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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 13, 1998
REGISTRATION NO. 333-42293
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
PRE-EFFECTIVE
AMENDMENT NO. 1
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 FEBRUARY 13, 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 values 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 refrigerated warehouse investment) 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 has invested, and will continue to invest, in a
broad range of real estate assets relating to various industries and, as
a result, will be subject to particular risks for each type of 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 FEBRUARY , 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 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 "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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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
Real Estate Risks Specific to the
Operating Partnership's
Business......................... 14
Conflicts of Interest............... 15
Risk of Inability to Manage Rapid
Growth and Acquisition of
Substantial New Assets
Effectively...................... 16
General Real Estate Risks Affecting
the Operating Partnership........ 16
Financially Distressed Properties
Are Riskier Investments than
Other Properties................. 17
Noteholders Cannot Control Changes
in Policies...................... 17
Operating Partnership's Success
Depends on Key Personnel......... 18
Limited Restrictions on Increases in
Debt............................. 18
THE OPERATING PARTNERSHIP............. 18
Investment Strategy................. 19
Operating Strategy.................. 20
Financing Strategy.................. 21
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CONFLICTS OF INTEREST................. 23
Common Management, Ownership and
Investments...................... 23
Relationships with Crescent
Operating, Inc. ................. 23
Joint Investments................... 24
Competition for Management Time..... 24
Legal Representation................ 24
Conflicts Resolution Procedures..... 24
NO CASH PROCEEDS TO THE OPERATING
PARTNERSHIP......................... 25
CAPITALIZATION........................ 26
THE EXCHANGE OFFER.................... 27
Purpose of the Exchange Offer....... 27
Terms of the Exchange Offer......... 27
Expiration Date; Extensions;
Amendments....................... 28
Interest on the Exchange Notes and
Accrued Interest on the
Private Notes.................... 29
Resale of the Exchange Notes........ 29
Procedures for Tendering............ 30
Return of Private Notes............. 32
Book-Entry Transfer................. 32
Guaranteed Delivery Procedures...... 32
Withdrawal of Tenders............... 32
Termination of Certain Rights....... 33
Exchange Agent...................... 33
Fees and Expenses................... 33
Consequence of Failure to
Exchange......................... 34
Accounting Treatment................ 34
DESCRIPTION OF THE EXCHANGE NOTES..... 34
General............................. 34
Principal and Interest.............. 35
Optional Redemption................. 36
Rating.............................. 36
Certain Covenants................... 37
Merger, Consolidation or Sale....... 39
Global Securities................... 39
Events of Default, Notice and
Waiver........................... 41
Modification of the Indenture....... 42
Satisfaction and Discharge.......... 43
No Conversion Rights................ 44
Payment............................. 44
Governing Law....................... 44
SELECTED FINANCIAL DATA............... 45
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF THE OPERATING
PARTNERSHIP......................... 48
Results of Operations............... 48
Liquidity and Capital Resources..... 51
Funds from Operations............... 56
RATIOS OF EARNINGS TO FIXED CHARGES... 57
BUSINESS AND PROPERTIES............... 58
Office Properties................... 58
Lease Expirations of Office
Properties....................... 63
Office Property Market
Information...................... 64
Behavioral Healthcare Facilities.... 65
Hotel Properties.................... 66
Residential Development
Properties....................... 66
Retail Properties................... 67
Recent Acquisitions................. 67
Pending Investments................. 69
Competition......................... 70
Interest Rates...................... 71
Year 2000 Compliance................ 71
Employees........................... 72
Insurance........................... 72
Legal Proceedings................... 72
Environmental Matters............... 72
CERTAIN POLICIES...................... 73
Investment Policies................. 73
Financing Policies.................. 74
Working Capital Reserves............ 75
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Other Policies...................... 75
MANAGEMENT............................ 76
Management of the Operating
Partnership...................... 76
Executive Compensation.............. 79
Option Grants in 1996............... 81
Option Exercises and Values at
December 31, 1996................ 82
Employment Agreements............... 82
Agreements Not To Compete........... 83
Compensation Policies............... 83
PRINCIPAL SHAREHOLDERS................ 84
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS........................ 87
STRUCTURE OF THE OPERATING
PARTNERSHIP......................... 91
U.S. FEDERAL INCOME TAX
CONSEQUENCES........................ 92
Exchange Offer...................... 92
PLAN OF DISTRIBUTION.................. 93
AVAILABLE INFORMATION................. 94
EXPERTS............................... 94
LEGAL MATTERS......................... 94
GLOSSARY.............................. 95
INDEX TO FINANCIAL STATEMENTS......... F-1
APPENDIX A............................ A-1
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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").
Certain matters discussed within this Prospectus are forward-looking
statements within the meaning of the federal securities laws. Although the
Operating Partnership believes that the expectations reflected in such
forward-looking statements are based upon reasonable assumptions, there can be
no assurance that these expectations will be realized. Factors that could cause
actual results to differ materially from current expectations include the
failure of pending investments to close, changes in general economic conditions,
changes in local real estate conditions, changes in industries in which the
Operating Partnership's principal tenants compete, the failure to timely lease
unoccupied square footage, the failure to timely re-lease occupied square
footage upon expiration of leases, the inability to generate sufficient revenues
to meet debt service payments and operating expenses, the unavailability of
equity and debt financing and other risks described in this Prospectus.
THE OPERATING PARTNERSHIP
The Operating Partnership owns a portfolio of real estate assets (the
"Properties") consisting primarily of 81 office properties (the "Office
Properties") located in 29 metropolitan submarkets in Texas, Colorado, Arizona,
Louisiana, Nebraska, New Mexico, California 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 79 refrigerated warehouses with an aggregate of approximately 368
million cubic feet (the "Refrigerated Warehouse Investment"). See "Business and
Properties" for a more detailed description of the Operating Partnership's
business and assets, including the proposed acquisitions of a corporation that
owns primarily four full-service casino/hotels and two riverboat casinos
(collectively, the "Casino/Hotel Properties") and of a three-building Class A
office complex.
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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 proposed 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 nine months ended September 30,
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 the Pending Investments
(other than the proposed 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........................................... 60%
Behavioral Healthcare Facilities............................ 13
Hotel Properties............................................ 11
Refrigerated Warehouse Investment........................... 8
Residential Development Properties.......................... 6
Retail Properties........................................... 2
---
100%
===
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The following table sets forth, for the nine months ended September 30,
1997, the EBIDA of the Operating Partnership, on a percentage basis, by type of
Property, after giving effect to the Pending Investments (including the proposed
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..................................... 28
Behavioral Healthcare Facilities............................ 9
Hotel Properties............................................ 8
Refrigerated Warehouse Investment........................... 6
Residential Development Properties.......................... 5
Retail Properties........................................... 1
---
100%
===
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PENDING INVESTMENTS
The following briefly summarizes the Operating Partnership's Pending
Investments as of the date of this Prospectus. A more detailed description of
these proposed investments is contained in "Business and Properties -- Pending
Investments."
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 affiliate established 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 one or
more leases with the Operating Partnership. The Operating Partnership also will
enter into a right of first refusal and non-competition agreement with the
lessee. See "Business and Properties -- Pending Investments."
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
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<PAGE> 9
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.
Post Oak Central. The Operating Partnership has entered into an agreement
to acquire Post Oak Central, a three-building Class A office complex located in
the West Loop/Galleria submarket of Houston, Texas.
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 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.
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
"Conflicts of Interest."
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Relationship with Crescent Operating, Inc. In April 1997, the Operating
Partnership established a new Delaware corporation, Crescent Operating, Inc. All
of the outstanding common stock of Crescent Operating, Inc. 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, Inc. and the Operating Partnership have entered into an agreement
pursuant to which each has agreed to provide the other with rights to
participate in certain transactions. Subsidiaries of Crescent Operating, Inc.
are the lessees of each of the Hotel Properties. Crescent Operating, Inc. 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
current base rental revenues. 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, Inc., and Gerald W. Haddock also serves
as the President, Chief Executive Officer and a director of Crescent Operating,
Inc., the General Partner and the Company.
Common Ownership by Senior Management. Messrs. Rainwater, Goff and Haddock,
together with other senior management of the Company and the General Partner,
beneficially own an approximately 14.3% equity interest in the Operating
Partnership, both directly through their Units in the Operating Partnership and
indirectly through their ownership of Common Shares of the Company, and
approximately the same percentage of the outstanding common stock of Crescent
Operating, Inc. The common management and ownership among these entities may
lead to conflicts of interest in connection with transactions between or among
the Operating Partnership, the Company and Crescent Operating, Inc.
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, Inc.) 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.
-5-
<PAGE> 11
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."
If the Operating Partnership fails to consummate
the Exchange Offer prior to March 21, 1998 or, if
applicable, fails to fulfill its obligations under
a registration rights agreement to obtain and
maintain effectiveness of a shelf registration
statement to cover resales of the Private Notes by
the holders thereof during specified time periods,
the interest rate for the Private Notes otherwise
eligible for exchange in the Exchange Offer or, as
applicable, for registration on such shelf
registration statement will be increased by 50
basis points. See "The Exchange Offer -- Purpose of
the Exchange Offer."
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,
-6-
<PAGE> 12
together with such Private Notes and any other
required documentation 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
-7-
<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.
RANKING The Exchange Notes are senior 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. As of the date of this Prospectus, the
Operating Partnership does not have any outstanding
debt that will be subordinate to the Exchange
Notes. The Exchange Notes will be effectively
subordinated to the claims of any secured mortgage
lender to the extent of the
-8-
<PAGE> 14
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 September 30, 1997, after
giving pro forma effect to investments completed
after September 30, 1997, Pending Investments and
related financing, the Operating Partnership and
its Subsidiaries collectively had total
indebtedness of $3,095.8 million, which consisted
of $767.5 million of secured indebtedness (of which
$205.6 million was secured indebtedness of the
Operating Partnership and $561.9 million was
secured indebtedness of its Subsidiaries) and
$2,328.3 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."
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."
-9-
<PAGE> 15
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, 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) Property acquisitions, other
investments and related financing and share issuances during 1996, 1997 and
1998, and (viii) the Pending Investments and related financing, including
$1,054.2 million for refinancing and/or assumption of indebtedness, and
associated refinancing and transaction costs, in connection with the merger with
Station.
The pro forma information for the nine months ended September 30, 1997
assumes completion, in each case as of January 1, 1997 in determining operating
and other data, and, in each case as of September 30, 1997 in determining
balance sheet data, of (i) 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, (ii) 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, (iii) 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, (iv) 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, (v)
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, (vi) Property acquisitions, other
investments and related financing and share issuances during 1997 and 1998, and
(viii) the Pending Investments and related financing, including $1,054.2 million
for refinancing and/or assumption of indebtedness, and associated refinancing
and transaction costs, in connection with the merger with Station.
-10-
<PAGE> 16
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
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED YEAR ENDED
----------------------------------------------- DECEMBER 31, DECEMBER 31,
1997 1997 1996 1996 1996
------------ ------------ ----------- ------------ ------------
PRO FORMA ACTUAL ACTUAL (UNAUDITED)
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenue.......... $ 581,679 $ 303,260 $ 137,427 $ 739,354 $ 208,861
Operating income
(loss)................ 111,234 81,148 23,668 123,966 44,101
Income (loss) before
minority interest and
extraordinary item.... 125,482 84,266 26,735 137,986 47,951
BALANCE SHEET DATA (AT
PERIOD END):
Total assets........... $ 6,169,580 $ 3,615,064 $ 1,216,515 $ -- $ 1,733,540
Total debt............. 3,095,754 1,776,904 664,483 -- 667,808
Total partners'
capital............... 2,982,200 1,721,534 487,213 -- 988,005
OTHER DATA:
Funds from Operations
before minority
interests(1)(2)....... $ 246,719 $ 134,615 $ 55,741 $ 301,210 $ 87,616
Distribution per
partner interest...... -- $ .92 $ .83 -- $ 1.16
Weighted average
partner
interests(2).......... 147,124,058 100,592,573 58,116,124 147,124,058 64,684,842
Cash flow provided by
(used in):
Operating
activities.......... $ --(3) $ 134,730 $ 49,590 $ --(3) $ 77,384
Investing
activities.......... --(3) (1,865,984) (221,498) --(3) (513,033)
Financing
activities.......... --(3) 1,752,410 169,336 --(3) 444,315
EBIDA(4)............... 429,133 191,950 89,000 541,369 134,224
Total Debt to Total
Assets(5)............. 49% 47% 49% -- 39%
Total Secured Debt to
Total Assets(5)....... 14% 17% 35% -- 37%
Ratio of Consolidated
Income Available for
Debt Service to Annual
Debt Service
Charge(5)............. 2.5 3.0 2.8 2.4 3.1
Ratio of earnings to
fixed charges(6)...... 1.7 2.4 1.8 1.6 2.0
Ratio of Funds from
Operations before
fixed charges to fixed
charges(7)............ 2.4 3.3 2.6 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 1992
------------ ------------ ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenue.......... $ 129,960 $ 50,343 $ 21,185 $ 57,168 $ 49,586
Operating income
(loss)................ 30,858 10,864 (1,599) (53,024) (36,612)
Income (loss) before
minority interest and
extraordinary item.... 36,358 12,595 (1,599) (53,024) (36,612)
BALANCE SHEET DATA (AT
PERIOD END):
Total assets........... $ 965,232 $ 538,354 -- $290,869 $ 296,291
Total debt............. 444,528 194,642 -- 278,060 548,517
Total partners'
capital............... 479,517 328,448 -- 2,941 (328,240)
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 $ (640)
Investing
activities.......... (421,306) (260,666) (2,379) (20,572) (8,924)
Financing
activities.......... 343,079 265,608 (21,310) 28,861 14,837
EBIDA(4)............... 85,699 31,266 11,061 (5,717) 17,823
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."
-11-
<PAGE> 17
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
-12-
<PAGE> 18
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.
The Notes also will be unsecured and 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, Inc., 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"), to lease any hotel properties that it may
acquire in the future to Crescent Operating, Inc. 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, 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, Inc. 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"). 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, Inc. and Vornado. The partnership agreement for each of
the partnerships provides for a buy-sell arrangement upon a failure of Crescent
Operating, Inc. and Vornado to agree on any of the specified major decisions
pursuant to which the entire interest of Crescent Operating, Inc. 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, Inc. 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 that will be owned
50% by former management of Station and 50% by Crescent Operating, Inc. or one
of its affiliates (the "Station Lessee"). 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 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. To the extent that operations of the
Casino/Hotel Properties may affect the ability of the Station Lessee to pay
rent, the Operating Partnership also may indirectly bear the risks associated
with any increases in expenses or decreases in 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 such factors as changes in general and local
economic conditions, the level of demand for the services of the Casino/Hotel
Properties, competition in the casino/ hotel industry and other factors related
to the operation of the Casino/Hotel Properties.
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
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<PAGE> 20
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."
CONFLICTS OF INTEREST
General. As discussed in detail in "Conflicts of Interest" and "Certain
Relationships and Related Transactions," the Operating Partnership will be
subject to conflicts of interest arising out of the common management and
ownership among the Operating Partnership, the Company and Crescent Operating,
Inc., including conflicts related to allocation of management and investments
with affiliated persons. See, for example, "Conflicts of Interest -- Common
Management, Ownership and Investments" and "Conflicts of Interest -- Competition
for Management Time."
Relationship with Crescent Operating, Inc. The Operating Partnership has
entered into an agreement (the "Intercompany Agreement") with Crescent
Operating, Inc., pursuant to which each has agreed to provide the other with
rights to participate in certain transactions before taking the opportunity
itself or offering the opportunity to others. The certificate of incorporation
of Crescent Operating, Inc., as amended and restated, generally prohibits
Crescent Operating, Inc., 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 "Business and Properties -- Pending
Investments" for a description of certain investment opportunities which the
Operating Partnership has elected or expects to offer to Crescent Operating,
Inc. In addition, subsidiaries of Crescent Operating, Inc. are the lessees of
each of the Hotel Properties, and Crescent Operating, Inc. 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.
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,
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<PAGE> 21
Inc., and Gerald W. Haddock also serves as the President, Chief Executive
Officer and a director of Crescent Operating, Inc., the General Partner and the
Company. Messrs. Rainwater, Goff and Haddock, together with other senior
management of the Company and the General Partner, beneficially own an
approximately 14.3% equity interest in the Operating Partnership, both directly
through their Units in the Operating Partnership and indirectly through their
ownership of Common Shares of the Company, and approximately the same percentage
of the outstanding common stock of Crescent Operating, Inc. 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, Inc. and 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.
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 Health Services, Inc. ("Magellan"), a
subsidiary of which is a 50% owner (along with Crescent Operating, Inc.) of
CBHS. Mr. Rainwater's spouse, Darla D. Moore, is a member of the board of
directors of Magellan.
RISK OF INABILITY TO MANAGE RAPID GROWTH AND ACQUISITION OF SUBSTANTIAL NEW
ASSETS EFFECTIVELY
From the time it commenced operations in May 1994 through September 30,
1997, the Operating Partnership has experienced rapid growth, increasing its
total assets by approximately 1,705%, after giving pro forma effect to the
Pending Investments and investments completed after September 30, 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, including the
obligations represented by the Notes.
GENERAL REAL ESTATE RISKS AFFECTING THE OPERATING PARTNERSHIP
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. 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 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.
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<PAGE> 22
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, the building materials used at each Property and the presence of ground
water on or near the 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 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.
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<PAGE> 23
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 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.
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<PAGE> 24
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.]
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(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,
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).
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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 Investments, 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.
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
construc-
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<PAGE> 26
tion of new buildings. For the Office Properties and the Pending Investments in
office properties as of September 30, 1997, the weighted average full-service
rental rate was $16.82 per square foot, compared to an estimated weighted
average full-service replacement cost rental rate of $27.90 per square foot.
Many of the Operating Partnership's submarkets have experienced substantial
rental rate growth during the past two years. For example, based on the third
party sources identified in footnote 2 to the chart that sets forth market
rental rates in the "Business and Properties -- Properties -- Office Properties"
subsection, Class A office rental rates in Dallas, Houston, Denver and Austin
have increased by approximately 30%, 18%, 15% and 19%, respectively, from 1995
to 1997. 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 21%, 23%,
16%, 27% and 11%, respectively. 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.
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. Senior management of the Company and the General
Partner and Messrs. Rainwater and Goff beneficially own an approximately 14.3%
equity interest in the Operating Partnership, both directly through their Units
in the Operating Partnership and indirectly through their ownership of Common
Shares of the Company. This ownership percentage includes the approximately
11.0% ownership position of Richard E. Rainwater, the Chairman of the Board of
Trust Managers of the Company, the approximately 2.1% ownership position of John
C. Goff, the Vice Chairman of the Board of Trust Managers of the Company, and
the approximately 1.6% ownership position of Gerald W. Haddock, the President
and Chief Executive Officer of the Company and the General Partner, and the sole
director of the General Partner.
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 $2.1
billion in net proceeds derived from public offerings of its Common 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
September 30, 1997, after giving pro forma effect to investments completed after
September 30, 1997, Pending Investments and related financing, the Operating
Partnership and its Subsidiaries collectively had total indebtedness of $3,095.8
million, which consisted of $767.5 million
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<PAGE> 27
of secured indebtedness (of which $205.6 million was secured indebtedness of the
Operating Partnership and $561.9 million was secured indebtedness of its
Subsidiaries) and $2,328.3 million of unsecured indebtedness (all of which was
unsecured indebtedness of the Operating Partnership). After giving pro forma
effect to investments completed after September 30, 1997, Pending Investments
and related financing, the ratio of debt of the Operating Partnership to market
capitalization of the Company (based on a closing stock price on February 9,
1998 of $35.6875 per Common Share, after full conversion of all Units and
including total indebtedness and minority interests in joint ventures) was
approximately 36%.
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<PAGE> 28
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,
Inc. All of the outstanding common stock of Crescent Operating, Inc. 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, Inc. and the Operating Partnership have entered into the
Intercompany Agreement pursuant to which each has agreed to provide the other
with rights to participate in certain transactions before taking the opportunity
itself or offering the opportunity to others.
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, Inc., and Gerald W. Haddock also serves as the President, Chief
Executive Officer and a director of Crescent Operating, Inc., the General
Partner and the Company. In addition, Messrs. Rainwater, Goff and Haddock,
together with other senior management of the Company and the General Partner,
beneficially own an approximately 14.3% equity interest in the Operating
Partnership, both directly through their Units in the Operating Partnership and
indirectly through their ownership of Common Shares of the Company, and
approximately the same percentage of the outstanding common stock of Crescent
Operating, Inc. This common management and ownership among these entities may
lead to conflicts of interest in connection with transactions between the
Operating Partnership and Crescent Operating, Inc.
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, Inc.) 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, Inc., 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 the Company have developed certain
procedures designed to reduce or eliminate any such conflicts of interest. See
"-- Conflicts Resolution Procedures," below.
RELATIONSHIPS WITH CRESCENT OPERATING, INC.
Subsidiaries of Crescent Operating, Inc. are the lessees of each of the
Hotel Properties, and Crescent Operating, Inc. 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. In addition, it
is anticipated that Crescent Operating, Inc. will have the opportunity to own a
50% interest in the Station Lessee. The Operating Partnership expects to offer
Crescent Operating, Inc. the opportunity to become a lessee and operator of
other assets in accordance with the Intercompany Agreement.
Crescent Operating, Inc. currently is the largest single lessee of the
Operating Partnership in terms of revenues under its leases. As a result, and
due to the common management and ownership between the Operating Partnership and
Crescent Operating, Inc., 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, Inc. is the lessee or if there were a
default by Crescent Operating, Inc. 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, Inc. In any such situation, however,
Messrs. Rainwater, Goff and Haddock have fiduciary
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<PAGE> 29
obligations to the beneficial owners of the Operating Partnership, the Company
and Crescent Operating, Inc. 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 owns all of the non-voting stock in companies
that own a 40% interest in Americold and URS, and Crescent Operating, Inc. owns
all of the voting stock in these companies. It is possible that the Operating
Partnership will choose to structure future investments as joint investments
between itself and Crescent Operating, Inc. 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, Inc. and the common management and common ownership
among the Operating Partnership, the Company and Crescent Operating, Inc.
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, Inc., 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, Inc., 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, Inc. in connection with
certain matters. In the event any controversy arise in which the interests of
the Operating Partnership appear to be in conflict with those of Crescent
Operating, Inc., other counsel may be retained for one or both parties.
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, Inc., 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
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<PAGE> 30
Haddock, through certain affiliates, retains 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.
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> 31
CAPITALIZATION
The following table sets forth the capitalization of the Operating
Partnership as of September 30, 1997 (i) on an historical basis and (ii) on a
pro forma basis after giving effect to investments completed after September 30,
1997, Pending Investments 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 SEPTEMBER 30, 1997
------------------------
HISTORICAL PRO FORMA
---------- ----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Indebtedness
Credit Facility, Short-Term Indebtedness and other
Indebtedness (Unsecured)............................... $ 751,500(1) $1,928,250
Mortgage Indebtedness (Secured)(2)........................ 625,404 767,504
The 2002 Notes............................................ 150,000 150,000
The 2007 Notes............................................ 250,000 250,000
---------- ----------
Total Indebtedness................................ $1,776,904 $3,095,754
---------- ----------
Partners' capital........................................... $1,721,534 $2,982,200(3)
---------- ----------
Total Capitalization.............................. $3,498,438 $6,077,954
========== ==========
</TABLE>
- ---------------
(1) Credit Facility and Short-Term Indebtedness (Unsecured) decreased to
$541,900 as of December 31, 1997 as a result of the net $209,600 of capital
contributions made by the Company from the October 1997 Offering and Merrill
Offering and borrowings obtained in connection with the acquisition of Bank
One Center, the Refrigerated Warehouse Investment, Fountain Place, Ventana
Country Inn, Energy Centre and for working capital.
(2) Of these amounts, $561,904 represents total indebtedness of the Operating
Partnership's Subsidiaries, all of which is secured indebtedness.
(3) The pro forma increase in partners' capital reflects the following: (i)
$370,100 of capital contributions made by the Company from the October 1997
equity offering, (ii) $199,900 of capital contributions made by the Company
from the Merrill Offering and (iii) $690,666 of capital contributions to be
made upon the Company's issuance of common and preferred shares in
conjunction with the Merger.
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<PAGE> 32
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. If
(i) prior to the consummation of the Exchange Offer, the Operating Partnership
reasonably determines in good faith or holders of at least a majority in
aggregate principal amount of the Private Notes notify the Operating Partnership
that they have reasonably determined in good faith that (A) in the opinion of
counsel to the Operating Partnership or to such holders, upon which opinion the
Operating Partnership is entitled to rely, the Private Notes would not, upon
receipt, be tradeable by such holders who are not affiliates of the Operating
Partnership without restriction under the Securities Act and without
restrictions under applicable blue sky or state securities laws or (B) in the
opinion of counsel to such holders or counsel to the Operating Partnership, upon
which opinion the Operating Partnership is entitled to rely, the Commission is
unlikely to permit the consummation of the Exchange Offer and/or (ii) the
Exchange Offer is commenced and not consummated on or before March 21, 1998 for
any reason, then the Operating Partnership has agreed to file and use its
reasonable best efforts to cause a shelf registration statement (the "Shelf
Registration Statement") with respect to the resale of the Private Notes to be
declared effective and, subject to certain exceptions set forth in the
Registration Rights Agreement, keep the Shelf Registration Statement effective
until two years after the effectiveness date of such Shelf Registration
Statement. If the Operating Partnership fails to consummate the Exchange Offer
or, if applicable, fails to obtain and maintain effectiveness the Shelf
Registration Statement within and during the time periods specified in the
Registration Rights Agreement, the interest rate for the Private Notes required
to be either exchanged or registered on the Shelf Registration Statement, as
applicable, will be increased by 50 basis points.
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.
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<PAGE> 33
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.
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
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<PAGE> 34
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,
commencing March 15, 1998. The Exchange Notes will bear interest from their date
of issuance. 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 days prior to such payment date.
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."
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<PAGE> 35
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.
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
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("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.
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.
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<PAGE> 37
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.
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
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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 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 a timely basis, if the Exchange Offer is not consummated 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>
<C> <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.
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<PAGE> 39
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 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
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<PAGE> 40
debt securities from the 2002 Notes under the Indenture. The Exchange Notes will
be direct, senior 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 September 30, 1997, after giving pro
forma effect to investments completed after September 30, 1997, Pending
Investments and related investment financing, the Operating Partnership and its
Subsidiaries collectively had total indebtedness of $3,095.8 million, which
consisted of $767.5 million of secured indebtedness (of which $205.6 million was
secured indebtedness of the Operating Partnership and $561.9 million was secured
indebtedness of its Subsidiaries) and $2,328.3 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 service its
indebtedness, 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."
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<PAGE> 41
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.
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.
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<PAGE> 42
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 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
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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).
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
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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.
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
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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 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
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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.
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
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<PAGE> 47
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 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
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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 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)).
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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.
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, 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) Property acquisitions, other
investments and related financing and share issuances during 1996, 1997 and
1998, and (viii) the Pending Investments and related financing, including
$1,054.2 million for refinancing and/or assumption of indebtedness, and
associated financing and transaction costs, in connection with the Merger.
The pro forma information for the nine months ended September 30, 1997
assumes completion, in each case as of January 1, 1997 in determining operating
and other data, and, in each case as of September 30, 1997 in determining
balance sheet data, of (i) 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, (ii) 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, (iii) 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, (iv) 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, (v)
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, (vi) Property acquisitions, other
investments and related financing and share issuances during 1997 and 1998, and
(vii) the Pending Investments and related financing, including $1,054.2 million
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
-------------------------------------------------------------------------
PRO FORMA
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED YEAR ENDED
------------------------------------------ DECEMBER 31, DECEMBER 31,
1997 1997 1996 1996 1996
------------ ------------ ----------- ------------ ------------
PRO FORMA ACTUAL ACTUAL
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue --
Rental property................ $ 561,380 $ 233,825 $ 133,855 $ 717,212 $ 202,003
Interest and other income...... 20,299 13,508 3,572 22,142 6,858
Residential developments(1).... -- -- -- -- --
Operating expenses --
Rental property operating(2)... 156,939 104,573 47,996 202,005 73,813
Corporate general and
administrative............... 9,855 9,855 3,498 10,000 4,674
Residential developments(1).... -- -- -- -- --
Interest expense................ 167,959 54,687 30,861 224,645 42,926
Depreciation and amortization... 132,996 50,840 29,339 175,207 40,535
Amortization of deferred
financing costs................ 2,696 2,157 2,065 3,531 2,812
Writedown of investment
property....................... -- -- -- -- --
------------ ------------ ----------- ------------ -----------
Operating income (loss)......... 111,234 81,148 23,668 123,966 44,101
Reorganization costs............ -- -- -- -- --
Equity in net income of
unconsolidated companies(1).... 14,248 3,118 3,067 14,020 3,850
------------ ------------ ----------- ------------ -----------
Income (loss) before minority
interests and extraordinary
item........................... $ 125,482 $ 84,266 $ 26,735 $ 137,986 $ 47,951
============ ============ =========== ============ ===========
BALANCE SHEET DATA (AT PERIOD END):
Real estate, before accumulated
depreciation................... $ 5,374,759 $ 3,113,743 $ 1,238,417 $ -- $ 1,732,626
Total assets.................... 6,169,580 3,615,064 1,216,515 -- 1,733,540
Mortgages and other secured
notes
payable........................ 767,504 625,505 491,983 -- 627,808
Credit Facility and other
unsecured obligations(3)....... 2,328,250 751,500 172,500 -- 40,000
Total liabilities............... 3,158,984 1,865,134 694,781 -- 716,270
Partners' capital............... 2,982,200 1,721,534 487,213 -- 988,005
OTHER DATA:
Funds from Operations before
minority interests(4)(5)....... $ 246,719 $ 134,615 $ 55,741 $ 301,210 $ 87,616
Distribution per partner
interest....................... -- $ .92 $ .83 -- $ 1.16
Weighted average partner
interests(5)................... 147,124,058 100,592,573 58,116,124 147,124,058 64,684,842
Cash flow provided by (used in):
Operating activities........... $ --(10) $ 134,730 $ 49,590 $ --(10) $ 77,384
Investing activities........... --(10) (1,865,984) (221,498) --(10) (513,033)
Financing activities........... --(10) 1,752,410 169,336 --(10) 444,315
EBIDA(6)........................ 429,133 191,950 89,000 541,369 134,224
Total Debt to Total Assets(7)... 49% 47% 49% -- 39%
Total Secured Debt to Total
Assets(7)...................... 14% 17% 35% -- 37%
Ratio of Consolidated Income
Available for Debt Service to
Annual Debt Service
Charge(7)...................... 2.5 3.0 2.8 2.4 3.1
Ratio of earnings to fixed
charges(8)..................... 1.7 2.4 1.8 1.6 2.0
Ratio of FFO before fixed
charges to fixed charges(9).... 2.4 3.3 2.6 2.3 2.9
Number of Properties (at period
end):
Office Properties.............. 84 76 37 84 53
Hotel Properties............... 9 7 4 9 6
Behavioral Healthcare
Facilities................... 90 91 0 90 0
Retail Properties.............. 7 7 2 7 6
Residential Development
Properties................... 12 12 9 12 9
<CAPTION>
OPERATING PARTNERSHIP RAINWATER PROPERTY GROUP
------------------------------ ---------------------------------
FOR THE
PERIOD
FOR THE FROM
PERIOD FROM JANUARY 1, YEAR ENDED
YEAR ENDED MAY 5, 1994 1994 TO DECEMBER 31,
DECEMBER 31, TO DECEMBER 31, MAY 4, --------------------
1995 1994 1994 1993 1992
------------ --------------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue --
Rental property................ $ 123,489 $ 49,075 $ 18,550 $ 48,232 $ 41,946
Interest and other income...... 6,471 1,268 42 605 425
Residential developments(1).... -- -- 2,593 8,331 7,215
Operating expenses --
Rental property operating(2)... 45,949 18,993 8,696 21,230 20,104
Corporate general and
administrative............... 3,812 1,815 -- -- --
Residential developments(1).... -- -- 1,428 4,077 5,714
Interest expense................ 18,781 3,493 4,867 29,226 36,245
Depreciation and amortization... 28,060 14,255 7,793 18,081 18,190
Amortization of deferred
financing costs................ 2,500 923 -- -- --
Writedown of investment
property....................... -- -- -- 37,578 5,945
----------- ----------- -------- -------- ---------
Operating income (loss)......... 30,858 10,864 (1,599) (53,024) (36,612)
Reorganization costs............ -- 1,900 -- -- --
Equity in net income of
unconsolidated companies(1).... 5,500 3,631 -- -- --
----------- ----------- -------- -------- ---------
Income (loss) before minority
interests and extraordinary
item........................... $ 36,358 $ 12,595 $ (1,599) $(53,024) $ (36,612)
=========== =========== ======== ======== =========
BALANCE SHEET DATA (AT PERIOD EN
Real estate, before accumulated
depreciation................... $ 1,006,706 $ 557,675 -- $358,400 $ 336,923
Total assets.................... 965,232 538,354 -- 290,869 296,291
Mortgages and other secured
notes
payable........................ 424,528 -- -- 278,060 548,517
Credit Facility and other
unsecured obligations(3)....... 20,000 194,642 -- -- --
Total liabilities............... 476,234 209,900
Partners' capital............... 479,517 328,448 -- 2,941 (328,240)
OTHER DATA:
Funds from Operations before
minority interests(4)(5)....... $ 64,475 $ 32,723 -- -- --
Distribution per partner
interest....................... $ 1.05 $ .65 -- -- --
Weighted average partner
interests(5)................... 54,182,006 44,997,716 -- -- --
Cash flow provided by (used in):
Operating activities........... $ 64,877 $ 21,614 $ 2,455 $ 9,313 $ (640)
Investing activities........... (421,306) (260,666) (2,379) (20,572) (8,924)
Financing activities........... 343,079 265,608 (21,310) 28,861 14,837
EBIDA(6)........................ 85,699 31,266 -- -- --
Total Debt to Total Assets(7)... 47% 37% -- -- --
Total Secured Debt to Total
Assets(7)...................... 47% 37% -- -- --
Ratio of Consolidated Income
Available for Debt Service to
Annual Debt Service
Charge(7)...................... 4.6 9.0 -- -- --
Ratio of earnings to fixed
charges(8)..................... 2.6 3.9 -- -- --
Ratio of FFO before fixed
charges to fixed charges(9).... 3.9 8.4 -- -- --
Number of Properties (at period
end):
Office Properties.............. 30 10 4 4 3
Hotel Properties............... 3 0 0 0 0
Behavioral Healthcare
Facilities................... 0 0 0 0 0
Retail Properties.............. 2 2 2 2 2
Residential Development
Properties................... 9 3 3 2 1
</TABLE>
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<PAGE> 52
- ---------------
(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 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> 53
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 the three and
nine months ended September 30, 1997 and each of the years ended December 31,
1996, 1995 and 1994 should be read in conjunction with the financial statements
and notes included herein.
The changes in operating results from period to period are primarily the
result of increases in the total square feet of Office and Retail Properties and
number of hotel/resort rooms/guest nights contained in the portfolio due to
acquisitions made by the Operating Partnership. The weighted average square feet
of consolidated office and retail properties for the three and nine months ended
September 30, 1997, were approximately 21.6 and 19.8 million, respectively,
compared to 10.3 and 9.4 million for the same periods in 1996. These increases
represent an 120.4% and 110.6% increase in square feet for the three and nine
months ended September 30, 1997, respectively, compared to the same periods in
1996. The weighted average number of rooms/guest nights for consolidated hotel
properties for the three months and nine months ended September 30, 1997, were
approximately 1,939 and 1,922 compared to 1,463 and 1,356, for the same periods
in 1996. These increases represent a 32.5% and 41.7% increase in rooms/guest
nights for the three and nine months ended September 30, 1997.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1997 TO THREE MONTHS ENDED
SEPTEMBER 30, 1996
Total revenues increased approximately $70.7 million, or 143.1%, to $120.1
million for the three months ended September 30, 1997, as compared to $49.4
million for the three months ended September 30, 1996. An increase in Office and
Retail Property revenues of $48.8 million is primarily attributable to the
acquisition of: a) 23 Office Properties in 1997 which resulted in $19.7 million
of incremental revenues; b) 16 Office Properties and four Retail Properties in
the fourth quarter of 1996 which resulted in $24.0 million of incremental
revenues; and c) four Office Properties in the third quarter of 1996 which
resulted in $2.2 million of incremental revenues. An increase in Hotel Property
revenues of $4.0 million is primarily attributable to the acquisition of two
destination health and fitness resorts and one full-service hotel property in
the third and fourth quarters of 1996. The increase in Behavioral Healthcare
Facilities revenues of $13.8 million is attributable to the acquisition of the
facilities in June 1997. The increase in interest and other income of $4.1
million is primarily attributable to the $134.3 million increase in notes
receivable as a result of the acquisition of certain notes in the Carter-Crowley
transaction, loans to Crescent Operating, Inc., loans to Desert Mountain
Properties Limited Partnership ("DMPLP") and the acquisition of a note
receivable secured by a hotel property.
Total expenses increased $44.6 million, or 107.0%, to $86.3 million for the
three months ended September 30, 1997, as compared to $41.7 million for the
three months ended September 30, 1996. The increase in rental property operating
expenses of $22.5 million is primarily attributable to the acquisition of: a) 23
Office Properties in 1997 which resulted in $9.7 million of incremental
expenses; b) 16 Office Properties and four Retail Properties in the fourth
quarter of 1996 which resulted in $9.8 million of incremental expenses; and c)
four Office Properties in the third quarter of 1996 which resulted in $1.0
million of incremental expenses during the period. Depreciation and amortization
increased $9.5 million due primarily to the acquisition of Office Properties and
Behavioral Healthcare Facilities. The increase in interest expense of $11.2
million is primarily attributable to: (i) $.5 million of interest payable under
the financing arrangement with Northwestern Mutual Life Insurance Company, which
was in place as of December 1996; (ii) $2.3 million payable under LaSalle Note
III, which was assumed in the acquisition of the Greenway Plaza Portfolio in
October 1996; (iii) $5.1 million of interest payable under the $200 million and
$235 million short-term notes with BankBoston, N.A. ("BankBoston") which were
obtained in June and August of 1997, respectively; (iv) $2.6 million of
incremental interest payable due to draws under the Credit Facility (average
balance outstanding for the third quarter 1997 and 1996 was $294.1 million and
$115.4 million, respectively); and (v) $.7 million of interest payable under the
senior unsecured notes aggregating $400 million ("Notes"). All of the financing
arrangements, except for LaSalle Note III, were used to fund acquisitions. The
increase in
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<PAGE> 54
corporate general and administrative expense of $1.2 million was attributable to
incremental costs associated with the corporate operations of the Operating
Partnership as a direct result of recent property additions to the Operating
Partnership's portfolio.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
Total revenues increased approximately $165.9 million, or 120.7%, to $303.3
million for the nine months ended September 30, 1997, as compared to $137.4
million for the nine months ended September 30, 1996. An increase in Office and
Retail Property revenues of $127.3 million is primarily attributable to the
acquisition of: a) 23 Office Properties in 1997 which resulted in $38.4 million
of incremental revenues; b) six Office Properties during the nine months ended
September 30, 1996, which resulted in $14.8 million of incremental revenues; and
c) 16 Office Property and four Retail Properties in the fourth quarter of 1996,
which resulted in $68.9 million of incremental revenues. In addition, Office
Property revenues increased due to The Crescent's increase in rental rates and
occupancy which resulted in $1.7 million of incremental revenues. An increase in
Hotel Property revenues of $12.7 million is primarily attributable to the
acquisition of two destination health and fitness resorts and one full-service
hotel property in the third and fourth quarters of 1996, which resulted in $11.9
million of incremental revenues. The increase in Behavioral Healthcare
Facilities revenues of $16.0 million is attributable to the acquisition of the
facilities in June 1997. The increase in interest and other income of $9.9
million for the nine months ended September 30, 1997, is primarily attributable
to: a) the $3.1 million profit distribution related to the Operating
Partnership's investment in HBCLP, Inc., the primary asset of which is the
investment in Hudson Bay Partners, L.P., an investment partnership in which the
Operating Partnership holds an effective 95% economic interest; b) the $134.3
million increase in notes receivable as a result of the acquisition of certain
notes in the Carter-Crowley transaction, loans to Crescent Operating, loans to
DMPLP and the acquisition of a note receivable secured by a hotel property; and
c) interest earned on available cash from the Offerings (as defined below).
Total expenses increased $108.3 million, or 95.2%, to $222.1 million for
the nine months ended September 30, 1997, as compared to $113.8 million for the
nine months ended September 30, 1996. An increase in rental property operating
expenses of $56.6 million is primarily attributable to the acquisition of: a) 23
Office Properties in 1997 which resulted in $17.2 million of incremental
expenses; b) six Office Properties during the nine months ended September 30,
1996, which resulted in $5.7 million of incremental expenses; and c) 16 Office
Properties and four Retail Properties in the fourth quarter of 1996, which
resulted in $30.0 million of incremental expenses during the period.
Depreciation and amortization increased $21.5 million primarily due to the
acquisitions of Office Properties and Behavioral Healthcare Facilities. An
increase in interest expense of $23.8 million is primarily attributable to: (i)
$1.5 million of interest payable under the financing arrangement with
Northwestern Mutual Life Insurance Company, which was in place as of December
1996; (ii) $6.7 million of interest payable under LaSalle Note III, which was
assumed in the acquisition of the Greenway Plaza Portfolio transaction in
October 1996; (iii) $5.6 million of interest payable under the $200 million and
$235 million short-term notes with BankBoston, which were obtained in June and
August of 1997, respectively; (iv) $7.2 million of incremental interest payable
due to draws under the Credit Facility (average balance outstanding for nine
months ended September 30, 1997 and 1996 was $236.3 and $47.1, respectively);
and (v) $.7 million of interest payable under the Notes. All of the financing
arrangements, except for LaSalle Note III, were used to fund acquisitions. An
increase in corporate general and administrative expense of $6.4 million was
primarily attributable to incentive compensation awarded to the Operating
Partnership's executive officers and also to incremental costs associated with
the corporate operations of the Operating Partnership as a direct result of
recent property additions to the Operating Partnership's portfolio.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
The changes in operating results from year to year are primarily the result
of increases in the total square feet and number of rooms/guest nights of the
portfolio due to significant acquisitions made by the Operating Partnership. The
weighted average square feet of consolidated Office and Retail Properties for
the years ended December 31, 1996 and 1995, were approximately 9.5 and 6.5
million, respectively, which represents a 46.2% increase in net rentable square
feet. The weighted average number of rooms/guest nights for consolidated
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<PAGE> 55
Hotel Properties for the years ended December 31, 1996 and 1995, were
approximately 1,397 and 615, respectively, which represents a 127.2% increase in
rooms/guest nights.
The consolidated statement of operations for the year ended December 31,
1996 includes the results of operations of 53 Office Properties, six Retail
Properties, four Hotel Properties and interests in three Residential Development
Corporations for all or a portion of the year. The consolidated statement of
operations for the year ended December 31, 1995 includes the results of
operations of 30 Office Properties, two Retail Properties, three Hotel
Properties and interests in three Residential Development Corporations for all
or a portion of the year.
Revenues from rental properties increased approximately $78.5 million, or
63.6%, to $202.0 million for the year ended December 31, 1996, as compared to
$123.5 million for the year ended December 31, 1995. This increase is primarily
attributable to the acquisition of: (i) 23 Office Properties, one full-service
hotel property, and two destination health and fitness resorts during the year
ended December 31, 1996 which resulted in $35.5 million of incremental revenues;
and (ii) 20 Office Properties and three full-service hotel properties during
1995 which resulted in $43.9 million of incremental revenues; which was offset
by a $.9 million decrease in revenues from the Office Properties owned in 1994.
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. An increase in rental property operating expenses of $27.9
million, is primarily attributable to the acquisition of: (i) 23 Office
Properties, one full-service hotel, and two destination health and fitness
resorts during the year ended December 31, 1996 which resulted in $14.0 million
of incremental expenses; and (ii) 20 Office Properties and three full-service
hotel properties during 1995 which resulted in $14.1 million of incremental
expenses; which was offset by a $.2 million decrease in expense from the Office
Properties owned in 1994. Depreciation and amortization increased $12.8 million
primarily due to the property acquisitions during 1996 and 1995. An 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 between August 1995 and 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 Greenway Plaza Portfolio transaction. This increase was offset by
a $5.1 million decrease in interest expense on the Credit Facility, primarily
due to a lower average outstanding balance throughout the year. An increase in
corporate general and administrative expenses of $.9 million was attributable to
incremental costs associated with the corporate operations of the Operating
Partnership as a direct result of recent property additions to the Operating
Partnership's portfolio.
Income before minority interest and extraordinary item increased from $36.4
million for the year ended December 31, 1995 to $48.0 million for the year ended
December 31, 1996, an increase of $11.6 million, for the reasons discussed
above.
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994
The changes in operating results from year end December 31, 1995 to 1994
are primarily the result of increases in the total square feet of the Operating
Partnership's real estate portfolio due to significant acquisitions made
subsequent to May 5, 1994. The weighted average square feet of consolidated
properties for the year ended December 31, 1995 and 1994 were approximately 6.5
and 3.6 million, respectively, which represents an 80.6% increase.
The consolidated statement of operations for the year ended December 31,
1995 includes the results of operations of 30 Office Properties, two Retail
Properties, three Hotel Properties and interests in three Residential
Development Corporations for all or a portion of the year. The combined
statement of operations for the year ended December 31, 1994 includes the
results of operations of ten Office Properties, two Retail Properties and
interests in two Residential Development Corporations for all or a portion of
the year.
Revenues from rental properties increased approximately $55.9 million, or
82.7%, to $123.5 million for the year ended December 31, 1995, as compared to
$67.6 million for the year ended December 31, 1994. This increase is
attributable to: (i) an increase in revenue of $.8 million from the Office and
Retail Properties
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<PAGE> 56
owned as of May 5, 1994, which is offset by a $.7 million lease termination fee
received in July 1994 at Continental Plaza; (ii) the acquisition of six Office
Properties between May 5, 1994 and December 31, 1994 which resulted in $25.5
million of incremental revenue; and (iii) the acquisition of 20 Office
Properties and three Hotel Properties in 1995 which resulted in $30.3 million of
incremental revenue.
The increase in interest and other income of $5.2 million for the year
ended December 31, 1995, is primarily attributable to the $2.3 million net
profit from the sale of co-investment rights in the Ritz-Carlton Hotel Company,
interest income of $1.2 million and $.4 million due to the acquisition of the
Biltmore Note and Spectrum Center mortgage note, respectively, and interest
earned on a greater amount of short-term cash investments outstanding during
1995.
The decrease in lot sale revenue and corresponding increase in income from
investments in real estate mortgages and common stock of Residential Development
Corporations for the year ended December 31, 1995, is a result of a change in
accounting treatment resulting from the non-controlling interest held after the
Company's formation transactions. On a comparative basis, residential
development lot sale revenue increased approximately $1.0 million, or 10.4%, to
$10.6 million for the year ended December 31, 1995, compared to $9.6 million for
the year ended December 31, 1994. The increase was attributable to 150 lot
closings (Mira Vista -- 131 and Falcon Point -- 19) for the year ended December
31, 1995, as compared to 117 lot closings (Mira Vista -- 73 and Falcon
Point -- 44) for the year ended December 31, 1994. Residential development
expenses increased approximately $.7 million, or 13.2%, to $6.0 million for the
year ended December 31, 1995, as compared to $5.3 million for the year ended
December 31, 1994. The increase was attributable to the increased lot closings
discussed above and a $.5 million income tax provision incurred for the year
ended December 31, 1995, which was not required in 1994.
Total expenses increased $36.8 million, or 59.1%, to $99.1 million for the
year ended December 31, 1995, as compared to $62.3 million for the year ended
December 31, 1994. The increase in rental property operating expenses of $18.3
million is attributable to: (i) the acquisition of six Office Properties between
May 5, 1994 and December 31, 1994 which resulted in $9.6 million of incremental
expenses; (ii) the acquisition of 20 Office Properties and three Hotel
Properties in 1995 which resulted in $9.7 million of incremental expenses; and
(iii) offset by a $1.0 million decrease in expenses from the Office and Retail
Properties owned as of May 5, 1994. Depreciation and amortization increased $6.0
million due to the acquisitions in 1994 and 1995. The increase in interest
expense and amortization of deferred financing costs of $10.4 million and $1.5
million, respectively, is primarily attributable to an increase in borrowings
under the Operating Partnership's $150 million Credit Facility and the addition
of long-term debt pursuant to a financing arrangement with Nomura Asset Capital
Corporation ("Nomura"). The borrowings were used primarily to fund property
acquisitions. The increase in corporate general and administrative expenses of
$2.0 million was attributable to a complete year of Operating Partnership
operations in 1995 versus a partial year in 1994 and also, to incremental costs
associated with the corporate operations of the Operating Partnership as a
direct result of property additions to the Operating Partnership's portfolio.
These increases were offset by an aggregate decrease in cost of lot sales and
residential development operating expenses of $1.4 million as a result of the
non-controlling interest held after the Company's formation transactions.
Income before minority interest and extraordinary item increased from $11.0
million for the year ended December 31, 1994 to $36.4 million for the year ended
December 31, 1995, an increase of $25.4 million, for the reasons discussed
above.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $46.7 million and $25.5 million at September
30, 1997 and December 31, 1996, respectively. The increase is attributable to
$1,752.4 million and $134.7 million of cash provided by financing and operating
activities, respectively, offset by $1,865.9 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 ($761.8 million), the net borrowings under the Credit Facility and
borrowings under the short-term BankBoston notes ($711.5 million), and proceeds
from the Notes offering ($400.0 million). These sources were partially offset by
the distributions paid to partners ($93.2 million) and the distribution of
Crescent Operating shares to partners of the Operating Partnership ($11.9
million). The
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<PAGE> 57
cash inflow from operating activities is primarily attributable to: (i) property
operations; (ii) a decrease in restricted cash reserves for payment of real
estate taxes; and (iii) an increase in accounts payable which is primarily
attributable to 1997 acquisitions. The inflows from operating activities were
partially offset by an increase in other assets which is primarily attributable
to the purchase of the Magellan warrants ($12.5 million). The Operating
Partnership utilized $1,865.9 million of cash flow primarily in the following
investing activities: (i) the acquisition of 23 Office Properties and 91
Behavioral Healthcare Facilities ($1,356.3 million); (ii) notes receivable
($134.9 million) primarily attributable to the acquisition of a note receivable
secured by a hotel property ($6.3 million), the acquisition as a part of the
Carter-Crowley transaction of certain secured and unsecured promissory notes
relating primarily to the Dallas Mavericks ($56.1 million), loans to Crescent
Operating ($37.0 million), loans to DMPLP ($26.2 million) and loans to Houston
Area Development Corporation ($3.5 million); (iii) investments in unconsolidated
companies ($328.5 million) primarily attributable to DBL Holdings, Inc. ($12.6
million), Desert Mountain Development Corporation ($210.9 million), Woodland
Commercial Properties Company, L.P. ($38.6 million), and Woodlands Land
Development Company, L.P. ($41.2 million); and (iv) capital expenditures for
rental properties ($14.5 million) primarily attributable to non-recoverable
building improvements for the Office and Retail Properties, and replacement of
furniture, fixtures and equipment for the Hotel Properties; and (v) recurring
and non-recurring tenant improvement and leasing costs for the Office and Retail
Properties ($27.1 million).
Capital Activities: On February 14, 1997, the Company filed a shelf
registration with the Commission for an aggregate of $1.2 billion of common
shares, preferred shares and warrants exercisable for common shares. Securities
issued under the registration statement (an aggregate of $1,184 million to date)
were offered from time to time in amounts, at prices, and on terms that were
determined at the time of the offering. Net proceeds from the offerings of these
securities were used as described in the notes to the Financial Statements for
the Operating Partnership for the nine months ended September 30, 1997, included
herein, 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 April 28, 1997, the Company 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 to the Company after underwriting discount of $29.2 million and other
offering costs of $3.0 million were approximately $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 share, with gross proceeds of $12.9 million
(collectively, the "Offerings"). Net proceeds from the Offerings were
contributed to the Operating Partnership in exchange for an increased limited
partner interest.
In the second quarter of 1997, the Operating Partnership used net proceeds
of $593.5 million from the Offerings and approximately $314.7 million from
borrowings under the Credit Facility and $160.0 million of short-term borrowings
from BankBoston (i) to fund approximately $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 approximately $306.3 million
of the purchase price of the Carter-Crowley Portfolio acquired by the Operating
Partnership and (v) to fund the commitments of the Operating Partnership and
Crescent Operating related to the Magellan transaction totaling approximately
$419.7 million. The remaining $31.2 million has been used 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, the Company
sold 4,700,000 common shares at $31.5625 per share to UBS Securities, LLC for
approximately $148 million (approximately $145 million of net proceeds) ("UBS
Offering"). In the other transaction, 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's distribution rate. The Company may
complete the settlement for cash or common shares at its option. The net
proceeds, which were contributed to the Operating Partnership, were used to
repay borrowings under the Credit Facility.
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<PAGE> 58
In September 1997, the Notes along with the Company's cumulative preferred
stock and non-cumulative and junior preferred stock issuable under the Company's
shelf registration were assigned investment grade ratings from Moody's Investors
Service.
On October 8, 1997, the Company completed an offering ("October 1997
Offering") of 10,000,000 common shares at $39.00 per share. Net proceeds from
the October 1997 Offering to the Company after underwriting discount of $19.9
million were approximately $371.1 million (with other estimated offering costs
of $1.5 million). The net proceeds of $370.1 million, which were contributed to
the Operating Partnership, were used to partially repay approximately $325.1
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 with the
Commission for an aggregate of $1.5 billion of common shares, preferred shares
and warrants exercisable for common shares. Any securities issued under the
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
this shelf registration 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 offering of these securities are expected to
be contributed to the Operating Partnership to be 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, the Company sold 5,375,000
Common Shares to Merrill Lynch International for approximately $205 million and
received approximately $199.9 million in net proceeds. In the other transaction,
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 the Selling Shareholder 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's 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. If such
number of Common Shares is greater than the number of Settlement Shares as a
result of a decrease in the market price of the Common Shares, the Company will
deliver additional Common Shares to Merrill Lynch International. 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.
In August 1997, the Operating Partnership completed the construction of a
Class A office building in Austin, Texas for approximately $9.6 million. The
project was financed through a construction loan, which was repaid in September
1997 from proceeds of the September 1997 Notes Offering.
Additional development commitments of the Operating Partnership consist of
two parking garages, with construction costs in total estimated at $19.1
million. Currently, the Operating Partnership has incurred approximately $5.4
million for the development of the two garages which has been funded through
cash flow provided by operating activities.
Indebtedness. The existing indebtedness of the Operating Partnership as of
December 31, 1997, is set forth in the table below:
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<PAGE> 59
<TABLE>
<CAPTION>
BALANCE
INTEREST RATE AT OUTSTANDING
MAXIMUM DECEMBER 31, EXPIRATION AT DECEMBER 31,
DESCRIPTION BORROWINGS 1997 DATE 1997
----------- ---------- ---------------- ---------- -------------------
<S> <C> <C> <C> <C>
SECURED FIXED RATE DEBT:
LaSalle Note I(1)................. $ 239,000,000 7.83% August 2027 $ 239,000,000
LaSalle Note II(2)................ 161,000,000 7.79% March 2028 161,000,000
CIGNA Note(3)..................... 63,500,000 7.47% December 2002 63,500,000
Northwestern Life Note(4)......... 26,000,000 7.66% January 2004 26,000,000
Metropolitan Life Note I(5)(6).... 12,136,000 8.88% September 2001 12,109,000
Nomura Funding VI Note(6)(7)...... 8,700,000 10.07% July 2020 8,691,000
Metropolitan Life Note II(8)...... 45,000,000 6.93% January 2003 45,000,000
Rigney Promissory Note(9)......... 800,000 8.50% June 2012 800,000
-------------- ------ --------------
Subtotal/Weighted
Average................. $ 556,136,000 7.75% $ 556,100,000
-------------- ------ --------------
SECURED VARIABLE RATE DEBT:
LaSalle Note III(6)(10)........... $ 115,000,000 8.07% July 1999 $ 115,000,000
Chase Manhattan Note(11).......... 97,123,000 7.69% September 2001 97,123,000
-------------- ------ --------------
Subtotal/Weighted
Average................. $ 212,123,000 7.90% $ 212,123,000
-------------- ------ --------------
UNSECURED FIXED RATE DEBT:
September Notes due 2002(12)...... $ 150,000,000 6.63% September 2002 $ 150,000,000
September Notes due 2007(12)...... 250,000,000 7.13% September 2007 250,000,000
-------------- ------ --------------
Subtotal/Weighted
Average................. $ 400,000,000 6.94% $ 400,000,000
-------------- ------ --------------
UNSECURED VARIABLE RATE DEBT:
Line of Credit(13)................ $ 550,000,000 7.14% June 2000 $ 350,000,000
BankBoston Bridge Loan(14)........ 150,000,000 7.14% March 1998 91,900,000
BankBoston Note(14)............... 100,000,000 7.14% August 1998 100,000,000
-------------- ------ --------------
Subtotal/Weighted
Average................. $ 800,000,000 7.14% $ 541,900,000
-------------- ------ --------------
TOTAL/WEIGHTED AVERAGE.... $1,968,259,000 7.38% $1,710,123,000
============== ====== ==============
</TABLE>
- ---------------
(1) The note provides for the payment of interest only through August 2002,
followed by principal amortization based on a 25-year amortization schedule
through maturity. 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 million. The LaSalle Note I is secured
by the Properties owned by Funding I. See "Structure of the Operating
Partnership." The note or loan 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 or loan
agreement), canceling a material claim or debt owed to it, entering into an
affiliate transaction (except as specifically permitted in the note or loan
agreement), distributing funds derived from operation of the Properties
securing the note (except as specifically permitted in the note or loan
agreement), or creating easements with respect to the Properties securing
the note.
(2) The note provides for the payment of interest only through March 2003,
followed by principal amortization based on a 25-year amortization schedule
through maturity. 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 million. The LaSalle Note II is secured
by the Properties owned by Funding II. See "Structure of the Operating
Partnership." The note or loan 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 or loan
agreement), canceling a material claim or debt owed to it, entering into an
affiliate transaction (except as specifically permitted in the note or loan
agreement), distributing funds derived from operation of the Properties
securing the note (except as specifically permitted in the note or loan
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 MCI Tower and Denver Marriott City Center. The note or loan
agreement has no negative covenants.
(4) The note requires payments of interest only during its term. The
Northwestern Life Note is secured by 301 Congress Avenue. The note or loan
agreement requires a subsidiary of the Operating Partnership to maintain
compliance with a number of customary covenants, including maintaining the
Property that secures the note in compliance with applicable laws and not
creating any other liens against such Property.
(5) The note requires monthly payments of principal and interest and is secured
by five of The Woodlands Office Properties. The note or loan agreement has
no negative covenants.
(6) The note was assumed in connection with an acquisition and was not
subsequently retired by the Operating Partnership because of prepayment
penalties.
(7) 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 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 or loan agreement
requires Funding VI to
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<PAGE> 60
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.
(8) The note requires principal and interest to be payable based on a 25-year
amortization schedule through maturity, at which time the outstanding
principal balance is due and payable. The Met Life note is secured by
Energy Centre. The note or loan 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.
(9) The note requires quarterly payments of principal and interest based on a
15-year amortization schedule through maturity. The note is secured by a
parcel of land located across from an Office Property. The note or loan
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 or loan 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 or loan agreement), canceling or releasing a material
claim or debt owed to it, or distributing funds derived from operation of
the Properties securing the note (except as specifically permitted in the
note or loan agreement).
(11) The note bears interest at the rate for 30-day LIBOR plus 1.75 basis points
and requires payment of interest only during its term. The Chase Manhattan
Bank note is secured by Fountain Place. The note or loan agreement has no
negative covenants.
(12) The September Notes are unsecured and require payments of interest only
during their terms. The interest rate on the September Notes is subject to
temporary increase by 50 basis points in the event that the Exchange Offer
is not consummated or a shelf registration statement with respect to the
resale of the September Notes declared effective by the Commission on or
before March 21, 1998. The interest rate on the September 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 do not continue to be assigned an
Investment Grade Rating by specified rating agencies. These adjustments may
apply simultaneously.
(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 interest only during its term.
The note or loan agreement has no negative covenants.
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.................................................. 724,772
</TABLE>
Based on the Company's total market capitalization of $6.4 billion at
September 30, 1997 (at a $40.00 share price, which was the closing price of the
common shares on the NYSE on September 30, 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 28% of its
total market capitalization. The Operating Partnership currently intends to
maintain a conservative capital structure with total debt targeted at 40% of
total market capitalization.
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 shareholders and unitholders. To the extent the Operating
Partnership's cash flow from operating activities is not sufficient to finance
non-recurring capital expenditures, such as investment property acquisition
costs or tenant improvement and leasing costs related to previously unoccupied
space, the Operating Partnership expects to finance such activities with
proceeds available under 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
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<PAGE> 61
unsecured borrowings and the issuance of debt securities and/or additional
equity securities of the Company or Operating Partnership.
The Company intends to maintain its qualification as a real estate
investment trust ("REIT") under the Internal Revenue Code of 1986, as amended
(the "Code"). As a REIT, the Company will generally not be subject to corporate
federal income taxes as long as it satisfies certain technical requirements of
the Code, including the requirement to distribute 95% of its taxable income to
its shareholders.
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 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. The aggregate cash distributions
paid to partners for the nine months ended September 30, 1997 and 1996 were
$93.2 and $47.6 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.
STATEMENTS OF FUNDS FROM OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1997 1996
------------ -----------
<S> <C> <C>
Income before minority interests............................ $ 84,266 $ 26,735
Adjustments:
Depreciation and amortization of real estate assets....... 49,434 28,488
Adjustment for investments in real estate mortgages and
common stock of unconsolidated companies............... 2,107 1,473
Minority interest in joint ventures....................... (1,192) (955)
------------ -----------
Funds from operations....................................... $ 134,615 $ 55,741
============ ===========
Weighted average common shares outstanding and issuable in
exchange for units........................................ 100,592,573 58,116,124
</TABLE>
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<PAGE> 62
RECONCILIATION OF FUNDS FROM OPERATIONS TO NET CASH PROVIDED
BY OPERATING ACTIVITIES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1997 1996
-------- -------
<S> <C> <C>
Funds from operations....................................... $134,615 $55,741
Adjustments:
Depreciation and amortization of non-real estate assets... 905 578
Amortization of deferred financing costs.................. 2,157 2,065
Minority interest in joint ventures profit and
depreciation and amortization of real estate assets.... 1,693 1,228
Adjustment in investments in real estate mortgages and
common stock of unconsolidated companies............... (2,107) (1,473)
Change in deferred rent receivable........................ (14,432) (2,932)
Change in current assets and liabilities.................. 11,994 (5,345)
Other..................................................... (95) (272)
-------- -------
Net cash provided by operating activities................... $134,730 $49,590
======== =======
</TABLE>
RATIOS OF EARNINGS TO FIXED CHARGES
The Operating Partnership's ratio of earnings to fixed charges for the nine
months ended September 30, 1997 and for the years ended December 31, 1996 and
1995 and the period from May 4, 1994 to December 31, 1994 were 2.42, 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> 63
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 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, 1996.
OFFICE PROPERTIES
The Office Properties are located primarily in Dallas/Fort Worth and
Houston, Texas. The Operating Partnership's office properties in Dallas/Fort
Worth and Houston will represent, after giving effect to the Pending Investments
in office properties and the investments in Office Properties completed after
January 1, 1997, an aggregate of approximately 74% of its office portfolio based
on total net rentable square feet (41% and 33% for Dallas/Fort Worth and
Houston, respectively) and, on a pro forma basis, after giving effect to the
Pending Investments in office properties and the investments in Office
Properties completed after January 1, 1997, as if they had occurred on January
1, 1997, would have accounted for approximately 75% of Office Property rental
revenues (44% and 31%, respectively) for the nine months ended September 30,
1997.
The following table sets forth certain information about the Office
Properties as of September 30, 1997, assuming completion of the Pending
Investments in office properties and including the investments in Office
Properties completed after September 30, 1997. Based on annualized base rental
revenues from office leases in place as of September 30, 1997 and assuming
completion of the Pending Investments in Office Properties and including the
investments in Office Properties completed after September 30, 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) Significant Tenants(2)
- ----------------------------- ------------------ --------- ----------- ------- ------------ ----------------------------
<S> <C> <C> <C> <C> <C> <C>
TEXAS
DALLAS
The Crescent Office
Towers.................. Uptown/Turtle 1985 1,210,899 98% $ 25.86 --
Creek
Fountain Place(3)......... CBD 1986 1,200,266 94 14.90 Hunt Consolidated
Trammell Crow Center(4)... CBD 1984 1,128,331 83(5) 23.25 Jones, Day, Reavis and Pogue
Bank One Center(3)(6)..... CBD 1987 1,530,957 70 19.52 Bank One Texas, N.A.; Vial,
Hamilton, Koch & Knox, LLP
Stemmons Place............ Stemmons Freeway 1983 634,381 89 13.45 Aetna Life Insurance Company
Spectrum Center(7)........ Far North Dallas 1983 598,250 93 16.84 Federal Deposit Insurance
Corp.; Frito-Lay, Inc.
Waterside Commons......... Las Colinas 1986 458,739 100 13.72 Sprint Communications
Company L.P.
Caltex House.............. Las Colinas 1982 445,993 96 23.43 Caltex Petroleum Corporation
Reverchon Plaza........... Uptown/Turtle 1985 374,165 92(5) 14.75 BloomFCA!, Inc.; Pusker
Creek Gibbon Chapin, Inc.
The Aberdeen.............. Far North Dallas 1986 320,629 100 17.31 Tricon Restaurant Services
Group, Inc.
MacArthur Center I & II... Las Colinas 1982/1986 294,069 99 17.02 Federal Home Loan Bank of
Dallas
Stanford Corporate
Centre.................. Far North Dallas 1985 265,507 100 14.74 TENET Healthcare, Inc.
The Amberton.............. Central Expressway 1982 255,052 79 10.58 Pacific Southwest Bank,
F.S.B.
Concourse Office Park..... LBJ Freeway 1972-1986 244,879 90 11.61 --
12404 Park Central........ LBJ Freeway 1987 239,103 63(5) 15.59 Steak & Ale Restaurant
Corporation
</TABLE>
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<PAGE> 64
<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) Significant Tenants(2)
- ----------------------------- ------------------ --------- ----------- ------- ------------ ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Palisades Central II...... Richardson/Plano 1985 237,731 100 15.05 United States Data
Corporation; Northern
Telecom, Inc.; Lyons
Partnership, L.P.
3333 Lee Parkway.......... Uptown/Turtle 1983 233,484 39(5) 17.38 PageMart Wireless, Inc.
Creek
Liberty Plaza I & II...... Far North Dallas 1981/1986 218,813 100 12.82 Intecom, Inc.; Anthem Group
Services Corporation
The Addison............... Far North Dallas 1981 215,016 100 14.95 Comp USA, Inc.
The Meridian.............. LBJ Freeway 1984 213,915 97 12.89 OpenConnect Systems
Incorporated
Palisades Central I....... Richardson/Plano 1980 180,503 100 13.40 ITEX Corporation
Walnut Green.............. Central Expressway 1986 158,669 97 13.05 Cinemark USA, Inc.
Greenway II............... Richardson/Plano 1985 154,329 100 19.02 Northern Telecom, Inc.
Addison Tower............. Far North Dallas 1987 145,886 97 12.84 --
5050 Quorum............... Far North Dallas 1981 133,594 96(5) 14.10 --
Cedar Springs Plaza....... Uptown/Turtle 1982 110,923 89 15.00 Larkin, Meeder & Scheiwdel,
Creek Inc.
Greenway IA............... Richardson/Plano 1983 94,784 100 14.31 Northern Telecom, Inc.
Valley Centre............. Las Colinas 1985 74,861 99 13.18 --
Greenway I................ Richardson/Plano 1983 51,920 100 14.31 Northern Telecom, Inc.
One Preston Park.......... Far North Dallas 1980 40,525 87 13.37 --
----------- ---- -------
Subtotal/Weighted
Average............... 11,466,173 89% $ 17.69
----------- ---- -------
FORT WORTH
Continental Plaza......... CBD 1982 954,895 54%(5) $ 15.99 Burlington Northern Santa Fe
----------- ---- -------
Railroad
HOUSTON
Greenway Plaza Office
Portfolio(8)............ Richmond/Buffalo 1969-1982 4,286,277 82%(5) $ 13.63 The Coastal Corporation
Speedway
Houston Center(9)......... CBD 1974-1983 2,764,418 92 14.14 --
Post Oak Central(9)(10)... West Loop/Galleria 1974-1981 1,277,516 95 13.93 Apache Corporation
The Woodlands Office
Properties(11).......... The Woodlands 1980-1996 812,227 94 14.48 --
Three Westlake Park(12)... Katy Freeway 1983 414,251 100 13.58 Amoco Production Company
U.S. Home Building(3)..... West Loop/Galleria 1982 399,777 87 16.84 --
----------- ---- -------
Subtotal/Weighted
Average............... 9,954,466 88% $ 14.01
----------- ---- -------
AUSTIN
Frost Bank Plaza.......... CBD 1984 433,024 74% $ 16.79 --
301 Congress Avenue(13)... CBD 1986 418,338 95 22.90 IBM Corporation; Lumberman's
Investment Corporation
Bank One Tower............ CBD 1974 389,503 95 15.68 Texas Workers' Compensation
Insurance Fund
Austin Centre(3).......... CBD 1986 343,664 85 17.99 Investors Life Insurance
Company of North America
The Avallon............... Northwest 1993/1997 232,301(14) 79(5) 17.04 BMC Software, Inc.
Barton Oaks Plaza One..... Southwest 1986 99,792 94 19.30 Iguana Entertainment, Inc.
----------- ---- -------
Subtotal/Weighted
Average.............. 1,916,622 86% $ 18.29
----------- ---- -------
COLORADO
DENVER
MCI Tower................. CBD 1982 550,807 98% $ 17.10 Atlantic Richfield Company
Ptarmigan Place........... Cherry Creek 1984 418,565 82(5) 15.58 Janus Capital Corporation
Regency Plaza One......... DTC 1985 309,862 86 20.40 Nextel Communications
AT&T Building............. CBD 1982 169,610 92 13.65 AT&T Corp.
The Citadel............... Cherry Creek 1987 130,652 98 19.03 --
55 Madison................ Cherry Creek 1982 125,690 87 15.47 --
44 Cook................... Cherry Creek 1984 119,366 79(5) 17.82 Allmerica Financial
----------- ---- -------
Subtotal/Weighted
Average.............. 1,824,552 90% $ 17.06
----------- ---- -------
COLORADO SPRINGS
Briargate Office and
Research Center......... Colorado Springs 1988 252,857 100% $ 15.23 The Principal Mutual Life
----------- ---- -------
Insurance Company
FLORIDA
MIAMI
Miami Center.............. Downtown/CBD 1983 782,686 78% $ 23.50 --
----------- ---- -------
</TABLE>
-59-
<PAGE> 65
<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) Significant Tenants(2)
- ----------------------------- ------------------ --------- ----------- ------- ------------ ----------------------------
<S> <C> <C> <C> <C> <C> <C>
ARIZONA
PHOENIX
Two Renaissance Square.... Downtown/CBD 1990 476,373 89% $ 23.31 Lewis & Roca
6225 North 24th Street.... Camelback Corridor 1981 86,451 67 21.24 Employee Solutions, Inc.
----------- ---- -------
Subtotal/Weighted
Average.............. 562,824 85% $ 22.99
----------- ---- -------
LOUISIANA
NEW ORLEANS
1615 Poydras.............. CBD 1984 508,741 75% $ 14.62 FM Service Company
Energy Centre(3).......... CBD 1984 761,500 77 14.63 --
----------- ---- -------
Subtotal/Weighted
Average.............. 1,270,241 76% $ 14.63
----------- ---- -------
NEBRASKA
OMAHA
Central Park Plaza........ CBD 1982 409,850 100% $ 13.21 Acceptance Insurance
----------- ---- -------
Company; First National
Bank of Omaha
NEW MEXICO
ALBUQUERQUE
Albuquerque Plaza......... CBD 1990 366,236 94% $ 18.26 U.S. West Communications;
----------- ---- -------
Rodey, Dickason, Sloan,
Akin & Robb, P.A.
CALIFORNIA
SAN FRANCISCO
160 Spear Street.......... South of 1984 276,420 83% $ 22.66 Providian National
Market/CBD
----------- ---- -------
Bancorp; Sedwick
James of California, Inc.
SAN DIEGO
Chancellor Park(15)....... UTC 1988 195,733 86%(5) $ 20.64 Van Camp Seafood
----------- ---- -------
Company
TOTAL WEIGHTED
AVERAGE.............. 30,233,555 87%(5) $ 16.54
=========== ==== =======
</TABLE>
- ---------------
(1) Calculated based on base rent payable as of September 30, 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) Identifies tenants with leases that contributed 20% or more of total rental
revenue paid at the Property as of September 30, 1997, on an annualized
basis. These tenants have been separately identified because of the
Operating Partnership's dependence on these tenants for a significant
portion of its revenues from the identified Property. In addition to the
listed tenants, tenants at the Office Properties include numerous tenants
that do not, on an individual basis, contribute significantly to revenues
from the Office Properties and that operate in a variety of industries.
Many of those tenants may be substantially less well-capitalized than the
listed tenants.
(3) Acquired after September 30, 1997.
(4) 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.
(5) Leases have been executed at certain Office Properties but had not
commenced as of September 30, 1997. If such leases had commenced as of
September 30, 1997, the percent leased for Office Properties would have
been 91%. The total percent leased for such Properties would have been as
follows: Trammell Crow Center -- 87%; Reverchon Plaza -- 99%; 12404 Park
Central -- 100%; 3333 Lee Parkway -- 99%; 5050 Quorum -- 99%; Continental
Plaza -- 100%; Greenway Plaza Office Portfolio -- 85%; The Avallon -- 100%;
Ptarmigan Place -- 95%; 44 Cook -- 95%; and Chancellor Park -- 91%.
(6) The Operating Partnership has a 50% general partner interest in the
partnership that owns Bank One Center.
(7) 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.
(8) Consists of 10 Office Properties.
(9) Consists of three Office Properties.
(10) Represents a Pending Investment.
(11) 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.
(12) The Operating Partnership owns the principal economic interest in Three
Westlake Park through its ownership of a mortgage note secured by Three
Westlake Park.
(13) The Operating Partnership has a 1% general partner and a 49% limited
partner interest in the partnership that owns 301 Congress Avenue.
(14) 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.
(15) 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.
-60-
<PAGE> 66
The following table provides information for the Office Properties by
state, city and submarket as of September 30, 1997, assuming completion of the
Pending Investments in office properties and including the investments in Office
Properties completed after September 30, 1997.
<TABLE>
<CAPTION>
PERCENT
PERCENT OF LEASED AT OFFICE
TOTAL TOTAL OPERATING SUBMARKET
OPERATING OPERATING PARTNERSHIP PERCENT OPERATING OFFICE
NUMBER OF PARTNERSHIP PARTNERSHIP OFFICE LEASED/ PARTNERSHIP SUBMARKET
STATE, CITY, SUBMARKET PROPERTIES NRA(1) NRA(1) PROPERTIES OCCUPIED(2) SHARE OF NRA(1)(2)
- --------------------------------- ---------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS A OFFICE PROPERTIES
TEXAS
DALLAS
CBD(6)........................ 3 3,859,554 14% 81%(7) 80% 21% $ 19.86
Uptown/Turtle Creek........... 4 1,929,471 7 89(7) 90 34 25.23
Far North Dallas.............. 7 1,897,695 7 97(7) 98 31 24.20
Las Colinas................... 4 1,273,662 5 98 96 19 25.67
Richardson/Plano.............. 5 719,267 3 100 99 21 21.07
Stemmons Freeway.............. 1 634,381 2 89 81 31 17.71
LBJ Freeway................... 2 453,018 2 79(7) 94 5 23.46
-- ----------- -- -- -- -- -------
Subtotal/Weighted Average... 26 10,767,048 36% 89% 89% 21% $ 22.39
-- ----------- -- -- -- -- -------
FORT WORTH
CBD........................... 1 954,895 3% 54%(7) 83% 23% $ 17.24
-- ----------- -- -- -- -- -------
HOUSTON
CBD........................... 3 2,764,418 10% 92% 98% 11% $ 15.63
Richmond/Buffalo Speedway..... 4 1,994,274 7 95 93 51 16.39
The Woodlands................. 7 486,140 2 95 100 100 15.01
Katy Freeway.................. 1 414,251 1 100 99 15 18.55
West Loop/Galleria(6)......... 4 1,677,293 1 93 94 13 18.18
-- ----------- -- -- -- -- -------
Subtotal/Weighted Average... 19 7,336,376 24% 94% 94% 16% $ 16.54
-- ----------- -- -- -- -- -------
AUSTIN
CBD(6)........................ 4 1,584,529 5% 87% 90% 44% $ 20.89
Northwest..................... 1 232,301 1 79(7) 100 10 22.47
Southwest..................... 1 99,792 0 94 95 9 23.76
-- ----------- -- -- -- -- -------
Subtotal/Weighted Average... 6 1,916,622 6% 86% 92% 27% $ 21.23
-- ----------- -- -- -- -- -------
COLORADO
DENVER
Cherry Creek.................. 4 794,273 3% 85%(7) 93% 37% $ 19.34
CBD........................... 2 720,417 2 97 92 7 17.77
DTC........................... 1 309,862 1 86 88 7 23.20
-- ----------- -- -- -- -- -------
Subtotal/Weighted Average... 7 1,824,552 6% 90% 91% 11% $ 19.38
-- ----------- -- -- -- -- -------
COLORADO SPRINGS................ 1 252,857 1% 100% 95% 7% $ 17.30(8)
-- ----------- -- -- -- -- -------
FLORIDA
MIAMI
Downtown/CBD.................. 1 782,686 3% 78% 91% 23% $ 26.27
-- ----------- -- -- -- -- -------
ARIZONA
PHOENIX
Downtown/CBD.................. 1 476,373 2% 89% 90% 27% $ 21.21
Camelback Corridor............ 1 86,451 0 67 94 3 24.34
-- ----------- -- -- -- -- -------
Subtotal/Weighted Average... 2 562,824 2% 85% 92% 12% $ 23.18
-- ----------- -- -- -- -- -------
LOUISIANA
NEW ORLEANS
CBD(6)........................ 2 1,270,241 4% 76% 87% 14% $ 15.52
-- ----------- -- -- -- -- -------
NEBRASKA
OMAHA
CBD........................... 1 409,850 1% 100% 94% 32% $ 18.29
-- ----------- -- -- -- -- -------
NEW MEXICO
ALBUQUERQUE
CBD........................... 1 366,236 1% 94% 93% 31% $ 18.40
-- ----------- -- -- -- -- -------
<CAPTION>
WEIGHTED
AVERAGE OPERATING
QUOTED PARTNERSHIP
MARKET QUOTED
RENTAL RENTAL
RATE PER RATE PER
SQUARE SQUARE
STATE, CITY, SUBMARKET FOOT(2)(3) FOOT(4)
- --------------------------------- ----------- -----------
<S> <C> <C>
CLASS A OFFICE PROPERTIES
TEXAS
DALLAS
CBD(6)........................ $ 22.54 $ 19.17
Uptown/Turtle Creek........... 29.22 22.06
Far North Dallas.............. 23.21 15.45
Las Colinas................... 23.18 17.85
Richardson/Plano.............. 21.01 15.34
Stemmons Freeway.............. 16.00 13.45
LBJ Freeway................... 21.24 14.32
------- -------
Subtotal/Weighted Average... $ 23.42 $ 18.08
------- -------
FORT WORTH
CBD........................... $ 17.00 $ 15.99
------- -------
HOUSTON
CBD........................... $ 15.31 $ 14.14
Richmond/Buffalo Speedway..... 16.50 15.49
The Woodlands................. 15.01 14.88
Katy Freeway.................. 18.55 13.58
West Loop/Galleria(6)......... 18.00 14.58
------- -------
Subtotal/Weighted Average... $ 16.41 $ 14.63
------- -------
AUSTIN
CBD(6)........................ $ 20.47 $ 18.38
Northwest..................... 21.00 17.04
Southwest..................... 22.00 19.30
------- -------
Subtotal/Weighted Average... $ 20.61 $ 18.29
------- -------
COLORADO
DENVER
Cherry Creek.................. $ 19.81 $ 16.42
CBD........................... 16.87 16.29
DTC........................... 25.00 20.40
------- -------
Subtotal/Weighted Average... $ 19.51 $ 17.06
------- -------
COLORADO SPRINGS................ $ 17.50 $ 15.23
------- -------
FLORIDA
MIAMI
Downtown/CBD.................. $ 26.00 $ 23.50
------- -------
ARIZONA
PHOENIX
Downtown/CBD.................. $ 21.50 $ 23.31
Camelback Corridor............ 21.97 21.24
------- -------
Subtotal/Weighted Average... $ 21.57 $ 22.99
------- -------
LOUISIANA
NEW ORLEANS
CBD(6)........................ $ 15.50 $ 14.63
------- -------
NEBRASKA
OMAHA
CBD........................... $ 18.50 $ 13.21
------- -------
NEW MEXICO
ALBUQUERQUE
CBD........................... $ 18.50 $ 18.26
------- -------
</TABLE>
-61-
<PAGE> 67
<TABLE>
<CAPTION>
PERCENT
PERCENT OF LEASED AT OFFICE
TOTAL TOTAL OPERATING SUBMARKET
OPERATING OPERATING PARTNERSHIP PERCENT OPERATING OFFICE
NUMBER OF PARTNERSHIP PARTNERSHIP OFFICE LEASED/ PARTNERSHIP SUBMARKET
STATE, CITY, SUBMARKET PROPERTIES NRA(1) NRA(1) PROPERTIES OCCUPIED(2) SHARE OF NRA(1)(2)
- --------------------------------- ---------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
CALIFORNIA
SAN FRANCISCO
South of Market/CBD........... 1 276,420 1% 83% 98% 3% $ 31.04
-- ----------- -- -- -- -- -------
SAN DIEGO
UTC........................... 1 195,733 1% 86%(7) 94% 7% $ 24.90
-- ----------- -- -- -- -- -------
CLASS A OFFICE PROPERTIES
SUBTOTAL/WEIGHTED
AVERAGE................... 69 26,916,340 89% 88% 92% 17% $ 20.36
== =========== == == == == =======
CLASS B OFFICE PROPERTIES
TEXAS
DALLAS
Central Expressway............ 2 413,721 1% 85% 82% 11% $ 15.37
LBJ Freeway................... 1 244,879 1 90 93 2 16.94
Far North Dallas.............. 1 40,525 0 87 90 1 18.97
-- ----------- -- -- -- -- -------
Subtotal/Weighted Average... 4 699,125 2% 87% 90% 3% $ 17.37
-- ----------- -- -- -- -- -------
HOUSTON
Richmond/Buffalo Speedway..... 6 2,262,611 8% 71%(7) 73% 54% $ 15.29
The Woodlands................. 5 326,087 1 92 94 100 14.29
-- ----------- -- -- -- -- -------
Subtotal/Weighted Average... 11 2,618,090 9% 73% 74% 58% $ 15.22
-- ----------- -- -- -- -- -------
CLASS B OFFICE PROPERTIES
SUBTOTAL/WEIGHTED
AVERAGE................... 15 3,317,215 11% 76% 87% 13% $ 16.99
== =========== == == == == =======
CLASS A AND CLASS B OFFICE
PROPERTIES TOTAL/WEIGHTED
AVERAGE................... 84 30,233,555 100% 87%(7) 91% 17% $ 19.99
== =========== == == == == =======
<CAPTION>
WEIGHTED
AVERAGE OPERATING
QUOTED PARTNERSHIP
MARKET QUOTED
RENTAL RENTAL
RATE PER RATE PER
SQUARE SQUARE
STATE, CITY, SUBMARKET FOOT(2)(3) FOOT(4)
- --------------------------------- ----------- -----------
<S> <C> <C>
CALIFORNIA
SAN FRANCISCO
South of Market/CBD........... $ 29.30 $ 22.66
------- -------
SAN DIEGO
UTC........................... $ 24.36 $ 20.64
------- -------
CLASS A OFFICE PROPERTIES
SUBTOTAL/WEIGHTED
AVERAGE................... $ 20.31 $ 17.01
======= =======
CLASS B OFFICE PROPERTIES
TEXAS
DALLAS
Central Expressway............ $ 17.12 $ 11.53
LBJ Freeway................... 17.00 11.61
Far North Dallas.............. 17.00 13.37
------- -------
Subtotal/Weighted Average... $ 17.07 $ 11.66
------- -------
HOUSTON
Richmond/Buffalo Speedway..... $ 14.00 $ 12.01
The Woodlands................. 14.29 13.89
------- -------
Subtotal/Weighted Average... $ 14.04 $ 12.24
------- -------
CLASS B OFFICE PROPERTIES
SUBTOTAL/WEIGHTED
AVERAGE................... $ 14.68 $ 12.12
======= =======
CLASS A AND CLASS B OFFICE
PROPERTIES TOTAL/WEIGHTED
AVERAGE................... $ 20.16 $ 16.54
======= =======
</TABLE>
- ---------------
(1) NRA means net rentable area in square feet assuming completion of the
Pending Investment in the West Loop/Galleria submarket and including the
investments in Office Properties completed after September 30, 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 Corporation (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 Miami-Downtown/CBD; Phoenix-Downtown/CBD
and Camelback Corridor and San Francisco-South of Market/CBD submarkets),
Pacific Realty Group, Inc. (for the Omaha-CBD submarket), Koll Market
Research (for the Albuquerque-CBD submarket) and John Burnham & Co. (for the
San Diego-UTC submarket).
(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 September 30, 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 September 30, 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 September 30, 1997, in the submarket as of
September 30, 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) Includes two properties acquired in the Dallas CBD submarket, one property
acquired in the Houston West Loop/Galleria submarket, one property acquired
in the Austin CBD submarket and one property acquired in the New Orleans CBD
submarket after September 30, 1997. Includes the Pending Investment in the
Houston West Loop/Galleria submarket.
(7) Leases have been executed at certain Office Properties in these submarkets
but had not commenced as of September 30, 1997. If such leases had commenced
as of September 30, 1997, the percent leased for all Office Properties in
the Operating Partnership's submarkets would have been 91%. The total
percent leased at the Office Properties would have been as follows: Dallas
CBD -- 83%; Dallas Uptown/Turtle Creek -- 98%; Far North Dallas -- 98%;
Dallas LBJ Freeway -- 96%; Fort Worth CBD -- 100%; Austin Northwest -- 100%;
Denver Cherry Creek -- 94%; San Diego UTC -- 91%; and Houston
Richmond/Buffalo Speedway(Class B) -- 75%.
(8) Represents weighted average quoted triple-net rental rates per square foot,
adjusted based on management estimates, to equivalent full-service quoted
rental rates.
-62-
<PAGE> 68
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 September 30, 1997(1), for each of
the 10 years beginning with the remainder of 1997, assuming that none of the
tenants exercises renewal options and excluding an aggregate of 3,960,206 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>
1997........................ 198 794,414 3.0% $13,668,966 2.9% $17.21
1998........................ 488 2,399,903 9.2 36,387,774 7.8 15.16
1999........................ 412 3,306,030 12.6 55,623,836 11.9 16.82
2000........................ 346 3,395,199 13.0 57,026,417 12.2 16.80
2001........................ 276 3,417,705 13.1 60,541,060 12.9 17.71
2002........................ 224 3,055,446 11.7 57,022,230 12.2 18.66
2003........................ 68 1,440,218 5.5 24,755,137 5.3 17.19
2004........................ 58 2,609,729 10.0 50,455,688 10.8 19.33
2005........................ 39 1,924,163 7.3 34,788,957 7.4 18.08
2006........................ 18 425,933 1.6 8,704,203 1.9 20.44
2007 and thereafter......... 38 3,407,070 13.0 68,655,290 14.7 20.15
</TABLE>
- ---------------
(1) Includes five Office Properties acquired after September 30, 1997 and the
Pending Investment in the West Loop/Galleria submarket.
(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.
-63-
<PAGE> 69
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 1996, and at September 30, 1997, for Class A office properties
in all submarkets in which the Operating Partnership has invested or has Pending
Investments in Class A office properties.
CLASS A OFFICE
VACANCY AND QUOTED MARKET RENT
FOR ALL OPERATING PARTNERSHIP SUBMARKETS
[CHART]
<TABLE>
<CAPTION>
MEASUREMENT PERIOD AVG. RENT(1) VACANCY
(FISCAL YEAR COVERED)
<S> <C> <C>
1992........................................................ $16.10 16.9%
1993........................................................ 15.72 16.1
1994........................................................ 16.14 12.6
1995........................................................ 16.94 11.4
1996........................................................ 18.47 10.5
9/30/97..................................................... 20.31 8.5
</TABLE>
- ---------------
(1) Weighted average based on total net rentable square feet of Class A office
properties in all Operating Partnership submarkets.
Source: Compiled from third-party sources.
-64-
<PAGE> 70
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, Inc. 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 $78.3 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.
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; (v) a trend toward limiting employee mental health benefits, such as
reductions in annual and lifetime limits on mental health coverage and (vi)
pricing pressure related to an increasing rate of claims denials by third party
payers.
The following chart sets forth the locations of the 90 Behavioral
Healthcare Facilities by state:
<TABLE>
<CAPTION>
NUMBER OF
STATE FACILITIES
----- ----------
<S> <C> <C>
Alabama 2
Arkansas 2
Arizona 2
California 9
Delaware 1
Florida 10
Georgia 12
Indiana 8
Kansas 2
Kentucky 4
Louisiana 2
Maryland 1
Minnesota 1
Missouri 1
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
STATE FACILITIES
----- ----------
<S> <C> <C>
Mississippi 2
North Carolina 4
New Hampshire 2
New Jersey 1
Nevada 1
Ohio 1
Pennsylvania 2
South Carolina 3
Tennessee 1
Texas 9
Utah 1
Virginia 4
Wisconsin 2
</TABLE>
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<PAGE> 71
HOTEL PROPERTIES
The following table sets forth certain information about the Hotel
Properties, including investments in Hotel Properties completed after September
30, 1997, for the nine months ended September 30, 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
-------------- -------------- --------------
NINE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED
YEAR SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
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 84% 83% $117 $107 $ 98 $ 89
Four Seasons Hotel --
Houston Houston, TX 1982 399 68 65 159 144 108 93
Hyatt Regency Albuquerque Albuquerque, NM 1990 395 75 79 99 92 74 72
Hyatt Regency Beaver
Creek() Avon, CO 1989 295 70 72 231 212 162 151
Sonoma Mission Inn & Spa(2) Sonoma, CA 1927/1987/1997 198 90 93 205 177 185 165
Ventana Country Inn(3) Big Sur, CA 1975/1982/1988 62 87 86 332 310 288 268
Omni Austin Hotel(3) Austin, TX 1986 314 78 76 103 102 81 77
----- -- --- ---- ---- ---- ----
TOTAL/WEIGHTED AVERAGE 2,276 77% 77% $147 $134 $113 $104
===== == === ==== ==== ==== ====
DESTINATION HEALTH AND FITNESS RESORTS
Canyon Ranch-Tucson Tucson, AZ 1980 250(4) 84%(5) 80%(5) $486(6) $467(6) $385(7) $354(7)
Canyon Ranch-Lenox Lenox, MA 1989 202(4) 81(5) 83(5) 446(6) 401(6) 353(7) 322(7)
----- -- --- ---- ---- ---- ----
TOTAL/WEIGHTED AVERAGE 452 83% 81% $468 $436 $370 $339
===== == === ==== ==== ==== ====
</TABLE>
- ---------------
(1) Because of the Company's status as a REIT for federal income tax purposes,
the Operating Partnership does not operate the Hotel Properties and has
leased the Hotel Properties to subsidiaries of Crescent Operating, Inc.
pursuant to long-term leases.
(2) Includes, for the period from July 1, 1997 through September 30, 1997, 30
additional rooms completed in July 1997.
(3) Acquired after September 30, 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.
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 Desert Mountain Development Corporation ("DMDC"), two
Residential Development Corporations formed to make investments in The Woodlands
and Desert Mountain, respectively. Crescent Operating, Inc. 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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<PAGE> 72
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 September 30, 1997, the Retail Properties
were 93% leased.
RECENT ACQUISITIONS
Since January 1, 1997, the Operating Partnership has completed
approximately $2,616.5 million in Property acquisitions and other investments.
The Property acquisitions include 28 Office Properties and one Retail Property
for approximately $1,149.7 million, 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
million, approximately 40.375% and approximately 88.35% interests in two
Residential Development Corporations that own two Residential Development
Properties for approximately $346.6 million, the Refrigerated Warehouse
Investment for approximately $401.6 million and a 42.5% partnership interest in
The Woodlands Commercial Properties Company, L.P. for approximately $97.8
million.
The following briefly describes the Operating Partnership's investments
since September 30, 1997.
U.S. Home Building. On October 15, 1997, the Operating Partnership acquired
the U.S. Home Building, a 21-story Class A office building located in the West
Loop/Galleria suburban office submarket of Houston, Texas, for approximately $45
million. The U.S. Home Building is located approximately five miles west of
downtown Houston and approximately 2.5 miles west of the Operating Partnership's
Greenway Plaza properties. Built in 1982, the building is located on
approximately 1.9 acres and contains approximately 400,000 net rentable square
feet. Major tenants of the U.S. Home Building include U.S. Home Corporation and
Nextel Communications, Inc.
Bank One Center. On October 22, 1997, the Operating Partnership, together
with affiliates of TrizecHahn Corporation ("Trizec"), acquired Bank One Center,
a 60-story Class A office building located in the CBD of Dallas, Texas, from two
unaffiliated entities. The acquisition was made through a newly formed limited
partnership in which the Operating Partnership and Trizec each own a 50%
interest, for an aggregate purchase price of approximately $238 million. Of the
approximately $238 million purchase price, approximately $83 million was funded
through capital contributions of $41.5 million from each of the Operating
Partnership and Trizec, and the remaining approximately $155 million was funded
through two loans provided by The Travelers Insurance Company. Construction of
the office property was completed in 1987. Situated on a 2.88-acre site, Bank
One Center contains approximately 1.5 million net rentable square feet.
Americold Corporation and URS Logistics, Inc. On October 31, 1997, the
Operating Partnership, through two newly formed subsidiaries (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.
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 79 refrigerated warehouses, with an aggregate of approximately 368
million cubic feet, that are operated pursuant to arrangements with national
food suppliers such as Tyson Foods, Kraft Foods, ConAgra and Pillsbury.
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The aggregate purchase price for the acquisition of Americold and URS was
approximately $1,004 million (including transaction costs associated with the
acquisition). Of this amount, the purchase price for the acquisition of
Americold was approximately $632 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 $367 million in retention of debt and approximately $2 million in
transaction costs), and the purchase price for the acquisition of URS was
approximately $372 million (consisting of approximately $173 million in cash for
the purchase of the equity, approximately $192 million in retention of debt and
approximately $7 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, Inc.
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 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.
Fountain Place. On November 7, 1997, the Operating Partnership acquired
Fountain Place, a 60-story Class A office building located in the CBD submarket
of Dallas, Texas, approximately three blocks west of the Operating Partnership's
Trammell Crow Center Office Property, for approximately $114 million. Built in
1986 and designed by renowned architect, I.M. Pei, the building, located on
approximately 1.8 acres, contains approximately 1.2 million net rentable square
feet. Major tenants of Fountain Place include Hunt Consolidated, the United
States Environmental Protection Agency, Jenkens & Gilchrist and Principal
Financial Securities, Inc.
Ventana Country Inn. On December 19, 1997, the Operating Partnership
acquired for approximately $30 million the Ventana Country Inn, a 62-room resort
hotel located in Big Sur, California. The Ventana Country Inn is located on a
243-acre wooded site in the foothills of the Santa Lucia Mountains overlooking
the Pacific Ocean. The purchase also includes an adjacent 72-acre undeveloped
land parcel offering the potential for single-family residential development.
Crescent Operating, Inc., pursuant to a lease with the Operating Partnership,
will market and operate the resort hotel jointly with the Operating
Partnership's Sonoma Mission Inn & Spa.
Energy Centre. On December 22, 1997, the Operating Partnership acquired
Energy Centre, a 39-story Class A office building located in the central
business district of New Orleans, Louisiana. Built in 1984, the building,
located on approximately 1.28 acres, contains approximately 761,500 net rentable
square feet. Energy Centre was acquired for approximately $75 million. Major
tenants of Energy Centre include Chaffe, McCall, Phillips, Toler & Sarpy,
L.L.P., Louisiana's oldest law firm, Legg Mason and Montgomery, Barnett, Brown,
Reed, Hammond & Mintz.
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 $96.9 million. Austin Centre was developed in 1986,
and its major tenants include Investors Life Insurance of North America, HCD
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Austin Corporation and Texas Monthly, Inc. Crescent Operating, Inc., pursuant to
a lease with the Operating Partnership, will market and operate the hotel.
PENDING INVESTMENTS
Station Casinos, Inc. 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. 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 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, Inc. or another
affiliate established 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 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 million.
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, directors 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 third quarter
of 1998. 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.
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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, Inc.
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 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 an entity under its
control.
Post Oak Central. The Operating Partnership has entered into an agreement
to acquire Post Oak Central, a three-building Class A office complex 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.
COMPETITION
The Operating Partnership believes that it does not have a direct
competitor with its Office Properties considered as a group. In all of the
Operating Partnership's markets, however, the Office Properties 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 Class B properties). Many of these owners
and developers may own more than one property. In each of its core markets of
Dallas-Fort Worth, Houston and Austin, Texas and Denver, Colorado, the Operating
Partnership believes it owns office properties with a higher number of square
feet than most of its competitors. 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
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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.
When the Operating Partnership made the Refrigerated Warehouse Investment,
Americold and URS were the two largest operators of refrigerated warehouses in
the country. As a result, the Operating Partnership believes that the combined
companies do not have any competitors of comparable size.
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.
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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 approximately 365 employees. None of the
employees are covered by collective bargaining agreements. The Operating
Partnership believes that its relationships with its employees are satisfactory.
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
contaminations 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
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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.
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 Common Shares outstanding, 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.
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<PAGE> 79
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 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's Board of Trust Managers 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
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<PAGE> 80
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
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 question,
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> 81
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 35 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 and the Company
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 40 Vice President, Corporate Leasing of the General
Partner
John M. Walker, Jr. N/A 47 Vice President, Acquisitions 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 January 31, 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 1990 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, the world's largest hospital company. Mr. Rainwater serves as a
director of Pioneer Natural Resources ("Pioneer"), one of the largest oil and
gas
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<PAGE> 82
companies in the United States. In 1996, Mr. Rainwater led a recapitalization of
Mesa, Inc. (Pioneer's predecessor), and a partnership wholly owned by Mr.
Rainwater became the controlling shareholder in July 1996. Mr. Rainwater is also
Chairman of the Board and director of Crescent Operating, Inc. 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 1997, 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 Charter Behavioral Health Systems, Inc. Mr.
Goff is also Vice Chairman of the Board and director of Crescent Operating, Inc.
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, Inc. 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 eighteen 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,
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<PAGE> 83
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 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 own or are
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 their
inception in 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. For two and one-half years prior to joining CRC, 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. 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
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<PAGE> 84
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.) in Real Estate from the
University of Texas at Arlington in 1977 and earned the Certified Property
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.) from Harvard
University. Mr. Lovett has served as Vice President, Corporate Leasing since
June 1996.
John M. Walker, Jr., prior to joining the Company in 1995, practiced law
privately from 1976 to 1992. During 1993, he served as the Executive Vice
President and Chief Operating Officer of a corporate subsidiary of NHP, Inc., a
real estate asset and property management company, and was involved in several
personal business projects during 1994 and 1995. Mr. Walker currently serves as
a director of Walden Special Corp., a special purpose affiliate of Walden
Residential Properties, Inc. Mr. Walker earned a Bachelor of Arts (B.A.) degree
from Vanderbilt University. He also holds Juris Doctor (J.D.) and Master of
Business Administration (M.B.A.) degrees from Southern Methodist University. Mr.
Walker has served as Vice President, Acquisitions 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 Institute of
Real Estate Management. He received his Bachelor of Business Administration
(B.B.A.) 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, 1996
and 1995, respectively. The Company was organized in February 1994, and,
accordingly, did not pay any compensation to its executive officers for the
years prior to 1994. 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 Common Shares on a one-for-two basis 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> 85
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
OTHER ALL OTHER
ANNUAL RESTRICTED SECURITIES COMPEN-
NAME AND COMPEN- STOCK UNDERLYING LTIP SATION
PRINCIPAL POSITION(1) YEAR SALARY($) BONUS($) SATION($) AWARDS($) OPTIONS(#) PAYOUTS ($)(2)
- --------------------------- ---- --------- ---------- --------- ---------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gerald W. Haddock 1996 286,165 1,500,000 -- -- 2,000,000(3) -- 960
President and Chief 1995 200,000 125,000 -- -- 250,000 -- 1,005
Executive Officer(4) 1994(5) 104,500 90,000 -- 402,472 -- 800
John C. Goff 1996 286,165 1,500,000 -- -- 2,000,000(3) -- 960
Vice Chairman of the 1995 200,000 125,000 -- -- 250,000 -- 1,005
Board of Trust 1994(5) 104,500 90,000 -- 641,904 -- 800
Managers(6)
Dallas E. Lucas 1996 141,300 81,000 -- -- 120,000 -- 960
Senior Vice President 1995 131,250 52,500 -- 250,007(7) 60,000(8) -- 1,005
and Chief Financial 1994(5) 81,587 50,000 -- 58,000(9) -- 625
and Accounting
Officer
David M. Dean 1996 141,300 81,000 -- -- 120,000 -- 960
Senior Vice President, 1995 131,250 52,500 -- 100,015(7) 60,000(8) -- 1,005
Law and Secretary 1994(5) 52,083 15,000 -- 48,000(9) -- 521
James M. Eidson, Jr. 1996 138,740 331,000 -- -- 210,000 -- 960
Senior Vice President, 1995 117,949 392,442 273,758(10) -- 60,000(8) -- --
Acquisitions 1994(5) 53,125 -- -- -- -- -- --
</TABLE>
- ---------------
(1) Excludes James S. Wassel, who resigned from his position as an executive
officer and employee of the General Partner in April 1997. For 1996, 1995
and 1994, Mr. Wassel's salary was $200,000, $200,000 and $143,950,
respectively, and his bonus for each of such years was $110,000, $55,000
and $39,000, respectively. Had the Company been in existence during the
entire period of 1994, Mr. Wassel's base salary would have been $200,000.
In addition, the Company issued 1,196 Units valued at $16.75 (a total of
$20,033) to Mr. Wassel in 1995 as non-cash bonus compensation. In 1995 and
1996, the Company granted Mr. Wassel options to purchase 10,000 and 60,000
Common Shares, respectively. The 10,000 options were granted in 1995 based
on Mr. Wassel's performance in 1994.
(2) All amounts in this column represent matching contributions to the Crescent
Real Estate Equities, Ltd. 401(k) Plan.
(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) Had the Company been in existence during the entire period of 1994, base
salaries would have been $160,000, $160,000, $125,000, $125,000 and $85,000
for Messrs. Haddock, Goff, Lucas, Dean and Eidson, respectively.
(6) Mr. Goff served as Chief Executive Officer of the Company from the
Company's inception in 1994 to December 19, 1996.
(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 shares underlying options granted in March 1996 based on
individual's performance in 1995.
(9) Includes 8,000 shares underlying options granted in 1995 based on
individual's performance in 1994.
(10) The Company issued 19,044 Units valued at $14.375 to Mr. Eidson as non-cash
bonus compensation.
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<PAGE> 86
OPTION GRANTS IN 1996
The following table provides certain information regarding options granted
to the named executive officers for the year ended December 31, 1996.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE AT
ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM*
OPTIONS EMPLOYEES IN OR BASE EXPIRATION -------------------
GRANTED(#) FISCAL YEAR PRICE($/SH.) DATE 5% 10%
NAME(1) ------------ ------------ ------------ ------------------ -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Gerald W. Haddock......... 2,000,000(2) 41.2% $17.5625 July 2006 $ 22,090 $55,980
John C. Goff.............. 2,000,000(2) 41.2% $17.5625 July 2006 $ 22,090 $55,980
Dallas E. Lucas........... 120,000(3) 2.5% $21.8125 November 2006 $ 1,646 $ 4,172
David M. Dean............. 120,000(3) 2.5% $21.8125 November 2006 $ 1,646 $ 4,172
James M. Eidson, Jr....... 210,000(4) 4.3% $20.5982 July/November 2006(4) $ 2,720(4) $ 6,894(4)
</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. Haddock's grant results in a share price of $28.61 per
share and a 10% growth rate, compounded annually, results in a share price
of $45.55 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) Excludes James S. Wassel, who resigned from his position as an executive
officer and employee of the General Partner in April 1997. For 1996, the
Company granted options to purchase 60,000 Common Shares to Mr. Wassel,
representing 1.2% of the total options granted to employees for 1996. The
options had an exercise price of $21.8125 per Common Share and, due to Mr.
Wassel's resignation, expired in April 1997. The "potential realizable
value" of such options (see above note explaining the calculation thereof)
at a 5% and 10% assumed annual rate of stock price appreciation for the
option term was $823,000 and $2,086,000 respectively.
(2) 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. Plan Options relating to 1,500,000 Common
Shares vest in equal one-seventh installments on July 16, 1997, 1998, 1999,
2000, 2001, 2002 and 2003; Plan Options relating to 500,000 Common Shares
vested on January 8, 1997.
(3) Vest in equal one-fifth installments on November 19, 1997, 1998, 1999, 2000
and 2001.
(4) Options relating to 150,000 Common Shares (i) vest in equal one-fifth
installments on November 19, 1997, 1998, 1999, 2000 and 2001, (ii) have an
expiration date of November 2006 and (iii) have a potential realizable
value of $2,058,000 and $5,215,000 based on 5% and 10%, respectively,
assumed annual rates of stock price appreciation for the option term.
Options relating to the remaining 60,000 Common Shares (i) vest in equal
one-fifth installments on July 16, 1997, 1998, 1999, 2000 and 2001, (ii)
have an expiration date of July 2006 and (iii) have a potential realizable
value of $662,000 and $1,679,000 based on 5% and 10%, respectively, assumed
annual rates of stock price appreciation for the option term.
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<PAGE> 87
OPTION EXERCISES AND VALUES AT DECEMBER 31, 1996
The following table provides information about option exercises by the
named executive officers in the last fiscal year and options held by each of
them at December 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
SHARES FISCAL YEAR END(#) AT FISCAL YEAR END($)(4)
ACQUIRED ON VALUE ---------------------------- ---------------------------
NAME(1) EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------- ----------- ----------- ----------- ------------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Gerald W. Haddock....... -- -- 893,314(2) 1,759,158(3) $ 9,543 $16,494
John C. Goff............ -- -- 1,052,936(2) 1,838,968(3) $11,758 $17,602
Dallas E. Lucas......... -- -- 34,933 203,067 $ 484 $ 1,477
David M. Dean........... -- -- 21,600 206,400 $ 289 $ 1,513
James M. Eidson, Jr..... -- -- -- 270,000 -- $ 1,824
</TABLE>
- ---------------
(1) Excludes James S. Wassel, who resigned from his position as an executive
officer and employee of the General Partner in April 1997. At December 31,
1996, Mr. Wassel held exercisable options to acquire 2,000 Common Shares and
unexercisable options to acquire 128,000 Common Shares. The value of the
unexercised in-the-money options held by Mr. Wassel at December 31, 1996 was
$27,000 for exercisable options and $683,000 for unexercisable options. As a
result of Mr. Wassel's resignation, all exercisable options must be
exercised by April 1998, and all unexercisable options lapsed.
(2) The number of securities underlying exercisable but unexercised options
includes 500,000 Common Shares. Such Common Shares may be issued following
exercise of Plan Options for Plan Units on a one-for-one basis and, assuming
shareholder approval of Exchange Rights for such Plan Units, the exchange of
Plan Units for Common Shares on a one-for-two basis.
(3) The number of securities underlying unexercisable and unexercised options
includes 1,500,000 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, assuming shareholder approval of Exchange Rights for such Plan Units,
the exchange of Plan Units for Common Shares on a one-for-two 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, 1996 (the last
trading day of the fiscal year) on the New York Stock Exchange of $26.375,
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
Noncompetition Agreements described below. See " -- Agreements Not to Compete,"
below. The Employment Agreements for Messrs. Goff and Haddock provide 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. 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. The term of
each of the Employment Agreements expires on April 14, 1998, 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.
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<PAGE> 88
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 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. 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.
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, 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 officer 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 Compensation
Committee. The Compensation Committee is composed of two trust managers, each of
whom is an outside trust manager.
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<PAGE> 89
PRINCIPAL SHAREHOLDERS
The following table sets forth the beneficial ownership of Common Shares
and Units for (i) each shareholder of the Company who beneficially owns more
than 5% of the Common Shares or Units; (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 and all Units are owned directly by the listed
beneficial owner.
<TABLE>
<CAPTION>
PERCENT OF
NUMBER PERCENT NUMBER PERCENT NUMBER OF SHARES
NAME AND ADDRESS OF OF OF OF OF SHARES AND AND
BENEFICIAL OWNER(1) SHARES(2) SHARES(3) UNITS(2) UNITS(3) UNITS(2) UNITS(3)
------------------- --------- --------- --------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard E. Rainwater............ 7,065,912 (4)(5) 5.9% 6,822,962(5) 54.2% 13,888,874 11.0%
John C. Goff.................... 1,006,997 (4)(6) 0.8% 1,484,400(7) 6.1% 2,491,397 2.1%
Gerald W. Haddock............... 652,472 (4)(6) 0.6% 1,227,124(8) 4.1% 1,881,302 1.6%
Dallas E. Lucas................. 106,284 (4)(6)(9) * -- * 106,284 *
David M. Dean................... 83,741 (4)(6)(9) * -- 83,741 *
James M. Eidson, Jr............. 87,052 (4)(6) * -- 87,052 *
FMR Corp........................ 7,837,800 (10) 6.6% -- * 7,837,800 6.0%
82 Devonshire Street
Boston, Massachusetts 02109
Cohen & Steers Capital.......... 6,154,800 (11) 5.2% -- * 6,154,800 4.7%
Management, Inc.
757 Third Avenue
New York, New York 10017
Director and Executive Officers
as a Group (14 persons(12))... 9,180,148 (4)(5)(6) 7.6% 9,537,070(5)(7)(8) 68.1% 18,717,218 14.3%
(9)(13)
</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 February 9, 1998 unless otherwise indicated. All
information as to number of Units reflects the number of Common Shares
issuable (on a one-for-two basis) upon exchange of Units, assuming the
availability of Exchange Rights of all Units. As of such date, 118,190,005
Common Shares and 12,582,974 Units were outstanding. 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
February 9, 1998 upon exercise of options to purchase Common Shares
("Options") granted pursuant to the Company's 1994 Stock Incentive Plan and
the Amended 1995 Plan or, 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). The total number of Units
outstanding represents approximately 9.6% 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 exchange of Units
(assuming the availability of Exchange Rights for all Units) for 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.
For purposes of computing the percentage of outstanding Units and the
percentage of outstanding Common Shares and Units held by each person, all
Units that such person has the right to acquire within 60 days upon the
exchange of Units (assuming the availability of Exchange Rights for all
Units) for Common Shares on a one-for-two basis are deemed to be
outstanding.
(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.
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<PAGE> 90
Goff -- 891,904; Gerald W. Haddock -- 652,472; Dallas E. Lucas -- 87,200;
David M. Dean -- 77,600; James M. Eidson, Jr. -- 66,000; and Director and
Executive Officers as a Group -- 3,089,150.
(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 1,780 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 128,368 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 September 30, 1997 as follows: John C.
Goff -- 1,563; Gerald W. Haddock -- 1,706; Dallas E. Lucas -- 886; David M.
Dean -- 1,029; James M. Eidson, Jr. -- 604; and Director and Executive
Officers as a Group -- 12,772.
(7) The number of Units beneficially owned by John C. Goff includes 152,560
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 four years. Mr. Lucas and Mr. Dean each
has sole voting power with respect to all such restricted shares owned by
him.
(10) As reported in the Form 13F-E filed November 14, 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 7,476,300 Common Shares, none of which it has the power
to vote. In addition to such 7,476,300 Common Shares, Fidelity Management
Trust Company ("Fidelity Management"), a wholly owned subsidiary of FMR
Corp., is the beneficial owner of 361,500 Common Shares, each of which it
has the sole power to vote. As reported in the Schedule 13G dated February
14, 1997, filed by FMR Corp., Fidelity is the beneficial owner of 6,648,800
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 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 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 6,648,800 Common Shares,
Fidelity Management is the beneficial owner of 271,000 Common Shares as a
result of its serving as investment manager of the institutional
account(s). Edward C. Johnson III, Abigail Johnson
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<PAGE> 91
and FMR Corp., through its control of Fidelity Management Trust Company,
have sole voting and dispositive power over such 271,000 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 and Form 13F-E filed by FMR Corp.
(11) As reported in the Form 13-F for the quarter ended September 30, 1997 filed
by Cohen & Steers Capital Management, Inc. ("Cohen & Steers"), Cohen &
Steers has sole power to vote or to direct the vote of 5,441,000 Common
Shares. As reported in the Schedule 13G dated March 7, 1996, filed by Cohen
& Steers, Cohen & Steers has sole power to vote or direct the vote of
4,555,600 Common Shares and sole power to dispose of or direct the
disposition of 5,321,200 Common Shares. All information presented herein
relating to Cohen & Steers is based on the Schedule 13G and Form 13-F filed
by Cohen & Steers.
(12) Excludes James S. Wassel, who resigned from his position as an executive
officer and employee of the General Partner in April 1997. As of May 9,
1997, Mr. Wassel was the beneficial owner of 2,908 Common Shares, including
2,000 Common Shares attributable to the vesting of options and 1,196 Units.
In addition, this amount includes 908 Common Shares owned by Mr. Wassel at
December 31, 1996 through participation in the Company's 401(k) Plan.
(13) 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 four
years. Each such executive officer has sole voting power with respect to
all restricted shares owned by him.
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<PAGE> 92
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the formation of the Company in 1994, operating
businesses affiliated with Richard E. Rainwater (the "Rainwater Group") and
Rosewood Property Company ("Rosewood") received, in the aggregate, 6,474,288
Units, 617,392 shares of the Company's Common Stock (the "Common Stock") and
cash payments in the amount of $7,500,000. Based on their respective ownership
interests in various members of the Rainwater Group, the portion of such
consideration allocable at that time to Richard E. Rainwater, John C. Goff and
Gerald W. Haddock, each of whom was a director and executive officer of the
Company, was: (i) 3,425,270, 385,058 and 270,318 Units, respectively, and (ii)
253,131, 55,565 and 6,174 shares of Common Stock, respectively. Rosewood and
RRCC Limited Partnership, a member of the Rainwater Group that owned in 1994 and
1995 in excess of 5% of the outstanding Common Shares and Units, received in the
formation of the Company 1,384,299 and 2,475,342 Units, respectively.
In 1994, Rosewood, which contributed (directly or indirectly) two
properties to the Operating Partnership in connection with the formation
transactions, and its affiliates leased approximately 164,120 square feet of
space in the Crescent Facilities representing approximately 12.6% of the
rentable area of the Company's properties and 3.2% of the aggregate rentable
area of the Company's portfolio of 12 Class A office properties and two retail
centers.) Total rental payments with respect to this space were approximately
$3,300,000 for the year ended December 31, 1994.
In 1994, RRCC Limited Partnership leased 22,281 square feet of space in the
Company's properties (representing approximately 2.0% of the rentable area of
the properties and 4% of the aggregate rentable area of the Company's 12 Class A
office properties and two retail centers). Total rental payments with respect to
this space were approximately $800,000 for the year ended December 31, 1994.
In connection with the formation transactions, the Company assumed the
lease by Rainwater, Inc., a corporation wholly-owned by Mr. Rainwater, of
approximately 23,000 square feet of space in Continental Plaza (representing
approximately 2.4% of the rentable area of Continental Plaza and 0.4% of the
aggregate rentable area of the Company's 12 Class A office properties and two
retail centers). Total rental payments with respect to this space were
approximately $412,000 for the year ended December 31, 1994. The Company also
assumed the lessor's obligation to sublease a portion of Continental Plaza to
affiliates of Mr. Rainwater and received total rental payments with respect to
the subleased space of approximately $83,988 for the year ended December 31,
1994.
Certain of the Company's properties were managed by affiliates of the
Rainwater Group until May 1994. Management, security, leasing and other fees
earned by these affiliates in connection with the management of these properties
was $900,000 for the year ended December 31, 1994. In addition, the Rainwater
Group reimbursed affiliates for various operating expenses paid to third parties
on its behalf.
During the period August 5, 1994 through November 7, 1994, the Operating
Partnership made a loan totaling approximately $390,000 to Houston Area
Development Corp., bearing interest at 14.5% per annum and repayable following
the receipt of certain proceeds related to the creation of certain municipal
utility districts covering parts of the Houston Area Development Corp.'s land
developments. This loan has been repaid in full.
In 1994, John C. Goff, a director and executive officer of the Company,
purchased a lot in the Mira Vista Residential Development Property for a price
of $80,000, equal to approximately 50% of its list price.
In 1994, James S. Wassel, an executive officer of the Company, received a
short-term bridge loan from the Company in the amount of $135,000. The loan was
part of Mr. Wassel's relocation allowance, and was used to purchase a personal
residence in Dallas before the sale of his personal residence in New Jersey
closed. The loan was funded on July 11, 1994, did not bear interest, and was
repaid in full on August 10, 1994.
In connection with the second public offering of the Company's Common
Shares in April 1995 (the "April 1995 Offering"), Mr. Rainwater 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.
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<PAGE> 93
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 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 trust manager of the Company, and 91% by
the asset managers of these companies and other persons. Effective July 31,
1997, subsidiaries of Crescent Operating, Inc. (the "Hotel Lessees") acquired
each of these companies. The terms of the leases of the Hotel Properties were
not modified in connection with the acquisition. 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. As part of each of the lease agreements for five of the Hotel
Properties, the Operating Partnership has agreed to fund all capital
expenditures relating to furniture, fixtures and equipment reserves required
under the applicable management agreements. The only exception is Canyon
Ranch-Tucson, in which the Hotel Lessee of such property owns all furniture,
fixtures and equipment associated with the property and will fund all related
capital expenditures. 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 room revenues above a specified
amount and (iii) a percentage of gross food and beverage revenues above a
specified amount. Under the leases, the former hotel lessees paid an aggregate
of $15,881,117 in rent to the Operating Partnership during 1996. 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.
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 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.
Effective March 14, 1996, July 17, 1996 and June 10, 1997, the Operating
Partnership loaned to Morton H. Meyerson, Anthony M. Frank and Paul E. Rowsey
III, respectively, independent trust managers of the Company, $187,425, $187,425
and $419,997, 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
Amended 1995 Plan. Each of Messrs. Meyerson and Frank used the proceeds of the
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 Messrs. Meyerson and Frank
on May 5, 1994 under the 1994 Plan. Mr. Rowsey used the proceeds, of his loan,
together with $300.00 in cash, to acquire 30,000 Common Shares pursuant to the
exercise of 30,000 options granted to him on May 5, 1994 under the 1994 Plan and
$28.00 in cash to acquire 2,800 Common Shares pursuant to the exercise of 2,800
options granted to him on March 14, 1996 under the Amended 1995 Plan. Each of
the loans bears interest at a fixed annual rate equal to the dividend yield on
the Common Shares as of March 14, 1996 (for Mr. Meyerson's loan), July 17, 1996
(for Mr. Frank's loan) and June 10, 1997 (for Mr. Rowsey's loan), the effective
date of the applicable loan. Each loan is payable, interest only, on a quarterly
basis from dividends 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 (for Mr. Meyerson's loan), July 17, 2001 (for Mr.
Frank's loan) and June 10, 2002 (for
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Mr. Rowsey's loan). Mr. Meyerson's loan is secured by 7,500 Units owned by Mr.
Meyerson, Mr. Frank's loan is secured by 15,000 Common Shares owned by Mr. Frank
and Mr. Rowsey's loan is secured by 32,800 Common Shares owned by Mr. Rowsey. In
addition, effective March 14, 1997, the Operating Partnership loaned Mr.
Meyerson $45,311 on a recourse basis, and Mr. Meyerson used the proceeds of the
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 Mr. Meyerson on March 14,
1996 under the Amended 1995 Plan. The loan bears interest at a fixed annual rate
equal to the dividend yield on the Common Shares as of March 14, 1997, is
secured by the 2,800 Common Shares, and is payable, interest only, on a
quarterly basis from distributions paid with respect to such 2,800 Common
Shares, with a final payment of all accrued and unpaid interest plus the entire
original principal balance due on March 14, 2002.
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). Mr. Rainwater is currently
the holder of approximately 8.8% 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 Participating
Non-Voting Convertible Preferred Stock 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 preferred stock of Fresh Choice. The Series B
preferred stock also is convertible into shares of the common stock or Series A
Voting Participating Convertible Stock of Fresh Choice on a one-for-one basis
(and, under certain conditions relating to the earnings of Fresh Choice, 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 Company 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 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 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 compounded quarterly).
During the pendency of the Fresh Choice Option, Mr. Rainwater retains sole
beneficial ownership of the Fresh Choice Shares unless and until the Fresh
Choice Shares are sold. Prior to selling any of the Fresh Choice 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 Shares but must remit to
the Operating Partnership the cash proceeds from the sale, net of his investment
cost in the Fresh Choice Shares sold. Also on August 11, 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., whereby Crescent assigned to Rainwater, Inc.
the Series C Stock Option with respect to 80,000 shares of Series C preferred
stock covered by that option.
On June 17, 1997, the Operating Partnership acquired, for an aggregate
purchase price of approximately $399.7 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, Inc. was formed by
the Operating Partnership (through a spin-off of shares of Crescent Affiliate to
all shareholders of the Company
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and limited partners of the Operating Partnership at the time of the spin-off).
Messrs. Rainwater, Goff and Haddock are directors of Crescent Operating, Inc.
and serve as executive officers of Crescent Operating, Inc. (in the same
capacities as for the Company). Crescent Operating, Inc. and Magellan formed
CBHS to operate the Behavioral Healthcare Facilities. Crescent Operating, Inc.
and Magellan each have a 50% interest in CBHS, subject to dilution of up to 5%
each in connection with future incentive compensation of management of 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) for annual minimum rent of approximately $41.7 million,
increasing annually at a 5% compounded annual rate.
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.
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 of the voting and non-voting common stock
of DBL for an aggregate purchase price of approximately $2,500,000 and loaned
DBL approximately $10,100,000. The voting common stock, which represents a 5%
economic interest in DBL, was subsequently sold to Gerald W. Haddock and John C.
Goff for $12,600. On June 11, 1997, DBL acquired the limited partner interest in
the partnership that owns the Dallas Mavericks for $12,500,000.
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:
(13)
<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, 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, 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.
(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
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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.
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.
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AVAILABLE INFORMATION
The Operating Partnership has filed with the Commission a Registration
Statement, of which this Prospectus constitutes 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.
EXPERTS
The consolidated financial statements of the Operating Partnership as of
December 31, 1996 and 1995 and for each of the three years in the period ended
December 31, 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 (i) Carter-Crowley Operating Real Estate
Portfolio for the year ended December 31, 1996, (ii) Trammell Crow Center for
the year ended December 31, 1996, (iii) Fountain Place for the year ended
December 31, 1996 and the five month period ended May 31, 1997, (iv) Houston
Center for the year ended December 31, 1996 and the six month period ended June
30, 1997, (v) Miami Center for the year ended December 31, 1996 and the six
month period ended June 30, 1997, (vi) Bank One Center for the year ended
December 31, 1996 and the eight month period ended August 31, 1997 and (vii)
Energy Centre for the year ended December 15, 1996 and the nine month period
ended September 15, 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.
"Casino/Hotel Properties" means one of the Pending Investments that
includes four full-service casino/ hotels and two riverboat casinos owned by a
corporation that may be acquired by the Operating Partnership.
"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.
"Company" means Crescent Real Estate Equities Company, a Texas real estate
investment trust, unless the context requires otherwise.
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"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 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 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
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<PAGE> 102
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.
"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.
"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.
"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 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.
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<PAGE> 103
"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.
"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.
"Magellan" means Magellan Health Services, Inc., a subsidiary of which owns
50% of CBHS.
"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.
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<PAGE> 104
"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.
"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.
"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 investments in the Casino/Hotel
Properties and Post Oak Central.
"Pioneer" means Pioneer Natural Resources.
"1994 Plan" means the 1994 Crescent Real Estate Equities, Inc. Stock
Incentive Plan.
"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.
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<PAGE> 105
"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.
"Rainwater Group" means businesses associated with Richard E. Rainwater.
"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.
"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 constitutes 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.
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<PAGE> 106
"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.
"Rosewood" means Rosewood Property Company.
"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 has 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 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 the Selling
Shareholder.
"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.
"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
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<PAGE> 107
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 the
Selling Shareholder, pursuant to which the Selling Shareholder 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.
"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.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended.
"Trustee" means the 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.
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<PAGE> 108
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
FINANCIAL STATEMENTS FOR CRESCENT REAL ESTATE EQUITIES
LIMITED PARTNERSHIP
AS OF SEPTEMBER 30, 1997 (UNAUDITED)
Consolidated Balance Sheets as of September 30, 1997 and
December 31, 1996......................................... F-4
Consolidated Statements of Operations for the three and nine
months ended September 30,
1997 and 1996............................................. F-5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1997
and 1996.................................................. F-6
Notes to Financial Statements............................... F-7
FINANCIAL STATEMENTS FOR CRESCENT REAL ESTATE EQUITIES
LIMITED PARTNERSHIP
AS OF DECEMBER 31, 1996 (AUDITED)
Report of Independent Public Accountants.................... F-19
Consolidated Balance Sheets of Crescent Real Estate Equities
Limited Partnership as of December 31, 1996 and 1995...... F-20
Consolidated Statements of Operations of Crescent Real
Estate Equities Limited Partnership (successor to the
Rainwater Property Group) for the years ended December 31,
1996 and 1995, and for the period from May 5, 1994 to
December 31, 1994 and Combined Statement of Operations of
the Rainwater Property Group for the period from January
1, 1994 to
May 4, 1994............................................... F-21
Consolidated Statements of Partners' Capital of Crescent
Real Estate Equities Limited Partnership (successor to the
Rainwater Property Group) for the years ended December 31,
1996 and 1995, and for the period from May 5, 1994 to
December 31, 1994 and Combined Statement of Partners'
Deficit of the Rainwater Property Group for the period
from January 1, 1994 to May 4, 1994....................... F-22
Consolidated Statements of Cash Flows of Crescent Real
Estate Equities Limited Partnership (successor to the
Rainwater Property Group) for the years ended December 31,
1996 and 1995, and for the period from May 5, 1994 to
December 31, 1994 and Combined Statement of Cash Flows of
the Rainwater Property Group for the period from January
1, 1994 to May 4, 1994.................................... F-23
Notes to Financial Statements............................... F-24
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
Report of Independent Public Accountants.................... F-38
Combined Balance Sheets as of September 30, 1995 and 1996
(audited) and March 31, 1997 (unaudited).................. F-39
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-40
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-41
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-42
Notes to Combined Financial Statements...................... F-43
</TABLE>
F-1
<PAGE> 109
CARTER-CROWLEY OPERATING REAL ESTATE PORTFOLIO
Report of Independent Public Accountants.................... F-55
Statement of Excess of Revenues Over Specific Operating
Expenses for the Year Ended December 31, 1996 and the
Three Month Period Ended March 31, 1997(unaudited)........ F-56
Notes to Statement.......................................... F-57
TRAMMELL CROW CENTER
Report of Independent Public Accountants.................... F-60
Statement of Excess of Revenues Over Specific Operating
Expenses for the Year Ended December 31, 1996............. F-61
Notes to Statement.......................................... F-62
FOUNTAIN PLACE
Report of Independent Public Accountants.................... F-65
Statements of Excess of Revenues Over Specific Operating
Expenses for the Year Ended December 31, 1996, the Five
Month Period Ended May 31, 1997 and the Nine Month Period
Ended September 30, 1997 (unaudited)...................... F-66
Notes to Statements......................................... F-67
HOUSTON CENTER
Report of Independent Public Accountants.................... F-70
Statements of Excess of Revenues Over Specific Operating
Expenses for the Year Ended December 31, 1996 and the Six
Month Period Ended June 30, 1997.......................... F-71
Notes to Statements......................................... F-72
Schedules................................................... F-74
MIAMI CENTER
Report of Independent Public Accountants.................... F-77
Statements of Excess of Revenues Over Specific Operating
Expenses for the Year Ended December 31, 1996 and the Six
Month Period Ended June 30, 1997.......................... F-78
Notes to Statements......................................... F-79
BANK ONE CENTER
Report of Independent Public Accountants.................... F-81
Statements of Excess of Revenues Over Specific Operating
Expenses for the Year Ended December 31, 1996 and the
Eight Month Period Ended August 31, 1997.................. F-82
Notes to Statements......................................... F-83
ENERGY CENTRE
Report of Independent Public Accounts....................... F-85
Statement of Excess of Revenues Over Specific Operating
Expenses for Year Ended December 15, 1996 and the Nine
Month Period Ended September 15, 1997..................... F-86
Notes to Statements......................................... F-87
F-2
<PAGE> 110
<TABLE>
<S> <C>
STATION CASINOS, INC.
Report of Independent Public Accountants.................... F-89
Consolidated Balance Sheets as of March 31, 1997 and 1996... F-90
Consolidated Statements of Operations for the years ended
March 31, 1997, 1996 and 1995............................. F-91
Consolidated Statements of Stockholders' Equity for the
years ended March 31, 1997, 1996 and 1995................. F-92
Consolidated Statements of Cash Flows for the years ended
March 31, 1997, 1996 and 1995............................. F-93
Notes to the Consolidated Financial Statements.............. F-94
PRO FORMA FINANCIAL STATEMENTS FOR CRESCENT REAL ESTATE
EQUITIES LIMITED PARTNERSHIP (UNAUDITED)
Pro Forma Consolidated Balance Sheet as of September 30,
1997 and Notes Thereto.................................... F-112
Pro Forma Consolidated Statement of Operations for the Nine
Months Ended September 30, 1997 and Notes Thereto......... F-116
Pro Forma Consolidated Statement of Operations for the Year
Ended December 31, 1996 and Notes Thereto................. F-120
</TABLE>
F-3
<PAGE> 111
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS:
Investments in real estate:
Land................................................... $ 418,625 $ 146,036
Building and improvements.............................. 2,647,981 1,561,639
Furniture, fixtures and equipment...................... 47,137 24,951
Less -- accumulated depreciation....................... (256,204) (208,808)
---------- ----------
Net investment in real estate..................... 2,857,539 1,523,818
Cash and cash equivalents................................. 46,691 25,535
Restricted cash and cash equivalents...................... 32,462 36,882
Accounts receivable, net.................................. 23,980 15,330
Deferred rent receivable.................................. 30,649 16,217
Investments in real estate mortgages and common stock of
unconsolidated companies............................... 369,779 37,069
Notes receivable, net..................................... 166,323 31,405
Other assets, net......................................... 87,641 47,284
---------- ----------
Total assets...................................... $3,615,064 $1,733,540
========== ==========
LIABILITIES:
Borrowings under Credit Facility.......................... $ 316,500 $ 40,000
Notes payable............................................. 1,460,404 627,808
Accounts payable, accrued expenses and other
liabilities............................................ 88,230 48,462
---------- ----------
Total liabilities................................. 1,865,134 716,270
---------- ----------
MINORITY INTERESTS.......................................... 28,396 29,265
PARTNERS' CAPITAL
General partner........................................... 4,295 4,515
Limited partners.......................................... 1,717,239 983,490
---------- ----------
Total partners' capital........................... 1,721,534 988,005
---------- ----------
Total liabilities and partners' capital........... $3,615,064 $1,733,540
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 112
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- --------------------
1997 1996 1997 1996
--------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Office and retail properties................... $ 92,014 $43,255 $247,333 $120,080
Hotel properties............................... 9,032 5,051 26,453 13,775
Behavioral healthcare properties............... 13,824 -- 15,966 --
Interest and other income...................... 5,187 1,062 13,508 3,572
-------- ------- -------- --------
Total revenues......................... 120,057 49,368 303,260 137,427
-------- ------- -------- --------
EXPENSES:
Real estate taxes.............................. 10,607 5,077 28,229 13,454
Repairs and maintenance........................ 6,301 2,369 17,244 7,248
Other rental property operating................ 22,500 9,452 59,100 27,294
Corporate general and administrative........... 2,372 1,199 9,855 3,498
Interest expense............................... 23,075 11,843 54,687 30,861
Amortization of deferred financing costs....... 937 745 2,157 2,065
Depreciation and amortization.................. 20,549 11,058 50,840 29,339
-------- ------- -------- --------
Total expenses......................... 86,341 41,743 222,112 113,759
-------- ------- -------- --------
Operating income....................... 33,716 7,625 81,148 23,668
OTHER INCOME:
Equity in net income of unconsolidated
companies................................... 1,119 892 3,118 3,067
-------- ------- -------- --------
INCOME BEFORE MINORITY INTERESTS AND
EXTRAORDINARY ITEM............................. 34,835 8,517 84,266 26,735
Minority interests............................. (390) (635) (1,192) (955)
-------- ------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM................. 34,445 7,882 83,074 25,780
Extraordinary item............................. -- (1,599) -- (1,599)
-------- ------- -------- --------
NET INCOME....................................... $ 34,445 $ 6,283 $ 83,074 $ 24,181
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 113
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(NOTES 1 AND 2)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
------------------------
1997 1996
----------- ---------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 83,074 $ 24,181
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 52,997 31,404
Minority interest...................................... 1,192 955
Extraordinary item..................................... -- 1,599
Non-cash compensation.................................. 157 91
Equity in earnings in excess of distributions received
from unconsolidated subsidiaries...................... (252) (363)
Increase in accounts receivable........................ (8,650) (3,997)
Increase in deferred rent receivable................... (14,432) (2,932)
Increase in other assets............................... (24,068) (1,405)
Decrease in restricted cash and cash equivalents....... 4,944 1,451
Increase (decrease) in accounts payable, accrued
expenses and other liabilities........................ 39,768 (1,394)
----------- ---------
Net cash provided by operating activities......... 134,730 49,590
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of investment properties...................... (1,356,266) (173,091)
Capital expenditures -- rental properties................. (14,497) (4,504)
Tenant improvement and leasing costs -- rental
properties............................................. (27,121) (8,738)
(Increase) decrease in restricted cash and cash
equivalents............................................ (524) 1,682
Investment in unconsolidated subsidiaries................. (328,468) (18,924)
Escrow deposits -- acquisition of investment properties... (4,190) (6,350)
Increase in notes receivable.............................. (134,918) (11,573)
----------- ---------
Net cash used in investing activities............. (1,865,984) (221,498)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt financing costs...................................... (11,329) (4,317)
Borrowings under Credit Facility.......................... 612,500 172,500
Payments under Credit Facility............................ (336,000) (20,000)
Debt proceeds............................................. 990,696 124,638
Debt payments............................................. (158,100) (57,184)
Capital contributions -- joint venture.................... -- 750
Capital distributions -- joint venture.................... (2,061) (988)
Capital contributions to the Operating Partnership........ 761,826 1,574
Distribution of Crescent Operating, Inc. shares to limited
partners of Operating Partnership...................... (11,907) --
Distributions from the Operating Partnership.............. (93,215) (47,637)
----------- ---------
Net cash provided by financing activities......... 1,752,410 169,336
----------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 21,156 (2,572)
CASH AND CASH EQUIVALENTS,
Beginning of period....................................... 25,535 16,869
----------- ---------
CASH AND CASH EQUIVALENTS,
End of period............................................. $ 46,691 $ 14,297
=========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 114
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION:
Formation of the Operating Partnership and 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 May 5, 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 which owns an approximate 1% general partner interests in the
Operating Partnership ("CREE, Ltd."). 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 seven single purpose limited
partnerships (formed for the purpose of obtaining securitized debt). The term
"Operating Partnership" includes, unless context otherwise requires, CREELP and
other limited partnerships ("subsidiaries") of the Operating Partnership.
As of September 30, 1997, the Operating Partnership directly or indirectly
owned a portfolio of real estate assets (the "Properties") located primarily in
20 metropolitan submarkets in Texas and Colorado. The Properties include 76
office properties (the "Office Properties") with an aggregate of approximately
24.7 million net rentable square feet, 91 behavioral healthcare facilities
("Behavioral Healthcare Facilities"), five full-service hotels with a total of
1,900 rooms and two destination health and fitness resorts (the "Hotel
Properties"), seven retail properties (the "Retail Properties") with an
aggregate of approximately .8 million net rentable square feet, and real estate
mortgages and non-voting common stock representing economic interests ranging
from approximately 40% to 98% in five unconsolidated residential development
corporations (the "Residential Development Corporations"). The Operating
Partnership also, has a 42.5% partnership interest in an unconsolidated entity
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 September 30, 1997:
CREELP: The Addison, Addison Tower, The Amberton, AT&T
Building, Bank One Tower, Canyon Ranch-Tucson,
Cedar Springs Plaza, Central Park Plaza, Chancellor
Park(1), Concourse Office Park, Denver Marriott
City Center, Four Seasons Hotel-Houston, Frost Bank
Plaza, Greenway I and IA, Greenway II, Houston
Center Office Properties, MCI Tower, The Meridian,
Miami Center, One Preston Park, Palisades Central
I, Palisades Central II, The Park Shops in Houston
Center, Reverchon Plaza, Sonoma Mission Inn & Spa,
Spectrum Center(2), Stemmons Place, Three Westlake
Park(3), Trammell Crow Center(4), The Woodlands
Office Properties(5), The Woodlands Retail
Properties(5), Valley Centre, Walnut Green, 44
Cook, 55 Madison, 160 Spear Street, 301 Congress
Avenue(6), 1615 Poydras, 3333 Lee Parkway, 5050
Quorum, and 6225 North 24th Street
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
F-7
<PAGE> 115
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 Greenway Plaza Portfolio(7)
Funding III, IV, and V, L.P.:
("Funding III, IV and V")
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) CREELP 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.
(2) CREELP owns the principal economic interest in Spectrum Center through an
interest in the limited partnership which owns both a mortgage note secured
by Spectrum Center and the ground lessor's interest in the land underlying
the building.
(3) CREELP owns the principal economic interest in Three Westlake Park through
its ownership of a mortgage note secured by Three Westlake Park.
(4) CREELP 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.
(5) CREELP 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.
(6) CREELP owns a 49% limited partner interest and Crescent/301, L.L.C., a
wholly owned subsidiary of the CREE, Ltd. and CREELP, owns a 1% general
partner interest in 301 Congress Avenue, L.P., the partnership that owns 301
Congress Avenue.
(7) 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 unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In management's opinion, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation of the
unaudited interim financial statements have been included. Operating results for
interim periods reflected are not necessarily indicative of the results that may
be expected for a full fiscal year. These financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
of the Operating Partnership as of December 31, 1996 and 1995 and for each of
the three years in the period ended December 31, 1996.
F-8
<PAGE> 116
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUPPLEMENTAL DISCLOSURES TO STATEMENTS OF CASH FLOWS:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1997 1996
------- -------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid............................................. $52,594 $30,930
Supplemental schedule of noncash investing and financing
activities:
Minority interest -- joint venture capital................ $ -- $21,635
Issuance of limited partnership interests in conjunction
with property acquisition.............................. $ -- $27,056
</TABLE>
3. INVESTMENTS IN REAL ESTATE MORTGAGES AND COMMON STOCK 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 (see Note 1) has been
presented on an aggregated basis as of September 30, 1997.
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
------------------ ------------------
<S> <C> <C>
Total revenues.............................................. $27,685 $34,105
Total expenses.............................................. 26,247 30,853
------- -------
Net income.................................................. $ 1,438 $ 3,252
======= =======
Operating Partnership equity in net income of unconsolidated
companies................................................. $ 1,119 $ 3,118
======= =======
</TABLE>
4. NOTES PAYABLE AND BORROWINGS UNDER CREDIT FACILITY:
Following is a summary of the Company's Operating Partnership financing:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
Note payable to LaSalle National Bank, as Trustee for
Commercial Mortgage Pass-Through Certificates, Series
1995-MD IV ("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.............. $ 239,000
Note payable to LaSalle National Bank, as Trustee for
Commercial Mortgage Pass-Through Certificates, Series
1996-MD V ("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............. 161,000
Note payable to LaSalle National Bank, as Trustee for
Commercial Mortgage Pass-Through Certificates, Series
1994-MD II ("LaSalle Note III") due July 1999, bears
interest at 30-day LIBOR plus a weighted average rate of
2.135% (at September 30, 1997 the rate was 7.82% subject
to a rate cap of 10%) with a five-year interest-only term,
secured by the Funding III, IV and V properties........... 115,000
Note payable to Connecticut General Life Insurance Company
("CIGNA") due December 2002, bears interest at 7.47% with
a seven-year interest-only term, secured by the MCI Tower
and Denver Marriott City Center properties................ 63,500
</TABLE>
F-9
<PAGE> 117
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
Note payable to Northwestern Mutual Life Insurance Company
due January 2004, bears interest at 7.66% with a
seven-year interest-only term, secured by the 301 Congress
Avenue property........................................... 26,000
Note payable to Metropolitan Life Insurance Company due
September 2001, bears interest at 8.88% with monthly
principal and interest payments, secured by five of The
Woodlands Office Properties............................... 12,188
Note payable to Nomura Asset Capital Corporation ("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....................................... 8,716
Short-term unsecured note payable to BankBoston, N.A.
("BankBoston") due October 1997, bears interest at
Eurodollar rate plus 137.5 basis points (at September 30,
1997, the rate was 7.03%.................................. 235,000(4)
Short-term unsecured note payable to BankBoston due August
1998, bears interest at Eurodollar rate plus 120 basis
points (at September 30, 1997, the rate was 6.86%)........ 200,000
Senior unsecured notes to State Street Bank & Trust Company
of Missouri, N.A., as Trustee, bear interest at a fixed
rate of 6.63% with a five-year interest-only term, due
September 2002 (see description of Notes offering
below).................................................... 150,000
Senior unsecured notes to State Street Bank & Trust Company
of Missouri, N.A., as Trustee, bear interest at a fixed
rate of 7.13% with a ten-year interest-only term, due
September 2007 (see description of Notes offering
below).................................................... 250,000
----------
Total Notes Payable......................................... $1,460,404
==========
</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 Company so elects, it may repay the note
without penalty.
(4) On October 15, 1997, the note was repaid in full through a draw under the
Operating Partnership's Credit Facility (see Note 9 -- October 1997
Offering).
On September 22, 1997, the Operating Partnership's line of credit from a
consortium of banks led by BankBoston (the "Credit Facility") was increased to
$450,000 to enhance the Operating Partnership's financial flexibility in making
new real estate investments. Concurrently with such 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 September 30, 1997, the Operating Partnership was in
compliance with all covenants. As of September 30, 1997, the interest rate was
6.86% and the outstanding balance was $316,500, with availability of $133,500.
F-10
<PAGE> 118
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On September 22, 1997, the Operating Partnership completed a private note
offering of senior 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
semi-annually in arrears. The interest rate on the Notes is 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 the 180th day
following the date of original issuance of the Notes. 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.
5. PARTNERS' CAPITAL:
On February 4, 1997, the Operating Partnership paid a distribution of
$26,100.
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 to Crescent Equities after underwriting discount of $29,222 and other
offering costs of $3,000 were approximately $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"). Net proceeds from the Offerings were
contributed to the Operating Partnership in exchange for an increased limited
partner interest.
In the second quarter of 1997, the Operating Partnership used net proceeds
of $593,522 from the Offerings and approximately $314,700 from borrowings under
the Credit Facility and $160,000 of short-term borrowings from BankBoston (i) to
fund approximately $30,000 in connection with the formation and capitalization
of Crescent Operating, Inc. ("Crescent Operating"); (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 approximately $306,300 of the purchase price
of the Carter-Crowley Portfolio (as defined in Note 7) acquired by the Company;
and (v) to fund the commitments of the Company and Crescent Operating related to
the Magellan transaction totaling approximately $419,700. The remaining $31,222
has been used for working capital purposes.
On May 14, 1997, the Operating Partnership paid a distribution of $33,476.
F-11
<PAGE> 119
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On July 23, 1997, the Crescent Equities sold to Merrill Lynch & Co. 351,185
common shares at $28.475 per share (the "Merrill Offering"). The proceeds were
contributed to the Operating Partnership, which used these funds to repay
approximately $10,000 of borrowings incurred under the Credit Facility.
On August 5, 1997, the Company paid a distribution of $33,639.
On September 22, 1997, in connection with the acquisition of Houston
Center, Crescent Equities sold to the seller of Houston Center 307,831 common
shares at $32.485 per share (the "HC Offering"). The proceeds were contributed
to the Operating Partnership, which used these funds to repay approximately
$10,000 of borrowings under the Credit Facility.
6. FORMATION AND CAPITALIZATION OF CRESCENT OPERATING, INC.
In April 1997, the Operating Partnership established a new Delaware
Corporation, 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 Crescent
Equities on May 30, 1997, in a spin-off.
Crescent Operating was formed to become a lessee and operator of various
assets and to perform the Intercompany Agreement between Crescent Operating 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 Crescent Operating and the execution of the Intercompany Agreement,
persons who own equity interests in both Crescent Operating 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
state assets) and the lease of certain of such assets and the ownership of other
non-real estate assets by Crescent Operating. The certificate of incorporation,
as amended and restated, of Crescent Operating 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.
In connection with the formation and capitalization of Crescent Operating,
the Operating Partnership provided to Crescent Operating approximately $50,000
in the form of cash contributions and loans to be used by Crescent Operating to
acquire certain assets described in Note 7. The Operating Partnership also made
available to Crescent Operating a line of credit in the amount of $20,400 to be
used by Crescent Operating to fulfill certain ongoing obligations associated
with these assets.
7. ACQUISITIONS:
Greenway II. On January 17, 1997, the Operating Partnership acquired
Greenway II, a seven-story Class A office building containing approximately
154,000 net rentable square feet and located in the Richardson/Plano submarket
of Dallas, Texas. The purchase price was approximately $18,200, which was funded
through a draw under the Credit Facility.
Trammell Crow Center. On February 28, 1997, the Operating Partnership
acquired substantially all of the economic interest in Trammell Crow Center, a
50-story Class A office building, which contains approximately 1,128,000 net
rentable square feet. The property is located in the cultural and financial
district of the Central Business District ("CBD") submarket of Dallas, Texas.
The Operating Partnership acquired its interest in Trammell Crow Center through
the purchase 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. The purchase price was
approximately $162,000, of which $150,000 was funded through proceeds from an
unsecured, short-term loan with BankBoston and the remaining balance of $12,000
through a draw under the Credit Facility.
F-12
<PAGE> 120
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Denver Properties. On February 28, 1997, the Operating Partnership acquired
three office buildings in Denver, Colorado, in a single transaction: 44 Cook, 55
Madison and the AT&T Building. 44 Cook, a 10-story Class A office building
containing approximately 119,000 net rentable square feet, and 55 Madison, an
eight-story Class A office building containing approximately 125,000 net
rentable square feet, are both located in the Cherry Creek submarket of Denver,
Colorado. The AT&T Building, a 15-story office building, contains approximately
170,000 net rentable square feet and is located in the Denver CBD submarket. The
three office properties were acquired for an aggregate purchase price of
approximately $42,675, which was funded through a draw under the Credit
Facility.
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 properties (the "Carter-Crowley Office Portfolio"),
with an aggregate of approximately 3.0 million net rentable square feet,
approximately 1,216 acres of commercially zoned, undeveloped land located in the
Dallas/Fort Worth metropolitan area, two multifamily 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 nonoperating 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 Crescent Operating 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 multifamily
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.
Crescent Operating purchased the remainder of the Carter-Crowley Portfolio
utilizing cash contributions and loan proceeds provided to Crescent Operating 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.
Dallas Mavericks Interest. 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 and Sole Director of CREE,
Ltd. and Crescent Equities and Crescent Operating, and John C. Goff, the Vice
Chairman of Crescent Equities and Crescent Operating, for $126. On June 11,
1997, DBL acquired from Crescent Operating, for approximately $12,550, the
limited partner interest in the partnership that owns the Dallas Mavericks.
Magellan Transaction. 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
F-13
<PAGE> 121
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
previously owned and operated by a wholly owned subsidiary of Magellan. The
Magellan transaction involved various components, certain of which related to
the Operating Partnership and certain of which related to Crescent Operating.
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 91 Behavioral Healthcare
Facilities (and one additional behavioral healthcare facility, which
subsequently was sold) and $12,500 for the acquisition of warrants to purchase
1,283,311 shares of common stock of Magellan. Crescent Operating paid $5,000 for
its interest in Charter Behavioral Health Systems, LLC, a limited liability
company ("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. CBHS is
owned 50% by Crescent Operating 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.
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 Corporation, 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 the $235,000 BankBoston loan. 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 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
Company, L.P. ("Woodlands-CPC"), a limited partnership in which the Morgan
Stanley Group holds a 57.5% interest and the Company holds a 42.5% interest, and
the Woodlands Land Development Company, 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 Company, Inc.
("WLC"), holds a 42.5% interest. The Operating Partnership currently owns all of
the non-voting common stock, representing a 95% economic interest in WLC and,
effective September 29, 1997, Crescent Operating owns 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 ownership interest in these Properties
increased to approximately 85%. The other assets acquired by Woodlands-CPC
F-14
<PAGE> 122
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
include a 364-room executive conference center, a private golf and tennis club
serving approximately 1,600 members and offering 81 holes of golf, 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 Crescent
Operating 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 lots, approximately 1,500 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 the $200,000
BankBoston loan and a draw under the Credit Facility. The sole limited partner
of DMPLP is Sonora Partners Limited Partnership ("Sonora") whose principal owner
is Lyle Anderson, 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, Crescent Operating
owns 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.
Houston Center. On September 22, 1997, the Operating Partnership acquired
Houston Center, an approximately 3.0 million square foot, mixed-use property
located in the CBD submarket of Houston, Texas. Houston Center consists of three
high-rise Class A office buildings aggregating approximately 2.8 million net
rentable square feet ("Houston Center Office Properties"), a 399-room Four
Seasons Hotel-Houston, 114 luxury apartments, The Park Shops in Houston Center
(a retail property containing approximately 191,000 net rentable square feet),
and approximately 20 acres of contiguous undeveloped commercial land. The
aggregate purchase price for Houston Center was approximately $327,600 which was
funded from the proceeds of the Notes offering (described in Note 4).
Miami Center. On September 30, 1997, the Operating Partnership acquired
Miami Center, a 34-story Class A office building containing approximately
783,000 net rentable square feet located in the Downtown-CBD submarket of Miami,
Florida. The Operating Partnership acquired fee simple title, subject to a
Condominium Declaration, to Miami Center for approximately $131,500. The
purchase price was funded through an approximately $121,500 draw under the
Credit Facility and $10,000 from proceeds of the Notes offering. The Operating
Partnership owns the single condominium unit that comprises the Miami Center
office building and an unaffiliated party owns the hotel unit. The Condominium
Declaration grants each unit a 50% interest in common areas, as well as in the
common operating expenses of the condominium.
8. PRO FORMA FINANCIAL INFORMATION
The pro forma financial information for the nine months ended September 30,
1997 and 1996 assumes the completion, in each case as of January 1, 1996, of (i)
the 11,500,000 common share offering on October 2,
F-15
<PAGE> 123
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1996 and the additional 450,000 common share offering on October 9, 1996; (ii)
the Offerings; (iii) the Merrill Offering; (iv) the UBS Offering; (v) the Notes
offering; (vi) the HC Offering; (vii) the 1996 and 1997 completed acquisitions
inclusive of subsequent events (see Note 9), except for the Refrigerated
Warehouses transaction (collectively referred to as the, "Acquisitions"); and
(viii) the October 1997 Offering (as defined in Note 9). Proforma information
assumes as of January 1, 1996, all offering proceeds were used for repayment of
indebtedness for Acquisitions.
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
<S> <C> <C>
Total revenue..................................... $437,619 $408,865
Operating income.................................. $100,440 $ 79,165
Income before minority interests and extraordinary
item............................................ $120,339 $ 95,185
Net income........................................ $120,706 $ 94,136
</TABLE>
The pro forma 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 1996 and 1997, based
on the lease payments from the hotel lessees and calculated on a pro forma basis
by applying the rent provisions (as set forth in the lease agreements); (ii)
rental income based on the lease payment from CBHS to the Operating Partnership
by applying the rent provisions (as set forth in the lease agreement); (iii)
adjustment for depreciation expense for Hotel Properties and Magellan
Facilities; (iv) adjustment for equity in net income for the Woodlands and
Desert Mountain transactions; (v) interest income for the notes acquired in the
Carter-Crowley transaction, the loans to Crescent Operating and the loans to
DMPLP; and (vi) interest costs assuming the borrowings to finance acquisitions
and assumption of debt for property acquisitions.
These pro forma amounts are not necessarily indicative of what the actual
financial position of the Operating Partnership would have been assuming the
above investments had been consummated as of the beginning of the period, nor do
they purport to represent the future financial position of the Operating
Partnership.
9. SUBSEQUENT EVENTS
Distribution. On November 4, 1997, the Operating Partnership paid a
distribution of $47,584.
October 1997 Offering. On October 8, 1997, Crescent Equities completed an
offering (the "October 1997 Offering") of 10,000,000 common shares at $39.00 per
share. Net proceeds from the October 1997 Offering to Crescent Equities after
underwriting discount of $19,900 were approximately $370,100 (with other
estimated offering costs of $1,500). The net proceeds of $370,100 were
contributed to the Operating Partnership, which used these funds to partially
repay approximately $325,100 of borrowings under the Credit Facility and to fund
approximately $45,000 of the purchase price of the U.S. Home Building.
U.S. Home Building. On October 15, 1997, the Operating Partnership acquired
U.S. Home Building, a 21-story Class A office building located in the West
Loop/Galleria submarket of Houston, Texas, containing approximately 400,000 net
rentable square feet. The purchase price was approximately $45,000, which was
funded from proceeds of the October 1997 Offering.
Bank One Center. On October 22, 1997, the Operating Partnership, together
with affiliates of TrizecHahn Corporation ("Trizec") acquired Bank One Center, a
60-story Class A office building located in the CBD submarket of Dallas, Texas.
Bank One Center contains approximately 1.5 million net rentable square feet. The
acquisition was made by Main Street Partners, L.P. (the "Partnership"), a Texas
limited
F-16
<PAGE> 124
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
partnership in which the Operating Partnership and Trizec each own a 50%
interest. Crescent 1717 Main, L.L.C., a Texas limited liability company that is
wholly owned by the Operating Partnership and TrizecHahn 1717 Main St., Inc., a
Delaware corporation, serve as the general partners of the Partnership. The
Partnership acquired Bank One Center for approximately $238,000 from two
unaffiliated entities. The purchase price was funded through (i) proceeds from
two secured loans aggregating $155,000 provided by The Travelers Insurance
Company and (ii) capital contributions of $41,500 from each of Operating
Partnership and Trizec partner groups. The Operating Partnership's capital
contribution of $41,500 was funded through a draw under the Credit Facility.
Registration Statement. On October 29, 1997, Crescent Equities filed a
shelf registration with the SEC for an aggregate of $1.5 billion of common
shares, preferred shares, and warrants exercisable for common shares. Any
securities issued under the 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 this shelf registration will provide Crescent
Equities with more efficient and immediate access to the capital markets at such
time as it is considered appropriate. Net proceeds from any offering of these
securities are expected to be contributed to the Operating Partnership to be
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.
Refrigerated Warehouses Transaction. Effective September 28, 1997, the
Operating Partnership entered into a partnership with Vornado Realty Trust
("Vornado" and, collectively with its affiliates, "VNO") to participate in the
acquisition of Americold Corporation ("Americold") and URS Logistics, Inc.
("URS"), two suppliers of refrigerated warehouse space in the United States. On
October 30, 1997, the Operating Partnership and VNO agreed to the termination of
that partnership and the formation of two new partnerships, one of which was
formed to consummate the acquisition of Americold (the "Americold Partnership")
and the other to consummate the acquisition of URS (the "URS Partnership"). The
Operating Partnership, through two newly formed subsidiaries ("Crescent
Subsidiaries"), will own 40% of these partnerships, and Vornado, through two
newly formed subsidiaries ("Vornado Subsidiaries"), will own 60%.
On October 31, 1997, the Americold Partnership acquired all of the common
stock of Americold through the merger of a subsidiary of Vornado into Americold,
and the URS Partnership acquired all of the common stock of URS through the
merger of a separate subsidiary of Vornado into URS. As a result, the Americold
Partnership and the URS Partnership became the owners and operators of
approximately 79 refrigerated warehouses with an aggregate of approximately 368
million cubic feet.
The aggregate purchase price for the acquisition of Americold and URS was
approximately $1.0 billion (including transaction costs associated with the
acquisition). Of this amount, the purchase price for the acquisition of
Americold was approximately $632 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 $367 million in retention of debt and approximately $2 million in
transaction costs), and the purchase price for the acquisition of URS was
approximately $372 million (consisting of approximately $173 million in cash for
the purchase of the equity, approximately $192 million in retention of debt and
approximately $7 million in transaction costs).
The Operating Partnership currently owns all of the voting common stock,
representing an approximately 5% economic interest, and all of the nonvoting
common stock, representing an approximately 95% economic interest, of the
Crescent Subsidiaries. The Operating Partnership has offered and expects
Crescent Operating to accept the opportunities to acquire all of the voting
common stock in the subsidiaries. It is intended that the transfer of the voting
common stock to Crescent Operating (or, if Crescent Operating does not accept
such offer, to another entity) will take place in the near future and in no
event later than December 31, 1997.
F-17
<PAGE> 125
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The parties have not yet determined certain matters relating to the future
ownership 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 will 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 will be entered into between the operating entity and
the owner of the warehouses.
Term Loan. On November 3, 1997, the Operating Partnership negotiated a term
loan with BankBoston in the amount of $50,000 (the "BankBoston Term Loan"). The
loan bears interest at Eurodollar plus 120 basis points and matures on March 31,
1998. The BankBoston Term Loan can be increased to $150,000 subject to certain
conditions.
Fountain Place. On November 7, 1997, the Operating Partnership acquired
Fountain Place, a 60-story Class A office building located in the CBD submarket
of Dallas, Texas containing approximately 1.2 million net rentable square feet.
The purchase price was approximately $114,000 of which the Operating Partnership
funded $16,900 through the BankBoston Term Loan and $97,100 through the
assumption of nonrecourse indebtedness.
F-18
<PAGE> 126
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, 1996 and 1995, and
the related consolidated statements of operations, partners' capital, and cash
flows for the years ended December 31, 1996 and 1995, and for the period from
May 5, 1994, to December 31, 1994, and the combined statements of operations,
partners' deficit, and cash flows of the Rainwater Property Group (see Note 1)
for the period from January 1, 1994, to May 4, 1994. 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 Crescent Real Estate
Equities Limited Partnership as of December 31, 1996 and 1995, and the results
of its operations and its cash flows for the years ended December 31, 1996 and
1995, and for the period from May 5, 1994, to December 31, 1994, and the results
of operations and cash flows of the Rainwater Property Group for the period from
January 1, 1994, to May 4, 1994, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
January 17, 1997
F-19
<PAGE> 127
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(NOTES 1 AND 2)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
---------- ---------
<S> <C> <C>
Assets:
Investments in Real Estate:
Land................................................... $ 146,036 $ 57,566
Building and improvements.............................. 1,561,639 932,340
Furniture, fixtures and equipment...................... 24,951 16,800
Less -- Accumulated depreciation....................... (208,808) (172,267)
---------- ---------
Net Investment in Real Estate..................... 1,523,818 834,439
Cash and cash equivalents................................. 25,535 16,869
Restricted cash and cash equivalents...................... 36,882 22,187
Accounts receivable, net of allowance for doubtful
accounts of $904 and $715, respectively................ 15,330 7,005
Deferred rent receivable.................................. 16,217 10,007
Investments in real estate mortgages and common stock of
residential development corporations................... 37,069 20,090
Notes receivable.......................................... 31,405 18,933
Other assets, net......................................... 47,284 35,702
---------- ---------
Total assets...................................... $1,733,540 $ 965,232
========== =========
Liabilities:
Borrowings under Credit Facility.......................... $ 40,000 $ 20,000
Notes payable............................................. 627,808 424,528
Accounts payable, accrued expenses and other
liabilities............................................ 48,462 31,706
---------- ---------
Total liabilities................................. 716,270 476,234
---------- ---------
Minority interests.......................................... 29,265 9,481
Partners' capital:
General partner........................................... 4,515 4,800
Limited partners.......................................... 983,490 474,717
---------- ---------
Total partners' capital........................... 988,005 479,517
---------- ---------
Total liabilities and partners' capital........... $1,733,540 $ 965,232
========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE> 128
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS AND
RAINWATER PROPERTY GROUP
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(NOTES 1 AND 2)
<TABLE>
<CAPTION>
RAINWATER
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP PROPERTY GROUP
------------------------------------------------- --------------
FOR THE PERIOD FOR THE
FOR THE FOR THE FROM MAY 5, PERIOD FROM
YEAR ENDED YEAR ENDED 1994 TO JANUARY 1,
DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 TO
1996 1995 1994 MAY 4, 1994
------------- ------------- --------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Rental property...................... $ 202,003 $ 123,489 $ 49,075 $ 18,550
Interest and other income............ 6,858 6,471 1,268 42
Lot sales............................ -- -- -- 2,593
----------- ----------- ----------- ----------
Total revenues............... 208,861 129,960 50,343 21,185
----------- ----------- ----------- ----------
Expenses:
Real estate taxes.................... 20,606 12,494 5,426 2,270
Repairs and maintenance.............. 12,292 7,787 2,651 1,279
Other rental property operating...... 40,915 25,668 10,916 5,147
Corporate general and
administrative.................... 4,674 3,812 1,815 --
Interest expense..................... 42,926 18,781 3,493 4,867
Amortization of deferred financing
costs............................. 2,812 2,500 923 --
Depreciation and amortization........ 40,535 28,060 14,255 7,793
Cost of lot sales.................... -- -- -- 867
Residential development operating.... -- -- -- 561
----------- ----------- ----------- ----------
Total expenses............... 164,760 99,102 39,479 22,784
----------- ----------- ----------- ----------
Operating income (loss)...... 44,101 30,858 10,864 (1,599)
Other income (expense):
Reorganization costs................. -- -- (1,900) --
Equity in net income of residential
development corporations.......... 3,850 5,500 3,631 --
----------- ----------- ----------- ----------
Income (loss) before minority interests
and extraordinary items.............. 47,951 36,358 12,595 (1,599)
Minority interests................... (1,482) (815) -- --
----------- ----------- ----------- ----------
Income (loss) before extraordinary
items................................ 46,469 35,543 12,595 (1,599)
Extraordinary items.................. (1,599) -- (949) --
----------- ----------- ----------- ----------
Net income (loss)...................... $ 44,870 $ 35,543 $ 11,646 $ (1,599)
=========== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE> 129
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL AND
RAINWATER PROPERTY GROUP
COMBINED STATEMENT OF PARTNERS' DEFICIT
(DOLLARS IN THOUSANDS)
(NOTES 1, 2 AND 8)
<TABLE>
<CAPTION>
LIMITED GENERAL TOTAL
PARTNERS' PARTNER'S PARTNERS'
CAPITAL CAPITAL CAPITAL
--------- --------- ---------
<S> <C> <C> <C>
Partners' capital, December 31, 1993........................ $ 2,941 $ -- $ 2,941
Contributions............................................. 5,660 -- 5,660
Distributions............................................. (16,675) -- (16,675)
Net Loss.................................................. (1,599) -- (1,599)
-------- ------ --------
Partners' deficit, May 4, 1994.............................. (9,673) -- (9,673)
Contributions............................................. 339,232 5,035 344,267
Distributions............................................. (17,614) (178) (17,792)
Net Income................................................ 11,530 116 11,646
-------- ------ --------
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
======== ====== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 130
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS AND
RAINWATER PROPERTY GROUP
COMBINED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(NOTES 1 AND 2)
<TABLE>
<CAPTION>
RAINWATER
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP PROPERTY GROUP
--------------------------------------------------- --------------
FOR THE PERIOD FOR THE
FOR THE FOR THE FROM MAY 5, PERIOD FROM
YEAR ENDED YEAR ENDED 1994 TO JANUARY 1,
DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 TO
1996 1995 1994 MAY 4, 1994
------------- ------------- --------------- --------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................... $ 44,870 $ 35,543 $ 11,646 $(1,599)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization......................... 43,347 30,560 15,178 7,793
Reorganization costs.................................. -- -- 1,900 --
Minority interests.................................... 1,482 815 -- --
Extraordinary items................................... 1,599 -- 949 --
Non-cash compensation................................. 111 -- -- --
Equity in earnings in excess of distributions received
from residential development corporations........... (322) -- -- --
(Increase) decrease in accounts receivable............ (8,325) (5,043) (608) 534
Increase in deferred rent receivable.................. (6,210) (875) -- --
Increase in other assets.............................. (387) (7,871) (1,797) (2,520)
Increase in lots held for development and sale........ -- -- -- (1,670)
Increase in restricted cash and cash equivalents...... (15,537) (4,700) (12,074) --
Increase (decrease) in accounts payable, accrued
expenses and other liabilities...................... 16,756 16,448 6,420 (293)
Increase in accrued interest payable -- affiliate..... -- -- -- 210
--------- --------- --------- -------
Net cash provided by operating activities......... 77,384 64,877 21,614 2,455
--------- --------- --------- -------
Cash flows from investing activities:
Acquisition of investment properties.................... (460,113) (420,284) (192,200) --
Capital expenditures -- rental properties............... (2,380) (1,148) (2,100) (1,354)
Tenant improvement and leasing costs -- rental
properties............................................ (20,052) (13,911) -- --
Decrease (increase) in restricted cash and cash
equivalents........................................... 842 (5,413) -- --
Purchase of non-continuing partner's interest........... -- -- (14,000) (1,025)
Payments to continuing partners in connection with
formation transactions................................ -- -- (7,496) --
Decrease in cash and cash equivalents resulting from
non-controlling interest held in residential
development corporations after formation
transactions.......................................... -- -- (744) --
Investment in residential development corporations...... (16,657) (8,654) -- --
Investment in unconsolidated companies.................. (3,900) -- -- --
Escrow deposits -- acquisition of investment
properties............................................ 140 40,836 (41,186) --
Increase in notes receivable............................ (10,913) (12,732) (2,940) --
--------- --------- --------- -------
Net cash used in investing activities............. (513,033) (421,306) (260,666) (2,379)
--------- --------- --------- -------
Cash flows from financing activities:
Debt financing costs.................................... (7,081) (8,342) (4,227) --
Borrowings under Credit Facility........................ 191,500 217,450 194,642 --
Payments under Credit Facility.......................... (171,500) (392,092) -- --
Debt proceeds........................................... 152,755 411,862 -- 3,411
Debt payments........................................... (92,254) (66) (266,334) (15,137)
Capital contributions -- Joint Venture.................. 750 125 -- 5,660
Capital distributions -- Joint Venture.................. (14,505) -- -- --
Capital distributions................................... -- -- -- (16,675)
Capital contributions to the Operating Partnership...... 458,017 166,926 359,133 --
Reorganization costs.................................... -- -- (1,900) --
Distributions from the Operating Partnership............ (73,367) (52,784) (17,792) --
Decrease in due from affiliates......................... -- -- 3,439 815
(Decrease) increase in due to affiliates................ -- -- (1,353) 616
--------- --------- --------- -------
Net cash provided by (used in) financing
activities...................................... 444,315 343,079 265,608 (21,310)
--------- --------- --------- -------
Increase (decrease) in cash and cash equivalents.......... 8,666 (13,350) 26,556 (21,234)
Cash and cash equivalents, Beginning of period............ 16,869 30,219 3,663 24,897
--------- --------- --------- -------
Cash and cash equivalents, End of period.................. $ 25,535 $ 16,869 $ 30,219 $ 3,663
========= ========= ========= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE> 131
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
AND RAINWATER PROPERTY GROUP
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION:
Formation of the Operating Partnership and 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 which owns an approximate 1% general partner
interest in the Operating Partnership ("CREE, Ltd."). In addition, Crescent
Equities owns an approximate 84% limited partner interest in the Operating
Partnership, with the remaining approximate 15% 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, 1996, the Operating Partnership directly or indirectly
owned a portfolio of real estate assets (the "Properties") located primarily in
16 metropolitan submarkets in Texas and Colorado. The Properties include 53
office properties (the "Office Properties") with an aggregate of approximately
16.3 million net rentable square feet, four full-service hotels with a total of
1,471 rooms and two destination health and fitness resorts (the "Hotel
Properties"), six retail properties (the "Retail Properties") with an aggregate
of approximately .6 million net rentable square feet and real estate mortgages
and nonvoting common stock in three residential development corporations (the
"Residential Development Corporations") that own all or a portion of six
single-family residential land developments and three condominium/townhome
developments. In addition, the Operating Partnership owns one mortgage note
secured by a Class A office property.
The following table sets forth, by subsidiary, the Properties owned by such
subsidiary:
<TABLE>
<S> <C>
CREELP: Bank One Tower, Canyon Ranch-Tucson, Chancellor Park(1),
Central Park Plaza, Denver Marriott City Center, Frost Bank
Plaza, Greenway I and IA, MCI Tower, Sonoma Mission Inn &
Spa, Spectrum Center(2), Three Westlake Park(3), The
Woodlands Office Properties(4), The Woodlands Retail
Properties(4), 160 Spear Street, 1615 Poydras, 301 Congress
Avenue(5), 3333 Lee Parkway, and 6225 North 24th Street
Crescent Real Estate Funding I, L.P.: The Aberdeen, The Avallon, Caltex House, The Citadel,
("Funding I") Continental Plaza, The Crescent Atrium, The Crescent Office
Towers, Regency Plaza One, and Waterside Commons
Crescent Real Estate Funding II, Albuquerque Plaza, Barton Oaks Plaza One, Briargate Office
L.P.: ("Funding II") 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, Greenway Plaza Portfolio(6)
and V L.P.: ("Funding III, IV and
V")
</TABLE>
F-24
<PAGE> 132
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
AND RAINWATER PROPERTY GROUP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Crescent Real Estate Funding VI, Canyon Ranch-Lenox
L.P.: ("Funding VI")
- ---------------
(1) CREELP 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.
(2) CREELP 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.
(3) CREELP owns the principal economic interest in Three Westlake Park through
its ownership of a mortgage note secured by the building.
(4) CREELP owns a 75% limited partner interest in the partnerships that own The
Woodlands Office and Retail Properties.
(5) CREELP owns a 49% limited partner interest and Crescent/301, L.L.C., a
wholly owned subsidiary of CREE, Ltd. and CREELP, owns a 1% general partner
interest in 301 Congress Avenue, L.P., the partnership that owns 301
Congress Avenue.
(6) 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 (see Note 11).
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.
The accompanying combined statements of operations, partners' deficit, and
cash flows of the Rainwater Property Group ("RPG") consist of the accounts of
prior entity partnerships and owner which had ownership interest in the
properties of The Crescent Office Towers, The Crescent Atrium, Continental
Plaza, MacArthur Center I & II, Mira Vista, Falcon Point, Spring Lakes, The
Citadel and Las Colinas Plaza (collectively, the "RPG Properties").
The business combination, in 1994, was structured as an exchange of
properties or partnership interests by RPG for limited partnership interests in
the Operating Partnership or shares of Crescent Equities. Therefore, the
combination was accounted for as a reorganization of entities under common
control (except for investments in real estate mortgages and common stock of
Residential Development Corporations, which were accounted for under the equity
method of accounting) and, accordingly, all assets and liabilities of the
predecessor partnerships were recorded at predecessor historical cost in a
manner similar to that in pooling of interests accounting. Purchase accounting
was applied to those properties for which monetary consideration was given to
acquire certain partnership interests previously held by partners who did not
participate in the reorganization, in which case the value of the property
reflects the amount of the consideration paid in addition to predecessor
historical cost.
The accompanying combined statements of operations, partners' deficit, and
cash flows of RPG have been presented on a combined historical cost basis
because of the affiliated ownership and management, and because the assets and
liabilities were subject to a business combination with the Operating
Partnership, both newly formed entities with no prior operations. All
significant intercompany balances and transactions have been eliminated.
F-25
<PAGE> 133
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
AND RAINWATER PROPERTY GROUP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In accordance with the terms of the Limited Partnership Agreement, Crescent
Equities is reimbursed for all expenses incurred relating to the ownership and
operation of, or for the benefit of, the Operating Partnership. Therefore, all
expenses of Crescent Equities are included herein as expenses of the Operating
Partnership.
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.
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>
Expenditures for maintenance and repairs are charged to operations as
incurred. Significant renovations are capitalized.
Concentration of Real Estate Investments
The majority of the Operating Partnership's office and retail properties
are in the Houston, Texas and Dallas/Fort Worth, Texas metropolitan areas. As of
December 31, 1996, these office and retail properties together represented
approximately 35% and 33%, respectively, of the Operating Partnership's total
net rentable square feet and accounted for approximately 27% and 34%,
respectively, of the Operating Partnership's total pro forma rental revenues for
1996 (see Note 11). 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.
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 term 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.
F-26
<PAGE> 134
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
AND RAINWATER PROPERTY GROUP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, and short-term
investments are reasonable estimates of their fair values because of the short
maturities of these instruments. The fair value of notes receivable, which
approximates carrying value, is estimated based on year-end interest rates for
receivables of comparable maturity. Notes payable and borrowings under 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, 1996 and 1995.
During 1996 and 1995, the Operating Partnership did not invest in any asset
backed or off balance sheet derivative financial instruments as defined pursuant
to Statement of Financial Accounting Standards No. 119 "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments".
Revenue Recognition
Office/Retail
The Operating Partnership, as a lessor, has retained substantially all of
the risks and benefits of ownership of the investment 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.
Residential Lots
Prior to the business combination of the Operating Partnership, revenue
from residential lot sales was recognized at the time of the closing of a sale,
when title to or possession of the property transferred to the buyer. In 1995,
the Operating Partnership adopted the accounting prescribed in EITF 95-6,
"Accounting by Real Estate Investment Trust for an Investment in Service
Corporation" and utilized the equity method with regard to the Operating
Partnership's investment in the Residential Development Corporations. The effect
of this change on the period from May 5, 1994, to December 31, 1994, was not
material and such amounts have been reclassified to conform to the current
presentation.
Hotels
The Operating Partnership does not operate the Hotel Properties directly.
It has leased these hotel properties to independent companies affiliated with
the Operating Partnership (see Note 6). 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 room revenues above a
specified amount, and (iii) a percentage of gross food and beverage revenues
above a specified amount. Base rental income under these leases is recognized on
a straight-line basis over the terms of the respective leases.
Income Taxes
Prior to May 5, 1994, all of the RPG Properties were owned by partnerships
and joint ventures whose partners were required to include their respective
share of profits and losses in their individual tax returns.
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.
F-27
<PAGE> 135
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
AND RAINWATER PROPERTY GROUP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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>
1996 1995 1994
-------- ------- ------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid......................................... $ 42,488 $18,224 $7,100(1)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Mortgage notes assumed in property acquisitions....... $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....................................... 77,236 -- --
Issuance of restricted limited partner interests in
the Operating Partnership.......................... -- 455 --
</TABLE>
- ---------------
(1) Represents for the periods January 1, 1994 to May 4, 1994 and May 5, 1994 to
December 31, 1994, $4,657 and $2,443, respectively.
Adoption of New Accounting Pronouncements
In March 1995, the Operating Partnership adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets to be Disposed Of." This statement
requires that long-lived assets and certain identifiable intangibles, to be held
and used by an entity, be reviewed for impairment whenever events or changes in
circumstances indicated that the carrying amount of an asset may not be
recoverable. 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.
3. OTHER ASSETS:
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
Leasing costs............................................... $ 39,483 $ 30,858
Deferred financing costs.................................... 13,956 12,569
Other....................................................... 15,237 10,986
-------- --------
68,676 54,413
Less -- Accumulated amortization............................ (21,392) (18,711)
-------- --------
$ 47,284 $ 35,702
======== ========
</TABLE>
F-28
<PAGE> 136
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
AND RAINWATER PROPERTY GROUP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. NOTES PAYABLE AND BORROWINGS UNDER CREDIT FACILITY:
Following is a summary of the Operating Partnership's debt financing:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
Note payable to LaSalle National Bank, as Trustee for
Commercial Mortgage Pass-Through Certificates, Series
1995-MD IV ("LaSalle Note I") bears interest at 7.83% with
an initial seven-year interest-only period (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 $311,339........................... $239,000 $239,000
Note payable to LaSalle National Bank, as Trustee for
Commercial Mortgage Pass-Through Certificates, Series
1996-MD V ("LaSalle Note II") bears interest at 7.79% with
an initial seven-year interest-only period (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 $296,600........................... 161,000 67,362
Note payable to LaSalle National Bank, Trustee of Commercial
Mortgage Pass-Through Certificates, Series 1994-MD II
("LaSalle Note III") due July 1999, bears interest at
30-day LIBOR plus a weighted average rate of 2.135% (at
December 31, 1996 the rate was 7.51% 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 book value of
$213,243.................................................. 115,000 --
Note payable to Connecticut General Life Insurance Company
("CIGNA") due December 2002, bears interest at 7.47% with
a seven-year interest-only term, secured by the MCI Tower
and Denver Marriott City Center properties with a combined
book value of $102,990.................................... 63,500 51,500
Note payable to Northwestern Mutual Life Insurance Company
due January 2004, bears interest at 7.66% with a
seven-year interest-only term, secured by the 301 Congress
Avenue property with a book value of $44,501.............. 26,000 --
Note payable to Metropolitan Life Insurance Company due
September 2001, bears interest at 8.875% with monthly
principal and interest payments, secured by five of The
Woodlands Office Properties with a combined book value of
$16,058................................................... 12,411 12,666
Note payable to Nomura Asset Capital Corporation ("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 $29,332.......... 8,780 --
</TABLE>
F-29
<PAGE> 137
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
AND RAINWATER PROPERTY GROUP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
Short-term note payable to The First National Bank of Boston
("FNBB") due March 1996, bears interest at 7.9%, secured
by six CREELP properties.................................. $ -- $ 54,000
Short-term construction loan payable to Texas Commerce Bank
due September 1997, bears interest at LIBOR plus 1.7%, (at
December 31, 1996 the rate was 7.39%) secured by land and
improvements that relate to the construction of The
Avallon Phase II (Building 5)............................. 2,117 --
-------- --------
Total Notes Payable............................... $627,808 $424,528
======== ========
</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 loan by purchasing
treasuries to pay out the obligation without penalty. In July 2010, the
loan's interest rate will change to a 10 year treasury yield plus 500 basis
points or if elected, the loan can be prepaid without defeasance.
In June 1996, the Operating Partnership executed a new $150,000 credit
facility (the "Credit Facility") led by FNBB, which was increased to $175,000 in
August 1996, to enhance the Operating Partnership's financial flexibility in
making new real estate investments. The Credit Facility initially had a term
that expired in March 1997, with advances under the Credit Facility bearing
interest at the Eurodollar rate plus 240 basis points for advances of $2,000 or
more, or at the lender's prime rate plus 50 basis points for advances of less
than $2,000. In October 1996, Crescent Equities completed a public offering of
its common shares and contributed proceeds to the Operating Partnership, as a
result, the Credit Facility became unsecured, the annual interest rate was
reduced to the Eurodollar rate plus 185 basis points or, as applicable, the
lender's prime rate, and the term was extended until March 1999. As of December
31, 1996, the interest rate was 7.41% and the outstanding balance was $40,000
with availability of $135,000. The Credit Facility requires the Operating
Partnership to maintain compliance with a number of customary financial and
other covenants on an ongoing basis, including loan-to-value, fixed charge and
debt service coverage ratios, limitations on additional indebtedness and
distributions, and a minimum net worth requirement. As of December 31, 1996, the
Operating Partnership was in compliance with all covenants, except for one
financial covenant for which the Operating Partnership had obtained a bank
waiver.
F-30
<PAGE> 138
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
AND RAINWATER PROPERTY GROUP
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>
1997...................................................... $ 2,515
1998...................................................... 435
1999...................................................... 155,477
2000...................................................... 523
2001...................................................... 11,170
Thereafter................................................ 497,688
--------
$667,808
========
</TABLE>
5. RENTALS UNDER OPERATING LEASES:
The Operating Partnership receives rental income from the leasing of
office, retail and hotel property space under operating leases. Future minimum
rentals (base rents) under noncancelable operating leases over the next five
years (excluding tenant reimbursements of operating expenses) as of December 31,
1996, are as follows:
<TABLE>
<CAPTION>
COMBINED
OFFICE,
LEASES RETAIL AND
WITH HOTEL
AFFILIATES BUILDING SPACE
---------- ---------------
<S> <C> <C>
1997............................................. $ 24,879 $ 227,195
1998............................................. 25,530 209,590
1999............................................. 25,174 189,068
2000............................................. 25,380 173,015
2001............................................. 24,777 152,007
Thereafter....................................... 105,866 589,445
-------- ----------
$231,606 $1,540,320
======== ==========
</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
$16,719, $8,267, and $3,952 for the years ended December 31, 1996, 1995 and
1994, respectively. These increases are generally payable in equal installments
throughout the year, based on estimated increases, with any differences being
adjusted at year end based upon actual expenses.
The Operating Partnership recognized percentage lease revenue from the
Hotel Properties of approximately $4,493, $1,797 and $0 for the years ended
December 31, 1996, 1995, and 1994, respectively.
6. RELATED PARTY TRANSACTIONS:
Certain of the RPG Properties were managed by affiliates of certain
partners of RPG prior to the business combination. Management, security, leasing
and other fees earned by these affiliates in connection with the management of
these properties were $864 for the period from January 1, 1994, to May 4, 1994.
In addition, the RPG Properties reimbursed affiliates for various operating
expenses paid to third parties on its behalf. No related party fees have been
paid subsequent to May 4, 1994.
F-31
<PAGE> 139
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
AND RAINWATER PROPERTY GROUP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Operating Partnership has leased the Hotel Properties to independent
companies (collectively, the "Hotel Lessees") pursuant to six separate leases,
each for a term of approximately 10 years. These independent companies are owned
4.5% by each of John C. Goff, who is an officer and trust manager of Crescent
Equities, and Gerald W. Haddock, who is an officer and trust manager of Crescent
Equities and an officer and the sole director of CREE, Ltd., and 91% by the
Hotel Lessees' asset manager. Under the leases, the Hotel Lessees have assumed
the rights and obligations of the property owner under the respective management
agreement with the hotel operators, as well as the obligation to pay all
property taxes and other charges against the property. As part of the lease
agreements for five of the Hotel Properties, the Operating Partnership has
agreed to fund all capital expenditures relating to furniture, fixtures and
equipment reserves required under the applicable management agreements. The only
exception is Canyon Ranch-Tucson, in which the hotel lessee owns all furniture,
fixtures, and equipment associated with the property and will fund all related
capital expenditures.
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 2057. Ground
lease expense during each of the three years ended December 31, 1996, 1995 and
1994 was $681, $442, and $83, respectively. Future minimum lease payments due
under such ground leases as of December 31, 1996, are as follows:
<TABLE>
<CAPTION>
GROUND
LEASES
------------
<S> <C>
1997.................................................. $ 1,259
1998.................................................. 1,212
1999.................................................. 1,215
2000.................................................. 1,228
2001.................................................. 1,244
Thereafter............................................ 79,456
-------
$85,614
=======
</TABLE>
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. PARTNERS' CAPITAL AND PARTNERS' DEFICIT:
The distributions paid during the period from May 5, 1994 to December 31,
1994, were $17,792.
On April 11, 1995, Crescent Equities completed a public offering of
5,175,000 common shares (including the underwriters' overallotment option) at
$28.125 per share. Net proceeds of approximately $136,400 from the offering were
contributed to the Operating Partnership, all of which were used to reduce
amounts outstanding under the Credit Facility. In connection with the Crescent
Equities offering, Richard E.
F-32
<PAGE> 140
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
AND RAINWATER PROPERTY GROUP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Rainwater, Chairman of the Board for Crescent Equities, contributed
approximately $30,500 to the Operating Partnership, all of which were used to
reduce amounts outstanding under the Credit Facility.
The distributions paid during the year ended December 31, 1995, were
$52,784.
On October 2, 1996, Crescent Equities completed a public offering (the
"Offering") of 11,500,000 common shares (including the underwriters'
overallotment option) at $40.375 per share. Net proceeds from the Offering
contributed to the Operating Partnership were approximately $437,433. The
Operating Partnership used a portion of these net proceeds to repay $16,000 on
FNBB short term note and $151,500 of 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 450,000 common
shares to several underwriters who participated in the Offering. The common
shares were sold at $42 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 subsequent acquisitions.
The distributions paid during the year ended December 31, 1996, was
$73,367.
On February 4, 1997, the Operating Partnership paid a distribution of
$26,100.
9. REORGANIZATION COSTS:
In 1994, non-recurring reorganization costs, which represent costs incurred
in the formation of the Operating Partnership and in connection with the
transfer of the properties by the predecessor partnerships, are comprised of the
following:
<TABLE>
<S> <C>
Professional fees........................................... $ 955
Title insurance premiums.................................... 920
Other....................................................... 25
------
$1,900
======
</TABLE>
10. EXTRAORDINARY ITEMS:
In April 1996, the Operating Partnership canceled its $150,000 credit
facility led by FNBB. 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
$1,599, resulting from the write-off of unamortized deferred financing costs.
During the period from May 5, 1994, to December 31, 1994, the Operating
Partnership recognized an extraordinary loss of $949 resulting from the
write-off of deferred financing costs on notes payable which were repaid early
and the write-off of predecessor partnership organization costs.
F-33
<PAGE> 141
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
AND RAINWATER PROPERTY GROUP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. ACQUISITIONS:
During 1996, 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 contributions from Crescent
Equities, debt proceeds from Nomura Asset Capital Corporation and CIGNA Note,
borrowings under the Credit Facility, debt assumption, and issuance of limited
partnership interests in the Operating Partnership.
<TABLE>
<CAPTION>
OPERATING
PARTNERSHIP'S ROOMS/ NET
ACQ. EFFECTIVE ACQ. GUEST RENTABLE
PROPERTY DATE CITY, STATE OWNERSHIP% PRICE NIGHTS AREA
-------- ----- ----------- ------------- -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
3333 Lee Parkway 1/96 Dallas, TX 100% $ 14,500 -- 233,484
301 Congress Avenue 4/96 Austin, TX 50 21,635 -- 418,338
Central Park Plaza 6/96 Omaha, NE 100 25,486 -- 409,850
Canyon Ranch-Tucson 7/96 Tucson, AZ 100 57,000 240 --
The Woodlands Office
Properties 7/96 Houston, TX 75 8,186 -- 109,400
Three Westlake Park 8/96 Houston, TX 100 28,980 -- 414,251
1615 Poydras 8/96 New Orleans, LA 100 36,450 -- 508,741
Greenway Plaza Office
Portfolio 10/96 Houston, TX 100 206,000 -- 4,256,885
Chancellor Park 10/96 San Diego, CA 100 31,058 -- 195,733
The Woodlands Retail
Properties 10/96 Houston, TX 75 22,500 -- 356,104
Sonoma Mission Inn & Spa 11/96 Sonoma, CA 100 53,400 168 --
Canyon Ranch-Lenox 12/96 Lenox, MA 100 30,000 202 --
160 Spear Street 12/96 San Francisco, CA 100 35,450 -- 276,420
Greenway I & IA 12/96 Dallas, TX 100 17,000 -- 146,704
Bank One Tower 12/96 Austin, TX 100 39,220 -- 389,503
Frost Bank Plaza 12/96 Austin, TX 100 36,000 -- 433,024
</TABLE>
The following represents additional information for properties which the
CREELP either owns a limited partnership interest in the partnership that owns
the property or has the principal economic interest in the property through its
ownership of a mortgage note secured by the property.
On April 18, 1996, CREELP together with Aetna Life Insurance Company
("Aetna") formed 301 Congress Avenue, L.P., a Delaware limited partnership in
which CREELP and Aetna, each own a 50% interest. Crescent/301, L.L.C., a
Delaware limited liability company that is wholly owned by the CREELP and CREE,
Ltd., serves as the general partner of 301 Congress Avenue, L.P. On April 18,
1996, 301 Congress Avenue, L.P. acquired from Aetna the 301 Congress Avenue
property. CREELP contributed to the 301 Congress Avenue, L.P. approximately
$21,635. Beginning in April 1996, the operations of 301 Congress Avenue, L.P.
were consolidated into the operations of CREELP.
On July 31, 1996, the Woodland Office Equities -- '95 Limited ("WOE"), in
which CREELP owns a 75% limited partnership interest, acquired two office
properties developed by The Woodlands Corporation. The purchase price for the
two office properties was approximately $10,915, of which CREELP contributed
$8,186 to WOE.
On August 16, 1996, CREELP acquired for approximately $29,000, the
principal economic interest in Three Westlake Park through its acquisition from
the lender of a mortgage note (the "Three Westlake Note"), in the principal
amount of approximately $46,300. Under the terms of the Three Westlake Note, as
F-34
<PAGE> 142
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
AND RAINWATER PROPERTY GROUP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
modified, CREELP will receive all net cash flow from Three Westlake Park through
February 2004. The Three Westlake Note is secured by a first priority deed of
trust on Three Westlake Park. The operations of the property were consolidated
into the operations of CREELP.
On October 31, 1996, the Company formed the Woodland Retail Equities -- '96
Limited ("WRE") partnership with The Woodlands Corporation ("TWC"), a subsidiary
of Mitchell Energy & Development Corp., in which CREELP owns a 75% limited
partner interest. WRE owns four retail properties located in The Woodlands.
CREELP's investment was approximately $22,500, with a minimum preferential
return of 9.75% that escalates in January 1999 to 10.5%.
Significant Transaction
On October 7, 1996, the Operating Partnership through three newly formed
single purpose limited partnerships, Fundings III, IV and V, L.P., acquired a
property portfolio located in Houston, Texas (the "Greenway Plaza Portfolio").
The Greenway Plaza Portfolio consists primarily of 10 suburban office properties
with an aggregate of approximately 4.3 million net rentable square feet, a
central plant which provides heated and chilled water to both the 10 office
properties and third parties, and a 389-room full-service hotel and a private
health and dining club, which are both subject to triple-net leases. The
aggregate cost of the Greenway Plaza Portfolio was $206,000, which was funded
through the issuance to the sellers of equity shares in the Operating
Partnership of $25,000, the assumption of $115,000 of nonrecourse indebtedness
and $66,000 of cash from contributions received from Crescent Equities.
Pro Forma Operating Results
Assuming completion of (i) the 1996 and 1995 property acquisitions and
Biltmore Note and (ii) the capital contributions received on October 2, 1996,
October 9, 1996, and April 11, 1995, in each case as of January 1, 1996 and
1995, pro forma operating results are presented as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
--------------------
1996 1995
-------- --------
(UNAUDITED)
<S> <C> <C>
Total Revenue............................................... $298,046 $288,536
Operating Income............................................ 74,802 72,481
Income before minority interest and extraordinary item...... 78,653 77,981
Net Income.................................................. 76,035 75,921
</TABLE>
The pro forma 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 property acquisitions and pro forma
adjustments. The historical operations of the destination resorts and
full-service hotel properties were adjusted to reflect the lease payments from
the hotel lessee to the Operating Partnership calculated on a pro forma basis by
applying the rent provisions (as defined in the lease agreements). Pro forma
adjustments primarily represent the increase in interest costs assuming the
borrowings to finance property acquisitions had occurred at the beginning of the
period.
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.
F-35
<PAGE> 143
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
AND RAINWATER PROPERTY GROUP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
12. SUBSEQUENT EVENTS (THROUGH MARCH 1, 1997, UNAUDITED):
Greenway II. On January 17, 1997, the Operating Partnership acquired
Greenway II, a seven-story Class A office property containing approximately
154,000 square feet of net rentable space located in the Richardson/Plano
submarket of Dallas, Texas. The purchase price was approximately $18,200, which
was funded through a draw under the Credit Facility.
Magellan Health Service Portfolio. On January 29, 1997, the Operating
Partnership entered into a definitive agreement, as amended effective February
28, 1997, to acquire substantially all of the real estate assets of Magellan
Health Services Inc.'s ("Magellan") domestic hospital provider business as
currently operated by Charter Behavioral Health Systems, Inc. ("Charter"). The
assets to be acquired by the Operating Partnership consist primarily of
approximately 90 acute care psychiatric hospitals and similar facilities.
Magellan and an affiliate of Crescent Equities ("Crescent Affiliate") to be
formed as described below will be equal owners of a to-be-formed limited
liability company ("OpCo") which will operate the facilities under a franchise
arrangement with Magellan and a triple-net lease agreement with the Operating
Partnership. The Operating Partnership will receive $40,000 in base rent the
first year with base rents in subsequent years increasing at a 5% compounded
annual rate over an initial twelve-year term. All maintenance and capital
improvement costs will be subordinated to the base rents due to the Operating
Partnership under the lease. Also, in conjunction with the acquisition, the
Operating Partnership and Crescent Affiliate will each receive warrants to
purchase 1,283,311 shares of Magellan's common stock exercisable at $30 per
share, subject to vesting and exercise restrictions. Management believes these
warrants will allow the Operating Partnership and Crescent Affiliate to
participate in the benefits realized by Magellan from this business realignment
as well as any benefits from the growth of Magellan's managed care business and
public sector business. The total amount to be paid in connection with the
transaction is $400,000, $5,000 of which will be paid by Crescent Affiliate for
its interest in OpCo upon the closing. Crescent Affiliate and Magellan each will
pay an additional $2,500 to OpCo within five days after the closing and will
commit to loan up to $17,500 during the five years following the closing.
Closing of the transaction is scheduled to be complete by the end of May 1997,
subject to approval of the transaction by Magellan's shareholders and customary
closing conditions.
Carter Crowley Portfolio. On February 10, 1997, the Operating Partnership
entered into a definitive agreement to acquire substantially all of the assets
of Carter-Crowley Properties, Inc., a company controlled by the family of Donald
J. Carter for an aggregate purchase price of approximately $383,000. The
purchase includes fourteen office properties aggregating approximately 3 million
square feet located in seven suburban Dallas submarkets. The Operating
Partnership or Crescent Affiliate will also acquire other assets consisting
principally of 1,221 acres of commercially zoned, undeveloped land in the
Dallas-Fort Worth metroplex, marketable securities, and equity and debt
interests in the Dallas Mavericks NBA basketball franchise. The transaction is
scheduled to be completed by the end of April 1997, subject to the completion of
due diligence and customary closing conditions.
Shelf Registration. On February 14, 1997, Crescent Equities filed a shelf
registration with the Securities and Exchange Commission ("SEC") for an
aggregate of $1,200,000 of common stock, preferred stock and warrants
exercisable for common stock. Any securities issued under the 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 this shelf
registration will provide Crescent Equities with more efficient and immediate
access to the capital markets at such time as it is considered appropriate. Net
proceeds from any offering of these securities are expected to be 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 in the Operating
Partnership's portfolio.
Trammell Crow Center. On February 28, 1997, the Operating Partnership
acquired substantially all of the economic interest in Trammell Crow Center
("TCC"), a 50-story Class A office property containing
F-36
<PAGE> 144
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
AND RAINWATER PROPERTY GROUP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
approximately 1,128,000 square feet of net rentable space. The Operating
Partnership acquired its interest in TCC through the purchase of fee simple
title to the property (subject to a ground lease and a leasehold estate for
years regarding the building) and two mortgage notes encumbering the leasehold
interests in the land and building. TCC is located in the cultural and financial
district of the Central Business District ("CBD") submarket of Dallas, Texas.
The purchase price was approximately $162,000, of which $150,000 was funded
through proceeds from an unsecured, short-term loan with the FNBB and the
remaining balance of $12,000 through a draw under the Credit Facility. The
short-term loan, which is interest only, bears interest at the Eurodollar rate
plus 185 basis points and is due at maturity on July 28, 1997.
Denver Properties. On February 28, 1997, the Operating Partnership
acquired, in a single transaction, the following three office properties in
Denver, Colorado: 44 Cook, 55 Madison and AT&T. 44 Cook, a 10-story Class A
office property, contains approximately 119,000 square feet of net rentable
space and 55 Madison, an 8-story Class A office property, contains approximately
126,000 square feet of net rentable space are both located in the Cherry Creek
submarket. The AT&T, a 15-story office property, contains approximately 170,000
square feet of net rentable space and is located in the Denver CBD. The combined
purchase price for the three office properties was $42,675 which was funded
through a draw under the Credit Facility.
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
<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>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------------------
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues............................................ $25,955 $29,228 $34,280 $40,497
Income before minority interests.................... 5,320 11,012 11,427 8,599
Minority interests.................................. -- -- (148) (667)
Net income.......................................... 5,320 11,012 11,279 7,932
</TABLE>
F-37
<PAGE> 145
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-38
<PAGE> 146
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-39
<PAGE> 147
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-40
<PAGE> 148
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-41
<PAGE> 149
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-42
<PAGE> 150
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-43
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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.
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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
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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,
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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-47
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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.
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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.
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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.
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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>
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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
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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-53
<PAGE> 161
CARTER-CROWLEY OPERATING REAL ESTATE PORTFOLIO
STATEMENT OF EXCESS OF REVENUES OVER
SPECIFIC OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
F-54
<PAGE> 162
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Crescent Real Estate Equities Limited Partnership:
We have audited the accompanying statement of excess of revenues over
specific operating expenses (as defined in Note 2) of Carter-Crowley Operating
Real Estate Portfolio for the year ended December 31, 1996. This statement is
the responsibility of the Property's management. Our responsibility is to
express an opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statement. 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 audit
provides a reasonable basis for our opinion.
In our opinion, the statement referred to above presents fairly, in all
material respects, the excess of revenues over specific operating expenses of
Carter-Crowley Operating Real Estate Portfolio for the year ended December 31,
1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
March 18, 1997
F-55
<PAGE> 163
CARTER-CROWLEY OPERATING REAL ESTATE PORTFOLIO
STATEMENT OF EXCESS OF
REVENUES OVER SPECIFIC OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, 1997
1996 (UNAUDITED)
------------ -----------
<S> <C> <C>
REVENUES:
Office rent............................................... $31,191,267 $8,650,675
Residential rent.......................................... 881,509 218,631
Recoveries................................................ 383,872 123,213
Other..................................................... 355,157 61,952
----------- ----------
32,811,805 9,054,471
SPECIFIC OPERATING EXPENSES:
Utilities................................................. 5,085,564 1,213,195
Repairs, maintenance, and contract services............... 4,493,230 992,070
Real estate taxes......................................... 3,924,737 1,015,814
Salaries.................................................. 2,954,502 761,541
General and administrative................................ 526,811 99,209
Insurance................................................. 272,421 77,201
Ground lease.............................................. 154,104 38,526
Management fees........................................... 44,322 10,909
----------- ----------
17,455,691 4,208,465
----------- ----------
EXCESS OF REVENUES OVER SPECIFIC OPERATING EXPENSES......... $15,356,114 $4,846,086
=========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-56
<PAGE> 164
CARTER-CROWLEY OPERATING REAL ESTATE PORTFOLIO
NOTES TO STATEMENT OF EXCESS
OF REVENUES OVER SPECIFIC OPERATING EXPENSES
DECEMBER 31, 1996
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Description of Portfolio
Carter-Crowley Operating Real Estate Portfolio (the "Portfolio") consists
of 14 office buildings (the "Buildings") and two apartment/condominium complexes
(the "Apartments") located in Dallas, Texas, and surrounding suburbs. The
Properties contain approximately 3 million rentable square feet. The Portfolio,
including the land on which the Buildings and Apartments are located (with the
exception of one office building subject to a ground lease expiring May, 2079),
are owned fee simple.
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 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 statement of excess of revenues over specific operating
expenses is presented on the accrual basis of accounting. This statement is not
intended to be a complete presentation of revenues and operating expenses for
the year ended December 31, 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
Properties. This statement has been prepared in accordance with requirements for
financial information required by Form 8-K and Rule 3.14 of Regulation S-X of
the Securities and Exchange Commission. Accordingly, the statement does not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
3. PROPERTY MANAGEMENT:
The Buildings are managed internally and are allocated a management fee of
4% of gross rental receipts. Total management fees allocated to the Buildings
for the year ended December 31, 1996, were approximately $1.3 million and are
eliminated against the corresponding fees recorded by the Portfolio in the
accompanying statement of excess of revenues over specific operating expenses.
Approximately $1.1 million of home office salary expenses related to Building
management are included in salaries in the accompanying statement of excess of
revenues over specific operating expenses.
The Portfolio entered into a management agreement with Columbus Management
Services, Inc. (the "Manager") on January 1, 1996, relating to the management of
the Apartments. The agreement with the Manager requires a monthly management fee
of $200 and 5% of gross revenues, as defined. Total management fees for the year
ended December 31, 1996, were approximately $44,000. The agreement may be
terminated at
F-57
<PAGE> 165
CARTER-CROWLEY OPERATING REAL ESTATE PORTFOLIO
NOTES TO STATEMENT OF EXCESS
OF REVENUES OVER SPECIFIC OPERATING EXPENSES -- (CONTINUED)
any time by either party in accordance with the management agreement. If
terminated, the management fees must be paid through the month in which the
Manager's service will extend.
4. INTENT TO SELL:
On February 10, 1997, the fee owner of the Properties entered into a
contract to sell its interest in the Portfolio to an unaffiliated third party.
F-58
<PAGE> 166
TRAMMELL CROW CENTER
STATEMENT OF EXCESS OF REVENUES OVER
SPECIFIC OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
F-59
<PAGE> 167
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Crescent Real Estate Equities Limited Partnership:
We have audited the accompanying statement of excess of revenues over
specific operating expenses (as defined in Note 2) of Trammell Crow Center for
the year ended December 31, 1996. This statement is the responsibility of the
Property's management. Our responsibility is to express an opinion on this
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statement. 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 audit
provides a reasonable basis for our opinion.
In our opinion, the statement referred to above presents fairly, in all
material respects, the excess of revenues over specific operating expenses of
Trammell Crow Center for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
February 14, 1997
F-60
<PAGE> 168
TRAMMELL CROW CENTER
STATEMENT OF EXCESS OF REVENUES
OVER SPECIFIC OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
REVENUES:
Office rent............................................... $19,616,793
Parking................................................... 1,143,927
Recoveries................................................ 2,223,219
Other..................................................... 20,751
-----------
23,004,690
SPECIFIC OPERATING EXPENSES:
Real estate taxes......................................... 2,207,946
Utilities................................................. 1,924,197
Repairs, maintenance, and contract services............... 1,916,371
Ground lease.............................................. 1,700,000
Salaries.................................................. 1,088,448
General and administrative................................ 821,717
Management fees........................................... 454,099
Insurance................................................. 151,982
-----------
10,264,760
-----------
EXCESS OF REVENUES OVER SPECIFIC OPERATING EXPENSES......... $12,739,930
===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-61
<PAGE> 169
TRAMMELL CROW CENTER
NOTES TO STATEMENT OF EXCESS OF REVENUES
OVER SPECIFIC OPERATING EXPENSES
DECEMBER 31, 1996
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Description of Property
Trammell Crow Center (the "Property") is a 50-story office tower located in
the central business district of Dallas, Texas. The Property contains
approximately 1,133,000 rentable square feet as well as an underground parking
garage. C-W #11 Limited Partnership ("C-W #11") is the lessee of the land under
a ground lease, as amended February 28, 1997, which expires December 2037. The
fee owner of the land is one of the Property's lenders.
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 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 statement of excess of revenues over specific operating
expenses is presented on the accrual basis of accounting. This statement is not
intended to be a complete presentation of revenues and operating expenses for
the year ended December 31, 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:
C-W #11 entered into a management agreement with Trammell Crow Dallas/Fort
Worth, Inc. (the "Manager") on June 1, 1993. The agreement with the Manager
requires a management fee of 2% of gross rental receipts, as defined. Effective
January 1, 1997, the monthly management fee decreases to 1.75% of gross rental
receipts. Total management fees for the year ended December 31, 1996, were
approximately $454,000. The agreement may be terminated at any time by either
party in accordance with the management agreement. If terminated, the management
fees must be paid through the month in which the Manager's service will extend.
4. SIGNIFICANT TENANTS:
The largest tenant of the Property occupies approximately 173,000 square
feet, or 15%, of the total leasable square footage. This lease expires in
December 1999. The second largest tenant of the Property occupies approximately
132,000 square feet, or 12%, of the total leasable square footage. This lease
expires in June 2005.
F-62
<PAGE> 170
TRAMMELL CROW CENTER
NOTES TO STATEMENT OF EXCESS OF REVENUES
OVER SPECIFIC OPERATING EXPENSES -- (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES:
Lease Commitments
Ground lease expense for the year ended December 31, 1996 was approximately
$1.7 million. Future minimum lease payments due under the ground lease as of
December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997........................................... $ 2,500,000
1998........................................... 2,500,000
1999........................................... 2,500,000
2000........................................... 2,500,000
2001........................................... 2,500,000
Thereafter..................................... 90,000,000
------------
$102,500,000
============
</TABLE>
Contingencies
The accompanying statement of excess of revenues over specific operating
expenses includes bad debt expense of approximately $675,000 relating to a legal
dispute which is in the settlement process.
6. INTENT TO SELL:
On January 14, 1997, the fee owner of the Property and both of the
Property's mortgage note lenders approved a nonbinding letter of intent to sell
their interest (including equity, debt, and accrued interest) in the Property to
an unaffiliated third party. The expected sales price is approximately $162
million.
F-63
<PAGE> 171
FOUNTAIN PLACE
STATEMENTS OF EXCESS OF REVENUES OVER
SPECIFIC OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996,
AND THE FIVE MONTH PERIOD ENDED MAY 31, 1997
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
F-64
<PAGE> 172
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 Fountain Place for the
year ended December 31, 1996, and the five month period ended May 31, 1997. This
statement is 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
Fountain Place for the year ended December 31, 1996, and the five month period
ended May 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
July 23, 1997
F-65
<PAGE> 173
FOUNTAIN PLACE
STATEMENTS OF EXCESS OF REVENUES
OVER SPECIFIC OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996,
THE FIVE MONTH PERIOD ENDED MAY 31, 1997 AND
THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, MAY 31, SEPTEMBER 30,
1996 1997 1997
------------ ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES:
Office rent........................................... $18,920,706 $7,523,968 $13,569,128
Parking............................................... 1,003,465 415,852 750,573
Recoveries............................................ 1,934,493 918,133 1,967,193
Other................................................. 648,730 254,579 260,067
----------- ---------- -----------
22,507,394 9,112,532 16,546,961
----------- ---------- -----------
SPECIFIC OPERATING EXPENSES:
Real estate taxes..................................... 2,250,067 1,174,762 2,088,491
Utilities............................................. 1,720,973 720,101 1,347,975
Repairs, maintenance, and contract services........... 3,563,067 1,529,122 2,776,031
Salaries.............................................. 1,070,729 502,839 887,270
General and administrative............................ 375,787 223,369 465,128
Management fees....................................... 648,505 243,322 428,392
Insurance............................................. 205,864 80,829 146,726
----------- ---------- -----------
9,834,992 4,474,344 8,140,013
----------- ---------- -----------
EXCESS OF REVENUES OVER SPECIFIC OPERATING EXPENSES..... $12,672,402 $4,638,188 $ 8,406,948
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-66
<PAGE> 174
FOUNTAIN PLACE
NOTES TO STATEMENTS OF EXCESS OF REVENUES
OVER SPECIFIC OPERATING EXPENSES
MAY 31, 1997, AND DECEMBER 31, 1996
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Description of Property
Fountain Place (the "Property") is a 58-story office tower located in the
central business district of Dallas, Texas. The Property contains approximately
1,200,000 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 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 five month period ended May 31,
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:
Chubb Realty of Texas, Inc. (the "Manager"), a wholly owned subsidiary of
Bellemead Development Corporation, has had an arrangement to manage the Property
since August 1995. The Manager requires a management fee of 3.25% of gross
rental receipts, as defined. Total management fees for the year ended December
31, 1996, and the five month period ended May 31, 1997, were approximately
$649,000 and $243,000, respectively.
F-67
<PAGE> 175
FOUNTAIN PLACE
NOTES TO STATEMENTS OF EXCESS OF REVENUES
OVER SPECIFIC OPERATING EXPENSES
MAY 31, 1997, AND DECEMBER 31, 1996 -- (CONTINUED)
4. SIGNIFICANT TENANTS:
The largest tenant of the Property occupies approximately 300,000 square
feet, or 25%, of the total square footage. This lease expires in December 1999.
The second largest tenant of the Property occupies approximately 251,000 square
feet, or 21%, of the total rentable square footage. This lease expires in
February 2017.
F-68
<PAGE> 176
HOUSTON CENTER
STATEMENTS OF EXCESS OF REVENUES OVER
SPECIFIC OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996,
AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
F-69
<PAGE> 177
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 Houston Center for the
year ended December 31, 1996, and for the six month period ended June 30, 1997.
These statements and the supplemental schedules are the responsibility of the
Property's management. Our responsibility is to express an opinion on these
statements and the supplemental schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 statements 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
Houston Center for the year ended December 31, 1996, and for the six month
period ended June 30, 1997, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
statements taken as a whole. The supplemental schedules included on pages 4 and
5 are presented for the purposes of additional analysis and are not a required
part of the basic statements. This information has been subjected to the
auditing procedures applied in our audits of the basic statements taken as a
whole.
ARTHUR ANDERSEN LLP
Dallas, Texas,
August 22, 1997
F-70
<PAGE> 178
HOUSTON CENTER
STATEMENTS OF EXCESS OF REVENUES
OVER SPECIFIC OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996,
AND THE SIX MONTH PERIOD ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
<S> <C> <C>
REVENUES:
Office rent............................................... $21,761,693 $10,745,759
Stepped rent.............................................. (30,158) (291,114)
Parking................................................... 4,909,768 2,739,939
Recoveries................................................ 16,762,064 8,569,720
Other..................................................... 2,165,715 862,381
----------- -----------
45,569,082 22,626,685
----------- -----------
SPECIFIC OPERATING EXPENSES:
Real estate taxes......................................... 5,094,126 2,520,371
Utilities................................................. 4,589,307 2,332,058
Repairs, maintenance, and contract services............... 7,939,089 3,406,810
Leasehold interest expense (First City Tower Garage)...... 995,832 493,972
Salaries.................................................. 2,387,584 1,069,142
General and administrative................................ 1,844,256 829,184
Management fees........................................... 1,962,873 958,472
Insurance................................................. 529,401 278,342
----------- -----------
25,342,468 11,888,351
----------- -----------
EXCESS OF REVENUES OVER SPECIFIC OPERATING
EXPENSES.................................................. $20,226,614 $10,738,334
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-71
<PAGE> 179
HOUSTON CENTER
NOTES TO STATEMENTS OF EXCESS OF REVENUES
OVER SPECIFIC OPERATING EXPENSES
DECEMBER 31, 1996, AND JUNE 30, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Description of Property
Houston Center (the "Property") is a combination of the following certain
assets located in downtown Houston, Texas.
<TABLE>
<CAPTION>
ASSET TYPE SQUARE FEET/NO. OF UNITS
----- ---- ------------------------
<S> <C> <C>
1 Houston Center....................................... Office 1,065,215 sq. ft.
2 Houston Center....................................... Office 1,024,956 sq. ft.
4 Houston Center....................................... Office 674,247 sq. ft.
The Park Shops......................................... Retail 190,729 sq. ft.
Houston Center Garage.................................. 1,353 spaces
First City Tower Garage leasehold interest............. 731 spaces
Undeveloped Land....................................... 870,000 sq. ft.
</TABLE>
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 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 for the six months ended June 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:
The Property (except for The Park Shops) entered into a management
agreement with Heitman Properties of Texas Ltd. (the "Manager") on September 30,
1993. The agreement with the Manager requires a management fee of 4.25% of gross
rental receipts, as defined. The Park Shops entered into a management agreement
with Urban Retail Properties Co. ("Urban"). Urban receives a management fee of
4.25% of gross rental receipts, as defined. Total management fees for the year
ended December 31, 1996, and for the six month period ended June 30, 1997, were
approximately $1,962,873 and $ 958,472, respectively. The agreements currently
expire September 30, 1999. However, in conjunction with the sale of the
Property, the agreements are being amended to expire on December 31, 1998.
F-72
<PAGE> 180
HOUSTON CENTER
NOTES TO STATEMENTS OF EXCESS OF REVENUES
OVER SPECIFIC OPERATING EXPENSES -- (CONTINUED)
4. SIGNIFICANT TENANTS:
There are no individual tenants that occupy more than 10% of the net
rentable square footage of the Property as of June 30, 1997.
5. FIRST CITY TOWER GARAGE LEASEHOLD INTEREST:
The Property's owner leases 731 spaces located in the First City Tower
Garage from an affiliate. The lease expires in 2019. The lease requires monthly
installments based on estimates of the garage's operations for each year. The
estimates of expenses are reconciled to actual expenses in the following year.
F-73
<PAGE> 181
SCHEDULE I
HOUSTON CENTER
STATEMENTS OF EXCESS OF REVENUES
OVER SPECIFIC OPERATING EXPENSES BY ASSET
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
HOUSTON FIRST CITY
1 HOUSTON 2 HOUSTON 4 HOUSTON THE PARK CENTER TOWER UNDEVELOPED
CENTER CENTER CENTER SHOPS GARAGE GARAGE LAND
----------- ----------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Office rent.................. $ 8,161,593 $ 7,274,383 $4,094,402 $2,231,315 $ -- $ -- $ --
Stepped rent................. 206,622 (157,294) (48,133) (31,353) -- -- --
Parking(A)................... 387,759 673,414 211,222 -- 1,819,681 1,218,419 599,273
Recoveries................... 5,695,959 6,180,408 3,775,454 1,110,243 -- -- --
Other........................ 548,682 705,180 620,905 249,808 5,040 -- 36,100
----------- ----------- ---------- ---------- ---------- ---------- --------
15,000,615 14,676,091 8,653,850 3,560,013 1,824,721 1,218,419 635,373
----------- ----------- ---------- ---------- ---------- ---------- --------
SPECIFIC OPERATING EXPENSES:
Real estate taxes............ 1,586,259 1,347,783 1,074,583 331,420 318,153 150,400 285,528
Utilities.................... 1,563,791 1,557,007 972,075 375,831 49,770 -- 70,833
Repairs, maintenance, and
contract services.......... 2,337,064 2,702,426 1,610,049 1,038,962 152,982 -- 97,606
Leasehold interest expense... -- -- -- -- -- 995,832 --
Salaries..................... 693,682 815,513 548,190 318,786 7,184 -- 4,229
General and administrative... 576,957 395,332 269,810 536,424 -- -- 65,733
Management fees.............. 626,037 625,602 382,744 177,368 74,451 48,550 28,121
Insurance.................... 156,642 193,887 93,758 34,686 25,871 -- 24,557
----------- ----------- ---------- ---------- ---------- ---------- --------
7,540,432 7,637,550 4,951,209 2,813,477 628,411 1,194,782 576,607
----------- ----------- ---------- ---------- ---------- ---------- --------
EXCESS OF REVENUES OVER
SPECIFIC OPERATING
EXPENSES..................... $ 7,460,183 $ 7,038,541 $3,702,641 $ 746,536 $1,196,310 $ 23,637 $ 58,766
=========== =========== ========== ========== ========== ========== ========
<CAPTION>
CONSOLIDATED
TOTAL
------------
<S> <C>
REVENUES:
Office rent.................. $21,761,693
Stepped rent................. (30,158)
Parking(A)................... 4,909,768
Recoveries................... 16,762,064
Other........................ 2,165,715
-----------
45,569,082
-----------
SPECIFIC OPERATING EXPENSES:
Real estate taxes............ 5,094,126
Utilities.................... 4,589,307
Repairs, maintenance, and
contract services.......... 7,939,089
Leasehold interest expense... 995,832
Salaries..................... 2,387,584
General and administrative... 1,844,256
Management fees.............. 1,962,873
Insurance.................... 529,401
-----------
25,342,468
-----------
EXCESS OF REVENUES OVER
SPECIFIC OPERATING
EXPENSES..................... $20,226,614
===========
</TABLE>
- ---------------
(A) Parking is net of expenses paid by the third party operator.
F-74
<PAGE> 182
SCHEDULE II
HOUSTON CENTER
STATEMENTS OF EXCESS OF REVENUES
OVER SPECIFIC OPERATING EXPENSES BY ASSET
FOR THE PERIOD ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
1 HOUSTON 2 HOUSTON 4 HOUSTON THE PARK HOUSTON FIRST CITY UNDEVELOPED
CENTER CENTER CENTER SHOPS CENTER GARAGE TOWER GARAGE LAND
---------- ---------- ---------- ---------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Office rent..................... $4,366,484 $3,586,693 $1,720,578 $1,072,578 $ -- $ -- $ --
Stepped rent.................... (67,273) (129,295) (67,218) (27,328) -- -- --
Parking(A)...................... 204,747 372,694 120,001 -- 1,009,422 621,616 411,459
Recoveries...................... 3,009,647 3,058,185 1,823,901 677,987 -- -- --
Other........................... 292,612 122,024 323,661 114,364 2,520 -- 7,200
---------- ---------- ---------- ---------- ---------- -------- --------
7,806,217 7,010,301 3,920,349 1,837,601 1,011,942 621,616 418,659
---------- ---------- ---------- ---------- ---------- -------- --------
SPECIFIC OPERATING EXPENSES:
Real estate taxes............... 793,130 666,990 537,291 141,398 160,574 77,854 143,134
Utilities....................... 849,051 799,552 488,721 154,463 20,783 -- 19,488
Repairs, maintenance, and
contract services............. 1,108,755 1,091,851 622,498 486,411 42,294 -- 55,001
Leasehold interest expense...... -- -- -- -- -- 493,972 --
Salaries........................ 361,886 311,355 249,526 141,019 3,862 -- 1,494
General and administrative...... 218,266 182,227 165,193 249,055 -- -- 14,443
Management fees................. 330,183 309,292 149,475 86,442 39,213 27,186 16,681
Insurance....................... 92,074 100,223 44,550 17,464 12,360 -- 11,671
---------- ---------- ---------- ---------- ---------- -------- --------
3,753,345 3,461,490 2,257,254 1,276,252 279,086 599,012 261,912
---------- ---------- ---------- ---------- ---------- -------- --------
EXCESS OF REVENUES OVER SPECIFIC
OPERATING EXPENSES.............. $4,052,872 $3,548,811 $1,663,095 $ 561,349 $ 732,856 $ 22,604 $156,747
========== ========== ========== ========== ========== ======== ========
<CAPTION>
CONSOLIDATED
TOTAL
------------
<S> <C>
REVENUES:
Office rent..................... $10,745,759
Stepped rent.................... (291,114)
Parking(A)...................... 2,739,939
Recoveries...................... 8,569,720
Other........................... 862,381
-----------
22,626,685
-----------
SPECIFIC OPERATING EXPENSES:
Real estate taxes............... 2,520,371
Utilities....................... 2,332,058
Repairs, maintenance, and
contract services............. 3,406,810
Leasehold interest expense...... 493,972
Salaries........................ 1,069,142
General and administrative...... 829,184
Management fees................. 958,472
Insurance....................... 278,342
-----------
11,888,351
-----------
EXCESS OF REVENUES OVER SPECIFIC
OPERATING EXPENSES.............. $10,738,334
===========
</TABLE>
- ---------------
(A) Parking is net of expenses paid by the third party operator.
F-75
<PAGE> 183
MIAMI CENTER
STATEMENTS OF EXCESS OF REVENUES OVER
SPECIFIC OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996,
AND THE SIX-MONTH PERIOD ENDED JUNE 30, 1997
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
F-76
<PAGE> 184
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 Miami Center for the year
ended December 31, 1996, and the six-month period ended June 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
Miami Center for the year ended December 31, 1996, and the six-month period
ended June 30, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
August 21, 1997
F-77
<PAGE> 185
MIAMI CENTER
STATEMENTS OF EXCESS OF REVENUES
OVER SPECIFIC OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996,
AND THE SIX-MONTH PERIOD ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ ----------
<S> <C> <C>
REVENUES:
Office rent............................................... $12,554,877 $6,033,466
Parking................................................... 1,259,118 624,675
Recoveries................................................ 930,406 492,001
Other..................................................... 83,863 8,160
----------- ----------
14,828,264 7,158,302
SPECIFIC OPERATING EXPENSES:
Real estate taxes......................................... 2,498,327 1,236,978
Utilities................................................. 1,147,064 566,893
Repairs, maintenance, and contract services............... 2,614,911 1,276,345
Salaries.................................................. 363,052 212,870
General and administrative................................ 546,345 224,529
Management fees........................................... 331,665 167,269
Insurance................................................. 209,933 100,828
----------- ----------
7,711,297 3,785,712
----------- ----------
EXCESS OF REVENUES OVER SPECIFIC OPERATING EXPENSES......... $ 7,116,967 $3,372,590
=========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-78
<PAGE> 186
MIAMI CENTER
NOTES TO STATEMENTS OF EXCESS OF REVENUES
OVER SPECIFIC OPERATING EXPENSES
DECEMBER 31, 1996, AND JUNE 30, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Description of Property
Miami Center (the "Property") is a 34-story office tower located in the
central business district of Miami, Florida. The Property contains approximately
773,000 rentable square feet as well as a nine level attached parking facility.
The building is owned by The Prudential Insurance Company of America, a New
Jersey Corporation. The Property is managed by Premisys Real Estate Services,
Inc.
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 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 six-month period ended June 30,
1997, as certain items such as depreciation, amortization, interest, and
administrative expenses have been excluded since they are not comparable to the
proposed future operations of the Property.
3. PROPERTY MANAGEMENT:
The Property entered into a management agreement with Premisys Real Estate
Services, Inc. (the "Manager") in June 1995. The agreement with the Manager
requires a management fee of 2.25 % of gross rental receipts, as defined. Total
management fees for the year ended December 31, 1996, and the six-month period
ended June 30, 1997, were approximately $331,665 and $167,269, respectively. The
agreement may be terminated at any time by either party in accordance with the
management agreement. If terminated, the Manager shall be paid an amount equal
to the next monthly installment of the annual fee.
4. SIGNIFICANT TENANTS:
The largest tenant of the Property occupies approximately 100,000 square
feet, or 13%, of the total leasable square footage. This lease expires in
January 2009. The second largest tenant of the Property occupies approximately
67,000 square feet, or 9%, of the total leasable square footage. This lease
expires in October 2005.
F-79
<PAGE> 187
BANK ONE CENTER
STATEMENT OF EXCESS OF REVENUES OVER
SPECIFIC OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996,
AND THE EIGHT MONTH PERIOD ENDED AUGUST 31, 1997
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
F-80
<PAGE> 188
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Crescent Real Estate Equities Limited Partnership
and TrizecHahn Office Properties, Inc.:
We have audited the accompanying statements of excess of revenues over
specific operating expenses (as defined in Note 2) of Bank One Center for the
year ended December 31, 1996, and the eight month period ended August 31, 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 presents fairly, in all
material respects, the excess of revenues over specific operating expenses of
Bank One Center for the year ended December 31, 1996, and the eight month period
ended August 31, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
October 15, 1997
F-81
<PAGE> 189
BANK ONE CENTER
STATEMENTS OF EXCESS OF REVENUES
OVER SPECIFIC OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996,
AND THE EIGHT MONTH PERIOD ENDED AUGUST 31, 1997
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1996 1997
------------ -----------
<S> <C> <C>
REVENUES:
Office rent............................................... $15,443,972 $10,498,563
Parking................................................... 1,950,290 1,251,984
Recoveries................................................ 6,816,286 4,614,930
Other..................................................... 831,886 584,718
----------- -----------
25,042,434 16,950,195
----------- -----------
SPECIFIC OPERATING EXPENSES:
Real estate taxes......................................... 2,366,374 2,103,054
Utilities................................................. 1,861,291 1,290,853
Repairs, maintenance, and contract services............... 3,688,396 2,754,971
Salaries.................................................. 908,148 610,310
General and administrative................................ 1,393,094 797,074
Management fees........................................... 231,581 165,582
Insurance................................................. 212,121 130,749
Ground rent............................................... 264,033 183,626
----------- -----------
10,925,038 8,036,219
----------- -----------
EXCESS OF REVENUES OVER SPECIFIC OPERATING
EXPENSES.................................................. $14,117,396 $ 8,913,976
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-82
<PAGE> 190
BANK ONE CENTER
NOTES TO STATEMENTS OF EXCESS OF REVENUES
OVER SPECIFIC OPERATING EXPENSES
AUGUST 31, 1997, AND DECEMBER 31, 1996
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Description of Property
Bank One Center (the "Property") is a 60-story office tower located in the
central business district of Dallas, Texas. The Property contains approximately
1,531,000 rentable square feet as well as underground and attached above ground
parking garages. A parcel of the Property's land is subject to a ground lease
dated December 28, 1981, which expires May 31, 2042.
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 eight month period ended August
31, 1997, as certain items such as depreciation, amortization, and interest
expense have been excluded since they are not comparable to the proposed future
operations of the Property.
3. PROPERTY MANAGEMENT:
The Property entered into a management agreement with LaSalle Partners
Management Limited (the "Manager") in November 1995. The Manager requires a
management fee of 1% of gross rental receipts, as defined. Total management fees
for the year ended December 31, 1996, and the eight month period ended August
31, 1997, were approximately $232,000 and $166,000, respectively.
4. SIGNIFICANT TENANT:
The largest tenant of the Property occupies approximately 350,000 square
feet, or 23%, of the total square footage. This lease expires in January 2010.
F-83
<PAGE> 191
ENERGY CENTRE
STATEMENTS OF EXCESS OF REVENUES OVER
SPECIFIC OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 15, 1996, AND
THE NINE-MONTH PERIOD ENDED SEPTEMBER 15, 1997
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
F-84
<PAGE> 192
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 Energy Centre for the year
ended December 15, 1996, and the nine-month period ended September 15, 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
Energy Centre for the year ended December 15, 1996, and the nine-month period
ended September 15, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
December 4, 1997
F-85
<PAGE> 193
ENERGY CENTRE
STATEMENTS OF EXCESS OF REVENUES
OVER SPECIFIC OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 15, 1996,
AND THE NINE-MONTH PERIOD ENDED SEPTEMBER 15, 1997
<TABLE>
<CAPTION>
DECEMBER 15, SEPTEMBER 15,
1996 1997
------------ -------------
<S> <C> <C>
REVENUES:
Office rent............................................... $8,081,180 $6,088,826
Parking................................................... 838,914 640,834
Recoveries................................................ 67,519 38,398
Other..................................................... 356,294 345,389
---------- ----------
9,343,907 7,113,447
---------- ----------
SPECIFIC OPERATING EXPENSES:
Real estate taxes......................................... 850,622 639,123
Utilities................................................. 863,193 654,141
Repairs, maintenance, and contract services............... 846,475 492,322
Salaries and benefits..................................... 436,045 331,202
General and administrative................................ 917,319 719,876
Management fees........................................... 114,247 74,406
Insurance................................................. 173,993 131,382
---------- ----------
4,201,894 3,042,452
---------- ----------
EXCESS OF REVENUES OVER SPECIFIC OPERATING EXPENSES......... $5,142,013 $4,070,995
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-86
<PAGE> 194
ENERGY CENTRE
NOTES TO STATEMENTS OF EXCESS OF REVENUES
OVER SPECIFIC OPERATING EXPENSES
DECEMBER 15, 1996, AND SEPTEMBER 15, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Description of Property
Energy Centre (the "Property") is a 39-story office tower located in the
central business district of New Orleans, Louisiana. The Property contains
approximately 761,500 rentable square feet.
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 are 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 15, 1996, and the nine-month period ended September
15, 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:
Transwestern Property Company (the "Manager") has had an arrangement to
manage the Property since January 1995. The Manager required a management fee of
1.5% of gross rental revenue in 1996 and through March 1997. Effective April
1997, the management fee was adjusted to 1.4% through June 1997, then adjusted
to 1.0% from July through September 15, 1997. Total management fees for the year
ended December 15, 1996, and the nine-month period ended September 15, 1997,
were approximately $114,000 and $74,000, respectively.
4. SIGNIFICANT TENANTS:
The largest tenant of the Property occupies approximately 73,000 square
feet, or 10%, of the total square footage. This lease expires in July 2008.
F-87
<PAGE> 195
STATION CASINOS
F-88
<PAGE> 196
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-89
<PAGE> 197
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-90
<PAGE> 198
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-91
<PAGE> 199
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-92
<PAGE> 200
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-93
<PAGE> 201
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-94
<PAGE> 202
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-95
<PAGE> 203
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
F-96
<PAGE> 204
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
jurisdictions where gaming has been approved. In addition, at March 31, 1997 and
1996, $3.7 million and $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>
F-97
<PAGE> 205
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. A tranche of the Bank Facility contains
a minimum tangible net worth requirement for Palace
F-98
<PAGE> 206
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-99
<PAGE> 207
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $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
F-100
<PAGE> 208
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-101
<PAGE> 209
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
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
F-102
<PAGE> 210
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-103
<PAGE> 211
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
F-104
<PAGE> 212
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-105
<PAGE> 213
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 of $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
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
F-106
<PAGE> 214
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-107
<PAGE> 215
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>
F-108
<PAGE> 216
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
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.
F-109
<PAGE> 217
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company does not believe the Akin Ruling will have a material adverse
impact on the Station Casino St. Charles operations.
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
F-110
<PAGE> 218
STATION CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-111
<PAGE> 219
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
PRO FORMA CONSOLIDATING FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS)
The pro forma information for the year ended December 31, 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 450,000 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 these net proceeds were contributed 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 these net proceeds were contributed 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) Property
acquisitions, other investments and related financing and share issuances during
1996, 1997 and 1998, and (viii) Pending Investments 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.
The pro forma information for the nine months ended September 30, 1997
assumes completion, in each case as of January 1, 1997 in determining operating
and other data, and, in each case as of September 30, 1997 in determining
balance sheet data, of (i) 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, (ii) the UBS Offering and these net
proceeds were contributed to the Operating Partnership, which used the net
proceeds to repay approximately $145,000 of indebtedness under the Credit
Facility, (iii) 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, (iv) the October 1997 Offering and
these net proceeds were contributed to the Operating Partnership, which used the
net proceeds 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, (v) 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, (vi) Property acquisitions, other investments and related financing
and share issuances during 1997 and 1998, and (vii) Pending Investments 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.
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-112
<PAGE> 220
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 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.................... $3,113,743 $2,261,016(B) $5,374,759
Less -- accumulated depreciation.............. (256,204) -- (256,204)
---------- ---------- ----------
Net investment in real estate....... 2,857,539 2,261,016 5,118,555
Cash and cash equivalents..................... 46,691 67,625(C) 114,316
Restricted cash and cash equivalents.......... 32,462 -- 32,462
Accounts receivable, net...................... 23,980 -- 23,980
Deferred rent receivable...................... 30,649 -- 30,649
Investments in mortgages and equity of
unconsolidated companies.................... 369,779 218,075(D) 587,854
Notes receivable, net......................... 166,323 7,800(E) 174,123
Other assets, net............................. 87,641 -- 87,641
---------- ---------- ----------
Total assets........................ $3,615,064 $2,554,516 $6,169,580
========== ========== ==========
LIABILITIES
Borrowings under Credit Facility.............. $ 316,500 $ 207,550(F) $ 524,050
Notes payable................................. 1,460,404 (85,000)(G) 2,571,704
1,196,300(H)
Accounts payable, accrued expenses and other
liabilities.............................. 88,230 (25,000)(I) 63,230
---------- ---------- ----------
Total liabilities................... 1,865,134 1,293,850 3,158,984
---------- ---------- ----------
MINORITY INTERESTS............................ 28,396 -- 28,396
PARTNERS' CAPITAL
General partner............................. 4,295 -- 4,295
Limited partners............................ 1,717,239 1,260,666(J) 2,977,905
---------- ---------- ----------
Total partners' capital............. 1,721,534 1,260,666 2,982,200
---------- ---------- ----------
Total liabilities and partners'
capital........................... $3,615,064 $2,554,516 $6,169,580
========== ========== ==========
</TABLE>
See accompanying notes to Pro Forma Consolidated Balance Sheet.
F-113
<PAGE> 221
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
unaudited consolidated historical balance sheet as of
September 30, 1997........................................ --
(B) Increase reflects the following:
Acquisition of US Home Building office property............. $ 45,000
Acquisition of Fountain Place office property............... 114,000
Acquisition of Ventana Country Inn hotel property........... 30,000
Acquisition of Energy Centre office property................ 75,000
Acquisition of Austin Centre office property and Omni Austin
Hotel property............................................ 96,900
Pending acquisition of Post Oak Central office property..... 155,250
Pending acquisition of Station's casino/hotel properties.... 1,744,866
----------
$2,261,016
==========
(C) Net increase reflects the following:
Capital contributions made by the Company from the October
1997 Offering............................................. $ 370,100
Acquisition of US Home Building office property............. (45,000)
Partial repayment under the Credit Facility using proceeds
from the
October 1997 Offering................................... (325,100)
Draw under the Credit Facility for working capital.......... 21,500
Borrowings under the Bridge Loan for working capital........ 43,100
Acquisition of Energy Centre office property................ (5,000)
Proceeds from sale of voting common stock to Crescent
Operating, Inc. ("COI")
for the Refrigerated Warehouse investment............... 8,025
----------
$ 67,625
==========
(D) Net increase reflects the following:
Refrigerated Warehouse Transaction -- 40% equity
investment................................................ $ 160,500
Sale of 100% of voting common stock to COI representing 5%
equity interest in
Refrigerated Warehouse Investment....................... (8,025)
Investment in a partnership that owns Bank One Center office
property -- 50%
equity investment....................................... 41,500
Additional investments in equity of unconsolidated
companies................................................. 24,100
----------
$ 218,075
==========
(E) Increase in notes receivable reflects the following:
Loan to a residential development corporation............... $ 7,800
==========
</TABLE>
F-114
<PAGE> 222
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET -- (CONTINUED)
ADJUSTMENTS
(DOLLARS IN THOUSANDS)
(F) Net increase in borrowings under the Credit Facility as a
result of:
Partial repayment under the Credit Facility using capital
contributions made by the Company from the October 1997
Offering.................................................. $ (325,100)
Draw to repay the BankBoston Note I......................... 235,000
Draw to partially repay the BankBoston Note II.............. 100,000
Investment in a partnership that owns Bank One Center office
property -- 50%
equity investment....................................... 41,500
Draw for working capital.................................... 21,500
Refrigerated Warehouse Transaction -- 40% equity
investment................................................ 160,500
Partial repayment under the Credit Facility using capital
contributions made by
the Company from the Equity Offering in December 1997 to
Merrill Lynch............................................. (199,900)
Acquisition of Austin Centre office property and Omni Austin
Hotel property............................................ 96,900
Draw for additional investments in equity of unconsolidated
companies................................................. 21,900
Pending acquisition of Post Oak Central office property..... 55,250
----------
$ 207,550
==========
(G) Net decrease in short-term borrowings as a result of:
Repayment of BankBoston Note I through a draw under the
Credit Facility........................................... $ (235,000)
Partial repayment of BankBoston Note II through a draw under
the Credit Facility....................................... (100,000)
Borrowings under the Bridge Loan for working capital and
property taxes............................................ 68,100
Borrowings under the Bridge Loan to partially fund the
acquisition of Fountain
Place office property................................... 16,900
Borrowings under the Bridge Loan for the acquisition of
Ventana Country Inn
hotel property.......................................... 30,000
Borrowings under the Bridge Loan to partially fund the
acquisition of Energy
Centre office property.................................. 25,000
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 pending acquisition
of Post Oak Central office property..................... 100,000
----------
$ (85,000)
==========
(H) Increase in notes payable reflects the following:
Assumption of debt with the acquisition of Fountain Place
office property........................................... $ 97,100
Proceeds from Met Life note in conjunction with the
acquisition of Energy Centre
office property......................................... 45,000
Debt relating to the pending acquisition of Station's
casino/hotel properties................................... 1,054,200
----------
$1,196,300
==========
(I) Decrease reflects the following:
Payment of property taxes with borrowings under the Bridge
Loan...................................................... $ (25,000)
==========
F-115
<PAGE> 223
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET -- (CONTINUED)
ADJUSTMENTS
(DOLLARS IN THOUSANDS)
(J) Increase reflects the following:
Capital contributions made by the Company from the October
1997 Equity
Offering................................................ $ 370,100
Capital contributions made by the Company from the Equity
Offering in
December 1997 with Merrill Lynch........................ 199,900
The Company's issuance of preferred and common shares in
conjunction with the
pending acquisition of Station's casino/hotel
properties................................................ 690,666
----------
$1,260,666
==========
F-116
<PAGE> 224
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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) INVESTMENTS(C) ADJUSTMENTS CONSOLIDATED
--------------- -------------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Rental property............. $289,752 $120,565 $151,063 $ -- $561,380
Interest and other income... 13,508 -- -- 6,791(D) 20,299
Total revenues...... 303,260 120,565 151,063 6,791 581,679
EXPENSES:
Real estate taxes........... 28,229 10,843 2,348 -- 41,420
Repairs and maintenance..... 17,244 12,843 2,563 -- 32,650
Other rental property
operating................ 59,100 21,045 3,990 (283)(E) 82,869
(983)(F)
Corporate general and
administrative........... 9,855 -- -- -- 9,855
Interest expense............ 54,687 -- -- 113,463(G) 168,150
Depreciation and
amortization............. 50,840 21,723 60,433 -- 132,996
Amortization of deferred
financing costs.......... 2,157 -- -- 539(H) 2,696
-------- -------- -------- --------- --------
Total expenses...... 222,112 66,454 69,334 112,736 470,636
-------- -------- -------- --------- --------
Operating income
(loss)............ 81,148 54,111 81,729 (105,945) 111,043
OTHER INCOME:
Equity in net income of
unconsolidated
companies................ 3,118 11,130 -- -- 14,248
-------- -------- -------- --------- --------
INCOME (LOSS) BEFORE MINORITY
INTERESTS................... 84,266 65,241 81,729 (105,945) 125,291
Minority interests............ (1,192) -- -- -- (1,192)
-------- -------- -------- --------- --------
NET INCOME (LOSS)............. $ 83,074 $ 65,241 $ 81,729 $(105,945) $124,099
======== ======== ======== ========= ========
Preferred dividend(I)......... (5,434)
--------
Net income applicable to
partners'................... $118,665
========
</TABLE>
See adjustments to Pro Forma Consolidated Statement of Operations on following
page.
F-117
<PAGE> 225
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 unaudited
consolidated historical statement of operations for the nine months ended
September 30, 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 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.
(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-118
<PAGE> 226
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 investments, 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.................... pending
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 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) Casino/hotel properties' lease payment is estimated using
Station's fiscal third quarter ended December 31, 1997
annualized EBITDA net of lessee leakage calculated as 1.5%
of casino/hotel property rental revenues. This quarter's
information represents the first full quarter of stabilized
casino/hotel operations as two casinos 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%) $ 5,337
Ritz Note........................................... ($ 8,850 @ 18%) 1,593
COI Note............................................ ($36,955 @ 12%) 4,435
Residential Development Corp Note................... ($ 7,800 @ 10%) 780
Desert Mountain Note................................ ($26,157 @ 12%) 3,139
-------
Total............................................... $15,284
Prorated for nine months............................ 11,463
Less: Historical interest income.................... (4,672)
-------
Total............................................... $ 6,791
========
(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.................... $ (983)
========
</TABLE>
F-119
<PAGE> 227
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 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......................... $ 524,050 @ 6.86% $ 35,950
BankBoston Note II...................... 100,000 @ 6.86% 6,860
Bridge Loan............................. 250,000 @ 6.86% 17,150
Note Offering -- 6.625% Notes due
2002.................................. 150,000 @ 6.625% 9,938
Note Offering -- 7.125% Notes due
2007.................................. 250,000 @ 7.125% 17,813
Met Life Note........................... 45,000 @ 6.86% 3,087
Chase Manhattan Note.................... 97,100 @ 7.41% 7,195
Station's Refinanced Debt............... 1,054,200 @ 7.50% 79,025
LaSalle Note I.......................... 239,000 @ 7.83% 18,714
LaSalle Note II......................... 161,000 @ 7.79% 12,542
Cigna Note.............................. 63,500 @ 7.47% 4,743
Metropolitan Life Note.................. 12,188 @ 8.88% 1,082
LaSalle Note III........................ 115,000 @ 7.82% 8,993
Nomura Funding VI Note.................. 8,716 @ 10.07% 878
Northwestern Life Note.................. 26,000 @ 7.66% 1,992
---------- ------------
Total annual amount..................... $3,095,754 $ 226,002
Prorated for nine months................ 169,501
Less: Capitalized interest.............. (1,351)
Historical interest expense............. (54,687)
------------
$113,463
========
</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> <C> <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
========
(I) 7% preferred dividend on the $103.5 million of preferred
shares issued by the Company in connection with the Station
transaction................................................. $ 5,434
========
</TABLE>
F-120
<PAGE> 228
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) INVESTMENTS(D) ADJUSTMENTS CONSOLIDATED
--------------- -------------- -------------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Rental property............. $202,003 $89,185 $225,276 $200,748 $ -- $717,212
Interest and other income... 6,858 -- -- -- 15,284(E) 22,142
-------- ------- -------- -------- --------- --------
Total revenues...... 208,861 89,185 225,276 200,748 15,284 739,354
-------- ------- -------- -------- --------- --------
EXPENSES:
Real estate taxes........... 20,606 8,176 18,991 3,008 -- 50,781
Repairs and maintenance..... 12,292 8,403 23,434 3,445 -- 47,574
Other rental property
operating................ 40,915 21,346 39,751 5,422 (1,700)(F) 103,650
(2,084)(G)
Corporate general and
administrative........... 4,674 -- -- -- 5,326(H) 10,000
Interest expense............ 42,926 -- -- -- 181,974(I) 224,900
Depreciation and
amortization............. 40,535 12,727 41,368 80,577 -- 175,207
Amortization of deferred
financing costs.......... 2,812 -- -- -- 719(J) 3,531
-------- ------- -------- -------- --------- --------
Total expenses...... 164,760 50,652 123,544 92,452 184,235 615,643
-------- ------- -------- -------- --------- --------
Operating income
(loss)............ 44,101 38,533 101,732 108,296 (168,951) 123,711
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 38,533 111,902 108,296 (168,951) 137,731
Minority interests............ (1,482) (533) -- -- -- (2,015)
-------- ------- -------- -------- --------- --------
INCOME BEFORE EXTRAORDINARY
ITEM........................ 46,469 38,000 111,902 108,296 (168,951) 135,716
Extraordinary item............ (1,599) -- -- -- -- (1,599)
-------- ------- -------- -------- --------- --------
NET INCOME (LOSS)............. $ 44,870 $38,000 $111,902 $108,296 $(168,951) $134,117
======== ======= ======== ======== ========= ========
Preferred dividend(K)......... (7,245)
--------
Net income applicable to
partners.................... $126,872
========
</TABLE>
See adjustments to Pro Forma Consolidated Statement of Operations on following
page.
F-121
<PAGE> 229
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 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.
(iii) The Operating Partnership had a 75% interest in the partnership
that owns these properties, in 1996. Currently, the Company 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-122
<PAGE> 230
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 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.
(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 investments, 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.................... pending
Station's casino/hotel properties(ii)....................... pending
</TABLE>
F-123
<PAGE> 231
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) Casino/hotel properties' lease payment is estimated using
Station's fiscal third quarter ended December 31, 1997 annualized
EBITDA net of lessee leakage calculated as 1.5% of casino/hotel
property rental revenues. This quarter's information represents
the first full quarter of stabilized casino/hotel operations as
two casinos 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%) $ 5,337
Ritz Note..................................... ($ 8,850 @ 18%) 1,593
COI Note...................................... ($36,955 @ 12% 4,435
Residential Development Corp Note............. ($ 7,800 @ 10%) 780
Desert Mountain Note.......................... ($26,157 @ 12%) 3,139
--------
Total......................................... $ 15,284
========
(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.................... $ (2,084)
(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-124
<PAGE> 232
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 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.............................. $ 524,050 @ 6.86% $ 35,950
BankBoston Note II........................... 100,000 @ 6.86% 6,860
Bridge Loan.................................. 250,000 @ 6.86% 17,150
Note Offering -- 6.625% Notes due 2002....... 150,000 @ 6.625% 9,938
Note Offering -- 7.125% Notes due 2007....... 250,000 @ 7.125% 17,813
Met Life Note................................ 45,000 @ 6.86% 3,087
Chase Manhattan Note......................... 97,100 @ 7.41% 7,195
Stations Refinanced Debt..................... 1,054,200 @ 7.50% 79,065
LaSalle Note I............................... 239,000 @ 7.83% 18,714
LaSalle Note II.............................. 161,000 @ 7.79% 12,542
Cigna Note................................... 63,500 @ 7.47% 4,743
Metropolitan Life Note....................... 12,188 @ 8.88% 1,082
LaSalle Note III............................. 115,000 @ 7.82% 8,993
Nomura Funding VI Note....................... 8,716 @ 10.07% 878
Northwestern Life Note....................... 26,000 @ 7.66% 1,992
---------- --------
Total annual amount.......................... $3,095,754 $226,002
Less: Capitalized interest (1,102)
Historical interest expense.................. (42,926)
--------
$181,974
========
</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) 7% preferred dividend on the $103.5 million of preferred shares issued by
the Company in
<TABLE>
<S> <C> <C>
connection with the Station Transaction................................... $7,245
======
</TABLE>
F-125
<PAGE> 233
APPENDIX A
The following information concerns each 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, 1996 amounted to 10 percent or more of the
aggregate gross revenues of the Operating Partnership and its Subsidiaries
during such year.
The Woodlands. 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 Corporation, for approximately $543
million. In connection with the acquisition, the Operating Partnership and the
Morgan Stanley Group made equity investments of approximately $80 million and
$109 million, respectively. The remaining approximately $354 million and
associated acquisition and financing costs of approximately $15 million 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 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
Company, 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 Company, 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 Company,
Inc. ("WLC"), holds a 42.5% interest. The Operating Partnership currently owns
all of the non-voting common stock, representing a 95% economic interest in WLC
and, effective September 29, 1997, Crescent Operating, Inc. ("COI") owns 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 Office and Retail Properties in The
Woodlands. 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 ownership 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
serving approximately 1,600 members and offering 81 holes of golf, 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 percent, 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 Crescent
Operating, Inc. 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. The partnership interest was acquired from a
subsidiary of Mobil Land Development Corporation for approximately $214 million.
The sole limited partner of DMPLP is Sonora Partners Limited Partnership
("Sonora") whose principal owner is Lyle Anderson, the original developer of
Desert Mountain. A portion of Sonora's interest in DMPLP is exchangeable for
Common Shares of the Company. Sonora currently owns a
A-1
<PAGE> 234
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 owns 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. DMPLP has
entered into an advisory agreement with the Lyle Anderson Company pursuant to
which Mr. Anderson provides advisory services in connection with the operation
and development of Desert Mountain.
Desert Mountain is an 8,300-acre property that is zoned for the development
of approximately 4,500 lots, approximately 1,500 of which have been sold.
However, the current plans for Desert Mountain contemplate limiting development
in order to maintain the exclusive nature of the community. Desert Mountain also
includes The Desert Mountain Club, a private golf, tennis and fitness club
serving over 1,600 members. The club offers four Jack Nicklaus signature 18-hole
golf courses, including Cochise, site of the Senior PGA Tour's The Tradition
golf tournament.
Houston Center. Houston Center consists of three high-rise Class A office
buildings aggregating approximately 2.8 million net rentable square feet ("HC
Office Properties"), approximately 191,000 net rentable square feet of retail
space, four parking garages aggregating 2,698 spaces, a leasehold interest in
First City Tower Garage for the use of 731 spaces (collectively with the HC
Office Properties, "HC Complex"), a 399-room Four Seasons Hotel, 114 luxury
apartments and approximately 20 acres of contiguous undeveloped commercial land
which currently contains eight surface parking lots which have an aggregate of
1,490 spaces used by the HC Complex which was purchased for an aggregate
purchase price of $327.6 million. The Operating Partnership has leased the Four
Seasons Hotel and 114 luxury apartments to COI. Developed between 1974 and 1983,
the HC Office Properties are situated on approximately 5.7 acres.
As of September 30, 1997, the HC Office Properties were 92% leased with a
weighted average base rental rate per square foot of $7.97 (a weighted average
full-service rental rate of $14.14). The HC Office Properties' leases are
primarily triple net, with the tenant responsible for payment or reimbursement
of, in addition to base rent, most operating costs of the property, including
utilities, real estate taxes and insurance. The weighted average remaining lease
term for the HC Office Properties is approximately 4.1 years. The HC Office
Properties are leased to approximately 220 tenants, the major tenants having
principal businesses in the industry sectors of energy, as well as professional
services such as a accounting, consulting, engineering and legal. Major tenants
include Chevron USA, Inc., Ernst & Young U.S., Lyondell Petrochemical Company
and American Exploration Company. None of the tenants in the HC Office
Properties leases more than 10% of the aggregate net rentable area.
The Houston CBD submarket consists of 25.2 million square feet of Class A
office space, which was approximately 40% of Houston's total Class A office
space at September 30, 1997. At September 30, 1997, the Houston CBD Class A
office space was 93% occupied, and the average quoted full-service market rental
rate for such space was $15.63 per square foot.
The aggregate tax basis for the HC Complex of depreciable real property and
improvements and personal property for federal income tax purposes is $250.1
million. For federal income tax purposes, depreciation is computed using the
straight-line method over lives which range from 15 to 39 years for the real
property and improvements, and the double-declining balance method over lives
which range from 5 to 7 years for the personal property.
The 1996 realty tax rate, for HC Complex and the 20 acres of undeveloped
commercial land, was $2.92 per $100 of the $174 million assessed value. The
total amount of tax at this rate for 1996 was approximately $5.1 million.
For the year ended December 31, 1996 and the six months ended June 30,
1997, utility expense was approximately $4.6 million and $2.3 million,
respectively, and expenses for repairs, maintenance and contract services were
approximately $7.9 million and $3.4 million, respectively, for the HC Complex
and the 20 acres of undeveloped commercial land.
A-2
<PAGE> 235
The Operating Partnership has no immediate plans to renovate the HC Office
Properties, other than expenditures associated with the maintenance of the
property. Management believes that Houston Center is suitable and adequate for
continued use as Class A office properties, a full-service hotel, retail space
and apartments and is adequately covered by insurance.
The following table sets forth HC Office Properties' year-end occupancy and
average base rent per leased square foot for the five years ended December 31,
1996, and for the nine months ended September 30, 1997.
<TABLE>
<CAPTION>
AVERAGE
BASE
YEAR OCCUPANCY RENT(1)(2)
---- --------- ----------
<S> <C> <C>
1992.................................................. 88% $9.64
1993.................................................. 79 9.41
1994.................................................. 87 8.06
1995.................................................. 88 7.58
1996.................................................. 92 7.86
9/30/97............................................... 92 7.97
</TABLE>
- ---------------
(1) Represents annual base rental revenues (excluding scheduled rent increases
and free rent that would be taken into account under generally accepted
accounting principles) divided by average occupancy in square footage for
the year or period and excluding expenses payable by or reimbursable from
the tenants.
(2) Leases are primarily triple net, with the tenant responsible for payment, or
reimbursement of, in addition to base rent, most operating costs of the
property, including utilities, real estate taxes and insurance.
The following table sets forth a schedule of lease expirations for leases
in place as of September 30, 1997, for the HC Office Properties, for each of the
10 years beginning with the remainder of 1997, assuming that none of the tenants
exercises renewal options and excluding 220,876 square feet of unleased space.
<TABLE>
<CAPTION>
ANNUAL BASE
PERCENTAGE PERCENTAGE OF RENT PER
NET RENTABLE OF LEASED TOTAL ANNUAL SQUARE FOOT
NUMBER OF AREA SUBJECT TO NET RENTABLE ANNUAL BASE BASE RENT FOR NET
TENANTS WITH EXPIRING AREA SUBJECT RENT UNDER REPRESENTED RENTABLE
YEAR OF LEASE EXPIRING LEASES TO EXPIRING EXPIRING BY EXPIRING AREA
EXPIRATION LEASES (SQUARE FEET) LEASES LEASES(1)(2) LEASES EXPIRING(1)(2)
------------- ------------ --------------- ------------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
1997................. 8 10,429 0.4% $ 66,115 0.3% $6.34
1998................. 68 175,042 6.9 969,092 4.4 5.54
1999................. 45 624,366 24.5 4,603,235 21.1 7.37
2000................. 33 189,057 7.4 317,936 6.1 6.97
2001................. 36 875,519 34.4 646,897 34.9 8.73
2002................. 18 203,158 8.0 3,091,288 14.1 15.22
2003................. 8 79,464 3.1 598,487 2.7 7.53
2004................. 5 52,268 2.1 425,362 1.9 8.14
2005................. 2 59,940 2.4 457,649 2.1 7.64
2006................. 2 60,665 2.4 595,288 2.7 9.81
2007 and
thereafter......... 4 213,634 8.4 2,117,309 9.7 9.91
</TABLE>
- ---------------
(1) 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 excluding expenses payable by or
reimbursable from the tenants.
(2) Leases are triple net, with the tenant responsible for payment or
reimbursement of, in addition to base rent, most operating costs of the
property, including utilities, real estate taxes and insurance.
Americold Corporation and URS Logistics, Inc. See "Business and
Properties -- Recent Acquisitions."
A-3
<PAGE> 236
Behavioral Healthcare Facilities. See "Business and
Properties -- Properties -- Behavioral Healthcare Facilities."
Station Casinos, Inc. See "Business and Properties -- Pending Investments."
A-4
<PAGE> 237
======================================================
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.............. 18
Conflicts of Interest.................. 23
No Cash Proceeds to the Operating
Partnership.......................... 25
Capitalization......................... 26
The Exchange Offer..................... 27
Description of the Exchange Notes...... 34
Selected Financial Data................ 45
Management's Discussion and Analysis of
Financial Condition and Results of
Operations of the Operating
Partnership.......................... 48
Ratios of Earnings to Fixed Charges.... 57
Business and Properties................ 58
Certain Policies....................... 73
Management............................. 76
Principal Shareholders................. 84
Certain Relationships and Related
Transactions......................... 87
Structure of the Operating
Partnership.......................... 91
U.S. Federal Income Tax Consequences... 92
Plan of Distribution................... 93
Available Information.................. 94
Experts................................ 94
Legal Matters.......................... 94
Glossary............................... 95
Index to Financial Statements.......... F-1
Appendix A............................. A-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
------------------------------------
FEBRUARY , 1998
======================================================
<PAGE> 238
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
II-1
<PAGE> 239
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 -- Form of Noncompetition Agreement (Rainwater) filed as
Exhibit No. 10.02 to the Company's Registration Statement
on Form S-11 (File No. 33-90226) (the "1995 S-11") and
incorporated herein by reference).
10.02 -- Form of Noncompetition Agreement (Goff) (filed as Exhibit
No. 10.03 to the 1995 S-11 and incorporated herein by
reference).
10.03 -- Form of Noncompetition Agreement (Haddock) (filed as
Exhibit No. 10.04 to the 1995 S-11 and incorporated
herein by reference).
10.04 -- Form of Employment Agreement (Goff) (filed as Exhibit No.
10.05 to the 1995 S-11 and incorporated herein by
reference).
</TABLE>
II-2
<PAGE> 240
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.05 -- Form of Employment Agreement (Haddock) (filed as Exhibit
No. 10.06 to the 1995 S-11 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. 401(k) Plan (filed as
Exhibit No. 10.10 to the 1995 S-11 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).
</TABLE>
II-3
<PAGE> 241
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
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).
10.23 -- 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, 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-Q 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 (filed herewith).
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).
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 February 10, 1998 (filed herewith).
23.02 -- Consent of Arthur Andersen LLP (Atlanta), Certified
Public Accountants, dated February 5, 1998 (filed
herewith).
23.03 -- Consent of Arthur Andersen LLP (Las Vegas), Certified
Public Accountants, dated February 10, 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.
99.01** -- Form of Letter of Transmittal.
99.02** -- Form of Notice of Guaranteed Delivery.
99.03** -- Form of Letter to Brokers.
</TABLE>
II-4
<PAGE> 242
<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> 243
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> 244
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 13 day of February, 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 February 13, 1998
- ----------------------------------------------------- Chief Executive Officer of
Gerald W. Haddock the General Partner
(Principal Executive
Officer)
/s/ DALLAS E. LUCAS Senior Vice President and February 13, 1998
- ----------------------------------------------------- Chief Financial Officer of
Dallas E. Lucas the General Partner
(Principal Financial and
Accounting Officer)
</TABLE>
II-7
<PAGE> 245
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 -- Form of Noncompetition Agreement (Rainwater) (filed as
Exhibit No. 10.02 to the Company's Registration Statement
on Form S-11 (File No. 33-90226) (the "1995 S-11") and
incorporated herein by reference).
10.02 -- Form of Noncompetition Agreement (Goff) (filed as Exhibit
No. 10.03 to the 1995 S-11 and incorporated herein by
reference).
10.03 -- Form of Noncompetition Agreement (Haddock) (filed as
Exhibit No. 10.04 to the 1995 S-11 and incorporated
herein by reference).
10.04 -- Form of Employment Agreement (Goff) (filed as Exhibit No.
10.05 to the 1995 S-11 and incorporated herein by
reference).
10.05 -- Form of Employment Agreement (Haddock) (filed as Exhibit
No. 10.06 to the 1995 S-11 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. 401(k) Plan (filed as
Exhibit No. 10.10 to the 1995 S-11 and incorporated
herein by reference).
</TABLE>
<PAGE> 246
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
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).
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> 247
<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, 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-Q 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 (filed herewith).
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).
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 February 10, 1998 (filed herewith).
23.02 -- Consent of Arthur Andersen LLP (Atlanta), Certified
Public Accountants, dated February 5, 1998 (filed
herewith).
23.03 -- Consent of Arthur Andersen LLP (Las Vegas), Certified
Public Accountants, dated February 10, 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.
99.01** -- Form of Letter of Transmittal.
99.02** -- Form of Notice of Guaranteed Delivery.
99.03** -- Form of Letter to Brokers.
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.
<PAGE> 1
EXHIBIT 10.25
FOURTH AMENDED AND RESTATED
REVOLVING CREDIT AGREEMENT
DATED DECEMBER 19, 1997
among
CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
and
BANKBOSTON, N.A.,
THE OTHER BANKS WHICH ARE A
PARTY TO THIS AGREEMENT
and
OTHER BANKS WHICH MAY BECOME
PARTIES TO THIS AGREEMENT
and
BANKBOSTON, N.A., AS AGENT
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
Section 1. DEFINITIONS AND RULES OF INTERPRETATION . . . . . . . . . . . . . . . . . . . . . . . . . . . -1-
Section 1.1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1-
Section 1.2. Rules of Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -16-
Section 2. THE REVOLVING CREDIT FACILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -17-
Section 2.1. Commitment to Lend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -17-
Section 2.2. Facility Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -17-
Section 2.3. Reduction of Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -17-
Section 2.4. Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -18-
Section 2.5. Interest on Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -18-
Section 2.6. Requests for Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -19-
Section 2.7. Funds for Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -20-
Section 2.8. Intentionally Omitted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -20-
Section 2.9. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -20-
Section 3. REPAYMENT OF THE LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -21-
Section 3.1. Stated Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -21-
Section 3.2. Mandatory Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -21-
Section 3.3. Optional Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-
Section 3.4. Partial Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-
Section 3.5. Effect of Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-
Section 3.6. Proceeds from Debt or Equity Offering . . . . . . . . . . . . . . . . . . . . . . . -22-
Section 4. CERTAIN GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -23-
Section 4.1. Conversion Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -23-
Section 4.2. Closing Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -23-
Section 4.3. Agent's Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -24-
Section 4.4. Funds for Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -24-
Section 4.5. Computations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -24-
Section 4.6. Inability to Determine Eurodollar Rate . . . . . . . . . . . . . . . . . . . . . . . -25-
Section 4.7. Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -25-
Section 4.8. Additional Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -25-
Section 4.9. Additional Costs, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -25-
Section 4.10. Capital Adequacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -27-
Section 4.11. Indemnity of Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -27-
Section 4.12. Interest on Overdue Amounts; Late Charge . . . . . . . . . . . . . . . . . . . . . -27-
Section 4.13. Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -28-
Section 4.14. Limitation on Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -28-
Section 5. COLLATERAL SECURITY AND GUARANTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -28-
Section 5.1. Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -28-
Section 5.2. Subsidiary Guarantors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -28-
Section 6. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -29-
Section 6.1. Corporate Authority, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -29-
Section 6.2. Governmental Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -30-
Section 6.3. Title to Properties; Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . -30-
Section 6.4. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -30-
Section 6.5. No Material Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -31-
Section 6.6. Franchises, Patents, Copyrights, Etc. . . . . . . . . . . . . . . . . . . . . . . . -31-
Section 6.7. Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -31-
Section 6.8. No Materially Adverse Contracts, Etc. . . . . . . . . . . . . . . . . . . . . . . . -31-
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Section 6.9. Compliance with Other Instruments, Laws, Etc. . . . . . . . . . . . . . . . . . . . -32-
Section 6.10. Tax Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -32-
Section 6.11. No Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -32-
Section 6.12. Holding Company and Investment Company Acts . . . . . . . . . . . . . . . . . . . . -32-
Section 6.13. Absence of UCC Financing Statements, Etc. . . . . . . . . . . . . . . . . . . . . . -32-
Section 6.14. Certain Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -33-
Section 6.15. Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -33-
Section 6.16. Regulations U and X . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -33-
Section 6.17. Environmental Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -33-
Section 6.18. Subsidiaries; Investment Partnerships . . . . . . . . . . . . . . . . . . . . . . . -35-
Section 6.19. Loan Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -35-
Section 6.20. Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -36-
Section 6.21. Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -36-
Section 6.22. Partners and the Guarantor . . . . . . . . . . . . . . . . . . . . . . . . . . . . -36-
Section 6.23. Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -36-
Section 6.24. Other Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -37-
Section 6.25. Magellan Transaction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -37-
Section 6.26. Contribution Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -37-
Section 6.27. Applicability of Representations and Warranties to Investment Partnerships. . . . . -37-
Section 7. AFFIRMATIVE COVENANTS OF THE BORROWER . . . . . . . . . . . . . . . . . . . . . . . . . . . . -37-
Section 7.1. Punctual Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -37-
Section 7.2. Maintenance of Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -38-
Section 7.3. Records and Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -38-
Section 7.4. Financial Statements, Certificates and Information . . . . . . . . . . . . . . . . . -38-
Section 7.5. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -40-
Section 7.6. Existence; Maintenance of Properties . . . . . . . . . . . . . . . . . . . . . . . . -41-
Section 7.7. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -42-
Section 7.8. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -42-
Section 7.9. Inspection of Properties and Books . . . . . . . . . . . . . . . . . . . . . . . . . -42-
Section 7.10. Compliance with Laws, Contracts, Licenses, and Permits . . . . . . . . . . . . . . -43-
Section 7.11. Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -43-
Section 7.12. Ownership of Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -43-
Section 7.13. Investment Advisor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -43-
Section 7.14. Non-Competition Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . -43-
Section 7.15. Business Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -44-
Section 7.16. Intentionally Omitted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -44-
Section 7.17. Limiting Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -44-
Section 7.18. More Restrictive Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . -44-
Section 7.19. Applicability of Covenants to Residential Corporations and
Investment Partnerships. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -45-
Section 7.20. Distributions of Income to the Borrower . . . . . . . . . . . . . . . . . . . . . . -45-
Section 8. CERTAIN NEGATIVE COVENANTS OF THE BORROWER . . . . . . . . . . . . . . . . . . . . . . . . . . -45-
Section 8.1. Restrictions on Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . -45-
Section 8.2. Restrictions on Liens, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -47-
Section 8.3. Restrictions on Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . -48-
Section 8.4. Merger, Consolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -50-
Section 8.5. Sale and Leaseback . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -50-
Section 8.6. Compliance with Environmental Laws . . . . . . . . . . . . . . . . . . . . . . . . . -50-
Section 8.7. Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -51-
Section 8.8. Asset Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -52-
Section 8.9. Development Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -52-
Section 8.10. Investment Opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -53-
Section 8.11. Refinancing of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -53-
Section 8.12. Variable Rate Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -53-
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Section 8.13. Restriction on Prepayment of Indebtedness . . . . . . . . . . . . . . . . . . . . . -53-
Section 8.14. Bankruptcy Remote Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . -53-
Section 8.15. Magellan Transaction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -54-
Section 9. FINANCIAL COVENANTS OF THE BORROWER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -54-
Section 9.1. Liabilities to Worth Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -54-
Section 9.2. Debt Service Coverage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -54-
Section 9.3. Intentionally Omitted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -54-
Section 9.4. Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -54-
Section 9.5. Secured Debt to Assets Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . -54-
Section 9.6. Fixed Charge Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -54-
Section 9.7. Fixed Charge and Preferred Distribution Coverage . . . . . . . . . . . . . . . . . . -55-
Section 9.8. Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -55-
Section 9.9. Real Estate Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -55-
Section 9.10. Value Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -55-
Section 9.11. CBHS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -55-
Section 9.12. Unencumbered Operating Properties. . . . . . . . . . . . . . . . . . . . . . . . . -56-
Section 10. CLOSING CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -56-
Section 10.1. Loan Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -56-
Section 10.2. Certified Copies of Organizational Documents . . . . . . . . . . . . . . . . . . . -56-
Section 10.3. Bylaws; Resolutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -56-
Section 10.4. Incumbency Certificate; Authorized Signers . . . . . . . . . . . . . . . . . . . . -56-
Section 10.5. Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -57-
Section 10.6. Payment of Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -57-
Section 10.7. Performance; No Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -57-
Section 10.8. Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . -57-
Section 10.9. Proceedings and Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -57-
Section 10.10. Intentionally Omitted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -57-
Section 10.11. Compliance Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -58-
Section 10.12. Real Estate Spreadsheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -58-
Section 10.13. Contribution Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -58-
Section 10.14. Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -58-
Section 11. CONDITIONS TO ALL BORROWINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -58-
Section 11.1. Prior Conditions Satisfied . . . . . . . . . . . . . . . . . . . . . . . . . . . . -58-
Section 11.2. Representations True; No Default . . . . . . . . . . . . . . . . . . . . . . . . . -58-
Section 11.3. No Legal Impediment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -58-
Section 11.4. Governmental Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -58-
Section 11.5. Proceedings and Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -59-
Section 11.6. Borrowing Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -59-
Section 12. EVENTS OF DEFAULT; ACCELERATION; ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -59-
Section 12.1. Events of Default and Acceleration . . . . . . . . . . . . . . . . . . . . . . . . -59-
Section 12.2. Limitation of Cure Periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . -62-
Section 12.3. Termination of Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . -63-
Section 12.4. Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -63-
Section 12.5. Distribution of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -63-
Section 13. SETOFF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -64-
Section 14. THE AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -65-
Section 14.1. Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -65-
Section 14.2. Employees and Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -65-
Section 14.3. No Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -65-
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Section 14.4. No Representations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -65-
Section 14.5. Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -66-
Section 14.6. Holders of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -67-
Section 14.7. Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -67-
Section 14.8. Agent as Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -67-
Section 14.9. Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -67-
Section 14.10. Duties in the Case of Enforcement . . . . . . . . . . . . . . . . . . . . . . . . -68-
Section 15. EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -68-
Section 16. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -69-
Section 17. SURVIVAL OF COVENANTS, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -70-
Section 18. ASSIGNMENT AND PARTICIPATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -70-
Section 18.1. Conditions to Assignment by Banks . . . . . . . . . . . . . . . . . . . . . . . . . -70-
Section 18.2. Register . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -72-
Section 18.3. New Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -72-
Section 18.4. Participations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -72-
Section 18.5. Pledge by Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -72-
Section 18.6. No Assignment by Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -73-
Section 18.7. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -73-
Section 18.8. Restrictions on Assignment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -73-
Section 19. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -73-
Section 20. RELATIONSHIP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -74-
Section 21. GOVERNING LAW; CONSENT TO JURISDICTION AND SERVICE . . . . . . . . . . . . . . . . . . . . . -74-
Section 22. HEADINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -75-
Section 23. COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -75-
Section 24. ENTIRE AGREEMENT, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -75-
Section 25. WAIVER OF JURY TRIAL AND CERTAIN DAMAGE CLAIMS . . . . . . . . . . . . . . . . . . . . . . . -75-
Section 26. DEALINGS WITH THE BORROWER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -76-
Section 27. CONSENTS, AMENDMENTS, WAIVERS, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -76-
Section 28. SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -77-
Section 29. NO UNWRITTEN AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -77-
Section 30. TIME OF THE ESSENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -77-
</TABLE>
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<PAGE> 6
LIST OF EXHIBITS:
A FORM OF NOTE
B FORM OF LOAN REQUEST
C FORM OF COMPLIANCE CERTIFICATE
LIST OF SCHEDULES:
Schedule 1 Banks and Commitments
Schedule 6.3 Title to Properties
Schedule 6.7 Litigation
Schedule 6.18(a) Subsidiaries of Borrower
Schedule 6.18(b) Investment Partnerships of Borrower
Schedule 8.1(h) Existing Indebtedness
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<PAGE> 7
FOURTH AMENDED AND RESTATED
REVOLVING CREDIT AGREEMENT
THIS FOURTH AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT is made
the 19th day of December, 1997, by and among CRESCENT REAL ESTATE EQUITIES
LIMITED PARTNERSHIP (the "Borrower"), a Delaware limited partnership having its
principal place of business at 777 Main Street, Suite 2100, Fort Worth, Texas
76102, and BANKBOSTON, N.A., a national banking association, formerly known as
The First National Bank of Boston, the other Banks which are a party hereto,
and the other lending institutions which may become parties hereto pursuant to
Section 18 (the "Banks"), and BANKBOSTON, N.A., a national banking association,
formerly known as The First National Bank of Boston, as Administrative and
Syndication Agent for the Banks (the "Agent"), and BANKERS TRUST COMPANY, as
Documentation Agent for the Banks, and NATIONSBANK OF TEXAS, N.A., as
Documentation Agent for the Banks.
RECITALS.
WHEREAS, Borrower, BankBoston and Agent have entered into that certain
Revolving Credit Agreement dated June 18, 1996, as amended and restated
pursuant to that certain First Amended and Restated Revolving Credit Agreement
among Borrower, BankBoston and certain other Banks and Agent dated August 14,
1996, and as further amended and restated pursuant to that certain Second
Amended and Restated Revolving Credit Agreement among Borrower, BankBoston and
certain other Banks and Agent dated June 6, 1997, and as further amended and
restated pursuant to that certain Third Amended and Restated Revolving Credit
Agreement among Borrower, BankBoston and certain other Banks and Agent dated
September 22, 1997 (the "Amended Credit Agreement"); and
WHEREAS, Borrower has requested that BankBoston increase the Total
Commitment and amend certain provisions of the Amended Credit Agreement; and
WHEREAS, the Borrower, the Banks and the Agent desire to amend and
restate the Amended Credit Agreement in its entirety;
NOW, THEREFORE, in consideration of the recitals herein and the mutual
covenants contained herein, the parties hereto hereby amend and restate the
Amended Credit Agreement in its entirety as follows:
Section 1. DEFINITIONS AND RULES OF INTERPRETATION.
Section 1.1. Definitions. The following terms shall have the
meanings set forth in this Section l or elsewhere in the provisions of this
Agreement referred to below:
Agent. BankBoston, N.A., acting as agent for the Banks, its
successors and assigns.
<PAGE> 8
Agent's Head Office. The Agent's head office located at 100 Federal
Street, Boston, Massachusetts 02110, or at such other location as the Agent may
designate from time to time by notice to the Borrower and the Banks.
Agent's Special Counsel. Long Aldridge & Norman LLP or such other
counsel as may be approved by the Agent.
Agreement. This Fourth Amended and Restated Revolving Credit
Agreement, including the Schedules and Exhibits hereto.
Applicable Margin. On any date that the higher of the Implied Ratings
issued from time to time by either of the Rating Agencies for the Borrower is
an Investment Grade Rating, the Applicable Margin for Eurodollar Rate Loans
shall be as set forth below based on the higher of Implied Ratings issued by
either of the Rating Agencies:
<TABLE>
<CAPTION>
Rating LIBOR Rate Loans
------ ----------------
<S> <C>
BBB+/Baa1 or better 0.90%
BBB/Baa2 1.050%
BBB-/Baa3 1.20%
</TABLE>
In the event that either of the Rating Agencies issues an Implied Rating for
the Borrower that is an Investment Grade Rating, or in the event of any change
in an Implied Rating of the Borrower by either of the Rating Agencies, or if
the Borrower's Implied Rating, after having obtained an Investment Grade
Rating, shall cease at any time to be an Investment Grade Rating by either of
the Rating Agencies (but subject to the provisions within the definition of the
term "Investment Grade Rating"), such change shall effect a change in the
Applicable Margin, as applicable, on the first Business Day after the Rating
Notice Date. On any date that the higher of the Implied Ratings for the
Borrower is not an Investment Grade Rating, or the Borrower has not obtained an
Investment Grade Rating from either of the Rating Agencies, the Applicable
Margin for Eurodollar Rate Loans shall be one and three-eighths percent
(1.375%). It is the intention of the parties that if the Borrower shall only
obtain an Investment Grade Rating from one of the Rating Agencies without
seeking an Investment Grade Rating from the other of the Rating Agencies, the
Borrower shall be entitled to the benefit of the rate reductions described
above; provided that if the Borrower shall have obtained an Investment Grade
Rating from both of the Rating Agencies, the higher of the two ratings (or the
loss of the Investment Grade Rating from either or both of the Rating Agencies
thereafter) shall control.
Asset Value. The purchase price of Real Estate (including
improvements and related fixtures, personal property and intangibles) and
ordinary related purchase transaction costs without deduction for depreciation,
or if the Real Estate has been developed by such Person, the completed
construction costs determined in accordance with generally accepted accounting
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<PAGE> 9
principles without deduction for depreciation. If the Real Estate is purchased
as a part of a group of properties, the Asset Value shall be calculated based
upon a reasonable allocation by the Borrower of the aggregate purchase price
among all Real Estate purchased in such transaction.
Balance Sheet Date. September 30, 1997 (as adjusted for purchases
subsequent to such date and prior to the date hereof).
BankBoston. BankBoston, N.A., a national banking association,
formerly known as The First National Bank of Boston.
Banks. BankBoston, the other Banks that are a party to this Agreement
and any other Person who becomes an assignee of any rights of a Bank pursuant
to Section 18.
Base Rate. The greater of (a) the annual rate of interest announced
from time to time by BankBoston at its head office in Boston, Massachusetts as
its "base rate" or (b) one-half of one percent (0.5%) above the Federal Funds
Effective Rate (rounded upwards, if necessary, to the next one-eighth of one
percent). Any change in the rate of interest payable hereunder resulting from
a change in the Base Rate shall become effective as of the opening of business
on the day on which such change in the Base Rate becomes effective.
Base Rate Loans. Those Loans bearing interest calculated by reference
to the Base Rate.
Behavioral Healthcare Facilities. The "Collective Leased Properties",
as such term is defined in the Master Lease Agreement.
Borrower. As defined in the preamble hereto.
Business Day. Any day on which banking institutions in Boston,
Massachusetts are open for the transaction of banking business and, in the case
of Eurodollar Rate Loans, which also is a Eurodollar Business Day.
Capitalized Lease. A lease under which a Person is the lessee or
obligor, the discounted future rental payment obligations under which are
required to be capitalized on the balance sheet of the lessee or obligor in
accordance with generally accepted accounting principles; provided that if the
total of such future rental payment obligations is less than $250,000.00, then
such lease shall be treated as an expense of such Person and not as a
Capitalized Lease.
Cash. At any time, the sum of the Borrower's cash, marketable
securities and other cash equivalents, including restricted cash.
CBHS. Charter Behavioral Health Systems, LLC, a Delaware limited
liability company.
CERCLA. See Section 6.17.
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<PAGE> 10
Closing Date. The first date on which all of the conditions set forth
in Section 10 and Section 11 have been satisfied.
Code. The Internal Revenue Code of 1986, as amended.
Commitment. With respect to each Bank, the amount set forth on
Schedule 1 hereto as the amount of such Bank's Commitment to make or maintain
Loans to the Borrower, as the same may be reduced from time to time in
accordance with the terms of this Agreement.
Commitment Percentage. With respect to each Bank, the percentage set
forth on Schedule 1 hereto as such Bank's percentage of the aggregate
Commitments of all of the Banks.
Compliance Certificate. See Section 7.4(d).
Consolidated or combined. With reference to any term defined herein,
that term as applied to the accounts of a Person and its Subsidiaries,
consolidated or combined in accordance with generally accepted accounting
principles.
Consolidated Cash Flow. With respect to any period of the Borrower or
CBHS, as applicable, an amount equal to the sum of the following amounts of the
Borrower and its Subsidiaries or CBHS, as applicable: (a) the Net Income of
such Person for such period plus (b) depreciation and amortization, interest
expense, and any extraordinary or non-recurring losses deducted in calculating
such Net Income minus (c) any extraordinary or nonrecurring gains included in
calculating such Net Income, all as determined in accordance with generally
accepted accounting principles.
Consolidated Tangible Net Worth. The amount by which Consolidated
Total Assets exceeds Consolidated Total Liabilities, and less the sum of:
(a) the total book value of all assets of a Person and
its Subsidiaries properly classified as intangible assets under
generally accepted accounting principles, including such items as
goodwill, the purchase price of acquired assets in excess of the fair
market value thereof, trademarks, trade names, service marks, brand
names, copyrights, patents and licenses, and rights with respect to
the foregoing; plus
(b) all amounts representing any write-up in the book
value of any assets of such Person or its Subsidiaries resulting from
a revaluation thereof subsequent to the Balance Sheet Date; plus
(c) all amounts representing minority interests which are
applicable to third parties.
Consolidated Total Assets. All assets of a Person and its
Subsidiaries determined on a consolidated basis in accordance with generally
accepted accounting principles. All real estate assets shall be valued on an
undepreciated cost basis, except as otherwise shown on the financial
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<PAGE> 11
statements provided pursuant to Section 6.4 or as adjusted pursuant to Section
9.10. The Borrower shall account for its investments which are not
consolidated in accordance with the equity method of accounting.
Consolidated Total Liabilities. All liabilities of a Person and its
Subsidiaries determined on a consolidated basis in accordance with generally
accepted accounting principles and all Indebtedness of such Person and its
Subsidiaries, whether or not so classified.
Contribution Agreement. The Contribution Agreement dated of even date
herewith between the Borrower and the Subsidiary Guarantors a party thereto as
of the date hereof, and each other Subsidiary Guarantor which may hereafter
become a party thereto.
Conversion Request. A notice given by the Borrower to the Agent of
its election to convert or continue a Loan in accordance with Section 4.1.
Crescent Guarantor. Crescent Real Estate Equities Company, a Texas
real estate investment trust, having a usual place of business at 777 Main
Street, Suite 2100, Fort Worth, Texas 76102.
Debt Offering. The issuance and sale to the general public or as a
private placement by the Borrower or the Crescent Guarantor subsequent to the
date of this Agreement of any debt securities of the Borrower or Crescent
Guarantor for cash or the right to receive payment in the future.
Debt Service. For any period, the sum of all interest (including
capitalized interest) and mandatory principal payments due and payable during
such period excluding any balloon payments due upon maturity of any
indebtedness.
Default. See Section 12.1.
Distribution. With respect to Crescent Guarantor, the declaration or
payment of any dividend or distribution on or in respect of any shares of any
class of capital stock or beneficial interest of Crescent Guarantor, other
than dividends or distributions payable solely in equity securities of Crescent
Guarantor; the purchase, redemption, exchange or other retirement of any shares
of any class of capital stock or beneficial interest of Crescent Guarantor,
directly or indirectly through a Subsidiary of Crescent Guarantor or otherwise;
the return of capital by Crescent Guarantor to its shareholders as such; or any
other distribution on or in respect of any shares of any class of capital stock
or beneficial interest of Crescent Guarantor. With respect to the Borrower,
the declaration or payment of any distribution of cash or cash flow to the
partners of the Borrower; the return of capital by the Borrower to its
partners; or any other distribution on or in respect of any partnership
interests in the Borrower.
Dollars or $. Dollars in lawful currency of the United States of
America.
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<PAGE> 12
Domestic Lending Office. Initially, the office of each Bank
designated as such in Schedule 1 hereto; thereafter, such other office of such
Bank, if any, located within the United States that will be making or
maintaining Base Rate Loans.
Drawdown Date. The date on which any Loan is made or is to be made,
and the date on which any Loan which is made prior to the Maturity Date is
converted or combined in accordance with Section 4.1.
Employee Benefit Plan. Any employee benefit plan within the meaning
of Section 3(3) of ERISA maintained or contributed to by the Borrower or any
ERISA Affiliate, other than a Multiemployer Plan.
Environmental Laws. See Section 6.17(a).
Equity Offering. The issuance and sale to the general public or as a
private placement by the Borrower or Crescent Guarantor subsequent to the date
of this Agreement of any partnership interests or equity securities of the
Borrower or Crescent Guarantor, as applicable, for cash or the right to receive
payment in the future (it being acknowledged that an Equity Offering shall not
include (a) the issuance of limited partnership interests in the Borrower other
than for cash to a seller or partner thereof in connection with the acquisition
of Real Estate or the conversion thereof into equity securities of Crescent
Guarantor, or (b) the exercise or conversion of options to acquire equity
securities of Crescent Guarantor or the Borrower or the issuance of restricted
stock under incentive compensation plans maintained by Borrower or Crescent
Guarantor for itself or its Subsidiaries, directors, officers and employees).
ERISA. The Employee Retirement Income Security Act of 1974, as
amended and in effect from time to time.
ERISA Affiliate. Any Person which is treated as a single employer with
the Borrower under Section 414 of the Code.
ERISA Reportable Event. A reportable event with respect to a
Guaranteed Pension Plan within the meaning of Section 4043 of ERISA and the
regulations promulgated thereunder as to which the requirement of notice has
not been waived.
Eurocurrency Reserve Rate. For any day with respect to a Eurodollar
Rate Loan, the maximum rate (expressed as a decimal) at which any lender
subject thereto would be required to maintain reserves under Regulation D of
the Board of Governors of the Federal Reserve System (or any successor or
similar regulations relating to such reserve requirements) against
"Eurocurrency Liabilities" (as that term is used in Regulation D or any
successor or similar regulation), if such liabilities were outstanding. The
Eurocurrency Reserve Rate shall be adjusted automatically on and as of the
effective date of any change in the Eurocurrency Reserve Rate.
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<PAGE> 13
Eurodollar Business Day. Any day on which commercial banks are open
for international business (including dealings in Dollar deposits) in London or
such other eurodollar interbank market as may be selected by the Agent and the
Banks in their sole discretion acting in good faith.
Eurodollar Lending Office. Initially, the office of each Bank
designated as such in Schedule 1 hereto; thereafter, such other office of such
Bank, if any, that shall be making or maintaining Eurodollar Rate Loans.
Eurodollar Rate. For any Interest Period with respect to a Eurodollar
Rate Loan, the rate per annum equal to the quotient (rounded upwards to the
nearest 1/16 of one percent) of (a) the rate at which the Reference Bank's
Eurodollar Lending Office is offered Dollar deposits two Eurodollar Business
Days prior to the beginning of such Interest Period in whatever interbank
eurodollar market may be selected by the Reference Bank in its sole discretion,
acting in good faith, for delivery on the first day of such Interest Period for
the number of days comprised therein and in an amount comparable to the amount
of the Eurodollar Rate Loan to which such Interest Period applies, divided by
(b) a number equal to 1.00 minus the Eurocurrency Reserve Rate.
Eurodollar Rate Loans. Loans bearing interest calculated by reference
to a Eurodollar Rate.
Event of Default. See Section 12.1.
Existing Fixed Rate Indebtedness. Collectively, (i) the long term
fixed rate debt provided to Crescent Real Estate Funding I, L.P. ("Funding I")
by Nomura Asset Capital Corporation ("Nomura") in the principal face amount of
$239,000,000 which matures on August 11, 2027, as evidenced by that certain
Promissory Note dated August 24, 1995 made by Funding I to the order of Nomura
in the principal face amount of $239,000,000 which has been assigned to LaSalle
National Bank, as Trustee under that certain Pooling and Servicing Agreement
dated October 1, 1995; (ii) the long term fixed rate debt provided to Crescent
Real Estate Funding II, L.P. ("Funding II") by Nomura in the original principal
face amount of $161,000,000, which matures on March 11, 2028, as evidenced by
that certain Promissory Note dated August 24, 1995, made by Funding II to the
order of Nomura in the principal face amount of $161,000,000, which has been
assigned to LaSalle National Bank, as Trustee under that certain Pooling and
Servicing Agreement dated April 1, 1996; (iii) the long term fixed rate debt
provided to Borrower in the principal face amount of $63,500,000 which matures
on December 31, 2002, as evidenced by that certain Note dated December 11, 1995
made by Borrower to the order of Connecticut General Life Insurance Company in
the principal face amount of $63,500,000; (iv) the long term fixed rate debt
provided to The Woodlands Corporation ("Woodlands") in the principal face
amount of $13,000,000, which matures on September 1, 2001, as evidenced by that
certain Promissory Note dated August 10, 1994, made by Woodlands to the order
of Hartford Life Insurance Company; (v) the long term fixed rate debt provided
to 301 Congress Avenue, L.P. ("301 Congress") by Northwestern Mutual Life
Insurance Company ("Northwestern") in the
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<PAGE> 14
original principal face amount of $26,000,000, which matures on January 1,
2004, as evidenced by that certain Promissory Note dated December 26, 1996 made
by 301 Congress to the order of Northwestern in the principal face amount of
$26,000,000; (vi) the debt maturing on July 1, 1999, in the original face
amount of $115,000,000, assumed by Crescent Real Estate Funding III, L.P.
("Funding III"), Crescent Real Estate Funding IV, L.P. ("Funding IV"), and
Crescent Real Estate Funding V, L.P. ("Funding V") pursuant to an Assumption
Agreement dated October 7, 1996, as evidenced by that certain Promissory Note
Secured by Deed of Trust dated June 30, 1994 made by Greenway Plaza, Ltd. and
Nine Greenway, Ltd. to the order of Nomura in the principal face amount of
$115,000,000, which has been assigned to LaSalle National Bank, as Trustee
under that certain Pooling and Servicing Agreement dated as of August 1, 1994;
(vii) the debt maturing on July 1, 2020, in the original face amount of
$8,900,000.00, assumed by Crescent Real Estate Funding VI, L.P. ("Funding VI")
pursuant to a Consent and Assumption Agreement dated December 5, 1996, as
evidenced by that certain Promissory Note dated June 28, 1995 made by Canyon
Ranch-Bellefontaine Associates, L.P. to the order of Nomura in the principal
face amount of $8,900,000.00 which has been assigned to LaSalle National Bank,
as Trustee under that certain Pooling and Servicing Agreement dated as of
August 1, 1995; (viii) a $250,000,000.00 senior unsecured debt security
designated as the 7 1/8% Notes maturing September 15, 2007; and (ix) a
$150,000,000.00 senior unsecured debt security designated as the 6 5/8% Notes
maturing September 15, 2002.
Federal Funds Effective Rate. For any day, the rate per annum equal
to the weighted average of the rates on overnight Federal funds transactions
with members of the Federal Reserve System arranged by Federal funds brokers,
as published for such day (or, if such day is not a Business Day, for the next
preceding Business Day) by the Federal Reserve Bank of New York, or, if such
rate is not so published for any day that is a Business Day, the average of the
quotations for such day on such transactions received by the Agent from three
(3) Federal funds brokers of recognized standing selected by the Agent.
Fixed Charges. With respect to any Person for any fiscal period, an
amount equal to Debt Service plus Non-Incremental Revenue Generating Capital
Expenditures plus/minus Rent Adjustments, all as determined in accordance with
generally accepted accounting principles.
Funds Available for Distribution. With respect to any Person for any
fiscal period, an amount equal to Funds from Operations plus non-real estate
depreciation and the amortization of deferred financing costs plus/minus Rent
Adjustments minus Non-Incremental Revenue Generating Capital Expenditures
(excluding any extraordinary or nonrecurring non-tenant related capital
expenditures).
Funds from Operations. With respect to any Person for any fiscal
period, the net income (or deficit) of such Person computed in accordance with
generally accepted accounting principles, excluding financing costs and gains
(or losses) from debt restructuring and sales of property, plus depreciation
(except non-real estate depreciation) and amortization (except the amortization
of deferred financing costs), and after adjustments for unconsolidated
partnerships and joint ventures.
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<PAGE> 15
generally accepted accounting principles. Principles that are (a)
consistent with the principles promulgated or adopted by the Financial
Accounting Standards Board and its predecessors, as in effect from time to time
and (b) consistently applied with past financial statements of the Borrower
adopting the same principles; provided that a certified public accountant
would, insofar as the use of such accounting principles is pertinent, be in a
position to deliver an unqualified opinion (other than a qualification
regarding changes in generally accepted accounting principles) as to financial
statements in which such principles have been properly applied.
General Partner. Crescent Real Estate Equities, Ltd., a Delaware
corporation.
Guaranteed Pension Plan. Any employee pension benefit plan within the
meaning of Section 3(2) of ERISA maintained or contributed to by the Borrower
or any ERISA Affiliate the benefits of which are guaranteed on termination in
full or in part by the PBGC pursuant to Title IV of ERISA, other than a
Multiemployer Plan.
Guarantor. Collectively, Crescent Guarantor and each Subsidiary
Guarantor, and individually any one such Guarantor.
Guarantor's Compliance Certificate. The compliance certificate which
Crescent Guarantor is required to provide to the Agent pursuant to the terms of
the Guaranty.
Guaranty. Collectively, the Unconditional Guaranty of Payment and
Performance, dated of even date herewith, made by Crescent Guarantor in favor
of the Agent and the Banks, and each Unconditional Guaranty of Payment and
Performance which is executed by a Subsidiary Guarantor, as the same may be
modified or amended, each such Guaranty to be in form and substance
satisfactory to the Agent and the Majority Banks.
Hazardous Substances. See Section 6.17(b).
Implied Rating. With respect to a Person, the most recent rating
issued from time to time by a Rating Agency as is applicable to such Person's
senior unsecured long-term debt, or if no such senior unsecured long-term debt
is outstanding, then the most recent rating issued from time to time by a
Rating Agency as would hypothetically be applicable to such Person's senior
unsecured long-term debt (i.e., an implied rating).
Indebtedness. All obligations, contingent and otherwise, that in
accordance with generally accepted accounting principles should be classified
upon the obligor's balance sheet as liabilities, or to which reference should
be made by footnotes thereto, including in any event and whether or not so
classified: (a) all debt and similar monetary obligations, whether direct or
indirect; (b) all liabilities secured by any mortgage, pledge, security
interest, lien, charge or other encumbrance existing on property owned or
acquired subject thereto, whether or not the liability secured thereby shall
have been assumed; (c) all guarantees, endorsements and other contingent
obligations whether direct or indirect in respect of indebtedness of others,
including any
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<PAGE> 16
obligation to supply funds to or in any manner to invest directly or indirectly
in a Person, to purchase indebtedness, or to assure the owner of indebtedness
against loss through an agreement to purchase goods, supplies or services for
the purpose of enabling the debtor to make payment of the indebtedness held by
such owner or otherwise, the obligation to reimburse the issuer in respect of
any letter of credit, and obligations under interest rate swaps and similar
agreements, excluding, however, any such guarantees, endorsements and other
contingent obligations which when satisfied, funded or vested give rise to
corresponding assets under generally accepted accounting principles; (d) any
obligation as a lessee or obligor under a Capitalized Lease; (e) all
subordinated debt; and (f) all obligations to purchase under agreements to
acquire, or otherwise to contribute money with respect to, properties under
"development" within the meaning of Section 8.9.
Interest Payment Date. (a) As to each Loan, the first day of each
calendar month during the term of such Loan, and (b) also as to each Eurodollar
Rate Loan, the last day of the Interest Period relating thereto.
Interest Period. With respect to each Eurodollar Rate Loan (a)
initially, the period commencing on the Drawdown Date of such Loan and ending
one, two, three, six or twelve months thereafter, and (b) thereafter, each
period commencing on the day following the last day of the next preceding
Interest Period applicable to such Loan and ending on the last day of one of
the periods set forth above, as selected by the Borrower in a Conversion
Request; provided that all of the foregoing provisions relating to Interest
Periods are subject to the following:
(A) if any Interest Period with respect to a Eurodollar
Rate Loan would otherwise end on a day that is not a Eurodollar
Business Day, that Interest Period shall end and the next Interest
Period shall commence on the next preceding or succeeding Eurodollar
Business Day as determined conclusively by the Reference Bank in
accordance with the then current bank practice in the Eurodollar
interbank market;
(B) if the Borrower shall fail to give notice as provided
in Section 4.1, the Borrower shall be deemed to have requested a
conversion of the affected Eurodollar Rate Loan to a Base Rate Loan on
the last day of the then current Interest Period with respect thereto;
and
(C) no Interest Period relating to any Eurodollar Rate
Loan shall extend beyond the Maturity Date.
Investment Grade Rating. With respect to any Person, an Implied
Rating equal to or more favorable than BBB- with respect to a rating issued by
Standard & Poors Corporation (or in the case of a rating issued by Moody's
Investor Service, Inc., a rating of Baa3). If, at any time after a Person
obtains an Investment Grade Rating, (a) no Implied Rating for such Person's
senior unsecured long-term debt shall have been issued or confirmed in writing
by either of the Rating Agencies within the previous 365 days, or (b) the
rating system of either of the Rating Agencies (as opposed to the rating of a
Person) shall change, or (c) either of the Rating Agencies shall no longer
perform the functions of a securities rating agency, then the Borrower and the
Agent shall promptly negotiate in good faith to amend the reference to the
specific ratings in this definition for the determination of the Investment
Grade Rating, and pending such amendment,
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<PAGE> 17
the applicable rating in effect as of the date the event described in this
paragraph occurred shall continue to apply.
Investment Partnerships. Investments in joint ventures, general
partnerships, limited partnerships, limited liability companies or any other
business association formed for the purpose of acquiring Investments of the
type permitted in Section 8.3.
Investments. With respect to any Person, all shares of capital stock,
evidences of Indebtedness and other securities issued by any other Person, all
loans, advances, or extensions of credit to, or contributions to the capital
of, any other Person, all purchases of the securities or business or integral
part of the business of any other Person and commitments and options to make
such purchases, all interests in real property, and all other investments;
provided, however, that the term "Investment" shall not include (i) equipment,
inventory and other tangible personal property acquired in the ordinary course
of business, or (ii) current trade and customer accounts receivable for
services rendered in the ordinary course of business and payable in accordance
with customary trade terms. In determining the aggregate amount of Investments
outstanding at any particular time: (a) the amount of any investment
represented as a guaranty shall be taken at not less than the principal amount
of the obligations guaranteed and still outstanding; (b) there shall be
included as an Investment all interest accrued with respect to Indebtedness
constituting an Investment unless and until such interest is paid; (c) there
shall be deducted in respect of each such Investment any amount received as a
return of capital (but only by repurchase, redemption, retirement, repayment,
liquidating dividend or liquidating distribution); (d) there shall not be
deducted in respect of any Investment any amounts received as earnings on such
Investment, whether as dividends, interest or otherwise, except that accrued
interest included as provided in the foregoing clause (b) may be deducted when
paid; and (e) there shall not be deducted from the aggregate amount of
Investments any decrease in the value thereof.
Leases. Leases, licenses and agreements whether written or oral,
relating to the use or occupation of space in or on the Real Estate by persons
other than the Borrower.
Liens. See Section 8.2.
Limited Partner. Crescent Guarantor, successor by merger with CRE
Limited Partner, Inc., a Delaware corporation.
Loan Documents. This Agreement, the Notes, the Guaranty and all other
documents, instruments or agreements now or hereafter executed or delivered by
or on behalf of the Borrower or a Guarantor in connection with the Loans.
Loan or Loans. An individual loan or the aggregate loans, as the case
may be, to be made by the Banks hereunder.
Loan Request. See Section 2.6.
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<PAGE> 18
Magellan. Magellan Health Services, Inc., a Delaware corporation.
Majority Banks. As of any date, the Bank or Banks whose aggregate
Commitment Percentage is equal to or greater than the required percentage, as
determined by the Banks, required to approve such matter, as disclosed by the
Agent to the Borrower from time to time.
Master Lease Agreement. That certain Master Lease Agreement dated
June 12, 1997 between Crescent Real Estate Funding VII, L.P., as Landlord, and
CBHS and certain other parties, as Tenant.
Maturity Date. June 6, 2000, or such earlier date on which the Loans
shall become due and payable pursuant to the terms hereof.
Modified Book Asset Value. For each type of direct or indirect
interest in real estate (undeveloped land, hotels/resorts, behavioral
healthcare facilities and Class A institutional quality office buildings,
retail properties, industrial and warehouse properties), an amount equal to the
sum of the aggregate net book value of assets of that type (determined in
accordance with the acquisition cost of such assets and as shown on the books
and records of the Borrower), plus that type of Real Estate's applicable share
of real estate depreciation since the date of the Borrower's initial public
offering, plus that type of Real Estate's applicable share of the one-time
market value adjustment described in Section 9.10.
Multiemployer Plan. Any multiemployer plan within the meaning of
Section 3(37) of ERISA maintained or contributed to by the Borrower or any
ERISA Affiliate.
Net Income (or Deficit). With respect to any Person (or any asset of
any Person) for any fiscal period, the net income (or deficit) of such Person
(or attributable to such asset), after deduction of all expenses, taxes and
other proper charges, determined in accordance with generally accepted
accounting principles.
Non-Competition Agreements. Noncompetition Agreements dated May 5,
1994, from Richard E. Rainwater, John C. Goff and Gerald W. Haddock.
Non-Incremental Revenue Generating Capital Expenditures. With respect
to any Person for any fiscal period, an amount equal to the sum of the amount
of capital expenditures paid in cash by such Person or with respect to such
asset (other than tenant related building improvements) during such fiscal
period and considered to be "Non-Incremental Revenue Generating", as such term
is defined by industry standards and as applied by the Borrower historically,
plus the amount of leasing costs (including leasing commission and tenant
improvements) paid in cash by such Person or with respect to such asset during
such fiscal period and considered to be "Non-Incremental Revenue Generating",
as such term is defined by industry standards and as applied by the Borrower
historically.
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Non-Recourse Indebtedness. Indebtedness of the Borrower or a
Subsidiary which is secured by one or more parcels of Real Estate and related
personal property or interests therein and Short-term Investments and is not a
general obligation of the Borrower or any Subsidiary, the holder of such
Indebtedness having recourse solely to the parcels of Real Estate securing such
Indebtedness, the improvements and leases thereon and the rents and profits
thereof and the Short-term Investments securing such Indebtedness.
Notes. See Section 2.4.
Notice. See Section 19.
Obligations. All indebtedness, obligations and liabilities of the
Borrower to any of the Banks and the Agent, individually or collectively, under
this Agreement or any of the other Loan Documents or in respect of any of the
Loans or the Notes, or other instruments at any time evidencing any of the
foregoing, whether existing on the date of this Agreement or arising or
incurred hereafter, direct or indirect, joint or several, absolute or
contingent, matured or unmatured, liquidated or unliquidated, secured or
unsecured, arising by contract, operation of law or otherwise.
Outstanding. With respect to the Loans, the aggregate unpaid
principal thereof as of any date of determination.
PBGC. The Pension Benefit Guaranty Corporation created by Section
4002 of ERISA and any successor entity or entities having similar
responsibilities.
Permitted Liens. Liens, security interests and other encumbrances
permitted by Section 8.2.
Person. Any individual, corporation, partnership, limited liability
company, trust, unincorporated association, business, or other legal entity,
and any government or any governmental agency or political subdivision thereof.
Preferred Distributions. For any period, the amount of any and all
Distributions due and payable to the holders of any form of preferred stock or
partnership interest (whether perpetual, convertible or otherwise) or other
ownership or beneficial interest in Crescent Guarantor or Borrower that
entitles the holders thereof to preferential payment or distribution priority
with respect to dividends, distributions, assets or other payments over the
holders of any other stock, partnership interest or other ownership or
beneficial interest in such Person.
Prospectus. The 10-K of Crescent Guarantor, dated December 31, 1996
and filed with the SEC.
Rating Agencies. Standard & Poor's Corporation and Moody's Investors
Service, Inc.
Rating Notice. See Section 7.4(i).
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Rating Notice Date. The earlier of (a) the date a Rating Notice is
received by the Agent, or (b) the date the Agent, having received actual notice
of a change by the Rating Agency of the Borrower's Implied Rating, sends notice
to the Borrower of such change, provided that nothing contained herein shall
imply any obligation of the Agent to monitor such rating changes.
Real Estate. All real property at any time owned or leased (as lessee
or sublessee) by the Borrower or any of its Subsidiaries or any Investment
Partnerships.
Record. The grid attached to any Note, or the continuation of such
grid, or any other similar record, including computer records, maintained by
any Bank with respect to any Loan referred to in such Note.
Reference Bank. BankBoston.
Register. See Section 18.2.
REIT Status. With respect to Crescent Guarantor, its status as a real
estate investment trust as defined in Section 856(a) of the Code.
Release. See Section 6.17(c)(iii).
Rent Adjustments. For any Person, straight line adjustments to rent
payable under Leases, as determined in accordance with generally accepted
accounting principles.
Rent Payments. For any period, the "Rent" as such term is defined in
the Master Lease Agreement.
Required Behavioral Healthcare Facilities Capital Expenditures. With
respect to any fiscal period, an amount equal to the capital expenditures
incurred by CBHS with respect to the Behavioral Healthcare Facilities pursuant
to the Master Lease Agreement during such fiscal period, determined in
accordance with generally accepted accounting principles.
Residential Corporations. Collectively Mira Vista Development Corp.,
Houston Area Development Corp., Crescent Development Management Corp.,
Woodlands Land Company, Inc. and Desert Mountain Development Corporation.
Revocation Costs. See Section 2.6.
Sale Agreement. That certain Real Estate Purchase and Sale Agreement
dated as of January 29, 1997, between the Borrower, as Purchaser, and Magellan,
as Seller, as amended by that certain First Amendment to Real Estate Purchase
and Sale Agreement dated as of February 28, 1997, between the Borrower and
Magellan, and as further amended by that certain Second Amendment to Real
Estate Purchase and Sale Agreement dated as of May 29, 1997 between the
Borrower and Magellan, with respect to the purchase of the Behavioral
Healthcare Facilities.
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SEC. The federal Securities and Exchange Commission.
Secured Indebtedness. Indebtedness of a Person that is pursuant to a
Capitalized Lease or is directly or indirectly secured by a Lien.
Short-term Investments. Investments described in subsections (a)
through (g), inclusive, of Section 8.3.
State. A state of the United States of America.
Subsidiary. (a) Any corporation, association, partnership, trust, or
other business entity of which the designated parent shall at any time own
directly or indirectly through a Subsidiary or Subsidiaries at least a majority
(by number of votes or controlling interests) of the outstanding Voting
Interests, (b) any other entity the accounts of which are consolidated with the
accounts of the Borrower, and (c) the Residential Corporations. A Subsidiary
may also include an Investment Partnership to the extent the provisions of
clause (a), (b) or (c) apply.
Subsidiary Guarantor. CresCal Properties, L.P., CresTex Development,
L.C. and each additional Subsidiary which becomes a Guarantor pursuant to
Section 5.2.
Test Period. See Section 9.2.
Total Commitment. The sum of the Commitments of the Banks, as in
effect from time to time.
Type. As to any Loan, its nature as a Base Rate Loan or a Eurodollar
Rate Loan.
Unencumbered Operating Property. An Unencumbered Operating Property
shall mean Real Estate (a) which is owned one hundred percent (100%) in fee
simple by the Borrower, or (b) in which the Borrower owns a leasehold interest
pursuant to a mortgageable ground lease having a remaining term of not less
than fifty (50) years (calculated from the date of acquisition of such
interest), or (c) which is owned by an entity which is controlled by the
Borrower or in which the Borrower is the general partner or managing member
provided that (i) the Borrower has control over all major and day-to-day
decisions with respect to the operation of such entity (including, without
limitation, the decision to sell or encumber the assets of such entity), (ii)
the organizational agreements of such entity specifically authorize the
Borrower to pledge the assets of such entity as security for the Obligations,
and (iii) the Borrower certifies to the Agent that applicable law does not
preclude such entity from pledging its assets to secure the Obligations; and in
any case which satisfies all of the following conditions:
(x) such Unencumbered Operating Property shall be free and clear
of all Liens other than the Liens permitted in Section 8.2(i), (iii) and (vi);
and
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(y) such Unencumbered Operating Property shall consist solely of
Real Estate which is an income producing operating property.
Variable Interest Rate. A rate of interest payable with respect to
Indebtedness that may vary, float or change during the term of such
Indebtedness (that is, a rate of interest that is not fixed for the entire term
of such Indebtedness).
Voting Interests. Stock or similar ownership interests, of any class
or classes (however designated), the holders of which are at the time entitled,
as such holders, (a) to vote for the election of a majority of the directors
(or persons performing similar functions) of the corporation, association,
partnership, trust or other business entity involved, or (b) to control,
manage, or conduct the business of the corporation, partnership, association,
trust or other business entity involved.
Section 1.2. Rules of Interpretation.
(a) A reference to any document or agreement shall
include such document or agreement as amended, modified or supplemented from
time to time in accordance with its terms and the terms of this Agreement.
(b) The singular includes the plural and the plural
includes the singular. Without limiting the foregoing, a reference to
Guarantor shall be a reference to any or all Guarantors as the context may
permit or require.
(c) A reference to any law includes any amendment or
modification to such law.
(d) A reference to any Person includes its permitted
successors and permitted assigns.
(e) Accounting terms not otherwise defined herein have
the meanings assigned to them by generally accepted accounting principles
applied on a consistent basis by the accounting entity to which they refer.
(f) The words "include", "includes" and "including" are
not limiting.
(g) The words "approval" and "approved", as the context
so determines, means an approval in writing given to the party seeking approval
after full and fair disclosure to the party giving approval of all material
facts necessary in order to determine whether approval should be granted.
(h) All terms not specifically defined herein or by
generally accepted accounting principles, which terms are defined in the
Uniform Commercial Code as in effect in the Commonwealth of Massachusetts, have
the meanings assigned to them therein.
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(i) Reference to a particular "Section ", refers to that
section of this Agreement unless otherwise indicated.
(j) The words "herein", "hereof", "hereunder" and words
of like import shall refer to this Agreement as a whole and not to any
particular section or subdivision of this Agreement.
Section 2. THE REVOLVING CREDIT FACILITY.
Section 2.1. Commitment to Lend. Subject to the terms and conditions
set forth in this Agreement, each of the Banks severally agrees to lend to the
Borrower, and the Borrower may borrow (and repay and reborrow) from time to
time between the Closing Date and the Maturity Date, upon notice by the
Borrower to the Agent given in accordance with Section 2.6, such sums as are
requested by the Borrower for the purposes set forth in Section 2.9 (but
subject to the limitations set forth in Section 2.9) up to a maximum aggregate
principal amount outstanding (after giving effect to all amounts requested) at
any one time equal to such Bank's Commitment; provided, that, in all events no
Default or Event of Default shall have occurred and be continuing and the
Borrower's financial statements as required pursuant to Section 2.6(iii) shall
demonstrate compliance with all covenants set forth therein; and provided,
further, that the outstanding principal amount of the Loans (after giving
effect to all amounts requested) shall not at any time exceed the Total
Commitment. The Loans shall be made pro rata in accordance with each Bank's
Commitment Percentage. Each request for a Loan hereunder shall constitute a
representation and warranty by the Borrower that all of the conditions set
forth in Section 10 and Section 11, in the case of the initial Loan, and
Section 11, in the case of all other Loans, have been satisfied on the date of
such request (except as otherwise permitted in Paragraph 4 of the form of Loan
Request with respect to warranties and representations). No Bank shall have
any obligation to make Loans to the Borrower in the maximum aggregate principal
amount outstanding of more than the principal face amount of its Note.
Section 2.2. Facility Fee. The Borrower agrees to pay to the Agent
for the accounts of the Banks in accordance with their respective Commitment
Percentages a facility fee calculated at the rate of one-fourth of one percent
(0.25%) per annum on the daily amount by which the Total Commitment exceeds the
outstanding principal amount of Loans during each calendar quarter or portion
thereof commencing on the date hereof and ending on the Maturity Date. The
facility fee shall be payable quarterly in arrears on the fifth day of each
calendar quarter for the immediately preceding calendar quarter or portion
thereof, or on any earlier date on which the Commitments shall be reduced or
shall terminate as provided in Section 2.3, with a final payment on the
Maturity Date. Any payment due under this Section 2.2 shall be prorated for
any partial calendar quarter.
Section 2.3. Reduction of Commitment. The Borrower shall have the
right at any time and from time to time upon five Business Days' prior written
notice to the Agent to reduce by $5,000,000 or an integral multiple of $100,000
in excess thereof or to terminate entirely the unborrowed portion of the
Commitments, whereupon the Commitments of the Banks shall be reduced pro rata
in accordance with their respective Commitment Percentages of the amount
specified in such
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notice or, as the case may be, terminated, any such reduction to be without
penalty (unless such reduction requires repayment of a Eurodollar Rate Loan).
Promptly after receiving any notice of the Borrower delivered pursuant to this
Section 2.3, the Agent will notify the Banks of the substance thereof. Upon
the effective date of any such reduction or termination, the Borrower shall pay
to the Agent for the respective accounts of the Banks the full amount of any
facility fee under Section 2.2 then accrued on the amount of the reduction. No
reduction or termination of the Commitment may be reinstated. Notwithstanding
the foregoing, unless the Commitments are terminated in full, in no event shall
the aggregate Commitments be reduced to less than $300,000,000.00.
Section 2.4. Notes. The Loans shall be evidenced by separate
promissory notes of the Borrower in substantially the form of Exhibit A hereto
(collectively, the "Notes"), dated of even date with this Agreement and
completed with appropriate insertions. One Note shall be payable to the order
of each Bank in the principal amount equal to such Bank's Commitment or, if
less, the outstanding amount of all Loans made by such Bank, plus interest
accrued thereon, as set forth below. The Borrower irrevocably authorizes each
Bank to make or cause to be made, at or about the time of the Drawdown Date of
any Loan or at the time of receipt of any payment of principal thereof, an
appropriate notation on such Bank's Record reflecting the making of such Loan
or (as the case may be) the receipt of such payment. The outstanding amount of
the Loans set forth on such Bank's Record shall be prima facie evidence of the
principal amount thereof owing and unpaid to such Bank, but the failure to
record, or any error in so recording, any such amount on such Bank's Record
shall not limit or otherwise affect the obligations of the Borrower hereunder
or under any Note to make payments of principal of or interest on any Note when
due. By delivery of the Notes, there shall not be deemed to have occurred, and
there has not otherwise occurred, any payment, satisfaction or novation of the
Indebtedness evidenced by the "Notes" described in the Amended Credit
Agreement, which Indebtedness is instead allocated among the Banks as of the
date hereof and evidenced by the Notes and their respective Commitment
Percentages, and the Banks shall as of the date hereof make such adjustments to
the outstanding loans of such Banks so that such outstanding Loans are
consistent with their respective Commitment Percentages.
Section 2.5. Interest on Loans.
(a) Each Base Rate Loan shall bear interest for the
period commencing with the Drawdown Date thereof and ending on the date on
which such Base Rate Loan is paid in full or is converted to a Eurodollar Rate
Loan from a Base Rate Loan at the Base Rate.
(b) Each Eurodollar Rate Loan shall bear interest for the
period commencing with the Drawdown Date thereof and ending on the last day of
the Interest Period with respect thereto at the rate per annum equal to the sum
of the Applicable Margin plus the Eurodollar Rate determined for such Interest
Period.
(c) The Borrower promises to pay interest on each Loan in
arrears on each Interest Payment Date with respect thereto.
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(d) Base Rate Loans and Eurodollar Rate Loans may be
converted to Loans of the other Type as provided in Section 4.1.
Section 2.6. Requests for Loans. The Borrower (i) shall notify the
Agent of a potential request for a Loan as soon as possible prior to the
Borrower's proposed Drawdown Date, and (ii) shall give to the Agent written
notice in the form of Exhibit B hereto (or telephonic notice confirmed in
writing in the form of Exhibit B hereto) of each Loan requested hereunder (a
"Loan Request") no later than 10:00 a.m. three (3) Business Days prior to the
proposed Drawdown Date. The Agent shall promptly notify each of the Banks
following the receipt of a Loan Request, but in any event no later than 2:00
p.m. three (3) Business Days prior to the proposed Drawdown Date. Borrower
shall not make a Loan Request more frequently than three times each month.
Each such notice shall specify with respect to the requested Loan the proposed
principal amount, Drawdown Date, Interest Period (if applicable) and Type.
Each such notice shall also contain (i) a statement as to the purpose for which
such advance shall be used (which purpose shall be in accordance with the terms
of Section 2.9), (ii) a certification by the chief financial or chief
accounting officer of the General Partner that the Borrower is and will be in
compliance with all covenants under the Loan Documents after giving effect to
the making of such Loan, (iii) a Compliance Certificate prepared using the
financial statements of the Borrower most recently provided or required to be
provided to the Agent under Section 6.4 or Section 7.4 adjusted in the best
good faith estimate of the Borrower to give effect to the proposed advance and
incorporating the operating performance of any asset to be acquired, and (iv)
the Guarantor's Compliance Certificate prepared using the financial statements
of Crescent Guarantor most recently provided or required to be provided to the
Agent pursuant to the Guaranty adjusted in the best good faith estimate of
Crescent Guarantor to the date of the proposed advance. Promptly upon receipt
of any such notice, the Agent shall notify each of the Banks thereof. Except
as provided in this Section 2.6, each such Loan Request shall be irrevocable
and binding on the Borrower and shall obligate the Borrower to accept the Loan
requested from the Banks on the proposed Drawdown Date, provided that, in
addition to the Borrower's other remedies against any Bank which fails to
advance its proportionate share of a requested Loan, such Loan Request may be
revoked by the Borrower by notice received by the Agent no later than the
Drawdown Date if any Bank fails to advance its proportionate share of the
requested Loan in accordance with the terms of this Agreement, provided further
that the Borrower shall be liable in accordance with the terms of this
Agreement to any Bank which is prepared to advance its proportionate share of
the requested Loan for any costs, expenses or damages incurred by such Bank as
a result of the Borrower's election to revoke such Loan Request (the
"Revocation Costs"). Nothing herein shall prevent the Borrower from seeking
recourse against any Bank that fails to advance its proportionate share of a
requested Loan as required by this Agreement. The Borrower may, without any
liability for the payment of the Revocation Costs or other cost or penalty,
revoke a Loan Request by delivering notice thereof to each of the Banks no
later than 3:00 p.m. three (3) Business Days prior to the Drawdown Date. Each
Loan Request shall be (a) for a Base Rate Loan in a minimum aggregate amount of
$1,000,000 or an integral multiple of $100,000 in excess thereof, or (b) for a
Eurodollar Rate Loan in a minimum aggregate amount of $2,000,000 or an integral
multiple of $100,000 in excess thereof; provided, however, that there shall be
no more than five (5) Eurodollar Rate Loans outstanding at any one time.
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Section 2.7. Funds for Loans.
(a) Not later than 11:00 a.m. (Boston time) on the
proposed Drawdown Date of any Loans, each of the Banks will make available to
the Agent, at the Agent's Head Office, in immediately available funds, the
amount of such Bank's Commitment Percentage of the amount of the requested
Loans which may be disbursed pursuant to Section 2.1. Upon receipt from each
Bank of such amount, and upon receipt of the documents required by Section 10
and Section 11 and the satisfaction of the other conditions set forth therein,
to the extent applicable, the Agent will make available to the Borrower the
aggregate amount of such Loans made available to the Agent by the Banks by wire
transfer in accordance with Borrower's instructions. The failure or refusal of
any Bank to make available to the Agent at the aforesaid time and place on any
Drawdown Date the amount of its Commitment Percentage of the requested Loans to
the extent it is obligated to fund such Loan hereunder shall not relieve any
other Bank from its several obligation hereunder to make available to the Agent
the amount of such other Bank's Commitment Percentage of any requested Loans,
including any additional Loans that may be requested by the Borrower subject to
the terms and conditions hereof to provide funds to replace those not advanced
by the Bank so failing or refusing, provided that the Borrower may by notice
received by the Agent no later than the Drawdown Date refuse to accept any Loan
which is not fully funded in accordance with the Borrower's Loan Request
subject to the terms of Section 2.6 (except that such refusal shall not relieve
the Borrower of its obligation to pay the Revocation Costs); provided further
that no Bank shall be obligated to advance any amount in excess of the limits
set forth in Section 2.1. In the event of any such failure or refusal, the
Banks not so failing or refusing shall be entitled to a priority position as
against the Bank or Banks so failing or refusing for such Loans as provided in
Section 12.4.
(b) Unless Agent shall have been notified by any Bank
prior to the applicable Drawdown Date that such Bank will not make available to
Agent such Bank's pro rata share of a proposed Loan, Agent may in its
discretion assume that such Bank has made such Loan available to Agent in
accordance with the provisions of this Agreement and Agent may, if it chooses,
in reliance upon such assumption make such Loan available to Borrower, and such
Bank shall be liable to the Agent for the amount of such advance.
Section 2.8. Intentionally Omitted.
Section 2.9. Use of Proceeds. The Borrower will use the proceeds of
the Loans solely to provide short-term financing (a) for the acquisition of fee
interests in Real Estate which is utilized principally for Class A office
space, behavioral healthcare facilities and/or hotel/resort properties which
are of institutional quality or other income-producing real estate reasonably
satisfactory to the Majority Banks, subject to the limitations in Section 9.9,
(b) for working capital purposes, (c) for the acquisition of non-income
producing land assets or real estate assets which are held in fee simple or in
any form other than undivided fee simple ownership (such as cotenancy
interests, leasehold interests, partnership interests, shares of stock in
corporations owning real estate, or through mortgages or participation
interests in or assignments of mortgages), subject however to the limitations
in Section 9.9, and (d) for such other purposes as the Majority Banks in their
discretion from time to time may agree to in writing. Without the
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consent of the Majority Banks, in no event may any amount advanced under the
Loan be used directly or indirectly (i) to pay dividends or other distributions
to any partner or member of the Borrower, the Crescent Guarantor or the
shareholders of the Crescent Guarantor or (ii) except as expressly permitted in
Section 8.9, with respect to the obligations described in Schedule 8.1(h) or
with respect to the Investments described in Section 8.3(k) and (l), to make
advances, loans, Investments or other contributions to, or in any other manner
"downstream" into, Crescent Real Estate Funding I, L.P., Crescent Real Estate
Funding II, L.P., Crescent Real Estate Funding III, L.P., Crescent Real Estate
Funding IV, L.P., Crescent Real Estate Funding V, L.P., Crescent Real Estate
Funding VI, L.P., Crescent Real Estate Funding VII, L.P. or any other
Subsidiary or Investment Partnership of the Borrower whether now existing or
hereafter formed. Without the consent of the Majority Banks, except with
respect to the development of Phase II at the project commonly referred to as
"The Avallon" (and the potential development of Phase III at the Avallon),
tenant improvements and the renovation or demolition and construction of the
"Frost Bank Garage" to be constructed at the northeast corner of the
intersection of Lavaca Street and Ninth Street in Austin, Texas, on land
acquired by the Borrower in connection with the acquisition of the Frost Bank
Plaza Building, the Surtran Garage at Continental Plaza, the convention hotel
at Houston Center and an office building near The Crescent as permitted
pursuant to Section 8.9, no portion of the proceeds of the Loan shall be used
to develop or construct new commercial real estate projects or for the
substantial renovation or rehabilitation of commercial real estate projects.
Section 3. REPAYMENT OF THE LOANS.
Section 3.1. Stated Maturity. The Borrower promises to pay on the
Maturity Date and there shall become absolutely due and payable on the Maturity
Date, all of the Loans outstanding on such date, together with any and all
accrued and unpaid interest thereon.
Section 3.2. Mandatory Prepayments. The Borrower promises to pay
principal of the Loans prior to stated maturity, as follows:
(a) If at any time the aggregate outstanding principal
amount of the Loans exceeds the Total Commitment, then the Borrower
shall immediately upon demand from Agent pay the amount of such excess
to the Agent for the respective accounts of the Banks for application
to the Loans (it being acknowledged that in the event the Borrower
makes such payment as provided herein, the Borrower shall not be in
default of Section 9.3).
(b) All of the Borrower's interest in the gross proceeds
of each and every sale or refinancing of real estate assets of the
Borrower and its Subsidiaries and Investment Partnerships (whether
held directly or indirectly but excluding Borrower's interest in the
gross proceeds of sales or refinancings of real estate assets by
Subsidiaries and Investment Partnerships whose primary business is the
subdivision and sale of residential land) provided such gross proceeds
are in an amount in excess of $10,000,000.00 (provided further that
the exclusion of sales with gross proceeds equal to or less than
$10,000,000.00 shall be capped at $25,000,000.00 per year), less all
reasonable costs, expenses and commissions paid to unrelated parties
and less any Indebtedness (other than
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the Obligations) secured by such asset to be satisfied as a part of
such sale or refinance, shall be promptly paid by the Borrower to the
Agent for the account of the Banks as a prepayment of the Loans to the
extent of the outstanding balance of the Loans; provided that, (x) so
long as (i) there has been no acceleration of the maturity of the
Obligations pursuant to Section 12.1, (ii) no Event of Default under
Section 12.1(a), (b), (d), (g), (h), (i), (j), (k), (l), (m), (n), and
(o) has occurred and is continuing, or (iii) no breach of the
covenants contained in Section 8.1, Section 8.2, Section 8.3 or
Section 8.7 has occurred and is continuing, the Borrower shall not as
a result of this Section 3.2(b) be required to reduce the principal
balance of the Loans to less than $50,000,000.00; and (y) with respect
to the Borrower's interest in the gross proceeds of a sale or
refinancing of real estate assets of a Subsidiary or Investment
Partnership in which the Borrower does not own a majority (by number
of votes or controlling interests) of the outstanding Voting
Interests, the Borrower shall pay such gross proceeds to the Agent for
the account of the Banks as soon as distributed to the Borrower by
such Subsidiary or Investment Partnership.
Section 3.3. Optional Prepayments. The Borrower shall have the
right, at its election, to prepay the outstanding amount of the Loans, as a
whole or in part, at any time without penalty or premium; provided, that the
full or partial prepayment of the outstanding amount of any Eurodollar Rate
Loans pursuant to this Section 3.3 may be made only on the last day of the
Interest Period relating thereto except as otherwise required pursuant to
Section 4.7. The Borrower shall give the Agent, no later than 10:00 a.m.,
Boston time, at least three (3) Business Days prior written notice of any
prepayment pursuant to this Section 3.3, in each case specifying the proposed
date of payment of Loans and the principal amount to be paid.
Section 3.4. Partial Prepayments. Each partial prepayment of the
Loans under Section 3.2 and Section 3.3 shall be in the minimum amount of
$500,000.00 or an integral multiple of $100,000 in excess thereof (unless the
Loans are being prepaid in full), shall be accompanied by the payment of
accrued interest on the principal prepaid to the date of payment and, after
payment of such interest, shall be applied, in the absence of instruction by
the Borrower, first to the principal of Base Rate Loans and then to the
principal of Eurodollar Rate Loans.
Section 3.5. Effect of Prepayments. Amounts of the Loans prepaid
under Section 3.2 and Section 3.3 prior to the Maturity Date may be reborrowed
as provided in Section 2. Except as otherwise expressly provided herein, all
payments shall first be applied to accrued but unpaid interest and then to
principal.
Section 3.6. Proceeds from Debt or Equity Offering. The Borrower
shall cause all gross proceeds of each and every Debt Offering and Equity
Offering, less all reasonable costs, fees, expenses, underwriting commissions,
fees and discounts incurred in connection therewith, to be promptly paid by the
Borrower to the Agent for the account of the Banks as a prepayment of the Loans
to the extent of the outstanding balance of the Loans; provided that, subject
to the limitations contained in Section 3.2(b) above, the Borrower shall not as
a result of this Section 3.6 be required to reduce the principal balance of the
Loans to less than $50,000,000.00.
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Section 4. CERTAIN GENERAL PROVISIONS.
Section 4.1. Conversion Options.
(a) The Borrower may elect from time to time to convert
any outstanding Loan to a Loan of another Type and such Loan shall thereafter
bear interest as a Base Rate Loan or a Eurodollar Rate Loan, as applicable;
provided that (i) with respect to any such conversion of a Eurodollar Rate Loan
to a Base Rate Loan, the Borrower shall give the Agent at least three Business
Days' prior written notice of such election, and such conversion shall only be
made on the last day of the Interest Period with respect to such Eurodollar
Rate Loan; (ii) with respect to any such conversion of a Base Rate Loan to a
Eurodollar Rate Loan, the Borrower shall give the Agent at least four
Eurodollar Business Days' prior written notice of such election and the
Interest Period requested for such Loan, the principal amount of the Loan so
converted shall be in a minimum aggregate amount of $2,000,000 or an integral
multiple of $100,000 in excess thereof and, after giving effect to the making
of such Loan, there shall be no more than five (5) Eurodollar Rate Loans
outstanding at any one time; and (iii) no Loan may be converted into a
Eurodollar Rate Loan when any Default or Event of Default has occurred and is
continuing. All or any part of the outstanding Loans of any Type may be
converted as provided herein, provided that no partial conversion shall result
in a Base Rate Loan in an aggregate principal amount of less than $1,000,000 or
a Eurodollar Rate Loan in an aggregate principal amount of less than $2,000,000
and that the aggregate principal amount of each Loan shall be in an integral
multiple of $100,000. On the date on which such conversion is being made, each
Bank shall take, to the extent it deems it necessary to do so, such action as
is necessary to transfer its Commitment Percentage of such Loans to its
Domestic Lending Office or its Eurodollar Lending Office, as the case may be.
Each Conversion Request relating to the conversion of a Base Rate Loan to a
Eurodollar Rate Loan shall be irrevocable by the Borrower.
(b) Any Loan may be continued as such Type upon the
expiration of an Interest Period with respect thereto by compliance by the
Borrower with the terms of Section 4.1; provided that no Eurodollar Rate Loan
may be continued as such when any Default or Event of Default has occurred and
is continuing, but shall be automatically converted to a Base Rate Loan on the
last day of the Interest Period relating thereto ending during the continuance
of any Default or Event of Default.
(c) In the event that the Borrower does not notify the
Agent of its election hereunder with respect to any Loan, such Loan shall be
automatically converted to a Base Rate Loan at the end of the applicable
Interest Period.
Section 4.2. Closing Fee. The Borrower has previously paid to
BankBoston closing fees pursuant to an Agreement Regarding Fees among the
Borrower and BankBoston. BankBoston has paid to the Banks a closing fee in
accordance with their separate agreement.
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Section 4.3. Agent's Fee. The Borrower shall pay to the Agent, for
the Agent's own account, an Agent's fee calculated at the rate of $50,000.00
per year. The Agent's fee shall be payable quarterly in arrears on the first
day of each calendar quarter for the immediately preceding calendar quarter or
portion thereof. The Agent's fee for any partial calendar quarter shall be
prorated.
Section 4.4. Funds for Payments.
(a) All payments of principal, interest, facility fees,
Agent's fees, closing fees and any other amounts due hereunder or under any of
the other Loan Documents shall be made to the Agent, for the respective
accounts of the Banks and the Agent, as the case may be, at the Agent's Head
Office, not later than 3:00 p.m. (Boston time) on the day when due, in each
case in immediately available funds. To the extent funds are available in such
account, the Agent is hereby authorized to charge the account of the Borrower
with BankBoston, on the dates when the amount thereof shall become due and
payable, with the amounts of the principal of and interest on the Loans and all
fees, charges, expenses and other amounts owing to the Agent and/or the Banks
under the Loan Documents.
(b) All payments by the Borrower hereunder and under any
of the other Loan Documents shall be made without setoff or counterclaim and
free and clear of and without deduction for any taxes, levies, imposts, duties,
charges, fees, deductions, withholdings, compulsory loans, restrictions or
conditions of any nature now or hereafter imposed or levied by any jurisdiction
or any political subdivision thereof or taxing or other authority therein
unless the Borrower is compelled by law to make such deduction or withholding.
If any such obligation is imposed upon the Borrower with respect to any amount
payable by it hereunder or under any of the other Loan Documents, the Borrower
will pay to the Agent, for the account of the Banks or (as the case may be) the
Agent, on the date on which such amount is due and payable hereunder or under
such other Loan Document, such additional amount in Dollars as shall be
necessary to enable the Banks or the Agent to receive the same net amount which
the Banks or the Agent would have received on such due date had no such
obligation been imposed upon the Borrower. The Borrower will deliver promptly
to the Agent certificates or other valid vouchers for all taxes or other
charges deducted from or paid with respect to payments made by the Borrower
hereunder or under such other Loan Document.
Section 4.5. Computations. All computations of interest on the Loans
and of other fees to the extent applicable shall be based on a 360-day year and
paid for the actual number of days elapsed. Except as otherwise provided in
the definition of the term "Interest Period" with respect to Eurodollar Rate
Loans, whenever a payment hereunder or under any of the other Loan Documents
becomes due on a day that is not a Business Day, the due date for such payment
shall be extended to the next succeeding Business Day, and interest shall
accrue during such extension. The outstanding amount of the Loans as reflected
on the records of the Agent from time to time shall be considered prima facie
evidence of such amount.
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Section 4.6. Inability to Determine Eurodollar Rate. In the event
that, prior to the commencement of any Interest Period relating to any
Eurodollar Rate Loan, the Agent shall determine in the exercise of its good
faith business judgment that adequate and reasonable methods do not exist for
ascertaining the Eurodollar Rate for such Interest Period, the Agent shall
forthwith give notice of such determination (which shall be conclusive and
binding on the Borrower and the Banks) to the Borrower and the Banks. In such
event (a) any Loan Request with respect to Eurodollar Rate Loans shall be
automatically withdrawn and shall be deemed a request for Base Rate Loans and
(b) each Eurodollar Rate Loan will automatically, on the last day of the then
current Interest Period thereof, become a Base Rate Loan, and the obligations
of the Banks to make Eurodollar Rate Loans shall be suspended until the Agent
determines in the exercise of its good faith business judgment that the
circumstances giving rise to such suspension no longer exist, whereupon the
Agent shall so notify the Borrower and the Banks.
Section 4.7. Illegality. Notwithstanding any other provisions
herein, if any present or future law, regulation, treaty or directive or the
interpretation or application thereof shall make it unlawful, or any central
bank or other governmental authority having jurisdiction over a Bank or its
Eurodollar Lending Office shall assert that it is unlawful, for any Bank to
make or maintain Eurodollar Rate Loans, such Bank shall forthwith give notice
of such circumstances to the Agent and the Borrower and thereupon (a) the
commitment of the Banks to make Eurodollar Rate Loans or convert Loans of
another type to Eurodollar Rate Loans shall forthwith be suspended and (b) the
Eurodollar Rate Loans then outstanding shall be converted automatically to Base
Rate Loans on the last day of each Interest Period applicable to such
Eurodollar Rate Loans or within such earlier period as may be required by law.
Section 4.8. Additional Interest. If any Eurodollar Rate Loan or any
portion thereof is repaid or is converted to a Base Rate Loan for any reason on
a date which is prior to the last day of the Interest Period applicable to such
Eurodollar Rate Loan, the Borrower will pay to the Agent upon demand for the
account of the Banks in accordance with their respective Commitment
Percentages, in addition to any amounts of interest otherwise payable
hereunder, any amounts required to compensate the Banks for any losses, costs
or expenses which may reasonably be incurred as a result of such payment or
conversion, including, without limitation, an amount equal to daily interest
for the unexpired portion of such Interest Period on the Eurodollar Rate Loan
or portion thereof so repaid or converted at a per annum rate equal to the
excess, if any, of (a) the interest rate calculated on the basis of the
Eurodollar Rate applicable to such Eurodollar Rate Loan (including any spread
over such Eurodollar Rate) minus (b) the yield obtainable by the Agent upon the
purchase of debt securities customarily issued by the Treasury of the United
States of America which have a maturity date most closely approximating the
last day of such Interest Period (it being understood that the purchase of such
securities shall not be required in order for such amounts to be payable).
Section 4.9. Additional Costs, Etc. Notwithstanding anything herein
to the contrary, if any present or future applicable law, which expression, as
used herein, includes statutes, rules and regulations thereunder and legally
binding interpretations thereof by any competent court or by any governmental
or other regulatory body or official with appropriate jurisdiction charged with
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the administration or the interpretation thereof and requests, directives,
instructions and notices at any time or from time to time hereafter made upon
or otherwise issued to any Bank or the Agent by any central bank or other
fiscal, monetary or other authority (whether or not having the force of law),
shall:
(a) subject any Bank or the Agent to any tax, levy,
impost, duty, charge, fee, deduction or withholding of any nature with respect
to this Agreement, the other Loan Documents, such Bank's Commitment or the
Loans (other than taxes based upon or measured by the income or profits of such
Bank or the Agent), or
(b) materially change the basis of taxation (except for
changes in taxes on income or profits) of payments to any Bank of the principal
of or the interest on any Loans or any other amounts payable to any Bank under
this Agreement or the other Loan Documents, or
(c) impose or increase or render applicable any special
deposit, reserve, assessment, liquidity, capital adequacy or other similar
requirements (whether or not having the force of law) against assets held by,
or deposits in or for the account of, or loans by, or commitments of an office
of any Bank, or
(d) impose on any Bank or the Agent any other conditions
or requirements with respect to this Agreement, the other Loan Documents, the
Loans, such Bank's Commitment, or any class of loans or commitments of which
any of the Loans or such Bank's Commitment forms a part; and the result of any
of the foregoing is
(i) to increase the cost to any Bank of making,
funding, issuing, renewing, extending or maintaining any of the Loans or such
Bank's Commitment, or
(ii) to reduce the amount of principal, interest
or other amount payable to such Bank or the Agent hereunder on account of such
Bank's Commitment or any of the Loans, or
(iii) to require such Bank or the Agent to make any
payment or to forego any interest or other sum payable hereunder, the amount of
which payment or foregone interest or other sum is calculated by reference to
the gross amount of any sum receivable or deemed received by such Bank or the
Agent from the Borrower hereunder,
then, and in each such case, the Borrower will, within thirty (30) days of
demand made by such Bank or (as the case may be) the Agent at any time and from
time to time and as often as the occasion therefor may arise, pay to such Bank
or the Agent such additional amounts as such Bank or the Agent shall determine
in good faith to be sufficient to compensate such Bank or the Agent for such
additional cost, reduction, payment or foregone interest or other sum. Each
Bank and the Agent in determining such amounts may use any reasonable averaging
and attribution methods, generally applied by such Bank or the Agent.
Notwithstanding the foregoing, the Borrower shall have the right, in lieu of
making the payment referred to in this Section 4.9, to prepay the
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Loan of the applicable Bank within thirty (30) days of such demand and avoid
the payment of the amounts otherwise due under this Section 4.9, provided,
however, that the Borrower shall be required to pay together with such
prepayment of the Loan all other costs, damages and expenses otherwise due
under Section 4.8 of this Agreement as a result of such prepayment, and
following such prepayment, the Total Commitment shall be reduced by the amount
of the Loan so prepaid, and the Commitment Percentages of the remaining Banks
shall be adjusted based on the percentage that each Bank's Commitment bears to
the adjusted Total Commitment.
Section 4.10. Capital Adequacy. If after the date hereof any Bank
reasonably determines that (a) the adoption of or change in any law, rule,
regulation or guideline regarding capital requirements for banks or bank
holding companies or any change in the interpretation or application thereof by
any governmental authority charged with the administration thereof, or (b)
compliance by such Bank or its parent bank holding company with any guideline,
request or directive of any such entity regarding capital adequacy (whether or
not having the force of law), has the effect of reducing the return on such
Bank's or such holding company's capital as a consequence of such Bank's
commitment to make Loans hereunder to a level below that which such Bank or
holding company could have achieved but for such adoption, change or compliance
(taking into consideration such Bank's or such holding company's then existing
policies with respect to capital adequacy and assuming the full utilization of
such entity's capital) by any amount deemed by such Bank to be material, then
such Bank may notify the Borrower thereof. The Borrower agrees to pay to such
Bank the amount of such reduction in the return on capital as and when such
reduction is determined, upon presentation by such Bank of a statement of the
amount setting forth the Bank's calculation thereof. In determining such
amount, such Bank may use any reasonable averaging and attribution methods.
Section 4.11. Indemnity of Borrower. The Borrower agrees to
indemnify each Bank and to hold each Bank harmless from and against any loss,
cost or expense that such Bank may sustain or incur as a consequence of (a)
default by the Borrower in payment of the principal amount of or any interest
on any Eurodollar Rate Loans as and when due and payable, including any such
loss or expense arising from interest or fees payable by such Bank to lenders
of funds obtained by it in order to maintain its Eurodollar Rate Loans, or (b)
default by the Borrower in making a borrowing or conversion after the Borrower
has given (or is deemed to have given) a Loan Request or a Conversion Request
(excluding, however, any Loan Request that pursuant to Section 2.6 may be
revoked without penalty and the deemed withdrawal of a Loan Request pursuant to
Section 4.6), or (c) default by the Borrower in making the payments or
performing its obligations under Sections 4.8, 4.9, 4.10, 4.12 or 4.13.
Section 4.12. Interest on Overdue Amounts; Late Charge. Overdue
principal and (to the extent permitted by applicable law) interest on the Loans
and all other overdue amounts payable hereunder or under any of the other Loan
Documents shall bear interest payable on demand at a rate per annum equal to
four percent (4.0%) above the Base Rate until such amount shall be paid in full
(after as well as before judgment), or if such rate shall exceed the maximum
rate permitted by law, then at the maximum rate permitted by law. In addition,
the Borrower shall pay a late charge equal to three percent (3%) of any amount
of interest and/or principal payable on the
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Loans or any other amounts payable hereunder or under the Loan Documents, which
is not paid within ten days of the date when due.
Section 4.13. Certificate. A certificate, prepared in good faith by
a Bank consistent with such Bank's practice in calculating such amounts,
setting forth any amounts payable pursuant to Section 4.8, Section 4.9, Section
4.10, Section 4.11 or Section 4.12 and a brief explanation of such amounts
which are due, submitted by any Bank or the Agent to the Borrower, shall be
conclusive in the absence of manifest error.
Section 4.14. Limitation on Interest. Notwithstanding anything in
this Agreement to the contrary, all agreements between the Borrower and the
Banks and the Agent, whether now existing or hereafter arising and whether
written or oral, are hereby limited so that in no contingency, whether by
reason of acceleration of the maturity of any of the Obligations or otherwise,
shall the interest contracted for, charged or received by the Banks exceed the
maximum amount permissible under applicable law. If, from any circumstance
whatsoever, interest would otherwise be payable to the Banks in excess of the
maximum lawful amount, the interest payable to the Banks shall be reduced to
the maximum amount permitted under applicable law; and if from any circumstance
the Banks shall ever receive anything of value deemed interest by applicable
law in excess of the maximum lawful amount, an amount equal to any excessive
interest shall be applied to the reduction of the principal balance of the
Obligations and to the payment of interest or, if such excessive interest
exceeds the unpaid balance of principal of the Obligations, such excess shall
be refunded to the Borrower. All interest paid or agreed to be paid to the
Banks shall, to the extent permitted by applicable law, be amortized, prorated,
allocated and spread throughout the full period until payment in full of the
principal of the Obligations (including the period of any renewal or extension
thereof) so that the interest thereon for such full period shall not exceed the
maximum amount permitted by applicable law. This section shall control all
agreements between the Borrower and the Banks and the Agent.
Section 5. COLLATERAL SECURITY AND GUARANTY.
Section 5.1. Security. The Banks have agreed to make the Loans to the
Borrower on an unsecured basis. Notwithstanding the foregoing, the Obligations
shall be guaranteed by Guarantor pursuant to the Guaranty.
Section 5.2. Subsidiary Guarantors. In the event that the Borrower
shall after the Closing Date have an Investment in any Subsidiary in which
Borrower directly or indirectly owns a one hundred percent (100%) interest and
in which the Borrower has control over all major day-to-day decisions with
respect to the operation of such entity, Borrower shall cause such Subsidiary
to execute and deliver to Agent a Guaranty, and such Subsidiary shall become a
Guarantor hereunder. The Borrower shall further cause such Subsidiary to
become a party to the Contribution Agreement. The organizational agreements of
such Subsidiary or such other resolutions or consents satisfactory to Agent
shall specifically authorize such Subsidiary to guarantee the Obligations. The
Borrower shall further cause all representations, covenants and agreements in
the Loan Documents with respect to Guarantors to be true and correct with
respect to such Guarantor. In connection with the delivery of such Guaranty,
the Borrower shall deliver
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to the Agent such organizational documents, resolutions, consents, opinions and
other documents and instruments as the Agent may reasonably require.
Section 6. REPRESENTATIONS AND WARRANTIES.
The Borrower represents and warrants to the Agent and the Banks as
follows.
Section 6.1. Corporate Authority, Etc.
(a) Organization; Good Standing. The Borrower is a
Delaware limited partnership duly organized pursuant to a Limited Partnership
Agreement and a Limited Partnership Certificate dated February 9, 1994 filed
with the Secretary of State of Delaware and is validly existing and in good
standing under the laws of Delaware. The General Partner is a Delaware
corporation duly organized pursuant to its Articles of Incorporation and
amendments thereto filed with the Secretary of State of Delaware and is validly
existing and in good standing under the laws of Delaware. Crescent Guarantor
is a Texas real estate investment trust duly organized pursuant to its
Declaration of Trust and amendments thereto filed with the Secretary of State
of Texas and is validly existing and in good standing under the laws of the
State of Texas. The Subsidiary Guarantors are limited partnerships, limited
liability companies or other entities duly organized and validly existing and
in good standing under the laws of their respective State of organization.
Each of the Borrower, the General Partner and the Guarantor (i) has all
requisite power to own its respective properties and conduct its respective
business as now conducted and as presently contemplated, and (ii) as to the
Borrower, is in good standing as a foreign entity and is duly authorized to do
business in the jurisdictions where its respective Real Estate is located to
the extent required, and as to the Borrower, the General Partner and the
Guarantor, in each other jurisdiction where a failure to be so qualified in
such other jurisdiction could have a materially adverse effect on the business,
assets or financial condition of such Person. Crescent Guarantor is a real
estate investment trust in full compliance with and entitled to the benefits of
Section 856 of the Code. The Borrower is a qualified subsidiary of a real
estate investment trust within the meaning of the Code.
(b) Subsidiaries; Investment Partnerships. Each of the
Subsidiaries and Investment Partnerships of the Borrower (i) is a corporation,
limited partnership, limited liability company or trust duly organized under
the laws of its State of organization and is validly existing and in good
standing under the laws thereof, (ii) has all requisite power to own its
property and conduct its business as now conducted and as presently
contemplated and (iii) is in good standing and is duly authorized to do
business in each jurisdiction where a failure to be so qualified could have a
materially adverse effect on the business, assets or financial condition such
Person.
(c) Authorization. The execution, delivery and
performance of this Agreement and the other Loan Documents to which the
Borrower, the General Partner or the Guarantor is or is to become a party and
the transactions contemplated hereby and thereby (i) are within the authority
of such Person, (ii) have been duly authorized by all necessary proceedings on
the part of such Person, (iii) do not and will not conflict with or result in
any breach or
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contravention of any provision of law, statute, rule or regulation to which
such Person is subject or any judgment, order, writ, injunction, license or
permit applicable to such Person, (iv) do not and will not conflict with or
constitute a default (whether with the passage of time or the giving of notice,
or both) under any provision of the articles of incorporation, partnership
agreement, declaration of trust or other charter documents or bylaws of, or any
agreement or other instrument binding upon, such Person or any of its
properties, and (v), except as provided in the Loan Documents, do not and will
not result in or require the imposition of any lien or other encumbrance on any
of the properties, assets or rights of such Person.
(d) Enforceability. The execution and delivery of this
Agreement and the other Loan Documents to which the Borrower, the General
Partner or the Guarantor is or is to become a party are valid and legally
binding obligations of such Person enforceable in accordance with the
respective terms and provisions hereof and thereof, except as enforceability is
limited by bankruptcy, insolvency, reorganization, moratorium or other laws
relating to or affecting generally the enforcement of creditors' rights and
except to the extent that availability of the remedy of specific performance or
injunctive relief is subject to the discretion of the court before which any
proceeding therefor may be brought.
Section 6.2. Governmental Approvals. The execution, delivery and
performance of this Agreement and the other Loan Documents to which the
Borrower, the General Partner or the Guarantor is or is to become a party and
the transactions contemplated hereby and thereby do not require the approval or
consent of, or filing with, any governmental agency or authority other than
those already obtained.
Section 6.3. Title to Properties; Leases. Except as set forth on
Schedule 6.3 hereto, the Borrower and its Subsidiaries own all of the assets
reflected in the consolidated balance sheet of the Borrower as at the Balance
Sheet Date or acquired since that date (except property and assets sold or
otherwise disposed of in the ordinary course of business since that date),
subject to no rights of others, including any mortgages, leases, conditional
sales agreements, title retention agreements, liens or other encumbrances
except Liens permitted by this Agreement. Without limiting the foregoing, the
Borrower and its Subsidiaries and Investment Partnerships have good and
marketable (or with respect to any properties in Texas, good and indefeasible)
fee simple title to or leasehold estate in all real property reasonably
necessary for the operation of its business, free from all liens or
encumbrances of any nature whatsoever, except for Permitted Liens. The
Borrower or its Subsidiaries is the insured under owners' policies of title
insurance covering all real property owned by it, in each case in an amount not
less than the purchase price for such real property.
Section 6.4. Financial Statements. The Borrower has furnished or
caused Guarantor to furnish to each of the Banks: (a) the consolidated balance
sheet of the Borrower and its Subsidiaries and of Guarantor and its
Subsidiaries as of the Balance Sheet Date certified by the chief financial or
accounting officer of the General Partner and Guarantor, respectively, as
fairly presenting the balance sheet of such Persons for such period, and (b)
certain other financial information relating to the Borrower, Guarantor and
their Subsidiaries requested by the Agent. Guarantor has
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furnished to each of the Banks the consolidated balance sheet of Guarantor and
its Subsidiaries as of the Balance Sheet Date. Such balance sheet and
statements have been prepared in accordance with generally accepted accounting
principles and fairly present the financial condition of the Borrower and
Guarantor and their respective Subsidiaries as of such dates and the results of
the operations of the Borrower and Guarantor and their respective Subsidiaries
for such periods. There are no liabilities, contingent or otherwise, of the
Borrower, Guarantor or any of their respective Subsidiaries involving material
amounts not disclosed in said financial statements and the related notes
thereto.
Section 6.5. No Material Changes. Since the Balance Sheet Date,
there has occurred no materially adverse change in the financial condition or
business of the Borrower, the Guarantor and their respective Subsidiaries taken
as a whole as shown on or reflected in the consolidated balance sheet of the
Borrower and the Guarantor as of the Balance Sheet Date, or its consolidated
statement of income or cash flows for the fiscal year then ended, other than
changes in the ordinary course of business that have not had any materially
adverse effect either individually or in the aggregate on the business or
financial condition of such Person and changes reflected in the consolidated
balance sheet, consolidated statement of income or cash flows, or other
financial information submitted to the Agent after the Balance Sheet Date.
Section 6.6. Franchises, Patents, Copyrights, Etc. The Borrower, its
Subsidiaries, its Investment Partnerships and the General Partner possess all
franchises, patents, copyrights, trademarks, trade names, servicemarks,
licenses and permits, and rights in respect of the foregoing, adequate for the
conduct of their business substantially as now conducted without known
violation of any rights of others, except where a failure to possess such
rights could not have a materially adverse effect on the business, assets or
financial condition of such Person.
Section 6.7. Litigation. Except as stated on Schedule 6.7 there are
no actions, suits, proceedings or investigations of any kind pending or to the
best of the Borrower's knowledge and belief threatened against the Borrower,
the General Partner, the Guarantor or any of the Borrower's Subsidiaries or
Investment Partnerships before any court, tribunal or administrative agency or
board that, if adversely determined, might, either in any case or in the
aggregate, materially adversely affect the properties, assets, financial
condition or business of such Person or materially impair the right of such
Person to carry on business substantially as now conducted by it, or result in
any liability not adequately covered by insurance, or for which adequate
reserves are not maintained on the balance sheet of such Person, or which
question the validity of this Agreement or any of the other Loan Documents, any
action taken or to be taken pursuant hereto or thereto or any lien or security
interest created or intended to be created pursuant hereto or thereto, or which
will adversely affect the ability of such Person to pay and perform the
Obligations in the manner contemplated by this Agreement and the other Loan
Documents.
Section 6.8. No Materially Adverse Contracts, Etc. Neither the
Borrower, the General Partner, the Guarantor nor any of the Borrower's
Subsidiaries or Investment Partnerships is subject to any charter, corporate or
other legal restriction, or any judgment, decree, order, rule or regulation
that has or is expected in the future to have a materially adverse effect on
the business, assets or
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financial condition of such Person. Neither the Borrower, the General Partner,
the Guarantor nor any of the Borrower's Subsidiaries or Investment Partnerships
is a party to any contract or agreement that has or is expected, in the
judgment of the partners or officers of such Person, to have any materially
adverse effect on the business of any of them.
Section 6.9. Compliance with Other Instruments, Laws, Etc. Neither
the Borrower, the General Partner, the Guarantor nor any of the Borrower's
Subsidiaries or Investment Partnerships is in violation of any provision of its
partnership agreement, charter or other organizational documents, bylaws, or
any agreement or instrument to which it may be subject or by which it or any of
its properties may be bound or any decree, order, judgment, statute, license,
rule or regulation, in any of the foregoing cases in a manner that could result
in the imposition of substantial penalties or materially and adversely affect
the financial condition, properties or business of such Person.
Section 6.10. Tax Status. The Borrower, the General Partner, the
Guarantor and each of the Borrower's Subsidiaries and Investment Partnerships
(a) has made or filed all federal and state income and all other tax returns,
reports and declarations required by any jurisdiction to which it is subject,
if applicable or required, except to the extent such Person has obtained an
extension of the deadline to file such return, (b) has paid all taxes and other
governmental assessments and charges shown or determined to be due on such
returns, reports and declarations, if applicable or required, except those
being contested in good faith and by appropriate proceedings or where a failure
to so pay could not have a materially adverse effect on the business, assets or
financial condition of such Person and (c) has set aside on its books
provisions reasonably adequate for the payment of all taxes for periods
subsequent to the periods to which such returns, reports or declarations apply,
if applicable or required. There are no unpaid taxes in any material amount
claimed to be due by the taxing authority of any jurisdiction except for those
that are being contested as permitted by this Agreement, and the partners or
officers of such Person know of no basis for any such claim.
Section 6.11. No Event of Default. No Default or Event of Default
has occurred and is continuing.
Section 6.12. Holding Company and Investment Company Acts. Neither
the Borrower, the General Partner, the Guarantor nor any of the Borrower's
Subsidiaries or Investment Partnerships is a "holding company", or a
"subsidiary company" of a "holding company", or an "affiliate" of a "holding
company", as such terms are defined in the Public Utility Holding Company Act
of 1935; nor is it an "investment company", or an "affiliate company" or a
"principal underwriter" of an "investment company", as such terms are defined
in the Investment Company Act of 1940.
Section 6.13. Absence of UCC Financing Statements, Etc. Except with
respect to Liens permitted by Section 8.2, there is no financing statement,
security agreement, chattel mortgage, real estate mortgage or other document
filed or recorded with any filing records, registry, or other public office,
that purports to cover, affect or give notice of any present or possible future
lien on,
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or security interest or security title in, any property of the Borrower or its
Subsidiaries or rights thereunder.
Section 6.14. Certain Transactions. Except as set forth in the
Prospectus, none of the partners, officers, trustees, directors, or employees
of the Borrower, the General Partner, the Guarantor or any of the Borrower's
Subsidiaries is a party to any material transaction with the Borrower or any of
its Subsidiaries (other than for services as partners, employees, officers,
trustees and directors), including any contract, agreement or other arrangement
providing for the furnishing of services to or by, providing for rental of real
or personal property to or from, or otherwise requiring payments to or from any
partner, officer, trustee, director or such employee or, to the knowledge of
the Borrower, any corporation, partnership, trust or other entity in which any
partner, officer, trustee, director, or any such employee has a substantial
interest or is an officer, director, trustee or partner, unless such contract,
agreement or other arrangement is an arms-length arrangement with terms
comparable to those which would be obtained from an unaffiliated Person or is
otherwise approved by the Agent. For the purposes of this Section 6.14, a
transaction shall be deemed "material" to the extent such transaction would be
required to be disclosed to the shareholders of Crescent Guarantor pursuant to
applicable securities laws (including, without limitation, Item 404 of
Regulation SK promulgated by the SEC).
Section 6.15. Employee Benefit Plans. The Borrower and each ERISA
Affiliate has fulfilled its obligations under the minimum funding standards of
ERISA and the Code with respect to each Employee Benefit Plan, Multiemployer
Plan or Guaranteed Pension Plan and is in compliance in all material respects
with the presently applicable provisions of ERISA and the Code with respect to
each Employee Benefit Plan, Multiemployer Plan or Guaranteed Pension Plan.
Neither the Borrower nor any ERISA Affiliate has (a) sought a waiver of the
minimum funding standard under Section 412 of the Code in respect of any
Employee Benefit Plan, Multiemployer Plan or Guaranteed Pension Plan, (b)
failed to make any contribution or payment to any Employee Benefit Plan,
Multiemployer Plan or Guaranteed Pension Plan, or made any amendment to any
Employee Benefit Plan, Multiemployer Plan or Guaranteed Pension Plan, which has
resulted or could result in the imposition of a Lien or the posting of a bond
or other security under ERISA or the Code, or (c) incurred any liability under
Title IV of ERISA other than a liability to the PBGC for premiums under Section
4007 of ERISA. None of the Real Estate constitutes a "plan asset" of any
Employee Plan, Multiemployer Plan or Guaranteed Pension Plan.
Section 6.16. Regulations U and X. No portion of any Loan is to be
used by Borrower for the purpose of purchasing or carrying any "margin
security" or "margin stock" as such terms are used in Regulations U and X of
the Board of Governors of the Federal Reserve System, 12 C.F.R. Parts 221 and
224.
Section 6.17. Environmental Compliance. The Borrower has taken all
commercially reasonable steps necessary to investigate the past and present
conditions and usage of the Real Estate and the operations conducted thereon
and, based upon such investigation, makes the following representations and
warranties. All of the representations and warranties in this Section 6.17
with respect to the Real Estate shall be deemed to except to the matters
specifically set forth in the
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written environmental site assessment reports with respect thereto provided to
the Agent on or before thirty (30) days after receipt of written notice from
the Agent of those environmental reports that are in Agent's possession with
respect to existing Real Estate, or within sixty (60) days of the acquisition
of Real Estate with respect to Real Estate acquired after the date hereof,
provided that, except for any such exceptions approved by the Majority Banks,
none of such exceptions may individually or in the aggregate have a materially
adverse effect on the business, assets or financial condition of the Borrower,
the General Partner or any of the Borrower's Subsidiaries or Investment
Partnerships.
(a) To the best of the Borrower's knowledge, none of the
Borrower, the General Partner or the Borrower's Subsidiaries or Investment
Partnerships or any operator of the Real Estate, or any operations thereon is
in violation, or alleged violation, of any judgment, decree, order, law,
license, rule or regulation pertaining to environmental matters, including
without limitation, those arising under the Resource Conservation and Recovery
Act ("RCRA"), the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 as amended ("CERCLA"), the Superfund Amendments and
Reauthorization Act of 1986 ("SARA"), the Federal Clean Water Act, the Federal
Clean Air Act, the Toxic Substances Control Act, or any state or local statute,
regulation, ordinance, order or decree relating to the environment (hereinafter
"Environmental Laws"), which violation involves the Real Estate and would have
a material adverse effect on the environment or the business, assets or
financial condition of such Person.
(b) Neither the Borrower, the General Partner nor any of
the Borrower's Subsidiaries or Investment Partnerships has received notice from
any third party including, without limitation, any federal, state or local
governmental authority, (i) that it has been identified by the United States
Environmental Protection Agency ("EPA") as a potentially responsible party
under CERCLA with respect to a site listed on the National Priorities List, 40
C.F.R. Part 300 Appendix B (1986); (ii) that any hazardous waste, as defined
by 42 U.S.C. Section 9601(5), any hazardous substances as defined by 42 U.S.C.
Section 9601(14), any pollutant or contaminant as defined by 42 U.S.C. Section
9601(33) or any toxic substances, oil or hazardous materials or other chemicals
or substances regulated by any Environmental Laws ("Hazardous Substances")
which it has generated, transported or disposed of have been found at any site
at which a federal, state or local agency or other third party has conducted or
has ordered that the Borrower, the General Partner or any of the Borrower's
Subsidiaries or Investment Partnerships conduct a remedial investigation,
removal or other response action pursuant to any Environmental Law; or (iii)
that it is or shall be a named party to any claim, action, cause of action,
complaint, or legal or administrative proceeding (in each case, contingent or
otherwise) arising out of any third party's incurrence of costs, expenses,
losses or damages of any kind whatsoever in connection with the release of
Hazardous Substances.
(c) To the best of the Borrower's knowledge, or in the
case of Real Estate acquired after the date hereof, to the best of the
Borrower's knowledge except as may be disclosed to Agent in writing upon the
acquisition of the same: (i) no portion of the Real Estate has been used as a
landfill or for dumping or for the handling, processing, storage or disposal of
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Hazardous Substances except in accordance with applicable Environmental Laws,
and no underground tank or other underground storage receptacle for Hazardous
Substances is located on any portion of the Real Estate; (ii) in the course of
any activities conducted by the Borrower, the General Partner, the Borrower's
Subsidiaries or Investment Partnerships or the operators of any of their
properties, no Hazardous Substances have been generated or are being used on
the Real Estate except in the ordinary course of business and in accordance
with applicable Environmental Laws; (iii) there has been no past or present
releasing, spilling, leaking, pumping, pouring, emitting, emptying,
discharging, injecting, escaping, disposing or dumping (a "Release") or
threatened Release of Hazardous Substances on, upon, into or from the Real
Estate, which Release would have a material adverse effect on the value of any
of the Real Estate or adjacent properties or the environment; (iv) there have
been no Releases on, upon, from or into any real property in the vicinity of
any of the Real Estate which, through soil or groundwater contamination, may
have come to be located on, and which would have a material adverse effect on
the value of, the Real Estate; and (v) any Hazardous Substances that have been
generated on any of the Real Estate have been transported off-site only by
carriers having an identification number issued by the EPA or approved by a
state or local environmental regulatory authority having jurisdiction regarding
the transportation of such substance and treated or disposed of only by
treatment or disposal facilities maintaining valid permits as required under
all applicable Environmental Laws, which transporters and facilities have been
and are, to the best of the Borrower's knowledge, operating in compliance with
such permits and applicable Environmental Laws.
(d) Neither the Borrower, the General Partner, the
Borrower's Subsidiaries, nor any Real Estate is subject to any applicable
Environmental Law requiring the performance of Hazardous Substances site
assessments, or the removal or remediation of Hazardous Substances, or the
giving of notice to any governmental agency or the recording or delivery to
other Persons of an environmental disclosure document or statement by virtue of
the transactions set forth herein and contemplated hereby, or to the
effectiveness of any other transactions contemplated hereby.
Section 6.18. Subsidiaries; Investment Partnerships. Schedule
6.18(a) sets forth, as of the date hereof, all of the Subsidiaries of the
Borrower, the form and jurisdiction of organization of each of the
Subsidiaries, and the Borrower's ownership interest therein. Schedule 6.18(b)
sets forth, as of the date hereof, all of the Investment Partnerships of the
Borrower, the form and jurisdiction of organization of each of the Investment
Partnerships, the Borrower's ownership interest therein and the other owners of
the Investment Partnership.
Section 6.19. Loan Documents. All of the representations and
warranties made by or on behalf of the Borrower, the General Partner, the
Guarantor and the Borrower's Subsidiaries and Investment Partnerships made in
this Agreement and the other Loan Documents or any document or instrument
delivered to the Agent or the Banks pursuant to or in connection with any of
such Loan Documents are true and correct in all material respects, and neither
the Borrower nor the Guarantor has failed to disclose such information as is
necessary to make such representations and warranties not misleading.
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Section 6.20. Property. All of the Borrower's and its Subsidiaries'
and Investment Partnerships' Real Estate are in good condition and working
order subject to ordinary wear and tear, other than with respect to deferred
maintenance existing as of the date of acquisition of such property which is
being corrected or repaired in the ordinary course of business. The Borrower
further has completed an appropriate investigation of the environmental
condition of each such property owned or leased by the Borrower or its
Subsidiaries or Investment Partnerships as of the later of the date of the
Borrower's, such Subsidiary's or such Investment Partnership's purchase thereof
or the date upon which such property was last security for Indebtedness of the
Borrower, such Subsidiary or such Investment Partnership, including preparation
or updating of a "Phase I" report and, if recommended by the "Phase I" report,
a "Phase II" report, in each case prepared by a recognized environmental
engineer in accordance with customary standards which discloses that such
property is not in violation of the representations and covenants set forth in
this Agreement, unless satisfactory remediation actions are being taken. There
are no unpaid or outstanding real estate or other taxes or assessments on or
against any property of the Borrower or any of its Subsidiaries or Investment
Partnerships which are payable by the Borrower or its Subsidiaries or
Investment Partnerships (except only real estate or other taxes or assessments,
that are not yet due and payable or are being protested as permitted by this
Agreement). There are no pending eminent domain proceedings against any
property of the Borrower or its Subsidiaries or Investment Partnerships or any
part thereof, and, to the knowledge of the Borrower, no such proceedings are
presently threatened or contemplated by any taking authority which may
individually or in the aggregate have any materially adverse effect on the
business or financial condition of the Borrower. None of the property of
Borrower or its Subsidiaries or Investment Partnerships is now damaged as a
result of any fire, explosion, accident, flood or other casualty in any manner
which individually or in the aggregate would have any materially adverse effect
on the business or financial condition of the Borrower.
Section 6.21. Brokers. Neither the Borrower nor any of its
Subsidiaries has engaged or otherwise dealt with any broker, finder or similar
entity in connection with this Agreement or the Loans contemplated hereunder.
Section 6.22. Partners and the Guarantor. General Partner is the
sole general partner of the Borrower and owns a 1% partnership interest in the
Borrower. Crescent Guarantor is the sole shareholder of the General Partner.
Crescent Guarantor is a limited partner of the Borrower and as of the date of
this Agreement owns approximately an 89% limited partnership interest in the
Borrower. Crescent Guarantor owns no assets other than its stock in the
General Partner, its interest in the Borrower as the Limited Partner, Cash and
Short-Term Investments.
Section 6.23. Solvency. As of the Closing Date and after giving
effect to the transactions contemplated by this Agreement and the other Loan
Documents, including all of the Loans to be made hereunder, neither the
Borrower nor the Guarantor is insolvent on a balance sheet basis such that the
sum of such Person's assets exceeds the sum of such Person's liabilities, the
Borrower and the Guarantor are able to pay their respective debts as they
become due, and the Borrower and the Guarantor have sufficient capital to carry
on their respective businesses.
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Section 6.24. Other Debt. None of the Borrower, the Guarantor nor
any of their respective Subsidiaries nor any of the Investment Partnerships is
in default of the payment of any Indebtedness or the terms of any other
mortgage, deed of trust, security agreement, financing agreement, indenture or
other material lease or agreement to which any of them is a party which relates
to Indebtedness or other obligations which individually or in the aggregate
exceed $1,000,000.00. None of the Borrower or the Guarantor is a party to or
bound by any agreement, instrument or indenture that may require the
subordination in right or time of payment of any of the Obligations to any
other indebtedness or obligation of the Borrower or the Guarantor. The
Borrower and the Guarantor have made available to the Agent copies of all
agreements, mortgages, deeds of trust, financing agreements or other material
agreements binding upon the Borrower and the Guarantor and their Subsidiaries
or their respective properties and entered into by the Borrower or the
Guarantor and their Subsidiaries as of the date of this Agreement with respect
to any Indebtedness of such Borrower or Guarantor and their Subsidiaries.
Section 6.25. Magellan Transaction. As of the date hereof, the
Borrower has provided the Agent with correct and complete copies of all
documentation relating to the Borrower's acquisition of the Behavioral
Healthcare Facilities from Magellan.
Section 6.26. Contribution Agreement. The Borrower and the
Subsidiary Guarantors have executed and delivered the Contribution Agreement,
and the Contribution Agreement constitutes the valid and legally binding
obligations of such parties enforceable against them in accordance with the
terms and provisions thereof, except as enforceability is limited by
bankruptcy, insolvency, reorganization, moratorium or other laws relating to or
affecting generally the enforcement of creditors' rights and except to the
extent that availability of the remedy of specific performance or injunctive
relief is subject to the discretion of the court before which any proceeding
therefor may be brought.
Section 6.27. Applicability of Representations and Warranties to
Residential Corporations and Investment Partnerships.
By acceptance of this Agreement, the Banks agree that
the representations and warranties made by Borrower with respect to Investment
Partnerships in which the Borrower does not own a controlling interest or
otherwise control the day to day business operations shall be limited to the
best of Borrower's knowledge and belief.
Section 7. AFFIRMATIVE COVENANTS OF THE BORROWER.
The Borrower covenants and agrees that, so long as any Loan or Note is
outstanding or any Bank has any obligation to make any Loans:
Section 7.1. Punctual Payment. The Borrower will duly and punctually
pay or cause to be paid the principal and interest on the Loans and all
interest and fees provided for in this Agreement, all in accordance with the
terms of this Agreement and the Notes as well as all other sums owing pursuant
to the Loan Documents.
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Section 7.2. Maintenance of Office. The Borrower will maintain its
chief executive office at 777 Main Street, Suite 2100, Tarrant County, Fort
Worth, Texas, or at such other place in the United States of America as the
Borrower shall designate upon prior written notice to the Agent and the Banks,
where notices, presentations and demands to or upon the Borrower in respect of
the Loan Documents may be given or made.
Section 7.3. Records and Accounts. The Borrower will (a) keep, and
cause each of its Subsidiaries to keep, true and accurate records and books of
account in which full, true and correct entries will be made in accordance with
generally accepted accounting principles and (b) maintain reasonably adequate
accounts and reserves for all taxes (including income taxes), depreciation and
amortization of its properties and the properties of its Subsidiaries,
contingencies and other reserves. Neither the Borrower nor any of its
Subsidiaries shall, without the prior written consent of the Majority Banks
make any material change to the accounting procedures used by such Person in
preparing the financial statements and other information described in Section
6.4.
Section 7.4. Financial Statements, Certificates and Information. The
Borrower will deliver to the Agent:
(a) as soon as practicable, but in any event not later
than 95 days after the end of each fiscal year of the Borrower and the Crescent
Guarantor, the audited consolidated balance sheet of the Borrower and its
Subsidiaries and the Crescent Guarantor at the end of such year, and the
related audited consolidated statements of income, changes in capital and cash
flows for such year, each setting forth in comparative form the figures for the
previous fiscal year and all such statements to be in reasonable detail,
prepared in accordance with generally accepted accounting principles, and
accompanied by an auditor's report prepared without qualification by Arthur
Andersen & Co. or by another "Big Six" accounting firm, and any other
information the Banks may need to complete a financial analysis of the
Borrower, together with a written statement from such accountants to the effect
that they have read a copy of this Agreement, and that, in making the
examination necessary to said certification, they have obtained no knowledge of
any Default or Event of Default, or, if such accountants shall have obtained
knowledge of any then existing Default or Event of Default they shall disclose
in such statement any such Default or Event of Default; provided that such
accountants shall not be liable to the Agent or the Banks for failure to obtain
knowledge of any Default or Event of Default;
(b) as soon as practicable, but in any event not later
than 45 days after the end of each fiscal quarter of the Borrower (including
the fourth fiscal quarter in each year), copies of the unaudited consolidated
balance sheet of the Borrower and its Subsidiaries as at the end of such
quarter, and the related unaudited consolidated statements of income, changes
in capital and cash flows for the portion of the Borrower's fiscal year then
elapsed, all in reasonable detail and prepared in accordance with generally
accepted accounting principles, together with a certification by the principal
financial or accounting officer of the General Partner that the information
contained in such financial statements fairly presents the financial position
of the Borrower and its Subsidiaries on the date thereof (subject to year-end
adjustments);
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(c) contemporaneously with the delivery of the financial
statements referred to in clause (a) above, a statement of all contingent
liabilities of the Borrower and its Subsidiaries which are not reflected in
such financial statements or referred to in the notes thereto (including,
without limitation, all guarantees, endorsements and other contingent
obligations in respect of indebtedness of others, and obligations to reimburse
the issuer in respect of any letters of credit);
(d) simultaneously with the delivery of the financial
statements referred to in subsections (a) and (b) above, a statement (a
"Compliance Certificate") certified by the principal financial or accounting
officer of the General Partner in the form of Exhibit C hereto setting forth in
reasonable detail computations evidencing compliance with the covenants
contained in Section 9 and the other covenants described therein, and (if
applicable) reconciliations to reflect changes in generally accepted accounting
principles since the Balance Sheet Date;
(e) simultaneously with the delivery of the financial
statements referred to in subsections (a) and (b) above and the Compliance
Certificate referred to in subsection (d) above, a spreadsheet listing each
parcel of Real Estate and its location, date of acquisition, whether such Real
Estate is owned by the Borrower or a Subsidiary or Investment Partnership, size
(square footage for office, retail, industrial and warehouse assets; number of
rooms for hotel/resort assets; and number of beds for behavioral healthcare
facilities), occupancy level for the quarter most recently ended, cost
(appraised value if acquired prior to October, 1995), rolling four quarter Net
Income (actual lease payments received by the Borrower for hotel/resort assets
and behavioral healthcare facilities) and for office building, retail,
industrial and warehouse assets, the major tenants and percentage of gross
leasable area occupied;
(f) not later than 60 days following each acquisition of
an interest in Real Estate by the Borrower or any of its Subsidiaries or
Investment Partnerships (which for the purposes of this Section 7.4(f) shall
include the Investments described in Section 8.3(i)), each of the following
(provided that with respect to the Investments described in Section 8.3(i), the
following items shall be provided to the extent the same are reasonably
available to the Borrower or its Subsidiaries or Investment Partnerships): (i)
a description of the property acquired, and (ii) a Compliance Certificate
prepared using the financial statements of the Borrower most recently provided
or required to be provided to the Banks under Section 6.4 or this Section 7.4
adjusted in the best good-faith estimate of the Borrower to give effect to such
acquisition and demonstrating that no Default or Event of Default with respect
to the covenants referred to therein shall exist after giving effect to such
acquisition;
(g) promptly after they are filed with the Internal
Revenue Service, copies of all annual federal income tax returns and amendments
thereto of the Borrower, the General Partner and the Limited Partner;
(h) prior to the acquisition by the Borrower of any Real
Estate or interest therein costing in excess of $1,000,000.00, a statement of
Borrower that no Default or Event of Default exists or would be caused as a
result of such acquisition;
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(i) not later than five (5) Business Days after the
Borrower receives notice of the same from either of the Rating Agencies or
otherwise learns of the same, notice of the issuance of any change in the
rating by either of the Rating Agencies in respect of any debt of the Borrower
(including any change in an Implied Rating), together with the details thereof,
and of any announcement by either of the Rating Agencies that any such rating
is "under review" or that any such rating has been placed on a watch list or
that any similar action has been taken by either of the Rating Agencies
(collectively a "Rating Notice");
(j) such financial statements and other information with
respect to CBHS as shall be reasonably required by the Agent to test compliance
with the covenants contained in Section 9.11; and
(k) from time to time such other financial data and
information in the possession of the Borrower or its Subsidiaries or Investment
Partnerships (including without limitation auditors' management letters,
property inspection and environmental reports and information as to zoning and
other legal and regulatory changes affecting the Borrower or its Subsidiaries
or Investment Partnerships) as the Agent may reasonably request.
Section 7.5. Notices.
(a) Defaults. The Borrower will promptly notify the
Agent in writing of the occurrence of any Default or Event of Default. If any
Person shall give any notice or take any other action in respect of a claimed
default (whether or not constituting an Event of Default) under this Agreement
or under any note, obligation or other evidence of indebtedness to which or
with respect to which the Borrower, the General Partner, the Guarantor or any
of the Borrower's Subsidiaries or Investment Partnerships is a party or
obligor, whether as principal or surety, and such default would permit the
holder of such note or obligation or other evidence of indebtedness to
accelerate the maturity thereof, which acceleration would have a material
adverse effect on the Borrower, the General Partner, the Guarantor or any of
the Borrower's Subsidiaries or Investment Partnerships, the Borrower shall
forthwith give written notice thereof to the Agent describing the notice or
action and the nature of the claimed default.
(b) Environmental Events. The Borrower will promptly
give notice to the Agent (i) upon the Borrower obtaining knowledge of any
potential or known Release, or threat of Release, of any Hazardous Substances
at or from any Real Estate of the Borrower or its Subsidiaries or Investment
Partnerships; (ii) of any violation of any Environmental Law that the Borrower
or any of its Subsidiaries or Investment Partnerships reports in writing or is
reportable by such Person in writing (or for which any written report
supplemental to any oral report is made) to any federal, state or local
environmental agency and (iii) upon becoming aware thereof, of any inquiry,
proceeding, investigation, or other action, including a notice from any agency
of potential environmental liability, of any federal, state or local
environmental agency or board, that in either case involves any Real Estate of
the Borrower or its Subsidiaries or Investment Partnerships or has the
potential to materially affect the assets, liabilities, financial conditions or
operations of the Borrower or any Subsidiary or Investment Partnership.
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(c) Notice of Litigation and Judgments. The Borrower
will give notice to the Agent in writing within 15 days of becoming aware of
any litigation or proceedings threatened in writing or any pending litigation
and proceedings affecting the Borrower, the General Partner, any of the
Borrower's Subsidiaries or Investment Partnerships or the Guarantor or to which
any of such persons is or is to become a party involving an uninsured claim
against any of such Persons that could reasonably be expected to have a
materially adverse effect on such Person and stating the nature and status of
such litigation or proceedings. The Borrower will give notice to the Agent, in
writing, in form and detail satisfactory to the Agent and each of the Banks,
within ten days of any judgment not covered by insurance, whether final or
otherwise, against the Borrower, the General Partner, any of the Borrower's
Subsidiaries or Investment Partnerships or the Guarantor in an amount in excess
of $500,000.00.
(d) Notice of Proposed Sales, Encumbrances, Refinance or
Transfer of Property. The Borrower will give notice to the Agent of any
proposed or completed sale, encumbrance, refinance or transfer by the Borrower
or its Subsidiaries or Investment Partnerships of any Real Estate or any other
Investment described in Section 8.3(i) within any fiscal quarter of the
Borrower, such notice to be submitted together with the Compliance Certificate
provided or required to be provided to the Banks under Section 7.4 with respect
to such fiscal quarter. The Compliance Certificate shall with respect to any
proposed or completed sale, encumbrance, refinance or transfer be adjusted in
the best good-faith estimate of the Borrower to give effect to such sale,
encumbrance, refinance or transfer and demonstrate that no Default or Event of
Default with respect to the covenants referred to therein shall exist after
giving effect to such sale, encumbrance, refinance or transfer.
Notwithstanding the foregoing, in the event of any sale, encumbrance, refinance
or transfer by the Borrower or its Subsidiaries or Investment Partnerships of
any Real Estate or any other Investment described in Section 8.3(i) involving
an amount in excess of $35,000,000.00, the Borrower shall promptly give notice
to the Agent of such transaction, which notice shall be accompanied by a
Compliance Certificate prepared using the financial statements of the Borrower
most recently provided or required to be provided to the Banks under Section
6.4 or Section 7.4 adjusted as provided in the preceding sentence.
Section 7.6. Existence; Maintenance of Properties.
(a) The Borrower will do or cause to be done all things
necessary to preserve and keep in full force and effect its existence as a
Delaware limited partnership. The Borrower will cause each of its Subsidiaries
and Investment Partnerships to do or cause to be done all things necessary to
preserve and keep in full force and effect its legal existence. The Borrower
will do or cause to be done all things necessary to preserve and keep in full
force all of its material rights and franchises and those of its Subsidiaries
and Investment Partnerships. The Borrower will, and will cause each of its
Subsidiaries to, continue to engage primarily in the businesses now conducted
by it and in related businesses, unless otherwise consented to by the Majority
Banks.
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(b) Irrespective of whether proceeds of the Loans are
available for such purpose, the Borrower (i) will cause all of its properties
and those of its Subsidiaries and Investment Partnerships used or useful in the
conduct of its business or the business of its Subsidiaries and Investment
Partnerships to be maintained and kept in good condition, repair and working
order (ordinary wear and tear excepted) and supplied with all necessary
equipment, and (ii) will cause to be made all necessary repairs, renewals,
replacements, betterments and improvements thereof in all cases in which the
failure so to do would have a material adverse effect on the condition of its
properties or on the financial condition, assets or operations of the Borrower
and its Subsidiaries.
Section 7.7. Insurance. The Borrower will procure and maintain or
cause to be procured and maintained insurance covering the Borrower and the
Guarantor and their respective Subsidiaries and Investment Partnerships and
their respective properties (the cost of such insurance to be borne by the
insured thereunder) in such amounts and against such risks and casualties as
are customary for properties of similar character and location, due regard
being given to the type of improvements thereon, their construction, location,
use and occupancy.
Section 7.8. Taxes. The Borrower and each Subsidiary and Investment
Partnership will duly pay and discharge, or cause to be paid and discharged,
before the same shall become overdue, all taxes, assessments and other
governmental charges imposed upon it and upon the Real Estate, sales and
activities, or any part thereof, or upon the income or profits therefrom, as
well as all claims for labor, materials, or supplies that if unpaid might by
law become a lien or charge upon any of its property; provided that any such
tax, assessment, charge, levy or claim need not be paid if the validity or
amount thereof shall currently be contested in good faith by appropriate
proceedings and if the Borrower or such Subsidiary or Investment Partnership
shall have set aside on its books reasonably adequate reserves with respect
thereto; and provided, further, that forthwith upon the commencement of
proceedings to foreclose any lien that may have attached as security therefor,
the Borrower and each Subsidiary and Investment Partnership of the Borrower
either (i) will provide a bond issued by a surety reasonably acceptable to the
Agent and sufficient to stay all such proceedings or (ii) if no such bond is
provided, will pay each such tax, assessment, charge, levy or claim.
Section 7.9. Inspection of Properties and Books. The Borrower shall
permit the Banks, through the Agent or any representative designated by the
Agent, to visit and inspect any of the properties of the Borrower or any of its
Subsidiaries or Investment Partnerships, to examine the books of account of the
Borrower and its Subsidiaries and Investment Partnerships (and to make copies
thereof and extracts therefrom) and to discuss the affairs, finances and
accounts of the Borrower and its Subsidiaries and Investment Partnerships with,
and to be advised as to the same by, its officers, all at such reasonable times
and intervals as the Agent or any Bank may reasonably request. The Agent shall
use good faith efforts to coordinate such visits and inspections so as to
minimize the interference with and disruption to the Borrower's normal business
operations. From and after the occurrence of an Event of Default which is
continuing, the Borrower shall bear the costs and expenses incurred by Agent or
its representatives in conducting such visits or inspections.
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Section 7.10. Compliance with Laws, Contracts, Licenses, and Permits.
The Borrower will comply with, and will cause each of its Subsidiaries and
Investment Partnerships to comply in all respects with (i) all applicable laws
and regulations now or hereafter in effect wherever its business is conducted,
including all Environmental Laws, (ii) the provisions of its corporate charter,
partnership agreement or declaration of trust, as the case may be, and other
charter documents and bylaws, (iii) the Prospectus, (iv) all agreements and
instruments (other than the Loan Documents) to which it is a party or by which
it or any of its properties may be bound, (v) all applicable decrees, orders,
and judgments, and (vi) all licenses and permits required by applicable laws
and regulations for the conduct of its business or the ownership, use or
operation of its properties, except when a failure to so comply with the
foregoing (i) - (vi) would not have a material adverse effect on the business,
assets or financial condition of the Borrower or such Subsidiary or Investment
Partnership. If at any time while any Loan or Note is outstanding or the Banks
have any obligation to make Loans hereunder, any authorization, consent,
approval, permit or license from any officer, agency or instrumentality of any
government shall become necessary or required in order that the Borrower may
fulfill any of its obligations hereunder, the Borrower will immediately take or
cause to be taken all steps necessary to obtain such authorization, consent,
approval, permit or license.
Section 7.11. Further Assurances. The Borrower will cooperate with,
and will cause each of its Subsidiaries to cooperate with the Agent and the
Banks and execute such further instruments and documents as the Banks or the
Agent shall reasonably request to carry out to their satisfaction the
transactions contemplated by this Agreement and the other Loan Documents.
Section 7.12. Ownership of Real Estate. All interests (whether
direct or indirect) of the Borrower, the General Partner, the Guarantor or
their respective Subsidiaries or the Borrower's Investment Partnerships in
income- producing real estate assets acquired after the date hereof shall be
owned directly by the Borrower or, subject to the terms of Section 8.3(m),
Investment Partnerships (other than interests in residential real estate
developments held by the Residential Corporations and other than as
specifically permitted in Section 8.14).
Section 7.13. Investment Advisor. The Borrower shall be
self-directed and the Borrower shall not retain or otherwise rely on any other
Person for investment advisory services.
Section 7.14. Non-Competition Agreements. The Non-Competition
Agreements have been duly executed and delivered, are in full force and effect,
and are the legal, valid and binding obligations of the parties thereto,
enforceable in accordance with their terms. Without the prior written consent
of the Agent, the Borrower shall not (a) amend or modify any of the
Non-Competition Agreements, (b) terminate or surrender any of the
Non-Competition Agreements, or (c) waive or release any other party thereto
from the performance or observation by such Person of any obligation or
condition of any of the Non-Competition Agreements (provided that the foregoing
shall not prohibit Richard E. Rainwater, Gerald W. Haddock or John C. Goff from
obtaining waivers to specific transactions from a majority of the independent
directors of Crescent Guarantor as provided therein). The Borrower shall, at
no cost or expense to the Agent, enforce, short of termination, the performance
and observance of each and every term, condition
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and covenant of each of the Non-Competition Agreements to be performed or
observed by the other parties thereunder, and appear in and defend any action
arising out of, or in any manner connected with, any of the Non-Competition
Agreements, and give prompt notice to the Agent of any claim of default under
any of the Non-Competition Agreements, whether given by the Borrower to the
other party thereto, or given by the other party thereto to the Borrower.
Section 7.15. Business Operations. The Borrower shall operate its
business substantially as described in the Prospectus and in compliance with
the terms and conditions of this Agreement and the Loan Documents.
Section 7.16. Intentionally Omitted.
Section 7.17. Limiting Agreements.
(a) Neither Borrower, the Guarantor, nor any of their
respective Subsidiaries or Investment Partnerships shall enter into any
agreement, instrument or transaction which has or may have the effect of
prohibiting or limiting Borrower's ability to pledge to Agent Real Estate which
is owned by the Borrower and is free and clear of all Liens other than the
Liens permitted in Section 8.2(i), (iii) and (vi) or any other assets of the
Borrower as security for the Loans. Borrower shall take, and shall cause
Guarantor and their respective Subsidiaries and Investment Partnerships to
take, such actions as are necessary to preserve the right and ability of
Borrower to pledge those Real Estate and other assets as security for the Loans
without any such pledge after the date hereof causing or permitting the
acceleration (after the giving of notice or the passage of time, or otherwise)
of any other Indebtedness of Borrower, Guarantor, or any of their respective
Subsidiaries or Investment Partnerships.
(b) Borrower shall, upon demand, provide to the Agent
such evidence as the Agent may reasonably require to evidence compliance with
this Section 7.17, which evidence shall include, without limitation, copies of
any agreements or instruments which would in any way restrict or limit the
Borrower's ability to pledge assets as security for Indebtedness, or which
provide for the occurrence of a default (after the giving of notice or the
passage of time, or otherwise) if assets are pledged in the future as security
for Indebtedness of the Borrower or any of its Subsidiaries.
Section 7.18. More Restrictive Agreements. Should the Borrower or
the Guarantor enter into or modify any agreements or documents pertaining to
any existing or future Indebtedness, Debt Offering or Equity Offering, which
agreements or documents include covenants, whether affirmative or negative (or
any other provision which may have the same practical effect as any of the
foregoing), which are individually or in the aggregate more restrictive against
the Borrower, the Guarantor or their respective Subsidiaries than those set
forth in Articles 8 or 9 of this Agreement or Paragraph 11 of the Guaranty, the
Borrower shall promptly notify the Agent and, if requested by the Majority
Banks, the Borrower, the Agent, and the Majority Banks shall promptly amend
this Agreement and the other Loan Documents to include some or all of such more
restrictive provisions as determined by the Majority Banks in their sole
discretion.
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Section 7.19. Applicability of Covenants to Residential Corporations
and Investment Partnerships. By acceptance of this Agreement, the Banks agree
that the Borrower's obligations to cause the Residential Corporations and
Investment Partnerships to comply with the covenants set forth in Articles 7
and 8 of this Agreement shall be limited to the full extent that the Borrower
has the legal right, whether by contract, at law or in equity, to cause
compliance by the Residential Corporations with such covenants.
Section 7.20. Distributions of Income to the Borrower. The Borrower
shall cause all of its Subsidiaries and Investment Partnerships to promptly
distribute to the Borrower (but not less frequently than once each fiscal
quarter of the Borrower), whether in the form of dividends, distributions or
otherwise, all profits, proceeds or other income relating to or arising from
its Subsidiaries' or Investment Partnerships' use, operation, financing,
refinancing, sale or other disposition of their respective assets and
properties after (a) the payment by each Subsidiary or Investment Partnership
of its Debt Service and operating expenses for such quarter and (b) the
establishment of reasonable reserves for the payment of operating expenses not
paid on at least a quarterly basis and capital improvements to be made to such
Subsidiary's or Investment Partnership's assets and properties approved by such
Subsidiary or Investment Partnership in the ordinary course of business
consistent with its past practices. Notwithstanding the foregoing, the
Borrower shall enforce its rights at law and in equity to receive distributions
from (i) the Residential Corporations at the same time that distributions are
made to other shareholders of the Residential Corporations, and (ii)
Subsidiaries and Investment Partnerships of the Borrower in which the Borrower
owns less than a majority (by number of votes or controlling interests) of the
outstanding Voting Interests.
Section 8. CERTAIN NEGATIVE COVENANTS OF THE BORROWER.
The Borrower covenants and agrees that, so long as any Loan or Note is
outstanding or any of the Banks has any obligation to make any Loans:
Section 8.1. Restrictions on Indebtedness. Subject to the provisions
of Section 9, the Borrower will not, and will not permit any of its
Subsidiaries to, create, incur, assume, guarantee or be or remain liable,
contingently or otherwise, with respect to any Indebtedness other than:
(a) Indebtedness to the Banks arising under any of the
Loan Documents;
(b) Current liabilities of the Borrower or its
Subsidiaries incurred in the ordinary course of business but not incurred
through (i) the borrowing of money, or (ii) the obtaining of credit except for
credit on an open account basis customarily extended and in fact extended in
connection with normal purchases of goods and services;
(c) Indebtedness in respect of taxes, assessments,
governmental charges or levies and claims for labor, materials and supplies to
the extent that payment therefor shall not at the time be required to be made
in accordance with the provisions of Section 7.8;
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(d) Indebtedness in respect of judgments or awards that
have been in force for less than the applicable period for taking an appeal so
long as execution is not levied thereunder or in respect of which the Borrower
shall at the time in good faith be prosecuting an appeal or proceedings for
review and in respect of which a stay of execution shall have been obtained
pending such appeal or review;
(e) Endorsements for collection, deposit or negotiation
and warranties of products or services, in each case incurred in the ordinary
course of business;
(f) Non-recourse Indebtedness of the Borrower or any
Subsidiary of the Borrower, provided that neither the Borrower nor any of its
Subsidiaries shall incur any Non-recourse Indebtedness in excess of
$10,000,000.00 in any single transaction unless it shall have provided to the
Agent a statement that no Default or Event of Default exists and a Compliance
Certificate demonstrating that the Borrower will be in compliance with its
covenants referred to therein after giving effect to such incurrence;
(g) Indebtedness in respect of reverse repurchase
agreements having a term of not more than 180 days with respect to Investments
described in Section 8.3(d) or (e);
(h) Indebtedness existing on the date of this Agreement
and listed and described on Schedule 8.1(h) hereto;
(i) Other recourse Indebtedness of the Borrower and its
Subsidiaries in an aggregate outstanding principal amount (excluding the
Obligations) (A) not exceeding $100,000,000.00 and (B) an additional amount not
exceeding $350,000,000.00, provided that such Indebtedness has a maturity of
one (1) year or less (and with respect to which the Borrower or such Subsidiary
has no right to extend the maturity date) and the majority of each separate
financing comprising such Indebtedness is held by one or more of the Banks;
provided that neither the Borrower nor any of its Subsidiaries shall incur any
recourse Indebtedness described in this Section 8.1(i) in excess of
$10,000,000.00 in any single transaction unless it shall have provided to the
Agent a statement that no Default or Event of Default exists and a Compliance
Certificate demonstrating that the Borrower will be in compliance with its
covenants referred to therein after giving effect to such incurrence;
(j) Indebtedness of Subsidiaries of the Borrower to the
Borrower; and
(k) unsecured Debt Offerings which have been granted an
Investment Grade Rating by either of the Rating Agencies at the time of
issuance; provided (i) at the time such Indebtedness is issued the scheduled
maturity date of such Indebtedness is not earlier than two (2) years after the
Maturity Date (after giving effect to any extension of the Maturity Date which
may have been requested by the Borrower prior to the issuance of such
Indebtedness or approved by the Banks, whether or not the same has become
effective), and (ii) if any covenants or restrictions imposed upon the Borrower
or its Subsidiaries or the Guarantor in connection with such Indebtedness are
individually or in the aggregate more restrictive against the Borrower, its
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Subsidiaries and the Guarantor than the covenants and restrictions imposed
pursuant to this Agreement or the other Loan Documents, the Borrower shall
promptly notify the Agent and if requested by the Majority Banks, the Borrower,
the Guarantor, the Agent, and the Majority Banks shall promptly amend this
Agreement and the other Loan Documents to include some or all of such more
restrictive provisions as determined by the Majority Banks in their sole
discretion; and provided further that neither the Borrower, its Subsidiaries
nor the Guarantor shall incur any of the Indebtedness described in this Section
8.1(k) unless it shall have provided to the Banks prior written notice of the
proposed issuance of such Indebtedness, a statement that no Default or Event of
Default exists and a Compliance Certificate that the Borrower will be in
compliance with its covenants referred to herein after giving effect to such
incurrence.
Section 8.2. Restrictions on Liens, Etc. The Borrower will not, and
will not permit any of its Subsidiaries to, (a) create or incur or suffer to be
created or incurred or to exist any lien, encumbrance, mortgage, pledge,
negative pledge, charge, restriction or other security interest of any kind
upon any of its property or assets of any character whether now owned or
hereafter acquired, or upon the income or profits therefrom; (b) transfer any
of its property or assets or the income or profits therefrom for the purpose of
subjecting the same to the payment of Indebtedness or performance of any other
obligation in priority to payment of its general creditors; (c) acquire, or
agree or have an option to acquire, any property or assets upon conditional
sale or other title retention or purchase money security agreement, device or
arrangement; (d) suffer to exist for a period of more than 60 days after the
same shall have been incurred any Indebtedness or claim or demand against it
that if unpaid might by law or upon bankruptcy or insolvency, or otherwise, be
given any priority whatsoever over its general creditors; (e) pledge or
otherwise encumber any accounts, contract rights, general intangibles, chattel
paper or instruments, with or without recourse; or (f) incur or maintain any
obligation to any holder of Indebtedness of the Borrower or such Subsidiary
which prohibits the creation or maintenance of any lien securing the
Obligations (collectively "Liens"); provided that the Borrower and any
Subsidiary of the Borrower may create or incur or suffer to be created or
incurred or to exist:
(i) liens on properties to secure taxes, assessments and
other governmental charges or claims for labor, material or supplies
in respect of obligations not overdue;
(ii) liens on properties in respect of judgments, awards
or indebtedness, the Indebtedness with respect to which is permitted
by Section 8.1(d), Section 8.1(f) or Section 8.1(i);
(iii) encumbrances on properties consisting of easements,
rights of way, zoning restrictions, restrictions on the use of real
property, landlord's or lessor's liens under leases to which the
Borrower or a Subsidiary of the Borrower is a party, and other minor
non-monetary liens or encumbrances none of which interferes materially
with the use of the property affected in the ordinary conduct of the
business of the Borrower and its Subsidiaries, which encumbrances or
liens do not individually or in the aggregate have a materially
adverse effect on the business of the Borrower individually or of the
Borrower and its Subsidiaries on a consolidated basis;
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(iv) [intentionally omitted];
(v) liens on Real Estate and Short-term Investments
securing Non-recourse Indebtedness permitted by Section 8.1(f) or
recourse Indebtedness permitted by Section 8.1(i);
(vi) liens in favor of the Agent and the Banks under the
Loan Documents; and
(vii) liens on office equipment, vehicles, furnishings or
equipment incurred in the ordinary course of business securing a
maximum aggregate outstanding Indebtedness of not more than
$1,000,000.00.
Section 8.3. Restrictions on Investments. The Borrower will not, and
will not permit any of its Subsidiaries to, make or permit to exist or to
remain outstanding any Investment except Investments in:
(a) marketable direct or guaranteed obligations of the
United States of America that mature within one (1) year from the date of
purchase by the Borrower or its Subsidiary;
(b) marketable direct obligations of any of the
following: Federal Home Loan Mortgage Corporation, Student Loan Marketing
Association, Federal Home Loan Banks, Federal National Mortgage Association,
Government National Mortgage Association, Bank for Cooperatives, Federal
Intermediate Credit Banks, Federal Financing Banks, Export-Import Bank of the
United States, Federal Land Banks, or any other agency or instrumentality of
the United States of America;
(c) demand deposits, certificates of deposit, bankers
acceptances and time deposits of United States banks having total assets in
excess of $100,000,000; provided, however, that the aggregate amount at any
time so invested with any single bank having total assets of less than
$1,000,000,000 will not exceed $200,000;
(d) securities commonly known as "commercial paper"
issued by a corporation organized and existing under the laws of the United
States of America or any State which at the time of purchase are rated by
Moody's Investors Service, Inc. or by Standard & Poor's Corporation at not less
than "P 2" if then rated by Moody's Investors Service, Inc., and not less than
"A 2", if then rated by Standard & Poor's Corporation;
(e) mortgage-backed securities guaranteed by the
Government National Mortgage Association, the Federal National Mortgage
Association or the Federal Home Loan Mortgage Corporation and other
mortgage-backed bonds which at the time of purchase are rated by Moody's
Investors Service, Inc. or by Standard & Poor's Corporation at not less than
"Aa" if then rated by Moody's Investors Service, Inc. and not less than "AA" if
then rated by Standard & Poor's Corporation;
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(f) repurchase agreements having a term not greater than
90 days and fully secured by securities described in the foregoing subsection
(a), (b) or (e) with banks described in the foregoing subsection (c) or with
financial institutions or other corporations having total assets in excess of
$500,000,000;
(g) shares of so-called "money market funds" registered
with the SEC under the Investment Company Act of 1940 which maintain a level
per-share value, invest principally in investments described in the foregoing
subsections (a) through (f) and have total assets in excess of $50,000,000;
(h) Subject to the provisions of Section 9.9, Investments
in fee interests or mortgageable ground leases having a remaining term
(calculated from the date of acquisition of such interest) of not less than
fifty (50) years in Real Estate utilized principally for behavioral healthcare
facilities, Class A office space, retail, industrial, warehouse and/or
hotel/resort properties which are of institutional quality or other
income-producing real estate approved by the Majority Banks, including earnest
money deposits relating thereto and transaction costs;
(i) Subject to the provisions of Section 9.9, Investments
in undeveloped land and Real Estate which are held in a form other than
undivided fee simple ownership or mortgageable ground leases having a remaining
term (calculated from the date of acquisition of such interest) of not less
than fifty (50) years (such as, without limitation, cotenancy interests,
leasehold interests, partnership interests, membership in a limited liability
company, shares of stock in corporations owning real estate, or through
mortgages or participation interests in or assignments of mortgages);
(j) Investments in stock of other publicly traded
companies; provided, however, that the aggregate amount at any time so invested
shall not exceed $50,000,000.00;
(k) Investments in convertible non-voting preferred stock
and/or voting common stock of Fresh Choice, Inc.; provided, however, that the
aggregate amount at any time so invested shall not exceed $14,000,000.00;
(l) Investments in HBCLP, Inc. or affiliated funds;
provided, however, that the aggregate amount at any time so invested shall not
exceed $75,000,000.00; and
(m) Investments in (i) Investment Partnerships in which
the Borrower (A) shall own not less than a fifty percent (50%) interest, (B)
shall either be the managing partner, member or similar managing entity or
shall share such day-to-day management responsibilities with another Person,
and (C) shall have sufficient voting interests or other rights to veto or block
any major actions to be taken by any other Person owning an interest in such
Investment Partnership, and (ii) Investment Partnerships not meeting the
foregoing criteria; provided that the aggregate value of the Borrower's equity
Investments pursuant to clause (ii) after the date hereof shall not exceed
$500,000,000.00; and provided further that with respect to such Investment
Partnerships, the Investment in the form of advances or loans to each such
Investment Partnership after the
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initial capitalization thereof shall not exceed ten percent (10%) of the
initial capitalization thereof (with respect to the Borrower's Investment in
the joint venture with Vornado known as Americold URS only, this percentage
shall be increased to 25%).
Section 8.4. Merger, Consolidation. The Borrower will not, and will
not permit any of its Subsidiaries to, become a party to any merger,
consolidation or other business combination except (i) the merger or
consolidation of one or more of the Subsidiaries of the Borrower with and into
the Borrower and (ii) the merger or consolidation of two or more Subsidiaries
of the Borrower.
Section 8.5. Sale and Leaseback. The Borrower will not, and will not
permit any of its Subsidiaries to, enter into any arrangement, directly or
indirectly, whereby the Borrower or any Subsidiary of the Borrower shall sell
or transfer any Real Estate owned by it in order that then or thereafter the
Borrower or any Subsidiary shall lease back such Real Estate.
Section 8.6. Compliance with Environmental Laws. The Borrower will
not, and will not permit any of its Subsidiaries or Investment Partnerships or
any tenants or other occupants of any of the Real Estate, to do any of the
following: (a) use any of the Real Estate or any portion thereof as a facility
for the handling, processing, storage or disposal of Hazardous Substances,
except for small quantities of Hazardous Substances used in the ordinary course
of business and in compliance with all applicable Environmental Laws, (b) cause
or permit to be located on any of the Real Estate any underground tank or other
underground storage receptacle for Hazardous Substances except in full
compliance with Environmental Laws, (c) generate any Hazardous Substances on
any of the Real Estate except in full compliance with Environmental Laws, (d)
conduct any activity at any Real Estate or use any Real Estate in any manner so
as to cause a Release of Hazardous Substances on, upon or into the Real Estate
or any surrounding properties or any threatened Release of Hazardous Substances
which might give rise to liability under CERCLA or any other Environmental Law,
or (e) directly or indirectly transport or arrange for the transport of any
Hazardous Substances (except in compliance with all Environmental Laws).
The Borrower shall:
(i) in the event of any change in Environmental Laws
governing the assessment, release or removal of Hazardous Substances, which
change would lead a prudent lender to require additional testing to avail
itself of any statutory insurance or limited liability, take all action
(including, without limitation, the conducting of engineering tests at the sole
expense of the Borrower) to confirm that no Hazardous Substances are or ever
were Released or disposed of on the Real Estate; and
(ii) if any Release or disposal of Hazardous Substances
shall occur or shall have occurred on the Real Estate (including without
limitation any such Release or disposal occurring prior to the acquisition of
such Real Estate by the Borrower or its Subsidiary or Investment Partnership),
cause the prompt containment and removal of such Hazardous Substances and
remediation of the Real Estate in full compliance with all applicable laws and
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regulations and to the reasonable satisfaction of the Majority Banks; provided,
that the Borrower shall be deemed to be in compliance with Environmental Laws
for the purpose of this clause (ii) so long as it or a responsible third party
with sufficient financial resources is taking reasonable action to remediate or
manage any event of noncompliance to the reasonable satisfaction of the
Majority Banks and no action shall have been commenced by any enforcement
agency. The Majority Banks may engage their own environmental engineer to
review the environmental assessments and the Borrower's compliance with the
covenants contained herein.
At any time after an Event of Default shall have occurred hereunder,
or, whether or not an Event of Default shall have occurred, at any time that
the Agent or the Majority Banks shall have reasonable grounds to believe that a
Release or threatened Release of Hazardous Substances may have occurred,
relating to any Real Estate, or that any of the Real Estate is not in
compliance with the Environmental Laws, the Agent may at its election (and will
at the request of the Majority Banks) obtain such environmental assessments of
such Real Estate prepared by an environmental engineer as may be necessary or
advisable for the purpose of evaluating or confirming (i) whether any Hazardous
Substances are present in the soil or water at or adjacent to such Real Estate
and (ii) whether the use and operation of such Real Estate comply with all
Environmental Laws. Environmental assessments may include detailed visual
inspections of such Real Estate including, without limitation, any and all
storage areas, storage tanks, drains, dry wells and leaching areas, and the
taking of soil samples, as well as such other investigations or analyses as are
necessary or appropriate for a complete determination of the compliance of such
Real Estate and the use and operation thereof with all applicable Environmental
Laws. All such environmental assessments shall be at the sole cost and expense
of the Borrower.
Section 8.7. Distributions.
(a) The Borrower shall not pay any Distribution to the
partners of the Borrower which for any four (4) successive quarters is in
excess of (i) ninety percent (90%) of its Funds from Operations for such fiscal
quarters, or (ii) one hundred percent (100%) of its Funds Available for
Distribution for such fiscal quarters; provided that the limitation contained
in this Section 8.7(a) shall not preclude the Borrower from making
Distributions to Crescent Guarantor in an amount equal to the minimum
distributions required under the Code to maintain the REIT Status of Crescent
Guarantor, as evidenced by a certification of the principal financial or
accounting officer of the General Partner containing calculations in detail
reasonably satisfactory in form and substance to the Agent.
(b) In the event that a Default under Section 12.1(a) or
(b) or an Event of Default shall have occurred and be continuing, the Borrower
shall make no Distributions other than Distributions to Crescent Guarantor in
an amount equal to the minimum distributions required under the Code to
maintain the REIT Status of Crescent Guarantor, as evidenced by a certification
of the principal financial or accounting officer of the General Partner
containing calculations in detail reasonably satisfactory in form and substance
to the Agent.
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(c) Notwithstanding the foregoing, at any time when an
Event of Default shall have occurred and the maturity of the Obligations has
been accelerated, at the option of the Majority Banks the Borrower shall not
make any Distributions whatsoever, directly or indirectly.
Section 8.8. Asset Sales. Except for sales by the Residential
Corporations in the ordinary course of development of residential developments
with related amenities, neither the Borrower nor any Subsidiary shall sell,
transfer or otherwise dispose of any Real Estate (except as the result of a
condemnation or casualty and except for the granting of Permitted Liens)
involving an amount in excess of $5,000,000.00 in any single transaction unless
there shall have been delivered to the Agent a statement that no Default or
Event of Default exists or will exist after giving effect to such sale,
transfer or other disposition.
Section 8.9. Development Activity. Without the consent of the
Majority Banks, neither the Borrower nor any Subsidiary or Investment
Partnership shall engage, directly or indirectly, in the development,
construction or substantial renovation or rehabilitation of commercial real
estate (provided that the foregoing shall not be deemed to be breached by the
residential real estate development activities by the Residential Corporations
nor the development activities permitted by the partnership agreements for the
Woodlands and Americold URS nor the restoration or rehabilitation of commercial
real estate following damage by casualty or condemnation). The Borrower
acknowledges that the decision of the Majority Banks to grant or withhold such
consent shall be based on such factors as the Majority Banks deem relevant in
their sole discretion, including without limitation, evidence of sufficient
funds both from borrowings (other than from the Loans) and equity to complete
such development and evidence that the Borrower or its Subsidiary or Investment
Partnership has the resources and expertise necessary to complete such project.
Notwithstanding the foregoing, the Borrower is currently developing for its own
account an office building not exceeding 110,000 square feet on Phase II of the
land owned by Borrower in Austin, Texas known as "The Avallon" and may develop
an office building not exceeding 80,000 square feet on Phase III of the land
owned by Borrower in Austin, Texas known as "The Avallon", provided that with
respect to each such building (a) BMC Software or an affiliate thereof shall
have executed and delivered to Borrower a lease to occupy not less than
sixty-five percent (65%) of such building within one (1) year of completion of
the same, and (b) the actual cost of developing improvements thereon with
respect to each such building shall not exceed $15,000,000.00. Notwithstanding
the foregoing, Borrower can engage in, and proceeds of the Loans may be used
for, (i) the construction of tenant improvements within space to be occupied by
tenants of buildings owned by the Borrower or its Subsidiaries, (ii) the
renovation or demolition and reconstruction of the Surtran Garage at
Continental Plaza, provided that the cost of such renovation or demolition and
reconstruction shall not exceed $20,000,000.00, (iii) the construction of the
Frost Bank Garage in Austin, Texas, (iv) the construction for its own account
of an approximately 1,000 room hotel and related amenities on land owned by the
Borrower at Houston Center, and (v) the construction for its own account of an
office building not exceeding 1,000,000 square feet on land owned by the
Borrower near The Crescent. Nothing herein shall prohibit the Borrower or any
Subsidiary or Investment Partnership from acquiring Real Estate which has been
developed and initially leased by another Person.
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Section 8.10. Investment Opportunities. During the term of the
Non-Competition Agreements, the Borrower shall cause each of Richard E.
Rainwater, Gerald W. Haddock and John C. Goff to offer to the Borrower all real
estate investment opportunities that are presented to any of such individuals,
and if the Borrower elects not to participate in such opportunity, the Borrower
shall not permit any of such individuals, or any Person controlling, controlled
by or under common control with any of such individuals, to participate in such
investment, unless such transaction is approved by a majority of the
independent directors of Crescent Guarantor as permitted in the Non-Competition
Agreements.
Section 8.11. Refinancing of Assets. No asset of the Borrower or its
Subsidiaries shall be financed or refinanced unless the gross proceeds
therefrom equal or exceed fifty-five percent (55%) of the original acquisition
cost by Borrower or such Subsidiary of such asset; provided that such
percentage shall be reduced to forty percent (40%) for hotel/resort assets.
Section 8.12. Variable Rate Debt.
(a) Borrower shall not permit all or any portion of the
Existing Fixed Rate Indebtedness to be refinanced or otherwise replaced by
Indebtedness (i) which has a Variable Interest Rate (unless such Variable
Interest Rate is hedged or otherwise capped pursuant to an interest rate swap,
cap or other agreement acceptable to the Agent that provides that such Variable
Interest Rate shall not through the maturity date of such Indebtedness exceed a
rate equal to the sum of (x) the then-current yield on obligations of the
United States Treasury having a maturity date the same as (to the extent
practicable) such Indebtedness, determined by the Agent as of the date of the
incurrence of such Indebtedness, plus (y) three percent (3.0%), or (ii) has a
scheduled maturity date which is earlier than the maturity date with respect to
the portion of the Existing Fixed Rate Indebtedness that is being refinanced or
replaced, or (iii) which provides for any principal amortization or other
scheduled payments of principal, other than the payment of principal at
maturity.
(b) Notwithstanding Section 8.12(a)(i), no more than
thirty percent (30%) of the total Indebtedness (excluding Indebtedness
described in Section 8.1(b)-(e), but including the Obligations) of Borrower
and its Subsidiaries may be Indebtedness that is payable with respect to a
Variable Interest Rate that is not hedged or otherwise capped as described in
Section 8.12(a)(i) and that has a maturity date of greater than twelve (12)
months.
Section 8.13. Restriction on Prepayment of Indebtedness. The
Borrower shall not prepay, redeem or purchase the principal amount, in whole or
in part, of any Indebtedness other than the Obligations after the occurrence of
any Event of Default; provided, however, that this Section 8.13 shall not
prohibit the prepayment of Indebtedness which is financed solely from the
proceeds of a new loan which would otherwise be permitted by the terms of
Section 8.1.
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Section 8.14. Bankruptcy Remote Subsidiaries. Without the prior
written consent of the Majority Banks, Borrower shall not create any new single
purpose, special purpose or other so-called bankruptcy remote subsidiaries
(such as a REMIC), as determined by the Agent in its reasonable discretion,
other than in connection with the acquisition of the Behavioral Healthcare
Facilities (provided that its debt shall not exceed $350,000,000.00).
Section 8.15. Magellan Transaction. Without the prior written
consent of the Majority Banks, the Borrower will not materially modify or alter
the terms or structure of its transaction with Magellan and CBHS as contained
in (i) the Master Lease Agreement; (ii) that certain Subordination Agreement
dated June 16, 1997 among Magellan, Charter Franchise Services, LLC, Crescent
Real Estate Funding VII, L.P. and CBHS; (iii) the Sale Agreement; (iv) that
certain Warrant Purchase Agreement dated January 29, 1997 between the Borrower
and Magellan; and (v) any and all other agreements, documents and instruments
relating to the acquisition of the Behavioral Healthcare Facilities by the
Borrower or Crescent Real Estate Funding VII, L.P..
Section 9. FINANCIAL COVENANTS OF THE BORROWER.
The Borrower covenants and agrees that, so long as any Loan or Note is
outstanding or any Bank has any obligation to make any Loans it will comply
with the following:
Section 9.1. Liabilities to Worth Ratio. The Borrower will not
permit the ratio of Consolidated Total Liabilities to Consolidated Tangible Net
Worth of the Borrower to exceed 1 to 1.
Section 9.2. Debt Service Coverage. The Borrower will not permit the
Consolidated Cash Flow of the Borrower and its Subsidiaries for any period of
four consecutive fiscal quarters (treated as a single accounting period) (the
"Test Period") to be less than 2.5 times the Debt Service of the Borrower and
its Subsidiaries for the Test Period.
Section 9.3. Intentionally Omitted.
Section 9.4. Tangible Net Worth. Borrower will not permit its
Consolidated Tangible Net Worth (as adjusted pursuant to Section 9.10) to be
less than $1,359,520,000.00 plus seventy percent (70%) of the net proceeds from
each Equity Offering subsequent to the date hereof.
Section 9.5. Secured Debt to Assets Ratio. The Borrower will not
permit the ratio of the Secured Indebtedness of the Borrower and its
Subsidiaries to the Consolidated Total Assets of the Borrower and its
Subsidiaries to exceed .40 to 1.
Section 9.6. Fixed Charge Coverage. Borrower will not permit the
Consolidated Cash Flow for the Test Period to be less than 2 times the Fixed
Charges of the Borrower and its Subsidiaries for the Test Period.
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Section 9.7. Fixed Charge and Preferred Distribution Coverage.
Borrower will not permit the Consolidated Cash Flow for the Test Period to be
less than 1.5 times the sum of (a) the Fixed Charges of the Borrower and its
Subsidiaries for the Test Period plus (b) the Preferred Distributions of
Crescent Guarantor and the Borrower for the Test Period.
Section 9.8. Total Liabilities. The Borrower shall not permit the
Consolidated Total Liabilities of the Borrower and its Subsidiaries to be
greater than 5 times the Consolidated Cash Flow of the Borrower and its
Subsidiaries. In the event that a parcel of Real Estate has only been owned by
the Borrower or a Subsidiary for a portion of the period for which data is
needed to test compliance with this covenant, the Borrower shall annualize the
data which is available in such manner as the Agent determines in its sole
discretion so as to allow the test to be performed with respect to the full
period.
Section 9.9. Real Estate Assets. The Borrower shall not permit (i)
the ratio of the Modified Book Asset Value of its direct and indirect interests
in non-income producing land assets and mortgages secured by non-income
producing land to the Consolidated Total Assets of the Borrower and its
Subsidiaries to exceed .10 to 1; (ii) the ratio of the Modified Book Asset
Value of its direct and indirect interests in hotels/resorts to the
Consolidated Total Assets of the Borrower and its Subsidiaries to exceed .20 to
1; (iii) the ratio of the Modified Book Asset Value of its direct and indirect
interests in behavioral healthcare facilities to the Consolidated Total Assets
of the Borrower and its Subsidiaries to exceed .15 to 1; and (iv) the ratio of
the Modified Book Asset Value of its direct and indirect interests in Class A
institutional quality office buildings, retail properties, industrial and
warehouse properties to the Consolidated Total Assets of the Borrower and its
Subsidiaries to be less than .55 to 1. For the purposes of this Section 9.9,
the interest of Spectrum Mortgage Associates, L.P. in the land at the project
commonly known as Spectrum Center shall be excluded from the calculation in (i)
above. Furthermore, for the purposes of this Section 9.9, the Consolidated
Total Assets of the Borrower and its Subsidiaries shall be reduced by the Cash
and accounts receivable of the Borrower and its Subsidiaries.
Section 9.10. Value Adjustment. The Borrower and the Banks have
agreed to a one-time market value adjustment increase in the amount of
$63,500,000.00 to the value of the assets of the Borrower as of the date of
this Agreement, and the financial covenants set forth in Section 9.1, Section
9.4, Section 9.5 and Section 9.9 (including without limitation the Borrower's
Consolidated Tangible Net Worth and the value of the Borrower's Consolidated
Total Assets) shall for the term of this Agreement be tested against the market
value of the Borrower's assets, based on such one-time market value adjustment,
plus all real estate depreciation to such assets since the date of the
Borrower's initial public offering.
Section 9.11. CBHS. The Borrower will not permit the Consolidated
Cash Flow of CBHS for the Test Period to be less than (i) 2 times the Rent
Payments payable to Crescent Real Estate Funding VII, L.P. ("Funding VII") for
the Test Period, and (ii) 1.75 times the sum of the Rent Payments payable to
Funding VII for the Test Period plus the Required Behavioral Healthcare
Facilities Capital Expenditures for the Test Period. In the event that data
needed to test compliance with this covenant is not available for a portion of
the Test Period, the Borrower
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shall annualize the data which is available in such manner as the Agent
determines in its sole discretion so as to allow the test to be performed with
respect to the full Test Period. For the purpose of testing compliance with
this covenant, the Consolidated Cash Flow of CBHS shall be calculated without
deduction for franchise fees payable by CBHS to Magellan.
Section 9.12. Unencumbered Operating Properties. The Borrower shall
at all times own Unencumbered Operating Properties with an aggregate Asset
Value of at least one hundred fifty percent (150%) of the Borrower's unsecured
Indebtedness (including without limitation the Obligations) outstanding from
time to time.
Section 10. CLOSING CONDITIONS.
The obligations of the Agent and the Banks to make the initial Loans
shall be subject to the satisfaction of the following conditions precedent on
or prior to December 19, 1997:
Section 10.1. Loan Documents. Each of the Loan Documents shall have
been duly executed and delivered by the respective parties thereto, shall be in
full force and effect and shall be in form and substance reasonably
satisfactory to the Majority Banks in their good faith determination. The
Agent shall have received a fully executed copy of each such document, except
that each Bank shall have received a fully executed counterpart of its Note.
Section 10.2. Certified Copies of Organizational Documents. The
Agent shall have received from the Borrower a copy, certified as of a recent
date by the appropriate officer of each State in which the Borrower, the
General Partner or Guarantor, as applicable, is organized or in which the Real
Estate is located and a duly authorized partner or officer of such Person, as
applicable, to be true and complete, of the partnership agreement or corporate
charter of the Borrower, the General Partner or such Guarantor, as applicable,
or its qualification to do business, as applicable, as in effect on such date
of certification.
Section 10.3. Bylaws; Resolutions. All action on the part of the
Borrower, the General Partner and the Guarantor necessary for the valid
execution, delivery and performance by the Borrower, the General Partner and
the Guarantor of this Agreement and the other Loan Documents to which such
Person is or is to become a party shall have been duly and effectively taken,
and evidence thereof satisfactory to the Agent shall have been provided to the
Agent. The Agent shall have received from the General Partner and Guarantor
true copies of their respective bylaws and the resolutions adopted by their
respective board of directors authorizing the transactions described herein,
each certified by its secretary as of a recent date to be true and complete.
Section 10.4. Incumbency Certificate; Authorized Signers. The Agent
shall have received from the General Partner and Guarantor an incumbency
certificate, dated as of the Closing Date, signed by a duly authorized officer
of the General Partner and Guarantor and giving the name and bearing a specimen
signature of each individual who shall be authorized to sign, in the name and
on behalf of the General Partner and Guarantor, each of the Loan Documents to
which such Person is or is to become a party. The Agent shall have also
received from the Borrower a
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certificate, dated as of the Closing Date, signed by a duly authorized partner
of the Borrower and giving the name and specimen signature of each individual
who shall be authorized to make Loan and Conversion Requests, and give notices
and to take other action on behalf of the Borrower under the Loan Documents.
Section 10.5. Opinion of Counsel. The Agent shall have received a
favorable opinion addressed to the Banks and the Agent and dated as of the
Closing Date, in form and substance reasonably satisfactory to the Agent, from
counsel of the Borrower, the General Partner and the Guarantor (a) stating that
all Loan Documents have been duly authorized, executed and delivered by
Borrower and Guarantor are valid, binding and enforceable against Borrower and
Guarantor including, without limitation, the choice of law provisions of the
Loan Documents, (b) indicating the due organization, legal existence and good
standing of Borrower, General Partner and Guarantor in the state of its
formation, (c) stating that the Loan is not usurious under Massachusetts law
(without resort to any "usury savings" clause in the Loan Documents), (d)
stating that to Borrower's counsel's current actual knowledge there is no
material action, suit or proceeding pending or threatened against or affecting
Borrower, General Partner and Guarantor before any court, administrative
agency, arbitrator or governmental authority, and (e) such other matters as are
reasonably requested by Agent's Special Counsel.
Section 10.6. Payment of Fees. The Borrower shall have paid to
BankBoston the fees required to be paid pursuant to Section 4.2.
Section 10.7. Performance; No Default. The Borrower shall have
performed and complied with all terms and conditions herein required to be
performed or complied with by it on or prior to the Closing Date, and on the
Closing Date there shall exist no Default or Event of Default.
Section 10.8. Representations and Warranties. The representations
and warranties made by the Borrower, the General Partner and the Guarantor in
the Loan Documents or otherwise made by or on behalf of the Borrower, the
General Partner, the Guarantor or the Borrower's Subsidiaries or Investment
Partnerships in connection therewith or after the date thereof shall have been
true and correct in all material respects when made and shall also be true and
correct in all material respects on the Closing Date, subject to the provisions
of Section 6.27 above.
Section 10.9. Proceedings and Documents. All proceedings in
connection with the transactions contemplated by this Agreement and the other
Loan Documents shall be reasonably satisfactory to the Agent and the Agent's
Special Counsel in form and substance, and the Agent shall have received all
information and such counterpart originals or certified copies of such
documents and such other certificates, opinions or documents as the Agent and
the Agent's Special Counsel may reasonably require.
Section 10.10. Intentionally Omitted.
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Section 10.11. Compliance Certificate. A Compliance Certificate and
a Guarantor's Compliance Certificate dated as of the date of the Closing Date
demonstrating compliance with each of the covenants calculated therein as of
the most recent fiscal quarter end for which the Borrower or Crescent Guarantor
has provided financial statements under Section 6.4 or the Guaranty, as
applicable, adjusted in the best good faith estimate of the Borrower or
Crescent Guarantor, as applicable, dated as of the date of the Closing Date
shall have been delivered to the Agent.
Section 10.12. Real Estate Spreadsheet. The Agent shall have
received the spreadsheet on the Real Estate described in Section 6.4 above.
Section 10.13. Contribution Agreement. The Agent shall have received
an executed counterpart of the Contribution Agreement.
Section 10.14. Other. The Agent shall have reviewed such other
documents, instruments, certificates, opinions, assurances, consents and
approvals as the Agent or the Agent's Special Counsel may reasonably have
requested.
Section 11. CONDITIONS TO ALL BORROWINGS.
The obligations of the Banks to make any Loan, whether on or after the
Closing Date, shall also be subject to the satisfaction of the following
conditions precedent:
Section 11.1. Prior Conditions Satisfied. All conditions set forth
in Section 10 shall continue to be satisfied as of the date upon which any Loan
is to be made.
Section 11.2. Representations True; No Default. Each of the
representations and warranties made by or on behalf of the Borrower, the
General Partner, the Guarantor and the Borrower's Subsidiaries and Investment
Partnerships contained in this Agreement, the other Loan Documents or in any
document or instrument delivered pursuant to or in connection with this
Agreement shall be true as of the date as of which they were made and shall
also be true at and as of the time of the making of such Loan, with the same
effect as if made at and as of that time (except to the extent of changes
resulting from transactions contemplated or permitted by this Agreement and the
other Loan Documents and changes occurring in the ordinary course of business
that singly or in the aggregate are not materially adverse, and except to the
extent that such representations and warranties relate expressly to an earlier
date) and no Default or Event of Default shall have occurred and be continuing.
Section 11.3. No Legal Impediment. No change shall have occurred in
any law or regulations thereunder or interpretations thereof that in the
reasonable opinion of any Bank would make it illegal for such Bank to make such
Loan.
Section 11.4. Governmental Regulation. Each Bank shall have received
such statements in substance and form reasonably satisfactory to such Bank as
such Bank shall require for the purpose of compliance with any applicable
regulations of the Comptroller of the Currency or the Board of Governors of the
Federal Reserve System.
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Section 11.5. Proceedings and Documents. All proceedings in
connection with the Loan shall be satisfactory in substance and in form to the
Majority Banks, and the Majority Banks shall have received all information and
such counterpart originals or certified or other copies of such documents as
the Majority Banks may reasonably request.
Section 11.6. Borrowing Documents. In the case of any request for a
Loan, the Agent shall have received a copy of each of the following:
(a) the request for a Loan required by Section 2.6 in the
form of Exhibit B hereto, fully completed; and
(b) the Compliance Certificate and the Guarantor's
Compliance Certificate required by clauses (iii) and (iv) of Section 2.6
prepared in a manner reasonably acceptable to the Agent.
Section 12. EVENTS OF DEFAULT; ACCELERATION; ETC.
Section 12.1. Events of Default and Acceleration. If any of the
following events ("Events of Default" or, if the giving of notice or the lapse
of time or both is required, then, prior to such notice or lapse of time,
"Defaults") shall occur:
(a) the Borrower shall fail to pay any principal of the
Loans when the same shall become due and payable, whether at the stated date of
maturity or any accelerated date of maturity or at any other date fixed for
payment;
(b) the Borrower shall fail to pay any interest on the
Loans or any other sums due hereunder or under any of the other Loan Documents,
when the same shall become due and payable, whether at the stated date of
maturity or any accelerated date of maturity or at any other date fixed for
payment;
(c) the Borrower shall fail to comply with any covenant
contained in Section 7.17;
(d) the Borrower shall fail to comply with any covenant
contained in Section 9, and such failure shall continue for 30 days after
written notice thereof shall have been given to the Borrower by the Agent;
(e) the Borrower or any of its Subsidiaries or the
Guarantor shall fail to perform any other term, covenant or agreement contained
herein or in any of the other Loan Documents (other than those specified above
in this Section 12);
(f) any representation or warranty made by or on behalf
of the Borrower, its General Partner, the Guarantor or any of the Borrower's
Subsidiaries or Investment Partnerships in this Agreement or any other Loan
Document, report, certificate, financial statement, request
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for a Loan, or in any other document or instrument delivered pursuant to or in
connection with this Agreement, any advance of a Loan or any of the other Loan
Documents shall prove to have been false in any material respect upon the date
when made or deemed to have been made or repeated;
(g) the Borrower, any of its general partners, the
Guarantor or any of the Borrower's Subsidiaries shall fail to pay at maturity,
or within any applicable period of grace, any obligation for borrowed money or
credit received, or fail to observe or perform any material term, covenant or
agreement contained in any agreement by which it is bound, evidencing or
securing any such borrowed money or credit received for such period of time as
would permit (assuming the giving of appropriate notice if required) the holder
or holders thereof or of any obligations issued thereunder to accelerate the
maturity thereof;
(h) the Borrower, any of its general partners, the
Guarantor or any of the Borrower's Subsidiaries, (1) shall make an assignment
for the benefit of creditors, or admit in writing its general inability to pay
or generally fail to pay its debts as they mature or become due, or shall
petition or apply for the appointment of a trustee or other custodian,
liquidator or receiver of the Borrower, any of its general partners, the
Guarantor or any of the Borrower's Subsidiaries or of any substantial part of
the assets of any thereof, (2) shall commence any case or other proceeding
relating to the Borrower, any of its general partners, the Guarantor or any of
the Borrower's Subsidiaries under any bankruptcy, reorganization, arrangement,
insolvency, readjustment of debt, dissolution or liquidation or similar law of
any jurisdiction, now or hereafter in effect, or (3) shall take any action to
authorize or in furtherance of any of the foregoing;
(i) a petition or application shall be filed for the
appointment of a trustee or other custodian, liquidator or receiver of the
Borrower, any of its general partners, the Guarantor or any of the Borrower's
Subsidiaries or any substantial part of the assets of any thereof, or a case or
other proceeding shall be commenced against the Borrower, any of its general
partners, the Guarantor or any of the Borrower's Subsidiaries under any
bankruptcy, reorganization, arrangement, insolvency, readjustment of debt,
dissolution or liquidation or similar law of any jurisdiction, now or hereafter
in effect, and the Borrower, any of its general partners, the Guarantor or any
of the Borrower's Subsidiaries shall indicate its approval thereof, consent
thereto or acquiescence therein or such petition, application, case or
proceeding shall not have been dismissed within 90 days following the filing or
commencement thereof;
(j) a decree or order is entered appointing any such
trustee, custodian, liquidator or receiver or adjudicating the Borrower, any of
its general partners, the Guarantor or any of the Borrower's Subsidiaries
bankrupt or insolvent, or approving a petition in any such case or other
proceeding, or a decree or order for relief is entered in respect of the
Borrower, any of its general partners, the Guarantor or any of the Borrower's
Subsidiaries, in an involuntary case under federal bankruptcy laws as now or
hereafter constituted;
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(k) there shall remain in force, undischarged,
unsatisfied and unstayed, for more than 60 days, whether or not consecutive,
any uninsured final judgment against the Borrower, any of its general partners,
the Guarantor or any of the Borrower's Subsidiaries that, with other
outstanding uninsured final judgments, undischarged, against the Borrower, any
of its general partners, the Guarantor or any of the Borrower's Subsidiaries
exceeds in the aggregate $10,000,000.00;
(l) if any of the Loan Documents shall be canceled,
terminated, revoked or rescinded otherwise than in accordance with the terms
thereof or with the express prior written agreement, consent or approval of the
Banks, or any action at law, suit in equity or other legal proceeding to
cancel, revoke or rescind any of the Loan Documents shall be commenced by or on
behalf of the Borrower, any of its general partners, the Guarantor, any of the
Borrower's Subsidiaries or Investment Partnerships or any of their respective
stockholders, partners or beneficiaries, or any court or any other governmental
or regulatory authority or agency of competent jurisdiction shall make a
determination that, or issue a judgment, order, decree or ruling to the effect
that, any one or more of the Loan Documents is illegal, invalid or
unenforceable in accordance with the terms thereof;
(m) any dissolution, termination, partial or complete
liquidation, merger or consolidation of the Borrower, any of its general
partners or the Guarantor, or any sale, transfer or other disposition of the
assets of the Borrower, any of its general partners or the Guarantor, other
than as permitted under the terms of this Agreement or the other Loan
Documents;
(n) any suit or proceeding shall be filed against the
Borrower, the Guarantor or any of their respective assets, which in the good
faith business judgment of the Majority Banks after giving consideration to the
likelihood of success of such suit or proceeding and the availability of
insurance to cover any judgment with respect thereto and based on the
information available to them, if adversely determined, would have a materially
adverse affect on the ability of the Borrower or the Guarantor to perform each
and every one of its respective obligations under and by virtue of the Loan
Documents;
(o) the Borrower, any of its general partners, the
Guarantor or any of the Borrower's or the Guarantor's Subsidiaries shall be
indicted for a federal crime, a punishment for which could include the
forfeiture of any assets of such Person;
(p) with respect to any Guaranteed Pension Plan, an ERISA
Reportable Event shall have occurred and the Majority Banks shall have
determined in their reasonable discretion that such event reasonably could be
expected to result in liability of the Borrower, any of its general partners,
the Guarantor or any of the Borrower's Subsidiaries to the PBGC or such
Guaranteed Pension Plan in an aggregate amount exceeding $1,000,000 and such
event in the circumstances occurring reasonably could constitute grounds for
the termination of such Guaranteed Pension Plan by the PBGC or for the
appointment by the appropriate United States District Court of a trustee to
administer such Guaranteed Pension Plan; or a trustee shall have
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been appointed by the United States District Court to administer such Plan; or
the PBGC shall have instituted proceedings to terminate such Guaranteed Pension
Plan;
(q) the Guarantor denies that it has any liability or
obligation under the Guaranty, or shall notify the Agent or any of the Banks of
the Guarantor's intention to attempt to cancel or terminate the Guaranty, or
shall fail to observe or comply with any term, covenant, condition or agreement
under the Guaranty;
(r) (1) at least two of Richard Rainwater, John C. Goff
and Gerald Haddock shall not collectively occupy two of the following
positions: Chairman of the Board, Chief Executive Officer, Vice-Chairman and
President of Crescent Guarantor, or (2) Richard Rainwater, John C. Goff and
Gerald Haddock in the aggregate shall no longer own units in the Borrower or
shares in Crescent Guarantor which, on a combined basis, equal to at least a
ten percent (10%) economic interest in the Borrower (provided, however, in the
event that the circumstances described in (1) or (2) have occurred as a result
of the death or mental incapacity of any of such Persons, the same shall not
constitute an Event of Default hereunder so long as within six (6) months from
the date of such death or mental incapacitation the Majority Banks shall have
approved the individual or individuals who shall replace such Person as the
Chairman of the Board, Chief Executive Officer, Vice-Chairman or President, as
applicable, of Crescent Guarantor and who shall own such interests in the
Borrower and Crescent Guarantor), or (3) without the prior written approval of
the Majority Banks there shall be any other material change in the management
of Crescent Guarantor or the Borrower; or
(s) any default or Event of Default, as defined in any of
the other Loan Documents, shall occur;
then, and in any such event, the Agent may, and upon the request of the
Majority Banks shall, by notice in writing to the Borrower declare all amounts
owing with respect to this Agreement, the Notes and the other Loan Documents to
be, and they shall thereupon forthwith become, immediately due and payable
without presentment, demand, protest or other notice of any kind, all of which
are hereby expressly waived by the Borrower; provided that in the event of any
Event of Default specified in Section 12.1(h), Section 12.1(i) or Section
12.1(j), all such amounts shall become immediately due and payable
automatically and without any requirement of notice from any of the Banks or
the Agent.
Section 12.2. Limitation of Cure Periods.
(a) Notwithstanding anything contained in Section 12.1 to
the contrary, (i) no Event of Default shall exist hereunder upon the occurrence
of any failure described in Section 12.1(a) or Section 12.1(b) in the event
that the Borrower cures such default within five (5) days following receipt of
written notice of such default, provided, however, that Borrower shall not be
entitled to receive more than two (2) notices in the aggregate pursuant to this
clause (i) in any period of 365 days ending on the date of any such occurrence
of default, and provided further that no such cure period shall apply to any
payments due upon the maturity of the Notes, and (ii) no Event of
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Default shall exist hereunder upon the occurrence of any failure described in
Section 12.1(e) in the event that the Borrower cures such default with thirty
(30) days following receipt of written notice of such default, provided that
the provisions of this clause shall not pertain to defaults consisting of a
failure to comply with Section 7.4(d) or to any default excluded from any
provision of cure of defaults contained in any other of the Loan Documents.
(b) Notwithstanding the provisions of Section 12.1(d),
the cure period provided therein shall not be allowed and the occurrence of a
Default thereunder immediately shall constitute an Event of Default for all
purposes of this Agreement and the other Loan Documents if, within the period
of twelve months immediately preceding the occurrence of such Default, there
shall have occurred two periods of cure or portions thereof under said
subsection.
Section 12.3. Termination of Commitments. If any one or more Events
of Default specified in Section 12.1(h), Section 12.1(i) or Section 12.1(j)
shall occur, then immediately and without any action on the part of the Agent
or any Bank any unused portion of the credit hereunder shall terminate and the
Banks shall be relieved of all obligations to make Loans to the Borrower. If
any other Event of Default shall have occurred, the Agent, upon the election of
the Majority Banks, may by notice to the Borrower terminate the obligation to
make Loans to the Borrower. No termination under this Section 12.3 shall
relieve the Borrower of its obligations to the Banks arising under this
Agreement or the other Loan Documents. Nothing in this Section 12.3 shall
limit or impair the terms of this Agreement (including Section 2.1) which
provide that the Banks shall have no obligation to make Loans upon the
occurrence of a Default or Event of Default.
Section 12.4. Remedies. In case any one or more of the Events of
Default shall have occurred and be continuing, and whether or not the Banks
shall have accelerated the maturity of the Loans pursuant to Section 12.1, the
Agent on behalf of the Banks, may, with the consent of the Majority Banks but
not otherwise, proceed to protect and enforce their rights and remedies under
this Agreement, the Notes or any of the other Loan Documents by suit in equity,
action at law or other appropriate proceeding, whether for the specific
performance of any covenant or agreement contained in this Agreement and the
other Loan Documents or any instrument pursuant to which the Obligations are
evidenced, including to the full extent permitted by applicable law the
obtaining of the ex parte appointment of a receiver, and, if such amount shall
have become due, by declaration or otherwise, proceed to enforce the payment
thereof or any other legal or equitable right. No remedy herein conferred upon
the Agent or the holder of any Note is intended to be exclusive of any other
remedy and each and every remedy shall be cumulative and shall be in addition
to every other remedy given hereunder or now or hereafter existing at law or in
equity or by statute or any other provision of law. In the event that all or
any portion of the Obligations is collected by or through an attorney-at-law,
the Borrower shall pay all reasonable costs of collection including, but not
limited to, reasonable attorney's fees.
Section 12.5. Distribution of Proceeds. In the event that, following
the occurrence or during the continuance of any Event of Default, any monies
are received in connection with the enforcement of any of the Loan Documents,
or otherwise with respect to the realization upon any of the assets of the
Borrower or the Guarantor, such monies shall be distributed for application as
follows:
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(a) First, to the payment of, or (as the case may be) the
reimbursement of, the Agent for or in respect of all reasonable costs,
expenses, disbursements and losses which shall have been incurred or sustained
by the Agent to protect or preserve any collateral or in connection with the
collection of such monies by the Agent, for the exercise, protection or
enforcement by the Agent of all or any of the rights, remedies, powers and
privileges of the Agent under this Agreement or any of the other Loan Documents
or in support of any provision of adequate indemnity to the Agent against any
taxes or liens which by law shall have, or may have, priority over the rights
of the Agent to such monies;
(b) Second, to all other Obligations in such order or
preference as the Majority Banks shall determine; provided, however, that (i)
distributions in respect of such other Obligations shall be made pari passu
among Obligations with respect to the Agent's fee payable pursuant to Section
4.3 and all other Obligations, (ii) in the event that any Bank shall have
wrongfully failed or refused to make an advance under Section 2.7 and such
failure or refusal shall be continuing, advances made by other Banks during the
pendency of such failure or refusal shall be entitled to be repaid as to
principal and accrued interest in priority to the other Obligations described
in this subsection (b), and (iii) Obligations owing to the Banks with respect
to each type of Obligation such as interest, principal, fees and expenses,
shall be made among the Banks pro rata; and provided further that the Majority
Banks may in their discretion make proper allowance to take into account any
Obligations not then due and payable; and
(c) Third, the excess, if any, shall be returned to the
Borrower or to such other Persons as are entitled thereto.
Section 13. SETOFF.
Regardless of the adequacy of any collateral, during the continuance of
any Event of Default, any deposits (general or specific, time or demand,
provisional or final, regardless of currency, maturity, or the branch of where
such deposits are held) or other sums credited by or due from any of the Banks
to the Borrower or the Guarantor and any securities or other property of the
Borrower or the Guarantor in the possession of such Bank may be applied to or
set off against the payment of Obligations and any and all other liabilities,
direct, or indirect, absolute or contingent, due or to become due, now existing
or hereafter arising, of the Borrower to such Bank. Each of the Banks agrees
with each other Bank that if such Bank shall receive from the Borrower or the
Guarantor, whether by voluntary payment, exercise of the right of setoff, or
otherwise, and shall retain and apply to the payment of the Note or Notes held
by such Bank any amount in excess of its ratable portion of the payments
received by all of the Banks with respect to the Notes held by all of the
Banks, such Bank will make such disposition and arrangements with the other
Banks with respect to such excess, either by way of distribution, pro tanto
assignment of claims, subrogation or otherwise as shall result in each Bank
receiving in respect of the Notes held by it its proportionate payment as
contemplated by this Agreement; provided that if all or any part of such excess
payment is thereafter recovered from such Bank, such disposition and
arrangements shall be rescinded and the amount restored to the extent of such
recovery, but without interest.
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Section 14. THE AGENT.
Section 14.1. Authorization. The Agent is authorized to take such
action on behalf of each of the Banks and to exercise all such powers as are
hereunder and under any of the other Loan Documents and any related documents
delegated to the Agent, together with such powers as are reasonably incident
thereto, provided that no duties or responsibilities not expressly assumed
herein or therein shall be implied to have been assumed by the Agent. The
obligations of Agent hereunder are primarily administrative in nature, and
nothing contained in this Agreement, or any of the other Loan Documents shall
be construed to constitute the Agent as a trustee for any Bank or to create an
agency or fiduciary relationship. The Borrower and any other Person shall be
entitled to conclusively rely on a statement from the Agent that it has the
authority to act for and bind the Banks pursuant to this Agreement and the
other Loan Documents.
Section 14.2. Employees and Agents. The Agent may exercise its
powers and execute its duties by or through employees or agents and shall be
entitled to take, and to rely on, advice of counsel concerning all matters
pertaining to its rights and duties under this Agreement and the other Loan
Documents. The Agent may utilize the services of such Persons as the Agent may
reasonably determine, and all reasonable fees and expenses of any such Persons
shall be paid by the Borrower.
Section 14.3. No Liability. Neither the Agent nor any of its
shareholders, directors, officers or employees nor any other Person assisting
them in their duties nor any agent, or employee thereof, shall be liable for
any waiver, consent or approval given or any action taken, or omitted to be
taken, in good faith by it or them hereunder or under any of the other Loan
Documents, or in connection herewith or therewith, or be responsible for the
consequences of any oversight or error of judgment whatsoever, except that the
Agent or such other Person, as the case may be, shall be liable for losses due
to its willful misconduct or gross negligence.
Section 14.4. No Representations. The Agent shall not be responsible
for the execution or validity or enforceability of this Agreement, the Notes,
any of the other Loan Documents or any instrument at any time constituting, or
intended to constitute, collateral security for the Notes, or for the value of
any such collateral security or for the validity, enforceability or
collectability of any such amounts owing with respect to the Notes, or for any
recitals or statements, warranties or representations made herein, or any
agreement, instrument or certificate delivered in connection therewith or in
any of the other Loan Documents or in any certificate or instrument hereafter
furnished to it by or on behalf of the Borrower or any of its Subsidiaries or
Investment Partnerships or the Guarantor, or be bound to ascertain or inquire
as to the performance or observance of any of the terms, conditions, covenants
or agreements herein or in any other of the Loan Documents. The Agent shall
not be bound to ascertain whether any notice, consent, waiver or request
delivered to it by the Borrower or the Guarantor or any of their respective
Subsidiaries or Investment Partnerships or any holder of any of the Notes shall
have been duly authorized or is true, accurate and complete. The Agent has not
made nor does it now make any representations or warranties, express or
implied, nor does it assume any liability to the Banks, with respect to the
creditworthiness or financial condition of the Borrower or any of its
Subsidiaries or
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Investment Partnerships or the Guarantor. Each Bank acknowledges that it has,
independently and without reliance upon the Agent or any other Bank, and based
upon such information and documents as it has deemed appropriate, made its own
credit analysis and decision to enter into this Agreement. Each Bank also
acknowledges that it will, independently and without reliance upon the Agent or
any other Bank, based upon such information and documents as it deems
appropriate at the time, continue to make its own credit analysis and decisions
in taking or not taking action under this Agreement and the other Loan
Documents.
Section 14.5. Payments.
(a) A payment by the Borrower or the Guarantor to the
Agent hereunder or under any of the other Loan Documents for the account of any
Bank shall constitute a payment to such Bank. The Agent agrees to distribute
to each Bank not later than one Business Day after the Agent's receipt of good
funds, determined in accordance with the Agent's customary practices, such
Bank's pro rata share of payments received by the Agent for the account of the
Banks except as otherwise expressly provided herein or in any of the other Loan
Documents. In the event that the Agent fails to distribute such amounts within
one Business Day as provided above, the Agent shall pay interest on such amount
at a rate per annum equal to the Federal Funds Effective Rate from time to time
in effect.
(b) If in the opinion of the Agent the distribution of
any amount received by it in such capacity hereunder, under the Notes or under
any of the other Loan Documents might involve it in liability, it may refrain
from making distribution until its right to make distribution shall have been
adjudicated by a court of competent jurisdiction. If a court of competent
jurisdiction shall adjudge that any amount received and distributed by the
Agent is to be repaid, each Person to whom any such distribution shall have
been made shall either repay to the Agent its proportionate share of the amount
so adjudged to be repaid or shall pay over the same in such manner and to such
Persons as shall be determined by such court.
(c) Notwithstanding anything to the contrary contained in
this Agreement or any of the other Loan Documents, any Bank that fails (i) to
make available to the Agent its pro rata share of any Loan or (ii) to comply
with the provisions of Section 13 with respect to making dispositions and
arrangements with the other Banks, where such Bank's share of any payment
received, whether by setoff or otherwise, is in excess of its pro rata share of
such payments due and payable to all of the Banks, in each case as, when and to
the full extent required by the provisions of this Agreement, shall be deemed
delinquent (a "Delinquent Bank") and shall be deemed a Delinquent Bank until
such time as such delinquency is satisfied. A Delinquent Bank shall be deemed
to have assigned any and all payments due to it from the Borrower and the
Guarantor, whether on account of outstanding Loans, interest, fees or
otherwise, to the remaining nondelinquent Banks for application to, and
reduction of, their respective pro rata shares of all outstanding Loans. The
Delinquent Bank hereby authorizes the Agent to distribute such payments to the
nondelinquent Banks in proportion to their respective pro rata shares of all
outstanding Loans. A Delinquent Bank shall be deemed to have satisfied in full
a delinquency when and if, as a result of application of the assigned payments
to all outstanding Loans of the
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nondelinquent Banks or as a result of other payments by the Delinquent Banks to
the nondelinquent Banks, the Banks' respective pro rata shares of all
outstanding Loans have returned to those in effect immediately prior to such
delinquency and without giving effect to the nonpayment causing such
delinquency.
Section 14.6. Holders of Notes. Subject to the terms of Article 18,
the Agent may deem and treat the payee of any Note as the absolute owner or
purchaser thereof for all purposes hereof until it shall have been furnished in
writing with a different name by such payee or by a subsequent holder, assignee
or transferee.
Section 14.7. Indemnity. The Banks ratably agree hereby to indemnify
and hold harmless the Agent from and against any and all claims, actions and
suits (whether groundless or otherwise), losses, damages, costs, expenses
(including any expenses for which the Agent has not been reimbursed by the
Borrower as required by Section 15), and liabilities of every nature and
character arising out of or related to this Agreement, the Notes or any of the
other Loan Documents or the transactions contemplated or evidenced hereby or
thereby, or the Agent's actions taken hereunder or thereunder, except to the
extent that any of the same shall be directly caused by the Agent's willful
misconduct or gross negligence.
Section 14.8. Agent as Bank. In its individual capacity, BankBoston
shall have the same obligations and the same rights, powers and privileges in
respect to its Commitment and the Loans made by it, and as the holder of any of
the Notes as it would have were it not also the Agent.
Section 14.9. Resignation. Subject to the terms of Section 18.1, the
Agent may resign at any time by giving 30 calendar days' prior written notice
thereof to the Banks and the Borrower. Upon any such resignation, the Majority
Banks, subject to the terms of Section 18.1, shall have the right to appoint as
a successor Agent any Bank or any bank whose senior debt obligations are rated
not less than "A" or its equivalent by Moody's Investors Service, Inc. or not
less than "A" or its equivalent by Standard & Poor's corporation and which has
a net worth of not less than $500,000,000. Unless a Default or Event of
Default shall have occurred and be continuing, such successor Agent shall be
reasonably acceptable to the Borrower. If no successor Agent shall have been
appointed and shall have accepted such appointment within thirty (30) days
after the retiring Agent's giving of notice of resignation, then the retiring
Agent may, on behalf of the Banks, appoint a successor Agent, which shall be a
bank whose debt obligations are rated not less than "A" or its equivalent by
Moody's Investors Service, Inc. or not less than "A" or its equivalent by
Standard & Poor's Corporation and which has a net worth of not less than
$500,000,000. Upon the acceptance of any appointment as Agent hereunder by a
successor Agent, such successor Agent shall thereupon succeed to and become
vested with all the rights, powers, privileges and duties of the retiring or
removed Agent, and the retiring Agent shall be discharged from its duties and
obligations hereunder as Agent. After any retiring Agent's resignation, the
provisions of this Agreement and the other Loan Documents shall continue in
effect for its benefit in respect of any actions taken or omitted to be taken
by it while it was acting as Agent. Upon any change in the Agent under
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this Agreement, the resigning Agent shall execute such assignments of and
amendments to the Loan Documents as may be necessary to substitute the
successor Agent for the resigning Agent.
Section 14.10. Duties in the Case of Enforcement. In case one or
more Events of Default have occurred and shall be continuing, and whether or
not acceleration of the Obligations shall have occurred, the Agent shall, if
(a) so requested by the Majority Banks and (b) the Banks have provided to the
Agent such additional indemnities and assurances against expenses and
liabilities as the Agent may reasonably request, proceed to exercise all or any
legal and equitable and other rights or remedies as it may have. The Majority
Banks may direct the Agent in writing as to the method and the extent of any
such exercise, the Banks hereby agreeing to indemnify and hold the Agent
harmless from all liabilities incurred in respect of all actions taken or
omitted in accordance with such directions, provided that the Agent need not
comply with any such direction to the extent that the Agent reasonably believes
the Agent's compliance with such direction to be unlawful or commercially
unreasonable in any applicable jurisdiction.
Section 15. EXPENSES.
The Borrower agrees to pay (a) the reasonable costs of producing and
reproducing this Agreement, the other Loan Documents and the other agreements
and instruments mentioned herein, (b) except as otherwise specifically provided
herein, any taxes (including any interest and penalties in respect thereto)
payable by the Agent or any of the Banks, including any recording, mortgage,
documentary or intangibles taxes in connection with the Loan Documents, or
other taxes payable on or with respect to the transactions contemplated by this
Agreement (other than taxes based upon the Agent's or any Bank's gross or net
income), (c) the reasonable fees, expenses and disbursements of the counsel to
the Agent and any local counsel to the Agent incurred in connection with the
preparation, administration or interpretation of the Loan Documents and other
instruments mentioned herein (excluding, however, the preparation of agreements
evidencing participations granted under Section 18.4), each closing hereunder,
and amendments, modifications, approvals, consents or waivers hereto or
hereunder (it being understood and agreed that the Borrower shall pay to the
Agent for the account of the Banks a fee in the amount of $10,000.00 for each
material amendment or waiver (as determined by the Agent in its sole
discretion) requested by Borrower and granted by the Agent or the Banks, with
such fee to be split equally among the Banks), (d) the reasonable fees,
expenses and disbursements of the Agent incurred by the Agent in connection
with the preparation, administration or interpretation of the Loan Documents
and other instruments mentioned herein, and the making of each advance
hereunder, (e) all reasonable out-of-pocket expenses (including reasonable
attorneys' fees and costs, which attorneys may be employees of any Bank or the
Agent and the fees and costs of appraisers, engineers, investment bankers or
other experts retained by any Bank or the Agent) incurred by any Bank or the
Agent in connection with (i) the enforcement of or preservation of rights under
any of the Loan Documents against the Borrower, any of its general partners or
the Guarantor or the administration thereof after the occurrence of a Default
or Event of Default and (ii) any litigation, proceeding or dispute whether
arising hereunder or otherwise, in any way related to the Agent's or any of the
Bank's relationship with the Borrower, any of its general partner, the
Guarantor or any of their respective Subsidiaries or Investment Partnerships
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unless the Borrower, such general partner, such Guarantor or such Subsidiary or
Investment Partnership is the prevailing party in such litigation, proceeding
or dispute, and (f) all reasonable fees, expenses and disbursements of the
Agent incurred in connection with UCC searches, UCC filings, title rundowns,
title searches or mortgage recordings. The covenants of this Section 15 shall
survive payment or satisfaction of payment of amounts owing with respect to the
Notes.
Section 16. INDEMNIFICATION.
The Borrower agrees to indemnify and hold harmless the Agent and the Banks
and each director, officer, employee, agent and Person who controls the Agent
or any Bank from and against any and all claims, actions and suits, whether
groundless or otherwise, and from and against any and all liabilities, losses,
damages and expenses of every nature and character arising out of or relating
to this Agreement or any of the other Loan Documents or the transactions
contemplated hereby and thereby including, without limitation, (a) any leasing
fees and any brokerage, finders or similar fees asserted against any Person
indemnified under this Section 16 based upon any agreement, arrangement or
action made or taken, or alleged to have been made or taken, by the Borrower,
any of its general partners, the Guarantor or any of the Borrower's
Subsidiaries or Investment Partnerships (provided that the Borrower shall not
be required to indemnify a Bank from and against any agreement that is proven
to have been made by a Bank to pay any brokerage fees or commissions), (b) any
condition of the Real Estate first occurring prior to the Agent or the Banks or
their nominee acquiring title to the applicable Real Estate by the exercise of
any applicable foreclosure remedies or by deed in lieu of foreclosure, (c) any
actual or proposed use by the Borrower of the proceeds of any of the Loans, (d)
any actual or alleged infringement of any patent, copyright, trademark, service
mark or similar right of the Borrower, any of its general partners, the
Guarantor or any of the Borrower's Subsidiaries or Investment Partnerships, (e)
the Borrower, the Guarantor or any Subsidiary or Investment Partnership of the
Borrower entering into or performing this Agreement or any of the other Loan
Documents, (f) any actual or alleged violation of any law, ordinance, code,
order, rule, regulation, approval, consent, permit or license relating to the
Real Estate which violation first occurred prior to the Agent or the Banks or
their nominee acquiring title to the applicable Real Estate by the exercise of
any applicable foreclosure remedies or by deed in lieu of foreclosure, or (g)
with respect to the Borrower, each of its general partners, the Guarantor, the
Borrower's Subsidiaries and Investment Partnerships and their respective
properties and assets, the violation of any Environmental Law, the Release or
threatened Release of any Hazardous Substances or any action, suit, proceeding
or investigation brought or threatened with respect to any Hazardous Substances
(including, but not limited to claims with respect to wrongful death, personal
injury or damage to property), first occurring prior to the Agent or the Banks
or their nominee acquiring title to the applicable Real Estate by the exercise
of any applicable foreclosure remedies or by deed in lieu of foreclosure, in
each case including, without limitation, the reasonable fees and disbursements
of counsel and allocated costs of internal counsel incurred in connection with
any such investigation, litigation or other proceeding; provided, however, that
the Borrower shall not be obligated under this Section 16 to indemnify any
Person for liabilities arising from such Person's own gross negligence or
willful misconduct. In litigation, or the preparation therefor, the Banks and
the Agent shall be entitled to select a single law firm as their own counsel
and, in addition to the foregoing indemnity, the
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Borrower agrees to pay promptly the reasonable fees and expenses of such
counsel. If, and to the extent that the obligations of the Borrower under this
Section 16 are unenforceable for any reason, the Borrower hereby agrees to make
the maximum contribution to the payment in satisfaction of such obligations
which is permissible under applicable law. The provisions of this Section 16
shall survive the repayment of the Loans and the termination of the obligations
of the Banks hereunder.
Section 17. SURVIVAL OF COVENANTS, ETC.
All covenants, agreements, representations and warranties made herein, in
the Notes, in any of the other Loan Documents or in any documents or other
papers delivered by or on behalf of the Borrower, any of its general partners,
the Guarantor or any of the Borrower's Subsidiaries or Investment Partnerships
pursuant hereto or thereto shall be deemed to have been relied upon by the
Banks and the Agent, notwithstanding any investigation heretofore or hereafter
made by any of them, and shall survive the making by the Banks of any of the
Loans, as herein contemplated, and shall continue in full force and effect so
long as any amount due under this Agreement or the Notes or any of the other
Loan Documents remains outstanding or any Bank has any obligation to make any
Loans. The indemnification obligations of the Borrower provided herein and the
other Loan Documents shall survive the full repayment of amounts due and the
termination of the obligations of the Banks hereunder and thereunder to the
extent provided herein and therein. All statements contained in any
certificate or other paper delivered to any Bank or the Agent at any time by or
on behalf of the Borrower, any of its general partners, the Guarantor or any of
the Borrower's Subsidiaries or Investment Partnerships pursuant hereto or in
connection with the transactions contemplated hereby shall constitute
representations and warranties by the Borrower, its general partners, the
Guarantor or such Subsidiary or Investment Partnership hereunder.
Section 18. ASSIGNMENT AND PARTICIPATION.
Section 18.1. Conditions to Assignment by Banks. Except as provided
herein, each Bank may assign to one or more banks or other entities all or a
portion of its interests, rights and obligations under this Agreement
(including all or a portion of its Commitment Percentage and Commitment and the
same portion of the Loans at the time owing to it, and the Notes held by it);
provided that (a) the Agent shall have given its prior written consent to such
assignment, which consent shall not be unreasonably withheld (provided that
such consent shall not be required for any assignment to another Bank or to a
wholly-owned subsidiary of such Bank provided that such assignee shall remain a
wholly-owned subsidiary of such Bank), (b) each such assignment shall be of a
constant, and not a varying, percentage of all the assigning Bank's rights and
obligations under this Agreement, (c) the parties to such assignment shall
execute and deliver to the Agent, for recording in the Register (as hereinafter
defined), a notice of such assignment, together with any Notes subject to such
assignment, (d) in no event shall any voting, consent or approval rights of a
Bank be assigned to any Person controlling, controlled by or under common
control with, or which is not otherwise free from influence or control by, the
Borrower, any of its general partners, the Guarantor or their respective
Subsidiaries or Investment Partnerships, which rights shall instead be
allocated pro rata among the other remaining Banks, (e) such assignee shall
have
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a net worth as of the date of such assignment of not less than $500,000,000
unless such requirement is waived in writing by the Borrower and the Agent, (f)
such assignment is subject to the terms of any intercreditor agreement among
the Banks and the Agent, and (g) such assignee shall acquire an interest in the
Loans of not less than $10,000,000.00. Upon such execution, delivery,
acceptance and recording, of such notice of assignment, (i) the assignee
thereunder shall be a party hereto and all other Loan Documents executed by the
Banks and, to the extent provided in such assignment, have the rights and
obligations of a Bank hereunder, (ii) the assigning Bank shall, to the extent
provided in such assignment and upon payment to the Agent of the registration
fee referred to in Section 18.2, be released from its obligations under this
Agreement, and (iii) the Agent may unilaterally amend Schedule 1 to reflect
such assignment. In connection with each assignment, the assignee shall
represent and warrant to the Agent, the assignor and each other Bank as to
whether such assignee is controlling, controlled by, under common control with
or is not otherwise free from influence or control by, the Borrower, its
general partners, and the Guarantor or their respective Subsidiaries or
Investment Partnerships. Notwithstanding anything herein to the contrary, in
the event that BankBoston shall at any time hold a Commitment equal to or less
than $40,000,000.00 then BankBoston shall first provide written notice thereof
to the Banks and shall offer to resign as Agent, which offer must be accepted
in writing by the Majority Banks within fifteen (15) days of delivery of such
notice by Agent (for the purposes of this sentence only BankBoston shall be
deemed to have accepted its own offer to resign). A failure to accept such
offer within such period shall be deemed a rejection of such offer.
NationsBank shall have a period of fifteen (15) calendar days following the
acceptance by the Majority Banks of BankBoston's offer to resign within which
to elect to replace BankBoston as Agent (provided, however, that the option of
NationsBank to replace BankBoston as Agent shall be null and void in the event
that NationsBank has at such time, without regard to any assignment to be made
by BankBoston, a Commitment which is not greater than or equal to the
Commitment of each other Bank other than BankBoston or in the event that within
such thirty (30) calendar day period the Majority Banks do not approve
NationsBank so acting as Agent). In the event that the Majority Banks have
accepted BankBoston's offer to resign and NationsBank declines to replace
BankBoston as Agent, is not eligible to replace BankBoston as Agent or is not
approved by the Majority Banks as the successor Agent as provided above,
BankBoston shall thereafter resign as Agent as provided in this Agreement in
the event that a successor Agent from among the Banks is not selected by the
Majority Banks or does not accept such appointment within fifteen (15) calendar
days following receipt of notice from Agent that NationsBank has declined to
replace BankBoston as Agent or a determination or vote that NationsBank is
ineligible or not approved. Except with respect to the rights of NationsBank
as provided above to succeed BankBoston as Agent, each Agent, as a condition to
any resignation of its position as Agent shall be required to provide written
notice thereof to the other Banks and provide the Majority Banks an opportunity
to designate a successor Agent within thirty (30) calendar days following
receipt of such notice in the same manner as provided above. Upon any change
in the Agent under this Agreement, the resigning or removed Agent shall execute
such assignments of and amendments to the Loan Documents as may be necessary to
substitute the successor Agent for the resigning or removed Agent.
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Section 18.2. Register. The Agent shall maintain a copy of each
assignment delivered to it and a register or similar list (the "Register") for
the recordation of the names and addresses of the Banks and the Commitment
Percentages of, and principal amount of the Loans owing to the Banks from time
to time. The entries in the Register shall be conclusive, in the absence of
manifest error, and the Borrower, the Agent and the Banks may treat each Person
whose name is recorded in the Register as a Bank hereunder for all purposes of
this Agreement. The Register shall be available for inspection by the Borrower
and the Banks at any reasonable time and from time to time upon reasonable
prior notice. Upon each such recordation, the assigning Bank agrees to pay to
the Agent a registration fee in the sum of $5,000.
Section 18.3. New Notes. Upon its receipt of an assignment executed
by the parties to such assignment, together with each Note subject to such
assignment, the Agent shall (a) record the information contained therein in the
Register, and (b) give prompt notice thereof to the Borrower and the Banks
(other than the assigning Bank). Within five Business Days after receipt of
such notice, the Borrower, at its own expense, shall execute and deliver to the
Agent, in exchange for each surrendered Note, a new Note to the order of such
assignee in an amount equal to the amount assumed by such assignee pursuant to
such assignment and, if the assigning Bank has retained some portion of its
obligations hereunder, a new Note to the order of the assigning Bank in an
amount equal to the amount retained by it hereunder, and shall cause the
Guarantor to deliver to the Agent an acknowledgment in form and substance
reasonably satisfactory to the Agent to the effect that the Guaranty extends to
and is applicable to each new Note. Such new Notes shall provide that they are
replacements for the surrendered Notes, shall be in an aggregate principal
amount equal to the aggregate principal amount of the surrendered Notes, shall
be dated the effective date of such assignment and shall otherwise be in
substantially the form of the assigned Notes. The surrendered Notes shall be
canceled and returned to the Borrower.
Section 18.4. Participations. Each Bank may sell participations to
one or more banks or other entities in all or a portion of such Bank's rights
and obligations under this Agreement and the other Loan Documents; provided
that (a) any such sale or participation shall not affect the rights and duties
of the selling Bank hereunder to the Borrower, (b) such participation shall not
entitle such participant to any rights or privileges under this Agreement or
the Loan Documents, including, without limitation, the right to approve
waivers, amendments or modifications, (c) such participant shall have no direct
rights against the Borrower, any of its general partners, the Guarantor or any
of their respective Subsidiaries or Investment Partnerships except the rights
granted to the Banks pursuant to Section 13, (d) such sale is effected in
accordance with all applicable laws, and (e) such participant shall not be a
Person controlling, controlled by or under common control with, or which is not
otherwise free from influence or control by, the Borrower, any of its general
partners, the Guarantor or any of their respective Subsidiaries or Investment
Partnerships.
Section 18.5. Pledge by Bank. Any Bank may at any time pledge all or
any portion of its interest and rights under this Agreement (including all or
any portion of its Note) to any of the twelve Federal Reserve Banks organized
under Section 4 of the Federal Reserve Act, 12 U.S.C. Section 341. No such
pledge or the enforcement thereof shall release the pledgor Bank from its
obligations hereunder or under any of the other Loan Documents.
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Section 18.6. No Assignment by Borrower. The Borrower shall not
assign or transfer any of its rights or obligations under any of the Loan
Documents without the prior written consent of each of the Banks.
Section 18.7. Disclosure. The Borrower agrees that in addition to
disclosures made in accordance with standard banking practices any Bank may
disclose information obtained by such Bank pursuant to this Agreement to
assignees or participants and potential assignees or participants hereunder.
Section 18.8. Restrictions on Assignment. Notwithstanding anything
in this Agreement to the contrary, no Bank other than BankBoston shall be
permitted to assign all or any portion of its interests, rights and obligations
under this Agreement (including all or a portion of its Commitment Percentage
and Commitment and the same portion of the Loans at the time owing to it, and
the Notes held by it) or the other Loan Documents prior to the date that is one
hundred eighty days (180) following the Closing Date without the prior written
consent of BankBoston, which consent maybe withheld by BankBoston in its sole
and absolute discretion. Nothing herein shall prevent the sale by a Bank of a
participation pursuant to Section 18.4 of this Agreement during such period.
Section 19. NOTICES.
Each notice, demand, election or request provided for or permitted to
be given pursuant to this Agreement (hereinafter in this Section 19 referred to
as "Notice"), but specifically excluding to the maximum extent permitted by law
any notices of the institution or commencement of foreclosure proceedings, must
be in writing and shall be deemed to have been properly given or served by
personal delivery or by sending same by overnight courier or by depositing same
in the United States Mail, postpaid and registered or certified, return receipt
requested, or as expressly permitted herein, by telegraph, telecopy, telefax or
telex, and addressed as follows:
If to the Agent or any Bank, at the address set forth on the signature
page for the Agent or such Bank; and
If to the Borrower:
Crescent Real Estate Equities Limited Partnership
777 Main Street
Suite 2100
Fort Worth, Texas 76102
Attn: Dallas E. Lucas
Telecopy No.: 817/878-0429
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<PAGE> 80
with a copy to:
Crescent Real Estate Equities Limited Partnership
777 Main Street
Suite 2100
Fort Worth, Texas 76102
Attn: David M. Dean, Esq.
Telecopy No.: 817/878-0429
and to each other Bank which may hereafter become a party to this Agreement at
such address as may be designated by such Bank. Each Notice shall be effective
upon being personally delivered or upon being sent by overnight courier or upon
being deposited in the United States Mail as aforesaid. The time period in
which a response to such Notice must be given or any action taken with respect
thereto (if any), however, shall commence to run from the date of receipt if
personally delivered or sent by overnight courier, or if so deposited in the
United States Mail, the earlier of three (3) Business Days following such
deposit or the date of receipt as disclosed on the return receipt. Rejection
or other refusal to accept or the inability to deliver because of changed
address for which no notice was given shall be deemed to be receipt of the
Notice sent. By giving at least fifteen (15) days prior Notice thereof, the
Borrower, a Bank or Agent shall have the right from time to time and at any
time during the term of this Agreement to change their respective addresses and
each shall have the right to specify as its address any other address within
the United States of America.
Section 20. RELATIONSHIP.
Neither the Agent nor any Bank has any fiduciary relationship with or
fiduciary duty to the Borrower, the Guarantor or their respective Subsidiaries
arising out of or in connection with this Agreement or the other Loan Documents
or the transactions contemplated hereunder or thereunder, and the relationship
between each Bank and the Borrower is solely that of a lender and borrower, and
nothing contained herein or in any of the other Loan Documents shall in any
manner be construed as making the parties hereto partners, joint venturers or
any other relationship other than lender and borrower.
Section 21. GOVERNING LAW; CONSENT TO JURISDICTION AND SERVICE.
THIS AGREEMENT AND EACH OF THE OTHER LOAN DOCUMENTS EXCEPT AS OTHERWISE
SPECIFICALLY PROVIDED THEREIN, ARE CONTRACTS UNDER THE LAWS OF THE COMMONWEALTH
OF MASSACHUSETTS AND SHALL FOR ALL PURPOSES BE CONSTRUED IN ACCORDANCE WITH AND
GOVERNED BY THE LAWS OF SUCH STATE (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS
OR CHOICE OF LAW). THE BORROWER AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF
THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS
OF THE COMMONWEALTH OF MASSACHUSETTS OR ANY FEDERAL COURT SITTING THEREIN AND
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<PAGE> 81
CONSENTS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURT AND THE SERVICE OF
PROCESS IN ANY SUCH SUIT BEING MADE UPON THE BORROWER BY MAIL AT THE ADDRESS
SPECIFIED IN Section 19. THE BORROWER HEREBY WAIVES ANY OBJECTION THAT IT MAY
NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH SUIT OR ANY SUCH COURT OR THAT
SUCH SUIT IS BROUGHT IN AN INCONVENIENT COURT.
Section 22. HEADINGS.
The captions in this Agreement are for convenience of reference only
and shall not define or limit the provisions hereof.
Section 23. COUNTERPARTS.
This Agreement and any amendment hereof may be executed in several
counterparts and by each party on a separate counterpart, each of which when so
executed and delivered shall be an original, and all of which together shall
constitute one instrument. In proving this Agreement it shall not be necessary
to produce or account for more than one such counterpart signed by the party
against whom enforcement is sought.
Section 24. ENTIRE AGREEMENT, ETC.
The Loan Documents and any other documents executed in connection
herewith or therewith express the entire understanding of the parties with
respect to the transactions contemplated hereby. Neither this Agreement nor
any term hereof may be changed, waived, discharged or terminated, except as
provided in Section 27.
Section 25. WAIVER OF JURY TRIAL AND CERTAIN DAMAGE CLAIMS.
EACH OF THE BORROWER, THE AGENT AND THE BANKS HEREBY WAIVES ITS RIGHT
TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE
IN CONNECTION WITH THIS AGREEMENT, ANY NOTE OR ANY OF THE OTHER LOAN DOCUMENTS,
ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THEREUNDER OR THE PERFORMANCE OF SUCH
RIGHTS AND OBLIGATIONS. EXCEPT TO THE EXTENT EXPRESSLY PROHIBITED BY LAW, THE
BORROWER HEREBY WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH
LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY
DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES. THE BORROWER (A)
CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY BANK OR THE AGENT
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH BANK OR THE AGENT WOULD NOT,
IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS AND (B)
ACKNOWLEDGES THAT THE AGENT AND THE BANKS HAVE BEEN INDUCED
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<PAGE> 82
TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS TO WHICH THEY ARE
PARTIES BY, AMONG OTHER THINGS, THE WAIVERS AND CERTIFICATIONS CONTAINED IN
THIS Section 25.
Section 26. DEALINGS WITH THE BORROWER.
The Banks and their affiliates may accept deposits from, extend credit
to and generally engage in any kind of banking, trust or other business with
the Borrower, its Subsidiaries, its Investment Partnerships or any of their
affiliates regardless of the capacity of the Bank hereunder.
Section 27. CONSENTS, AMENDMENTS, WAIVERS, ETC.
Except as otherwise expressly provided in this Agreement, any consent
or approval required or permitted by this Agreement may be given, and any term
of this Agreement or of any other instrument related hereto or mentioned herein
may be amended, and the performance or observance by the Borrower of any terms
of this Agreement or such other instrument or the continuance of any Default or
Event of Default may be waived (either generally or in a particular instance
and either retroactively or prospectively) with, but only with, the written
consent of the Majority Banks. Notwithstanding the foregoing, none of the
following may occur without the written consent of each Bank: a change in the
rate of interest on and the term of the Notes; except as provided in Section
18, a change in the amount of the Commitments of the Banks; a reduction or
waiver of the principal of any unpaid Loan or any interest thereon; a change in
the amount of any fee payable to a Bank hereunder; an extension of Maturity
Date; the release of the Borrower, the Guarantor, any Subsidiary which has
executed any of the Loan Documents except as otherwise provided herein; any
modification to require a Bank to fund a pro rata share of a request for an
advance of the Loans made by the Borrower other than based on its Commitment
Percentage; a change to this Section 27; any postponement of any date fixed for
any payment of principal of or interest on the Loan; any change in the manner
of distribution of any payments to the Banks or Agent; a change to the
provisions of Section 2.1 which provide that the Banks shall not be required to
make an advance of proceeds of the Loan following a Default or Event of Default
(provided that the foregoing shall not limit the ability of the Majority Banks
to waive a Default or Event of Default or agree to make an advance
notwithstanding such Default of Event of Default); or an amendment of the
definition of Majority Banks or of any requirement for consent by all of the
Banks. The amount of the Agent's fee payable for the Agent's account and the
provisions of Section 14 may not be amended without the written consent of the
Agent. The Borrower agrees to enter into such modifications or amendments of
this Agreement or the other Loan Documents as reasonably may be requested by
BankBoston in connection with the syndication by BankBoston of its Commitment,
provided that no such amendment or modification materially affects or increases
any of the obligations of the Borrower hereunder. No waiver shall extend to or
affect any obligation not expressly waived or impair any right consequent
thereon. No course of dealing or delay or omission on the part of the Agent or
any Bank in exercising any right shall operate as a waiver thereof or otherwise
be prejudicial thereto. No notice to or demand upon the Borrower shall entitle
the Borrower to other or further notice or demand in similar or other
circumstances.
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<PAGE> 83
Section 28. SEVERABILITY.
The provisions of this Agreement are severable, and if any one clause
or provision hereof shall be held invalid or unenforceable in whole or in part
in any jurisdiction, then such invalidity or unenforceability shall affect only
such clause or provision, or part thereof, in such jurisdiction, and shall not
in any manner affect such clause or provision in any other jurisdiction, or any
other clause or provision of this Agreement in any jurisdiction.
Section 29. NO UNWRITTEN AGREEMENTS.
THE WRITTEN LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.
Section 30. TIME OF THE ESSENCE.
Time is of the essence with respect to each and every covenant,
agreement and obligation of the Borrower under this Agreement and the other
Loan Documents.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 84
IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as a
sealed instrument the date first set forth above.
CRESCENT REAL ESTATE EQUITIES LIMITED
PARTNERSHIP, a Delaware limited
partnership, by its sole general
partner
By: Crescent Real Estate Equities,
Ltd., a Delaware corporation
By:
---------------------------
Name:
----------------------
Title:
---------------------
[CORPORATE SEAL]
[Signatures continued on next page]
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<PAGE> 85
BANKBOSTON, N.A., a national banking
association, formerly known as The
First National Bank of Boston,
individually and as Agent
By:
----------------------------
Its:
--------------------------
BankBoston, N.A.
115 Perimeter Center Place, N.E.
Suite 500
Atlanta, Georgia 30346
Attn: Dan Sullivan
Facsimile: 770/390-8434
and
BankBoston, N.A.
100 Federal Street
Boston, Massachusetts 02110
Attn: Real Estate Division
Facsimile: 617/434-7108
[Signatures continued on next page]
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<PAGE> 86
NATIONSBANK OF TEXAS, N.A.,
individually and as Documentation
Agent
By:
----------------------------
Its:
--------------------------
NationsBank of Texas, N.A.
901 Main Street
NationsBank Plaza
51st Floor
Dallas, Texas 75202
Attn: Real Estate Administration
Facsimile: 214/508-1571
[Signatures continued on next page]
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<PAGE> 87
BANKERS TRUST COMPANY, individually
and as Documentation Agent
By:
----------------------------
Its:
--------------------------
Bankers Trust Company
130 Liberty Street
25th Floor
New York, New York 10006
Attn: Alexander B. Johnson
Facsimile: 212/669-0752
[Signatures continued on next page]
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<PAGE> 88
FIRST AMERICAN BANK TEXAS, S.S.B.
By:
----------------------------
Its:
--------------------------
First American Bank Texas, S.S.B.
14651 Dallas Parkway
Suite 400
Dallas, Texas 75240
Attn: Jeff Schultz
Facsimile: 972/419-3308
[Signatures continued on next page]
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<PAGE> 89
COMERICA BANK-TEXAS
By:
----------------------------
Its:
--------------------------
Comerica Bank-Texas
1601 Elm Street
Thanksgiving Tower, 2nd Floor
Dallas, Texas 75201
Attn: Scott Gosslee
Facsimile: 214/979-8383
[Signatures continued on next page]
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<PAGE> 90
KREDIETBANK N.V.
By:
----------------------------
Its:
--------------------------
Kredietbank N.V.
Suite 1750
1349 West Peachtree Street
Atlanta, Georgia 30309
Attn: Mike Sawicki
Facsimile: 404/876-3212
[Signatures continued on next page]
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<PAGE> 91
TEXAS COMMERCE BANK NATIONAL
ASSOCIATION
By:
----------------------------
Its:
--------------------------
Texas Commerce Bank National
Association
2200 Ross Avenue
7th Floor
Dallas, Texas 75201
Attn: Randy Lieberman
Facsimile: 214/965-2290
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<PAGE> 92
THE BANK OF NOVA SCOTIA, ACTING
THROUGH ITS SAN FRANCISCO AGENCY
By:
----------------------------
Its:
--------------------------
The Bank of Nova Scotia,
Acting Through Its San Francisco Agency
500 California Street
Suite 2100
San Francisco, California 94119
Attn: Paul Stiplosek
Facsimile: 415/397-0791
[Signatures continued on next page]
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<PAGE> 93
SOCIETE GENERALE, SOUTHWEST AGENCY
By:
----------------------------
Its:
--------------------------
Societe Generale,
Southwest Agency
2001 Ross Avenue
Suite 4900
Dallas, Texas 75201
Attn: Jeff Etter
Facsimile: 214/979-2727
[Signatures continued on next page]
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<PAGE> 94
COMMERZBANK AG, ATLANTA AGENCY
By:
----------------------------
Its:
--------------------------
CommerzBank AG,
Atlanta Agency
1230 Peachtree Street, N.E.
Suite 3500
Atlanta, Georgia 30309
Attn Mark Wortmann
Facsimile: 404/888-6539
[Signatures continued on next page]
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<PAGE> 95
GUARANTY FEDERAL BANK, F.S.B.
By:
----------------------------
Its:
--------------------------
Guaranty Federal Bank, F.S.B.
8333 Douglas Avenue
Dallas, Texas 75225
Attn: Lesa Balsley
Facsimile: 214/360-8910
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<PAGE> 96
DRESDNER BANK AG, NEW YORK AND GRAND
CAYMAN BRANCHES
By:
----------------------------
Its:
--------------------------
Dresdner Bank AG, New York and
Grand Cayman Branches
75 Wall Street
New York, New York 10005
Attn: Michael Seton
Facsimile: 212/429-2781
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<PAGE> 97
PACIFIC LIFE INSURANCE COMPANY
By:
-------------------------------
Its: Assistant Vice President
Attest:
----------------------------
Its: Assistant Secretary
Pacific Life Insurance Company
700 Newport Center Drive
Newport Beach, California 92660
Attn: Marc Ley
Facsimile: 714/721-5174
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<PAGE> 98
THE SUMITOMO BANK, LIMITED
By:
----------------------------
Its:
--------------------------
The Sumitomo Bank, Limited
277 Park Avenue, 6th Floor
New York, New York 10172
Attn: Anthony Mugno
Facsimile: 212/224-4887
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<PAGE> 99
EXHIBIT A
FORM NOTE
$______________ December __, 1997
FOR VALUE RECEIVED, the undersigned CRESCENT REAL ESTATE EQUITIES
LIMITED PARTNERSHIP, a Delaware limited partnership, hereby promises to pay to
______________________ or order, in accordance with the terms of that certain
Fourth Amended and Restated Revolving Credit Agreement dated December 19, 1997
(the "Credit Agreement"), as from time to time in effect, among the
undersigned, BankBoston, N.A., for itself and as Agent, and such other Banks as
may be from time to time named therein, to the extent not sooner paid, on or
before the Maturity Date, the principal sum of ___________________________
DOLLARS ($___________), or such amount as may be advanced by the payee hereof
under the Credit Agreement with daily interest from the date hereof, computed
as provided in the Credit Agreement, on the principal amount hereof from time
to time unpaid, at a rate per annum on each portion of the principal amount
which shall at all times be equal to the rate of interest applicable to such
portion in accordance with the Credit Agreement, and with interest on overdue
principal and, to the extent permitted by applicable law, on overdue
installments of interest and late charges at the rates provided in the Credit
Agreement. Interest shall be payable on the dates specified in the Credit
Agreement, except that all accrued interest shall be paid at the stated or
accelerated maturity hereof or upon the prepayment in full hereof. Capitalized
terms used herein and not otherwise defined herein shall have the meanings set
forth in the Credit Agreement.
Payments hereunder shall be made to BankBoston, N.A., as Agent for the
payee hereof, 100 Federal Street, Boston, Massachusetts 02110.
This Note is one of one or more Notes evidencing borrowings under and
is entitled to the benefits and subject to the provisions of the Credit
Agreement. The principal of this Note may be due and payable in whole or in
part prior to the maturity date stated above and is subject to mandatory
prepayment in the amounts and under the circumstances set forth in the Credit
Agreement, and may be prepaid in whole or from time to time in part, all as set
forth in the Credit Agreement.
Notwithstanding anything in this Note to the contrary, all agreements
between the Borrower and the Banks and the Agent, whether now existing or
hereafter arising and whether written or oral, are hereby limited so that in no
contingency, whether by reason of acceleration of the maturity of any of the
Obligations or otherwise, shall the interest contracted for, charged or
received by the Banks exceed the maximum amount permissible under applicable
law. If, from any circumstance whatsoever, interest would otherwise be payable
to the Banks in excess of the maximum lawful amount, the interest payable to
the Banks shall be reduced to the maximum amount permitted under applicable
law; and if from any circumstance the Banks shall ever
<PAGE> 100
receive anything of value deemed interest by applicable law in excess of the
maximum lawful amount, an amount equal to any excessive interest shall be
applied to the reduction of the principal balance of the Obligations and to the
payment of interest or, if such excessive interest exceeds the unpaid balance
of principal of the Obligations, such excess shall be refunded to the Borrower.
All interest paid or agreed to be paid to the Banks shall, to the extent
permitted by applicable law, be amortized, prorated, allocated and spread
throughout the full period until payment in full of the principal of the
Obligations (including the period of any renewal or extension thereof) so that
the interest thereon for such full period shall not exceed the maximum amount
permitted by applicable law. This paragraph shall control all agreements
between the Borrower and the Banks and the Agent.
In case an Event of Default shall occur, the entire principal amount
of this Note may become or be declared due and payable in the manner and with
the effect provided in said Credit Agreement.
This Note shall be governed by and construed in accordance with the
laws of the Commonwealth of Massachusetts (without giving effect to the
conflict of laws rules of any jurisdiction).
The undersigned maker and all guarantors and endorsers, hereby waive
presentment, demand, notice, protest, notice of intention to accelerate the
indebtedness evidenced hereby, notice of acceleration of the indebtedness
evidenced hereby and all other demands and notices in connection with the
delivery, acceptance, performance and enforcement of this Note, except as
specifically otherwise provided in the Credit Agreement, and assent to
extensions of time of payment or forbearance or other indulgence without
notice.
This Note is a note executed in amendment and restatement in part of
the "Notes" as defined in the Amended Credit Agreement.
IN WITNESS WHEREOF the undersigned has by its duly authorized
officers, executed this Note under seal as of the day and year first above
written.
CRESCENT REAL ESTATE EQUITIES LIMITED
PARTNERSHIP, a Delaware limited
partnership, by its sole general
partner
By: Crescent Real Estate Equities,
Ltd., a Delaware corporation
By:
----------------------------
Name:
-----------------------
Title:
----------------------
[CORPORATE SEAL]
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<PAGE> 101
EXHIBIT B
FORM OF REQUEST FOR LOAN
BankBoston, N.A.,
for itself and as Agent
115 Perimeter Center Place, N.E.
Suite 500
Atlanta, Georgia 30346
Attn: Dan Sullivan
Ladies and Gentlemen:
Pursuant to the provisions of Section 2.6 of the Fourth Amended and
Restated Revolving Credit Agreement dated December 19, 1997, as from time to
time in effect (the "Credit Agreement"), among Crescent Real Estate Equities
Limited Partnership (the "Borrower"), BankBoston, N.A., for itself and as
Agent, and the other Banks from time to time party thereto, the Borrower hereby
requests and certifies as follows:
1. Loan. The Borrower hereby requests a Loan under Section 2.1
of the Credit Agreement:
Principal Amount: $
Type (Eurodollar, Base Rate):
Drawdown Date: , 19
Interest Period:
to be wire transferred to the following account:
-------------------------------------------
-------------------------------------------
-------------------------------------------
2. Use of Proceeds. Such Loan shall be used for the following
purposes permitted by Section 2.9 of the Credit Agreement:
[Describe]
<PAGE> 102
3. No Default. The undersigned chief financial or chief accounting
officer of the General Partner certifies that the Borrower is and will be in
compliance with all covenants under the Loan Documents after giving effect to
the making of the Loan requested hereby. Attached to this Request for Loan is
a Compliance Certificate and a Guarantor's Compliance Certificate prepared
using the financial statements of the Borrower and Crescent Guarantor most
recently provided or required to be provided under Section 6.4 or Section 7.4
of the Credit Agreement or the Guaranty, as applicable, adjusted in the best
good-faith estimate of the Borrower and Crescent Guarantor to give effect to
the making of the Loan requested hereby.
4. Representations True. Each of the representations and
warranties made by or on behalf of the Borrower, the General Partner, the
Guarantor and the Borrower's Subsidiaries and Investment Partnerships contained
in the Credit Agreement, in the other Loan Documents or in any document or
instrument delivered pursuant to or in connection with the Credit Agreement was
true as of the date as of which it was made and shall also be true at and as of
the Drawdown Date for the Loan requested hereby, with the same effect as if
made at and as of such Drawdown Date (except to the extent of changes resulting
from transactions contemplated or permitted by the Credit Agreement and the
other Loan Documents and changes occurring in the ordinary course of business
that singly or in the aggregate are not materially adverse, and except to the
extent that such representations and warranties relate expressly to an earlier
date, such as the representations in Section 6.4) and no Default or Event of
Default has occurred and is continuing.
5. Other Conditions. All other conditions to the making of the
Loan requested hereby set forth in Section 11 of the Credit Agreement have been
satisfied.
6. Drawdown Date. Except to the extent, if any, specified by
notice actually received by the Agent prior to the Drawdown Date specified
above, the foregoing representations and warranties shall be deemed to have
been made by the Borrower on and as of such Drawdown Date.
7. Definitions. Terms defined in the Credit Agreement are used
herein with the meanings so defined.
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<PAGE> 103
IN WITNESS WHEREOF, I have hereunto set my hand this _____ day of
_______________, 199___.
CRESCENT REAL ESTATE EQUITIES LIMITED
PARTNERSHIP, a Delaware limited
partnership, by its sole general
partner
By: Crescent Real Estate Equities,
Ltd., a Delaware corporation
By:
---------------------------
Chief Financial or
Chief Accounting Officer
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<PAGE> 104
EXHIBIT C
FORM OF
COMPLIANCE CERTIFICATE
BankBoston, N.A.,
for itself and as Agent
115 Perimeter Center Place, N.E.
Suite 500
Atlanta, Georgia 30346
Attn: Dan Sullivan
Ladies and Gentlemen:
Reference is made to the Fourth Amended and Restated Revolving Credit
Agreement dated December 19, 1997 (the "Credit Agreement") by and among
Crescent Real Estate Equities Limited Partnership (the "Borrower"), BankBoston,
N.A., for itself and as Agent, and the other Banks from time to time party
thereto. Terms defined in the Credit Agreement and not otherwise defined
herein are used herein as defined in the Credit Agreement.
Pursuant to the Credit Agreement, the Borrower is furnishing to you
herewith (or has most recently furnished to you) the financial statements of
the Borrower and its Subsidiaries for the fiscal period ended _______________
(the "Balance Sheet Date"). Such financial statements have been prepared in
accordance with generally accepted accounting principles and present fairly the
financial position of the Borrower and the Subsidiaries covered thereby at the
date thereof and the results of their operations for the periods covered
thereby, subject in the case of interim statements only to normal year-end
audit adjustments.
This certificate is submitted in compliance with requirements of
Section 2.6(iii), Section 7.4(d), Section 7.4(f), Section 7.5(d), Section
8.1(f), Section 8.1(i), Section 8.1(k), Section 8.8, Section 10.11 or Section
11.6(b) of the Credit Agreement. IF THIS CERTIFICATE IS PROVIDED UNDER A
PROVISION OTHER THAN Section 7.4(D), THE CALCULATIONS PROVIDED BELOW ARE MADE
USING THE FINANCIAL STATEMENTS OF THE BORROWER AND ITS SUBSIDIARIES AS OF THE
BALANCE SHEET DATE ADJUSTED IN THE BEST GOOD-FAITH ESTIMATE OF THE BORROWER TO
GIVE EFFECT TO THE MAKING OF A LOAN, ACQUISITION OR DISPOSITION OF PROPERTY OR
OTHER EVENT THAT OCCASIONS THE PREPARATION OF THIS CERTIFICATE; AND THE NATURE
OF SUCH EVENT AND THE BORROWER'S ESTIMATE OF ITS EFFECTS ARE SET FORTH IN
REASONABLE DETAIL IN AN ATTACHMENT HERETO. The undersigned officer of the
General Partner is its chief financial or chief accounting officer.
The undersigned officer has caused the provisions of the Credit
Agreement to be reviewed and has no knowledge of any Default or Event of
Default. (Note: If the signer does have knowledge of any Default or Event of
Default, the form of certificate should be revised to specify the Default or
Event of Default, the nature thereof, the actions taken, being taken or
<PAGE> 105
proposed to be taken by the Borrower with respect thereto in order to cure such
Default or Event of Default and the time period required to cure such Default
or Event of Default.]
The Borrower is providing the following information to demonstrate
compliance as of the date hereof with the following covenants:
1. Section 7.5(d). Transfers and Encumbrances.
Describe sales, encumbrances, refinances
and other transfers referred to in
Section 7.5(d).
NOTE: Assets may not be refinanced unless
proceeds equal or exceed 55% of cost (40% for hotel/resort
assets) (see Section 8.11)
2. Section 8.1(i). Recourse Indebtedness.
A. Amount of recourse Indebtedness
(other than the Loans) pursuant to Section 8.1(A) $
-------
Amount may not exceed $100,000,000.00
B. Amount of recourse Indebtedness
(other than Loans) that are bridge loans
pursuant to Section 8.1(i)(B) $
-------
Amount may not exceed $350,000,000.00
3. Section 8.7. Distributions.
A. Amount of Distributions for previous
4 quarters:
Quarter ending $
---------- --------------
Quarter ending $
---------- --------------
Quarter ending $
---------- --------------
Quarter ending $
---------- --------------
Total Distributions for previous 4 quarters $
-------
-2-
<PAGE> 106
B. Funds from Operations for previous
4 quarters:
Quarter ending $
---------- --------------
Quarter ending $
---------- --------------
Quarter ending $
---------- --------------
Quarter ending $
---------- --------------
Total Funds from Operations for previous
4 quarters $
-------
C. Funds Available for Distribution for previous
4 quarters:
Quarter ending $
---------- --------------
Quarter ending $
---------- --------------
Quarter ending $
---------- --------------
Quarter ending $
---------- --------------
Total Funds Available for Distribution
for previous 4 quarters $
-------
D. A is ____% of B
(A may not exceed 90% of B)
E. A is ____% of C
(A may not exceed 100% of C)
4. Section 8.12(b). Variable Rate Debt.
A. Total Indebtedness (excluding
Indebtedness described in Section 8.1(b)-(e)) $
-------
B. Principal Balance of Indebtedness
payable with respect to a Variable Interest
Rate and that has a maturity date of greater
than 12 months $
-------
-3-
<PAGE> 107
C. Principal Amount of Indebtedness described in
Item 5.B that is not hedged or capped as
provided in Section 8.12(b) $
-------
D. C is ____% of A
(C may not exceed 30% of A)
5. Section 8.14. Subsidiaries.
Describe new Subsidiaries established by Borrower
and compliance with Section 8.14.
6. Section 9.1. Liabilities to Worth Ratio.
(For changes to the Balance Sheet since the last statement or advance,
use the attached adjustment form.)
<TABLE>
<S> <C>
A. Consolidated Total Liabilities
per balance sheet $
-------
B. Consolidated Tangible Net Worth
Consolidated Total Assets per
balance sheet $
-------
One-time market adjustment $
-------
Plus real estate depreciation since date of IPO $
-------
Consolidated Total Assets after
one-time market adjustment and adjustment for
depreciation $
-------
Minus Consolidated Total
Liabilities per balance sheet ($ )
-------
Minus aggregate book value of
intangible assets ($ )
-------
Minus asset write-up amounts,
if any ($ )
-------
Minus minority interests applicable to third parties ($ )
-------
Total $
-------
</TABLE>
-4-
<PAGE> 108
<TABLE>
<S> <C> <C>
C. Ratio of A to B
--------
Ratio of A to total of B may not exceed 1 to 1
7. Section 9.2. Debt Service Coverage.
A. Consolidated Cash Flow
Net Income for 4 quarters ending __________ $
--------
Plus Depreciation and amortization $
--------
Plus Interest expense $
--------
Plus Extraordinary or non-recurring
losses $
--------
Minus extraordinary or non-
recurring gains ($ )
--------
Total for most recent 4 quarters $
--------
B. Debt Service for four prior
quarters
Principal Paid $
--------
Interest Paid $
--------
Total
C. Ratio of A to B
(expressed as a percentage) %
--------
A must equal or exceed 250% of total of B
8. Section 9.4. Tangible Net Worth.
(For changes to the Balance Sheet since the last statement or advance,
use attached adjustment form.)
A. Consolidated Tangible Net Worth
(from Item 7.B above) $
--------
</TABLE>
-5-
<PAGE> 109
Consolidated Tangible Net Worth may
not be less than $1,000,000,000.00.
9. Section 9.5 Secured Indebtedness.
A. Secured Indebtedness $
--------
B. Consolidated Total Assets
Consolidated Total Assets per balance sheet $
--------
One-time market adjustment $
--------
Plus real estate depreciation since date of IPO $
--------
Consolidated Total Assets,
after one-time market adjustment
and adjustment for real estate depreciation
since date of IPO $
--------
C. Ratio of A to B
--------
Ratio of A to B may not exceed 0.40 to 1
10. Section 9.6. Fixed Charge Coverage.
A. Consolidated Cash Flow for previous 4 quarters
(from Item 8.A above) $
--------
B. Fixed Charges
Debt Service for 4 quarters ending
$
-------------
Plus Non-Incremental Revenue
Generating Capital Expenditures $
-------------
Plus/Minus Rent Adjustments $
-------------
(Note: A negative Rent Adjustment shown on the
Borrower's financial statements shall
be shown as a positive number here)
Total for most recent 4 quarters $
-------------
-6-
<PAGE> 110
C. Ratio of A to total of B (expressed as a percentage) %
-----
A must equal or exceed 200% of total of B
11. Section 9.7. Fixed Charge and Preferred Distribution Coverage
A. Consolidated Cash Flow for previous 4 quarters
(from Item 8.A above) $
------
B. Fixed Charges for previous 4 quarters
(from Item 10.B above) $
------
C. Preferred Distributions for previous 4 quarters $
------
C. Ratio of A to sum of B+C
(expressed as a percentage) %
-----
A must equal or exceed 150% of the sum of B+C.
12. Section 9.8. Total Liabilities to Consolidated Cash Flow
A. Consolidated Total Liabilities per balance sheet $
------
B. Consolidated Cash Flow
(from Item 8.A above adjusted to annualize assets
owned for partial period) $
------
C. Ratio of A to B
------
Such ratio shall not exceed 5 to 1
13. Section 9.9. Real Estate Assets.
A. Modified Book Asset Value of hotels/resorts
$
-------
-7-
<PAGE> 111
B. Modified Book Asset Value of behavioral healthcare
facilities $
-------
C. Modified Book Asset Value of Class A Office
Buildings, retail properties and industrial and
warehouse properties $
-------
D. Modified Book Asset Value of non-income
producing land assets or
mortgages secured by non-income
producing land valued at cost $
-------
E. Consolidated Total Asset Value after one-time
market adjustment and adjustment for real estate
depreciation since date of IPO
(from Item 10.B above) $
-------
Total $
-------
F. Ratio of A to E
(may not exceed .20 to 1) -------
G. Ratio of B to E
(may not exceed .15 to 1) -------
H. Ratio of C to E
(may not be less than .55 to 1) -------
I. Ratio of D to E
(may not exceed .10 to 1) -------
14. Section 9.11. CBHS.
A. Consolidated Cash Flow for CBHS for
previous 4 quarters $
-------
B. Rent Payments for previous 4 quarters $
-------
C. Ratio of A to B (expressed as percentage) $
(A must equal or exceed 200% of B) -------
D. Required Behavioral Healthcare Facilities Capital
Expenditures for previous 4 quarters $
-------
E. Ratio of A to sum of B and D (expressed
as percentage)
(A must equal or exceed 175% of B plus D) -------
-8-
<PAGE> 112
15. Section 9.12. Unencumbered Operating Properties.
A. Asset Value of Unencumbered Operating
Properties (Attached Schedule of
Unencumbered Operating Properties and
Asset Value of each) $
-------
B. Unsecured Indebtedness of Borrower $
-------
C. A is ___% of B
(A may not be less than 150% of B)
IN WITNESS WHEREOF, I have hereunto set my hand this _____ day of
____________, 199___.
CRESCENT REAL ESTATE EQUITIES LIMITED
PARTNERSHIP, a Delaware limited
partnership, by its sole general partner
By: Crescent Real Estate Equities,
Ltd., a Delaware corporation
By:
-----------------------------
Chief Financial or
Chief Accounting Officer
-9-
<PAGE> 113
SCHEDULE 1
BANKS AND COMMITMENTS
<TABLE>
<CAPTION>
Name and Address Commitment Commitment Percentage
- ---------------- ---------- ---------------------
<S> <C> <C>
BankBoston, N.A. $130,000,000.00 23.64%
100 Federal Street
Boston, Massachusetts 02110
Attn: Real Estate Division
Eurodollar Lending Office
same as above
Bankers Trust Company $50,000,000.00 9.09%
130 Liberty Street, 25th Floor
New York, New York 10006
Attn: David Genovese
Eurodollar Lending Office
same as above
Guaranty Federal Bank, F.S.B. $42,500,000.00 7.73%
8333 Douglas Avenue
Dallas, Texas 75225
Attn: Lesa B. Balsley
Eurodollar Lending Office
same as above
NationsBank of Texas, N.A. $50,000,000.00 9.09%
901 Main Street
NationsBank Plaza
51st Floor
Dallas, Texas 75202
Attn: Real Estate Administration
Eurodollar Lending Office
same as above
Comerica Bank-Texas $30,000,000.00 5.45%
1601 Elm Street
Thanksgiving Tower, 2nd Floor
Dallas, Texas 75201
Attn: Scott Gosslee
Eurodollar Lending Office
same as above
</TABLE>
<PAGE> 114
<TABLE>
<S> <C> <C>
Societe Generale, Southwest Agency $40,000,000.00 7.27%
2001 Ross Avenue
Suite 4900
Dallas, Texas 75201
Attn: Jeff Etter
Eurodollar Lending Office
same as above
The Bank of Nova Scotia acting through its $40,000,000.00 7.27%
San Francisco Agency
600 Peachtree Street, N.E.
Suite 2700
Atlanta, Georgia 30308
Attn: M. Velker
Eurodollar Lending Office
same as above
Texas Commerce Bank National $25,000,000.00 4.55%
Association
2200 Ross Avenue
7th Floor
Dallas, Texas 75201
Attn: Randy Lieberman
Eurodollar Lending Office
same as above
Commerzbank AG, Atlanta Agency $22,500,000.00 4.09%
1230 Peachtree Street, N.E.
Atlanta, Georgia 30309
Attn: Mark Wortman
Eurodollar Lending Office
same as above
First American Bank Texas, S.S.B. $10,000,000.00 1.82%
14651 Dallas Parkway
Suite 400
Dallas, Texas 75240
Attn: Jeff Schultz
Eurodollar Lending Office
same as above
Kredietbank N.V. $30,000,000.00 5.45%
2 Midtown Plaza
Suite 1750
1349 West Peachtree Street
Atlanta, Georgia 30309
Attn: Mike Sawicki
</TABLE>
<PAGE> 115
<TABLE>
<S> <C> <C>
Eurodollar Lending Office
same as above
Dresdner Bank AG, New York and $35,000,000.00 6.36%
Grand Cayman Branches
75 Wall Street
New York, New York 10005
Attn: Michael Seton
Eurodollar Lending Office
same as above
Pacific Life Insurance Company $30,000,000.00 5.45%
700 Newport Center Drive
Newport Beach, California 92660
Attn: Marc Ley
Eurodollar Lending Office
same as above
The Sumitomo Bank, Limited $15,000,000.00 2.73%
277 Park Ave., 6th Floor
New York, New York 10172
Attn: Anthony Mugno
Eurodollar Lending Office
same as above
--------------- -----
$550,000,000.00 100.0%
Percentages may not equal 100% due to rounding.
</TABLE>
<PAGE> 116
SCHEDULE 6.3
TITLE TO PROPERTIES
NO CHANGES TO REFLECT
<PAGE> 117
SCHEDULE 6.7
LITIGATION
<PAGE> 118
SCHEDULE 6.18(a)
SUBSIDIARIES OF THE BORROWER
<PAGE> 119
SCHEDULE 6.18(b)
INVESTMENT PARTNERSHIPS OF THE BORROWER
<PAGE> 120
SCHEDULE 8.1(h)
EXISTING INDEBTEDNESS
<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 report dated January 17, 1997
included in Crescent Real Estate Equities Company's Form 10-K for the year
ended December 31, 1996 and of our reports dated February 14, 1997 on Trammell
Crow Center, March 18, 1997 on Carter-Crowley Operating Real Estate Portfolio,
July 23, 1997 on Fountain Place, August 21, 1997 on Miami Center, August 22,
1997 on Houston Center, October 15, 1997 on Bank One Center, and December 4,
1997 on Energy Centre and to all references to our Firm included in this
Registration Statement.
/s/ ARTHUR ANDERSEN LLP
Dallas, Texas,
February 10, 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
February 5, 1998
<PAGE> 1
EXHIBIT 23.03
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 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 this Registration Statement.
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
February 10, 1998
