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Filed Pursuant to Rule 424(b)(3)
Registration Number 333-25223
PROSPECTUS
CRESCENT OPERATING, INC.
COMMON STOCK
PREFERRED SHARE PURCHASE RIGHTS
This Prospectus is being furnished to both the shareholders of Crescent
Real Estate Equities Company, a Texas real estate investment trust ("Crescent"),
and the limited partners (the "Limited Partners") of Crescent Real Estate
Equities Limited Partnership, a Delaware limited partnership ("Crescent
Operating Partnership"), in connection with the distribution (the
"Distribution") by Crescent Operating Partnership and Crescent of all of the
outstanding shares of common stock, par value $.01 per share (the "Crescent
Operating Common Stock"), of Crescent Operating, Inc., a Delaware corporation
("Crescent Operating" or the "Company").
SEE "RISK FACTORS" BEGINNING ON PAGE 11 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS RELEVANT TO THE OWNERSHIP OF CRESCENT OPERATING COMMON STOCK.
It is expected that the Distribution will be made on June 12, 1997. For
Limited Partners, the Distribution will be made on the basis of one share of
Crescent Operating Common Stock for every 5 units of limited partner interest
(the "Units") in Crescent Operating Partnership held on May 30, 1997 (the
"Partnership Record Date"), and for shareholders of Crescent, the Distribution
will be made on the basis of one share of Crescent Operating Common Stock for
every 10 common shares of beneficial interest, $.01 par value, of Crescent (the
"Crescent Common Shares") held on May 30, 1997 (the "Crescent Record Date" and,
together with the Partnership Record Date, the "Record Date"). No certificates
representing fractional shares of Crescent Operating will be issued in
connection with the Distribution. In lieu of fractional shares, the distribution
agent will pay to any holder who would be entitled to a fractional share of
Crescent Operating Common Stock an amount of cash (without interest) equal to
$.99 per share.
No payment need be made by, or will be accepted from, Crescent shareholders
or Limited Partners for the Crescent Operating Common Stock to be received by
them in the Distribution. Crescent shareholders will not be required to
surrender or exchange Crescent Common Shares, and Limited Partners will not be
required to surrender or exchange Units, in order to receive Crescent Operating
Common Stock. Each share of Crescent Operating Common Stock issued in the
Distribution will be accompanied by one Preferred Share Purchase Right.
There is currently no public market for Crescent Operating Common Stock.
Crescent Operating has applied for quotation of the Crescent Operating Common
Stock on the Nasdaq National Market and expects to apply for quotation of the
Crescent Operating Common Stock on the OTC Bulletin Board, although there is no
assurance that shares of Crescent Operating Common Stock will be approved for
listing on any national securities exchange, automated quotation system or
over-the-counter market.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION
OF AN OFFER TO BUY ANY SECURITIES. ANY SUCH OFFERING MAY ONLY BE MADE BY MEANS
OF A SEPARATE PROSPECTUS PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND
OTHERWISE IN COMPLIANCE WITH APPLICABLE LAW.
The date of this Prospectus is June 12, 1997.
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TABLE OF CONTENTS
<TABLE>
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Available Information....................................... 1
Summary..................................................... 2
The Distribution.......................................... 2
Crescent Operating........................................ 4
Summary Pro Forma Financial Data.......................... 9
Summary Selected Financial Data........................... 10
Risk Factors................................................ 11
Lack of Operating History................................. 11
Risks Associated with the Carter-Crowley Assets........... 11
Risks Associated with the CBHS Interest................... 11
Restrictions on Crescent Operating's Business and Future
Opportunities.......................................... 13
Dependence upon Crescent; Limited Resources for Growth
through New Opportunities.............................. 13
Potential Conflicts of Interest........................... 14
Risks Associated with Unrelated Investments and Ability to
Manage Unrelated Investments; Competition.............. 14
Limited Financial Resources; Obligations under Financing
Arrangements; Limited Future Funding Commitments; Need
for Future Capital..................................... 15
Absence of a Public Market for Crescent Operating Common
Stock.................................................. 15
Absence of Dividends on Crescent Operating Common Stock
Following the Distribution............................. 15
Reliance on Key Personnel................................. 16
Certain Antitakeover Provisions........................... 16
Federal Income Tax Risks.................................. 17
The Distribution............................................ 17
Background of and Reasons for the Distribution............ 17
Manner of Effecting the Distribution...................... 18
Federal Income Tax Consequences........................... 18
Listing and Trading of Crescent Operating Common Stock.... 22
Shares Available for Future Sale.......................... 22
Dividend Policy............................................. 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................. 23
Business.................................................... 27
Overview.................................................. 27
Strategy.................................................. 27
The Intercompany Agreement................................ 28
The Carter-Crowley Assets................................. 29
The CBHS Interest......................................... 30
Property.................................................. 38
Employees................................................. 38
Management.................................................. 39
Directors and Executive Officers of Crescent Operating.... 39
Committees of the Board of Directors...................... 40
Compensation of Directors................................. 41
Annual Meeting............................................ 41
Security Ownership of Certain Beneficial Owners and
Management After the Distribution...................... 41
Executive Compensation.................................... 42
Crescent Operating Stock Incentive Plan................... 43
Certain Transactions........................................ 44
Interests Relating to Crescent Operating Partnership...... 44
Crescent.................................................. 45
</TABLE>
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Interests Relating to Magellan............................ 45
Contract with Affiliate of Director....................... 46
Description of Crescent Operating Capital Stock............. 47
Authorized Capital Stock.................................. 47
Common Stock.............................................. 47
Preferred Stock........................................... 47
Series A Junior Preferred Stock........................... 48
Warrants.................................................. 49
Certain Antitakeover Provisions............................. 50
Staggered Board of Directors.............................. 50
Number of Directors; Removal; Filling Vacancies........... 50
No Stockholder Action by Written Consent; Special
Meetings............................................... 50
Advance Notice Provisions for Stockholder Nominations and
Stockholder Proposals.................................. 50
Relevant Factors To Be Considered by the Crescent
Operating Board........................................ 51
Amendment................................................. 51
Rights Plan............................................... 52
Delaware Business Combination Statute..................... 54
Control Share Acquisitions................................ 54
Liability of Directors and Officers; Indemnification...... 55
Experts..................................................... 56
Legal Matters............................................... 56
Index to Financial Statements............................... F-1
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ii
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AVAILABLE INFORMATION
Crescent Operating has filed with the Securities and Exchange Commission
(the "Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to Crescent Operating Common Stock and Preferred Share Purchase
Rights described herein. This Prospectus does not contain all of the information
set forth in the Registration Statement and the exhibits and schedules thereto.
For further information, reference is made hereby to the Registration Statement,
exhibits and schedules. Statements contained herein concerning any documents are
not necessarily complete and, in each instance, reference is made to the copies
of such documents filed as exhibits to the Registration Statement. Each such
statement is qualified in its entirety by such reference. Copies of these
documents may be inspected without charge at the principal office of the
Commission at 450 5th Street, N.W., Washington, D.C. 20549, and at the Regional
Offices of the Commission at 7 World Trade Center, Suite 1300, New York, New
York 10048, at Citicorp Center, Suite 1400, 500 West Madison Street, Chicago,
Illinois 60661, and at 5670 Wilshire Boulevard, Suite 1100, Los Angeles,
California 90036, and copies of all or any part thereof may be obtained from the
Commission upon payment of the charges prescribed by the Commission. Copies of
such material may also be obtained from the Commission's Web Site
(http://www.sec.gov).
Following the Distribution, Crescent Operating will be required to comply
with the reporting requirements of the Securities Exchange Act of 1934 (the
"Exchange Act") and will file annual, quarterly and other reports with the
Commission. The Company will also be subject to the proxy solicitation
requirements of the Exchange Act and, accordingly, will furnish audited
financial statements to its stockholders in connection with its annual meetings
of stockholders.
NO PERSON IS AUTHORIZED BY CRESCENT OR CRESCENT OPERATING TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED.
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SUMMARY
This summary is qualified by the more detailed information set forth
elsewhere in this Prospectus, which should be read in its entirety, including
the discussion of certain factors set forth under "Risk Factors." Unless the
context requires otherwise, reference to "Crescent" herein includes Crescent
Real Estate Equities Company; its predecessor, Crescent Real Estate Equities,
Inc.; and its direct and indirect subsidiaries, including Crescent Real Estate
Equities Limited Partnership (the "Crescent Operating Partnership"), Crescent
Real Estate Equities, Ltd. ("Crescent Ltd."), which is the general partner of
Crescent Operating Partnership, and the other subsidiaries of Crescent.
THE DISTRIBUTION
Distributing Companies Crescent Real Estate Equities Limited Partnership,
a Delaware limited partnership, and Crescent Real
Estate Equities Company, a Texas real estate
investment trust.
Shares to be Distributed Approximately 11,025,547 shares of Crescent
Operating Common Stock, representing all of the
outstanding shares of Crescent Operating Common
Stock (subject to reduction to the extent that cash
payments are made in lieu of the issuance of
fractional shares of Crescent Operating Common
Stock).
Distribution Ratio One share of Crescent Operating Common Stock for
every 10 Crescent Common Shares held on the Record
Date (as defined below), and one share of Crescent
Operating Common Stock for every 5 Units held on
the Record Date. The difference in the distribution
ratios reflects a two-for-one stock split with
respect to Crescent Common Shares, effective as of
March 26, 1997, for which there was not a
corresponding split of Units. No certificates
representing fractional shares of Crescent
Operating will be issued in connection with the
Distribution. In lieu of fractional shares, the
Distribution Agent (as defined below) will pay to
any holder who would be entitled to a fractional
share of Crescent Operating Common Stock an amount
of cash (without interest) equal to $.99 per share.
No payment need be made by, or will be accepted
from, Crescent shareholders or Limited Partners for
Crescent Operating Common Stock to be received by
them in the Distribution. Crescent shareholders
will not be required to surrender or exchange
Crescent Common Shares and Limited Partners will
not be required to surrender or exchange Units, in
order to receive Crescent Operating Common Stock.
See "The Distribution -- Manner of Effecting the
Distribution."
Federal Income Tax
Consequences For Crescent shareholders, the Distribution
generally should only result in additional taxable
income to the extent the value of the Crescent
Operating Common Stock distributed by Crescent
exceeds the basis of Crescent's share of the assets
contributed by Crescent Operating Partnership to
Crescent Operating. Management anticipates that the
amount of such income will be nominal. As a result,
management anticipates that, for a typical Crescent
shareholder, the result of the Distribution, as
compared to what would occur in the absence of the
Distribution, will be to increase the shareholder's
tax-free return of capital, but this result cannot
be assured. The Distribution will generally be
taxable to Limited Partners only if and to the
extent the value of the Crescent Operating Common
Stock distributed to them exceeds their respective
bases in their partnership interests. See "The
Distribution -- Federal Income Tax Consequences."
Risk Factors Shareholders and Limited Partners should consider
certain factors discussed under "Risk Factors,"
including risks associated with the assets that
Crescent Operating will acquire and own, Crescent
Operating's lack
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of operating history, potential conflicts of
interest and Crescent Operating's dependence on
Crescent.
Background of and Reasons
for the Distribution Crescent Operating has been formed to become a
lessee and operator of various assets and to
perform an agreement between Crescent Operating and
Crescent Operating Partnership (the "Intercompany
Agreement") pursuant to which Crescent Operating
and Crescent Operating Partnership have agreed to
provide each other with rights to participate in
certain transactions. In particular, Crescent
Operating will have the right to become the lessee
under a "master" lease arrangement of any property
owned or subsequently acquired by Crescent
Operating Partnership if Crescent Operating
Partnership determines that, consistent with the
status of Crescent as a real estate investment
trust for federal income tax purposes (a "REIT"),
Crescent Operating Partnership is required to enter
into such a lease and certain other conditions are
met. For example, Crescent generally would be
required, consistent with its status as a REIT, to
enter into a master lease arrangement as to hotels
and behavioral healthcare facilities. In general, a
master lease arrangement is an arrangement pursuant
to which an entire property or project (or a group
of related properties or projects) is leased to a
single lessee.
The formation of Crescent Operating and the
execution of the Intercompany Agreement will permit
stockholders of Crescent Operating who also own
Crescent Common Shares to participate in the
benefits both of the real estate operations of
Crescent (including ownership of real property) and
of the lease of certain of such assets and the
ownership of other non-real estate assets. No such
opportunities to benefit from the lease of any
assets or the ownership of any non-real estate
assets other than those identified herein have been
identified at this time (see "-- Crescent
Operating," below), and there can be no assurance
that any such opportunities will arise in the
future. In the case of opportunities for Crescent
Operating to become the lessee of any assets under
a master lease arrangement, the Intercompany
Agreement provides that Crescent Operating
Partnership must provide Crescent Operating with
written notice of the lessee opportunity. During
the 30 days following such notice, Crescent
Operating has a right of first refusal with regard
to the offer to become a lessee and the right to
negotiate with Crescent Operating Partnership on an
exclusive basis regarding the terms and conditions
of the lease. If a mutually satisfactory agreement
cannot be reached within the 30-day period,
Crescent Operating Partnership may offer the
opportunity to others for a period of one year
thereafter. Any investment opportunity other than a
lessee opportunity may be offered by Crescent
Operating Partnership to Crescent Operating in the
discretion of Crescent Operating Partnership, upon
such notice and other terms as Crescent Operating
Partnership may determine. See "Business -- The
Intercompany Agreement."
Richard E. Rainwater, John C. Goff and Gerald W.
Haddock will serve as Chairman of the Board, Vice
Chairman and President and Chief Executive Officer,
respectively, of both Crescent and Crescent
Operating. Messrs. Rainwater, Goff and Haddock all
are limited partners in Crescent Operating
Partnership and shareholders of Crescent, and Mr.
Haddock also serves as President and Chief
Executive Officer and the sole director of Crescent
Ltd., which is the general partner of Crescent
Operating Partnership. Messrs. Rainwater, Goff and
Haddock therefore will be subject to conflicts of
interest in connection with the business
relationships, and the allocation of investment
opportunities, between Crescent Operating, on the
one hand, and Crescent and Crescent Operating
Partnership, on the other.
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Crescent Operating is intended to function
principally as an operating company, in contrast to
Crescent's principal focus on investment in real
estate assets. The operating activities and
operating assets made available to Crescent
Operating by Crescent are designed to provide
Crescent's existing shareholders with the long-term
benefits of ownership in an entity devoted to the
conduct of operating business activities in
addition to their principal investment interest in
Crescent itself. A small number of REITs, operating
under tax provisions that no longer are available
to newly formed REITs, have shares that are
"paired" or "stapled" with shares of a related
operating company, and therefore cannot be owned or
transferred independently. The shares of Crescent
and Crescent Operating are not, and will not be,
paired or stapled in any manner. Because the shares
of Crescent and Crescent Operating can be owned and
transferred separately and independently of each
other, Crescent and Crescent Operating will not
provide a paired investment on an ongoing basis to
investors who purchase shares of only one company
or the other.
The Distribution of Crescent Operating Common Stock
will provide Crescent shareholders and the Limited
Partners as of the Record Date with the ability to
benefit from both the real estate operations of
Crescent and the business operations of Crescent
Operating.
Distribution Agent BankBoston, N.A. will be the Distribution Agent for
the Distribution.
Record Date May 30, 1997 (the "Record Date").
Distribution Effective Date June 12, 1997 (the "Distribution Effective Date").
Commencing on or about the Distribution Effective
Date, the Distribution Agent will begin mailing
account statements reflecting ownership of Crescent
Operating Common Stock to holders of Crescent
Common Shares and Units as of the Record Date.
Crescent shareholders and Limited Partners will not
be required to make any payment or to take any
other action to receive the Crescent Operating
Common Stock to which they are entitled in the
Distribution. See "The Distribution -- Manner of
Effecting the Distribution."
Trading Market There is currently no public market for Crescent
Operating Common Stock. Crescent Operating has
applied for quotation of the Crescent Operating
Common Stock on the Nasdaq National Market and
expects to apply for quotation of the Crescent
Operating Common Stock on the OTC Bulletin Board,
although there is no assurance that the Crescent
Operating Common Stock will be approved for listing
on any national securities exchange, automated
quotation system or over-the-counter market or that
a public market will develop. See "Risk Factors --
Absence of a Public Market for Crescent Operating
Common Stock" and "The Distribution -- Listing and
Trading of Crescent Operating Common Stock."
CRESCENT OPERATING
Crescent Operating Crescent Operating has been formed to become a
lessee and operator of various types of assets,
including real property owned by Crescent and
others, and to perform the Intercompany Agreement
between Crescent Operating and Crescent Operating
Partnership. In connection with the formation and
capitalization of Crescent Operating, Crescent
Operating Partnership contributed approximately
$14.1 million in cash and agreed to advance to
Crescent Operating an aggregate of approximately
$35.9 million in the form of loans (approximately
$15.3 million of which was funded on May 8, 1997),
which Crescent Operating has used or
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expects to use to purchase the following assets
(collectively, the "Assets"):
- assets acquired from Carter-Crowley Properties,
Inc., an unaffiliated entity, ("Carter-Crowley"),
consisting of (i) Moody-Day, Inc. ("Moody-Day"),
a construction equipment sales, leasing and
servicing company acquired for approximately $4.1
million; and (ii) a 1.21% limited partner
interest in Hicks Muse Tate & Furst Equity Fund
II, LP ("Hicks-Muse"), a private venture capital
fund acquired for approximately $9.6 million,
through which Crescent Operating has invested in
companies operating in a variety of industries,
including manufacturing, communications, real
estate, financial services and food
(collectively, the "Carter-Crowley Assets"); and
- a 50% member interest (the "CBHS Interest"), to
be acquired for approximately $7.5 million, in
Charter Behavioral Health Systems, LLC ("CBHS"),
a newly formed limited liability company which
will operate approximately 90 behavioral
healthcare facilities (the "Facilities") which
Magellan Health Services, Inc. ("Magellan"), an
unaffiliated entity, and its wholly owned
subsidiaries are expected to sell to Crescent as
a part of a transaction with Magellan (the
"Magellan Transaction"), and certain warrants to
acquire up to 1,283,311 shares of Magellan common
stock valued by Crescent Operating at
approximately $12.5 million. See "Business -- The
CBHS Interest." Richard E. Rainwater, John C.
Goff and Gerald W. Haddock, who will serve as the
Chairman of the Board, the Vice Chairman of the
Board and the President and Chief Executive
Officer of Crescent Operating and Crescent,
respectively, and each of whom will serve as
directors of Crescent and Crescent Operating,
beneficially own shares of Magellan common stock.
Mr. Rainwater beneficially owns, directly
(including shares held directly or indirectly by
his spouse and children) and indirectly through a
limited partnership of which a corporation owned
by Mr. Rainwater is the sole general partner,
approximately 19.1% of the outstanding Magellan
common stock. Each of Messrs. Goff and Haddock
beneficially owned less than one percent of the
common stock of Magellan as of December 31, 1996.
Darla D. Moore, the spouse of Mr. Rainwater, is a
director of Magellan.
Crescent Operating obtained the rights to purchase
the Assets from Crescent Operating Partnership, and
on May 9, 1997, Crescent Operating, utilizing funds
contributed to Crescent Operating by Crescent
Operating Partnership, purchased (i) the
Carter-Crowley Assets for approximately $13.7
million and (ii) a 12.38% limited partner interest
in Dallas Basketball Limited, the partnership that
holds the National Basketball Association franchise
for the Dallas Mavericks, for approximately $12.4
million.
As of June 11, 1997, Crescent Operating sold, for
approximately $12.55 million, the limited partner
interest in the partnership that owns the Dallas
Mavericks to a newly formed corporation wholly
owned by Crescent Operating Partnership. Richard E.
Rainwater, John C. Goff and Gerald W. Haddock, each
of whom will serve as a director of Crescent
Operating, also are limited partners of Crescent
Operating Partnership. As of May 30, 1997, Messrs.
Rainwater, Goff and Haddock beneficially owned
Units representing approximately 6.2%, 1.1% and
.9%,
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respectively, of the partnership interests in
Crescent Operating Partnership outstanding as of
such date. In addition, Mr. Haddock serves as
President and Chief Executive Officer and the sole
director of Crescent Ltd., which is the general
partner of Crescent Operating Partnership, and will
serve in the same capacities in the newly formed
corporation. See "-- Interests of Richard E.
Rainwater and Affiliates," below, and "Certain
Transactions." Crescent Operating had purchased the
limited partner interest in the partnership that
owns the Dallas Mavericks from Carter-Crowley for
approximately $12.4 million utilizing a combination
of cash payments and proceeds of borrowings from
Crescent Operating Partnership. Crescent Operating
used the proceeds of the sale of the interest (i)
to pay all accrued interest under the term loan
from Crescent Operating Partnership, in the amount
of approximately $.2 million, (ii) to make a
payment of principal under the term loan of
approximately $9.9 million, and (iii) to pay a
dividend to its sole stockholder, Crescent
Operating Partnership, of approximately $2.4
million. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
An additional approximately $20.6 million will be
advanced to Crescent Operating by Crescent
Operating Partnership in the form of loans.
Crescent Operating will use approximately $20.0
million to acquire the CBHS Interest and the
warrants to acquire Magellan common stock. Crescent
Operating will use approximately $1.5 million in
cash and the remaining $.6 million in loans to fund
certain obligations to purchase construction
equipment of Moody-Day.
Crescent Operating participates in Hicks-Muse on an
investment-by-investment basis and does not own an
interest in all investments included in the
Hicks-Muse portfolio. The purchase price of the
1.21% limited partner interest in the Hicks-Muse
fund does not include Crescent Operating's
obligation to invest an additional $2.2 million in
the fund. This amount is required to be paid when
called.
Crescent Operating's certificate of incorporation,
as amended and restated (the "Charter"), provides
that one of Crescent Operating's corporate purposes
is to perform the Intercompany Agreement, pursuant
to which Crescent Operating and Crescent Operating
Partnership have agreed to provide each other with
rights to participate in certain transactions. In
addition, the Charter 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 Crescent Operating Partnership was
first given the opportunity but elected not to
pursue such activities or investments.
The principal executive offices of Crescent
Operating are located at 777 Main Street, Forth
Worth, Texas 76102, and its telephone number at
that location is (817) 877-0477. Crescent Operating
was incorporated in Delaware in April 1997.
Business Strategy Crescent Operating intends to manage the Assets,
enter into certain of the businesses to which the
Assets relate and pursue additional opportunities.
Crescent Operating believes that it has, or will
have access to, sufficient liquidity and management
expertise to manage the Assets successfully.
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Crescent Operating's investment and operating
strategies are to acquire and operate a
complementary group of businesses which are aligned
with certain of the investments and businesses of
Crescent. To pursue additional opportunities,
Crescent Operating plans to capitalize on its
relationship with Crescent and Crescent's ability
to structure transactions creatively. Crescent
Operating also plans to explore the possibility of
providing to Crescent certain lessee and
operational services currently provided by others
to Crescent. In this regard, Crescent Operating
plans to enter into negotiations to acquire or
replace the current tenants of certain hotels and
resorts owned by Crescent and leased to third
parties. No such negotiations are currently
ongoing, however, and there is no assurance that
any such agreements will be reached. The additional
opportunities Crescent Operating may pursue are
expected to be varied and may be unrelated to any
business in which Crescent Operating will be
engaged initially. Accordingly, Crescent Operating
expects that, in the future, it may sell existing
assets that are inconsistent with its long-term
strategies.
Management of Crescent
Operating Richard E. Rainwater, John C. Goff and Gerald W.
Haddock will serve as Chairman of the Board, Vice
Chairman and the President and Chief Executive
Officer, respectively, of Crescent Operating. Each
currently serves in the same capacity at Crescent.
See "Management."
Preferred Share Purchase
Rights Crescent Operating expects to adopt a Preferred
Share Purchase Rights Plan (the "Rights Plan") on
or prior to the Distribution Effective Date. If so
adopted, certificates issued in the Distribution
representing Crescent Operating Common Stock will
also initially represent an equivalent number of
associated Preferred Share Purchase Rights of
Crescent Operating (the "Rights"). See "Certain
Antitakeover Provisions -- Rights Plan."
Certain Antitakeover
Provisions Certain provisions of Crescent Operating's Charter
and Crescent Operating's bylaws, as amended and
restated (the "Bylaws"), as each will be in effect
as of the Distribution, and of the Delaware General
Corporation Law (the "DGCL"), have the effect of
making more difficult an acquisition of control of
Crescent Operating in a transaction not approved by
the Crescent Operating Board of Directors. These
provisions include (i) a provision for a classified
Board, with only approximately one-third of the
Board to be elected in any year, to serve for
three-year terms, (ii) a requirement that directors
be removed only for cause upon the affirmative vote
of holders of at least 80% of the total voting
power, (iii) a requirement that actions of
stockholders be taken at a meeting of stockholders,
rather than by written consent, (iv) a prohibition
on the stockholders' ability to call a special
meeting, (v) an advance notice requirement for
stockholders to make nominations of candidates for
directors or to bring other business before an
annual meeting of stockholders, and (vi) a
requirement that certain amendments to the Charter
be approved by the affirmative vote of 80% of the
total voting power. See "Description of Crescent
Operating Capital Stock" and "Certain Antitakeover
Provisions." The Rights Plan will also make more
difficult an acquisition of control of Crescent
Operating in a transaction not approved by the
Crescent Operating Board. The Rights Plan and
certain provisions of the Charter do not apply to
Crescent and its affiliates. See "Certain
Antitakeover Provisions -- Rights Plan."
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Post-Distribution Dividend
Policy Following the Distribution, Crescent Operating
intends to use its available funds to pursue
investment and business opportunities and,
therefore, does not anticipate the payment of any
cash dividends on Crescent Operating Common Stock
in the foreseeable future. Payment of dividends on
Crescent Operating Common Stock is prohibited under
loans from Crescent Operating Partnership until all
amounts outstanding thereunder are paid in full and
will also be subject to such limitations as may be
imposed by any other credit facilities that
Crescent Operating may obtain from time to time. As
of June 11, 1997, the outstanding principal balance
of loans from Crescent Operating Partnership to
Crescent Operating was approximately $5.4 million.
The declaration of dividends will be subject to the
discretion of the Crescent Operating Board. See
"Dividend Policy."
Interests of Richard E.
Rainwater
and Affiliates Richard E. Rainwater, John C. Goff and Gerald W.
Haddock will serve as Chairman of the Board, Vice
Chairman and the President and Chief Executive
Officer, respectively, of Crescent Operating and
Crescent. Each also will serve as a director of
Crescent Operating and Crescent. Mr. Rainwater has
a significant interest in Crescent, Crescent
Operating and Magellan through Mr. Rainwater's
positions as an officer or director of Crescent and
Crescent Operating and through his direct and
indirect ownership of common equity of each of
these entities and his ownership of Units of
Crescent Operating Partnership. Mr. Haddock is the
sole director of Crescent Ltd., which is the sole
general partner of Crescent Operating Partnership.
Crescent Ltd. is a wholly owned subsidiary of
Crescent. As of May 30, 1997, Messrs. Rainwater,
Goff and Haddock beneficially owned approximately
12.5%, 2.0%, and 1.5% of Crescent, respectively,
which interests consist of Crescent Common Shares
and Units of Crescent Operating Partnership, a
portion of which may be held by partnerships or
trusts as to which Messrs. Rainwater, Goff and
Haddock have voting control. Immediately following
the Distribution, each of Messrs. Rainwater, Goff
and Haddock is expected to beneficially own
approximately 12.5%, 2.0%, and 1.5% of the
then-outstanding shares of Crescent Operating
Common Stock. See "Management -- Security Ownership
of Certain Beneficial Owners and Management After
the Distribution." In addition, Mr. Rainwater
beneficially owns approximately 19.1% of the
outstanding Magellan common stock, the substantial
portion of which is attributable to his ownership
of 100% of the stock of the sole general partner of
a limited partnership that beneficially owned
3,885,832 shares of Magellan common stock as of
December 31, 1996. See "Risk Factors -- Potential
Conflicts of Interest" and "Certain Transactions."
Transfer Agent and
Registrar BankBoston, N.A. will be the Transfer Agent and
Registrar for Crescent Operating after the
Distribution.
8
<PAGE> 12
SUMMARY PRO FORMA FINANCIAL DATA
The following tables set forth certain unaudited summary financial
information for the Company on a combined pro forma basis. This summary
information is qualified by, and should be read in conjunction with, the
financial statements and notes thereto included elsewhere in this Prospectus.
The pro forma information for the year ended December 31, 1996, assumes
completion, in each case as of January 1, 1996 in determining operating data, of
(i) the formation and capitalization of Crescent Operating, (ii) the acquisition
of the Carter-Crowley Assets and the recording of the transaction under the
purchase method of accounting, (iii) the purchase and subsequent sale of the
12.38% limited partner interest in the partnership that owns the Dallas
Mavericks, and (iv) the acquisition of the CBHS Interest, which is a 50%
interest in CBHS.
<TABLE>
<CAPTION>
CRESCENT
OPERATING, INC.
AS ADJUSTED FOR
CRESCENT ACQUISITION OF ACQUISITION OF ACQUISITION OF
OPERATING, INC. CARTER-CROWLEY CARTER-CROWLEY 50% INTEREST PRO FORMA
HISTORICAL ASSET GROUP(1) ASSET GROUP(1) IN CBHS(2) CONSOLIDATED
--------------- -------------- --------------- -------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating Data:
Revenues............................. $ -- $10,394 $10,394 $ -- $ 10,394
Gross Profit......................... -- 1,857 1,857 -- 1,857
Equity in loss of CBHS............... -- -- -- 7,659 7,659
Income (loss) from Operations........ -- 109 (397) (7,659) (8,056)
Net loss............................. -- (111) (3,162) (7,659) (10,821)
Weighted average shares
outstanding........................ 11,025,547
Net loss per share................... $ (.98)
</TABLE>
- ---------------
(1) For purposes of this table, the "Carter-Crowley Asset Group" consists of
Moody-Day and Hicks-Muse.
(2) Represents Crescent Operating's share of the pro forma loss of CBHS
primarily as a result of the anticipated $78.2 million franchise fee and the
$63.0 million payable under lease arrangements with Crescent, reduced by
depreciation relating to the Facilities. See "Business -- The CBHS
Interest."
The pro forma information for the three months in the period ended March
31, 1997, assumes completion, in each case as of January 1, 1997 in determining
operating data, and, in each case as of December 31, 1996, in determining
balance sheet data, of (i) the formation and capitalization of Crescent
Operating, (ii) the acquisition of the Carter-Crowley Assets and the recording
of the transaction under the purchase method of accounting, and (iii) the
purchase and subsequent sale of the 12.38% limited partner interest in the
partnership that owns the Dallas Mavericks, (iv) the acquisition of the CBHS
Interest, which is a 50% interest in CBHS, and the related acquisition of
warrants to purchase 1,283,311 shares of Magellan common stock.
<TABLE>
<CAPTION>
CRESCENT
OPERATING, INC.
ACQUISITION OF AS ADJUSTED FOR
CRESCENT CARTER- ACQUISITION OF ACQUISITION OF
OPERATING, INC. CROWLEY CARTER-CROWLEY 50% INTEREST PRO FORMA
HISTORICAL ASSET GROUP(1) ASSET GROUP(1) IN CBHS(2) CONSOLIDATED
--------------- -------------- --------------- -------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating Data:
Revenues................................. $ -- $ 3,039 $ 3,039 $ -- $ 3,039
Gross Profit............................. -- 577 577 -- 577
Equity in loss of CBHS................... -- -- -- 2,416 2,416
Income (loss) from Operations............ -- 139 13 (2,416) (2,403)
Net income (loss)........................ -- 23 (715) (2,416) (3,131)
Weighted average shares outstanding...... 11,025,547
Net loss per share....................... $ (.28)
Balance Sheet Data:
Total assets............................. $ 1 NA $37,364 -- $ 37,364
Total debt............................... -- NA 24,226 -- 24,226
Total stockholder equity................. 1 NA 11,721 -- 11,721
</TABLE>
- ---------------
(1) For purposes of this table, the "Carter-Crowley Asset Group" consists of
Moody-Day and Hicks-Muse.
(2) Represents Crescent Operating's share of the pro forma loss of CBHS
primarily as a result of the anticipated $78.2 million franchise fee and the
$63.0 million payable under lease arrangements with Crescent, reduced by
depreciation relating to the Facilities. See "Business -- The CBHS
Interest."
9
<PAGE> 13
SUMMARY SELECTED FINANCIAL DATA
The following table sets forth certain summary historical financial
information for the Carter-Crowley Asset Group. This summary information is
qualified by and should be used in conjunction with the Carter-Crowley Asset
Group financial statements and notes thereto included elsewhere in this
Prospectus. For purposes of this table, the "Carter-Crowley Asset Group"
consists of Moody-Day and Hicks-Muse.
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------------- -----------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------- ------- ------- ------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Revenues.............................................. $ 3,039 $ 2,723 $10,394 $ 9,147 $ 7,671 $ 6,979 $ 5,831
Gross Profit.......................................... 577 458 1,857 1,698 1,457 1,303 1,206
Income (loss) from Operations......................... 139 68 109 89 83 89 (45)
Net income (loss)..................................... 23 13 (111) 79 43 36 (90)
Balance Sheet Data:
Total assets.......................................... $18,677 $14,475 $17,483 $13,230 $ 5,348 $ 4,578 $ 4,017
Total debt............................................ 4,863 3,127 5,405 3,121 1,375 850 466
Total stockholder equity.............................. 12,397 10,476 10,925 9,358 3,338 3,289 3,661
</TABLE>
10
<PAGE> 14
RISK FACTORS
Shareholders and Limited Partners should carefully consider and evaluate
all of the information set forth in this Prospectus, including the risk factors
listed below. Crescent Operating also cautions readers that, in addition to the
historical information included herein, this Prospectus includes certain
forward-looking statements and information that are based on management's
beliefs as well as on assumptions made by and information currently available to
management. When used in this Prospectus, the words "expect," "anticipate,"
"intend," "plan," "believe," "seek," "estimate," and similar expressions are
intended to identify such forward-looking statements. Such statements are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions, including but not limited to the following factors, which could
cause the Company's future results and stockholder values to differ materially
from those expressed in any forward-looking statements made by or on behalf of
Crescent Operating. Many of such factors are beyond the Company's ability to
control or predict. Readers are cautioned not to put undue reliance on
forward-looking statements.
LACK OF OPERATING HISTORY
The Company is newly formed and has no operating history. The financial
information relating to the Assets that is presented elsewhere in this
Prospectus is not necessarily indicative of future operations of Crescent
Operating.
RISKS ASSOCIATED WITH THE CARTER-CROWLEY ASSETS
The Carter-Crowley Assets consist of a construction equipment sales,
leasing and service company and a 1.21% limited partner interest in a private
venture capital fund purchased from Carter-Crowley. The Carter-Crowley Assets
are unrelated to one another and possibly unrelated to any future business in
which Crescent Operating will invest. The Carter-Crowley Assets are relatively
illiquid. See "Business -- The Carter-Crowley Assets."
Construction Equipment Sales, Leasing and Service Company. Moody-Day sells,
leases and services construction equipment primarily to the construction and
utility industries in Texas. An economic downturn or recession in these
industries may adversely affect Moody-Day's operating results. Moody-Day has
several competitors, some of which are larger or better capitalized and may be
better-positioned to acquire a larger share of the market. Moreover, equipment
shortages have and may continue to have a negative impact on operations.
Moody-Day also faces exposure for claims of injury incurred in connection with
the use of the equipment it sells, leases and services.
Limited Partner Interest in Private Venture Capital Fund. Hicks-Muse is a
private venture capital fund in which Crescent Operating owns a 1.21% limited
partner interest. The unpaid principal balance due on the original commitment by
Carter-Crowley to invest $10 million in Hicks-Muse was $2.2 million as of
December 31, 1996, and Crescent Operating has assumed this obligation in
connection with the acquisition of its interest in Hicks-Muse. Investments of
Crescent Operating through Hicks-Muse consist of, among other things,
investments in a manufacturer of wire and cable and a cable television operator
(which investments account for approximately 56% of Crescent Operating's
investments through Hicks-Muse). In addition to such investments in the
manufacturing and communications industries, Crescent Operating has investments,
through Hicks-Muse in the real estate, financial services and food industries.
Volatility in the securities markets, interest rate increases and unfavorable
conditions in the economy generally, and in the manufacturing and communications
industries in particular, may have a negative impact on Hicks-Muse's
performance.
RISKS ASSOCIATED WITH THE CBHS INTEREST
The Magellan Transaction cannot be consummated, and therefore the CBHS
Interest cannot be acquired, until the Distribution is effective and customary
closing conditions have been satisfied. See "Business -- The CBHS Interest." On
May 30, 1997, the requisite percentage of the Magellan stockholders approved the
Magellan Transaction. In addition, the Magellan Transaction is conditioned upon
the closing of each component transaction, including the purchase of the
Facilities by Crescent.
11
<PAGE> 15
If acquired, the CBHS Interest presents the following risks to stockholders
of Crescent Operating.
Franchise Agreement Risks. The Master Franchise Agreement to be entered
into between CBHS and Magellan, through a wholly owned subsidiary, is for an
initial term of 12 years, and CBHS will have the right to renew the Master
Franchise Agreement for four additional five-year terms, for a maximum of 32
years. At the end of the initial term and each renewal term the franchise fees
will be adjusted to reflect the fair market value of the franchise.
Notwithstanding that the Master Franchise Agreement provides for an appraisal
mechanism for determining the fair market value of the franchise fees, Magellan
will have the right not to consent to the fee adjustment, and can terminate the
Master Franchise Agreement, at the end of the initial or any renewal term. If
Magellan terminates the Master Franchise Agreement prior to the full 32-year
term, CBHS will be subject to a three-year covenant not to engage in the
hospital-based behavioral healthcare business except pursuant to a written
agreement with Magellan. Accordingly, Magellan could extract franchise fees in
excess of the fair market value of the franchise, or CBHS could be precluded
from being in the hospital-based behavioral healthcare business for a
significant period of time. Either result could materially adversely affect the
value of Crescent Operating's investment in CBHS.
Reliance of CBHS on Magellan and Crescent Operating. CBHS will rely on
Magellan to extend a line of credit in the principal amount of up to $55 million
secured by CBHS's receivables, for up to one year after the closing of the
Magellan Transaction (the "Magellan Closing") or, under certain circumstances,
provide a guarantee not to exceed $65 million for a CBHS bank line of credit
secured by receivables of CBHS. Each of Crescent Operating and a wholly owned
subsidiary of Magellan ("Magellan Affiliate") also will be required to
contribute an additional $2.5 million to CBHS in cash five days after the
Magellan Closing, and to lend CBHS up to $17.5 million upon the request of
Magellan Affiliate during the five years following the Magellan Closing. In
addition, Magellan will be required to provide various assets and services to
CBHS under the Master Franchise Agreement and to CBHS subsidiaries under
Subsidiary Franchise Agreements. Accordingly, CBHS' ability to operate the
Facilities as contemplated by the Magellan Transaction will depend in part upon,
Magellan Affiliate's and Crescent Operating's financial status.
Lack of Control of CBHS; Management Deadlock. CBHS will be governed by a
four-member board (the "CBHS Board"), two of which will be appointed by each of
Crescent Operating and Magellan Affiliate. A significant number of decisions
require 80% CBHS Board approval (specifically, the approval of all four
directors). Accordingly, the directors appointed by Crescent Operating will be
unable to exercise control of CBHS without the concurrence of the directors
appointed by Magellan Affiliate. The CBHS Operating Agreement provides that a
deadlock of the CBHS Board will be deemed to exist if the CBHS Board is unable
to reach agreement by the required vote at two successive meetings on (i) a
decision requiring 80% CBHS Board approval; (ii) a decision involving the
expenditure of more than a specified amount; or (iii) a decision relating to the
executive officers. Further, an unresolved deadlock could lead either to the
forced sale of Crescent Operating's interest in CBHS, or the required purchase
by Crescent Operating of Magellan Affiliate's interest in CBHS. In the latter
case, Crescent Operating would be faced with funding the purchase of Magellan
Affiliate's interest and subsequently operating the Facilities, through CBHS,
without Magellan's healthcare experience.
CBHS Conflicts of Interest. With the exception of John C. Goff, who will
become Chairman of the CBHS Board, all of the executive officers of CBHS upon
formation of CBHS will be former employees of Magellan, and therefore may be
subject to conflicts of interests in matters in which Crescent Operating and
Magellan have conflicting interests.
Possible Violation of Government Regulations. The operation of healthcare
facilities such as the Facilities is subject to substantial federal, state and
local regulation, including federal Medicare law. In addition to other laws and
regulations with which CBHS will be required to comply, CBHS will be subject to
federal and state laws that govern financial arrangements between healthcare
providers. Any failure to comply with these laws or regulations could have an
adverse effect on the operations of CBHS.
The laws governing financial arrangements between healthcare providers
generally prohibit certain direct and indirect payments and/or fee-splitting
arrangements between healthcare providers that are designed to induce, are in
exchange for, or encourage patient referrals. The Medicare Law Amendments, which
are among the most prominent of laws of this type, prohibit the offering,
paying, soliciting or receiving of any form of
12
<PAGE> 16
remuneration in return for referring federal healthcare patients, or in return
for purchasing, leasing, ordering or arranging for, or recommending purchasing,
leasing or ordering any good, facility, service or item for which payment may be
made under federal healthcare programs. Violations of the Medicare Law
Amendments may result in criminal and civil sanctions, including exclusion from
the Medicare and/or Medicaid programs.
Following the consummation of the Magellan Transaction, CBHS will pay fixed
franchise fees to Magellan, subject to increase in certain circumstances. See
"Business -- The CBHS Interest -- Master Franchise Agreement." CBHS will receive
from Magellan an array of services, including advertising and marketing
assistance, risk management services, outcomes monitoring, consultation with
respect to matters relating to CBHS' business in which Magellan has expertise
and Magellan's operation of a telephone call center utilizing an "800" telephone
number. Magellan has advised Crescent Operating that it believes that the
franchise fee arrangements described herein are consistent with the Medicare Law
Amendments because such arrangements do not involve CBHS's receipt of referrals
of patients from Magellan. There can be no assurance, however, that regulatory
agencies or private parties will not challenge the arrangement and Crescent
Operating based on alleged violations of the Medicare Law Amendments.
RESTRICTIONS ON CRESCENT OPERATING'S BUSINESS AND FUTURE OPPORTUNITIES
Crescent Operating's Charter provides that, for so long as the Intercompany
Agreement remains in effect, Crescent Operating is prohibited from engaging in
activities or making investments that a REIT could make unless Crescent
Operating Partnership was first given the opportunity but elected not to pursue
such activities or investments. Crescent Operating's Charter also provides that
a corporate purpose of Crescent Operating is to perform its obligations under
the Intercompany Agreement. The formation of Crescent Operating and the
execution of the Intercompany Agreement will permit stockholders of Crescent
Operating who also own Crescent Common Shares to participate in the benefits
both of the real estate operations of Crescent (including ownership of real
property) and of the lease of certain of such assets and the ownership of other
non-real estate assets. Under the Charter and the Intercompany Agreement,
Crescent Operating has agreed not to acquire or make (i) investments in real
estate (which, for purposes of the Intercompany Agreement, includes the
provision of services related to real estate and investment in hotel properties,
real estate mortgages, real estate derivatives or entities that invest in real
estate assets) or (ii) any other investments that may be structured in a manner
that qualifies under the federal income tax requirements applicable to REITs,
unless it has notified Crescent Operating Partnership of the acquisition or
investment opportunity, in accordance with the terms of the Intercompany
Agreement, and Crescent Operating Partnership has determined not to pursue such
acquisition or investment. See "Business -- The Intercompany Agreement."
Crescent Operating also has agreed to assist Crescent Operating Partnership in
structuring and consummating any such acquisition or investment which Crescent
Operating Partnership elects to pursue, on terms determined by Crescent
Operating Partnership. Further, Crescent Operating Partnership is not required
to offer Crescent Operating the opportunity to participate in transactions or
make investments other than pursuant to Crescent Operating's right of first
refusal to become the lessee of any real property acquired by Crescent Operating
Partnership as to which Crescent Operating Partnership determines that,
consistent with Crescent's status as a REIT, it is required to enter into a
master lease arrangement. This lessee opportunity will be available to Crescent
Operating only if Crescent Operating Partnership determines, in its sole
discretion, that Crescent Operating is qualified to be the lessee. Because of
the provisions of the Intercompany Agreement and Crescent Operating's Charter,
the nature of Crescent Operating's business and the opportunities it may pursue
are restricted.
DEPENDENCE UPON CRESCENT; LIMITED RESOURCES FOR GROWTH THROUGH NEW OPPORTUNITIES
Due to Crescent Operating's restricted corporate purpose and the
Intercompany Agreement, Crescent Operating will rely significantly on Crescent
and Crescent Operating Partnership to identify business opportunities for
Crescent Operating. There is no assurance that Crescent or Crescent Operating
Partnership will identify opportunities for Crescent Operating or that any
opportunities that either identifies will be within Crescent Operating's
financial, operational or management parameters. In addition, Crescent Operating
Partnership will provide the lessee opportunities described in the Intercompany
Agreement only if it is
13
<PAGE> 17
necessary for Crescent, consistent with its status as a REIT, to enter into a
master lease arrangement and only if Crescent Operating and Crescent Operating
Partnership negotiate a mutually satisfactory master lease arrangement. If
Crescent in the future should fail to qualify as a REIT, such failure could have
a substantial adverse effect on those aspects of Crescent Operating's business
operations and business opportunities that are dependent upon Crescent. See "The
Distribution -- Federal Income Tax Considerations -- Taxation of Crescent in
General" for a discussion of Crescent's status as a REIT. For example, the
Intercompany Agreement remains effective even if Crescent ceases to qualify as a
REIT, with Crescent Operating's rights relating to lessee opportunities under
the Intercompany Agreement continuing to be based on Crescent's need to create a
master lease structure due to its status as a REIT. Accordingly, if Crescent
failed to qualify as a REIT and thereafter acquired a property, Crescent would
have the right under the Intercompany Agreement to lease the property to any
person or entity pursuant to any type of lease (including a master lease
arrangement) or to operate the property itself. Crescent Operating, however,
would remain subject to all of the limitations on its operations contained in
the Charter and the Intercompany Agreement. In addition, although it is
anticipated that any master lease arrangement involving Crescent Operating
generally will provide that Crescent Operating's rights will continue following
a sale of the property or an assignment of the lease (with the likelihood of a
sale or assignment of lease possibly increasing if Crescent fails to qualify as
a REIT), Crescent Operating could lose its rights under any such master lease
arrangement upon the expiration of the lease. If Crescent Operating and Crescent
Operating Partnership do not negotiate a mutually satisfactory lease arrangement
within 30 days after Crescent Operating Partnership provides Crescent Operating
with written notice of the lessee opportunity (or such longer period to which
Crescent Operating and Crescent Operating Partnership may agree), Crescent
Operating Partnership may offer the opportunity to others for a period of one
year before it must again offer the opportunity to Crescent Operating.
POTENTIAL CONFLICTS OF INTEREST
Richard E. Rainwater will serve as Chairman of the Boards of Crescent and
Crescent Operating. John C. Goff will serve as Vice Chairman of Crescent and of
Crescent Operating. Gerald W. Haddock is President, Chief Executive Officer and
a director of Crescent and of Crescent Operating. Although each of them is
committed to the success of Crescent Operating, they are also committed to the
success of Crescent. None of Messrs. Rainwater, Goff or Haddock is committed to
spending a particular amount of time on Crescent Operating's affairs, nor will
any of them devote his full time to Crescent Operating. Five of the members of
the Crescent Board will also be members of the Crescent Operating Board. In
addition, it is anticipated that the Crescent Operating Board will include two
members who are unaffiliated with Crescent.
In addition to his positions with Crescent Operating and Crescent Operating
Partnership, Mr. Rainwater is the beneficial owner of approximately 19.1% of the
outstanding Magellan common stock. Mr. Rainwater's spouse, Darla D. Moore,
serves as a director of Magellan. Through these relationships, Mr. Rainwater may
have the ability to influence decisions of Magellan in a manner that may benefit
Magellan to the detriment of Crescent Operating or vice versa.
Officers and directors of a corporation owe fiduciary duties to the
stockholders of that corporation. There is a risk that the common membership of
management and members of the Boards of Crescent Operating and Crescent will
lead to conflicts of interest in connection with transactions between the two
companies. Crescent Operating was formed with specific purpose clauses in its
Charter in an effort to avoid conflicts of interest issues by identifying at the
outset which types of opportunities will be pursued by each company. These
clauses provide that Crescent Operating's purposes include performing the
Intercompany Agreement and refraining from engaging in activities or making
investments that a REIT could make until Crescent has been offered the
opportunity and has declined to pursue such activities or investments.
RISKS ASSOCIATED WITH UNRELATED INVESTMENTS AND ABILITY TO MANAGE UNRELATED
INVESTMENTS; COMPETITION
Either through management of the Assets or through implementing its
strategy and corporate purpose of carrying out the Intercompany Agreement,
Crescent Operating will pursue a variety of opportunities. Although Crescent
Operating intends to acquire and operate a complementary group of businesses,
there may be differences among the businesses in which it engages that may
require a wide range of skills and qualifications, and there is no assurance
that the management or employees of Crescent Operating will have,
14
<PAGE> 18
or that Crescent Operating will be able to hire and retain employees with, such
skills and qualifications. There also is no assurance that the opportunities
Crescent Operating pursues will be integrated, perform as expected or contribute
significant revenues or profits to Crescent Operating. The industries in which
Crescent Operating will compete may be subject to government regulation and
restrictions, some of which may be significant and burdensome. The businesses
with which it will compete may be better capitalized or have other features that
will make it difficult for Crescent Operating to compete effectively.
LIMITED FINANCIAL RESOURCES; OBLIGATIONS UNDER FINANCING ARRANGEMENTS; LIMITED
FUTURE FUNDING COMMITMENTS; NEED FOR FUTURE CAPITAL
Crescent Operating will be in a position to manage the Carter-Crowley
Assets and acquire the CBHS Interest because of funds, including loans and a
line of credit, provided to it by Crescent Operating Partnership in connection
with the formation and capitalization of Crescent Operating. In connection with
the formation and capitalization of Crescent Operating, Crescent Operating
obtained from Crescent Operating Partnership (i) a five-year term loan pursuant
to which it has the right to borrow from Crescent Operating Partnership an
aggregate of approximately $35.9 million (approximately $15.3 million of which
was funded on May 8, 1997 and approximately $9.9 million of which was repaid on
June 11, 1997, as a result of the sale to an affiliated entity of the limited
partner interest in the partnership that owns the Dallas Mavericks, as described
in "Certain Transactions") and (ii) a line of credit for up to $20.4 million. As
a result of the repayment of a portion of the amounts outstanding under the term
loan on June 11, 1997, it is anticipated that the maximum borrowings under the
term loan will be approximately $26.0 million. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Crescent
Operating -- Liquidity and Capital Resources." Prior to maturity the loan and
line of credit will be payable only to the extent of net cash flow, with the
line of credit payable on an interest-only basis during its term. There can be
no assurance that the Company will be able to satisfy all of its obligations
under the loan and line of credit at the time that they mature.
Crescent Operating intends to utilize any funds it may borrow under the
$20.4 million line of credit primarily to meet its requirements under the CBHS
Operating Agreement. Crescent Operating has not received any commitment with
respect to any additional borrowing. There is no assurance that Crescent
Operating will have sufficient working capital to finance future acquisitions or
pursue additional opportunities. Crescent Operating expects to be able to access
capital markets or to seek other financing, including financing from Crescent or
with Crescent's assistance, but there is no assurance that it will be able to do
so at all or in amounts or on terms acceptable to the Company, and currently the
$20.4 million line of credit is the Company's only external source of financing.
Crescent currently is not obligated to provide any additional funds to Crescent
Operating or to assist it in obtaining additional financing.
ABSENCE OF A PUBLIC MARKET FOR CRESCENT OPERATING COMMON STOCK
There is currently no public market for Crescent Operating Common Stock.
Crescent Operating has applied for quotation of the Crescent Operating Common
Stock on the Nasdaq National Market and expects to apply for quotation of the
Crescent Operating Common Stock on the OTC Bulletin Board, although there is no
assurance that the Crescent Operating Common Stock will be approved for listing
on any national securities exchange, automated quotation system or
over-the-counter market. There can be no assurance as to the prices at which
trading in Crescent Operating Common Stock will occur after the Distribution.
Until the Crescent Operating Common Stock is fully distributed and an orderly
trading market develops, the prices at which trading in the Crescent Operating
Common Stock occurs may fluctuate significantly. In the event no regular trading
market develops for Crescent Operating Common Stock, holders of Crescent
Operating Common Stock may not be able to sell their shares promptly at a
desired price. Accordingly, holders of Crescent Operating Common Stock should
consider such shares a long-term investment.
ABSENCE OF DIVIDENDS ON CRESCENT OPERATING COMMON STOCK FOLLOWING THE
DISTRIBUTION
Following the Distribution, Crescent Operating intends to use its available
funds to pursue investment and business opportunities and, therefore, does not
anticipate the payment of any cash dividends on Crescent
15
<PAGE> 19
Operating Common Stock in the foreseeable future. On June 11, 1997, Crescent
Operating paid a one-time dividend of approximately $2.4 million to its sole
stockholder, Crescent Operating Partnership, in connection with the sale of the
limited partner interest in the partnership that owns the Dallas Mavericks.
Payment of dividends on Crescent Operating Common Stock is prohibited under
the loan and line of credit from Crescent Operating Partnership until all
amounts outstanding thereunder have been paid in full, and will also be subject
to such limitations as may be imposed by any other credit facilities that
Crescent Operating may obtain from time to time. See "Dividend Policy."
RELIANCE ON KEY PERSONNEL
The success of Crescent Operating depends to a significant degree upon the
contribution of its executive officers and other key personnel. None of the
Crescent Operating executive officers has an employment agreement with Crescent
Operating. There can be no assurance that the Company will be able to retain its
key managerial and other key personnel or to attract suitable replacements or
additional personnel if required. Crescent Operating has not obtained key-man
insurance for any of its executive officers and other key personnel.
CERTAIN ANTITAKEOVER PROVISIONS
The Charter and Bylaws, the Rights Plan and applicable sections of the DGCL
contain several provisions that may make more difficult the acquisition of
control of Crescent Operating without the approval of the Crescent Operating
Board. Certain provisions of Crescent Operating's Charter and the Bylaws, among
other things: (i) classify the Crescent Operating Board into three classes, each
of which serves for staggered three-year terms; (ii) provide that a director of
Crescent Operating may be removed by the stockholders only for cause; (iii)
provide that only the Chairman of the Board, Vice Chairman, President or the
Crescent Operating Board may call special meetings of the stockholders; (iv)
provide that the stockholders may take action only at a meeting of Crescent
Operating stockholders, not by written consent; (v) provide that stockholders
must comply with certain advance notice procedures in order to nominate
candidates for election to the Crescent Operating Board or to place
stockholders' proposals on the agenda for consideration at meetings of the
stockholders; (vi) provide that, under certain circumstances, the affirmative
vote of the holders of two-thirds of the Crescent Operating Common Stock is
required to approve any merger or similar business combination involving
Crescent Operating; (vii) provide that the holder of "control shares" of
Crescent Operating acquired in a control share acquisition have no voting rights
with respect to such control shares except to the extent approved by the vote of
the holders of two-thirds of the Crescent Operating Common Stock (the "control
shares provision"); and (viii) provide that the stockholders may amend or repeal
any of the foregoing provisions of the Charter or the Bylaws only by a vote of
80% of the stock entitled to vote generally in the election of directors. With
certain exceptions, Section 203 of the DGCL ("Section 203") imposes certain
restrictions on mergers and other business combinations between Crescent
Operating and any holder of 15% or more of the Crescent Operating Common Stock.
The Charter provides that the control shares provision, the Rights Plan and
Section 203 do not apply to Crescent and its affiliates. Accordingly, Crescent
and its affiliates will be in a position to effect a business combination or
other transaction with Crescent Operating in situations where others would be
restricted from effecting a similar transaction. The Charter authorizes the
Board of Directors to issue up to 10 million shares of preferred stock, par
value $.01 per share, in series, and to establish the rights and preferences
(including the convertibility of such shares of preferred stock into shares of
Crescent Operating Common Stock) of any series of preferred stock so issued. The
issuance of preferred stock could have the effect of delaying or preventing a
change in control of Crescent Operating, even if such a change in control were
in the best interests of some, or a majority, of Crescent Operating's
stockholders. See "Description of Crescent Operating Capital Stock" and "Certain
Antitakeover Provisions."
The Rights Plan would cause substantial dilution to a person or group that
attempts to acquire Crescent Operating on terms not approved in advance by the
Crescent Operating Board. Under the Rights Plan, until 10 business days
following such time as a person or group has acquired beneficial ownership of,
or has proposed a tender offer or exchange offer that would result in a person
or group's owning, 10% or more of the outstanding shares of Crescent Operating
Common Stock, (the "Rights Distribution Effective Date") the
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Rights will be transferred only with the Crescent Operating Common Stock.
Following the Rights Distribution Effective Date, separate certificates
evidencing the Rights will be mailed to each holder of record on the Rights
Distribution Effective Date. Thereafter, each holder of a Right (other than the
person or group) will thereafter have the right to receive, upon exercise of
such Right, that number of shares of Crescent Operating Common Stock having a
market value equal to two times the exercise price of the Right. Similar
provisions apply in the event of a merger or other business combination as a
result of which a person or group will own 10% or more of the outstanding shares
of Crescent Operating Common Stock. Prior to the time that any such person or
group acquires 10% or more of the outstanding shares of Crescent Operating
Common Stock, the Board of Directors may redeem the Rights in whole for $.01 per
Right. After the time that any such person or group acquires 10% or more, but
less than 50%, of the outstanding shares of Crescent Operating Common Stock, the
Board of Directors may exchange the Rights, in whole or in part, at an exchange
ratio of one share of Crescent Operating Common Stock, or one-hundredth of a
share of Series A Junior Preferred Stock per Right. See "Description of Crescent
Operating Capital Stock -- Series A Junior Preferred Stock."
FEDERAL INCOME TAX RISKS
On the Distribution Effective Date, Crescent will, in the opinion of Shaw,
Pittman, Potts & Trowbridge, tax counsel to Crescent Operating and Crescent
("Tax Counsel"), recognize gain measured by the difference between the value of
the Crescent Operating Common Stock distributed by Crescent and the basis of
Crescent in such stock, which will depend in turn on the basis of Crescent's
share of the assets contributed by Crescent Operating Partnership to Crescent
Operating. Although management anticipates that any such gain would be nominal,
the Internal Revenue Service (the "Service") may be able to assert successfully
that the gain is not insubstantial. Because of the factual nature of valuation,
Tax Counsel is not able to render an opinion on it. Under the REIT rules,
Crescent's gain, if any, would be passed through to the Crescent shareholders.
The value of the Crescent Operating Common Stock distributed, plus any cash
distributed in lieu of fractional shares, would be treated under the rules
generally applicable to cash distributions. Management anticipates that, for a
typical Crescent shareholder, the result of the Distribution, as compared to
what would occur in the absence of the Distribution, will be to increase the
shareholder's tax-free return of capital, but this result cannot be assured.
With respect to Limited Partners, the contribution by Crescent Operating
Partnership into Crescent Operating should not constitute a taxable event, but
the Service may successfully assert the contrary, and in any event the
Distribution will be taxable to a Limited Partner if and to the extent the value
of the Crescent Operating Stock received by the Limited Partner exceeds the
Limited Partner's basis in the Limited Partner's partnership interest. See "The
Distribution -- Federal Income Tax Consequences."
THE DISTRIBUTION
BACKGROUND OF AND REASONS FOR THE DISTRIBUTION
Crescent Operating has been formed to become a lessee and operator of
various assets and to perform the Intercompany Agreement. Under the Intercompany
Agreement, Crescent Operating and Crescent Operating Partnership will agree to
provide each other with rights to participate in certain transactions. In
particular, Crescent Operating will have a right of first refusal to become the
lessee of any real property acquired by Crescent Operating Partnership if
Crescent Operating Partnership determines that, consistent with Crescent's
status as a REIT, it is required to enter into a "master" lease arrangement,
provided that Crescent Operating Partnership determines, in its sole discretion,
that Crescent Operating is qualified to be the lessee. See "Business -- The
Intercompany Agreement." In addition, Crescent Operating intends to pursue
additional opportunities with others in the future. The Distribution of Crescent
Operating Common Stock will enable Crescent shareholders and the Limited
Partners as of the Record Date with the opportunity to participate in the
benefits both of the real estate operations of Crescent (including ownership of
real property) and of the lease of certain of such assets and the ownership of
other non-real estate assets.
Crescent Operating is intended to function principally as an operating
company, in contrast to Crescent's principal focus on investment in real estate
assets. The operating activities and operating assets made available to Crescent
Operating by Crescent are designed to provide Crescent's existing shareholders
with the long-term
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benefits of ownership in an entity devoted to the conduct of operating business
activities in addition to their investment interest in Crescent itself. A small
number of REITs, operating under tax provisions that no longer are available to
newly formed REITs, have shares that are "paired" or "stapled" with shares of a
related operating company, and therefore cannot be owned or transferred
independently. The shares of Crescent Operating and Crescent are not, and will
not be, paired or stapled in any manner. Because the shares of Crescent and
Crescent Operating can be owned and transferred separately and independently of
each other, Crescent and Crescent Operating will not provide a paired investment
on an ongoing basis to investors who purchase shares of only one company or the
other.
Crescent Operating Partnership has contributed cash in the amount of
approximately $14.1 million in exchange for all of the outstanding shares of
Crescent Operating Common Stock which are being distributed by Crescent
Operating Partnership to its partners, including Crescent, and by Crescent to
its shareholders in connection with the Distribution.
MANNER OF EFFECTING THE DISTRIBUTION
It is expected that the Distribution Effective Date will be June 12, 1997.
At the time of the Distribution, share certificates for Crescent Operating
Common Stock will be delivered to the Distribution Agent. Commencing on or about
the date of the Distribution, the Distribution Agent will begin mailing account
statements reflecting ownership of Crescent Operating Common Stock to holders of
Crescent Common Shares and Units as of the Record Date. The Distribution will be
made on the basis of one share of Crescent Operating Common Stock for every 10
Crescent Common Shares held on the Record Date and one share of Crescent
Operating Common Stock for every 5 Units held on the Record Date. The difference
in the distribution ratio as between the Crescent shareholders and the Limited
Partners is due to a two-for-one stock split with respect to Crescent Common
Shares, effective as of March 26, 1997, for which there was not a corresponding
split of Units. No certificates representing fractional shares of Crescent
Operating will be issued in connection with the Distribution. In lieu of
fractional shares, the Distribution Agent will pay to any holder who would be
entitled to a fractional share of Crescent Operating Common Stock an amount of
cash (without interest) equal to $.99 per share. All shares of Crescent
Operating Common Stock will be fully paid and nonassessable. See "Description of
Crescent Operating Capital Stock."
Prior to the Distribution Effective Date, inquiries relating to the
Distribution should be directed to the Distribution Agent at 150 Royall, Canton,
Massachusetts 02021, or by telephone at 617-575-4190, Monday through Friday,
9:00 a.m. to 5:00 p.m. (Eastern time). After the Distribution Effective Date,
inquiries may be directed to the Distribution Agent or Crescent Operating
Investor Relations, at 777 Main Street, Fort Worth, Texas 76102, or by telephone
at 817-877-0477, Monday through Friday, 9:00 a.m. to 5:00 p.m. (Dallas time).
NO HOLDER OF CRESCENT COMMON SHARES OR UNITS WILL BE REQUIRED TO MAKE ANY
PAYMENT FOR THE SHARES OF CRESCENT OPERATING COMMON STOCK TO BE RECEIVED IN THE
DISTRIBUTION OR TO SURRENDER OR EXCHANGE CRESCENT COMMON SHARES OR UNITS OR TO
TAKE ANY OTHER ACTION IN ORDER TO RECEIVE CRESCENT OPERATING COMMON STOCK TO
WHICH THE HOLDER IS ENTITLED IN THE DISTRIBUTION.
FEDERAL INCOME TAX CONSEQUENCES
Introduction. The following is a summary of the material federal income tax
considerations associated with the Distribution prepared by Shaw, Pittman, Potts
& Trowbridge, Tax Counsel. This discussion is based upon the laws, regulations
and reported rulings and decisions in effect as of the date of this Prospectus,
all of which are subject to change, retroactively or prospectively, and to
possibly differing interpretations. This discussion does not purport to deal
with the federal income or other tax consequences applicable to all investors in
light of their particular investment circumstances or to all categories of
investors, some of whom may be subject to special rules (including, for example,
insurance companies, tax-exempt organizations, financial institutions,
broker-dealers, foreign corporations and persons who are not citizens or
residents of the United States). No ruling on the federal, state or local tax
considerations relevant to the operation of Crescent
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or Crescent Operating or to the Distribution is being requested from the Service
or from any other tax authority. Tax Counsel has rendered certain opinions
discussed herein, which Tax Counsel believes address the material issues with
respect to the Distribution and with respect to the qualification of Crescent as
a REIT which are raised by the structure and currently anticipated activities of
Crescent Operating. Tax Counsel believes that if the Service were to challenge
the conclusions of Tax Counsel, such conclusions would prevail in court.
However, opinions of counsel are not binding on the Service or on the courts,
and no assurance can be given that the conclusions reached by Tax Counsel would
be sustained in court.
Taxation of Crescent in General. Crescent has made an election to be
treated as a real estate investment trust under Sections 856 through 860 of the
Code (as used in this section, a "REIT"), commencing with its taxable year ended
December 31, 1994. Crescent believes that it was organized and has operated in
such a manner so as to qualify as a REIT, and Crescent intends to continue to
operate in such a manner, but no assurance can be given that it has operated in
a manner so as to qualify, or will operate in a manner so as to continue to
qualify as a REIT.
The sections of the Code relating to qualifications and operation as a REIT
are highly technical and complex. In the opinion of Tax Counsel, Crescent
qualified as a REIT under the Code with respect to its taxable years ending on
or before December 31, 1996, and is organized in conformity with the
requirements for qualification as a REIT, its manner of operation has enabled it
to meet the requirements for qualification as a REIT as of the date of this
Prospectus, and its proposed manner of operation will enable it to meet the
requirements for qualification as a REIT in the future. It must be emphasized
that this opinion is based on various assumptions relating to the organization
and operation of Crescent and Crescent Operating Partnership and is conditioned
upon certain representations made by Crescent and Crescent Operating Partnership
as to certain relevant factual matters, including matters related to the
organization, expected operation, and assets of Crescent and Crescent Operating
Partnership. Moreover, continued qualification as a REIT will depend upon
Crescent's ability to meet, through actual annual operating results, the
distribution levels, stock ownership requirements and the various qualification
tests and other requirements imposed under the Code, as discussed below.
Accordingly, no assurance can be given that the actual stock ownership of
Crescent, the mix of its assets, or the results of its operations for any
particular taxable year will satisfy such requirements.
Tax Counsel has also addressed what Tax Counsel believes to be the material
issues with respect to the qualification of Crescent as a REIT which are raised
by the structure and currently anticipated activities of Crescent Operating. In
particular, Tax Counsel has opined that Crescent and Crescent Operating will be
treated as separate corporate entities, that Crescent Operating will not be
treated as the agent of Crescent, that Crescent and Crescent Operating will not
be considered to constitute a stapled entity under Section 269B, that rent paid
by affiliates of Crescent Operating should not be considered to be rent from
related parties which does not qualify as rent from real property under Section
856(d), and that the temporary ownership of Crescent Operating by the Crescent
Operating Partnership will not cause Crescent to be considered to have violated
the requirement under Section 856(c)(5) that Crescent not own, at the close of
each quarter of the taxable year, more than 10 percent of the outstanding voting
securities of an issuer.
Income Recognition by Crescent as a Result of the Distribution. On the
Distribution Effective Date, Crescent will, in the opinion of Tax Counsel,
recognize gain on the Distribution to the extent the value of the Crescent
Operating Common Stock distributed by Crescent exceeds the basis of Crescent in
such stock, which will depend in turn on the basis of Crescent's share of the
assets contributed by Crescent Operating Partnership to Crescent Operating.
Because the assets consist primarily of cash and recently negotiated rights to
acquire the Assets, management anticipates that any such gain will be nominal,
but the Service may be able to assert successfully that the gain is not
insubstantial. Because of the factual nature of the valuation issue, Tax Counsel
is unable to render an opinion on it. The amount of gain, if any, will increase
Crescent's current or accumulated earnings and profits.
Taxation of Taxable Domestic Shareholders of Crescent as a Result of the
Distribution. The Distribution will be treated as a distribution whose amount
equals the value of the Crescent Operating Common Stock distributed plus any
cash in lieu of fractional shares, and Crescent shareholders will receive a
basis in Crescent Operating Common Stock equal to the value thereof at the time
of the Distribution. As long as Crescent
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qualifies as a REIT, distributions (including the Distribution) made to
Crescent's taxable U.S. shareholders out of Crescent's current or accumulated
earnings and profits (and not designated as capital gain dividends) will be
taken into account by such U.S. shareholders as ordinary income and, for
corporate shareholders, will not be eligible for the dividends received
deduction. Distributions in excess of current and accumulated earnings and
profits will not be taxable to a shareholder to the extent that they do not
exceed the adjusted basis of the shareholder's Crescent Common Shares, but
rather will reduce the adjusted basis of such shares. To the extent that
distributions in excess of current and accumulated earnings and profits exceed
the adjusted basis of a shareholder's Crescent Common Shares, such distributions
will be included in income as long-term capital gain (or short-term capital gain
if the shares have been held for one year or less) assuming the shares are a
capital asset in the hands of the shareholder. In addition, any distribution
declared by Crescent in October, November or December of any year payable to a
shareholder of record on a specified date in any such month shall be treated as
both paid by Crescent and received by the shareholder on December 31 of such
year, provided that the distribution is actually paid by Crescent during January
of the following calendar year. Shareholders may not include any net operating
losses or capital losses of Crescent in their respective income tax returns. In
general, any loss upon a sale or exchange of shares by a stockholder who has
held such shares for six months or less (after applying certain holding period
rules) will be treated as a long-term capital loss to the extent of
distributions from Crescent required to be treated by such shareholder as
long-term capital gain.
Based upon the above, management anticipates that for a typical Crescent
shareholder, the result of the Distribution, as opposed to what would occur in
the absence of the Distribution, will be to increase the shareholder's tax-free
return of capital, but this result cannot be assured.
Taxation of Tax-Exempt Shareholders of Crescent as a Result of the
Distribution. Most tax-exempt employees' pension trusts are not subject to
federal income tax except to the extent of their receipt of "unrelated business
taxable income" as defined in Section 512(a) of the Code ("UBTI"). The
Distribution to a shareholder that is a tax-exempt entity should not constitute
UBTI, provided that the tax-exempt entity has not financed the acquisition of
its Crescent Common Shares with "acquisition indebtedness" within the meaning of
the Code and the Crescent Common Shares are not otherwise used in an unrelated
trade or business of the tax-exempt entity. In addition, certain pension trusts
that own more than 10% of a "pension-held REIT" must report a portion of the
dividends that they receive from such a REIT as UBTI. Crescent has not been and
does not expect to be treated as a pension-held REIT for purposes of this rule.
Taxation of Foreign Stockholders of Crescent as a Result of the
Distribution. The rules governing United States federal income taxation of
nonresident alien individuals, foreign corporations, foreign partnerships and
other foreign stockholders (collectively, "Non-U.S. Stockholders") are complex,
and no attempt will be made in this Prospectus to provide more than a summary of
such rules. Non-U.S. Stockholders should consult with their own tax advisors to
determine the impact of federal, state and local tax laws with regard to the
Distribution, including any reporting requirements. In general, as is the case
with domestic taxable shareholders of Crescent, the Distribution is treated as a
distribution whose amount equals the value of the Crescent Operating Common
Stock distributed plus any cash in lieu of fractional shares, and Crescent
shareholders will receive a basis in Crescent Operating Common Stock equal to
the fair market value thereof at the time of the Distribution.
Distributions that are not attributable to gain from sales or exchanges by
Crescent of United States real property interests and not designated by Crescent
as capital gain dividends will be treated as dividends of ordinary income to the
extent that they are made out of current and accumulated earnings and profits of
Crescent. Such distributions ordinarily will be subject to a withholding tax
equal to 30% of the gross amount of the distribution, unless an applicable tax
treaty reduces or eliminates that tax. Crescent expects to withhold U.S. income
tax at the rate of 30% on the gross amount of any such distribution made to a
Non-U.S. Stockholder unless (i) a lower treaty rate applies and the Non-U.S.
Stockholder has filed the required IRS Form 1001 with Crescent or (ii) the
Non-U.S. Stockholder files an IRS Form 4224 with Crescent claiming that the
distribution is effectively connected with the Non-U.S. Stockholder's conduct of
a U.S. trade or business. Distributions in excess of Crescent's current and
accumulated earnings and profits will be subject to a 10% withholding
requirement but will not be taxable to a shareholder to the extent that such
distributions do not exceed the adjusted basis of the stockholder's Crescent
Common Shares, but rather will reduce the
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adjusted basis of such shares. To the extent that distributions in excess of
current and accumulated earnings and profits exceed the adjusted basis of a
Non-U.S. Stockholder's shares, such distributions will give rise to tax
liability if the Non-U.S. Stockholder would otherwise be subject to tax on any
gain from the sale or disposition of the Crescent Common Shares, as described
below. If it cannot be determined at the time a distribution is made whether or
not such distribution will be in excess of current and accumulated earnings and
profits, the distributions would be subject to withholding at the same rate as
dividends. However, a Non-U.S. Stockholder may seek a refund of such amounts
from the Service if it is subsequently determined that such distribution was, in
fact, in excess of Crescent's current and accumulated earnings and profits.
Gain recognized by a Non-U.S. Stockholder upon a sale of Crescent Common
Shares generally will not be taxed under the provisions of the Foreign
Investment in Real Property Tax Act of 1980, as amended ("FIRPTA"), if Crescent
is a "domestically controlled REIT," defined generally as a REIT in which at all
times during a specified testing period less than 50% in value of the stock was
held directly or indirectly by foreign persons. Crescent is and currently
expects to continue to be a "domestically controlled REIT," and in such case the
sale of Crescent Common Shares would not be subject to taxation under FIRPTA.
However, gain not subject to FIRPTA nonetheless will be taxable to a Non-U.S.
Stockholder if (i) investment in the Crescent stock is treated as effectively
connected with the Non-U.S. Stockholder's U.S. trade or business, in which case
the Non-U.S. Stockholder will be subject to the same treatment as U.S.
shareholders with respect to such gain or (ii) the Non-U.S. Stockholder is a
nonresident alien individual who was present in the United States for 183 days
or more during the taxable year and either the individual has a "tax home" in
the United States or the gain is attributable to an office or other fixed place
of business maintained by the individual in the United States, in which case
gains will be subject to a 30% tax. If the gain on the sale of Crescent Common
Shares were to be subject to taxation under FIRPTA, the Non-U.S. Stockholder
would be subject to the same treatment as U.S. shareholders with respect to such
gain (subject to applicable alternative minimum tax and a special alternative
minimum tax in the case of nonresident alien individuals), and the purchaser of
the Crescent Common Shares would be required to withhold and remit to the IRS
10% of the purchase price.
Taxation of Limited Partners of Crescent Operating Partnership as a Result
of the Distribution. In the opinion of Tax Counsel, the contribution of cash and
recently acquired rights to acquire the Assets by Crescent Operating Partnership
into Crescent Operating should qualify as a tax-free contribution of assets to a
controlled corporation for federal income tax purposes. The Service may,
however, be able to challenge this conclusion successfully, and if the
contribution were taxable it would result in gain equal to the excess, if any,
of Crescent Operating Partnership's basis in the assets over the value of
Crescent Operating Common Stock received by Crescent Operating Partnership.
Limited Partners would be taxable on their distributable share of such gain, if
any. Because the assets contributed by Crescent Operating Partnership consist
primarily of cash and recently negotiated rights to acquire the Assets,
management anticipates that any such gain would be nominal, but the Service may
be able to assert successfully that the gain is not insubstantial. Because of
the factual nature of the valuation issue, Tax Counsel is unable to render an
opinion on it. Furthermore, under tax rules which pertain to the distribution by
partnerships of marketable securities, whether or not the contribution by
Crescent Operating Partnership is taxable, the distribution of Crescent
Operating Common Stock to a Limited Partner will, in the opinion of Tax Counsel,
be taxable to such Limited Partner if and to the extent that the value of the
Crescent Operating Common Stock distributed exceeds the basis of such Limited
Partner in such Limited Partner's partnership interest immediately prior to the
distribution.
ALL CRESCENT SHAREHOLDERS AND LIMITED PARTNERS ARE URGED TO CONSULT THEIR
OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES OF THE DISTRIBUTION TO
THEM, INCLUDING THE APPLICATION OF STATE, LOCAL AND FOREIGN TAX LAWS.
LISTING AND TRADING OF CRESCENT OPERATING COMMON STOCK
There is currently no public market for Crescent Operating Common Stock.
Crescent Operating has applied to the Nasdaq National Market for quotation of
the Crescent Operating Common Stock and expects to apply for quotation of the
Crescent Operating Common Stock on the OTC Bulletin Board, although there is no
assurance that the Crescent Operating Common Stock will be approved for listing
on any national
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securities exchange, automated quotation system or over the-the-counter market.
There can be no assurance as to the prices at which trading in Crescent
Operating Common Stock will occur after the Distribution. Until Crescent
Operating Common Stock is fully distributed and an orderly trading market
develops, the prices at which trading in such stock occurs may fluctuate
significantly. There can be no assurance that an active trading market in
Crescent Operating Common Stock will develop or be sustained in the future.
The prices at which Crescent Operating Common Stock trades will be
determined by the marketplace and may be influenced by many factors, including,
among others, Crescent Operating's performance and prospects, the depth and
liquidity of the market for Crescent Operating Common Stock, investor perception
of Crescent Operating and of the industries in which the Company operates and
economic conditions in general, Crescent Operating's dividend policy, and
general financial and other market conditions. In addition, financial markets
have experienced extreme price and volume fluctuations that have affected the
market price of many stocks and that, at times, could be viewed as unrelated or
disproportionate to the operating performance of such companies. Such
fluctuations have also affected the share prices of many newly public issuers.
Such volatility and other factors may materially adversely affect the market
price of Crescent Operating Common Stock.
Crescent Operating will have approximately 400 stockholders of record,
based on the number of record holders of Crescent Common Shares and the number
of Limited Partners on the Record Date . The Transfer Agent and Registrar for
the Crescent Operating Common Stock will be BankBoston, N.A. For certain
information regarding options and other equity-based employee benefit awards
involving Crescent Operating Common Stock that may become outstanding after the
Distribution, see "Management."
SHARES AVAILABLE FOR FUTURE SALE
Crescent Operating Common Stock distributed in the Distribution, which
based on a Record Date of May 30, 1997, is approximately 11,025,547 shares
(subject to reduction to the extent that cash payments are made in lieu of the
issuance of fractional shares of Crescent Operating Common Stock), will be
freely transferable, except for securities received by persons who may be deemed
to be "affiliates" of Crescent Operating under the Securities Act. Persons who
may be deemed to be affiliates of Crescent Operating after the Distribution
generally include individuals or entities that control, are controlled by, or
are under common control with, Crescent Operating and may include certain
officers and directors of Crescent Operating as well as principal stockholders
of Crescent Operating. Persons who are affiliates of Crescent Operating will be
permitted to sell their shares of Crescent Operating Common Stock only pursuant
to an effective registration statement under the Securities Act or an exemption
from the registration requirements of the Securities Act, such as the exemption
afforded by Section 4(2) of the Securities Act (relating to private sales) or by
Rule 144 under the Securities Act. Neither Crescent nor Crescent Operating is
able to predict whether substantial amounts of Crescent Operating Common Stock
will be sold in the open market following the Distribution. Sale of substantial
amounts of Crescent Operating Common Stock in the public market, or the
perception that such sales might occur, could adversely affect the market price
of Crescent Operating Common Stock.
DIVIDEND POLICY
Following the Distribution, Crescent Operating intends to use its available
funds to pursue investment and business opportunities and, therefore, does not
anticipate the payment of any cash dividends on Crescent Operating Common Stock
in the foreseeable future. Payment of dividends on Crescent Operating Common
Stock is prohibited under the loans and line of credit from Crescent Operating
Partnership until all amounts outstanding thereunder are paid in full, and will
also be subject to such limitations as may be imposed by any other credit
facilities that Crescent Operating may obtain from time to time. The declaration
of dividends will be subject to the discretion of the Crescent Operating Board.
On June 11, 1997, Crescent Operating paid a one-time dividend of
approximately $2.4 million to its sole stockholder, Crescent Operating
Partnership, in connection with the sale of the limited partner interest in the
partnership that owns the Dallas Mavericks.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Summary
Pro Forma Financial Data," "Summary Selected Financial Data," and the financial
statements appearing elsewhere in this Prospectus.
This discussion is based on the Combined Financial Statements of the
Carter-Crowley Asset Group, which is a portfolio of businesses and investments
wholly owned by Carter-Crowley and the Pro Forma Consolidating Financial
Information of Crescent Operating. This discussion does not include an analysis
of the historical operating results of the Provider Segment of Magellan
primarily because Crescent Operating is not acquiring the Provider Segment of
Magellan. Crescent Operating instead is acquiring (but has not yet acquired) the
CBHS Interest, which represents an interest in 50% of certain assets of the
Provider Segment of Magellan, after various adjustments. In addition, Crescent
Operating will account for the CBHS Interest under the equity method of
accounting. For these reasons, an analysis of the financial condition and
results of operations of the Provider Segment of Magellan would not be
meaningful in the context of the financial condition and operating results of
Crescent Operating.
The pro forma effects of the acquisition of the Carter-Crowley Assets and
the CBHS Interest are set forth in the Pro Forma Financial Statements of
Crescent Operating, which are included elsewhere in this Prospectus.
CRESCENT OPERATING
Crescent Operating has only recently been formed and has no operating
history. The Company has financed the acquisition of the Carter-Crowley Assets,
in part through borrowings, and intends to finance through borrowings, the
acquisition of the CBHS Interest and the warrants to purchase Magellan common
stock, and may under certain circumstances borrow for the purpose of satisfying
commitments relating to the Assets (see "-- Liquidity and Capital Resources,"
below), making additional investments or providing working capital for
operations. Crescent Operating obtained the rights to acquire the Assets from
Crescent Operating Partnership. The Assets may not be readily marketable and
their values may be affected by general market conditions. The Company believes,
however, that its capital resources and revenues will be sufficient to fund the
Company's anticipated investments and proposed operations.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the formation and capitalization of Crescent Operating,
Crescent Operating has received approximately $14.1 million in cash from
Crescent Operating Partnership and Crescent Operating Partnership agreed to lend
Crescent Operating approximately $35.9 million pursuant to a five-year term loan
(approximately $15.3 million of which was funded on May 8, 1997). The loan is a
recourse loan that is or will be secured, to the extent not prohibited by
pre-existing arrangements, by a first lien on the Assets and all other assets
owned by Crescent Operating now or in the future (other than assets of Crescent
Operating acquired after June 30, 1997, which may be pledged in the future to
secure non-recourse loans to Crescent Operating). The loan bears interest at the
rate of 12% per annum, compounded annually, and is payable quarterly in an
amount equal to the lesser of (i) the net cash flow for the preceding quarter
and (ii) the quarterly amount of principal due, together with interest accrued
on the loan. Net cash flow will be computed by subtracting the total costs
incurred by Crescent Operating from its gross receipts. The loan will mature on
May 8, 2002. The Company also has obtained a $20.4 million line of credit which
bears interest at the same rate as the term loan. The line of credit is payable
on an interest-only basis during its term, which expires on the later of (i) May
21, 2002 or (ii) five years after the last draw under the line of credit. Draws
may be made under the line of credit until June 22, 2002. The line of credit is
a recourse obligation and amounts outstanding thereunder are or will be secured,
to the extent not prohibited by pre-existing arrangements, by a first lien on
the Assets and all other assets owned by Crescent Operating now or in the future
(other than assets of Crescent Operating acquired after June 30, 1997, which may
be pledged in the future to secure non-recourse loans to Crescent Operating). As
of June 11, 1997, no amounts were outstanding under the line of credit.
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Approximately $12.6 million in cash and the proceeds of approximately $15.3
million of loans were used to acquire the Carter-Crowley Assets and the 12.38%
limited partner interest in the partnership that owns the Dallas Mavericks. The
remaining approximately $1.5 million previously funded in the form of cash,
together with the remaining approximately $20.6 million to be advanced in the
form of loans, is expected to be used both to acquire, and make an additional
contribution relating to, the CBHS Interest and to acquire the warrants to
acquire shares of Magellan common stock for an aggregate of approximately $20.0
million, and to fund an obligation of Moody-Day (the construction equipment
sales, leasing and servicing company acquired from Carter-Crowley) to purchase
construction equipment for approximately $2.1 million. The line of credit is
expected to be used to support future funding obligations associated with the
Assets (consisting of approximately $2.2 million relating to Crescent
Operating's investment in Hicks-Muse and approximately $17.5 million relating to
the CBHS Interest) and other cash requirements.
On June 11, 1997, Crescent Operating sold the 12.38% limited partner
interest in the partnership that owns the Dallas Mavericks to an affiliated
entity (see "Certain Transactions," below) and received proceeds from the sale
in the amount of approximately $12.55 million. The limited partner interest was
originally purchased by Crescent Operating for approximately $12.4 million and
the sale resulted in a gain to Crescent Operating of approximately $.15 million.
Of the approximately $12.55 million proceeds from the sale of the limited
partner interest, Crescent Operating used approximately $9.9 million to repay
outstanding principal and $.2 million to pay accrued and unpaid interest on the
$15.3 million advance on the term loan from Crescent Operating Partnership,
thereby reducing the outstanding principal balance of the term loan to $5.4
million as of June 11, 1997. Additionally, Crescent Operating paid a dividend of
approximately $2.4 million to Crescent Operating Partnership, its sole
stockholder. As a result of the sale of the limited partner interest, the
payment of principal and interest on the loan and the distribution to Crescent
Operating Partnership, the pro forma consolidated balance sheet reflects (i) a
decrease in total assets of approximately $12.3 million (reflecting a $12.4
million decrease in investments, partially offset by a $.1 million increase in
cash), (ii) a decrease in total liabilities of approximately $9.9 million
(reflecting a $9.9 million decrease in long-term notes payable) and (iii) a
decrease in stockholder's equity of approximately $2.4 million.
PRO FORMA CAPITAL RESOURCES
As of the date of this Prospectus, the Company has no commitments to
purchase any assets, although it has the right to acquire the CBHS Interest.
Crescent Operating has no external sources of financing except as described
above in "Liquidity and Capital Resources." The purchase of additional assets
will be contingent upon securing adequate funding on terms acceptable to the
Company. The Company is not aware of any material unfavorable trends in either
capital resources or the outlook for long-term cash generation, nor does it
expect any material change in the availability and relative cost of such capital
resources.
There are currently no material changes being considered in the objectives
and policies of the Company as set forth in this Prospectus.
PRO FORMA RESULTS OF OPERATIONS
Three Months Ended March 31, 1997. On a pro forma basis, after giving
effect to the completion of the formation and capitalization of Crescent
Operating, the acquisition of the Carter-Crowley Assets and the acquisition of
the CBHS Interest, Crescent Operating would have experienced a net loss of $3.1
million for the three months ended March 31, 1997. This pro forma net loss
reflects the historical operating results of the Carter-Crowley Asset Group
adjusted to reflect a decrease in historical net income as a result of (i) an
increase in interest expense of $.6 million on long-term financing incurred in
connection with the capitalization of Crescent Operating, and (ii) incremental
general and administrative expenses of $.1 million related to the operation of
Crescent Operating. The $3.1 million pro forma net loss also reflects the $2.4
million net loss related to Crescent Operating's 50% interest in the pro forma
operating results of CBHS. Crescent Operating's 50% interest in CBHS reflects
50% of the historical net income of the Provider Segment of Magellan for the
period which is $4.5 million, as adjusted to reflect (i) an increase in such net
income as a result of (a) the elimination of $2.3 million of expenses
attributable to the European Hospitals and other operations which will not be
acquired by CBHS (and in which Crescent Operating therefore will have no
interest as a result of its
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acquisition of the CBHS Interest) (b) reductions in depreciation and
amortization expenses of $3.0 million, (c) a net decrease of $4.4 million,
attributable to a decrease in tax expenses partially offset by an increase in
interest expense; and (d) an increase in management fees of $1.8 million payable
by Magellan to CBHS for the management of hospital-based businesses which will
not be owned by CBHS (and therefore will not be part of the CBHS Interest), and
(ii) offset completely by an increase in franchise fees, rent expense and
corporate overhead payable by CBHS of $18.4 million.
Year Ended December 31, 1996. On a pro forma basis, Crescent Operating
would have experienced a net loss of $10.8 million for the year ended December
31, 1996. This pro forma net loss reflects the historical operating results of
the Carter-Crowley Asset Group adjusted to reflect an increase in historical net
loss as a result of (i) an increase in interest expense on long-term financing
incurred in connection with the capitalization of Crescent Operating of $2.5
million, and (ii) incremental general and administrative expenses of $.5 million
related to the operation of Crescent Operating. The $10.8 million pro forma net
loss also reflects the $7.7 million net loss related to Crescent Operating's 50%
interest in the pro forma operating results of CBHS. Crescent Operating's 50%
interest in CBHS reflects 50% of the historical net income of the Provider
Segment of Magellan for the period which is $12.1 million, as adjusted to
reflect (i) an increase in such net income as a result of (a) the elimination of
$17.6 million of expenses attributable to the European Hospitals and other
operations which will not be acquired by Crescent Operating as part of the CBHS
Interest, (b) a decrease in tax expense of $19.7 million, (c) reductions in
depreciation, amortization and interest expenses of $13.8 million, and (d) an
increase in management fees payable by Magellan to CBHS for the management of
hospital-based businesses which will not be part of the CBHS Interest of $5.3
million, and (ii) a decrease in net income as a result of an increase in
franchise fees, rent expense and corporate overhead payable by CBHS of $76.2
million.
The Company is not aware of any known trends or uncertainties, other than
national economic conditions, which have had or which may reasonably be expected
to have a material impact, favorable or unfavorable, on revenues or income from
the acquisition of the Assets and operations of its business, other than those
referred to in this Prospectus.
THE CARTER-CROWLEY ASSET GROUP (THE "PORTFOLIO")
HISTORICAL RESULTS OF OPERATIONS
Three Months Ended March 31, 1997 and 1996. Total revenues of the Portfolio
increased approximately $.3 million, or 11.1% to $3.0 million for the three
months ended March 31, 1997, compared with $2.7 million for the three months
ended March 31, 1996. This increase was due to an increase in customer
construction projects and a corresponding increase in demand for Moody-Day's
equipment and services, an increase in the amount of equipment Moody-Day had
available to meet sale and rental demand and the favorable introduction by
Moody-Day of new lines of equipment available for sale and rental.
Total cost of sales for the Portfolio increased approximately $.2 million,
or 8.7%, to $2.5 million for the three months ended March 31, 1997, compared
with $2.3 million for the three months ended March 31, 1996. This increase is
due primarily to an increase in depreciation expense as a result of inventory
purchased by Moody-Day to meet customer demand for rental equipment and an
increase in cost of sales as a result of the new equipment lines available for
sale.
Selling, general and administrative and other expense for the Portfolio
increased approximately $.1 million, or 25.0%, in the aggregate, due primarily
to increases in interest expense attributable to increases in corporate
borrowing and in general corporate expenses.
Year Ended December 31, 1996 Compared to Year Ended December 31,
1995. Total revenues of the Portfolio increased approximately $1.3 million, or
14.3%, to $10.4 million for the year ended December 31, 1996, compared with $9.1
million for the year ended December 31, 1995. The increase is primarily the
result of an increase in customer construction projects and a corresponding
increase in demand for Moody-Day's equipment and services, an increase in the
amount of equipment Moody-Day had available to meet sale and
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rental demand and the favorable introduction by Moody-Day of new lines of
equipment available for sale and rental.
Total cost of sales for the Portfolio increased approximately $1.1 million,
or 14.9%, to $8.5 million for the year ended December 31, 1996, compared with
$7.4 million for the year ended December 31, 1995. This increase is due
primarily to an increase in depreciation expense as a result of inventory
purchased by Moody-Day to meet customer demand for rental equipment and an
increase in cost of sales as a result of the new equipment lines available for
sale.
Selling, general and administrative expense of the Portfolio increased
approximately $.1 million, or 6.3%, to $1.7 million for the year ended December
31, 1996, compared with $1.6 million for the year ended December 31, 1995, due
to increases in general corporate expenses and sales commissions.
Other expense of the Portfolio increased approximately $.3 million, for the
year ended December 31, 1996, compared with December 31, 1995 due primarily to a
$.2 million increase in interest expense resulting from an increase in corporate
borrowings.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994.
Total revenues of the Portfolio increased approximately $1.4 million, or
18.2%, to $9.1 million for the year ended December 31, 1995, compared with $7.7
million for the year ended December 31, 1994. This increase was due to the
implementation of improved revenue-generating strategies and an increase in the
amount of equipment inventory Moody-Day had available to meet the increased
customer sales and rental demand.
Total cost of sales for the Portfolio increased approximately $1.2 million,
or 19.4% to $7.4 million for the year ended December 31, 1995, as compared with
$6.2 million for the year ended December 31, 1994. The increase is the result of
an increase in the volume of sales and rentals.
Selling, general and administrative expense of the Portfolio increased
approximately $.2 million, or 14.3%, to $1.6 million in the year ended December
31, 1995, compared with $1.4 million in the year ended December 31, 1994. The
increase is due to increases in general corporate expenses and sales
commissions.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were approximately $.1 million and $22,000 at
March 31, 1997 and December 31, 1996, respectively. The approximately $.1
million increase is attributable to approximately $.7 million and $11,000 of
cash provided by financing and operating activities, respectively, offset by
approximately $.6 million used in investing activities. Cash provided by
financing activities is primarily attributable to proceeds received from
Carter-Crowley in the form of capital contributions totaling approximately $1.2
million and proceeds from notes payable totaling approximately $.3 million,
primarily (approximately $.2 million) relating to Ingersoll-Rand. Cash used for
financing activities included repayments of notes issued to Carter-Crowley
totaling approximately $.8 million. The Portfolio used cash to fund the purchase
of $.9 million in assets, $.3 million of which was provided by proceeds from the
sale of certain rental equipment.
To the extent the Portfolio's cash flow from operating activities was
insufficient to finance certain capital expenditures, the Portfolio financed
such activities with proceeds available through a line of credit with
Carter-Crowley. The Portfolio expects to meet its liquidity requirements
primarily through cash flow provided by operating activities, which the
Portfolio believes will be adequate to fund normal recurring operating expenses,
debt service requirements and certain capital expenditures.
In April 1997, the line of credit and note payable with Carter-Crowley were
contributed by Carter-Crowley to the Portfolio as a capital contribution
resulting in the removal of all of the Portfolio's notes payable to affiliates.
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BUSINESS
OVERVIEW
Crescent Operating expects to become a lessee and operator of various types
of assets, including real property owned by Crescent and others. Crescent
Operating has had no operations to date. It owns the Carter-Crowley Assets and
anticipates that it will acquire the CBHS Interest. The Carter-Crowley Assets
consist of a construction equipment sales, leasing and service company and an
interest in a private venture capital fund. If Crescent Operating acquires the
CBHS Interest, it will become a 50% owner of CBHS which will operate the
Facilities.
Crescent Operating's Charter provides that one of its corporate purposes is
to perform the Intercompany Agreement between Crescent Operating and Crescent
Operating Partnership, pursuant to which Crescent Operating and Crescent
Operating Partnership have agreed to provide each other with rights to
participate in certain transactions. In addition, the Charter prohibits, for so
long as the Intercompany Agreement remains in effect, Crescent Operating from
engaging in activities or making investments that a REIT could make unless, in
accordance with the terms of the Intercompany Agreement, Crescent Operating
Partnership was first given the opportunity but elected not to pursue such
activities or investments.
Crescent Operating is intended to function principally as an operating
company, in contrast to Crescent's principal focus on investment in real estate
assets. The operating activities and operating assets made available to Crescent
Operating by Crescent are designed to provide Crescent's existing shareholders
with the long-term benefits of ownership in an entity devoted to the conduct of
operating business activities in addition to their investment interest in
Crescent itself. A small number of REITs, operating under tax provisions that no
longer are available to newly formed REITs, have shares that are "paired" or
"stapled" with shares of a related operating company, and therefore cannot be
owned or transferred independently. Because the shares of Crescent and Crescent
Operating can be owned and transferred separately and independently of each
other and are not, and will not be, paired or stapled, Crescent and Crescent
Operating will not provide a paired investment on an ongoing basis to investors
who purchase shares of only one company or the other.
STRATEGY
Crescent Operating intends to manage the Assets, enter into certain of the
businesses to which the Assets relate and pursue additional opportunities.
Crescent Operating believes that it has, or will have access to, sufficient
liquidity and management expertise to manage the Assets successfully.
Crescent Operating's investment and operating strategies are to acquire and
operate a complementary group of businesses which are aligned with certain of
the investments and businesses of Crescent. To pursue additional opportunities,
Crescent Operating plans to capitalize on its relationship with Crescent and
Crescent's ability to structure transactions creatively. Crescent Operating also
plans to determine whether it could provide to Crescent certain lessee and
operator functions currently provided by others to Crescent. In this regard, it
plans to negotiate to acquire or replace the tenants of certain hotels and
resorts owned by Crescent and leased to third parties. No such negotiations are
currently ongoing, however, and there is no assurance that any such agreements
will be reached. The additional opportunities Crescent Operating may pursue are
expected to be varied and may be unrelated to any business in which Crescent
Operating is then engaged or may be engaged at any future date. Crescent
Operating also expects that, in the future, it may sell existing assets that are
inconsistent with its long-term strategies. To the extent any such sales are
made at a time when Crescent Operating has outstanding indebtedness, Crescent
Operating anticipates that it will use the proceeds of any such sales of assets
to reduce the amount of any such indebtedness.
Crescent Operating also intends to pursue additional and similar
opportunities with Crescent and others in the future. The Distribution of
Crescent Operating Common Stock will provide Crescent shareholders and the
Limited Partners as of the Record Date who retain their Crescent Common Shares
with the opportunity to participate in the benefits both of the real estate
operations of Crescent (including ownership of real property) and of the lease
of certain of such assets and the ownership of other non-real estate assets. No
such opportunities to benefit from the lease of any assets or the ownership of
any non-real estate assets other than
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those identified herein have been identified at this time, and there can be no
assurance that any such opportunities will arise in the future.
THE INTERCOMPANY AGREEMENT
Crescent Operating and Crescent Operating Partnership have entered into the
Intercompany Agreement to provide each other with rights to participate in
certain transactions. The Intercompany Agreement is designed to permit investors
who purchase or retain equity interests in both Crescent and Crescent Operating
to participate in the benefits of investments in both companies in a manner
similar to holders of shares in "paired share" REITs. See "-- Overview," above.
The Intercompany Agreement provides, subject to certain terms, that Crescent
Operating Partnership will provide Crescent Operating with a right of first
refusal to become the lessee of any real property acquired by Crescent Operating
Partnership if Crescent Operating Partnership determines that, consistent with
Crescent's status as a REIT, it is required to enter into a "master" lease
arrangement, provided that Crescent Operating and Crescent Operating Partnership
negotiate a mutually satisfactory lease arrangement and Crescent Operating
Partnership determines, in its sole discretion, that Crescent Operating is
qualified to be the lessee. For example, Crescent generally would be required,
consistent with its status as a REIT, to enter into a master lease arrangement
as to hotels and behavioral healthcare facilities. In general, a master lease
arrangement is an arrangement pursuant to which an entire property or project
(or a group of related properties or projects) is leased to a single lessee. As
to opportunities for Crescent Operating to become the lessee of any assets under
a master lease arrangement, the Intercompany Agreement provides that Crescent
Operating Partnership must provide Crescent Operating with written notice of the
lessee opportunity. During the 30 days following such notice, Crescent Operating
has a right of first refusal with regard to the offer to become a lessee and the
right to negotiate with Crescent Operating Partnership on an exclusive basis
regarding the terms and conditions of the lease. If a mutually satisfactory
agreement cannot be reached within the 30-day period (or such longer period to
which Crescent Operating and Crescent Operating Partnership may agree), Crescent
Operating Partnership may offer the opportunity to others for a period of one
year thereafter before it must again offer the opportunity to Crescent Operating
in accordance with the procedures specified above. Crescent Operating
Partnership may, in its discretion, offer any investment opportunity other than
a lessee opportunity to Crescent Operating, upon such notice and other terms as
Crescent Operating Partnership may determine.
Under the Intercompany Agreement, Crescent Operating has agreed not to
acquire or make (i) investments in real estate which, for purposes of the
Intercompany Agreement, includes the provision of services related to real
estate and investment in a hotel properties, real estate mortgages, real estate
derivatives or entities that invest in real estate assets or (ii) any other
investments that may be structured in a manner that qualifies under the federal
income tax requirements applicable to REITs unless it has provided written
notice to Crescent Operating Partnership of the material terms and conditions of
the acquisition or investment opportunity, and Crescent Operating Partnership
has determined not to pursue such acquisitions or investments either by
providing written notice to Crescent Operating rejecting the opportunity within
10 days from the date of receipt of notice of the opportunity or by allowing
such 10-day period to lapse. Crescent Operating also has agreed to assist
Crescent Operating Partnership in structuring and consummating any such
acquisition or investment which Crescent Operating Partnership elects to pursue,
on terms determined by Crescent Operating Partnership. In addition, Crescent
Operating has agreed to notify Crescent Operating Partnership of, and make
available to Crescent Operating Partnership, investment opportunities developed
by Crescent Operating or of which Crescent Operating becomes aware but is unable
or unwilling to pursue.
THE CARTER-CROWLEY ASSETS
On February 10, 1997, Crescent Operating Partnership entered into a
contract with Carter-Crowley and various of its affiliated entities
(collectively, the "Carter-Crowley Sellers"), all of whom are unaffiliated with
Crescent and Crescent Operating, to acquire for approximately $383.3 million,
substantially all of the assets (the "Carter-Crowley Portfolio") of
Carter-Crowley. 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,
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undeveloped land located in the Dallas/Fort Worth metropolitan area, two
multifamily residential properties located in the Dallas/Fort Worth metropolitan
area, marketable securities, secured and unsecured promissory notes, certain
direct non-operating working interests in various oil and gas wells, an
approximately 35% limited partner interest in two oil and gas limited
partnerships, an approximately 12.38% limited partner interest in the
partnership that owns the Dallas Mavericks and the Carter-Crowley Assets.
Pursuant to an agreement between Carter-Crowley and Crescent Operating
Partnership, Carter-Crowley liquidated approximately $51.0 million 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
$332.3 million. On May 9, 1997, Crescent Operating Partnership and Crescent
Operating acquired the remaining assets in the Carter-Crowley Portfolio.
Crescent Operating Partnership acquired certain assets from the
Carter-Crowley Portfolio, with an aggregate purchase price of approximately
$306.3 million, 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, Crescent Operating Partnership obtained rights from the
current holders of the majority interest in the Dallas Mavericks to a contingent
$10.0 million payment if a new arena is built within a 75-mile radius of Dallas.
The remainder of the Carter-Crowley Portfolio, consisting of the
Carter-Crowley Assets and the limited partner interest in the partnership that
owns the Dallas Mavericks, was purchased by Crescent Operating utilizing cash
contributions and loan proceeds that were provided to Crescent Operating by
Crescent Operating Partnership. As of June 11, 1997, Crescent Operating sold,
for approximately $12.55 million, the limited partner interest in the
partnership that owns the Dallas Mavericks to a newly formed corporation wholly
owned by Crescent Operating Partnership. Richard E. Rainwater, John C. Goff and
Gerald W. Haddock, each of whom will serve as a director of Crescent Operating,
also are limited partners of Crescent Operating Partnership. As of May 30, 1997,
Messrs. Rainwater, Goff and Haddock beneficially owned Units representing
approximately 6.2%, 1.1% and .9%, respectively, of the partnership interests in
Crescent Operating Partnership outstanding as of such date. In addition, Mr.
Haddock serves as President and Chief Executive Officer and the sole director of
Crescent Ltd., which is the general partner of Crescent Operating Partnership,
and will serve in the same capacities in the newly formed corporation. See
"Certain Transactions." Crescent Operating had purchased the limited partner
interest in the partnership that owns the Dallas Mavericks from Carter-Crowley
for approximately $12.4 million utilizing a combination of cash payments and
proceeds of borrowings from Crescent Operating Partnership. Crescent Operating
used the proceeds of the sale of the interest (i) to pay all accrued interest
under the term loan from Crescent Operating Partnership, in the amount of
approximately $.2 million, (ii) to make a payment of principal under the term
loan of approximately $9.9 million, and (iii) to pay a dividend to its sole
stockholder, Crescent Operating Partnership, of approximately $2.4 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Carter-Crowley Assets held by Crescent Operating, which have an
allocated cost of approximately $13.7 million, consist of the assets described
below.
Moody-Day, Inc. Moody-Day is a Texas corporation, wholly owned by Crescent
Operating, engaged in the sale, leasing and service of construction equipment
and accessories to the construction and utility industries located primarily in
Texas. Moody-Day's leasing activities consist principally of leasing
construction equipment and accessories under various leases, including certain
non-cancelable operating leases and sales-type leases.
Moody-Day's inventory available for sale or lease is supplied pursuant to
various distributor or dealer agreements. Moody-Day believes that the terms and
conditions of these agreements are consistent with industry standards.
Moody-Day's operations are not notably seasonal, although adverse weather
conditions, such as extended periods of precipitation, could adversely affect
its operations.
The business is operated from a building and the adjacent property in
Dallas, Texas. An underground gasoline and diesel storage tank was previously
removed from the property, but prior to the time case closure
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documentation was issued by the State of Texas, regulations applicable to
removal of the tank were modified to require testing and monitoring procedures.
A remedial plan for the installation of test wells was prepared by Moody-Day and
accepted by the State of Texas, and monitoring of the groundwater currently is
in process.
Moody-Day competes with various large and small companies in its business.
Among its primary competitors are national firms such as A-1, Prime Equipment
Company and Hertz, and local firms such as Gaedcke Equipment Company, a Texas
company with four locations. Moody-Day believes that the principal competitive
factors in its markets for sale and rental of the construction equipment and
accessories it offers are availability of requested equipment, price and product
features. Moody-Day's products and services are marketed directly by its
11-person sales force. No customer accounted for more than 10% of Moody-Day's
gross sales for the twelve-month period ended December 31, 1996, with the
exception of Austin Commercial, a commercial construction contractor, which
accounted for approximately 11% of Moody-Day's sales for that period.
Day-to-day operations and management will be the responsibility of Mark
Roberson, who has been employed by Moody-Day since 1989. From 1989 through 1991,
Mr. Roberson served as Moody-Day's general rental manager. Since 1991, he has
served as the general manager of operations. Prior to joining Moody-Day, Mr.
Roberson had a total of six years of similar industry experience.
At March 1, 1997, Moody-Day had 32 employees, all of whom worked full time.
Of this number, 6 were involved in corporate administrative and support
functions and the remainder were employed in the sales, leasing and service
operations of the business. Moody-Day is currently not a party to any collective
bargaining agreements covering its employees, has not experienced any work
stoppages, and believes that relations with its employees are good. Moody-Day is
not a party to any material pending litigation.
Hicks Muse Tate & Furst Equity Fund II, LP. Hicks-Muse is a private venture
capital fund in which Crescent Operating owns a 1.21% limited partner interest.
Crescent Operating participates in Hicks-Muse on an investment-by-investment
basis and does not own an interest in all investments included in the Hicks-Muse
portfolio. As of December 31, 1996, the unpaid principal balance due on the
original commitment by Carter-Crowley to invest $10 million in Hicks-Muse was
approximately $2.2 million. This amount is required to be paid by Crescent
Operating when called.
As of December 31, 1996, Crescent Operating's investments in the Hicks-Muse
portfolio consisted of investments in the following industries: (i)
manufacturing (37.4%, 22.5% of which consisted of investments in a company that
manufactures copper wire); (ii) communications (33.9%, 33.1% of which consisted
of investments in a cable television operator); (iii) real estate (13.2%, all of
which consisted of investments in a company that provides debt and equity
capital to real estate owners and developers); (iv) financial services (10.5%,
all of which consisted of investments in a foreign insurance company and a small
business investment company); and (v) food (5.0%, all of which consisted of
investments in a chocolate company).
THE CBHS INTEREST
Crescent Operating expects to participate in the operations of behavioral
healthcare and related facilities through its acquisition of an ownership
interest in CBHS pursuant to the Magellan Transaction. Each of the transactions,
as identified below, that forms a part of the Magellan Transaction is
conditioned upon the closing of the other transactions. Accordingly, Crescent
Operating's ability to acquire the CBHS Interest is contingent upon the Magellan
Closing. Officers and directors of Crescent Operating and their affiliates and
associates have significant interests in Crescent and Magellan. See "Certain
Transactions." It is expected that the Magellan Closing will occur in June 1997.
The Magellan Transaction includes:
- the purchase of the Facilities, which consist of approximately 90
behavioral healthcare facilities, by a newly formed affiliated limited
partnership of Crescent Operating Partnership ("Crescent Affiliate"),
pursuant to a Real Estate Purchase and Sale Agreement between Crescent
and Magellan;
- the formation of CBHS pursuant to an Operating Agreement to be entered
into between Crescent Operating and CBHS, Inc.;
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- the capitalization of CBHS, as set forth in a Contribution Agreement to
be entered into among Crescent Operating, Magellan and CBHS;
- the lease of the Facilities from Crescent Affiliate to CBHS and its
wholly-owned subsidiaries, pursuant to the Facilities Lease;
- the grant of rights to CBHS with respect to various assets currently used
by Magellan in the operation of the Facilities but not otherwise
contributed to CBHS or sold to Crescent Affiliate, pursuant to the Master
Franchise Agreement and the Subsidiary Franchise Agreement; and
- the grant by Magellan of an option to Crescent and Crescent Operating to
become equity holders of Magellan, and the grant by Crescent Operating to
Magellan to become an equity holder of Crescent Operating, pursuant to
warrant agreements.
Crescent Affiliate will acquire the Facilities (including the related
medical office buildings) and substantially all of the fixtures, furniture and
equipment currently owned by separate indirect subsidiaries of Magellan and used
in the operation of the Facilities. CBHS will be formed as a joint venture
between Magellan Affiliate and Crescent Operating to operate the Facilities
pursuant to the Facilities Lease, utilizing the franchise services to be
provided to CBHS by Magellan (through a wholly owned subsidiary) for an annual
fee that initially will be approximately $78.2 million pursuant to the Master
Franchise Agreement.
As a result of the Magellan Transaction, Crescent Operating will acquire an
interest in CBHS, through which Crescent Operating will participate in the
operations of CBHS. Initially, each of Magellan Affiliate and Crescent Operating
will own 50% of CBHS, subject to CBHS' right to grant up to 10% of the equity
interest in CBHS to CBHS management as incentive compensation, with any such
grant to reduce the relative ownership interests of Crescent Operating and
Magellan Affiliate on an equal basis. CBHS will continue the operations of the
Provider Segment of Magellan's former business and will focus its business
strategy on the provider segment of the behavioral healthcare industry.
Magellan will contribute to CBHS certain property and intangible rights
used in connection with the Facilities for the interest in CBHS to be held by
Magellan Affiliate, including interests in five behavioral healthcare facilities
and other ancillary real property. Crescent Operating will contribute $5 million
in exchange for its interest. CBHS will purchase certain assets relating to
Magellan's information systems for approximately $5 million. The assets
contributed or sold to CBHS by Magellan and its subsidiaries will include all
supplies and inventory and certain equipment, contract rights and business
records. CBHS will assume the liabilities associated with these assets.
Through its interest in CBHS, Crescent Operating will also participate in
the management of CBHS. Each of Magellan Affiliate and Crescent Operating will
appoint two directors to the four-member board of directors, and all "major
decisions," as described below, must be made by unanimous consent.
Crescent Operating also will have the right, pursuant to warrants granted
by Magellan (see "Magellan Warrant Purchase Agreement," below) to acquire up to
1,283,311 shares of Magellan common stock at an exercise price of $30 per share
during the 12-year period after the Magellan Closing. In addition, Crescent
Operating has granted warrants to purchase up to 2.5% of Crescent Operating
Common Stock on similar terms (see "Crescent Operating Purchase Agreement,"
below).
Real Estate Purchase and Sale Agreement. Crescent Affiliate will acquire
the Facilities from Magellan and its subsidiaries. The obligations of both
Crescent and Magellan to consummate the Real Estate Purchase and Sale Agreement
include the transfer of all material permits, licenses and approvals, the
absence of material regulatory or contractual impediments and governmental
proceedings respecting the operation of the Facilities, the receipt of all
necessary approvals and other material consents, regulatory and other approvals,
licenses and permits and the compliance with all federal and state laws
applicable to the execution of the Master Franchise Agreement. In addition,
Crescent's obligation to consummate the Real Estate Purchase and Sale Agreement
is subject to conditions that include the absence of material adverse changes in
the business or financial condition of Magellan and the absence of any
withdrawal of Crescent's "fairness" opinion from its investment bankers, and
Magellan's obligation to consummate the Real Estate Purchase and Sale Agreement
is subject to conditions that include the absence of any withdrawal of
Magellan's "fairness" opinion from its investment bankers and approval by
Magellan's stockholders.
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<PAGE> 35
Contribution Agreement. For its 50% interest in CBHS, Crescent Operating
will make an initial cash contribution to CBHS in the amount of $5 million, to
be used by CBHS to purchase certain information systems-related assets from a
Magellan subsidiary. For Magellan Affiliate's 50% interest in CBHS, Magellan
will contribute to CBHS certain assets related to the Facilities, and to certain
leased facilities operated by subsidiaries of Magellan, such as patient medical
records, licenses and permits used in the operation of the Facilities, to the
extent they are transferable, leasehold interests, as lessee, in the leased
facilities and in certain medical office buildings, and certain other assets.
On the Magellan Closing Date, CBHS will acquire from Magellan for $8
million various working capital assets related to the Facilities and certain
additional facilities leased to Magellan such as supplies and inventory, notes
receivable, prepaid assets and expenses, lease deposits and utility deposits,
subject to a post-closing adjustment. Magellan will retain certain assets used
in the operation of the Facilities, including those to be provided to CBHS under
the Master Franchise Agreement. CBHS will assume all debts, obligations, duties
and liabilities relating to, or arising out of, the operation of the Facilities
and business related thereto after the Magellan Closing, including obligations
that require performance after the Magellan Closing, liabilities and obligations
relating to the assets contributed to CBHS and liabilities relating to employee
accrued vacation time and sick days.
At the Magellan Closing, at Magellan's option, either (i) Magellan will
provide CBHS with bridge financing for a one-year term in the maximum amount of
$55 million to fund CBHS' reasonable working capital needs during its first year
of operation, including funding of CBHS' purchase of working capital assets from
Magellan's subsidiaries pursuant to the CBHS Contribution Agreement in the
amount of approximately $8 million; or alternatively, (ii) the bridge financing
may be provided by a bank line of credit secured by receivables and guaranteed
by Magellan under certain circumstances. A group of commercial banks has agreed
to issue a loan commitment to CBHS for a line of credit of up to $100 million
pursuant to a five-year revolving credit facility.
Prior to the Magellan Closing, Magellan will cause its subsidiaries which
are joint venturers in a joint venture owning or operating a domestic hospital
to enter into a services agreement with CBHS for each hospital owned or operated
by a joint venture, pursuant to which CBHS will perform, to the extent possible,
all of Magellan's obligations under the joint venture agreement in exchange for
the payment to CBHS by Magellan of all distributions and fees paid to Magellan
by or on behalf of the joint venture. The services agreement will continue in
effect until termination of the Facilities Lease.
CBHS Operating Agreement. The CBHS Operating Agreement provides that, in
addition to the contributions made by Crescent Operating and Magellan under the
CBHS Contribution Agreement, both Crescent Operating and Magellan Affiliate will
contribute an additional $2.5 million in cash to the capital of CBHS within five
days after the Magellan Closing, and will agree to lend, in equal amounts, up to
an additional $17.5 million to CBHS upon demand by Magellan Affiliate within
five years of the Magellan Closing.
The management of CBHS will be vested in the CBHS Board, a four-member
governing board of directors, with Crescent Operating and CBHS, Inc. each
designating two individuals as directors. Each director will have one vote and,
except in the event of certain decisions described below, the CBHS Board will
act by the affirmative vote of a majority of the directors. John C. Goff, Vice
Chairman of Crescent and Crescent Operating, will be Chairman of the CBHS Board.
John M. DeStefanis, an executive officer of Magellan, is expected to resign from
his positions with Magellan and become the President and Chief Executive Officer
of CBHS. With the exception of Mr. Goff, all of initial officers of CBHS are
expected to be former employees of Magellan.
Certain decisions will require 80% CBHS Board approval, including, among
others, any transfer or other disposition of any asset of CBHS in an amount in
excess of $50,000 (unless approved in CBHS' annual budget), the acquisition of
any stock or interest in any corporation, partnership or other business entity,
causing or permitting CBHS to engage in activities other than the behavioral
healthcare business, CBHS' entry into certain agreements proposed between CBHS
and Magellan or Crescent Operating or their affiliates, entering into contracts
not in the ordinary course of business or contracts requiring payments in a
single fiscal
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<PAGE> 36
year in excess of $10,000 or such other amount authorized by the CBHS Board,
unless approved in CBHS' annual budget, incurring certain indebtedness or
granting certain security interests, the admission of any person as an
additional member to CBHS or the issuance of any additional interests in CBHS,
unless provided for in the CBHS Operating Agreement, employment of any person
whose annual compensation is likely to exceed $150,000, unless approved in CBHS'
annual budget, any distributions to Crescent Operating or Magellan Affiliate,
selecting executive officers or removing the chairman of the CBHS Board or CBHS'
President, and the decision to renew the Facilities Lease, the Master Franchise
Agreement or the Subsidiary Franchise Agreement.
Crescent Operating and Magellan Affiliate will not have any right or power
to take part in the management or control of CBHS in any way, except to the
extent set forth in the CBHS Operating Agreement. Crescent Operating and
Magellan Affiliate will only have voting rights with respect to matters
specifically reserved for their vote in the CBHS Operating Agreement and each
will have one vote for each percentage interest in CBHS. The following actions
may be taken only with the approval of CBHS members owning at least 80% of CBHS'
percentage interests: (i) causing or permitting CBHS to engage in any activity
not consistent with the purposes of CBHS; (ii) the performance of any act in
contravention of the CBHS Operating Agreement; (iii) causing CBHS to reorganize,
recapitalize, merge or consolidate with another entity; (iv) electing to
dissolve or liquidate CBHS; (v) causing CBHS to take any action that would cause
a bankruptcy; (vi) possessing CBHS assets or assigning rights in CBHS assets
other than for a CBHS purpose; (vii) confessing a judgment against CBHS; (viii)
changing the percentage interest of any CBHS member without the consent of the
affected member; or (ix) amending the CBHS Operating Agreement. Crescent
Operating and Magellan Affiliate will not be liable for a judgment, decree or
order of a court, or any other debt, obligation or liability of CBHS solely by
reason of being a member of CBHS.
Except for certain transfers permitted in the CBHS Operating Agreement
under certain conditions, a CBHS member may not transfer all or any portion of
its interest in CBHS. Permitted transfers include transfers to (i) a wholly
owned subsidiary; (ii) the transferor's administrator or trustee if transferred
involuntarily by operation of law; (iii) any transferee if the transfer is
approved by all CBHS members having a 20% or greater interest in CBHS; (iv) in
the case of Crescent Operating, to a single transferee if necessary for Crescent
to avoid jeopardizing its status as a REIT (subject to certain conditions); and
(v) to any person upon compliance with the right of first refusal provision in
the CBHS Operating Agreement. In the event a CBHS member has a binding offer
from an unrelated person for the transfer of its interest in CBHS, other than
pursuant to the permitted transfers described above, the non-selling CBHS member
and, in the event there are more than two CBHS members, CBHS, will have a right
of first refusal to purchase all of the selling CBHS member's interest. In the
event that Crescent Operating's or Magellan Affiliate's percentage interest in
CBHS decreases to less than 25%, (i) the other party may not transfer its CBHS
interest without allowing the other CBHS members to sell to the proposed
transferee, on the same terms and conditions, their CBHS interests; and (ii) the
other party may require the other CBHS members to sell their CBHS interests to a
proposed transferee, on the same terms and conditions.
A deadlock of the CBHS Board will be deemed to exist if the CBHS Board will
be unable to reach agreement by the required vote at two successive meetings on
(i) a decision requiring 80% board approval; (ii) a decision involving the
expenditure of more than an amount to be specified; or (iii) a decision relating
to the election of executive officers. The CBHS Operating Agreement contains
provisions requiring the members of CBHS, the CBHS Board and chief executive
officers of Crescent Operating and Magellan Affiliate to use their best efforts
to resolve a deadlock. In the event of a failure to resolve a deadlock pursuant
to these procedures, either Crescent Operating or Magellan Affiliate will be
authorized to offer to purchase all of the interest of the other, and the
non-offering member must either sell on the offered terms or purchase the
offering member's interest on such terms.
Facilities Lease. CBHS will establish a wholly owned subsidiary to operate
each Facility. At the Magellan Closing, Crescent Affiliate, CBHS and
subsidiaries of CBHS will enter into the Facilities Lease, which will be a
triple-net lease structured as an operating lease under which all of the
Facilities will be leased by Crescent Affiliate to CBHS and its subsidiaries.
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<PAGE> 37
The initial term of the Facilities Lease will be 12 years, with four
renewal terms of five years each. CBHS may renew the lease as to all, but not
less than all, of the Facilities at its option upon notice at least one year
prior to the end of the initial term or any renewal term.
The base rent for the first year of the initial term will be $40 million
plus 10% of any increase in the purchase price for the Facilities resulting from
the acquisition of additional facilities by Magellan after the execution of the
Real Estate Purchase and Sale Agreement and prior to the Magellan Closing. The
base rent will increase by 5% compounded annually. At the commencement of any
renewal term of the Facilities Lease, a new fair market rent for the renewal
term will be determined by agreement of the parties, or if the parties are
unable to agree on a fair market rent, then by an appraisal mechanism. Following
appraisal, Crescent Affiliate will have the right to render void the exercise of
the option to extend the Facilities Lease if Crescent Affiliate is not satisfied
with the fair market value rent as determined by the appraiser. In addition,
CBHS will pay annually an additional $20 million under the Facilities Lease (the
"Additional $20 Million Amount"), at least $10 million of which must be used, as
directed by CBHS, for capital expenditures each year and up to $10 million of
which may be used, if requested by CBHS, to cover capital expenditures, property
taxes, insurance premiums and franchise fees. CBHS' failure to pay the
Additional $20 Million Amount is not a default under the Facilities Lease unless
Crescent has expended funds for capital expenditures, property taxes, insurance
premiums or franchise fees.
CBHS will have the right to pledge its leasehold interest to secure senior
indebtedness provided that such pledge is subordinate to any lien placed on the
Facilities by Crescent Affiliate to secure financing for Crescent Affiliate.
CBHS will have the right to sublease all or any of the Facilities, or to
assign the Facilities Lease, to any affiliate of CBHS or joint venture in which
it owns at least a 25% interest provided that CBHS remains liable for all
obligations under the Facilities Lease and the Franchise Agreement is assigned
to the sublessee or assignee.
At the termination of the Facilities Lease, any improvements to real estate
revert to Crescent Affiliate. CBHS will agree that upon expiration of the
Facilities Lease, supplies and inventory that are, in the aggregate, the
equivalent amount in value to that reasonably established for use by the
Facilities in the immediately preceding lease year, will remain at the leased
premises.
Master Franchise Agreement. Under the Master Franchise Agreement, Magellan
(through a wholly owned subsidiary) will grant a franchise for each Facility,
and CBHS agrees to enter into and cause each subsidiary/lessee of a Facility to
enter into a franchise agreement for such Facility. Magellan has agreed to grant
franchises for facilities subsequently acquired, developed or leased by CBHS
provided such facilities meet reasonable requirements of Magellan and that
Magellan is not contractually or legally prevented from granting such franchise.
CBHS will guarantee all obligations of its subsidiaries under the Subsidiary
Franchise Agreements.
Franchise fees payable by CBHS under the Master Franchise Agreement will be
the greater of (i) $78.2 million, subject to increases for inflation; or (ii)
$78.2 million, plus 3% of CBHS Gross Revenues (as defined in the agreement) over
$1 billion and not exceeding $1.2 billion and 5% of CBHS Gross Revenues over
$1.2 billion. Franchise fees are payable monthly. Interest will accrue on past
due franchise fees, but only to the extent that such franchise fees are not past
due as a result of either the operation of the Subordination Agreement or the
failure of CBHS to achieve earnings sufficient to pay such amounts. Franchise
fees are subordinated in payment to the annual base rent due Crescent Affiliate
under the Facilities Lease.
In addition to other remedies, if franchise fees are past due for any
reason in the amount of $6 million or more, Magellan will have the right to
prohibit any incentive compensation to CBHS management and prohibit any vesting
of CBHS management equity. If they are past due in the amount of $18 million or
more, Magellan will have the right to prohibit any salary increases for key
personnel of CBHS, prohibit any additional hiring by CBHS and prohibit any new
hospital acquisitions/joint ventures, directly or indirectly. If they are past
due in an amount greater than $24 million, Magellan will have the right to
require a 5% cutback on budgeted expenses under the then-current approved CBHS
annual budget, require monthly approval of expenditures of
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<PAGE> 38
CBHS by Magellan, including capital and operating expenditures, and require
transfer of control and management of CBHS and CBHS franchisees to Magellan.
CBHS will agree during the term of the Master Franchise Agreement that it
will not engage as an owner, as an operator, in any managerial capacity or
otherwise in any business except (i) as a franchisee of Magellan; (ii) in
certain other businesses in the behavioral healthcare business pursuant to
existing contracts or contracts approved by Magellan; or (iii) in the management
and administration of businesses franchised by Magellan or conducted by a CBHS
subsidiary franchisee for new products. CBHS will not, directly or through any
subsidiary or other affiliate, engage in the hospital-based behavioral
healthcare business, except pursuant to a written agreement with Magellan, for
three years if the Master Franchise Agreement is terminated by Magellan prior to
the thirty-second anniversary of the Master Franchise Agreement. CBHS will keep
confidential the confidential information provided by Magellan and not use such
information other than to operate the franchised businesses. Magellan agrees
that CBHS will be a third party beneficiary of, and may enforce, Magellan's
covenants not to compete as set forth in the Subsidiary Franchise Agreement.
CBHS will have the right to use the "CHARTER" System in connection with its
business of the management and administration of the franchised businesses,
existing joint venture arrangements, existing businesses that are the subject of
management agreements, other businesses franchised by Magellan and new
arrangements. Magellan will continue to operate or provide a toll free "800"
telephone number and call center to provide substantially the same service to
the CBHS franchisees as provided by the call center to the Facilities when
operated by Magellan. The CBHS franchisees will advertise the "800" telephone
number and otherwise use the call center as a means of assisting customers to
locate the places of business of franchisees of Magellan.
CBHS will have the right to assign its rights under the Master Franchise
Agreement only (i) with the consent of Magellan (which consent may not be
unreasonably withheld, conditioned or delayed); (ii) to an entity which
simultaneously acquires all or substantially all of CBHS' business and assets,
provided, in each instance, that such assignee also acquires or assumes CBHS'
rights and obligations under the Facilities Lease; or (iii) if the Facilities
Lease is terminated as a result of an event of default thereunder, and Crescent
Affiliate elects to assume all of CBHS' obligations under the Master Franchise
Agreement and all other agreements specified in the Facilities Lease, to
Crescent Affiliate or a designee of Crescent Affiliate. Magellan has the right
to assign its obligations under the Master Franchise Agreement with the prior
written consent of CBHS and Crescent Affiliate, which consent may not be
unreasonably withheld, or to an entity which simultaneously therewith acquires
all or substantially all of Magellan's business and assets.
In the event the Master Franchise Agreement is assigned to Crescent
Affiliate as a result of the early termination of the Facilities Lease upon an
event of default, Magellan may terminate the Master Franchise Agreement and all
of Crescent Affiliate's rights thereunder for "good cause," which includes the
assignee's insolvency or bankruptcy; violation of any transfer and assignment
provision contained in the Master Franchise Agreement; the assignee's
noncompliance with any law, rule or regulation applicable to the operation of
its business (subject to reasonable attempts to cure); material violations of
confidentiality or nondisclosure covenants; the assignee's failure to perform or
the breach of any covenant, obligation, term, condition, warranty or
certification in the Master Franchise Agreement (subject to reasonable cure
periods); and the assignee's failure to pay certain fees owed to Magellan under
the Master Franchise Agreement within ten days.
CBHS will indemnify and defend Magellan from all losses and liabilities
arising directly or indirectly as a result of, arising out of or in connection
with the operation of CBHS' business, except those directly resulting from
Magellan's willful misconduct or fraud, and Magellan will indemnify CBHS from
all losses and liabilities arising directly or indirectly as a result of,
arising out of or in connection with the operation of CBHS' business or from
Magellan's willful misconduct or fraud.
The initial term of the Master Franchise Agreement is 12 years. CBHS has
the right to renew the Master Franchise Agreement for four additional five-year
renewal terms, provided that at the end of the initial term and each renewal
term, the fees will be adjusted to reflect the fair market value of the
franchise utilized by the Facilities as of the renewal date for the
then-applicable renewal term. The Master Franchise Agreement
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<PAGE> 39
includes an appraisal mechanism for determining fair market value franchise
fees. Notwithstanding the foregoing, if the fair market value franchise fee as
so determined is not acceptable to Magellan, then Magellan will have the option
to terminate the Master Franchise Agreement at the end of the then-current term
and the Master Franchise Agreement will not be further extended. In all other
events, Magellan will not have the right to terminate the Master Franchise
Agreement (whether for breach or otherwise) without the consent of CBHS and
Crescent Affiliate. CBHS will not have the right to terminate the Master
Franchise Agreement (whether for breach or otherwise) without the consent of
Magellan and Crescent Affiliate.
Subsidiary Franchise Agreement. Magellan (through a wholly owned
subsidiary) will grant each CBHS subsidiary that operates a Facility (each, a
"franchisee") a franchise pursuant to a Subsidiary Franchise Agreement. Each
franchisee will be granted the right to engage in the business of providing
behavioral healthcare utilizing the "CHARTER" System from facilities in the
territory defined in the Subsidiary Franchise Agreement. The "CHARTER" System is
a system for the operation of behavioral healthcare businesses under the
"CHARTER" names and marks, including the right to use existing computer
software, existing treatment programs and procedures, existing quality
standards, existing quality assessment methods, existing performance improvement
and monitoring programs, advertising and marketing assistance, promotional
materials, consultation and other matters relating to the operation of the
business. The rights granted under each Subsidiary Franchise Agreement will
relate solely to a defined territory.
Each Subsidiary Franchise Agreement will have the same term as the Master
Franchise Agreement. CBHS will pay Magellan, pursuant to the Master Franchise
Agreement, all franchise fees on behalf of each franchisee.
During the term of each Subsidiary Franchise Agreement, Magellan will
provide franchisees advertising and marketing assistance including (i)
consultation, access to media buying programs and access to broadcast and other
advertising materials produced by Magellan from time to time for franchisees;
(ii) risk management services, including risk financial planning, loss control
and claims management; (iii) outcomes monitoring; (iv) national and regional
contracting services; and (v) consultation by telephone or at Magellan's offices
with respect to matters relating to the franchisee's business in which Magellan
has expertise, including reimbursement, government relations, clinical
strategies, regulatory matters, strategic planning and business development.
During the term of the Subsidiary Franchise Agreement, franchisees will be
prohibited from engaging in the hospital-based behavioral healthcare business
except under franchise from Magellan. For a period expiring on the earlier of
three years after expiration or termination of the Subsidiary Franchise
Agreement or the thirty-second anniversary of the Magellan Closing, the
franchisee agrees not to engage in its exclusive territory in the operation of a
hospital/residential treatment center-based, behavioral healthcare business. The
franchisees agree to keep confidential the confidential information provided by
Magellan and not use such information other than to operate its franchised
business.
The franchisee may not terminate a Subsidiary Franchise Agreement without
the consent of Magellan. Each Subsidiary Franchise Agreement will be subject to
termination by Magellan for "good cause," which includes certain acts of
bankruptcy or insolvency of the franchisee; violation of any transfer and
assignment provision contained in the Master Franchise Agreement; the
franchisee's noncompliance with any law, rule or regulation applicable to the
operation of its business (subject to reasonable attempts to cure); material
violations of confidentiality or nondisclosure covenants; the franchisee's
failure to perform or the breach of any covenant, obligation, term, condition,
warranty or certification in the Master Franchise Agreement (subject to
reasonable cure periods); and the franchisee's failure to pay certain fees owed
to Magellan under the Master Franchise Agreement within ten days.
Subordination Agreement
Magellan, CBHS and Crescent Affiliate will enter into a Subordination
Agreement at the Magellan Closing, which will provide, in general, that
franchise fees are subordinated to base rent, the annual 5% increase (the
"Minimum Escalator Rent") and the first $10 million of the Additional $20
Million Amount due annually under the Facilities Lease (including all renewals).
If, however, the accrued and unpaid
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franchise fees, including interest thereon, if any, equals or exceeds $15
million, then CBHS's available cash generally will first be applied to base rent
and Minimum Escalator Rent, but not to the Additional $20 Million Amount, under
the Facilities Lease (including all renewals). To the extent, however, that CBHS
(with the consent of Magellan) informs Crescent Affiliate that capital
expenditures are required and Crescent Affiliate funds or makes an irrevocable
commitment to fund such capital expenditures, then franchise fees will be
subordinated to such amounts paid or committed by Crescent Affiliate, and CBHS's
available cash will first be applied to base rent, Minimum Escalator Rent and
the portion of the Additional $20 Million Amount necessary to fund such capital
expenditures, and Crescent Affiliate will have no obligation to refund any
amounts paid by CBHS as the Additional $20 Million Amount.
The subordination arrangement provided for in the Subordination Agreement
will continue as long as any base rent, Minimum Escalator Rent or the Additional
$20 Million Amount is unpaid under the Facilities Lease if such base rent,
Minimum Escalator Rent or the Additional $20 Million Amount would have been
entitled to the benefits of the subordination described above.
Magellan Warrant Purchase Agreement. Under the Magellan Warrant Purchase
Agreement, Crescent Operating and Crescent will each receive warrants (the
"Magellan Warrants") to acquire 1,283,311 shares of Magellan common stock at a
warrant exercise price of $30 per share (subject to adjustment pursuant to
antidilution provisions). The Magellan Warrants will be exercisable in varying
increasing amounts beginning on May 31, 1998 and ending on May 31, 2009 as set
forth below.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
DATE FIRST MAGELLAN COMMON STOCK END OF
EXERCISABLE ISSUABLE UPON EXERCISE EXERCISE PERIOD
MAY 31 OF MAGELLAN WARRANTS MAY 31
- ----------- ---------------------- ---------------
<C> <C> <C>
1998 30,000 2001
1999 62,325 2002
2000 97,114 2003
2001 134,513 2004
2002 174,678 2005
2003 217,770 2006
2004 263,961 2007
2005 313,433 2008
2006 366,376 2009
2007 422,961 2009
2008 483,491 2009
</TABLE>
The Magellan Warrant Purchase Agreement provides that, at least 90 days
prior to the first date on which shares of Magellan common stock are issuable
upon exercise of Magellan Warrants, Magellan shall file with the SEC a
registration statement under the Securities Act with respect to the issuance of
Magellan common stock upon exercise of the Magellan Warrants and the resale of
such shares and any other Magellan common stock or other equity securities
issued with respect thereto by way of stock dividend or stock split or in
connection with a recapitalization or reorganization or otherwise. The Magellan
Warrant Purchase Agreement also provides that Magellan shall keep such
registration statement effective on a continual basis so long as Crescent
Operating owns Magellan Warrants pursuant to which Magellan common stock may be
purchased upon exercise thereof, provided that Magellan is not required to
maintain the effectiveness of any registration statement for more than 12 years
and 60 days after the Magellan Closing. Crescent Operating is also given the
right to have shares of Magellan common stock issuable upon exercise of Magellan
Warrants included in certain other registration statements filed by Magellan
under the Securities Act.
Magellan, Crescent Operating and Crescent have valued the Magellan Warrants
at $25.0 million ($12.5 million for the Magellan Warrants issued to Crescent
Operating and $12.5 million for the Magellan Warrants issued to Crescent).
Crescent Operating Warrant Purchase Agreement. Under the Crescent Operating
Warrant Purchase Agreement, Magellan will receive warrants to acquire up to 2.5%
of Crescent Operating Common Stock (the
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<PAGE> 41
"Crescent Operating Warrants") outstanding as of the date of the Magellan
Closing. The Crescent Operating Warrants are exercisable only at the times, and
in the proportions, that Crescent Operating exercises its Magellan Warrants. The
exercise price for the Crescent Operating Warrants will reflect the same premium
as used to calculate the exercise price of the Magellan Warrants, based upon a
valuation of Crescent Operating once a trading market for Crescent Operating
Common Stock has been established.
Prior to the first date on which Magellan exercises its right to acquire
shares of Crescent Operating Common Stock upon exercise of Crescent Warrants
under the Warrant Purchase Agreement, Crescent Operating will use its best
efforts to obtain effectiveness of a registration statement under the Securities
Act with respect to the issuance of the shares of Crescent Operating Common
Stock upon exercise of Crescent Operating Warrants and the resale of such shares
and any other Crescent Operating Common Stock or other equity securities of
Crescent Operating issued with respect thereto by way of stock dividend or stock
split or in connection with a recapitalization or reorganization or otherwise.
Crescent Operating also agrees to keep such registration statement effective on
a continual basis as long as Magellan owns Crescent Operating Warrants pursuant
to which shares of Crescent Operating Common Stock may be purchased upon
exercise thereof, provided that Crescent Operating is not required to maintain
the effectiveness of any registration statement for more than 12 years and 90
days after the Magellan Closing.
PROPERTY
Crescent has agreed to make available to Crescent Operating, at Crescent's
principal office in Fort Worth, Texas, space for Crescent Operating's principal
corporate office. In addition, Crescent Operating owns the property in Dallas,
Texas from which Moody-Day conducts its operations. This property consists of a
one-story office building and a lot and related buildings where equipment is
stored and serviced. Crescent Operating believes that its facilities are
adequate to meet its expected requirements for the coming year.
EMPLOYEES
As of June 11, 1997, Crescent Operating had no employees.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF CRESCENT OPERATING
As of June 11, 1997, Gerald W. Haddock was the sole director of Crescent
Operating and served as its President and Chief Executive Officer. Jeffrey L.
Stevens served as the Treasurer, Chief Financial Officer and Secretary as of
such date. The following table sets forth certain information concerning those
persons who have agreed to serve as executive officers and directors of Crescent
Operating commencing subsequent to June 11, 1997 and prior to the Distribution.
<TABLE>
<CAPTION>
TERM
NAME EXPIRES AGE POSITION
---- ------- --- --------
<S> <C> <C> <C>
Richard E. Rainwater 1998 52 Chairman of the Board of Directors Nominee
John C. Goff 2000 41 Vice Chairman Nominee
Gerald W. Haddock 1999 49 President, Chief Executive Officer and
Director
Anthony M. Frank 2000 66 Director Nominee
Paul E. Rowsey, III 1998 42 Director Nominee
Carl F. Thorne 1999 56 Director Nominee
Jeffrey L. Stevens 2000 48 Treasurer, Chief Financial Officer,
Secretary and Director Nominee
</TABLE>
Richard E. Rainwater has been an independent investor since 1986. Mr.
Rainwater founded Crescent in 1994 and has served as its Chairman of the Board
since its formation. From 1970 to 1986, he served as the chief investment
advisor to the Bass family, whose overall wealth increased dramatically during
his tenure.
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<PAGE> 42
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 that created Columbia/HCA Healthcare Corporation, the
world's largest hospital company. Mr. Rainwater is a graduate of the University
of Texas at Austin and the Graduate School of Business at Stanford University.
John C. Goff, from 1987 to 1994, served as a senior investment advisor to,
and investor with, Mr. Rainwater, as well as a vice president of Rainwater,
Inc., a management operating company wholly owned by Mr. Rainwater. In those
capacities, he has been involved in, and principally responsible for, numerous
acquisitions and financings involving corporate, debt and real estate interests.
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 director and the Vice Chairman of the Board of Crescent. Mr. Goff is a
graduate of the University of Texas at Austin and is a Certified Public
Accountant. From 1994 to 1996, Mr. Goff was Chief Executive Officer and a
director of Crescent. Since December 19, 1996, Mr. Goff has served as Vice
Chairman of the Board of Trust Managers of Crescent. Mr. Goff will also serve as
Chairman of the CBHS Board.
Gerald W. Haddock, prior to joining Crescent in 1994, 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 Rainwater, Inc.
Mr. Haddock is President, Chief Executive Officer and a director of Crescent.
Mr. Haddock was vice president of Rainwater, Inc. from 1990 to 1994 and was the
lead transactional attorney for Mr. Rainwater from 1986 to 1994. Mr. Haddock
presently 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, an oil field service and offshore drilling company,
of which he was one of the three founding directors. 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 1994 through December 18, 1996, Mr.
Haddock served as President, Chief Operating Officer and a director of Crescent.
Since December 19, 1996, Mr. Haddock has served as President, Chief Executive
Officer and a director of Crescent.
Anthony M. Frank served as Postmaster General of the United States from
1988 to 1992. Prior to that time, Mr. Frank served as chairman and chief
executive officer of First Nationwide Bank, chairman of the Federal Home Loan
Bank of San Francisco, chairman of the California Housing Finance Agency, and as
the chairman of the Federal Home Loan Mortgage Corporation Advisory Board. Since
1992, he has served as the founding chairman of Independent Bancorp of Arizona
until October 1993 and currently serves as a consultant and director of
TransAmerica HomeFirst, a mortgage company specializing in loans to the elderly.
Mr. Frank currently serves as a director of Crescent and of Acrogen, Inc. a
biotechnology company. Irvine Apartment Communities, a large California-based
apartment REIT, and Charles Schwab & Co., one of the nation's largest discount
brokerages. He is also a director of Temple Inland, Inc., a manufacturer of
paper and timber products, Bedford Property Investors, Inc., an office and
commercial property REIT investing primarily on the West Coast, General American
Investors Company, Inc., a closed-end investment company, Financial Security
Assurance, a company providing credit enhancement for municipal bond issuers,
Cotelligent, Inc., a provider of temporary office support services, and Living
Centers of America, Inc., an operator of nursing homes. Mr. Frank received a
Bachelor of Arts (B.A.) degree from Dartmouth College and a Master of Business
Administration (M.B.A.) degree from the Amos Tuck School of Business at
Dartmouth where he currently serves as overseer.
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<PAGE> 43
Paul E. Rowsey, III is president of the commercial real estate group of
Rosewood Property Company, a commercial real estate development and investment
company, a position he has held for the past six years, and a member of the
board of directors of Rosewood Property Company. Mr. Rowsey is a director of
Crescent. Mr. Rowsey began his career in 1980 as an attorney specializing in
commercial real estate. Mr. Rowsey holds a Bachelor of Arts (B.A.) degree from
Duke University and a Juris Doctor (J.D.) degree from Southern Methodist
University School of Law.
Carl F. Thorne has been a director of ENSCO International Incorporated, an
oilfield service and offshore drilling company, since December 1986. He was
elected President and Chief Executive Officer of ENSCO in May 1987 and was
elected Chairman of the Board of Directors of ENSCO in November 1987. Mr. Thorne
holds a Bachelor of Science Degree in Petroleum Engineering from the University
of Texas and a Juris Doctorate Degree from Baylor University College of Law.
Jeffrey L. Stevens is the founder, President and Chief Executive Officer of
Petroleum Financial Inc., a firm providing accounting and financial services to
the oil and gas industry. Mr. Stevens has held this position since its inception
in 1991. Mr. Stevens is also a director of Amerac Energy Corporation, an oil and
gas acquisition, production and development company and has held various
positions with Amerac Energy Corporation since 1974. His last position was
Senior Vice President and Chief Financial Officer and Secretary which he held
until January 1997. Mr. Stevens is also a director of Gorilla Capital Limited, a
Canadian firm providing merger and acquisition services. Mr. Stevens is a
Certified Public Accountant.
COMMITTEES OF THE BOARD OF DIRECTORS
The Crescent Operating Board has standing Audit and Compensation
Committees. Anthony M. Frank, Chairman, and Carl F. Thorne will serve as the
members of the Audit Committee and Carl F. Thorne, Chairman, and Paul E. Rowsey,
III will serve as the members of the Compensation Committee. The Audit Committee
makes recommendations concerning the engagement of independent public
accountants, reviews with the independent public accountants the plans and
results of the audit engagement, reviews the independence of the independent
public accountants, considers the range of audit and non-audit fees and reviews
the adequacy of the Company's internal controls. The Compensation Committee is
responsible for establishing salaries, bonuses and other compensation for the
Company's officers and administering the Company's stock option plans.
COMPENSATION OF DIRECTORS
Each director other than Messrs. Rainwater, Goff and Haddock will receive
from the Company an annual fee of $7,500 or a meeting fee of $500 for each
Crescent Operating Board or Committee meeting attended and reimbursements of
expenses incurred in attending meetings.
ANNUAL MEETING
Crescent Operating's Bylaws provide that its annual meeting of stockholders
will be held in June of each year at its principal office or on such other date
and at such other place and time as may be fixed by resolution of Crescent
Operating's Board. The first annual meeting for which proxies will be solicited
from stockholders will be held in 1998.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AFTER THE
DISTRIBUTION
Executive officers and directors will receive shares of Crescent Operating
Common Stock in the Distribution in respect of Crescent Common Shares and Units
held by them on the Record Date. The Distribution will be made on the basis of
one share of Crescent Operating Common Stock for every 10 Crescent Common Shares
held on the Record Date and one share of Crescent Operating Common Stock for
every 5 Units held on the Record Date. In addition, existing incentive plan
awards under Crescent incentive plans will be converted into comparable awards
based on Crescent Operating Common Stock under the Crescent Operating Stock
Incentive Plan as described below.
For purposes of providing an indication of the beneficial ownership of
certain persons following the Distribution, the following table sets forth the
number of shares of Crescent Operating Common Stock that
40
<PAGE> 44
will be beneficially owned immediately following the Distribution, based on a
Record Date of May 30, 1997, by each person then serving as an executive officer
and director of Crescent Operating, all such executive officers and directors of
Crescent Operating as a group, and persons or entities owning 5% or more of the
outstanding Crescent Common Shares and Units.
BENEFICIAL OWNERSHIP
<TABLE>
<CAPTION>
NUMBER PERCENT
NAME AND ADDRESS OF OF OF
BENEFICIAL OWNER(1) SHARES(2) SHARES(2)
------------------- ------------- ---------
<S> <C> <C>
Richard E. Rainwater 1,388,887 12.5%
John C. Goff 227,605 2.0%
Gerald W. Haddock 169,362 1.5%
Anthony M. Frank 1,980 *
Paul E. Rowsey, III 3,398 *
Carl F. Thorne -- *
Jeffrey L. Stevens -- *
FMR Corp. 719,080 6.5%
82 Devonshire Street
Boston, Massachusetts 02109
The Prudential Insurance 516,170 4.7%
Company of America
Prudential Plaza
Newark, New Jersey 07102-3777
Cohen & Steers Capital Management, Inc. 532,120 4.8%
757 Third Avenue
New York, New York 10017
Directors and Executive Officers as a Group
(7 persons) 1,791,232 15.7%
</TABLE>
- ---------------
* Less than 1%.
(1) Unless otherwise indicated, the address of each beneficial owner is 777
Main Street, Fort Worth, Texas 76102.
(2) As of May 30, 1997, 96,993,199 Crescent Common Shares and 6,631,133 Units
were outstanding. Based on the Record Date of May 30, 1997, such amounts of
Crescent Common Shares and Units outstanding would result in the
distribution of approximately 11,025,547 shares of Crescent Operating
Common Stock (subject to reduction to the extent that cash payments are
made in lieu of the issuance of fractional shares of Crescent Operating
Common Stock). For purposes of this table, a person is deemed to have
"beneficial ownership" of the number of shares of Crescent Operating Common
Stock that such person would have had the right to acquire within 60 days
of May 30, 1997 upon exercise of options to purchase Crescent Common Shares
granted pursuant to Crescent's stock incentive plans. For purposes of
computing the percentage of outstanding shares held by each person, all
shares of Crescent Operating Common Stock that such person has the right to
acquire within 60 days pursuant to the exercise of options for 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.
EXECUTIVE COMPENSATION
Crescent Operating was recently formed. None of the Company's executive
officers has received compensation from or on behalf of Crescent Operating since
its formation. The Company has no employment agreements with any person and will
not pay a salary or other compensation to any executive officer for his
41
<PAGE> 45
services in such capacity, although options have been, and in the future may be,
granted to executive officers. See "Certain Transactions -- Contract with
Affiliate of Director."
The following table provides certain information regarding options granted
to the Company's named executive officers at June 11, 1997. None of the options
is exercisable until the Distribution Effective Date. The Company has not
granted any SARs.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF STOCK PRICE
SECURITIES APPRECIATION FOR
UNDERLYING EXERCISE OPTION TERM*
OPTIONS OR BASE EXPIRATION --------------------
NAME GRANTED PRICE ($/SH.) DATE 5% 10%
---- ---------- ------------- -------------------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Richard E. Rainwater........... 116,562 (1) April 2004 $ 72(1) $184(1)
John C. Goff................... 289,190 (1) April 2004/July 2006 179(1) 457(1)
Gerald W. Haddock.............. 265,247 (1) April 2004/July 2006 164(1) 419(1)
</TABLE>
- ---------------
* Potential Realizable Value is based on the assumed annual growth rates shown
over their 10-year option term. For example, a 5% growth rate compounded
annually, for Mr. Goff's grant results in a stock price of $1.61 per share
and a 10% growth rate, compounded annually, results in a stock price of
$2.57 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 stock option
exercises are dependent on the future performance of the stock.
(1) The exercise price per share will equal the approximately $11.7 million in
equity contributed by Crescent Operating Partnership (the $14.1 million
contributed originally less the approximately $2.4 million dividend from
Crescent Operating to Crescent Operating Partnership) divided by the sum of
(i) the number of shares of Crescent Operating Common Stock to be
distributed in the Distribution and (ii) the number of shares of Crescent
Operating Common Stock underlying options granted as of June 11, 1997 to all
persons (approximately 862,538 shares). Based on the Record Date of May 30,
1997, approximately 11,025,547 shares of Crescent Operating Common Stock
will be distributed in the Distribution (subject to reduction to the extent
that cash payments are made in lieu of the issuance of fractional shares of
Crescent Operating Common Stock), and the exercise price per share will be
$.99, which the Company's Board of Directors has determined represents the
fair market value as of the date of grant.
CRESCENT OPERATING STOCK INCENTIVE PLAN
Crescent Operating has adopted a Stock Incentive Plan pursuant to which
grants of options ("Options") to purchase a specified number of shares of
Crescent Operating Common Stock and shares of restricted stock in Crescent
Operating ("Restricted Stock") were made in order to provide each holder of
shares of restricted stock in Crescent or options in Crescent or Crescent
Operating Partnership with an equivalent number of shares of Restricted Stock or
Options in Crescent Operating, based on a ratio of one share of Restricted Stock
or Option to purchase Crescent Operating Common Stock for each 10 shares of
restricted stock in Crescent or options for Crescent Common Shares and one
Option to purchase Crescent Operating Common Stock for each 5 options for Units.
None of the Options is exercisable until the Distribution Effective Date. Under
the Stock Incentive Plan, 1,000,000 shares of Crescent Operating Common Stock
are authorized for issuance. Non-employee directors of Crescent Operating will
receive annual grants of Options to purchase 1,400 shares of Crescent Operating
Common Stock (including an initial grant of an Option to purchase 1,400 shares
of Crescent Operating Common Stock upon appointment of any non-employee
director). In addition, non-employee directors of Crescent received a one-time
grant of 1,400 shares of Crescent Operating Common Stock as of May 13, 1997. No
further grants of Options or Restricted Stock will be made under the Stock
Incentive Plan. The Stock Incentive Plan expires on May 7, 2007.
The Compensation Committee of Crescent Operating has authority to determine
the employees, officers and advisors to be granted Options or Restricted Stock,
to interpret the Stock Incentive Plan, to prescribe, amend and rescind any rules
and regulations necessary or appropriate for the administration of the Stock
Incentive Plan, to determine and interpret the details and provisions of each
Option agreement and Restricted Stock agreement, to modify or amend any Option
agreement or Restricted Stock agreement or waive any conditions or restrictions
applicable to any Option (or the exercise thereof) or to Restricted Stock, and
to
42
<PAGE> 46
make all other determinations necessary or advisable for the administration of
the Stock Incentive Plan. With respect to any provisions of the Stock Incentive
Plan granting the Compensation Committee the right to agree, in its sole
discretion, to further extend the term of any award, the Compensation Committee
may exercise such right at the time of grant, in the agreement relating to such
award, or at any time or from time to time after the grant of any award
thereunder. The discretion of the Compensation Committee under the Stock
Incentive Plan does not extend to Options granted to outside directors.
CERTAIN TRANSACTIONS
INTERESTS RELATING TO CRESCENT OPERATING PARTNERSHIP
Management and Certain Beneficial Owners of Crescent Operating Partnership.
Gerald W. Haddock is the sole director of Crescent Ltd., the sole general
partner of Crescent Operating Partnership, and also serves as the President and
Chief Executive Officer of Crescent Ltd. Additionally, each of Messrs.
Rainwater, Goff and Haddock beneficially owns Units representing approximately
6.2%, 1.1% and 0.9%, respectively, of the partnership interests in Crescent
Operating Partnership outstanding as of such date, and will own Crescent
Operating Common Stock following the Distribution, as set forth above under
"Management -- Security Ownership of Certain Beneficial Owners and Management
After the Distribution."
Formation and Equity Capitalization of Crescent Operating; Ownership of
Crescent Operating Common Stock. Crescent Operating Partnership is the sole
stockholder of Crescent Operating as of the date hereof. On April 1, 1997,
Crescent Operating Partnership acquired 1,000 shares of the Crescent Operating
Common Stock for $1,000. In order to permit Crescent Operating to acquire the
Assets and the limited partner interest in the partnership that owns the Dallas
Mavericks, Crescent Operating Partnership contributed to Crescent Operating cash
totaling $14.1 million. In consideration of the aggregate cash contributions of
approximately $14.1 million from Crescent Operating Partnership, Crescent
Operating has issued to Crescent Operating Partnership the number of shares of
Crescent Operating Common Stock required to make the Distribution to holders of
record of Crescent Common Shares and Units on the Record Date (which is
11,025,547 shares, subject to reduction to the extent that cash payments are
made in lieu of the issuance of fractional shares of Crescent Operating Common
Stock).
Loans from Crescent Operating Partnership. In connection with the
capitalization of Crescent Operating, Crescent Operating Partnership agreed to
advance funds in the form of loans in the aggregate amount of $35.9 million, to
be used to purchase the Assets, the limited partner interest in the partnership
that owns the Dallas Mavericks and to support future funding obligations and
cash requirements. As a result of the repayment of a portion of the funds
borrowed, it is anticipated that the maximum borrowings under the term loan will
be approximately $26.0 million, approximately $5.4 million of which was
outstanding as of June 11, 1997.
Of the $35.9 million that Crescent Operating Partnership agreed to lend to
Crescent Operating, approximately $15.3 million was funded on May 8, 1997 and
approximately $9.9 million of which was repaid on June 11, 1997 as a result of
the sale of the limited partner interest in the partnership that owns the Dallas
Mavericks to an affiliate, as described under "-- Sale of Limited Partner
Interest to Affiliate," below. The loan is a five-year, recourse term loan that
is or will be secured, to the extent not prohibited by pre-existing
arrangements, by a first lien on the Assets and all other assets owned by
Crescent Operating now or in the future (other than assets of Crescent Operating
acquired after June 30, 1997, which may be pledged in the future to secure
non-recourse loans to Crescent Operating). The loan will bear interest at the
rate of 12% per annum, compounded annually, and is payable quarterly in an
amount equal to the lesser of (i) the net cash flow for the preceding quarter
and (ii) the quarterly amount of principal due, together with interest accrued
on the loan. Net cash flow will be computed by subtracting the total costs
incurred by Crescent Operating from its gross receipts. The loan will mature on
May 8, 2002.
The Company has also obtained a line of credit for up to $20.4 million from
Crescent Operating Partnership which shall bear interest at the same rate as the
term loan. The line of credit is payable on an interest-only basis during its
term, which expires on the later of (i) May 21, 2002 or (ii) five years after
the last draw under the line of credit. Draws may be made under the line of
credit until June 22, 2002. The line of
43
<PAGE> 47
credit is a recourse obligation and amounts outstanding thereunder are or will
be secured, to the extent not prohibited by pre-existing arrangements, by a
first lien on the Assets and all other assets owned by Crescent Operating now or
in the future (other than assets of Crescent Operating acquired after June 30,
1997, which may be pledged in the future to secure non-recourse loans to
Crescent Operating). As of June 11, 1997, no amounts were outstanding under the
line of credit.
Sale of Limited Partner Interest to Affiliate. As of June 11, 1997,
Crescent Operating sold, for approximately $12.55 million, the limited partner
interest in the partnership that owns the Dallas Mavericks to a newly formed
corporation wholly owned by Crescent Operating Partnership. Richard E.
Rainwater, John C. Goff and Gerald W. Haddock, each of whom will serve as a
director of Crescent Operating, also are limited partners of Crescent Operating
Partnership. As of May 30, 1997, Messrs. Rainwater, Goff and Haddock
beneficially owned Units representing approximately 6.2%, 1.1% and .9%,
respectively, of the partnership interests in Crescent Operating Partnership
outstanding as of such date. In addition, Mr. Haddock serves as President and
Chief Executive Officer and the sole director of Crescent Ltd., which is the
general partner of Crescent Operating Partnership, and will serve in the same
capacities in the newly formed corporation. See "-- Management and Certain
Beneficial Owners of Crescent Operating Partnership," above, and "-- Crescent,"
below. Crescent Operating had purchased the limited partner interest in the
partnership that owns the Dallas Mavericks from Carter-Crowley for approximately
$12.4 million utilizing a combination of cash payments and proceeds of
borrowings from Crescent Operating Partnership. Crescent Operating used the
proceeds of the sale of the interest (i) to pay all accrued interest under the
term loan from Crescent Operating Partnership, in the amount of approximately
$.2 million, (ii) to make a payment of principal under the term loan of
approximately $9.9 million, and (iii) to pay a dividend to its sole stockholder,
Crescent Operating Partnership, of approximately $2.4 million.
The Intercompany Agreement. The Intercompany Agreement between the Company
and Crescent Operating Partnership sets forth the basis on which Crescent
Operating and Crescent Operating Partnership will refer opportunities to one
another. See "Business -- The Intercompany Agreement."
CRESCENT
The officers of Crescent include Richard E. Rainwater, Chairman of the
Board of Trust Managers, John C. Goff, Vice Chairman, and Gerald W. Haddock,
President and Chief Executive Officer. The sole general partner of Crescent
Operating Partnership is Crescent Ltd., which is a wholly owned subsidiary of
Crescent. Mr. Haddock is the sole director of Crescent Ltd. The persons who are
executive officers of Crescent hold the same offices in Crescent Ltd., except
that Messrs. Rainwater and Goff are not directors or officers of Crescent Ltd.
Messrs. Rainwater, Goff and Haddock owned approximately 12.5%, 2.0% and 1.5% of
Crescent as of May 30, 1997, which interests consist of Crescent Common Shares
and Units (including vested options to acquire Crescent Common Shares and
Units). In connection with the Magellan Transaction, Mr. Goff will become
Chairman of CBHS. Mr. Rainwater is an affiliate of Crescent Operating
Partnership, Crescent Ltd. and Crescent.
INTERESTS RELATING TO MAGELLAN
The CBHS Interest. The CBHS Interest is a part of the Assets expected to be
purchased by Crescent Operating and is a component of the Magellan Transaction.
The CBHS Interest cannot be acquired unless customary closing conditions are
satisfied and all of the transactions that comprise the Magellan Transaction are
consummated, including the acquisition by Crescent Affiliate of the Facilities,
the lease of the Facilities from Crescent Affiliate to CBHS and the
subordination of franchise fees to payments under the Facilities Lease. On May
30, 1997, the requisite percentage of Magellan stockholders approved the
Magellan Transaction. Management of CBHS will be vested in the CBHS Board.
Crescent Operating and Magellan Affiliate will each have the right to designate
two members to the CBHS Board. It is expected that Crescent Operating will
designate John C. Goff and Gerald W. Haddock as its two designees to the CBHS
Board, and that Mr. Goff will serve as Chairman of the CBHS Board.
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<PAGE> 48
Ownership of Magellan Securities. Messrs. Rainwater, Goff and Haddock and
Mr. Rainwater's children own shares of Magellan common stock and warrants to
acquire Magellan common stock. Mr. Rainwater, either directly or indirectly,
owns approximately 2,474,000 shares, and warrants to acquire 1,237,000 shares,
of Magellan common stock. Mr. Rainwater's children, either directly or
indirectly, own approximately 320,000 shares, and warrants to acquire 160,000
shares, of Magellan common stock. Messrs. Goff and Haddock each own, directly or
indirectly, approximately 57,000 shares, and warrants to acquire 28,000 shares,
of Magellan common stock.
The warrants entitle the warrant holders to purchase, at any time until the
January 25, 2000 expiration date, up to 2,000,000 shares of Magellan common
stock at a purchase price of $26.15 per share. Agreements executed in connection
with the acquisition of the warrants (the "Private Placement") provide, among
other things, for the adjustment of the number of shares of Magellan common
stock that can be purchased under the warrants and the purchase price,
respectively, for certain dilutive events, for registration rights for shares,
including the shares of Magellan common stock underlying the warrants, which
registration rights have been exercised, and for a variety of other customary
provisions, including, without limitation, certain restrictions on the private
sale of such shares, certain preemptive rights to acquire additional securities
issued by Magellan for cash in a private placement transaction (which have been
waived to the extent they may apply to the Magellan Transaction), and standstill
covenants restricting the purchase of additional shares of Magellan common stock
by Mr. Rainwater and his affiliates in certain circumstances.
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, 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 (collectively, the "Rainwater Group") continue to own
beneficially a specified minimum number of shares of Magellan common stock. A
limited partnership of which a corporation owned by Mr. Rainwater is the sole
general partner proposed Ms. Moore as its nominee for director, and Ms. Moore
was elected a director by the Magellan Board on February 22, 1996.
As part of the Private Placement, Magellan agreed (i) to pay a transaction
fee of $150,000; (ii) to reimburse certain expenses of Rainwater, Inc. in
connection with the Private Placement; (iii) to pay the Rainwater Group an
annual monitoring fee of $75,000 commencing on March 31, 1996; and (iv) to
reimburse the Rainwater Group for reasonable fees and expenses (up to a maximum
of $25,000 annually) incurred in connection with its ownership of the Magellan
common stock and the warrants. Magellan also agreed to reimburse the Rainwater
Group in the future for one additional filing under the Hart-Scott Rodino
Anti-Trust Improvements Act of 1976 if such a filing is required in connection
with an exercise of the warrants.
From January 25, 1996 through December 31, 1996, Magellan paid to the
Rainwater Group under the Private Placement an aggregate of $306,344, consisting
of a transaction fee of $150,000, expense reimbursement in connection with the
Private Placement of $86,156, and monitoring fees and expenses of $70,188.
Excluded from these amounts are directors' fees and expense reimbursement paid
to Ms. Moore in her capacity as a director of Magellan.
CONTRACT WITH AFFILIATE OF DIRECTOR
Crescent Operating has entered into a one-year contract (subject to
automatic renewal for one-year terms unless terminated by either party 60 days
prior to any anniversary date of the contract) with Petroleum Financial Inc., a
company owned by Jeffrey L. Stevens, a director nominee and the Treasurer, Chief
Financial Officer and Secretary of the Company, pursuant to which Petroleum
Financial will provide certain services to Crescent Operating. These services
include accounting services, review or initial preparation of reports required
to be filed with the Commission, reports to shareholders, and similar matters.
Crescent Operating will pay Petroleum Financial an annual fee in an amount to be
determined.
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DESCRIPTION OF CRESCENT OPERATING CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
Crescent Operating's authorized capital stock consists of 10,000,000 shares
of preferred stock, par value $.01 per share (the "Preferred Stock"), and
22,500,000 shares of Crescent Operating Common Stock. Immediately following the
Distribution, approximately 11,025,547 shares of Crescent Operating Common Stock
will be outstanding (subject to reduction to the extent that cash payments are
made in lieu of the issuance of fractional shares of Crescent Operating Common
Stock). All of the shares of Crescent Operating Common Stock that will be
outstanding immediately following the Distribution will be validly issued, fully
paid and nonassessable.
COMMON STOCK
The holders of Crescent Operating Common Stock will be entitled to one vote
for each share on all matters voted on by stockholders, including elections of
directors, and, except as otherwise required by law or provided in any
resolution adopted by Crescent Operating's Board with respect to any series of
Preferred Stock, the holders of such shares will possess all voting power. The
Charter does not provide for cumulative voting in the election of directors.
Subject to any preferential rights of any outstanding series of Preferred Stock
created by the Crescent Operating Board from time to time, the holders of
Crescent Operating Common Stock will be entitled to such dividends as may be
declared from time to time by the Crescent Operating Board from funds available
therefor, and upon liquidation will be entitled to receive pro rata all assets
of the Company available for distribution to such holders.
PREFERRED STOCK
The Charter authorizes the Crescent Operating Board to establish one or
more series of Preferred Stock and to determine, with respect to any series of
Preferred Stock, the terms and rights of such series, including (i) the
designation of the series, (ii) the number of shares of the series, which number
the Crescent Operating Board may thereafter (except where otherwise provided in
the applicable certificate of designation) increase or decrease (but not below
the number of shares thereof then outstanding), (iii) whether dividends, if any,
will be cumulative or noncumulative, and, in the case of shares of any series
having cumulative dividend rights, the date or dates or method of determining
the date or dates from which dividends on the shares of such series shall be
cumulative, (iv) the rate of any dividends (or method of determining such
dividends) payable to the holders of the shares of such series, any conditions
upon which such dividends will be paid and the date or dates or the method for
determining the date or dates upon which such dividends will be payable, (v) the
redemption rights and price or prices, if any, for shares of the series, (vi)
the terms and amounts of any sinking fund provided for the purchase or
redemption of shares of the series, (vii) the amounts payable on and the
preferences, if any, of shares of the series in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of Crescent
Operating, (viii) whether the shares of the series will be convertible or
exchangeable into shares of any other class or series, or any other security, of
Crescent Operating or any other corporation, and, if so, the specification of
such other class or series or such other security, the conversion or exchange
price or prices or rate or rates, any adjustments thereof, the date or dates as
of which such shares will be convertible or exchangeable and all other terms and
conditions upon which such conversion or exchange may be made, (ix) restrictions
on the issuance of shares of the same series or of any other class or series,
(x) the voting rights, if any, of the holders of the shares of the series, and
(xi) any other relative rights, preferences and limitations of such series.
Crescent Operating believes that the ability of the Crescent Operating
Board to issue one or more series of Preferred Stock will provide it with
flexibility in structuring possible future financings and acquisitions, and in
meeting other corporate needs which might arise. The authorized shares of
Preferred Stock, as well as shares of Crescent Operating Common Stock, will be
available for issuance without further action by Crescent Operating's
stockholders, unless such action is required by applicable law or the rules of
any stock exchange or automated quotation system on which Crescent Operating's
securities may be listed or traded. If the approval
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of Crescent Operating's stockholders is not required for the issuance of shares
of Preferred Stock or Crescent Operating Common Stock, the Crescent Operating
Board may determine not to seek stockholder approval.
Although the Crescent Operating Board has no intention at the present time
of doing so, it could issue a series of Preferred Stock that could, depending on
the terms of such series, impede the completion of a merger, tender offer or
other takeover attempt. The Crescent Operating Board will make any determination
to issue such shares based on its judgment as to the best interests of Crescent
Operating and its stockholders. The Crescent Operating Board, in so acting,
could issue Preferred Stock having terms that could discourage an acquisition
attempt through which an acquiror may be able to change the composition of the
Crescent Operating Board, including a tender offer or other transaction that
some, or a majority, of Crescent Operating's stockholders might believe to be in
their best interests or in which such stockholders might receive a premium for
their stock over the then-current market price of such stock.
SERIES A JUNIOR PREFERRED STOCK
The Company expects to reserve 225,000 shares of Series A Junior Preferred
Stock for issuance upon exercise of the Rights. The Series A Junior Preferred
Stock will not be redeemable and will rank, with respect to the payment of
dividends and the distribution of assets, junior to any other series of any
other classes of Preferred Stock that may exist from time to time. Generally,
each share of Series A Junior Preferred Stock will entitle its holder to 100
votes on all matters submitted to a vote of the Company's stockholders.
Subject to the rights of holders of any shares of any series of Preferred
Stock ranking prior and superior to the Series A Junior Preferred Stock with
respect to dividends, holders of shares of Series A Junior Preferred Stock, in
preference to holders of Crescent Operating Common Stock and any other junior
stock, will be entitled to receive, when, as and if declared by the Crescent
Operating Board, quarterly cash dividends, in an amount per share equal to the
greater of (i) $1 or (ii) subject to adjustment as set forth herein, 100 times
the aggregate per share amount of all cash dividends and 100 times the aggregate
per share amount (payable in kind) of all non-cash dividends or other
distributions (other than dividends payable in Crescent Operating Common Stock
or a subdivision of outstanding shares of Crescent Operating Common Stock)
declared on the Crescent Operating Common Stock since the immediately preceding
quarterly dividend payment date, or since the first issuance of any share of
Series A Junior Preferred Stock, in the case of the first quarterly dividend
payment date. In the event the Board declares or pays a dividend on the Crescent
Operating Common Stock payable in shares of Crescent Operating Common Stock or
subdivides, combines or consolidates the outstanding shares of Crescent
Operating Common Stock into a greater or lesser number of shares of Crescent
Operating Common Stock, the amount of in-kind dividend payable to holders of
Series A Junior Preferred Stock will be adjusted for such dividend on, or
subdivision, combination or consolidation of, shares of Crescent Operating
Common Stock. Dividends on the Series A Junior Preferred Stock generally will be
declared immediately following a dividend declaration on the Crescent Operating
Common Stock, and will be cumulative. Accrued but unpaid dividends will not bear
interest.
During such times as dividends payable on the Series A Junior Preferred
Stock are in arrears, and until such averages have been paid in full, Crescent
Operating will be prohibited from (i) declaring or paying dividends, or making
other distributions on any shares of stock ranking junior to the Series A Junior
Preferred Stock, (ii) declaring or paying dividends, or making other
distributions on any shares of stock ranking on a parity with the Series A
Junior Preferred Stock, except dividends paid ratably on the Series A Junior
Preferred Stock and all such parity stock, in proportion to the amounts to which
holders of all such shares are then entitled, (iii) redeeming or otherwise
acquiring for value any stock ranking junior to the Series A Junior Preferred
Stock, and (iv) redeeming or otherwise acquiring for value any shares of Series
A Junior Preferred Stock, or any shares of stock ranking on a parity with the
Series A Junior Preferred Stock, except in accordance with a purchase offer made
under certain limited circumstances. Redemptions and other acquisitions of stock
ranking junior to the Series A Junior Preferred Stock will be permissible if
such redemptions or acquisitions are made in exchange for shares of any stock of
Crescent Operating ranking junior to the Series A Junior Preferred Stock.
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In the event of any liquidation, dissolution or winding up of Crescent
Operating, no distribution will be made to the holders of shares of stock
ranking junior to the Series A Junior Preferred Stock unless and until the
holders of the Series A Junior Preferred Stock have received $100 per share,
plus an amount equal to accrued and unpaid dividends and distributions thereon.
Holders of Series A Junior Preferred Stock will be entitled to receive an
aggregate amount per share equal to 100 times the aggregate amount to be
distributed per share to holders of Crescent Operating Common Stock. Further, no
distribution will be made to the holders of shares of stock ranking on a parity
with the Series A Junior Preferred Stock, except distributions made ratably on
the Series A Junior Preferred Stock and all such parity stock in proportion to
the totals to which the holders are entitled upon such liquidation, dissolution
or winding up. In the event the Board declares or pays a dividend payable in
shares of Crescent Operating Common Stock or subdivides, combines or
consolidates the outstanding shares of Crescent Operating Common Stock into a
greater or lesser number of shares of Crescent Operating Common Stock, the
amount of the liquidating distribution payable to holders of Series A Junior
Preferred Stock will be adjusted for such dividend on, or subdivision,
combination or consolidation of, shares of Crescent Operating Common Stock.
In the event Crescent Operating enters into a consolidation, merger,
combination or other transaction pursuant to which shares of Crescent Operating
Common Stock are exchanged for or changed into other stock or securities, cash
or other property, each share of Series A Junior Preferred Stock must be
similarly exchanged or changed into an amount per share equal to 100 times the
aggregate amount of stock, securities, cash or other property (payable in kind)
into which or for which each share of Crescent Operating Common Stock is changed
or exchanged. In the event the Board declares or pays a dividend payable in
shares of Crescent Operating Common Stock or subdivides, combines or
consolidates the outstanding shares of Crescent Operating Common Stock into a
greater or lesser number of shares of Crescent Operating Common Stock, the
amount payable to holders of Series A Junior Preferred Stock in respect of a
consolidation, merger, combination or other such transaction will be adjusted
for such dividend on, or subdivision, combination or consolidation of, shares of
Crescent Operating Common Stock.
WARRANTS
Crescent Operating Warrant Purchase Agreement. Under the Crescent Operating
Warrant Purchase Agreement, Magellan will receive warrants to acquire up to 2.5%
of Crescent Operating Common Stock outstanding as of the date of the Magellan
Closing. The Crescent Operating Warrants are exercisable only at the times, and
in the proportions, that Crescent or Crescent Operating exercises its Magellan
Warrants. The exercise price for the Crescent Operating Warrants will reflect
the same premium as used to calculate the exercise price of the Magellan
Warrants, based upon a valuation of Crescent Operating to be conducted by a
mutually agreed upon independent appraiser once a trading market for Crescent
Operating Common Stock has been established. See "Business -- The CBHS
Interest -- Crescent Operating Warrant Purchase Agreement" for a more detailed
description of the terms of the Crescent Operating Warrants.
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CERTAIN ANTITAKEOVER PROVISIONS
STAGGERED BOARD OF DIRECTORS
The Charter and the Bylaws provide that the Crescent Operating Board will
be divided into three classes of directors, each class constituting
approximately one-third of the total number of directors, with the classes
serving staggered three-year terms. The classification of the Crescent Operating
Board will have the effect of making it more difficult for stockholders to
change the composition of the Crescent Operating Board, because only a minority
of the directors are up for election, and the Crescent Operating Board may not
be replaced by vote of the stockholders, at any one time. Crescent Operating
believes, however, that the longer terms associated with the classified Crescent
Operating Board will help to ensure continuity and stability of the Company's
management and policies.
The classification provisions also could have the effect of discouraging a
third party from accumulating a large block of Crescent Operating Common Stock
or attempting to obtain control of Crescent Operating, even though such an
attempt might be beneficial to the Company and some, or a majority, of its
stockholders. Accordingly, under certain circumstances stockholders could be
deprived of opportunities to sell their shares of Crescent Operating Common
Stock at a higher price than might otherwise be available.
NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES
The Charter provides that, subject to any rights of holders of Preferred
Stock to elect additional directors under specified circumstances ("Preferred
Holders' Rights"), the number of directors will be fixed by the Bylaws. The
Bylaws provide that, subject to any Preferred Holders' Rights, the number of
directors will be fixed by the Crescent Operating Board, but must not be more
than 25 nor less than three. In addition, the Bylaws provide that, subject to
any Preferred Holders' Rights, and unless the Crescent Operating Board otherwise
determines, any vacancies (other than vacancies created by an increase in the
total number of directors) will be filled by the affirmative vote of a majority
of the remaining directors, though less than a quorum, and any vacancies created
by an increase in the total number of directors may be filled by a majority of
the entire Crescent Operating Board. Accordingly, the Crescent Operating Board
could temporarily prevent any stockholder from enlarging the Crescent Operating
Board and then filling the new directorship with such stockholder's own
nominees.
The Charter and the Bylaws provide that, subject to any Preferred Holders'
Rights, directors may be removed only for cause upon the affirmative vote of
holders of at least 80% of the entire voting power of all the then-outstanding
shares of stock entitled to vote generally in the election of directors, voting
together as a single class.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS
The Charter and Bylaws provide that any action required or permitted to be
taken by the stockholders of Crescent Operating must be effected at a duly
called annual or special meeting of such holders and may not be effected by any
consent in writing by such holders. Except as otherwise required by law and
subject to the rights of the holders of any Preferred Stock, special meetings of
stockholders of Crescent Operating for any purpose or purposes may be called
only by the Chairman of the Board, Vice Chairman, President or the Crescent
Operating Board pursuant to a resolution stating the purpose or purposes
thereof, and any power of stockholders to call a special meeting is specifically
denied. No business other than that stated in the notice shall be transacted at
any special meeting. These provisions may have the effect of delaying
consideration of a stockholder proposal until the next annual meeting unless a
special meeting is called by the Chairman of the Board, Vice Chairman, President
or the Crescent Operating Board.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND STOCKHOLDER PROPOSALS
The Bylaws establish an advance notice procedure for stockholders to make
nominations of candidates for directors or bring other business before an annual
meeting of stockholders of Crescent Operating (the "Stockholder Notice
Procedure").
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The Stockholder Notice Procedure provides that (i) only persons who are
nominated by, or at the direction of, the Crescent Operating Board, or by a
stockholder who has given timely written notice containing specified information
to the Secretary of Crescent Operating prior to the meeting at which directors
are to be elected, will be eligible for election as directors of Crescent
Operating and (ii) at an annual meeting, only such business may be conducted as
has been brought before the meeting by, or at the direction of the Chairman or
the Crescent Operating Board or by a stockholder who has given timely written
notice to the Secretary of Crescent Operating of such stockholder's intention to
bring such business before such meeting. In general, for notice of stockholder
nominations or proposed business to be conducted at an annual meeting to be
timely, such notice must be received by the Company not less than 70 days nor
more than 90 days prior to the first anniversary of the previous year's annual
meeting.
The purpose of requiring stockholders to give the Company advance notice of
nominations and other business is to afford the Crescent Operating Board a
meaningful opportunity to consider the qualifications of the proposed nominees
or the advisability of the other proposed business and, to the extent deemed
necessary or desirable by the Crescent Operating Board, to inform stockholders
and make recommendations about such nominees or business, as well as to ensure
an orderly procedure for conducting meetings of stockholders. Although the
Bylaws do not give the Crescent Operating Board power to block stockholder
nominations for the election of directors or proposal for action, they may have
the effect of discouraging a stockholder from proposing nominees or business,
precluding a contest for the election of directors or the consideration of
stockholder proposals if procedural requirements are not met, and deterring
third parties from soliciting proxies for a non-management slate of directors or
proposal, without regard to the merits of such slate or proposal.
RELEVANT FACTORS TO BE CONSIDERED BY THE CRESCENT OPERATING BOARD
The Charter, which provides that one of the purposes of Crescent Operating
is to perform the Intercompany Agreement, also provides that, in determining
what is in the best interest of Crescent Operating in evaluating a "business
combination," "change in control" or other transaction, a director of Crescent
Operating shall consider all of the relevant factors, which may include (i) the
immediate and long-term effects of the transaction on Crescent Operating's
stockholders, including stockholders, if any, who do not participate in the
transaction; (ii) the social and economic effects of the transaction on the
Company's employees, suppliers, creditors and customers and others dealing with
the Company and on the communities in which the Company operates and is located;
(iii) whether the transaction is acceptable, based on the historical and current
operating results and financial condition of the Company; (iv) whether a more
favorable price would be obtained for the Company's stock or other securities in
the future; (v) the reputation and business practices of the other party or
parties to the proposed transaction, including its or their management and
affiliates, as they would affect employees of the Company; (vi) the future value
of the Company's securities; (vii) any legal or regulatory issues raised by the
transactions; (viii) the effect on the Intercompany Agreement; and (ix) the
business and financial condition and earnings prospects of the other party or
parties to the proposed transactions including, without limitation, debt service
and other existing financial obligations, financial obligations to be incurred
in connection with the transaction and other foreseeable financial obligations
of such other party or parties. Pursuant to this provision, the Crescent
Operating Board may consider subjective factors affecting a proposal, including
certain nonfinancial matters, and on the basis of these considerations, may
oppose a business combination or other transaction which, evaluated only in
terms of its financial merits, might be attractive to some, or a majority, of
the Company's stockholders.
AMENDMENT
The Charter provides that the affirmative vote of the holders of at least
80% of the stock entitled to vote generally in the election of directors (the
"Voting Stock"), voting together as a single class, is required to amend
provisions of the Charter relating to stockholder action without a meeting; the
calling of special meetings; the number, election and term of the Company's
directors; the filling of vacancies; and the removal of directors. The Charter
further provides that the related Bylaws described above (including the
Stockholder Notice Procedure) may be amended only by the Crescent Operating
Board or by the affirmative vote of the
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holders of at least 80% of the voting power of the outstanding shares of Voting
Stock, voting together as a single class. In all cases, amendments to the
Charter require that the Crescent Operating Board determine that the proposed
amendment is advisable.
RIGHTS PLAN
The Crescent Operating Board currently expects to adopt the Rights Plan on
or prior to the Distribution Effective Date. Pursuant to the Rights Plan, the
Crescent Operating Board will cause to be issued one Right for each share of
Crescent Operating Common Stock outstanding on the Distribution Effective Date.
Each Right will entitle the registered holder to purchase from Crescent
Operating one-hundredth of a share of Series A Junior Preferred Stock, par value
$.01 per share, of Crescent Operating at a price of $5 (the "Purchase Price"),
subject to adjustment. The description and terms of the Rights will be set forth
in a Rights Agreement (the "Rights Agreement"), between Crescent Operating and
the designated Rights Agent (the "Rights Agent"). The description set forth
below is intended as a summary only and is qualified in its entirety by
reference to the form of the Rights Agreement filed as an exhibit to the
Registration Statement. See "Available Information."
Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") has acquired beneficial ownership of 10% or more of the outstanding
shares of Crescent Operating Common Stock or (ii) 10 business days (or such
later date as may be determined by action of the Crescent Operating Board prior
to such time as any person becomes an Acquiring Person) following the
commencement of, or announcement of an intention to make, a tender offer or
exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 10% or more of such outstanding shares of
Crescent Operating Common Stock (the earlier of such dates being called the
"Rights Distribution Effective Date"), the Rights will be evidenced by the
certificates representing the Crescent Operating Common Stock.
The Rights Agreement will provide that, until the Rights Distribution
Effective Date (or earlier redemption or expiration of the Rights), the Rights
will be transferred with and only with the Crescent Operating Common Stock.
Until the Rights Distribution Effective Date (or earlier redemption or
expiration of the Rights), the Crescent Operating Common Stock certificates will
contain a notation incorporating the Rights Agreement by reference. As soon as
practicable following the Rights Distribution Effective Date, separate
certificates evidencing the Rights (the "Right Certificates") will be mailed to
holders of record of the Crescent Operating Common Stock as of the close of
business on the Rights Distribution Effective Date and such separate Right
Certificates alone will evidence the Rights.
The Rights will not be exercisable until the Rights Distribution Effective
Date. The Rights will expire on the 10th anniversary of the Distribution
Effective Date (the "Final Expiration Date"), unless the Final Expiration Date
is extended or unless the Rights are earlier redeemed or exchanged by Crescent
Operating, in each case, as summarized below.
In the event that any person or group of affiliated or associated persons
becomes an Acquiring Person, proper provision shall be made so that each holder
of a Right, other than Rights beneficially owned by the Acquiring Person (which
will thereafter be void), will thereafter have the right to receive upon
exercise that number of shares of Crescent Operating Common Stock having a
market value of two times the exercise price of the Right. In the event that
Crescent Operating is acquired in a merger or other business combination
transaction or 50% or more of its consolidated assets or earning power are sold
after a person or group of affiliated or associated persons becomes an Acquiring
Person, proper provision will be made so that each holder of a Right will
thereafter have the right to receive, upon the exercise thereof at the
then-current exercise price of the Right, that number of shares of common stock
of the acquiring company which at the time of such transaction will have a
market value of two times the exercise price of the Right.
At any time after the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 10% or more of the outstanding
Crescent Operating Common Stock and prior to the acquisition by such person or
group of 50% or more of the outstanding Crescent Operating Common Stock, the
Crescent Operating Board may exchange the Rights (other than Rights owned by
such person or group which have
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become void), in whole or in part, at an exchange ratio of one share of Crescent
Operating Common Stock, or one-hundredth of a share of Series A Junior Preferred
Stock (or of a share of a class or series of the Preferred Stock having
equivalent rights, preference and privileges) per Right (subject to adjustment).
At any time prior to the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 10% or more of the outstanding
Crescent Operating Common Stock, the Crescent Operating Board may redeem the
Rights in whole, but not in part, at a price of $.01 per Right (the "Redemption
Price"). The redemption of the Rights may be made effective at such time on such
basis and with such conditions as the Crescent Operating Board, in its sole
discretion, may establish. Immediately upon any redemption of the Rights, the
right to exercise the Rights will terminate and the holders of the Rights then
will be eligible to receive only the Redemption Price.
The terms of the Rights may be amended by the Crescent Operating Board
without the consent of the holders of the Rights; provided, however, that from
and after such time as any person or group of affiliated or associated persons
becomes an Acquiring Person, no such amendment may adversely affect the
interests of the holders of the Rights.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of Crescent Operating, including, without limitation,
the right to vote or to receive dividends.
The number of outstanding Rights and the number of one-hundredths of a
share of Series A Junior Preferred Stock issuable upon exercise of each Right
also will be subject to adjustment in the event of a split of the Crescent
Operating Common Stock, or a stock dividend on the Crescent Operating Common
Stock payable in Crescent Operating Common Stock or subdivisions, consolidations
or combinations of the Crescent Operating Common Stock occurring, in any such
case, prior to the Rights Distribution Effective Date.
The Purchase Price payable, and the number of shares of Series A Junior
Preferred Stock or other securities or property issuable, upon exercise of the
Rights will be subject to adjustment from time to time to prevent dilution (i)
in the event of a stock dividend on, or a subdivision, combination or
reclassification of, the shares of Series A Junior Preferred Stock, (ii) upon
the grant to holders of shares of Series A Junior Preferred Stock of certain
rights or warrants to subscribe for or purchase shares of Series A Junior
Preferred Stock at a price, or securities convertible into shares of Series A
Junior Preferred Stock with a conversion price, less than the then-current
market price of shares of Series A Junior Preferred Stock or (iii) upon the
distribution to holders of shares of Series A Junior Preferred Stock of
evidences of indebtedness or assets (excluding regular periodic cash dividends
paid out of earnings or retained earnings or dividends payable in shares of
Series A Junior Preferred Stock) or of subscription rights or warrants (other
than those referred to above).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least one
percent in such Purchase Price. No fractional shares of Series A Junior
Preferred Stock will be issued (other than fractions which are integral
multiples of one-hundredth of a share of Series A Junior Preferred Stock, which
may, at the election of the Company, be evidenced by depositary receipts) and in
lieu thereof, an adjustment in cash will be made based on the market price of
shares of Series A Junior Preferred Stock on the last trading day prior to the
date of exercise.
Shares of Series A Junior Preferred Stock purchasable upon exercise of the
Rights will not be redeemable. Each share of Series A Junior Preferred Stock
will be entitled to a minimum preferential quarterly dividend payment of $1 per
share but will be entitled to an aggregate dividend of 100 times the dividend
declared per share of Crescent Operating Common Stock. In the event of
liquidation, the holders of shares of Series A Junior Preferred Stock will be
entitled to a minimum preferential liquidation payment of $100 per share but
will be entitled to an aggregate payment of 100 times the payment made per share
of Crescent Operating Common Stock. Each share of Series A Junior Preferred
Stock will have 100 votes voting together with the Crescent Operating Common
Stock. Finally, in the event of any merger, consolidation or other transaction
in which shares of Crescent Operating Common Stock are exchanged, each share of
Series A Junior Preferred Stock will be entitled to receive 100 times the amount
received per share of Crescent Operating Common Stock. These rights are
protected by customary anti-dilution provisions.
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Due to the nature of the shares of Series A Junior Preferred Stock's
dividend, liquidation and voting rights, the value of the one-hundredth interest
in a share of Series A Junior Preferred Stock purchasable upon exercise of each
Right should approximate the value of one share of Crescent Operating Common
Stock.
The Rights have certain antitakeover effects. The Rights will cause
substantial dilution to a person or group of persons that attempts to acquire
Crescent Operating on terms not approved by the Crescent Operating Board. The
Rights should not interfere with any merger or other business combination
approved by the Crescent Operating Board prior to the time that a person or
group has acquired beneficial ownership of 10% or more of the Crescent Operating
Common Stock since the Rights may be redeemed by Crescent Operating at the
Redemption Price until such time.
The Rights Plan contains certain provisions to exclude Crescent and its
affiliates from the operative provisions thereof.
DELAWARE BUSINESS COMBINATION STATUTE
Section 203 of the DGCL provides that, subject to certain exceptions
specified therein, an "interested stockholder" of a Delaware corporation shall
not engage in any business combination, including mergers or consolidations or
acquisitions of additional shares of the corporation, with the corporation for a
three-year period following the date that such stockholder becomes an interested
stockholder unless (i) prior to such date, the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
"interested stockholder," the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding certain shares), or (iii) on or subsequent to such date,
the business combination is approved by the board of directors of the
corporation and authorized at an annual or special meeting of stockholders by
the affirmative vote of at least 66 2/3% of the outstanding voting stock which
is not owned by the interested stockholder. Except as otherwise specified in
Section 203, an interested stockholder is defined to include (x) any person that
is the owner of 15% or more of the outstanding voting stock of the corporation,
or is an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation at any time within three
years immediately prior to the date of determination and (y) the affiliates and
associates of any such person.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an interested stockholder to effect various business
combinations with a corporation for a three-year period. Crescent Operating has
not elected to be exempt from the restrictions imposed under Section 203.
However, the Charter excludes Crescent and its affiliates from the definition of
"interested stockholder" pursuant to the terms of Section 203. The provisions of
Section 203 may encourage persons interested in acquiring Crescent Operating to
negotiate in advance with the Crescent Operating Board, since the stockholder
approval requirement would be avoided if a majority of the directors then in
office approves either the business combination or the transaction which results
in any such person becoming an interested shareholder. Such provisions also may
have the effect of preventing changes in the management of Crescent Operating.
It is possible that such provisions could make it more difficult to accomplish
transactions which the Company's stockholders may otherwise deem to be in their
best interests.
CONTROL SHARE ACQUISITIONS
The Charter provides that the holder of "control shares" of Crescent
Operating acquired in a control share acquisition have no voting rights with
respect to such control shares except to the extent approved by a vote of
two-thirds of the votes entitled to be cast by stockholders, excluding shares
owned by the acquiror, officers of Crescent Operating and employees of Crescent
Operating who are also directors. "Control shares" are shares which, if
aggregated with all other shares previously acquired which the person is
entitled to vote, would entitle the acquiror to vote (i) 20% or more but less
than one-third, (ii) one-third or more but less than a majority, or (iii) a
majority of the outstanding shares. Control shares do not include shares that
the acquiring
53
<PAGE> 57
person is entitled to vote on the basis of prior stockholder approval. A
"control share acquisition" means the acquisition of control shares subject to
certain exceptions.
The Charter provides that a person who has made or proposed to make a
control share acquisition and who has obtained a definitive financing agreement
with a responsible financial institution providing for any amount of financing
not to be provided by the acquiring person may compel the Crescent Operating
Board to call a special meeting of stockholders to be held within 50 days of
demand to consider the voting rights of the holder in respect of such control
shares. If no request for a meeting is made, the Charter permits Crescent
Operating itself to present the question at any stockholders' meeting.
Pursuant to the Charter, if voting rights are not approved at a
stockholders' meeting or if the acquiring person does not deliver an acquiring
person's statement, which would disclose certain information about the
particular control share acquisition, as required by the Charter, then, subject
to certain conditions and limitations set forth in the Charter, Crescent
Operating may redeem any or all of the control shares, except those for which
voting rights have previously been approved, for "fair value." Fair value is
determined, without regard to the absence of voting rights, as of the date of
the last control share acquisition or of any meeting of stockholders at which
the voting rights of the holder in respect of such control shares are considered
and not approved, and means, for purposes of the redemption, the highest closing
sale price during the 30-day period immediately prior to and including the date
in question, of a share of such stock on the exchange on which the shares are
listed or, if not so listed, the highest closing bid quotation during such
30-day period or, if no such quotations are available, the fair market value as
determined by the Crescent Operating Board. Under the Charter, if voting rights
of the holder in respect of such control shares are approved at a stockholders'
meeting and, as a result, the acquiror would be entitled to vote a majority of
the shares entitled to vote, then the Charter shall be amended to so state, and
all other stockholders will have the rights of dissenting stockholders under the
DGCL. The Charter provides that the fair value of the shares for purposes of
such appraisal rights may not be less than the highest price per share paid by
the acquiror in the control share acquisition, and that certain limitations and
restrictions of the DGCL otherwise applicable to the exercise of dissenters'
rights do not apply.
The control share acquisition provisions do not apply to the holder in
respect of control shares acquired in a merger, consolidation or share exchange
if Crescent Operating is a party to the transaction, or if the acquisition is
approved or excepted by the Charter or Bylaws prior to a control share
acquisition. The control share provisions in the Charter do not apply to
Crescent and its affiliates.
LIABILITY OF DIRECTORS AND OFFICERS; INDEMNIFICATION
The Charter provides that a director of Crescent Operating will not be
personally liable to Crescent Operating or its stockholders for monetary damages
for breach of fiduciary duty as a director, except, if required by the DGCL, as
amended from time to time, for liability (i) for any breach of the director's
duty of loyalty to Crescent Operating or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the DGCL, which concerns unlawful
payments of dividends, stock purchases or redemptions, or (iv) for any
transaction from which the director derived an improper personal benefit.
Neither the amendment nor repeal of such provision will eliminate or reduce the
effect of such provision in respect of any matter occurring, or any cause of
action, suit or claim that, but for such provision, would accrue or arise prior
to such amendment or repeal.
While the Charter provides directors with protection from awards for
monetary damages for breaches of their duty of care, it does not eliminate such
duty. Accordingly, the Charter will have no effect on the availability of
equitable remedies such as an injunction or rescission based on a director's
breach of his or her duty of care.
The Charter provides that each person who was threatened to be made a party
to or is involved in any proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such person, or a person of whom such
person is the legal representative, is or was a director or officer of Crescent
Operating or is or was serving at the request of Crescent Operating as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
54
<PAGE> 58
employee benefit plans, whether the basis of such proceeding is alleged action
in an official capacity as a director, officer, employee or agent or in any
other capacity while serving as a director, officer, employee or agent, will be
indemnified and held harmless by Crescent Operating to the fullest extent
authorized by the DGCL, as the same exists or may hereafter be amended (but, in
the case of any such amendment, only to the extent that such amendment permits
Crescent Operating to provide broader indemnification rights than said law
permitted Crescent Operating to provide prior to such amendment), against all
expense, liability and loss reasonably incurred or suffered by such person in
connection therewith. Such right to indemnification includes the right to have
Crescent Operating pay the expenses incurred in defending any such proceeding in
advance of its final disposition, subject to the provisions of the DGCL. Such
rights are not exclusive of any other right which any person may have or
thereafter acquire under any statute, provision of the Charter, Bylaw,
agreement, vote of stockholders or disinterested directors or otherwise. No
repeal or modification of such provision will in any way diminish or adversely
affect the rights of any director, officer, employee or agent of Crescent
Operating thereunder in respect of any occurrence or matter arising prior to any
such repeal or modification. The Charter also specifically authorizes Crescent
Operating to maintain insurance and to grant similar indemnification rights to
employees or agents of Crescent Operating.
Crescent Operating has entered into indemnification agreements with each of
its executive officers and directors. The indemnification agreements require,
among other things, that Crescent Operating indemnify its officers and directors
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 the indemnification is not permitted. The Company also must
indemnify and advance expenses incurred by officers and directors seeking to
enforce their rights under the indemnification agreements and cover officers and
directors under the Company's directors' and officers' liability insurance.
Although the indemnification agreements offer substantially the same scope of
coverage afforded by provisions in the Charter and Bylaws, they provide greater
assurance to directors and executive officers that indemnification will be
available, because, as contracts, they cannot be modified unilaterally in the
future by the Board of Directors or by the stockholders to alter, limit or
eliminate the rights they provide.
EXPERTS
The financial statements included in this Prospectus and elsewhere in the
Registration Statement 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 as experts in giving
said reports.
LEGAL MATTERS
The legality of the issuance of the shares of Crescent Operating Common
Stock to be distributed in the Distribution and certain legal matters relating
to federal income tax considerations will be passed upon for the Company by
Shaw, Pittman, Potts & Trowbridge, Washington, D.C., a partnership including
professional corporations.
55
<PAGE> 59
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HISTORICAL FINANCIAL STATEMENTS
CRESCENT OPERATING, INC. --
Report of Independent Public Accountants............... F-2
Balance Sheet as of April 3, 1997...................... F-3
Notes to Balance Sheet................................. F-4
CARTER-CROWLEY ASSET GROUP --
Report of Independent Public Accountants............... F-8
Combined Balance Sheets as of December 31, 1996 and
1995 (audited) and March 31, 1997 and 1996
(unaudited)........................................... F-9
Combined Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 (audited) and for the
three months ended March 31, 1997 and 1996
(unaudited)........................................... F-10
Combined Statements of Shareholder's Equity for the
years ended December 31, 1996, 1995 and 1994 (audited)
and for the three months ended March 31, 1997 and 1996
(unaudited)........................................... F-11
Combined Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 (audited) and for the
three months ended March 31, 1997 and 1996
(unaudited)........................................... F-12
Notes to Combined Financial Statements................. F-13
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC. --
Report of Independent Public Accountants............... F-20
Combined Balance Sheets as of September 30, 1995 and
1996 (audited) and March 31, 1997 (unaudited)......... F-21
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-23
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-24
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-25
Notes to Combined Financial Statements................. F-26
PROFORMA CONSOLIDATING FINANCIAL INFORMATION
Crescent Operating, Inc................................... F-37
Charter Behavioral Health Systems, LLC.................... F-45
</TABLE>
F-1
<PAGE> 60
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Crescent Operating, Inc.:
We have audited the accompanying balance sheet of Crescent Operating, Inc.
(a Delaware corporation) as of April 3, 1997. This balance sheet is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this balance sheet 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 balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Crescent Operating, Inc. as of
April 3, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas
April 3, 1997
F-2
<PAGE> 61
CRESCENT OPERATING, INC.
BALANCE SHEET
APRIL 3, 1997
<TABLE>
<S> <C>
Cash........................................................ $1,000
======
Stockholder's Equity:
Common Stock, $.01 par value, 1,000 shares, authorized,
issued and outstanding................................. $ 10
Additional paid-in capital................................ 990
------
$1,000
======
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-3
<PAGE> 62
CRESCENT OPERATING, INC.
NOTES TO BALANCE SHEET
APRIL 3, 1997
(1) SUMMARY OF SIGNIFICANT TRANSACTIONS:
Crescent Operating, Inc. ("Crescent Operating" or the "Company"), a
Delaware corporation wholly owned by Crescent Real Estate Equities
Limited Partnership ("Crescent Operating Partnership"), was formed on
April 1, 1997, to become a lessee and operator of various assets and to
perform an agreement between Crescent Operating and Crescent Operating
Partnership (the "Intercompany Agreement"). Under the Intercompany
Agreement, Crescent Operating and Crescent Operating Partnership agree,
subject to certain terms, to provide each other with rights to
participate in certain transactions.
Subsequent to effectiveness of the Company's Registration Statement on
Form S-1, the Crescent Operating Common Stock will be distributed (the
"Distribution") to holders of common shares of beneficial interest of
Crescent Real Estate Equities Company ("Crescent") and Units of Crescent
Operating Partnership on the basis of one share of the Company's Common
Stock for every 10 Crescent common shares held, and one share of the
Company's Common Stock for every 5 Units held. Each share of the
Company's Common Stock issued in the distribution is expected to be
accompanied by one Preferred Share Purchase Right.
Crescent Operating Partnership has provided the Company with a
combination of debt and equity capital (i) of which a portion will be
used to acquire certain assets owned by Carter Crowley Properties, Inc.,
an unrelated party (the "Carter-Crowley Assets") and (ii) of which a
portion will be used primarily to acquire and fund ongoing obligations
and cash requirements relating to, among other things, a 50% interest in
Charter Behavioral Health Systems, LLC ("CBHS"), an operator of
behavioral healthcare and related facilities, and acquire certain
warrants as part of a larger sale, leaseback and license transaction
(the "Magellan Transaction") among Crescent, CBHS and Magellan Health
Services, Inc. ("Magellan"). The right to acquire 50% of CBHS cannot be
consummated unless the Magellan Transaction is consummated.
The Carter-Crowley Assets consist primarily of Moody-Day, Inc.
("Moody-Day"), a construction equipment sales, leasing and servicing
company, and a limited partner interest in Hicks, Muse, Tate & Furst
Equity Fund II (the "Fund"), a private venture capital fund.
Pursuant to the Magellan Transaction, the Company will acquire a 50%
interest in CBHS and warrants to acquire up to 1,283,311 shares of
Magellan common stock.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company intends to adopt the same accounting policies as
Carter-Crowley Asset Group as described below:
USE OF ESTIMATES
The financial statements include estimates and assumptions made by
management that affect the carrying amounts of assets and liabilities,
reported amounts of revenues and expenses and the disclosure of
contingent assets and liabilities. Actual results may differ from these
estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less to be cash equivalents.
F-4
<PAGE> 63
PROPERTY AND EQUIPMENT
The Company uses the straight-line and accelerated methods of
depreciation for financial statement purposes. The estimated useful
lives used in computing depreciation are as follows:
<TABLE>
<S> <C>
Rental equipment............................................ 2-7 years
Building and improvements................................... 30 years
Transportation equipment.................................... 3-5 years
Office furniture and other equipment........................ 5-10 years
</TABLE>
Expenditures for maintenance and repairs are charged to expense as
incurred. Expenditures for renewals or betterments are capitalized. The
cost of property replaced, retired, or otherwise disposed of is removed
from the asset account along with the related accumulated depreciation.
Gains or losses on the disposal of rental equipment are recorded in
gross profit and for other assets are recorded as other income or
expense in the year of disposal.
INVENTORIES
Inventories consist of new equipment held for sale, construction
accessories, and equipment parts and are stated at the lower of average
cost or market.
REVENUE RECOGNITION
Revenues from equipment rentals under operating leases are recognized as
the revenue becomes receivable according to the provisions of the lease.
Revenues from equipment rentals under sales-type lease agreements are
capitalized and recognized over the life of the contract.
FINANCIAL INSTRUMENTS
At inception, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 107, "Disclosures About Fair Value of Financial
Instruments." This statement requires disclosure of the fair value of
financial instruments for which it is practicable to estimate as well as
the methods and significant assumptions used to estimate that value. The
carrying amounts of cash and cash equivalents and accounts receivable
approximate fair value due to the short maturity of those instruments.
LONG-LIVED ASSETS
At inception, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," which establishes methods of valuation for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used. The adoption of this
statement had no material impact on the accompanying financial
statements.
INVESTMENTS
Upon completion of the acquisition of Moody-Day and the 1.21% limited
partner interest in the Fund, the Company intends to account for such
investments in the same manner as they were recorded in the
Carter-Crowley Asset Group. Accordingly, Moody-Day will be fully
consolidated, and the investment in the Fund will be recorded on the
cost basis. The Company will account for CBHS on the equity method.
F-5
<PAGE> 64
(3) STOCKHOLDER'S EQUITY:
Upon formation, Crescent Operating Partnership contributed $1,000 cash
to the Company for 100% of the outstanding Crescent Operating Common
Stock. In exchange for a contribution of approximately $14.1 million,
Crescent Operating Partnership issued all of the outstanding shares of
Crescent Operating Common Stock to Crescent Operating Partnership.
Crescent Operating Partnership also agreed to lend Crescent Operating up
to $35.9 million. The total of $50.0 million was or is expected to be
used to purchase the assets and to support future funding obligations
and cash requirements. The certificate of incorporation, as amended and
restated, authorizes the Crescent Operating Board to establish one or
more series of Preferred Stock. The Company expects to reserve 225,000
shares of Series A Junior Preferred Stock for issuance upon exercise of
the rights pursuant to the Preferred Share Purchase Rights Plan.
(4) MAGELLAN WARRANT PURCHASE AGREEMENT:
Under the Magellan Warrant Purchase Agreement, Crescent Operating and
Crescent will each receive warrants (the "Magellan Warrants") to acquire
1,283,311 shares of Magellan common stock at a warrant exercise price of
$30 per share (subject to adjustment pursuant to antidilution
provisions). The Magellan Warrants will be exercisable in varying
increasing amounts beginning on May 31, 1998 and ending on May 31, 2009
as set forth below.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
DATE FIRST MAGELLAN COMMON STOCK END OF
EXERCISABLE ISSUABLE UPON EXERCISE EXERCISE PERIOD
MAY 31 OF MAGELLAN WARRANTS MAY 31
- ----------- ---------------------- ---------------
<C> <C> <C>
1998 30,000 2001
1999 62,325 2002
2000 97,114 2003
2001 134,513 2004
2002 174,678 2005
2003 217,770 2006
2004 263,961 2007
2005 313,433 2008
2006 366,376 2009
2007 422,961 2009
2008 483,491 2009
</TABLE>
The Magellan Warrant Purchase Agreement provides that, at least 90 days
prior to the first date on which shares of Magellan common stock are
issuable upon exercise of Magellan Warrants, Magellan shall file with
the SEC a registration statement under the Securities Act with respect
to the issuance of Magellan common stock upon exercise of the Magellan
Warrants and the resale of such shares and any other Magellan common
stock or other equity securities issued with respect thereto by way of
stock dividend or stock split or in connection with a recapitalization
or reorganization or otherwise. The Magellan Warrant Purchase Agreement
also provides that Magellan shall keep such registration statement
effective on a continual basis so long as Crescent Operating owns
Magellan Warrants pursuant to which Magellan common stock may be
purchased upon exercise thereof, provided that Magellan is not required
to maintain the effectiveness of any registration statement for more
than 12 years and 60 days after the Magellan Closing. Crescent Operating
is also given the right to have shares of Magellan common stock issuable
upon exercise of Magellan Warrants included in certain other
registration statements filed by Magellan under the Securities Act.
(5) CRESCENT OPERATING WARRANT PURCHASE AGREEMENT:
Under the Crescent Operating Warrant Purchase Agreement, Magellan will
receive warrants to acquire up to 2.5% of Crescent Operating Common
Stock outstanding as of the Magellan Transaction closing date. The
Crescent Operating Warrants are exercisable only at the times, and in
the proportions that Crescent Operating, exercises its Magellan
Warrants. The exercise price for the
F-6
<PAGE> 65
Crescent Operating Warrants will reflect the same premium as used to
calculate the exercise price of the Magellan Warrants, based upon a
valuation of Crescent Operating conducted by a mutually agreed upon
independent appraiser once a trading market for Crescent Operating
Common Stock has been established.
(6) SUBSEQUENT EVENTS (Unaudited):
Subsequent to formation, approximately $14.1 million of equity was
contributed and approximately $15.3 million of debt was funded to
Crescent Operating by Crescent Operating Partnership to be utilized in
the acquisition of the Carter-Crowley Assets and a 12.38% limited
partner interest in Dallas Basketball Limited, the partnership that owns
the Dallas Mavericks.
Additionally, the Company authorized 10 million shares of preferred
stock, $.01 par value per share, of which no shares have been issued.
The Company also authorized an additional 22,499,000 shares of common
stock (total authorized of 22.5 million), par value $.01 per share. No
additional common shares have been issued since inception.
The assets acquired from Carter-Crowley consisted of 100% of the stock
of Moody-Day, a 1.21% limited partner interest in the Fund and a 12.38%
limited partner interest in the partnership that owns the Dallas
Mavericks.
As of June 11, 1997, Crescent Operating sold, for approximately $12.55
million, the limited partner interest in the partnership that owns the
Dallas Mavericks to a newly formed corporation wholly owned by Crescent
Operating Partnership. Richard E. Rainwater, John C. Goff and Gerald W.
Haddock, each of whom will serve as a director of Crescent Operating,
also are limited partners of Crescent Operating Partnership. As of May
30, 1997, Messrs. Rainwater, Goff and Haddock beneficially owned Units
representing approximately 6.2%, 1.1% and .9%, respectively, of the
partnership interests in Crescent Operating Partnership outstanding as
of such date. In addition, Mr. Haddock serves as President and Chief
Executive Officer and the sole director of Crescent Ltd., which is the
general partner of Crescent Operating Partnership, and will serve in the
same capacities in the newly formed corporation. Crescent Operating had
purchased the limited partner interest in the partnership that owns the
Dallas Mavericks from Carter-Crowley for approximately $12.4 million
utilizing a combination of cash payments and proceeds of borrowings from
Crescent Operating Partnership. Crescent Operating used the proceeds of
the sale of the interest (i) to pay all accrued interest under the term
loan from Crescent Operating Partnership, in the amount of approximately
$.2 million, (ii) to make a payment of principal under the term loan of
approximately $9.9 million, and (iii) to pay a dividend to its sole
stockholder, Crescent Operating Partnership, of approximately $2.4
million.
Crescent Operating has adopted a Stock Incentive Plan pursuant to which
grants of options ("Options") to purchase 862,538 shares, at an exercise
price of $.99 per share, of Crescent Operating Common Stock and shares
of restricted stock in Crescent Operating ("Restricted Stock") were made
on May 13, 1997 based on the fair value on the date of grant in order to
provide each holder of shares of restricted stock in Crescent or options
in Crescent or Crescent Operating Partnership with an equivalent number
of shares of Restricted Stock or Options in Crescent Operating, based on
a ratio of one share of Restricted Stock or Option to purchase Crescent
Operating Common Stock for each 10 shares of restricted stock in
Crescent or options for Crescent Common Shares and one Option to
purchase Crescent Operating Common Stock for each 5 options for Units.
Under the Stock Incentive Plan, 1,000,000 shares of Crescent Operating
Common Stock are authorized for issuance. The Stock Incentive Plan
expires on June 11, 2005.
F-7
<PAGE> 66
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Carter-Crowley Properties, Inc.:
We have audited the accompanying combined balance sheets of Carter-Crowley
Asset Group (the "Portfolio") as described in Notes 1 and 3, as of December 31,
1996 and 1995, and the related combined statements of operations, shareholder's
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Portfolio'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 Carter-Crowley Asset Group
as of December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
May 14, 1997
F-8
<PAGE> 67
CARTER-CROWLEY ASSET GROUP
COMBINED BALANCE SHEETS -- DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
------------------------- -------------------------
1997 1996 1996 1995
----------- ----------- ----------- -----------
(UNAUDITED) (AUDITED)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.............. $ 123,888 $ 510,154 $ 22,335 $ 352,577
Accounts receivable --
Trade, net of allowance for doubtful
accounts of $30,645 and $16,334 in
1996 and 1995, respectively....... 1,617,876 748,784 1,030,648 1,307,729
Affiliate........................... 211,766 138,131 129,296 14,096
Other............................... 56,333 26,930 42,641 36,669
Inventories............................ 1,611,083 1,174,080 1,612,952 736,024
Investment in sales-type leases, net... 152,751 152,609 212,320 311,777
Deferred income tax asset.............. 30,705 22,823 30,705 22,823
Prepaid expenses and other current
assets.............................. 9,283 10,265 6,164 4,062
----------- ----------- ----------- -----------
Total current assets........... 3,813,685 2,783,776 3,087,061 2,785,757
PROPERTY AND EQUIPMENT, at cost:
Rental equipment....................... 8,308,889 4,974,818 7,733,007 4,568,970
Land................................... 452,397 452,397 452,397 451,647
Building and improvements.............. 680,895 648,772 680,895 648,772
Transportation equipment............... 376,691 468,101 375,721 465,529
Office furniture and other equipment... 369,169 363,533 368,752 346,841
----------- ----------- ----------- -----------
10,188,041 6,907,621 9,610,772 6,481,759
Less -- Accumulated depreciation......... (3,238,060) (2,399,941) (2,927,314) (2,240,524)
----------- ----------- ----------- -----------
Net property and equipment..... 6,949,981 4,507,680 6,683,458 4,241,235
INVESTMENTS:
Investment in Hicks, Muse, Tate and
Furst Equity Fund II................ 7,794,478 6,896,186 7,593,493 5,915,749
Investments in sales-type leases,
net................................. 118,721 287,275 118,721 287,275
----------- ----------- ----------- -----------
$18,676,865 $14,474,917 $17,482,733 $13,230,016
=========== =========== =========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
liabilities......................... 1,047,342 661,608 782,567 540,523
Notes payable, current portion --
Affiliate........................... 1,874,100 1,941,606 1,941,606 1,182,319
Other............................... 299,188 176,240 264,136 108,307
----------- ----------- ----------- -----------
Total current liabilities...... 3,220,630 2,779,454 2,988,309 1,831,149
LONG-TERM LIABILITIES:
Long-term debt, affiliate, net of
current portion..................... 2,689,910 1,008,907 3,199,607 1,830,070
Deferred income taxes.................. 369,806 210,746 369,806 210,746
----------- ----------- ----------- -----------
Total liabilities.............. 6,280,346 3,999,107 6,557,722 3,871,965
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY..................... 12,396,519 10,475,810 10,925,011 9,358,051
----------- ----------- ----------- -----------
$18,676,865 $14,474,917 $17,482,733 $13,230,016
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
F-9
<PAGE> 68
CARTER-CROWLEY ASSET GROUP
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, DECEMBER 31,
----------------------- ------------------------------------
1997 1996 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(UNAUDITED) (AUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Sales and service.............. $ 832,378 $ 856,716 $2,998,880 $2,873,657 $2,897,085
Equipment sales................ 1,349,310 1,259,198 4,364,039 4,237,337 2,810,132
Rental......................... 857,807 607,389 3,030,764 2,036,248 1,963,530
---------- ---------- ---------- ---------- ----------
Total revenues......... 3,039,495 2,723,303 10,393,683 9,147,242 7,670,747
COST OF SALES:
Sales and service.............. 679,676 683,144 2,535,525 2,412,289 2,373,603
Equipment sales................ 1,183,733 1,156,605 4,049,563 3,571,092 2,446,801
Rental......................... 598,574 425,845 1,951,783 1,466,242 1,393,085
---------- ---------- ---------- ---------- ----------
Total cost of sales.... 2,461,983 2,265,594 8,536,871 7,449,623 6,213,489
---------- ---------- ---------- ---------- ----------
GROSS PROFIT..................... 577,512 457,709 1,856,812 1,697,619 1,457,258
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES........ 438,406 389,407 1,747,839 1,608,226 1,374,410
---------- ---------- ---------- ---------- ----------
INCOME FROM OPERATIONS........... 139,106 68,302 108,973 89,393 82,848
OTHER (INCOME) EXPENSE:
Interest expense............... 113,253 64,867 356,517 152,631 28,995
Interest income................ (9,718) (15,635) (51,881) (50,394) (10,819)
Other.......................... 58 (1,369) (27,202) (136,783) (2,977)
---------- ---------- ---------- ---------- ----------
Total other (income)
expense.............. 103,593 47,863 277,434 (34,546) 15,199
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME
TAXES.......................... 35,513 20,439 (168,461) 123,939 67,649
INCOME TAX PROVISION (BENEFIT)... 12,428 7,154 (57,677) 44,783 24,331
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS)................ $ 23,085 $ 13,285 $ (110,784) $ 79,156 $ 43,318
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-10
<PAGE> 69
CARTER-CROWLEY ASSET GROUP
COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, DECEMBER 31,
------------------------- --------------------------------------
1997 1996 1996 1995 1994
----------- ----------- ----------- ----------- ----------
(UNAUDITED) (AUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE, beginning of period.. $10,925,011 $ 9,358,051 $ 9,358,051 $ 3,338,297 $3,289,479
Net income (loss)........... 23,085 13,285 (110,784) 79,156 43,318
Contributions............... 1,552,820 1,509,449 3,355,290 6,328,366 --
Distributions............... (104,397) (404,975) (1,677,546) (412,617) --
Net book value of assets
contributed.............. -- -- -- 24,849 5,500
----------- ----------- ----------- ----------- ----------
BALANCE, end of period........ $12,396,519 $10,475,810 $10,925,011 $ 9,358,051 $3,338,297
=========== =========== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-11
<PAGE> 70
CARTER-CROWLEY ASSET GROUP
COMBINED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, DECEMBER 31,
----------------------- --------------------------------------
1997 1996 1996 1995 1994
---------- ---------- ----------- ---------- -----------
(UNAUDITED) (AUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.......................................... $ 23,085 $ 13,285 $ (110,784) $ 79,156 $ 43,318
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization..................... 504,225 283,453 1,367,579 1,166,102 971,724
Provision (benefit) for deferred income taxes..... -- -- 151,178 29,421 (38,985)
Gain on sale of rental equipment.................. (96,921) (46,282) (103,968) (443,735) (242,756)
(Increase) decrease in accounts receivable, net... (683,390) 444,649 (155,909) (741,731) 75,333
(Increase) decrease in inventories................ 1,869 (438,056) (876,928) (110,770) (152,538)
(Increase) decrease in prepaid expenses and other
current assets.................................. (3,119) (6,203) (2,102) 24,646 (24,188)
Increase in accounts payable and accrued
liabilities..................................... 264,775 121,085 242,044 26,232 177,434
---------- ---------- ----------- ---------- -----------
Net cash provided by operating activities..... 10,524 371,931 511,110 29,321 809,342
INVESTING ACTIVITIES:
Purchases of rental equipment....................... (860,270) (572,040) (4,296,971) (2,351,439) (2,121,839)
Purchases of fixed assets........................... (1,387) (20,014) (78,822) (283,120) (49,383)
Proceeds from sale of rental equipment.............. 270,301 212,475 981,777 1,343,032 1,241,773
---------- ---------- ----------- ---------- -----------
Net cash used in investing activities......... (591,356) (379,579) (3,394,016) (1,291,527) (929,449)
---------- ---------- ----------- ---------- -----------
FINANCING ACTIVITIES:
Proceeds from issuance of notes payable............. 299,188 670,229 4,885,240 3,288,642 --
Reduction in notes payable.......................... (841,339) (664,172) (2,600,587) (1,492,969) (57,522)
Capital contributions............................... 1,164,967 -- -- -- --
(Increase) decrease in investment in sales-type
leases, net....................................... 59,569 159,168 268,011 (599,052) --
---------- ---------- ----------- ---------- -----------
Net cash provided by (used in) financing
activities.................................. 682,385 165,225 2,552,664 1,196,621 (57,522)
---------- ---------- ----------- ---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS......................................... 101,553 157,577 (330,242) (65,585) (177,629)
CASH AND CASH EQUIVALENTS, beginning of period........ 22,335 352,577 352,577 418,162 595,791
---------- ---------- ----------- ---------- -----------
CASH AND CASH EQUIVALENTS, end of period.............. $ 123,888 $ 510,154 $ 22,335 $ 352,577 $ 418,162
========== ========== =========== ========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid (refunded)........................ $ -- $ -- $ (19,502) $ (22,462) $ (92,673)
========== ========== =========== ========== ===========
Interest paid....................................... $ 113,253 $ 64,867 $ 352,773 $ 144,039 $ 29,522
========== ========== =========== ========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Investments contributed by CCP...................... $ 387,853 $1,509,449 $ 3,355,290 $6,328,366 $ --
========== ========== =========== ========== ===========
Distributions from investments to CCP............... $ (104,397) $ (404,975) $(1,677,546) $ (412,617) $ --
========== ========== =========== ========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Purchase of inventory and equipment held for rental
in which short-term liabilities were assumed...... $ -- $ -- $ -- $ -- $ 532,823
========== ========== =========== ========== ===========
Transfer of fixed assets from CCP (net book
value)............................................ $ -- $ -- $ -- $ 24,849 $ 5,500
========== ========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-12
<PAGE> 71
CARTER-CROWLEY ASSET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. DESCRIPTION OF PORTFOLIO AND NATURE OF OPERATIONS:
The Carter-Crowley Asset Group (the "Portfolio") is a portfolio of
businesses and investments wholly owned by Carter-Crowley Properties, Inc. (CCP)
which include ownership of a construction equipment and accessories sales and
leasing company, and a minority investment in a venture capital fund. The
Portfolio represents businesses and investments owned by CCP which were sold to
Crescent Operating, Inc. on May 9, 1997, excluding the 12.38% interest in the
limited partnership which owns the Dallas Mavericks basketball team which as of
June 11, 1997 was sold to an affiliated entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION AND PRINCIPLES OF COMBINATION
The accompanying combined financial statements have been presented on a
combined historical cost basis because of the affiliated ownership and
management. All significant intercompany balances and transactions have been
eliminated. These combined financial statements have been prepared in accordance
with requirements for financial information required by Form S-1. The
accompanying combined financial statements for the three months ended March 31,
1997 and 1996, have been prepared in accordance with generally accepted
accounting principles for interim financial information. Accordingly, they do
not include all of the information 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.
USE OF ESTIMATES
The financial statements include estimates and assumptions made by
management that affect the carrying amounts of assets and liabilities, reported
amounts of revenues and expenses and the disclosure of contingent assets and
liabilities. Actual results may differ from these estimates.
CASH AND CASH EQUIVALENTS
The Portfolio considers all highly liquid investments with a maturity of
three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
The Portfolio uses the straight-line and accelerated methods of
depreciation for financial statement purposes. The estimated useful lives used
in computing depreciation are as follows:
<TABLE>
<S> <C>
Rental equipment............................................ 2-7 years
Building and improvements................................... 30 years
Transportation equipment.................................... 3-5 years
Office furniture and other equipment........................ 5-10 years
</TABLE>
Expenditures for maintenance and repairs are charged to expense as
incurred. Expenditures for renewals or betterments are capitalized. The cost of
property replaced, retired, or otherwise disposed of is removed from the asset
account along with the related accumulated depreciation. Gains or losses on the
disposal of rental equipment are recorded in gross profit and for other assets
are recorded as other income or expense in the year of disposal. During 1996,
the Portfolio changed the estimated useful lives of certain rental equipment.
This change resulted in a decrease in 1996 depreciation expense of approximately
$157,000.
F-13
<PAGE> 72
CARTER-CROWLEY ASSET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
INVENTORIES
Inventories consist of new equipment held for sale, construction
accessories, and equipment parts and are stated at the lower of average cost or
market.
REVENUE RECOGNITION
Revenues from equipment rentals under operating leases are recognized as
the revenue becomes receivable according to the provisions of the lease.
Revenues from equipment rentals under sales-type lease agreements are
capitalized and recognized over the life of the contract.
INCOME TAXES
The taxable income or loss of the Portfolio is included in the consolidated
federal income tax return filed by CCP. The Portfolio's income tax provision
(benefit) is determined as if the Portfolio had filed a separate income tax
return on a separate company basis. Taxes currently payable or receivable are
recorded as accounts receivables-affiliate and accounts payable-affiliate in the
accompanying balance sheets.
The Portfolio's current provision (benefit) for income taxes is generally
based on income before taxes adjusted for permanent differences between
financial reporting and taxable income. Deferred income taxes are provided for
temporary differences between financial reporting and taxable income (see Note
7).
FINANCIAL INSTRUMENTS
During 1995, the Portfolio adopted Statement of Financial Accounting
Standards (SFAS) No. 107, "Disclosures About Fair Value of Financial
Instruments." This statement requires disclosure of the fair value of financial
instruments for which it is practicable to estimate as well as the methods and
significant assumptions used to estimate that value. The carrying amounts of
cash and cash equivalents and accounts receivable approximate fair value due to
the short maturity of those instruments. Notes payable bear interest at variable
rates which fluctuate based upon comparable market rates, and, therefore,
carrying amounts approximate fair value.
LONG-LIVED ASSETS
During 1996, the Portfolio adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
which establishes methods of valuation for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used. The adoption of this statement had no material impact on the
accompanying financial statements.
3. DESCRIPTION OF PORTFOLIO BUSINESSES AND INVESTMENTS:
MOODY-DAY, INC.
Moody-Day, Inc. ("Moody-Day") is a wholly owned Texas corporation engaged
in the sale, leasing, and service of construction equipment and accessories to
the construction and utility industries located primarily in Texas. Effective
December 31, 1994, Moody-Day became a wholly owned subsidiary of CCP pursuant to
a corporate reorganization. Moody-Day and CCP had previously both been wholly
owned subsidiaries of a common parent (the "Former Parent").
INVESTMENT IN HICKS MUSE TATE & FURST EQUITY FUND II
Effective January 1, 1995, CCP subscribed to a 1.42% limited partner
minority interest in Hicks Muse Tate & Furst Equity Fund II (the "Fund"), a
private venture capital fund. CCP has the option to participate on an investment
by investment basis within the Fund. As of December 31, 1996, CCP owns a 1.21%
overall
F-14
<PAGE> 73
CARTER-CROWLEY ASSET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
limited partner interest in the Fund. During 1995 and 1996, CCP contributed its
subscribed limited partner interest to the Portfolio. Accordingly, contributions
and distributions between CCP and the Fund are reflected in the accompanying
combined financial statements as adjustments to equity. The Portfolio's interest
in the Fund is recorded in the accompanying combined financial statements based
upon CCP's contributed historical cost basis. Contributions of $3,355,290, and
$6,328,366 were made by CCP to the Fund in 1996 and 1995, respectively.
Distributions of $1,677,546 and $412,617 were made to CCP from the Fund in 1996
and 1995 respectively. There was no income or loss from the Portfolio's
investment in the Fund for the years ended December 31, 1996 or 1995. The
Portfolio has an unpaid balance due of approximately $2.2 million on the
original commitment to invest $10 million in the Fund. The remaining $2.2
million commitment is due upon capital calls at the discretion of Hicks, Muse,
Tate & Furst, subject to certain morality exemptions (as an example the
portfolio is not required to invest in any company producing alcoholic
beverages).
As of December 31, 1996, Crescent Operating's investments in the Fund
consisted of investments in the following industries: (i) manufacturing (37.4%,
22.5% of which consisted of investments in the common stock, preferred stock and
warrants of a company that manufactures copper wire); (ii) communications
(33.9%, 33.1% of which consisted of an investment of a partnership interest in a
cable television operator); (iii) real estate (13.2%, all of which consisted of
an investment in a company which owns partnership interests in partnerships that
provide debt and equity capital to real estate owners and developers); (iv)
financial services (10.5%, all of which consisted of investments of partnership
interests in a foreign insurance company and a small business investment
company); and (v) food (5.0%, all of which consisted of an investment in the
common stock of a chocolate company).
The following represents companies or partnerships in which CCP has a
significant interest through its ownership interest in the Fund. CCP's interest
in the Fund is recorded based upon CCP's contributed historical cost basis. The
Fund determines the current market value of the underlying securities and
investments by using quoted rates for securities that are publicly traded and as
determined by the general partner of the Fund for securities that are not
publicly traded. For each investment CCP has contributed to within the Fund, the
number of shares or partnership interest owned by CCP is calculated by the
number of shares or partnership interest owned by the Fund multiplied by CCP's
ownership percentage as determined based on contributions by CCP divided by
total contributions to the Fund.
<TABLE>
<CAPTION>
SHARES, FAIR MARKET
PUBLICLY WARRANTS OR VALUE AT
TRADED TYPE OF PARTNERSHIP DECEMBER 31,
COMPANY/PARTNERSHIP SECURITIES INVESTMENT INTEREST INDUSTRY COST 1996
------------------- ---------- ----------------- -------------- ------------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Marcus Cable Company, L.P.(1) No Partnership 0.33% Communications $2,002,574 $ 3,393,193
International Wire Group, No Common Stock/ 1,725,738 Manufacturing 1,725,738 2,201,318
Inc.(1)
Preferred Stock/ 3,480 80,321 100,634
Warrants 5,920 5,383 6,744
Olympus Partnerships No Various .19% to 2.08% Real Estate 1,059,199 1,347,198
Partnerships
Crain Holdings Corp. No Common Stock 425,253 Manufacturing 479,723 981,130
Seguros Comer. Amer., SA de Yes Common Stock 229,340 Financial Services 725,883 739,665
CV(1)
Other Investments 1,514,672 1,474,776
---------- -----------
$7,593,493 $10,244,658
========== ===========
</TABLE>
- ---------------
(1) This company files periodic reports with the Securities and Exchange
Commission.
F-15
<PAGE> 74
CARTER-CROWLEY ASSET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVENTORIES:
Inventories at Moody-Day consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
New equipment............................................... $ 995,306 $291,099
Light equipment and accessories............................. 453,567 308,623
Equipment parts............................................. 152,891 121,777
Other....................................................... 11,188 14,525
---------- --------
Total inventory................................... $1,612,952 $736,024
========== ========
</TABLE>
5. INVESTMENTS IN SALES-TYPE LEASES, NET:
Although Moody-Day's leasing operations consist primarily of leasing
construction equipment and accessories under operating leases (see Note 10),
Moody-Day occasionally enters into leases which are accounted for as sales-type
leases. At December 31, 1996, Moody-Day had approximately 18 sales-type leases
with expirations through 1999. The following is a summary of Moody-Day's
investment in sales-type leases, net at December 31:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Total minimum lease payments to be received................ $ 372,436 $ 676,594
Unearned income............................................ (41,395) (77,542)
--------- ---------
Net investment........................................... 331,041 599,052
Less -- Current amount................................ (212,320) (311,777)
--------- ---------
Long-term amount...................................... $ 118,721 $ 287,275
========= =========
</TABLE>
Minimum lease payments to be received as of December 31, 1996, for each of
the next five years and in the aggregate on sales-type leases are:
<TABLE>
<S> <C>
1997........................................................ $212,320
1998........................................................ 92,727
1999........................................................ 67,389
2000........................................................ --
2001........................................................ --
Subsequent to 2001.......................................... --
--------
Total minimum future rentals...................... $372,436
========
</TABLE>
6. NOTES PAYABLE AND LONG-TERM DEBT:
The following summarizes the Portfolio's debt financing at December 31:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Notes payable to a finance company, maturities through
June 1997, collateralized by equipment............... $ 264,136 $ 108,307
Note payable to CCP due December 1997, interest at
prime plus 1/2%, with monthly principal and interest
payments, collateralized by land and building........ 266,163 322,739
</TABLE>
F-16
<PAGE> 75
CARTER-CROWLEY ASSET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Note payable to CCP due March 1998, interest at prime
plus 1%, with monthly principal and interest
payments, collateralized by equipment................ 197,213 392,168
Note payable to CCP due March 1996, interest at 10%,
with monthly principal and interest payments,
collateralized by equipment.......................... -- 28,705
Line of credit with CCP, interest at prime plus 1%,
with monthly principal and interest payments through
December 1999, collateralized by land and
equipment............................................ 4,677,837 2,268,777
----------- -----------
Notes payable, affiliate............................... 5,141,213 3,012,389
----------- -----------
Total notes payable.................................... 5,405,349 3,120,696
Less -- Current maturities............................. (2,205,742) (1,290,626)
----------- -----------
$ 3,199,607 $ 1,830,070
=========== ===========
</TABLE>
MATURITIES OF LONG-TERM DEBT ARE AS FOLLOWS:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
1997..................................................... $2,205,742
1998..................................................... 1,388,197
1999..................................................... 991,968
2000..................................................... 558,727
2001..................................................... 196,167
Thereafter............................................... 64,548
----------
Total............................................. $5,405,349
==========
</TABLE>
7. INCOME TAXES:
The deferred tax balances in the accompanying balance sheets include the
following amounts of deferred tax assets and liabilities:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax asset -- current............................... $ 92,712 $ 105,768
Valuation allowance......................................... (62,007) (82,945)
Deferred tax liability -- noncurrent........................ (369,806) (210,746)
--------- ---------
Net deferred tax liability................................ $(339,101) $(187,923)
========= =========
</TABLE>
The Portfolio has net operating loss carryforwards (NOLs) of approximately
$193,851 which will expire in years 2003 through 2005. Accordingly, a valuation
allowance was established for NOLs not expected to be utilizable.
F-17
<PAGE> 76
CARTER-CROWLEY ASSET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes the components of the net deferred tax liability
at December 31:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Assets:
Inventories............................................... $ 11,220 $ 8,346
Allowance for doubtful accounts........................... 10,725 5,717
Net operating loss carryforwards, net of allowance........ 8,760 8,760
--------- ---------
Deferred tax asset................................ 30,705 22,823
--------- ---------
Liabilities:
Rental equipment.......................................... (366,251) (205,966)
Property and equipment.................................... (3,555) (4,780)
--------- ---------
Deferred tax liability............................ (369,806) (210,746)
--------- ---------
Net deferred tax liability........................ $(339,101) $(187,923)
========= =========
</TABLE>
The components of income tax provision are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- ------- ---------
<S> <C> <C> <C>
Federal:
Current provision (benefit)....................... $(208,855) $15,362 $ 63,316
Deferred tax provision (benefit).................. 151,178 29,421 (38,985)
--------- ------- ---------
Total provision (benefit)................. $ (57,677) $44,783 $ 24,331
========= ======= =========
</TABLE>
The Portfolio's income tax provision differed from the statutory federal
rate of 35% due primarily to nondeductible expenses for federal income tax
purposes.
8. PROFIT SHARING PLAN:
Prior to 1996, Moody-Day had a noncontributory profit sharing plan (the
"Plan") covering substantially all of its full-time employees who have completed
one year of service. Contributions to the Plan were at the discretion of the
Board of Directors. Moody-Day made no contributions to the Plan in 1995 or 1994.
The Plan was terminated in 1995. Additionally, a loan from Moody-Day to the Plan
of $135,000 that was previously written off by Moody-Day was paid back and
included as other income on the December 31, 1995, income statement.
9. RELATED-PARTY TRANSACTIONS:
Effective January 1, 1993, the Former Parent transferred the land and
building which Moody-Day occupies to Moody-Day in exchange for a note. The note
has an annual interest rate of prime + 1/2% and calls for monthly payments of
$7,000. The note, as further discussed in Note 6, had a balance of $266,163 at
December 31, 1996. Additionally, CCP has provided financing to Moody-Day (see
Note 6). The total outstanding principal to CCP at December 31, 1996, is
$5,141,213. The Company had a net receivable relating to income taxes with CCP
of $129,296 and $14,096, respectively, at December 31, 1996 and 1995. Prior to
1996, Moody-Day was managed on a decentralized basis and had relatively no
senior management involvement from the parent company. Therefore, no management
fee has been allocated to the accompanying financial statements for 1995 or
1994. Beginning in the fourth quarter of 1995, senior management of the parent
company became more involved in Moody-Day's daily operational decision making as
a result of an increased activity in the construction industry and a management
reorganization. In 1996, CCP charged Moody-Day approximately $188,000 for
management fees which represents the cost of the parent company's involvement
which began in 1996.
F-18
<PAGE> 77
CARTER-CROWLEY ASSET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
10. RENTALS UNDER OPERATING LEASES:
Moody-Day receives rental income from the lease of construction equipment
and accessories under operating leases, with expirations through 1998.
Minimum future rentals to be received under noncancelable leases over the
next five years and as of December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997........................................................ $307,394
1998........................................................ 74,700
1999........................................................ --
2000........................................................ --
2001........................................................ --
Subsequent to 2001.......................................... --
--------
Total minimum future rentals...................... $382,094
========
</TABLE>
11. CONCENTRATIONS:
As Moody-Day's operations are conducted primarily to the construction and
utility industries in Texas, Moody-Day is subject to vulnerability to economic
downturns in the geographic region and specific industries in which it operates.
Additionally, Moody-Day had one customer which accounted for 11% of its gross
revenues for the year ended December 31, 1996.
F-19
<PAGE> 78
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-20
<PAGE> 79
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
========= ========= =========
</TABLE>
The accompanying Notes to Combined Financial Statements are an integral part of
these balance sheets.
F-21
<PAGE> 80
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDER'S DEFICIT
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------- MARCH 31,
1995 1996 1997
--------- --------- -----------
(AUDITED) (AUDITED) (UNAUDITED)
<S> <C> <C> <C>
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-22
<PAGE> 81
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-23
<PAGE> 82
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-24
<PAGE> 83
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-25
<PAGE> 84
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-26
<PAGE> 85
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
respectively, for the settlement and adjustment of reimbursement issues related
to earlier fiscal periods. Net revenue for the six months ended March 31, 1996
and 1997 (unaudited) includes $11.1 million and $13.8 million, respectively for
the settlement and adjustment of reimbursement issues related to earlier fiscal
periods. Management believes that adequate provision has been made for any
adjustments that may result from such reviews.
ADVERTISING COSTS
The production costs of advertising are expensed as incurred. The Company
does not consider any of its advertising costs to be direct-response and,
accordingly, does not capitalize such costs. Advertising costs consist primarily
of radio and television air time, which is amortized as utilized, and printed
media services. Advertising expense was approximately $35.6 million, $33.5
million and $30.3 million for the years ended September 30, 1994, 1995 and 1996,
respectively.
CHARITY CARE
The Company provides healthcare services without charge or at amounts less
than its established rates to patients who meet certain criteria under its
charity care policies. Because the Company does not pursue collection of amounts
determined to be charity care, they are not reported as revenue. For the years
ended September 30, 1994, 1995 and 1996, the Company provided, at its
established billing rates, approximately $29.3 million, $41.2 million and $37.9
million, respectively, of such care.
ALLOCATED INTEREST, NET
Magellan provides financing and cash management services for CBHS.
Magellan's interest expense is allocated to CBHS based on the financing and the
cost of financing provided directly to CBHS. Deferred financing costs and
accrued interest related to such financing is carried on the books of the
Parent.
INCOME TAXES
The operations of CBHS are included in the Magellan consolidated federal
income tax return and in various unitary, foreign and consolidated state income
tax returns. Magellan allocates its consolidated income tax provision or benefit
to CBHS, which approximates income taxes that would be calculated on a
stand-alone basis.
Current and deferred income taxes payable or receivable are settled
currently through the Due to Parent account.
CASH AND CASH EQUIVALENTS
Cash equivalents are short-term, highly liquid interest-bearing investments
with a maturity of three months or less when purchased, consisting primarily of
money market instruments.
CONCENTRATION OF CREDIT RISK
Accounts receivable from patient revenue subject the Company to a
concentration of credit risk with third party payors that include insurance
companies, managed healthcare organizations and governmental entities. The
Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific payors, historical trends and other
information. Management believes the allowance for doubtful accounts is adequate
to provide for normal credit losses.
F-27
<PAGE> 86
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
ASSETS RESTRICTED FOR THE SETTLEMENT OF UNPAID CLAIMS AND OTHER LONG-TERM
LIABILITIES
Assets restricted for the settlement of unpaid claims and other long-term
liabilities include marketable securities which are carried at fair market
value. Transfer of such investments from the Insurance subsidiaries to the
Company or any of its other subsidiaries is subject to approval by certain
regulatory authorities. These assets will remain with Magellan subsequent to the
sale of the psychiatric facilities.
During fiscal 1994, the Company adopted Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Investments in Debt and Equity
Securities" ("FAS 115"). Under FAS 115, investments are classified into three
categories: (i) held to maturity; (ii) available for sale; and (iii) trading.
Unrealized holding gains or losses are recorded for trading and available for
sale securities. The Company's investments are classified as available for sale
and the adoption of FAS 115 did not have a material effect on the Company's
financial statements, financial condition and liquidity or results of
operations. The unrealized gain or loss on investments available for sale was
not material at September 30, 1995 and 1996.
PROPERTY AND EQUIPMENT
As a result of the adoption of fresh start accounting, property and
equipment were adjusted to their estimated fair value as of July 31, 1992 and
historical accumulated depreciation was eliminated. Expenditures for renewals
and improvements are charged to the property accounts. Replacements and
maintenance and repairs that do not improve or extend the life of the respective
assets are expensed as incurred. The Company removes the cost and related
accumulated depreciation from the accounts for property sold or retired, and any
resulting gain or loss is included in operations. Amortization of capital lease
assets is included in depreciation expense. Depreciation is provided on a
straight-line basis over the estimated useful lives of the assets, which is
generally 10 to 40 years for buildings and improvements and three to ten years
for equipment. Depreciation expense was $27.4 million, $34.5 million and $34.9
million for the years ended September 30, 1994, 1995 and 1996, respectively.
INTANGIBLE ASSETS
Intangible assets are composed principally of (i) goodwill and (ii)
non-compete agreements. Goodwill represents the excess of the cost of businesses
acquired over the fair value of the net identifiable assets at the date of
acquisition and is amortized using the straight-line method over 25 to 40 years.
Non-compete agreements are amortized over the term of the related agreements.
The Company continually monitors events and changes in circumstances that
could indicate carrying amounts of intangible assets may not be recoverable.
When events or changes in circumstances are present that indicate the carrying
amount of intangible assets may not be recoverable, the Company assesses the
recoverability of intangible assets by determining whether the carrying value of
such intangible assets will be recovered through the future cash flows expected
from the use of the asset and its eventual disposition. No impairment losses on
intangible assets were recorded by the Company in fiscal 1994 and 1996.
Impairment losses of approximately $4.0 million were recorded in fiscal 1995.
(See Note 4)
FOREIGN CURRENCY
Changes in the cumulative translation of foreign currency assets and
liabilities are presented as a separate component of stockholder's deficit.
Gains and losses resulting from foreign currency transactions, which were not
material, are included in operations as incurred.
RECENT ACCOUNTING PRONOUNCEMENTS
In March, 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121 ("FAS 121"), "Accounting for
the Impairment of Long-Lived Assets and for
F-28
<PAGE> 87
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
definitive 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 will form New
CBHS, which will consist of the domestic portion of its provider business
segment. New CBHS will be operated as a joint venture that is equally owned by
Magellan and an affiliate of Crescent (the "Crescent Affiliate"). Magellan will
receive $400 million in cash, subject to adjustment, and warrants in the
Crescent Affiliate for the purchase of 2.5% of the Crescent Affiliate's common
stock, exercisable over 12 years, as consideration for the assets. In addition
to the assets, Crescent and the Crescent Affiliate will each receive 1,283,311
warrants 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 $40 million, subject to
adjustment, 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 $81
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.
These transactions are subject to approval by Magellan stockholders and
other customary closing conditions, including the negotiation of certain
financing matters.
On March 19, 1997, Magellan announced that it had signed definitive
agreements to sell its three European hospitals for approximately $75 million.
The transaction is expected to close in May, 1997, pending regulatory approval.
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 Affiliate.
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").
F-29
<PAGE> 88
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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, 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 Affiliate.
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.
F-30
<PAGE> 89
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. UNUSUAL ITEMS
INSURANCE SETTLEMENTS
Unusual items included the resolutions of disputes between the Company and
insurance carriers concerning certain billings for services.
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> <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 Affiliate 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
F-31
<PAGE> 90
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 are 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.
F-32
<PAGE> 91
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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>
F-33
<PAGE> 92
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
LEASES
The Company leases certain of its operating facilities, some of which may
be purchased during the term or at expiration of the leases. The book value of
capital leased assets was approximately $8.4 million at September 30, 1996. The
leases, which expire at various dates through 2069, generally require the
Company to pay all maintenance, property tax and insurance costs.
At September 30, 1996, aggregate amounts of future minimum payments under
operating leases were as follows: 1997 -- $6.4 million; 1998 -- $4.8 million;
1999 -- $3.6 million; 2000 -- $2.2 million; 2001 -- $1.8 million; subsequent to
2001 -- $47.4 million.
Rent expense for the years ended September 1994, 1995 and 1996 was $11.4
million, $15.4 million and $14.0 million, respectively.
8. INCOME TAXES
The provision (benefit) for income taxes allocated to CBHS by Magellan
consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------
1994 1995 1996
-------- -------- -------
<S> <C> <C> <C>
Income taxes currently payable:
Federal.............................................. $ -- $ 595 $ 977
State, excluding California state refund............. 639 1,694 971
California state refund.............................. -- -- (3,695)
Foreign.............................................. 1,466 1,188 3,779
Deferred income taxes:
Federal.............................................. (11,078) (14,360) 11,214
State................................................ (1,583) (2,051) 1,602
Foreign.............................................. 52 -- 35
-------- -------- -------
$(10,504) $(12,934) $14,883
======== ======== =======
</TABLE>
A reconciliation of the Company's income tax provision (benefit) to that
computed by applying the statutory federal income tax rate is as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------
1994 1995 1996
-------- -------- -------
<S> <C> <C> <C>
Income tax provision (benefit) at federal statutory
income tax rate...................................... $(20,111) $(19,897) $14,208
State income taxes, net of federal income tax benefit
and excluding California state refund................ (616) (232) 1,673
California state refund, net of federal income tax
benefit........................................... -- -- (2,402)
Foreign income taxes, net of federal income tax
benefit.............................................. 987 772 2,479
Amortization of excess reorganization value............ 10,920 9,100 --
Other -- net........................................... (1,684) (2,677) (1,075)
-------- -------- -------
Income tax provision (benefit)......................... $(10,504) $(12,934) $14,883
======== ======== =======
</TABLE>
F-34
<PAGE> 93
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
9. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1995 1996
-------- --------
<S> <C> <C>
Salaries, wages and other benefits.......................... $ 27,386 $ 27,313
Amounts due health insurance programs....................... 10,252 27,146
Other....................................................... 78,742 62,755
-------- --------
$116,380 $117,214
======== ========
</TABLE>
10. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
------------------------ -------------------------
1994 1995 1996 1996 1997
------ ------ ------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash paid for interest, net of amounts
capitalized................................. $5,842 $5,303 $5,680 $2,099 $2,278
====== ====== ====== ====== ======
</TABLE>
The non-cash portion of unusual items for fiscal 1995 and 1996 includes the
unpaid portion of the $29.8 million and $30.0 million insurance settlements that
were recorded during the quarters ended March 31, 1995, and June 30, 1996,
respectively. The payments of the insurance settlements are included in accounts
payable and other accrued liabilities in the statement of cash flows for the
years ended September 30, 1995 and 1996.
11. COMMITMENTS AND CONTINGENCIES
The Company is self-insured for a substantial portion of its general and
professional liability risks through Magellan. The reserves for self-insured
general and professional liability losses, including loss adjustment expenses,
are based on actuarial estimates that are discounted at an average rate of 6% to
their present value based on the Company's historical claims experience adjusted
for current industry trends. The undiscounted amount of the reserve for unpaid
claims at September 30, 1995 and 1996 was approximately $113.1 million and $84.3
million, respectively. The reserve for unpaid claims is adjusted periodically as
such claims mature, to reflect changes in actuarial estimates based on actual
experience. During fiscal 1996, the Company recorded a reduction in malpractice
claim reserves of approximately $15.3 million as a result of updated actuarial
estimates. The Company recorded reductions of expenses of approximately $7.5
million and $5.0 million during the six months ended March 31, 1996 and 1997,
(unaudited) respectively. These reductions resulted primarily from updates to
actuarial assumptions regarding the Company's expected losses for more recent
policy years. These revisions are based on changes in expected values of
ultimate losses resulting from the Company's claim experiences, and increased
reliance on such claim experience. While management and its actuaries believe
that the present reserve is reasonable, ultimate settlement of losses may vary
from the amount recorded.
Certain assets of the Company, including substantially all accounts
receivable and personal property, are pledged to the Parent's bank lenders as
collateral for certain Parent indebtedness. In the opinion of management, the
Parent's obligations under such indebtedness will continue to be serviced from
ongoing operations, thereby mitigating the lenders' potential claims against
these assets.
Certain of the Company's subsidiaries are subject to or parties to claims,
civil suits and governmental investigations and inquiries relating to their
operations and certain alleged business practices. In the opinion of 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.
F-35
<PAGE> 94
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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-36
<PAGE> 95
CRESCENT OPERATING, INC.
PRO FORMA CONSOLIDATING FINANCIAL INFORMATION
The following unaudited proforma Statements of Crescent Operating, Inc.
(the "Company" or "Crescent Operating"), assumes completion of (i) the formation
and capitalization of the Company, (ii) the acquisition of the Carter-Crowley
Asset Group, (iii) the purchase and subsequent sale of the 12.38% limited
partner interest in the partnership that owns the Dallas Mavericks, (iv) the
acquisition of a 50% equity interest in Charter Behavioral Health Systems LLC
and the related acquisition of 1,238,311 warrants to purchase 1,238,311 common
shares of Magellan Health Services, Inc., as of March 31, 1997 as it relates to
the balance sheet, and as of January 1, 1996, in each case, as it relates to the
statement of operations.
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 Company would have been for the period,
nor does it purport to represent the Company's results of operations for future
periods.
F-37
<PAGE> 96
CRESCENT OPERATING, INC.
PROFORMA CONSOLIDATED BALANCE SHEET
AS OF APRIL 3, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CRESCENT CAPITALIZATION OF ACQUISITION OF
OPERATING, INC. CRESCENT CARTER-CROWLEY ACQUISITION OF SALE OF
HISTORICAL(A) OPERATING, INC.(B) ASSET GROUP(C) INVESTMENT(D) INVESTMENT(D)
--------------- ------------------ -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash......................... $ 1 $47,947 $(15,423) $(12,400) $ 100
A/R.......................... -- -- 1,886 -- --
Inventory.................... -- -- 1,611 -- --
Other assets................. -- -- 193 -- --
---- ------- -------- -------- --------
Total current assets..... 1 47,947 (11,733) (12,400) 100
Property and equipment,
net........................ -- -- 3,860 -- --
Investments.................. -- -- 9,589 12,400 (12,400)
---- ------- -------- -------- --------
Total assets............. $ 1 $47,947 $ 1,716 $ -- $(12,300)
==== ======= ======== ======== ========
LIABILITIES:
Accounts payable and accrued
liabilities................ $ -- $ -- $ 1,047 $ -- $ --
Notes payable, current....... -- -- 299 -- --
---- ------- -------- -------- --------
Total current............ -- -- 1,346 -- --
Long-term notes payable, net
of current portion......... 33,847 -- -- (9,920)
Deferred income taxes........ -- -- 370 -- --
---- ------- -------- -------- --------
Total liabilities........ -- 33,847 1,716 -- (9,920)
---- ------- -------- -------- --------
STOCKHOLDER'S EQUITY:
Common stock................. -- -- -- --
Additional Paid in Capital... 1 14,100 -- -- (2,380)
Retained Earnings............ -- -- -- --
---- ------- -------- -------- --------
Total stockholder's
equity................. 1 14,100 -- -- (2,380)
---- ------- -------- -------- --------
Total liabilities and
stockholder's equity... $ 1 $47,947 $ 1,716 $ -- $(12,300)
==== ======= ======== ======== ========
<CAPTION>
CRESCENT OPERATING, INC.
AS ADJUSTED FOR
ACQUISITION OF CARTER- ACQUISITION OF 50% PROFORMA
CROWLEY ASSET GROUP INTEREST IN CBHS(E) CONSOLIDATED
------------------------ -------------------- -------------
<S> <C> <C> <C>
ASSETS:
Cash......................... $20,225 $(20,000) $ 225
A/R.......................... 1,886 -- 1,886
Inventory.................... 1,611 -- 1,611
Other assets................. 193 -- 193
------- -------- -------
Total current assets..... 23,915 (20,000) 3,915
Property and equipment,
net........................ 3,860 -- 3,860
Investments.................. 9,589 20,000 29,589
------- -------- -------
Total assets............. $37,364 $ -- $37,364
======= ======== =======
LIABILITIES:
Accounts payable and accrued
liabilities................ 1,047 $ -- $ 1,047
Notes payable, current....... 299 -- 299
------- -------- -------
Total current............ 1,346 -- 1,346
Long-term notes payable, net
of current portion......... 23,927 -- 23,927
Deferred income taxes........ 370 -- 370
------- -------- -------
Total liabilities........ 25,643 -- 25,643
------- -------- -------
STOCKHOLDER'S EQUITY:
Common stock................. -- -- --
Additional Paid in Capital... 11,721 -- 11,721
Retained Earnings............ -- --
------- -------- -------
Total stockholder's
equity................. 11,721 -- 11,721
------- -------- -------
Total liabilities and
stockholder's equity... $37,364 $ -- $37,364
======= ======== =======
</TABLE>
F-38
<PAGE> 97
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
(A) Reflects Crescent Operating's audited historical balance sheet at April 3,
1997.
(B) Reflects capitalization of Crescent Operating to provide approximately $14.1
million equity and $33.8 million debt to be utilized in the acquisition of
the various assets.
(C) Amounts reflect the acquisition of the Carter-Crowley Asset Group, an
unrelated party, reflected at fair value based upon the acquisition
transaction of $13.7 million, including liabilities assumed, accounted for
as a purchase transaction. Amounts reflect the preliminary purchase price
adjustments as follows (in thousands):
<TABLE>
<S> <C>
Property and equipment, net................................ $(3,090)
Investments:
Hicks, Muse, Tate & Furst Equity Fund II................. 1,905
Notes payable, current..................................... (1,874)
Long-term Notes payable.................................... (2,690)
</TABLE>
Fair values assigned were based upon the following methodologies:
Dallas Basketball Limited (DBL) -- Sales of comparable sports franchises
and a recent limited partnership transaction within DBL. (See Note D).
Hicks, Muse, Tate & Furst Equity Fund II (the "Fund") -- Recorded based
upon the purchase price paid by Crescent Operating to Carter-Crowley for
its ownership interest in the Fund. Current values of traded securities
are based upon quoted rates and current values of non-traded securities
are determined by the general partner of the Fund.
As of March 31, 1997, Crescent Operating's investments in the Fund
portfolio consisted of investments in the following industries: (i)
manufacturing (36.6%, 22.0% of which consisted of investments in the
common stock, preferred stock and warrants of a company that
manufactures copper wire); (ii) communications (33.2%, 32.4% of which
consisted of an investment of a partnership interest in a cable
television operator); (iii) real estate (15.0%, all of which consisted
of an investment in a company which owns partnership interests in
partnerships that provide debt and equity capital to real estate owners
and developers); (iv) financial services (10.3%, all of which consisted
of investments of partnership interests in a foreign insurance company
and a small business investment company); and (v) food (4.9%, all of
which consisted of an investment in the common stock of a chocolate
company).
The following represents companies or partnerships in which Crescent
Operating has a significant interest through its ownership interest in
the Fund. Crescent Operating's interest in the Fund is recorded based
upon the purchase price paid by Crescent Operating to Carter-Crowley for
its ownership interest in the Fund. The Fund determines the current
market value of the underlying securities and investments by using
quoted rates for securities that are publicly traded and as determined
by the general partner of the Fund for securities that are not publicly
traded. For each investment Crescent Operating (or previously by
Carter-Crowley) has contributed to within the Fund, the number of shares
or partnership interest owned by Crescent Operating is calculated by the
number of shares or partnership interest owned by the Fund multiplied by
Crescent Operating's
F-39
<PAGE> 98
ownership percentage as determined based on contributions by Crescent
Operating (or previously by Carter-Crowley) divided by total
contributions to the Fund.
<TABLE>
<CAPTION>
CRESCENT
SHARES, OPERATING CARTER-
PUBLICLY WARRANTS OR PURCHASE CROWLEY
TRADED TYPE OF PARTNERSHIP PRICE COST
COMPANY/PARTNERSHIP SECURITIES INVESTMENT INTEREST INDUSTRY ALLOCATION BASIS
- ---------------------- ---------- ----------------- -------------- ------------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Marcus Cable Company, No Partnership
L.P.(1) 0.33% Communications $3,110,724 $2,002,574
International Wire No Common Stock/
Group, Inc.(1) 1,725,738 Manufacturing 2,107,965 1,725,738
Debt Securities/ -- -- 80,321
Warrants 5,920 -- 5,383
Olympus Partnerships No Various 0.19% to 2.08% Real Estate 1,434,263 1,277,062
Partnerships
Crain Holdings Corp. No Common Stock 425,253 Manufacturing 899,455 479,423
Seguros Comer. Amer.,
SA de CV(1) Yes Common Stock 229,340 Financial Services 691,629 725,883
Other Investments 1,345,260 1,498,094
---------- ----------
$9,589,296 $7,794,478
========== ==========
<CAPTION>
FAIR
MARKET
VALUE AT
MARCH 31,
COMPANY/PARTNERSHIP 1997
- ---------------------- -----------
<S> <C>
Marcus Cable Company,
L.P.(1) $ 3,393,193
International Wire
Group, Inc.(1) 2,201,318
91,316
6,744
Olympus Partnerships 1,564,501
Crain Holdings Corp. 981,130
Seguros Comer. Amer.,
SA de CV(1) 754,432
Other Investments 1,467,416
-----------
$10,460,050
===========
</TABLE>
- ---------------
(1) This company files periodic reports with the Securities and Exchange
Commission.
Moody-Day -- A multiple of historical cash flow.
Notes payable, current and long-term notes payable -- adjustments
represent historical liabilities of Carter-Crowley not being assumed.
Property and equipment, net -- in applying the provisions of APB No. 16,
the book value of assets acquired in excess of purchase price has been
recorded as a reduction in long-term assets.
(D) Reflects the acquisition and subsequent sale of the investment in DBL,
repayment of debt and capital distribution to Crescent Operating
Partnership. Crescent Operating recognized a $150,000 gain on the sale of
DBL. (See Note 6 to Crescent Operating, Inc. historical financial
statements).
(E) Increase reflects the acquisition of a 50% interest in Charter Behavioral
Health Systems LLC ("CBHS") and the related acquisition of 1,283,311 million
warrants to purchase 1,283,311 million common shares of Magellan Health
Services, Inc. ("Magellan Warrants") based on a preliminary valuation, as
follows (in thousands):
<TABLE>
<S> <C>
Investments in CBHS..................... $ 7,500
Acquisition of Magellan Warrants........ 12,500
=======
$20,000
=======
</TABLE>
Crescent Operating and Crescent have valued the Magellan Warrants at $25.0
million ($12.5 million for the Magellan Warrants issued to Crescent Operating
and $12.5 million for the Magellan Warrants issued to Crescent), based upon a
Black Shoales valuation performed by an independent third party.
F-40
<PAGE> 99
The following is a pro forma condensed balance sheet of CBHS as of March
31, 1997:
<TABLE>
<CAPTION>
MARCH 31,
1997
---------
<S> <C>
Current assets.............................................. $ 9,657
Property and equipment, net................................. 18,418
Other long-term assets...................................... 343
-------
$28,418
=======
Accrued liabilities......................................... $ 6,984
Capital lease obligation.................................... 53
Note Payable -- Magellan.................................... 10,000
-------
Total current liabilities......................... 17,037
Capital lease obligation.................................... 888
Member capital.............................................. 10,493
-------
Total liabilities and member capital.............. $28,418
=======
</TABLE>
F-41
<PAGE> 100
CRESCENT OPERATING, INC.
PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CRESCENT OPERATING, INC.
AS ADJUSTED FOR
CRESCENT ACQUISITION OF ACQUISITION OF
OPERATING, INC. CARTER-CROWLEY OTHER CARTER-CROWLEY
HISTORICAL(A) ASSET GROUP(B) ADJUSTMENTS ASSET GROUP
--------------- -------------- ----------- ------------------------
<S> <C> <C> <C> <C>
Revenues................................. $ -- $10,394 $ -- $10,394
Cost of Sales............................ -- 8,537 -- 8,537
---- ------- ------- -------
Gross Profit............................. -- 1,857 -- 1,857
Equity in loss of CBHS................... -- -- -- --
Selling, General and Administrative
Expenses............................... -- 1,748 506(C) 2,254
---- ------- ------- -------
Income (Loss) from Operations............ -- 109 (506) (397)
Other (Income) Expense:
Interest Expense....................... -- 356 2,545(D) 2,901
Other.................................. -- (79) -- (79)
---- ------- ------- -------
Total Other Expense, net......... -- 277 2,545 2,822
---- ------- ------- -------
Income (Loss) Before Income Taxes...... -- (168) (3,051) (3,219)
Income Tax Benefit..................... -- (57) -- (57)
---- ------- ------- -------
Net Income (Loss)...................... $ -- $ (111) $(3,051) $(3,162)
==== ======= ======= =======
Net Income (Loss) per Share............
<CAPTION>
ACQUISITION OF
50% INTEREST PRO FORMA
IN CBHS(E) CONSOLIDATED
-------------- ------------
<S> <C> <C>
Revenues................................. $ -- $ 10,394
Cost of Sales............................ -- 8,537
------- --------
Gross Profit............................. -- 1,857
Equity in loss of CBHS................... 7,659 7,659
Selling, General and Administrative
Expenses............................... -- 2,254
------- --------
Income (Loss) from Operations............ (7,659) (8,056)
Other (Income) Expense:
Interest Expense....................... -- 2,901
Other.................................. -- (79)
------- --------
Total Other Expense, net......... -- 2,822
------- --------
Income (Loss) Before Income Taxes...... (7,659) (10,878)
Income Tax Benefit..................... -- (57)
------- --------
Net Income (Loss)...................... $(7,659) $(10,821)
======= ========
Net Income (Loss) per Share............ $ (.98)
========
</TABLE>
F-42
<PAGE> 101
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS)
<TABLE>
<S> <C> <C>
(A) Crescent Operating had no operations prior to the
acquisition of the Carter-Crowley Asset Group
(B) Reflects the historical income and expenses associated with
the acquired company, assuming it occurred at the beginning
of the period...............................................
(C) Reflects the incremental:
Corporate general and administrative expenses related to the
formation and operation of the Company as follows:
Salaries and benefits....................................... $ 250
Rent and other office supplies.............................. 200
Professional fees........................................... 150
Depreciation and amortization of the purchase price
adjustment as a result of the acquisition of the
Carter-Crowley Asset Group.................................. (94)
-------
$ 506
-------
(D) Increase is a result of interest expense for long term
financing in conjunction with the capitalization of the
Company, assuming it occurred at the beginning of the
period.
$23,927 loan at a rate of 12%............................... $ 2,901
Less historical interest expense............................ (356)
-------
Incremental interest expense................................ $ 2,545
=======
(E) Reflects the Company's 50% share of net loss of CBHS
(accounted for on the equity method of accounting since the
Company does not control CBHS; the four member board
consists of two directors named by the Company and two
directors named by Magellan) (see F-46)..................... $(7,659)
</TABLE>
F-43
<PAGE> 102
CRESCENT OPERATING, INC.
PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS IN THE PERIOD ENDED MARCH 31, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CRESCENT OPERATING, INC.
AS ADJUSTED FOR
CRESCENT ACQUISITION OF ACQUISITION OF
OPERATING, INC. CARTER-CROWLEY OTHER CARTER-CROWLEY
HISTORICAL(A) ASSET GROUP(B) ADJUSTMENTS ASSET GROUP
--------------- -------------- ----------- ------------------------
<S> <C> <C> <C> <C>
Revenues................................. $ -- $3,039 $ -- $3,039
Cost of Sales............................ -- 2,462 -- 2,462
---- ------ ----- ------
Gross Profit............................. -- 577 -- 577
Equity in loss of CBHS................... -- -- -- --
Selling, General and Administrative
Expenses............................... -- 438 126(C) 564
---- ------ ----- ------
Income (loss) from Operations............ -- 139 (126) 13
Other (Income) Expense:
Interest Expense....................... -- 113 612(D) 725
Other.................................. -- (9) -- (9)
---- ------ ----- ------
Total Other Expense, net......... -- 104 612 716
---- ------ ----- ------
Income (Loss) Before Income Taxes...... -- 35 (738) (703)
Income Tax Provision................... -- 12 -- 12
---- ------ ----- ------
Net Income (Loss)...................... $ -- $ 23 $(738) $ (715)
==== ====== ===== ======
Net Income (Loss) per Share............
<CAPTION>
ACQUISITION OF
50% INTEREST PRO FORMA
IN CBHS(E) CONSOLIDATED
-------------- ------------
<S> <C> <C>
Revenues................................. $ -- $ 3,039
Cost of Sales............................ -- 2,462
------- -------
Gross Profit............................. -- 577
Equity in loss of CBHS................... 2,416 2,416
Selling, General and Administrative
Expenses............................... -- 564
------- -------
Income (loss) from Operations............ (2,416) (2,403)
Other (Income) Expense:
Interest Expense....................... -- 725
Other.................................. -- (9)
------- -------
Total Other Expense, net......... -- 716
------- -------
Income (Loss) Before Income Taxes...... (2,416) (3,119)
Income Tax Provision................... -- 12
------- -------
Net Income (Loss)...................... $(2,416) $(3,131)
======= =======
Net Income (Loss) per Share............ $ (.28)
=======
</TABLE>
F-44
<PAGE> 103
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS IN THE PERIOD ENDED MARCH 31, 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<S> <C> <C>
(A) Crescent Operating had no operations prior to the
acquisition of the Carter-Crowley Asset Group
(B) Reflects the historical income and expenses associated with
the acquired company, assuming it occurred at the beginning
of the period...............................................
(C) Reflects the incremental:
Corporate general and administrative expenses related to the
formation and operation of the Company as follows:
Salaries and benefits....................................... $ 62
Rent and other office supplies.............................. 50
Professional fees........................................... 38
Depreciation and amortization of the purchase price
adjustment as a result of the acquisition of the
Carter-Crowley Asset Group.................................. (24)
-------
126
(D) Increase is a result of interest expense for long term
financing in conjunction with the capitalization of the
Company, assuming it occurred at the beginning of the
period.
$23,927 loan at a rate of 12%............................... $ 725
Less historical interest expense............................ (113)
-------
Incremental interest expense................................ $ (612)
=======
(E) Reflects the Company's 50% share of net loss of CBHS
(accounted for on the equity method of accounting since the
Company does not control CBHS; the four member board
consists of two directors named by the Company and two
directors named by Magellan) (see F-49)..................... $(2,416)
</TABLE>
F-45
<PAGE> 104
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS
SEPTEMBER 30, 1996
The following unaudited proforma statement of operations of Charter
Behavioral Health Systems, LLC (CBHS) for the year ended September 30, 1996,
assumes the following: (i) the elimination of the European Hospitals, JV
Hospitals not being acquired by CBHS and other operations and overhead and (ii)
the completion of the Crescent Transaction, including the execution of the
Facility Lease Agreement and Master Franchise Agreement, as if they had occurred
on October 1, 1995.
F-46
<PAGE> 105
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
(The investment in this entity will be reflected in the financial
statements of Crescent Operating, Inc. on the equity method of accounting. (See
F-42 Note E)
<TABLE>
<CAPTION>
PRO FORMA
CHARTER CHARTER
PROVIDER BEHAVIORAL BEHAVIORAL
SEGMENT HEALTH PRO FORMA HEALTH
AS REPORTED CARVE OUT(A) SYSTEMS, LLC ADJUSTMENTS SYSTEMS, LLC
----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Net Revenue............... $1,044,345 $235,601 $808,744 $ 10,615(B) $819,359
---------- -------- -------- -------- --------
Salaries, supplies and
other operating
expense................. 800,912 195,585 605,327 152,312(C) 757,639
Bad debt expense.......... 79,930 9,909 70,021 0 70,021
Depreciation and
amortization............ 37,108 8,245 28,863 (26,444)(D) 2,419
Interest, net............. 47,615 42,763 4,852 (1,252)(E) 3,600
Stock option expense...... 914 914 0 0 0
Unusual items............. 37,271 36,274 997 0 997
---------- -------- -------- -------- --------
1,003,750 293,690 710,060 124,616 834,676
---------- -------- -------- -------- --------
Income before income taxes
and minority interest... 40,595 (58,089) 98,684 (114,001) (15,317)
Provision for income
taxes................... 14,883 (24,591) 39,474 (39,474)(F) --
---------- -------- -------- -------- --------
Income before minority
interest................ 25,712 (33,498) 59,210 (74,527) (15,317)
Minority interest......... 1,615 1,615 0 -- --
---------- -------- -------- -------- --------
Net income................ $ 24,097 $(35,113) $ 59,210 $(74,527) $(15,317)
========== ======== ======== ======== ========
</TABLE>
F-47
<PAGE> 106
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
NOTES TO PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
(A) Includes the elimination of the European Hospitals, and JV Hospitals and
other operations, including closed facilities, which will not be part of
CBHS after the Crescent Transaction, and corporate overhead and other
adjustments necessary to eliminate revenues and expenses related to
non-acquired assets.
(B) Represents management fees of $10.6 million payable by Magellan to CBHS for
the management of hospital based businesses controlled and less than
wholly-owned by Magellan which will not be part of CBHS after the Crescent
Transaction.
(C) Reflects increase in expenses pursuant to franchise fees of $78.2 million
payable under the Master Franchise Agreement, rent expense of $63.0 million
payable to Crescent for hospital-based real estate and equipment computed
on a straight-line basis over the 12 year term under the Facility Lease
Agreement, and $11.1 million of corporate general and administrative
expenses for necessary CBHS corporate functions formerly performed by
Magellan including human resources, legal, and finance and accounting.
(D) Reflects decrease in historical depreciation and amortization expense as a
result of the sale of fixed assets and the Facility Lease Agreement.
(E) Reflects decrease in interest expense based on the following assumptions
(in thousands):
<TABLE>
<S> <C> <C>
Old interest expense, net................................ $ (4,852)
Expected average borrowings -- working capital........... 45,000
Estimated borrowing rate................................. 8.0%
------
3,600
--------
Pro forma adjustment..................................... $ (1,252)
========
</TABLE>
Borrowing rate estimates the rate on a loan commitment received from a
group of commercial banks to provide a line of credit of up to $100 million
pursuant to a 5-year revolving credit facility.
(F) Pro forma adjustment reflects the elimination of the provision for income
taxes as Charter Behavioral Health Systems, LLC is a limited liability
company and is not subject to federal income tax.
F-48
<PAGE> 107
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS
MARCH 31, 1997
The following unaudited proforma statement of operations of Charter
Behavioral Health Systems, LLC (CBHS) for the three months in the period ended
March 31, 1997, assumes the following: (i) the elimination of the European
Hospitals, JV Hospitals not being acquired by CBHS and other operations and
overhead and (ii) the completion of the Crescent Transaction, including the
execution of the Facility Lease Agreement and Master Franchise Agreement, as if
they had occurred on October 1, 1996.
F-49
<PAGE> 108
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS IN THE PERIOD ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
CHARTER CHARTER
PROVIDER BEHAVIORAL BEHAVIORAL
SEGMENT HEALTH PRO FORMA HEALTH
AS REPORTED CARVE OUT(A) SYSTEMS, LLC ADJUSTMENTS SYSTEMS, LLC
----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Net Revenue................ $236,862 $ 42,075 $194,787 $ 3,541(B) $198,328
-------- -------- -------- -------- --------
Salaries, supplies and
other operating
expense.................. 181,705 34,210 147,495 36,696(C) 184,191
Bad debt expense........... 14,826 690 14,136 0 14,136
Depreciation and
amortization............. 9,329 2,099 7,230 (6,097)(D) 1,133
Interest, net.............. 13,176 12,231 945 255(E) 1,200
Stock option expense....... 829 829 0
Unusual items.............. 1,395 (1,105) 2,500 0 2,500
-------- -------- -------- -------- --------
221,260 48,954 172,306 30,854 203,160
-------- -------- -------- -------- --------
Income before income taxes
and minority interest.... 15,602 (6,879) 22,481 (27,313) (4,832)
Provision for income
taxes.................... 5,938 (3,054) 8,992 (8,992)(F) --
-------- -------- -------- -------- --------
Income before minority
interest................. 9,664 (3,825) 13,489 (18,321) (4,832)
Minority interest.......... 693 693 0 -- --
-------- -------- -------- -------- --------
Net income................. $ 8,971 $ (4,518) $ 13,489 $(18,321) $ (4,832)
======== ======== ======== ======== ========
</TABLE>
F-50
<PAGE> 109
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
NOTES TO PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS IN THE PERIOD ENDED MARCH 31, 1997
(A) Includes the elimination of the European Hospitals, and JV Hospitals and
other operations, including closed facilities, which will not be part of
CBHS after the Crescent Transaction, and corporate overhead and other
adjustments necessary to eliminate revenues and expenses related to
non-acquired assets.
(B) Fees from Magellan for the management of hospital-based businesses
controlled by Magellan that are less than wholly-owned by Magellan.
(C) The pro forma adjustments to salaries, supplies and other operating
expenses are as follows (000's):
<TABLE>
<S> <C>
Franchise Fees.............................................. $19,550
Rent Expense under the Facilities Lease..................... 15,764
Additional Corporate Overhead............................... 1,382
-------
$36,696
=======
</TABLE>
(D) The pro forma adjustment to depreciation and amortization expense
represents the decrease in depreciation expense as a result of the sale of
property and equipment to Crescent by Magellan and the elimination of
amortization expense related to impaired intangible assets.
(E) The pro forma adjustment to interest, net, is computed as follows (000's):
<TABLE>
<S> <C>
Interest expense on serviced IRB's.......................... $ (945)
Interest expense for new borrowings......................... 1,200
--------
$ 255
========
Average borrowings.......................................... 60,000
Borrowing rate.............................................. 8.0%
--------
Annual Interest................................... 4,800
========
Quarterly Interest................................ 1,200
========
</TABLE>
(F) CBHS will be formed as a limited liability company. Accordingly, no tax
benefit is presented as the tax consequences will pass through to Magellan
and COI.
F-51
<PAGE> 110
============================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY DISTRIBUTION MADE PURSUANT HERETO SHALL, UNDER ANY
CIRCUMSTANCE, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE FACTS
SET FORTH IN THIS PROSPECTUS OR IN AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary..................................... 2
Risk Factors................................ 11
The Distribution............................ 17
Dividend Policy............................. 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 23
Business.................................... 27
Management.................................. 38
Certain Transactions........................ 43
Description of Crescent Operating Capital
Stock..................................... 46
Certain Antitakeover Provisions............. 49
Experts..................................... 55
Legal Matters............................... 55
Index to Financial Statements............... F-1
---------------------
UNTIL JULY 7, 1997 (25 DAYS AFTER THE DATE OF
THIS PROSPECTUS), ALL DEALERS EFFECTING
TRANSACTIONS IN THE COMMON STOCK DISTRIBUTED
PURSUANT HERETO, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
</TABLE>
============================================================
============================================================
CRESCENT
OPERATING, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
June 12, 1997
============================================================
