund approximately $45 million of the purchase price of one
Property and to repay approximately $325.1 million of short-term indebtedness
and indebtedness incurred under the Credit Facility, (vi) the Company's offering
of 5,375,000 Common Shares to Merrill Lynch International (the "Merrill
Offering") and the contribution of the net proceeds to the Operating
Partnership, which used the net proceeds to repay approximately $199.9 million
of indebtedness under the Credit Facility, (vii) the Company's public offering
of 8,000,000 Preferred Shares in February 1998 and the contribution of the net
proceeds to the Operating Partnership, which used the net proceeds to repay
approximately $191.5 million of indebtedness under the Credit Facility, (viii)
Property acquisitions, other investments and related financing and share
issuances during 1996, 1997 and 1998, and (ix) the Pending Investment and
related financing, including $1.05 billion for refinancing and/or assumption of
indebtedness, and associated refinancing and transaction costs, in connection
with the merger with Station.
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<PAGE> 17
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
PRO FORMA AND HISTORICAL FINANCIAL DATA AND
RAINWATER PROPERTY GROUP COMBINED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER PARTNER INTEREST DATA)
<TABLE>
<CAPTION>
OPERATING PARTNERSHIP
---------------------------------------------------------------------
PRO FORMA
YEAR ENDED DECEMBER 31, YEAR ENDED YEAR ENDED
--------------------------------- DECEMBER 31, DECEMBER 31,
1997 1997 1996 1996
------------ ------------ ------------ ------------
PRO FORMA ACTUAL (UNAUDITED)
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING DATA:
Total revenue............................. $ 784,460 $ 447,373 $ 716,714 $ 208,861
Operating income (loss)................... 140,715 111,281 90,710 44,101
Income (loss) before minority interest and
extraordinary item....................... 175,048 135,024 104,730 47,951
Preferred distributions................... $ 20,745 -- $ 20,745 --
Net income available to partners'......... $ 152,869 $ 133,590
BALANCE SHEET DATA (AT PERIOD END):
Total assets.............................. $ 6,395,391 $ 4,182,875 $ -- $ 1,733,540
Total debt................................ 3,065,474 1,710,124 -- 667,808
Total partners' capital................... 3,199,519 2,317,353 -- 988,005
OTHER DATA:
Funds from Operations before minority
interests(1)(2).......................... $ 364,854 $ 216,319 $ 294,724 $ 87,616
Distribution per partner interest......... -- $ 1.30 -- $ 1.16
Weighted average partner interests(2)..... 147,124,058 106,835,579 147,124,058 64,684,842
Cash flow provided by (used in):
Operating activities..................... $ --(3) $ 211,452 $ --(3) $ 77,384
Investing activities..................... --(3) (2,295,080) --(3) (513,033)
Financing activities..................... --(3) 2,124,156 --(3) 444,315
EBIDA(4).................................. 585,484 299,390 513,237 134,224
Total Debt to Total Assets(5)............. 46% 39% -- 39%
Total Secured Debt to Total Assets(5)..... 12% 18% -- 37%
Ratio of Consolidated Income Available for
Debt Service to Annual Debt Service
Charge(5)................................ 2.5 3.4 2.3 3.1
Ratio of earnings to fixed charges(6)..... 1.8 2.5 1.4 2.0
Ratio of Funds from Operations before
fixed charges to fixed charges(7)........ 2.6 3.3 2.3 2.9
<CAPTION>
OPERATING PARTNERSHIP RAINWATER PROPERTY GROUP
--------------------------- -------------------------
FOR THE
FOR THE PERIOD
PERIOD FROM FROM
MAY 5, 1994 JANUARY 1, YEAR ENDED
YEAR ENDED TO 1994 TO DECEMBER 31,
DECEMBER 31, DECEMBER 31, MAY 4, ------------
1995 1994 1994 1993
------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
OPERATING DATA:
Total revenue............................. $ 129,960 $ 50,343 $ 21,185 $ 57,168
Operating income (loss)................... 30,858 10,864 (1,599) (53,024)
Income (loss) before minority interest and
extraordinary item....................... 36,358 12,595 (1,599) (53,024)
Preferred distributions................... -- -- -- --
Net income available to partners'.........
BALANCE SHEET DATA (AT PERIOD END):
Total assets.............................. $ 965,232 $ 538,354 -- $ 290,869
Total debt................................ 444,528 194,642 -- 278,060
Total partners' capital................... 479,517 328,448 -- 2,941
OTHER DATA:
Funds from Operations before minority
interests(1)(2).......................... $ 64,475 $ 32,723 -- --
Distribution per partner interest......... $ 1.05 $ .65 -- --
Weighted average partner interests(2)..... 54,182,186 44,997,716 -- --
Cash flow provided by (used in):
Operating activities..................... $ 64,877 $ 21,614 $ 2,455 $ 9,313
Investing activities..................... (421,306) (260,666) (2,379) (20,572)
Financing activities..................... 343,079 265,608 (21,310) 28,861
EBIDA(4).................................. 85,699 31,266 11,061 (5,717)
Total Debt to Total Assets(5)............. 47% 37% -- --
Total Secured Debt to Total Assets(5)..... 47% 37% -- --
Ratio of Consolidated Income Available for
Debt Service to Annual Debt Service
Charge(5)................................ 4.6 9.0 -- --
Ratio of earnings to fixed charges(6)..... 2.6 3.9 -- --
Ratio of Funds from Operations before
fixed charges to fixed charges(7)........ 3.9 8.4 -- --
</TABLE>
- ---------------
(1) Funds from Operations ("FFO"), based on the revised definition adopted by
the Board of Governors of the National Association of Real Estate Investment
Trusts ("NAREIT"), and as used herein, means net income (loss) (determined
in accordance with generally accepted accounting principles), excluding
gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization of real estate assets, and after adjustments
for unconsolidated partnerships and joint ventures. For a more detailed
description of FFO, see "Selected Financial Data."
(2) Weighted average partner interest excludes preferred partner interests. The
FFO calculation includes an adjustment for preferred dividends.
(3) Pro forma information relating to operating, investing and financing
activities has not been included because management believes that the data
would not be meaningful due to the number of assumptions required in order
to calculate this data.
(4) EBIDA means earnings before interest expense, depreciation, amortization and
minority interests. For a more detailed description of EBIDA, see "Selected
Financial Data."
(5) See "Description of the Exchange Notes" for the definitions of capitalized
terms.
(6) Ratio of earnings to fixed charges is computed as income from operations
before minority interests and extraordinary items plus fixed charges
(excluding capitalized interest) divided by fixed charges. For a more
detailed description of ratio of earnings to fixed charges, see "Selected
Financial Data."
(7) Ratio of FFO before fixed charges to fixed charges is computed as FFO plus
fixed charges (excluding capitalized interest), divided by fixed charges.
For a more detailed description of ratio of FFO before fixed charges to
fixed charges, see "Selected Financial Data."
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<PAGE> 18
RISK FACTORS
Prospective investors should carefully consider the following information
in conjunction with the other information contained in this Prospectus before
deciding whether or not to tender Private Notes in exchange for Exchange Notes
pursuant to the Exchange Offer.
RESTRICTIONS ON TRANSFER CONTINUE AFTER FAILURE TO COMPLY WITH EXCHANGE
PROCEDURES
The Exchange Notes will be issued in exchange for Private Notes only after
timely receipt by the Exchange Agent of such Private Notes along with a properly
completed and duly executed Letter of Transmittal and all other required
documentation. Therefore, holders of Private Notes desiring to tender such
Private Notes in exchange for Exchange Notes should allow sufficient time to
ensure timely delivery. Neither the Exchange Agent nor the Operating Partnership
is under any duty to give notification of defects or irregularities with respect
to tenders of Private Notes for exchange.
Private Notes that are not tendered or are tendered but not accepted will,
following consummation of the Exchange Offer, continue to be subject to the
existing restrictions upon transfer thereof. In addition, any holder of Private
Notes who tenders in the Exchange Offer for the purpose of participating in a
distribution of the Exchange Notes will be required, in the absence of an
applicable exemption, to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
See "The Exchange Offer."
The Private Notes are eligible for trading in the Private Initial
Offerings, Resales and Trading through Automated Linkages market of the National
Association of Securities Dealers, Inc. To the extent, however, that Private
Notes are tendered and accepted in the Exchange Offer, the trading market for
untendered and tendered but unaccepted Private Notes could be adversely affected
due to the limited principal amount of the Private Notes that is expected to
remain outstanding following the Exchange Offer. A small outstanding amount of a
security could result in less demand to purchase such security and could,
therefore, result in lower prices for such security.
NO CURRENT PUBLIC MARKET FOR EXCHANGE NOTES WHICH COULD MAKE SALE OF EXCHANGE
NOTES MORE DIFFICULT
The Operating Partnership does not intend to apply for listing of the
Exchange Notes on any securities exchange or to seek approval through any
automated quotation system. Merrill Lynch, Pierce, Fenner & Smith Incorporated
and Salomon Brothers Inc (the "Initial Purchasers") have advised the Operating
Partnership that they currently intend to make a market in the Exchange Notes
after the Exchange Offer as permitted by applicable laws and regulations,
although they are not obligated to do so and may discontinue any market making
activity at any time without notice. There can be no assurance regarding the
future development of a market for the Exchange Notes, the ability of holders of
the Exchange Notes to sell their Exchange Notes or the price at which such
holders may be able to sell their Exchange Notes. If such a market were to
develop, the Exchange Notes could trade at prices that may be higher or lower
than the initial public offering price of the Private Notes depending on many
factors, including prevailing interest rates, the Operating Partnership's
operating results and the market for similar securities. Further, holders of
Private Notes who do not exchange those Notes will hold an investment subject to
restrictions on transfer not applicable to the Exchange Notes and, to the extent
that a large amount of Private Notes are not tendered or are tendered and not
accepted in the Exchange Offer, the trading market for the Exchange Notes could
be adversely affected. See "Plan of Distribution."
NOTES SUBORDINATE TO CERTAIN OTHER OPERATING PARTNERSHIP INDEBTEDNESS
The Operating Partnership derives the majority of its operating income from
its Subsidiaries. The holders of the Notes will have no direct claim against the
Subsidiaries for payment under the Notes. The Operating Partnership must rely on
distributions and other payments from its Subsidiaries and the contribution of
the net proceeds raised in public or private equity or debt offerings by the
Company, or must raise funds in public or private equity or debt offerings or
sell assets, to generate the funds necessary to meet its obligations, including
the payment of principal and interest on the Notes. If the distributions and
other payments from Subsidiaries and the contribution of the net proceeds raised
in public or private equity or debt offerings by the Company are
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insufficient to meet such obligations, there can be no assurance that the
Operating Partnership will be able to obtain such funds on acceptable terms or
at all.
The Notes will be effectively subordinated in right of payment to all
existing and future liabilities of the Subsidiaries. See "-- Limited
Restrictions on Increases in Debt," below. Consequently, in the event of a
bankruptcy, liquidation, dissolution, reorganization or similar proceeding with
respect to any of the Subsidiaries, the holders of any indebtedness of such
Subsidiary will be entitled to payment thereof from the assets of such
Subsidiary prior to the holders of any general unsecured obligations of the
Operating Partnership, including the Notes.
Because the Notes will be unsecured, they will be effectively subordinated
to any secured indebtedness of the Operating Partnership to the extent of the
value of the assets securing such indebtedness. See "-- Limited Restrictions on
Increases in Debt," below. The Indenture permits the Operating Partnership and
its Subsidiaries to incur additional secured indebtedness provided certain
conditions are satisfied. See "Description of the Exchange Notes -- Certain
Covenants." Consequently, in the event of a bankruptcy, liquidation,
dissolution, reorganization or similar proceeding with respect to the Operating
Partnership, the holders of any secured indebtedness will be entitled to proceed
against the collateral that secures such secured indebtedness and such
collateral will not be available for satisfaction of any amounts owed under the
Notes.
REGIONAL CONCENTRATION OF ASSETS INCREASES EFFECTS OF ADVERSE TRENDS IN CERTAIN
MARKETS
A significant portion of the Operating Partnership's assets are, and
revenues are derived from, Properties 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 other geographic markets in which the Operating
Partnership in the future may acquire substantial assets could have an adverse
effect on the financial condition and results of operations of the Operating
Partnership and on the Operating Partnership's ability to satisfy its
obligations as they become due.
OPERATING PARTNERSHIP DOES NOT FULLY CONTROL CERTAIN INVESTMENTS AND
CONSEQUENTLY HAS NO CONTROL OVER REVENUES FROM THE INVESTMENTS
REVENUES FROM HOTELS DEPENDENT ON THIRD-PARTY OPERATORS AND HOSPITALITY
INDUSTRY. The Operating Partnership has leased the Hotel Properties to
subsidiaries of Crescent Operating, and such subsidiaries, rather than the
Operating Partnership, are entitled to exercise all rights of the owner of the
respective hotel. The Operating Partnership will receive both base rent and a
percentage of gross sales above a certain minimum level pursuant to the leases,
which expire between the years 2004 and 2012. As a result, the Operating
Partnership will participate in the economic operations of the Hotel Properties
only through its indirect participation in gross sales. To the extent that
operations of the Hotel Properties may affect the ability of such subsidiaries
to pay rent, the Operating Partnership also may indirectly bear the risks
associated with any increases in expenses. Each of the Hotel Properties is
managed pursuant to a management agreement. The amount of rent payable to the
Operating Partnership under the leases with respect to the Hotel Properties will
depend on the ability of such subsidiaries and the managers of the Hotel
Properties to maintain and increase revenues from the Hotel Properties.
Accordingly, the Operating Partnership's results of operations, and ultimately
its ability to meet its obligations, will be affected by such factors as changes
in general economic conditions, the level of demand for rooms and related
services at the Hotel Properties, the ability of such subsidiaries and the
managers of the Hotel Properties to maintain and increase gross revenues at the
Hotel Properties, competition in the hotel industry and other factors relating
to the operation of the Hotel Properties. In addition, the Operating Partnership
expects, in accordance with the terms of the Intercompany Agreement (as defined
in "-- Conflicts of Interest -- Relationship with Crescent Operating"), to lease
any hotel properties that it may acquire in the future to Crescent Operating or
any of its subsidiaries which, as lessees of any such hotel properties, will be
entitled to exercise all rights of the owner.
LACK OF CONTROL OF RESIDENTIAL DEVELOPMENT CORPORATIONS AND DIVIDENDS. The
Operating Partnership is not able to elect the boards of directors of the
Residential Development Corporations and does not have the authority to control
the management and operation of the Residential Development Corporations. As a
result,
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the Operating Partnership does not have the right to control the timing or
amount of dividends paid by the Residential Development Corporations and,
therefore, does not have the authority to require that funds be distributed to
it by any of these entities. The inability of the Operating Partnership to
control its access to its dividends from the Residential Development
Corporations increases the likelihood that such dividends might not be available
to the Operating Partnership, which may adversely affect its results of
operations and its ability to meet its obligations.
AMERICOLD AND URS PARTNERSHIPS CONTROLLED BY THIRD PARTIES. The Operating
Partnership owns, through two subsidiaries (the "Crescent Subsidiaries"), a 38%
interest in each of two partnerships, one of which owns Americold Corporation
("Americold") and the other of which owns URS Logistics, Inc. ("URS"). Crescent
Operating owns a 2% interest in each of the partnerships. The remaining 60%
interest in the partnerships is owned by two subsidiaries of Vornado Realty
Trust (collectively, "Vornado"). The Operating Partnership currently owns all of
the non-voting common stock, representing an approximately 95% economic
interest, in each of the Crescent Subsidiaries, and Crescent Operating owns all
of the voting stock, representing an approximately 5% economic interest, in each
of the Crescent Subsidiaries. As a result, the Operating Partnership is not able
to elect the boards of directors of the Crescent Subsidiaries and does not have
the authority to control the management or operation of the Crescent
Subsidiaries. Under the terms of the existing partnership agreements for each of
the partnerships, the Operating Partnership does not have the right to
participate in the decisions with respect to the Partnerships. Vornado has the
right to make all decisions relating to the management and operation of the
partnerships other than certain major decisions that require the approval of
both Crescent Operating and Vornado. The partnership agreement for each of the
partnerships provides for a buy-sell arrangement upon a failure of Crescent
Operating and Vornado to agree on any of the specified major decisions pursuant
to which the entire interest of Crescent Operating and the Operating Partnership
or the entire interest of Vornado may be purchased by the other party. Until
November 1, 2000, the buy-sell arrangement can only be exercised by Vornado.
There can be no assurance that Vornado or Crescent Operating will operate the
partnerships in a way that will maximize the Operating Partnership's return on
its investment. See "-- Real Estate Risks Specific to the Operating
Partnership's Business -- Joint Ownership of Assets Limits Operating
Partnership's Flexibility with Investments."
REVENUES FROM PROPOSED CASINO/HOTEL INVESTMENT DEPENDENT ON THIRD-PARTY
OPERATORS AND CASINO/ HOTEL INDUSTRY. In connection with the proposed merger
with Station (the "Merger"), the Operating Partnership intends to lease the
Casino/Hotel Properties to a new limited liability company (the "Station
Lessee") that will be owned 50% by former management of Station and 50% by
Crescent Operating or one of its affiliates. The Operating Partnership expects
that it will receive both base rent and a percentage of gross revenues above a
certain minimum level pursuant to the leases, which will expire in 2008, subject
to one, five-year renewal option. Although the rental payments have not yet been
finally determined, it is anticipated that base rental payments will exceed 20%
of current base rental revenues of the Operating Partnership on an annual basis.
As a result of the percentage rent payments, the Operating Partnership will
participate in the economic operations of the Casino/Hotel Properties only
through its indirect participation in gross revenues. The amount of rent payable
to the Operating Partnership under the leases with respect to the Casino/Hotel
Properties will depend on the ability of the Station Lessee to maintain and
increase revenues from the Casino/ Hotel Properties. Accordingly, the Operating
Partnership's results of operations and its ability to meet its obligations will
be affected by (i) changes in general and local economic conditions and the
level of demand for the services of the Casino/Hotel Properties, a deterioration
in either of which could adversely affect the Operating Partnership's results of
operations and its ability to meet its obligations, (ii) competition in the
casino/hotel industry, an increase in which could reduce the gross revenues at
the Casino/Hotel Properties and adversely affect the Operating Partnership's
results of operations and its ability to meet its obligations, (iii)
governmental regulation that limits the ability of the Casino/Hotel Properties
to continue conducting their business as presently conducted, (iv) any decision
by the Nevada Gaming Commission or the Missouri Gaming Commission to suspend,
revoke or not reissue a gaming license held by the Company or one of its
Subsidiaries or the Station Lessee, which decision would adversely affect the
ability of the Station Lessee to continue making its lease payments to the
Operating Partnership and (v) the temporary or permanent loss of a riverboat or
dockside facility due to casualty, mechanical failure or severe weather, which
could prevent the
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<PAGE> 21
Station Lessee from deriving revenue from the affected location and thereby
decrease its ability to make lease payments to the Operating Partnership.
REAL ESTATE RISKS SPECIFIC TO THE OPERATING PARTNERSHIP'S BUSINESS
The following risks, in addition to the other risks discussed herein, are
the material risks relevant to an investment in the Notes.
RISKS RELATED TO INVESTMENT STRATEGY. In implementing its investment
strategies, the Operating Partnership has invested in a broad range of real
estate assets, and in the future, it may invest in additional types of real
estate assets not currently included in its portfolio. There can be no
assurance, however, that the Operating Partnership will be able to implement its
investment strategies successfully. As a result of its real estate investments,
the Operating Partnership will be subject to risks, in addition to general real
estate risks, relating to the specific assets and asset types in which it
invests. The Operating Partnership is subject to the risks that, upon
expiration, leases for space in the Office Properties and Retail 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. Similarly, the Operating
Partnership is subject to the risk that the success of its investment in the
Hotel Properties will be highly dependent upon such Properties' ability to
compete in 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. In addition, the Operating Partnership is
subject to risks relating to the Behavioral Healthcare Facilities, including the
effect of any failure of the lessee of the Behavioral Healthcare Facilities to
make the required lease payments (which equal more than 10% of the Operating
Partnership's current base rental revenues); the effects of factors, such as
regulation of the healthcare industry and limitations on government
reimbursement programs, on the ability of the lessee to make the required lease
payments; and the limited number of replacement tenants in the event of a
default under, or non-renewal of, the lease. If any one or a combination of such
risks were realized, the Operating Partnership could experience a material
adverse change in its financial condition and results of operations, which could
lead to difficulty in meeting its obligations.
JOINT OWNERSHIP OF ASSETS LIMITS OPERATING PARTNERSHIP'S FLEXIBILITY WITH
INVESTMENTS. The Operating Partnership has the right to invest, and in certain
cases has invested, in properties and assets jointly with other persons or
entities. Joint ownership of properties, under certain circumstances, may
involve risks not otherwise present, including the possibility that the
Operating Partnership's partners or co-investors might become bankrupt, that
such partners or co-investors might at any time have economic or other business
interests or goals which are inconsistent with the business interests or goals
of the Operating Partnership, and that such partners or co-investors may be in a
position to take action contrary to the instructions or the requests of the
Operating Partnership or contrary to the Operating Partnership's policies or
objectives. Because it gives a third party, which is not controlled by the
Operating Partnership and which may have different goals and capabilities than
the Operating Partnership, the opportunity to influence the return the Operating
Partnership can achieve on some of its investments, joint ownership may
adversely affect the ability of the Operating Partnership to meet its
obligations. See "-- Operating Partnership Does Not Fully Control Certain
Investments and Consequently Has No Control Over Revenues from the
Investments -- Americold and URS Partnerships Controlled by Third Parties."
RISK THAT ADEQUATE FINANCING WILL NOT BE AVAILABLE TO REFINANCE STATION
DEBT. Station currently has outstanding approximately $919 million of
indebtedness at rates in excess of the Operating Partnership's current cost of
capital. At the time of the closing of the Merger, as a result of covenants of
certain Station indebtedness, the Operating Partnership will be required to
refinance an aggregate of approximately $378 million of such outstanding
indebtedness. In addition, the Operating Partnership intends to finance the
transaction in part by incurring an additional $126 million in debt primarily
related to transaction costs. There are no definitive agreements or arrangements
for any such refinancing or the obtaining of any new debt, and there can be no
assurance that the Operating Partnership will be able to complete the
refinancing or obtain the necessary financing or that the terms thereof will be
favorable to the Operating Partnership.
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<PAGE> 22
CONFLICTS OF INTEREST
COMMON MANAGEMENT AND OWNERSHIP. Richard E. Rainwater and John C. Goff are,
respectively, the Chairman of the Board and the Vice Chairman of the Board of
both the Company and Crescent Operating, and Gerald W. Haddock serves as the
President, Chief Executive Officer and a director of Crescent Operating, the
General Partner and the Company. As a result, Messrs. Rainwater, Goff and
Haddock have fiduciary obligations to the Operating Partnership, the Company and
Crescent Operating. Messrs. Rainwater, Goff and Haddock, together with the other
management of the Company and the General Partner with a rank of Vice President
or higher appearing in the management chart in the "Management" section below,
beneficially owned, as of April 13, 1998, an approximately 14.3% equity interest
in the Operating Partnership, both directly through their ownership of 9,529,030
Units in the Operating Partnership and indirectly through their ownership of
9,190,948 Common Shares of the Company, and approximately the same percentage of
the outstanding common stock of Crescent Operating through their ownership of
1,712,251 shares of Crescent Operating common stock. The common management and
ownership among these entities may lead to conflicts of interest in connection
with transactions between the Operating Partnership, the Company and Crescent
Operating, because management of the Operating Partnership may not have the same
financial interests as the other shareholders or other investors in the
Operating Partnership. Members of management of the Operating Partnership who
also own shares of Crescent Operating will have a financial interest in the
success of Crescent Operating that will not be shared by shareholders of the
Company or investors in the Operating Partnership, including holders of the
Notes, who do not also own shares of Crescent Operating. There can be no
assurance that, as a result of such conflicts, the Operating Partnership will
not have less revenue available with which to satisfy its obligations when they
become due. These conflicts and the material risks associated with them are set
forth below.
RELATIONSHIP WITH CRESCENT OPERATING. The Operating Partnership has
entered into an agreement (the "Intercompany Agreement") with Crescent
Operating, which provides, subject to certain terms, that the Operating
Partnership will provide Crescent Operating with a right of first refusal to
become the lessee of any real property acquired by the Operating Partnership if
the Operating Partnership determines that, consistent with the Company's status
as a REIT, it is required to enter into a master lease arrangement, provided
that Crescent Operating and the Operating Partnership negotiate a mutually
satisfactory lease arrangement and the Operating Partnership determines, in its
sole discretion, that Crescent Operating is qualified to be the lessee. As to
opportunities for Crescent Operating to become the lessee of any assets under a
master lease arrangement, the Intercompany Agreement provides that the Operating
Partnership must provide Crescent Operating with written notice of the lessee
opportunity. During the 30 days following such notice, Crescent Operating has a
right of first refusal with regard to the offer to become a lessee and the right
to negotiate with the Operating Partnership on an exclusive basis regarding the
terms and conditions of the lease. If a mutually satisfactory agreement cannot
be reached within the 30-day period (or such longer period to which Crescent
Operating and the Operating Partnership may agree), the Operating Partnership
may offer the opportunity to others, on terms not more favorable than those
offered to Crescent Operating, for a period of one year thereafter before it
must again offer the opportunity to Crescent Operating in accordance with the
procedures specified above. The Operating Partnership may, in its discretion,
offer any investment opportunity other than a lessee opportunity to Crescent
Operating upon such notice and other terms as the Operating Partnership may
determine. The certificate of incorporation of Crescent Operating, as amended
and restated, generally prohibits Crescent Operating, for so long as the
Intercompany Agreement remains in effect, from engaging in activities or making
investments that a REIT could make, unless the Operating Partnership was first
given the opportunity, but elected not to pursue such activities or investments.
See "Business and Properties -- Completed Investments" and "Recent Developments"
for a description of certain investment opportunities which the Operating
Partnership has elected or expects to offer to Crescent Operating.
Subsidiaries of Crescent Operating are the lessees of each of the Hotel
Properties. Crescent Operating owns a 50% interest in Charter Behavioral Health
Systems, LLC ("CBHS"), which is the lessee of the Behavioral Healthcare
Facilities and the Operating Partnership's largest tenant in terms of base
rental revenues. On March 5, 1998, Crescent Operating entered into a definitive
agreement to acquire from a subsidiary of Magellan Health Services, Inc.
("Magellan") the remaining 50% interest in CBHS. The
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<PAGE> 23
Operating Partnership owns all of the non-voting stock and Crescent Operating
owns all of the voting stock of the entities through which the Operating
Partnership made the Refrigerated Warehouse Investment and its investments in
the Desert Mountain and Woodlands Residential Development Properties. In
addition, it is anticipated that Crescent Operating will have the opportunity to
own a 50% interest in the Station Lessee. The Operating Partnership expects to
offer Crescent Operating the opportunity to become a lessee and operator of
other assets in accordance with the Intercompany Agreement.
Due to the common management and ownership between the Operating
Partnership and Crescent Operating management of the Operating Partnership could
experience conflicts of interest in the event of a dispute relating to any of
the leases in which Crescent Operating is the lessee or if there were a default
by Crescent Operating under a lease. Conflicts of interest also could arise in
connection with the renegotiation or renewal of any lease or other agreement
with Crescent Operating.
RELATIONSHIP WITH MAGELLAN HEALTH SERVICES, INC. Mr. Rainwater, along with
certain affiliates of and members of his family, owns approximately 19% of the
outstanding common stock of Magellan, a subsidiary of which is a 50% owner
(along with Crescent Operating) of CBHS. Mr. Rainwater's spouse, Darla D. Moore,
is a member of the board of directors of Magellan. Through these relationships,
Mr. Rainwater may have the ability to influence decisions of Magellan in a
manner that may benefit Magellan to the detriment of Crescent Operating or the
Operating Partnership, or vice versa.
JOINT INVESTMENTS. The Operating Partnership has in the past and may in
the future structure investments as joint investments with Crescent Operating.
See "-- Relationship with Crescent Operating." The Operating Partnership could
experience potential conflicts of interest in connection with the negotiation of
the terms of such joint investments due to its ongoing business relationship
with Crescent Operating and the common management and common ownership among the
Operating Partnership, the Company and Crescent Operating.
COMPETITION FOR MANAGEMENT TIME. Messrs. Rainwater, Goff and Haddock
currently are engaged, and will in the future continue to engage, in the
management of other properties and business entities, including Crescent
Operating. Messrs. Rainwater, Goff and Haddock may experience conflicts of
interest in allocating management time, services and functions among the
Operating Partnership and the various other business activities, including the
operation of Crescent Operating, in which any of them are or may become
involved.
LEGAL REPRESENTATION. Shaw Pittman Potts & Trowbridge, which has served as
securities and tax counsel to the Operating Partnership in connection with this
Exchange Offer, also serves as special counsel to Crescent Operating in
connection with certain matters. In the event any controversy arises in which
the interests of the Operating Partnership appear to be in conflict with those
of Crescent Operating, other counsel may be retained for one or both parties.
RISK OF INABILITY TO MANAGE RAPID GROWTH AND ACQUISITION OF SUBSTANTIAL NEW
ASSETS EFFECTIVELY
From the time it commenced operations in May 1994 through December 31,
1997, the Operating Partnership has experienced rapid growth, increasing its
total assets by approximately 1,770%, after giving pro forma effect to the
Pending Investment and investments completed after December 31, 1997. There can
be no assurance that the Operating Partnership will be able to manage its growth
effectively and the failure to do so may have an adverse effect on the financial
condition and results of operations of the Operating Partnership. If such an
adverse effect were great enough, the Operating Partnership could have
difficulty meeting its obligations when they become due.
GENERAL REAL ESTATE RISKS AFFECTING THE OPERATING PARTNERSHIP
The following paragraphs describe the material factors influencing the
general real estate risks to which the Operating Partnership is subject.
OPERATING PARTNERSHIP'S INABILITY TO CONTROL CERTAIN FACTORS AFFECTING
PERFORMANCE AND VALUE. The economic performance and value of the Operating
Partnership's real estate assets will be subject to the risks normally
associated with changes in national, regional and local economic and market
conditions, as discussed
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below. The principal markets in which the Operating Partnership's Properties are
located are Dallas/Fort Worth, Houston and Austin, Texas and Denver, Colorado.
The economic condition of each of these markets is dependent on a limited number
of industries, and an economic downturn in some or all these industries could
adversely affect the Operating Partnership's performance in that market. Other
local economic conditions that may affect the performance and value of the
Operating Partnership's Properties include excess supply of office space and
competition for tenants, including competition based on rental rates,
attractiveness and location of the property and quality of maintenance and
management services. These factors may adversely affect the ability of the
tenants to pay rent. 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 of financing. Any of these factors, each of which is beyond the
control of the Operating Partnership, could reduce the income that the Operating
Partnership receives from the Properties, thereby adversely affecting the
Operating Partnership's ability to meet its obligations.
REAL ESTATE INVESTMENTS ARE ILLIQUID. Because real estate investments are
relatively illiquid, the Operating Partnership's ability to vary its portfolio
promptly in response to economic or other conditions will be limited. In
addition, certain significant expenditures, such as debt service (if any), real
estate taxes and operating and maintenance costs, generally are not reduced in
circumstances resulting in a reduction in income from the investment. The
foregoing and any other factor or event that would impede the ability of the
Operating Partnership to respond to adverse changes in the performance of its
investments could have an adverse effect on the Operating Partnership's
financial condition and results of operations and its ability to meet its
obligations.
RISK OF ENVIRONMENTAL LIABILITY. Under various federal, state and local
laws, ordinances and regulations, an owner or operator of real property may
become liable for the costs of removal or remediation of certain hazardous or
toxic substances released on or in its property, as well as certain other costs
relating to hazardous or toxic substances. Such liability may be imposed without
regard to whether the owner or operator knew of, or was responsible for, the
release of such substances. The presence of, or the failure to remediate
properly, such substances, may adversely affect the owner's ability to sell the
affected real estate or to borrow using such real estate as collateral. Such
costs or liabilities could exceed the value of the affected real estate. The
Operating Partnership has not been notified by any governmental authority of any
non-compliance, liability or other claim in connection with any of the
Properties and the Operating Partnership is not aware of any other environmental
condition with respect to any of the Properties that management believes would
have a material adverse effect on the Operating Partnership's business, assets
or results of operations. The application of environmental laws to a specific
Property owned by the Operating Partnership will be dependent on a variety of
Property-specific circumstances, including the former uses to which the Property
was put and the building materials used at each Property. Prior to the Operating
Partnership's acquisition of its Properties, independent environmental
consultants conducted or updated Phase I environmental assessments (which
generally do not involve invasive techniques such as soil or ground water
sampling) on the Properties. None of these Phase I assessments or updates
revealed any materially adverse environmental condition not known to the
Operating Partnership or the independent consultants preparing the assessments.
There can be no assurance, however, that environmental liabilities have not
developed since such environmental assessments were prepared, or that future
uses or conditions (including, without limitation, changes in applicable
environmental laws and regulations) will not result in imposition of
environmental liability. If the Operating Partnership were subject to
environmental liability, the liability could be so great that the Operating
Partnership could have difficulty meeting its obligations when they become due,
including the obligations represented by the Notes.
FINANCIALLY DISTRESSED PROPERTIES ARE RISKIER INVESTMENTS THAN OTHER PROPERTIES
Implementation of the Operating Partnership's strategy of investing in real
estate assets in distressed circumstances has resulted in the acquisition of
certain Properties from owners that were in poor financial condition, and such
strategy is expected to result in the purchase of additional properties under
similar
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<PAGE> 25
circumstances in the future. In addition to general real estate risks,
properties acquired in distressed situations present risks related to inadequate
maintenance, negative market perception and continuation of circumstances which
precipitated the distress originally. If a Property has been inadequately
maintained, capital and maintenance expenditures may be significant. A negative
market perception of a Property may make the Property more difficult to lease
than originally expected, resulting in lower occupancy rates and lease revenues
for a longer period of time than the Operating Partnership originally
anticipated. A continuation of factors precipitating distress, such as adverse
regional economic conditions, could adversely affect the Operating Partnership's
return on its investment in the Property or asset and the amount of funds the
Operating Partnership has available to meet its obligations.
NOTEHOLDERS CANNOT CONTROL CHANGES IN POLICIES
The Company is the sole shareholder of the General Partner of the Operating
Partnership. The Board of Trust Managers of the Company elects the sole director
of the General Partner and provides guidance to the senior management of the
Operating Partnership regarding operating and financial policies and strategies,
including its policies and strategies with respect to acquisitions, growth,
operations, indebtedness and capitalization. The holders of the Notes have no
voting rights and, accordingly, no ability to approve or disapprove any policies
or strategies of the Operating Partnership or the Company. These policies and
strategies of the Operating Partnership and the Company may change from time to
time, in a manner that could adversely affect the financial condition and
results of operations of the Operating Partnership.
OPERATING PARTNERSHIP'S SUCCESS DEPENDS ON KEY PERSONNEL
The Operating Partnership is dependent on the efforts of senior management
personnel of the Company and the General Partner. These senior management
personnel include Richard E. Rainwater, Chairman of the Board of Trust Managers
of the Company, John C. Goff, Vice Chairman of the Board of Trust Managers of
the Company, and Gerald W. Haddock, President, Chief Executive Officer and Trust
Manager of the Company, and President, Chief Executive Officer and sole Director
of the General Partner. While the Operating Partnership believes that it would
be possible to find replacements for these key executives, the loss of their
services could have an adverse effect on the operations of the Operating
Partnership. Mr. Rainwater has no employment agreement with the Company and,
therefore, is not obligated to remain with the Company for any specified term.
Each of Messrs. Goff and Haddock has entered into employment agreements with the
Company, and each of Messrs. Rainwater, Goff and Haddock has entered into a
noncompetition agreement with the Company. Neither the Company nor the General
Partner has obtained key-man insurance for any of its senior management
personnel.
LIMITED RESTRICTIONS ON INCREASES IN DEBT
The Operating Partnership is subject to the risks normally associated with
debt financing, including the risk that the Operating Partnership's net
operating income will be insufficient to meet required payments of principal and
interest, risks associated with possible increases in variable interest rates,
the risk that the Operating Partnership will not be able to refinance existing
indebtedness or, if necessary, to obtain additional financing for necessary
capital expenditures such as renovations and other improvements on favorable
terms or at all. A default under secured indebtedness could result in a transfer
of the secured asset to the mortgagee, with a consequent loss of income and
asset value to the Operating Partnership.
The Operating Partnership's organizational documents do not limit the level
or amount of debt that it may incur. The Indenture, however, contains
limitations on the Operating Partnership's ability to incur indebtedness. See
"Description of the Exchange Notes." It is the Operating Partnership's current
policy to pursue a strategy of conservative use of leverage, generally with a
ratio of debt to total market capitalization of the Company targeted at
approximately 40 percent, although this policy is subject to reevaluation and
modification and could be increased above 40 percent. The debt policy is based
on the relationship between the debt of the Operating Partnership and the total
market capitalization of the Company, rather than the book value of its assets
or other historical measures, because management believes that market
capitalization more accurately reflects the ability of the Operating Partnership
to borrow money and to meet its debt service
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<PAGE> 26
requirements. Market capitalization is, however, more variable than book value
of assets or other historical measures. There can be no assurance that the ratio
of indebtedness to market capitalization (or any other measure of asset value)
or the incurrence of debt at any particular level would not adversely affect the
financial condition and results of operations of the Operating Partnership and
its ability to meet its obligations as they become due.
THE OPERATING PARTNERSHIP
The Operating Partnership is controlled by the Company through the
Company's ownership of all of the outstanding stock of the General Partner,
which is the sole general partner of the Operating Partnership and owns a 1%
general partner interest in the Operating Partnership. In addition, the Company
owns an approximately 89% limited partner interest in the Operating Partnership.
The remaining limited partner interests are owned by senior members of
management of the Company and the General Partner and certain outside investors.
The Operating Partnership holds substantially all of the Company's assets,
including interests in the Properties, and conducts substantially all of the
Company's operations, including providing management, leasing and development
services for certain of the Properties.
The following chart indicates the relationships among the Operating
Partnership, the Company, the General Partner and certain subsidiaries of these
entities.
[CHART]
Chart indicating that Crescent Real Estate Equities Company owns 100% of
Crescent Real Estate Equities, Ltd. and an approximately 89% limited partner
interest in Crescent Real Estate Equities Limited Partnership; Crescent Real
Estate Equities, Ltd. owns an approximately 1% general partner interest in
Crescent Real Estate Equities Limited Partnership and 100% of certain Subsidiary
Corporations; the Subsidiary Corporations own general partner interests ranging
from 0.1% to 1.0% in Entities that own Real Property; Crescent Real Estate
Equities Limited Partnership owns limited partner interests ranging from 41.5%
to 99.9% in Entities that own Real Property and non-voting interests in
unconsolidated companies generally, ranging from interests of approximately 38%
to approximately 95%; and Unit Holders own an approximately 10% limited partner
interest in Crescent Real Estate Equities Limited Partnership.]
- ---------------
(1) Represents general partner interests ranging from 0.1% to 1.0% and limited
partner interests ranging from 41.5% to 99.9%.
(2) Represents non-voting interests in unconsolidated companies generally
ranging from interests of approximately 38% to approximately 95%. These
unconsolidated companies directly or indirectly own the Residential
Development Properties and the Refrigerated Warehouse Investment.
The Operating Partnership was organized as a Delaware limited partnership
in February 1994. The Operating Partnership's executive offices are located at
777 Main Street, Suite 2100, Fort Worth, Texas 76102, and its telephone number
is (817) 878-0477.
INVESTMENT STRATEGY
The Operating Partnership acquires premier assets and assets that have been
undervalued by utilizing its extensive network of relationships, market
reputation, ready access to low-cost equity and debt capital and ability to
structure transactions creatively. Management believes that it will be able to
identify substantial opportunities for future real estate investments from
sources such as life insurance companies and pension funds seeking to reduce
their direct real estate investments, public and private real estate companies,
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<PAGE> 27
corporations divesting of nonstrategic real estate assets, public and private
sellers requiring complex disposition structures and other domestic and
international sources.
The Operating Partnership's targeted investments include office properties
that can be acquired at significant discounts from replacement cost and that
provide both a favorable current return on invested capital and the opportunity
for significant cash flow growth through future increases in rental rates.
Integral to this investment strategy is the identification of specific markets
and submarkets that management believes will experience significant increases in
demand for office space due to the impact of factors that management expects to
have a positive effect on population and employment growth, including (i)
desirable market and submarket conditions, such as political environments
favorable to business, the availability of skilled and competitively priced
labor, favorable corporate and individual tax structures, affordable housing and
a favorable quality of life (as in markets such as Albuquerque, Omaha and
Austin), (ii) demographic shifts in the United States (such as the relocation of
businesses and the migration of people from the Northeast and the West Coast to
Texas, Colorado and Arizona) and (iii) specific regional, national and global
economic developments, such as an increase in demand for natural resources and
the resulting employment growth in markets that have a significant presence in
the oil and gas industry (as in Houston and New Orleans) and an improvement in
economic conditions as a result of growth in the technology industry and/or
international trade (as in San Francisco, San Diego and Miami).
The markets and submarkets in which the Operating Partnership concentrates
its acquisitions of office properties are those in which, in addition to
anticipated above-average population and employment growth, replacement cost
rental rates are significantly in excess of current market rental rates.
Management believes that investment in markets and submarkets in which market
rental rates are below the level necessary to justify new construction of
competitive properties will allow the Operating Partnership to continue to
increase rental rates and cash flows as demand for available office space
increases.
Within its core office markets and submarkets, the Operating Partnership
seeks to develop or acquire substantial ownership positions which provided
distinct competitive operating advantages, including the ability (i) to
accommodate changing tenant space needs within a particular submarket, (ii) to
influence rental rates through the Operating Partnership's ownership of a
significant portion of high-quality office space in these markets and submarkets
and (iii) to achieve superior operating expense efficiencies through
arrangements with local and regional providers of office services.
The Operating Partnership also seeks innovative real estate investments
that offer superior returns on its capital investment. For example, the lease of
the Behavioral Healthcare Facilities provides the Operating Partnership, based
on its investment in the Behavioral Healthcare Facilities, with an attractive
lease payment that increases annually during the initial 12-year term of the
lease. In addition, the Operating Partnership has completed the Refrigerated
Warehouse Investment and intends to acquire the Casino/Hotel Properties. Each of
these investments will provide the Operating Partnership a significant ownership
position in a real estate intensive operating business that provides
opportunities for further strategic investments in those industries.
Upon completion of the Pending Investment, the Operating Partnership will
have completed over $5,800 million of real estate investments since it commenced
operations in May 1994. The Operating Partnership believes that its success in
completing investments is the result of several competitive advantages,
including (i) management's ability, due to its extensive network of
relationships, to identify property acquisition opportunities, often before the
property is offered for sale, (ii) the proven ability of management to identify
underperforming assets that can be acquired at market prices not reflecting
their potential value, (iii) management's skill and creativity in consummating
unusual and complex transactions, such as acquisitions of mixed-use facilities
and portfolios that include traditional real estate assets, non-traditional real
estate assets and, in certain instances, other types of income-producing or
operating assets, and transactions that satisfy the special needs of sellers and
(iv) the Operating Partnership's reputation for "certainty of closure" as a
result of its proven ability to complete large, time-sensitive transactions
based on its internal due diligence capability and expertise and its ready
access to capital. The Operating Partnership also believes that these
competitive advantages offer it increased opportunities to acquire attractive
properties, often on terms more favorable than those available to other
potential purchasers.
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<PAGE> 28
OPERATING STRATEGY
The Operating Partnership maintains a well-defined leasing strategy in
order to capture the potential rental growth in its portfolio of Office
Properties as the submarkets in which the Operating Partnership has invested
continue to recover and occupancy and rental rates increase. The Operating
Partnership's strategy is based in part on identifying, and then investing 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 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 estimated by management 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. The Operating Partnership believes that the difference between
the two rates is a useful measure of the additional revenue that the Operating
Partnership may be able to obtain from a property, because the difference should
represent the amount by which rental rates would have to increase before
construction of properties that would compete with the Operating Partnership's
Properties would cause the Operating Partnership to risk losing tenants to
construction of new buildings. For the Office Properties as of December 31,
1997, including acquisitions completed subsequent to December 31, 1997, the
weighted average full-service rental rate was $18.12 per square foot, compared
to an estimated weighted average full-service replacement cost rental rate of
$28.33 per square foot. Many of the Operating Partnership's submarkets have
experienced substantial rental rate growth during the past two years. For
example, from 1995 to 1997 Class A office rental rates increased by
approximately 30% in Dallas (according to Jamison Research, Inc.), by
approximately 18% in Houston (according to Baca Landata, Inc., The Woodlands
Operating Company, L.P. and Cushman & Wakefield of Texas, Inc.), by
approximately 15% in Denver (according to Cushman & Wakefield of Colorado, Inc.)
and by approximately 19% in Austin (according to CB Commercial). As a result,
the Operating Partnership has been successful in renewing or re-leasing office
space in these markets at rental rates significantly above expiring rental
rates. For Office Properties owned during the year ended December 31, 1997,
leases were signed renewing or re-leasing 1,585,769 net rentable square feet of
office space at a weighted average full-service rental rate and an annual net
effective rate (calculated as weighted average full-service rental rate minus
operating expenses) of $19.42 and $12.43 per square foot, respectively, compared
to expiring leases with a weighted average full-service rental rate and an
annual net effective rate of $15.96 and $8.94 per square foot, respectively.
This represents increases in the weighted average full-service rental rate and
in the annual net effective rate of 22% and 39%, respectively.
The Operating Partnership's share of the Class A office property markets in
its core markets of Dallas, Fort Worth, Houston, Austin and Denver is 20%, 23%,
16%, 25% and 11%, respectively (calculated by dividing the total number of
square feet of Class A office space owned by the Operating Partnership in a
submarket by the total number of square feet of Class A office space in the
respective submarket, with the total number of square feet of Class A office
space in a particular submarket based on reports of Jamison Research, Inc. for
Dallas and Fort Worth, Baca Landata, Inc., The Woodlands Operating Company, L.P.
and Cushman & Wakefield of Texas, Inc. for Houston, CB Commercial for Austin and
Cushman & Wakefield of Colorado, Inc. for Denver). The Operating Partnership
expects to use this substantial market share in its core office markets and
submarkets to reduce Property operating expenses. For example, in Dallas,
Houston and Denver, the Operating Partnership successfully negotiated bulk
contracts for such services as cleaning and elevator maintenance, resulting in
discounts of approximately 5% to 10% from contracts previously in place.
The Operating Partnership focuses its operational efforts at its Office
Properties on providing quality service, individualized attention to tenants and
active preventive maintenance programs, while managing Property operating
expenses to ensure competitive pricing. Management believes that this focus on
creating and maintaining long-term relationships with its tenants will increase
tenant retention, which in turn will reduce vacancy rates and leasing costs and
enhance overall operating performance.
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<PAGE> 29
The Operating Partnership provides its skilled management team with
substantial flexibility in conducting its operations while offering incentives
that reward management based on compensation formulas linked directly with
enhanced operating performance.
FINANCING STRATEGY
The Operating Partnership intends to maintain a conservative capital
structure with total debt currently targeted at approximately 40% of total
market capitalization of the Company. The Operating Partnership, however,
consistently seeks to optimize its use of debt and other sources of financing to
create a flexible capital structure that will allow the Operating Partnership to
continue its innovative investment strategy.
The Company has contributed to the Operating Partnership approximately $2.4
billion in net proceeds derived from public offerings of its Common Shares and
Preferred Shares, in exchange for an increased limited partner interest. The
Operating Partnership's sources of debt financing include its Credit Facility,
which the Operating Partnership converted from a secured facility to an
unsecured facility in October 1996 and which was increased to $550 million in
December 1997. As of December 31, 1997, after giving pro forma effect to
investments completed after December 31, 1997, the Pending Investment and
related financing, the Operating Partnership and its Subsidiaries collectively
had total indebtedness of $3,065 million, which consisted of $768 million of
secured indebtedness (of which $206 million was secured indebtedness of the
Operating Partnership and $562 million was secured indebtedness of its
Subsidiaries) and $2,297 million of unsecured indebtedness (all of which was
unsecured indebtedness of the Operating Partnership). After giving pro forma
effect to investments completed after December 31, 1997, the Pending Investment
and related financing, the ratio of debt of the Operating Partnership to market
capitalization of the Company (based on a closing stock price on April 15, 1998
of $35 11/16 per Common Share, after full conversion of all Units and including
total indebtedness and minority interests in joint ventures) was approximately
35%.
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<PAGE> 30
CONFLICTS OF INTEREST
COMMON MANAGEMENT, OWNERSHIP AND INVESTMENTS
The Operating Partnership will be subject to various conflicts of interest
arising out of the relationships between certain trust managers of the Company
and members of management of the General Partner and certain lessees and
operators of the Operating Partnership's assets.
In April 1997, the Operating Partnership established Crescent Operating.
All of the outstanding common stock of Crescent Operating 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. Crescent
Operating and the Operating Partnership have entered into the Intercompany
Agreement which provides, subject to certain terms, that the Operating
Partnership will provide Crescent Operating with a right of first refusal to
become the lessee of any real property acquired by the Operating Partnership if
the Operating Partnership determines that, consistent with the Company's status
as a REIT, it is required to enter into a master lease arrangement, provided
that Crescent Operating and the Operating Partnership negotiate a mutually
satisfactory lease arrangement and the Operating Partnership determines, in its
sole discretion, that Crescent Operating is qualified to be the lessee. As to
opportunities for Crescent Operating to become the lessee of any assets under a
master lease arrangement, the Intercompany Agreement provides that the Operating
Partnership must provide Crescent Operating with written notice of the lessee
opportunity. During the 30 days following such notice, Crescent Operating has a
right of first refusal with regard to the offer to become a lessee and the right
to negotiate with the Operating Partnership on an exclusive basis regarding the
terms and conditions of the lease. If a mutually satisfactory agreement cannot
be reached within the 30-day period (or such longer period to which Crescent
Operating and the Operating Partnership may agree), the Operating Partnership
may offer the opportunity to others, on terms not more favorable than those
offered to Crescent Operating, for a period of one year thereafter before it
must again offer the opportunity to Crescent Operating in accordance with the
procedures specified above. The Operating Partnership may, in its discretion,
offer any investment opportunity other than a lessee opportunity to Crescent
Operating upon such notice and other terms as the Operating Partnership may
determine.
Richard E. Rainwater and John C. Goff are, respectively, the Chairman of
the Board and the Vice Chairman of the Board of both the Company and Crescent
Operating, and Gerald W. Haddock serves as the President, Chief Executive
Officer and a director of Crescent Operating, the General Partner and the
Company. In addition, Messrs. Rainwater, Goff and Haddock, together with the
other management of the Company and the General Partner with a rank of Vice
President or higher appearing in the management chart in the "Management"
section below, beneficially owned, as of April 13, 1998, an approximately 14.3%
equity interest in the Operating Partnership, both directly through their
ownership of 9,529,030 Units in the Operating Partnership and indirectly through
their ownership of 9,190,948 Common Shares of the Company, and approximately the
same percentage of the outstanding common stock of Crescent Operating, Inc.
through their ownership of 1,712,251 shares of Crescent Operating common stock.
This common management and ownership among these entities may lead to conflicts
of interest in connection with transactions between the Operating Partnership,
the Company and Crescent Operating.
Mr. Rainwater, along with certain affiliates and members of his family,
also owns approximately 19% of the outstanding common stock of Magellan, the
corporation which is a 50% owner (along with Crescent Operating) of CBHS. In
addition, Mr. Rainwater's spouse, Darla D. Moore, is a member of the board of
directors of Magellan. Through these relationships, Mr. Rainwater may have the
ability to influence decisions of Magellan in a manner that may benefit Magellan
to the detriment of Crescent Operating or the Operating Partnership, or vice
versa.
The Operating Partnership has acquired properties and made investments in
which members of management of the Operating Partnership or the Company have an
interest (see "Certain Relationships and Related Transactions") and may do so in
the future. These acquisitions and investments may create a conflict between the
interests of the members of management who may benefit from the acquisition or
investment and those of the beneficial owners of the Operating Partnership and
the Company. The Operating Partnership and
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<PAGE> 31
the Company have developed certain procedures designed to reduce or eliminate
any such conflicts of interest. See "-- Conflicts Resolution Procedures," below.
RELATIONSHIP WITH CRESCENT OPERATING
Subsidiaries of Crescent Operating are the lessees of each of the Hotel
Properties. Crescent Operating owns a 50% interest in CBHS, which is the lessee
of the Behavioral Healthcare Facilities and the Operating Partnership's largest
tenant in terms of base rental revenues. On March 5, 1998, Crescent Operating
entered into a definitive agreement to acquire from a subsidiary of Magellan
Health Services, Inc. ("Magellan") the remaining 50% interest in CBHS. In
addition, the Operating Partnership owns all of the non-voting stock and
Crescent Operating owns all of the voting stock of the entities through which
the Operating Partnership made the Refrigerated Warehouse Investment and its
investments in the Desert Mountain and Woodlands Residential Development
Properties. It is also anticipated that Crescent Operating will have the
opportunity to own a 50% interest in the Station Lessee. The Operating
Partnership expects to offer Crescent Operating the opportunity to become a
lessee and operator of other assets in accordance with the Intercompany
Agreement.
Crescent Operating currently is the largest tenant of the Operating
Partnership in terms of base rental revenues under its leases. As a result, and
due to the common management and ownership between the Operating Partnership and
Crescent Operating, management of the Operating Partnership could experience
conflicts of interest in the event of a dispute relating to any of the leases of
which Crescent Operating is the lessee or if there were a default by Crescent
Operating under a lease. Conflicts of interest also could arise in connection
with the renegotiation or renewal of any lease or other agreement with Crescent
Operating. In any such situation, however, Messrs. Rainwater, Goff and Haddock
have fiduciary obligations to the beneficial owners of the Operating
Partnership, the Company and Crescent Operating. Further, the Operating
Partnership has established procedures designed to reduce or eliminate any such
conflicts of interest, as described in "-- Conflicts Resolution Procedures,"
below.
JOINT INVESTMENTS
The Operating Partnership has in the past and may in the future structure
investments as joint investments between itself and Crescent Operating. See
"-- Relationship with Crescent Operating." The Operating Partnership could
experience potential conflicts of interest in connection with the negotiation of
the terms of such joint investments due to its ongoing business relationship
with Crescent Operating and the common management and common ownership among the
Operating Partnership, the Company and Crescent Operating.
COMPETITION FOR MANAGEMENT TIME
Messrs. Rainwater, Goff and Haddock currently are engaged, and will in the
future continue to engage, in the management of other properties and business
entities, including Crescent Operating, and in other business activities. None
of them is required to devote his full time to any of these activities. As a
result, Messrs. Rainwater, Goff and Haddock may experience conflicts of interest
in allocating management time, services and functions among the Operating
Partnership and the various other business activities, including the operation
of Crescent Operating in which any of them are or may become involved.
LEGAL REPRESENTATION
Shaw Pittman Potts & Trowbridge, which has served as securities and tax
counsel to the Operating Partnership in connection with this Exchange Offer,
also serves as special counsel to Crescent Operating in connection with certain
matters. In the event any controversy arises in which the interests of the
Operating Partnership appear to be in conflict with those of Crescent Operating
other counsel may be retained for one or both parties.
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<PAGE> 32
CONFLICTS RESOLUTION PROCEDURES
General. The Operating Partnership has adopted certain policies and entered
into certain agreements designed to eliminate or minimize potential conflicts of
interest. There can be no assurance, however, that these policies and statutory
provisions will entirely eliminate the influence of such conflicts.
Policies Applicable to Transactions Involving Trust Managers. Messrs.
Rainwater, Goff and Haddock are all trust managers of the Company and as such
owe fiduciary duties to the shareholders of the Company. Pursuant to the Texas
Real Estate Investment Trust Act, the interest of any trust manager or officer
of the Company in any transaction is required to be disclosed to or known to the
Board of Trust Managers or, if applicable, the shareholders and generally must
be approved by a majority of the disinterested trust managers or the
shareholders. All transactions between the Company or the Operating Partnership
and any trust manager or any entity in which such a trust manager has a material
financial interest, including Crescent Operating, must be confirmed and ratified
by the Board of Trust Managers, with the interested trust manager abstaining.
Noncompetition. Each of Messrs. Rainwater, Goff and Haddock has entered
into an agreement not to engage, directly or indirectly, in certain real estate
related activities (a "Noncompetition Agreement") during specified periods of
time. See "Management -- Agreements Not to Compete." Each also has agreed that,
as long as his Noncompetition Agreement remains in effect, real estate
investment opportunities that are presented to him will be offered to the
Operating Partnership and that, if the Operating Partnership elects not to make
an investment offered to it by any of them, neither they, nor their respective
controlled affiliates, will participate in the investment unless approved by the
Operating Partnership. The Noncompetition Agreements do not prohibit Messrs.
Rainwater, Goff and Haddock from engaging in certain activities with respect to
properties already owned or from making certain passive real estate investments.
Messrs. Rainwater, Goff and Haddock, through certain affiliates, retain
ownership of the Hotel Crescent Court and the Crescent Spa, and a limited
partnership in which Rainwater, Inc. and Messrs. Rainwater, Goff and Haddock are
indirect investors, retains ownership of a hotel in Arlington, Texas. The
Company has rights of first refusal to acquire the hotel in Arlington and the
Hotel Crescent Court upon any proposed transfer to a third party.
RECENT DEVELOPMENTS
PENDING TRANSACTION WITH STATION CASINOS, INC.
The following section describes the Company's pending transaction with
Station Casinos, Inc. The transaction is expected to be completed during the
fourth quarter of 1998. The information contained in this Prospectus regarding
Station is taken from publicly available information prepared by Station.
Proposed Merger with Station. On January 16, 1998, the Company entered into
an agreement and plan of merger (the "Merger Agreement") pursuant to which
Station will merge with and into the Company. The Merger Agreement also provides
for certain alternative structures to facilitate the combinations of the
businesses of the Company and Station. As a result of the Merger, the Operating
Partnership will acquire the real estate and other assets of Station, except to
the extent operating assets are transferred immediately prior to the Merger, as
described below.
It is presently anticipated that, as part of the transactions associated
with the Merger, but immediately prior to the Merger, certain operating assets
and the employees of Station will be transferred to the Station Lessee. The
Station Lessee will be owned 50% by Crescent Operating or another entity
designated by the Company, 24.9% by a newly formed entity (the "Management
Entity") owned by three of the existing directors of Station (including its
Chairman, President and Chief Executive Officer) and 25.1% by a separate newly
formed entity owned by other members of Station management (the "Secondary
Management Entity"). It is anticipated that the Station Lessee will operate the
Casino/Hotel Properties currently operated by Station pursuant to a lease with
the Operating Partnership. The lease will have a 10-year term, with one
five-year renewal option. The lease will provide that the Station Lessee is
required to maintain the properties in good condition at its expense. The
Operating Partnership will establish and maintain a reserve account to be
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<PAGE> 33
used under certain circumstances for the purchase of furniture, fixtures and
equipment with respect to the properties, to be used from time to time to
replace furniture, fixtures and equipment. The lease will provide for base and
percentage rent but the amount of the rent has not yet been determined. Under
the lease, the Operating Partnership will have a right of first refusal to
acquire, and thereafter to include under the lease, any additional casino and/or
hotel properties which the Station Lessee desires to acquire.
In order to effect the Merger, the Company will issue .466 Common Shares
for each share of common stock of Station (including each restricted share) that
is issued and outstanding immediately prior to the Merger. In addition, the
Company will create a new class of preferred shares which will be exchanged,
upon consummation of the Merger, for the shares of $3.50 Convertible Preferred
Stock of Station outstanding immediately prior to the Merger.
The total value of the Merger transaction, including the Company's issuance
of Common Shares and Preferred Shares in connection with consummation of the
Merger and the Company's assumption and/or refinancing of approximately $919
million in existing indebtedness of Station and its subsidiaries, is currently
valued at approximately $1.745 billion.
In connection with the merger, the Company also has agreed to purchase up
to $115 million of a new class of convertible preferred stock of Station prior
to consummation of the merger. The purchase will be made in increments, or in a
single transaction, upon call by Station subject to certain conditions, whether
or not the merger is consummated.
Consummation of the Merger is subject to various conditions, including
Station's receipt of the approval of two-thirds of the holders of both its
common stock and its preferred stock, expiration or termination of the waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act of 1974, and the
receipt by the Company and certain of its officers, trust managers and
affiliates of the approvals required under applicable gaming laws. It is
anticipated that the Merger and the associated transactions will be consummated
in the fourth quarter of 1998, although there can be no assurances that the
Merger will be consummated on the terms described herein. Certain individuals
who own in the aggregate approximately 41% of the outstanding capital stock of
Station have agreed to vote in favor of the Merger.
The Company will be entitled to receive a break-up fee of $54 million if
the Merger Agreement is terminated (i) by either the Company or the Board of
Directors of Station if any required approval of the Merger by the holders of
each class of capital stock of Station shall not have been obtained by reason of
the failure to obtain the required vote of stockholders, (ii) by the Company if
the Board of Directors of Station shall not recommend the Merger or shall
recommend a superior proposal or (iii) by the Board of Directors of Station if
it receives a superior proposal that the Company does not match or exceed.
In connection with the transaction, the Operating Partnership will enter
into a Right of First Refusal and Noncompetition Agreement with the Station
Lessee. Under the agreement, the Operating Partnership will grant the Station
Lessee a right of first refusal as to any lease arrangement (a "master lease")
for a casino/ hotel property (defined as real estate on which hotel and casino
or other gaming-related operations are conducted) in which the operators of the
business conducted at the property prior to the date the property is owned or
acquired by the Operating Partnership will cease to operate the business. The
Station Lessee will grant the Operating Partnership a right of first refusal to
invest, directly or indirectly, (i) in casino/hotel properties (including the
opportunity to provide services related to real estate or to invest in a hotel
property), real estate mortgages, real estate derivatives, or entities that
invest primarily in or have a substantial portion of their assets in such types
of real estate assets or (ii) any other casino/hotel-related investments that
can be structured as REIT-suitable investments. In addition, without the prior
written consent of the Management Entity, the Company, Crescent Operating and
their affiliates may not own, operate or otherwise engage in activities related
to any casino/hotel properties other than casino/hotel properties operated and
leased by the Station Lessee or an entity under its control, provided that the
Company may own a casino/hotel property if a master lease arrangement already
exists at the property, if casino/hotel activities conducted at the property are
incidental to the primary business operations at the property or if the sellers
or operators desire to enter into a master lease arrangement with the Company.
Under the agreement, without the prior written consent of the Operating
Partnership, neither the Management Entity, the Secondary Management Entity, nor
any of the
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<PAGE> 34
affiliates of either, may own, operate or otherwise engage in any activities
related to casino/hotel properties that are not operated and leased by the
Station Lessee or an entity under its control.
Station Properties and Performance. Station is an established
multi-jurisdictional casino/hotel company that owns and operates, through wholly
owned subsidiaries, six distinctly themed casino/hotel properties, four of which
are located in Las Vegas, Nevada, one of which is located in Kansas City,
Missouri and one of which is located in St. Charles, Missouri. The table below
sets forth general information concerning each of the casino/hotel properties
and certain assets currently maintained at each property. Upon consummation of
the Merger, the Operating Partnership will acquire the casino/hotel properties
and, in addition, will acquire those assets listed in the table which it may
acquire consistent with the Company's status as a REIT. The remaining assets
will be acquired by the Station Lessee. It has not yet been finally determined
which assets listed below will be owned directly by the Operating Partnership
upon consummation of the Merger. It is expected that each of the Casino/Hotel
Properties will continue to operate all of the assets set forth in the table.
<TABLE>
<CAPTION>
MISSOURI PROPERTIES
LAS VEGAS PROPERTIES ----------------------------
------------------------------------------------- STATION STATION
PALACE BOULDER TEXAS SUNSET CASINO CASINO
STATION STATION STATION STATION ST. CHARLES KANSAS CITY
------- ------- ------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Date Opened....................... July 1976 August 1994 July 1995 June 1997 May 1994 January 1997
Casino Square Footage............. 84,000 86,000 75,000 80,000 47,000 140,000
Facility Square Footage........... 287,000 337,000 258,000 350,000 175,000 526,000
Slot & Video Poker Machines....... 2,250 3,040 2,020 2,770 1,860 3,100
Gaming Tables..................... 45 39 34 47 75 166
Site Acreage...................... 39 47 47 100 52 171
Hotel Rooms....................... 1,028 300 200 467 -- 200
Parking Spaces.................... 3,700 4,350 4,000 4,200 4,000 5,000
Movie Theaters.................... -- 11-screen 12-screen 13-screen -- 18-screen
Meeting and Convention Space...... 20,000 -- -- -- -- 1,400 seat
square feet Grand Pavilion
Child Care Facility............... -- available -- available -- available
Restaurant Seats.................. 1,225 1,400 1,300 1,400 330 1,700
</TABLE>
A detailed description of the casino/hotel properties operated by Station
is set forth in "Appendix A -- Recent Developments."
Station had net revenues of $290.3 million, $466.9 million, $583.5 million
and $564.8 million for the years ended March 31, 1995, 1996 and 1997 and the
nine months ended December 31, 1997, respectively, and Station had net losses of
$7.9 million and $2.5 million for the year ended March 31, 1995 and the nine
months ended December 31, 1997, respectively, and net income of $25.5 million
and $13.8 million for the years ended March 31, 1996 and 1997, respectively. The
loss during the year ended March 31, 1995 was primarily attributable to
preopening expenses of approximately $19.4 million related to the opening of
Boulder Station and Station Casino St. Charles. The loss during the nine months
ended December 31, 1997 was primarily attributable to pre-opening expenses of
approximately $10.9 million related to the opening of Sunset Station, as well as
increased interest expense and the expiration of option agreements to lease or
acquire land for future development requiring certain option payments to Station
from third parties. In addition, Station's operating income was negatively
impacted by a $18.7 million decline in the operating income generated by Station
Casino St. Charles, which was due primarily to increased competition at that
facility.
Station Competition. The casino/hotel industry includes land-based casinos,
dockside casinos, riverboat casinos, casinos located on Indian reservations and
other forms of legalized gaming. There is intense competition among companies in
the casino/hotel industry, many of which have significantly greater resources
than Station. Station primarily competes with other casino/hotel operators in
Las Vegas, Nevada and St. Louis and Kansas City, Missouri, as described below.
To a lesser extent, the casino/hotel properties compete with gaming operations
in other parts of the state of Nevada, such as Reno, Laughlin and Lake Tahoe,
with facilities in Atlantic City, New Jersey and other parts of the world and
with casino gambling on Indian reservations, state-sponsored lotteries,
on-and-off-track pari-mutuel wagering, card parlors and other forms of legalized
gambling.
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Palace Station, Boulder Station, Texas Station and Sunset Station face
competition from all other casinos and hotels in the Las Vegas area, including,
to some degree, from each other. Such competition includes at least eight
casino/hotel properties targeted primarily towards local residents and repeat
visitors, as well as numerous non-hotel gaming facilities targeted towards local
residents. In recent months, several direct competitors to the casino/hotel
properties that cater to the "locals" market have completed major expansion
projects, and other expansions are in progress or are planned. As of September
30, 1997, there are approximately 28 major gaming properties located on or near
the Las Vegas Strip, 14 located in the downtown area and several located in
other areas of Las Vegas. In the past year, one large casino/hotel property has
opened and five major expansions were completed on the Las Vegas Strip. In
addition, as of September 30, 1997, five new casino/hotel properties were under
construction or had been announced, which will add approximately 22,500 rooms to
the Las Vegas area in the near future. The announced expansions and any other
major additions, expansions or enhancements of existing properties or the
construction of new properties by competitors, could have a material adverse
effect on the business of Palace Station, Boulder Station, Texas Station and
Sunset Station. The additional capacity has had little, if any, impact on hotel
occupancy or casino volume to date at Palace Station, Boulder Station or Texas
Station, although there can be no assurance that hotel occupancy or casino
volume will not be adversely affected in the future.
Station Casino St. Charles competes primarily with other gaming operations
in and around St. Louis, Missouri. Currently, there are six facilities operating
in the St. Louis market, including two facilities in Maryland Heights, one of
which opened in March 1997 and caused a significant decline in revenues at
Station Casino St. Charles. Additionally, two of the five competitors operating
in the St. Louis market are located in Illinois, which does not impose a limit
on the size of losses or restrict extension of credit to customers. Gaming also
has been approved by local voters in jurisdictions near St. Louis, including St.
Charles and other cities and counties along the Mississippi and Missouri Rivers.
Station Casino Kansas City competes primarily with other gaming operations in
and around Kansas City, Missouri. Currently, there are five gaming facilities
operating in the Kansas City market. Earlier entrants to the Kansas City market
may have an advantage over Station Casino Kansas City due to their ability to
establish early market share. Gaming has been approved by local voters in
jurisdictions near Kansas City, including St. Joseph (which currently has one
riverboat gaming operation) and other cities and counties along the Missouri
River. Recently, Davis Gaming was selected for investigation for licensure for a
gaming operation which it intends to develop in Boonville, Missouri, a city in
central Missouri near Jefferson City and Columbia, and Mark Twain Casino L.L.C.
was selected for investigation for licensure for a gaming operation which it
intends to develop in LaGrange, Missouri, a city in northeastern Missouri.
Neither area is currently served by a Missouri gaming facility.
Several companies engage in riverboat gaming in states adjacent to
Missouri. Illinois sites, including Alton, East St. Louis and Metropolis, enjoy
certain competitive advantages over Station Casino St. Charles because Illinois,
unlike Missouri, does not impose limits on the size of losses and places fewer
restrictions on the extension of credit to customers. In contrast, Missouri
gaming law provides for a maximum loss of $500 per player on each cruise and
prohibits the extension of credit (except credit cards and checks). Unlike
Illinois gaming law, the Missouri gaming law places no limits on the number of
gaming positions allowed at each site. As of September 30, 1997, Illinois had
approved a total of ten licenses. While riverboats currently are the only
licensed form of casino-style gaming in Illinois and the number of licenses is
restricted to ten, possible future competition may arise if gaming is legalized
in or around Chicago, which was specifically excluded from the legislation
permitting gaming in Illinois.
Station Environmental Matters. Station's operating costs may be affected by
the obligation to pay for the cost of complying with existing environmental
laws, ordinances and regulations, as well as the cost of future legislation.
Station's riverboat facilities are subject to those laws, ordinances and
regulations applicable to all of the Operating Partnership's Properties (see
"Business and Properties -- Environmental Matters") and to the following
additional regulations. Operation of the two riverboat sites must be in
conformity with state and federal clean water requirements, including the
Federal Water Pollution Control Act (the "OPA"). The OPA establishes an
extensive regulatory and liability regime for the protection and clean up of the
environment from oil spills and affects all owners and operators whose vessels
operate in United States waters, which include the Missouri and Mississippi
Rivers. The OPA also requires vessel owners and operators to establish
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<PAGE> 36
and maintain with the U.S. Coast Guard evidence of financial responsibility
sufficient to meet their potential liabilities under the OPA.
Limited environmental site assessments ("ESAs") were conducted at certain
of the casino/hotel properties by an independent environmental engineer at the
time of their initial acquisition by Station. The purpose of the ESAs was to
identify potential sources of contamination or environmental liability for which
the owners and operators of the casino/hotel properties may be responsible. At
least two of Station's properties include protected wetlands areas which have
subjected, and may subject, Station to obligations and liabilities and may limit
the ability of Station to utilize such areas for development. The ESAs did not
reveal, and Station is not aware of, any environmental liability or compliance
concerns that Station believes will have a material adverse effect on Station's
business, assets, results of operations or liquidity. However, Station has not
conducted, and is not aware of, any current or more comprehensive environmental
assessments or compliance audits for any of its properties. As a result, it is
possible that material environmental liabilities or compliance concerns exist of
which Station is currently unaware.
Station Litigation. Station and its subsidiaries are defendants in various
lawsuits relating to routine matters incidental to their business. Management of
Station does not believe that the outcome of such litigation, in the aggregate,
will have a material adverse effect on Station.
A suit seeking status as a class action lawsuit was filed by plaintiff,
William H. Poulos, et al., as class representative, on April 26, 1994, in the
United States District Court, Middle District of Florida, naming 41
manufacturers, distributors and casino operators of video poker and electronic
slot machines, including Station. On May 10, 1994, a lawsuit alleging
substantially identical claims was filed by another plaintiff, William Ahearn,
et al., as class representative, in the United States District Court, Middle
District of Florida, against 48 manufacturers, distributors and casino operators
of video poker and electronic slot machines, including Station and most of the
other major casino/hotel companies. The lawsuits allege that the defendants have
engaged in a course of fraudulent and misleading conduct intended to induce
persons to play such games based on a false belief concerning how the gaming
machines operate, as well as the extent to which there is an opportunity to win.
The two lawsuits have been consolidated into a single action and have been
transferred to the United States District Court for the State of Nevada. On
September 26, 1995, a lawsuit alleging substantially identical claims was filed
by plaintiff, Larry Schreier, et al., as class representative, in the United
States District Court for the District of Nevada, naming 45 manufacturers,
distributors and casino operators of video poker and electronic slot machines,
including Station. Motions to dismiss the Poulos/Ahearn and Schreier cases were
filed by the defendants, including Station. On April 17, 1996, the Poulos/Ahearn
lawsuits were dismissed, but plaintiffs were given leave to file Amended
Complaints on or before May 31, 1996. On May 31, 1996, an amended complaint was
filed, naming William H. Poulos, et al., as plaintiff. Defendants filed a motion
to dismiss. On August 15, 1996, the Schreier lawsuit was dismissed with leave to
amend. On September 27, 1996, Schreier filed an amended complaint. The
defendants, including Station, filed motions to dismiss the amended complaint.
In December 1996, the Court consolidated the Poulos/Ahearn, the Schreier and a
third case not involving Station and ordered all pending motions be deemed
withdrawn without prejudice, including the defendants' motions to dismiss the
amended complaints. The plaintiffs filed a consolidated amended complaint on
February 13, 1997. On or about December 19, 1997, the Court issued formal
opinions granting in part and denying in part the defendants' motion to dismiss.
In so doing, the Court ordered plaintiffs to file an amended complaint in
accordance with the Court's orders in January of 1998. Station and all other
defendants continue to deny the allegations contained in the amended complaint
filed on behalf of plaintiffs. The defendants have committed to vigorously
defend all claims and allegations contained in the consolidated action, and
Station does not expect that the lawsuits will have a material adverse effect on
Station's financial position or results of operations.
A suit seeking status as a class action lawsuit was filed by plaintiff
Nicole Anderson, et al., as class representative, on September 24, 1997, in the
United States District Court for the Eastern District of Missouri, Eastern
Division. The lawsuit alleges certain racially based discriminatory action at
Station Casino St. Charles. On or about October 24, 1997, plaintiff filed her
first amended complaint. On November 24, 1997, Station filed its answer to
plaintiff's first amended complaint which denied the allegations contained
therein. Station does not believe the suit has merit and intends to defend
itself vigorously.
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On January 16, 1997, Station's gaming license in Kansas City was formally
issued for its facility, which is located in a man-made basin filled with water
piped in from the surface of the Missouri River. In reliance on numerous
approvals from the Missouri Gaming Commission specific to the configuration and
granted prior to the formal issuance of its gaming license, Station built and
opened the Station Casino Kansas City facility. The license issued to Station
and the resolutions related thereto specifically acknowledge that the Missouri
Gaming Commission had reviewed and approved this configuration. On November 25,
1997, the Supreme Court of Missouri, in a case challenging the gaming licensing
of certain competing operators of Station Casino St. Charles located in Maryland
Heights, Missouri, ruled that gaming may occur only in artificial spaces that
are contiguous to the surface stream of the Missouri and Mississippi Rivers. The
case was remanded to the trial court for a factual determination as to whether
such competing operators meet this requirement.
Based upon this Missouri Supreme Court ruling (the so-called "Akin
Ruling"), the Missouri Gaming Commission attempted to issue preliminary orders
for disciplinary action to all licensees in Missouri that operate gaming
facilities in artificial basins. These preliminary orders started the gaming
license hearing process, which allows the affected licensees to demonstrate that
they are, in fact, contiguous to the surface stream of the Missouri or
Mississippi River. The preliminary orders were challenged by the licensees. The
Circuit Court of Cole County entered writs of prohibition preventing the
Missouri Gaming Commission from proceeding with such hearings under the Missouri
Gaming Commission's existing procedures. The Missouri Gaming Commission is
currently seeking further review of these writs of prohibition in the Missouri
Supreme Court, which has not yet ruled on the matter.
After the Akin Ruling was entered by the Missouri Supreme Court, but before
any further proceedings on remand, the plaintiffs dismissed the Akin case
without prejudice. Therefore, the status of the Akin Ruling is unclear.
On January 16, 1998, Station Casino Kansas City's licenses were renewed for
one year, subject to the satisfactory resolution of the issues raised in the
Akin Ruling. This renewal occurred before any writs of prohibition were entered
preventing the Missouri Gaming Commission from proceeding with hearings
concerning Station Casino Kansas City or any other licensees for alleged
noncompliance with the Akin Ruling. Because of the open questions raised but not
answered in the Akin Ruling, it is not possible to predict what effect, if any,
the Akin Ruling or Missouri Gaming Commission's actions will have on operations
at Station Casino Kansas City.
At this time, based on discussions with Missouri legal counsel, management
of Station believes that it has potentially meritorious defenses in any lawsuits
or administrative actions that are based on the Akin Ruling. Station management
cannot provide any assurance, however, as to whether the Station Casino Kansas
City facility would be found to comply with the guidelines described in the Akin
Ruling, whether it would be permitted to modify the facility to comply with such
standards, or whether Station's legal defenses, legislative alternatives or
other means available to permit the continued use of this current configuration
would succeed. Further, it is unclear, in the event of a determination that the
configuration of Station Casino Kansas City does not comply with the Akin
Ruling, whether Station Casino Kansas City would be able to continue to operate
or whether such findings would result in the temporary or permanent closure of
Station Casino Kansas City. Station cannot provide any assurance that there
would not be a material adverse impact in such an eventuality. Management of
Station does not believe, however, that the Akin Ruling will have a material
adverse impact on the Station Casino St. Charles operations.
A class action lawsuit was filed by plaintiff Stephen B. Small, et al., as
class representative, on November 28, 1997, in the United States District Court
for the Western District of Missouri, naming four gaming operators in Kansas
City, Missouri, including Kansas City Station Corporation. The lawsuit alleges
that the defendants are conducting gaming operations that are not located on the
Missouri River in violation of certain state and federal statutes. On January
28, 1998, Station filed its answer to the complaint denying the allegations
contained therein. Management of Station believes that the claims are without
merit and does not expect that the lawsuit will have a material adverse effect
on Station's financial position or results of operations.
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Station Government Regulation. Station is subject to a variety of
governmental regulations relating to the gaming industry in each state in which
it has operations. Appendix B contains a description of the gaming regulations
to which Station is currently subject and to which the Company or the Station
Lessee will become subject upon consummation of the Merger.
NO CASH PROCEEDS TO THE OPERATING PARTNERSHIP
The Operating Partnership will not receive any proceeds from the issuance
of the Exchange Notes offered hereby and has agreed to pay the expenses of the
Exchange Offer. In consideration of its issuance of 2002 Exchange Notes and 2007
Exchange Notes as contemplated in this Prospectus, the Operating Partnership
will receive 2002 Private Notes and 2007 Private Notes, respectively,
representing an equal aggregate principal amount. The Private Notes surrendered
in exchange for Exchange Notes will be retired and canceled and cannot be
reissued. Accordingly, issuance of the Exchange Notes will not result in any
increase in the outstanding indebtedness of the Operating Partnership. The
proceeds from the issuance of the Private Notes were used to fund the
acquisition of Houston Center, repay amounts outstanding under the Credit
Facility and to repay additional short-term indebtedness, as described in the
pro forma financial statements presented in "Summary Selected Financial Data"
and "Selected Financial Data."
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<PAGE> 39
CAPITALIZATION
The following table sets forth the capitalization of the Operating
Partnership as of December 31, 1997 (i) on an historical basis and (ii) on a pro
forma basis after giving effect to investments completed after December 31,
1997, the Pending Investment and related investment financing. Such information
should be read in conjunction with the financial statements and notes included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
------------------------
HISTORICAL PRO FORMA
---------- ----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Indebtedness
Credit Facility, Short-Term Indebtedness and other
Indebtedness (Long-Term and Short-Term) (Unsecured).... $ 541,900 $1,897,250
Mortgage Indebtedness (Secured)(1)........................ 768,224 768,224
The 2002 Notes............................................ 150,000 150,000
The 2007 Notes............................................ 250,000 250,000
---------- ----------
Total Indebtedness................................ $1,710,124 $3,065,474
---------- ----------
Partners' capital........................................... $2,317,353 $3,199,519
---------- ----------
Total Capitalization.............................. $4,027,477 $6,264,993
========== ==========
</TABLE>
- ---------------
(1) Of these amounts, $561,801 represents total indebtedness of the
Subsidiaries, all of which is secured indebtedness.
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<PAGE> 40
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Exchange Offer is designed to provide holders of Private Notes the
opportunity to acquire Exchange Notes which, unlike the Private Notes, will be
freely transferable at all times (subject to certain exceptions relating to the
nature of the holders, as described below in "-- Resale of Exchange Notes").
The Private Notes were sold by the Operating Partnership on September 22,
1997 to the Initial Purchasers pursuant to a purchase agreement, dated as of
September 19, 1997, among the Operating Partnership and the Initial Purchasers
(the "Purchase Agreement"). The Initial Purchasers subsequently sold the Private
Notes to (i) "qualified institutional buyers" ("QIBs"), as defined in Rule 144A
under the Securities Act ("Rule 144A"), in reliance on Rule 144A and (ii) a
limited number of institutional "accredited investors", as defined in Rule
501(a)(1), (2), (3) or (7) under the Securities Act. As a condition to the sale
of the Private Notes, the Operating Partnership and the Initial Purchasers
entered into a registration rights agreement, dated as of September 22, 1997
(the "Registration Rights Agreement"). Pursuant to the Registration Rights
Agreement, the Operating Partnership agreed that (i) it would cause an exchange
offer registration statement under the Securities Act with respect to the
Exchange Notes to be filed with the Commission and (ii) it would use its
reasonable best efforts to cause such Registration Statement to remain effective
under the Securities Act until the closing of the Exchange Offer or such date as
is otherwise required by law and to consummate the Exchange Offer on or before
March 21, 1998. A copy of the Registration Rights Agreement has been filed as an
exhibit to the registration statement of which this Prospectus is a part (the
"Registration Statement"). The Exchange Offer is intended to satisfy the
Operating Partnership's obligations under the Registration Rights Agreement.
Because the Operating Partnership failed to consummate the Exchange Offer on or
before March 21, 1998, the interest rate on each series of the Private Notes has
increased by 50 basis points. This increase will remain in effect until
consummation of the Exchange Offer. See "Description of the Exchange
Notes -- Principal and Interest."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Operating Partnership will accept any and
all Private Notes validly tendered and not withdrawn prior to the Expiration
Date.
The Operating Partnership will issue 2002 Exchange Notes and 2007 Exchange
Notes in exchange for an equal aggregate principal amount of outstanding 2002
Private Notes and 2007 Private Notes, respectively, validly tendered pursuant to
the Exchange Offer and not withdrawn prior to the Expiration Date. Private Notes
may be tendered only in integral multiples of $1,000 principal amount.
The form and terms of the 2002 Exchange Notes and the 2007 Exchange Notes
are the same as the form and terms of the 2002 Private Notes and the 2007
Private Notes, respectively, except that (i) the Exchange Notes will be
registered under the Securities Act and, therefore, the Exchange Notes will not
bear legends restricting the transfer thereof and (ii) holders of the Exchange
Notes will not be entitled to any of the registration rights of holders of
Private Notes under the Registration Rights Agreement, which rights will
terminate upon the consummation of the Exchange Offer. The 2002 Exchange Notes
and the 2007 Exchange Notes will evidence the same indebtedness as the 2002
Private Notes and the 2007 Private Notes (which they replace), respectively, and
will be issued under, and be entitled to the benefits of the Indenture, which
also authorized the issuance of the Private Notes, such that the 2002 Exchange
Notes and the 2002 Private Notes and the 2007 Exchange Notes and the 2007
Private Notes will each be treated as a single series of debt securities under
the Indenture. In the Letter of Transmittal, holders of Private Notes whose
Private Notes are accepted for exchange will waive the right to receive any
payment in respect of interest on the Private Notes accrued from the later of
September 22, 1997 or the Interest Payment Date immediately preceding the date
of issuance of the Exchange Notes (currently expected to be the Interest Payment
Date on March 15, 1998) to the date of the issuance of the Exchange Notes.
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<PAGE> 41
As of the date of this Prospectus, $150 million in aggregate principal
amount of the 2002 Private Notes is outstanding, and $250 million in aggregate
principal amount of the 2007 Private Notes is outstanding. Only a registered
holder of the Private Notes (or such holder's legal representative or
attorney-in-fact), as reflected on the records of the Trustee under the
Indenture, may participate in the Exchange Offer. There will be no fixed record
date for determining registered holders of the Private Notes entitled to
participate in the Exchange Offer.
Holders of the Private Notes do not have any appraisal or dissenters'
rights under the Delaware Uniform Limited Partnership Act or the Indenture in
connection with the Exchange Offer. The Operating Partnership intends to conduct
the Exchange Offer in accordance with the provisions of the Registration Rights
Agreement and the applicable requirements of the Securities Act and the rules
and regulations of the Commission thereunder.
The Operating Partnership shall be deemed to have accepted validly tendered
Private Notes when, and if, the Operating Partnership has given oral or written
notice of acceptance to the Exchange Agent. The Exchange Agent will act as agent
for the tendering holders of Private Notes for the purposes of receiving the
Exchange Notes from the Operating Partnership.
Holders who tender Private Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Private
Notes pursuant to the Exchange Offer. The Operating Partnership will pay all
charges and expenses, other than certain applicable taxes described below, in
connection with the Exchange Offer. See "-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time on
, 1998, unless the Operating Partnership, in its sole discretion,
extends the Exchange Offer, in which case the term "Expiration Date" shall mean
the latest date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Operating Partnership will
notify the Exchange Agent of any extension by oral or written notice and will
notify the registered holders through a press release or other public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date.
The Operating Partnership reserves the right, in its sole discretion, (i)
to delay accepting any Private Notes, (ii) to extend the Exchange Offer or (iii)
if, in the opinion of counsel for the Operating Partnership, the consummation of
the Exchange Offer would violate any applicable law, rule or regulation or any
applicable interpretation of the staff of the Commission, to terminate or amend
the Exchange Offer by giving oral or written notice of such delay, extension,
termination or amendment to the Exchange Agent. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as practicable
by notice thereof to the registered holders through a press release or other
public announcement. If the Exchange Offer is amended in a manner determined by
the Operating Partnership to constitute a material change, the Operating
Partnership will promptly disclose such amendment by means of a prospectus
supplement that will be distributed to the registered holders, and the Operating
Partnership will extend the Exchange Offer for a period of at least ten business
days, if the Exchange Offer would otherwise expire during such ten business day
period.
Without limiting the manner in which the Operating Partnership may choose
to make a public announcement of any delay, extension, amendment or termination
of the Exchange Offer, the Operating Partnership shall have no obligation to
publish, advertise or otherwise communicate any such public announcement, other
than as required by law or by making a timely release to an appropriate news
agency.
INTEREST ON THE EXCHANGE NOTES AND ACCRUED INTEREST ON THE PRIVATE NOTES
The 2002 Exchange Notes will bear interest at an annual rate of 6 5/8%,
payable semi-annually in arrears on each September 15 and March 15, commencing
March 15, 1998. The 2007 Exchange Notes will bear interest at an annual rate of
7 1/8%, payable semi-annually in arrears on each September 15 and March 15,
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<PAGE> 42
commencing March 15, 1998. The Exchange Notes will bear interest from the later
of September 22, 1997 or the Interest Payment Date immediately preceding the
date of issuance of the Exchange Notes (currently expected to be the Interest
Payment Date on March 15, 1998). Interest on the Private Notes which are
exchanged for the Exchange Notes will cease to accrue on the day preceding the
date of issuance of the Exchange Notes. Interest payable on the first Interest
Payment Date with respect to the Exchange Notes will include accrued but unpaid
interest due on the Private Notes (which they replace) for the period from the
later of September 22, 1997 or the Interest Payment Date immediately preceding
the date of issuance of the Exchange Notes (currently expected to be the
Interest Payment Date on March 15, 1998) to the date of such issuance and will
be paid to those who are holders of record of the Exchange Notes as of the close
of business on the date 15 calendar days prior to such payment date. See
"Description of the Exchange Notes -- Principal and Interest."
RESALE OF THE EXCHANGE NOTES
Based upon interpretations by the staff of the Commission set forth in
certain no-action letters issued to third parties, the Operating Partnership
believes that a holder who exchanges Private Notes for Exchange Notes in the
ordinary course of business, who is not participating, does not intend to
participate and has no arrangement with any person to participate, in a
distribution of the Exchange Notes, and who is not an "affiliate" of the
Operating Partnership within the meaning of Rule 405 of the Securities Act, will
be allowed to resell Exchange Notes to the public without further registration
under the Securities Act and without delivering to the purchasers of the
Exchange Notes a prospectus that satisfies the requirements of Section 10 of the
Securities Act. If, however, any holder acquires Exchange Notes in the Exchange
Offer for the purpose of distributing or participating in the distribution of
the Exchange Notes, such holder cannot rely on the position of the staff of the
Commission enumerated in certain no-action letters issued to third parties and
instead must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any resale transaction, unless an
exemption from registration is otherwise available. In addition, each
broker-dealer that receives Exchange Notes for its own account in exchange for
Private Notes acquired by such broker-dealer as a result of market-making or
other trading activities must acknowledge that it will deliver a prospectus in
connection with any resale of Exchange Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. Such broker-dealer may use this Prospectus, as it may be amended
or supplemented from time to time, in connection with resales of any Exchange
Notes received in exchange for Private Notes acquired by such broker-dealer
(other than Private Notes acquired directly from the Operating Partnership) as a
result of market-making or other trading activities. Pursuant to the
Registration Rights Agreement, the Operating Partnership has agreed to make this
Prospectus, as it may be amended or supplemented from time to time, available to
any such broker-dealer that requests copies of such Prospectus in the Letter of
Transmittal for use in connection with any such resale for a period not to
exceed 120 days after the closing of the Exchange Offer. The Operating
Partnership will undertake to update such Prospectus during such 120-day period.
See "Plan of Distribution."
PROCEDURES FOR TENDERING
Only a registered holder of Private Notes may tender such Private Notes in
the Exchange Offer. To tender in the Exchange Offer, a holder of Private Notes
must complete, sign and date the Letter of Transmittal, or a facsimile thereof,
have the signatures thereon guaranteed if required by the Letter of Transmittal,
and mail or otherwise deliver such Letter of Transmittal or such facsimile to
the Exchange Agent at the address set forth below under "-- Exchange Agent" for
receipt prior to the Expiration Date. In addition, prior to the Expiration Date,
either (i) certificates for such Private Notes must be received by the Exchange
Agent along with the Letter of Transmittal, (ii) a timely confirmation of a
book-entry transfer (a "Book-Entry Confirmation") of such Private Notes, if such
procedure is available, into the Exchange Agent's account at the Depository
pursuant to the procedure for book-entry transfer described below must be
received by the Exchange Agent or (iii) the holder must comply with the
guaranteed delivery procedures described below.
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<PAGE> 43
A tender of Private Notes by a holder that is not withdrawn prior to the
Expiration Date will constitute an agreement between such holder and the
Operating Partnership in accordance with the terms and subject to the conditions
set forth herein and in the Letter of Transmittal.
THE METHOD OF DELIVERY OF PRIVATE NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. DO NOT SEND THE LETTER OF TRANSMITTAL OR ANY PRIVATE
NOTES TO THE OPERATING PARTNERSHIP. HOLDERS MAY REQUEST THEIR RESPECTIVE
BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE
ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner of the Private Notes whose Private Notes are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact the registered holder
promptly and instruct such registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to tender on such owner's own
behalf, such owner either must make appropriate arrangements to register
ownership of the Private Notes in such owner's name or must obtain a properly
completed bond power from the registered holder prior to completing and
executing the Letter of Transmittal and delivering such owner's Private Notes.
The transfer of registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "-- Withdrawal of Tenders"), as the case may be, must be guaranteed
by an Eligible Institution (as defined below) unless the Private Notes tendered
pursuant thereto are tendered (i) by a registered holder to whom Exchange Notes
are to be issued directly and who has not completed the box titled "Special
Delivery Instructions" nor the box titled "Special Registration Instructions" on
the Letter of Transmittal or (ii) for the account of an Eligible Institution. In
the event that signatures on a Letter of Transmittal or a notice of withdrawal,
as the case may be, are required to be guaranteed, such guarantee must be made
by a member firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., a commercial bank or trust company
having an office or correspondent in the United States or an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 under the Exchange Act (an
"Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Private Notes listed therein, such Private Notes must
be endorsed or accompanied by a properly completed bond power, signed by such
registered holder exactly as such registered holder's name appears on such
Private Notes.
If the Letter of Transmittal or any Private Notes are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by the Operating
Partnership, evidence satisfactory to the Operating Partnership of their
authority to so act must be submitted with the Letter of Transmittal.
The Exchange Agent and the Depository (as defined below) have confirmed
that any financial institution that is a participant in the Depository's system
may utilize the Depository's Automated Tender Offer Program ("ATOP") to tender
Private Notes. Accordingly, participants in the Depository's ATOP may, in lieu
of physically completing and signing the Letter of Transmittal and delivering it
to the Exchange Agent, electronically transmit their acceptance of the Exchange
Offer by causing the Depository to transfer the Private Notes to the Exchange
Agent in accordance with the Depository's ATOP procedures for transfer. The
Depository will then send an Agent's Message to the Exchange Agent.
The term "Agent's Message" means a message transmitted by the Depository,
received by the Exchange Agent and forming part of the Book-Entry Confirmation,
which states that the Depository has received an express acknowledgement from a
participant in the Depository's ATOP that is tendering Private Notes which are
the subject of such book-entry confirmation, that such participant has received
and agrees to be bound by the terms of the Letter of Transmittal (or, in the
case of an Agent's Message relating to guaranteed delivery, that such
participant has received and agrees to be bound by the applicable notice of
guaranteed delivery), and that the agreement may be enforced against such
participant.
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All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Private Notes will be determined
by the Operating Partnership in its sole discretion, which determination will be
final and binding. The Operating Partnership reserves the absolute right to
reject any and all Private Notes not properly tendered or any Private Notes the
Operating Partnership's acceptance of which would, in the opinion of counsel for
the Operating Partnership, be unlawful. The Operating Partnership also reserves
the right to waive any defects, irregularities or conditions of tender as to
particular Private Notes. The Operating Partnership's interpretation of the
terms and conditions of the Exchange Offer (including the instructions in the
Letter of Transmittal) will be final and binding on all parties. Unless waived,
any defects or irregularities in connection with tenders of Private Notes must
be cured within such time as the Operating Partnership shall determine. Although
the Operating Partnership intends to notify holders of defects or irregularities
with respect to tenders of Private Notes, none of the Operating Partnership, the
Exchange Agent or any other person shall incur any liability for failure to give
such notification. Tenders of Private Notes will not be deemed to have been made
until such defects or irregularities have been cured or waived.
While the Operating Partnership has no present plan to acquire any Private
Notes that are not tendered in the Exchange Offer, the Operating Partnership
reserves the right in its sole discretion to purchase or make offers for any
Private Notes that remain outstanding subsequent to the Expiration Date and, to
the extent permitted by applicable law, to purchase Private Notes in the open
market, in privately negotiated transactions or otherwise. The terms of any such
purchases or offers could differ from the terms of the Exchange Offer.
By tendering, each holder of Private Notes will represent to the Operating
Partnership that, among other things, (i) any Exchange Notes acquired in
exchange for Private Notes tendered thereby are being acquired in the ordinary
course of business of the person receiving such Exchange Notes, (ii) the person
receiving such Exchange Notes is not engaging in and does not intend to engage
in a distribution of the Exchange Notes, (iii) the person receiving such
Exchange Notes does not have an arrangement or understanding with any person to
participate in the distribution of such Exchange Notes, and (iv) neither the
holder nor any other person receiving the Exchange Notes is an "affiliate," as
defined in Rule 405 under the Securities Act, of the Operating Partnership. If
the holder is a broker-dealer that will receive Exchange Notes for its own
account in exchange for Private Notes that were acquired as a result of
market-making activities or other trading activities, such holder will be
required to acknowledge in the Letter of Transmittal that such holder will
deliver a prospectus in connection with any resale of such Exchange Notes. Such
acknowledgement and prospectus delivery by such holder will not be deemed to
constitute an admission by such holder that it is an "underwriter" within the
meaning of the Securities Act. By tendering, each holder of Private Notes will
be required to acknowledge that if it is participating in the Exchange Offer for
the purpose of distributing the Exchange Notes (i) it cannot rely on the
position of the staff of the Commission in certain no-action letters and, in the
absence of an exemption therefrom, must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction of the Exchange Notes, in which case the
registration statement must contain the selling security holder information
required by Item 507 or Item 508, as applicable, of Regulation S-K of the
Securities Act and (ii) failure to comply with such requirements in such
instance could result in such holder incurring liability under the Securities
Act for which it is not indemnified by the Operating Partnership.
RETURN OF PRIVATE NOTES
If any tendered Private Notes are not accepted for any reason set forth in
the terms and conditions of the Exchange Offer or if Private Notes are
withdrawn, such unaccepted, withdrawn or non-exchanged Private Notes will be
returned without expense to the tendering holder thereof (or, in the case of
Private Notes tendered by book-entry transfer into the Exchange Agent's account
at the Depository pursuant to the book-entry transfer procedures described
below, such Private Notes will be credited to an account maintained with the
Depository) as promptly as practicable.
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BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Private Notes with the Depository for purposes of the Exchange Offer
within two business days after the date of this Prospectus, and any financial
institution that is a participant in the Depository's systems may make
book-entry delivery of Private Notes by causing the Depository to transfer such
Private Notes into the Exchange Agent's account at the Depository in accordance
with the Depository's procedures for transfer. However, although delivery of
Private Notes may be effected through book-entry transfer at the Depository, the
Letter of Transmittal or facsimile thereof, with any required signature
guarantees and any other required documents, must, in any case, be transmitted
to and received by the Exchange Agent at the address set forth below under
"-- Exchange Agent" on or prior to the Expiration Date or pursuant to the
guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Private Notes and (i) whose Private Notes
are not immediately available, (ii) who cannot deliver their Private Notes, the
Letter of Transmittal or any other required documents to the Exchange Agent
prior to the Expiration Date or (iii) who are unable to complete the procedure
for book-entry transfer on a timely basis, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed notice of
guaranteed delivery (a "Notice of Guaranteed Delivery") substantially in
the form provided by the Operating Partnership (by facsimile transmission,
mail or hand delivery) setting forth the name and address of the holder,
the certificate number(s) of such Private Notes and the principal amount of
Private Notes tendered, stating that the tender is being made thereby and
guaranteeing that, within three (3) New York Stock Exchange, Inc. ("NYSE")
trading days after the Expiration Date, either (x) the Letter of
Transmittal (or facsimile thereof) together with the Private Notes (or a
Book-Entry Confirmation) in proper form for transfer will be deposited by
the Eligible Institution with the Exchange Agent or (y) an Agent's Message
will be properly transmitted to the Exchange Agent; and
(c) Such properly executed Letter of Transmittal (or facsimile
thereof), as well as the certificate(s) for all physically tendered shares
of Private Notes, in proper form for transfer, or Book-Entry Confirmation,
as the case may be, and all other documents required by the Letter of
Transmittal or a properly transmitted Agent's Message, are received by the
Exchange Agent within three (3) NYSE trading days after the date of
execution of the Notice of Guaranteed Delivery.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Private Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Private Notes may be
withdrawn at any time prior to the Expiration Date. To withdraw a tender of
Private Notes in the Exchange Offer, a written or facsimile transmission notice
of withdrawal must be received by the Exchange Agent at its address set forth
herein prior to the Expiration Date. Any such notice of withdrawal must (i)
specify the name of the person having deposited the Private Notes to be
withdrawn, (ii) identify the Private Notes to be withdrawn (including the
certificate number or numbers) and (iii) be signed by the holder in the same
manner as the original signature on the Letter of Transmittal by which such
Private Notes were tendered (including any required signature guarantees). All
questions as to the validity, form and eligibility (including time of receipt)
of such notices will be determined by the Operating Partnership, in its sole
discretion, whose determination shall be final and binding on all parties. Any
Private Notes so withdrawn will be deemed not to have been validly tendered for
purposes of the Exchange Offer, and no Exchange Notes will be issued with
respect thereto unless the Private Notes so withdrawn are validly retendered.
Properly withdrawn Private Notes may be retendered by following
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one of the procedures described above under "-- Procedures for Tendering" at any
time prior to the Expiration Date.
TERMINATION OF CERTAIN RIGHTS
All registration rights under the Registration Rights Agreement accorded to
holders of the Private Notes eligible to participate in the Exchange Offer (and
all rights to receive additional interest due to failure to consummate the
Exchange Offer on or before March 21, 1998) will terminate upon consummation of
the Exchange Offer except with respect to the Operating Partnership's duty to
keep the Registration Statement effective until the closing of the Exchange
Offer and, for a period of 120 days after the closing of the Exchange Offer, to
provide copies of the latest version of the Prospectus to any broker-dealer that
requests copies of such Prospectus in the Letter of Transmittal for use in
connection with any resale by such broker-dealer of Exchange Notes received for
its own account pursuant to the Exchange Offer in exchange for Private Notes
that were acquired for its own account as a result of market-making or other
trading activities.
EXCHANGE AGENT
State Street Bank and Trust Company of Missouri, N.A. has been appointed as
Exchange Agent for the Exchange Offer. Questions and requests for assistance,
requests for additional copies of this Prospectus or of the Letter of
Transmittal and requests for Notice of Guaranteed Delivery should be directed to
the Exchange Agent addressed as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
By Facsimile Transmission:
(For Eligible Institutions
Only)
(617) 664-5232
Confirm by Telephone:
(617) 664-5590
By Mail: By Overnight Delivery: By Hand:
State Street Bank and Trust State Street Bank and Trust State Street Bank and Trust
Company Company Company
P.O. Box 778 Two International Place Two International Place
Boston, Massachusetts 4th Floor 4th Floor
02102-0778 Boston, Massachusetts 02110 Boston, Massachusetts 02110
Attention: Corporate Trust Attention: Corporate Trust Attention: Corporate Trust
Window Window Window
</TABLE>
State Street Bank and Trust Company of Missouri, N.A. also serves as
Trustee under the Indenture.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Operating
Partnership. The principal solicitation is being made by mail; however,
additional solicitations may be made by telegraph, facsimile transmission,
telephone or in person by officers and regular employees of the Operating
Partnership and their affiliates.
The Operating Partnership has not retained any dealer-manager in connection
with the Exchange Offer and will not make any payments to brokers, dealers or
others soliciting acceptances of the Exchange Offer. The Operating Partnership,
however, will pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for its reasonable, out-of-pocket expenses in
connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Operating Partnership and are estimated in the aggregate to be
approximately $500,000. Such expenses include registration fees, fees and
expenses of the Exchange Agent and the Trustee, accounting and legal fees and
printing costs, among others.
The Operating Partnership will pay all transfer taxes, if any, applicable
to the exchange of Private Notes pursuant to the Exchange Offer. If, however, a
transfer tax is imposed for any reason other than the exchange
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<PAGE> 47
of the Private Notes pursuant to the Exchange Offer, then the amount of any such
transfer tax (whether imposed on the registered holder or any other persons)
will be payable by the tendering holder. If satisfactory evidence of payment of
such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendering holder.
CONSEQUENCE OF FAILURE TO EXCHANGE
Participation in the Exchange Offer is voluntary. Holders of the Private
Notes are urged to consult their financial and tax advisors in making their own
decisions on what action to take.
Private Notes that are not exchanged for the Exchange Notes pursuant to the
Exchange Offer will remain "restricted securities" within the meaning of Rule
144(a)(3)(iv) of the Securities Act. Accordingly, such Private Notes may not be
offered, sold, pledged or otherwise transferred except (i) to a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act or
to a person whom the seller reasonably believes is a qualified institutional
buyer purchasing for its own account in a transaction meeting the requirements
of Rule 144A, (ii) in an offshore transaction complying with Rule 903 or Rule
904 of Regulation S under the Securities Act, (iii) pursuant to an exemption
from registration under the Securities Act provided by Rule 144 thereunder (if
available), (iv) pursuant to an effective registration statement under the
Securities Act or (v) to institutional accredited investors in a transaction
exempt from the registration requirements of the Securities Act, and, in each
case, in accordance with all other applicable securities laws and the transfer
restrictions set forth in the Indenture.
ACCOUNTING TREATMENT
For accounting purposes, the Operating Partnership will recognize no gain
or loss as a result of the Exchange Offer. The expenses of the Exchange Offer
will be amortized over the remaining term of the Notes.
DESCRIPTION OF THE EXCHANGE NOTES
The Exchange Notes will be issued under the Indenture, a copy of which is
filed as an exhibit to the Registration Statement and which will be made
available upon request. The terms of the Exchange Notes include those provisions
contained in the Indenture and those made part of the Indenture by reference to
the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The
Exchange Notes are subject to all such terms, and Holders (as defined below) of
the Exchange Notes are referred to the Indenture and the Trust Indenture Act for
a statement thereof. The following summary of certain provisions of the
Indenture does not purport to be complete and is subject to and qualified in its
entirety by reference to the Indenture. As used in this section, the term
"Operating Partnership" means Crescent Real Estate Equities Limited Partnership
and does not include any of its Subsidiaries unless otherwise expressly stated
or the context otherwise requires.
GENERAL
The 2002 Exchange Notes and the 2007 Exchange Notes constitute separate
series of securities under the Indenture and will be limited to aggregate
principal amounts of $150,000,000 and $250,000,000, respectively. The 2002
Exchange Notes and the 2002 Private Notes will be treated as a single series of
debt securities under the Indenture, and the 2007 Exchange Notes and the 2007
Private Notes will be treated as a separate series of debt securities from the
2002 Notes under the Indenture. The Exchange Notes will be direct, unsecured and
unsubordinated obligations of the Operating Partnership and will have equal
priority of security with each other and with all other unsecured and
unsubordinated indebtedness of the Operating Partnership from time to time
outstanding. The Exchange Notes will be effectively subordinated to mortgages
and other secured indebtedness of the Operating Partnership to the extent of the
value of the property securing such indebtedness. The Exchange Notes also will
be effectively subordinated to all existing and future third party indebtedness
and other liabilities of the Operating Partnership's Subsidiaries. As of
December 31, 1997, after giving pro forma effect to investments completed after
December 31, 1997, the Pending Investment and related investment financing, the
Operating Partnership and its Subsidiaries collectively had total indebtedness
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<PAGE> 48
of $3,065 million, which consisted of $768 million of secured indebtedness (of
which $206 million was secured indebtedness of the Operating Partnership and
$562 million was secured indebtedness of its Subsidiaries) and $2,297 million of
unsecured indebtedness (all of which was unsecured indebtedness of the Operating
Partnership). See "Capitalization."
The 2002 Exchange Notes will mature on September 15, 2002, and the 2007
Exchange Notes will mature on September 15, 2007 (each a "Maturity Date"). The
Exchange Notes are not subject to any sinking fund provisions.
Except as described under "-- Certain Covenants -- Limitations on
Incurrence of Debt" and "-- Merger, Consolidation or Sale," the Indenture does
not contain any other provisions that would limit the ability of the Operating
Partnership to incur indebtedness or that would afford Holders of the Exchange
Notes protection in the event of (i) a highly leveraged or similar transaction
involving the Operating Partnership, the management of the Operating
Partnership, the General Partner or the Company, or any subsidiary of any of
them, (ii) a change of control of the Operating Partnership, the General Partner
or the Company or (iii) a reorganization, restructuring, merger or similar
transaction involving the Operating Partnership that may adversely affect the
Holders of the Exchange Notes. Such additional indebtedness may consist of
obligations of the Operating Partnership, the General Partner or the Company, or
any subsidiary of any of them, and is not limited to indebtedness issued under
the Indenture. In addition, subject to the limitations set forth under
"-- Merger, Consolidation or Sale," the Operating Partnership may, in the
future, enter into certain transactions such as the sale of all or substantially
all of its assets or the merger or consolidation of the Operating Partnership
that would increase the amount of the Operating Partnership's indebtedness or
substantially reduce or eliminate the Operating Partnership's assets, which may
have an adverse effect on the Operating Partnership's ability to satisfy its
obligations as they become due, including the Exchange Notes. The Operating
Partnership and its management have no present intention of engaging in a highly
leveraged or similar transaction involving the Operating Partnership.
PRINCIPAL AND INTEREST
The 2002 Exchange Notes will bear interest at 6 5/8% per annum, and the
2007 Exchange Notes will bear interest at 7 1/8% per annum, each from the later
of September 22, 1997 or the Interest Payment Date immediately preceding the
date of issuance of the Exchange Notes (currently expected to be the Interest
Payment Date on March 15, 1998), payable semi-annually in arrears on each
September 15 and March 15, commencing March 15, 1998 (each, an "Interest Payment
Date"), through the applicable Maturity Date, to the persons (the "Holders") in
whose names the applicable Exchange Notes are registered in the security
register applicable to the Exchange Notes at the close of business on the date
15 calendar days prior to such payment day regardless of whether such day is a
Business Day, as defined below (each, a "Regular Record Date"). In the Letter of
Transmittal, holders of Private Notes whose Private Notes are accepted for
exchange will waive the right to receive any payment in respect of interest on
the Private Notes accrued from the later of September 22, 1997 or the Interest
Payment Date immediately preceding the date of issuance of the Exchange Notes
(currently expected to be the Interest Payment Date on March 15, 1998) to the
date of the issuance of the Exchange Notes. Interest on the Exchange Notes will
be computed on the basis of a 360-day year of twelve 30-day months. The interest
rate on the Exchange Notes is subject to adjustment in the event that the
Exchange Notes are assigned a rating that is not an Investment Grade Rating, do
not continue to be assigned a rating or are not assigned a rating by the Rating
Agencies. See "-- Rating." The interest rate on the Private Notes increased by
50 basis points, effective March 22, 1998, to 7 1/8% for the Private Notes due
2002 and 7 5/8% for the Private Notes due 2007. This interest rate increase will
remain in effect until consummation of the Exchange Offer. Upon consummation of
the Exchange Offer, the interest rate increase will be eliminated and the
Exchange Notes and the Private Notes that remain outstanding will bear interest
at their stated rates of 6 5/8 for the Notes due 2002 and 7 1/8 for the Notes
due 2007.
The principal of each Exchange Note payable on the applicable Maturity Date
will be paid against presentation and surrender of such Exchange Note at the
corporate trust office of the Trustee, located initially in Boston,
Massachusetts, in such coin or currency of the United States of America as at
the time of payment is legal tender for payment of public and private debts.
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<PAGE> 49
If any Interest Payment Date or a Maturity Date falls on a day that is not
a Business Day, the required payment shall be made on the next Business Day as
if it were made on the date such payment was due and no interest shall accrue on
the amount so payable for the period from and after such Interest Payment Date
or such Maturity Date, as the case may be. "Business Day" means any day, other
than a Saturday or Sunday, on which banking institutions in New York, New York,
Boston, Massachusetts and St. Louis, Missouri are open for business.
OPTIONAL REDEMPTION
The Exchange Notes may be redeemed at any time at the option of the
Operating Partnership, in whole or from time to time in part, at a redemption
price equal to the sum of (i) the principal amount of the Exchange Notes (or
portion thereof) being redeemed plus accrued and unpaid interest, if any,
thereon to the redemption date and (ii) the Make-Whole Amount (as defined
below), if any, with respect to such Exchange Notes (or portion thereof)
(collectively, the "Redemption Price").
If notice has been given as provided in the Indenture and funds for the
redemption of any Exchange Notes (or portion thereof) called for redemption
shall have been made available on the redemption date referred to in such
notice, such Exchange Notes (or portion thereof) will cease to bear interest on
the date fixed for such redemption specified in such notice and the only right
of the Holders of the Exchange Notes will be to receive payment of the
Redemption Price.
Notice of any optional redemption of any Exchange Notes (or portion
thereof) will be given to Holders at their addresses, as shown in the security
register for the Exchange Notes, not more than 60 or less than 30 days prior to
the date fixed for redemption. The notice of redemption will specify, among
other items, the Redemption Price and the principal amount of the Exchange Notes
held by such Holder to be redeemed.
If less than all the Exchange Notes are to be redeemed at the option of the
Operating Partnership, the Operating Partnership will notify the Trustee at
least 45 days prior to giving notice of redemption to the Holders (or such
shorter period as is satisfactory to the Trustee) of the aggregate principal
amount of Exchange Notes to be redeemed and their redemption date. The Trustee
shall select, in such manner as it shall deem fair and appropriate, Exchange
Notes to be redeemed in whole or in part.
RATING
The Operating Partnership intends to obtain a rating of the Private Notes
and/or the Exchange Notes from the Rating Agencies. If, within the period from
September 22, 1997 to September 22, 1998, (i) either Rating Agency at any time
(a) assigns a rating to a series of the Private Notes or the Exchange Notes that
is not an Investment Grade Rating or (b) withdraws any rating for a series of
the Private Notes or the Exchange Notes and does not promptly assign a new
rating, or (ii) either Rating Agency fails to assign any rating to a series of
the Private Notes or the Exchange Notes, then the interest rate for such series
shall increase by the Rating Adjustment commencing on the date on which such
series is rated with other than an Investment Grade Rating, the date a rating
for any series is withdrawn, or September 22, 1998 if no rating is assigned, as
the case may be. In the case of clause (i) above, from and after such date, if
any, until September 22, 1998, if such series becomes rated by such Rating
Agency with an Investment Grade Rating, then the Rating Adjustment shall be
eliminated, until such time as it would otherwise again be applicable. The
interest rate for each series of Private Notes or Exchange Notes, as the case
may be, shall be fixed on September 22, 1998 for the remainder of the term of
such series. Notwithstanding anything to the contrary contained herein, if at
any time within the period from September 22, 1997 to September 22, 1998, both
Rating Agencies shall have rated any series of Private Notes or Exchange Notes
with an Investment Grade Rating, the Rating Adjustment shall be eliminated for
the remainder of the term of such series of Private Notes or Exchange Notes.
CERTAIN COVENANTS
Limitations on Incurrence of Debt. The Operating Partnership will not, and
will not permit a Subsidiary to, incur any Debt (as defined below) other than
intercompany Debt (representing Debt to which the only
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<PAGE> 50
parties are the Operating Partnership and any of its Subsidiaries, but only so
long as such Debt is held solely by any of the Operating Partnership and any
Subsidiary) that is subordinate in right of payment to the Notes, if,
immediately after giving effect to the incurrence of such additional Debt, the
aggregate principal amount of all outstanding Debt of the Operating Partnership
and its Subsidiaries on a consolidated basis determined in accordance with GAAP
is greater than 60% of the sum of (i) Total Assets (as defined below) as of the
end of the fiscal quarter covered in the Operating Partnership's most recent
quarterly or annual financial statements, as the case may be, most recently
required to be delivered to Holders pursuant to the Indenture, prior to the
incurrence of such additional Debt and (ii) the increase or decrease in Total
Assets from the end of such quarter including, without limitation, any increase
in Total Assets resulting from the incurrence of such additional Debt (such
increase or decrease together with the Operating Partnership's Total Assets is
referred to as the "Adjusted Total Assets") (Section 1004(a)).
In addition to the foregoing limitations on the incurrence of Debt, the
Operating Partnership will not, and will not permit any Subsidiary to, incur any
Secured Debt (as defined below) of the Operating Partnership or any Subsidiary
if, immediately after giving effect to the incurrence of such additional Secured
Debt, the aggregate principal amount of all outstanding Secured Debt of the
Operating Partnership and its Subsidiaries on a consolidated basis is greater
than 40% of Adjusted Total Assets (Section 1004(b)).
In addition to the foregoing limitations on the incurrence of Debt, the
Operating Partnership will not, and will not permit any Subsidiary to, incur any
Debt, other than intercompany Debt that is subordinate in right of payment to
the Notes, if the ratio of the Consolidated Income Available for Debt Service to
the Annual Debt Service Charge (in each case as defined below) for the period
consisting of the four consecutive fiscal quarters most recently ended prior to
the date on which such additional Debt is to be incurred shall have been less
than 1.5 to 1 on a pro forma basis after giving effect to the incurrence of such
Debt and to the application of the proceeds therefrom, and calculated on the
assumption that (i) such Debt and any other Debt incurred by the Operating
Partnership or its Subsidiaries since the first day of such four-quarter period,
which was outstanding at the end of such period, had been incurred at the
beginning of such period and continued to be outstanding throughout such period,
and the application of the proceeds of such Debt, including to refinance other
Debt, had occurred at the beginning of such period, (ii) the repayment or
retirement of any other Debt by the Operating Partnership or its Subsidiaries
since the first day of such four-quarter period had been repaid or retired at
the beginning of such period (except that, in determining the amount of Debt so
repaid or retired, the amount of Debt under any revolving credit facility shall
be computed based upon the average daily balance of such Debt during such
period), (iii) in the case of Acquired Indebtedness or Debt incurred in
connection with any acquisition since the first day of the four-quarter period,
the related acquisition had occurred as of the first day of the period with the
appropriate adjustments with respect to the acquisition being included in the
pro forma calculation and (iv) in the case of any increase or decrease in Total
Assets, or any other acquisition or disposition by the Operating Partnership or
any Subsidiary of any asset or group of assets, since the first day of such
four-quarter period, including, without limitation, by merger, stock purchase or
sale, or asset purchase or sale, such increase, decrease or other acquisition or
disposition or any related repayment of Debt had occurred as of the first day of
such period with the appropriate adjustments to revenues, expenses and Debt
levels with respect to such increase, decrease or other acquisition or
disposition being included in such pro forma calculation (Section 1004(c)).
Maintenance of Total Unencumbered Assets. The Operating Partnership is
required at all times to maintain Total Unencumbered Assets (as defined below)
of not less than 150% of the aggregate outstanding principal amount of all
outstanding Unsecured Debt of the Operating Partnership and its Subsidiaries on
a consolidated basis (Section 1004(d)).
Existence. Except as permitted under "-- Merger, Consolidation or Sale,"
the Operating Partnership is required to do or cause to be done all things
necessary to preserve and keep in full force and effect its existence, rights
and franchises; provided, however, that the Operating Partnership shall not be
required to preserve any right or franchise if the Board of Directors of the
General Partner determines that the preservation thereof is no longer desirable
in the conduct of the Operating Partnership's business and that the loss thereof
is not disadvantageous in any material respect to the Holders (Section 1006).
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<PAGE> 51
Maintenance of Properties. The Operating Partnership is required to cause
all of its material properties used or useful in the conduct of its business or
the business of any Subsidiary to be maintained and kept in good condition,
repair and working order and supplied with all necessary equipment and to cause
to be made all necessary repairs, renewals, replacements, betterments and
improvements thereof, all as in the reasonable judgment of the Operating
Partnership may be necessary so that the business carried on in connection
therewith may be properly and advantageously conducted at all times; provided,
however, that the Operating Partnership and its Subsidiaries shall not be
prevented from discontinuing the operation and maintenance of any of the
properties if such discontinuance is, in the judgment of the Operating
Partnership, desirable in the conduct of its business and not disadvantageous in
any material respect to the Holders (Section 1007).
Insurance. The Operating Partnership is required to, and is required to
cause each of its Subsidiaries to, maintain insurance coverage by financially
sound and reputable insurance companies on all of its insurable property against
loss or damage with amounts and types of insurance that are commercially
reasonable (Section 1008).
Payment of Taxes and Other Claims. The Operating Partnership is required to
pay or discharge or cause to be paid or discharged, before the same shall become
delinquent, (i) all taxes, assessments and governmental charges levied or
imposed upon it or any Subsidiary or upon its income, profits or property or
that of any Subsidiary and (ii) all lawful claims for labor, materials and
supplies which, if unpaid, might by law become a lien upon the property of the
Operating Partnership or any Subsidiary; provided, however, that the Operating
Partnership shall not be required to pay or discharge or cause to be paid or
discharged any such tax, assessment, charge or claim whose amount, applicability
or validity is being contested in good faith by appropriate proceedings (Section
1009).
Provision of Financial Information. The Operating Partnership will deliver
to each Holder of the Exchange Notes (a) quarterly unaudited consolidated
financial statements (including statements of income and cash flow and a
consolidated balance sheet), in comparative form, of the Operating Partnership
and its Subsidiaries within 60 days of the end of each of the first three fiscal
quarters, (b) annual audited consolidated financial statements of the Operating
Partnership and its Subsidiaries within 105 days of the end of each fiscal year,
(c) together with the statements delivered under (a) and (b) above,
certification from an officer of the Operating Partnership ranking at the level
of a Senior Vice President or above and having responsibility for financial
information as fairly presenting in all material respects the financial position
and results of operations of the Operating Partnership and its Subsidiaries, (d)
together with the statements delivered under (a) above, a certificate from an
officer of the Operating Partnership ranking at the level of Senior Vice
President or above and having responsibility for financial information showing
compliance with the provisions of restrictive covenants and indicating whether
or not the Operating Partnership is aware of any defaults, (e) together with the
statements delivered under (b) above, a certificate from the Operating
Partnership's accountants showing compliance with the provisions of restrictive
covenants and indicating whether or not they became aware of any defaults during
their audit, (f) copies of all public documents sent by the Operating
Partnership to public securities holders or filed by the Operating Partnership
with the Commission within 15 days after the filing of such documents and (g)
notice within ten business days after an officer of the Operating Partnership
ranking at the level of a Senior Vice President or above and having
responsibility for financial information becomes aware of the existence of any
Default or Event of Default, specifying the nature and period of existence
thereof and what action the Operating Partnership is taking or proposes to take
with respect thereto.
Following the effectiveness of the Registration Statement of which this
Prospectus constitutes a part, the quarterly and annual consolidated financial
statements referred to above will be deemed to refer to the Operating
Partnership's quarterly reports on Form 10-Q or annual reports on Form 10-K or
current reports on Form 8-K, respectively (Section 1010).
Compliance with the covenants described herein with respect to the Notes
generally may not be waived by the Board of Directors of the General Partner or
by the Trustee unless the Holders of at least a majority in principal amount
outstanding of all Notes of each series of Notes affected by such waiver consent
to such waiver; provided, however, that the defeasance and covenant defeasance
provisions of the Indenture described under "-- Satisfaction and Discharge" will
apply to the Notes.
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MERGER, CONSOLIDATION OR SALE
The Operating Partnership may consolidate with, or sell, lease or convey
all or substantially all of its assets to, or merge with or into, any other
corporation, limited liability company, association, partnership, real estate
investment trust, company or business trust (any such entity, a "Corporation"),
provided that (a) the Operating Partnership shall be the continuing Corporation
or the successor Corporation or its transferees or assignees of such assets (if
other than the Operating Partnership) formed by or resulting from any such
consolidation or merger or which shall have received the transfer of such assets
by lease (subject to the continuing obligations of the Operating Partnership set
forth in the Indenture) or otherwise, either directly or indirectly, shall
expressly assume payment of the principal of (and premium or Make-Whole Amount,
if any) and interest on all the Notes and the due and punctual performance and
observance of all of the covenants and conditions contained in the Indenture;
(b) the successor corporation formed by or resulting from any such consolidation
or merger or which shall have received the transfer of assets shall be a United
States Corporation (as defined in the Indenture); (c) immediately after giving
effect to such transaction and treating any Debt which becomes an obligation of
the Operating Partnership or any Subsidiary of the Operating Partnership as a
result thereof as having been incurred by the Operating Partnership or such
Subsidiary at the time of such transaction, no Event of Default under the
Indenture, and no event which, after notice or the lapse of time, or both, would
become such an Event of Default, shall have occurred and be continuing; and (d)
an officer's certificate and legal opinion covering such conditions shall be
delivered to the Trustee (Sections 801 and 803).
GLOBAL SECURITIES
Exchange Notes issued in exchange for the Private Notes currently
represented by one or more fully registered global notes will be represented by
one or more fully registered global notes (collectively, the "Global
Securities"), and will be deposited upon issuance with The Depository Trust
Company (the "Depository") or an agent of the Depository and registered in the
name of Cede & Co. ("Cede"), as the Depository's nominee.
Exchange Notes issued in exchange for other Private Notes will be issued in
registered, certificated form without interest coupons.
Holders may hold their interests in any Global Securities directly through
the Depository, or indirectly through organizations which are participants in
the Depository ("Participants"). Transfers between Participants will be effected
in the ordinary way in accordance with the Depository's rules and will be
settled in immediately available funds. Access to the Depository's system is
also available to other entities such as banks, brokers, dealers, trust
companies and other parties that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly, and have
indirect access to the Depository's system ("Indirect Participants"). Persons
who are not Participants or Indirect Participants may beneficially own
securities held by or on behalf of the Depository only through the Participants
or the Indirect Participants. The ownership interests and transfer of ownership
interests of such persons held by or on behalf of the Depository are recorded on
the records of the Participants and Indirect Participants. So long as Cede, as
the nominee of the Depository, is the registered owner of any Global Security,
Cede for all purposes will be considered the sole holder of such Global
Security. Except as provided below, owners of beneficial interests in a Global
Security will not be entitled to have certificates registered in their names,
will not receive or be entitled to receive physical delivery of certificates in
definitive form and will not be considered the Holder thereof.
The Depository has advised the Operating Partnership as follows: the
Depository is a limited purpose trust company organized under the laws of the
State of New York, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Depository was
created to hold securities for its Participants and to facilitate the clearance
and settlement of securities transactions, such as transfers and pledges, among
Participants in deposited securities through electronic book-entry changes to
accounts of its Participants, thereby eliminating the need for physical
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movement of securities certificates. Participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Certain of such Participants (or their representatives), together
with other entities, own the Depository. The rules applicable to the Depository
and its Participants are on file with the Commission.
The Depository has also advised the Operating Partnership that pursuant to
procedures established by it, (i) upon deposit of the Global Securities, the
Depository will credit the accounts of its Participants with portions of the
principal amount of the Global Securities representing the Exchange Notes issued
in exchange for the Private Notes that each such Participant has instructed the
Depository to surrender for exchange and (ii) ownership of such interests in the
Global Securities will be shown on, and the transfer of ownership thereof will
be effected only through, records maintained by the Depository (with respect to
the Participants) or by the Participants and the Indirect Participants (with
respect to other owners of beneficial interests in the Global Securities).
Under the terms of the Indenture, the Operating Partnership and the Trustee
will treat the persons in whose names the Exchange Notes, including the Global
Securities, are registered as the owners thereof for the purpose of receiving
payments in respect of the principal of and premium, if any, and interest on any
Exchange Notes and for any and all other purposes whatsoever. Payments on any
Exchange Notes registered in the name of Cede will be payable by the Trustee to
Cede in its capacity as the registered holder under the Indenture. Consequently,
none of the Operating Partnership, the Trustee or any agent of the Operating
Partnership or the Trustee has or will have any responsibility or liability for
(i) any aspect of the Depository's records or the records of any Participant or
Indirect Participant relating to or payments made on account of beneficial
ownership interests in the Global Securities, or for maintaining, supervising or
reviewing any of the Depository's records or records of any Participant or
Indirect Participant relating to the beneficial ownership interests in the
Global Securities or (ii) any other matter relating to the actions and practices
of the Depository or any of its Participants or Indirect Participants. The
Depository has advised the Operating Partnership that its current practice, upon
receipt of any payment in respect of securities such as the Exchange Notes
(including principal and interest), is to credit the accounts of the relevant
Participants with the payment on the payment date, in amounts proportionate to
their respective holdings in principal amount of beneficial interests in the
relevant security as shown on the records of the Depository unless the
Depository has reason to believe it will not receive payment on such payment
date. Payments by the Participants and the Indirect Participants to the
beneficial owners of Exchange Notes will be governed by standing instructions
and customary practices and will be the responsibility of the Participants or
the Indirect Participants and will not be the responsibility of the Depository,
the Trustee or the Operating Partnership. Neither the Operating Partnership nor
the Trustee will be liable for any delay by the Depository or any of its
Participants or Indirect Participants in identifying the beneficial owners of
the Exchange Notes, and the Operating Partnership and the Trustee may
conclusively rely on and will be protected in relying on instructions from Cede
for all purposes.
The Depository may discontinue providing its services as securities
depositary with respect to the Exchange Notes at any time by giving reasonable
notice to the Operating Partnership. In the event that the Depository notifies
the Operating Partnership that it is unwilling or unable to continue as
depositary for any Global Security or if at any time the Depository ceases to be
a clearing agency registered as such under the Exchange Act when the Depository
is required to be so registered to act as such depositary and no successor
depositary shall have been appointed within 90 days of such notification or of
the Operating Partnership's becoming aware of the Depository's ceasing to be so
registered, as the case may be, certificates for the relevant Exchange Notes
will be printed and delivered in exchange for interests in such Global Security.
Any Global Security that is exchangeable pursuant to the preceding sentence
shall be exchanged for the relevant Exchange Notes registered in such names as
the Depository shall direct. It is expected that such instructions will be based
upon directions received by the Depository from its Participants with respect to
ownership of beneficial interests in such Global Security.
The Operating Partnership may decide to discontinue use of the system of
book-entry transfers through the Depository (or a successor securities
depositary). In that event, certificates representing the Exchange Notes will be
printed and delivered.
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The information in this section concerning the Depository and the
Depository's book-entry system has been obtained from sources that the Operating
Partnership believes to be reliable, but the Operating Partnership does not take
responsibility for the accuracy thereof.
EVENTS OF DEFAULT, NOTICE AND WAIVER
The following events are "Events of Default" with respect to any series of
the Notes: (a) default for 30 days in the payment of any installment of interest
on any Note of such series; (b) default in the payment of the principal of (or
premium or Make-Whole Amount, if any, on) any Note of such series at its
maturity; (c) default in the performance, or breach, of any other covenant or
warranty of the Operating Partnership contained in the Indenture, such default
having continued for 60 days after written notice as provided in the Indenture;
(d) default in the payment of an aggregate principal amount exceeding $5,000,000
of any recourse indebtedness of the Operating Partnership or any mortgage,
indenture or other instrument under which such indebtedness is issued or by
which such indebtedness is secured, such default having occurred after the
expiration of any applicable grace period and having resulted in the
acceleration of the maturity of such indebtedness, but only if such indebtedness
is not discharged or such acceleration is not rescinded or annulled, such
default having continued for a period of 10 days after written notice as
provided in the Indenture; (e) certain events of bankruptcy, insolvency or
reorganization, or court appointment of a receiver, liquidator or trustee of the
Operating Partnership or any Significant Subsidiary or any of their respective
property; and (f) any other Event of Default provided in the Indenture with
respect to the Note (Section 501).
If an Event of Default under the Indenture with respect to any series of
the Notes occurs and is continuing, then in every such case the Trustee or the
Holders of not less than 25% in principal amount of the Outstanding Notes (as
defined below) of such series may declare the principal amount of all of the
Notes of such series to be due and payable immediately by written notice thereof
to the Operating Partnership (and to the Trustee if given by the Holders).
However, at any time after such a declaration of acceleration with respect to
Notes of any series has been made, but before a judgment or decree for payment
of the money due has been obtained by the Trustee, the Holders of not less than
a majority in principal amount of Outstanding Notes of such series may rescind
and annul such declaration and its consequences if (a) the Operating Partnership
shall have paid or deposited with the Trustee all payments of principal which
have become due otherwise than by such declaration of acceleration of (and
premium or Make-Whole Amount, if any) and required interest on the Notes of such
series, plus certain fees, expenses, disbursements and advances of the Trustee
and (b) all Events of Default, other than the nonpayment of principal of (and
premium or Make-Whole Amount, if any) or interest on the Notes of such series
which have become due solely by declaration of acceleration, have been cured or
waived as provided in the Indenture (Section 502). The Indenture also provides
that the Holders of not less than a majority in principal amount of the
Outstanding Notes of any series may waive any past default with respect to such
series and its consequences, except a default (x) in the payment of the
principal of (or premium or Make-Whole Amount, if any) or interest payable on
any Note of such series or (y) in respect of a covenant or provision contained
in the Indenture that cannot be modified or amended without the consent of the
Holder of each Outstanding Note of such series affected thereby (Section 513). A
Note shall be deemed outstanding ("Outstanding") if it has been authenticated
and delivered under the Indenture unless, among other things, such Note has been
cancelled or redeemed.
The Trustee will be required to give notice to the Holders of Notes of any
series within 90 days of a default under the Indenture unless such default has
been cured or waived; provided, however, that the Trustee may withhold notice to
the Holders of any default (except a default in the payment of the principal of
(or premium or Make-Whole Amount, if any) or interest on any Note of such
series) if specified responsible officers of the Trustee in good faith determine
such withholding to be in the best interests of the Holders of the Notes of such
series; and provided further that in the case of any default or breach of the
character specified in Section 501(d) of the Indenture no such notice shall be
given until at least 60 days after the occurrence thereof (Section 601).
The Indenture provides that no Holders of Notes of any series may institute
any proceedings, judicial or otherwise, with respect to the Indenture or for any
remedy thereunder, except in the case of failure of the Trustee, for 60 days, to
act after it has received a written request to institute proceedings in respect
of an Event
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<PAGE> 55
of Default from the Holders of not less than 25% in principal amount of the
Outstanding Notes, as well as an offer of indemnity reasonably satisfactory to
it (Section 507). This provision will not prevent, however, any Holder of Notes
from instituting suit for the enforcement of payment of the principal of (and
premium or Make-Whole Amount, if any) and interest on such Notes at the
respective due dates thereof (Section 508).
Subject to provisions in the Indenture relating to its duties in case of
default, the Trustee is under no obligation to exercise any of its rights or
powers under the Indenture at the request or direction of any Holders of any
Outstanding Notes of any series under the Indenture, unless such Holders shall
have offered to the Trustee thereunder reasonable security or indemnity (Section
602). The Holders of not less than a majority in principal amount of the
Outstanding Notes of any series shall have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee,
or of exercising any trust or power conferred upon the Trustee. The Trustee,
however, may refuse to follow any direction which is in conflict with any law or
with the Indenture or with the Notes of such series, which may involve the
Trustee in personal liability or which may be unduly prejudicial to the Holders
of Notes of such series not joining therein (Section 512).
Within 120 days after the close of each fiscal year, the Operating
Partnership must deliver to the Trustee a certificate, signed by one of several
specified officers of the General Partner ranking at the level of Senior Vice
President or above, stating whether or not such officer has knowledge of any
default under the Indenture and, if so, specifying each such default and the
nature and status thereof (Section 1011).
MODIFICATION OF THE INDENTURE
Modifications and amendments of the Indenture will be permitted to be made
only with the consent of the Holders of not less than a majority in principal
amount of all Outstanding Notes which are affected by such modification or
amendment; provided, however, that no such modification or amendment may,
without the consent of the Holders of each Outstanding Note affected thereby,
(a) change the stated maturity of the principal of (or premium or Make-Whole
Amount, if any, on) or any installment of principal of or interest on, any such
Note; (b) reduce the principal amount of, or the rate or amount of interest on,
or any premium payable on redemption of, any such Note, (c) change the place of
payment, or the coin or currency, for payment of principal of, or any premium or
interest on, any such Note; (d) impair the right to institute suit for the
enforcement of any payment on or with respect to any such Note; (e) reduce the
above-stated percentage in principal amount of Outstanding Notes of any series
necessary to modify or amend the Indenture, to waive compliance with certain
provisions thereof or certain defaults and consequences thereunder or to reduce
the quorum or voting requirements set forth in the Indenture; or (f) modify any
of the foregoing provisions or any of the provisions relating to the waiver of
certain past defaults or certain covenants, except to increase the required
percentage to effect such action or to provide that certain other provisions may
not be modified or waived without the consent of the Holders of each Outstanding
Note affected thereby (Section 902).
The Indenture provides that the Holders of not less than a majority in
principal amount of Outstanding Notes have the right to waive compliance by the
Operating Partnership with certain covenants in the Indenture (Section 1013).
Modifications and amendments of the Indenture will be permitted to be made
by the Operating Partnership and the Trustee without the consent of any Holder
of Notes for any of the following purposes: (i) to evidence the succession or
addition of another person to the Operating Partnership as obligor under the
Indenture; (ii) to add to the covenants of the Operating Partnership for the
benefit of the Holders of all or any series of Notes or to surrender any right
or power conferred upon the Operating Partnership in the Indenture; (iii) to add
Events of Default for the benefit of the Holders of all or any series of Notes;
(iv) to permit or facilitate the issuance of Notes in uncertificated form,
provided, that such action shall not adversely affect the interests of the
Holders of Notes of any series in any material respect; (v) to secure the Notes;
(vi) to establish the form or terms of additional notes of any series; (vii) to
provide for the acceptance of appointment by a successor Trustee or facilitate
the administration of the trusts under the Indenture by more than one Trustee;
(viii) to comply with any requirements of the Commission in connection with the
qualification of the Indenture under the Trust Indenture Act or in connection
with the registration of the Private Notes or the
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Exchange Notes pursuant to the requirements of the Securities Act; (ix) to cure
any ambiguity, defect or inconsistency in the Indenture, provided that such
action shall not adversely affect the interests of Holders of Notes of any
series in any material respect; or (x) to supplement any of the provisions of
the Indenture to the extent necessary to permit or facilitate defeasance and
discharge of any series of Notes or additional notes under the Indenture,
provided that such action shall not adversely affect the interests of the
Holders of the notes of such series in any material respect (Section 901).
The Indenture contains provisions for convening meetings of the Holders of
Notes (Section 1501). A meeting will be permitted to be called at any time by
the Trustee, and also, upon request to the Trustee, by the Operating Partnership
or the Holders of at least 10% in principal amount of the Outstanding Notes of
any series, in any such case upon notice given as provided in the Indenture
(Section 1502). Except for any consent that must be given by the Holder of each
Note affected by certain modifications and amendments of the Indenture, any
resolution presented at a meeting or adjourned meeting duly reconvened at which
a quorum is present will be permitted to be adopted by the affirmative vote of
the Holders of a majority in principal amount of the Outstanding Notes of that
series; provided, however, that, except as referred to above, any resolution
with respect to any request, demand, authorization, direction, notice, consent,
waiver or other action that may be made, given or taken by the Holders of a
specified percentage, which is less than a majority, in principal amount of the
Outstanding Notes of a series may be adopted at a meeting or adjourned meeting
duly reconvened at which a quorum is present by the affirmative vote of the
Holders of such specified percentage in principal amount of the Outstanding
Notes of such series. Any resolution passed or decision taken at any meeting of
Holders of Notes of any series duly held in accordance with the Indenture will
be binding on all Holders of Notes of such series. The quorum at any meeting
called to adopt a resolution, and at any reconvened meeting, will be Persons
holding or representing a majority in principal amount of the Outstanding Notes
of a series; provided, however, that if any action is to be taken at such
meeting with respect to a consent or waiver which may be given by the Holders of
not less than a specified percentage in principal amount of the Outstanding
Notes of a series, the Persons holding or representing such specified percentage
in principal amount of the Outstanding Notes of such series will constitute a
quorum (Section 1504).
Notwithstanding the foregoing provisions, if any action is to be taken at a
meeting of Holders of Notes of any series with respect to any request, demand,
authorization, direction, notice, consent, waiver or other action that the
Indenture expressly provides may be made, given or taken by the Holders of a
specified percentage in principal amount of all Outstanding Notes affected
thereby, or of the Holders of such series and one or more additional series: (i)
there shall be no minimum quorum requirement for such meeting and (ii) the
principal amount of the Outstanding Notes of such series that vote in favor of
such request, demand, authorization, direction, notice, consent, waiver or other
action shall be taken into account in determining whether such request, demand,
authorization, direction, notice, consent, waiver or other action has been made,
given or taken under the Indenture (Section 1504).
SATISFACTION AND DISCHARGE
The Operating Partnership may discharge certain obligations to Holders of
Notes of a series that have not already been delivered to the Trustee for
cancellation and that either have become due and payable or will become due and
payable within one year (or scheduled for redemption within one year) by
irrevocably depositing with the Trustee, in trust, funds in such currency or
currencies, currency unit or units or composite currency or currencies in which
the Notes of such series are payable in an amount sufficient to pay the entire
indebtedness on such Notes in respect of principal (and premium or Make-Whole
Amount, if any) and interest to the date of such deposit (if such Notes have
become due and payable) or to the stated maturity or Redemption Date, as the
case may be (Section 401(a)(2)).
NO CONVERSION RIGHTS
The Notes will not be convertible into or exchangeable for any capital
stock of the Company or equity interest in the Operating Partnership.
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PAYMENT
All payments of principal and interest in respect of the Exchange Notes in
the form of Global Securities will be made by the Operating Partnership in
immediately available funds.
GOVERNING LAW
The Indenture is governed by and shall be construed in accordance with the
laws of the State of New York.
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SELECTED FINANCIAL DATA
The following table sets forth certain summary financial information for
the Operating Partnership on a pro forma and historical basis and for the
Rainwater Property Group (the Operating Partnership's predecessor) on a combined
historical basis, which consists of the combined financial statements of the
entities that contributed Properties in exchange for Units or Common Shares of
the Company in connection with the formation of the Company and the Operating
Partnership. Such information should be read in conjunction with "Selected
Financial Data."
The pro forma information for the year ended December 31, 1997 and 1996
assumes completion, in each case as of January 1, 1996 in determining operating
and other data, of (i) the Company's public offering of its Common Shares that
closed on October 2, 1996 (the "October 1996 Offering") and the additional
public offering of 450,000 Common Shares that closed on October 9, 1996 and the
contribution of the net proceeds to the Operating Partnership, which used the
net proceeds to repay approximately $168 million of indebtedness and to fund
approximately $289 million of Property acquisitions in the fourth quarter of
1996 and the first quarter of 1997, (ii) the Company's public offering of its
Common Shares in April 1997 (the "April 1997 Offering") and the additional
public offering of 500,000 Common Shares that closed on May 14, 1997 and the
contribution of the net proceeds to the Operating Partnership, which used the
net proceeds to fund approximately $593.5 million of Property acquisitions and
other investments in the second quarter of 1997, (iii) the Company's offering of
4,700,000 Common Shares to an affiliate of Union Bank of Switzerland (the "UBS
Offering") and the contribution of the net proceeds to the Operating
Partnership, which used the net proceeds to repay approximately $145 million of
indebtedness under the Credit Facility, (iv) the Operating Partnership's
offering of the Private Notes in an aggregate principal amount of $400 million
(the "September Note Offering") and the use of the net proceeds therefrom to
fund approximately $337.6 million of the purchase price of two Properties and to
repay approximately $57.2 million of indebtedness incurred under the Credit
Facility and other short-term indebtedness, (v) the Company's public offering of
its Common Shares in October 1997 (the "October 1997 Offering") and the
contribution of the net proceeds to the Operating Partnership, which used the
net proceeds to fund approximately $45 million of the purchase price of one
Property and to repay approximately $325.1 million of short-term indebtedness
and indebtedness incurred under the Credit Facility, (vi) the Company's offering
of 5,375,000 Common Shares to Merrill Lynch International (the "Merrill
Offering") and the contribution of the net proceeds to the Operating
Partnership, which used the net proceeds to repay approximately $199.9 million
of indebtedness under the Credit Facility, (vii) the Company's public offering
of 8,000,000 Preferred Shares in February 1998 and the contribution of the net
proceeds to the Operating Partnership, which used the net proceeds to repay
approximately $191.5 million of indebtedness under the Credit Facility (viii)
Property acquisitions, other investments and related financing and share
issuances during 1996, 1997 and 1998, and (ix) the Pending Investment and
related financing, including $1.05 billion for refinancing and/or assumption of
indebtedness, and associated financing and transaction costs, in connection with
the Merger.
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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
PRO FORMA AND HISTORICAL FINANCIAL DATA AND
RAINWATER PROPERTY GROUP COMBINED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER PARTNER INTEREST DATA)
<TABLE>
<CAPTION>
OPERATING PARTNERSHIP
--------------------------------------------------------------------------------------------
FOR THE
PRO FORMA PERIOD FROM
YEAR ENDED DECEMBER 31, YEAR ENDED YEAR ENDED YEAR ENDED MAY 5, 1994
---------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, TO DECEMBER 31,
1997 1997 1996 1996 1995 1994
------------ ------------ ------------ ------------ ------------ ---------------
PRO FORMA ACTUAL
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue --
Rental property.................. $ 761,109 $ 430,383 $ 695,287 $ 202,003 $ 123,489 $ 49,075
Interest and other income........ 23,351 16,990 21,427 6,858 6,471 1,268
Residential developments(1)...... -- -- -- -- -- --
Operating expenses --
Rental property operating(2)..... 220,451 158,868 207,497 73,813 45,949 18,993
Corporate general and
administrative................. 12,858 12,858 10,000 4,674 3,812 1,815
Residential developments(1)...... -- -- -- -- -- --
Interest expense.................. 224,816 86,441 225,744 42,926 18,781 3,493
Depreciation and amortization..... 181,582 74,426 179,232 40,535 28,060 14,255
Amortization of deferred financing
costs............................ 4,038 3,499 3,531 2,812 2,500 923
Writedown of investment
property......................... -- -- -- -- -- --
------------ ------------ ------------ ----------- ----------- -----------
Operating income (loss)........... 140,715 111,281 90,710 44,101 30,858 10,864
Reorganization costs.............. -- -- -- -- -- 1,900
Equity in net income of
unconsolidated companies(1)...... 34,333 23,743 14,020 3,850 5,500 3,631
------------ ------------ ------------ ----------- ----------- -----------
Income (loss) before minority
interests and extraordinary
item............................. $ 175,048 $ 135,024 $ 104,730 $ 47,951 $ 36,358 $ 12,595
============ ============ ============ =========== =========== ===========
Preferred distributions........... $ 20,745 -- $ 20,745 -- -- --
Net income available to
partners'........................ $ 152,869 $ 133,590 $ 80,371 $ 44,870 $ 35,543 $ 11,648
BALANCE SHEET DATA (AT PERIOD END):
Real estate, before accumulated
depreciation..................... $ 5,580,646 $ 3,423,130 $ -- $ 1,732,626 $ 1,006,706 $ 557,675
Total assets...................... 6,395,391 4,182,875 -- 1,733,540 965,232 538,354
Mortgages and other secured notes
payable.......................... 768,224 768,224 -- 627,808 424,528 --
Credit Facility and other
unsecured obligations(3)......... 2,297,250 941,900 -- 40,000 20,000 194,642
Total liabilities................. 3,167,694 1,837,344 -- 716,270 476,234 209,900
Partners' capital................. 3,199,519 2,317,353 -- 988,005 479,517 328,448
OTHER DATA:
Funds from Operations before
minority interests(4)(5)......... $ 364,854 $ 216,319 $ 294,724 $ 87,616 $ 64,475 $ 32,723
Distribution per partner
interest......................... -- $ 1.30 -- $ 1.16 $ 1.05 $ .65
Weighted average partner
interests(5)..................... 147,124,058 106,835,579 147,124,058 64,684,842 54,182,006 44,997,716
Cash flow provided by (used in):
Operating activities............. $ --(10) $ 211,452 $ --(10) $ 77,384 $ 64,877 $ 21,614
Investing activities............. --(10) (2,295,080) --(10) (513,033) (421,306) (260,666)
Financing activities............. --(10) 2,124,156 --(10) 444,315 343,079 265,608
EBIDA(6).......................... 585,484 299,390 513,237 134,224 85,699 31,266
Total Debt to Total Assets(7)..... 46% 39% -- 39% 47% 37%
Total Secured Debt to Total
Assets(7)........................ 12% 18% -- 37% 47% 37%
Ratio of Consolidated Income
Available for Debt Service to
Annual Debt Service Charge(7).... 2.5 3.4 2.3 3.1 4.6 9.0
Ratio of earnings to fixed
charges(8)....................... 1.5 2.5 1.4 2.0 2.6 3.9
Ratio of FFO before fixed charges
to fixed charges(9).............. 2.6 3.3 2.3 2.9 3.9 8.4
Number of Properties (at period
end):
Office Properties................ 86 80 86 53 30 10
Hotel Properties................. 9 8 9 6 3 0
Behavioral Healthcare
Facilities..................... 90 90 90 0 0 0
Retail Properties................ 7 7 7 6 2 2
Residential Development
Properties..................... 12 12 12 9 9 3
<CAPTION>
RAINWATER PROPERTY GROUP
-----------------------------
FOR THE PERIOD
FROM
JANUARY 1,
1994 YEAR ENDED
TO MAY 4, DECEMBER 31,
1994 1993
-------------- ------------
<S> <C> <C>
OPERATING DATA:
Revenue --
Rental property.................. $ 18,550 $ 48,232
Interest and other income........ 42 605
Residential developments(1)...... 2,593 8,331
Operating expenses --
Rental property operating(2)..... 8,696 21,230
Corporate general and
administrative................. -- --
Residential developments(1)...... 1,428 4,077
Interest expense.................. 4,867 29,226
Depreciation and amortization..... 7,793 18,081
Amortization of deferred financing
costs............................ -- --
Writedown of investment
property......................... -- 37,578
-------- --------
Operating income (loss)........... (1,599) (53,024)
Reorganization costs.............. -- --
Equity in net income of
unconsolidated companies(1)...... -- --
-------- --------
Income (loss) before minority
interests and extraordinary
item............................. $ (1,599) $(53,024)
======== ========
Preferred distributions........... -- --
Net income available to
partners'........................ $ (1,599) $(53,024)
BALANCE SHEET DATA (AT PERIOD END)
Real estate, before accumulated
depreciation..................... -- $358,400
Total assets...................... -- 290,869
Mortgages and other secured notes
payable.......................... -- 278,060
Credit Facility and other
unsecured obligations(3)......... -- --
Total liabilities.................
Partners' capital................. -- 2,941
OTHER DATA:
Funds from Operations before
minority interests(4)(5)......... -- --
Distribution per partner
interest......................... -- --
Weighted average partner
interests(5)..................... -- --
Cash flow provided by (used in):
Operating activities............. $ 2,455 $ 9,313
Investing activities............. (2,379) (20,572)
Financing activities............. (21,310) 28,861
EBIDA(6).......................... -- --
Total Debt to Total Assets(7)..... -- --
Total Secured Debt to Total
Assets(7)........................ -- --
Ratio of Consolidated Income
Available for Debt Service to
Annual Debt Service Charge(7).... -- --
Ratio of earnings to fixed
charges(8)....................... -- --
Ratio of FFO before fixed charges
to fixed charges(9).............. -- --
Number of Properties (at period
end):
Office Properties................ 4 4
Hotel Properties................. 0 0
Behavioral Healthcare
Facilities..................... 0 0
Retail Properties................ 2 2
Residential Development
Properties..................... 3 2
</TABLE>
- ---------------
(1) The Operating Partnership accounts for its investments in the Residential
Development Property Mortgages and non-voting common stock of the
Residential Development Corporations under the equity method of accounting
as a result of the noncontrolling interests held. The Operating Partnership
also accounts for its investment in Woodlands Commercial Properties
Company, L.P. and the Refrigerated Warehouse Investment under the equity
method of accounting.
(2) Includes real estate taxes, repairs and maintenance and other rental
property operating expenses, including property-level general and
administrative expenses.
(3) The Credit Facility was converted from a secured facility to an unsecured
facility in October 1996.
(4) FFO, based on the revised definition adopted by the Board of Governors of
NAREIT and as used herein, means net income (loss), determined in
accordance with generally accepted accounting principles ("GAAP"),
excluding gains (or losses) from debt restructuring and sales of property,
plus
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<PAGE> 60
depreciation and amortization of real estate assets, and after adjustments
for unconsolidated partnerships and joint ventures. FFO was developed by
NAREIT as a relative measure of performance and liquidity of an equity REIT
in order to recognize that income-producing real estate historically has
not depreciated on the basis determined under GAAP. The Operating
Partnership considers FFO an appropriate measure of performance of a
limited partnership through which an equity REIT conducts its operations
due to the fact that income-producing real estate such as that owned by the
Operating Partnership has not historically depreciated in the manner
reflected by GAAP. However, FFO (i) 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), (ii) is not necessarily
indicative of cash flow available to fund cash needs and (iii) should not
be considered as an alternative to net income determined in accordance with
GAAP as an indication of the Operating Partnership's operating performance,
or to cash flow from operating activities determined in accordance with
GAAP as a measure of either liquidity or the Operating Partnership's
ability to make distributions. The Operating Partnership has historically
distributed an amount less than FFO, primarily due to reserves required for
capital expenditures, including leasing costs. An increase in FFO does not
necessarily result in an increase in aggregate distributions because the
Board of Trust Managers of the Company is not required to increase
distributions unless necessary in order to enable the Company to maintain
REIT status. Because the Company must distribute 95% of its real estate
investment trust taxable income (as defined in the Code), however, a
significant increase in FFO will generally require an increase in
distributions to shareholders and unitholders although not necessarily on a
proportionate basis. Accordingly, the Operating Partnership believes that
in order to facilitate a clear understanding of the consolidated historical
operating results of the Operating Partnership, FFO should be considered in
conjunction with the Operating Partnership's net income (loss) and cash
flows as reported in the consolidated financial statements and notes
included elsewhere in this Prospectus. However, the Operating Partnership's
measure of FFO may not be comparable to similarly titled measures for other
REITs because these REITs may not apply the modified definition of FFO in
the same manner as the Operating Partnership.
(5) Weighted average partner interest excludes preferred partner interests. The
FFO calculation includes an adjustment for preferred dividends.
(6) EBIDA means earnings before interest expense, depreciation, amortization
and minority interests. EBIDA is computed as income from operations before
extraordinary items plus interest expense, depreciation and amortization.
The Operating Partnership believes that in addition to cash flows and net
income, EBIDA is a useful financial performance measurement for assessing
the operating performance of a limited partnership through which an equity
REIT conducts its operations because, together with net income and cash
flows, EBIDA provides investors with an additional basis to evaluate the
ability of a limited partnership such as the Operating Partnership to incur
and service debt and to fund acquisitions and other capital expenditures.
To evaluate EBIDA and the trends it depicts, the components of EBIDA, such
as rental revenues, rental expenses, real estate taxes and general and
administrative expenses, should be considered. Excluded from EBIDA are
financing costs such as interest as well as depreciation and amortization,
each of which can significantly affect the Operating Partnership's results
of operations and liquidity and should be considered in evaluating the
Operating Partnership's operating performance. Further, EBIDA does not
represent net income or cash flows from operating, financing and investing
activities as defined by GAAP and does not necessarily indicate that cash
flows will be sufficient to fund cash needs. It should not be considered as
an alternative to net income as an indicator of the Operating Partnership's
operating performance or to cash flows as a measure of liquidity.
(7) See "Description of the Exchange Notes" for the definitions of capitalized
terms.
(8) The ratio of earnings to fixed charges is computed as income from
operations before minority interests and extraordinary items plus fixed
charges (excluding capitalized interest), divided by fixed charges. Fixed
charges consist of interest costs, including amortization of debt discount
and deferred financing fees, whether capitalized or expensed.
(9) The ratio of FFO before fixed charges to fixed charges is calculated as FFO
plus fixed charges (excluding capitalized interest), divided by fixed
charges (as defined in Note (7)). The Operating Partnership believes that
in addition to the ratio of earnings to fixed charges, this ratio provides
a useful measure of the ability of the Operating Partnership to service its
debt because of the exclusion of non-cash items such as depreciation and
amortization from the definition of FFO. This ratio differs from a
GAAP-based ratio of earnings to fixed charges and should not be considered
as an alternative to that ratio. Further, funds from operations statistics
as disclosed by other limited partnerships may not be comparable to the
Operating Partnership's calculation of FFO.
(10) Pro forma information relating to operating, investing and financing
activities has not been included because management believes that the data
would not be meaningful due to the number of assumptions required in order
to calculate this data.
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<PAGE> 61
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE OPERATING PARTNERSHIP
The following discussion and analysis of the financial condition and
historical results of operations of the Operating Partnership for each of the
years ended December 31, 1997, 1996 and 1995 should be read in conjunction with
the financial statements and notes included herein.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996
Total revenues increased $238.5 million, or 114.2%, to $447.4 million for
the year ended December 31, 1997, as compared to $208.9 million for the year
ended December 31, 1996. The increase in Office and Retail Property revenues of
$181.1 million is primarily attributable to: a) the acquisition of 26 Office
Properties and one Retail Property during 1997, which resulted in $79.5 million
of incremental revenues; b) the fact that 23 Office Properties and four Retail
Properties acquired during 1996 contributed revenues for a full year in 1997 as
compared to a partial year in 1996, which resulted in $91.6 million of
incremental revenues; and c) an increase in Office and Retail Property revenues
of $10.0 million from the 32 Office and Retail Properties owned prior to January
1, 1996, which is primarily due to rental rate increases at these Properties.
The increase in Hotel Properties revenues of $17.5 million is primarily
attributable to: a) the acquisition of two Hotel Properties during 1997, which
resulted in $2.1 million of incremental revenues; b) the fact that three Hotel
Properties acquired during 1996 contributed revenues for a full year in 1997 as
compared to a partial year in 1996, which resulted in $14.5 million of
incremental revenues; and c) an increase in Hotel Properties revenues of $.9
million from the three Hotel Properties owned prior to January 1, 1996. The
increase in Behavioral Healthcare Facilities revenues of $29.8 million is
attributable to the acquisition of the facilities in June 1997. The increase in
interest and other income of $10.1 million for the year ended December 31, 1997,
is primarily attributable to: a) the $127.8 million increase in notes receivable
primarily as a result of the acquisition of certain notes included in the assets
purchased from Carter-Crowley Properties, Inc. (such assets, the "Carter-Crowley
Portfolio"), loans to Crescent Operating, loans to Desert Mountain Properties
Limited Partnership ("DMPLP") and the acquisition of a note receivable secured
by a hotel property; and b) interest earned on available cash from the Company's
April 1997 Offering.
Total expenses increased $171.3 million, or 103.9%, to $336.1 million for
the year ended December 31, 1997, as compared to $164.8 million for the year
ended December 31, 1996. The increase in rental property operating expenses of
$85.1 million is primarily attributable to: a) the acquisition of 26 Office
Properties and one Retail Property during 1997, which resulted in $38.3 million
of incremental expenses; b) the fact that 23 Office Properties and four Retail
Properties acquired during 1996 contributed expenses for a full year in 1997 as
compared to a partial year in 1996, which resulted in $40.8 million of
incremental expenses; and c) an increase in expenses of $5.5 million from the 32
Office and Retail Properties owned prior to January 1, 1996. Depreciation and
amortization expense increased $33.9 million due primarily to the acquisitions
of Office and Retail Properties, Hotel Properties and Behavioral Healthcare
Facilities. The increase in interest expense of $43.5 million is primarily
attributable to: (i) $6.9 million of interest payable under LaSalle Note III,
which was assumed in the acquisition of the Greenway Plaza Portfolio in October
1996; (ii) $.8 million of interest payable to Nomura Asset Capital Corporation
under the Nomura Funding VI Note, which was assumed in December 1996; (iii) $2.0
million of interest payable under the financing arrangement with Northwestern
Mutual Life Insurance Company, which was in place as of December 1996; (iv) $1.0
million of interest payable under LaSalle Note II secured by the properties
owned by Funding II (as defined in "Structure of the Operating Partnership");
(v) $10.0 million of interest payable under various short-term notes with
BankBoston, N.A. ("BankBoston") with principal amounts ranging between $150
million and $235 million, which were entered into from June through December
1997; (vi) $14.0 million of incremental interest payable due to draws under the
Credit Facility (average balance outstanding for the year ended December 31,
1997 and 1996 was $216.8 million and $64.3 million, respectively); (vii) $7.7
million of interest payable under the Notes due 2002 and Notes due 2007, which
were issued in a private offering in September 1997; and (viii) $1.1 million of
interest payable under the Chase Manhattan Note, which was assumed in the
acquisition of Fountain Place in November 1997. All of these financing
arrangements (the terms of which are described in more detail below under
"Liquidity and Capital Resources"), were used to fund acquisitions. The increase
in corporate general and administrative expense of $8.2 million is primarily
attributable to incremental costs
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<PAGE> 62
associated with corporate operations of the Operating Partnership as a result of
the acquisition of additional Properties and to incentive compensation paid to
the Operating Partnership's executive officers.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
Total revenues increased $78.9 million, or 60.7%, to $208.9 million for the
year ended December 31, 1996, as compared to $130.0 million for the year ended
December 31, 1995. The increase in Office and Retail Property revenues of $66.8
million is primarily attributable to: a) the acquisition of 23 Office Properties
and four Retail Properties during 1996, which resulted in $32.8 million of
incremental revenues; and b) the fact that 20 Office Properties acquired during
1995 contributed revenues for a full year in 1996 as compared to a partial year
in 1995, which resulted in $34.9 million of incremental revenue. This increase
reflects a $.9 million decrease in revenues from the Office and Retail
Properties owned as of January 1, 1995. The increase in Hotel Property revenues
of $11.7 million is primarily attributable to: a) the acquisition of three Hotel
Properties in 1996, which resulted in $2.7 million of incremental revenues; and
b) the fact that three Hotel Properties acquired during 1995 contributed
revenues for a full year in 1996 as compared to a partial year in 1995, which
resulted in $9.1 million of incremental revenues.
Total expenses increased $65.7 million, or 66.3%, to $164.8 million for the
year ended December 31, 1996, as compared to $99.1 million for the year ended
December 31, 1995. The increase in rental property operating expenses of $27.9
million is primarily attributable to: a) the acquisition of 23 Office Properties
and four Retail Properties during 1996, which resulted in $13.9 million of
incremental expenses; and b) the fact that 20 Office Properties acquired during
1995 contributed expenses for a full year in 1996 as compared to a partial year
in 1995, which resulted in $14.1 million of incremental expenses. This increase
reflects a $.2 million decrease in expenses from the Office and Retail
Properties owned as of January 1, 1995. Depreciation and amortization expense
increased $12.5 million, primarily due to the acquisitions of Office, Retail and
Hotel Properties during 1996 and 1995. The increase in interest expense of $24.1
million is primarily attributable to $27.1 million of interest payable under the
terms of the three new long-term financing arrangements entered into from August
1995 through March 1996, proceeds of which were used to repay the Credit
Facility and to fund property acquisitions in 1995 and 1996, and $2.1 million of
interest payable under LaSalle Note III, which was assumed in the acquisition of
the Greenway Plaza Portfolio in October 1996. This increase reflects a $5.1
million decrease in interest expense under the Credit Facility, primarily due to
a lower average outstanding balance throughout the year. The increase in
corporate general and administrative expenses of $.9 million is primarily
attributable to incremental costs associated with corporate operations of the
Operating Partnership as a result of acquisitions of additional Properties.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $66.6 million and $25.6 million at December
31, 1997 and December 31, 1996, respectively. The increase is attributable to
$2,124.2 million and $211.5 million of cash provided by financing and operating
activities, respectively, offset by $2,295.1 million used in investing
activities. The Operating Partnership's inflow of cash provided by financing
activities is primarily attributable to proceeds received from the Company's
offerings of Common Shares ($1,345.3 million), net borrowings under the Credit
Facility ($310.0 million), net borrowings under the short-term BankBoston notes
($191.9 million) and proceeds from the September 1997 Notes Offering ($400.0
million). The inflow of cash provided by financing activities was partially
offset by the distributions paid to general and limited partners of the
Operating Partnership (the "Partners") ($140.8 million) and the distribution of
Crescent Operating shares to Partners ($11.9 million). The inflow from operating
activities is primarily attributable to: (i) Property operations, and (ii) an
increase in accounts payable which is primarily attributable to 1997
acquisitions. The inflow of cash from operating activities was partially offset
by an increase in other assets and deferred rent receivable ($52.8 million). The
Operating Partnership utilized $2,294.4 million of cash inflow primarily in the
following investing activities: (i) the acquisition of 26 Office Properties, one
Retail Property, two Hotel Properties and 90 Behavioral Healthcare Facilities
($1,532.7 million); (ii) additional investments in Residential Development
Corporations ($270.2 million) primarily attributable to Desert Mountain
Development Corporation ("DMDC") ($214.0 million) and Woodlands Land Development
Company, L.P. ($41.2 million); (iii) investments in unconsolidated companies
($278.0 million) primarily attributable to Woodland Commer-
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<PAGE> 63
cial Properties Company, L.P. ($38.6 million), the Refrigerated Warehouse
Investment ($160 million), Bank One Center ($41.5 million) and DBL Holding, Inc.
($12.6 million); (iv) notes receivable ($127.8 million) primarily attributable
to loans included in the Carter-Crowley Portfolio ($58.4 million), a loan to
DMPLP ($17.6 million), loans made to Crescent Operating ($42.1 million), and the
acquisition of a note receivable secured by a hotel property ($7.1 million); (v)
capital expenditures for rental properties ($22.0 million), primarily
attributable to building improvements for the Office and Retail Properties, and
replacement of furniture, fixtures and equipment for the Hotel Properties; and
(vi) recurring and non-recurring tenant improvement and leasing costs for the
Office and Retail Properties ($53.9 million).
On February 14, 1997, the Company filed a shelf registration (the "February
Shelf Registration Statement") with the Commission for an aggregate of $1.2
billion of Common Shares, Preferred Shares and warrants exercisable for Common
Shares. An aggregate of $1,184.0 million of Common Shares have been issued under
the February Shelf Registration Statement. Net proceeds from the offerings of
these securities were contributed to the Operating Partnership used as described
below.
On April 28, 1997, the Company completed an offering of 24,150,000 Common
Shares (including the underwriters' overallotment option) at $25.375 per Common
Share. Net proceeds from the April 1997 Offering were $580.6 million. On May 14,
1997, the Company completed an additional offering of 500,000 Common Shares to
several underwriters who participated in the April 1997 Offering. The Common
Shares were sold at $25.875 per Common Share, with gross and net proceeds of
$12.9 million (collectively, the "Offerings").
In the second quarter of 1997, the net proceeds of $593.5 million which
were contributed to the Operating Partnership, from the Offerings, $314.7
million from borrowings under the Credit Facility and $160.0 million of
short-term borrowings from BankBoston were used by the Operating Partnership:
(i) to fund $30.0 million in connection with the formation and capitalization of
Crescent Operating; (ii) to repay the $150.0 million BankBoston short-term note
payable; (iii) to reduce by $131.0 million borrowings under the Credit Facility;
(iv) to fund $306.3 million of the purchase price of the Carter-Crowley
Portfolio acquired by the Operating Partnership; (v) to fund the $419.7 million
commitment of the Operating Partnership and Crescent Operating relating to the
acquisition of the Behavioral Healthcare Facilities; and (vi) to fund $31.2
million for working capital purposes.
On August 12, 1997, the Company entered into two transactions with
affiliates of Union Bank of Switzerland ("UBS"). In one transaction, pursuant to
which the Company obtained additional equity capital through the issuance of
Common Shares, the Company sold 4,700,000 Common Shares at $31.5625 per Common
Share to UBS Securities, LLC for $148.3 million ($145.0 million of net
proceeds). The net proceeds from the UBS Offering were contributed to the
Operating Partnership and used to repay borrowings under the Credit Facility. In
the other transaction, which will permit the Company to benefit from any
increases in the market price of its Common Shares, the Company entered into a
forward share purchase agreement with Union Bank of Switzerland, London Branch
("UBS-LB") which provides that the Company will purchase 4,700,000 Common Shares
from UBS-LB within one year. The purchase price will be determined on the date
the Company settles the agreement and will include a forward accretion
component, minus an adjustment for the Company distribution rate. The Company,
at its option, may complete the settlement in cash or Common Shares.
On September 22, 1997, the Operating Partnership completed the September
1997 Notes Offering, which was a private offering of unsecured notes in an
aggregate principal amount of $400.0 million ($394.8 million of net proceeds)
the Notes due 2002 and the Notes due 2007. The net proceeds of the September
1997 Notes Offering were used to fund $327.6 million of the purchase price for
Houston Center, to repay $50.0 million of borrowings under the Credit Facility,
to fund $10.0 million of the purchase price of Miami Center and to repay $7.2
million of short-term indebtedness.
In September 1997, the Operating Partnership's Notes due 2002 and the Notes
due 2007 were assigned a rating of Baa3 from Moody's Investors Service, Inc.
On October 8, 1997, the Company completed an offering of 10,000,000 Common
Shares at $39.00 per Common Share. Net proceeds to the Company from the October
1997 Offering contributed to the Operating
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<PAGE> 64
Partnership were $368.5 million. The net proceeds were used to repay
approximately $323.5 million of borrowings under the Credit Facility and to fund
approximately $45.0 million of the purchase price of the U.S. Home Building.
On October 29, 1997, the Company filed a shelf registration statement (the
"October Shelf Registration Statement") with the Commission for an aggregate of
$1.5 billion of Common Shares, Preferred Shares and warrants exercisable for
Common Shares. As of March 25, 1998, the Company has issued $424.0 million of
securities under the October Shelf Registration Statement, as described below.
Any securities issued in the future under the October Shelf Registration
Statement may be offered from time to time in amounts, at prices and on terms to
be determined at the time of the offering. Management believes the October Shelf
Registration Statement will provide the Company with more efficient and
immediate access to the capital markets at such time as it is considered
appropriate. Net proceeds from any future offering of these securities are
expected to be contributed to the Operating Partnership used for general
business purposes, including the acquisition and development of additional
properties and other acquisition transactions, the payment of certain
outstanding debt and improvements to certain properties.
On December 12, 1997, the Company entered into two transactions with
Merrill Lynch International. In one transaction, pursuant to which the Company
obtained additional equity capital through the issuance of Common Shares, the
Company sold 5,375,000 Common Shares at $38.125 per Common Share to Merrill
Lynch International for $204.9 million ($199.9 million in net proceeds). The net
proceeds to the Company from the Merrill Lynch Offering were contributed to the
Operating Partnership and used to repay borrowings under the Credit Facility. In
the other transaction, which will permit the Company to benefit from any
increases in the market price of its Common Shares, the Company entered into a
swap agreement (the "Swap Agreement") with Merrill Lynch International relating
to 5,375,000 Common Shares (the "Settlement Shares"), pursuant to which Merrill
Lynch International will sell, as directed by the Company on or before December
12, 1998, a sufficient number of Common Shares to achieve net sales proceeds
equal to the market value of the Settlement Shares on December 12, 1997, plus a
forward accretion component, minus an adjustment for the Company distribution
rate. The precise number of Common Shares that will be required to be sold
pursuant to the Swap Agreement will depend primarily on the market price of the
Common Shares at the time of settlement. The Common Shares required to be sold
by Merrill Lynch International pursuant to the Swap Agreement are expected to be
the same Common Shares initially issued by the Company (although Merrill Lynch
International, at its option, may substitute other Common Shares that it holds).
If, however, as a result of a decrease in the market price of the Common Shares,
the number of Common Shares required to be sold is greater than the number of
Settlement Shares, the Company will deliver additional Common Shares to Merrill
Lynch International. In contrast, if such number of Common Shares is less than
the number of Settlement Shares as a result of an increase in the market price
of the Common Shares, Merrill Lynch International will deliver Common Shares or,
at the option of the Company, cash to the Company. On February 20, 1998, the
Company issued an additional 525,000 Common Shares to Merrill Lynch
International as a result of the decline in market price of the Common Shares
from the date of issuance on December 12, 1997 through February 12, 1998.
On February 19, 1998, the Company completed an offering (the "February 1998
Preferred Offering") under the October Shelf Registration Statement of 8,000,000
6 3/8% Series A Convertible Cumulative Preferred Shares (the "Series A Preferred
Shares") with a liquidation preference of $25.00 per Series A Preferred Share.
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. Net proceeds to the Company from the February 1998
Preferred Offering contributed to the Operating Partnership were $191.3 million.
The net proceeds were used to repay borrowings under the Credit Facility.
As of March 25, 1998, with the exception of the Station transaction
described below, the Operating Partnership had no commitments for material
capital expenditures. The Company principally expects to fund the approximately
$1.745 billion required to consummate the Merger with Station through the
issuance of Common Shares and a new series of Preferred Shares with a value of
approximately $700 million, the assumption of approximately $541 million of
Station's outstanding debt, the refinancing of approximately
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<PAGE> 65
$378 million of Station's outstanding debt and the incurrence of approximately
$126 million in additional debt primarily related to transaction costs. There
are currently no definitive agreements or arrangements relating to refinancing
or obtaining any such debt.
The significant terms of the Operating Partnership's primary debt financing
arrangements are set forth below (dollars in thousands).
<TABLE>
<CAPTION>
INTEREST BALANCE
RATE OUTSTANDING
MAXIMUM AT EXPIRATION AT
DESCRIPTION BORROWINGS 12/31/97 DATE 12/31/97
- ----------- ---------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Secured Fixed Rate Debt:
LaSalle Note I(1)......................... $ 239,000 7.83% August 2027 $ 239,000
LaSalle Note II(2)........................ 161,000 7.79% March 2028 161,000
CIGNA Note(3)............................. 63,500 7.47% December 2002 63,500
Metropolitan Life Note II(4).............. 45,000 6.93% December 2002 45,000
Northwestern Life Note(5)................. 26,000 7.66% January 2003 26,000
September
Metropolitan Life Note I(6)(7)............ 12,109 8.88% 2001 12,109
Nomura Funding VI Note(7)(8).............. 8,691 10.07% July 2020 8,692
Rigney Promissory Note(9)................. 800 8.50% November 2012 800
---------- ----- ----------
Subtotal/Weighted Average......... $ 556,100 7.75% $ 556,101
========== ===== ==========
Secured Variable Rate Debt:
LaSalle Note III(7)(10)................... $ 115,000 8.07% July 1999 $ 115,000
September
Chase Manhattan Note(11).................. 97,123 7.44% 2001 97,123
---------- ----- ----------
Subtotal/Weighted Average......... $ 212,123 7.78% $ 212,123
========== ===== ==========
Unsecured Fixed Rate Debt:
September
Notes due 2007(12)........................ $ 250,000 7.13% 2007 $ 250,000
September
Notes due 2002(12)........................ 150,000 6.63% 2002 150,000
---------- ----- ----------
Subtotal/Weighted Average......... $ 400,000 6.94% $ 400,000
========== ===== ==========
Unsecured Variable Rate Debt:
Line of Credit(13)........................ $ 550,000 7.14% June 2000 $ 350,000
March
BankBoston Bridge Loan(14)................ 150,000(15) 7.14% 1998(16) 91,900
BankBoston Note II(14).................... 100,000 7.14% August 1998 100,000
---------- ----- ----------
Subtotal/Weighted Average......... $ 800,000 7.14% $ 541,900
========== ===== ==========
TOTAL/WEIGHTED AVERAGE............ $1,968,223 7.37% $1,710,124
========== ===== ==========
</TABLE>
- ---------------
Notes:
(1) The note has a seven-year period during which only interest is payable
(through August 2002), followed by principal amortization based on a
25-year amortization schedule through maturity. At the end of 12 years
(August 2007), the interest rate increases, and the Operating Partnership
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 Operating Partnership's intention to
repay the note in full at such time (August 2007) by making a final payment
of approximately $220 million. LaSalle Note I is secured by Properties
owned by Funding I (see "Structure of the Operating Partnership"). The note
agreement prohibits Funding I from engaging in certain activities,
including incurring liens on the Properties securing the note, pledging the
Properties securing the note, incurring other indebtedness (except as
specifically permitted in the note agreement), canceling a material claim
or debt owed to it, entering into an affiliate transaction (except as
specifically permitted in the note agreement), distributing funds derived
from operation of the Properties securing the note (except as specifically
permitted in the note agreement), or creating easements with respect to the
Properties securing the note.
(2) The note has a seven-year period during which only interest is payable
(through March 2003), followed by principal amortization based on a 25-year
amortization schedule through maturity. At the end of
-60-
<PAGE> 66
10 years (March 2006), the interest rate increases, and the Operating
Partnership 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 Operating Partnership's intention to
repay the note in full at such time (March 2006) by making a final payment
of approximately $154 million. LaSalle Note II is secured by Properties
owned by Funding II (See "Structure of the Operating Partnership"). The
note agreement prohibits Funding II from engaging in certain activities,
including incurring liens on the Properties securing the note, pledging the
Properties securing the note, incurring other indebtedness (except as
specifically permitted in the note agreement), canceling a material claim
or debt owed to it, entering into an affiliate transaction (except as
specifically permitted in the note agreement), distributing funds derived
from operation of the Properties securing the note (except as specifically
permitted in the note agreement), or creating easements with respect to the
Properties securing the note.
(3) The note requires payments of interest only during its term. The CIGNA Note
is secured by the MCI Tower and Denver Marriott City Center properties. The
note agreement has no negative covenants.
(4) The note requires monthly payments of principal and interest based on a
25-year amortization schedule through maturity, at which time the
outstanding principal balance is due and payable. The Metropolitan Life
Note II is secured by Energy Centre. The note agreement requires the
Operating Partnership to maintain compliance with a number of customary
covenants, including maintaining the Property that secures the note and not
creating any lien with respect to or otherwise encumbering such Property.
(5) The note requires payments of interest only during its term. The
Northwestern Life Note is secured by the 301 Congress Avenue Property. The
note agreement requires the Operating Partnership to maintain compliance
with a number of customary covenants, including maintaining the Property
that secures the note and not creating any lien with respect to or
otherwise encumbering such Property.
(6) The note requires monthly payments of principal and interest based on
20-year amortization schedule through maturity, at which time the
outstanding principal balance is due and payable. The Metropolitan Note I
is secured by five of The Woodlands Office Properties. The note agreement
has no negative covenants.
(7) The note was assumed in connection with an acquisition and was not
subsequently retired by the Operating Partnership because of prepayment
penalties.
(8) Under the terms of the note, principal and interest are payable based on a
25-year amortization schedule. In July 1998, the Operating Partnership may
defease the note by purchasing Treasury obligations to pay the note without
penalty. The Nomura Funding VI Note is secured by Canyon Ranch-Lenox, the
Property owned by Funding VI (see "Structure of the Operating
Partnership"). In July of 2010, the interest rate due under the note will
change to a 10-year Treasury yield plus 500 basis points or, if the
Operating Partnership so elects, it may repay the note without penalty. The
note agreement requires Funding VI to maintain compliance with a number of
customary covenants, including a debt service coverage ratio for the
Property that secures the note, a restriction on the ability to transfer or
encumber the Property that secures the note, and covenants related to
maintaining its single purpose nature, including restrictions on ownership
by Funding VI of assets other than the Property that secures the note,
restrictions on the ability to incur indebtedness and make loans and
restrictions on operations.
(9) The note requires quarterly payments of principal and interest based on a
15-year amortization schedule through maturity, at which time the
outstanding principal balance is due and payable. The Rigney Promissory
Note is secured by a parcel of land owned by the Operating Partnership and
located across from an Office Property. The note agreement has no negative
covenants.
(10) The note bears interest at the rate for 30-day LIBOR plus a weighted
average rate of 2.135% (subject to a rate cap of 10%), and requires
payments of interest only during its term. The LaSalle Note III is secured
by the Properties owned by Funding III, IV, and V (see "Structure of the
Operating Partnership"). The note agreement prohibits Fundings III, IV and
V from engaging in certain activities, including using the Properties
securing the note in certain ways, imposing any restrictions, agreements or
covenants that run with the land upon the Properties securing the note,
incurring additional indebtedness (except as specifically permitted in the
note agreement), canceling or releasing a material claim or
-61-
<PAGE> 67
debt owed to it, or distributing funds derived from operation of the
Properties securing the note (except as specifically permitted in the note
agreement).
(11) The note bears interest at the rate for 30-day LIBOR plus 175 basis points
and requires payment of interest only during its term. The Chase Manhattan
Note is secured by Fountain Place. The note agreement has no negative
covenants.
(12) The notes are unsecured and require payments of interest only during their
terms. The interest rates on the notes are subject to temporary increase by
50 basis points in the event that a registered offer to exchange the notes
for the notes of the Operating Partnership with terms identical in all
material respects to the notes is not consummated or a shelf registration
statement with respect to the resale of the notes is not declared effective
by the Commission on or before March 21, 1998. The interest rates on the
notes will increase by 50 basis points temporarily, since the exchange
offer was not completed by March 21, 1998. The Operating Partnership
anticipates that the interest rates will return to the original rates
during the second quarter of 1998. The interest rates on the notes also is
subject to temporary or permanent increase by 37.5 basis points in the
event that, within the period from September 22, 1997 to September 22,
1998, such notes are not assigned, or do not retain, an investment grade
rating (as defined in the notes) by specified rating agencies. These
adjustments may apply simultaneously. The indenture requires the Operating
Partnership to maintain compliance with a number of customary financial and
other covenants on an ongoing basis, including leverage ratios and debt
service coverage ratios, limitations on the incurrence of additional
indebtedness and maintaining the Operating Partnership's Properties.
(13) The Credit Facility is unsecured with an interest rate of the Eurodollar
rate plus 120 basis points. The Credit Facility requires the Operating
Partnership to maintain compliance with a number of customary financial and
other covenants on an ongoing basis, including leverage ratios based on
book value and debt service coverage ratios, limitations on additional
secured and total indebtedness and distributions, limitations on additional
investments and the incurrence of additional liens, restrictions on real
estate development activity and a minimum net worth requirement.
(14) The note is unsecured with an interest rate of the Eurodollar rate plus 120
basis points. The note requires payments of the interest only during its
term. The note agreement has no negative covenants.
(15) The maximum borrowings under the BankBoston Bridge Loan were increased to
$250 million subsequent to December 31, 1997.
(16) The Operating Partnership has a commitment with BankBoston to extend the
term to May 31, 1998, with the same interest rate.
The combined aggregate principal amounts either at maturity or in the form
of scheduled principal installments due pursuant to borrowings under the Credit
Facility and other indebtedness of the Operating Partnership are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998................................................... $193,038
1999................................................... 116,223
2000................................................... 351,322
2001................................................... 109,149
2002................................................... 215,619
Thereafter............................................. 724,773
</TABLE>
Based on the Company's total market capitalization of $6.9 billion at
December 31, 1997 (at a $39.375 Common Share price, which was the closing price
of the Common Shares on the NYSE on December 31, 1997, and including the full
conversion of all units of minority interest in the Operating Partnership plus
total indebtedness), the Operating Partnership's debt represented 25% of its
total market capitalization. The Operating Partnership intends to maintain a
flexible and conservative capital structure with total debt targeted at
approximately 40% of total market capitalization.
The Company intends to maintain its qualification as a REIT under the Code.
As a REIT, the Company will generally not be subject to corporate federal income
taxes as long as it satisfies certain technical
-62-
<PAGE> 68
requirements of the Code, including the requirement to distribute at least 95%
of its taxable income to its shareholders.
The Operating Partnership expects to meet its short-term liquidity
requirements primarily through cash flow provided by operating activities, which
the Operating Partnership believes will be adequate to fund normal recurring
operating expenses, debt service requirements, recurring capital expenditures
and distributions to Partners. To the extent the Operating Partnership's cash
flow from operating activities is not sufficient to finance non-recurring
capital expenditures or investment property acquisition costs, the Operating
Partnership expects to finance such activities with proceeds from the Credit
Facility, available cash reserves and other debt and equity financing.
The Operating Partnership expects to meet its long-term liquidity
requirements, consisting primarily of maturities under the Operating
Partnership's fixed and variable rate debt, through long-term secured and
unsecured borrowings and the issuance of debt securities and/or additional
equity securities of the Operating Partnership.
FUNDS FROM OPERATIONS
Funds from Operations ("FFO"), based on the definition adopted by the Board
of Governors of the National Association of Real Estate Investment Trusts
("NAREIT") and as used herein, means net income (loss) (determined in accordance
with generally accepted accounting principles or "GAAP"), excluding gains (or
losses) from debt restructuring and sales of property, plus depreciation and
amortization of real estate assets, and after adjustments for unconsolidated
partnerships and joint ventures. FFO was developed by NAREIT as a relative
measure of performance and liquidity of an equity REIT in order to recognize
that income-producing real estate historically has not depreciated on the basis
determined under GAAP. The Operating Partnership considers FFO an appropriate
measure of performance of an equity REIT due to the fact that income-producing
real estate such as that owned by the Operating Partnership has not historically
depreciated in the manner reflected by GAAP. However, FFO (i) 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), (ii) is not
necessarily indicative of cash flow available to fund cash needs, and (iii)
should not be considered as an alternative to net income determined in
accordance with GAAP as an indication of the Operating Partnership's operating
performance, or the cash flow from operating activities determined in accordance
with GAAP as a measure of either liquidity or the Operating Partnership's
ability to make distributions. The Operating Partnership 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 Partners for the years ended December 31, 1997 and 1996 were $140.8 and
$73.4 million, respectively. An increase in FFO does not necessarily result in
an increase in aggregate distributions because the General Partner is not
required to increase distributions on a quarterly basis unless necessary in
order to enable the Company to maintain REIT status. However, the Company must
distribute 95% of its real estate investment trust taxable income (as defined in
the Code). A significant increase in FFO will generally require an increase in
distributions to partners although not necessarily on a proportionate basis.
Accordingly, the Operating Partnership believes that in order to facilitate a
clear understanding of the consolidated historical operating results of the
Operating Partnership, FFO should be considered in conjunction with the
Operating Partnership's net income (loss) and cash flows as reported in the
consolidated financial statements and notes thereto. However, the Operating
Partnership's measure of FFO may not be comparable to similarly titled measures
of other REIT's because these REIT's may not apply the definition of FFO in the
same manner as the Operating Partnership.
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<PAGE> 69
STATEMENTS OF FUNDS FROM OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------
1997 1996
---------- ---------
<S> <C> <C>
Income before minority interest and extraordinary item...... $135,024 $47,951
Adjustments:
Depreciation and amortization of real estate assets....... 72,503 39,290
Adjustment for investments in real estate mortgages and
equity of unconsolidated companies..................... 8,303 1,857
Minority interest in joint ventures....................... (1,434) (1,482)
-------- -------
Funds from operations....................................... $214,396 $87,616
======== =======
</TABLE>
RECONCILIATION OF FUNDS FROM OPERATIONS
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------
1997 1996
---------- ---------
<S> <C> <C>
Funds from operations....................................... $214,396 $87,616
Depreciation and amortization of non-real estate assets... 1,235 835
Amortization of deferred financing costs.................. 3,499 2,812
Minority interest in joint ventures profit and
depreciation and amortization.......................... 2,122 1,892
Adjustment for investments in real estate mortgages and
equity of unconsolidated companies..................... (8,303) (1,857)
Change in deferred rent receivable........................ (23,371) (6,210)
Change in current assets and liabilities.................. 34,238 (7,493)
Equity in earnings in excess of distributions received
from unconsolidated companies.......................... (12,536) (322)
Non-cash compensation..................................... 172 111
-------- -------
Net cash provided by operating activities................... $211,452 $77,384
======== =======
</TABLE>
OPERATING INFORMATION
The following table presents on an aggregate basis, for the years ended
December 31, 1997 and 1996, the EBIDA and occupancy rates of the Office and
Retail Properties owned as of January 1, 1996 on a stabilized (occupancy rate of
90% or more) and unstabilized (occupancy rate of less than 90%) basis.
<TABLE>
<CAPTION>
EBIDA(1)
NET RENTABLE (IN MILLIONS) % OCCUPIED
NUMBER AREA -------------- ------------
OF PROPERTIES (IN MILLIONS) 1997 1996 1997 1996
------------- ------------- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Stabilized(3)............... 27 5.9 $75.4 $71.7 96% 96%
Unstabilized................ 6 3.1 $21.2 $19.0 72%(2) 74%
</TABLE>
- ---------------
(1) "EBIDA" consists of operating income plus interest, depreciation and
amortization. The Operating Partnership believes that in addition to cash
flows and net income, EBIDA is a useful financial performance measurement
for assessing the operating performance of the Office and Retail Properties.
Together with net income and cash flows, EBIDA provides investors with an
additional basis to evaluate the ability of the Operating Partnership to
incur and service debt and to fund acquisitions and other capital
expenditures. To evaluate EBIDA and the trends it depicts, the components of
EBIDA, such as rental revenues, rental expenses, real estate taxes and
general administrative expenses, should be considered. Excluded from EBIDA
are financing costs such as interest as well as depreciation and
amortization, each of which can significantly affect the Operating
Partnership's results of operations and
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<PAGE> 70
liquidity and should be considered in evaluating the Operating Partnership's
operating performance. Further, EBIDA does not represent net income or cash
flows from operating, financing and investing activities as defined by
generally accepted accounting principals ("GAAP") and does not necessarily
indicate that cash flows will be sufficient to fund cash needs. It should
not be considered as an alternative to net income as an indicator of the
Operating Partnership's operating performance or to cash flows as a measure
of liquidity.
(2) Leases have been executed at certain of "unstabilized" properties but had
not commenced as of December 31, 1997. If such leases had commenced as of
December 31, 1997, the percent leased for the "unstabilized" properties
would have been 96%.
(3) Properties owned as of January 1, 1996, with occupancies equal to 90% or
more, in 1997 and 1996.
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, 1996
and 1997, attributable to signed leases, all of which have commenced or will
commence during the next twelve months (i.e., the renewal or replacement tenant
began or will begin to pay rent) for the Office Properties consolidated in the
Operating Partnership's financial statements during each of the periods
presented. Tenant improvement and leasing costs for signed leases during a
particular period do not equal the cash paid for tenant improvement and leasing
costs during such period, due to timing of payments.
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
CAPITAL EXPENDITURES:
Capital Expenditures (in thousands)....................... $ 1,214 $ 3,310
Per square foot........................................... $ .13 $ .15
TENANT IMPROVEMENT AND LEASING COSTS:(1)
Replacement Tenant Square Feet............................ 390,945 584,116
Renewal Tenant Square Feet................................ 248,603 1,001,653
Tenant Improvement Costs (in thousands)................... $ 6,263 $ 10,958
Per square foot leased.................................... $ 9.79 $ 6.91
Tenant Leasing Costs (in thousands)....................... $ 2,877 $ 6,601
Per square foot leased.................................... $ 4.50 $ 4.16
Total (in thousands)...................................... $ 9,140 $ 17,559
Total per square foot.................................. $ 14.29 $ 11.07
Average lease term..................................... 5.3 years 6.4 years
Total per square foot per year......................... $ 2.38 $ 1.73
</TABLE>
- ---------------
(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 the Operating
Partnership's Property portfolio. The Operating Partnership maintains an active
preventive maintenance program in order to minimize required capital
improvements. In addition, capital improvement costs are recoverable from
tenants in many instances.
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. Management believes that
future recurring tenant improvements and leasing costs for the Operating
Partnership's existing Office Properties will approximate on average for
"renewal tenants" $6.00 to $8.00 per square foot, or $1.20 to $1.60 per square
foot per year based on an average five-year lease term, and, on average for
"replacement tenants", $12.00 to $14.00 per square foot, or $2.40 to $2.80 per
square foot per year based on an average five-year lease term.
-65-
<PAGE> 71
RATIOS OF EARNINGS TO FIXED CHARGES
The Operating Partnership's ratio of earnings to fixed charges for the
years ended December 31, 1997, 1996 and 1995 and the period from May 4, 1994 to
December 31, 1994 were 2.45, 2.01, 2.60 and 3.85, respectively.
Prior to the Operating Partnership's commencement of operations in May
1994, the Operating Partnership's predecessors, which consisted of a group of
affiliated entities owned and controlled by Mr. Rainwater, utilized traditional
single asset mortgage loans and construction loans as their principal source of
outside capital. In connection with completion of the initial public offering of
the Company's Common Shares in May 1994, the predecessor entities were
reorganized into a single consolidated entity and substantially deleveraged
their asset base. As a result of these factors, the Operating Partnership does
not consider information relating to the ratio of earnings to fixed charges for
the periods prior to the completion of the initial public offering to be
meaningful.
For the purposes of computing these ratios, earnings have been calculated
by adding fixed charges (excluding capitalized interest) to income (loss) before
taxes and extraordinary items. Fixed charges consist of interest costs,
including amortization of debt discount and deferred financing fees, whether
capitalized or expensed.
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<PAGE> 72
BUSINESS AND PROPERTIES
The Company is a fully integrated real estate company operating as a REIT
for federal income tax purposes. The Operating Partnership holds substantially
all of the Company's assets, including interests in the Properties, and conducts
substantially all of the Company's operations, including providing management,
leasing and development services for certain of the Properties.
PROPERTIES
Appendix A contains information concerning each Property (including the
Casino/Hotel Properties to be acquired in the Pending Investment) the book value
of which amounted to 10 percent or more of the total assets of the Operating
Partnership and its Subsidiaries as of the date hereof or the gross revenue from
which for the last fiscal year amounted to 10 percent or more of the aggregate
gross revenues of the Operating Partnership and its Subsidiaries for the year
ended December 31, 1997.
OFFICE PROPERTIES
The Office Properties are located primarily in the Dallas/Fort Worth and
Houston, Texas metropolitan areas. The Operating Partnership's Office Properties
in Dallas/Fort Worth and Houston will represent, after giving effect to the
investments in Office Properties completed after January 1, 1998, an aggregate
of approximately 72% of its office portfolio based on total net rentable square
feet (40% and 32% for Dallas/ Fort Worth and Houston, respectively).
The following table sets forth certain information about the Office
Properties as of December 31, 1997, including the investments in Office
Properties completed after December 31, 1997. Based on annualized base rental
revenues from office leases in place as of December 31, 1997 and including the
investments in Office Properties completed after December 31, 1997, no single
tenant would account for more than 4% of the Operating Partnership's total
annualized office property rental revenues for 1997.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NET FULL-SERVICE
RENTABLE RENTAL RATE
YEAR AREA PERCENT PER LEASED
STATE, CITY, PROPERTY SUBMARKET COMPLETED (SQ. FT.) LEASED SQ. FT.(1)
- ----------------------------------------------------- ------------------ --------- ----------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
TEXAS
DALLAS
Bank One Center(2)................................ CBD 1987 1,530,957 73% $ 18,41
The Crescent Office Towers........................ Uptown/Turtle 1985 1,210,949 96 27.06
Creek
Fountain Place.................................... CBD 1986 1,200,266 95 14.99
Trammell Crow Center(3)........................... CBD 1984 1,128,331 87 23.28
Stemmons Place.................................... Stemmons Freeway 1983 634,381 92 13.73
Spectrum Center(4)................................ Far North Dallas 1983 598,250 94 17.12
Waterside Commons................................. Las Colinas 1986 458,739 98 13.68
Caltex House...................................... Las Colinas 1982 445,993 94 23.75
Reverchon Plaza................................... Uptown/Turtle 1985 374,165 99 16.73
Creek
The Aberdeen...................................... Far North Dallas 1986 320,629 100 17.31
MacArthur Center I & II........................... Las Colinas 1982/1986 294,069 99 17.35
Stanford Corporate Centre......................... Far North Dallas 1985 265,507 100 14.80
The Amberton...................................... Central Expressway 1982 255,052 79 10.78
Concourse Office Park............................. LBJ Freeway 1972-1986 244,879 88 12.31
12404 Park Central................................ LBJ Freeway 1987 239,103 96 18.38
Palisades Central II.............................. Richardson/Plano 1985 237,731 100 15.68
3333 Lee Parkway.................................. Uptown/Turtle 1983 233,484 77 18.77
Creek
Liberty Plaza I & II.............................. Far North Dallas 1981/1986 218,813 100 12.84
The Addison....................................... Far North Dallas 1981 215,016 100 15.09
The Meridian...................................... LBJ Freeway 1984 213,915 96 14.54
Palisades Central I............................... Richardson/Plano 1980 180,503 100 13.64
Walnut Green...................................... Central Expressway 1986 158,669 96 13.21
Greenway II....................................... Richardson/Plano 1985 154,329 100 19.38
Addison Tower..................................... Far North Dallas 1987 145,886 99 13.27
5050 Quorum....................................... Far North Dallas 1981 133,594 97 14.23
Cedar Springs Plaza............................... Uptown/Turtle 1982 110,923 91 15.08
Creek
Greenway IA....................................... Richardson/Plano 1983 94,784 100 14.31
Valley Centre..................................... Las Colinas 1985 74,861 98 13.22
Greenway I........................................ Richardson/Plano 1983 51,920 100 14.31
One Preston Park.................................. Far North Dallas 1980 40,525 87 13.55
----------- ---- -------
Subtotal/Weighted Average....................... 11,466,223 92% $ 17.92
----------- ---- -------
</TABLE>
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<PAGE> 73
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NET FULL-SERVICE
RENTABLE RENTAL RATE
YEAR AREA PERCENT PER LEASED
STATE, CITY, PROPERTY SUBMARKET COMPLETED (SQ. FT.) LEASED SQ. FT.(1)
- ----------------------------------------------------- ------------------ --------- ----------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
FORT WORTH
Continental Plaza................................. CBD 1982 954,895 53%(5) $ 16.34
----------- ---- -------
HOUSTON
Greenway Plaza Office Portfolio(6)................ Richmond/Buffalo 1969-1982 4,286,277 85% $ 14.64
Speedway
Houston Center(7)................................. CBD 1974-1983 2,764,418 92 17.61
Post Oak Central(7)............................... West Loop/Galleria 1974-1981 1,277,598 94 13.54
The Woodlands Office Properties(8)................ The Woodlands 1980-1996 812,227 99 14.37
Three Westlake Park(9)............................ Katy Freeway 1983 414,251 100 13.46
U.S. Home Building................................ West Loop/Galleria 1982 399,777 81 16.37
----------- ---- -------
Subtotal/Weighted Average....................... 9,954,548 90% $ 15.32
----------- ---- -------
AUSTIN
Frost Bank Plaza.................................. CBD 1984 433,024 75% $ 17.82
301 Congress Avenue(10)........................... CBD 1986 418,338 96 22.86
Bank One Tower.................................... CBD 1974 389,503 95 16.76
Austin Centre(11)................................. CBD 1986 343,665 84(5) 17.99
The Avallon....................................... Northwest 1993/1997 232,301(12) 79(5) 17.10
Barton Oaks Plaza One............................. Southwest 1986 99,792 95 19.56
----------- ---- -------
Subtotal/Weighted Average..................... 1,916,623 87% $ 18.84
----------- ---- -------
COLORADO
DENVER
MCI Tower......................................... CBD 1982 550,807 98% $ 17.74
Ptarmigan Place................................... Cherry Creek 1984 418,565 82(5) 15.52
Regency Plaza One................................. DTC 1985 309,862 87 20.24
AT&T Building..................................... CBD 1982 184,581 97 14.89
The Citadel....................................... Cherry Creek 1987 130,652 98 18.80
55 Madison........................................ Cherry Creek 1982 137,176 77 16.43
44 Cook........................................... Cherry Creek 1984 124,174 93 17.45
----------- ---- -------
Subtotal/Weighted Average..................... 1,855,817 91% $ 17.36
----------- ---- -------
COLORADO SPRINGS
Briargate Office and Research Center.............. Colorado Springs 1988 252,857 100% $ 15.55
----------- ---- -------
LOUISIANA
NEW ORLEANS
Energy Centre..................................... CBD 1984 761,500 78 14.54
1615 Poydras...................................... CBD 1984 508,741 75%(5) $ 15.09
----------- ---- -------
Subtotal/Weighted Average..................... 1,270,241 77% $ 14.76
----------- ---- -------
FLORIDA
MIAMI
Miami Center...................................... CBD 1983 782,686 79% $ 22.31
----------- ---- -------
ARIZONA
PHOENIX
Two Renaissance Square............................ Downtown/CBD 1990 476,373 89% $ 23.09
6225 North 24th Street............................ Camelback Corridor 1981 86,451 67 21.00
----------- ---- -------
Subtotal/Weighted Average..................... 562,824 85% $ 22.84
----------- ---- -------
WASHINGTON, D.C.
WASHINGTON, D.C.
Washington Harbour(11)............................ Georgetown 1986 536,206 95% $ 36.60
NEBRASKA
OMAHA
Central Park Plaza................................ CBD 1982 409,850 100% $ 14.71
----------- ---- -------
NEW MEXICO
ALBUQUERQUE
Albuquerque Plaza................................. CBD 1990 366,236 83%(5) $ 18.09
----------- ---- -------
CALIFORNIA
SAN FRANCISCO
160 Spear Street.................................. South of 1984 276,420 83%(5) $ 22.76
Market/CBD
----------- ---- -------
SAN DIEGO
Chancellor Park(13)............................... UTC 1988 195,733 85% $ 20.11
----------- ---- -------
TOTAL WEIGHTED AVERAGE........................ 30,801,159 88%(5) $ 17.46
=========== ==== =======
</TABLE>
-68-
<PAGE> 74
- ---------------
(1) Calculated based on base rent payable as of December 31, 1997, without
giving effect to free rent or scheduled rent increases that would be taken
into account under generally accepted accounting principles and including
adjustments for expenses payable by or reimbursable from tenants.
(2) The Operating Partnership has a 50% general partner interest in the
partnership that owns Bank One Center.
(3) The Operating Partnership 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) The Operating Partnership owns the principal economic interest in Spectrum
Center through an interest in Spectrum Mortgage Associates L.P., which owns
both a mortgage note 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 December 31, 1997. If such leases had commenced as of
December 31, 1997, the percent leased for Office Properties would have been
92%. The total percent leased for such Properties would have been as
follows: 3333 Lee Parkway -- 98%; Continental Plaza -- 100%; Austin
Centre -- 98%; The Avallon -- 100%; Ptarmigan Place -- 99%; 1615
Poydras -- 80%; Albuquerque Plaza -- 96% and 160 Spear Street -- 91%.
(6) Consists of 10 Office Properties.
(7) Consists of three Office Properties.
(8) The Operating Partnership has a 75% limited partner interest and an
indirect approximately 10% general partner interest in the partnership that
owns the 12 Office Properties that comprise The Woodlands Office
Properties.
(9) The Operating Partnership owns the principal economic interest in Three
Westlake Park through its ownership of a mortgage note secured by Three
Westlake Park.
(10) The Operating Partnership has a 1% general partner and a 49% limited
partner interest in the partnership that owns 301 Congress Avenue.
(11) Acquired after December 31, 1997.
(12) In August 1997, construction was completed on a 106,342 square foot office
property. The entire building is leased to BMC Software, Inc., which is
expected to occupy in stages over the next 19 months.
(13) The Operating Partnership 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.
The following table provides information for the Office Properties by
state, city and submarket as of December 31, 1997, including the investments in
Office Properties completed after December 31, 1997.
<TABLE>
<CAPTION>
WEIGHTED
PERCENT OPERATING AVERAGE
PERCENT OF LEASED AT OFFICE PARTNERSHIP QUOTED
TOTAL TOTAL OPERATING SUBMARKET SHARE OF MARKET
OPERATING OPERATING PARTNERSHIP PERCENT OFFICE RENTAL RATE
NUMBER OF PARTNERSHIP PARTNERSHIP OFFICE LEASED/ SUBMARKET PER SQUARE
STATE, CITY, SUBMARKET PROPERTIES NRA(1) NRA(1) PROPERTIES OCCUPIED(2) NRA(1)(2) FOOT(2)(3)
- --------------------------------- ---------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS A OFFICE PROPERTIES
TEXAS
DALLAS
CBD........................... 3 3,859,554 14% 84% 81% 21% $ 20.37
Uptown/Turtle Creek........... 4 1,929,521 6 94(6) 90 34 25.28
Far North Dallas.............. 7 1,897,695 6 98 92 30 24.12
Las Colinas................... 4 1,273,662 4 97 94 18 25.95
Richardson/Plano.............. 5 719,267 2 100 99 20 19.01
Stemmons Freeway.............. 1 634,381 2 92 84 31 17.95
LBJ Freeway................... 2 453,018 1 96 95 5 22.89
--- ----------- --- --- --- --- -------
Subtotal/Weighted Average... 26 10,767,098 35% 92% 89% 20% $ 22.44
--- ----------- --- --- --- --- -------
FORT WORTH
CBD........................... 1 954,895 3% 53%(6) 84% 23% $ 17.24
--- ----------- --- --- --- --- -------
HOUSTON
CBD........................... 3 2,764,418 9% 92% 94% 11% $ 17.82
Richmond/Buffalo Speedway..... 4 1,994,274 6 96 98 51 18.01
West Loop/Galleria(7)......... 4 1,677,375 5 91 94 13 19.44
The Woodlands................. 7 486,140 2 100 100 100 15.36
Katy Freeway.................. 1 414,251 1 100 100 15 17.69
--- ----------- --- --- --- --- -------
Subtotal/Weighted Average... 19 7,336,458 23% 95% 95% 16% $ 18.07
--- ----------- --- --- --- --- -------
AUSTIN
CBD(7)........................ 4 1,584,530 5% 88%(6) 93% 44% $ 23.02
Northwest..................... 1 232,301 1 79(7) 96 10 22.40
Southwest..................... 1 99,792 0 95 94 6 24.87
--- ----------- --- --- --- --- -------
Subtotal/Weighted Average... 6 1,916,623 6% 87% 94% 25% $ 23.04
--- ----------- --- --- --- --- -------
COLORADO
DENVER
Cherry Creek.................. 4 810,567 3% 86%(6) 91% 38% $ 19.42
CBD........................... 2 735,388 2 98 94 7 18.63
DTC........................... 1 309,862 1 87 90 7 23.21
--- ----------- --- --- --- --- -------
Subtotal/Weighted Average... 7 1,855,817 6% 91% 92% 11% $ 19.74
--- ----------- --- --- --- --- -------
COLORADO SPRINGS................ 1 252,857 1% 100% 96% 7% $ 17.69(8)
--- ----------- --- --- --- --- -------
<CAPTION>
WEIGHTED
AVERAGE
OPERATING
OPERATING PARTNERSHIP
PARTNERSHIP FULL-
QUOTED SERVICE
RENTAL RENTAL
RATE PER RATE PER
SQUARE SQUARE
STATE, CITY, SUBMARKET FOOT(4) FOOT(5)
- --------------------------------- ----------- -----------
<S> <C> <C>
CLASS A OFFICE PROPERTIES
TEXAS
DALLAS
CBD........................... $ 23.18 $ 18.68
Uptown/Turtle Creek........... 29.32 23.47
Far North Dallas.............. 23.23 15.59
Las Colinas................... 23.28 17.94
Richardson/Plano.............. 21.29 15.68
Stemmons Freeway.............. 18.75 13.73
LBJ Freeway................... 22.17 16.50
------- -------
Subtotal/Weighted Average... $ 23.87 $ 18.28
------- -------
FORT WORTH
CBD........................... $ 17.00 $ 16.34
------- -------
HOUSTON
CBD........................... $ 18.76 $ 17.61
Richmond/Buffalo Speedway..... 19.00 15.43
West Loop/Galleria(7)......... 19.88 14.14
The Woodlands................. 15.36 14.28
Katy Freeway.................. 18.55 13.46
------- -------
Subtotal/Weighted Average... $ 18.84 $ 15.74
------- -------
AUSTIN
CBD(7)........................ $ 23.36 $ 19.03
Northwest..................... 21.00 17.10
Southwest..................... 22.00 19.56
------- -------
Subtotal/Weighted Average... $ 23.01 $ 18.84
------- -------
COLORADO
DENVER
Cherry Creek.................. $ 20.64 $ 16.59
CBD........................... 18.50 17.00
DTC........................... 25.00 20.24
------- -------
Subtotal/Weighted Average... $ 20.52 $ 17.36
------- -------
COLORADO SPRINGS................ $ 17.50 $ 15.55
------- -------
</TABLE>
-69-
<PAGE> 75
<TABLE>
<CAPTION>
WEIGHTED
PERCENT OPERATING AVERAGE
PERCENT OF LEASED AT OFFICE PARTNERSHIP QUOTED
TOTAL TOTAL OPERATING SUBMARKET SHARE OF MARKET
OPERATING OPERATING PARTNERSHIP PERCENT OFFICE RENTAL RATE
NUMBER OF PARTNERSHIP PARTNERSHIP OFFICE LEASED/ SUBMARKET PER SQUARE
STATE, CITY, SUBMARKET PROPERTIES NRA(1) NRA(1) PROPERTIES OCCUPIED(2) NRA(1)(2) FOOT(2)(3)
- --------------------------------- ---------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
LOUISIANA
NEW ORLEANS
CBD........................... 2 1,270,241 4% 77%(6) 87% 14% $ 15.82
--- ----------- --- --- --- --- -------
FLORIDA
MIAMI
CBD........................... 1 782,686 3% 79% 89% 23% $ 27.39
--- ----------- --- --- --- --- -------
ARIZONA
PHOENIX
Downtown/CBD.................. 1 476,373 2% 89% 90% 27% $ 21.60
Camelback Corridor............ 1 86,451 0 67 94 3 24.82
--- ----------- --- --- --- --- -------
Subtotal/Weighted Average... 2 562,824 2% 85% 93% 11% $ 22.09
--- ----------- --- --- --- --- -------
WASHINGTON, D.C.
WASHINGTON, D.C.
Georgetown(7)................. 2 536,206 2% 95% 95% 100% $ 40.00
--- ----------- --- --- --- --- -------
NEBRASKA
OMAHA
CBD........................... 1 409,850 1% 100% 93% 32% $ 18.13
--- ----------- --- --- --- --- -------
NEW MEXICO
ALBUQUERQUE
CBD........................... 1 366,236 1% 83%(6) 95% 63% $ 18.50
--- ----------- --- --- --- --- -------
CALIFORNIA
SAN FRANCISCO
South of Market/CBD........... 1 276,420 1% 83%(6) 99% 3% $ 33.28
--- ----------- --- --- --- --- -------
SAN DIEGO
UTC........................... 1 195,733 1% 85% 92% 7% $ 25.20
--- ----------- --- --- --- --- -------
CLASS A OFFICE PROPERTIES
SUBTOTAL/WEIGHTED
AVERAGE................... 71 27,483,944 89% 89% 92% 17% $ 21.09
=== =========== === === === === =======
CLASS B OFFICE PROPERTIES
TEXAS
DALLAS
Central Expressway............ 2 413,721 1% 86% 89% 11% $ 15.28
LBJ Freeway................... 1 244,879 1 88 93 2 16.94
Far North Dallas.............. 1 40,525 0 87 90 1 17.60
--- ----------- --- --- --- --- -------
Subtotal/Weighted Average... 4 699,125 2% 87% 91% 3% $ 16.00
--- ----------- --- --- --- --- -------
HOUSTON
Richmond/Buffalo Speedway..... 6 2,292,003 8% 76% 74% 54% $ 16.52
The Woodlands................. 5 326,087 1 97 97 100 14.46
--- ----------- --- --- --- --- -------
Subtotal/Weighted Average... 11 2,618,090 9% 78% 75% 58% $ 16.27
--- ----------- --- --- --- --- -------
CLASS B OFFICE PROPERTIES
SUBTOTAL/WEIGHTED
AVERAGE................... 15 3,317,215 11% 80% 88% 12% $ 16.21
=== =========== === === === === =======
CLASS A AND CLASS B OFFICE
PROPERTIES TOTAL/WEIGHTED
AVERAGE................... 86 30,801,159 100% 88%(7) 91% 16% $ 20.57
=== =========== === === === === =======
<CAPTION>
WEIGHTED
AVERAGE
OPERATING
OPERATING PARTNERSHIP
PARTNERSHIP FULL-
QUOTED SERVICE
RENTAL RENTAL
RATE PER RATE PER
SQUARE SQUARE
STATE, CITY, SUBMARKET FOOT(4) FOOT(5)
- --------------------------------- ----------- -----------
<S> <C> <C>
LOUISIANA
NEW ORLEANS
CBD........................... $ 16.70 $ 14.76
------- -------
FLORIDA
MIAMI
CBD........................... $ 30.25 $ 22.31
------- -------
ARIZONA
PHOENIX
Downtown/CBD.................. $ 21.50 $ 23.09
Camelback Corridor............ 21.97 21.00
------- -------
Subtotal/Weighted Average... $ 21.57 $ 22.84
------- -------
WASHINGTON, D.C.
WASHINGTON, D.C.
Georgetown(7)................. $ 40.00 $ 36.60
------- -------
NEBRASKA
OMAHA
CBD........................... $ 18.50 $ 14.71
------- -------
NEW MEXICO
ALBUQUERQUE
CBD........................... $ 18.00 $ 18.09
------- -------
CALIFORNIA
SAN FRANCISCO
South of Market/CBD........... $ 34.00 $ 22.76
------- -------
SAN DIEGO
UTC........................... $ 24.36 $ 20.11
------- -------
CLASS A OFFICE PROPERTIES
SUBTOTAL/WEIGHTED
AVERAGE................... $ 22.01 $ 17.89
======= =======
CLASS B OFFICE PROPERTIES
TEXAS
DALLAS
Central Expressway............ $ 17.73 $ 11.85
LBJ Freeway................... 17.50 12.31
Far North Dallas.............. 17.00 13.55
------- -------
Subtotal/Weighted Average... $ 17.61 $ 12.12
------- -------
HOUSTON
Richmond/Buffalo Speedway..... $ 17.00 $ 13.77
The Woodlands................. 14.46 14.50
------- -------
Subtotal/Weighted Average... $ 16.69 $ 13.88
------- -------
CLASS B OFFICE PROPERTIES
SUBTOTAL/WEIGHTED
AVERAGE................... $ 16.88 $ 13.48
======= =======
CLASS A AND CLASS B OFFICE
PROPERTIES TOTAL/WEIGHTED
AVERAGE................... $ 21.46 $ 17.46
======= =======
</TABLE>
- ---------------
(1) NRA means net rentable area in square feet including the investments in
Office Properties completed after December 31, 1997.
(2) Market information is for Class A office space under the caption "Class A
Office Properties" and market information is for Class B office space under
the caption "Class B Office Properties." Sources are Jamison Research, Inc.
(for the Dallas-CBD, Uptown/Turtle Creek, Far North Dallas, Las Colinas,
Richardson/Plano, Stemmons Freeway, LBJ Freeway and Central Expressway; Fort
Worth-CBD and the New Orleans-CBD submarkets), Baca Landata, Inc. (for the
Houston-Richmond/Buffalo Speedway, CBD and West Loop/Galleria submarkets),
The Woodlands Operating Company, L.P. (for the Houston-The Woodlands
submarket), Cushman & Wakefield of Texas, Inc. (for the Houston-Katy Freeway
submarket), CB Commercial (for the Austin-CBD, Northwest and Southwest
submarkets), Cushman & Wakefield of Colorado, Inc. (for the Denver-Cherry
Creek, CBD and DTC submarkets), Turner Commercial Research (for the Colorado
Springs market), Grubb and Ellis Company (for the Phoenix-Downtown/CBD,
Camelback Corridor, and San Francisco-South of Market/CBD submarkets), Jones
Lang Wootton (for the Washington, D.C.-Georgetown submarket), Pacific Realty
Group, Inc. (for the Omaha-CBD submarket), Building Interests, Inc. (for the
Albuquerque-CBD submarket), Real Data Information Systems, Inc. (for the
Miami-CBD submarket) and John Burnham & Co. (for the San Diego-UTC
submarket).
-70-
<PAGE> 76
(3) Represents full-service rental rates. These rates do not necessarily
represent the amounts at which available space at the Office Properties will
be leased. The weighted average subtotals and total are based on total net
rentable square feet of Office Properties in the submarket.
(4) For Office Properties, represents weighted average rental rates per square
foot quoted by the Operating Partnership as of December 31, 1997, based on
total net rentable square feet of Office Properties in the submarket,
adjusted based on management estimates, to equivalent full-service quoted
rental rates to facilitate comparison to weighted average Class A or Class
B, as the case may be, quoted submarket rental rates per square foot. For
Office Properties acquired after December 31, 1997, represents weighted
average full-service market rental rates per square foot quoted in the
market. These rates do not necessarily represent the amounts at which
available space at the Office Properties will be leased.
(5) Calculated based on base rent payable for Office Properties, including
Office Properties acquired after December 31, 1997, in the submarket as of
December 31, 1997, without giving effect to free rent or scheduled rent
increases that would be taken into account under generally accepted
accounting principles and including adjustments for expenses payable by
tenants, divided by total net rentable square feet of Office Properties in
the submarket.
(6) Leases have been executed at certain Office Properties in these submarkets
but had not commenced as of December 31, 1997. If such leases had commenced
as of December 31, 1997, the percent leased for all Office Properties in the
Operating Partnership's submarkets would have been 92%. The total percent
leased at the Office Properties would have been as follows: Dallas Uptown/
Turtle Creek -- 98%; Fort Worth CBD -- 100%; Austin CBD -- 92%; Austin
Northwest -- 100%; Denver Cherry Creek -- 94%; New Orleans CBD -- 79%;
Albuquerque CBD -- 96%; and San Francisco South of Market/CBD -- 91%.
(7) Includes three Office Properties in the Houston West Loop/Galleria
submarket, one Office Property acquired in the Austin CBD submarket and two
Office Properties acquired in the Washington, D.C.-Georgetown submarket
after December 31, 1997.
(8) Represents weighted average quoted triple-net rental rates per square foot,
adjusted based on management estimates, to equivalent full-service quoted
rental rates.
The following table sets forth, as of December 31, 1997, the principal
business conducted by the tenants at the Office Properties, based on information
supplied to the Operating Partnership by tenants, after giving effect to the
acquisitions of Office Properties completed after December 31, 1997.
<TABLE>
<CAPTION>
PERCENT OF
INDUSTRY SECTOR LEASED SQ. FT.
--------------- --------------
<S> <C>
Professional Services(1).................................... 26%
Financial Services(2)....................................... 20%
Energy...................................................... 15%
Telecommunications.......................................... 7%
Technology.................................................. 6%
Manufacturing............................................... 5%
Retail...................................................... 3%
Medical..................................................... 3%
Government.................................................. 3%
Food Service................................................ 3%
Other(3).................................................... 9%
---
Total Leased................................................ 100%
===
</TABLE>
- ---------------
(1) Includes legal, accounting, engineering, architectural and advertising
services.
(2) Includes banking, title and insurance and investment services.
(3) Includes construction, real estate, transportation and other industries.
-71-
<PAGE> 77
LEASE EXPIRATIONS OF OFFICE PROPERTIES
The following table sets forth a schedule of lease expirations for leases
in place at the Office Properties owned as of December 31, 1997(1), for each of
the 10 years beginning with 1998, assuming that none of the tenants exercises
renewal options and excluding an aggregate of 3,991,391 square feet of unleased
space.
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL ANNUAL FULL
NET RENTABLE ANNUAL SERVICE
AREA PERCENTAGE OF ANNUAL FULL FULL SERVICE RENT PER
NUMBER OF REPRESENTED LEASED NET SERVICE RENT NET
TENANTS WITH BY EXPIRING RENTABLE AREA RENT UNDER REPRESENTED RENTABLE
YEAR OF LEASE EXPIRING LEASES REPRESENTED BY EXPIRING BY EXPIRING AREA
EXPIRATION LEASES (SQUARE FEET) EXPIRING LEASES LEASES(2) LEASES EXPIRING(2)
------------- ------------ ------------- ---------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
1998........................ 416 2,454,569 9.2% $39,165,179 7.8% $15.96
1999........................ 418 3,470,357 12.9 59,169,483 11.8 17.05
2000........................ 372 3,311,919 12.4 60,340,936 12.0 18.22
2001........................ 288 3,680,753 13.7 63,445,501 12.7 17.24
2002........................ 277 3,407,331 12.7 66,653,848 13.3 19.56
2003........................ 74 1,423,950 5.3 24,016,848 4.8 16.87
2004........................ 70 2,561,029 9.6 49,035,329 9.8 19.15
2005........................ 47 1,988,191 7.5 40,734,393 8.1 20.49
2006........................ 20 521,177 1.9 10,096,070 2.0 19.37
2007........................ 23 1,138,952 4.2 19,837,446 4.0 17.42
2008 and thereafter......... 30 2,851,334 10.6 68,926,526 13.7 24.17
</TABLE>
- ---------------
(1) Includes six Office Properties acquired after December 31, 1997.
(2) Calculated based on base rent payable as of the expiration date of 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 generally
accepted accounting principles and including adjustments for expenses
payable by or reimbursable from tenants based on current levels.
-72-
<PAGE> 78
OFFICE PROPERTY MARKET INFORMATION
The following graph provides information regarding vacancy levels and
weighted average quoted market rental rates at year end for each of the years
from 1992 through 1997, for Class A office properties in all submarkets,
excluding the Washington, D.C.-Georgetown submarket for 1992 through 1996, in
which the Operating Partnership has invested in Class A office properties.
CLASS A OFFICE
VACANCY AND QUOTED MARKET RENT
FOR ALL OPERATING PARTNERSHIP SUBMARKETS(1)(2)
[CHART]
<TABLE>
<CAPTION>
MEASUREMENT PERIOD AVG. RENT(1) VACANCY
(FISCAL YEAR COVERED)
<S> <C> <C>
1992........................................................ $16.10 16.9%
1993........................................................ 15.71 16.1
1994........................................................ 16.13 12.6
1995........................................................ 16.93 11.5
1996........................................................ 18.47 10.5
1997........................................................ 21.17 8.0
</TABLE>
- ---------------
(1) Weighted average based on total net rentable square feet of Class A office
properties in all submarkets in which the Operating Partnership owns Class A
Office Properties (See Note 2 below). Sources are Jamison Research, Inc.
(for the Dallas-CBD, Uptown/ Turtle Creek, Far North Dallas, Las Colinas,
Richardson/Plano, Stemmons Freeway, LBJ Freeway and Central Expressway; Fort
Worth-CBD and the New Orleans-CBD submarkets), Baca Landata, Inc. (for the
Houston-Richmond/Buffalo Speedway, CBD and West Loop/Galleria submarkets),
The Woodlands Operating Company, L.P. (for the Houston-The Woodlands
submarket), Cushman & Wakefield of Texas, Inc. (for the Houston-Katy Freeway
submarket), CB Commercial (for the Austin-CBD, Northwest and Southwest
submarkets), Cushman & Wakefield of Colorado, Inc. (for the Denver-Cherry
Creek, CBD and DTC submarkets), Turner Commercial Research (for the Colorado
Springs market), Grubb and Ellis Company (for the Phoenix-Downtown/CBD,
Camelback Corridor and San Francisco-South of Market/CBD submarkets), Jones
Lang Wootton (for the Washington, D.C.-Georgetown submarket), Pacific Realty
Group, Inc. (for the Omaha-CBD submarket), Koll Market Research and Building
Interests, Inc. (for the Albuquerque-CBD submarket); Real Data Information
Systems, Inc. (for the Miami-CBD submarket) and John Burnham & Co. (for the
San Diego-UTC submarket).
(2) Weighted average vacancy rates across Class A office property markets are
calculated by using vacancy rate data provided by the sources listed in Note
1 above. The vacancy rate for each submarket during a particular year is
weighted based on total square feet of Class A office properties in that
submarket, divided by total square feet of Class A office properties in all
submarkets in which the Operating Partnership owns Class A Office
Properties. These weighted vacancy rates are then averaged together to
obtain the weighted average vacancy rate for the specified year. Weighted
average rental rates are calculated by using rental rate data provided by
the sources listed in Note 1 above. The rental rate for each submarket
during a particular year is weighted based on total square feet of Class A
office properties in that submarket divided by total square feet of Class A
office properties in all submarkets in which the Operating Partnership owns
Class A Office Properties. These weighted rental rates are then averaged
together to obtain the weighted average rental rate for the specified year.
-73-
<PAGE> 79
BEHAVIORAL HEALTHCARE FACILITIES
On June 17, 1997, the Operating Partnership acquired substantially all of
the real estate assets of the domestic hospital provider business of Magellan,
as previously owned and operated by a wholly owned subsidiary of Magellan. The
transaction involved various components, the principal component of which was
the acquisition of the 90 Behavioral Healthcare Facilities (and two additional
behavioral healthcare facilities which subsequently were sold) for approximately
$387.2 million. The Behavioral Healthcare Facilities, which are located in 27
states, are leased to CBHS and its subsidiaries. CBHS is a Delaware limited
liability company formed to operate the Behavioral Healthcare Facilities and
owned 50% by a subsidiary of Magellan and 50% by Crescent Operating. The lease
requires the payment of annual minimum rent in the amount of approximately $41.7
million for the period ending June 16, 1998, increasing in each subsequent year
during the 12-year term at a 5% compounded annual rate. All maintenance and
capital improvement costs are the responsibility of CBHS during the term of the
lease. In addition, the obligation of CBHS to pay an approximately $78.2 million
franchise fee to Magellan and one of its subsidiaries, as franchisor, pursuant
to a franchise agreement, is subordinated to the obligation of CBHS to pay
annual minimum rent to the Operating Partnership. The franchisor does not have
the right to terminate the franchise agreement due to any nonpayment of the
franchise fee as a result of the subordination of the franchise fee to the
annual minimum rent.
On March 5, 1998, Crescent Operating entered into a definitive agreement to
acquire Magellan's 50% interest in CBHS in exchange for $30 million in common
stock of Crescent Operating. In a related transaction, CBHS executed a
definitive agreement to purchase from Magellan, for approximately $280 million,
certain assets and intellectual property rights used by Magellan to supply
franchise services to CBHS. The agreement provides for the elimination of the
franchise fee that is payable by CBHS to Magellan. The transactions are subject
to a number of conditions, including customary closing conditions, a condition
that CBHS obtain funds sufficient to finance the purchase and certain regulatory
conditions. The transactions, as currently structured, will not affect the
arrangements pursuant to which CBHS leases the Behavioral Healthcare Facilities
from the Operating Partnership.
The Behavioral Healthcare Facilities are located in well-populated urban
and suburban locations. Most of the Behavioral Healthcare Facilities offer a
full continuum of behavioral care in their service area, including inpatient
hospitalization, partial hospitalization, intensive outpatient services and, in
some markets, residential treatment services. The Behavioral Healthcare
Facilities provide structured and intensive treatment programs for mental health
and alcohol and drug dependency disorders in children, adolescents and adults. A
significant portion of admissions are provided by referrals from former
patients, local marketplace advertising, managed care organizations and
physicians. The Behavioral Healthcare Facilities work closely with mental health
professionals, non-psychiatric physicians, emergency rooms and community
agencies that come in contact with individuals who may need treatment for mental
illness or substance abuse.
The Behavioral Healthcare Facilities have been in the past and in the
future may be adversely affected by factors influencing the entire psychiatric
hospital industry. The industry is subject to governmental regulation in various
respects. Factors which may affect the operations and successful results of
operations of the Behavioral Healthcare Facilities include (i) the imposition of
more stringent length of stay and admission criteria by payers; (ii) the failure
of reimbursement rates received from certain payers that reimburse on a per diem
or other discounted basis to offset increases in the cost of providing services;
(iii) an increase in the percentage of business that the Behavioral Healthcare
Facilities derive from payers that reimburse on a per diem or other discounted
basis; (iv) a trend toward higher deductibles and co-insurance for individual
patients and (v) pricing pressure related to an increasing rate of claims
denials by third party payers. In addition to these regulations, the recently
adopted National Mental Health Parity Act of 1997 potentially benefits the
industry by imposing an obligation for health insurance issuers and group health
plans to place mental health benefits on equal footing with all other medical
benefits. Title I of this Act amends the Code to impose on an issuer or group
health plan a tax equal to 25% of a health plan's premiums received during the
calendar year if the plan imposes limitations or financial requirements on the
coverage of benefits relating to certain mental health conditions unless similar
limitations or requirements also are imposed on coverage of benefits with
respect to conditions other than mental health.
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<PAGE> 80
The following chart sets forth the locations of the 90 Behavioral
Healthcare Facilities by state:
<TABLE>
<CAPTION>
NUMBER OF
STATE FACILITIES
----- ----------
<S> <C>
Alabama 2
Arizona 2
Arkansas 2
California 9
Delaware 1
Florida 10
Georgia 12
Indiana 8
Kansas 2
Kentucky 4
Louisiana 2
Maryland 1
Minnesota 1
Mississippi 2
Missouri 1
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
STATE FACILITIES
----- ----------
<S> <C>
Nevada 1
New Hampshire 2
New Jersey 1
North Carolina 4
Ohio 1
Pennsylvania 2
South Carolina 3
Tennessee 1
Texas 9
Utah 1
Virginia 4
Wisconsin 2
--
Total 90
==
</TABLE>
HOTEL PROPERTIES
The following table sets forth certain information about the Hotel
Properties, including investments in Hotel Properties completed after December
31, 1997, for the years ended December 31, 1997 and 1996. The information for
the Hotel Properties is based on available rooms, except for Canyon Ranch-Tucson
and Canyon Ranch-Lenox, which are destination health and fitness resorts that
measure their performance based on available guest nights.
<TABLE>
<CAPTION>
AVERAGE AVERAGE REVENUE PER
OCCUPANCY DAILY AVAILABLE
RATE RATE ROOM
------------- ------------- -------------
YEAR ENDED YEAR ENDED YEAR ENDED
YEAR DECEMBER 31, DECEMBER 31, DECEMBER 31,
COMPLETED/ ------------- ------------- -------------
HOTEL PROPERTY(1) LOCATION RENOVATED ROOMS 1997 1996 1997 1996 1997 1996
----------------- -------- -------------- ------ ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FULL-SERVICE/LUXURY HOTELS
Denver Marriott City Center Denver, CO 1982/1994 613 80% 79% $117 $108 $ 94 $ 85
Four Seasons Hotel-Houston Houston, TX 1982 399 67 65 161 142 108 93
Hyatt Regency Albuquerque Albuquerque, NM 1990 395 74 77 98 93 73 71
Omni Austin Hotel(2) Austin, TX 1986 314 78 76 103 102 81 77
Hyatt Regency Beaver Creek Avon, CO 1989 295 66 67 229 207 151 139
Sonoma Mission Inn & Spa Sonoma, CA 1927/1987/1997 198(3) 87 92 210 181 183 166
Ventana Country Inn Big Sur, CA 1975/1982/1988 62 84 83 337 312 282 258
----- -- -- ---- ---- ---- ----
TOTAL/WEIGHTED AVERAGE 2,276(3) 75% 75% $149 $136 $112 $102
===== == == ==== ==== ==== ====
DESTINATION HEALTH AND FITNESS RESORTS
Canyon Ranch-Tucson Tucson, AZ 1980 250(4) 81%(5) 80%(5) $508(6) $479(6) $387(7) $366(7)
Canyon Ranch-Lenox Lenox, MA 1989 202(4) 80(5) 81(5) 445(6) 407(6) 347(7) 320(7)
----- -- -- ---- ---- ---- ----
TOTAL/WEIGHTED AVERAGE 452 81% 81% $477 $446 $370 $345
===== == == ==== ==== ==== ====
</TABLE>
- ---------------
(1) Because of the Company's status as a REIT for federal income tax purposes,
it does not operate the Hotel Properties and has leased the Hotel Properties
to subsidiaries of Crescent Operating pursuant to long-term leases.
(2) Acquired subsequent to December 31, 1997.
(3) Includes, for the period from July 1, 1997 through December 31, 1997, 30
additional rooms completed in July 1997.
(4) Represents available guest nights, which is the maximum number of guests
that the resort can accommodate per night.
(5) Represents the number of paying and complimentary guests for the period,
divided by the maximum number of available guest nights for the period.
(6) Represents the average daily "all-inclusive" guest package charges for the
period, divided by the average daily number of paying guests for the period.
(7) Represents the total "all-inclusive" guest package charges for the period,
divided by the maximum number of available guest nights for the period.
REFRIGERATED WAREHOUSE INVESTMENT
On October 31, 1997, the Operating Partnership, through the Crescent
Subsidiaries, acquired a 40% interest in each of two partnerships, one of which
owns Americold and one of which owns URS. The remaining 60% interest in the
partnerships is owned by Vornado. Americold and URS are the two largest
suppliers of refrigerated warehouse space in the United States.
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One of the partnerships acquired all of the common stock of Americold
through the merger of a subsidiary of Vornado into Americold, and the other
partnership acquired all of the common stock of URS through the merger of a
separate subsidiary of Vornado into URS. As a result of the acquisition, the
Americold partnership and the URS partnership became the owners and operators of
approximately 80 refrigerated warehouses, with an aggregate of approximately 394
million cubic feet, that are operated pursuant to arrangements with national
food suppliers such as Tyson Foods, Kraft Foods, ConAgra and Pillsbury. In March
1998, Americold entered into an agreement to acquire the assets of Freezer
Services Inc., which operates nine additional refrigerated warehouses.
The aggregate purchase price for the acquisition of Americold and URS was
approximately $1.04 billion (including transaction costs associated with the
acquisition). Of this amount, the purchase price for the acquisition of
Americold was approximately $645 million (consisting of approximately $112
million in cash for the purchase of the equity, approximately $151 million in
cash for the repayment of certain outstanding bonds issued by Americold,
approximately $372 million in retention of debt and approximately $10 million in
transaction costs), and the purchase price for the acquisition of URS was
approximately $399 million (consisting of approximately $173 million in cash for
the purchase of the equity, approximately $211 million in retention of debt and
approximately $15 million in transaction costs).
The Operating Partnership currently owns all of the non-voting common
stock, representing an approximately 95% economic interest, in each of the
Crescent Subsidiaries. On December 30, 1997 and effective October 31, 1997, the
Operating Partnership sold all of its voting stock, representing an
approximately 5% economic interest, in each of the Crescent Subsidiaries to
Crescent Operating.
Under the terms of the existing partnership agreements for each of the
partnerships, the Operating Partnership does not have the right to participate
in the decisions with respect to the Partnerships. Vornado has the right to make
all decisions relating to the management and operation of the partnerships other
than certain major decisions that require the approval of both Crescent
Operating and Vornado. The partnership agreement for each of the partnerships
provides for a buy-sell arrangement upon a failure of Crescent Operating and
Vornado to agree on any of the specified major decisions pursuant to which the
entire interest of Crescent Operating and the Operating Partnership or the
entire interest of Vornado may be purchased by the other party. Until November
1, 2000, the buy-sell arrangement can only be exercised by Vornado.
The parties have not yet determined certain matters relating to the future
ownership structure and operations of Americold and URS, including the
identification and division of the assets that will continue to be owned by one
of the partnerships and those that may be owned by one or more other entities
formed to conduct the business operations currently conducted by Americold and
URS, and the nature and terms of any lease that may be entered into between the
operating entity and the owner of the warehouses.
RESIDENTIAL DEVELOPMENT PROPERTIES
The Operating Partnership owns economic interests in five Residential
Development Corporations through the real estate mortgages (the "Residential
Development Property Mortgages") relating to and the non-voting common stock in
these Residential Development Corporations. In addition, the Operating
Partnership currently owns the non-voting common stock of The Woodlands Land
Company, Inc. ("WLC") and DMDC, two Residential Development Corporations formed
to make investments in The Woodlands and Desert Mountain, respectively. Crescent
Operating owns all of the voting common stock, representing a 5% economic
interest, in each of WLC and DMDC. The Residential Development Corporations in
turn, through joint ventures or partnership arrangements, own interests in the
12 Residential Development Properties. The Residential Development Corporations
are responsible for the continued development and the day-to-day operations of
the Residential Development Properties. The Residential Development Properties
include the following properties under development: The Highlands, The Reserve
at Frisco, One Beaver Creek, Market Square, Villas at Beaver Creek, Villa
Montane Townhouses and Villa Montane Club, which are located in Colorado; The
Woodlands, Mira Vista, Falcon Point and Spring Lakes, which are located in
Texas; and Desert Mountain, which is located in Arizona.
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RETAIL PROPERTIES
The Operating Partnership owns seven Retail Properties, which in the
aggregate contain approximately 771,000 net rentable square feet. Four of the
Retail Properties, The Woodlands Retail Properties, with an aggregate of
approximately 356,000 net rentable square feet, are located in The Woodlands, a
master-planned development located 27 miles north of downtown Houston, Texas.
The Company has a 75% limited partner interest and an indirect approximately 10%
general partner interest in the partnership that owns The Woodlands Retail
Properties. Two of the Retail Properties, Las Colinas Plaza, with approximately
135,000 net rentable square feet, and The Crescent Atrium, with approximately
89,000 net rentable square feet, are located in submarkets of Dallas, Texas. The
remaining Retail Property, The Park Shops at Houston Center, with an aggregate
of approximately 191,000 net rentable square feet, is located in the CBD
submarket of Houston, Texas. As of December 31, 1997, the Retail Properties were
95% leased.
RECENT ACQUISITIONS
Since January 1, 1997, the Operating Partnership has completed
approximately $3.05 billion in Property acquisitions and other investments. The
Property acquisitions include 33 Office Properties and one Retail Property for
approximately $1.52 billion, 90 Behavioral Healthcare Facilities (and two
additional behavioral healthcare facilities which subsequently were sold) for
approximately $387.2 million, three Hotel Properties for approximately $125.0
million, approximately 40.375% and approximately 88.35% interests in two
Residential Development Corporations that own two Residential Development
Properties for approximately $370.2 million, the Refrigerated Warehouse
Investment for approximately $417.6 million and a 42.5% partnership interest in
The Woodlands Commercial Properties Company, L.P. for approximately $83.9
million.
The following briefly describes the Operating Partnership's investments
since December 31, 1997.
Austin Centre. On January 23, 1998, the Operating Partnership acquired
Austin Centre, a mixed-use property including a 343,664 square foot Class A
office building, a 314-room, four-star Omni Austin Hotel and 61 apartments
located on approximately 1.75 acres. The property is located in the central
business district of Austin, four blocks from the state capitol building and was
acquired for approximately $96.4 million. Austin Centre was developed in 1986,
and its major tenants include Investors Life Insurance of North America, HCD
Austin Corporation and Texas Monthly, Inc. Crescent Operating, Inc., pursuant to
a lease with the Operating Partnership, will market and operate the hotel.
Post Oak Central. On February 13, 1998, the Operating Partnership acquired
for approximately $155.3 million Post Oak Central, an office complex consisting
of three Class A office buildings located in the West Loop/Galleria submarket of
Houston, Texas. Built between 1974 and 1981 and designed by renowned architects
Philip Johnson and John Burgee, the buildings are located on approximately 17.3
acres and contain approximately 1.3 million net rentable square feet. Major
tenants of Post Oak Central include Apache Corporation and Stewart Information
Services Corporation.
Washington Harbour. On February 25, 1998, the Operating Partnership
acquired Washington Harbour, a two building complex consisting of a 5-story
office building and an 8-story office building (the top three stories of which
comprise 35 luxury condominiums, which were not included in the purchase),
located in the Georgetown submarket of Washington, D.C. Built in 1986, the two
Office Properties contain approximately 536,000 net rentable square feet with a
two-level attached, below-ground parking structure that accommodates
approximately 613 cars. Washington Harbour was purchased for approximately $161
million. The major tenants of Washington Harbour are Swidler & Berlin, Foley &
Lardner, and Collier, Shannon, Rill & Scott.
COMPETITION
The Operating Partnership believes that it does not have a direct
competitor with its Office Properties considered as a group. The Office
Properties, primarily Class A properties located in 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 types
of office properties (for example, Class A and
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Class B properties). A number of these owners and developers may own more than
one property. The number and type of properties in a particular market or
submarket could have a material effect on the Operating Partnership's ability to
lease space or maintain or increase occupancy at its Office Properties or at any
newly acquired properties.
Each of the Behavioral Healthcare Facilities competes with other hospitals,
some of which are larger and have greater financial resources. The Behavioral
Healthcare Facilities frequently draw patients from areas outside their
immediate area and therefore may, in certain markets, compete with both local
and distant hospitals. The Behavioral Healthcare Facilities compete not only
with other psychiatric hospitals, but also with psychiatric units in general
hospitals, and outpatient services provided by the Behavioral Healthcare
Facilities may compete with private practicing mental health professionals. The
Operating Partnership believes that its primary competitors are other operators
that operate a large number of psychiatric beds in multiple states, such as
Behavioral Healthcare Corp., Columbia/HCA Healthcare Corp., Universal Health
Services, Ramsey Health Care and Healthcare America.
The competitive position of a Behavioral Healthcare Facility is, to a
significant degree, dependent upon the number and quality of physicians who
practice at the hospital and who are members of its medical staff. In recent
years, an increasing percentage of the Behavioral Healthcare Facilities'
revenues have come from contracts with preferred provider organizations
("PPOs"), health maintenance organizations ("HMOs") and other managed care
programs. Such contracts normally involve a discount from the hospital's
established charges, but provide a base of patient referrals. As a result of the
increasing importance of PPOs, HMOs and other managed care programs, the
competitive position of the Behavioral Healthcare Facilities is increasingly
affected by their ability to win contracts from these organizations. The
importance of obtaining contracts with PPOs, HMOs and other managed care
companies varies from market to market, depending on the individual market
strength of the managed care companies.
Certificate of need laws in certain states regulate the Behavioral
Healthcare Facilities, and their competitors' ability to build new hospitals and
to expand existing hospital facilities and services. These laws provide some
protection from competition, as their intent is to prevent duplication of
services. In most cases, these state laws do not restrict the ability of the
Behavioral Healthcare Facilities or their competitors to offer new outpatient
services.
The Operating Partnership's Denver Marriott City Center and Hyatt Regency
Albuquerque Hotel Properties are convention centers that compete against other
convention center hotels in Denver and Albuquerque, respectively, which are
owned by a variety of owners, including national hotel chains and local owners.
The Operating Partnership believes, however, that its destination health and
fitness resorts are unique properties that do not have direct competitors. In
addition, the Operating Partnership believes that each of the remaining Hotel
Properties experiences little or no direct competition due to its high
replacement cost and unique concept or location. The Hotel Properties do
compete, although 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.
At the time that the Operating Partnership made the Refrigerated Warehouse
Investment, Americold and URS were the two largest owners and operators of
refrigerated warehouses in the country in terms of cubic feet of storage space
owned. As a result, the Operating Partnership believes that the combined
companies do not have any competitors of comparable size. Industry sources
indicate that, in 1997, Americold and URS owned and operated an aggregate of
approximately 25% of total refrigerated warehouse space. Among other owners and
operators of refrigerated warehouse space, no other owner and operator owned or
operated more than 8% of total refrigerated warehouse space. As a result, the
Operating Partnership believes that Americold and URS do not have any
competitors of comparable size. Americold and URS operate in an environment in
which competition is national, regional and local in nature and in which the
breadth of service, warehouse locations, customer mix, warehouse size, service
performance and price are the principal competitive factors. Since frozen food
manufacturers and distributors incur transportation costs which typically are
significantly greater than warehousing costs, breadth of total logistics
services and warehouse location are major competitive factors. In addition, in
certain locations, customers depend upon pooling
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shipments, which involves combining their products with the products of others
destined for the same markets. In these cases, the mix of customers in a
warehouse can significantly influence the cost of delivering products to
markets. The size of a warehouse is important because large customers prefer to
have all of the products needed to serve a given market in a single location to
have the flexibility to increase storage in that single location during seasonal
peaks. If there are several warehouse locations which satisfy a customer mix and
size requirements, the Operating Partnership believes that customers generally
will select a warehouse facility based upon the types of services available,
service performance and price.
The Operating Partnership'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 detached housing, condominiums, townhouses and non-owner occupied
housing, such as luxury apartments.
The Retail Properties compete against other commercial properties in each
of their respective areas, including shopping malls, free-standing retail
operations and convenience stores.
INTEREST RATES
A portion of the Operating Partnership's acquisition activities are funded
at least initially through secured and unsecured and fixed and variable rate
debt. As a result, the Operating Partnership's ability to continue building its
portfolio of properties depends in part on its ability to obtain financing at
rates that management considers acceptable in light of investment returns
expected to be derived from the Properties. If interest rates increase and the
Operating Partnership is unable to increase net income (whether through
increases in rents or otherwise) in an amount sufficient to offset its increased
financing costs, its acquisition activity might be curtailed.
In addition, certain of the Operating Partnership's outstanding credit
facilities have variable interest rate components. As of December 31, 1997, the
Operating Partnership had approximately $754 million of variable rate debt
outstanding, only $115 million of which was subject to an interest rate cap. As
a result, increases in interest rates will result in an increase in the interest
payments due under these facilities, which in turn may decrease the Operating
Partnership's net income. The Operating Partnership endeavors to balance its
exposure to changes in interest rates by maintaining a mix of variable rate and
fixed rate debt. As of December 31, 1997, the Operating Partnership had
outstanding approximately $956.1 million in fixed rate debt.
YEAR 2000 COMPLIANCE
The Operating Partnership has reviewed its in-house computer software
programs and operating systems, which consist primarily of the accounting and
property management systems, to assess the impact of the Year 2000 on these
systems. These programs and systems are Year 2000 compliant.
Based on present information, the Operating Partnership believes that it
will be able to achieve Year 2000 compliance for its property-specific computer
systems, such as energy management and security access systems, through a
combination of the modification and replacement of systems within its office
property portfolio. The Operating Partnership anticipates that the costs
associated with achieving Year 2000 compliance will not have a material impact
on the Operating Partnership's financial results. The implementation will take
place over the next 12 to 18 months with the assistance of full-time employees
and independent contractors.
EMPLOYEES
The Operating Partnership has more than 475 employees. None of the
employees are covered by collective bargaining agreements. The Operating
Partnership believes that its relationships with its employees are satisfactory.
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INSURANCE
The Operating Partnership and each of its Subsidiaries maintains insurance
coverage by financially sound and reputable insurance companies on all of its
insurable property against loss or damage with amounts and types of insurance
that are commercially reasonable.
LEGAL PROCEEDINGS
Neither the Operating Partnership nor any of its Subsidiaries nor any of
the Properties currently is the subject of any material litigation nor, to the
knowledge of the Operating Partnership, is any material litigation currently
threatened against the Operating Partnership, any of its Subsidiaries or any of
the Properties.
ENVIRONMENTAL MATTERS
The Operating Partnership and its Properties are subject to a variety of
federal and state environmental laws and regulations, including The
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended, the Superfund Amendments and Reauthorization Act of 1986, the
Federal Clean Water Act, the Federal Clean Air Act and the Toxic Substances
Control Act. The application of these laws to a specific Property owned by the
Operating Partnership will be dependent on a variety of Property-specific
circumstances, including the former uses to which the Property was put and the
building materials used at each Property. The Operating Partnership believes
that any environmental liability that may be associated with the Properties does
not present a material risk to its financial condition or results of operations.
Under the environmental laws set forth above, a current or previous owner
or operator of real estate may be required to investigate and clean up certain
hazardous or toxic substances, asbestos-containing materials, or petroleum
product releases at the property, and may be held liable to a governmental
entity or to third parties for property damage and for investigation and cleanup
costs incurred by such parties in connection with the contamination. In
addition, some environmental laws create a lien on the contaminated site in
favor of the government for damages and costs it incurs in connection with the
contamination. The presence of contamination or the failure to remediate
contamination may adversely affect the owner's ability to sell or lease real
estate or to borrow using the real estate as collateral. The owner or operator
of a site may be liable under common law to third parties for damages and
injuries resulting from environmental contamination emanating from the site.
Such costs or liabilities could exceed the value of the affected real estate.
The Operating Partnership has not been notified by any governmental authority of
any non-compliance, liability or other claim in connection with any of the
Properties, and the Operating Partnership is not aware of any other
environmental condition with respect to any of the Properties that management
believes would have a material adverse effect on the Operating Partnership's
business, assets or results of operations. Prior to the Operating Partnership's
acquisition of its Properties, independent environmental consultants conducted
or updated Phase I environmental assessments (which generally do not involve
invasive techniques such as soil or ground water sampling) on the Properties.
None of these Phase I assessments or updates revealed any materially adverse
environmental condition not known to the Operating Partnership or the
independent consultants preparing the assessments. There can be no assurance,
however, that environmental liabilities have not developed since such
environmental assessments were prepared, or that future uses or conditions
(including, without limitation, changes in applicable environmental laws and
regulations) will not result in imposition of environmental liability.
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CERTAIN POLICIES
The following is a discussion of the Operating Partnership's investment and
financing policies, as well as its policies regarding certain other activities.
The Company is the sole shareholder of the General Partner of the Operating
Partnership. The Board of Trust Managers of the Company elects the sole director
of the General Partner and provides guidance to the senior management of the
General Partner of the Operating Partnership regarding operating and financial
policies and strategies, including its policies and strategies with respect to
acquisitions, growth, operations, indebtedness and capitalization. These
policies and strategies of the Operating Partnership and the Company may change
from time to time, except that (i) changes in conflicts of interest policies
must be consistent with applicable legal requirements and (ii) neither the
Company (without the approval of the holders of a majority of the shares of
equity securities outstanding and entitled to vote on the matter) nor the
Operating Partnership may act in a manner that could adversely affect the
ability of the Company to maintain its qualification as a REIT for federal
income tax purposes. In addition, the Operating Partnership may not act in a
manner that could subject the Company to certain taxes on REITs or result in a
violation of any law or regulation of any governmental body or agency having
jurisdiction over the Company or its securities.
INVESTMENT POLICIES
General. The Operating Partnership's investment objectives are to provide
stable cash flow available for quarterly distributions and to increase funds
from operations, and the underlying value, of the Operating Partnership and,
thereby, of the Company over time through the Operating Partnership's
operational and investment activities. The Operating Partnership intends to
accomplish these objectives by pursuing its operating, investment and financing
strategies. See "The Operating Partnership." There can be no assurance, however,
that the Operating Partnership will successfully implement its strategies, that
its investment objectives will be attained or that the value of the Operating
Partnership will not decline.
The Operating Partnership intends at all times to invest in a manner
consistent with the requirements under the Code for the Company to qualify as a
REIT for federal income tax purposes. This policy of maintaining the Company's
REIT qualification will not be changed unless, due to changes in the tax laws,
changes in economic conditions or other fundamental changes in the Company's
business environment, the Company's Board of Trust Managers, with the consent of
the holders of a majority of the shares of equity securities outstanding and
entitled to vote on the matter, determines that it is no longer in the best
interest of the Company to qualify as a REIT for federal income tax purposes.
Investment in Real Estate or Interests in Real Estate. The Operating
Partnership pursues its investment objectives primarily through the direct
ownership of real estate assets and, indirectly, through ownership of interests
in entities that, in turn, own real estate assets. Future investments will not
be limited to any specified geographic area or areas, but will be made in
markets meeting the Operating Partnership's selection criteria as described at
"The Operating Partnership -- Investment Strategies," and may include any type
of asset, property or interest the ownership of which is consistent with the
Company's qualification as a REIT for federal income tax purposes. The Operating
Partnership generally purchases existing properties meeting its selection
criteria, as described at "The Operating Partnership -- Investment Strategies,"
and currently does not intend to engage in development activities, except with
respect to the Residential Development Properties and any undeveloped properties
that it may acquire in the future. In the future, however, the Operating
Partnership may elect to develop properties alone or in concert with others.
The Operating Partnership has no limit on the amount or percentage of its
assets represented by one property or property type. Subject to the percentage
ownership limitations and gross income tests which must be satisfied to maintain
the Company's qualification as a REIT for federal income tax purposes, the
Operating Partnership may invest in the securities of entities engaged in real
estate activities, or securities of other issuers, including investments made
for the purpose of exercising control over such issuers. The Operating
Partnership may acquire some, all or substantially all of the securities or
assets of other REITs or similar real estate investment entities, where such
investment would be consistent with the Operating Partnership's
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investment objectives and policies and the Company's continued qualification as
a REIT for federal income tax purposes.
The Operating Partnership may purchase or lease income-producing properties
for long-term investment, expand or improve the properties that it controls, or
sell such properties, in whole or in part, as the circumstances may warrant. The
Operating Partnership may participate with other entities or individuals in the
ownership of properties, through joint ventures or other co-ownership
arrangements consistent with qualification as a REIT for federal income tax
purposes. Equity investments may be subject to existing or future mortgage
financing and other indebtedness which may have priority over the Operating
Partnership's equity interest in any such investment.
Investment in Real Estate Mortgages. While the Operating Partnership
emphasizes equity real estate investments, it has in the past and in the future
may, in its discretion, elect to invest in conventional or convertible mortgages
if it concludes that it would benefit from the cash flow from, or appreciation
of, such an investment. Such mortgages may be similar in character to the
Residential Development Property Mortgages, or may be in such other form and
have such terms as the Operating Partnership determines is advantageous to it.
In addition, if the Operating Partnership concludes that such action is
favorable to it, from time to time the Operating Partnership may elect to
exchange mortgage interests for equity interests in the properties secured
thereby. See "The Operating Partnership -- Investment Strategies."
FINANCING POLICIES
Although the Operating Partnership's organizational documents contain no
limitation on the level or amount of debt that it may incur, the Operating
Partnership intends to maintain a ratio of indebtedness to total market
capitalization of the Company (the aggregate of the market value of all issued
and outstanding Common Shares and Units plus total debt) of approximately 40%,
although this policy is subject to reevaluation and modification and could be
increased above 40%. The debt policy is based on the relationship between the
debt of the Operating Partnership and the total market capitalization of the
Company, rather than the book value of its assets or other historical measures,
because management believes that market capitalization more accurately reflects
the ability of the Operating Partnership to borrow money and meet its debt
service requirements. Market capitalization is, however, more variable than book
value of assets or other historical measures. There can be no assurance that the
ratio of indebtedness to market capitalization (or any other measure of asset
value) or the incurrence of debt at any particular level would not adversely
affect the financial condition and results of operations of the Operating
Partnership. See "Risk Factors -- Limited Restrictions on Increases in Debt" and
"The Operating Partnership -- Financing Strategies." Total market capitalization
may not, however, be reflective of the value of the Operating Partnership's
underlying assets. Management will endeavor to retain the Operating
Partnership's ability and flexibility to raise additional capital through the
issuance of debt as well as equity securities, to pursue attractive
opportunities as they arise and otherwise to act in a manner that it believes is
consistent with the best interests of the Operating Partnership. From time to
time the Operating Partnership may reevaluate its borrowing and debt policies in
light of then-current market conditions, relative costs of debt and equity
capital, market values of properties, growth and investment opportunities and
such other factors as management deems relevant, and may increase or decrease
its borrowings and its ratio of debt to total capitalization in light of such
reevaluation.
To the extent that the Company or the Operating Partnership determines to
seek additional capital, such capital may be raised through (i) additional
equity offerings by either the Company or the Operating Partnership, (ii) debt
financings by the Operating Partnership, (iii) operating cash flow, subject to
the distribution requirements which must be satisfied in order to maintain
qualification as a REIT for federal income tax purposes or (iv) a combination of
these financing methods, depending on then-current market conditions and the
Operating Partnership's then-current level of indebtedness. It is the Company's
policy that it shall not incur indebtedness other than short-term trade debt,
employee compensation, distribution payable or similar indebtedness that will be
paid in the ordinary course of business, and that indebtedness shall instead be
incurred by the Operating Partnership to the extent necessary to fund the
business activities conducted by the Operating Partnership and its Subsidiaries.
The Company is required by the Operating Partnership's limited partnership
agreement to contribute the proceeds of its equity offerings to the Operating
Partnership in
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exchange for an increased interest in the Operating Partnership. The proceeds
from equity offerings or debt financings may be used to finance the acquisition
or development of additional properties or interests therein or for working
capital purposes. To the extent that the costs of any such debt financings are
greater than the increased income derived from new or improved properties, the
Operating Partnership's results of operations could be adversely affected.
WORKING CAPITAL RESERVES
The Operating Partnership will maintain working capital reserves and, when
not sufficient, access to borrowings, in such amounts as the Operating
Partnership determines to be adequate to meet normal contingencies in connection
with the operation of the Operating Partnership's business and investments. In
addition, the Operating Partnership has the ability to borrow under its existing
Credit Facility for working capital purposes.
OTHER POLICIES
The Operating Partnership intends to invest and operate in a manner
consistent with the Company's ability to comply with the requirements of the
Code for qualification of the Company as a REIT for federal income tax purposes,
unless, due to changes in the tax laws, changes in economic conditions or other
fundamental changes in the Company's business environment, the Board of Trust
Managers of the Company, with the consent of the holders of a majority of the
shares of equity securities outstanding and entitled to vote on the matter,
determines that it is no longer in the best interest of the Company to qualify
as a REIT.
The Operating Partnership intends to operate in a manner that will not
subject it or the Company to regulation under the Investment Company Act of
1940, as amended.
The Operating Partnership has from time to time made loans to its officers
or the officers or director of its General Partner, and the Company has made
loans to certain of its trust managers to permit them to acquire Common Shares
of the Company. See "Certain Relationships and Related Transactions." In the
future, the Operating Partnership may make loans similar to the Residential
Development Property Mortgages. The Operating Partnership does not intend to
engage in trading, underwriting or agency distribution or sale of securities of
other issuers.
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<PAGE> 89
MANAGEMENT
The Operating Partnership is controlled by the Company through the
Company's ownership of all of the outstanding stock of the General Partner,
which is the sole general partner of the Operating Partnership and owns a 1%
general partner interest in the Operating Partnership. In addition, the Company
owns an approximately 89% limited partner interest in the Operating Partnership.
The remaining limited partner interests are owned by senior members of
management of the Company and the General Partner and certain outside investors.
Set forth below is information with respect to the sole director and the
executive officers of the General Partner and certain trust managers and the
executive officers of the Company.
<TABLE>
<CAPTION>
NAME TERM EXPIRES AGE(1) POSITION
---- ------------ ------ --------
<S> <C> <C> <C>
Richard E. Rainwater 2000 53 Chairman of the Board of Trust Managers of the
Company and Member of the Strategic Planning
Committee of the General Partner
John C. Goff 1999 42 Vice Chairman of the Board of Trust Managers of the
Company and Member of the Strategic Planning
Committee of the General Partner
Gerald W. Haddock 1998 50 President, Chief Executive Officer and Sole Director
of the General Partner, and President, Chief
Executive Officer and Trust Manager of the Company
and Member of the Strategic Planning Committee of
the General Partner
Dallas E. Lucas N/A 36 Senior Vice President and Chief Financial and
Accounting Officer of the Company and the General
Partner
David M. Dean N/A 37 Senior Vice President, Law and Secretary of the
General Partner and the Company
James M. Eidson, Jr. N/A 43 Senior Vice President, Acquisitions of the General
Partner
William D. Miller N/A 39 Senior Vice President, Administration of the General
Partner
Bruce A. Picker N/A 33 Vice President and Treasurer of the General Partner
and the Company
Joseph D. Ambrose III N/A 47 Vice President, Administration of the General
Partner
Jerry R. Crenshaw, Jr. N/A 34 Vice President and Controller of the General Partner
Barry L. Gruebbel N/A 43 Vice President, Property Management of the General
Partner
Howard W. Lovett N/A 41 Vice President, Corporate Leasing of the General
Partner
John L. Zogg, Jr. N/A 34 Vice President, Leasing and Marketing of the General
Partner
Murphy C. Yates N/A 51 Director of Leasing and Operations of the General
Partner
</TABLE>
- ---------------
(1) At April 15, 1998.
MANAGEMENT OF THE OPERATING PARTNERSHIP
The following is a summary of the experience of management of the Operating
Partnership.
Richard E. Rainwater has been an independent investor since 1986. From 1970
to 1986, he served as the chief investment advisor to the Bass family, whose
overall wealth increased dramatically during his tenure. During that time he was
principally responsible for numerous major corporate and real estate
acquisitions and dispositions. Immediately after beginning his independent
investment activities, he founded ENSCO International Incorporated, an oil field
service and offshore drilling company, in 1986. Additionally, in 1987 he co-
founded Columbia Hospital Corporation, and in 1989 participated in a
management-led buyout of HCA-Hospital Corporation of America; both of these
companies owned and operated "for profit" hospitals. In 1992, Mr. Rainwater was
one of the founders of 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 serves as a director of Pioneer Natural Resources
("Pioneer"), one of the largest oil and gas companies in the United States. In
1996, Mr. Rainwater led a recapitalization of Mesa, Inc. (Pioneer's
predecessor), and a partnership wholly
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<PAGE> 90
owned by Mr. Rainwater became a major shareholder in July 1996. Mr. Rainwater is
also Chairman of the Board of Directors and director of Crescent Operating. 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 the Company's inception in 1994.
John C. Goff, prior to joining the Company in 1994, served as a senior
investment advisor to, and investor with, Mr. Rainwater, as well as a vice
president of Rainwater, Inc., a management operating company wholly owned by Mr.
Rainwater. In those capacities, he has been involved in, and principally
responsible for, numerous acquisitions and financings involving corporate, debt
and real estate interests. Mr. Goff currently is a member of the boards of
directors of The Staubach Company and Gainsco, Inc. In 1997, Mr. Goff was
appointed Chairman of the Board of Directors of CBHS. Mr. Goff is also Vice
Chairman of the Board and director of Crescent Operating. Prior to joining
Rainwater, Inc. in 1987, Mr. Goff was employed by the accounting firm of KPMG
Peat Marwick LLP from 1981 to 1987. Before joining KPMG Peat Marwick LLP, Mr.
Goff was employed by Century Development Corporation, a major Houston-based
office developer and property management company. Mr. Goff is a graduate of the
University of Texas at Austin and is a Certified Public Accountant. From the
Company's inception in 1994 through December 19, 1996, Mr. Goff served as Chief
Executive Officer. Since December 19, 1996, Mr. Goff has served as Vice Chairman
of the Board of Trust Managers.
Gerald W. Haddock, prior to joining the Company, was a vice president of
Rainwater, Inc. from 1990 to 1994 and was the lead transactional attorney for
Mr. Rainwater from 1986 to 1994. During this period, he was in the private
practice of law, pursuant to which, among other things, he served as primary
outside legal counsel to, and investor with, Mr. Rainwater and primary outside
legal counsel to Rainwater, Inc. Mr. Haddock currently is a member of the board
of directors of AmeriCredit Corporation, a company engaged in the financing of
automobile dealer paper, and ENSCO International Incorporated, of which he was
one of the three founding directors. Mr. Haddock is also the President, Chief
Executive Officer and Director of Crescent Operating. In addition, Mr. Haddock
serves as general counsel for the Texas Rangers baseball club. Mr. Haddock
earned both Bachelor of Business Administration (B.B.A.) and Juris Doctor (J.D.)
degrees from Baylor University. He also holds a Master of Laws (L.L.M.) degree
in taxation from New York University and has served as the Chairman of the Tax
Section of the State Bar of Texas. From the Company's inception in 1994 through
December 19, 1996, Mr. Haddock served as President and Chief Operating Officer.
Since December 19, 1996, Mr. Haddock has served as President and Chief Executive
Officer.
Dallas E. Lucas, prior to joining the Company, was a financial consulting
and audit manager in the real estate services group of Arthur Andersen LLP in
Dallas. Mr. Lucas was employed by Arthur Andersen LLP for nine years, until
December 1993. Mr. Lucas holds a Bachelor of Business Administration (B.B.A.)
degree in accounting from the University of Oklahoma and is a Certified Public
Accountant. Mr. Lucas has served as the Senior Vice President and Chief
Financial and Accounting Officer since the Company's inception in 1994.
David M. Dean, prior to joining the Company, was an attorney for Burlington
Northern Railroad Company from 1992 to 1994, and 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 with Mr. Haddock 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 (B.A.) degrees in
English and Philosophy in 1983. He also holds a Juris Doctor (J.D.) degree and a
Master of Laws (L.L.M.) degree in taxation from Southern Methodist University
School of Law. Mr. Dean has served as the Senior Vice President, Law and
Secretary since August 1994.
James M. Eidson, Jr. has twenty years of experience in the commercial real
estate business. Prior to joining the Company, he owned an investment company,
specializing in investment grade commercial properties, from 1992 to 1994. From
1989 to 1992, he was associated with CB Commercial Real Estate Group, Inc.,
where he was a Senior Investment Specialist in their investment grade commercial
property group, and from 1982 to 1989 he owned a real estate company through
which he provided brokerage and investment
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<PAGE> 91
services for individuals and large corporate investors and made investments in
commercial properties for his own account. He gained his early experience in
real estate acquisitions, dispositions, leasing, marketing and consulting while
a broker and investment specialist for three years with Hank Dickerson &
Company. Mr. Eidson is a former professional football player who played with the
Dallas Cowboys from 1976 through 1978. Mr. Eidson holds a Master of Business
Administration (M.B.A.) degree from Southern Methodist University and a Bachelor
of Science (B.S.) degree from Mississippi State University. Mr. Eidson has
served as the Senior Vice President, Acquisitions since May 1995.
William D. Miller, prior to joining the Company, served as Vice President,
Legal Affairs of the Texas Rangers major league baseball club beginning in March
1994. While with the Rangers, Mr. Miller managed all legal matters concerning
the senior management of the baseball club and the partnerships that owned or
were affiliated with the owners of the club. Mr. Miller was also a member of the
senior management of the Rangers and certain partnerships affiliated with the
Rangers. In addition, Mr. Miller functioned as the primary lawyer responsible
for the Rangers' interest in the development of The Ballpark project in
Arlington. Prior to joining the Rangers, Mr. Miller practiced law at Jackson &
Walker, L.L.P. from September 1986, was the lead real estate lawyer for Mr.
Rainwater, Rainwater, Inc. and Mr. Haddock, and was instrumental in the
formation transactions of the Company. Mr. Miller received his Juris Doctor
(J.D.) degree with honors from the University of Texas, School of Law, and his
Bachelor of Science (B.S.) degree with first honors in Commerce and Engineering
Sciences from Drexel University. Mr. Miller has served as Senior Vice President,
Administration since joining the Company in May 1997.
Bruce A. Picker, prior to joining the Company, worked for Rainwater, Inc.,
from 1990 to 1994 as the partnership controller of its first major real estate
acquisition. Previously, Mr. Picker was a senior accountant for the accounting
firm of Arthur Andersen LLP in their audit department from 1986 to 1989. Mr.
Picker holds a Bachelor of Business Administration (B.B.A.) degree in accounting
from Harding University and is a Certified Public Accountant. Mr. Picker has
served as the Treasurer of the Company and the General Partner since July 1994
and has been a Vice President since June 1996.
Joseph D. Ambrose III, prior to joining the Company, served as Vice
President of CRC Environmental Risk Management, Inc., an environmental and risk
management consulting firm, from 1993 to 1994. He was responsible for major
client interface, development of new risk management initiatives and human
resources. Mr. Ambrose was a Vice President of American Real Estate Group
("AREG"), a liquidating real estate company, where he managed the environmental,
insurance and other risks associated with the disposition of a nationwide real
estate portfolio from 1990 to 1993. Prior to joining AREG, he was President of
Ambrose Properties, Inc., which acquired and developed oil and gas and real
estate properties. Mr. Ambrose graduated from Texas Christian University with a
Bachelor of Business Administration (B.B.A.) degree in management and received
his Juris Doctor (J.D.) and Master of Business Administration (M.B.A.) degrees
from Southern Methodist University. Mr. Ambrose joined the Company in 1994 and
in June 1995 was appointed Vice President, Administration and has served since
that time.
Jerry R. Crenshaw, Jr. 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 experienced audit senior in the real estate
services group of Arthur Andersen LLP. Mr. Crenshaw holds a Bachelor of Business
Administration (B.B.A.) degree in accounting from Baylor University and is a
Certified Public Accountant. Mr. Crenshaw has served as Controller since the
Company's inception in 1994 and has been a Vice President since March 1997.
Barry L. Gruebbel, CPM, prior to joining the Company, was involved with the
property/asset management of more than 10 million square feet of Class A office,
retail, industrial and multi-family real estate in Texas and New Mexico as the
Vice President of Property Management with Hines Industrial from 1982 to 1986,
the Vice President of Property Management with Southland Investment Properties
from 1986 to 1990 and most recently the Director of Property Management with
Rosewood Property Company at The Crescent. Active in the real estate
organizations of the Institute of Real Estate Management ("IREM") and Building
Owners and Managers, Mr. Gruebbel received a Bachelor of Business Administration
(B.B.A.) degree in Real Estate from the University of Texas at Arlington in 1977
and earned the Certified Property
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<PAGE> 92
Manager designation from IREM in 1985. Mr. Gruebbel has been with the Company
since its inception and became Vice President, Property Management in February
1997.
Howard W. Lovett, prior to joining the Company, was president of The
Gaineswood Company, a private investment company specializing in real estate and
venture capital investments, from January 1989 to August 1995. Previously, Mr.
Lovett was vice president of Morgan & Company, a Houston-based real estate
development company, where he was responsible for income property acquisitions
and management and the acquisition and development of Wildcat Ranch, an
exclusive residential development outside Aspen, Colorado. Mr. Lovett graduated
from Carleton College with a Bachelor of Arts (B.A.) degree in English in 1980.
He also holds a Master of Business Administration (M.B.A.) degree from Harvard
University. Mr. Lovett has served as Vice President, Corporate Leasing since
June 1996.
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. He graduated from the University of Texas at Austin
with a Bachelor of Arts (B.A.) degree in Economics and holds a Master of
Business Administration (M.B.A.) degree from the University of Dallas. Mr. Zogg
has served as Vice President, Leasing and Marketing since May 1994.
Murphy C. Yates has more than 22 years of experience in the commercial real
estate business. His emphasis has always been in the managing and/or leasing of
Class A office projects. Prior to joining the Company, Mr. Yates was employed in
the real estate business by Metro Inns Management Company from 1973 to 1978,
Carrozza Investment Company from 1980 to 1983, Rosewood Property Company from
1983 to 1990, and Trisept Inc. from 1990 to 1994. Mr. Yates holds a Texas Real
Estate License, is an active member and former President of the Fort Worth
Chapter of Building Owners and Managers and is involved with the IREM. He
received his Bachelor of Business Administration (B.B.A.) degree from Texas Tech
University in 1969. Mr. Yates has been with the Company since May 1994 and has
held the position of Director of Leasing and Operations since April 1997.
EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation paid
or awarded to the chief executive officer and the four most highly compensated
executive officers of the General Partner for the years ended December 31, 1997,
1996 and 1995, respectively. As a result of the Company's UPREIT structure, no
employees are compensated by the Company, but are compensated by the General
Partner. Neither the Operating Partnership nor the Company has granted any stock
appreciation rights. The Operating Partnership has issued units of ownership
interest (the "Units"). Unless otherwise indicated, each Unit is exchangeable
(the "Exchange Rights") for two Common Shares or, at the election of the
Company, cash equal to the then-current fair market value of the Common Shares
for which each Unit is exchangeable.
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<PAGE> 93
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
OTHER ALL OTHER
ANNUAL RESTRICTED SECURITIES COMPEN-
NAME AND COMPEN- STOCK UNDERLYING LTIP SATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) SATION($) AWARDS($) OPTIONS(#) PAYOUTS ($)(1)
- --------------------------- ---- --------- ---------- --------- ---------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gerald W. Haddock 1997 380,772 500,000 56,553(2) -- -- -- 1,600
President and Chief 1996 286,165 1,500,000 -- -- 2,000,000(3) -- 960
Executive Officer(4) 1995 200,000 125,000 -- -- 250,000 -- 1,005
John C. Goff 1997 230,772 -- 50,203(2) -- -- -- 1,600
Vice Chairman of the 1996 286,165 1,500,000 -- -- 2,000,000(3) -- 960
Board of Trust 1995 200,000 125,000 -- -- 250,000 -- 1,005
Managers(5)
Dallas E. Lucas 1997 169,375 200,000 -- -- 90,000(6) -- 1,600
Senior Vice President 1996 141,300 81,000 -- -- 120,000 -- 960
and Chief Financial 1995 131,250 52,500 -- 250,007(7) 60,000(8) -- 1,005
and Accounting
Officer
David M. Dean 1997 169,375 150,000 -- -- 80,000(6) -- 1,600
Senior Vice President, 1996 141,300 81,000 -- -- 120,000 -- 960
Law and Secretary 1995 131,250 52,500 -- 100,015(7) 60,000(8) -- 1,005
James M. Eidson, Jr. 1997 168,865 200,000 -- -- 80,000(6) -- 1,600
Senior Vice President, 1996 138,740 331,000 -- -- 210,000 -- 960
Acquisitions 1995 117,949 392,442 273,758(9) -- 60,000(8) -- --
</TABLE>
- ---------------
(1) All amounts in this column represent matching contributions to the Crescent
Real Estate Equities, Ltd. 401(k) Plan.
(2) Amounts represent salaries and benefits paid by the Company for personal
accountants.
(3) The number of securities underlying options granted represent the number of
Common Shares issuable following (i) exercise of Plan Options for Plan
Units on a one-for-one basis and (ii) the exchange of Plan Units for Common
Shares on a one-for-two basis.
(4) Mr. Haddock served as President and Chief Operating Officer of the Company
from the Company's inception in 1994 to December 19, 1996.
(5) Mr. Goff served as Chief Executive Officer of the Company from the
Company's inception in 1994 to December 19, 1996.
(6) Represents Common Shares underlying option granted in March 1998 based on
individual's performance in 1997.
(7) The Company issued 16,598 and 6,640 Restricted Shares on June 12, 1995 at a
market price of $15.0625 with annual vesting in equal one-fifth
installments to Mr. Lucas and Mr. Dean, respectively. Dividends are paid on
the Restricted Shares to the holder of the Restricted Shares.
(8) Represents Common Shares underlying options granted in March 1996 based on
individual's performance in 1995.
(9) The Company issued 19,044 Units valued at $14.375 to Mr. Eidson as non-cash
bonus compensation.
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<PAGE> 94
OPTION GRANTS IN 1997
The following table provides certain information regarding options granted
to the named executive officers for the year ended December 31, 1997.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT
ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM*
OPTIONS EMPLOYEES IN OR BASE EXPIRATION ------------------
GRANTED(#) FISCAL YEAR PRICE($/SH.) DATE 5% 10%
NAME ---------- ------------ ------------ ---------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Gerald W. Haddock................... -- -- -- -- -- --
John C. Goff........................ -- -- -- -- -- --
Dallas E. Lucas..................... 90,000(1) 6.6% $35.25 March 2008 $1,995 $5,056
David M. Dean....................... 80,000(1) 5.9% 35.25 March 2008 $1,774 $4,494
James M. Eidson, Jr................. 80,000(1) 5.9% 35.25 March 2008 $1,774 $4,494
</TABLE>
- ---------------
* Potential Realizable Value is the change in share price of securities
underlying options granted, based on the assumed annual growth rates shown
over their 10-year option term. For example, a 5% growth rate, compounded
annually, for Mr. Lucas' grant results in a share price of $57.42 per share
and a 10% growth rate, compounded annually, results in a share price of
$91.43 per share. These potential realizable values are listed to comply
with the regulations of the Commission, and the Company cannot predict
whether these values will be achieved. Actual gains, if any, on share option
exercise are dependent on the future performance of the shares.
(1) Vest in equal one-fifth installments on March 9, 1999, 2000, 2001, 2002 and
2003.
OPTION EXERCISES AND VALUES AT DECEMBER 31, 1997
The following table provides information about option exercises by the
named executive officers during the year ended December 3, 1997, and options
held by each of them at December 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
SHARES FISCAL YEAR END(#) AT FISCAL YEAR END($)(4)
ACQUIRED ON VALUE ------------------------------- ------------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE(1) EXERCISABLE UNEXERCISABLE(1)
---- ----------- ----------- ----------- ---------------- ----------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Gerald W. Haddock....... -- -- 1,366,758(2) 1,285,714(3) $32,475 $28,045
John C. Goff............ -- -- 1,606,190(2) 1,285,714(3) $38,910 $28,045
Dallas E. Lucas......... 15,000 232,463 74,200 238,800 $ 1,725 $ 3,298
David M. Dean........... 5,200 71,000 64,000 238,800 $ 1,438 $ 3,520
James M. Eidson, Jr..... -- -- 54,000 296,000 $ 1,067 $ 4,598
</TABLE>
- ---------------
(1) Including the option grant on March 9, 1998.
(2) The number of securities underlying exercisable but unexercised options
includes 714,286 Common Shares. Such Common Shares may be issued following
exercise of Plan Options for Plan Units on a one-for-one basis and, the
exchange of Plan Units for Common Shares on a one Unit for two Common Share
basis.
(3) The number of securities underlying unexercisable and unexercised options
includes 1,285,714 Common Shares. Such Common Shares may be issued following
vesting and exercise of Plan Options for Plan Units on a one-for-one basis
and the exchange of Plan Units for Common Shares on a one Unit for two
Common Share basis.
(4) Market value of securities underlying in-the-money options based on the
closing price of the Company's Common Shares on December 31, 1997 (the last
trading day of the fiscal year) on the New York Stock Exchange of $39.375,
minus exercise price.
EMPLOYMENT AGREEMENTS
As part of the transactions in connection with the formation of the
Company, the Operating Partnership assumed Employment Agreements between
Rainwater, Inc. and each of John C. Goff and Gerald W. Haddock. Such Employment
Agreements also require that Messrs. Goff and Haddock enter into the
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<PAGE> 95
Noncompetition Agreements described below. See " -- Agreements Not to Compete,"
below. The Employment Agreements for Messrs. Goff and Haddock initially provided
that each of them shall receive minimum base compensation of $160,000 per annum.
On July 1, 1995, the General Partner's Board of Directors increased the salary
for each of Messrs. Goff and Haddock to $240,000 per annum. On March 5, 1996,
the General Partner's Board of Directors increased the salary for each of
Messrs. Goff and Haddock to $300,000 per annum and, on March 3, 1997, to
$400,000 per annum and a 5% increase in Salary for 1998. On June 23, 1997, Mr.
Goff agreed to a reduction in his salary from the Operating Partnership to
$100,000 per annum to reflect his agreement to devote a significant amount of
his time to his duties as Chairman of CBHS and a 5% increase in salary for 1998.
Each of the Employment Agreements expires on April 14, 1999. Each of the
Employment Agreements is subject to automatic renewal for one-year terms unless
terminated by the Operating Partnership or Messrs. Goff or Haddock, as the case
may be. The salaries under the Employment Agreements, which are not subject to a
cap, may be increased at the discretion of the Operating Partnership, although
it is the Operating Partnership's practice to have increases in such salaries
reviewed by the compensation committee of the Board of Trust Managers of the
Company (the "Compensation Committee"). Bonuses under the Employment Agreements
are similarly determined by the Operating Partnership. See " -- Compensation
Policies," below.
AGREEMENTS NOT TO COMPETE
The Operating Partnership is dependent on the services of Richard E.
Rainwater, John C. Goff and Gerald W. Haddock. Messrs. Goff and Haddock are
employees of the Operating Partnership. Mr. Rainwater serves as Chairman of the
Board of Trust Managers of the Company but has no employment agreement with the
Company and, therefore, is not obligated to remain with the Company for any
specified term. In connection with the initial public offering of the Company's
Common Shares in May 1994 (the "Initial Offering"), each of Messrs. Rainwater,
Goff and Haddock entered into a Noncompetition Agreement with the Company that
restricts him from engaging in certain real estate related activities during
specified periods of time. The restrictions imposed by Mr. Rainwater's
Noncompetition Agreement will terminate one year after the later to occur of (i)
the date on which Mr. Rainwater ceases to serve as a trust manager of the
Company and (ii) the date on which Mr. Rainwater's beneficial ownership of the
Company (including Common Shares and Units) first represents less than a 2.5%
ownership interest in the Company. The restrictions imposed by Mr. Goff's and
Mr. Haddock's Noncompetition Agreements will terminate one year after the
subject individual first ceases to be a trust manager or an executive officer of
the Company. The Noncompetition Agreements do not, among other things, prohibit
Messrs. Rainwater, Goff and Haddock from engaging in certain activities in which
they were engaged at the time of formation of the Company in 1994 or from making
certain passive real estate investments.
In addition, each of Messrs. Rainwater, Goff and Haddock has agreed that,
as long as his Noncompetition Agreement remains in effect, real estate
investment opportunities that are presented to him will be offered to the
Operating Partnership and that, if the Operating Partnership elects not to make
any investment offered to it by any of them, neither the party who offered such
investment opportunity to the Operating Partnership nor his controlled
affiliates will participate in the investment without the consent of a majority
of the independent trust managers.
COMPENSATION POLICIES
The Operating Partnership determines salary, bonus, option and other
long-term incentive compensation awards based on a variety of factors, including
overall performance of the Operating Partnership (as measured by Company stock
price performance as well as the achievement of defined short-term and long-term
goals and objectives), the compensation levels of executives of the Company's
industry peers and the individual contributions of the executive. The Operating
Partnership does not have a compensation committee (other than for the 1996 Unit
Plan), but it is the Operating Partnership's practice to have its compensation
decisions reviewed by the Compensation Committee and with respect to certain
salary and option grants to executive officers of the General Partner and the
Operating Partnership, ratified by the Compensation Committee. All compensation
decisions involving Common Shares of the Company and Exchange Rights are made by
the
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<PAGE> 96
Compensation Committee. The Compensation Committee is composed of two trust
managers, each of whom is an outside trust manager.
PRINCIPAL SHAREHOLDERS
The following table sets forth the beneficial ownership of Common Shares
for (i) each shareholder of the Company who beneficially owns more than 5% of
the Common Shares; (ii) the sole director of the General Partner and each named
executive officer of the Company or General Partner; and (iii) the sole director
of the General Partner and the executive officers of the Company or General
Partner as a group. Unless otherwise indicated in the footnotes, all Common
Shares, Preferred Shares and all Units are owned directly by the listed
beneficial owner.
<TABLE>
<CAPTION>
PERCENT OF
TOTAL TOTAL
NAME AND ADDRESS OF COMMON PREFERRED BENEFICIAL BENEFICIAL
BENEFICIAL OWNER(1) SHARES(2) UNITS(2) SHARES(2) OWNERSHIP(2) OWNERSHIP(3)
------------------- ---------- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Richard E. Rainwater................... 7,065,912 (4)(5) 6,817,506(5) -- 13,883,418 11.0%
John C. Goff........................... 1,007,013 (4)(6) 1,484,400(7) -- 2,491,413 2.1%
Gerald W. Haddock...................... 654,167 (4)(6) 1,227,124(8) -- 1,881,291 1.6%
Dallas E. Lucas........................ 106,312 (4)(6)(9) -- -- 106,312 *
David M. Dean.......................... 83,740 (4)(6)(9) -- -- 83,740 *
James M. Eidson, Jr.................... 87,652 (4)(6) -- -- 87,652 *
FMR Corp............................... 10,186,700 (10) -- -- 10,186,700 7.5%
82 Devonshire Street
Boston, Massachusetts 02109
Director and Executive Officers
as a Group (13 persons).............. 9,190,948 (4)(5)(6) 9,529,030(5)(7)(8) -- 18,719,978 14.3%
(9)(12)
</TABLE>
- ---------------
* Less than 1%.
(1) Unless otherwise indicated, the address of each beneficial owner is 777
Main Street, Suite 2100, Fort Worth, Texas 76102.
(2) All information is as of April 9, 1998 unless otherwise indicated. As of
such date, 118,729,510 Common Shares and 12,832,200 Units were outstanding.
All information as to number of Units (including information contained in
the footnotes to this table) reflects the number of Common Shares issuable
(on a one Unit for two Common Share basis) upon exchange of Units, assuming
the availability of Exchange Rights for all Units. All information as to
the number of Preferred Shares reflects the number of Common Shares
issuable upon conversion of the Preferred Shares based on the current
conversion ratio of one Preferred Share for .6119 Common Shares. For
purposes of this table, a person is deemed to have "beneficial ownership"
of the number of Common Shares that such person has the right to acquire
within 60 days of April 9, 1998 (i) upon exercise of options to purchase
Common Shares ("Options") granted pursuant to the Company's 1994 Stock
Incentive Plan and the 1995 Crescent Real Estate Equities Company Incentive
Plan (as amended, the "1995 Plan") (ii) for Units, upon the exchange of
Units for Common Shares on a one-for-two basis (assuming the Company elects
to issue Common Shares rather than pay cash upon such exchange) or upon
exercise of options to purchase Units (the "Unit Options") granted pursuant
to the 1996 Crescent Real Estate Equities Limited Partnership Unit
Incentive Plan and the subsequent exchange of such Units for Common Shares
on a one-for-two basis and (iii) for Preferred Shares, upon conversion of
the Preferred Shares into Common Shares, as described above. As of April 9,
1998, all holders of Units and Preferred Shares listed in the table are
deemed to be beneficial owners of Common Shares. The total number of Units
outstanding represents approximately 10.0% of the total partnership
interests in the Operating Partnership.
(3) For purposes of computing the percentage of outstanding Shares held by each
person, all Common Shares that such person has the right to acquire within
60 days pursuant to the exercise of Options or upon the exercise of Unit
Options and subsequent exchange of Units or the exchange of Units currently
owned (assuming the availability of Exchange Rights for all Units) for
Common Shares or upon
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conversion of Preferred Shares to Common Shares are deemed to be
outstanding, but are not deemed to be outstanding for the purpose of
computing the ownership percentage of any other person.
(4) The number of Common Shares beneficially owned by the following persons
includes the number of Common Shares indicated due to the vesting of
Options: Richard E. Rainwater -- 1,165,624; John C. Goff -- 891,904; Gerald
W. Haddock -- 652,472; Dallas E. Lucas -- 87,800; David M. Dean -- 77,600;
James M. Eidson, Jr. -- 66,000; and Director and Executive Officers as a
Group -- 3,098,950.
(5) The number of Common Shares and Units beneficially owned by Richard E.
Rainwater includes 1,200,000 Common Shares and 126,588 Units owned by
trusts established for the benefit of Mr. Rainwater's children, and 460,000
Common Shares and 1,652 Units owned by Darla Moore, who is Mr. Rainwater's
spouse. Mr. Rainwater disclaims beneficial ownership as to all such
1,660,000 Common Shares and 128,240 Units. In addition, the number of
Common Shares and Units beneficially owned by Mr. Rainwater includes
2,206,374 Common Shares and 6,335,126 Units owned indirectly by Mr.
Rainwater, including (i) 12,346 Common Shares and 49,506 Units owned by
Rainwater, Inc., a Texas corporation, of which Mr. Rainwater is the sole
director and owner, (ii) 10,070 Units owned by Tower Holdings, Inc., a
Texas corporation, of which Mr. Rainwater is the sole director and owner,
(iii) 33,296 Units owned by 777 Main Street Corporation, a Texas
corporation, of which Mr. Rainwater is the sole director and owner, (iv)
2,425,836 Units owned by Rainwater Investor Partners, Ltd., a Texas limited
partnership, of which Rainwater Inc. is the sole general partner, (v)
555,424 Units owned by Rainwater RainAm Investors, L.P., a Texas limited
partnership, of which Rainwater, Inc. is the sole general partner, (vi)
3,260,994 Units owned by Office Towers LLC, a Nevada limited liability
company, of which Mr. Rainwater and Rainwater, Inc. own an aggregate 100%
interest, and (vii) 2,194,028 Common Shares owned by the Richard E.
Rainwater 1995 Charitable Remainder Unitrust No. 1, of which Mr. Rainwater
is the sole trustee.
(6) The number of Common Shares beneficially owned by the following persons
includes the number of Common Shares indirectly owned through participation
in the Company's 401(k) Plan as of December 31, 1997 as follows: John C.
Goff -- 1,579; Gerald W. Haddock -- 1,695; Dallas E. Lucas -- 914; David M.
Dean -- 1,028; James M. Eidson, Jr. -- 604; and Director and Executive
Officers as a Group -- 12,401.
(7) The number of Units beneficially owned by John C. Goff includes 152,408
Units owned by Goff Family, L.P., a Delaware limited partnership, of which
Mr. Goff is a general partner, and includes 714,286 Units due to the
vesting of Plan Options.
(8) The number of Units beneficially owned by Gerald W. Haddock includes
101,706 Units owned by Haddock Family, L.P., a Delaware limited
partnership, of which Mr. Haddock is a general partner, and includes
714,286 Units due to the vesting of Plan Options.
(9) The number of Common Shares beneficially owned by Dallas E. Lucas and David
M. Dean includes 9,959 and 3,984 restricted shares, respectively, that vest
in equal amounts during the next three years. Mr. Lucas and Mr. Dean each
has sole voting power with respect to all such restricted shares.
(10) As reported in the Form 13F-E for the calendar year ended December 31,
1997, filed by FMR Corp., Fidelity Management & Research Company
("Fidelity"), a registered investment advisor and wholly owned subsidiary
of FMR Corp. is the beneficial owner of 9,780,000 Common Shares, none of
which it has the power to vote. In addition to such 9,780,000 Common
Shares, Fidelity Management Trust Company ("Fidelity Management"), a wholly
owned subsidiary of FMR Corp., is the beneficial owner of 406,700 Common
Shares, each of which it has the sole power to vote. As reported in the
Schedule 13G/A dated February 10, 1998, filed by FMR Corp., Fidelity is the
beneficial owner of 9,780,000 Common Shares as a result of its serving as
investment adviser to various registered investment companies (the
"Funds"). Each of Edward C. Johnson III, Chairman of FMR Corp., Abigail P.
Johnson, a director of FMR Corp., FMR Corp., through its control of
Fidelity, and the Funds has sole power to dispose of such Common Shares
owned by the Funds. Neither FMR Corp., nor Edward C. Johnson III nor
Abigail Johnson has the sole power to vote or direct the voting of the
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Common Shares owned directly by the Funds, which power resides with the
Funds' Boards of Trustees. Fidelity carries out the voting of the Common
Shares under written guidelines established by the Funds' Boards of
Trustees. In addition to such 9,780,000 Common Shares, Fidelity Management
is the beneficial owner of 406,700 Common Shares as a result of its serving
as investment manager of the institutional account(s). Edward C. Johnson
III, Abigail Johnson and FMR Corp., through its control of Fidelity
Management Trust Company, have sole voting and dispositive power over such
406,700 Common Shares owned by the institutional account(s) as reported
above. All information presented herein relating to FMR Corp. and Fidelity
is based solely on the Schedule 13G/A and Form 13F-E filed by FMR Corp.
(11) The number of Common Shares beneficially owned by the trust managers and
executive officers as a group includes an aggregate of 4,183 restricted
shares held by two executive officers other than Messrs. Lucas and Dean.
Such restricted shares will vest in equal amounts during the next three
years. Each such executive officer has sole voting power with respect to
all restricted shares.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the second public offering of the Company's Common
Shares in April 1995 (the "April 1995 Offering"), Richard E. Rainwater, the
Chairman of the Board of the Company, purchased, indirectly through a charitable
remainder trust, a partnership interest consisting of 1,097,014 Units for
approximately $31,000,000. Mr. Rainwater's $31,000,000 investment was based on
the public offering price of the shares of Common Stock in the April 1995
Offering multiplied by the number of Units received. Following approval by the
Company's stockholders of conversion rights relating to such Units, Mr.
Rainwater converted such Units to 1,097,014 shares of the Common Stock.
At the end of 1996, the Operating Partnership owned four hotel properties,
Hyatt Regency Beaver Creek, Denver Marriott City Center, Hyatt Regency
Albuquerque and Sonoma Mission Inn & Spa, and two destination health and fitness
resorts, Canyon Ranch-Tucson and Canyon Ranch-Lenox (collectively, the "1996
Hotel Properties"). Through July 30, 1997, the Operating Partnership leased each
of the 1996 Hotel Properties to independent companies pursuant to six separate
leases. These companies were owned 4.5% by each of John C. Goff and Gerald W.
Haddock, each of whom is an officer and member of the Board of the Company, and
91% by other persons. Effective July 31, 1997, subsidiaries of Crescent
Operating (the "Hotel Lessees") acquired each of these companies. The terms of
the leases of the 1996 Hotel Properties were not modified in connection with the
acquisition. As of December 31, 1997, the Operating Partnership has leased each
of the Hotel Properties to the Hotel Lessees pursuant to eight separate leases.
Under the leases, each having a term of 10 years, the Hotel Lessees have assumed
the rights and obligations of the property owner under the management agreement
with the hotel operators, as well as the obligation to pay all property taxes
and other charges against the property. Each of the leases provides for the
payment by the respective Hotel Lessee of (i) base rent, with periodic rent
increases, (ii) percentage rent based on a percentage of gross revenue, room
revenues, and food and beverage revenues, or a combination thereof, above a
specified amount. The former hotel lessees of the three Hotel Properties owned
as of December 31, 1995 paid an aggregate of $6,021,112 in rent to the Operating
Partnership during 1995. Under the leases, the former hotel lessees paid an
aggregate of $15,881,117 in rent to the Operating Partnership during 1996 and
$19,025,965 in rent to the Operating Partnership during the seven months ended
July 31, 1997.
The Hotel Lessees of the eight Hotel Properties owned as of December 31,
1997 paid an aggregate of $16,201,306 in rent to the Operating Partnership
during the five months ended December 31, 1997. In addition, on January 23,
1998, a subsidiary of Crescent Operating entered into a 10-year lease agreement
with the Operating Partnership with respect to the Omni Austin Hotel. The terms
of the Omni Austin Hotel lease are substantially similar to those for the other
Hotel Properties. The Operating Partnership expects to receive minimum lease
payments from Crescent Operating during 1998 under all of the Hotel Property
leases of approximately $34.8 million.
In July 1996, the Operating Partnership acquired Canyon Ranch-Tucson and in
December 1996, the Operating Partnership acquired Canyon Ranch-Lenox for
purchase prices of approximately $57,000,000 and $30,000,000, respectively.
Melvin Zuckerman, who became a trust manager of the Company in November 1996,
was the principal shareholder of the corporation which owned Canyon Ranch-Tucson
and of the corporation which was one of the general partners of the general
partner of the partnership that owned Canyon Ranch-Lenox prior to the sale to
the Operating Partnership. Of the approximately $57,000,000 paid by the
Operating Partnership for Canyon Ranch-Tucson, approximately $27,000,000 was
paid through the issuance of Units to Mr. Zuckerman.
In July 1996, the Operating Partnership also obtained from Mr. Zuckerman
and Jerrold Cohen, who became a Trust Manager of the Company in November 1996,
an option to acquire up to 30% of a management company to be formed by Messrs.
Zuckerman and Cohen. The management company will have all rights to develop and
manage new Canyon Ranch resorts, both within the United States and
internationally, and to use and sublicense the Canyon Ranch name and trademarks.
The Operating Partnership must exercise the option on or before July 26, 1998,
either in full or in three increments, for an aggregate maximum of $6,000,000.
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Effective March 14, 1996, March 14, 1997 and March 30, 1998, the Company
loaned to Morton H. Meyerson, an independent trust manager of the Company,
$187,425, $45,311 and $45,297, respectively, on a recourse basis, pursuant to a
plan approved by the Board of Trust Managers for all holders of options under
the 1994 Crescent Real Estate Equities, Inc. Stock Incentive Plan (the "1994
Plan") and the 1995 Crescent Real Estate Equities Company Incentive Plan (as
amended, the "1995 Plan"). Mr. Meyerson used the proceeds of the first loan,
with $75.00 in cash, to acquire 15,000 Common Shares pursuant to the exercise of
15,000 options that were granted to him on May 5, 1994 under the 1994 Plan. Mr.
Meyerson used the proceeds of the second loan, together with $14.00 in cash, to
acquire 2,800 Common Shares pursuant to the exercise of 2,800 options that were
granted to him on March 14, 1996 under the 1995 Plan. Mr. Meyerson used the
proceeds of the third loan, together with $28.00 in cash, to acquire 2,800
Common Shares pursuant to the exercise of 2,800 options that were granted to him
on March 14, 1996 under the 1995 Plan. In addition, effective July 17, 1996 and
February 2, 1998, the Company loaned to Anthony M. Frank, an independent trust
manager of the Company, $187,425 and $45,298 on a recourse basis. Mr. Frank used
the proceeds of the first loan, together with $75.00 in cash, to acquire 15,000
Common Shares pursuant to the exercise of 15,000 options that were granted to
him on May 5, 1994 under the 1994 Plan. Mr. Frank used the proceeds of his
second loan, together with $28.00 in cash, to acquire 2,800 Common Shares
pursuant to the exercise of 2,800 options that were granted to him on March 14,
1996 under the 1995 Plan. Effective June 10, 1997, the Company also loaned to
Paul E. Rowsey, III, an independent trust manager of the Company, $419,997, on a
recourse basis. Mr. Rowsey used the proceeds of his loan, together with $328.00
in cash, to acquire 30,000 Common Shares pursuant to the exercise of 30,000
options that were granted to him on May 5, 1994 under the 1994 Plan, and 2,800
Common Shares pursuant to the exercise of 2,800 options that were granted to him
on March 14, 1996 under the 1995 Plan. Each of the loans bears interest at a
fixed annual rate equal to the distribution yield on the Common Shares as of
March 14, 1996, March 14, 1997 and March 30, 1998 (for Mr. Meyerson's respective
loans), July 17, 1996 and February 2, 1998 (for Mr. Frank's respective loans)
and June 10, 1997 (for Mr. Rowsey's loan), the effective date of the applicable
loan. Each loan to Messrs. Meyerson, Frank and Rowsey is payable, interest only,
on a quarterly basis from distributions paid with respect to such Common Shares,
with a final payment of all accrued and unpaid interest plus the entire original
principal balance due on March 14, 2001, March 14, 2002, and March 30, 2003 (for
Mr. Meyerson's respective loans), July 17, 2001 and February 2, 2003 (for Mr.
Frank's respective loans) and June 10, 2002 (for Mr. Rowsey's loan). Mr.
Meyerson's loans are secured by 7,500 Units, 2,800 Common Shares and 2,800
Common Shares, respectively, owned by Mr. Meyerson. Mr. Frank's loans are
secured by 15,000 Common Shares and 2,800 Common Shares, respectively, owned by
Mr. Frank, and Mr. Rowsey's loan is secured by 32,800 Common Shares owned by Mr.
Rowsey.
On September 13, 1996, the Operating Partnership purchased 1,187,906 shares
of the Series B Non-Voting Participating Convertible Preferred Stock of Fresh
Choice, Inc. ("Fresh Choice"), a chain of upscale casual restaurants, for a
total of approximately $5,500,000 ($4.63 per share). Richard E. Rainwater, the
Chairman of the Board of the Company, is currently the holder of approximately
8.7% of the voting common stock of Fresh Choice. The Operating Partnership also
acquired an immediately exercisable option to purchase up to an additional
593,953 shares of the Series C Non-Voting Participating Convertible Preferred
Stock of Fresh Choice at a price of $6.00 per share for a period of three years
following the closing of the initial purchase of preferred stock (the "Series C
Stock Option"). The Series C preferred stock is senior to the common stock of
Fresh Choice and all other preferred stock of Fresh Choice and is convertible
into shares of the common stock of Fresh Choice on a one-for-one basis. The
Series B preferred stock is senior to the common stock of Fresh Choice and the
Series A Voting Participating Convertible Preferred Stock of Fresh Choice. The
Series B preferred stock also is convertible into shares of Series A preferred
stock of Fresh Choice (which would then be convertible into shares of common
stock) on a one-for-one basis (and, under certain conditions relating to the
earnings of Fresh Choice, the holders of Series A preferred stock may elect a
majority of the directors of Fresh Choice), provided that, in order to preserve
the Company's REIT status, conversion is not permitted if it would cause the
Operating Partnership to be treated as the owner of more than 10% of the
outstanding voting securities of Fresh Choice for federal income tax purposes.
Outstanding Series A preferred stock may be converted into common stock at Fresh
Choice's election if the common stock trades at $15.00 per share. On August 11,
1997, the Operating Partnership entered into a Call Option
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Agreement (the "Option Agreement") with Mr. Rainwater whereby Mr. Rainwater
granted to the Operating Partnership an option (the "Fresh Choice Option"),
exercisable at any time through September 12, 2006, to purchase all, but not
less than all, of the 496,400 shares of common stock of Fresh Choice owned by
Mr. Rainwater (the "Fresh Choice Common Shares") at Mr. Rainwater's investment
cost in the Fresh Choice Shares ($3,645,191, plus incidental expenses, plus Mr.
Rainwater's cost of funds at the rate of LIBOR plus 50 basis points, with
interest adjusted and compounded quarterly). During the pendency of the Fresh
Choice Option, Mr. Rainwater retains sole beneficial ownership of the Fresh
Choice Common Shares unless and until the Fresh Choice Common Shares are sold.
Prior to selling any of the Fresh Choice Common Shares, Mr. Rainwater must give
the Operating Partnership notice of his intention to sell so that the Operating
Partnership may exercise the Fresh Choice Option; if the Operating Partnership
fails to exercise the Fresh Choice Option within two business days, Mr.
Rainwater may sell the Fresh Choice Common Shares but must remit to the
Operating Partnership the cash proceeds from the sale, net of his investment
cost in the Fresh Choice Common Shares sold. Also on August 11, 1997, as
compensation for services rendered in connection with the Fresh Choice
investment, the Operating Partnership entered into an Agreement of Assignment
with Mr. Rainwater's wholly owned corporation, Rainwater, Inc., pursuant to
which the Operating Partnership assigned to Rainwater, Inc. the Series C Stock
Option with respect to 80,000 shares of Series C preferred stock covered by the
Series C option. According to Mr. Rainwater's Schedule 13D filed on November 6,
1997, Rainwater, Inc. assigned its interest in the Series C Stock Option to two
individuals associated with it on August 11, 1997.
In April 1997, the Operating Partnership established Crescent Operating.
Crescent Operating was formed to be the lessee and operator of certain assets to
be acquired by the Operating Partnership and to perform the Intercompany
Agreement. Mr. Rainwater and John C. Goff are, respectively, the Chairman of the
Board and the Vice Chairman of the Board of both the Company and Crescent
Operating, and Gerald W. Haddock serves as the President, Chief Executive and a
member of the Board of the Company, Crescent Operating and the General Partner
of the Operating Officer Partnership. Messrs. Frank and Rowsey are members of
the Board of the Company and of Crescent Operating. In addition, Messrs.
Rainwater, Goff and Haddock, together with the other management of the Operating
Partnership, beneficially owned, as of April 13, an approximately 14.3% equity
interest in the Company, both directly through their ownership of 9,190,948
Common Shares of the Company and indirectly through their ownership of 9,529,030
Units in the Operating Partnership, and approximately the same percentage of the
outstanding common stock of Crescent Operating through their ownership of
1,712,251 shares of Crescent Operating common stock.
Pursuant to a purchase agreement dated as of September 29, 1997, the
Operating Partnership sold to Crescent Operating, for approximately $2.2
million, 100% of the voting stock of Desert Mountain Development Corporation,
which holds a 93% general partner interest in the partnership that owns Desert
Mountain, a master-planned, luxury residential and recreational community in
Scottsdale, Arizona. The Operating Partnership retained all of the non-voting
stock, representing a 95% economic interest, in Desert Mountain Development
Corporation.
Pursuant to a purchase agreement dated as of September 29, 1997, the
Operating Partnership sold to Crescent Operating, for approximately $2.2
million, 100% of the voting stock of The Woodlands Land Company, Inc., which
holds a 42.5% general partner interest in a partnership that owns approximately
8,900 acres zoned for commercial and residential development as well as a realty
office, an athletic center and interests in both a title company and mortgage
company. The Operating Partnership retained all of the non-voting stock,
representing a 95% economic interest, in The Woodlands Land Company, Inc.
Effective October 31, 1997, the Operating Partnership sold to Crescent
Operating, for approximately $8.0 million, 100% of the voting stock of two
corporations, one of which owns a 40% interest in the partnership that owns
Americold and the other of which owns a 40% interest in the partnership that
owns URS. The Operating Partnership retained all of the non-voting stock,
representing a 95% economic interest, in each of the two corporations.
In connection with the formation and capitalization of Crescent Operating,
the Operating Partnership contributed $14.1 million in cash to Crescent
Operating and loaned to Crescent Operating approximately
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$35.9 million pursuant to a five-year loan (the "Term Loan"), which bears
interest at 12% per annum and is collateralized by a lien on certain assets of
Crescent Operating now owned or acquired in the future. Also in connection with
Crescent Operating's formation, the Operating Partnership loaned to Crescent
Operating approximately $20.4 million pursuant to a line of credit (the "Line of
Credit"), which bears interest at 12% per annum and is collateralized by a lien
on certain assets of Crescent Operating now owned or acquired in the future. As
of December 31, 1997, the outstanding balances on the Term Loan and the Line of
Credit were approximately $26.0 million and $13.7 million, respectively.
In connection with the acquisition by Crescent Operating, effective July
31, 1997, of the companies that leased the hotel properties owned by the
Operating Partnership as of July 31, 1997, Crescent Operating acquired 100% of
an entity with outstanding notes payable to the Operating Partnership of
approximately $2.4 million and $0.65 million in connection with acquisition of
Canyon Ranch-Tucson. These notes bear interest at a rate of 10.75% per annum,
are secured by deeds of trust for certain real and personal property and mature
in August 2003. The outstanding balances at December 31, 1997 on the $2.4
million and $0.65 million notes were approximately $2.1 million and $0.56
million, respectively. In addition, in connection with this transaction,
Crescent Operating acquired 100% of an entity with an outstanding note payable
to the Operating Partnership of approximately $0.19 million in connection with
acquisition of Sonoma Mission Inn & Spa. This note bears interest at a rate of
7.5% per annum and matures in November 2006. The outstanding balance of the note
at December 31, 1997 was approximately $0.19 million.
In connection with Crescent Operating's acquisition, on September 22, 1997,
of a two-thirds interest in the joint venture that owns the Houston Center
Athletic Club and a $5.0 million note receivable from the joint venture, the
Operating Partnership made loans to Crescent Operating of $0.8 million and $1.0
million, each of which bears interest at 8.5% per annum. The $1.0 million note
is secured by the $5.0 million note receivable from the joint venture, and
matures on September 21, 1998. The $0.8 million note is secured by Crescent
Operating's interest in the joint venture, and matures on September 22, 2002.
The outstanding balances at December 31, 1997 on the $0.8 million and $1.0
million loans were approximately $0.79 million and $1.0 million, respectively.
On June 11, 1997, DBL, a wholly owned subsidiary of the Operating
Partnership was formed and acquired from Crescent Operating a 12.39% limited
partner interest in the partnership that owns the Dallas Mavericks for
approximately $12.4 million. Crescent Operating originally acquired the limited
partner interest from an unrelated party for approximately $1.4 million. The
voting common stock, which represents a 5% economic interest in DBL, was sold on
June 27, 1997 to Gerald W. Haddock and John C. Goff for $126,000. The Operating
Partnership retained 100% of the non-voting stock, representing an approximately
95% economic interest, in DBL.
On June 17, 1997, the Operating Partnership acquired, for an aggregate
purchase price of approximately $387.2 million, the 90 Behavioral Healthcare
Facilities (and two additional behavioral healthcare facilities that
subsequently were sold) that were previously owned and operated by a subsidiary
of Magellan and warrants to purchase shares of Magellan's common stock. The
purchase price was determined as the result of negotiations between the Vice
Chairman and the Chief Executive Officer of the Company and Magellan. The
warrants permit the Operating Partnership to purchase up to 1,283,311 shares of
common stock of Magellan, at an exercise price of $30.00 per share, with such
warrants exercisable, in increments, during the period from May 1998 through May
2009. In connection with the transaction, Crescent Operating and Magellan formed
CBHS to operate the Behavioral Healthcare Facilities. Crescent Operating and
Magellan each have a 50% interest in CBHS. CBHS leases the Behavioral Healthcare
Facilities from the Operating Partnership pursuant to a lease with an initial
12-year term (subject to four, five-year renewal options at fair market value)
for annual minimum rent of approximately $41.7 million, increasing annually at a
5% compounded annual rate. CBHS pays to the Operating Partnership an additional
$20 million annually, at least $10 million of which must be used for capital
expenditures and up to $10 million of which may be used for capital expenditures
and other purposes.
On March 5, 1998, Crescent Operating entered into a definitive agreement to
acquire Magellan's 50% interest in CBHS in exchange for $30 million in common
stock of Crescent Operating. In a related
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transaction, CBHS executed a definitive agreement to purchase from Magellan, for
approximately $280 million, certain assets and intellectual property rights used
by Magellan to supply franchise services to CBHS. The agreement provides for the
elimination of the franchise fee that is payable by CBHS to Magellan. The
transactions are subject to a number of conditions, including customary closing
conditions, a condition that CBHS obtain funds sufficient to finance the
purchase and certain regulatory conditions. The transactions, as currently
structured, will not affect the arrangements pursuant to which CBHS leases the
Behavioral Healthcare Facilities from the Operating Partnership.
A limited partnership, the sole general partner of which is Rainwater,
Inc., owns 3,885,832 shares of Magellan common stock and warrants to acquire an
additional 1,942,996 shares of Magellan common stock. Mr. Rainwater, either
directly or indirectly, owns interests in that partnership equivalent to
approximately 2,475,000 of those shares, and warrants to acquire approximately
1,237,200 shares, of Magellan common stock. Mr. Rainwater's children, either
directly or indirectly, own interests in that partnership equivalent to
approximately 320,000 of those shares, and warrants to acquire approximately
160,000 shares, of Magellan common stock. Messrs. Goff and Haddock each own,
directly or indirectly, approximately 57,000 shares, and warrants to acquire
approximately 28,500 shares, of Magellan common stock. These warrants entitle
the warrant holders to purchase, at any time until the January 25, 2000
expiration date, shares of Magellan common stock at a purchase price of $26.15
per share.
Darla D. Moore is married to Mr. Rainwater and is a director of Magellan.
As part of the arrangements pursuant to which Mr. Rainwater acquired securities
of Magellan, an affiliate of Mr. Rainwater has the right to designate a nominee
acceptable to Magellan for election as a director of Magellan for so long as Mr.
Rainwater and his affiliates continue to own beneficially a specified minimum
number of shares of Magellan common stock. Mr. Rainwater's affiliate proposed
Ms. Moore as its nominee for director, and Ms. Moore was elected a director by
the Magellan Board on February 22, 1996.
Management believes that the foregoing transactions are on terms no less
favorable than those that could have been obtained in comparable transactions
with unaffiliated parties.
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STRUCTURE OF THE OPERATING PARTNERSHIP
The Company is a fully integrated real estate company operating as a REIT
for federal income tax purposes. The Operating Partnership provides management,
leasing and development services with respect to certain of its properties. The
Operating Partnership is controlled by the Company through the Company's
ownership of all of the outstanding stock of the General Partner, which owns a
1% general partner interest in the Operating Partnership. In addition, the
Company owns an approximately 89% limited partner interest in the Operating
Partnership. The direct and indirect subsidiaries of the Operating Partnership
include seven single purpose limited partnerships in which the Operating
Partnership owns substantially all of the economic interests directly, through
its approximately 99% limited partner interest in such seven limited
partnerships, with the remaining interests owned indirectly by the Company
through seven separate corporations, each of which is a wholly owned subsidiary
of the General Partner and is the approximately 1% general partner of one of the
seven limited partnerships. The Operating Partnership also owns the real estate
mortgages and non-voting common stock representing interests ranging from
approximately 40% to 95% in the Residential Development Corporations. In
addition, the Company owns an indirect 38% interest in each of two corporations
that currently own and operate approximately 79 refrigerated warehouses with an
aggregate of approximately 368 million cubic feet. The Operating Partnership
also has a 42.5% partnership interest in a partnership whose primary holdings
consist of a 364-room executive conference center and general partner interests
ranging from one to 50% in additional office, retail, multi-family and
industrial properties.
The following table sets forth certain of the Properties owned by the
Operating Partnership and its Subsidiaries:
<TABLE>
<S> <C>
Operating Partnership: The Addison, Addison Tower, The Amberton, AT&T Building,
Austin Centre, Bank One Center(1), Bank One Tower, Canyon
Ranch-Tucson, Cedar Springs Plaza, Central Park Plaza,
Chancellor Park(2), Concourse Office Park, Denver Marriott
City Center, Energy Centre, Fountain Place, Four Seasons
Hotel- Houston, Frost Bank Plaza, Greenway I, Greenway IA,
Greenway II, Houston Center Office Properties, MCI Tower,
The Meridian, Miami Center, Omni Austin Hotel, One Preston
Park, Palisades Central I, Palisades Central II, Park Shops
at Houston Center, Post Oak Central, Reverchon Plaza, Sonoma
Mission Inn & Spa, Spectrum Center(3), Stemmons Place, Three
Westlake Park(4), Trammell Crow Center(5), U.S. Home
Building, The Woodlands Office Properties(6), The Woodlands
Retail Properties(6), Valley Centre, Ventana Country Inn,
Walnut Green, Washington Harbour, 44 Cook, 55 Madison, 160
Spear Street, 301 Congress Avenue(7), 1615 Poydras, 3333 Lee
Parkway, 5050 Quorum and 6225 North 24th Street
Crescent Real Estate The Aberdeen, The Avallon, Caltex House, The Citadel,
Funding I, L.P. ("Funding Continental Plaza, The Crescent Atrium, The Crescent Office
I"): Towers, Regency Plaza One and Waterside Commons
Crescent Real Estate Albuquerque Plaza, Barton Oaks Plaza One, Briargate Office
Funding II, L.P. and Research Center, Hyatt Regency Albuquerque, Hyatt
("Funding II") Regency Beaver Creek, 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 Greenway Plaza Portfolio(8)
Funding III, IV and
V, L.P. ("Funding III,
IV and V"):
Crescent Real Estate Canyon Ranch-Lenox
Funding VI, L.P.
("Funding VI"):
Crescent Real Estate Behavioral Healthcare Facilities
Funding VII, L.P.
("Funding VII"):
</TABLE>
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(1) The Operating Partnership owns a 50% interest in the limited partnership
that owns the Bank One Center.
(2) The Operating Partnership 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.
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(3) The Operating Partnership owns the principal economic interest in Spectrum
Center through an interest in the partnership which owns both a mortgage
note secured by the building and the ground lessor's interest in the land
underlying the building.
(4) The Operating Partnership owns the principal economic interest in Three
Westlake Park through its ownership of a mortgage note secured by the
building.
(5) The Operating Partnership 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.
(6) The Operating Partnership owns a 75% limited partner interest and an
indirect approximately 10% general partner interest in the partnerships
that own The Woodlands Office and Retail Properties.
(7) The Operating Partnership owns a 49% limited partner interest and
Crescent/301, L.L.C., a wholly owned subsidiary of the General Partner and
the Operating Partnership, owns a 1% general partner interest in 301
Congress Avenue, L.P., the partnership that owns 301 Congress Avenue.
(8) Funding III owns the Greenway Plaza Portfolio, except for the central
heated and chilled water plant building and Coastal Tower office building,
both located within Greenway Plaza, which are owned by Funding IV and
Funding V, respectively.
U.S. FEDERAL INCOME TAX CONSEQUENCES
The following discussion, which was prepared by Shaw Pittman Potts &
Trowbridge, special tax counsel to the Operating Partnership ("Tax Counsel"),
summarizes the material U.S. federal income tax consequences of the exchange of
the Private Notes for the Exchange Notes pursuant to the Exchange Offer. Tax
Counsel's opinion is included as an exhibit to the Registration Statement of
which this Prospectus is a part. This discussion is based on provisions of the
Internal Revenue Code of 1986, as amended, its legislative history, judicial
authority, current administrative rulings and practice and existing and proposed
Treasury Regulations, all as in effect and existing on the date hereof.
Legislative, judicial or administrative changes or interpretations after the
date hereof could alter or modify the validity of this discussion and the
conclusions set forth below. Any such changes or interpretations may be
retroactive and could adversely affect a Holder of the Private Notes or the
Exchange Notes.
This discussion does not purport to deal with all aspects of U.S. federal
income taxation that might be relevant to particular Holders in light of their
personal investment or tax circumstances or status, nor does it discuss the U.S.
federal income tax consequences to certain types of Holders subject to special
treatment under the U.S. federal income tax laws, such as certain financial
institutions, insurance companies, dealers in securities or foreign currency,
tax-exempt organizations, foreign corporations or non-resident alien
individuals, or persons holding Private Notes or Exchange Notes that are a hedge
against, or that are hedged against, currency risk or that are part of a
straddle or conversion transaction, or persons whose functional currency is not
the U.S. dollar. Moreover, the effect of any state, local or foreign tax laws is
not discussed.
THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION ONLY. EACH HOLDER OF A
PRIVATE NOTE THAT IS PARTICIPATING IN THE EXCHANGE OFFER IS STRONGLY URGED TO
CONSULT WITH ITS OWN TAX ADVISORS TO DETERMINE THE IMPACT OF SUCH HOLDER'S
PARTICULAR TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES, INCLUDING THE TAX
CONSEQUENCES UNDER STATE, LOCAL, FOREIGN OR OTHER TAX LAWS, OF THE EXCHANGE OF
THE PRIVATE NOTES FOR THE EXCHANGE NOTES PURSUANT TO THE EXCHANGE OFFER.
EXCHANGE OFFER
The exchange of the Private Notes by any Holder for the Exchange Notes
pursuant to the Exchange Offer will not be treated as an "exchange" for federal
income tax purposes because the Exchange Notes will not be considered to differ
materially in kind or extent from the Private Notes. Rather, the Exchange Notes
received by any Holder will be treated as a continuation of the Private Notes in
the hands of such Holder. As a result, there will be no federal income tax
consequences to Holders exchanging the Private Notes for the Exchange Notes
pursuant to the Exchange Offer, and the federal income tax consequences of
holding and disposing of the Exchange Notes will be the same as the federal
income tax consequences of holding and disposing of the Private Notes.
Accordingly, a Holder's adjusted tax basis in the Exchange Notes will be the
same as its adjusted tax basis in the Private Notes exchanged therefor and its
holding period for the Private Notes will be included in its holding period for
the Exchange Notes. Thus, the determination of gain on a sale or other
disposition of the Exchange Notes will be the same as for the Private Notes. In
addition, the Holders, among other things, must continue to include original
issue discount in income as if the exchange had not occurred. There will be no
federal income tax consequences of the Exchange Offer to the Operating
Partnership.
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PLAN OF DISTRIBUTION
This Prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of any Exchange Notes
received in exchange for Private Notes acquired by such broker-dealer for its
own account as a result of market-making or other trading activities. Each
broker-dealer that receives Exchange Notes for its own account in exchange for
such Private Notes pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. The
Operating Partnership has agreed that for a period of up to 120 days after the
closing of the Exchange Offer, it will make this Prospectus, as amended or
supplemented, available to any such broker-dealer that requests copies of this
Prospectus in the Letter of Transmittal for use in connection with any such
resale.
The Operating Partnership will not receive any proceeds from any sale of
Exchange Notes by broker-dealers or any other persons. Exchange Notes received
by broker-dealers for their own account pursuant to the Exchange Offer may be
sold from time to time in one or more transactions in the over-the-counter
market, in negotiated transactions, through the writing of options on the
Exchange Notes, or a combination of such methods of resale, at market prices
prevailing at the time of resale, at prices related to such prevailing market
prices or negotiated prices. Any such resale may be made directly to purchasers
or to or through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such broker-dealer and/or the purchasers of
any such Exchange Notes. Any broker-dealer that resells Exchange Notes that were
received by it for its own account pursuant to the Exchange Offer and any
broker-dealer that participates in a distribution of such Exchange Notes may be
deemed to be an "underwriter" within the meaning of the Securities Act and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer that receives Exchange Notes in exchange for Private
Notes acquired by such broker-dealer as a result of market-making or other
trading activities will not be deemed to admit that it is an "underwriter"
within the meaning of the Securities Act.
The Operating Partnership has agreed to pay all expenses incident to the
Operating Partnership's performance of, or compliance with, the Registration
Rights Agreement and will indemnify the holders of Private Notes (including any
broker-dealers), and certain parties related to such holders, against certain
liabilities, including liabilities under the Securities Act.
AVAILABLE INFORMATION
The Operating Partnership has filed with the Commission a Registration
Statement, of which this Prospectus is a part, under the Securities Act with
respect to the Exchange Offer. This Prospectus omits certain information
contained in the Registration Statement, and reference is made to the
Registration Statement and the exhibits thereto for further information with
respect to the Operating Partnership and the Exchange Offer. Statements
contained herein concerning the provisions of any documents are not necessarily
an exhaustive description of such documents, and reference is made to the copy
of each such document filed as an exhibit to the Registration Statement. Each
such statement is qualified in its entirety by such reference. The Registration
Statement, including exhibits filed therewith, may be inspected at the Public
Reference Section maintained by the Commission at Judiciary Plaza, Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549 and the following regional
offices of the Commission: Citicorp Center, Suite 1400, 500 West Madison Street,
Chicago, Illinois 60661-2511 and Seven World Trade Center, Suite 1300, New York,
New York 10048. Copies of such material can be obtained from the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission also maintains a Web
site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission, including the Operating Partnership and the Company. In
addition, the Company's Common Shares are listed on the New York Stock Exchange
and reports, proxy statements and other information concerning the Company and
the Operating Partnership can be inspected at the offices of the New York Stock
Exchange, 20 Broad Street, New York, New York 10005.
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EXPERTS
The consolidated financial statements of the Operating Partnership as of
December 31, 1997 and 1996 and for each of the three years in the period ended
December 31, 1997 included in this Prospectus have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said report.
The financial statements of (i) Post Oak Central for the year ended
December 31, 1996 and the eleven month period ended November 30, 1997 (ii)
Washington Harbour for the years ended December 31, 1996 and 1997, included in
this Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm in giving said
reports.
The financial statements of the Provider Segment of Magellan Health
Services, Inc. as of September 30, 1996 and 1995 and for each of the three years
in the period ended September 30, 1996 included in this Prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
The financial statements of Station Casinos, Inc. as of March 31, 1997 and
1996 and for each of the three years in the period ended March 31, 1997 included
in this Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
report.
LEGAL MATTERS
The validity of the Exchange Notes offered hereby will be passed upon for
the Operating Partnership by Shaw Pittman Potts & Trowbridge, Washington, D.C.
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GLOSSARY
"Acquired Indebtedness" means Debt of a person (i) existing at the time the
person becomes a Subsidiary or (ii) assumed in connection with the acquisition
of assets from the person, in each case, other than Debt incurred in connection
with, or in contemplation of, the person becoming a Subsidiary or that
acquisition. Acquired Indebtedness shall be deemed to be incurred on the date of
the related acquisition of assets from any person or the date the acquired
person becomes a Subsidiary.
"Adjusted Total Assets" means the increase or decrease of the Total Assets,
together with the Total Assets, of the Operating Partnership and its
Subsidiaries.
"Agent's Message" means a message transmitted by the Depository, received
by the Exchange Agent and forming part of the Book-Entry Confirmation, which
states that the Depository has received an express acknowledgment from a
Participant that is tendering Private Notes which are the subject of such
book-entry confirmation, that such Participant has received and agrees to be
bound by the terms of the Letter of Transmittal (or, in the case of an Agent's
Message relating to guaranteed delivery, that such Participant has received and
agrees to be bound by the Notice of Guaranteed Delivery).
"Americold" means Americold Corporation.
"Annual Debt Service Charge" as of any date means the amount which is
expensed in any 12-month period for Consolidated Interest Expense of the
Operating Partnership and its Subsidiaries.
"April 1995 Offering" means the second public offering of the Company's
Common Shares in April 1995.
"April 1997 Offering" means the Company's public offering of its Common
Shares in April 1997.
"AREG" means the American Real Estate Group.
"ATOP" means the Depository's Automated Tender Offer Program.
"BankBoston" means BankBoston, N.A.
"Behavioral Healthcare Facilities" means the 90 behavioral healthcare
facilities owned by the Operating Partnership and leased by CBHS.
"Book-Entry Confirmation" means a timely confirmation of a book-entry
transfer.
"Business Day" means any day, other than a Saturday or Sunday, on which
banking institutions in New York, New York, Boston, Massachusetts and St. Louis,
Missouri are open for business.
"Carter-Crowley Portfolio" means substantially all of the assets of
Carter-Crowley Properties, Inc. which were purchased by the Operating
Partnership.
"Casino/Hotel Properties" means the four full-service casino/hotels and two
riverboat casinos owned by Station.
"CBHS" means Charter Behavioral Health Systems, LLC, which is 50% owned by
Crescent Operating, Inc. and 50% owned by a subsidiary of Magellan.
"Cede" means Cede & Co.
"Code" means the Internal Revenue Code of 1986, as amended.
"Cohen & Steers" means Cohen & Steers Capital Management.
"Commission" means the United States Securities and Exchange Commission.
"Common Shares" means the common shares of beneficial interest, $0.01 par
value, of the Company.
"Common Stock" means the common stock of Crescent Real Estate Equities,
Inc., the predecessor of the Company.
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"Company" means Crescent Real Estate Equities Company, a Texas real estate
investment trust, unless the context requires otherwise.
"Compensation Committee" means the compensation committee of the Board of
Trust Managers of the Company.
"Consolidated Income Available for Debt Service" for any period means
Consolidated Net Income plus amounts which have been deducted in determining
Consolidated Net Income during such period for (i) Consolidated Interest
Expense, (ii) provision for taxes of the Operating Partnership and its
Subsidiaries based on income, (iii) amortization (other than amortization of
debt discount) and depreciation, (iv) provisions for losses from sales or joint
ventures, (v) increases in deferred taxes and other non-cash items, (vi) charges
resulting from a change in accounting principles and (vii) charges for early
extinguishment of debt, and less amounts which have been added in determining
Consolidated Net Income during such period for (a) provisions for gains from
sales or joint ventures and (b) decreases in deferred taxes and other non-cash
items.
"Consolidated Interest Expense" means, for any period, and without
duplication, all interest (including the interest component of rentals on leases
reflected in accordance with GAAP as capitalized leases on the Operating
Partnership's consolidated balance sheet, letter of credit fees, commitment fees
and other like financial charges) and all amortization of debt discount on all
Debt (including, without limitation, payment-in-kind, zero coupon and other
securities) of the Operating Partnership and its Subsidiaries, but excluding
legal fees, title insurance charges and other out-of-pocket fees and expenses
incurred in connection with the issuance of Debt, all determined in accordance
with GAAP.
"Consolidated Net Income" for any period means the amount of net income (or
loss) of the Operating Partnership and its Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP.
"Corporation" means any of the entities with which the Operating
Partnership may consolidate or to which it may sell, lease or convey all or
substantially all of its assets or with or into which it may merge, including
any other corporation, limited liability company, association, partnership, real
estate investment trust, company or business trust.
"Credit Facility" means the Operating Partnership's unsecured credit
facility in the amount of up to $550 million.
"Crescent Operating" means Crescent Operating, Inc.
"Crescent Subsidiaries" means the two subsidiaries formed by the Operating
Partnership in connection with the Refrigerated Warehouse Investment.
"DBL" means DBL Holdings, Inc.
"Debt" of the Operating Partnership or any Subsidiary means, without
duplication, any indebtedness of the Operating Partnership or its Subsidiaries,
whether or not contingent, in respect of (i) borrowed money evidenced by bonds,
notes, debentures or similar instruments, (ii) indebtedness secured by any
mortgage, pledge, lien, charge, encumbrance or any security interest existing on
property owned by the Operating Partnership or its Subsidiaries, (iii) the
reimbursement obligations, contingent or otherwise, in connection with any
letters of credit actually issued or amounts representing the balance deferred
and unpaid of the purchase price of any property except any such balance that
constitutes an accrued expense or trade payable or (iv) any lease of property by
the Operating Partnership or its Subsidiaries as lessee which is reflected in
the Operating Partnership's consolidated balance sheet as a capitalized lease in
accordance with GAAP (but, in the case of items of indebtedness under (i)
through (iii) above, only to the extent that any such items (other than letters
of credit) would appear as a liability on the Operating Partnership's
consolidated balance sheet in accordance with GAAP), and also includes, to the
extent not otherwise included, any obligation by the Operating Partnership or
any Subsidiary to be liable for, or to pay, as obligor, guarantor or otherwise
(other than for purposes of collection in the ordinary course of business),
indebtedness of another person (other than the Operating Partnership or any
Subsidiary) (it being understood that "Debt" of the Operating Partnership and
its Subsidiaries on a consolidated basis shall be deemed to be incurred whenever
the Operating
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Partnership and its Subsidiaries on a consolidated basis shall create, assume,
guarantee or otherwise become liable in respect thereof, and Debt of a
Subsidiary of the Operating Partnership existing prior to the time it became a
Subsidiary of the Operating Partnership shall be deemed to be incurred upon such
Subsidiary's becoming a Subsidiary of the Operating Partnership, and Debt of a
person existing prior to a merger or consolidation of such person with the
Operating Partnership or any Subsidiary of the Operating Partnership in which
such person is the successor to the Operating Partnership or such Subsidiary
shall be deemed to be incurred upon the consummation of such merger or
consolidation); provided, however, that the term Debt shall not include any such
indebtedness that has been the subject of an "in substance" defeasance in
accordance with GAAP.
"Depository" means The Depository Trust Company.
"DMDC" means Desert Mountain Development Corporation.
"DMPLP" means Desert Mountain Properties Limited Partnership.
"EBIDA" means earnings before interest expense, depreciation, amortization
and minority interest.
"Eligible Institution" means a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an eligible guarantor institution, as defined in Rule 17Ad-15
under the Exchange Act.
"ESA" means environmental site assessments.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Agent" means State Street Bank and Trust Company of Missouri,
N.A.
"2002 Exchange Notes" means the 6 5/8% notes due 2002 offered by the
Operating Partnership.
"2007 Exchange Notes" means the 7 1/8% notes due 2007 offered by the
Operating Partnership.
"Exchange Notes" means the 2002 Exchange Notes and the 2007 Exchange Notes.
"Exchange Offer" means the offer by the Operating Partnership to exchange
the Exchange Notes for the Private Notes.
"Exchange Rights" means the rights granted by the Company to exchange Units
for Common Shares or, at the election of the Company, for cash equal to the
then-current fair market value of the number of Common Shares for which such
Units are exchangeable.
"Expiration Date" means 5:00 p.m., New York City time, on ,
1998, unless the Exchange Offer is extended by the Operating Partnership in its
sole discretion, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
"February 1998 Preferred Offering" means the offering the Company completed
on February 19, 1998 of Series A Preferred Shares.
"February Shelf Registration Statement" means the shelf registration the
Company filed with the Commission on February 14, 1997, for an aggregate of $1.2
billion of Common Shares, Preferred Shares and warrants exercisable for Common
Shares.
"FFO" means Funds From Operations.
"Fidelity" means Fidelity Management & Research Company, a registered
investment adviser and wholly owned subsidiary of FMR Corp.
"Fidelity Management" means Fidelity Management Trust Company, a wholly
owned subsidiary of FMR Corp.
"Fresh Choice" means Fresh Choice, Inc., a chain of upscale casual
restaurants.
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"Fresh Choice Option" means the option Richard E. Rainwater granted to the
Operating Partnership with respect to shares of Fresh Choice owned by Mr.
Rainwater.
"Fresh Choice Common Shares" means the 496,400 shares of common stock of
Fresh Choice owned by Mr. Rainwater.
"Funds" means the registered investment companies for which Fidelity serves
as investment adviser.
"GAAP" means generally accepted accounting principles.
"General Partner" means Crescent Real Estate Equities, Ltd., a Delaware
corporation, which is the sole general partner of the Operating Partnership.
"HMOs" means health maintenance organizations.
"Holders" means persons in whose names the applicable Exchange Notes are
registered.
"Hotel Lessees" means the lessees of the Hotel Properties.
"1996 Hotel Properties" means the four hotel properties, Hyatt Regency
Beaver Creek, Denver Marriott City Center, Hyatt Regency Albuquerque and Sonoma
Mission Inn & Spa, and two destination health and fitness resorts, Canyon
Ranch-Tuscson and Canyon Ranch-Lenox, owned by the Operating Partnership at the
end of 1996.
"Hotel Properties" means, collectively, Hyatt Regency Beaver Creek, Denver
Marriott City Center, Hyatt Regency Albuquerque, Sonoma Mission Inn & Spa,
Ventana Country Inn, Austin Centre Omni Hotel, Canyon Ranch-Tucson and Canyon
Ranch-Lenox.
"Indenture" means the indenture, dated as of September 22, 1997, by and
between the Operating Partnership and the Trustee.
"Indirect Participants" means entities such as banks, brokers, dealers,
trust companies and other parties that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly, and have
indirect access to the Depository's system.
"Initial Offering" means the initial public offering of the Company's
Common Shares in May 1994.
"Initial Purchasers" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Salomon Brothers Inc.
"Intercompany Agreement" means the agreement by and between Crescent
Operating, Inc. and Operating Partnership, pursuant to which each has agreed to
provide the other with rights to participate in certain transactions.
"Interest Payment Date" means each September 15 and March 15, commencing
March 15, 1998, through the applicable Maturity Date.
"Investment Grade Rating" means a rating in one of a Rating Agency's
generic rating categories that signifies investment grade, which are generally
accepted to be the four highest rating categories for corporate debt.
"IREM" means Institute of Real Estate Management.
"Letter of Transmittal" means the letter of transmittal accompanying this
Prospectus, which sets forth certain terms of the Exchange Offer and pursuant to
which a holder of Private Notes may elect to participate in the Exchange Offer.
"Line of Credit" means the line of credit pursuant to which the Operating
Partnership loaned $20.4 million to Crescent Operating.
"Magellan" means Magellan Health Services, Inc., a subsidiary of which owns
50% of CBHS.
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"Make-Whole Amount" means, in connection with any optional redemption or
accelerated payment of any Exchange Notes, the excess, if any, of (i) the
aggregate present value as of the date of such redemption or accelerated payment
of each dollar of principal being redeemed or paid and the amount of interest
(exclusive of interest accrued to the date of redemption or accelerated payment)
that would have been payable in respect of each such dollar if such redemption
or accelerated payment had not been made, determined by discounting, on a
semi-annual basis, such principal and interest at the Reinvestment Rate
(determined on the third Business Day preceding the date notice of such
redemption is given) from the respective dates on which such principal and
interest would have been payable if such redemption or accelerated payment had
not been made, to the date of redemption or accelerated payment, over (ii) the
aggregate principal amount of the Exchange Notes being redeemed or paid.
"Management Entity" means the newly formed entity owned by three existing
directors of Station (including its Chairman, President and Chief Executive
Officer) which will own 24.9% of the Station Lessee.
"Maturity Date" means, with respect to the 2002 Exchange Notes and the 2002
Private Notes, September 15, 2002, and, with respect to the 2007 Exchange Notes
and the 2007 Private Notes, September 15, 2007.
"Merger" means the merger of Station with and into the Company, pursuant to
the Merger Agreement.
"Merger Agreement" means the agreement and plan of merger, dated as of
January 16, 1998, by and between the Company and Station.
"Merrill Offering" means the Company's offering of 5,375,000 Common Shares
to Merrill Lynch International.
"NAREIT" means the National Association of Real Estate Investment Trusts.
"Nomura" means Nomura Asset Capital Corporation.
"Noncompetition Agreements" means the agreements not to compete between the
Company and each of Richard E. Rainwater, John C. Goff and Gerald W. Haddock.
"Notes" means the Exchange Notes and the Private Notes.
"Notice of Guaranteed Delivery" means a notice from an Eligible Institution
setting forth the name and address of the holder, the certificate number(s) and
the principal amount of Private Notes tendered, stating that the tender is being
made thereby and guaranteeing that, within three (3) NYSE trading days after the
Expiration date, either (x) the Letter of Transmittal (or facsimile thereof)
together with the Private Notes (or a Book-Entry Confirmation) in proper form
for transfer will be deposited by the Eligible Institution with the Exchange
Agent or (y) an Agent's Message will be properly transmitted to the Exchange
Agent.
"NYSE" means New York Stock Exchange, Inc.
"October 1996 Offering" means the Company's public offering of its Common
Shares that closed on October 2, 1996.
"October 1997 Offering" means the Company's public offering of its Common
Shares in October 1997.
"October Shelf Registration Statement" means the shelf registration
statement the Company filed with the Commission on October 29, 1997 for an
aggregate of $1.5 billion of Common Shares, Preferred Shares and warrants
exercisable for Common Shares.
"Offerings" means the additional offering of 500,000 Common Shares at
$25.875 per share to several underwriters who participated in the April 1997
offering completed by the Company on May 14, 1997.
"Office Properties" means the 81 office properties owned by the Operating
Partnership located in 27 metropolitan submarkets in Texas, Colorado, Arizona,
Louisiana, Nebraska, New Mexico, California and Florida.
"OPA" means the Federal Water Pollution Control Act.
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"Operating Partnership" means Crescent Real Estate Equities Limited
Partnership, a Delaware limited partnership, and those entities in which
Crescent Real Estate Equities Limited Partnership has a substantial ownership
interest or control, unless the context indicates otherwise.
"Option Agreement" means the Call Option Agreement, dated August 11, 1997,
by and between the Operating Partnership and Richard E. Rainwater with respect
to shares of Fresh Choice owned by Mr. Rainwater.
"Options" means options to purchase Common Shares, and any of them.
"Outstanding" means, with respect to a Note, that the Note has been
authenticated and delivered under the Indenture unless, among other things, such
Note has been canceled or redeemed.
"Participants" means participants in the Depository.
"Pending Investment" means the proposed investment in the Casino/Hotel
Properties through the Merger.
"Pioneer" means Pioneer Natural Resources.
"1994 Plan" means the 1994 Crescent Real Estate Equities, Inc. Stock
Incentive Plan.
"1995 Plan" means the 1995 Crescent Real Estate Equities Company Incentive
Plan, as amended.
"PPO" means preferred provider organizations.
"Preferred Shares" means the new class of preferred shares that the Company
will create that will be exchanged, upon consummation of the Merger, for the
shares of $3.50 Convertible Preferred Stock of Station outstanding immediately
prior to the Merger.
"2002 Private Notes" means the outstanding 6 5/8% notes due 2002 of the
Operating Partnership.
"2007 Private Notes" means the outstanding 7 1/8% notes due 2007 of the
Operating Partnership.
"Private Notes" means the 2002 Private Notes and the 2007 Private Notes.
"Properties" means the Office Properties, the Hotel Properties, real estate
mortgages relating to and non-voting common stock in the Residential Development
Corporations, interests in the Residential Development Properties, the Retail
Properties and the Refrigerated Warehouse Investment, and any of them.
"Prospectus" means this prospectus, as the same may be amended.
"Purchase Agreement" means the agreement, dated as of September 19, 1997,
by and between the Operating Partnership and the Initial Purchasers.
"QIBs" means qualified institutional buyers, as defined in Rule 144A under
the Securities Act.
"Rating Adjustment" means an increase in the interest rate of the
applicable Notes of 37.5 basis points.
"Rating Agency/ies" means Standard & Poor's Rating Services, a division of
the McGraw-Hill Companies, and Moody's Investors Services, Inc., and either of
them.
"Redemption Price" means the price at which the Exchange Notes may be
redeemed at any time at the option of the Operating Partnership, in whole or
from time to time in part, at a redemption price equal to the sum of (i) the
principal amount of the Exchange Notes (or portion thereof) being redeemed plus
accrued and unpaid interest, if any, thereon to the redemption date and (ii) the
Make-Whole Amount, if any, with respect to such Exchange Notes (or portion
thereof).
"Refrigerated Warehouse Investment" means the Operating Partnership's
ownership of an indirect 38% interest in each of two corporations that currently
own and operate approximately 79 refrigerated warehouses with an aggregate of
approximately 368 million cubic feet.
-108-
<PAGE> 114
"Registration Rights Agreement" means the agreement, dated as of September
22, 1997, by and between the Operating Partnership and the Initial Purchasers,
granting the holders of Private Notes certain exchange and registration rights.
"Registration Statement" means the registration statement on Form S-4 (File
No. 333-42293), of which this Prospectus is a part.
"Regular Record Date" means the date 15 days prior to the Interest Payment
Date, regardless of whether such day is a Business Day.
"Reinvestment Rate" means .25% plus the arithmetic mean of the yields under
the heading "Week Ending" published in the most recent Statistical Release under
the caption "Treasury Constant Maturities" for the maturity (rounded to the
nearest month) corresponding to the remaining life to maturity, as of the
payment date of the principal being redeemed or paid. If no maturity exactly
corresponds to such maturity, yields for the two published maturities most
closely corresponding to such maturity shall be calculated pursuant to the
immediately preceding sentence and the Reinvestment Rate shall be interpolated
or extrapolated from such yields on a straight-line basis, rounding in each of
such relevant periods to the nearest month. For the purposes of calculating the
Reinvestment Rate, the most recent Statistical Release published prior to the
date of determination of the Make-Whole Amount shall be used. If the format or
content of the Statistical Release changes in a manner that precludes
determination of the Treasury yield in the above manner, then the Treasury yield
shall be determined in the manner that most closely approximates the above
manner, as reasonably determined by the Operating Partnership.
"REIT" means a real estate investment trust.
"Residential Development Corporations" means the five residential
development corporations with respect to which the Operating Partnership owns
non-voting common stock and real estate mortgages.
"Residential Development Property Mortgages" means the Operating
Partnership's economic interests in the Residential Development Corporations.
"Retail Properties" means the seven retail properties owned by the
Operating Partnership, with an aggregate of 771,000 square feet.
"Rule 144A" means Rule 144A under the Securities Act which, subject to
certain conditions, permits the sale of securities not registered under the
Securities Act.
"Secondary Management Entity" means the newly formed entity owned by
certain members of Station management who do not own the Management Entity and
which will own 25.1% of the Station Lessee.
"Secured Debt" means, without duplication, Debt secured by any mortgage,
trust deed, deed of trust, deed to secure Debt, security agreement, pledge,
conditional sale or other title retention agreement, capitalized lease, or other
like agreement granting or conveying security title to or a security interest in
real property or other tangible assets. Secured Debt shall be deemed to be
incurred (i) on the date the Operating Partnership or any Subsidiary creates,
assumes, guarantees or otherwise becomes liable in respect thereof if it is
secured in the manner described in the preceding sentence on such date or (ii)
on the date the Operating Partnership or any Subsidiary first secures such Debt
in the manner described in the preceding sentence if such Debt was not so
secured on the date it was incurred.
"Securities Act" means the Securities Act of 1933, as amended.
"Selling Shareholder" means Merrill Lynch International, which entered into
two transactions with the Company as of December 12, 1997.
"September Note Offering" means the Operating Partnership's offering of an
aggregate principal amount of $400 million of Private Notes.
"Series A Preferred Shares" means the 8,000,000 6 3/8% Series A Convertible
Cumulative Preferred Shares offered in the February 1998 Preferred Offering.
-109-
<PAGE> 115
"Series C Stock Option" means the Operating Partnership's option, which
expires September 1999, to purchase additional shares of Series C Participating
Non-Voting Convertible Preferred Stock of Fresh Choice at $6.00 per share.
"Settlement Shares" means the 5,375,000 Common Shares owned by Merrill
Lynch International.
"Shelf Registration Statement" means the registration statement the
Operating Partnership has agreed to file under certain circumstances to cover
resales of the Private Notes by the holders thereof.
"Significant Subsidiary" means any Subsidiary which is a "significant
subsidiary" (as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
under the Securities Act) of the Operating Partnership.
"Station" means Station Casinos, Inc.
"Station Lessee" means the entity that will lease and operate the
properties that the Company intends to acquire in conjunction with the Merger.
"Statistical Release" means the statistical release designated "H.15(519)"
or any successor publication which is published weekly by the Federal Reserve
System and which reports yields on actively traded United States government
securities adjusted to constant maturities, or, if such statistical release is
not published at the time of any determination under the Indenture, then such
other reasonably comparable index which shall be designated by the Operating
Partnership.
"Stock Incentive Plan" means the 1994 Crescent Real Estate Equities, Inc.
Stock Incentive Plan and the Second Amendment and Restated 1995 Crescent Real
Estate Equities Company Stock Incentive Plan.
"Subsidiary" means (i) a corporation, partnership, limited liability
company, trust, real estate investment trust or other entity 50% or more of the
voting power of the voting equity securities of which are owned, directly or
indirectly, by the Operating Partnership or by one or more Subsidiaries of the
Operating Partnership, (ii) a partnership, limited liability company trust, real
estate investment trust or other entity not treated as a corporation for federal
income tax purposes 50% or more of the value of the equity interests of which
are owned, directly or indirectly, by the Operating Partnership or by one or
more other Subsidiaries of the Operating Partnership and (iii) one or more
corporations which, either individually or in the aggregate, would be
Significant Subsidiaries (as defined above, except that the investment, asset
and equity thresholds for purposes of this definition shall be 5%), 50% or more
of the value of the equity interests of which are owned, directly or indirectly,
by the Operating Partnership or by one or more Subsidiaries.
"Swap Agreement" means the agreement by and between the Company and Merrill
Lynch International, pursuant to which Merrill Lynch International will sell, as
directed by the Company, on or before December 12, 1998, a sufficient number of
the Common Shares to achieve net sales proceeds equal to the market value of the
Settlement Shares on December 12, 1997, plus a forward accretion component,
minus an adjustment for the Company's distribution rate.
"Tax Counsel" means Shaw Pittman Potts & Trowbridge, special tax counsel to
the Operating Partnership.
"Term Loan" means the approximately $35.9 million that the Operating
Partnership loaned to Crescent Operating pursuant to a five-year loan, which
bears interest at 12% per annum and is collateralized by a lien on assets of
Crescent Operating owned as of June 30, 1997, as well as certain other assets
subsequently acquired.
"Total Assets" as of any date means the sum of (i) Undepreciated Real
Estate Assets and (ii) all other assets of the Operating Partnership and its
Subsidiaries on a consolidated basis determined in accordance with GAAP (but
excluding intangibles and accounts receivable).
"Total Unencumbered Assets" as of any date means the sum of (i) those
Undepreciated Real Estate Assets not securing any portion of Secured Debt and
(ii) all other assets of the Operating Partnership and its Subsidiaries on a
consolidated basis not securing any portion of Secured Debt determined in
accordance with GAAP (but excluding intangibles and accounts receivable).
"Trizec" means the TrizecHahn Corporation.
-110-
<PAGE> 116
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended.
"Trustee" means State Street Bank and Trust Company of Missouri, N.A.
"UBS" means Union Bank of Switzerland.
"UBS-LB" means Union Bank of Switzerland, London Branch.
"UBS Offering" means the Company's offering of 4,700,000 Common Shares to
an affiliate of Union Bank of Switzerland.
"Undepreciated Real Estate Assets" as of any date means the cost (original
cost plus capital improvements) of real estate assets of the Operating
Partnership and its Subsidiaries on such date, before depreciation and
amortization, determined on a consolidated basis in accordance with GAAP.
"Units" means units of ownership interest in the Operating Partnership.
"URS" means URS Logistics, Inc.
"Unsecured Debt" means Debt of the Operating Partnership or any Subsidiary
that is not Secured Debt.
"Vornado" means collectively, two subsidiaries of Vornado Realty Trust.
"WLC" means The Woodlands Land Company, Inc.
-111-
<PAGE> 117
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
FINANCIAL STATEMENTS FOR CRESCENT REAL ESTATE EQUITIES
LIMITED PARTNERSHIP
AS OF DECEMBER 31, 1997 (AUDITED)
Report of Independent Public Accountants.................... F-3
Consolidated Balance Sheets as of December 31, 1997 and
December 31, 1996......................................... F-4
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995.......................... F-5
Consolidated Statements of Partners' Capital for the years
ended December 31, 1997, 1996 and 1995.................... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.......................... F-7
Notes to Financial Statements............................... F-8
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
Report of Independent Public Accountants.................... F-28
Combined Balance Sheets as of September 30, 1995 and 1996
(audited) and March 31, 1997 (unaudited).................. F-29
Combined Statements of Operations for the years ended
September 30, 1994, 1995 and 1996 (audited) and the six
months ended March 31, 1996 and 1997 (unaudited).......... F-30
Combined Statements of Changes in Stockholder's Deficit for
the years ended September 30, 1994, 1995 and 1996
(audited) and the six months ended March 31, 1996 and 1997
(unaudited)............................................... F-31
Combined Statements of Cash Flows for the years ended
September 30, 1994, 1995 and 1996 (audited) and the six
months ended March 31, 1996 and 1997 (unaudited).......... F-32
Notes to Combined Financial Statements...................... F-33
POST OAK CENTRAL
Report of Independent Public Accountants.................... F-45
Statements of Excess of Revenues Over Specific Operating
Expenses for the Year Ended December 31, 1996 and the
Eleven Month Period Ending November 30, 1997.............. F-46
Notes to Statements......................................... F-47
WASHINGTON HARBOUR
Report of Independent Public Accountants.................... F-50
Statements of Excess of Revenues Over Specific Operating
Expenses for the Year Ended December 31, 1996 and 1997.... F-51
Notes to Statements......................................... F-52
STATION CASINOS, INC.
Consolidated Balance Sheets as of December 31, 1997 and
March 31, 1997............................................ F-55
Consolidated Statements of Operations for the three months
and the nine months ended December 31, 1997 and 1996...... F-56
Consolidated Statements of Cash Flows for the nine months
ended December 31, 1997 and 1996.......................... F-57
Notes to the Consolidated Financial Statements.............. F-58
</TABLE>
F-1
<PAGE> 118
<TABLE>
<S> <C>
STATION CASINOS, INC. (AUDITED)
Report of Independent Public Accountants.................................................................... F-73
Consolidated Balance Sheets as of March 31, 1997 and 1996................................................... F-74
Consolidated Statements of Operations for the years ended March 31, 1997, 1996 and 1995..................... F-75
Consolidated Statements of Stockholders' Equity for the years ended March 31, 1997, 1996 and 1995........... F-76
Consolidated Statements of Cash Flows for the years ended March 31, 1997, 1996 and 1995..................... F-77
Notes to the Consolidated Financial Statements.............................................................. F-78
PRO FORMA FINANCIAL STATEMENTS FOR CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP (UNAUDITED)
Pro Forma Consolidated Balance Sheet as of December 31, 1997 and Notes Thereto.............................. F-96
Pro Forma Consolidated Statement of Operations for the Years Ended December 31, 1997 and 1996............... F-98
</TABLE>
F-2
<PAGE> 119
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Crescent Real Estate Equities Limited Partnership:
We have audited the accompanying consolidated balance sheets of Crescent
Real Estate Equities Limited Partnership as of December 31, 1997 and 1996, and
the related consolidated statements of operations, partners' capital and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements and this
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 Real Estate
Equities Limited Partnership as of December 31, 1997 and 1996, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
January 23, 1998
F-3
<PAGE> 120
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(NOTES 1 AND 2)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
ASSETS:
Investments in real estate:
Land................................................... $ 448,328 $ 146,036
Building and improvements.............................. 2,923,097 1,561,639
Furniture, fixtures and equipment...................... 51,705 24,951
Less -- accumulated depreciation....................... (278,194) (208,808)
---------- ----------
Net investment in real estate..................... 3,144,936 1,523,818
Cash and cash equivalents................................. 66,063 25,535
Restricted cash and cash equivalents...................... 41,528 36,882
Accounts receivable, net.................................. 30,049 15,330
Deferred rent receivable.................................. 39,588 16,217
Investments in real estate mortgages and equity of
unconsolidated companies............................... 601,770 40,969
Notes receivable, net..................................... 159,843 31,405
Other assets, net......................................... 99,098 43,384
---------- ----------
Total assets...................................... $4,182,875 $1,733,540
========== ==========
LIABILITIES:
Borrowings under Credit Facility.......................... $ 350,000 $ 40,000
Notes payable............................................. 1,360,124 627,808
Accounts payable, accrued expenses and other
liabilities............................................ 127,220 48,462
---------- ----------
Total liabilities................................. 1,837,344 716,270
---------- ----------
Minority interests.......................................... 28,178 29,265
PARTNERS' CAPITAL:
General partner........................................... 4,324 4,515
Limited partners'......................................... 2,313,029 983,490
---------- ----------
Total partners' capital........................... 2,317,353 988,005
---------- ----------
Total liabilities and partners' capital........... $4,182,875 $1,733,540
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 121
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(NOTES 1 AND 2)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Office and retail properties............................. $363,324 $182,198 $115,382
Hotel properties......................................... 37,270 19,805 8,107
Behavioral healthcare properties......................... 29,789 -- --
Interest and other income................................ 16,990 6,858 6,471
-------- -------- --------
Total revenues................................... 447,373 208,861 129,960
-------- -------- --------
EXPENSES:
Real estate taxes........................................ 44,154 20,606 12,494
Repairs and maintenance.................................. 27,783 12,292 7,787
Other rental property operating.......................... 86,931 40,915 25,668
Corporate general and administrative..................... 12,858 4,674 3,812
Interest expense......................................... 86,441 42,926 18,781
Amortization of deferred financing costs................. 3,499 2,812 2,500
Depreciation and amortization............................ 74,426 40,535 28,060
-------- -------- --------
Total expenses................................... 336,092 164,760 99,102
-------- -------- --------
Operating income................................. 111,281 44,101 30,858
OTHER INCOME:
Equity in net income of unconsolidated companies......... 23,743 3,850 5,500
-------- -------- --------
INCOME BEFORE MINORITY INTERESTS AND EXTRAORDINARY ITEM.... 135,024 47,951 36,358
Minority interests....................................... (1,434) (1,482) (815)
-------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM........................... 133,590 46,469 35,543
Extraordinary items...................................... -- (1,599) --
-------- -------- --------
NET INCOME................................................. $133,590 $ 44,870 $ 35,543
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 122
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
(NOTES 1 AND 2)
<TABLE>
<CAPTION>
LIMITED GENERAL TOTAL
PARTNERS' PARTNER'S PARTNERS'
CAPITAL CAPITAL CAPITAL
---------- --------- ----------
<S> <C> <C> <C>
Partners' capital, December 31, 1994..................... $ 323,475 $ 4,973 $ 328,448
Contributions............................................ 167,249 -- 167,249
Contribution of notes receivable......................... 1,061 -- 1,061
Distributions............................................ (52,256) (528) (52,784)
Net income............................................... 35,188 355 35,543
---------- ------- ----------
Partners' capital, December 31, 1995..................... 474,717 4,800 479,517
Contributions............................................ 535,428 -- 535,428
Contribution of notes receivable......................... 1,557 -- 1,557
Distributions............................................ (72,633) (734) (73,367)
Net income............................................... 44,421 449 44,870
---------- ------- ----------
Partners' capital, December 31, 1996..................... 983,490 4,515 988,005
Contributions............................................ 1,348,054 -- 1,348,054
Contribution of notes receivable......................... 413 -- 413
Distributions............................................ (139,394) (1,408) (140,802)
Distribution of Crescent Operating Inc. shares........... (11,788) (119) (11,907)
Net income............................................... 132,254 1,336 133,590
---------- ------- ----------
Partners' capital, December 31, 1997..................... $2,313,029 $ 4,324 $2,317,353
========== ======= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 123
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(NOTES 1 AND 2)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................... $ 133,590 $ 44,870 $ 35,543
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 77,925 43,347 30,560
Extraordinary item................................ -- 1,599 --
Minority interests................................ 1,434 1,482 815
Non-cash compensation............................. 172 111 --
Equity in earnings in excess of distributions
received from unconsolidated companies.......... (12,536) (322) --
Increase in accounts receivable................... (14,719) (8,325) (5,043)
Increase in deferred rent receivable.............. (23,371) (6,210) (875)
Increase in other assets.......................... (29,384) (387) (7,871)
Increase in restricted cash and cash
equivalents..................................... (417) (15,537) (4,700)
Increase in accounts payable, accrued expenses and
other liabilities............................... 78,758 16,756 16,448
----------- --------- ---------
Net cash provided by operating activities.... 211,452 77,384 64,877
----------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of investment properties................. (1,532,747) (460,113) (420,284)
Capital expenditures -- rental properties............ (22,005) (2,380) (1,148)
Tenant improvement and leasing costs -- rental
properties........................................ (53,886) (20,052) (13,911)
(Increase) decrease in restricted cash and cash
equivalents -- capital reserves................... (4,229) 842 (5,413)
Investment in unconsolidated companies............... (278,001) (3,900) --
Investment in residential development corporations... (270,174) (16,657) (8,654)
Increase in notes receivable......................... (128,438) (10,913) (12,732)
(Increase) decrease in escrow deposits -- acquisition
of investment properties.......................... (5,600) 140 40,836
----------- --------- ---------
Net cash used in investing activities........ (2,295,080) (513,033) (421,306)
----------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt financing costs................................. (12,132) (7,081) (8,342)
Borrowings under Credit Facility..................... 1,171,000 191,500 217,450
Payments under Credit Facility....................... (861,000) (171,500) (392,092)
Debt proceeds........................................ 1,127,596 152,755 411,862
Debt payments........................................ (493,203) (92,254) (66)
Capital distributions -- joint venture partner....... (2,522) (14,505) --
Capital contributions -- joint venture partner....... -- 750 125
Capital contributions to the Operating Partnership... 1,347,125 458,017 166,926
Distribution of Crescent Operating, Inc. shares to
limited partners of the Operating Partnership..... (11,907) -- --
Distributions from the Operating Partnership......... (140,801) (73,367) (52,784)
----------- --------- ---------
Net cash provided by financing activities.... 2,124,156 444,315 343,079
----------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... 40,528 8,666 (13,350)
CASH AND CASH EQUIVALENTS,
Beginning of period.................................. 25,535 16,869 30,219
----------- --------- ---------
CASH AND CASH EQUIVALENTS,
End of period........................................ $ 66,063 $ 25,535 $ 16,869
=========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 124
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ORGANIZATION AND BASIS OF PRESENTATION:
Organization
Crescent Real Estate Equities Limited Partnership, a Delaware limited
partnership ("CREELP," together with its direct and indirect interests in
limited partnerships, the "Operating Partnership") was formed under the terms of
the Limited Partnership Agreement dated February 9, 1994. The Operating
Partnership is controlled by Crescent Real Estate Equities Company, a Texas real
estate investment trust ("Crescent Equities"), through Crescent Equities'
ownership of all of the outstanding stock of Crescent Real Estate Equities,
Ltd., a Delaware corporation ("CREE, Ltd.") which owns an approximate 1% general
partner interest in the Operating Partnership. In addition, Crescent Equities
owns an approximate 89% limited partner interest in the Operating Partnership,
with the remaining approximate 10% held by other partners. The Operating
Partnership provides management, leasing, and development services with respect
to certain of its properties. The Operating Partnership owns substantially all
of the economic interest directly or indirectly of six single purpose limited
partnerships (formed for the purpose of obtaining securitized debt). The term
"Operating Partnership" includes, unless the context otherwise requires, CREELP
and other limited partnerships ("subsidiaries") of the Operating Partnership.
As of December 31, 1997, the Operating Partnership directly or indirectly
owned a portfolio of real estate assets (the "Properties") located primarily in
21 metropolitan submarkets in Texas and Colorado. The Properties include 80
office properties (the "Office Properties") with an aggregate of approximately
28.6 million net rentable square feet, 90 behavioral healthcare facilities (the
"Behavioral Healthcare Facilities"), six full-service hotels with a total of
1,962 rooms and two destination health and fitness resorts (the "Hotel
Properties"), real estate mortgages and non-voting common stock representing
interests ranging from 40% to 95% in five unconsolidated residential development
corporations (the "Residential Development Corporations"), which in turn,
through joint venture or partnership arrangements, own interests in 12
residential development properties (the "Residential Development Properties"),
and seven retail properties (the "Retail Properties") with an aggregate of
approximately .8 million net rentable square feet. In addition, the Operating
Partnership owns an indirect 38% interest in each of two corporations that
currently own and operate approximately 80 refrigerated warehouses with an
aggregate of approximately 394 million cubic feet (the "Refrigerated Warehouse
Investment"). The Operating Partnership also has a 42.5% partnership interest in
a partnership whose primary holdings consist of a 364-room executive conference
center and general partner interests ranging from one to 50%, in additional
office, retail, multi-family and industrial properties.
The following table sets forth, by subsidiary, the Properties owned by such
subsidiary as of December 31, 1997:
CREELP: 53 Office Properties, five Hotel Properties and
five Retail Properties
Crescent Real Estate
Funding I,
L.P.: ("Funding I") The Aberdeen, The Avallon, Caltex House, The
Citadel, Continental Plaza, The Crescent Atrium,
The Crescent Office Towers, Regency Plaza One, and
Waterside Commons
Crescent Real Estate
Funding II,
L.P.: ("Funding II") Albuquerque Plaza, Barton Oaks Plaza One, Briargate
Office and Research Center, Hyatt Regency
Albuquerque, Hyatt Regency Beaver Creek, 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 V,
L.P.:
("Funding III, IV and V") Greenway Plaza Portfolio(1)
F-8
<PAGE> 125
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Crescent Real Estate
Funding VI, L.P.:
("Funding VI") Canyon Ranch-Lenox
Crescent Real Estate
Funding VII, L.P.:
("Funding VII") Behavioral Healthcare Facilities
- ---------------
(1) Funding III owns the Greenway Plaza Portfolio, except for the central heated
and chilled water plant building and Coastal Tower Office property, both
located within Greenway Plaza, which are owned by Funding IV and Funding V,
respectively.
Basis of Presentation
The accompanying consolidated financial statements of the Operating
Partnership include all direct and indirect subsidiary entities. The equity
interests in those direct and indirect subsidiaries not owned by the Operating
Partnership are reflected as minority interests. All significant intercompany
balances and transactions have been eliminated.
Certain amounts in prior year financial statements have been reclassified
to conform with current year presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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, improvement 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:
<TABLE>
<S> <C>
Buildings and Improvements.................................. 5 to 49 years
Tenant Improvements......................................... Terms of leases
Furniture, Fixtures and Equipment........................... 3 to 10 years
</TABLE>
An impairment loss is recognized, on a property by property basis, when
expected undiscounted cash flows are less than the carrying value of the asset.
In cases where the Operating Partnership does not expect to recover its carrying
costs, the Operating Partnership reduces its carrying costs to fair value. No
such reductions have occurred to date.
Concentration of Real Estate Investments
The majority of the Operating Partnership's Office and Retail Properties
are in the Dallas/Fort Worth, Texas and Houston, Texas metropolitan areas. As of
December 31, 1997, these Office and Retail Properties together represented
approximately 43% and 31%, respectively, of the Operating Partnership's total
net rentable square feet and accounted for approximately 44% and 27%,
respectively, of the Operating Partnership's office rental revenues for the year
ended December 31, 1997. As a result of the geographic concentration, the
operations of these properties could be adversely affected by a recession or
general economic downturn in the areas where these properties are located.
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.
F-9
<PAGE> 126
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Other Assets
Other assets consist principally of leasing costs and deferred financing
costs. Leasing costs are amortized on a straight-line basis over the terms of
the respective leases and unamortized lease costs are written off upon early
termination of lease agreements. Deferred financing costs are amortized on a
straight-line basis over the terms of the respective loans.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Derivative Financial Instruments and Fair Value of Financial Instruments
Crescent Equities has entered into a forward share purchase agreement with
Union Bank of Switzerland and a swap agreement with Merrill Lynch International
("derivative transactions") as further discussed in Note 9.
At December 31, 1997, no common shares of Crescent Equities were required
to be delivered pursuant to these derivative transactions.
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 Credit
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, 1997 and 1996.
Revenue Recognition
Office & Retail Properties
The Operating Partnership, as a lessor, has retained substantially all of
the risks and benefits of ownership of the Office and Retail Properties and
accounts for its leases as operating leases. Income on leases which include
scheduled increases in rental rates over 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
under the applicable lease provisions.
Hotel Properties
The Operating Partnership does not operate the Hotel Properties directly.
It has leased these Hotel Properties to subsidiaries of Crescent Operating, Inc.
("COI") pursuant to eight separate leases. The leases provide for the payment by
the lessee of the Hotel Property of (i) base rent, with periodic rent increases,
(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 is recognized on a
straight-line basis over the terms of the respective leases.
Behavioral Healthcare Facilities
The Operating Partnership has leased the Behavioral Healthcare Facilities
to Charter Behavioral Health Systems, LLC ("CBHS") under a triple-net lease. The
lease requires the payment of annual minimum rent in
F-10
<PAGE> 127
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the amount of approximately $41,700 for the period ending June 16, 1998,
increasing in each subsequent year during the 12-year term at a 5% compounded
annual rate. The Operating Partnership recognizes the rent on a straight-line
basis.
Income Taxes
No provision has been made for federal or state income taxes because each
partner's proportionate share of income or loss from the Operating Partnership
will be passed through on each partner's separate tax return.
Statements of Cash Flows
For purposes of the statements of cash flows, all highly liquid investments
purchased with an original maturity of 90 days or less are included in cash and
cash equivalents.
Supplemental Disclosure to Statements of Cash Flows
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid...................................... $78,980 $ 42,488 $18,224
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Mortgage notes assumed in property acquisitions.... $97,923 $142,799 $12,732
Minority interest -- joint venture capital......... -- 31,985 8,994
Issuance of limited partner interests in the
Operating Partnership in conjunction with
property acquisitions........................... 1,200 77,236 --
Issuance of restricted limited partner interests in
the Operating Partnership....................... 10 -- 455
</TABLE>
Adoption of New Accounting Pronouncements
In January 1996, the Operating Partnership adopted SFAS No. 123,
"Accounting and Disclosure of Stock-Based Compensation," which requires
disclosures based on the fair values of unit options at the date of grant. There
was no cumulative effect nor any impact on the Operating Partnership's financial
position as a result of the adoption. The Operating Partnership will continue to
measure compensation costs associated with the issue of unit options using the
guidance provided by the Accounting Principles Board's Opinion No. 25 ("APB No.
25"). Under APB No. 25, compensation costs related to unit options issued
pursuant to compensatory plans are measured based on the difference between the
quoted market price of the unit at the measurement date (originally the date of
grant) and the grant price and should be charged to expense over the periods
during which the grantee performs the related services. All unit options issued
to date by the Operating Partnership have grant prices equal to the market price
of the units at the dates of grant (See Note 8).
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components. This statement requires a separate statement to
report the components of comprehensive income for each period reported. The
provisions of this statement are effective for fiscal years beginning after
December 15, 1997. Management believes that the Operating Partnership
historically and currently does not have items that would require presentation
in a separate statement of comprehensive income.
In June 1997, the FASB also issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information," which establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and require that those enterprises report
selected information about operating segments in interim financial reports
issued to the partners. This
F-11
<PAGE> 128
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
statement is effective for financial statements for periods beginning after
December 15, 1997. The Operating Partnership will implement SFAS No. 131 for
fiscal year ended December 31, 1998.
3. INVESTMENT IN REAL ESTATE MORTGAGES AND EQUITY OF UNCONSOLIDATED COMPANIES:
The Operating Partnership reports its share of income and losses based on
its ownership interest in the respective equity investments. The following
summarized information for all unconsolidated companies has been presented on an
aggregated basis and classified under the captions "Residential Development
Corporations" and "Refrigerated Warehouses and Other," as applicable, as of
December 31, 1997.
<TABLE>
<CAPTION>
RESIDENTIAL REFRIGERATED
DEVELOPMENT WAREHOUSES
CORPORATIONS AND OTHER
------------ ------------
<S> <C> <C>
BALANCE SHEETS AT DECEMBER 31, 1997:
Real estate, net......................................... $190,778 $1,617,340
Cash..................................................... 44,263 36,818
Other assets............................................. 182,846 384,025
-------- ----------
Total Assets..................................... $417,887 $2,038,183
======== ==========
Notes payable............................................ $229,744 $ 902,449
Other liabilities........................................ 62,483 464,677
Equity................................................... 125,660 671,057
-------- ----------
Total Liabilities and Equity..................... $417,887 $2,038,183
======== ==========
Operating Partnership's investment in real estate
mortgages and equity of unconsolidated companies...... $317,950 $ 283,820
======== ==========
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1997
----------------------------
RESIDENTIAL REFRIGERATED
DEVELOPMENT WAREHOUSES
CORPORATIONS AND OTHER
------------ ------------
<S> <C> <C>
SUMMARY STATEMENTS OF OPERATIONS:
Total revenue............................................ $173,764 $103,796
Total expenses........................................... 151,090 90,995
-------- --------
Net Income............................................... $ 22,674 $ 12,801
======== ========
Operating Partnership's equity in net income of
unconsolidated companies.............................. $ 18,771 $ 4,972
======== ========
</TABLE>
4. OTHER ASSETS, NET:
Other assets, net consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Leasing Costs............................................... $ 56,740 $ 39,483
Deferred financing costs.................................... 26,088 13,956
Escrow deposits............................................. 5,810 210
Prepaid expenses............................................ 3,451 1,329
Other....................................................... 36,870 9,798
-------- --------
128,959 64,776
Less -- Accumulated Amortization............................ (29,861) (21,392)
-------- --------
$ 99,098 $ 43,384
======== ========
</TABLE>
F-12
<PAGE> 129
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. NOTES PAYABLE AND BORROWINGS UNDER CREDIT FACILITY:
Following is a summary of the Operating Partnership's debt financing:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- --------
<S> <C> <C>
Secured Debt
LaSalle Note I 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(1),
secured by the Funding I properties with a combined book
value of $305,163......................................... $ 239,000 $239,000
LaSalle Note II 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(2),
secured by the Funding II properties with a combined book
value of $305,761......................................... 161,000 161,000
LaSalle Note III due July 1999, bears interest at 30-day
LIBOR plus a weighted average rate of 2.135% (at December
31, 1997 the rate was 8.07% subject to a rate cap of 10%)
with a five-year interest-only term, secured by the
Funding III, IV and V properties with a combined book
value of $225,723......................................... 115,000 115,000
Chase Manhattan Note due September 2001, bears interest at
30-day LIBOR plus 175 basis points (at December 31, 1997
the rate was 7.44%), and requires payments of interest
only during its term, secured by Fountain Place Office
Property with a book value of $113,146.................... 97,123 --
CIGNA Note due December 2002, bears interest at 7.47% with a
seven-year interest-only term, secured by the MCI Tower
Office Property and Denver Marriott City Center Hotel
Property with a combined book value of $101,375........... 63,500 63,500
Metropolitan Life Note II due December 2002, bears interest
at 6.93% with monthly principal and interest payments
based on a 25-year amortization schedule, secured by
Energy Centre Office Property with a book value of
$75,204................................................... 45,000 --
Northwestern Note due January 2003, bears interest at 7.66%
with a seven-year interest-only term, secured by the 301
Congress Avenue Office Property with a book value of
$45,350................................................... 26,000 26,000
Metropolitan Life Note 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
$15,771................................................... 12,109 12,411
Nomura Funding VI Note bears interest at 10.07% with monthly
principal and interest payments based on a 25-year
amortization schedule through July 2020(3), secured by the
Funding VI property with a book value of $30,294.......... 8,692 8,780
</TABLE>
F-13
<PAGE> 130
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- --------
<S> <C> <C>
Short-term construction loan due September 1997, beared
interest at LIBOR plus 1.7%, secured by land and
improvements that relate to the construction of The
Avallon -- Phase II (Building 5).......................... -- 2,117
Rigney 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
owned by the Company located across from an Office
Property with a book value of $16,872..................... 800 --
Unsecured Debt
Line of Credit with BankBoston, N.A. ("BankBoston") ("Credit
Facility") (see description of Credit Facility below)..... 350,000 40,000
Short-term BankBoston Note II due August 1998, bears
interest at Eurodollar rate plus 120 basis points (at
December 31, 1997, the rate was 7.14%).................... 100,000 --
Short-term BankBoston Note due March 1998(4), bears interest
at Eurodollar rate plus 120 basis points (at December 31,
1997, the rate was 7.14%)................................. 91,900 --
2007 Notes bear interest at a fixed rate of 7.13% with a
ten-year interest-only term, due September 2007 (see
"Notes Offering" below for a description of changes in the
interest rate under specified circumstances).............. 250,000 --
2002 Notes bear interest at a fixed rate of 6.63% with a
five-year interest-only term, due September 2002 (see
"Notes Offering" below for a description of changes in the
interest rate under specified circumstances).............. 150,000 --
---------- --------
Total Notes Payable............................... $1,710,124 $667,808
========== ========
</TABLE>
- ---------------
(1) In August 2007, the interest rate increases, and the Operating Partnership
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 Operating Partnership's intention to repay
the note in full at such time (August 2007) by making a final payment of
approximately $220,000.
(2) In March 2006, the interest rate increases, and the Operating Partnership 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 Operating Partnership's intention to repay the note in
full at such time (March 2006) by making a final payment of approximately
$154,000.
(3) In July 1998, the Operating Partnership may defease the note by purchasing
Treasury obligations to pay the note without penalty. 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 Operating Partnership so elects, it may
repay the note without penalty.
(4) The Operating Partnership has a commitment with BankBoston to extend the
term to May 31, 1998, with the same interest rate.
F-14
<PAGE> 131
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Combined aggregate principal maturities of notes payable and borrowings
under the Credit Facility are as follows:
<TABLE>
<CAPTION>
YEAR
- ----
<S> <C>
1998..................................................... $ 193,038
1999..................................................... 116,223
2000..................................................... 351,322
2001..................................................... 109,149
2002..................................................... 215,619
Thereafter............................................... 724,773
----------
$1,710,124
==========
</TABLE>
Credit Facility
On September 22, 1997, the Credit Facility was increased to $450,000, and
subsequently increased to $550,000 on December 19, 1997, to enhance the
Operating Partnership's financial flexibility in making new real estate
investments. Concurrently with the September increase, the interest rate on
advances under the Credit Facility was decreased from the Eurodollar rate plus
137.5 basis points to the Eurodollar rate plus 120 basis points. The Credit
Facility is unsecured and expires in June 2000. The Credit Facility requires the
Operating Partnership to maintain compliance with a number of customary
financial and other covenants on an ongoing basis, including leverage ratios
based on book value and debt service coverage ratios, limitations on additional
secured and total indebtedness and distributions, and a minimum net worth
requirement. As of December 31, 1997, the Operating Partnership was in
compliance with all covenants. As of December 31, 1997, the interest rate was
7.14% and $200,000 was available under the Credit Facility.
Notes Offering
On September 22, 1997, the Operating Partnership completed a private
offering of unsecured notes in an aggregate principal amount of $400,000 (the
"Notes"). The Notes were issued in two series, the 6 5/8%, $150,000 notes with
maturity on September 15, 2002, yielding a 6.73% effective rate (the "2002
Notes") and the 7 1/8%, $250,000 notes with maturity on September 15, 2007,
yielding a 7.151% effective rate (the "2007 Notes"). The Notes pay interest
semiannually in arrears. The interest rates on the Notes are subject to
temporary increase by 50 basis points in the event that a registered offer to
exchange the Notes for notes of the Operating Partnership with terms identical
in all material respects to the Notes is not consummated or a shelf registration
statement with respect to the resale of the Notes is not declared effective by
the Securities and Exchange Commission (the "SEC") on or before March 21, 1998.
The interest rates on the Notes were temporarily increased by 50 basis points,
since the exchange offer was not completed by March 21, 1998. The Operating
Partnership anticipates that the interest rates will return to the original
rates during the second quarter of 1998. The interest rate on the Notes also is
subject to temporary or permanent increase by 37.5 basis points in the event
that, within the period from the date of original issuance of the Notes to the
first anniversary of original issuance, the Notes are assigned a rating that is
not an investment grade rating (as defined in the Notes) or are not assigned, or
do not retain, a rating by specified rating agencies. These adjustments may
apply simultaneously.
The Notes are redeemable, in whole or in part, at the option of the
Operating Partnership upon payment of principal, accrued and unpaid interest,
and the premium specified in the Notes. The Notes also contain certain
covenants, including limitations on the ability of the Operating Partnership and
its subsidiaries to incur additional debt, other than certain intercompany debt
that is subordinate to payment of the Notes, unless certain asset and income
tests are satisfied.
The net proceeds of the Notes offering were used to fund the approximately
$327,600 purchase price of Houston Center, to repay approximately $50,000 of
borrowings under the Credit Facility, to fund approximately $10,000 of the
purchase price of Miami Center, and to repay approximately $7,200 of short term
indebtedness.
F-15
<PAGE> 132
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. RENTALS UNDER OPERATING LEASES:
The Operating Partnership receives rental income from the leasing of Office
Property, Retail Property, Hotel Property and Behavioral Healthcare Facility
space under operating leases. Future minimum rentals (base rents) under
noncancelable operating leases over the next five years (excluding tenant
reimbursements of operating expenses for Office and Retail Properties) as of
December 31, 1997, are as follows:
<TABLE>
<CAPTION>
OFFICE AND BEHAVIORAL
RETAIL HEALTHCARE HOTEL COMBINED
PROPERTIES FACILITIES PROPERTIES PROPERTIES
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
1998............................... $ 359,587 $ 42,763 $ 31,636 $ 433,986
1999............................... 329,240 44,901 32,937 407,078
2000............................... 281,150 47,146 33,636 361,932
2001............................... 243,094 49,504 33,836 326,434
2002............................... 193,323 51,979 34,036 279,338
Thereafter......................... 668,892 406,910 127,893 1,203,695
---------- -------- -------- ----------
$2,075,286 $643,203 $293,974 $3,012,463
========== ======== ======== ==========
</TABLE>
Generally, the office and retail leases also require that tenants reimburse
the Operating Partnership for increases in operating expenses above operating
expenses during the base year of the tenants lease. These amounts totaled
$42,385, $20,859 and $8,267 for the years ended December 31, 1997, 1996 and
1995, 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.
The Operating Partnership recognized percentage lease revenue from the
Hotel Properties of approximately $9,678, $4,493 and $1,797 for the years ended
December 31, 1997, 1996, and 1995, respectively.
COI currently is the largest single lessee of the Operating Partnership in
terms of revenues under its leases. In 1997, total rental revenues from COI and
previous Hotel Properties lessees, who were acquired by COI in July 1997,
represented 14.9% of the Operating Partnership's total revenues. Subsidiaries of
COI are the lessees of each of the Hotel Properties and COI owns a 50% interest
in CBHS, which is the lessee of the Behavioral Healthcare Facilities, the
Operating Partnership's largest tenant in terms of base rental revenues. (See
Note 12 for a further discussion of the Behavioral Healthcare Facilities).
7. COMMITMENTS AND CONTINGENCIES:
Lease Commitments
The Operating Partnership has twelve properties located on land that is
subject to long-term ground leases which expire between 2001 and 2079. Ground
lease expense during each of the three years ended December 31, 1997, 1996, and
1995 was $1,247, $681, and $442, respectively. Future minimum lease payments due
under such ground leases as of December 31, 1997, are as follows:
<TABLE>
<CAPTION>
GROUND
LEASES
-------
<S> <C>
1998....................................................... $ 1,372
1999....................................................... 1,378
2000....................................................... 1,391
2001....................................................... 1,407
2002....................................................... 1,365
Thereafter................................................. 92,056
-------
$98,969
=======
</TABLE>
F-16
<PAGE> 133
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Contingencies
The Operating Partnership currently is not subject to any material legal
proceedings or claims nor, to management's knowledge, are any material legal
proceedings or claims currently threatened.
Environmental Matters
All of the Properties have been subjected to Phase I environmental audits.
Such audits have not revealed, nor is management aware of, any environmental
liability that management believes would have a material adverse impact on the
financial position or results of operations.
8. UNIT BASED COMPENSATION 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 Crescent Equities. 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, 1997, an aggregate of 7,610 units had been distributed under
the 1995 Unit Plan. The 1995 Unit Plan does not provide for the grant of unit
options. The 1996 Unit Plan provides for the grant of unit options to acquire up
to 2,000,000 units, all of which were granted to the Chief Executive Officer and
Vice Chairman of the Board of Crescent Equities in July 1996. The unit options
were priced at fair market value on the date of grant, vesting over seven years,
with a ten year term (pursuant to the terms of the unit options; because the
fair market value of Crescent Equities' common shares equaled or exceeded $25
for each of ten consecutive trading days, the vesting of 500,000 units was
accelerated and such units became immediately exercisable in 1996). 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.
A summary of the status of the Operating Partnership's 1996 Unit Plan as of
December 31, 1997 and 1996, 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
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
WTD. AVG. WTD. AVG.
SHARES EXERCISE SHARES EXERCISE
(000) PRICE (000) PRICE
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Outstanding as of January 1.................... 4,000 $18 -- $--
Granted........................................ -- -- 4,000 18
Exercised...................................... -- -- -- --
Forfeited...................................... -- -- -- --
Expired........................................ -- -- -- --
----- --- ----- ---
Outstanding/Wtd. Avg. as of December 31........ 4,000 $18 4,000 $18
----- --- ----- ---
Exercisable/Wtd. Avg. as of December 31........ 1,429 $18 1,000 $18
</TABLE>
Unit Plan
The Operating Partnership applies APB No. 25 in accounting for options
granted pursuant to the 1996 Unit Plan. Accordingly, no compensation cost has
been recognized for the Plan. Had compensation cost for the Plan been determined
based on the fair value at the grant dates for awards under the Plans consistent
with
F-17
<PAGE> 134
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SFAS No. 123, the Operating Partnership's net income would have been reduced to
the following pro forma amounts:
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net Income.............................. $133,590 $132,477 $44,870 $42,645
</TABLE>
Because SFAS No. 123 has not been applied to options granted prior to
January 1, 1995, the resulting program compensation cost may not be
representative of what is to be expected in future years.
In 1996, the weighted average fair value of the unit options granted was
$4.45. The fair value of each option is estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for the grant in 1996; risk free interest rates of 6.8%;
expected dividend yields of 6.2%; expected lives of 10 years; expected
volatility of 17.0%.
9. PARTNERS' CAPITAL
Common Share Offerings
On October 2, 1996, the Crescent Equities completed a public offering (the
"October 1996 Offering") of 23,000,000 common shares (including the
underwriters' overallotment option) at $20.1875 per share. Net proceeds from the
October 1996 Offering contributed to the Operating Partnership were
approximately $437,433. The Operating Partnership used a portion of these net
proceeds to repay $16,000 of short-term borrowings from BankBoston and $151,500
of borrowings under the Credit Facility. The remaining net proceeds of $269,933
were used to fund subsequent acquisitions. On October 9, 1996, Crescent Equities
completed an additional offering of 900,000 common shares to several
underwriters who participated in the October 1996 Offering. The common shares
were sold at $21 per share. The gross proceeds of $18,900 from the additional
offering were contributed to the Operating Partnership. The Operating
Partnership used these cash contributions to fund fourth quarter 1996
acquisitions.
On April 28, 1997, Crescent Equities completed an offering (the "April 1997
Offering") of 24,150,000 common shares (including the underwriters'
overallotment option) at $25.375 per share. Net proceeds from the April 1997
Offering were $580,584. On May 14, 1997, Crescent Equities completed an
additional offering of 500,000 common shares to several underwriters who
participated in the April 1997 Offering. The common shares were sold at $25.875
per share, totaling gross proceeds of approximately $12,938 (collectively, the
"Offerings").
In the second quarter of 1997, the Operating Partnership used the net
proceeds from the Offerings of $593,522 which were contributed to the Operating
Partnership $314,700 from borrowings under the Credit Facility and $160,000 of
short-term borrowings from BankBoston (i) to fund $30,000 in connection with the
formation and capitalization of COI; (ii) to repay the $150,000 BankBoston
short-term note payable; (iii) to reduce by $131,000 borrowings under the Credit
Facility; (iv) to fund $306,300 of the purchase price of the Carter-Crowley
Portfolio (as defined in Note 12) acquired by the Operating Partnership; (v) to
fund the $419.7 million commitment of the Operating Partnership and COI relating
to the acquisition of the Behavioral Healthcare Facilities; and (vi) to fund
$31,222 for working capital purposes.
On August 12, 1997, Crescent Equities entered into two transactions with
affiliates of Union Bank of Switzerland ("UBS"). In one transaction, pursuant to
which Crescent Equities obtained additional equity capital through the issuance
of common shares, Crescent Equities sold 4,700,000 common shares at $31.5625 per
share to UBS Securities, LLC for $148,300 ($145,000 of net proceeds) ("UBS
Offering"). The net proceeds from the UBS Offering were contributed to the
Operating Partnership and used to repay borrowings under the Credit Facility. In
the other transaction, which will permit Crescent Equities to benefit from any
increases in the market price of its common shares, Crescent Equities entered
into a forward share purchase agreement with Union Bank of Switzerland, London
Branch ("UBS-LB") which provides that Crescent Equities will purchase 4,700,000
common shares from UBS-LB within one year. The purchase price will be
F-18
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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
determined on the date Crescent Equities settles the agreement and will include
a forward accretion component, minus an adjustment for Crescent Equities
distribution rate. Crescent Equities may complete, at its option, the settlement
in cash or common shares.
On October 8, 1997, Crescent Equities completed an offering ("October 1997
Offering") of 10,000,000 common shares at $39.00 per share. Net proceeds to
Crescent Equities from the October 1997 Offering contributed to the Operating
Partnership were $368,500. The net proceeds were used to repay approximately
$323,500 of borrowings under the Credit Facility and to fund approximately
$45,000 of the purchase price of the U.S. Home Building.
On December 12, 1997, Crescent Equities entered into two transactions with
Merrill Lynch International. In one transaction, pursuant to which Crescent
Equities obtained additional equity capital through the issuance of common
shares, Crescent Equities sold 5,375,000 common shares at $38.125 per share to
Merrill Lynch International for $204,900 ($199,900 in net proceeds) (the
"Merrill Lynch Offering"). The net proceeds to Crescent Equities from the
Merrill Lynch Offering were contributed to the Operating Partnership and used to
repay borrowings under the Credit Facility. In the other transaction, which will
permit Crescent Equities to benefit from any increases in the market price of
its common shares, Crescent Equities entered into a swap agreement (the "Swap
Agreement") with Merrill Lynch International relating to 5,375,000 common shares
(the "Settlement Shares"), pursuant to which Merrill Lynch International will
sell, as directed by Crescent Equities on or before December 12, 1998, a
sufficient number of common shares to achieve net sales proceeds equal to the
market value of the Settlement Shares on December 12, 1997, plus a forward
accretion component, minus an adjustment for Crescent Equities distribution
rate. The precise number of common shares that will be required to be sold
pursuant to the Swap Agreement will depend primarily on the market price of the
common shares at the time of settlement. The common shares required to be sold
by Merrill Lynch International pursuant to the Swap Agreement are expected to be
the same common shares initially issued by Crescent Equities (although Merrill
Lynch International, at its option, may substitute other common shares that it
holds). If however, as a result of a decrease in the market price of the common
shares, the number of common shares required to be sold is greater than the
number of Settlement Shares, Crescent Equities will deliver additional common
shares to Merrill Lynch International. In contrast, if such number of common
shares is less than the number of Settlement Shares as a result of an increase
in the market price of the common shares, Merrill Lynch International will
deliver common shares or, at the option of Crescent Equities, cash to Crescent
Equities. On February 20, 1998, Crescent Equities issued an additional 525,000
common shares to Merrill Lynch International as a result of the decline in
market price of the common share price from the date of issuance on December 12,
1997 through February 12, 1998.
Distributions
The distributions paid during the years ended December 31, 1997 and 1996
was $140,801 and $73,367, respectively.
10. FORMATION AND CAPITALIZATION OF COI
In April 1997, the Operating Partnership established a new Delaware
corporation, COI. All of the outstanding common stock of COI, valued at $.99 per
share, was distributed, effective June 12, 1997, to those persons who were
partners of the Operating Partnership or shareholders of Crescent Equities on
May 30, 1997, in a spin-off.
COI was formed to become a lessee and operator of various assets to be
acquired by the Operating Partnership and to perform the Intercompany Agreement
between COI and the Operating Partnership, pursuant to which each has agreed to
provide the other with rights to participate in certain transactions. As a
result of the formation of COI and the execution of the Intercompany Agreement,
persons who own equity interests in both COI and the Operating Partnership have
the opportunity to participate in the benefits of both the real estate
investments of the Operating Partnership (including ownership of real estate
assets) and the
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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
lease of certain of such assets and the ownership of other non-real estate
assets by COI. The certificate of incorporation, as amended and restated, of COI
generally prohibits COI for so long as the Intercompany Agreement remains in
effect, from engaging in activities or making investments that a REIT could
make, unless the Operating Partnership was first given the opportunity but
elected not to pursue such activities or investments.
In connection with the formation and capitalization of COI, the Operating
Partnership provided to COI approximately $50,000 in the form of cash
contributions and loans to be used by COI to acquire certain assets described in
Note 12. The Operating Partnership also made available to COI a line of credit
in the amount of $20,400 to be used by COI to fulfill certain ongoing
obligations associated with these assets. As of December 31, 1997, COI had
$13,725 and $25,980 outstanding under the line of credit and term loan,
respectively, with the Operating Partnership.
11. EXTRAORDINARY ITEMS:
In April 1996, the Operating Partnership canceled its $150,000 credit
facility led by BankBoston. At that time the Operating Partnership had no
outstanding borrowings under the credit facility. In connection with the
cancellation of the credit facility, the Operating Partnership recognized an
extraordinary loss of $1,306, net of minority interests, resulting from the
write-off of unamortized deferred financing costs.
12. ACQUISITIONS:
During 1997, the Operating Partnership acquired the following Properties
from unrelated third parties (certain of the Properties are owned in fee simple
or pursuant to a lessee's interest under a ground lease). The Operating
Partnership funded these acquisitions through cash proceeds received from
Crescent Equities offerings of common shares, the Notes Offering, borrowings
under the Credit Facility, debt assumption, and issuance of limited partner
interests in the Operating Partnership.
<TABLE>
<CAPTION>
NET
COMPANY'S RENTABLE
ACQ. EFFECTIVE ACQ. AREA
PROPERTY NAME DATE CITY, STATE OWNERSHIP % PRICE ROOMS (IN SQ. FT.)
------------- -------- ----------- ----------- -------- ----- ------------
<S> <C> <C> <C> <C> <C> <C>
Greenway II 1/15/97 Dallas, TX 100 $ 18,225 -- 154,329
Denver Properties 2/28/97 Denver, CO 100 42,675 -- 445,931
Trammell Crow Center 2/28/97 Dallas, TX 100 162,000 -- 1,128,331
Carter-Crowley Office
Portfolio 5/9/97 Dallas, TX 100 192,286 -- 3,020,100
Houston Center Office
and Retail 9/22/97 Houston, TX 100 250,100 -- 2,764,418
Four Seasons Hotel 9/22/97 Houston, TX 100 50,000 399 --
Miami Center 9/30/97 Miami, FL 100 131,450 -- 782,686
U.S. Home Building 10/15/97 Houston, TX 100 45,000 -- 399,777
Bank One Center 10/22/97 Dallas, TX 50 119,000 -- 1,530,957
Fountain Place 11/7/97 Dallas, TX 100 114,000 -- 1,200,266
Ventana Country Inn 12/19/97 Big Sur, CA 100 30,000 62 --
Energy Centre 12/22/97 New Orleans, LA 100 75,000 -- 761,500
</TABLE>
In addition to property acquisitions, the following represents transactions
closed in 1997.
Carter-Crowley Portfolio. On February 10, 1997, the Operating Partnership
entered into a contract to acquire for approximately $383,300, substantially all
of the assets (the "Carter-Crowley Portfolio") of Carter-Crowley Properties,
Inc. ("Carter-Crowley"), an unaffiliated company controlled by the family of
Donald J. Carter. At the time the contract was executed, the Carter-Crowley
Portfolio included 14 office buildings (the "Carter-Crowley Office Portfolio"),
with an aggregate of approximately 3.0 million net rentable square feet,
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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
approximately 1,216 acres of commercially zoned, undeveloped land located in the
Dallas/Fort Worth metropolitan area, two multi-family residential properties
located in the Dallas/Fort Worth metropolitan area, marketable securities, an
approximately 12% limited partner interest in the limited partnership that owns
the Dallas Mavericks NBA basketball franchise, secured and unsecured promissory
notes, certain direct non-operating working interests in various oil and gas
wells, an approximately 35% limited partner interest in two oil and gas limited
partnerships, and certain other assets (including operating businesses).
Pursuant to an agreement between Carter-Crowley and the Operating Partnership,
Carter-Crowley liquidated approximately $51,000 of such assets originally
included in the Carter-Crowley Portfolio, consisting primarily of the marketable
securities and the oil and gas investments, resulting in a reduction in the
total purchase price by a corresponding amount to approximately $332,300. On May
9, 1997, the Operating Partnership and COI acquired the Carter-Crowley
Portfolio.
The Operating Partnership acquired certain assets from the Carter-Crowley
Portfolio, with an aggregate purchase price of approximately $306,300,
consisting primarily of the Carter-Crowley Office Portfolio, the two
multi-family residential properties, the approximately 1,216 acres of
undeveloped land and the secured and unsecured promissory notes relating
primarily to the Dallas Mavericks. In addition to the promissory notes relating
to the Dallas Mavericks, the Operating Partnership obtained rights from the
current holders of the majority interest in the Dallas Mavericks to a contingent
$10,000 payment after a new arena is constructed within a 75-mile radius of
Dallas, as well as rights to participate in the ownership and development of the
new arena, certain land located adjacent to the arena and proposed commercial
properties to be developed on the adjacent land. On December 10, 1997, the City
of Dallas and the "Arena Group" (which consists of four corporations, one of
which is to be owned almost entirely by the Operating Partnership) entered into
the Arena Master Agreement for the construction and operation of a new arena
located adjacent to the Dallas CBD submarket. The taxpayers of Dallas have
subsequently approved a bond package which included the funding of the City's
portion of the new arena costs. Construction of the new arena is expected to
commence prior to the end of 1998.
COI purchased the remainder of the Carter-Crowley Portfolio utilizing cash
contributions and loan proceeds provided to COI by the Operating Partnership.
These assets, which have an allocated cost of approximately $26,000, consisted
primarily of the approximately 12% limited partner interest in the limited
partnership that owns the Dallas Mavericks, an approximately 1% interest in a
private venture capital fund, and a 100% interest in a construction equipment
sale, leasing and services company.
On June 11, 1997, DBL Holdings, Inc. ("DBL"), a wholly owned subsidiary of
the Operating Partnership was formed. In connection with the formation of DBL,
the Operating Partnership acquired all the voting and non-voting common stock of
DBL, for an aggregate purchase price of approximately $2,500 and loaned to DBL
approximately $10,100. The voting common stock which represented a 5% effective
interest in DBL, was subsequently sold to Gerald W. Haddock, the President and
Chief Executive Officer of Crescent Equities and COI, and Sole Director of CREE,
Ltd. and John C. Goff, the Vice Chairman of Crescent Equities and COI, for its
aggregate original cost of $126. On June 11, 1997, DBL acquired from COI for
approximately $12,550, the limited partner interest in the partnership that owns
the Dallas Mavericks.
Woodlands Transaction. On July 31, 1997, the Operating Partnership and
certain Morgan Stanley funds (the "Morgan Stanley Group") acquired The Woodlands
Corporation, a subsidiary of Mitchell Energy & Development Corp., for
approximately $543,000. In connection with the acquisition, the Operating
Partnership and the Morgan Stanley Group made equity investments of
approximately $80,000 and $109,000, respectively. The Operating Partnership's
contribution was funded through a $235,000 short-term loan from BankBoston. The
remaining approximately $354,000 and associated acquisition and financing costs
of approximately $15,000 were financed by the two limited partnerships,
described below, through which the investment was made. The Woodlands
Corporation was the principal owner, developer and operator of The Woodlands, an
approximately 27,000-acre, master-planned residential and commercial community
located 27
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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
miles north of downtown Houston, Texas. The Woodlands, which is approximately
50% developed, includes a shopping mall, retail centers, office buildings, a
hospital, club facilities, a community college, a performance pavilion, and
numerous other amenities.
The acquisition was made through The Woodlands Commercial Properties
Operating Partnership, L.P. ("Woodlands-CPC"), a limited partnership in which
the Morgan Stanley Group holds a 57.5% interest and the Operating Partnership
holds a 42.5% interest, and the Woodlands Land Development Operating
Partnership, L.P. ("Woodlands-LDC"), a limited partnership in which the Morgan
Stanley Group holds a 57.5% interest and a newly formed Residential Development
Corporation, The Woodlands Land Operating Partnership, Inc. ("WLC"), holds a
42.5% interest. The Operating Partnership owns all of the non-voting common
stock, representing a 95% economic interest in WLC and, effective September 29,
1997, COI acquired all of the voting common stock, representing a 5% economic
interest, in WLC. The Operating Partnership is the managing general partner of
Woodlands-CPC and WLC is the managing general partner of Woodlands-LDC.
In connection with the acquisition, Woodlands-CPC acquired The Woodlands
Corporation's 25% general partner interest in the partnerships that own
approximately 1.2 million square feet of The Woodlands Office and Retail
Properties. The Operating Partnership previously held a 75% limited partner
interest in each of these partnerships and, as a result of the acquisition, the
Operating Partnership's indirect economic interest in these Properties increased
to approximately 85%. The other assets acquired by Woodlands-CPC include a
364-room executive conference center, a private golf and tennis club, and
approximately 400 acres of land that will support commercial development of more
than 3.5 million square feet of office, multi-family, industrial, retail and
lodging properties. In addition, Woodlands-CPC acquired The Woodlands
Corporation's general partner interests, ranging from one to 50%, in additional
office and retail properties and in multi-family and light industrial
properties. Woodlands-LDC acquired approximately 6,400 acres of land that will
support development of more than 20,000 lots for single-family homes and
approximately 2,500 acres of land that will support more than 21.5 million net
rentable square feet of commercial development. The executive conference center,
including the golf and tennis club and golf courses, is operated and leased by a
wholly owned subsidiary of a partnership owned 42.5% by a subsidiary of COI and
57.5% by the Morgan Stanley Group.
Desert Mountain. On August 29, 1997, the Operating Partnership acquired,
through a newly formed Residential Development Corporation, Desert Mountain
Development Corporation ("DMDC"), the majority economic interest in Desert
Mountain Properties Limited Partnership ("DMPLP"), the partnership that owns
Desert Mountain, a master-planned, luxury residential and recreational community
in northern Scottsdale, Arizona. Desert Mountain is an 8,300-acre property that
is zoned for the development of approximately 4,500 residential lots,
approximately 1,539 of which have been sold. Desert Mountain also includes The
Desert Mountain Club, a private golf, tennis and fitness club serving over 1,600
members. The partnership interest was acquired from a subsidiary of Mobil Land
Development Corporation for approximately $214,000, which was funded through a
$200,000 loan from BankBoston and a draw under the Credit Facility. The sole
limited partner of DMPLP is Sonora Partners Limited Partnership ("Sonora") whose
principal owner is the original developer of Desert Mountain. A portion of
Sonora's interest in DMPLP is exchangeable for common shares of Crescent
Equities. Sonora currently owns a 7% economic interest in DMPLP, and DMDC, which
is the sole general partner of DMPLP, owns the remaining 93% economic interest.
The Operating Partnership owns all of the non-voting common stock, representing
a 95% economic interest, and, effective September 29, 1997, COI acquired all of
the voting common stock, representing a 5% economic interest, in DMDC. The
Operating Partnership also holds a residential development property mortgage on
Desert Mountain, which is accounted for as an acquisition, development and
construction loan. This loan is treated as an investment and is included in the
balance sheet caption of "Investments in real estate mortgages and equity of
unconsolidated companies."
F-22
<PAGE> 139
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Americold Corporation and URS Logistics, Inc. On October 31, 1997, the
Operating Partnership , through two newly formed subsidiaries (the "Crescent
Subsidiaries"), initially acquired a 40% interest in each of two partnerships,
one of which owns Americold Corporation ("Americold") and one of which owns URS
Logistics, Inc.("URS"). Vornado Realty Trust ("Vornado") acquired the remaining
60% interest in the partnerships. Americold and URS are the two largest
suppliers of refrigerated warehouse space in the United States.
One of the partnerships acquired all of the common stock of Americold
through the merger of a subsidiary of Vornado into Americold, and the other
partnership acquired all of the common stock of URS through the merger of a
separate subsidiary of Vornado into URS. As a result of the acquisition, the
Americold partnership and the URS partnership became the owners and operators of
approximately 80 refrigerated warehouses, with an aggregate of approximately 394
million cubic feet, that are operated pursuant to arrangements with national
food suppliers.
The aggregate purchase price for the acquisition of Americold and URS was
approximately $1,044,000 (including transaction costs associated with the
acquisition). Of this amount, the purchase price for the acquisition of
Americold was approximately $645,000 (consisting of approximately $112,000 in
cash for the purchase of the equity, approximately $151,000 in cash for the
repayment of certain outstanding bonds issued by Americold, approximately
$372,000 in retention of debt and approximately $10,000 in transaction costs),
and the purchase price for the acquisition of URS was approximately $399,000
(consisting of approximately $173,000 in cash for the purchase of the equity,
approximately $211,000 in retention of debt and approximately $15,000 in
transaction costs.)
On December 30, 1997 and effective October 31, 1997, the Operating
Partnership sold all of the voting common stock, representing a 5% economic
interest, in each of the Crescent Subsidiaries to COI. As a result, the
Operating Partnership currently owns a 38% interest in each of the Americold
partnership and URS partnership, through its ownership of all of the nonvoting
common stock, representing a 95% economic interest, in each of the Crescent
Subsidiaries.
Under the terms of the existing partnership agreements for each of the
partnerships, Vornado has the right to make all decisions relating to the
management and operation of the partnerships other than certain major decisions
that require the approval of both the Operating Partnership and Vornado. The
partnership agreement for each of the partnerships provides for a buy-sell
arrangement upon a failure of the Operating Partnership and Vornado to agree on
any of the specified major decisions which, until November 1, 2000, can be
exercised only by Vornado.
The parties have not yet determined certain matters relating to the future
ownership structure and operations of Americold and URS, including the
identification and division of the assets that will continue to be owned by one
of the partnerships and those that may be owned by one or more other entities
formed to conduct the business operations currently conducted by Americold and
URS, and the nature and terms of any lease that may be entered into between the
operating entity and the owner of the warehouses.
Significant Transactions
Behavioral Healthcare Facilities. On June 17, 1997, the Operating
Partnership acquired substantially all of the real estate assets of the domestic
hospital provider business of Magellan Health Services, Inc. ("Magellan"), as
previously owned and operated by a wholly owned subsidiary of Magellan. The
transaction involved various components, certain of which related to the
Operating Partnership and certain of which related to COI.
The total purchase price of the assets acquired in the Magellan transaction
was approximately $419,700. Of this amount, the Operating Partnership paid
approximately $387,200 for the acquisition of the 90 Behavioral Healthcare
Facilities (and two additional behavioral healthcare facilities, which
subsequently were sold)
F-23
<PAGE> 140
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
and $12,500 for the acquisition of warrants to purchase 1,283,311 shares of
common stock of Magellan. COI paid $5,000 for its interest in CBHS, $12,500 for
the acquisition of warrants to purchase 1,283,311 shares of common stock of
Magellan and $2,500 to CBHS after the closing in satisfaction of certain
obligations to make additional capital contributions. CBHS is owned 50% by COI
and 50% by a wholly owned subsidiary of Magellan, subject to potential dilution
of each by up to 5% in connection with future incentive compensation of
management of CBHS.
The principal component of the transaction was the Operating Partnership's
acquisition of the Behavioral Healthcare Facilities, which are leased to CBHS,
and the subsidiaries of CBHS, under a triple-net lease. The lease requires the
payment of annual minimum rent in the amount of $41,700, increasing in each
subsequent year during the 12-year term at a 5% compounded annual rate. The
lease provides for four, five-year renewal options. All maintenance and capital
improvement costs are the responsibility of CBHS during the term of the lease.
In addition, CBHS is required to pay annually an additional $20,000 under the
lease, at least $10,000 of which must be used, as directed by CBHS, for capital
expenditures each year and up to $10,000 of which may be used, if requested by
CBHS, to cover capital expenditures, property taxes, insurance premiums, and
franchise fees. CBHS' failure to pay the additional rent is not a default under
the lease unless the Operating Partnership has incurred unreimbursed capital
expenditures, property taxes, insurance premiums or franchise fees.
Pro Forma Operating Results
The pro forma financial information for the years ended December 31, 1997
and 1996 assumes completion, in each case as of January 1, 1996, of (i) the 1996
and 1997 common share Offerings; (ii) the September 1997 Notes Offering; (iii)
the 1996, 1997 and 1998 acquisitions and pending investment (see Note 13); and
(iv) the February 1998 Preferred Offering (defined in Note 13).
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------
1997 1996
-------- --------
(UNAUDITED)
<S> <C> <C>
Total revenue............................................... $784,461 $716,714
Operating income............................................ 140,715 90,710
Income before minority interests and extraordinary item..... 175,048 104,730
Net income available to partners'................. 152,869 80,371
</TABLE>
The pro forma and operating results combine the Operating Partnership's
historical operating results with the historical incremental rental income and
operating expenses including an adjustment for depreciation based on the
acquisition price associated with the Office and Retail Property acquisitions.
Pro forma adjustments primarily represent the following: (i) rental income to
the Operating Partnership from the hotels acquired during 1998, 1997, and 1996
based on the lease payments (base rent and percentage rent, if applicable) from
the hotel lessees by applying the rent provisions, (as set forth in the lease
agreements) to historical revenues of the hotel property; (ii) rental income
based on the lease payment from CBHS to the Operating Partnership by applying
the base rent provisions as set forth in the lease agreement; (iii) calculated
an estimated lease payment using the historical operating results of the
casino/hotel properties (the historical operations do not represent stabilized
casino/hotel operations, as two casino/hotel properties commenced operations in
1997), (iv) adjustment for depreciation expense for Hotel Properties, Behavioral
Healthcare Facilities and casino/hotel properties; (v) adjustment for equity in
net income for the Woodlands, Desert Mountain and Refrigerated Warehouse
transactions; (vi) interest income for the notes acquired in the Carter-Crowley
transaction, the loans to COI and loans to DMPLP; and (vii) interest costs
assuming the borrowings to finance acquisitions and assumption of debt for
investments.
F-24
<PAGE> 141
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
These pro forma amounts are not necessarily indicative of what the actual
financial position of the Operating Partnership would have been assuming the
above property acquisitions had been consummated as of the beginning of the
period, nor do they purport to represent the future financial position of the
Operating Partnership.
13. SUBSEQUENT EVENTS (THROUGH MARCH 25, 1998, UNAUDITED):
Pending Investment -- Station Casinos, Inc. On January 16, 1998, the
Operating Partnership entered into an agreement and plan of merger (the "Merger
Agreement") pursuant to which Station Casinos, Inc. ("Station") will merge (the
"Merger") with and into the Operating Partnership. Station is an established
multi-jurisdictional casino/hotel company that owns and operates, through wholly
owned subsidiaries, six distinctly themed casino/hotel properties, four of which
are located in Las Vegas, Nevada, one of which is located in Kansas City,
Missouri and one of which is located in St. Charles, Missouri. As a result of
the Merger, the Operating Partnership will acquire the real estate and other
assets of Station, except to the extent operating assets are transferred
immediately prior to the Merger, as described below.
As part of the transactions associated with the Merger, it is currently
anticipated that certain operating assets and the employees of Station will be
transferred to a limited liability company (the "Station Lessee") immediately
prior to the Merger. The Station Lessee will be owned 50% by COI or another
entity designated established by the Operating Partnership, 24.9% by an entity
owned by three of the existing directors of Station (including its Chairman,
President and Chief Executive Officer) and 25.1% by a separate entity owned by
other members of Station management. The Station Lessee will operate the six
casino/hotel properties currently operated by Station pursuant to a lease with
the Operating Partnership. The lease will have a 10-year term, with one
five-year renewal option. The lease will provide for base and percentage rent
but the amount of the rent has not yet been determined. The Station Lessee will
be required to maintain the properties in good condition at its own expense. The
Operating Partnership will establish and maintain a reserve account to be used
under certain circumstances for the purchase of furniture, fixtures and
equipment with respect to the properties. The Operating Partnership will also
enter into a Right of First Refusal and Noncompetition Agreement with the
Station Lessee, pursuant to which each party will grant certain rights to the
other party to participate in future investment in and operation of casino/hotel
properties and will agree not to invest in or operate any such properties
without the participation or consent of the other party.
In order to effect the Merger, Crescent Equities will issue 0.466 common
shares for each share of common stock of Station (including each restricted
share) that is issued and outstanding immediately prior to the Merger. In
addition, Crescent Equities will create a new class of preferred shares which
will be exchanged, upon consummation of the Merger, for the shares of $3.50
Convertible Preferred Stock of Station outstanding immediately prior to the
Merger. The new class of preferred shares will have equal priority with the
Crescent Equities Series A preferred shares as to rights to receive
distributions and to participate in distributions or payments upon any
liquidation, dissolution or winding up of the Crescent Equities.
The total value of the Merger transaction, including Crescent Equities
issuance of common shares and preferred shares in connection with consummation
of the Merger and the Operating Partnership's assumption and/or refinancing of
approximately $919,000 in existing indebtedness of Station and its subsidiaries,
is approximately $1,750,000.
In connection with the Merger, the Operating Partnership also has agreed to
purchase up to $115,000 of a new class of convertible preferred stock of Station
prior to consummation of the Merger. The purchase will be made in increments, or
in a single transaction, upon call by Station subject to certain conditions,
whether or not the Merger is consummated.
Consummation of the Merger is subject to various conditions, including
Station's receipt of the approval of two-thirds of the holders of both its
common stock and its preferred stock, expiration or termination of the
F-25
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CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1974,
and the receipt by Crescent Equities and certain of its officers, trust managers
and affiliates of the approvals required under applicable gaming laws. The
Operating Partnership anticipates that the Merger and the associated
transactions will be consummated in the fourth quarter of 1998, although there
can be no assurances that the Merger will be consummated on the terms described
above.
Austin Centre. On January 23, 1998, the Operating Partnership acquired
Austin Centre, a mixed-use property including a Class A office building
containing approximately 344,000 net rentable square feet and the Omni Austin
Hotel Property consisting of 314 rooms and 61 apartments, located in the CBD
submarket of Austin, Texas. The purchase price was approximately $96,400 which
was funded through a draw under the Credit Facility. A subsidiary of COI will
oversee the marketing and operations of the Omni Austin Hotel Property pursuant
to a participating triple-net lease with the Operating Partnership.
Post Oak Central. On February 13, 1998 the Operating Partnership acquired
Post Oak Central, a three-building Class A office complex containing
approximately 1,278,000 net rentable square feet, located in the West
Loop/Galleria suburban office submarket of Houston, Texas. The purchase price
was approximately $155,250, of which $100,000 was funded through borrowings
under the Operating Partnership's $250,000 short-term loan provided by
BankBoston and $55,250 through a draw under the Credit Facility.
Preferred Offering. On February 19, 1998, Crescent Equities completed an
offering (the "February 1998 Preferred Offering") of 8,000,000 shares of 6 3/4%
Series A convertible cumulative preferred shares (the "Series A Preferred
Shares") with a liquidation preference of $25 per share. 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 Equities 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.
Net proceeds from the February 1998 Preferred Offering contributed to Operating
Partnership were approximately $191,250. The net proceeds from the February 1998
Preferred Offering were used to repay borrowings under the Credit Facility.
Washington Harbour. On February 25, 1998, the Operating Partnership
acquired Washington Harbour, a Class A Office complex, consisting of a
five-story and an eight-story office building (the top three stories of which
contain 35 luxury condominiums, which were not included in the purchase),
located in the Georgetown submarket of Washington, D.C. The two Office
Properties contain approximately 536,000 net rentable square feet. The purchase
price was approximately $161,000, which was funded through a draw under the
Credit Facility.
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
<TABLE>
<CAPTION>
1997
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues..................................... $80,930 $99,129 $120,057 $147,257
Income before minority interests............. 20,245 29,186 34,835 50,758
Minority interests........................... (416) (386) (390) (242)
Net income................................... 19,829 28,800 34,445 50,516
</TABLE>
F-26
<PAGE> 143
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1996
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues..................................... $43,060 $44,999 $ 49,368 $ 71,434
Income before minority interests and
extraordinary item......................... 8,563 9,655 8,517 21,216
Minority interests........................... -- (320) (635) (527)
Extraordinary item........................... -- (1,599) -- --
Net income................................... 8,563 7,736 7,882 20,689
</TABLE>
F-27
<PAGE> 144
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Magellan Health Services, Inc:
We have audited the accompanying combined balance sheets of the Provider
Segment (the "Company") of Magellan Health Services, Inc., a Delaware
corporation, as of September 30, 1995 and 1996, and the related combined
statements of operations, changes in stockholder's deficit and cash flows for
each of the three years in the period ended September 30, 1996. These combined
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 Provider Segment of
Magellan Health Services, Inc. as of September 30, 1995 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1996 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
November 7, 1996
F-28
<PAGE> 145
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------- MARCH 31,
1995 1996 1997
--------- --------- -----------
(AUDITED) (AUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current Assets:
Cash, including cash equivalents of $60,234 in 1995
and $20,999 in 1996 at cost which approximates
market value....................................... $ 103,735 $ 71,822 66,151
Accounts receivable, less allowance for doubtful
accounts of $47,851 in 1995 and $48,299 in 1996.... 170,728 148,805 145,296
Supplies.............................................. 5,768 4,753 4,465
Other current assets.................................. 13,064 20,120 20,074
--------- --------- ---------
Total Current Assets.......................... 293,295 245,500 235,986
Assets restricted for settlement of unpaid claims and
other
long-term liabilities................................. 94,138 105,303 96,402
Property and Equipment:
Land.................................................. 88,019 83,431 82,705
Buildings and improvements............................ 377,169 388,821 393,812
Equipment............................................. 107,681 122,927 126,549
--------- --------- ---------
572,869 595,179 603,066
Accumulated depreciation.............................. (89,046) (118,937) (132,806)
--------- --------- ---------
483,823 476,242 470,260
Construction in progress.............................. 2,902 1,879 2,573
--------- --------- ---------
Total Property and Equipment.................. 486,725 478,121 472,833
Other Long-Term Assets.................................. 36,846 34,923 28,859
Goodwill, net of accumulated amortization of $944 in
1995 and $1,147 in 1996............................... 18,208 18,800 18,373
Other Intangible Assets, net of accumulated amortization
of $1,362 in 1995 and $2,958 in 1996.................. 5,394 6,258 6,370
--------- --------- ---------
$ 934,606 $ 888,905 $ 858,823
========= ========= =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current Liabilities:
Accounts payable...................................... $ 69,726 $ 61,685 $ 56,154
Accrued liabilities................................... 116,380 117,214 88,714
Current maturities of long-term debt and capital lease
obligations........................................ 2,799 2,751 2,845
--------- --------- ---------
Total Current Liabilities..................... 188,905 181,650 147,713
Long-Term Debt and Capital Lease Obligations............ 77,111 73,620 72,380
Reserve for Unpaid Claims............................... 100,125 73,040 62,316
Deferred Credits and Other Long-Term Liabilities........ 34,455 36,506 20,925
Minority Interest....................................... 7,486 21,421 21,947
Due to Parent........................................... 666,349 619,556 637,555
Commitments and Contingencies Stockholder's Deficit:
Accumulated deficit................................... (139,003) (114,906) (101,065)
Cumulative foreign currency adjustments............... (822) (1,982) (2,948)
--------- --------- ---------
(139,825) (116,888) (104,013)
--------- --------- ---------
$ 934,606 $ 888,905 $ 858,823
========= ========= =========
</TABLE>
The accompanying Notes to Combined Financial Statements are an integral part of
these balance sheets.
F-29
<PAGE> 146
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
----------------------------------- -------------------------
1994 1995 1996 1996 1997
--------- ---------- ---------- ----------- -----------
(AUDITED) (AUDITED) (AUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue............................ $904,646 $1,106,975 $1,044,345 $538,119 $479,289
-------- ---------- ---------- -------- --------
Costs and expenses Salaries, supplies
and other operating expenses......... 661,436 825,468 800,912 406,471 372,201
Bad debt expense..................... 70,623 91,652 79,930 41,381 35,055
Depreciation and amortization........ 28,354 36,029 37,108 18,720 18,566
Amortization of reorganization
value in excess of amounts
allocable to identifiable
assets.......................... 31,200 26,000 -- -- --
Interest, unaffiliated............... 6,364 5,421 5,492 2,872 2,483
Allocated interest, net from
Parent............................ 33,030 48,756 42,123 19,115 24,321
ESOP expense......................... 49,197 73,527 -- -- --
Stock option expense (credit)........ 10,614 (467) 914 1,414 1,433
Unusual items........................ 71,287 57,437 37,271 -- 1,395
-------- ---------- ---------- -------- --------
962,105 1,163,823 1,003,750 489,973 455,454
-------- ---------- ---------- -------- --------
Income (loss) before income taxes and
minority interest.................... (57,459) (56,848) 40,595 48,146 23,835
Provision for (benefit from) income
taxes................................ (10,504) (12,934) 14,883 18,920 8,886
-------- ---------- ---------- -------- --------
Income (loss) before minority
interest............................. (46,955) (43,914) 25,712 29,226 14,949
Minority interest...................... 48 340 1,615 1,476 1,108
-------- ---------- ---------- -------- --------
Net income (loss)...................... $(47,003) $ (44,254) $ 24,097 $ 27,750 $ 13,841
======== ========== ========== ======== ========
</TABLE>
The accompanying Notes to Combined Financial Statements are an integral part of
these statements.
F-30
<PAGE> 147
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
--------------------------------- -------------------------
1994 1995 1996 1996 1997
--------- --------- --------- ----------- -----------
(AUDITED) (AUDITED) (AUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Accumulated Deficit:
Balance, beginning of period.......... $(47,746) $ (94,749) $(139,003) $(139,003) $(114,906)
Net income (loss)..................... (47,003) (44,254) 24,097 27,750 13,841
-------- --------- --------- --------- ---------
Balance, end of period................ (94,749) (139,003) (114,906) (111,253) (101,065)
-------- --------- --------- --------- ---------
Cumulative Foreign Currency Adjustments:
Balance, beginning of period.......... (4,660) (2,454) (822) (822) (1,982)
Foreign currency translation gain
(loss)............................. 2,206 1,632 (1,160) (1,045) (966)
-------- --------- --------- --------- ---------
Balance, end of period................ (2,454) (822) (1,982) (1,867) (2,948)
-------- --------- --------- --------- ---------
Total Stockholder's Deficit............. $(97,203) $(139,825) $(116,888) $(113,120) $(104,013)
======== ========= ========= ========= =========
</TABLE>
The accompanying Notes to Combined Financial Statements are an integral part of
these statements.
F-31
<PAGE> 148
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
--------------------------------- -------------------------
1994 1995 1996 1996 1997
--------- --------- --------- ----------- -----------
(AUDITED) (AUDITED) (AUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net income (loss)..................................... $ (47,003) $ (44,254) $ 24,097 $ 27,750 $ 13,841
--------- --------- -------- -------- --------
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Gain on sale of assets........................... -- (2,961) (1,697) (138) (3,302)
Depreciation and amortization.................... 59,554 62,029 37,108 18,720 18,566
Non-cash portion of unusual items................ 70,207 45,773 31,206 -- --
ESOP expense..................................... 49,197 73,527 -- -- --
Stock option expense (credit).................... 10,614 (467) 914 1,414 1,433
Non-cash interest expense........................ 2,005 2,735 2,424 1,202 882
Cash flows from changes in assets and
liabilities, net of effects from sales and
acquisitions of businesses:
Accounts receivable, net...................... (7,533) 9,451 22,905 (8,828) 3,509
Other current assets.......................... 4,563 8,273 575 (2,848) 667
Other long-term assets........................ 2,860 (5,726) 5,496 5,886 (3,350)
Accounts payable and accrued liabilities...... 2,683 (15,192) (16,917) (12,567) (31,536)
Reserve for unpaid claims..................... 1,215 (5,885) (29,985) (10,625) (13,694)
Other liabilities............................. (8,249) (21,127) (18,968) (5,669) (15,179)
Minority interest, net of dividends paid...... 80 22 1,596 1,887 1,593
Due to Parent -- interest and income taxes.... (42,459) (11,966) 19,618 11,741 6,402
Other......................................... 613 285 1,022 121 (1,063)
--------- --------- -------- -------- --------
Total adjustments............................. 145,350 138,771 55,297 296 (35,072)
--------- --------- -------- -------- --------
Net cash provided by (used in) operating
activities................................ 98,347 94,517 79,394 28,046 (21,231)
--------- --------- -------- -------- --------
Cash Flows From Investing Activities
Capital expenditures.................................. (14,626) (19,354) (30,978) (10,403) (9,463)
Acquisitions of businesses, net of cash acquired...... (130,550) (62,125) (235) (256) (6,998)
Decrease (increase) in assets restricted for
settlement of unpaid claims and other long-term
liabilities........................................ 7,076 (19,606) (17,732) (6,070) 8,626
Proceeds from sale of assets.......................... 16,584 5,879 5,098 503 10,386
Investment in Parent.................................. -- (4,736) -- -- --
Other................................................. -- (1,050) -- -- --
--------- --------- -------- -------- --------
Net cash provided by (used in) investing
activities................................ (121,516) (100,992) (43,847) (16,226) 2,551
--------- --------- -------- -------- --------
Cash Flows From Financing Activities
Change in Due to Parent............................... 86,612 (16,970) (62,625) (30,443) 14,718
Payments on debt and capital lease obligations........ (19,842) (2,423) (4,835) (2,037) (1,709)
--------- --------- -------- -------- --------
Net cash provided by (used in) financing
activities................................ 66,770 (19,393) (67,460) (32,480) 13,009
--------- --------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents.... 43,601 (25,868) (31,913) (20,660) (5,671)
Cash and cash equivalents at beginning of period........ 86,002 129,603 103,735 103,735 71,822
--------- --------- -------- -------- --------
Cash and cash equivalents at end of period.............. $ 129,603 $ 103,735 $ 71,822 $ 83,075 $ 66,151
========= ========= ======== ======== ========
</TABLE>
The accompanying Notes to Combined Financial Statements are an integral part of
these statements.
F-32
<PAGE> 149
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(ALL REFERENCES TO MARCH 31, 1996 AND 1997 FINANCIAL DATA ARE UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The combined financial statements of the Provider Segment of Magellan
Health Services, Inc. ("CBHS" or the "Company") include the accounts of the
Company and its subsidiaries except where control is temporary or does not rest
with the Company. All significant intercompany accounts and transactions have
been eliminated in combination. The accompanying unaudited combined financial
statements for the six months ended March 31, 1996 and 1997 have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring adjustments considered necessary for a fair presentation,
have been included. Magellan Health Services, Inc. ("Magellan" or "Parent") is
an integrated behavioral healthcare company providing behavioral healthcare
services in the United States, the United Kingdom and Switzerland. Magellan
operates through three principal subsidiaries engaging in (i) the provider
business, (ii) the managed care business and (iii) the public sector business.
The Company utilizes certain Parent systems and services ("Magellan
Overhead"), including, but not limited to, risk management, computer systems,
auditing, third-party reimbursement and treasury. The Company procures insurance
("Insurance") for professional liability claims, worker's compensation claims
and general matters through the Parent. The assets, liabilities and operating
expenses for Magellan Overhead and Insurance are included in the combined
financial statements of the Company. The combined financial statements of CBHS
have been prepared in connection with the sale of certain CBHS assets and
related transactions, which are more fully described in Note 2.
The combined financial statements present the historical combined financial
position, results of operations and cash flows of CBHS and, as a result, include
certain assets, liabilities, operations and personnel that will not be included
in the transactions described below in Note 2.
On June 2, 1992, Magellan filed a voluntary petition under Chapter 11 of
the United States Bankruptcy Code. The prepackaged plan of reorganization (the
"Plan") effected a restructuring of Magellan's debt and equity capitalization.
Magellan's Plan was confirmed on July 8, 1992, and became effective on July 21,
1992 (effective on July 31, 1992 for financial reporting purposes). The combined
financial statements for all periods are presented for the Company after the
consummation of the Plan. These financial statements were prepared under the
principles of fresh start accounting. (See Note 4.)
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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
NET REVENUE
Net revenue is based on established billing rates, less estimated
allowances for patients covered by Medicare and other contractual reimbursement
programs and discounts from established billing rates. Amounts received by the
Company for treatment of patients covered by Medicare and other contractual
reimbursement programs, which may be based on cost of services provided or
predetermined rates, are generally less than the established billing rates of
the Company's hospitals. Final determination of amounts earned under contractual
reimbursement programs is subject to review and audit by the applicable
agencies. Net revenue for fiscal 1994, 1995 and 1996 included $32.1 million,
$35.6 million and $28.3 million,
F-33
<PAGE> 150
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
respectively, for the settlement and adjustment of reimbursement issues related
to earlier fiscal periods. Net revenue for the six months ended March 31, 1996
and 1997 (unaudited) includes $11.1 million and $13.8 million, respectively for
the settlement and adjustment of reimbursement issues related to earlier fiscal
periods. Management believes that adequate provision has been made for any
adjustments that may result from such reviews.
ADVERTISING COSTS
The production costs of advertising are expensed as incurred. The Company
does not consider any of its advertising costs to be direct-response and,
accordingly, does not capitalize such costs. Advertising costs consist primarily
of radio and television air time, which is amortized as utilized, and printed
media services. Advertising expense was approximately $35.6 million, $33.5
million and $30.3 million for the years ended September 30, 1994, 1995 and 1996,
respectively.
CHARITY CARE
The Company provides healthcare services without charge or at amounts less
than its established rates to patients who meet certain criteria under its
charity care policies. Because the Company does not pursue collection of amounts
determined to be charity care, they are not reported as revenue. For the years
ended September 30, 1994, 1995 and 1996, the Company provided, at its
established billing rates, approximately $29.3 million, $41.2 million and $37.9
million, respectively, of such care.
ALLOCATED INTEREST, NET
Magellan provides financing and cash management services for CBHS.
Magellan's interest expense is allocated to CBHS based on the financing and the
cost of financing provided directly to CBHS. Deferred financing costs and
accrued interest related to such financing is carried on the books of the
Parent.
INCOME TAXES
The operations of CBHS are included in the Magellan consolidated federal
income tax return and in various unitary, foreign and consolidated state income
tax returns. Magellan allocates its consolidated income tax provision or benefit
to CBHS, which approximates income taxes that would be calculated on a
stand-alone basis.
Current and deferred income taxes payable or receivable are settled
currently through the Due to Parent account.
CASH AND CASH EQUIVALENTS
Cash equivalents are short-term, highly liquid interest-bearing investments
with a maturity of three months or less when purchased, consisting primarily of
money market instruments.
CONCENTRATION OF CREDIT RISK
Accounts receivable from patient revenue subject the Company to a
concentration of credit risk with third party payors that include insurance
companies, managed healthcare organizations and governmental entities. The
Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific payors, historical trends and other
information. Management believes the allowance for doubtful accounts is adequate
to provide for normal credit losses.
F-34
<PAGE> 151
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
ASSETS RESTRICTED FOR THE SETTLEMENT OF UNPAID CLAIMS AND OTHER LONG-TERM
LIABILITIES
Assets restricted for the settlement of unpaid claims and other long-term
liabilities include marketable securities which are carried at fair market
value. Transfer of such investments from the Insurance subsidiaries to the
Company or any of its other subsidiaries is subject to approval by certain
regulatory authorities. These assets will remain with Magellan subsequent to the
sale of the psychiatric facilities.
During fiscal 1994, the Company adopted Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Investments in Debt and Equity
Securities" ("FAS 115"). Under FAS 115, investments are classified into three
categories: (i) held to maturity; (ii) available for sale; and (iii) trading.
Unrealized holding gains or losses are recorded for trading and available for
sale securities. The Company's investments are classified as available for sale
and the adoption of FAS 115 did not have a material effect on the Company's
financial statements, financial condition and liquidity or results of
operations. The unrealized gain or loss on investments available for sale was
not material at September 30, 1995 and 1996.
PROPERTY AND EQUIPMENT
As a result of the adoption of fresh start accounting, property and
equipment were adjusted to their estimated fair value as of July 31, 1992 and
historical accumulated depreciation was eliminated. Expenditures for renewals
and improvements are charged to the property accounts. Replacements and
maintenance and repairs that do not improve or extend the life of the respective
assets are expensed as incurred. The Company removes the cost and related
accumulated depreciation from the accounts for property sold or retired, and any
resulting gain or loss is included in operations. Amortization of capital lease
assets is included in depreciation expense. Depreciation is provided on a
straight-line basis over the estimated useful lives of the assets, which is
generally 10 to 40 years for buildings and improvements and three to ten years
for equipment. Depreciation expense was $27.4 million, $34.5 million and $34.9
million for the years ended September 30, 1994, 1995 and 1996, respectively.
INTANGIBLE ASSETS
Intangible assets are composed principally of (i) goodwill and (ii)
non-compete agreements. Goodwill represents the excess of the cost of businesses
acquired over the fair value of the net identifiable assets at the date of
acquisition and is amortized using the straight-line method over 25 to 40 years.
Non-compete agreements are amortized over the term of the related agreements.
The Company continually monitors events and changes in circumstances that
could indicate carrying amounts of intangible assets may not be recoverable.
When events or changes in circumstances are present that indicate the carrying
amount of intangible assets may not be recoverable, the Company assesses the
recoverability of intangible assets by determining whether the carrying value of
such intangible assets will be recovered through the future cash flows expected
from the use of the asset and its eventual disposition. No impairment losses on
intangible assets were recorded by the Company in fiscal 1994 and 1996.
Impairment losses of approximately $4.0 million were recorded in fiscal 1995.
(See Note 4)
FOREIGN CURRENCY
Changes in the cumulative translation of foreign currency assets and
liabilities are presented as a separate component of stockholder's deficit.
Gains and losses resulting from foreign currency transactions, which were not
material, are included in operations as incurred.
RECENT ACCOUNTING PRONOUNCEMENTS
In March, 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121 ("FAS 121"), "Accounting for
the Impairment of Long-Lived Assets and for
F-35
<PAGE> 152
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Long-Lived Assets to be Disposed Of," which became effective for fiscal years
beginning after December 15, 1995. FAS 121 established standards for determining
when impairment losses on long-lived assets have occurred and how impairment
losses should be measured. The Company adopted FAS 121 effective October 1,
1994. The initial financial statement impact of adopting FAS 121 was not
material.
2. SALE OF PSYCHIATRIC FACILITIES (UNAUDITED)
On January 30, 1997, Magellan announced that it had entered into a series
of transactions including an agreement to sell substantially all of CBHS
domestic hospital real estate and related personal property (the "Assets") to
Crescent Real Estate Equities Limited Partnership ("Crescent"). In addition,
Magellan's domestic portion of its provider business segment will be operated as
a joint venture, New CBHS, that is initially owned equally by Magellan an
affiliate of Crescent (the "Crescent Operating"). Magellan received $417.2
million in cash (before costs estimated to be $12.5 million), which includes
$17.2 million for hospitals acquired after January 30, 1997, and warrants in the
Crescent Operating for the purchase of 2.5% of the Crescent Operating's common
stock, exercisable over 12 years, as consideration for the Assets. In addition
to the assets, Crescent and the Crescent Operating will each receive 1,283,311
warrants (2,566,622 warrants in aggregate) to purchase Magellan Common Stock at
$30 per share, exercisable over 12 years.
In related agreements, (i) Crescent will lease the real estate and related
assets to New CBHS for annual rent beginning at $41.7 million, which includes
$1.7 million for hospitals acquired after January 30, 1997 that were sold to
Crescent with a 5% annual escalation clause compounded annually and additional
rent of $20 million, of which at least $10 million must be used for capital
expenditures, and (ii) New CBHS will pay Magellan approximately $78 million in
annual franchise fees, subject to increase, for the use of assets retained by
Magellan and for support in certain areas. The franchise fees paid by New CBHS
will be subordinated to the lease obligation with Crescent. The assets retained
by Magellan include, but are not limited to, the "CHARTER" name, intellectual
property, treatment protocols and procedures, clinical quality management,
operating processes and the "1-800-CHARTER" telephone call center. Magellan will
provide New CBHS ongoing support in areas including managed care contracting
services, advertising and marketing assistance, risk management services,
outcomes monitoring, and consultation on matters relating to reimbursement,
government relations, clinical strategies, regulatory matters, strategic
planning and business development.
3. ACQUISITIONS AND JOINT VENTURES
ACQUISITIONS
In February 1995, the Company acquired a 90 percent ownership interest in
Westwood Pembroke Health System ("Westwood Pembroke"), which includes two
psychiatric hospitals and a professional group practice. The Company accounted
for the acquisition using the purchase method of accounting. Magellan will
retain its proportionate ownership interest in Westwood Pembroke subsequent to
the closing of the transactions with Crescent and the Crescent Operating.
During fiscal 1994, the Company agreed to acquire 40 psychiatric hospitals
(the "Acquired Hospitals") from Tenet Healthcare Corporation (formerly National
Medical Enterprises). The purchase price for the Acquired Hospitals was
approximately $120.4 million in cash plus an additional cash amount of
approximately $51 million, subject to adjustment, for the net working capital of
the Acquired Hospitals (the "Hospital Acquisition").
On June 30, 1994, the Company completed the purchase of 27 of the Acquired
Hospitals for a cash purchase price of approximately $129.6 million, which
included approximately $39.3 million, subject to adjustment, for the net working
capital of the facilities. On October 31, 1994, the Company completed the
purchase of three additional Acquired Hospitals for a cash purchase price of
approximately $5 million, which included approximately $2.2 million related to
the net working capital of the facilities. On November 30, 1994,
F-36
<PAGE> 153
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the Company completed the purchase of the remaining ten Acquired Hospitals for a
cash purchase price of approximately $36.8 million, including approximately $9.5
million related to the net working capital of the ten Acquired Hospitals. The
Company accounted for the Hospital Acquisition using the purchase method of
accounting. The operating results of the Acquired Hospitals are included in the
Company's Consolidated Statements of Operations from the respective dates of
acquisition.
JOINT VENTURES
The Company has entered into four hospital-based joint ventures with
Columbia/HCA Healthcare Corporation. Generally, each member of the joint venture
leases and/or contributes certain assets in each respective market to the joint
venture with the Company becoming the managing member.
The joint ventures' results of operations have been included in the
consolidated financial statements since inception, less minority interest. A
summary of the joint ventures is as follows:
<TABLE>
<CAPTION>
MARKET DATE
------ ----
<S> <C>
Albuquerque, NM............................................. May 1995
Raleigh, NC................................................. June 1995
Lafayette, LA............................................... October 1995
Anchorage, AK............................................... August 1996
</TABLE>
Magellan will retain its proportionate ownership interest in these joint
ventures subsequent to the closing of the transactions with Crescent and the
Crescent Operating.
4. THE RESTRUCTURING AND FRESH START REPORTING
Under the principles of fresh start accounting, Magellan's total assets
were recorded at their assumed reorganization value, with the reorganization
value allocated to identifiable tangible assets on the basis of their estimated
fair value. Accordingly, the Company's property and equipment were reduced and
its intangible assets were written off. The excess of the reorganization value
over the value of identifiable assets was reported by Magellan as
"reorganization value in excess of amounts allocable to identifiable assets"
(the "Excess Reorganization Value").
The total reorganization value assigned to Magellan's assets was estimated
by calculating projected cash flows before debt service requirements, for a
five-year period, plus an estimated terminal value of Magellan (calculated using
a multiple of approximately six (6) on projected EBDIT (which is net revenue
less operating and bad debt expenses)), each discounted back to its present
value using a discount rate of 12% (representing the estimated after-tax
weighted cost of capital). This amount was approximately $1.2 billion and was
increased by (i) the estimated net realizable value of assets to be sold and
(ii) estimated cash in excess of normal operating requirements. The above
calculations resulted in an estimated reorganization value of approximately $1.3
billion, of which the Excess Reorganization Value was $225 million, of which
$129 million related to continuing operations. The Excess Reorganization Value
was amortized by Magellan over the three-year period ended July 31, 1995, which
is reflected in the Company's Statement of Operations for the years ended
September 30, 1994 and 1995.
5. UNUSUAL ITEMS
INSURANCE SETTLEMENTS
Unusual items included the resolutions of disputes between the Company and
insurance carriers concerning certain billings for services.
F-37
<PAGE> 154
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In November 1994, the Company and a group of insurance carriers resolved a
billing dispute that arose in the fourth quarter of fiscal 1994 related to
claims paid predominantly in the 1980's. As part of the resolution, the Company
agreed to pay the insurance carriers approximately $31 million plus interest,
for a total of $37.5 million in four installments over a three year period. The
Company and the insurance carriers will continue to do business at the same or
similar general levels. Furthermore, the parties will seek additional business
opportunities that will serve to enhance their present relationships.
In March 1995, the Company and a group of insurance carriers resolved a
billing dispute which arose in fiscal 1995 related to matters arising
predominately in the 1980's. As part of the settlement, the Company agreed to
pay the insurance carriers $29.8 million payable in five installments over a
three year period. The Company and the insurance carriers have agreed to
continue to do business at the same or similar general levels and to seek
additional business opportunities that will serve to enhance their present
relationships.
In August 1996, the Company and a group of insurance carriers resolved a
billing dispute which arose in fiscal 1996 related to matters originating in the
1980's. As part of the settlement of these claims, certain related payer matters
and associated legal fees, the Company recorded a charge of approximately $30.0
million during the quarter ended June 30, 1996. The Company will pay the
insurance settlement amount in twelve installments over a three year period,
beginning August 1996. The Company and the insurance carriers have agreed that
the dispute and settlement will not negatively impact any present or pending
business relationships nor will it prevent the parties from negotiating in good
faith concerning additional business opportunities available to, and future
relationships between, the parties.
Amounts payable in future periods under the insurance settlements are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------
<S> <C>
1997.......................................... $21,510
1998.......................................... 14,180
1999.......................................... 5,745
</TABLE>
FACILITY CLOSURES
During fiscal 1995 and fiscal 1996, the Company consolidated, closed or
sold fifteen and nine psychiatric facilities (the "Closed Facilities"),
respectively. The Closed Facilities will be retained by Magellan subsequent to
the closing of the transaction with Crescent and the Crescent Operating and will
be sold, leased or used for alternative purposes depending on the market
conditions in each geographic area.
The Company recorded charges of approximately $3.6 million and $4.1 million
related to facility closures in fiscal 1995 and fiscal 1996, respectively, as
follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Severance and related benefits.............................. $2,132 $2,334
Contract terminations and other............................. 1,492 1,782
------ ------
$3,624 $4,116
====== ======
</TABLE>
Approximately 500 and 620 employees were terminated at the facilities
closed in the fourth quarter of fiscal 1995 and during fiscal 1996,
respectively. Severance and related benefits paid and charged against the
resulting liability were approximately $1.3 million and $2.9 million in fiscal
1995 and fiscal 1996, respectively. Other exit costs paid and applied against
the resulting liabilities were approximately $212,000 and $1.4 million in fiscal
1995 and fiscal 1996, respectively.
F-38
<PAGE> 155
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
During the six months ended March 31, 1997, (unaudited) the Company
consolidated or closed three psychiatric facilities and its one general hospital
(the "1997 Closed Facilities"). The 1997 Closed Facilities which were owned by
the Company are expected to be sold as part of the Crescent Transactions. The
Company recorded charges of approximately $4.2 million related to facility
closures during the six months ended March 31, 1997, (unaudited) which consisted
of approximately $3.0 million for severance and related benefits and $1.2
million for contract terminations and other costs.
Approximately 700 employees were terminated at the 1997 Closed Facilities.
Severance and related benefits paid and applied against the resulting liability
were approximately $2.3 million during the six months ended March 31, 1997,
(unaudited). Other exit costs paid and applied against the resulting liability
were approximately $280,000.
The following table presents net revenue, salaries, supplies and other
operating expenses and bad debt expenses and depreciation and amortization, of
the 1995 and 1996 Closed Facilities and the 1997 Closed Facilities (in
thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
----------------------------- -------------------------
1994 1995 1996 1996 1997
-------- -------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues.................... $124,185 $156,164 $85,810 $51,649 $20,856
Salaries, supplies and other
operating expenses and bad
debt expenses................. 119,411 152,065 89,965 54,604 21,649
Depreciation and amortization... 3,291 3,134 1,870 1,193 299
</TABLE>
The Company also recorded a charge of approximately $2.0 million in fiscal
1996 related to severance and related benefits for approximately 275 employees
who were terminated pursuant to planned overhead reductions.
ASSET IMPAIRMENTS
As a result of the Hospital Acquisition, the Company reassessed its
business strategy in certain markets at the end of fiscal 1994. The Company
established a plan to consolidate services in selected markets and to close or
sell certain facilities owned prior to the Hospital Acquisition. The Company
recorded a charge of $23 million in fiscal 1994 primarily to write down the
property and equipment at these facilities to their net realizable value.
As discussed in Note 1, the Company adopted FAS 121 effective October 1,
1994. During fiscal 1995, the Company recorded impairment losses on property and
equipment and intangible assets of approximately $23.0 million and $4.0 million,
respectively. During fiscal 1996, the Company recorded impairment losses on
property and equipment of approximately $1.2 million. Such losses resulted from
changes in the manner that certain of the Company's assets will be used in
future periods and current period operating losses at certain of the Company's
operating facilities combined with projected future operating losses. Fair
values of the long-lived assets that have been written down were determined
using the best available information in each individual circumstance, which
included quoted market price, comparable sales prices for similar assets or
valuation techniques utilizing present value of estimated expected cash flows.
OTHER
During fiscal 1994, the Company recorded a charge of approximately $4.5
million related to the relocation of the Company's executive offices. During
fiscal 1995, the Company recorded a gain of approximately $3.0 million related
to the sale of three psychiatric hospitals.
F-39
<PAGE> 156
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Company also sold two psychiatric facilities during the six months
ended March 31, 1997 that were closed during fiscal 1995. The Company received
approximately $5.6 million in proceeds from sales and recorded an aggregate gain
on such sales of approximately $2.8 million during the six months ended March
31, 1997, (unaudited).
6. BENEFIT PLANS
Magellan maintains an Employee Stock Ownership Plan (the "ESOP"), a
noncontributory retirement plan that enables eligible Company employees to
participate in the ownership of Magellan.
Magellan had recorded unearned compensation to reflect the cost of Magellan
Common Stock purchased by the ESOP but not yet allocated to participants'
accounts. In the period that shares are allocated or projected to be allocated
to participants, ESOP expense is recorded and unearned compensation is reduced.
Magellan's ESOP expense is reflected in the Company's statement of operations.
All shares had been allocated to the participants as of September 30, 1995.
During fiscal 1992, Magellan reinstated a defined contribution plan (the
"401-k Plan"). Employee participants can elect to voluntarily contribute up to
6% of their compensation to the 401-k Plan. Effective October 1, 1992, Magellan
began making contributions to the 401-k Plan based on employee compensation and
contributions. Magellan makes a discretionary contribution of 2% of each
employee's compensation and matches 50% of each employee's contribution up to 3%
of their compensation. During the years ended September 30, 1994, 1995 and 1996,
Magellan made contributions of approximately $4.9 million, $5.8 million and $5.3
million, respectively, to the 401-k Plan, which is reflected in salaries,
supplies and other operating expenses.
Magellan maintains five stock option plans that enable key employees and
directors to purchase shares of Magellan Common Stock. Magellan's 1992 stock
option plan allows for the exercise price of certain options to be reduced upon
termination of employment of a certain optionee without cause. Stock option
expense under Magellan's 1992 stock option plan is reflected in the Company's
statement of operations. As of September 30, 1996, 362,990 options were
outstanding at an exercise price of $4.36 and 6,000 options were outstanding at
an exercise price of $22.75. Such options expire in October 2000 and are 100%
vested.
7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Information with regard to the Company's long-term debt and capital lease
obligations at September 30, 1995 and 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1995 1996
------------- -------------
<S> <C> <C>
6.59% to 10.75% Mortgage and other notes payable through
1999.................................................... $ 5,268 $ 3,163
Variable rate secured notes due through 2013 (3.65% to
3.85% at September 30, 1996)............................ 62,025 60,875
3.85% to 11.50% Capital lease obligations due through
2014.................................................... 12,617 12,333
------- -------
79,910 76,371
Less amounts due within one year.......................... 2,799 2,751
------- -------
$77,111 $73,620
======= =======
</TABLE>
The aggregate scheduled maturities of long-term debt and capital lease
obligations during the five years subsequent to September 30, 1996, are as
follows (in thousands): 1997 -- $2,751; 1998 -- $2,273; 1999 -- $2,103;
2000 -- $1,991 and 2001 -- $10,359.
F-40
<PAGE> 157
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
LEASES
The Company leases certain of its operating facilities, some of which may
be purchased during the term or at expiration of the leases. The book value of
capital leased assets was approximately $8.4 million at September 30, 1996. The
leases, which expire at various dates through 2069, generally require the
Company to pay all maintenance, property tax and insurance costs.
At September 30, 1996, aggregate amounts of future minimum payments under
operating leases were as follows: 1997 -- $6.4 million; 1998 -- $4.8 million;
1999 -- $3.6 million; 2000 -- $2.2 million; 2001 -- $1.8 million; subsequent to
2001 -- $47.4 million.
Rent expense for the years ended September 1994, 1995 and 1996 was $11.4
million, $15.4 million and $14.0 million, respectively.
8. INCOME TAXES
The provision (benefit) for income taxes allocated to CBHS by Magellan
consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------
1994 1995 1996
-------- -------- -------
<S> <C> <C> <C>
Income taxes currently payable:
Federal............................................. $ -- $ 595 $ 977
State, excluding California state refund............ 639 1,694 971
California state refund............................. -- -- (3,695)
Foreign............................................. 1,466 1,188 3,779
Deferred income taxes:
Federal............................................. (11,078) (14,360) 11,214
State............................................... (1,583) (2,051) 1,602
Foreign............................................. 52 -- 35
-------- -------- -------
$(10,504) $(12,934) $14,883
======== ======== =======
</TABLE>
A reconciliation of the Company's income tax provision (benefit) to that
computed by applying the statutory federal income tax rate is as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------
1994 1995 1996
-------- -------- -------
<S> <C> <C> <C>
Income tax provision (benefit) at federal statutory
income tax rate..................................... $(20,111) $(19,897) $14,208
State income taxes, net of federal income tax benefit
and excluding California state refund............... (616) (232) 1,673
California state refund, net of federal income tax
benefit.......................................... -- -- (2,402)
Foreign income taxes, net of federal income tax
benefit............................................. 987 772 2,479
Amortization of excess reorganization value........... 10,920 9,100 --
Other -- net.......................................... (1,684) (2,677) (1,075)
-------- -------- -------
Income tax provision (benefit)........................ $(10,504) $(12,934) $14,883
======== ======== =======
</TABLE>
F-41
<PAGE> 158
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
9. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1995 1996
-------- --------
<S> <C> <C>
Salaries, wages and other benefits.......................... $ 27,386 $ 27,313
Amounts due health insurance programs....................... 10,252 27,146
Other....................................................... 78,742 62,755
-------- --------
$116,380 $117,214
======== ========
</TABLE>
10. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
-------------------------- --------------------------
1994 1995 1996 1996 1997
------ ------ ------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash paid for interest, net of amounts
capitalized.......................... $5,842 $5,303 $5,680 $2,099 $2,278
====== ====== ====== ====== ======
</TABLE>
The non-cash portion of unusual items for fiscal 1995 and 1996 includes the
unpaid portion of the $29.8 million and $30.0 million insurance settlements that
were recorded during the quarters ended March 31, 1995, and June 30, 1996,
respectively. The payments of the insurance settlements are included in accounts
payable and other accrued liabilities in the statement of cash flows for the
years ended September 30, 1995 and 1996.
11. COMMITMENTS AND CONTINGENCIES
The Company is self-insured for a substantial portion of its general and
professional liability risks through Magellan. The reserves for self-insured
general and professional liability losses, including loss adjustment expenses,
are based on actuarial estimates that are discounted at an average rate of 6% to
their present value based on the Company's historical claims experience adjusted
for current industry trends. The undiscounted amount of the reserve for unpaid
claims at September 30, 1995 and 1996 was approximately $113.1 million and $84.3
million, respectively. The reserve for unpaid claims is adjusted periodically as
such claims mature, to reflect changes in actuarial estimates based on actual
experience. During fiscal 1996, the Company recorded a reduction in malpractice
claim reserves of approximately $15.3 million as a result of updated actuarial
estimates. The Company recorded reductions of expenses of approximately $7.5
million and $5.0 million during the six months ended March 31, 1996 and 1997,
(unaudited) respectively. These reductions resulted primarily from updates to
actuarial assumptions regarding the Company's expected losses for more recent
policy years. These revisions are based on changes in expected values of
ultimate losses resulting from the Company's claim experiences, and increased
reliance on such claim experience. While management and its actuaries believe
that the present reserve is reasonable, ultimate settlement of losses may vary
from the amount recorded.
Certain assets of the Company, including substantially all accounts
receivable and personal property, are pledged to the Parent's bank lenders as
collateral for certain Parent indebtedness. In the opinion of management, the
Parent's obligations under such indebtedness will continue to be serviced from
ongoing operations, thereby mitigating the lenders' potential claims against
these assets.
Certain of the Company's subsidiaries are subject to or parties to claims,
civil suits and governmental investigations and inquiries relating to their
operations and certain alleged business practices. In the opinion of
F-42
<PAGE> 159
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
management, based on consultation with counsel, resolution of these matters will
not have a material adverse effect on the Company's financial position or
results of operations.
In January 1996, the Company settled an ongoing dispute with the Resolution
Trust Corporation ("RTC"), for itself or in its capacity as conservator or
receiver for 12 financial institutions, which formerly held certain debt
securities that were issued by the Company in 1988. In connection with the
settlement, the Company, denying any liability or fault, paid $2.7 million to
the RTC in exchange for a release of all claims.
On August 1, 1996, the United States Department of Justice, Civil Division,
filed an Amended Complaint in a civil qui tam action initiated in November of
1994 against Magellan and the Company's Orlando South hospital subsidiary by two
former employees. The Amended Complaint alleges that the hospital violated the
federal False Claims Act ("the Act") in billing for inpatient treatment provided
to elderly patients. The Amended Complaint is based on disputed clinical and
factual issues which the Company believes do not constitute a violation of the
Act. The Company and its subsidiary deny any liability in this matter and will
continue to vigorously defend themselves against the suit. As is its policy, the
Company will continue to cooperate with the government in this matter. The
Company does not believe this matter will have a material adverse effect on its
financial position or results of operations.
F-43
<PAGE> 160
POST OAK CENTRAL
STATEMENTS OF EXCESS OF REVENUES OVER
SPECIFIC OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996,
AND THE ELEVEN-MONTH PERIOD ENDED NOVEMBER 30, 1997
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
F-44
<PAGE> 161
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PARTNERS OF
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP:
We have audited the accompanying statements of excess of revenues over
specific operating expenses (as defined in Note 2) of Post Oak Central for the
year ended December 31, 1996, and the eleven-month period ended November 30,
1997. These statements are the responsibility of the Property's management. Our
responsibility is to express an opinion on these statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the statements referred to above present fairly, in all
material respects, the excess of revenues over specific operating expenses of
Post Oak Central for the year ended December 31, 1996, and the eleven-month
period ended November 30, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
January 16, 1998
F-45
<PAGE> 162
POST OAK CENTRAL
STATEMENTS OF EXCESS REVENUES OVER SPECIFIC OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996, AND
FOR THE ELEVEN MONTHS ENDED NOVEMBER 30, 1997
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
REVENUES:
Rent...................................................... $15,830,875 $14,769,083
Parking................................................... 465,641 522,713
Recoveries................................................ 345,622 286,543
Other..................................................... 52,804 38,500
----------- -----------
16,694,942 15,616,839
----------- -----------
SPECIFIC OPERATING EXPENSES:
Real estate taxes......................................... 2,167,817 2,099,717
Utilities................................................. 1,793,577 1,764,849
Repairs, maintenance, and contract services............... 2,620,143 2,375,625
Salaries.................................................. 819,825 758,039
General and administrative................................ 477,066 251,582
Management fees........................................... 465,058 409,899
Insurance................................................. 70,532 64,654
----------- -----------
8,414,018 7,724,365
----------- -----------
EXCESS OF REVENUES OVER SPECIFIC OPERATING EXPENSES......... $ 8,280,924 $ 7,892,474
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-46
<PAGE> 163
POST OAK CENTRAL
NOTES TO STATEMENTS OF EXCESS OF REVENUES OVER
SPECIFIC OPERATING EXPENSES
DECEMBER 31, 1996, AND NOVEMBER 30, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Description of Property
Post Oak Central (the "Property") consists of three 24-story office towers,
each with an adjacent parking garage. The ground floor of each parking garage is
used as supporting retail space. The Property is located in the West Loop
Galleria submarket of Houston, Texas, and it contains approximately 1,277,516
rentable square feet and approximately 4,400 parking spaces.
Use of Estimates
The preparation of statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Rental Income and Deferred Rent Concessions
In connection with obtaining certain tenants under long-term leases,
property management grants rent concessions. The aggregate future minimum rental
payments due over the terms of the leases are recognized as rental income on a
straight-line basis over the full term of the leases, including the periods of
rent concessions.
Recoveries
A portion of the operating expenses is charged back to tenants on a monthly
basis based upon estimated expenses. These charges are adjusted at period-end,
based upon actual expenses.
2. BASIS OF ACCOUNTING:
The accompanying statements of excess of revenues over specific operating
expenses is presented on the accrual basis of accounting. These statements are
not intended to be a complete presentation of revenues and operating expenses
for the year ended December 31, 1996, and the eleven-month period ended November
30, 1997, as certain items such as depreciation, amortization, interest, and
partnership administrative expenses have been excluded since they are not
comparable to the proposed future operations of the Property.
3. PROPERTY MANAGEMENT:
O'Connor Realty Advisors, Inc. (the "Asset Manager") has had an arrangement
to be the Property's asset manager since April 1994 and PM Realty Group (the
"Property Manager") has had an arrangement to manage the Property since December
1991. The Asset Manager requires an asset management fee of approximately
$270,000 per year, which is not recoverable from tenants, and the Property
Manager requires a management fee of 1.25% of gross rental receipts, as defined,
which is recoverable from tenants. Total combined management fees for both the
Asset Manager and Property Manager for the year ended December 31, 1996, and the
eleven-month period ended November 30, 1997, were approximately $465,000 and
$410,000, respectively.
4. RENTAL INCOME:
The Property records rental income on a straight-line basis in accordance
with FAS 13 "Accounting for Leases". Rental income was increased $655,094 and
$1,059,295 for the year ended December 31, 1996 and for the period ended
November 30, 1997, respectively, in order to reflect rental income on a
straight-line basis.
F-47
<PAGE> 164
POST OAK CENTRAL
NOTES TO STATEMENTS OF EXCESS OF REVENUES OVER
SPECIFIC OPERATING EXPENSES -- (CONTINUED)
5. SIGNIFICANT TENANTS:
The largest tenant of the Property occupies approximately 260,000 square
feet, or 20%, of the total square footage. Approximately 97% of this lease
expires in April 2007, with the remainder being month to month storage. The
second largest tenant occupies approximately 216,000 square feet, or 17% of the
total square footage. Approximately 98% of this lease expires in September 2004,
with the remainder being 80 square feet of month to month storage and 3,693
square feet expiring in December 2000.
F-48
<PAGE> 165
WASHINGTON HARBOUR
STATEMENTS OF EXCESS OF REVENUES OVER
SPECIFIC OPERATING EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
F-49
<PAGE> 166
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Crescent Real Estate Equities Limited Partnership:
We have audited the accompanying statements of excess of revenues over
specific operating expenses (as defined in Note 2) of Washington Harbour for the
years ended December 31, 1997 and 1996. These statements are the responsibility
of the Property's management. Our responsibility is to express an opinion on
these statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the statements referred to above presents fairly, in all
material respects, the excess of revenues over specific operating expenses of
Washington Harbour for the years ended December 31, 1997 and 1996, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
January 16, 1998
F-50
<PAGE> 167
WASHINGTON HARBOUR
STATEMENTS OF EXCESS OF REVENUES OVER SPECIFIC OPERATING EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
REVENUES:
Office rent............................................... $13,918,108 $14,464,169
Parking................................................... 965,603 912,328
Recoveries................................................ 245,022 626,675
Other..................................................... 69,080 108,356
----------- -----------
15,197,813 16,111,528
----------- -----------
SPECIFIC OPERATING EXPENSES:
Real estate taxes......................................... 1,236,201 1,544,022
Utilities................................................. 915,630 728,192
Repairs, maintenance, and contract services............... 1,649,117 1,657,240
Salaries.................................................. 460,176 982,766
General and administrative................................ 210,934 449,079
Management fees........................................... 400,000 602,010
Insurance................................................. 128,030 127,826
----------- -----------
5,000,088 6,091,135
----------- -----------
EXCESS OF REVENUES OVER SPECIFIC OPERATING EXPENSES......... $10,197,725 $10,020,393
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-51
<PAGE> 168
WASHINGTON HARBOUR
NOTES TO STATEMENTS OF EXCESS OF REVENUES OVER
SPECIFIC OPERATING EXPENSES
DECEMBER 31, 1997 AND 1996
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Description of Property
Washington Harbour (the "Property") is a two-building complex containing a
5-story and an 8-story Class A office/condo property located in the Georgetown
submarket of Washington, D.C. The Property contains approximately 540,000
rentable square feet as well as an underground parking garage.
Use of Estimates
The preparation of statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Rental Income and Deferred Rent Concessions
In connection with obtaining certain tenants under long-term leases,
property management grants rent concessions. The aggregate future minimum rental
payments due over the terms of the leases are recognized as rental income on a
straight-line basis over the full term of the leases, including the periods of
rent concessions.
Recoveries
A portion of the operating expenses is charged back to tenants on an annual
basis based upon actual expenses.
2. BASIS OF ACCOUNTING:
The accompanying statements of excess of revenues over specific operating
expenses is presented on the accrual basis of accounting. These statements are
not intended to be a complete presentation of revenues and operating expenses
for the years ended December 31, 1997 and 1996, as certain items such as
depreciation, amortization, interest, and partnership administrative expenses
have been excluded since they are not comparable to the proposed future
operations of the Property.
3. PROPERTY MANAGEMENT:
Jones Lang Wootton USA, Inc. (the "Manager") has had an arrangement to
manage the Property since January 1, 1997. The Manager requires an asset and
property management fee of approximately $33,000 a month. Prior to January 1,
1997, Washington Harbour Management Corp. was the management company. Prior to
1997, management fees were assessed at 2 1/2% of gross operating revenue, as
defined, in addition to an asset management fee of approximately $16,000 per
month. Total management fees for the years ended December 31, 1997 and 1996,
were approximately $400,000 and $602,000, respectively.
4. SIGNIFICANT TENANTS:
The largest tenant of the Property occupies approximately 146,000 square
feet, or 27%, of the total square footage. This lease expires in June 2002. The
second largest tenant of the Property occupies approximately 102,000 square
feet, or 19%, of the total rentable square footage. This lease expires in June
2005.
F-52
<PAGE> 169
WASHINGTON HARBOUR
NOTES TO STATEMENTS OF EXCESS OF REVENUES OVER
SPECIFIC OPERATING EXPENSES -- (CONTINUED)
5. REAL ESTATE TAXES:
During 1997, the Property received a refund of approximately $817,000
related to a reduction in property taxes for previous years. This amount has
been excluded from the accompanying statements of excess of revenues over
specific operating expenses as it does not relate to the future operations of
the Property.
6. CONDOMINIUM DISPUTE:
The Property currently receives reimbursement under the condominium
Settlement Agreement from adjacent condominiums related to the condominiums'
allocable portion of maintenance of the common areas between the Property and
condominiums. The condominiums are disputing the portion of common area
maintenance cost being allocated to them. No resolution has been reached
regarding this matter.
F-53
<PAGE> 170
STATION CASINOS
F-54
<PAGE> 171
STATION CASINOS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1997
------------ ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 53,662 $ 42,522
Accounts and notes receivable, net........................ 16,455 7,852
Inventories............................................... 4,825 3,473
Prepaid gaming taxes...................................... 7,022 4,291
Prepaid expenses and other................................ 14,618 11,231
---------- ----------
TOTAL CURRENT ASSETS.............................. 96,582 69,369
Property and equipment, net................................. 1,141,268 1,069,052
Land held for development................................... 27,114 26,354
Other assets, net........................................... 59,432 69,343
---------- ----------
TOTAL ASSETS...................................... $1,324,396 $1,234,118
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 14,955 $ 18,807
Accounts payable.......................................... 15,762 21,106
Accrued payroll and related............................... 19,243 13,460
Construction contracts payable............................ 12,543 94,835
Accrued interest payable.................................. 13,970 10,625
Accrued expenses and other................................ 39,102 26,433
---------- ----------
TOTAL CURRENT LIABILITIES......................... 115,575 185,266
Long-term debt, less current portion........................ 904,609 742,156
Deferred income taxes, net.................................. 12,975 7,848
---------- ----------
TOTAL LIABILITIES................................. 1,033,159 935,270
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01; authorized 5,000,000
shares; 2,070,000 convertible preferred shares issued
and outstanding........................................ 103,500 103,500
Common stock, par value $.01; authorized 90,000,000
shares; 35,306,657 and 35,318,057 shares issued and
outstanding............................................ 353 353
Additional paid-in capital................................ 167,155 167,397
Deferred compensation -- restricted stock................. (652) (1,225)
Retained earnings......................................... 20,881 28,823
---------- ----------
TOTAL STOCKHOLDERS' EQUITY........................ 291,237 298,848
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $1,324,396 $1,234,118
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-55
<PAGE> 172
STATION CASINOS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Casino.......................................... $154,172 $102,002 $436,872 $314,074
Food and beverage............................... 34,282 20,954 97,859 63,580
Room............................................ 10,474 7,053 27,692 19,711
Other........................................... 12,557 12,440 41,233 35,192
-------- -------- -------- --------
Gross revenues.......................... 211,485 142,449 603,656 432,557
Less promotional allowances..................... (14,289) (8,682) (38,847) (25,316)
-------- -------- -------- --------
Net revenues............................ 197,196 133,767 564,809 407,241
-------- -------- -------- --------
OPERATING COSTS AND EXPENSES:
Casino.......................................... 73,910 45,976 211,502 139,254
Food and beverage............................... 22,764 15,499 67,626 47,774
Room............................................ 3,520 2,328 10,001 7,425
Other........................................... 5,744 5,659 19,225 16,919
Selling, general and administrative............. 45,523 26,781 127,419 82,387
Corporate expenses.............................. 3,524 4,735 11,168 13,377
Development expenses............................ -- 377 104 979
Depreciation and amortization................... 17,227 10,876 50,396 30,968
Preopening expenses............................. -- -- 10,866 --
-------- -------- -------- --------
172,212 112,231 508,307 339,083
-------- -------- -------- --------
OPERATING INCOME.................................. 24,984 21,536 56,502 68,158
-------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense, net........................... (19,884) (7,631) (55,597) (23,891)
Other........................................... 199 (116) (4,797) (50)
-------- -------- -------- --------
(19,685) (7,747) (60,394) (23,941)
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES................. 5,299 13,789 (3,892) 44,217
Income tax (provision) benefit.................... (1,874) (5,033) 1,384 (15,884)
-------- -------- -------- --------
NET INCOME (LOSS)................................. 3,425 8,756 (2,508) 28,333
PREFERRED STOCK DIVIDENDS......................... (1,812) (1,812) (5,434) (5,434)
-------- -------- -------- --------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK...... $ 1,613 $ 6,944 $ (7,942) $ 22,899
======== ======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE.................. $ 0.05 $ 0.20 $ (0.22) $ 0.65
======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING........ 35,307 35,318 35,309 35,315
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-56
<PAGE> 173
STATION CASINOS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
----------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ (2,508) $ 28,333
--------- ---------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 50,396 30,968
Increase in deferred income taxes...................... 3,089 7,772
Preopening expenses.................................... 10,866 --
Changes in assets and liabilities:
Increase in accounts and notes receivable, net....... (8,603) (6,586)
Increase in inventories and prepaid expenses and
other............................................... (5,432) (3,532)
(Decrease) increase in accounts payable.............. (5,344) 4,007
Increase in accrued expenses and other............... 20,265 7,384
Other, net............................................. 10,597 5,196
--------- ---------
Total adjustments................................. 75,834 45,209
--------- ---------
Net cash provided by operating activities......... 73,326 73,542
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (121,824) (373,496)
(Decrease) increase in construction contracts payable..... (82,292) 56,882
Preopening expenses....................................... (8,516) --
Other, net................................................ 3,523 (22,659)
--------- ---------
Net cash used in investing activities............. (209,109) (339,273)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Payments) borrowings under bank facility, net............ (47,000) 183,500
Borrowings under Sunset loan agreement.................... 64,000 22,500
Proceeds from the issuance of notes payable............... 16,250 2,250
Principal payments on notes payable....................... (23,381) (25,147)
Proceeds from the issuance of senior subordinated notes,
net.................................................... 144,287 --
Proceeds from the issuance of preferred stock, net........ -- 13,095
Dividends paid............................................ (5,434) (5,174)
Other, net................................................ (1,799) (4,735)
--------- ---------
Net cash provided by financing activities......... 146,923 186,289
--------- ---------
CASH AND CASH EQUIVALENTS:
Increase (decrease) in cash and cash equivalents.......... 11,140 (79,442)
Balance, beginning of period.............................. 42,522 114,868
--------- ---------
Balance, end of period.................................... $ 53,662 $ 35,426
========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest, net of amounts capitalized........ $ 47,121 $ 18,287
Cash paid for income taxes................................ $ 92 $ 5,950
Property and equipment purchases financed by debt......... $ 3,532 $ 361
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-57
<PAGE> 174
STATION CASINOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Station Casinos, Inc. (the "Company"), a Nevada Corporation, is an
established multi-jurisdictional gaming enterprise that currently owns and
operates four casino properties in Las Vegas, Nevada, a gaming and entertainment
complex in St. Charles, Missouri and a gaming and entertainment complex in
Kansas City, Missouri. The Company also owns and provides slot route management
services in Southern Nevada.
The accompanying condensed consolidated financial statements include the
accounts of Station Casinos, Inc. and its wholly-owned subsidiaries, Palace
Station Hotel & Casino, Inc. ("Palace Station"), Boulder Station, Inc. ("Boulder
Station"), St. Charles Riverfront Station, Inc. ("Station Casino St. Charles"),
Texas Station, Inc. ("Texas Station"), Kansas City Station Corporation ("Station
Casino Kansas City", opened January 16, 1997), Sunset Station, Inc. ("Sunset
Station", opened June 10, 1997) and Southwest Gaming Services, Inc. Material
intercompany accounts and transactions have been eliminated.
The accompanying condensed consolidated financial statements included
herein have been prepared by the Company, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading. In the opinion of management, all adjustments (which include normal
recurring adjustments) necessary for a fair presentation of the results for the
interim periods have been made. The results for the three and nine months ended
December 31, 1997 are not necessarily indicative of results to be expected for
the full fiscal year. These financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1997.
2. MERGER AGREEMENT
On January 16, 1998, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Crescent Real Estate Equities Company, a
Texas real estate investment trust ("Crescent"). Pursuant to the Merger
Agreement, the Company will be merged with and into Crescent (the "Merger"). The
Merger Agreement also provides for certain alternative structures to facilitate
the combination of the businesses of the Company and Crescent.
Upon consummation of the Merger, each share of the Company's $.01 par value
common stock issued and outstanding immediately prior to the effective time of
the Merger (the "Effective Time") together with the associated rights issued
pursuant to the Rights Agreement dated October 6, 1997 shall as of the Effective
Time, be converted into the right to receive 0.466 validly issued, fully paid
and nonassessable shares of Crescent's $.01 par value common shares of
beneficial interest. Each share of the Company's $3.50 Convertible Preferred
Stock issued and outstanding immediately prior to the Effective Time shall as of
the Effective Time be converted into the right to receive one validly issued,
fully paid and nonassessable $3.50 Convertible Preferred Share of Crescent
convertible into the number of Crescent common shares and having the terms
required by the Company's Convertible Preferred Stock. In addition, at the
option of the Company, the Company will issue to Crescent and Crescent has
agreed to purchase subject to the terms, conditions and procedures set forth in
the Merger Agreement up to an aggregate of 115,000 shares of a new series of
preferred stock of the Company (the "Redeemable Preferred Stock") at a price of
$1,000 per share (plus accrued dividends) in cash in increments of 5,000 shares.
The Redeemable Preferred Stock is convertible at the option of the holder any
time after January 16, 1999, unless previously redeemed, into shares of common
stock at a conversion rate of 60.606 Shares of Common Stock for each share of
Redeemable Preferred Stock subject to ordinary antidilution provisions. Unless
written consent from Crescent is received, the Company has agreed to
F-58
<PAGE> 175
STATION CASINOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
use the net proceeds from the sale of the Redeemable Preferred Stock to repay
indebtedness under its revolving loan agreement, borrowings under which were
used for acquisitions and master-planned expansions.
Consummation of the Merger is subject to the satisfaction of certain
closing conditions, including the approval of the Company's stockholders,
expiration or termination of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1974 and the approval of any other governmental
entity with jurisdiction in respect of gaming laws required or necessary in
connection with the Merger, the Merger Agreement and the transactions
contemplated by the Merger Agreement. The Merger Agreement entitles Crescent to
a $54 million break-up fee if such agreement is terminated (i) by either
Crescent or the Board of Directors of the Company if any required approval of
the Merger is not obtained by reason of the failure to obtain the required vote
of stockholders, (ii) by Crescent, if the Board of Directors of the Company
withdraws its approval or recommendation of the Merger, recommends a superior
proposal or (iii) by the Board of Directors of the Company, if it receives a
superior proposal that Crescent does not match or exceed.
Upon consummation of the Merger, it is anticipated that an operating
company owned equally by the Company's management team and Crescent Operating,
Inc. (the "Operating Company") will operate the six casino properties currently
operated by the Company pursuant to a lease with Crescent. The lease will be a
10-year lease with one, five-year renewal option. The lease also will be a
triple-net lease, and will provide that the Operating Company is required to
maintain the property in good condition at its expense during the term of the
lease. The lease provides for base and percentage rent but the amount of the
rent has not yet been determined.
Immediately prior to the execution of the Merger Agreement, the Company
amended its Rights Agreement dated October 6, 1997 (the "Rights Agreement"), to
exclude Crescent and its affiliates from the definition of Acquiring Person to
the extent that it is a Beneficial Owner (as defined in the Rights Agreement) as
a result of the approval, execution or delivery of, or the consummation of the
transactions contemplated by, the Merger Agreement, including, without
limitation, the purchase by Crescent of the Redeemable Preferred Stock.
F-59
<PAGE> 176
STATION CASINOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. LONG-TERM DEBT
Long-term debt consists of the following (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1997
------------ ---------
<S> <C> <C>
Station Casinos, Inc. (excluding Sunset Station):
Reducing revolving credit facility, secured by
substantially all of the assets of Palace Station,
Boulder Station, Texas Station, Station Casino St.
Charles and Station Casino Kansas City, $330 million
limit at December 31, 1997, due September 2000,
interest at a margin above the bank's prime rate or the
Eurodollar Rate (8.21% at December 31, 1997)........... $230,000 $277,000
9 5/8% senior subordinated notes, payable interest only
semi-annually, principal due June 1, 2003, net of
unamortized discount of $6.2 million at December 31,
1997................................................... 186,841 186,248
9 3/4% senior subordinated notes, payable interest only
semi-annually, principal due April 15, 2007, net of
unamortized discount of $5.5 million at December 31,
1997................................................... 144,541 --
10 1/8% senior subordinated notes, payable interest only
semi-annually, principal due March 15, 2006, net of
unamortized discount of $1.1 million at December 31,
1997................................................... 196,885 196,818
Notes payable to banks and others, collateralized by slot
machines, furniture and equipment, monthly installments
including interest ranging from 7.8% to 8.0% at
December 31, 1997...................................... 16,710 27,564
Capital lease obligations, collateralized by furniture and
equipment.............................................. 18,488 7,703
Other long-term debt...................................... 16,099 19,630
-------- --------
Sub-total......................................... 809,564 714,963
Sunset Station, Inc.:
$110 million Sunset Station first mortgage
construction/term loan agreement, secured by
substantially all of the assets of Sunset Station,
interest at a margin of 375 basis points above the
Eurodollar Rate (9.58% at December 31, 1997), due
September 2000......................................... 110,000 46,000
-------- --------
Total long-term debt.............................. 919,564 760,963
Current portion of long-term debt........................... (14,955) (18,807)
-------- --------
Total long-term debt, less current portion........ $904,609 $742,156
======== ========
</TABLE>
In April 1997, the Company completed an offering of $150 million of senior
subordinated notes due in April 2007, that rank pari passu with the Company's
existing senior subordinated notes. The $150 million senior subordinated notes
have a coupon rate of 9 3/4% and were priced to yield 10.37% to maturity. The
discount on the $150 million senior subordinated notes is recorded as a
reduction to long-term debt. Proceeds from the offering were used to pay down
amounts outstanding under the reducing revolving credit facility.
In June 1997, the Company obtained an amendment to the reducing revolving
credit facility (the "Bank Facility"). This amendment modified the covenant
restricting the maximum consolidated funded debt to EBITDA ratio as follows:
5.75 to 1.00 for the fiscal quarter ended December 31, 1997, 5.75 to 1.00 for
the fiscal quarter ending March 31, 1998, 5.00 to 1.00 for the fiscal quarter
ending June 30, 1998, 4.75 to 1.00 for the fiscal quarter ending September 30,
1998, 4.50 to 1.00 for the fiscal quarter ending December 31, 1998, 4.25 to 1.00
for each fiscal quarter through June 30, 1999, 4.00 to 1.00 for the fiscal
quarter ending September 30, 1999 and 3.75 to 1.00 thereafter. For the quarter
ended December 31, 1997, the Company obtained a one time waiver modifying the
funded debt to EBITDA ratio to a maximum of 5.90 to 1.00. As of
F-60
<PAGE> 177
STATION CASINOS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1997, the Company's funded debt to EBITDA ratio was 5.80 to 1.00.
In addition, in July 1997, the Company reduced the total amount available under
the Bank Facility by $30 million. As a result, no additional reductions are
required until June 30, 1998, at which time the Bank Facility will reduce by
$22.4 million each fiscal quarter through March 31, 2000.
4. OTHER MATTERS
Preopening Expenses
Prior to the opening of a facility, all operating expenses, including
incremental salaries and wages, related thereto are capitalized as preopening
expenses. The Company expenses preopening expenses upon the opening of the
related facility. In June 1997, Sunset Station Hotel & Casino opened. During the
nine months ended December 31, 1997, $10.9 million of preopening expenses
primarily related to Sunset Station were expensed.
Expired Option Payments
In June 1997, $5 million of certain expired option payments to lease or
acquire land for future development, which had previously been capitalized, were
expensed. Such amounts are included in other income/expense in the accompanying
condensed consolidated statements of operations for the nine months ended
December 31, 1997.
Earnings Per Share
The Financial Accounting Standards Board has issued Statement on Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share", which is effective
for fiscal years ending after December 15, 1997. This statement replaces primary
earnings per share ("EPS") with basic EPS. No dilution for potentially dilutive
securities is included in basic EPS. This statement also requires when applying
the treasury stock method for diluted EPS to compute dilution for options and
warrants, to use average share price for the period, rather than the more
dilutive greater of the average share price or end-of-period share price. The
Company will adopt SFAS No. 128 in its fiscal year 1998 annual financial
statements. Management believes the adoption of SFAS No. 128 will have no impact
on the Company's previously reported earnings per share.
F-61
<PAGE> 178
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
1. OVERVIEW
The following table highlights the results of operations for the Company
and its subsidiaries:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------ -------------------
1997 1996 1997 1996
-------- ------- -------- --------
<S> <C> <C> <C> <C>
NEVADA OPERATIONS:
PALACE STATION
Net revenues.............................. $ 32,314 $32,059 $ 95,704 $100,559
Operating income.......................... $ 7,087 $ 7,222 $ 21,075 $ 23,407
EBITDA (1)................................ $ 9,018 $ 9,214 $ 27,232 $ 29,444
BOULDER STATION
Net revenues.............................. $ 34,814 $35,904 $103,897 $105,948
Operating income.......................... $ 9,214 $ 9,054 $ 28,060 $ 27,267
EBITDA (1)................................ $ 12,063 $11,818 $ 36,805 $ 35,285
TEXAS STATION
Net revenues.............................. $ 24,560 $19,435 $ 67,217 $ 59,239
Operating income.......................... $ 3,962 $ 476 $ 8,618 $ 2,324
EBITDA (1)................................ $ 6,228 $ 2,814 $ 15,296 $ 8,153
SUNSET STATION
Net revenues.............................. $ 32,479 $ -- $ 74,629 $ --
Operating income.......................... $ 5,661 $ -- $ 2,275 $ --
EBITDAR (1)............................... $ 9,847 $ -- $ 21,674 $ --
EBITDA (1)................................ $ 7,420 $ -- $ 16,696 $ --
TOTAL NEVADA OPERATIONS:
Net revenues.............................. $124,167 $87,398 $341,447 $265,746
Operating income.......................... $ 25,924 $16,752 $ 60,028 $ 52,998
EBITDA (1)................................ $ 34,729 $23,846 $ 96,029 $ 72,882
MISSOURI OPERATIONS:
STATION CASINO ST. CHARLES
Net revenues.............................. $ 29,629 $39,209 $ 90,779 $120,026
Operating income.......................... $ 2,159 $ 9,221 $ 8,749 $ 27,451
EBITDA (1)................................ $ 5,441 $12,235 $ 18,588 $ 36,317
STATION CASINO KANSAS CITY
Net revenues.............................. $ 37,601 $ -- $112,595 $ --
Operating loss............................ $ (77) $ -- $ (2,391) $ --
EBITDA (1)................................ $ 4,534 $ -- $ 11,052 $ --
TOTAL MISSOURI OPERATIONS:
Net revenues.............................. $ 67,230 $39,209 $203,374 $120,026
Operating income.......................... $ 2,082 $ 9,221 $ 6,358 $ 27,451
EBITDA (1)................................ $ 9,975 $12,235 $ 29,640 $ 36,317
STATION CASINOS, INC. AND OTHER:
Net revenues.............................. $ 5,799 $ 7,160 $ 19,988 $ 21,469
Operating loss............................ $ (3,022) $(4,437) $ (9,884) $(12,291)
EBITDA (1)................................ $ (2,493) $(3,669) $ (7,905) $(10,073)
</TABLE>
- ---------------
(1) "EBITDA" consists of operating income plus depreciation and amortization,
including preopening expenses. "EBITDAR" consists of operating income plus
depreciation, amortization, preopening expenses and rent expense. EBITDA
and EBITDAR should not be construed as alternatives to operating income as
an indicator of the Company's operating performance, or as alternatives to
cash provided by operating activities as a measure of liquidity. The
Company has presented EBITDA and EBITDAR solely as supplemental disclosure
because the Company believes that certain investors consider this
information useful in the evaluation of the financial performance of
companies with substantial depreciation and amortization, preopening
expenses and rent expense.
F-62
<PAGE> 179
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
2. RESULTS OF OPERATIONS
Three and Nine months ended December 31, 1997 Compared to Three and Nine
months ended December 31, 1996.
Consolidated net revenues increased 47.4% to $197.2 million for the three
months ended December 31, 1997, from $133.8 million in the prior year. The
Company's Nevada Operations contributed $124.2 million of net revenues for the
three months ended December 31, 1997, an increase of 42.1% over the prior year.
This increase in net revenues is due primarily to the opening of Sunset Station
in June 1997, as well as the continued improvement at Texas Station. Net
revenues at Boulder Station declined 3.0% due primarily to the opening of Sunset
Station on June 10, 1997. The Company's Missouri Operations contributed $67.2
million of net revenues for the three months ended December 31, 1997, an
increase of 71.5% over the prior year. This increase in net revenues is due to
the opening of Station Casino Kansas City in January 1997, offset by a decline
of 24.4% in net revenues at Station Casino St. Charles due to increased
competition in the St. Louis market with the opening of a new hotel/casino in
Maryland Heights in March 1997. For the nine months ended December 31, 1997,
consolidated net revenues increased 38.7% to $564.8 million, as compared to
$407.2 million in the prior year. The Nevada Operations contributed $341.4
million of net revenues for the nine months ended December 31, 1997, an increase
of $75.7 million over the prior year. The Missouri Operations contributed $203.4
million of net revenues for the nine months ended December 31, 1997, an increase
of $83.3 million over the prior year. These net improvements are due to the
factors noted above.
Consolidated operating income increased 16.0% to $25.0 million for the
three months ended December 31, 1997, from $21.5 million in the prior year.
Operating income at the Company's Nevada Operations increased 54.8% to $25.9
million for the three months ended December 31, 1997, from $16.8 million in the
prior year. Operating income at the Company's Missouri Operations declined 77.4%
to $2.1 million for the three months ended December 31, 1997, from $9.2 million
in the prior year. The increase in consolidated operating income, together with
an increase in net interest expense of $12.3 million and a decrease in the
income tax provision resulted in net income applicable to common stock of $1.6
million, or earnings per common share of $0.05 for the three months ended
December 31, 1997. For the nine months ended December 31, 1997, consolidated
operating income decreased 17.1% to $56.5 million, from $68.2 million in the
prior year. The Nevada Operations generated operating income of $60.0 million,
an increase of 13.3% compared to the prior year. Excluding $10.9 million of
preopening expenses primarily related to the opening of Sunset Station, the
Nevada Operations generated operating income of $70.9 million, an increase of
33.8% over the prior year. The Missouri Operations generated operating income of
$6.4 million, a decrease of 76.8% due primarily to a decrease of $18.7 million
at Station Casino St. Charles related to increased competition and an operating
loss of $2.4 million at Station Casino Kansas City. The decline in consolidated
operating income, an increase in net interest expense of $31.7 million, and the
expiration of certain option payments to lease or acquire land for future
development resulting in an expense of $5.0 million, resulted in a net loss
applicable to common stock of $7.9 million, or a loss per common share of $0.22
for the nine months ended December 31, 1997, compared to net income applicable
to common stock of $22.9 million, or earnings per common share of $0.65 in the
prior year.
Casino. Casino revenues increased 51.1% to $154.2 million for the three
months ended December 31, 1997, from $102.0 million in the prior year. For the
nine months ended December 31, 1997, casino revenues increased 39.1% to $436.9
million, from $314.1 million in the prior year. These increases are due to the
opening of Sunset Station in June 1997, the opening of Station Casino Kansas
City in January 1997 and improvements at Texas Station, offset by a decrease at
Station Casino St. Charles due to the factors noted above.
Casino expenses increased 60.8% to $73.9 million for the three months ended
December 31, 1997, from $46.0 million in the prior year. For the nine months
ended December 31, 1997, casino expenses increased 51.9% to $211.5 million, from
$139.3 million in the prior year. These increases in casino expenses are
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
consistent with the increase in casino revenues noted above. The casino net
profit margin decreased to 52.1% for the three months ended December 31, 1997,
from 54.9% in the prior year. The Company's Nevada Operations experienced a
slight increase in net casino margin, while the Missouri Operations were
negatively impacted in St. Charles due to the increased competition and Station
Casino Kansas City which has a lower margin due to the start-up nature of its
operations, and its late entry into the Kansas City market. In addition, the
Missouri Operations have a lower margin than the Company's combined margin, due
primarily to higher gaming tax rates in Missouri as compared to Nevada. For the
nine months ended December 31, 1997, the casino net profit margin declined to
51.6% from 55.7% in the prior year for the same reasons as noted above.
Food and Beverage. Food and beverage revenues increased 63.6% to $34.3
million for the three months ended December 31, 1997, from $21.0 million in the
prior year. For the nine months ended December 31, 1997, food and beverage
revenues increased 53.9% to $97.9 million, from $63.6 million in the prior year.
These increases are due to the opening of Station Casino Kansas City and Sunset
Station as noted above.
Food and beverage net profit margins improved to 33.6% for the three months
ended December 31, 1997, from 26.0% in the prior year. For the nine months ended
December 31, 1997, food and beverage net profit margins improved to 30.9%, from
24.9% in the prior year. These increases in margin are due to improvement at the
Company's Nevada Operations, especially Texas Station, primarily as a result of
continued focus on cost control.
Room. Room revenues increased 48.5% to $10.5 million for the three months
ended December 31, 1997, from $7.1 million in the prior year. For the nine
months ended December 31, 1997, room revenues increased 40.5% to $27.7 million,
from $19.7 million in the prior year. These increases are due primarily to the
opening of Station Casino Kansas City and Sunset Station which added 632 rooms
for a total of 2,160 rooms company-wide. Room occupancy company-wide decreased
to 93% from 96%, while the average daily room rate increased to $52 from $48
during the nine months ended December 31, 1997.
Other. Other revenue increased 1.0% to $12.6 million for the three months
ended December 31, 1997, from $12.4 million in the prior year. For the nine
months ended December 31, 1997, other revenues increased 17.2% to $41.2 million
from $35.2 million in the prior year. These increases are due primarily to the
addition of Station Casino Kansas City and Sunset Station. Revenues from the
Company's slot route business increased 10.4% to $17.0 million for the nine
months ended December 31, 1997.
Selling, General and Administrative. Selling, general and administrative
expenses ("SG&A") increased 70.0% to $45.5 million for the three months ended
December 31, 1997, from $26.8 million in the prior year. For the nine months
ended December 31, 1997, SG&A increased 54.7% to $127.4 million, from $82.4
million in the prior year. These increases are due to the addition of Station
Casino Kansas City and Sunset Station. SG&A as a percentage of net revenues
increased to 23.1% for the three months ended December 31, 1997, from 20.0% in
the prior year. For the nine months ended December 31, 1997, SG&A as a
percentage of net revenues increased to 22.6% from 20.2% in the prior year.
These increases are due primarily to the new operations at Sunset Station and
Station Casino Kansas City which, as new properties, tend to have a higher
percentage of SG&A to net revenues.
Corporate Expenses. Corporate expenses decreased 25.6% to $3.5 million for
the three months ended December 31, 1997, from $4.7 million in the prior year.
For the nine months ended December 31, 1997, corporate expenses decreased 16.5%
to $11.2 million, from $13.4 million in the prior year. Corporate expenses
declined to 1.8% of net revenues for the three months ended December 31, 1997,
from 3.5% in the prior year. For the nine months ended December 31, 1997,
corporate expenses declined to 2.0% of net revenues from 3.3% in the prior year.
These reductions were the result of management's efforts to lower corporate
expenses.
Development Expenses. The Company incurred no development expenses during
the three months ended December 31, 1997. Such costs have historically been
incurred by the Company in its efforts to identify and pursue potential gaming
opportunities in selected jurisdictions, including those in which gaming has not
been
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
approved. The Company expenses development costs including lobbying, legal and
consulting until such time as the jurisdiction has approved gaming and the
Company has identified a specific site. Costs incurred subsequent to these
criteria being met are capitalized.
Depreciation and Amortization. Depreciation and amortization increased
58.4% to $17.2 million for the three months ended December 31, 1997, from $10.9
million in the prior year. For the nine months ended December 31, 1997,
depreciation and amortization increased 62.7% to $50.4 million, from $31.0
million in the prior year. These increases are due primarily to the addition of
Station Casino Kansas City and Sunset Station.
Preopening Expenses. The Company capitalizes preopening expenses associated
with its construction projects, including Sunset Station which opened June 10,
1997. These amounts are expensed upon the opening of the related project. During
the nine months ended December 31, 1997, the Company expensed preopening
expenses of $10.9 million related primarily to Sunset Station.
Interest Expense, net. Interest costs incurred (expensed and capitalized)
increased 57.9% to $23.7 million for the three months ended December 31, 1997.
For the nine months ended December 31, 1997 interest costs incurred increased
67.3% to $68.9 million. This increase is primarily attributable to added
interest costs associated with the 9 3/4% senior subordinated notes issued by
the Company in April 1997, borrowings under the Sunset Station loan agreement
and borrowings under the reducing revolving credit facility. Effective January
1, 1998, the Company will stop capitalizing interest on the St. Charles
Expansion Project.
3. LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended December 31, 1997, the Company's sources of
capital included net proceeds of $144.3 million from the issuance of 9 3/4%
senior subordinated notes, which were used to repay amounts outstanding under
the Company's reducing revolving bank credit facility, cash flows from operating
activities of $73.3 million, and borrowings under the Sunset Loan Agreement (as
defined herein) of $64.0 million. At December 31, 1997, the Company had
available borrowings of $100.0 million under its reducing revolving credit
facility, subject to covenant restrictions and $53.7 million in cash and cash
equivalents. Also, in connection with the Merger Agreement, the Company will
issue to Crescent and Crescent has agreed to purchase up to an aggregate of
115,000 shares of a new series of preferred stock of the Company at a price of
$1,000 per share (plus accrued dividends) in cash in increments of 5,000 shares
(See Liquidity and Capital Resources -- New Series of Preferred Stock).
During the nine months ended December 31, 1997, total capital expenditures
were approximately $125.4 million, of which approximately (i) $43.6 million was
associated with the development and construction of Sunset Station, (ii) $31.6
million was associated with the development and construction of the expansion
project at Station Casino St. Charles, (iii) $7.0 million was associated with
the acquisition of land adjacent to Boulder Station, and (iv) $43.2 million was
associated with various other projects, maintenance capital expenditures and net
construction period interest.
The Company's primary capital requirements during the remainder of fiscal
year 1998 are expected to include (i) the payment of construction contracts
payable of approximately $12.5 million as of December 31, 1997, (ii) maintenance
capital expenditures, (iii) principal and interest payments on indebtedness,
(iv) dividend payments on convertible preferred stock, and (v) general corporate
purposes.
The Company has commenced construction of an expansion project at Station
Casino St. Charles (the "St. Charles Expansion Project"). As of December 31,
1997, approximately $131.2 million (excluding construction period interest) had
been incurred. As of December 31, 1997, construction on the project has ceased
and management does not expect that any major construction on the project will
resume before the Merger with Crescent is consummated (See Note 2 to Condensed
Consolidated Financial Statements). Once the merger is consummated, the Company
jointly with Crescent will determine the scope and timing of the
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
project. Effective January 1, 1998, the Company will stop capitalizing interest
on the St. Charles Expansion Project.
The Company believes that cash flows from operations, borrowings under the
reducing revolving bank credit facility, vendor and lease financing of
equipment, the Redeemable Preferred Stock (see Note 2 to Condensed Consolidated
Financial Statements) and existing cash balances will be adequate to satisfy the
Company's anticipated uses of capital during the remainder of fiscal year 1998.
The Company, however, continually is evaluating its financing needs. If more
attractive financing alternatives become available to the Company, the Company
may amend its financing plans assuming such financing would be permitted under
its existing debt agreements (See "Description of Certain Indebtedness and
Capital Stock") and other applicable agreements, including the Merger Agreement
which requires the Company to obtain the consent of the other party prior to
issuing additional securities or selling assets.
Description of Certain Indebtedness and Capital Stock
Bank Facility
The Company's secured, Amended and Restated Reducing Revolving Loan
Agreement, dated as of March 19, 1996, as amended on June 27, 1997 (the "Bank
Facility"), is a reducing revolving credit facility which provides for
borrowings up to an aggregate principal amount of $330 million as of December
31, 1997. The Bank Facility is secured by substantially all of the assets of
Palace Station, Boulder Station, Texas Station, Station Casino Kansas City and
Station Casino St. Charles (collectively, the "Borrowers"). The Company and
Southwest Gaming Services, Inc. guarantee the borrowings under the Bank Facility
(collectively the "Guarantors"). The Bank Facility matures on September 30,
2000. In July 1997, the Company reduced the total amount available under the
Bank Facility by $30 million. As a result, no additional reductions are required
until June 30, 1998 at which time the Bank Facility will reduce by $22.4 million
each fiscal quarter through March 31, 2000. Borrowings under the Bank Facility
bear interest at a margin above the bank's prime rate or the Eurodollar Rate, as
selected by the Company. The margin above such rates, and the fee on the
unfunded portions of the Bank Facility, will vary quarterly based on the
combined Borrowers' and the Company's consolidated (exclusive of Sunset Station)
ratio of funded debt to earnings before interest, taxes, depreciation and
amortization ("EBITDA") adjusted for preopening expenses. As of December 31,
1997, the Borrowers' margin above the Eurodollar Rate on borrowings under the
Bank Facility was 2.25%. Such margin will increase to 2.75% if the maximum
funded debt to EBITDA (adjusted for preopening expenses) ratio is reached.
The Bank Facility contains certain financial and other covenants. These
include a maximum funded debt to EBITDA (adjusted for preopening expenses) ratio
for the Borrowers combined of 2.75 to 1.00 for each fiscal quarter through June
30, 1998, and 2.50 to 1.00 for each fiscal quarter thereafter, a minimum fixed
charge coverage ratio for the preceding four quarters for the Borrowers combined
of 1.35 to 1.00 for the periods March 31, 1996 through June 30, 1998, and 1.50
to 1.00 for periods thereafter, a limitation on indebtedness, and limitations on
capital expenditures. As of December 31, 1997, the Borrowers funded debt to
EBITDA ratio was 2.01 to 1.00 and the fixed charge coverage ratio for the
preceeding four quarters ended December 31, 1997 was 1.38 to 1.00. A tranche of
the Bank Facility contains a minimum tangible net worth requirement for Palace
Station ($10 million plus 95% of net income determined as of the end of each
fiscal quarter with no reduction for net losses) and certain restrictions on
distributions of cash from Palace Station to the Company. As of December 31,
1997, Palace Station's tangible net worth exceeded the requirement by
approximately $7.9 million. These covenants limit Palace Station's ability to
make payments to the Company, a significant source of anticipated cash for the
Company.
In addition, the Bank Facility has financial covenants relating to the
Company. These include prohibitions on dividends on, or redemptions of, the
Company's common stock, restrictions on repayment of any subordinated debt,
limitations on indebtedness beyond existing indebtedness, the Company's senior
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
subordinated notes and other specified indebtedness, minimum consolidated
tangible net worth requirements (adjusted upwards for post October 1, 1995
preopening expenses, not to exceed $18 million and for potential losses on
disposed or discontinued assets, not to exceed $30 million), for the Company of
$165 million plus 95% of post October 1, 1995 net income (not reduced by net
losses) and 100% of net equity offering proceeds, and limitations on capital
expenditures and investments. As of December 31, 1997, the Company's
consolidated net worth exceeded the requirement by approximately $18.5 million.
In March and June 1997, the Company obtained certain amendments to the Bank
Facility in order to enhance its borrowing capacity under the Bank Facility. As
amended, the Bank Facility includes a maximum funded debt to EBITDA (adjusted
for preopening expenses) ratio, including annualized EBITDA (adjusted for
preopening expenses) for any new venture, as defined, open less than a year, for
the Company on a consolidated basis of 5.75 to 1.00 for the fiscal quarter ended
December 31, 1997, 5.75 to 1.00 for the fiscal quarter ending March 31, 1998,
5.00 to 1.00 for the fiscal quarter ending June 30, 1998, 4.75 to 1.00 for the
fiscal quarter ending September 30, 1998, 4.50 to 1.00 for the fiscal quarter
ending December 31, 1998, 4.25 to 1.00 for each fiscal quarter through June 30,
1999, 4.00 to 1.00 for the fiscal quarter ending September 30, 1999 and 3.75 to
1.00 thereafter. For the quarter ended December 31, 1997, the Company obtained a
one time waiver modifying the funded debt to EBITDA ratio to a maximum of 5.90
to 1.00. As of December 31, 1997, the Company's funded debt to EBITDA ratio was
5.80 to 1.00. Such consolidated calculations for the Company do not include
Sunset Station. In addition, the Bank Facility prohibits the Company from
holding cash and cash equivalents in excess of the sum of the amounts necessary
to make the next scheduled interest or dividend payments on the Company's senior
subordinated notes and preferred stock, the amounts necessary to fund casino
bankroll in the ordinary course of business and $2.0 million. The Guarantors
waive certain defenses and rights including rights of subrogation and
reimbursement. The Bank Facility contains customary events of default and
remedies and is cross-defaulted to the Company's senior subordinated notes and
the Change of Control Triggering Event as defined in the indentures governing
the senior subordinated notes.
Senior Subordinated Notes
The Company has $528.2 million, net of unamortized discount of $12.8
million, of senior subordinated notes outstanding as of December 31, 1997,
$186.8 million of these notes bear interest, payable semi-annually, at a rate of
9 5/8% per year, $196.9 million of these notes bear interest, payable
semi-annually, at a rate of 10 1/8% per year and $144.5 million of the notes
bear interest, payable semi-annually, at a rate of 9 3/4% per year (collectively
the "Notes"). The indentures governing the Notes (the "Indentures") contain
certain customary financial and other covenants which prohibit the Company and
its subsidiaries from incurring indebtedness (including capital leases) other
than (a) non-recourse debt for certain specified subsidiaries, (b) certain
equipment financings, (c) the Notes, (d) up to $15 million of additional
indebtedness, (e) additional indebtedness if, after giving effect thereto, a
2.00 to 1.00 pro forma Consolidated Coverage Ratio (as defined) has been met,
(f) Permitted Refinancing Indebtedness (as defined), (g) borrowings of up to $72
million under the Bank Facility (the Line A Commitment), of which no amounts
were outstanding as of December 31, 1997 and (h) certain other indebtedness. At
December 31, 1997, the Company's Consolidated Coverage Ratio was 2.01 to 1.00.
In addition, the Indentures prohibit the Company from paying dividends on any of
its capital stock unless at the time of and after giving effect to such
dividends, among other things, the aggregate amount of all Restricted Payments
and Restricted Investments (as defined in the Indentures, and which include any
dividends on any capital stock of the Company) do not exceed the sum of (i) 50%
of Cumulative Consolidated Net Income (as defined) of the Company (less 100% of
any consolidated net losses), (ii) certain net proceeds from the sale of equity
securities of the Company, and (iii) $15 million. The limitation on the
incurrence of additional indebtedness and dividend restrictions in the
Indentures may significantly affect the Company's ability to pay dividends on
its capital stock. The Indentures also give the holders of the Notes the right
to require the Company to purchase the Notes at 101% of the principal amount of
the Notes plus accrued interest thereon upon a Change of Control and Rating
Decline (each as defined in the Indentures) of the Company.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Sunset Loan Agreement, Supplemental Loan Agreement and Sunset Operating Lease
On September 25, 1996, Sunset Station, a wholly-owned subsidiary of the
Company, entered into a Construction/Term Loan Agreement (the "Sunset Loan
Agreement") with Bank of America National Trust and Savings Association ("Bank
of America NT&SA"), Bank of Scotland, Societe Generale and each of the other
lenders party to such agreement, pursuant to which Sunset Station received a
commitment for $110 million to finance the remaining development and
construction costs of Sunset Station. The Company also entered into an operating
lease for certain furniture, fixtures and equipment with a cost of $40 million
to be subleased to Sunset Station.
The Sunset Loan Agreement includes a first mortgage term note in the amount
of $110 million (the "Sunset Note") which is non-recourse to the Company, except
as to certain construction matters pursuant to a completion guarantee dated as
of September 25, 1996, executed by the Company on behalf of Sunset Station, and
except that the Company has pledged all of the stock of Sunset Station as
security for the Sunset Loan Agreement. As of December 31, 1997, Sunset Station
had borrowed the full $110 million under the Sunset Note. The Sunset Note is to
reduce $1.8 million for each fiscal quarter ending March 1998 through December
1998, $2.3 million for each fiscal quarter ending March 1999 through December
1999, and $2.0 million for the fiscal quarters ending March 2000 and June 2000
and matures in September 2000. In addition, the Sunset Note is subject to
prepayment subsequent to July 1998 by an amount equal to a specified percentage
of Excess Cash Flow (as defined). The Sunset Note carries an interest rate of
375 basis points over the Eurodollar Rate (as defined in the Sunset Loan
Agreement). The Sunset Note is secured by substantially all of the assets of
Sunset Station, including a deed of trust with respect to the real property on
which Sunset Station is situated, a portion of which is subject to a lease from
the Company to Sunset Station, and the remainder of which property is owned by
Sunset Station, and a security agreement as to all tangible and intangible
personal property including Sunset Station's rights under an operating lease for
certain furniture, fixtures and equipment.
The Sunset Loan Agreement contains certain customary financial and other
covenants (related exclusively to Sunset Station) including a minimum fixed
charge coverage ratio as of the last day of any full quarter after the opening
of Sunset Station of not less than 1.10 to 1.00, a maximum senior funded debt to
EBITDA (adjusted for certain cash contributions or advances by the Company)
ratio after opening of 4.50 to 1.00 for the first full quarter reducing by 0.25
on certain quarters thereafter to 3.25 to 1.00 for the tenth quarter and each
quarter thereafter, and a minimum net worth as of any quarter end after opening
of not less than $52 million plus 80% of net income (not reduced by net losses),
plus 100% of certain additional equity contributions by the Company and
Supplemental Loans (as defined). As of December 31, 1997, Sunset Station's fixed
charge coverage ratio was 2.98 to 1.00 and the funded debt to EBITDA ratio was
3.76 to 1.00. As of December 31, 1997, Sunset Station's net worth exceed the
minimum requirement by approximately $8.5 million. In addition, the Sunset Loan
Agreement places restrictions on indebtedness and guarantees, dividends, stock
redemptions, mergers, acquisitions, sale of assets or sale of stock in
subsidiaries and limitations on capital expenditures.
In addition, the Company has provided a funding commitment to Sunset
Station of up to an additional $25 million pursuant to a supplemental loan
agreement (the "Supplemental Loan Agreement"). The Sunset Loan Agreement
requires Sunset Station to draw amounts under the Supplemental Loan Agreement in
the event of the failure of certain financial covenants under the Sunset Loan
Agreement. Loans under this funding commitment may be drawn down up to $10
million during the first year after September 30, 1997, up to $10 million during
the second year after such date and up to $5 million during the third year after
such date. The Supplemental Loan Agreement also provides for an additional,
separate funding commitment up to $40 million in connection with a purchase
option for certain furniture, fixtures and equipment currently financed under
the Sunset Operating Lease (as defined herein). Sunset Station will pay interest
at a rate per annum equal to the three month Eurodollar Rate, the interest being
payable solely in the form of commensurate additions to the principal of the
Supplemental Loans. The Supplemental Loan Agreement
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
expires in September 2001. The funding commitments under the Supplemental Loan
Agreement are subject to limitations imposed by the Indentures and the Bank
Facility.
In order to manage the interest rate risk associated with the Sunset Note,
Sunset Station entered into an interest rate swap agreement with Bank of America
NT&SA. This agreement swaps the variable rate interest pursuant to the Sunset
Note to a fixed rate of 9.58% on $100 million notional amount at December 1997
and then decreases to $95 million at June 1998. The agreement expires in
December 1998. The difference paid or received pursuant to the swap agreement is
accrued as interest rates change and recognized as an adjustment to interest
expense for the Sunset Note. Sunset Station is exposed to credit risk in the
event of non-performance by the counterparty to the agreement. The Company
believes the risk of non-performance by the counterparty is minimal.
The Company has also entered into an operating lease for furniture,
fixtures and equipment (the "Equipment") with a cost of $40 million, dated as of
September 25, 1996 (the "Sunset Operating Lease") between the Company and First
Security Trust Company of Nevada. The Sunset Operating Lease expires in October
2000 and carries a lease rate of 225 basis points above the Eurodollar Rate. As
of December 31, 1997, $35.7 million of this facility had been drawn and no
further draws pursuant to the lease will be made. The Company has entered into a
sublease with Sunset Station for the Equipment pursuant to an operating lease
with financial terms substantially similar to the Sunset Operating Lease. In the
event that Sunset Station elects to purchase the Equipment, the Company has
provided a funding commitment up to the amount necessary for such purchase
pursuant to the Supplemental Loan Agreement (subject to the limitations on
funding contained in the Supplemental Loan Agreement).
In connection with the Sunset Operating Lease, the Company also entered
into a participation agreement, dated as of September 25, 1996 (the
"Participation Agreement") with the trustee, as lessor under the Sunset
Operating Lease, and holders of beneficial interests in the Lessor Trust (the
"Holders"). Pursuant to the Participation Agreement, the Holders advanced funds
to the trustee for the purchase by the trustee of, or to reimburse the Company
for the purchase, of the Equipment, which is currently being leased to the
Company under the Sunset Operating Lease, and in turn subleased to Sunset
Station. Pursuant to the Participation Agreement, the Company also agreed to
indemnify the Lessor and the Holders against certain liabilities.
Common Stock
The Company is authorized to issue up to 90,000,000 shares of its common
stock, $0.01 par value per share (the "Common Stock"), 35,306,657 shares of
which were issued and outstanding as of December 31, 1997. Each holder of the
Common Stock is entitled to one vote for each share held of record on each
matter submitted to a vote of stockholders. Holders of the Common Stock have no
cumulative voting, conversion, redemption or preemptive rights or other rights
to subscribe for additional shares other than pursuant to the Rights Plan
described below. Subject to any preferences that may be granted to the holders
of the Company's preferred stock, each holder of Common Stock is entitled to
receive ratably such dividends as may be declared by the Board of Directors out
of funds legally available therefor as well as any distributions to the
stockholders and, in the event of liquidation, dissolution or winding up of the
Company, is entitled to share ratably in all assets of the Company remaining
after payment of liabilities.
Rights Plan
On October 6, 1997, the Company declared a dividend of one preferred share
purchase right (a "Right") for each outstanding share of Common Stock. The
dividend was paid on October 21, 1997. Each Right entitles the registered holder
to purchase from the Company one one-hundredth of a share of Series A Preferred
Stock, par value $0.01 per share ("Preferred Shares") of the Company at a price
of $40.00 per one one-hundredth of a Preferred Share, subject to adjustment. The
Rights are not exercisable until the earlier of
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
10 days following a public announcement that a person or group of affiliated or
associated persons have acquired beneficial ownership of 15% or more of the
outstanding Common Stock ("Acquiring Person") or 10 business days (or such later
date as may be determined by action of the Board of Directors prior to such time
as any person or group of affiliated persons 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 15% or more of the outstanding
Common Stock. The Rights will expire on October 21, 2007. Acquiring Persons do
not have the same rights to receive Common Stock as other holders upon exercise
of the Rights. Because of the nature of the Preferred Shares' dividend,
liquidation and voting rights, the value of one one-hundredth interest in a
Preferred Share purchasable upon exercise of each Right should approximate the
value of one Common Share. In the event that any person or group of affiliated
or associated persons becomes an Acquiring Person, the proper provisions will be
made so that each holder of a Right, other than Rights beneficially owned by the
Acquiring Person (which will thereafter become void), will thereafter have the
rights to receive upon exercise that number of Common Shares having a market
value of two times the exercise price of the Right. In the event that the
Company is acquired in a merger or other business combination transaction or 50%
or more of its consolidated assets or earning power are sold after a person or
group has become an Acquiring Person, proper provision will be made so that each
holder of a Right will thereafter have the right to receive, upon exercise
thereof, 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. Because of the characteristics of the Rights in connection
with a person or group of affiliated or associated persons becoming an Acquiring
Person, the Rights may have the effect of making an acquisition of the Company
more difficult and may discourage such an acquisition.
Immediately prior to the execution of the Merger Agreement, the Company
amended its Rights Agreement dated October 6, 1997 to exclude Crescent and its
affiliates from the definition of Acquiring Person to the extent that it is a
Beneficial Owner (as defined in the Rights Agreement) as a result of the
approval, execution or delivery of, or the consummation of the transactions
contemplated by, the Merger Agreement, including, without limitation, the
purchase by Crescent of the Redeemable Preferred Stock.
Preferred Stock
The Company is authorized to issue up to 5,000,000 shares of its preferred
stock, $0.01 par value per share (the "Preferred Stock"). As of December 31,
1997, 2,070,000 shares of $3.50 Convertible Preferred Stock (the "Convertible
Preferred Stock") has been issued and are outstanding. The Board of Directors,
without further action by the holders of Common Stock or the Convertible
Preferred Stock, may issue shares of Preferred Stock in one or more series and
may fix or alter the rights, preferences, privileges and restrictions, including
the voting rights, redemption provisions (including sinking fund provisions),
dividend rights, dividend rates, liquidation rates, liquidation preferences,
conversion rights and the description and number of shares constituting any
wholly unissued series of Preferred Stock. Except as described above, the Board
of Directors, without further stockholder approval, may issue shares of
Preferred Stock with rights that could adversely affect the rights of the
holders of Common Stock or the Convertible Preferred Stock. The issuance of
shares of Preferred Stock under certain circumstances could have the effect of
delaying or preventing a change of control of the Company or other corporate
action.
Convertible Preferred Stock
Each of the Convertible Preferred Stock shares outstanding, have a
liquidation preference of $50.00 per share plus an amount equal to any
accumulated and unpaid dividends at the annual rate of $3.50 per share, or 7.0%
of such liquidation preference. Such dividends accrue and are cumulative from
the date of issuance and are payable quarterly. The Convertible Preferred Stock
is convertible at the option of the holder thereof at any time, unless
previously redeemed, into shares of Common Stock at an initial conversion rate
of 3.2573 shares
F-70
<PAGE> 187
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
of Common Stock for each share of Convertible Preferred Stock, subject to
adjustment in certain circumstances. The Company may reduce the conversion price
of the Convertible Preferred Stock by any amount for any period of at least 20
days, so long as the decrease is irrevocable during such period. The Convertible
Preferred Stock is redeemable, at the option of the Company, in whole or in
part, for shares of Common Stock, at any time after March 15, 1999, initially at
a price of $52.45 per share of Convertible Preferred Stock, and thereafter at
prices decreasing annually to $50.00 per share of Convertible Preferred Stock on
and after March 15, 2006, plus accrued and unpaid dividends. The Common Stock to
be issued is determined by dividing the redemption price by the lower of the
average daily closing price for the Company's Common Stock for the preceding 20
trading days or the closing price of the Company's Common Stock on the first
business day preceding the date of the redemption notice. Any fractional shares
would be paid in cash. There is no mandatory sinking fund obligation with
respect to the Convertible Preferred Stock. The holders of the Convertible
Preferred Stock do not have any voting rights, except as required by applicable
law and except that, among other things, whenever accrued and unpaid dividends
on the Convertible Preferred Stock are equal to or exceed the equivalent of six
quarterly dividends payable on the Convertible Preferred Stock, the holders of
the Convertible Preferred Stock, voting separately as a class with the holders
of any other series of parity stock upon which like voting rights have been
conferred and are exercisable, will be entitled to elect two directors to the
Board of Directors until dividend arrearage has been paid or amounts have been
set apart for such payment. The Convertible Preferred Stock is senior to the
Common Stock with respect to dividends and upon liquidation, dissolution or
winding-up.
New Series of Preferred Stock
At the option of the Company, the Company will issue to Crescent and
Crescent has agreed to purchase subject to the terms, conditions and procedures
set forth in the Merger Agreement up to an aggregate of 115,000 shares of a new
series of preferred stock of the Company (the "Redeemable Preferred Stock") at a
price of $1,000 per share (plus accrued dividends) in cash in increments of
5,000 shares. The Redeemable Preferred Stock is convertible at the option of the
holder any time after January 16, 1999, unless previously redeemed, into shares
of common stock at a conversion rate of 60.606 shares of Common Stock for each
share of Redeemable Preferred Stock subject to ordinary antidilution provisions.
Crescent must fund the purchase price for the purchase of shares of Redeemable
Preferred Stock on the 10th business day following notice from the Company or,
in the case of a notice to sell 25,000 or more shares of Redeemable Preferred
Stock, the 20th business day following such notice. The Company may not require
Crescent to purchase shares of Redeemable Preferred Stock more than two times in
any 30-day period. The Company may redeem the Redeemable Preferred Stock at any
time for cash or for common stock of the Company that has a then market price
(determined on the basis of closing prices for such stock for the 20 trading
days immediately preceding the redemption notice) equal to approximately 111% of
the redemption price for the Redeemable Preferred Shares to be redeemed. Any
such issuance in redemption will be made such that stock held by each owner of
such common stock so issued in excess of 9.9% of the Company's outstanding
common stock will generally be non-voting common stock. The Redeemable Preferred
Stock will have no voting rights except as required by law. Dividends of $100
per share of Redeemable Preferred Stock per annum shall accrue without interest
and be payable when, as, and if declared out of legally available funds on a
fully cumulative basis. Unless written consent from Crescent is received, the
Company has agreed to use the net proceeds from the sale of the Redeemable
Preferred Stock to repay indebtedness under its revolving loan agreement,
borrowings under which were used for acquisitions and master-planned expansions.
Forward-Looking Statements
This document contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. The
forward-looking statements in this document are intended to be subject to the
safe harbor protection provided by Section 21E. All forward-looking statements
involve risks and uncertainties. Although the Company believes that its
expectations are based upon reasonable assump-
F-71
<PAGE> 188
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
tions within the bounds of its knowledge of its business and operations, there
can be no assurance that actual results will not materially differ from its
expectations. Factors that could cause actual results to differ materially from
expectations include, among other things, the Company's competition, the
limitations on capital resources imposed by the Company's Bank Facility and the
terms of the Indentures governing the Company's Notes, the Company's ability to
meet its interest expense and principal repayment obligations, loss of the
Company's riverboat and dockside facilities from service, construction risks,
the Company's dependence on key gaming markets, the Company's ability to take
advantage of new gaming development opportunities and gaming regulations. For
other factors that may cause actual results to materially differ from
expectations and underlying assumptions, refer to the Registration Statement on
Form S-4 (File No. 333-30685) (and particularly the section labeled "Risk
Factors" therein) and periodic reports, including the Annual Report on Form 10-K
for the year ended March 31, 1997, filed by the Company with the Securities and
Exchange Commission (and particularly the section labeled "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
therein). Readers are cautioned not to place undue reliance on any
forward-looking statements, which speak only as of the date thereof. The Company
undertakes no obligation to publicly release any revisions to such
forward-looking statements to reflect events or circumstances after the date
hereof.
F-72
<PAGE> 189
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Station Casinos, Inc.:
We have audited the accompanying consolidated balance sheets of Station
Casinos, Inc. (a Nevada corporation) and subsidiaries as of March 31, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended March 31,
1997. 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 generally accepted auditing
standards. 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 Station Casinos, Inc. and
subsidiaries as of March 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
April 23, 1997 (except for Note 5
as to which the date is June 27, 1997
and Note 14 as to which the date is
January 16, 1998)
F-73
<PAGE> 190
STATION CASINOS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1997 1996
---------- --------
(AMOUNTS IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 42,522 $114,868
Accounts and notes receivable, net........................ 7,852 5,151
Inventories............................................... 3,473 2,299
Prepaid gaming taxes...................................... 4,291 3,726
Prepaid expenses and other................................ 11,231 7,395
---------- --------
Total current assets.............................. 69,369 133,439
Property and equipment, net................................. 1,069,052 616,211
Land held for development................................... 26,354 28,934
Other assets, net........................................... 69,343 48,730
---------- --------
Total assets...................................... $1,234,118 $827,314
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 18,807 $ 23,256
Accounts payable.......................................... 21,106 11,091
Accrued payroll and related............................... 13,460 11,519
Construction contracts payable............................ 94,835 27,879
Accrued interest payable.................................. 10,625 6,875
Accrued expenses and other current liabilities............ 26,433 16,706
---------- --------
Total current liabilities......................... 185,266 97,326
Long-term debt, less current portion........................ 742,156 441,742
Deferred income taxes, net.................................. 7,848 9,776
---------- --------
Total liabilities................................. 935,270 548,844
---------- --------
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock, par value $.01; authorized 5,000,000
shares; 2,070,000 and 1,800,000 convertible preferred
shares issued and outstanding.......................... 103,500 90,000
Common stock, par value $.01; authorized 90,000,000
shares; 35,318,057 and 35,303,346 shares issued and
outstanding............................................ 353 353
Additional paid-in capital................................ 167,397 167,623
Deferred compensation -- restricted stock................. (1,225) (1,811)
Retained earnings......................................... 28,823 22,305
---------- --------
Total stockholders' equity........................ 298,848 278,470
---------- --------
Total liabilities and stockholders' equity........ $1,234,118 $827,314
========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-74
<PAGE> 191
STATION CASINOS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
------------------------------------------
1997 1996 1995
------------ ------------ ------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Operating revenues:
Casino.............................................. $ 450,013 $ 358,495 $ 210,534
Food and beverage................................... 92,220 73,057 43,208
Room................................................ 27,420 23,614 17,690
Other............................................... 48,957 39,099 36,561
----------- ----------- -----------
Gross revenues................................... 618,610 494,265 307,993
Promotional allowances.............................. (35,095) (27,408) (17,715)
----------- ----------- -----------
Net revenues..................................... 583,515 466,857 290,278
----------- ----------- -----------
Operating costs and expenses:
Casino.............................................. 203,857 150,805 92,812
Food and beverage................................... 68,994 57,659 34,045
Room................................................ 10,318 9,147 7,014
Other............................................... 23,927 24,902 27,270
Selling, general and administrative................. 120,285 97,466 60,810
Corporate expense................................... 18,284 15,979 13,141
Restructuring charge................................ 2,016 -- --
Development expenses................................ 1,302 3,960 7,200
Depreciation and amortization....................... 44,589 35,039 22,220
Preopening expenses................................. 31,820 2,436 19,378
----------- ----------- -----------
525,392 397,393 283,890
----------- ----------- -----------
Operating income...................................... 58,123 69,464 6,388
Other income (expense):
Interest expense, net............................... (36,698) (30,563) (19,967)
Other............................................... (47) 1,150 2,160
----------- ----------- -----------
(36,745) (29,413) (17,807)
----------- ----------- -----------
Income (loss) before income taxes..................... 21,378 40,051 (11,419)
Income tax (provision) benefit........................ (7,615) (14,579) 3,477
----------- ----------- -----------
Net income (loss)..................................... 13,763 25,472 (7,942)
Preferred stock dividends............................. (7,245) (53) --
----------- ----------- -----------
Net income (loss) applicable to common stock.......... $ 6,518 $ 25,419 $ (7,942)
=========== =========== ===========
Earnings (loss) per common share...................... $ 0.18 $ 0.75 $ (0.26)
=========== =========== ===========
Weighted average common shares outstanding............ 35,316,077 33,917,646 30,112,851
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-75
<PAGE> 192
STATION CASINOS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DEFERRED RETAINED
ADDITIONAL COMPENSATION -- EARNINGS TOTAL
PREFERRED COMMON PAID-IN RESTRICTED (ACCUMULATED STOCKHOLDERS'
STOCK STOCK CAPITAL STOCK DEFICIT) EQUITY
--------- ------ ---------- --------------- ------------ -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balances, March 31, 1994...... $ -- $300 $ 90,663 $ -- $ 4,828 $ 95,791
Restricted stock grant (Note
9).......................... -- 1 2,929 (2,930) -- --
Amortization of deferred
compensation................ -- -- -- 37 -- 37
Net loss...................... -- -- -- -- (7,942) (7,942)
-------- ---- -------- ------- ------- --------
Balances, March 31, 1995...... -- 301 93,592 (2,893) (3,114) 87,886
Issuance of common stock
(Note 7).................... -- 52 77,309 -- -- 77,361
Issuance of preferred stock
(Note 7).................... 90,000 -- (3,278) -- -- 86,722
Amortization of deferred
compensation................ -- -- -- 1,082 -- 1,082
Preferred stock dividends..... -- -- -- -- (53) (53)
Net income.................... -- -- -- -- 25,472 25,472
-------- ---- -------- ------- ------- --------
Balances March 31, 1996....... 90,000 353 167,623 (1,811) 22,305 278,470
Issuance of preferred stock
(Note 7).................... 13,500 -- (405) -- -- 13,095
Exercise of stock options..... -- -- 179 -- -- 179
Amortization of deferred
compensation................ -- -- -- 586 -- 586
Preferred stock dividends..... -- -- -- -- (7,245) (7,245)
Net income.................... -- -- -- -- 13,763 13,763
-------- ---- -------- ------- ------- --------
Balances March 31, 1997....... $103,500 $353 $167,397 $(1,225) $28,823 $298,848
======== ==== ======== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-76
<PAGE> 193
STATION CASINOS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................... $ 13,763 $ 25,472 $ (7,942)
--------- --------- ---------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization......................... 44,589 35,039 22,220
Amortization of debt discount and issuance costs...... 5,279 3,141 1,211
Preopening expenses................................... 31,820 2,436 19,378
(Decrease) increase in deferred income taxes.......... (3,752) 8,995 (5,449)
Changes in assets and liabilities:
Increase in accounts and notes receivable, net..... (1,151) (522) (955)
Increase in inventories and prepaid expenses and
other............................................ (3,751) (2,428) (3,152)
(Decrease) increase in accounts payable............ 10,015 (2,710) 10,547
Increase in accrued expenses and other current
liabilities...................................... 13,723 4,822 12,041
Other, net............................................ 1,268 3,708 595
--------- --------- ---------
Total adjustments............................. 98,040 52,481 56,436
--------- --------- ---------
Net cash provided by operating activities..... 111,803 77,953 48,494
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures.................................. (505,735) (279,340) (141,165)
Proceeds from sale of land, property and equipment.... 8,900 6,578 12,483
Land held for development............................. (36) (5,018) (5,507)
Other long-term assets................................ (15,772) (1,638) (2,489)
Refund on land held for development................... -- -- 9,500
Increase (decrease) in construction contracts
payable............................................ 66,956 21,460 (10,337)
Preopening expenses................................... (31,820) (2,436) (19,378)
Other, net............................................ (1,501) (6,541) (692)
--------- --------- ---------
Net cash used in investing activities......... (479,008) (266,935) (157,585)
--------- --------- ---------
Cash flows from financing activities:
Borrowings (payments) under bank facility, net........ 277,000 (65,000) 37,000
Borrowings under Sunset loan agreement................ 46,000 -- --
Proceeds from notes payable........................... 2,250 42,438 13,757
Principal payments on notes payable................... (30,444) (34,958) (8,195)
Proceeds from the issuance of common stock............ -- 78,246 --
Proceeds from the issuance of senior subordinated
notes.............................................. -- 191,292 72,091
Proceeds from the issuance of preferred stock......... 13,095 87,300 --
Distributions paid to stockholders.................... -- -- (4,014)
Dividends paid on preferred stock..................... (6,985) -- --
Debt issuance costs and other, net.................... (6,057) (12,429) (746)
--------- --------- ---------
Net cash provided by financing activities..... 294,859 286,889 109,893
--------- --------- ---------
Cash and cash equivalents:
(Decrease) increase in cash and cash equivalents...... (72,346) 97,907 802
Balance, beginning of year............................ 114,868 16,961 16,159
--------- --------- ---------
Balance, end of year.................................. $ 42,522 $ 114,868 $ 16,961
========= ========= =========
Supplemental cash flow disclosures:
Cash paid for interest, net of amounts capitalized.... $ 28,577 $ 27,817 $ 17,021
Cash paid for income taxes, net....................... $ 9,250 $ 8,668 $ 1,303
Property and equipment purchases financed by debt..... $ 361 $ 28,405 $ 22,719
Assets sold for note receivable....................... $ 1,550 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-77
<PAGE> 194
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis of Presentation and Organization
Station Casinos, Inc. (the "Company"), a Nevada Corporation, is an
established multi-jurisdictional gaming enterprise that currently owns and
operates three hotel/casino properties in Las Vegas, Nevada, a gaming and
entertainment complex in St. Charles, Missouri and a gaming and entertainment
complex in Kansas City, Missouri. The Company also owns and provides slot route
management services in Southern Nevada and Louisiana. Additionally, the Company
is constructing a new hotel/casino property in Las Vegas.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Palace Station Hotel & Casino, Inc. ("Palace
Station"), Boulder Station, Inc. ("Boulder Station"), Texas Station, Inc.
("Texas Station"), Sunset Station, Inc. ("Sunset Station"), St. Charles
Riverfront Station, Inc. ("Station Casino St. Charles"), Kansas City Station
Corporation ("Station Casino Kansas City"), and Southwest Gaming Services, Inc.
("SGSI"). The Company owns a 50% interest in Town Center Amusements, Inc. d.b.a.
Barley's Casino & Brewing Company. The Company accounts for this investment
using the equity method of accounting. All significant intercompany balances and
transactions have been eliminated.
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
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 may differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include investments purchased with an original
maturity of 90 days or less.
Inventories
Inventories are stated at the lower of cost or market; cost being
determined on a first-in, first-out basis.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of
the assets or the terms of the capitalized lease, whichever is less. Costs of
major improvements are capitalized, while costs of normal repairs and
maintenance are charged to expense as incurred.
Capitalization of Interest
The Company capitalizes interest costs associated with debt incurred in
connection with major construction projects. Interest capitalization ceases once
the project is complete. When no debt is specifically identified as being
incurred in connection with such construction projects, the Company capitalizes
interest on amounts expended on the project at the Company's average cost of
borrowed money. Interest capitalized for the fiscal years ended March 31, 1997,
1996 and 1995 was approximately $21.1 million, $6.1 million and $6.0 million,
respectively.
F-78
<PAGE> 195
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Debt Issuance Costs
Debt issuance costs incurred in connection with the issuance of long-term
debt are capitalized and amortized to interest expense over the terms of the
related debt agreements.
Development Activities
The Company expenses all internal salaries and related expenses with
respect to development activities. Other development costs, including legal,
lobbying, and consulting are expensed, until such time as the jurisdiction has
approved gaming and the Company has a specific site identified. Costs incurred
subsequent to these criteria being met are capitalized. At March 31, 1997 and
1996, the Company had capitalized costs of $0.7 million and $1.3 million,
respectively, related to various development projects. These costs are included
in other assets, net in the accompanying consolidated balance sheets.
Preopening Expenses
Prior to the opening of a facility, all operating expenses, including
incremental salaries and wages, related thereto are capitalized as preopening
expenses. At March 31, 1997, $2.4 million of preopening expenses related to a
new hotel/casino under construction known as Sunset Station had been capitalized
and are included in other assets, net in the accompanying consolidated balance
sheets. The Company expenses preopening expenses upon the opening of the related
facility. During the fiscal year ended March 31, 1995, the Company incurred
preopening expenses of $7.5 million and $11.9 million related to Boulder Station
and Station Casino St. Charles, respectively. During the fiscal year ended March
31, 1996, the Company incurred preopening expenses of $2.4 million related to
new projects for Texas Station and Barley's Casino & Brewing Company and
expansion projects at Boulder Station and Station Casino St. Charles. During the
fiscal year ended March 31, 1997, the Company incurred preopening expenses of
$31.8 million substantially related to the opening of Station Casino Kansas
City.
Revenues and Promotional Allowances
In accordance with industry practice, the Company recognizes as casino
revenues the net win from gaming activities, which is the difference between
gaming wins and losses. All other revenues are recognized as the service is
provided. Revenues include the retail value of accommodations and food and
beverage provided on a complimentary basis to customers. The estimated
departmental costs of providing such promotional allowances are included in
casino costs and expenses and consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Food and beverage..................................... $27,418 $23,483 $14,276
Room.................................................. 1,439 1,203 874
Other................................................. 1,263 653 313
------- ------- -------
Total....................................... $30,120 $25,339 $15,463
======= ======= =======
</TABLE>
Earnings (Loss) per Common Share
Earnings (loss) per common share is computed by dividing net income (loss)
applicable to common stock by the weighted average common shares outstanding
during the period. Earnings per share assuming full dilution is not presented
because the exercise of stock options and the conversion of the convertible
preferred stock does not have a dilutive effect on the per share amounts.
F-79
<PAGE> 196
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Financial Accounting Standards Board has issued Statement on Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which is effective
for fiscal years ending after December 15, 1997. This statement replaces primary
earnings per share ("EPS") with basic EPS. No dilution for potentially dilutive
securities is included in basic EPS. This statement also requires when applying
the treasury stock method for diluted EPS to compute dilution for options and
warrants, to use average share price for the period, rather than the more
dilutive greater of the average share price or end-of-period share price. The
Company will adopt SFAS No. 128 in the fiscal year ending March 31, 1998.
Management believes the adoption of SFAS No. 128 will have no impact on the
Company's previously reported earnings per share.
2. ACCOUNTS AND NOTES RECEIVABLE
Components of accounts and notes receivable are as follows (amounts in
thousands):
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1997 1996
------- ------
<S> <C> <C>
Casino...................................................... $ 3,698 $2,569
Hotel....................................................... 1,331 1,144
Other....................................................... 3,876 2,082
------- ------
8,905 5,795
Allowance for doubtful accounts............................. (1,053) (644)
------- ------
Accounts and notes receivable, net................ $ 7,852 $5,151
======= ======
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of March 31, 1997 and
1996 (amounts in thousands):
<TABLE>
<CAPTION>
MARCH 31,
ESTIMATED LIFE ----------------------
(YEARS) 1997 1996
-------------- ---------- ---------
<S> <C> <C> <C>
Land............................................. -- $ 27,718 $ 16,962
Land leases acquired............................. 48-52 4,395 4,395
Buildings and leasehold improvements............. 31-45 554,294 285,558
Boats and barges................................. 20-45 123,774 81,463
Furniture, fixtures and equipment................ 3-7 192,546 163,580
Construction in progress......................... -- 273,188 165,513
---------- ---------
1,175,915 717,471
Accumulated depreciation and amortization........ (106,863) (101,260)
---------- ---------
Property and equipment, net............ $1,069,052 $ 616,211
========== =========
</TABLE>
At March 31, 1997 and 1996, substantially all property and equipment of the
Company is pledged as collateral for long-term debt.
4. LAND HELD FOR DEVELOPMENT
The Company has acquired several parcels of land in various jurisdictions
as part of the Company's development activities. The Company's decision whether
to proceed with any new gaming opportunity is dependent upon future economic and
regulatory factors, the availability of financing and competitive and strategic
considerations. As many of these considerations are beyond the Company's
control, no assurances can be made that the Company will be able to obtain
appropriate licensing or be able to secure additional, acceptable financing in
order to proceed with any particular project. At March 31, 1997 and 1996, $22.6
million and $22.7 million, respectively, of land had been acquired for potential
gaming projects in jurisdictions where gaming has been approved. In addition, at
March 31, 1997 and 1996, $3.7 million and
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STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$6.2 million, respectively, of land had been acquired in certain jurisdictions
where gaming has not yet been approved. No assurances can be made that these
jurisdictions will approve gaming in the future.
The Company has entered into various purchase agreements whereby the
Company has the option to acquire or lease land for development of potential new
gaming projects totaling $31.3 million and $34.2 million at March 31, 1997 and
1996, respectively. In consideration for these options, the Company has paid or
placed in escrow $6.0 million and $2.4 million at March 31, 1997 and 1996,
respectively. Should the Company not exercise its option to acquire or lease the
land, it would forfeit all amounts paid or placed in escrow as of March 31,
1997. These option payments are included in other assets, net in the
accompanying consolidated balance sheets.
5. LONG-TERM DEBT
Long-term debt consists of the following (amounts in thousands):
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1997 1996
--------- ---------
<S> <C> <C>
Station Casinos, Inc. (excluding Sunset Station):
Reducing revolving credit facility, secured by substantially
all of the assets of Palace Station, Boulder Station,
Texas Station, Station Casino St. Charles and Station
Casino Kansas City, $368 million limit at March 31, 1997,
reducing quarterly by varying amounts until September 2000
when the remaining principal balance is due, interest at a
margin above the bank's prime rate or the Eurodollar Rate
(7.89% at March 31, 1997)................................. $277,000 $ --
9 5/8% senior subordinated notes, payable interest only
semi-annually, principal due June 1, 2003, net of
unamortized discount of $6.8 million at March 31, 1997.... 186,248 185,531
10 1/8% senior subordinated notes, payable interest only
semi-annually, principal due March 15, 2006, net of
unamortized discount of $1.2 million at March 31, 1997.... 196,818 196,737
Notes payable to banks and others, collateralized by slot
machines and related equipment, monthly installments
including interest ranging from 7.47% to 7.94%............ 15,952 24,726
Capital lease obligations, collateralized by furniture and
equipment................................................. 7,703 12,171
Other long-term debt........................................ 31,242 45,833
-------- --------
Sub-total......................................... 714,963 464,998
Sunset Station, Inc.:
$110 million Sunset Station first mortgage construction/term
loan agreement, secured by substantially all of the assets
of Sunset Station, interest at a margin of 375 basis
points above the Eurodollar Rate (9.37% at March 31,
1997), due September 2000................................. 46,000 --
-------- --------
Total long-term debt.............................. 760,963 464,998
Current portion of long-term debt........................... (18,807) (23,256)
-------- --------
Total long-term debt, less current portion........ $742,156 $441,742
======== ========
</TABLE>
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STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 1993, the Company completed an offering at par of $110 million in
9 5/8% senior subordinated notes due in June 2003. In May 1994, the Company
completed an offering of $83 million in senior subordinated notes that rank pari
passu with the existing $110 million senior subordinated notes, and have
identical maturities and covenants as the original issue. The $83 million senior
subordinated notes have a coupon rate of 9 5/8% and were priced to yield 11.5%
to maturity. The discount on the $83 million senior subordinated notes has been
recorded as a reduction to long-term debt in the accompanying consolidated
balance sheets.
In March 1996, the Company completed an offering of $198 million of senior
subordinated notes due in March 2006, that rank pari passu with the existing
$193 million of senior subordinated notes. The $198 million senior subordinated
notes have a coupon rate of 10 1/8% and were priced to yield 10.24% to maturity.
The discount on the $198 million senior subordinated notes has been recorded as
a reduction to long-term debt in the accompanying consolidated balance sheets.
In April 1997, the Company completed an offering of $150 million of senior
subordinated notes due in April 2007, that rank pari passu with the Company's
existing senior subordinated notes. The $150 million senior subordinated notes
have a coupon rate of 9 3/4% and were priced to yield 10.37% to maturity. The
discount on the $150 million senior subordinated notes will be recorded as a
reduction to long-term debt. Proceeds from the offering were used to pay down
amounts outstanding under the reducing revolving credit facility.
The indentures governing the Company's senior subordinated notes ("the
Indentures") contain certain customary financial and other covenants, which
among other things, govern the Company and certain of its subsidiaries ability
to incur indebtedness (except, as specifically allowed) unless after giving
effect thereto, a 2.0 to 1.0 pro forma Consolidated Coverage Ratio (as defined
in the Indentures) has been met. As of March 31, 1997, the Company's
Consolidated Coverage Ratio was 2.66 to 1.00.
On July 5, 1995, the Company obtained a $275 million reducing revolving
credit facility. On March 25, 1996, the Company amended and restated this bank
facility, providing for borrowings up to an aggregate principal amount of $400
million. On March 21, 1997, the Company obtained certain amendments to the
reducing revolving bank credit facility in order to enhance its borrowing
capacity (the "Bank Facility"). The Bank Facility is secured by substantially
all the assets of Palace Station, Boulder Station, Texas Station, Station Casino
St. Charles and Station Casino Kansas City (collectively, the "Borrowers"). The
Company and SGSI guarantee the borrowings under the Bank Facility (collectively
the "Guarantors"). The Bank Facility matures on September 30, 2000 and reduces
quarterly by varying amounts (including $8 million for the fiscal quarter ending
on June 30, 1997 and $10 million for each quarter ending September 30, 1997,
December 31, 1997 and March 31, 1998). Borrowings under the Bank Facility bear
interest at a margin above the bank's prime rate or LIBOR, as selected by the
Company. The margin above such rates, and the fee on the unfunded portions of
the Bank Facility, will vary quarterly based on the combined Borrower's and the
Company's consolidated ratio of funded debt to earnings before interest, taxes,
depreciation and amortization ("EBITDA").
The Bank Facility contains certain financial and other covenants. These
include a maximum funded debt to EBITDA ratio for the Borrowers combined of 3.00
to 1.00 for each fiscal quarter through June 30, 1997, 2.75 to 1.00 for each
fiscal quarter through June 30, 1998, and 2.50 to 1.00 for each fiscal quarter
thereafter, a minimum fixed charge coverage ratio for the preceding four
quarters for the Borrowers combined of 1.35 to 1.00 for periods March 31, 1996
through June 30, 1998, and 1.50 to 1.00 for periods thereafter, a limitation on
indebtedness, and limitations on capital expenditures. As of March 31, 1997, the
Borrowers funded debt to EBITDA ratio was 1.97 to 1.00 and the fixed charge
coverage ratio for the fiscal year ended March 31, 1997 was 2.54 to 1.00. A
tranche of the Bank Facility contains a minimum tangible net worth requirement
for Palace Station (as defined) and certain restrictions on distributions of
cash from Palace Station to the Company. As of March 31, 1997, Palace Station's
tangible net worth exceeded the requirement by
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STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approximately $7 million. These covenants limit Palace Station's ability to make
payments to the Company, a significant source of anticipated cash for the
Company.
In addition, the Bank Facility has financial covenants relating to the
Company. These include prohibitions on dividends on or redemptions of the
Company's common stock, restrictions on repayment of any subordinated debt,
limitations on indebtedness beyond existing indebtedness, the Company's senior
subordinated notes and up to $25 million of purchase money indebtedness, minimum
consolidated net worth requirements for the Company of $165 million plus post
October 1, 1995 preopening expenses, 95% of post October 1, 1995 net income (not
reduced by net losses) and 100% of net equity offering proceeds, and limitations
on capital expenditures. As of March 31, 1997, the Company's consolidated net
worth exceeded the requirement by approximately $20 million. The Bank Facility
also includes a maximum funded debt to EBITDA (adjusted for preopening expenses)
ratio including annualized EBITDA (adjusted for preopening expenses) for any new
venture, as defined, open less than a year for the Company on a consolidated
basis of 5.00 to 1.00 for the fiscal quarter ended March 31, 1997, 5.25 to 1.00
for each fiscal quarter through December 31, 1997, 5.00 to 1.00 for each fiscal
quarter through June 30, 1998, 4.75 to 1.00 for the fiscal quarter ending
September 30, 1998, 4.50 to 1.00 for the fiscal quarter ending December 31,
1998, 4.25 to 1.00 for each fiscal quarter through June 30, 1999, 4.00 to 1.00
for the fiscal quarter ending September 30, 1999 and 3.75 to 1.00 thereafter. As
previously discussed, in June 1997, the Company obtained an amendment to the
Bank Facility. This amendment modified the covenant restricting the maximum
consolidated funded debt to EBITDA ratio as follows: 5.75 to 1.00 for the fiscal
quarter ended June 30, 1997, 5.85 to 1.00 for the fiscal quarter ended September
30, 1997, 5.75 to 1.00 for the fiscal quarters ending December 31, 1997 and
March 31, 1998, 5.00 to 1.00 for the fiscal quarter ending June 30, 1998, 4.75
to 1.00 for the fiscal quarter ending September 30, 1998, 4.50 to 1.00 for the
fiscal quarter ending December 31, 1998, 4.25 to 1.00 for each fiscal quarter
through June 30, 1999, 4.00 to 1.00 for the fiscal quarter ending September 30,
1999 and 3.75 to 1.00 thereafter. In addition, in July 1997, the Company reduced
the total amount available under the Bank Facility by $30 million. As a result,
no additional reductions are required until June 30, 1998, at which time the
Bank Facility will reduce by $22.4 million each fiscal quarter through March 31,
2000. As of March 31, 1997, the Company's funded debt to EBITDA ratio was 4.54
to 1.00. Such consolidated calculations for the Company do not include Sunset
Station (see below). In addition, the Bank Facility prohibits the Company from
holding cash and cash equivalents in excess of the sum of the amounts necessary
to make the next scheduled interest or dividend payments on the Company's senior
subordinated notes and the Convertible Preferred Stock (see Note 7), the amounts
necessary to fund casino bankroll in the ordinary course of business, and
$2,000,000. The Guarantors waive certain defenses and rights including rights of
subrogation and reimbursement. The Bank Facility contains customary events of
default and remedies and is cross-defaulted to the Company's senior subordinated
notes and the Change of Control Triggering Event as defined in the Indentures.
On September 25, 1996, Sunset Station, a wholly-owned subsidiary of the
Company, entered into a Construction/Term Loan Agreement (the "Sunset Loan
Agreement") with Bank of America National Trust and Savings Association, Bank of
Scotland, Societe Generale and each of the other lenders party to such
agreement, pursuant to which Sunset Station received a commitment for $110
million to finance the remaining development and construction costs of Sunset
Station. The Company also entered into an operating lease for certain furniture,
fixtures and equipment with a cost of $40 million to be subleased to Sunset
Station as part of the Sunset Station Project (See Note 6).
The Sunset Loan Agreement includes a first mortgage term note in the amount
of $110 million (the "Sunset Note") which is non-recourse to the Company, except
as to certain construction matters pursuant to a completion guarantee dated as
of September 25, 1996, executed by the Company on behalf of Sunset Station and
except that the Company has pledged all of the stock of Sunset Station as
security for the Sunset Loan Agreement. The Sunset Note is to reduce $1.8
million for each fiscal quarter ending March 1998 through December 1998, $2.3
million for each fiscal quarter ending March 1999 through December 1999, and
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STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$2.0 million for the fiscal quarters ending March 2000 and June 2000 and matures
in September 2000. In addition, the Sunset Note is subject to prepayment
subsequent to July 1998 by an amount equal to a specified percentage of Excess
Cash Flow, as defined. The Sunset Note carries an interest rate of 375 basis
points above the Eurodollar Rate (as defined in the Sunset Loan Agreement). The
Sunset Note is secured by substantially all of the assets of Sunset Station,
including a deed of trust with respect to the real property on which Sunset
Station is being constructed, a portion of which is subject to a lease from the
Company to Sunset Station, and the remainder of which property is owned by
Sunset Station and a security agreement as to all tangible and intangible
personal property including Sunset Station's rights under an operating lease for
certain furniture, fixtures and equipment to be used by Sunset Station.
The Sunset Loan Agreement contains certain customary financial and other
covenants (related exclusively to Sunset Station) including a minimum fixed
charge coverage ratio as of the last day of any quarter after the opening of
Sunset Station of not less than 1.10 to 1.00, a maximum senior funded debt to
EBITDA (adjusted for certain cash contributions or advances by the Company)
ratio after opening of 4.50 to 1.00 for the first full quarter, reducing by 0.25
on certain quarters thereafter to 3.25 to 1.00 for the tenth quarter and each
quarter thereafter, and a minimum net worth as of any quarter end after opening
of not less than $52 million plus 80% of net income (not reduced by net losses)
for each quarter after opening, plus 100% of certain additional equity
contributions by the Company and Supplemental Loans, as defined. In addition,
the agreement places restrictions on indebtedness and guarantees, dividends,
stock redemptions, mergers, acquisitions, sale of assets or sale of stock in
subsidiaries and limitations on capital expenditures.
In addition, the Company has provided a funding commitment to Sunset
Station of up to an additional $25 million pursuant to a supplemental loan
agreement (the "Supplemental Loan Agreement"). The Sunset Loan Agreement
requires Sunset Station to draw amounts under the Supplemental Loan Agreement in
the event of the failure of certain financial covenants under the Sunset Loan
Agreement. Loans under this funding commitment may be drawn down beginning on
the last day of the first full calendar quarter ending after Sunset Station
opens for business in the amount of up to $10 million during the first year
after such date, up to $10 million during the second year after such date and up
to $5 million during the third year after such date. The Supplemental Loan
Agreement also provides for an additional, separate funding commitment up to $40
million in connection with a purchase option for certain furniture, fixtures and
equipment under the Sunset Operating Lease. Sunset Station will pay interest at
a rate per annum equal to the three-month Eurodollar Rate, the interest being
payable solely in the form of commensurate additions to the principal of the
Supplemental Loans. The Supplemental Loan Agreement expires in September 2001.
The funding commitments under the Supplemental Loan Agreement are subject to
limitations imposed by the indentures governing the Company's existing senior
subordinated notes and the Bank Facility.
In order to manage the interest rate risk associated with the Sunset Note,
Sunset Station entered into an interest rate swap agreement with Bank of America
National Trust and Savings Association. This agreement swaps the variable rate
interest pursuant to the Sunset Note to a fixed rate of 9.58% on $35 million
notional amount as of January 1997 increasing to $60 million at March 1997, $90
million at June 1997, $100 million at September 1997 and then decreasing to $95
million at June 1998. The agreement expires in December 1998. The difference
paid or received pursuant to the swap agreement is accrued as interest rates
change and recognized as an adjustment to interest expense on the Sunset Note.
Sunset Station is exposed to credit risk in the event of non-performance by the
counterparty to the agreement. The Company believes the risk of non-performance
by the counterparty is minimal. As of March 31, 1997, the market value of this
interest rate swap was $1.0 million.
The estimated fair value of the Company's long-term debt at March 31, 1997
was approximately $755.6 million, compared to its book value of approximately
$761.0 million. The estimated fair value amounts were based on quoted market
prices on or about March 31, 1997 for the Company's debt securities that are
publicly traded. For debt securities that are not publicly traded, fair value
was estimated based on the quoted
F-84
<PAGE> 201
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
market prices for similar issues or the current rates offered to the Company for
debt having the same remaining maturities.
Scheduled maturities of long-term debt are as follows (amounts in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
MARCH 31,
------------------
<S> <C>
1998......................................... $ 18,807
1999......................................... 12,948
2000......................................... 11,141
2001......................................... 333,373
2002......................................... 1,288
Thereafter................................... 383,406
--------
Total.............................. $760,963
========
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
Station Casino St. Charles
In September 1994, Station Casino St. Charles entered into an agreement for
property acquisitions with the City of St. Charles, Missouri which allows for
the acquisition by the Company of property within a designated 107-acre
Redevelopment Project Area, a portion of which is adjacent to Station Casino St.
Charles. This land is being acquired for the construction of a mixed use
development which may include retail space, a hotel, office space, convention
space or restaurants. The Company has a right to terminate the agreement if all
related acquisition costs exceed $13.7 million. As of March 31, 1997, the
Company has incurred $3.4 million of acquisition costs included in property and
equipment, net in the accompanying consolidated balance sheets.
Boulder Station Lease
The Company entered into a ground lease for 27 acres of land on which
Boulder Station is located. The Company leases this land from a trust pursuant
to a long-term ground lease. The trustee of this trust is Bank of America NT&SA,
the beneficiary of which is KB Enterprises, an affiliated company owned by Frank
J. Fertitta, Jr. and Victoria K. Fertitta (the "Related Lessor"), the parents of
Frank J. Fertitta III, Chairman of the Board and Chief Executive Officer of the
Company. The lease has a term of 65 years with monthly payments of $125,000
through June 1998. In June 1998, and every ten years thereafter, the rent will
be adjusted to the product of the fair market value of the land and the greater
of (i) the then prevailing annual rate of return for comparably situated
property or (ii) 8% per year. The rent will be further adjusted in June 2003,
and every ten years thereafter by a cost of living factor. In no event will the
rent for any period be less than the immediately prior period. Pursuant to the
ground lease, the Company has an option, exercisable at five-year intervals
beginning in June 1998, to purchase the land at fair market value. The Company's
leasehold interest in the property is subject to a lien to secure borrowings
under the Bank Facility.
Texas Station Lease
The Company entered into a ground lease for 47 acres of land on which Texas
Station is located. The Company leases this land from a trust pursuant to a
long-term ground lease. The trustee of this trust is Bank of America NT&SA, the
beneficiary of which is Texas Gambling Hall & Hotel, Inc. an affiliate company
of the Related Lessor. The lease has a term of 65 years with monthly rental
payments of $150,000 through July 2000. In July 2000, and every ten years
thereafter, the rent will be adjusted to the product of the fair market value of
the land and the greater of (i) the then prevailing annual rate of return being
realized for owners of comparable land in Clark County or (ii) 8% per year. The
rent will be further adjusted by a cost of living
F-85
<PAGE> 202
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
factor after the first ten years and every ten years thereafter. In no event
will the rent for any period be less than the immediately prior period. Pursuant
to the ground lease, the Company will have an option, exercisable at five-year
intervals beginning in May 2000, to purchase the land at fair market value. The
Company's leasehold interest in the property is subject to a lien to secure
borrowings under the Bank Facility.
Sunset Station Lease
In June 1994, the Company entered into a lease agreement for approximately
47.5 acres of land in the Southeast area of Las Vegas on which Sunset Station is
being developed. The lease has a term of 65 years with monthly rental payments
of $120,000, adjusted on each subsequent five-year anniversary by a cost of
living factor. On the seventh anniversary of the lease, the Company has an
option to purchase this land for $23.8 million. Additionally, on the seventh
anniversary of the lease, the lessor has an option to sell this land to the
Company for $21.8 million.
Station Casino Kansas City Lease
The Company has entered into a joint venture which owns the land on which
Station Casino Kansas City is located. At March 31, 1997, $3.5 million related
to this investment is included in other assets, net in the accompanying
consolidated balance sheets.
In April 1994, Station Casino Kansas City entered into an agreement with
the joint venture to lease this land. The agreement requires monthly payments of
$85,000 through March 31, 1997 and $90,000 through the remainder of the lease
term. The lease expires March 31, 2006, with an option to extend the lease for
up to eight renewal periods of ten years each, plus one additional seven year
period. Commencing April 1, 1998 and every anniversary thereafter, the rent
shall be adjusted by a cost of living factor. In connection with the joint
venture agreement, the Company received an option providing for the right to
acquire the joint venture partner's interest in this joint venture. The Company
has the option to acquire this interest at any time after April 1, 2002 through
April 1, 2011 for $11.7 million, however, commencing April 1, 1998 the purchase
price will be adjusted by a cost of living factor of not more than 5% or less
than 2% per annum. At March 31, 1997, $2.6 million paid by the Company in
consideration for this option is included in other assets, net in the
accompanying consolidated balance sheets.
Southern Florida
In October 1994, the Company entered into an agreement to form a limited
partnership with the existing operator of a pari-mutuel facility in Southern
Florida. In the event casino gaming is approved by the voters of Florida by
October 2000 and in the event the site is licensed by the state, the Company
will be obligated to make capital contributions to the partnership totaling $35
million, reduced by credits for amounts previously contributed to any Florida
gaming referendum campaign.
F-86
<PAGE> 203
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Operating Leases
The Company leases several parcels of land and equipment used in operations
at Palace Station, Boulder Station, Texas Station, Station Casino St. Charles
and Station Casino Kansas City and for land on which Sunset Station is being
developed. Leases on various parcels ranging from 13 acres to 171 acres have
terms expiring between March 2006 and July 2060. Future minimum lease payments
required under these operating leases and other noncancelable operating leases
are as follows for the fiscal years ending March 31, (amounts in thousands):
FUTURE MINIMUM LEASE PAYMENTS
<TABLE>
<S> <C>
1998.............................................. $ 6,423
1999.............................................. 6,296
2000.............................................. 5,932
2001.............................................. 5,932
2002.............................................. 5,932
Thereafter........................................ 280,479
--------
Total................................... $310,994
========
</TABLE>
Rent expense totaled approximately $5.4 million, $6.5 million and $4.9
million for the years ended March 31, 1997, 1996 and 1995, respectively. Rents
of $2.2 million and $2.1 million were capitalized in connection with the
construction of Station Casino Kansas City and Sunset Station for the fiscal
years ended March 31, 1997 and 1996, respectively.
During fiscal 1995, the Company sold approximately $13.0 million of
equipment and leased it back under lease agreements ranging from three to seven
years. The transactions produced gains of approximately $665,000 which have been
deferred and are being amortized against lease expense over the remaining lease
terms.
Equipment Lease
In connection with the Sunset Loan Agreement, the Company entered into an
operating lease for furniture, fixtures and equipment (the "Equipment") with a
cost of $40 million, dated as of September 25, 1996 (the "Sunset Operating
Lease") with First Security Trust Company of Nevada. The Sunset Operating Lease
expires in October 2000 and carries a lease rate of 225 basis points above the
Eurodollar Rate. The Company has entered into a sublease with Sunset Station for
the Equipment pursuant to an operating lease with financial terms substantially
similar to the Sunset Operating Lease. In the event that Sunset Station elects
to purchase the Equipment, the Company has provided a funding commitment up to
the amount necessary for such purchase pursuant to the Supplemental Loan
Agreement (subject to the limitations on funding contained in the Supplemental
Loan Agreement) (See Note 5).
In connection with the Sunset Operating Lease, the Company also entered
into a participation agreement, dated as of September 25, 1996 (the
"Participation Agreement") with the trustee, as lessor under the Sunset
Operating Lease, and holders of beneficial interests in the Lessor Trust (the
"Holders"). Pursuant to the Participation Agreement, the Holders will advance
funds to the trustee for the purchase by the trustee of, or to reimburse the
Company for, the purchase of the Equipment, which will then be leased to the
Company, and in turn subleased to Sunset Station. Pursuant to the Participation
Agreement, the Company also agreed to indemnify the Lessor and the Holders
against certain liabilities.
F-87
<PAGE> 204
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Legal Matters
The Company is a litigant in legal matters arising in the normal course of
business. In the opinion of management, all pending legal matters are either
adequately covered by insurance or, if not insured, will not have a material
adverse effect on the financial position or the results of operations of the
Company.
7. STOCKHOLDER'S EQUITY
In July 1995, the Company completed a public offering of 5,175,000 shares
of common stock at $16 per share generating net proceeds of approximately $78.2
million, before deducting $0.8 million of offering costs paid by the Company.
The proceeds from this offering were primarily used to acquire the assets of
Texas Station located in North Las Vegas, which commenced operations July 12,
1995. The seller of the assets is a wholly-owned subsidiary of a trust of which
the Related Lessor is the sole trustee (the "Seller"). The purchase price of
such assets was an amount equal to the Seller's out-of-pocket costs incurred in
connection with the financing, development and construction of the hotel/casino
through the closing date. At closing, the Company paid $62.8 million to the
Seller and assumed various liabilities and contracts to complete construction of
the facility. The total cost of the property was approximately $84.9 million.
The land on which the Texas Station facility is situated is being leased to the
Company by the Seller pursuant to a long-term ground lease (See Note 6).
In March 1996, the Company completed a public offering of 1,800,000 shares
of convertible preferred stock (the "Convertible Preferred Stock") at $50.00 per
share generating net proceeds of approximately $87.3 million, before deducting
$0.6 million of offering costs paid by the Company. In April 1996, the
underwriters exercised their option to purchase an additional 270,000 shares of
the Convertible Preferred Stock generating net proceeds to the Company of
approximately $13.1 million. The Convertible Preferred Stock is convertible at
an initial conversion rate of 3.2573 shares of common stock for each share of
Convertible Preferred Stock. The Convertible Preferred Stock is redeemable, at
the option of the Company in whole or in part, for shares of the Company's
common stock at any time after March 15, 1999, initially at a redemption price
of $52.45 per share and thereafter at prices decreasing annually to $50.00 per
share of Convertible Preferred Stock on and after March 15, 2006, plus accrued
and unpaid dividends. The common shares to be issued is determined by dividing
the redemption price by the lower of the average daily closing price for the
Company's common stock for the preceding 20 trading days or the closing price of
the Company's common stock on the first business day preceding the date of the
redemption notice. Any fractional shares would be paid in cash. Dividends on the
Convertible Preferred Stock of $3.50 per share annually, accrue and are
cumulative from the date of issuance. The Convertible Preferred Stock has a
liquidation preference of $50.00 per share, plus accrued and unpaid dividends.
8. RELATED PARTIES
The Company has employed McNabb/McNabb/DeSoto/Salter & Co. ("MMDS") to
provide advertising and marketing research services. Certain stockholders of the
Company own a 50% interest in MMDS. During the fiscal years ended March 31,
1997, 1996 and 1995 the Company paid MMDS $27.2 million, $17.4 million and $12.7
million respectively, for advertising, market research and other costs related
to these activities. In management's opinion, these transactions were conducted
with terms as fair to the Company as could have been obtained from unaffiliated
companies. In April 1997, the Company purchased the assets of MMDS for
approximately $0.8 million.
9. BENEFIT PLANS
Stock Compensation Program
The Company has adopted a Stock Compensation Program (the "Program") which
includes (i) an Incentive Stock Option Plan for the grant of incentive stock
options, (ii) a Compensatory Stock Option Plan
F-88
<PAGE> 205
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
providing for the grant of non-qualified stock options, and (iii) a Restricted
Shares Plan providing for the grant of restricted shares of common stock.
Officers, key employees, directors (whether employee directors or non-employee
directors) and independent contractors or agents of the Company and its
subsidiaries are eligible to participate in the program. However, only employees
of the Company and its subsidiaries are eligible to receive incentive stock
options.
A maximum of 6,307,000 shares of common stock have been reserved for
issuance under the Program. Options are granted at the current market price at
the date of grant. The plan provides for a variety of vesting schedules, ranging
from immediate to twenty percent a year for five years, to be determined at the
time of grant. All options have an exercise period of ten years from the date of
grant.
The Program will terminate ten years from the date of adoption, unless
terminated earlier by the Board of Directors, and no options or restricted
shares may be granted under the Program after such date. Summarized information
for the Program is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- --------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding Beginning of the
Year............................. 2,697,012 $16.24 2,372,100 $19.05 1,943,725 $20.09
Granted.......................... 2,160,822 $14.01 1,593,305 $13.42 541,750 $15.50
Exercised........................ (14,711) $12.16 (46) $12.00 -- $ --
Canceled......................... (410,941) $15.70 (1,268,347) $17.95 (113,375) $19.89
--------- ---------- ---------
Outstanding End of the Year........ 4,432,182 $15.22 2,697,012 $16.24 2,372,100 $19.05
========= ========== =========
Restricted Stock Grants............ -- -- 170,500
========= ========== =========
Exercisable at End of Year......... 1,408,893 $16.50 993,032 $16.67 721,200 $20.06
========= ========== =========
Options Available for Grant........ 1,689,561 649,942 479,910
========= ========== =========
</TABLE>
The following table summarizes information about the options outstanding at
March 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- -----------------------
WEIGHTED NUMBER
NUMBER AVERAGE WEIGHTED EXERCISABLE WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE AT AVERAGE
EXERCISE AT MARCH 31, CONTRACTUAL EXERCISE MARCH 31, EXERCISE
PRICES 1997 LIFE PRICE 1997 PRICE
-------- ------------ ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 9.38 - $ 9.88............ 228,000 9.9 $ 9.50 -- $ --
$11.63 - $13.75............ 890,081 7.3 $12.07 549,284 $12.04
$14.38 - $15.00............ 2,149,101 8.9 $14.59 100,709 $14.44
$18.00 - $20.00............ 1,075,000 6.3 $19.72 695,900 $19.83
$22.00 - $22.00............ 90,000 2.8 $22.00 63,000 $22.00
--------- --- ------ --------- ------
4,432,182 7.9 $15.22 1,408,893 $16.50
========= === ====== ========= ======
</TABLE>
Restricted stock grants in the amount of 170,500 shares were issued during
the fiscal year ended March 31, 1995. The effect of these grants is to increase
the issued and outstanding shares of the Company's common stock and decrease the
number of shares available for grant in the plan. Deferred compensation is
recorded for the restricted stock grants equal to the market value of the
Company's common stock on the date of grant. The deferred compensation is
amortized over the period the restricted stock vests and recorded as
compensation expense in selling, general, and administrative expense in the
accompanying consolidated statements of operations.
F-89
<PAGE> 206
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company applies APB Opinion No. 25 and related interpretations in
accounting for the Program. Accordingly, compensation expense recognized was
different than what would have been otherwise recognized under the fair value
based method defined in SFAS No. 123, "Accounting for Stock-Based Compensation".
Had compensation expense for the plans been determined in accordance with SFAS
No. 123, the effect on the Company's net income applicable to common stock and
earnings per common share would have been as follows (amounts in thousands,
except per share data):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------
1997 1996
------- --------
<S> <C> <C>
Net income applicable to common stock:
As reported............................................... $6,518 $25,419
Proforma.................................................. $3,640 $23,562
Earnings per common share:
As reported............................................... $ 0.18 $ 0.75
Proforma.................................................. $ 0.10 $ 0.69
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing method with the following assumptions: (i) no
dividends, (ii) expected volatility for both years of 45.5%, (iii) risk free
interest rate of 6.46% for 1997 and 6.04% for 1996, and (iv) the expected
average life of 3.92 years for 1997 and 3.05 years for 1996. The weighted
average fair value of options granted in 1997 and 1996 were $5.64 and $4.91,
respectively.
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to April 1, 1995, the resulting pro forma net income may
not be representative of that to be expected in future years.
In May 1995, the Board of Directors of the Company authorized the repricing
of 1,156,900 options with option prices ranging from $13.00 to $20.00. Options
held by certain members of the Company's Board of Directors, including the
Chairman and Chief Executive Officer of the Company were not repriced. The
effect of the repricing of all the subject options was the cancellation of
1,116,500 options and the reissuance of 872,680 options ("replacement options")
with a price of $12.00 (market value at date of the repricing) which are
included in granted and canceled options in the table above. The number of
replacement options was determined, based upon a valuation model, so that the
value of the replacement options was equivalent to the value of the options
originally granted.
401(k) Plans
The Company has a defined contribution 401(k) plan, which covers all
employees who meet certain age and length of service requirements and allows an
employer contribution up to 25 percent of the first four percent of each
participating employee's compensation. Plan participants can elect to defer
before tax compensation through payroll deductions. These deferrals are
regulated under Section 401(k) of the Internal Revenue Code. The Company's
matching contribution was $442,000, $293,000, and $203,000 for the fiscal years
ended March 31, 1997, 1996 and 1995, respectively.
10. EXECUTIVE COMPENSATION PLANS
The Company has employment agreements with certain of its executive
officers. These contracts provide for, among other things, an annual base salary
with annual adjustments and an annual cash bonus equal to at least 5 percent of
the executive's base salary, and supplemental long-term disability and
supplemental life insurance benefits in excess of the Company's normal coverage
for employees. The Company elected to self-insure with respect to the long-term
disability benefits. In addition, the Company has adopted a Supplemental
F-90
<PAGE> 207
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Executive Retirement Plan for its Chief Executive Officer and a Supplemental
Management Retirement Plan for certain key executives as selected by the Human
Resources Committee of the Company's Board of Directors. Other executive plans
include a Deferred Compensation Plan and a Long-Term Stay-On Performance
Incentive Plan. The expenses related to these plans are included in corporate
expenses in the accompanying consolidated statements of operations.
11. RESTRUCTURING CHARGE
In March 1997, the Company introduced a plan designed to reduce costs and
improve efficiency of operations. This plan resulted in a one-time charge to
earnings in the fourth quarter of fiscal 1997 totaling $2,016,000, primarily
related to employee severance payments.
12. INCOME TAXES
The Company files a consolidated federal income tax return. The provision
(benefit) for income taxes consists of the following (amounts in thousands):
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Current:
Federal............................................. $ 7,708 $ 4,784 $ 721
State............................................... (1,834) 374 (1,053)
------- ------- -------
5,874 5,158 (332)
Deferred.............................................. 1,741 9,421 (3,145)
------- ------- -------
Total income taxes.......................... $ 7,615 $14,579 $(3,477)
======= ======= =======
</TABLE>
The income tax provision (benefit) differs from that computed at the
federal statutory corporate tax rate as follows:
<TABLE>
<CAPTION>
MARCH 31,
---------------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Federal statutory rate.................................. 35.0% 35.0% (35.0)%
State income taxes, net of federal benefit.............. (5.5) 0.6 (6.0)
Meals and entertainment................................. 0.2 0.6 4.1
Other, net.............................................. 5.9 0.2 6.5
----- ----- -----
Effective tax rate...................................... 35.6% 36.4% (30.4)%
===== ===== =====
</TABLE>
F-91
<PAGE> 208
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of significant temporary differences representing net
deferred tax assets and liabilities are as follows (amounts in thousands):
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1997 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Current:
Accrued vacation, bonuses and group insurance.......... $ 2,981 $ 2,119
Prepaid gaming taxes................................... (1,341) (1,177)
Other.................................................. 2,261 1,135
-------- --------
Total current............................................. 3,901 2,077
-------- --------
Long-term:
Preopening and other costs, net of amortization........ 15,077 4,485
State deferred taxes................................... 1,907 462
Alternative minimum tax credits........................ 9,000 4,600
-------- --------
Total long-term................................... 25,984 9,547
-------- --------
Total deferred tax assets......................... 29,885 11,624
-------- --------
Deferred tax liabilities:
Long-term:
Temporary differences related to property and
equipment............................................ (32,583) (18,201)
Other.................................................. (1,249) (1,122)
-------- --------
Total deferred tax liabilities.................... (33,832) (19,323)
-------- --------
Net............................................... $ (3,947) $ (7,699)
======== ========
</TABLE>
The excess of the alternative minimum tax over the regular Federal income
tax is a tax credit which can be carried forward indefinitely to reduce future
regular Federal income tax liabilities. The Company did not record a valuation
allowance at March 31, 1997 relating to recorded tax benefits because all
benefits are likely to be realized.
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
NET
INCOME INCOME EARNINGS
(LOSS) (LOSS) (LOSS)
OPERATING BEFORE APPLICABLE PER
NET INCOME INCOME TO COMMON COMMON
REVENUES (LOSS) TAXES STOCK SHARE
--------- --------- -------- ---------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER COMMON SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
YEAR ENDED MARCH 31, 1997
First quarter........................................ $ 135,440 $ 22,813 $ 14,581 $ 7,648 $ 0.22
Second quarter....................................... $ 138,034 $ 23,809 $ 15,847 $ 8,307 $ 0.24
Third quarter........................................ $ 133,767 $ 21,536 $ 13,789 $ 6,944 $ 0.20
Fourth quarter....................................... $ 176,274 $(10,035) $(22,839) $(16,381) $(0.46)
YEAR ENDED MARCH 31, 1996
First quarter........................................ $ 94,145 $ 13,043 $ 5,530 $ 3,511 $ 0.12
Second quarter....................................... $ 119,850 $ 17,666 $ 11,459 $ 7,257 $ 0.21
Third quarter........................................ $ 122,929 $ 18,969 $ 11,509 $ 7,360 $ 0.21
Fourth quarter....................................... $ 129,933 $ 19,786 $ 11,553 $ 7,291 $ 0.21
YEAR ENDED MARCH 31, 1995
First quarter........................................ $ 47,672 $ (8,361) $(11,055) $ (7,399) $(0.25)
Second quarter....................................... $ 62,384 $ (6,962) $(11,428) $ (7,379) $(0.25)
Third quarter........................................ $ 83,641 $ 6,295 $ 807 $ 483 $ 0.02
Fourth quarter....................................... $ 96,581 $ 15,416 $ 10,257 $ 6,353 $ 0.22
</TABLE>
14. SUBSEQUENT EVENT
On January 16, 1997, the Company's gaming licenses for Station Casino
Kansas City were formally issued for its facility which is located in a man-made
basin filled with water piped in from the surface of the
F-92
<PAGE> 209
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Missouri River. In reliance on numerous approvals from the Missouri Gaming
Commission specific to the configuration and granted prior to the formal
issuance of its gaming license, the Company built and opened the Station Casino
Kansas City facility. The licenses issued to the Company and the resolutions
related thereto specifically acknowledge that the Missouri Gaming Commission had
reviewed and approved this configuration.
On November 25, 1997, the Supreme Court of Missouri ruled, in a case
challenging the gaming licensing of certain operators located in Maryland
Heights, Missouri who compete with Station Casino St. Charles, that gaming may
occur only in artificial spaces that are contiguous to the surface stream of the
Missouri or Mississippi Rivers. The case was remanded to the trial court for a
factual determination as to whether such competing operators meet this
requirement.
Based upon this Missouri Supreme Court ruling (the so-called "Akin
Ruling"), the Missouri Gaming Commission attempted to issue preliminary orders
for disciplinary action to all licensees in Missouri that operate gaming
facilities in artificial basins. These preliminary orders started the hearing
process which allow the affected licensees to demonstrate that they are in fact,
contiguous to the surface stream of the Missouri or Mississippi River. The
preliminary orders were challenged by the licensees. The Circuit Court of Cole
County has entered writs of prohibition preventing the Missouri Gaming
Commission from proceeding with such hearings under the Missouri Gaming
Commission's existing procedures. The Missouri Gaming Commission is currently
seeking further review of these writs of prohibition in the Missouri Supreme
Court, which has not yet ruled on the matter.
Further, the Akin case was dismissed by the plaintiffs without prejudice
after the Akin Ruling was entered by the Missouri Supreme Court, but before any
further proceedings on remand. Therefore, the status of the Akin Ruling is
unclear.
On January 16, 1998, Station Casino Kansas City's licenses were renewed for
one year, subject to the satisfactory resolution of the issues raised in the
Akin Ruling. This renewal occurred before any writs of prohibition were entered
preventing the Missouri Gaming Commission from proceeding with hearings
concerning Station Casino Kansas City or any other licensees for alleged
non-compliance with the Akin Ruling.
Because of the open questions raised but not answered in the Akin Ruling,
it is not possible to predict what effect the Akin Ruling or Missouri Gaming
Commission's actions will have on operations at Station Casino Kansas City.
At this time, based on discussions with Missouri legal counsel, management
believes that it has potentially meritorious defenses in any lawsuit or
administrative action based on the Akin Ruling. In addition, based on its
current understanding of the ruling, management believes that if it were to be
required to take remedial action with respect to Station Casino Kansas City,
such remediation could be completed at a cost that would not have a material
adverse effect on the Company's financial condition.
However, management cannot provide any assurance as to whether the Station
Casino Kansas City facility would be found to comply with the guidelines
described in the Akin Ruling, whether it would be permitted to modify the
facility to comply with such standards, or whether the Company's legal defenses,
legislative alternatives, or other means available to permit the continued use
of this current configuration would succeed.
Further, it is unclear, in the event of a determination that the
configuration at Station Casino Kansas City does not comply with the Akin
Ruling, whether Station Casino Kansas City would be able to continue to operate
or whether such findings would result in the possible temporary or permanent
closure of Station Casino Kansas City. The Company cannot provide any assurance
that there would not be a material adverse impact in such an eventuality.
The Company does not believe the Akin Ruling will have a material adverse
impact on the Station Casino St. Charles operations.
F-93
<PAGE> 210
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MERGER AGREEMENT (UNAUDITED)
On January 16, 1998, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Crescent Real Estate Equities Company, a
Texas real estate investment trust ("Crescent"). Pursuant to the Merger
Agreement, the Company will be merged with and into Crescent (the "Merger"). The
Merger Agreement also provides for certain alternative structures to facilitate
the combination of the businesses of the Company and Crescent.
Upon consummation of the Merger, each share of the Company's $.01 par value
common stock issued and outstanding immediately prior to the effective time of
the Merger (the "Effective Time") together with the associated rights issued
pursuant to the Rights Agreement dated October 6, 1997 shall as of the Effective
Time, be converted into the right to receive 0.466 validly issued, fully paid
and nonassessable shares of Crescent's $.01 par value common shares of
beneficial interest. Each share of the Company's $3.50 Convertible Preferred
Stock issued and outstanding immediately prior to the Effective Time shall as of
the Effective Time be converted into the right to receive one validly issued,
fully paid and nonassessable $3.50 Convertible Preferred Share of Crescent
convertible into the number of Crescent common shares and having the terms
required by the Company's Convertible Preferred Stock. In addition, at the
option of the Company, the Company will issue to Crescent and Crescent has
agreed to purchase subject to the terms, conditions and procedures set forth in
the Merger Agreement up to an aggregate of 115,000 shares of a new series of
preferred stock of the Company ("the Redeemable Preferred Stock") at a price of
$1,000 per share (plus accrued dividends) in cash in increments of 5,000 shares.
The Redeemable Preferred Stock is convertible at the option of the holder any
time after January 16, 1999, unless previously redeemed, into shares of common
stock at a conversion rate of 60.606 Shares of Common Stock for each share of
Redeemable Preferred Stock subject to ordinary antidilution provisions. Unless
written consent from Crescent is received, the Company has agreed to use the net
proceeds from the sale of the Redeemable Preferred Stock to repay indebtedness
under its revolving loan agreement, borrowings under which were used for
acquisitions and master-planned expansions.
Consummation of the Merger is subject to the satisfaction of certain
closing conditions, including the approval of the Company's stockholders,
expiration or termination of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1974 and the approval of any other governmental
entity with jurisdiction in respect of gaming laws required or necessary in
connection with the Merger, the Merger Agreement and the transactions
contemplated by the Merger Agreement. The Merger Agreement entitles Crescent to
a $54 million break-up fee if such agreement is terminated (i) by either
Crescent or the Board of Directors of the Company if any required approval of
the Merger is not obtained by reason of the failure to obtain the required vote
of stockholders, (ii) by Crescent if the Board of Directors of the Company
withdraws its approval or recommendation of the Merger, or recommends a superior
proposal or (iii) by the Board of Directors of the Company if it receives a
superior proposal that Crescent does not match or exceed.
Upon consummation of the Merger, it is anticipated that an operating
company owned equally by the Company's management team and Crescent Operating,
Inc. (the "Operating Company") or another affiliate established by Crescent will
operate the six casino properties currently operated by the Company pursuant to
a lease with Crescent. The lease will be a 10-year lease with one, five-year
renewal option. The lease also will be a triple-net lease, and will provide that
the Operating Company is required to maintain the property in good condition at
its expense during the term of the lease. The lease provides for base and
percentage rent but the amount of the rent has not yet been determined.
Immediately prior to the execution of the Merger Agreement, the Company
amended its Rights Agreement dated October 6, 1997 (the "Rights Agreement"), to
exclude Crescent and its affiliates from the definition of Acquiring Person to
the extent that it is a Beneficial Owner (as defined in the Rights Agreement) as
a result of the approval, execution or delivery of, or the consummation of the
transactions contemplated by, the Merger Agreement, including, without
limitation, the purchase by Crescent of the Redeemable Preferred Stock.
F-94
<PAGE> 211
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
PRO FORMA CONSOLIDATING FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS)
The pro forma information for the year ended December 31, 1997 and 1996
assumes completion, in each case as of January 1, 1996 in determining operating
and other data, of (i) Crescent Real Estate Equities Company's (the "Company")
public offering of its common shares that closed on October 2, 1996 (the
"October 1996 Offering") and the additional public offering of 900,000 common
shares that closed on October 9, 1996 and these net proceeds were contributed to
Crescent Real Estate Equities Limited Partnership (the "Operating Partnership"),
which used the net proceeds to repay approximately $168,000 of indebtedness and
to fund approximately $289,000 of Property acquisitions in the fourth quarter of
1996 and the first quarter of 1997, (ii) the Company's public offering of its
common shares in April 1997 (the "April 1997 Offering") and the additional
public offering of 500,000 common shares that closed on May 14, 1997 and these
net proceeds were contributed to the Operating Partnership, which used the net
proceeds to fund approximately $593,500 of Property acquisitions and other
investments in the second quarter of 1997, (iii) the Company's offering of
4,700,000 common shares to an affiliate of Union Bank of Switzerland (the "UBS
Offering") and the contribution of the net proceeds to the Operating
Partnership, which used the net proceeds to repay approximately $145,000 of
indebtedness under the Credit Facility, (iv) the Operating Partnership's
offering of an aggregate principal amount of $400 million of senior notes (the
"September 1997 Note Offering") and the use of the net proceeds therefrom to
fund approximately $337,600 of the purchase price of two Properties and to repay
approximately $57,200 of indebtedness incurred under the Credit Facility and
other short-term indebtedness, (v) the Company's public offering of its Common
Shares in October 1997 (the "October 1997 Offering") and the contribution of the
net proceeds to the Operating Partnership, which used the net proceeds therefrom
to fund approximately $45,000 of the purchase price of one Property and to repay
approximately $325,100 of short-term indebtedness and indebtedness incurred
under the Credit Facility, (vi) the Company's offering of 5,375,000 Common
Shares to Merrill Lynch (the "Merrill Offering") and the contribution of the net
proceeds to the Operating Partnership, which used the net proceeds to repay
approximately $199,900 of indebtedness under the Credit Facility, (vii) the
Company's public offering of 8,000,000 Preferred Shares in February 1998
("February 1998 Preferred Offering") and the contribution of the proceeds to the
Operating Partnership, which used the net proceeds to repay approximately
$191,500 of indebtedness under the Credit Facility, (viii) Property
acquisitions, other investments and related financing and share issuances during
1996, 1997 and 1998, and (ix) Pending Investment and related financing,
including $1,054,200 for refinancing and/or assumption of indebtedness, and
associated refinancing and transaction costs, in connection with the Merger with
Station.
The unaudited pro forma Consolidated Balance Sheet and Statements of
Operations should be read in conjunction with the historical audited financial
statements of the Operating Partnership for the year ended December 31, 1996,
filed herein. In management's opinion, all adjustments necessary to reflect the
above discussed transactions have been made. The unaudited pro forma
Consolidated Balance Sheet and Statements of Operations are not necessarily
indicative of what actual results of operations of the Operating Partnership
would have been for the period, nor does it purport to represent the Operating
Partnership's results of operations for future periods.
F-95
<PAGE> 212
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
CRESCENT REAL
ESTATE EQUITIES
LIMITED PARTNERSHIP PRO FORMA PRO FORMA
HISTORICAL(A) ADJUSTMENTS CONSOLIDATED
------------------- ----------- ------------
<S> <C> <C> <C>
Investments in real estate.................... $3,423,130 $2,157,516(B) $5,580,646
Less -- accumulated depreciation.............. (278,194) -- (278,194)
---------- ---------- ----------
Net investment in real estate....... 3,144,936 2,157,516 5,302,452
Cash and cash equivalents..................... 66,063 23,100(C) 89,163
Restricted cash and cash equivalents.......... 41,528 -- 41,528
Accounts receivable, net...................... 30,049 -- 30,049
Deferred rent receivable...................... 39,588 -- 39,588
Investments in real estate mortgages and
equity of unconsolidated companies.......... 601,770 24,100(D) 625,870
Notes receivable, net......................... 159,843 7,800(E) 167,643
Other assets, net............................. 99,098 -- 99,098
---------- ---------- ----------
Total assets........................ $4,182,875 $2,212,516 $6,395,391
========== ========== ==========
LIABILITIES
Borrowings under Credit Facility.............. $ 350,000 $ 143,050(F) $ 493,050
Notes payable................................. 1,360,124 158,100(G) 2,572,424
1,054,200(H)
Accounts payable, accrued expenses and other
liabilities................................. 127,220 (25,000)(I) 102,220
---------- ---------- ----------
Total liabilities................... 1,837,344 1,330,350 3,167,694
---------- ---------- ----------
MINORITY INTERESTS............................ 28,178 -- 28,178
PARTNERS' CAPITAL
General partner............................. 4,324 -- 4,324
Limited partners'........................... 2,313,029 882,166(J) 3,195,195
---------- ---------- ----------
Total partners' capital............. 2,317,353 882,166 3,199,519
---------- ---------- ----------
Total liabilities and partners'
capital........................... $4,182,875 $2,212,516 $6,395,391
========== ========== ==========
</TABLE>
See accompanying notes to Pro Forma Consolidated Balance Sheet.
F-96
<PAGE> 213
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
ADJUSTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C> <C>
(A) Reflects Crescent Real Estate Equities Limited Partnership
audited consolidated historical balance sheet as of
December 31, 1997......................................... --
(B) Increase reflects the following:
Acquisition of Austin Centre office property and Omni Austin
Hotel property............................................ $ 96,400
Acquisition of Post Oak Central office property............. 155,250
Acquisition of Washington Harbour office properties......... 161,000
Pending acquisition of Station's casino/hotel properties.... 1,744,866
----------
$2,157,516
==========
(C) Net increase reflects the following:
Borrowings under the Bridge Loan for working capital........ $ 23,100
----------
$ 23,100
==========
(D) Net increase reflects the following:
Additional investments in equity of unconsolidated
companies................................................. $ 24,100
----------
$ 24,100
==========
(E) Increase in notes receivable reflects the following:
Loan to a residential development corporation............... $ 7,800
==========
(F) Net increase in borrowings under the Credit Facility as a
result of:
Acquisition of Austin Centre office property and Omni Austin
Hotel property............................................ $ 96,400
Draw for additional investments in equity of unconsolidated
companies................................................. 21,900
Acquisition of Post Oak Central office property............. 55,250
Partial repayment under the Credit Facility using capital
contributions made by
the Company from the February 1998 Preferred Offering... (191,500)
Acquisition of Washington Harbour office properties......... 161,000
----------
$ 143,050
==========
(G) Net decrease in short-term borrowings as a result of:
Borrowings under the Bridge Loan for working capital and
property taxes............................................ $ 48,100
Borrowings under the Bridge Loan for a residential
development corporation loan
and additional investments in equity of unconsolidated
companies................................................. 10,000
Borrowings under the Bridge Loan for the acquisition of Post
Oak Central office
property................................................ 100,000
----------
$ 158,100
==========
(H) Increase in notes payable reflects the following:
Debt relating to the pending acquisition of Station's
casino/hotel properties................................... $1,054,200
----------
$1,054,200
==========
(I) Decrease reflects the following:
Payment of property taxes with borrowings under the Bridge
Loan...................................................... $ (25,000)
==========
(J) Increase reflects the following:
The Company's issuance of preferred and common shares in
conjunction with the pending acquisition of Station's
casino/hotel properties................................... $ 690,666
Capital contribution made by the Company from the February
1998 Preferred Offering................................. 191,500
----------
$ 882,166
==========
</TABLE>
F-97
<PAGE> 214
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
CRESCENT REAL
ESTATE EQUITIES
LIMITED 1998 ACQUIRED
PARTNERSHIP 1997 ACQUIRED AND PENDING OTHER PRO FORMA
HISTORICAL(A) INVESTMENTS(B) INVESTMENT(C) ADJUSTMENTS CONSOLIDATED
--------------- -------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Rental property............... $430,383 $125,295 $205,431 $ -- $761,109
Interest and other income..... 16,990 -- -- 6,361(D) 23,351
-------- -------- -------- --------- --------
Total revenues........ 447,373 125,295 205,431 6,361 784,460
-------- -------- -------- --------- --------
EXPENSES:
Real estate taxes............. 44,154 11,277 4,367 -- 59,798
Repairs and maintenance....... 27,783 13,317 5,066 -- 46,166
Other rental property
operating.................. 86,931 21,974 7,443 (283)(E) 114,487
(1,578)(F)
Corporate general and
administrative............. 12,858 -- -- -- 12,858
Interest expense.............. 86,441 -- -- 138,375(G) 224,816
Depreciation and
amortization............... 74,426 22,554 84,602 -- 181,582
Amortization of deferred
financing costs............ 3,499 -- -- 539(H) 4,038
-------- -------- -------- --------- --------
Total expenses........ 336,092 69,122 101,478 137,053 643,745
-------- -------- -------- --------- --------
Operating income
(loss).............. 111,281 56,173 103,953 (130,692) 140,715
OTHER INCOME:
Equity in net income of
unconsolidated companies... 23,743 10,590 -- -- 34,333
-------- -------- -------- --------- --------
INCOME (LOSS) BEFORE MINORITY
INTERESTS..................... 135,024 66,763 103,953 (130,692) 175,048
Minority interests.............. (1,434) -- -- -- (1,434)
-------- -------- -------- --------- --------
NET INCOME (LOSS)............... $133,590 $ 66,763 $103,953 $(130,692) $173,614
======== ======== ======== ========= ========
Preferred dividend(I)........... (20,745)
--------
Net income available to
partners'..................... $152,869
========
</TABLE>
See adjustments to Pro Forma Consolidated Statement of Operations on following
page.
F-98
<PAGE> 215
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
ADJUSTMENTS
(DOLLARS IN THOUSANDS)
(A) Reflects Crescent Real Estate Equities Limited Partnership's audited
consolidated historical statement of operations for the year ended December
31, 1997.
(B) Reflects the historical incremental rental income and operating expenses,
including an adjustment for depreciation based on acquisition price
associated with all investments acquired in 1997, assuming the investments
were acquired at the beginning of the period.
<TABLE>
<CAPTION>
ACQUISITION
INVESTMENT DATE
---------- -----------
<S> <C>
Greenway II office property................................. 1/17/97
Trammell Crow Center office property........................ 2/28/97
Three Denver office properties.............................. 2/28/97
Carter-Crowley Real Estate Assets........................... 5/9/97
Magellan Real Estate Assets(i).............................. 6/17/97
The Woodlands(ii)(iii)...................................... 7/31/97
Desert Mountain(iv)......................................... 8/29/97
Houston Center mixed-use property complex................... 9/22/97
Four Seasons Hotel -- Houston hotel property(v)............. 9/22/97
Miami Center office property................................ 9/30/97
U.S. Home Building office property.......................... 10/15/97
Bank One Center office property(vi)......................... 10/22/97
Refrigerated Warehouse Investment(vii)...................... 10/31/97
Fountain Place office property.............................. 11/7/97
Ventana Country Inn hotel property(v)....................... 12/19/97
Energy Centre office property............................... 12/22/97
</TABLE>
(i) Calculated to reflect the lease payment from the behavioral
healthcare facilities' lessee to the Operating Partnership by
applying the rent provisions (as set forth in the facilities'
lease agreement). Rent provisions include no percentage rent
component.
(ii) The Operating Partnership has an indirect 40.375% (after sale
of voting common stock to COI) non-voting equity investment in
the limited partnership whose primary holding consists of The
Woodlands land assets.
(iii) The Operating Partnership has a 42.5% equity investment in the
limited partnership whose primary holding consists of The
Woodlands commercial property assets.
(iv) The Operating Partnership has an indirect 88.35% (after sale of
voting common stock to COI) non-voting equity investment in the
limited partnership that owns Desert Mountain.
(v) Historical operations of the hotel property were adjusted to
reflect the lease payment (base rent and percentage rent, if
applicable) from the hotel lessee to the Operating Partnership
calculated by applying the rent provisions (as defined in the
lease agreement) to the historical revenues of the hotel
property.
(vi) The Operating Partnership has a 50% equity investment in the
partnership that owns Bank One Center office property.
(vii) The Operating Partnership has an indirect 38% (after the sale
of voting common stock to COI) non-voting equity investment in
two corporations that own the refrigerated warehouse
properties.
F-99
<PAGE> 216
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS -- (CONTINUED)
(C) Reflects the historical incremental rental income and operating expenses,
including an adjustment for depreciation based on acquisition price
associated with the 1998 acquired and pending investment, assuming the
investments were acquired at the beginning of the period.
<TABLE>
<S> <C> <C> <C>
Austin Centre office property............................... 1/23/98
Omni Austin Hotel property(i)............................... 1/23/98
Post Oak Central office property complex.................... 2/13/98
Washington Harbour office properties........................ 2/25/98
Station's casino/hotel properties(ii)....................... pending
(i) Historical operations of the hotel property were adjusted to
reflect the lease payment (base rent and percentage rent, if
applicable) from the hotel lessee to the Operating
Partnership calculated by applying the rent provisions (as
defined in the lease agreement) to the historical revenues
of the hotel property.
(ii) Calculated an estimated lease payment using the historical
operating results of the casino/hotel properties. The
historical operations do not represent stabilized
casino/hotel operations, as two casino/hotel properties
commenced operations in 1997.
</TABLE>
(D) Increase reflects the incremental interest income associated with the
following, assuming all had occurred at the beginning of the period.
<TABLE>
<S> <C> <C> <C> <C>
Carter Crowley Notes............................... ($53,365 @ 10%) $ 5,336
Ritz Note.......................................... ($ 8,850 @ 18%) 1,593
COI Note........................................... ($33,924 @ 12%) 4,070
Residential Development Corp Note.................. ($ 7,800 @ 10%) 780
Desert Mountain Note............................... ($23,251 @ 12%) 2,790
-------
Total.............................................. $14,569
Less: Historical interest income................... (8,208)
-------
Total.............................................. $ 6,361
========
(E) Reflects the elimination of historical ground lessee's expense, as a result
of the Operating Partnership acquiring the land underlying Trammell Crow
Center, assuming Trammell Crow Center was acquired at the beginning of the
period....................................................................... $ (283)
========
(F) Decrease as a result of the elimination of third party property management
fees which terminated subsequent to acquisition of certain of the
properties................................................................... $ (1,578)
========
</TABLE>
F-100
<PAGE> 217
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS -- (CONTINUED)
(G) Net increase as a result of interest costs for long and short-term
financing, as follows, net of repayment with proceeds of the February 1998
Preferred Offering, the Equity Offering to Merrill Lynch in December 1997,
the October 1997 Equity Offering, the September 1997 Note Offering, the
Equity Offering to UBS in August 1997 and the April and May 1997 Equity
Offerings, assuming the borrowings to finance investment acquisitions and
the assumption of debt and repayment, had all occurred at the beginning of
the period.
<TABLE>
<S> <C> <C> <C> <C> <C>
Credit Facility......................... $ 493,050 @ 7.14% $ 35,203
BankBoston Note II...................... 100,000 @ 7.14% 7,140
Bridge Loan............................. 250,000 @ 7.14% 17,850
Note Offering -- 6.625% Notes due
2002.................................. 150,000 @ 6.625% 9,937
Note Offering -- 7.125% Notes due
2007.................................. 250,000 @ 7.125% 17,812
Met Life Note........................... 45,000 @ 6.86% 3,087
Chase Manhattan Note.................... 97,123 @ 7.69% 7,468
Station's Refinanced Debt............... 1,054,200 @ 7.50% 79,065
LaSalle Note I.......................... 239,000 @ 7.83% 18,713
LaSalle Note II......................... 161,000 @ 7.79% 12,541
Cigna Note.............................. 63,500 @ 7.47% 4,743
Metropolitan Life Note.................. 12,109 @ 8.88% 1,075
LaSalle Note III........................ 115,000 @ 8.07% 9,280
Nomura Funding VI Note.................. 8,692 @ 10.07% 875
Northwestern Life Note.................. 26,000 @ 7.66% 1,991
Rigney Note............................. 800 @ 8.50% 68
---------- ------------
Total annual amount..................... $3,065,474 $ 226,848
Less: Capitalized interest.............. (2,032)
Historical interest expense............. (86,441)
------------
$138,375
========
</TABLE>
(H) Amortization of capitalized costs associated with the September 1997 Note
Offering ($4,731 purchaser's discount and $500 other costs).
<TABLE>
<CAPTION>
AMORTIZATION OF
FEES
---------------
<S> <C> <C>
Note Offering -- 6.625% Notes due 2002...................... $392
Note Offering -- 7.125% Notes due 2007...................... 327
Total....................................................... $719
----
Prorated for nine months.................................... $ 539
========
</TABLE>
(I) Reflects the following:
<TABLE>
<CAPTION>
<S> <C> <C>
7% preferred dividend for the $103.5 million of preferred
shares issued in connection with the Station
transaction............................................... $ 7,245
6.75% preferred dividend for the February 1998 Preferred
Offering.................................................. 13,500
-------
$ 20,745
========
</TABLE>
F-101
<PAGE> 218
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
CRESCENT REAL
ESTATE EQUITIES
LIMITED 1998 ACQUIRED
PARTNERSHIP 1996 ACQUIRED 1997 ACQUIRED AND PENDING OTHER PRO FORMA
HISTORICAL(A) INVESTMENTS(B) INVESTMENTS(C) INVESTMENT(D) ADJUSTMENTS CONSOLIDATED
--------------- -------------- -------------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Rental property............. $202,003 $89,185 $225,276 $178,823 $ -- $695,287
Interest and other income... 6,858 -- -- -- 14,569(E) 21,427
-------- ------- -------- -------- --------- --------
Total revenues...... 208,861 89,185 225,276 178,823 14,569 716,714
-------- ------- -------- -------- --------- --------
EXPENSES:
Real estate taxes........... 20,606 8,176 18,991 4,552 -- 52,325
Repairs and maintenance..... 12,292 8,403 23,437 5,102 -- 49,234
Other rental property
operating................ 40,915 21,346 39,751 8,312 (1,700)(F) 105,938
(2,686)(G)
Corporate general and
administrative........... 4,674 -- -- -- 5,326(H) 10,000
Interest expense............ 42,926 -- -- -- 182,818(I) 225,744
Depreciation and
amortization............. 40,535 12,727 41,368 84,602 -- 179,232
Amortization of deferred
financing costs.......... 2,812 -- -- -- 719(J) 3,531
-------- ------- -------- -------- --------- --------
Total expenses...... 164,760 50,652 123,547 102,568 184,477 626,004
-------- ------- -------- -------- --------- --------
Operating income
(loss)............ 44,101 38,533 101,729 76,255 (169,908) 90,710
OTHER INCOME:
Equity in net income of
unconsolidated
companies................ 3,850 -- 10,170 -- -- 14,020
-------- ------- -------- -------- --------- --------
INCOME (LOSS) BEFORE MINORITY
INTERESTS AND EXTRAORDINARY
ITEM........................ 47,951 38,533 111,899 76,255 (169,908) 104,730
Minority interests............ (1,482) (533) -- -- -- (2,015)
-------- ------- -------- -------- --------- --------
INCOME BEFORE EXTRAORDINARY
ITEM........................ 46,469 38,000 111,899 76,255 (169,908) 102,715
Extraordinary item............ (1,599) -- -- -- -- (1,599)
-------- ------- -------- -------- --------- --------
NET INCOME (LOSS)............. $ 44,870 $38,000 $111,899 $ 76,255 $(169,908) $101,116
======== ======= ======== ======== ========= ========
Preferred dividend(K)......... (20,745)
--------
Net income available to
partners'................... $ 80,371
========
</TABLE>
See adjustments to Pro Forma Consolidated Statement of Operations on following
page.
F-102
<PAGE> 219
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
ADJUSTMENTS
(DOLLARS IN THOUSANDS)
(A) Reflects Crescent Real Estate Equities Limited Partnership's audited
consolidated historical statement of operations for the year ended December
31, 1996
(B) Reflects the historical incremental rental income and operating expenses,
including an adjustment for depreciation based on acquisition price
associated with all investments acquired in 1996, assuming the investments
were acquired at the beginning of the period.
<TABLE>
<CAPTION>
ACQUISITION
INVESTMENT DATE
---------- -----------
<S> <C>
3333 Lee Parkway office property............................ 1/5/96
301 Congress Avenue office property(i)...................... 4/18/96
Central Park Plaza office property.......................... 6/13/96
Canyon Ranch -- Tucson resort property(ii).................. 7/26/96
The Woodlands office properties(iii)........................ 7/31/96
Three Westlake Park office property......................... 8/16/96
1615 Poydras office property................................ 8/23/96
Greenway Plaza Portfolio.................................... 10/7/96
Chancellor Park office property............................. 10/24/96
The Woodlands retail properties(iii)........................ 10/31/96
Sonoma Mission Inn & Spa hotel property(ii)................. 11/18/96
Canyon Ranch -- Lenox resort property(ii)................... 12/11/96
160 Spear Street office property............................ 12/13/96
Greenway I and IA office properties......................... 12/18/96
Bank One Tower office property.............................. 12/23/96
Frost Bank Plaza office property............................ 12/27/96
</TABLE>
(i) The Operating Partnership has a 1% general partner and a 49%
limited partner interest in the partnership that owns 301
Congress Avenue.
(ii) Historical operations of the hotel or/resort property were
adjusted to reflect the lease payment (base rent and percentage
rent, if applicable) from the hotel lessee to the Operating
Partnership calculated by applying the rent provisions (as
defined in the lease agreement) to the historical revenues of the
hotel or resort property.
(iii) The Operating Partnership had a 75% interest in the partnership
that owns these properties, in 1996. Currently, the Operating
Partnership has an approximate 85% interest.
(C) Reflects the historical incremental rental income and operating expenses,
including an adjustment for depreciation based on acquisition price
associated with all investments acquired in 1997, assuming the investments
were acquired at the beginning of the period.
F-103
<PAGE> 220
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS -- (CONTINUED)
<TABLE>
<CAPTION>
ACQUISITION
INVESTMENT DATE
---------- -----------
<S> <C>
Greenway II office property................................. 1/17/97
Trammell Crow Center office property........................ 2/28/97
Three Denver office properties.............................. 2/28/97
Carter-Crowley Real Estate Assets........................... 5/9/97
Magellan Real Estate Assets(i).............................. 6/17/97
The Woodlands(ii)(iii)...................................... 7/31/97
Desert Mountain(iv)......................................... 8/29/97
Houston Center mixed-use property complex................... 9/22/97
Four Seasons Hotel -- Houston hotel property(v)............. 9/22/97
Miami Center office property................................ 9/30/97
U.S. Home Building office property.......................... 10/15/97
Bank One Center office property(vi)......................... 10/22/97
Refrigerated Warehouse Investment(vii)...................... 10/31/97
Fountain Place office property.............................. 11/7/97
Ventana Country Inn hotel property(v)....................... 12/19/97
Energy Centre office property............................... 12/22/97
</TABLE>
(i) Calculated to reflect the lease payment from the behavioral
healthcare facilities' lessee to the Operating Partnership by
applying the rent provisions (as set forth in the facilities'
lease agreement). Rent provisions include no percentage rent
component.
(ii) The Operating Partnership has an indirect 40.375% (after sale of
voting common stock to COI) non-voting equity investment in the
limited partnership whose primary holding consists of The
Woodlands land assets.
(iii) The Operating Partnership has a 42.5% equity investment in the
limited partnership whose primary holding consists of The
Woodlands commercial property assets.
(iv) The Operating Partnership has an indirect 88.35% (after sale of
voting common stock to COI) non-voting equity investment in the
limited partnership that owns Desert Mountain.
(v) Historical operations of the hotel property were adjusted to
reflect the lease payment (base rent and percentage rent, if
applicable) from the hotel lessee to the Operating Partnership
calculated by applying the rent provisions (as defined in the
lease agreement) to the historical revenues of the hotel property.
(vi) The Operating Partnership has a 50% equity investment in the
partnership that owns Bank One Center office property.
(vii) The Operating Partnership has an indirect 38% (after the sale of
voting common stock to COI) non-voting equity investment in two
corporations that own the refrigerated warehouse properties.
(D) Reflects the historical incremental rental income and operating expenses,
including an adjustment for depreciation based on acquisition price
associated with the 1998 acquired and pending investment, assuming the
investments were acquired at the beginning of the period.
<TABLE>
<S> <C>
Austin Centre office property............................... 1/23/98
Omni Austin Hotel property(i)............................... 1/23/98
Post Oak Central office property complex.................... 2/13/98
Washington Harbour office properties........................ 2/25/98
Station's casino/hotel properties(ii)....................... pending
</TABLE>
F-104
<PAGE> 221
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS -- (CONTINUED)
(i) Historical operations of the hotel property were adjusted to
reflect the lease payment (base rent and percentage rent, if
applicable) from the hotel lessee to the Operating Partnership
calculated on a pro forma basis by applying the rent provisions
(as defined in the lease agreement). Rent provisions attributable
to percentage rent were applied based on gross revenue
thresholds, as defined, in excess of historical revenues.
(ii) Calculated an estimated lease payment using the historical
operating results of the casino/ hotel properties. The historical
operations do not represent stabilized casino/hotel operations,
as two casino/hotel properties commenced operations in 1997.
(E) Increase reflects the incremental interest income associated with the
following, assuming all had occurred at the beginning of the period.
<TABLE>
<S> <C> <C> <C> <C>
Carter Crowley Notes.......................... ($53,365 @ 10%) $ 5,336
Ritz Note..................................... ($ 8,850 @ 18%) 1,593
COI Note...................................... ($33,924 @ 12%) 4,070
Residential Development Corp Note............. ($ 7,800 @ 10%) 780
Desert Mountain Note.......................... ($23,251 @ 12%) 2,790
--------
Total......................................... $ 14,569
========
(F) Reflects the elimination of historical ground lessee's
expense, as a result of the Operating Partnership acquiring
the land underlying Trammell Crow Center, assuming Trammell
Crow Center was acquired at the beginning of the period..... $ (1,700)
========
(G) Decrease as a result of the elimination of third party
property management fees which terminated subsequent to
acquisition of certain of the properties.................... $ (2,686)
========
(H) Increase reflects the estimated incremental general and
administrative costs associated with the increase in
personnel due to numerous acquisitions in 1996 and 1997..... $ 5,326
========
</TABLE>
F-105
<PAGE> 222
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS -- (CONTINUED)
(I) Net increase as a result of interest costs for long and short-term
financing, as follows, net of repayment with proceeds of the February 1998
Preferred Offering, Equity Offering to Merrill Lynch in December 1997, the
October 1997 Equity Offering, the September 1997 Note Offering, the Equity
Offering to UBS in August 1997 and the April and May 1997 Equity Offerings,
and the 1996 Equity Offerings, assuming the borrowings to finance
investment acquisitions and the assumption of debt and repayment, had all
occurred at the beginning of the period.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Credit Facility.............................. $ 493,050 @ 7.14% $ 35,203
BankBoston Note II........................... 100,000 @ 7.14% 7,140
Bridge Loan.................................. 250,000 @ 7.14% 17,850
Note Offering -- 6.625% Notes due 2002....... 150,000 @ 6.625% 9,937
Note Offering -- 7.125% Notes due 2007....... 250,000 @ 7.125% 17,812
Met Life Note................................ 45,000 @ 6.86% 3,087
Chase Manhattan Note......................... 97,123 @ 7.69% 7,468
Stations Refinanced Debt..................... 1,054,200 @ 7.50% 79,065
LaSalle Note I............................... 239,000 @ 7.83% 18,713
LaSalle Note II.............................. 161,000 @ 7.79% 12,541
Cigna Note................................... 63,500 @ 7.47% 4,743
Metropolitan Life Note....................... 12,109 @ 8.88% 1,075
LaSalle Note III............................. 115,000 @ 8.07% 9,280
Nomura Funding VI Note....................... 8,692 @ 10.07% 875
Northwestern Life Note....................... 26,000 @ 7.66% 1,991
Rigney Note.................................. 800 @ 8.50% 68
---------- --------
Total annual amount.......................... $3,065,474 $226,848
Less: Capitalized interest (1,104)
Historical interest expense.................. (42,926)
--------
$182,818
========
</TABLE>
(J) Amortization of capitalized costs associated with the September 1997 Note
Offering ($4,731 purchaser's discount and $500 other costs).
<TABLE>
<CAPTION>
AMORTIZATION
OF FEES
------------
<S> <C> <C>
Note Offering -- 6.625% Notes due 2002...................... $392
Note Offering -- 7.125% Notes due 2007...................... 327
----
Total....................................................... $ 719
========
</TABLE>
(K) Reflects the following:
<TABLE>
<CAPTION>
<S> <C> <C>
7% preferred dividend for the $103.5 million of preferred
shares issued in connection with the Station
transaction............................................... $ 7,245
6.75% preferred dividend for the February 1998 Preferred
Offering.................................................. 13,500
-------
$ 20,745
========
</TABLE>
F-106
<PAGE> 223
APPENDIX A
COMPLETED INVESTMENTS
The Operating Partnership does not own any Property the book value of which
amounts to 10 percent or more of the total assets of the Operating Partnership
and its Subsidiaries as of the date hereof or the gross revenue from which
during the year ended December 31, 1997 amounted to 10 percent or more of the
aggregate gross revenues of the Operating Partnership and its Subsidiaries
during such year.
RECENT DEVELOPMENTS -- PENDING TRANSACTION WITH STATION CASINOS, INC.
Upon consummation of the proposed Merger with Station Casinos, Inc., the
following Casino/Hotel Properties will be owned by the Operating Partnership.
Each of the following Casino/Hotel Properties has a book value that amounts to
10 percent or more of the total assets of the Operating Partnership on the date
hereof or generated gross revenues during the year ended December 31, 1997
amounting to 10 percent or more of the aggregate gross revenues of the Operating
Partnership and its Subsidiaries during such year.
Palace Station. Palace Station is situated on approximately 39 acres
located on the west side of Las Vegas, Nevada. The Palace Station complex has
approximately 287,000 square feet of main facility area and features a
turn-of-the-century railroad station theme. The complex includes a 1,028-room
hotel, a 84,000-square foot casino, two swimming pools, 3,700 parking spaces
(including 1,900 spaces in two multi-level parking structures), a 20,000-square
foot banquet and convention center, five full-service restaurants with a total
of over 1,225 seats, five fast-food outlets, a gift shop and a non-gaming video
arcade. The casino offers approximately 2,250 slot and video poker machines, 45
gaming tables, a keno lounge, a poker room, a bingo parlor and a race and sports
book. The hotel features 587 rooms in a modern 21-story tower. The remaining 441
hotel rooms are located in low-rise buildings adjoining the tower and casino.
Palace Station's hotel rooms average approximately 377 square feet.
The Palace Station hotel was opened in 1976 and expanded in 1991. For the
fiscal year ended March 31, 1997 and the nine months ended December 31, 1997,
the average occupancy rate was 95% and 94%, respectively, the average daily rate
was $46 and $44, respectively, and the revenue per available room was $45 and
$42, respectively.
Station owns approximately 26 acres and leases the remaining approximately
13 acres pursuant to five long-term ground leases with unaffiliated third
parties with terms extending from December 2032 to June 2037. The property
currently secures Station's bank facility, and the Operating Partnership expects
to refinance the bank facility upon consummation of the Merger with unsecured
debt. As a result, the Operating Partnership expects that its interests in
Palace Station will be unencumbered when acquired. Further, the Operating
Partnership has no knowledge of any default or encumbrance under any such
leases, and Station has advised the Operating Partnership that there are no
material defaults thereunder. The Operating Partnership will not be able to
obtain assurances as to such lack of default or encumbrance from such third
parties in connection with the Merger.
Palace Station is master planned for further growth. The master plan
includes a total of 3,000 hotel rooms, approximately 148,000 square feet of
casino space, 3,200 slot machines and 90 table games. Additionally, the expanded
Palace Station would offer approximately 50,000 square feet of rentable banquet
space, a child-care facility, an expanded arcade, expanded retail lease space,
an estimated 5,600 parking spaces, a Las Vegas-style showroom and several new
restaurants, bars and other entertainment amenities. This master plan may be
executed in multiple phases over several years. Currently, there are neither
definitive construction plans nor budgets for any portion of the master-planned
development, and the scope of any project may vary significantly from that which
has been described.
Boulder Station. Boulder Station, which opened in August 1994, is situated
on approximately 47 acres located on the east side of Las Vegas, Nevada. Boulder
Station is located approximately four miles east of the Las Vegas Strip and
approximately four miles southeast of downtown Las Vegas. The Boulder Station
complex has approximately 337,000 square feet of main facility area and, like
Palace Station, features a turn-
A-1
<PAGE> 224
of-the-century railroad station theme. The complex includes a 300-room hotel, an
approximately 86,000-square foot casino, 4,350 parking spaces (including a
1,900-space multi-level parking structure), five full-service restaurants with a
total of over 1,400 seats, several fast-food outlets, a 280-seat entertainment
lounge, eight free-standing bars, a high-quality 11-screen movie theater
complex, a child-care facility, a swimming pool, a non-gaming video arcade and a
gift shop. The casino offers approximately 3,040 slot and video poker machines,
39 gaming tables, a keno lounge, a poker room, a bingo parlor and a race and
sports book. Act III Theaters ("Act III") entered into a 25-year lease agreement
with respect to the Boulder Station movie theater, pursuant to which Act III has
provided all interior theater construction, operates the theaters and pays a
percentage of the monthly gross sales to Station. The lease prohibits Act III
from operating or developing theaters at gaming facilities in Las Vegas other
than Station's facilities and provides the right to participate in future Act
III theater developments at non-gaming facilities in Las Vegas on similar terms.
The Boulder Station hotel was opened in 1994 and expanded in 1995. For the
fiscal year ended March 31, 1997 and the nine months ended December 31, 1997,
the average occupancy rate was 98% and 95%, respectively, the average daily rate
was $53 and $50, respectively, and the revenue per available room was $53 and
$49, respectively.
Station owns approximately 20 acres of the Boulder Station property and
leases the remaining approximately 27 acres from a trust pursuant to a long-term
ground lease. The trustee of such trust is Bank of America NT&SA and the
beneficiary is KB Enterprises, a company owned by Frank J. Fertitta, Jr. and
Victoria K. Fertitta (the "Related Lessor"), the parents of Frank J. Fertitta
III, Chairman of the Board and Chief Executive Officer of Station. The lease has
a maximum term of 65 years, ending in June 2058. Currently, the lease provides
for monthly payments of $125,000 until June 1998. In June 1998 and every ten
years thereafter, the rent will be adjusted to the product of the fair market
value of the land and the greater of (i) the then-prevailing annual rate of
return for comparably situated property or (ii) 8% per year. The rent will be
further adjusted in June 2003 and every ten years thereafter by a cost-of-living
factor. In no event will the rent for any period be less than the immediately
prior period. Pursuant to the ground lease, Station has an option, exercisable
at five-year intervals beginning in June 1998, to purchase the land at fair
market value. The property currently secures Station's bank facility, and the
Operating Partnership expects to refinance the bank facility upon consummation
of the Merger with unsecured debt. As a result, the Operating Partnership
expects that its interests in Boulder Station will be unencumbered when
acquired.
Boulder Station is master planned for further growth. After completion of
the potential master-planned development, Boulder Station would offer 1,500
hotel rooms, 140,000 square feet of casino space with 3,500 slot and video poker
machines and 50 table games, a 23-screen Act III movie theater complex, a
bowling center, several restaurant concepts and additional lease space for food
and retail uses. This master plan may be executed in multiple phases over
several years. Currently, there are neither definitive construction plans nor
budgets for any portion of the master-planned development, and the scope of any
project may vary significantly from that which has been described.
Texas Station. Texas Station, which commenced operations in July 1995, is
situated on approximately 47 acres in North Las Vegas, Nevada. Texas Station has
approximately 258,000 square feet of main facility area in a low-rise complex
plus a six story, 200-room hotel tower and approximately 4,000 parking spaces.
The complex includes a 75,000 square foot casino, five full-service restaurants
with over 1,300 seats, two fast-food outlets, a 132-seat entertainment lounge,
seven additional bars, a 12-screen Act III movie theater complex, a swimming
pool, a non-gaming video arcade and a gift shop. The casino offers approximately
2,020 slot and video poker machines, 34 gaming tables, a keno lounge, a poker
room, a bingo parlor and a race and sports book. Act III entered into a 25-year
lease agreement with respect to the Texas Station Movie Theater with terms
substantially the same as those of the Boulder Station agreement described
above. In December 1996, Station completed construction of a $7 million
multi-level parking structure with approximately 1,500 parking spaces.
The Texas Station hotel was opened in 1995 and expanded in 1996. For the
fiscal year ended March 31, 1997 and the nine months ended December 31, 1997,
the average occupancy rate was 95% and 89%, respectively, the average daily rate
was $52 and $55, respectively, and the revenue per available room was $51 and
$50, respectively.
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Station leases the property from a trust pursuant to a long-term ground
lease. The trustee of such trust is Bank of America NT&SA and the beneficiary of
which is Texas Gambling Hall & Hotel, Inc., an affiliate of the Related Lessor.
The lease has a maximum term of 65 years, ending in May 2060. The lease provides
for monthly rental payments of $150,000 until July 2000. In July 2000, and every
ten years thereafter, the rent will be adjusted to the product of the fair
market value of the land and the greater of (i) the then-prevailing rate of
return being realized for owners of comparable land in Clark County or (ii) 8%
per year. The rent will be further adjusted by a cost-of-living factor after the
first ten years and every ten years thereafter. In no event will the rent for
any period be less than the rent for the immediately prior period. Pursuant to
the ground lease, Station has an option, exercisable at five-year intervals, to
purchase the land at fair market value. The property currently secures Station's
bank facility, and the Operating Partnership expects to refinance the bank
facility upon consummation of the Merger with unsecured debt. As a result, the
Operating Partnership expects that its interests in Texas Station will be
unencumbered when acquired.
The Texas Station master plan would create a complex with 700 hotel rooms,
127,000 square feet of casino space with approximately 3,500 slots and video
poker machines and 50 table games, over 55,000 square feet of banquet and
meeting space, a 24-screen Act III movie theater, 42,000 square feet of space
for the purpose of retail leasing or an entertainment venue, additional arcade
space and a 70-lane bowling alley. This master plan may be executed in multiple
phases over several years. Currently, there are neither definitive construction
plans nor budgets for any portion of the master-planned development, and the
scope of any project may vary significantly from that which has been described.
Sunset Station. Sunset Station, which commenced operations in June 1997, is
located on approximately 100 acres in the Green Valley/Henderson area of Las
Vegas, Nevada. The Sunset Station facility features approximately 350,000 square
feet of main facility area, a 20-story, 467-room hotel tower and 4,200 parking
spaces. The complex includes an 80,000-square foot casino, 2,770 slot and video
poker machines, 47 gaming tables, a keno lounge, a 10-table poker room and a
race and sports book. The complex also includes five full-service restaurants,
with a total of over 1,700 seats, an entertainment lounge, additional bars, a
microbrewery, a gift shop, a non-gaming video arcade, several fast food outlets,
a 13-screen movie theater complex, a child-care facility, an outdoor swimming
pool and an amphitheater. Act III has entered into a 25-year lease agreement
with respect to the movie theater with terms substantially the same as those of
the Boulder Station agreement described above.
The Sunset Station hotel was opened and expanded in 1997. For the period
from the beginning of its operations in June 1997 through December 31, 1997, the
average occupancy rate was 92%, the average daily rate was $58 and the revenue
per available room was $54.
Station leases approximately 48 acres pursuant to a long-term ground lease
with an unaffiliated third party. The lease was entered into in June 1994, and
has a term of 65 years with monthly rental payments of $120,000, adjusted on
each subsequent five-year anniversary by a cost of living factor. On the seventh
anniversary date of the lease, Station has the option to purchase the land for
$23.9 million. The lessor also has an option to sell the land to Station for
$21.8 million on the seventh anniversary of the lease. The remaining portion of
the land consisting of approximately 52 acres, was purchased by Station for
approximately $11 million. The property currently secures Station's bank
facility, and the Operating Partnership expects to refinance the bank facility
upon consummation of the Merger with unsecured debt. As a result, the Operating
Partnership expects that its interests in Sunset Station will be unencumbered
when acquired. Further, the Operating Partnership has no knowledge of any
default or encumbrance under the lease, and Station has advised the Operating
Partnership that there are no material defaults thereunder. The Operating
Partnership will not be able to obtain assurances as to such lack of default or
encumbrance from such third party in connection with the Merger.
The first phase of master-planned development at Sunset Station includes a
2,000-space covered parking garage, the addition of 11 "Stadium-Style" screens
to the Act III movie theater complex, a 20,000 square foot expansion of the
casino, which will include 400 more slot and video poker machines, a roller
hockey and ice skating arena, a new steakhouse and enhanced conference
facilities. The development is expected to cost approximately $45 million.
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The Sunset Station master-planned development would create a complex with
2,000 hotel rooms, 130,000 square feet of casino space, 60,550 square feet of
banquet and meeting space, a bowling center and additional leasable space for
retail and entertainment venues. This master plan may be executed in phases over
multiple years. No decision has been made as to the timing of Sunset Station's
master plan, and the scope of any project may vary significantly from that which
has been described.
Sunset Station is located on approximately 100 acres, of which only
approximately 70 acres have been developed. Station is currently evaluating
potential development plans for the undeveloped property. Uses for the land
could include a life-style entertainment retail center, as well as the
development of several pads for various build-to-suit retail, restaurant and
entertainment concepts and a 199-gaming machine bar and restaurant. Timing and
definitive plans have not yet been determined for the development.
Station Casino Kansas City. Station Casino Kansas City, which commenced
operations in January 1997, is located on an approximately 171-acre site in
Kansas City, Missouri. The Station Casino Kansas City facility features two
continuously docked gaming vessels situated in a man-made protective basin. The
two gaming facilities feature approximately 140,000 square feet of gaming space
that offers approximately 3,100 slot and video poker machines and 166 gaming
tables and a poker room. The gaming facilities are docked adjacent to a
land-based entertainment facility with approximately 526,000 square feet of main
facility area which includes a 200-room hotel, seven full-service restaurants,
several fast-food outlets, 11 bars and lounges, a 1,400-seat Grand Pavilion
featuring headline entertainment, a child-care facility, a gift shop and parking
for 5,000 vehicles. Act III has entered into a long-term ground lease agreement
with respect to an 18-screen movie theater complex adjacent to the facility. In
addition, Station completed a 5,700-square foot non-gaming video arcade and a
midway operated by Sega Game Works, which was opened with the theater complex in
July 1997.
The Station Casino Kansas City hotel was opened and expanded in 1997. For
the fiscal year ended March 31, 1997 and the nine months ended December 31,
1997, the average occupancy rate was 95% and 89%, respectively, the average
daily rate was $87 and $91, respectively, and the revenue per available room was
$83 and $83, respectively.
Station entered into a joint venture with an unaffiliated third party to
acquire the land on which the Station Casino Kansas City property is located. A
subsidiary of Station leases the site from the joint venture for monthly
payments of $90,000 through the remainder of the lease term. The lease term was
extended to March 31, 2006, with the option to extend the lease for up to eight
renewal periods of ten years each plus one additional period of seven years.
Commencing April 1, 1998, and every anniversary thereafter the rent will be
adjusted by a cost-of-living factor. In connection with the joint venture
agreement, Station received an option that provided for the right to acquire the
joint venture partner's interest in the joint venture. Station has the option to
purchase the interest at any time after April 1, 2002 through April 1, 2011 for
$11.7 million, however, adjusted by a cost-of-living factor of not more than 5%
or less than 2% per annum. Station paid $2.6 million for this option. The
property currently secures Station's bank facility, and, the Operating
Partnership expects to refinance the bank facility upon consummation of the
Merger with unsecured debt. As a result, the Operating Partnership expects that
its interests in Station Casino Kansas City will be unencumbered when acquired.
Station Casino Kansas City is master-planned for multi-phased growth
including additional hotel rooms, restaurants, other entertainment facilities, a
parking garage and banquet and meeting space. At the present time, there exist
no definitive plans, designs or budgets for any master-planned expansion.
Station Casino Kansas City is located on approximately 171 acres of land,
of which only approximately 85 acres have been developed. Station is currently
considering entering into options for the development of the remainder of the
real property and is evaluating the sale or lease of certain parcels for the
development of complementary hotel rooms, separate and apart from the existing
hotel. Station is also currently evaluating the development of a significant
retail facility on a portion of the real property. At the current time, no
decisions have been made as to the future use of the property.
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Station Casino St. Charles. Station Casino St. Charles, which commenced
operations in May 1994, is located on 52 acres on the banks of the Missouri
River in St. Charles, Missouri. Station Casino St. Charles is a master-planned
gaming and entertainment complex featuring a historic riverboat theme.
Station Casino St. Charles currently features two gaming vessels, which are
a 292-foot long by 74-foot wide gaming riverboat and a floating two-story,
105,000-square foot gaming and entertainment facility. Station Casino St.
Charles has a 4,000-space five-story parking structure and is accessible via an
elevated roadway which facilitates access during the spring flooding season. The
two current gaming vessels have 47,000 square feet of gaming space with capacity
for 4,000 gaming customers, as well as food and beverage and other related
facilities. Station Casino St. Charles offers approximately 1,860 slot and video
poker machines, 75 gaming tables and a poker room. Station Casino St. Charles
features a 250-seat all-you-can-eat buffet and an 80-seat specialty steakhouse.
In addition to the casinos and restaurants, the facility offers seven bars,
several fast-food outlets, an entertainment lounge and a gift shop.
Station owns the entire approximately 52 acres on which Station Casino St.
Charles is located. The property currently secures Station's bank facility,
however, the Operating Partnership expects to refinance the bank facility upon
consummation of the Merger with unsecured debt. As a result, the Operating
Partnership expects that its interests in Station Casino St. Charles will be
unencumbered when acquired.
Station Casino St. Charles is master-planned to be a complete gaming and
entertainment destination, similar to Station Casino Kansas City. The St.
Charles master plan includes two new gaming vessels to be located in a recently
completed protective basin contiguous to the Missouri River, a uniquely designed
retail and entertainment complex, a full-service hotel, banquet and meeting
facilities and an additional parking structure. The new gaming vessels will
offer up to a combined 140,000 square feet of gaming space with 3,000 slot
machines and 190 gaming tables. The master-planned entertainment complex is
expected to include a 14-screen Act III movie theater, a 600-seat
Feast-Around-the-World Buffet, a child-care facility and various restaurants and
fast food venues. Station expects to explore opportunities for a third party to
develop and lease certain portions of the entertainment complex. Currently,
there are neither definitive construction plans nor budgets for any portion of
the master-planned development, and the scope of any project may vary
significantly from that which has been described.
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APPENDIX B
NEVADA GAMING REGULATIONS
The ownership and operation of casino gaming facilities, the operation of
gaming device routes and the manufacture, sale and distribution of gaming
devices for use or play in Nevada or for distribution outside of Nevada are
subject to the Nevada Gaming Control Act (the "Nevada Act") and various local
ordinances and regulations, and to the licensing and regulatory control of the
Nevada Commission, the Nevada State Gaming Control Board ("Nevada Board"), and
various other local city and county regulatory agencies (collectively, the
"Nevada Gaming Authorities").
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and
fraudulent practices; and (v) providing a source of state and local revenues
through taxation and licensing fees.
Station is currently registered and found suitable to own the stock of its
subsidiaries that conduct gaming operations (the "Station Gaming Subsidiaries")
at its casino/hotel properties (the "Initial Nevada Casino Properties"). The
Company must receive approval to acquire control of Station through the Merger.
In Nevada, the Company and the Operating Partnership, which will have an
interest in earnings from gaming operations through the leases with the Station
Lessee (a "Gaming Interest"), are required to be registered and found suitable,
or to be licensed by, the Nevada Gaming Authorities. Station is and the Company
and the Operating Partnership will each be required to be registered by the
Nevada Commission as a publicly traded corporation (a "Registered Corporation").
The Operating Partnership will also be required to be registered and found
suitable to own the stock of a subsidiary ("DSUB") which will be required to be
registered and found suitable to own the stock of certain Station Gaming
Subsidiaries that will be acquired in the Merger (the "Gaming Subsidiaries").
The General Partner, as the general partner of the Operating Partnership, will
be required to be registered and licensed and the limited partners of the
Operating Partnership may be required to be licensed or found suitable as
limited partners in the discretion of the Nevada Gaming Authorities. Crescent
Operating will also be required to be registered by the Nevada Commission as a
Registered Corporation and Crescent Operating or such other entity as Crescent
Operating establishes to be a limited partner in the Station Lessee (such
subsidiary limited partner, "COI-SUB") will be required to be registered or
licensed as a limited partner of the Station Lessee. Assuming that Crescent
Operating establishes a subsidiary called Crescent Operating, Ltd. ("COL") to be
the general partner of the Station Lessee, Crescent Operating will also be
required to be found suitable to own the stock of COL, which will be required to
be registered or licensed as a general partner of the Station Lessee. The
Management Entity and the Secondary Management Entity will be required to be
registered or licensed as a general partner and limited partner, respectively,
of the Station Lessee. The Station Lessee will be required to be registered and
licensed to own the interests of its limited liability company gaming
subsidiaries (individually, a "Lessee Gaming Subsidiary" and collectively, the
"Lessee Gaming Subsidiaries") under the terms of the Nevada Act. The Lessee
Gaming Subsidiaries will be required to be licensed to conduct certain gaming
operations at the Initial Nevada Casino Properties. All registrations,
approvals, findings of suitability and licenses required to conduct gaming
operations or receive a Gaming Interest are collectively referred to hereinafter
as "Gaming Licenses." Each of the Company, the Operating Partnership, the
General Partner, DSUB, Crescent Operating, COL, COI-SUB, the Management Entity
and the Secondary Management Entity is individually referred to hereinafter as a
"Station Party," and they are collectively referred to hereinafter as the
"Station Parties."
As a Registered Corporation, Station is, and the Company, the Operating
Partnership and Crescent Operating will be required to submit detailed financial
and operating reports to the Nevada Commission and the Nevada Board periodically
and furnish any other information which the Nevada Commission or the
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Nevada Board may require. No person may become a member or holder of an interest
of, or receive any percentage of profits from COL, DSUB, the Gaming
Subsidiaries, the Management Entity, the Secondary Management Entity, the
Station Lessee or the Lessee Gaming Subsidiaries without first obtaining Gaming
Licenses and approvals from the Nevada Gaming Authorities. The Station Parties,
the Station Lessee and the Lessee Gaming Subsidiaries will apply for Gaming
Licenses required in order to engage in gaming activities in Nevada or to have a
Gaming Interest, as applicable. The following regulatory requirements are
currently applicable to Station and the Station Gaming Subsidiaries, and will be
applicable to the Station Parties, the Gaming Subsidiaries, the Station Lessee
and the Lessee Gaming Subsidiaries upon their receipt of all necessary Gaming
Licenses and approvals from the Nevada Gaming Authorities to conduct gaming
operations at the Initial Nevada Casino Properties or to have a Gaming Interest,
as applicable. The Station Parties, the Station Lessee and the Lessee Gaming
Subsidiaries have not yet obtained the Gaming Licenses necessary to conduct
gaming operations in Nevada or to receive a Gaming Interest, as applicable, and
no assurances can be given that such Gaming Licenses will be obtained, or that
they will be obtained on a timely basis.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, a Registered Corporation
or a company which holds a Gaming License, in order to determine whether such
individual is suitable or should be licensed as a business associate of a
Registered Corporation or a gaming licensee. Officers, directors and certain key
employees of the Station Parties, the Station Lessee and the Lessee Gaming
Subsidiaries must file applications with the Nevada Gaming Authorities and will
be required to be licensed or found suitable by the Nevada Gaming Authorities.
Following the consummation of the Merger, officers, directors, trust managers
and key employees of the Station Parties and the Station Lessee who are actively
and directly involved in gaming activities of the Lessee Gaming Subsidiaries may
be required to be licensed or found suitable by the Nevada Gaming Authorities.
The Nevada Gaming Authorities may deny an application for licensing for any
cause which they deem reasonable. A finding of suitability is comparable to
licensing, and both require submission of detailed personal and financial
information, followed by a thorough investigation. The applicant for licensing
or a finding of suitability must pay all the costs of the investigation. Changes
in licensed positions must be reported to the Nevada Gaming Authorities and in
addition to their authority to deny an application for a finding of suitability
or licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a
change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director, trust
manager or key employee unsuitable for licensing or unsuitable to continue
having a relationship with the Station Parties, the Station Lessee or the Lessee
Gaming Subsidiaries, the companies involved would have to sever all
relationships with such person. In addition, the Nevada Commission may require
the Station Parties, the Station Lessee or the Lessee Gaming Subsidiaries to
terminate the employment of any person who refuses to file appropriate
applications. Determinations of suitability or of questions pertaining to
licensing are not subject to judicial review in Nevada.
Station is required, and the Station Parties, the Station Lessee and the
Lessee Gaming Subsidiaries will be required, to submit detailed financial and
operating reports to the Nevada Commission. Substantially all material loans,
leases, sales of securities and similar financing transactions by the Station
Parties, the Station Lessee and the Lessee Gaming Subsidiaries will be required
to be reported to or approved by the Nevada Commission.
If it were determined that the Nevada Act was violated by Station Parties,
the Station Lessee or a Lessee Gaming Subsidiary, the Gaming Licenses it holds
could be limited, conditioned, suspended or revoked, subject to compliance with
certain statutory and regulatory procedures. In addition, the Station Parties,
the Station Lessee, the Lessee Gaming Subsidiaries and the persons involved
could be subject to substantial fines for each separate violation of the Nevada
Act at the discretion of the Nevada Commission. Limitation, conditioning or
suspension of the Gaming Licenses of the Station Parties, the Station Lessee or
the Lessee Gaming Subsidiaries or the appointment of a supervisor could (and
revocation of any Gaming License would) materially adversely affect the results
of operations of the Company and the Operating Partnership and their ability to
have Gaming Interests and the gaming operations of the Station Lessee.
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Any beneficial holder of Station's voting securities, regardless of the
number of shares owned, may be, and, at any time following consummation of the
Merger, any beneficial owner of the voting securities of the Company or Crescent
Operating or the limited partnership interests of the Operating Partnership may
be, required to file an application, be investigated, and have its suitability
as a beneficial holder of such voting securities or the limited partnership
interests of the Operating Partnership determined if the Nevada Commission has
reason to believe that such ownership would otherwise be inconsistent with the
declared policies of the State of Nevada. The applicant must pay all costs of
investigation incurred by the Nevada Gaming Authorities in conducting any such
investigation.
The Nevada Act requires any person who acquires more than 5% of a
Registered Corporation's voting securities to report the acquisition to the
Nevada Commission. The Nevada Act requires that beneficial owners of more than
10% of a Registered Corporation's voting securities apply to the Nevada
Commission for a finding of suitability within thirty days after the Chairman of
the Nevada Board mails the written notice requiring such filing. Under certain
circumstances, an "institutional investor," as defined in the Nevada Act, which
acquires more than 10%, but not more than 15%, of a Registered Corporation's
voting securities may apply to the Nevada Commission for a waiver of such
finding of suitability if such institutional investor holds the voting
securities for investment purposes only. An institutional investor shall not be
deemed to hold voting securities for investment purposes unless the voting
securities were acquired and are held in the ordinary course of business as an
institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the board of directors
of the Registered Corporation, any change in the Registered Corporation's
corporate charter, bylaws, management, policies or operations of the Registered
Corporation, or any of its gaming affiliates, or any other action which the
Nevada Commission finds to be inconsistent with holding the Registered
Corporation's voting securities for investment purposes only. Activities which
are not deemed to be inconsistent with holding voting securities for investment
purposes only include: (i) voting on all matters voted on by stockholders; (ii)
making financial and other inquiries of management of the type normally made by
securities analysts for informational purposes and not to cause a change in its
management, policies or operations; and (iii) such other activities as the
Nevada Commission may determined to be consistent with such investment intent.
If the beneficial holder of voting securities who must be found suitable is a
corporation, partnership or trust, it must submit detailed business and
financial information including a list of beneficial owners. The applicant is
required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within thirty days after being ordered to do so by the Nevada Commission
or the Chairman of the Nevada Board, may be found unsuitable. The same
restrictions apply to a record owner if the record owner, after request, fails
to identify the beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the voting securities
beyond such period of time as may be prescribed by the Nevada Commission may be
guilty of a criminal offense. Station is and, following consummation of the
Merger, the Company, the Operating Partnership and Crescent Operating will be
subject to disciplinary action if, after they receive notice that a person is
unsuitable to be a stockholder or limited partner or to have any other
relationship with Station, the Company, the Operating Partnership or Crescent
Operating, as the case may be, Station, the Company, the Operating Partnership
or Crescent Operating, as the case may be, (i) pays that person any dividend or
interest upon voting securities of such Registered Corporation or any share of
the profits or interest upon any limited partnership interest, (ii) allows that
person, directly or indirectly, any voting right conferred through securities
held by that person, (iii) pays remuneration in any form to that person for
services rendered or otherwise or (iv) fails to pursue all lawful efforts to
require such unsuitable person to relinquish his voting securities including if
necessary, the immediate purchase of said voting securities for cash at fair
market value.
The Nevada Commission, in its discretion, may require the holder of any
debt security of a Registered Corporation, including preferred stock, the
Private Notes and the Exchange Notes, to file applications, be investigated and
be found suitable to own the debt security of a Registered Corporation. If the
Nevada Commission determines that a person is unsuitable to own such security,
then pursuant to the Nevada Act, the Registered Corporation can be sanctioned,
including the loss of approvals if, without the prior approval of the Nevada
Commission, it: (i) pays to the unsuitable person any dividend, interest or any
distribution
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whatsoever; (ii) recognizes any voting right by such unsuitable person in
connection with such securities; (iii) pays the unsuitable person remuneration
in any form; or (iv) makes any payment to the unsuitable person by way of
principal, redemption, conversion, exchange, liquidation, or similar
transaction.
Station is, and the Company, the Operating Partnership and Crescent
Operating will be, required to maintain a current stock ledger in Nevada which
may be examined by the Nevada Gaming Authorities at any time. If any securities
are held in trust by an agent or by a nominee, the record holder may be required
to disclose the identity of the beneficial owner to the Nevada Gaming
Authorities. A failure to make such disclosure may be grounds for finding the
record holder unsuitable. Station is also, and, following consummation of the
Merger, the Company, the Operating Partnership and Crescent Operating will be,
required to render maximum assistance in determining the identity of the
beneficial owner. The Nevada Commission has the power to require the stock
certificates of Station, and will have the power to require the share or limited
partnership certificates of the Company and the Operating Partnership to bear a
legend indicating that the securities are subject to the Nevada Act. However, to
date, the Nevada Commission has not imposed such a requirement on Station and it
is unknown whether such a requirement will be imposed on the Company, the
Operating Partnership or Crescent Operating.
Station may not, and, following consummation of the Merger, the Company,
the Operating Partnership and Crescent Operating will not be permitted to, make
a public offering of its securities without the prior approval of the Nevada
Commission if the securities or proceeds therefrom are intended to be used to
construct, acquire or finance gaming facilities in Nevada, or to retire or
extend obligations incurred for such purposes. On March 20, 1997, the Nevada
Commission granted Station prior approval to make public offerings for a period
of two years, subject to certain conditions (the "Shelf Approval"). However, the
Shelf Approval may be rescinded for good cause without prior notice upon the
issuance of an interlocutory stop order by the Chairman of the Nevada Board and
must be renewed at the end of the two-year approval period. The Shelf Approval
also applies to any affiliated company wholly owned by Station which is a
publicly traded corporation or would thereby become a publicly traded
corporation pursuant to a public offering. The Shelf Approval also includes
approval to place restrictions upon and enter into agreements not to encumber
equity securities of the Station Gaming Subsidiaries, and for the Station Gaming
Subsidiaries to guarantee any security issued by, or to hypothecate their assets
to secure the payment or performance of any obligations issued by, Station or an
affiliate in a public offering under the Shelf Approval.
Changes in control of Station through merger, consolidation, stock or asset
acquisitions, management or consulting agreements, or any act or conduct by a
person whereby such person obtains control, including the Merger, may not (and,
following consummation of the Merger, in the case of the Company, the Operating
Partnership and Crescent Operating will not be permitted to) occur without the
prior approval of the Nevada Commission. The Merger must be approved by the
Nevada Commission. Entities seeking to acquire control of a Registered
Corporation must satisfy the Nevada Board and Nevada Commission and meet a
variety of stringent standards prior to assuming control of such Registered
Corporation. The Nevada Commission may also require controlling stockholders,
officers, directors and other persons having a material relationship or
involvement with the entity proposing to acquire control, to be investigated and
licensed as part of the approval process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate defense
tactics affecting Nevada corporate gaming licensees, and Registered Corporations
that are affiliated with those operations, may be injurious to stable and
productive corporate gaming. The Nevada Commission has established a regulatory
scheme to ameliorate the potentially adverse effects of these business practices
upon Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming licensees and their affiliates; preserve
the beneficial aspects of conducting business in the corporate form; and (iii)
promote a neutral environment for the orderly governance of corporate affairs.
Approvals are, in certain circumstances, required from the Nevada Commission
before the Registered Corporation can make exceptional repurchases of voting
securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by the Registered
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Corporation's Board of Directors in response to a tender offer made directly to
the Registered Corporation's stockholders for the purposes of acquiring control
of the Registered Corporation.
Any person who is licensed, required to be licensed, registered, required
to be registered, or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada, is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation by
the Nevada Board of their participation in such foreign gaming. The revolving
fund is subject to increase or decrease in the discretion of the Nevada
Commission. Thereafter, Licensees are required to comply with certain reporting
requirements imposed by the Nevada Act. Licensees are also subject to
disciplinary action by the Nevada Commission if they knowingly violate any laws
of the foreign jurisdiction pertaining to the foreign gaming operations, fail to
conduct the foreign gaming operations in accordance with the standards of
honesty and integrity required of Nevada gaming operations, engage in activities
that are harmful to the state of Nevada or its ability to collect gaming taxes
and fees, or employ a person in the foreign operations who has been denied a
license or finding of suitability in Nevada on the ground of personal
unsuitability.
NEVADA LIQUOR REGULATIONS
The sale of alcoholic beverages at Palace Station and Boulder Station is
subject to licensing, control and regulation by the City of Las Vegas and the
Clark County Board, respectively. Texas Station is subject to the licensing,
control and regulation of the City of North Las Vegas. Sunset Station is subject
to the licensing, control and regulation of the City of Henderson. All licenses
are revocable and are not transferable. The agencies involved have full power to
limit, condition, suspend or revoke any such license, and any such disciplinary
action could (and revocation would) have a material adverse effect on the
operations of the Lessee Gaming Subsidiaries and, therefore, impact the ability
of Station Lessee to make lease payments.
MISSOURI GAMING REGULATIONS
Gaming was originally authorized in the State of Missouri and the City of
St. Charles on November 3, 1992, although no governmental action was taken to
enforce or implement the original law. On April 29, 1993, Missouri enacted the
Missouri Gaming Law which replaced the original law and established the Missouri
Gaming Commission, which is responsible for the licensing and regulation of
riverboat gaming in Missouri. The Missouri Gaming Commission has discretion to
approve gaming license applications for both permanently moored ("dockside")
riverboat casinos and powered ("excursion") riverboat casinos. On September 20,
1993, Station filed its initial application with the Missouri Gaming Commission
for either a dockside or a cruising gaming license in St. Charles, Missouri,
which license was issued on May 27, 1994, thereby making Station one of the
first two entrants in the Missouri riverboat gaming market.
However, due to both a January 25, 1994 ruling by the Missouri Supreme
Court, which held that games of chance, including certain games authorized under
the Missouri Gaming Law such as bingo and keno, constitute "lotteries" and were
therefore prohibited under the Missouri Constitution and the failure of a
statewide election on April 5, 1994 to adopt a constitutional amendment that
would have exempted excursion boats and floating facilities from such
constitutional prohibition on lotteries, Station commenced operations with only
those games which involve some element of skill ("limited gaming"), such as
poker and blackjack, that would be constitutionally permissible. The
authorization of both games of skill and games of chance ("full-scale gaming")
occurred on November 9, 1994 with passage by Missouri voters of a constitutional
amendment virtually identical to the measure which was defeated on April 5,
1994. Full-scale gaming became effective on December 9, 1994, and by the end of
December 1994, Station was conducting full-scale gaming on both its excursion
and dockside casinos in St. Charles, Missouri.
On January 16, 1997, the Missouri Gaming commission granted Station Casino
Kansas City a Class A and Class B Excursion Gambling Boat license to own and
operate the River King and River Queen floating gaming facilities.
Opponents of gaming in Missouri have brought several legal challenges to
gaming in the past and may possibly bring similar challenges in the future.
There can be no assurances that any future challenges, if
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brought, would not further interfere with full-scale gaming operations in
Missouri, including the operations of Station and its subsidiaries and,
following consummation of the Merger, the operations of the Station Parties. The
Supreme Court of Missouri has recently ruled, in a case involving certain
competitors of Station Casino St. Charles, that gaming may occur only in
artificial spaces that are contiguous to the surface stream on the Missouri and
Mississippi Rivers. It is not possible to predict the effect this ruling may
have on operations at Station Casino Kansas City. See "Recent
Developments -- Station Casinos, Inc. Litigation" for a more detailed
description of litigation relating to Station's ability to conduct gaming
operations in Missouri.
Under the Missouri Gaming Law, the ownership and operation of riverboat
gaming facilities in Missouri are subject to extensive state and local
regulation. By virtue of its gaming license in Missouri, Station, any
subsidiaries it has or it may form and certain of its officers and employees are
subject to the Missouri Gaming Law and the regulations of the Missouri Gaming
Commission. Upon obtaining Gaming Licenses in Missouri, the Station Parties, the
Station Lessee, the Licensed Gaming Subsidiaries and certain of their officers
and employees will be subject to the laws and regulations of the Missouri Gaming
Commission.
As part of the application and licensing process for a gaming license, the
applicant must submit detailed financial, operating and other reports to the
Missouri Gaming Commission. Each applicant has an ongoing duty to update the
information provided to the Missouri Gaming Commission in the application. In
addition to the information required of the applicant, directors, officers and
other key persons must submit personal disclosure forms which include detailed
personal financial information and are subject to thorough investigations. All
gaming employees must obtain an occupational license issued by the Missouri
Gaming Commission. Operators' licenses are issued through application to the
Missouri Gaming Commission, which requires, among other things, (a)
investigations into an applicant's character, financial responsibility and
experience and (b) that applicants furnish (i) an affirmative action plan for
the hiring and training of minorities and women and (ii) an economic development
or impact report. License fees are a minimum of $50,000 for the initial
application and $25,000 annually thereafter.
The Missouri Gaming Commission may revoke or suspend gaming licenses and
impose other penalties for violation of the Missouri Gaming Law and the rules
and regulations promulgated thereunder, including, without limitation,
forfeiture of all gaming equipment used for improper gaming and fines of up to
three times an operator's highest daily gross adjusted receipts during the
preceding twelve months. The gaming licenses may not be transferred or pledged
as collateral, and the Missouri Gaming Law regulations bar a licensee from
taking any of the following actions without 15 days' prior notice to, and
approval by, the Missouri Gaming Commission: any issuance of an ownership
interest of five percent or more of the issued and outstanding ownership
interests; any private incurrence of debt by the licensee or any holding company
of $1,000,000 or more; and any public issuance of debt by a licensee or its
holding company. The Missouri Gaming Commission may reopen the licensing hearing
of the applicable gaming licensee prior to or following the consummation date to
consider the effect of the transaction on the gaming licensee's suitability. In
addition, the licensee must notify the Missouri Gaming Commission of other
transactions, including the transfer of five percent or more of an ownership
interest in the licensee or holding company, the pledge of five percent or more
of the ownership interest in a licensee or holding company and any transaction
of at least $1,000,000. The restrictions on transfer of ownership apply to
Station and its subsidiaries and, following consummation of the Merger, will
apply to the Station Parties, the Station Lessee and the Licensed Gaming
Subsidiaries.
The Missouri Gaming Law imposes operational requirements on riverboat
operators, including a charge of $2.00 per gaming customer that licensees must
pay to the Missouri Gaming Commission, certain minimum payout requirements, a
20% tax on adjusted gross receipts, prohibitions against providing credit to
gaming customers (except for the use of credit cards and cashing checks) and a
requirement that each licensee reimburse the Missouri Gaming Commission for all
costs of any Missouri Gaming Commission staff necessary to protect the public on
the licensee's riverboat. Licensees must also submit audited quarterly financial
reports to the Commission and pay the associated auditing fees. The Missouri
Gaming Law provides for a loss limit of $500 per person per excursion and
requires licensees to maintain scheduled excursions with boarding and
disembarking times regardless of whether the riverboat cruises. Although the
Missouri Gaming Law provides no limit on the amount of riverboat space that may
be used for gaming, the Missouri Gaming Commission is empowered to impose such
space limitations through the adoption of rules and regulations. Additionally,
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United States Coast Guard safety regulations could affect the amount of
riverboat space that may be devoted to gaming. The Missouri Gaming Law also
includes requirements as to the form of riverboats, which must resemble
Missouri's riverboat history to the extent practicable and include certain
non-gaming amenities. All eleven licensees in Missouri are authorized to conduct
all or a portion of their operations on a dockside basis.
With respect to the availability of dockside gaming, which may be more
profitable than excursion gaming, the Missouri Gaming Commission is empowered to
determine on a site-by-site basis where such gaming is appropriate and shall be
permitted.
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======================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE OPERATING PARTNERSHIP. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE EXCHANGE NOTES IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE OPERATING PARTNERSHIP SINCE THE DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................ 1
Risk Factors........................... 12
The Operating Partnership.............. 20
Conflicts of Interest.................. 24
Recent Developments.................... 26
No Cash Proceeds to the Operating
Partnership.......................... 32
Capitalization......................... 33
The Exchange Offer..................... 34
Description of the Exchange Notes...... 41
Selected Financial Data................ 52
Management's Discussion and Analysis of
Financial Condition and Results of
Operations of the Operating
Partnership.......................... 55
Ratios of Earnings to Fixed Charges.... 65
Business and Properties................ 66
Certain Policies....................... 80
Management............................. 83
Principal Shareholders................. 90
Certain Relationships and Related
Transactions......................... 93
Structure of the Operating
Partnership.......................... 98
U.S. Federal Income Tax Consequences... 99
Plan of Distribution................... 100
Available Information.................. 100
Experts................................ 101
Legal Matters.......................... 101
Glossary............................... 102
Index to Financial Statements.......... F-1
Appendix A............................. A-1
Appendix B............................. B-1
</TABLE>
======================================================
======================================================
CRESCENT REAL ESTATE
EQUITIES LIMITED
PARTNERSHIP
OFFER TO EXCHANGE
6 5/8% NOTES DUE 2002 FOR ANY AND ALL OUTSTANDING 6 5/8% NOTES DUE 2002
7 1/8% NOTES DUE 2007 FOR ANY AND ALL OUTSTANDING 7 1/8% NOTES DUE 2007
------------------------------------
PROSPECTUS
------------------------------------
APRIL , 1998
======================================================
<PAGE> 236
PART II
INFORMATION REQUIRED IN THE REGISTRATION STATEMENT
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Operating Partnership's limited partnership agreement (the "Agreement")
provides that the Operating Partnership will indemnify any director or officer
of the Operating Partnership, Crescent Real Estate Equities Company (the
"Company") or Crescent Real Estate Equities, Ltd. (the "General Partner") who is
made a party to a proceeding by reason of his status as such director or officer
(an "Indemnitee") from and against any and all losses, claims, damages,
liabilities, joint or several, expenses (including, without limitation,
attorneys' fees and other legal fees and expenses), judgments, fines,
settlements and other amounts arising from any and all claims, demands, actions,
suits or proceedings, civil, criminal, administrative or investigative, that
relate to the operations of the Operating Partnership as set forth in the
Agreement in which such Indemnitee may be involved, or is threatened to be
involved, as a party or otherwise, unless it is established that: (i) the act or
omission of the Indemnitee was material to the matter giving rise to the
proceedings and either was committed in bad faith or was the result of active
and deliberate dishonesty; (ii) the Indemnitee actually received an improper
personal benefit in money, property or services; or (iii) in the case of any
criminal proceeding, the Indemnitee had reasonable cause to believe that the act
or omission was unlawful. The indemnity extends to any liability of any
Indemnitee, pursuant to a loan guaranty or otherwise, for any indebtedness of
the Operating Partnership or any subsidiary entity (including, without
limitation, any indebtedness which the Operating Partnership or any subsidiary
entity has assumed or taken subject to). The termination of any proceeding by
judgment, order or settlement does not create a presumption that the Indemnitee
did not meet the requisite standard of conduct set forth for indemnification.
The termination of any proceeding by conviction of an Indemnitee or upon a plea
of nolo contendre or its equivalent by an Indemnitee, or an entry of an order of
probation against an Indemnitee prior to judgment, creates a rebuttable
presumption that such Indemnitee acted in a manner contrary to that specified
for indemnification with respect to the subject matter of such proceeding.
The right to indemnification conferred in the Agreement is a contract right
and includes the right of each Indemnitee to be paid by the Operating
Partnership the expenses incurred in defending any such proceeding in advance of
its final disposition; provided, however, that the payment of such expenses in
advance of the final disposition of a proceeding shall be made only upon
delivery to the Operating Partnership of (i) a written affirmation of the
Indemnitee of his or her good faith belief that the standard of conduct
necessary for indemnification by the Operating Partnership has been met and (ii)
a written undertaking by or on behalf of the Indemnitee to repay all amounts so
advanced if it shall ultimately be determined that the standard of conduct has
not been met.
The Company's Restated Declaration of Trust provides that the trust
managers and officers shall be indemnified to the maximum extent permitted by
Texas law. The Declaration of Trust provides that no trust manager shall be
liable to the Company for any act, omission, loss, damage or expense arising
from the performance of his duties to the Company 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.
The Company carries insurance that purports to insure officers and trust
managers of the Company against certain liabilities incurred by them in the
discharge of their official functions.
The Company and the Operating Partnership have entered into indemnification
agreements with each of the Company's executive officers and trust managers. The
indemnification agreements require, among other things, that the Company and the
Operating Partnership 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. The Company and the Operating Partnership also
must indemnify and advance expenses incurred by officers and directors seeking
to
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<PAGE> 237
enforce their rights under the indemnification agreements and cover officers and
directors under the Company's and Operating Partnership'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, the Company's Bylaws and Operating Partnership Agreement,
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.
The following is a list of all exhibits and financial statement schedules
filed as a part of this Registration Statement on Form S-4, including those
incorporated herein by reference.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1.01** -- Form of Purchase Agreement, dated September 19, 1997,
among the Registrant, Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated and Salomon Brothers
Inc.
3.01 -- Second Amended and Restated Agreement of Limited
Partnership of Crescent Real Estate Equities Limited
Partnership dated as of November 1, 1997 (filed as
Exhibit 4.06 to the Registration Statement on Form S-3
(File No. 333-41049) of Crescent Real Estate Equities
Company (the "Company") and incorporated herein by
reference).
4.01** -- Indenture, dated as of September 22, 1997, between the
Registrant and State Street Bank and Trust Company of
Missouri, N.A.
4.02 -- Restated Declaration of Trust of the Company (filed as
Exhibit No. 4.01 to the Company's Registration Statement
on Form S-3 (File No. 333-21905) (the "1997 Form S-3")
and incorporated herein by reference).
4.03 -- Amended and Restated Bylaws of the Company, as amended
(filed as Exhibit 4.02 to the Company's Form 8-K dated
October 8, 1997 and filed October 14, 1997, and
incorporated herein by reference).
4.04** -- Form of 6 5/8% Note due 2002.
4.05** -- Form of 7 1/8% Note due 2007.
4.06** -- Registration Rights Agreement, dated as of September 22,
1997, among the Registrant, Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated and Salomon
Brothers Inc.
5.01* -- Opinion of Shaw Pittman Potts & Trowbridge as to the
legality of the securities being registered by the
Registrant.
8.01* -- Opinion of Shaw Pittman Potts & Trowbridge regarding
certain material tax issues relating to the Registrant.
10.01 -- Noncompetition Agreement (Rainwater) (filed as Exhibit
No. 10.02 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 (the "1997 10-K")
and incorporated herein by reference).
10.02 -- Noncompetition Agreement (Goff) (filed as Exhibit No.
10.03 to the 1997 10-K and incorporated herein by
reference).
10.03 -- Noncompetition Agreement (Haddock) (filed as Exhibit No.
10.04 to the 1997 10-K and incorporated herein by
reference).
10.04 -- Employment Agreement (Goff) (filed as Exhibit No. 10.05
to the 1997 10-K and incorporated herein by reference).
10.05 -- Employment Agreement (Haddock) (filed as Exhibit No.
10.06 to the 1997 10-K and incorporated herein by
reference).
</TABLE>
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<PAGE> 238
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.06 -- Form of Registration Rights, Lock-Up and Pledge Agreement
(filed as Exhibit No. 10.05 to the Registration Statement
on Form S-11 (File No. 33-78188) (the "1994 S-11") of the
Company and incorporated herein by reference).
10.07** -- Form of Officers' and Trust Managers' Indemnification
Agreement as entered into between the Company and each of
its executive officers and trust managers.
10.08 -- Crescent Real Estate Equities Company 1994 Stock
Incentive Plan (filed as Exhibit No. 10.07 to the 1994
S-11 and incorporated herein by reference).
10.09 -- Crescent Real Estate Equities, Ltd. First Amended and
Restated 401(k) Plan (filed as Exhibit No. 10.10 to the
1997 10-K and incorporated herein by reference).
10.10 -- Agreement, dated as of August 15, 1996, relating to the
acquisition of the Greenway Plaza Portfolio (filed as
Exhibit No. 10.02 to the 1996 Form 8-K and incorporated
herein by reference).
10.11 -- Form of Amended and Restated Lease Agreement, dated
January 1, 1996, among the Registrant, Mogul Management,
LLC and RoseStar Management, LLC, relating to the Hyatt
Regency Beaver Creek (filed as Exhibit 10.12 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 (the "1995 10-K") and
incorporated herein by reference).
10.12 -- Real Estate Purchase and Sale Agreement, dated as of
January 29, 1997, between the Registrant, as purchaser,
and Magellan Health Services, Inc., as seller, relating
to the acquisition of 92 behavioral healthcare facilities
(the "Magellan Facilities"), as amended effective
February 28, 1997 and May 29, 1997 (filed as Exhibit No.
10.13 to the Company's Quarterly Report on Form 10-Q/A
for the quarter ended June 30, 1997 (the "1997 10-Q") and
incorporated herein by reference).
10.13** -- Second Amended and Restated 1995 Crescent Real Estate
Equities Company Stock Incentive Plan.
10.14 -- Lease Agreement, dated December 19, 1995 between the
Registrant and RoseStar Management, LLC, relating to the
Hyatt Regency Albuquerque (filed as Exhibit 10.16 to the
1995 10-K and incorporated herein by reference).
10.15 -- Amended and Restated Lease Agreement, dated June 30, 1995
between the Registrant and RoseStar Management, LLC,
relating to the Denver Marriott (filed as Exhibit 10.17
to the 1995 10-K and incorporated herein by reference).
10.16 -- Loan Agreement, dated August 24, 1995, including Form of
Deed of Trust, Assignment of Rents, Security Agreement
and Fixture Filing, and Amendment to Loan Agreement,
dated October 19, 1995, between Crescent Real Estate
Funding I, L.P. and Nomura Asset Capital Corporation
(filed as Exhibit 10.15 to the 1995 10-K and incorporated
herein by reference).
10.17 -- Loan Agreement, dated August 24, 1995, including Form of
Deed of Trust, Assignment of Rents, Security Agreement
and Fixture Filing, between Crescent Real Estate Funding
II, L.P. and Nomura Asset Capital Corporation (filed as
Exhibit 10.19 to the 1995 10-K and incorporated herein by
reference).
10.18 -- Mortgage Loan Application and Agreement, dated October 3,
1995, as amended by letter agreements dated October 10,
1995 and October 30, 1995, between the Registrant and
CIGNA Investments, Inc. and Secured Promissory Note dated
December 11, 1995 (filed as Exhibit 10.20 to the 1995
10-K and incorporated herein by reference).
10.19 -- 1995 Crescent Real Estate Equities Limited Partnership
Unit Incentive Plan (filed as Exhibit No. 99.01 to the
Company's Registration Statement on Form S-8 (File No.
333-3452) and incorporated herein by reference).
10.20 -- 1996 Crescent Real Estate Equities Limited Partnership
Unit Incentive Plan (filed as Exhibit No. 10.01 to the
1996 Form 8-K and incorporated herein by reference).
</TABLE>
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<PAGE> 239
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.21 -- Lease Agreement, dated July 26, 1996, between Canyon
Ranch, Inc. and Canyon Ranch Leasing, L.L.C., as assigned
by Canyon Ranch, Inc. to the Registrant pursuant to the
Assignment and Assumption of Master Lease, dated July 26,
1996 (filed as Exhibit 10.24 to the 1997 10-Q and
incorporated herein by reference).
10.22 -- Lease Agreement, dated November 18, 1996, between the
Registrant and Wine Country Hotel, LLC. (filed as Exhibit
10.25 to the 1996 10-K and incorporated herein by
reference).
10.23 -- Lease Agreement, dated December 11, 1996, between Canyon
Ranch-Bellefontaine Associates, L.P., and Vintage
Resorts, LLC as assigned by Canyon Ranch-Bellefontaine
Associates, L.P. to Crescent Real Estate Funding VI, L.P.
pursuant to the Assignment and Assumption of Master
Lease, dated December 11, 1996 (filed as Exhibit 10.26 to
the 1997 10-Q and incorporated herein by reference).
10.24 -- Master Lease Agreement, dated June 16, 1997, as amended,
between Crescent Real Estate Funding VII, L.P. and
Charter Behavioral Health Systems, LLC and its
subsidiaries, relating to the Magellan Facilities (filed
as Exhibit 10.27 to the 1997 10-K and incorporated herein
by reference).
10.25** -- Fourth Amended and Restated Revolving Credit Agreement,
dated December 19, 1997 among the Registrant, BankBoston,
N.A. and the other banks named therein.
10.26 -- Intercompany Agreement, dated June 3, 1997, between the
Registrant and Crescent Operating, Inc. (filed as Exhibit
10.2 to the Registration Statement on Form S-1 (File No.
333-25223) of Crescent Operating, Inc. and incorporated
herein by reference).
10.27 -- First Amendment to the Second Amended and Restated
Agreement of Limited Partnership of Crescent Real Estate
Equities Limited Partnership, dated February 19, 1998,
among Crescent Real Estate Equities, Ltd. and the limited
partners of the Registrant (filed herewith).
10.28 -- Second Amendment to the Second Amended and Restated
Agreement of Limited Partnership of Crescent Real Estate
Equities Limited Partnership, dated March 2, 1998 among
Crescent Real Estate Equities, Ltd. and the limited
partners of the Registrant (filed herewith).
12.01** -- Statement Regarding Computation of Ratios of Earnings to
Fixed Charges and Preferred Shares Dividends.
21.01** -- Subsidiaries of the Registrant.
23.01 -- Consent of Arthur Andersen LLP (Dallas), Certified Public
Accountants, dated April 15, 1998 (filed herewith).
23.02 -- Consent of Arthur Andersen LLP (Atlanta), Certified
Public Accountants, dated April 13, 1998 (filed
herewith).
23.03 -- Consent of Arthur Andersen LLP (Las Vegas), Certified
Public Accountants, dated April 15, 1998 (filed
herewith).
23.04* -- Consent of Shaw Pittman Potts & Trowbridge (to be
included in its opinion to be filed as Exhibit 5.01 to
this Registration Statement).
23.05* -- Consent of Shaw Pittman Potts & Trowbridge (to be
included in its opinion to be filed as Exhibit 8.01 to
this Registration Statement).
25.01** -- Statement of Eligibility of Trustee.
27.01 -- Financial Data Schedule (filed herewith).
99.01** -- Form of Letter of Transmittal.
99.02** -- Form of Notice of Guaranteed Delivery.
99.03** -- Form of Letter to Brokers.
</TABLE>
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<PAGE> 240
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
99.04** -- Form of Letter to Clients.
99.05** -- Form of Instruction to Registered Holder and for Bank
Entry Transfer Participant from Beneficial Owner.
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
ITEM 22. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes that 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 of 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.
(b) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus 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.
(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 and 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.
(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 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
II-5
<PAGE> 241
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:
(1) 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), 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 items of the applicable form.
(2) that every prospectus: (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act of 1933 and is used in connection
with an offering of securities subject to Rule 415, will be filed as a 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.
II-6
<PAGE> 242
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 the 17th day of April, 1998.
CRESCENT REAL ESTATE
EQUITIES LIMITED PARTNERSHIP
By: CRESCENT REAL ESTATE EQUITIES,
LTD., its General Partner
By: /s/ GERALD W. HADDOCK
----------------------------------
Gerald W. Haddock
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ GERALD W. HADDOCK Sole Director, President and April 17, 1998
- ----------------------------------------------------- Chief Executive Officer of
Gerald W. Haddock the General Partner
(Principal Executive
Officer)
/s/ DALLAS E. LUCAS Senior Vice President and April 17, 1998
- ----------------------------------------------------- Chief Financial Officer of
Dallas E. Lucas the General Partner
(Principal Financial and
Accounting Officer)
</TABLE>
II-7
<PAGE> 243
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1.01** -- Form of Purchase Agreement, dated September 19, 1997,
among the Registrant, Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated and Salomon Brothers
Inc.
3.01 -- Second Amended and Restated Agreement of Limited
Partnership of Crescent Real Estate Equities Limited
Partnership dated as of November 1, 1997 (filed as
Exhibit 4.06 to the Registration Statement on Form S-3
(File No. 333-41049) of Crescent Real Estate Equities
Company (the "Company") and incorporated herein by
reference).
4.01** -- Indenture, dated as of September 22, 1997, between the
Registrant and State Street Bank and Trust Company of
Missouri, N.A.
4.02 -- Restated Declaration of Trust of the Company (filed as
Exhibit No. 4.01 to the Company's Registration Statement
on Form S-3 (File No. 333-21905) (the "1997 Form S-3")
and incorporated herein by reference).
4.03 -- Amended and Restated Bylaws of the Company, as amended
(filed as Exhibit 4.02 to the Company's Form 8-K dated
October 8, 1997 and filed October 14, 1997, and
incorporated herein by reference).
4.04** -- Form of 6 5/8% Note due 2002.
4.05** -- Form of 7 1/8% Note due 2007.
4.06** -- Registration Rights Agreement, dated as of September 22,
1997, among the Registrant, Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated and Salomon
Brothers Inc.
5.01* -- Opinion of Shaw Pittman Potts & Trowbridge as to the
legality of the securities being registered by the
Registrant.
8.01* -- Opinion of Shaw Pittman Potts & Trowbridge regarding
certain material tax issues relating to the Registrant.
10.01 -- Noncompetition Agreement (Rainwater) (filed as Exhibit
No. 10.02 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 (the "1997 10-K")
and incorporated herein by reference).
10.02 -- Noncompetition Agreement (Goff) (filed as Exhibit No.
10.03 to the 1997 10-K and incorporated herein by
reference).
10.03 -- Noncompetition Agreement (Haddock) (filed as Exhibit No.
10.04 to the 1997 10-K and incorporated herein by
reference).
10.04 -- Employment Agreement (Goff) (filed as Exhibit No. 10.05
to the 1997 10-K and incorporated herein by reference).
10.05 -- Employment Agreement (Haddock) (filed as Exhibit No.
10.06 to the 1997 10-K and incorporated herein by
reference).
10.06 -- Form of Registration Rights, Lock-Up and Pledge Agreement
(filed as Exhibit No. 10.05 to the Registration Statement
on Form S-11 (File No. 33-78188) (the "1994 S-11") of the
Company and incorporated herein by reference).
10.07** -- Form of Officers' and Trust Managers' Indemnification
Agreement as entered into between the Company and each of
its executive officers and trust managers.
10.08 -- Crescent Real Estate Equities Company 1994 Stock
Incentive Plan (filed as Exhibit No. 10.07 to the 1994
S-11 and incorporated herein by reference).
10.09 -- Crescent Real Estate Equities, Ltd. First Amended and
Restated 401(k) Plan (filed as Exhibit No. 10.10 to the
1997 10-K and incorporated herein by reference).
10.10 -- Agreement, dated as of August 15, 1996, relating to the
acquisition of the Greenway Plaza Portfolio (filed as
Exhibit No. 10.02 to the 1996 Form 8-K and incorporated
herein by reference).
</TABLE>
<PAGE> 244
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.11 -- Form of Amended and Restated Lease Agreement, dated
January 1, 1996, among the Registrant, Mogul Management,
LLC and RoseStar Management, LLC, relating to the Hyatt
Regency Beaver Creek (filed as Exhibit 10.12 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 (the "1995 10-K") and
incorporated herein by reference).
10.12 -- Real Estate Purchase and Sale Agreement, dated as of
January 29, 1997, between the Registrant, as purchaser,
and Magellan Health Services, Inc., as seller, relating
to the acquisition of 92 behavioral healthcare facilities
(the "Magellan Facilities"), as amended effective
February 28, 1997 and May 29, 1997 (filed as Exhibit No.
10.13 to the Company's Quarterly Report on Form 10-Q/A
for the quarter ended June 30, 1997 (the "1997 10-Q") and
incorporated herein by reference).
10.13** -- Second Amended and Restated 1995 Crescent Real Estate
Equities Company Stock Incentive Plan.
10.14 -- Lease Agreement, dated December 19, 1995 between the
Registrant and RoseStar Management, LLC, relating to the
Hyatt Regency Albuquerque (filed as Exhibit 10.16 to the
1995 10-K and incorporated herein by reference).
10.15 -- Amended and Restated Lease Agreement, dated June 30, 1995
between the Registrant and RoseStar Management, LLC,
relating to the Denver Marriott (filed as Exhibit 10.17
to the 1995 10-K and incorporated herein by reference).
10.16 -- Loan Agreement, dated August 24, 1995, including Form of
Deed of Trust, Assignment of Rents, Security Agreement
and Fixture Filing, and Amendment to Loan Agreement,
dated October 19, 1995, between Crescent Real Estate
Funding I, L.P. and Nomura Asset Capital Corporation
(filed as Exhibit 10.15 to the 1995 10-K and incorporated
herein by reference).
10.17 -- Loan Agreement, dated August 24, 1995, including Form of
Deed of Trust, Assignment of Rents, Security Agreement
and Fixture Filing, between Crescent Real Estate Funding
II, L.P. and Nomura Asset Capital Corporation (filed as
Exhibit 10.19 to the 1995 10-K and incorporated herein by
reference).
10.18 -- Mortgage Loan Application and Agreement, dated October 3,
1995, as amended by letter agreements dated October 10,
1995 and October 30, 1995, between the Registrant and
CIGNA Investments, Inc. and Secured Promissory Note dated
December 11, 1995 (filed as Exhibit 10.20 to the 1995
10-K and incorporated herein by reference).
10.19 -- 1995 Crescent Real Estate Equities Limited Partnership
Unit Incentive Plan (filed as Exhibit No. 99.01 to the
Company's Registration Statement on Form S-8 (File No.
333-3452) and incorporated herein by reference).
10.20 -- 1996 Crescent Real Estate Equities Limited Partnership
Unit Incentive Plan (filed as Exhibit No. 10.01 to the
1996 Form 8-K and incorporated herein by reference).
10.21 -- Lease Agreement, dated July 26, 1996, between Canyon
Ranch, Inc. and Canyon Ranch Leasing, L.L.C., as assigned
by Canyon Ranch, Inc. to the Registrant pursuant to the
Assignment and Assumption of Master Lease, dated July 26,
1996 (filed as Exhibit 10.24 to the 1997 10-Q and
incorporated herein by reference).
10.22 -- Lease Agreement, dated November 18, 1996, between the
Registrant and Wine Country Hotel, LLC. (filed as Exhibit
10.25 to the 1996 10-K and incorporated herein by
reference).
10.21 -- Lease Agreement, dated July 26, 1996, between Canyon
Ranch, Inc. and Canyon Ranch Leasing, L.L.C., as assigned
by Canyon Ranch, Inc. to the Registrant pursuant to the
Assignment and Assumption of Master Lease, dated July 26,
1996 (filed as Exhibit 10.24 to the 1997 10-Q and
incorporated herein by reference).
10.22 -- Lease Agreement, dated November 18, 1996, between the
Registrant and Wine Country Hotel, LLC. (filed as Exhibit
10.25 to the 1996 10-K and incorporated herein by
reference).
</TABLE>
<PAGE> 245
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.23 -- Lease Agreement, dated December 11, 1996, between Canyon
Ranch-Bellefontaine Associates, L.P., and Vintage
Resorts, LLC as assigned by Canyon Ranch-Bellefontaine
Associates, L.P. to Crescent Real Estate Funding VI, L.P.
pursuant to the Assignment and Assumption of Master
Lease, dated December 11, 1996 (filed as Exhibit 10.26 to
the 1997 10-Q and incorporated herein by reference).
10.24 -- Master Lease Agreement, dated June 16, 1997, as amended,
between Crescent Real Estate Funding VII, L.P. and
Charter Behavioral Health Systems, LLC and its
subsidiaries, relating to the Magellan Facilities (filed
as Exhibit 10.27 to the 1997 10-K and incorporated herein
by reference).
10.25** -- Fourth Amended and Restated Revolving Credit Agreement,
dated December 19, 1997 among the Registrant, BankBoston,
N.A. and the other banks named therein.
10.26 -- Intercompany Agreement, dated June 3, 1997, between the
Registrant and Crescent Operating, Inc. (filed as Exhibit
10.2 to the Registration Statement on Form S-1 (File No.
333-25223) of Crescent Operating, Inc. and incorporated
herein by reference).
10.27 -- First Amendment to the Second Amended and Restated
Agreement of Limited Partnership of Crescent Real Estate
Equities Limited Partnership, dated February 19, 1998,
among Crescent Real Estate Equities, Ltd. and the limited
partners of the Registrant (filed herewith).
10.28 -- Second Amendment to the Second Amended and Restated
Agreement of Limited Partnership of Crescent Real Estate
Equities Limited Partnership, dated March 2, 1998 among
Crescent Real Estate Equities, Ltd. and the limited
partners of the Registrant (filed herewith).
12.01** -- Statement Regarding Computation of Ratios of Earnings to
Fixed Charges and Preferred Shares Dividends.
21.01** -- Subsidiaries of the Registrant.
23.01 -- Consent of Arthur Andersen LLP (Dallas), Certified Public
Accountants, dated April 15, 1998 (filed herewith).
23.02 -- Consent of Arthur Andersen LLP (Atlanta), Certified
Public Accountants, dated April 13, 1998 (filed
herewith).
23.03 -- Consent of Arthur Andersen LLP (Las Vegas), Certified
Public Accountants, dated April 15, 1998 (filed
herewith).
23.04* -- Consent of Shaw Pittman Potts & Trowbridge (to be
included in its opinion to be filed as Exhibit 5.01 to
this Registration Statement).
23.05* -- Consent of Shaw Pittman Potts & Trowbridge (to be
included in its opinion to be filed as Exhibit 8.01 to
this Registration Statement).
25.01** -- Statement of Eligibility of Trustee.
27.01 -- Financial Data Schedule (filed herewith).
99.01** -- Form of Letter of Transmittal.
99.02** -- Form of Notice of Guaranteed Delivery.
99.03** -- Form of Letter to Brokers.
</TABLE>
<PAGE> 1
EXHIBIT 10.27
FIRST AMENDMENT
TO THE SECOND AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
THIS FIRST AMENDMENT TO THE SECOND AMENDED AND RESTATED AGREEMENT OF
LIMITED PARTNERSHIP OF CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP, dated
as of February 19, 1998, is entered into by and among Crescent Real Estate
Equities, Ltd., a Delaware corporation, on its own behalf as sole general
partner (the "General Partner") of Crescent Real Estate Equities Limited
Partnership, a Delaware limited partnership (the "Partnership"), and as
attorney-in-fact for each of the existing limited partners (the "Limited
Partners") of the Partnership pursuant to Sections 2.4 and 14.1.B of the Second
Amended and Restated Agreement of Limited Partnership of Crescent Real Estate
Equities Limited Partnership, dated as of November 1, 1997, hereinafter referred
to as the "Effective Agreement."
WITNESSETH:
WHEREAS, the Partnership was formed pursuant to that certain Certificate
of Limited Partnership dated February 9, 1994 and filed on February 9, 1994 in
the office of the Secretary of State of Delaware, and that certain Agreement of
Limited Partnership dated as of February 9, 1994 (the "Initial Agreement");
WHEREAS, the Initial Agreement, as previously amended and restated, was
amended and restated in its entirety by the Effective Agreement;
WHEREAS, the individuals set forth in the following table exercised
options to purchase REIT Shares for the respective number of shares, on the
respective date, pursuant to the respective stock option plan and for which
Crescent Equities shall receive credit for the respective Capital Contribution
to the Partnership indicated opposite each such individual's name:
<TABLE>
<CAPTION>
Number of REIT Capital
Individual Exercise Date Shares Purchased Stock Option Plan Contribution
-------------- ------------- ---------------- ----------------- ------------
<S> <C> <C> <C> <C>
Julie C. Carey 11/10/97 800 1995 Plan $ 28,350.00
Anna Dean 11/24/97 200 First Amended and $ 7,562.50
Restated 1995 Plan
Howard Lovett 12/4/97 3,000 1995 Plan $117,000.00
Howard Lovett 12/4/97 2,000 First Amended and $ 78,000.00
Restated 1995 Plan
Bobby Vann 12/5/97 200 First Amended and $ 7,775.00
Restated 1995 Plan
Bret Angle 12/5/97 200 First Amended and $ 7,775.00
Restated 1995 Plan
</TABLE>
<PAGE> 2
<TABLE>
<S> <C> <C> <C> <C>
Howard Lovett 12/19/97 200 1995 Plan $ 7,737.50
Lynn B. Sonsel 1/5/98 200 First Amended and $ 7,937.50
Restated 1995 Plan
Fred Hoeckstra 1/21/98 200 First Amended and $ 7,237.50
Restated 1995 Plan
Anthony M. Frank 2/2/98 2,800 First Amended and $ 97,125.00
Restated 1995 Plan
</TABLE>
WHEREAS, the individuals and entities set forth in the following table
exercised their Exchange Rights with respect to the respective number of
Partnership Units, on the respective date indicated opposite each such
individual's or entity's name:
<TABLE>
<CAPTION>
Number of
Partnership Units
Individual or Entity Exercise Date Exchanged
------------------------------ -------------------- --------------------
<S> <C> <C>
Gerald W. Haddock 12/12/97 5,000
Pridemore Asset Trust UA 1/1/98 8,064
Scott Asset Trust UA 1/1/98 8,064
Peter G. Henry 1/2/98 7,149
University of Arizona 1/5/98 61,250
Foundation
The Joost Family Living Trust 1/6/98 2,110
Scott Asset Trust UA 1/16/98 1,364
Pridemore Asset Trust UA 1/16/98 1,364
Robert J. Stirk 1/19/98 2,000
Peter G. Henry 1/28/98 10,000
The Lone Star Trust 1/29/98 4,220
</TABLE>
WHEREAS, on December 8, 1997, Richard E. Rainwater assigned 1,300
Partnership Units to Darla D. Moore;
WHEREAS, on December 19, 1997, Crescent Equities issued 5,375,000 REIT
Shares in a public stock offering at a cash price of $38.125 per share, which
cash proceeds aggregating $204,921,875 were contributed to the Partnership by
Crescent Equities pursuant to Section 4.2 of the Effective Agreement;
WHEREAS, effective as of December 31, 1997, Crescent Equities issued
30,933 REIT Shares to Senterra Real Estate Group, L.L.C. ("Senterra") in
satisfaction of certain obligations of the Partnership to Senterra, and, in
connection therewith, Crescent Equities shall receive credit for a Capital
Contribution to the Partnership of $1,200,000;
WHEREAS, on January 5, 1998, Canyon Ranch, Inc. assigned 61,250
Partnership Units to the University of Arizona Foundation;
-2-
<PAGE> 3
WHEREAS, on January 8, 1998. Crescent Equities issued 196 REIT Shares to
each of Morton H. Meyerson, William F. Quinn, and Paul E. Rowsey, III in
payment of trust managers' fees and, in connection therewith, Crescent Equities
shall receive credit for a Capital Contribution to the Partnership of $20,064;
WHEREAS, on January 16, 1998, Darla D. Moore assigned 682 Partnership
Units to the Scott Asset Trust UA and 682 Partnership Units to the Pridemore
Asset Trust UA;
WHEREAS, on January 16, 1998, Richard E. Rainwater assigned 682
Partnership Units to the Scott Asset Trust UA and 682 Partnership Units to the
Pridemore Asset Trust UA;
WHEREAS, on February 19,1998, Crescent Equities issued 8,000,000 6-3/4%
Series A Convertible Cumulative Preferred Shares ("Series A Preferred Shares")
and, in connection therewith, the General Partner, pursuant to Section 8.7.C of
the Effective Agreement, is required to cause the Partnership to issue to
Crescent Equities preferred equity ownership interests in the Partnership
("Series A Preferred Partnership Units"), and, pursuant to its authority under
Sections 6.1.C and 8.7.C of the Effective Agreement, desires to make such
revisions to the Agreement as are necessary to reflect the issuance of the
Series A Preferred Partnership Units; and
WHEREAS, the General Partner desires to amend the Effective Agreement
pursuant to its authority under Sections 2.4 and 14.1.B of the Effective
Agreement and the powers of attorney granted to the General Partner by the
Limited Partners in order to reflect the aforementioned.
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. In order to reflect (i) the Capital Contributions of Crescent Equities
aggregating $366,500 in connection with the exercise of options to purchase
REIT Shares by Julie C. Carey, Anna Dean, Howard Lovett, Bobby Vann, Bret
Angle, Lynn B. Sonsel, Fred Hoeckstra and Anthony M. Frank, as more fully set
forth above, (ii) the exercise by Gerald W. Haddock, the Pridemore Asset Trust
UA, the Scott Asset Trust UA, Peter G. Henry, the University of Arizona
Foundation, The Joost Family Living Trust, Robert J. Stirk, and the Lone Star
Trust of their Exchange Rights with respect to Partnership Units, as more fully
set forth above, (iii) the assignment by Richard E. Rainwater of 1,300
Partnership Units to Darla D. Moore, (iv) the Capital Contribution by Crescent
Equities on December 19, 1997 of $204,921,875 in connection with the public
stock offering of 5,375,000 REIT Shares at $38,125 per share, (v) the
assignment by Canyon Ranch, Inc. of 61,250 Partnership Units to the University
of Arizona Foundation, (vi) the Capital Contribution by Crescent Equities on
December 31, 1997, of $1,200,000 in connection with the issuance OF 30,933 REIT
Shares to Senterra in satisfaction of certain obligations of the Partnership to
Senterra, (vii) the Capital Contribution by Crescent Equities on January 8,
1998, of $20,064 in connection with the issuance of 196 REIT shares to each of
Morton H. Meyerson, William F. Quinn, and Paul E. Rowsey, III in payment of
trust managers' fees, (viii) the assignment by Darla D. Moore of 682
Partnership Units to each of the Scott Irrevocable Asset Trust and the
Pridemore Irrevocable Asset Trust, and (ix) the assignment by Richard E.
Rainwater of 682 Partnership Units to each of the Scott Irrevocable Asset Trust
and the Pridemore Irrevocable Asset Trust, Exhibit A to the Effective Agreement
is hereby deleted in its entirety and replaced with the Exhibit A attached to
this First Amendment and made a part hereof.
-3-
<PAGE> 4
2. Pursuant to Section 8.7.C of the Effective Agreement, effective as of
February 19, 1998, the issuance date of Series A Preferred Shares by Crescent
Equities, the Partnership hereby issues 8,000,000 Series A Preferred
Partnership Units to Crescent Equities.
(a) Crescent Equities shall have a zero percentage Partnership Interest
with respect to such Series A Preferred Partnership Units and shall have no
voting rights other than the right to vote on any amendment to the Effective
Agreement if such amendment would (i) convert the Series A Preferred Partnership
Units into a general partner's interest, (ii) modify the limited liability of
Crescent Equities with respect to the Series A Preferred Partnership Units, or
(iii) alter the distribution, redemption, conversion or liquidation rights of
the Series A Preferred Partnership Units as set forth in paragraphs 2(b) through
(e) below.
(b) Notwithstanding Section 5.2 of the Effective Agreement, and prior to
any distributions of Available Cash under such provision, the General Partner
shall cause distributions of Available Cash to be made quarterly in cash on the
15th day, or if not a Business Day, the next succeeding Business Day, of
February, May, August and November in each year, beginning November 15, 1998,
(or on any other date on which Crescent Equities makes a distribution of
accrued, unpaid quarterly distributions to the holders of Series A Preferred
Shares) to Crescent Equities in an amount equal to the amount that is required
to be distributed by Crescent Equities on that date to the holders of Series A
Preferred Shares.
(c) Notwithstanding Sections 6.1.A and B of the Effective Agreement
(i) Each year, after giving effect to the special allocations set
forth in Section 1 of Exhibit C to the Effective Agreement, gross income of the
Partnership shall be allocated first to Crescent Equities until the cumulative
amount allocated under this paragraph 2(c)(i) to Crescent Equities for the
current year and all prior years is equal to the cumulative amount for the
current year and all prior years of the distributions made to Crescent Equities
under paragraph 2(b) above and the portion of the distributions made to Crescent
Equities under paragraph 2(d) below (if any) that exceeds $25 per Series A
Preferred Partnership Unit. Any remaining Net Profits or Net Losses (other than
gain or loss from a sale or other disposition of all or substantially all of the
assets of the Partnership, which shall be allocated as set forth in paragraphs
2(c)(ii) and (iii) below) shall be allocated as set forth in Sections 6.1.A and
B of the Effective Agreement.
(ii) The gain of the Partnership from a sale or other disposition of
all or substantially all of the assets of the Partnership shall be allocated
among the Partners as follows: (A) first, to Crescent Equities in the amount
necessary to cause its Capital Account balance to be equal to the liquidation
preference payable by Crescent Equities on the outstanding Series A Preferred
Shares (the "Liquidation Preference") (i.e., a liquidation payment of $25 per
Series A Preferred Partnership Unit, necessary, plus and accrued, unpaid
quarterly distribution thereon), (B) second, to the Partners in the amounts
necessary, and in the ratio of such amounts, to cause the Capital Account
balance of Crescent Equities in excess of the liquidation Preference and the
Capital Account of each other Partner to be in the same ratio as their
respective Partnership Interests, and (iii) thereafter, to all of the Partners
in proportion to their respective Partnership Interests
(iii) The loss of the Partnership from a sale or other disposition of
all or substantially all of the assets of the Partnership shall be allocated
among the Partners as follows: (A) first, to the Partners, if any, having
positive Capital Account balances, in the amounts necessary, and in the ratio of
such amounts, so as to cause the positive Capital Account Balance of Crescent
-4-
<PAGE> 5
Equities to equal the Liquidation Preference and the positive Capital Account
balance of each other Partner to equal zero (or, if there is insufficient loss
to accomplish this result, loss shall be allocated in a manner so as to cause
the positive Capital Account balance of Crescent Equities in excess of the
Liquidation Preference and the positive Capital Account balance of each other
Partner to be in the same ratio as their respective Partnership Interests), (B)
second, to Crescent Equities, until its positive Capital Account balance equals
zero, and (C) thereafter, to the Partners in proportion to their respective
Partnership Interests.
(d) In the event that Crescent Equities exercises its redemption right
with respect to the Series A Preferred Shares, the Partnership shall
concurrently redeem a corresponding amount of Series A Preferred Partnership
Units at the same redemption price paid by Crescent Equities for the Series A
Preferred Shares (i.e., a redemption payment of $25 per Series A Preferred
Partnership Unit, plus any accrued, unpaid quarterly distribution thereon).
(e) Upon exercise of any conversion right with respect to Series A
Preferred Shares, (i) Crescent Equities shall, as of the date on which the
conversion is consummated, be deemed to have contributed to the Partnership as
Contributed Funds pursuant to Section 4.2.A(2) of the Effective Agreement an
amount equal to the Value (computed as of the Business Day immediately
preceding the date on which such conversion is consummated) of the REIT Shares
delivered by Crescent Equities to such holder of Series A Preferred Shares, (ii)
the Partnership Interests of Crescent Equities and the other Limited Partners
shall be adjusted as set forth in Section 4.2 of the Effective Agreement, and
(iii) a corresponding portion of Series A Preferred Partnership Units shall be
retired.
3. 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.
4. Except as herein amended, the Effective Agreement is hereby ratified,
confirmed, and reaffirmed for all purposes and in all respects.
IN WITNESS WHEREOF, the undersigned has executed this First Amendment as
of the date first written above.
GENERAL PARTNER:
CRESCENT REAL ESTATE EQUITIES, LTD.,
a Delaware corporation, on its own
behalf and as attorney-in-fact for the
Limited Partners pursuant to Sections
2.4 and 14.1.B of the Effective
Agreement
By: /s/ DAVID M. DEAN
-----------------------------
Name: David M. Dean
-----------------------------
Title: Senior Vice President, Law
-----------------------------
-5-
<PAGE> 1
EXHIBIT 10.28
SECOND AMENDMENT
TO THE SECOND AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
THIS SECOND AMENDMENT TO THE SECOND AMENDED AND RESTATED AGREEMENT OF
LIMITED PARTNERSHIP OF CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP, dated
as of March 2, 1998, is entered into by and among Crescent Real Estate Equities,
Ltd., a Delaware corporation, on its own behalf as sole general partner (the
"General Partner") of Crescent Real Estate Equities Limited Partnership, a
Delaware limited partnership (the "Partnership"), and as attorney-in-fact for
each of the existing limited partners (the "Limited Partners") of the
Partnership pursuant to Sections 2.4 and 14.1.B of the Second Amended and
Restated Agreement of Limited Partnership of Crescent Real Estate Equities
Limited Partnership, dated as of November 1, 1997, as amended by the First
Amendment to the Second Amended and Restated Agreement of Limited Partnership
of Crescent Real Estate Equities Limited Partnership, dated as of February
19, 1998, hereinafter referred to as the "Effective Agreement."
WITNESSETH:
WHEREAS, the Partnership was formed pursuant to that certain
Certificate of Limited Partnership dated February 9, 1994 and filed on February
9, 1994 in the office of the Secretary of State of Delaware and that certain
Agreement of Limited Partnership dated as of February 9, 1994 (the "Initial
Agreement");
WHEREAS, the Initial Agreement, as previously amended and restated,
was amended and restated in its entirety by the Effective Agreement:
WHEREAS, on March 2, 1998, the Partnership issued Limited Partnership
Interest including 125,155 Partnership Units to Senterra Real Estate Group,
L.L.C. ("Senterra") in exchange for the contribution by Senterra to the
Partnership of the property and assets, including providing noncompetition
agreements (the "Property"), specified in that certain Asset Contribution
Agreement dated as of October 7, 1996, as amended on December 31, 1997, and
March 2, 1998 (the "Contract");
WHEREAS, Senterra immediately distributed 83,441, 20,857 and 20,857
Partnership Units to Senterra Corporation, a Texas corporation, Myron G.
Blalock III ("Blalock"), and Neil H. Tofsky ("Tofsky"), respectively; and
WHEREAS, the General Partner desires to amend the Effective Agreement
pursuant to its authority under Sections 2.4 and 14.1.B of the Effective
Agreement and the powers of attorney granted to the General Partner by the
Limited Partners in order to reflect the aforementioned.
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:
<PAGE> 2
1. In order to reflect the issuance of a Limited Partnership interest
including 125,155 Partnership Units to Senterra and Senterra's immediate
distribution of 83,441, 20,857 and 20,857 Partnership Units to Senterra
Corporation, Blalock, and Tofsky, respectively, Exhibit A to the Effective
Agreement is hereby deleted in its entirety and replaced with the Exhibit A
attached to this Second Amendment and made a part hereof.
2. Each of Senterra Corporation, Blalock, and Tofsky hereby
acknowledges that it acquired a Limited Partnership Interest in exchange for a
Capital Contribution by Senterra of the Property, which Capital Contribution
has a Net Asset Value of $8,521,500.
3. Each of Senterra Corporation, Blalock, and Tofsky hereby
acknowledges its acceptance of all of the terms and conditions of the Effective
Agreement, including without limitation the power of attorney granted in Section
2.4 of the Effective Agreement, and all of the terms and conditions hereof.
4. Except as the context may otherwise require, any terms used in this
Second Amendment which are defined in the Effective Agreement shall have the
same meaning for purposes of this Second Amendment as in the Effective
Agreement.
5. Except as herein amended, the Effective Agreement is hereby
ratified, confirmed, and reaffirmed for all purposes and in all respects.
IN WITNESS WHEREOF, the undersigned has executed this Second Amendment
as of the date first written above.
GENERAL PARTNER:
CRESCENT REAL ESTATE EQUITIES, LTD.,
a Delaware corporation, on its own
behalf and as attorney-in-fact for the
Limited Partners pursuant to Sections
2.4 and 14.1.B of the Effective
Agreement
By: /s/ DAVID M. DEAN
--------------------------------
Name: DAVID M. DEAN
--------------------------------
Title: Senior Vice President, Law
--------------------------------
-2-
<PAGE> 3
NEW LIMITED PARTNERS:
/s/ MYRON G. BLALOCK, III
---------------------------------------
Myron G. Blalock, III
/s/ NEIL H. TOFSKY
---------------------------------------
Neil H. Tofsky
SENTERRA CORPORATION, a Texas
corporation
By: /s/ DOUGLAS W. SCHNITZER
-----------------------------------
Name: Douglas W. Schnitzer
Title: President
The undersigned is executing this Second Amendment for the sole purpose
of evidencing its contribution to the Partnership of the property and assets
specified in the Contract in exchange for a Limited Partnership Interest
including 123,155 Partnership Units, and its immediate withdrawal as a Partner
in connection with the distribution of 20,857 Partnership Units to each of
Blalock and Tofsky, and 83,441 Partnership Units to Senterra Corporation.
SENTERRA REAL ESTATE GROUP, L.L.C., a
Texas limited liability company
By: /s/ NEIL H. TOFSKY
-----------------------------------
Name: Neil H. Tofsky
Title: President
-3-
<PAGE> 1
EXHIBIT 23.01
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in this
Registration Statement on Form S-4 of our reports dated January 16, 1998 on
Post Oak Central, January 16, 1998 on Washington Harbor, and January 23, 1998 on
Crescent Real Estate Equities Limited Partnership and to all references to our
Firm included in this Registration Statement.
Arthur Andersen LLP
Dallas, Texas,
April 15, 1998
<PAGE> 1
EXHIBIT 23.02
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated November 7, 1996 on the Provider Segment of Magellan Health Services,
Inc. and to all references to our Firm included in or made a part of this
Registration Statement.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
April 13, 1998
<PAGE> 1
EXHIBIT 23.03
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated April 23, 1997 (except for Note 5 as to which the date is June 27,
1997 and Note 14 as to which the date is January 16, 1998), with respect to the
consolidated financial statements of Station Casinos, Inc. as of March 31, 1997
and 1996 and for each of the three years in the period ended March 31, 1997
(and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
April 15, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS FOUND ON PAGES F-4 AND
F-5 OF THE COMPANY'S FORM S-4 FOR THE YEAR-TO-DATE, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 66,063
<SECURITIES> 0
<RECEIVABLES> 69,637
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 902,239
<PP&E> 3,423,130
<DEPRECIATION> (278,194)
<TOTAL-ASSETS> 4,182,875
<CURRENT-LIABILITIES> 127,220
<BONDS> 1,710,124
0
0
<COMMON> 0
<OTHER-SE> 2,317,353
<TOTAL-LIABILITY-AND-EQUITY> 4,182,875
<SALES> 0
<TOTAL-REVENUES> 447,373
<CGS> 0
<TOTAL-COSTS> 249,631
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 86,441
<INCOME-PRETAX> 133,590
<INCOME-TAX> 0
<INCOME-CONTINUING> 133,590
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 133,590
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
