<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 2, 1997
REGISTRATION NO. 333-25223
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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CRESCENT OPERATING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 6531/9999 PENDING
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
INCORPORATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
GERALD W. HADDOCK, ESQ.
777 MAIN STREET 777 MAIN STREET
FORT WORTH, TEXAS 76102 FORT WORTH, TEXAS 76102
TELEPHONE: (817) 877-0477 TELEPHONE: (817) 877-0477
(ADDRESS AND TELEPHONE NUMBER (NAME, ADDRESS AND TELEPHONE NUMBER
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) OF AGENT FOR SERVICE)
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Copies to:
ROBERT B. ROBBINS, ESQ.
SYLVIA M. MAHAFFEY, ESQ.
SHAW, PITTMAN, POTTS & TROWBRIDGE
2300 N STREET, N.W.
WASHINGTON, D.C. 20037
TELEPHONE: (202)663-8000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
possible after the effective date of this registration statement
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE AS SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
PROSPECTUS SUBJECT TO COMPLETION DATED JUNE 2, 1997
CRESCENT OPERATING, INC.
[LOGO]
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 10 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 , 1997
(one business day following effectiveness of the registration statement of which
this prospectus is a part). 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, $.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 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
$1.19 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.
Shares of Crescent Operating Common Stock have not yet been approved for listing
on any national securities exchange, automated quotation system or
over-the-counter market, although Crescent Operating has applied for quotation
of the Crescent Operating Common Stock on the Nasdaq National 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 , 1997.
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TABLE OF CONTENTS
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Available Information....................................... 1
Summary..................................................... 2
The Distribution.......................................... 2
Crescent Operating........................................ 4
Summary Pro Forma Financial Data.......................... 9
Risk Factors................................................ 11
Lack of Operating History................................. 11
Risks Associated with the Carter-Crowley Assets........... 11
Risks Associated with the CBHS Interest................... 12
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.............. 15
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... 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.... 21
Shares Available for Future Sale.......................... 22
Dividend Policy............................................. 22
Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................. 23
Business.................................................... 26
Overview.................................................. 26
Strategy.................................................. 27
The Intercompany Agreement................................ 27
The Carter-Crowley Assets................................. 28
The CBHS Interest......................................... 30
Property.................................................. 38
Employees................................................. 38
Management.................................................. 38
Directors and Executive Officers of Crescent Operating.... 38
Committees of the Board of Directors...................... 40
Compensation of Directors................................. 40
Annual Meeting............................................ 40
Security Ownership of Certain Beneficial Owners and
Management After the Distribution...................... 40
Executive Compensation.................................... 41
Crescent Operating Stock Incentive Plan................... 42
Certain Transactions........................................ 43
Interests Relating to Crescent Operating Partnership...... 43
Crescent.................................................. 44
Interests Relating to Magellan............................ 44
Contract with Affiliate of Director....................... 45
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Description of Crescent Operating Capital Stock............. 45
Authorized Capital Stock.................................. 45
Common Stock.............................................. 45
Preferred Stock........................................... 45
Warrants.................................................. 47
Certain Antitakeover Provisions............................. 48
Staggered Board of Directors.............................. 48
Number of Directors; Removal; Filling Vacancies........... 48
No Stockholder Action by Written Consent; Special
Meetings............................................... 48
Advance Notice Provisions for Stockholder Nominations and
Stockholder Proposals.................................. 48
Relevant Factors To Be Considered by the Crescent
Operating Board........................................ 49
Amendment................................................. 49
Rights Plan............................................... 50
Delaware Business Combination Statute..................... 52
Control Share Acquisitions................................ 52
Liability of Directors and Officers; Indemnification...... 53
Experts..................................................... 54
Legal Matters............................................... 54
Index to Financial Statements............................... F-1
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ii
<PAGE> 5
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.
This Prospectus contains trademarks, service marks or registered marks of
Crescent Operating.
<PAGE> 6
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.
Distribution Ratio One share of Crescent Operating Common Stock for
every 10 Crescent Common Shares, and one share of
Crescent Operating Common Stock for every 5 Units.
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 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 $1.19 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, nor will
Crescent shareholders be required to surrender or
exchange Crescent Common Shares, or Limited
Partners 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 of operating history, potential
conflicts of interest and Crescent Operating's
dependence on Crescent.
2
<PAGE> 7
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 health care 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) are
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, vice chairman and
president and chief executive officer,
respectively, of both Crescent and Crescent
Operating. Messrs. Rainwater, Goff and Haddock all
are partners in Crescent Operating Partnership and
shareholders in Crescent, and Mr. Haddock also
serves as president and chief executive officer and
the sole director of 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.
3
<PAGE> 8
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 is 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 new 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 The First National Bank of Boston will be the
Distribution Agent for the Distribution.
Record Date May 30, 1997 (the "Record Date").
Distribution Date , 1997 (one business day following
effectiveness of the registration statement of
which this prospectus is a part) (the "Distribution
Date"). Commencing on or about the Distribution
Date, the Distribution Agent will begin mailing
account statements reflecting ownership of Crescent
Operating Common Stock to Limited Partners on the
Record Date and, subsequently, to holders of
Crescent Common Shares. 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. The Crescent Operating
Common Stock has not yet been approved for listing
on any national securities exchange, automated
quotation system or over-the-counter markets,
although Crescent Operating has applied for
quotation of the Crescent Operating Common Stock on
the Nasdaq National Market. There can be no
assurance that such listing application will be
approved or that a 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 has contributed approximately
$12.6 million in cash, and will contribute
approximately $1.5 million in additional cash, and
will advance to Crescent Operating an aggregate of
approximately $35.9 million in the form of loans
(approximately $15.3 million of which
4
<PAGE> 9
was funded on May 8, 1997), totaling, in the
aggregate, $50.0 million, which Crescent Operating
has used or expects to use to purchase the
following assets (collectively, the "Assets"):
- various assets acquired from Carter-Crowley
Properties, Inc., an unrelated party,
("Carter-Crowley"), including (i) Moody-Day, Inc.
("Moody-Day"), a construction equipment sales,
leasing and servicing company acquired for
approximately $4.1 million; (ii) a direct
minority interest of 12.38% in the partnership
which holds the National Basketball Association
("NBA") franchise for the Dallas Mavericks
acquired for approximately $12.4 million; and
(iii) 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 health
care facilities (the "Facilities") which Magellan
Health Services, Inc. ("Magellan") is expected to
sell to Crescent (the "CBHS Interest") as a part
of a transaction with Magellan Health Services,
Inc., an unaffiliated entity (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 common stock of Magellan. As of
December 31, 1996, Mr. Rainwater beneficially
owned, 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
common stock of Magellan. 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.
On May 9, 1997, Crescent Operating purchased the
Carter-Crowley Assets for approximately $26.0
million with funds contributed to Crescent
Operating by Crescent Operating Partnership. An
additional approximately $20.6 million will be
advanced to Crescent Operating by Crescent
Operating Partnership in the form of loans, and
Crescent Operating Partnership will contribute an
additional $1.5 million in cash to Crescent
Operating. 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 the
remaining approximately $2.1 million to fund
certain obligations to purchase construction
equipment of Moody-Day.
5
<PAGE> 10
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 private
venture capital fund acquired from Carter-Crowley
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 (the "Charter"), provides that one of
Crescent Operating's corporate purposes is to
perform the Intercompany Agreement, pursuant to
which Crescent Operating and Crescent 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 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.
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 of
Directors, 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 Date. If so adopted,
certificates issued in the Distribution
representing Crescent
6
<PAGE> 11
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 (the "Bylaws"), as
each will be in effect as of the Distribution, and
of applicable Delaware state corporation law, 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 (the "Board"). These provisions include
(i) a provision for a classified Board of
Directors, 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."
Post-Distribution Dividend
Policy 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 May 30, 1997,
the outstanding principal balance of loans from
Crescent Operating Partnership to Crescent
Operating was $15.3 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 of
Directors, 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
each of these entities and through his direct and
indirect ownership of Crescent Common Shares and
units of ownership in Crescent Operating
Partnership. Mr. Haddock is the sole director of
the sole general partner of Crescent Operating
Partnership. The general partner is a wholly owned
subsidiary of Crescent. As of May 30, 1997,
7
<PAGE> 12
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 ownership in
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. 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." In addition, Mr. Rainwater
beneficially owns approximately 19.1% of the
Magellan common stock, the substantial portion of
which is attributable to his ownership of 100% of
the stock of the sole general partner of
Rainwater-Magellan Holdings, L.P., a limited
partnership that owns 3,885,832 shares of Magellan
common stock. See "Risk Factors -- Potential
Conflicts of Interest" and "Certain Transactions."
Transfer Agent and
Registrar The First National Bank of Boston will be the
Transfer Agent and Registrar for Crescent Operating
after the Distribution.
8
<PAGE> 13
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, and (iii) the acquisition of the CBHS Interest,
which is a 50% interest in CBHS.
<TABLE>
<CAPTION>
CRESCENT
OPERATING, INC.
AS ADJUSTED FOR
ACQUISITION OF ACQUISITION OF
CRESCENT CARTER- CARTER- ACQUISITION OF
OPERATING, INC. CROWLEY CROWLEY 50% INTEREST PRO FORMA
HISTORICAL ASSET GROUP ASSET GROUP IN CBHS(1) 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............ -- 869 363 (7,659) (7,296)
---- ------- ------- ------- -----------
Net income (loss)........................ $ -- $ 383 $(3,707) $(7,659) $ (11,366)
Weighted average shares outstanding...... 11,025,547
Net loss per share....................... $ (1.03)
</TABLE>
- ---------------
(1) Represents Crescent Operating's share of the pro forma loss of CBHS
primarily as a result of the anticipated $81.0 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
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's
common stock.
<TABLE>
<CAPTION>
CRESCENT
OPERATING, INC.
AS ADJUSTED FOR
ACQUISITION OF ACQUISITION OF
CRESCENT CARTER- CARTER- ACQUISITION OF
OPERATING, INC. CROWLEY CROWLEY 50% INTEREST PRO FORMA
HISTORICAL ASSET GROUP ASSET GROUP IN CBHS(1) 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 $ (999) $(2,416) $ (3,415)
Weighted average shares outstanding...... 11,025,547
Net loss per share....................... $ (.31)
Balance Sheet Data:
Total assets............................. $ 1 NA $49,718 -- $ 49,718
Total debt............................... -- NA 34,146 -- 34,146
Total stockholder equity................. 1 NA 14,101 -- 14,101
</TABLE>
- ---------------
(1) Represents Crescent Operating's share of the pro forma loss of CBHS
primarily as a result of the anticipated $81.0 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> 14
The following table sets forth certain summary historical financial
information for 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.
SELECTED FINANCIAL DATA
<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 68 869 89 83 89 (49)
Net income (loss)..................................... 24 13 383 79 43 37 (90)
Balance Sheet Data:
Total assets.......................................... $18,465 $14,475 $17,353 $13,493 $ 5,705 $ 5,101 $ 4,936
Total debt............................................ 4,863 3,127 5,405 3,121 1,375 850 466
Total stockholder equity.............................. 12,130 10,476 10,659 9,621 3,695 3,709 4,580
</TABLE>
10
<PAGE> 15
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 variety of assets purchased from
Carter-Crowley, including a construction equipment sales, leasing and service
company, a direct minority (12.38%) limited partner interest in Dallas
Basketball Ltd., the entity that holds the NBA franchise for the Dallas
Mavericks, and a 1.21% limited partner interest in a private venture capital
fund. The Carter-Crowley Assets are varied, unrelated to one another, and
possibly unrelated to any future business in which Crescent Operating will
invest. Certain of 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.
Interest in Dallas Basketball Ltd. The transfer of Crescent Operating's
direct minority limited partnership interest in Dallas Basketball Ltd. is
restricted by the terms of the Dallas Basketball Ltd. partnership agreement and
by the NBA. The Dallas Basketball Ltd. partnership agreement provides that the
other limited partners have a right of first refusal to acquire any interests
sought to be transferred, and that the general partner must approve all
transfers. Additionally, all transfers are subject to certain restrictions
contained in the Constitution and Bylaws of the NBA. Consequently, the limited
partnership interest in Dallas Basketball Ltd. is relatively illiquid and its
value may be adversely affected by the win-loss record of the Dallas Mavericks
during a particular season.
Limited Partner Interest in Private Venture Capital Fund. 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. 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. 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.
11
<PAGE> 16
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.
If acquired, the CBHS Interest presents the following risks to stockholders
of Crescent Operating.
Franchise Agreement Risks. The Master Franchise Agreement 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.
CBHS Reliance 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 Magellan 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
Magellan's request during the five years following the closing of the Magellan
Transaction. 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'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. A significant number of decisions require 80%
CBHS Board approval (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. 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's interest in CBHS.
In the latter case, Crescent Operating would be faced with funding the purchase
of Magellan'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.
12
<PAGE> 17
The laws governing financial arrangements between healthcare providers
generally prohibit certain direct and indirect payments and/or fee-splitting
arrangements between health-care 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 any form of 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
to identify business opportunities for Crescent Operating. There is
13
<PAGE> 18
no assurance that Crescent Operating Partnership will identify opportunities for
Crescent Operating or that any opportunities that Crescent 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 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 "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 19.1% of the outstanding
common stock of Magellan. Mr. Rainwater's spouse 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.
14
<PAGE> 19
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 Crescent Operating management or employees will have, 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 a five-year term loan pursuant to which it expects 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 a line of
credit for up to $20.0 million from Crescent Operating Partnership. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity." 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
and 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 credit
facility at the time that they mature.
Crescent Operating intends to utilize any funds it may borrow under the
$20.0 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
$20.0 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.
Although Crescent Operating has applied for quotation of the Crescent Operating
Common Stock on the Nasdaq National Market, it has not yet been approved for
listing, there can be no assurance that it will be approved for quotation, and
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 Common Stock occurs may fluctuate
significantly. In the event no regular trading market develops for Crescent
Common Stock, holders of shares of Crescent Common Stock may not be able to sell
their shares promptly at a desired price. Accordingly, holders of Crescent
Operating Common Stock should consider the Common Stock a long-term investment.
ABSENCE OF DIVIDENDS ON CRESCENT OPERATING COMMON STOCK
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
15
<PAGE> 20
in the foreseeable future. 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
Delaware General Corporation Law (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, 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 Date") the Rights will be transferred
only with the Crescent Operating Common Stock. Following the Rights Distribution
Date, separate certificates evidencing the Rights will be mailed to each holder
of record on the Rights Distribution
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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 Junior Preferred Share
per Right.
FEDERAL INCOME TAX RISKS
On the Distribution 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 the 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 the 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 is 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 new REITs, have shares that are "paired" or "stapled"
with shares of a related operating
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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.
On May 8, 1997, Crescent Operating Partnership contributed cash in the
amount of approximately $12.6 million, and committed to contribute additional
cash in the amount of approximately $1.5 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 Date will be , 1997 (one
business day following effectiveness of the registration statement of which this
prospectus is a part). 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 close of
business 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. 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 $1.19 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 Date, inquiries relating to the Distribution
should be directed to the Distribution Agent at 150 Royall, Canton,
Massachusetts 02021 Monday through Friday, 9:00 a.m. to 5:00 p.m. (Eastern
time), at 617-575-4190. After the Distribution 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 OF 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 or Crescent Operating or to
the Distribution is being requested from the Service or from any other tax
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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 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 the Crescent Operating Partnership to Crescent Operating. Because the Assets
consist primarily of cash and recently negotiated contract rights, 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 qualifies as a REIT, distributions
(including the Distribution) made to Crescent's taxable U.S. shareholders
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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 adjusted basis of such shares. To the
extent that distributions in excess of current and accumulated earnings
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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 the
Assets by the 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 the Crescent Operating Partnership's basis
in the Assets over the value of the Crescent Operating Common Stock received by
the Crescent Operating Partnership. Limited Partners would be taxable on their
distributable share of such gain, if any. Because the Assets consist primarily
of cash and recently negotiated contract rights, 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 the 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.
Although Crescent Operating has applied to the Nasdaq National Market for
quotation of the Crescent Operating Common Stock, it has not yet been approved
for listing, there can be no assurance that it will be approved for listing, and
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
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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 on the Record
Date and the number of Limited Partners. The Transfer Agent and Registrar for
the Crescent Operating Common Stock will be The First National Bank of Boston.
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
(approximately 11,025,547 shares, based on a Record Date of May 30, 1997) will
be freely transferable, except for securities received by persons who may be
deemed to be "affiliates" of Crescent Operating under the Securities Act of
1933, as amended (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,
if any. 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
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.
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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," "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 Properties, Inc. ("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,
and intends to finance the acquisition of the CBHS Interest and the warrants to
purchase Magellan common stock, in part through borrowings, 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's
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 $12.6 million in cash from
Crescent Operating Partnership, which also has committed to fund an additional
approximately $1.5 million in cash to Crescent Operating, and Crescent Operating
will borrow approximately $35.9 million (approximately $15.3 million of which
was funded on May 8, 1997) from Crescent Operating Partnership pursuant to a
five-year term loan. The loan is a recourse loan secured by a first lien on the
Assets and all other assets owned by Crescent Operating now or in the future
(other than subsidiaries of CBHS formed or acquired after May 8, 1997). 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 total amount of principal and interest
outstanding 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 will obtain a $20.0 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 7, 2002 or (ii) five years after the last draw under the
line of credit. Draws may be made under the line of credit until May 1, 2002.
The line of credit is a recourse obligation and amounts outstanding thereunder
are secured by a first lien on the Assets (other than subsidiaries of CBHS
formed or acquired after May 8, 1997). Approximately $12.6 million in cash and
the proceeds of approximately $15.3 million of loans were used to acquire the
Carter-Crowley Assets. The remaining approximately $1.5 million to be 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 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
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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.
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 $3.4
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 $.9 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 $3.4 million pro forma net loss also reflects the $2.4
million net loss related to Crescent Operating 50% interest of 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 acquisition of the CBHS Interest) (b) reductions in
depreciation and amortization expenses of $3.0 million, and (c) a net decrease
of $4.4 million, attributable to a decrease in tax expenses partially offset by
an increase in interest expense; (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 $11.4 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 a decrease in historical net
income as a result of (i) an increase in interest expense on long-term financing
incurred in connection with the capitalization of Crescent Operating of $3.6
million, and (ii) incremental general and administrative expenses of $.5 million
related to the operation of Crescent Operating. The $11.4 million pro forma net
income also reflects the $7.7 million net loss related to the Crescent
Operating's 50% interest of 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, and (c)
reductions in depreciation, amortization and interest expenses of $13.8 million;
and (ii) a decrease in net income as a result of (a) an increase in management
fees payable by Magellan to CBHS for the management of hospital-based businesses
which will
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not be part of the CBHS Interest of $5.3 million, and (b) 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 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.
Distributions in excess of investment in limited partnership was
approximately $0.8 million in the year ended December 31, 1996 due to the
receipt by the Portfolio of a distribution in excess of the Portfolio's
investment in Dallas Basketball Ltd. Distributions made to the Portfolio in 1995
did not exceed the Portfolio's investment in Dallas Basketball Ltd.
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.
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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.
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 various assets, including an equipment sales, leasing and service
company, an interest in a limited partnership that owns the NBA franchise for
the Dallas Mavericks 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,
pursuant to which Crescent Operating and Crescent 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 was first given the opportunity but elected not to pursue such
activities or investments.
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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 is 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 new 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. It also plans to
determine whether Crescent Operating could provide to Crescent certain lessee
and operator functions currently provided by others to Crescent. In this regard,
it plans to negotiate to 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.
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." 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 health care facilities. In general, master lease
arrangement is an arrangement pursuant to which an entire property or project
(or a group of related properties or projects) are 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
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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 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, 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 and the Carter-Crowley Assets. Pursuant to an agreement between
Carter-Crowley and Crescent, 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
and Crescent Operating acquired the Carter-Crowley Portfolio.
Crescent 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
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, was purchased by Crescent Operating utilizing cash
contributions and loan proceeds that were provided to Crescent Operating by
Crescent Operating Partnership. These assets, which have an allocated cost of
approximately $26.0 million, consist primarily of the assets described below.
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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 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.
Dallas Mavericks Interest. Crescent Operating owns a 12.38% limited partner
interest in Dallas Basketball, Ltd., a Texas limited partnership that owns the
Dallas Mavericks basketball team, the related rights in the NBA franchise and
various other related rights and interests. The Dallas Basketball, Ltd.
partnership agreement sets forth the rights and obligations of the partners,
including rights and restrictions regarding transferring interests in the
partnership and future capital contributions. If the general partner does not
waive the provision, transfers of interests to a person or entity not related to
an existing partner must be offered to the existing partners who have the right
to accept, in the aggregate, all of the interests offered. If the offerees elect
to take less than all of the offered interests, the offer is deemed to be
rejected. When a contract for the sale of the interests has been entered into,
the general partner will review the contract and any additional information
regarding the character and financial capacity of the proposed purchaser, and
determine whether it will consent to the transfer. This consent may not be
unreasonably withheld, assuming the interest to be transferred is less than 25%
of the partnership interests. Any transfer is subject to all relevant
restrictions on such transfer as may be contained in the Constitution and Bylaws
of the NBA.
The partnership agreement does not contain any additional capital
contribution requirements. A limited partner, however, may make voluntary
contributions when and if requested by the general partner. Any such
contributions are subject to a preferential return.
Generally, the general partner has full control over the activities of the
partnership and has and can exercise full management powers and control.
However, until three promissory notes (aggregating approxi-
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mately $47 million, excluding a contingent $10 million note, all of which are
held by Crescent) are paid or otherwise retired or canceled, a "majority
interest" must consent to the general partner taking various actions, including
incurring debt in excess of $10 million, mortgaging or otherwise encumbering any
or all of the material assets of the partnership, agreeing to the transfer of
certain limited partner interests and certain mergers or consolidations.
"Majority interest" means 50% of the 33% of limited partner interests not
affiliated with the general partner. There are six limited partners not
affiliated with the general partner (including Crescent Operating), four of
which each own a 4.13% limited partner interest and one of which owns a 4.10%
limited partner interest. Accordingly, the other limited partners could combine,
or Crescent Operating with one of the 4.13% limited partners could combine, to
constitute a majority interest.
Hicks Muse Tate & Furst Equity Fund II, LP. Hicks Muse Tate & Furst Equity
Fund II, LP 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 become an operator 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 closing of the Magellan
Transaction. 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 the second
quarter of 1997.
The Magellan Transaction includes:
- the purchase of the Facilities by a newly formed affiliated limited
partnership of Crescent Operating Partnership, 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 Magellan;
- the capitalization of CBHS, as set forth in a Contribution Agreement to
be entered into between Crescent Operating and Magellan;
- the lease of the Facilities from Crescent to CBHS, 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, 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.
A newly formed affiliated limited partnership of Crescent Operating
Partnership will acquire the approximately 90 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 and Crescent Operating to operate the Facilities pursuant to
the Facilities Lease and utilizing the franchise services to be
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provided to CBHS by Magellan for an annual fee that initially will be
approximately $81 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 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 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 its interest in CBHS, 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 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).
Purchase Agreement. Crescent will acquire from Magellan the Facilities,
which consist of approximately 90 behavioral healthcare facilities. The
obligations of both Crescent and Magellan to consummate the Purchase 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 Purchase 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 Purchase 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.
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 its 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 the leased
facilities 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.
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<PAGE> 36
At the Magellan Closing, 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, in its capacity as a joint
venturer, 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 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 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 Magellan 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 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 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,
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 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 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
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<PAGE> 37
without the consent of the affected member; or (ix) amending the CBHS Operating
Agreement. Crescent Operating and Magellan 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'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 CBHS' members, the CBHS Board and chief executive officers
of Crescent Operating and Magellan 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 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, CBHS and CBHS' subsidiaries
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 to CBHS and its subsidiaries.
The initial term of the Facilities Lease will be twelve 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 ten percent of any increase in the purchase price for the Facilities
resulting from the acquisition of additional facilities by Magellan after the
execution of the Purchase 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 will have the right to render void the exercise of the option to extend
the Facilities Lease if Crescent 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 to secure financing for Crescent.
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<PAGE> 38
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. 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
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) $81 million, subject to increases for inflation; or (ii) $81
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 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 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.
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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
elects to assume all of CBHS' obligations under the Master Franchise Agreement
and all other agreements specified in the Facilities Lease, to Crescent or a
designee of Crescent. Magellan has the right to assign its obligations under the
Master Franchise Agreement with the prior written consent of CBHS and Crescent,
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 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'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 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. CBHS will not have the right to terminate the Master Franchise
Agreement (whether for breach or otherwise) without the consent of Magellan and
Crescent.
Subsidiary Franchise Agreement. Each CBHS subsidiary that operates a
Facility (each, a "franchisee") will enter into a Subsidiary Franchise Agreement
with Magellan. 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
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<PAGE> 40
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 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 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 that capital
expenditures are required and Crescent 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, 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 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.
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<PAGE> 41
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 "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 to be conducted by a mutually agreed upon independent appraiser 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
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<PAGE> 42
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 May 30, 1997, Crescent Operating had no employees.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF CRESCENT OPERATING
As of May 30, 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 May 30, 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 65 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 has been Chairman of the Board of Crescent since its formation in
1994. From 1970 to 1986, he served as the chief investment advisor to the Bass
family, whose overall wealth increased dramatically during his tenure. During
that time he was principally responsible for numerous major corporate and real
estate acquisitions and dispositions. Immediately after beginning his
independent investment activities, he founded ENSCO International Incorporated,
an oil field service and offshore drilling company, in 1986. Additionally, in
1990 he co-founded Columbia Hospital Corporation and in 1989 participated in a
management-led buyout of HCA-Hospital Corporation of America; both of these
companies owned and operated for-profit hospitals. In 1992, Mr. Rainwater was
one of the founders of Mid Ocean Limited, a provider of casualty re-insurance.
In February 1994, he assisted in the merger of Columbia Hospital Corporation and
HCA-Hospital Corporation 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.
Mr. Rainwater has served as the Chairman of the Board of Trust Managers of
Crescent, which he founded in 1994.
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<PAGE> 43
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.
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
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<PAGE> 44
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 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.
40
<PAGE> 45
BENEFICIAL OWNERSHIP
<TABLE>
<CAPTION>
NUMBER PERCENT
NAME AND ADDRESS OF OF OF
BENEFICIAL OWNER(1) SHARES(2) SHARES(3)
------------------- ------------- ---------
<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. 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 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."
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<PAGE> 46
The following table provides certain information regarding options granted
to the Company's named executive officers at June 2, 1997. 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 $ 87(1) $221(1)
John C. Goff...................... 289,190 (1) April 2004/July 2006 216(1) 548(1)
Gerald W. Haddock................. 265,247 (1) April 2004/July 2006 199(1) 508(1)
</TABLE>
- ---------------
* Potential Realizable Value is based on the assumed annual growth rates shown
over their ten-year option term. For example, a 5% growth rate compounded
annually, for Mr. Goff's grant results in a stock price of $1.94 per share
and a 10% growth rate, compounded annually, results in a stock price of
$3.09 per share. These Potential Realizable Values are listed to comply with
the regulations of the Securities and Exchange 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 $14.1 million in
equity contributed by 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 2, 1997 to all
persons (862,538) shares. Based on the Record Date of May 30, 1997,
11,025,547 shares of Crescent Operating Common Stock will be distributed in
the Distribution and the exercise price per share will be $1.19, 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.
Under the Stock Incentive Plan, 1,000,000 shares of Crescent Operating Common
Stock are authorized for issuance. Other than annual grants of Options to
purchase 1,400 shares of Crescent Operating Common Stock to non-employee
directors of Crescent Operating (and an initial grant of an Option to purchase
1,400 shares of Crescent Operating Common Stock upon appointment of any
non-employee director), no further grants of Options or Restricted Stock will be
made under the Stock Incentive Plan. The Stock Incentive Plan expires on June
11, 2005.
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 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.
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<PAGE> 47
CERTAIN TRANSACTIONS
INTERESTS RELATING TO CRESCENT OPERATING PARTNERSHIP
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 connection with the acquisition
of the Carter-Crowley Assets, Crescent Operating Partnership contributed cash
and advanced funds in the form of loans, as described below, in order to enable
Crescent Operating to acquire the Carter-Crowley Assets. In consideration of
this contribution, consisting of approximately $12.6 million in equity and in
consideration of Crescent Operating Partnership's commitment to contribute an
additional approximately $1.5 million in equity, Crescent Operating will issue a
sufficient number of shares of Crescent Operating Common Stock to Crescent
Operating Partnership in an amount equal to the number of shares required to
make the Distribution to holders of record of Crescent Common Shares and Units
of Crescent Operating Partnership on the Record Date (which is 11,025,547 shares
based on the Record Date of May 30, 1997).
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 in Crescent Operating
Partnership representing 6.2%, 1.1% and 0.9% of the partnership interests in
Crescent Operating Partnership outstanding as of May 30, 1997, 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 Capitalization of Crescent Operating; Loans from Crescent
Operating Partnership. In connection with the formation and capitalization of
Crescent Operating, Crescent Operating Partnership will provide cash and advance
funds in the form of loans in the aggregate amount of $50.0 million. In exchange
for a contribution of approximately $12.6 million, and in consideration of
Crescent Operating Partnership's commitment to contribute an additional
approximately $1.5 million in equity, Crescent Operating issued all of the
outstanding shares of Crescent Operating Common Stock to Crescent Operating
Partnership. The $50.0 million was or is expected to be used to purchase the
Assets and to support future funding obligations and cash requirements.
Of the $50.0 million to be provided by Crescent Operating Partnership,
approximately $12.6 million was contributed in cash, an additional approximately
$1.5 million will be contributed in cash and approximately $35.9 million
(approximately $15.3 million of which was funded on May 8, 1997) will be loaned
to Crescent Operating pursuant to a five-year term loan. The loan is a recourse
loan secured by a first lien on the Assets and all other assets owned by
Crescent Operating now or in the future (other than subsidiaries of CBHS formed
or acquired after May 8, 1997). 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 total
amount of principal and accrued interest outstanding 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 will also obtain a line of credit for up to $20.0 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 8, 2002 or (ii) five years after the
last draw under the line of credit. Draws may be made under the line of credit
until May 1, 2002. The line of credit is a recourse obligation and amounts
outstanding thereunder are secured by a first lien on the Assets (other than
subsidiaries of CBHS formed or acquired after May 8, 1997).
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."
43
<PAGE> 48
CRESCENT
The officers of Crescent include Richard E. Rainwater, Chairman of the
Board of Directors, 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 12.5%, 2.0% and 1.5% of Crescent as of
May 30, 1997, which interests consist of Crescent Common Shares and units of
ownership in Crescent Operating Partnership (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 all of the transactions that
comprise the Magellan Transaction are consummated, including the acquisition by
Crescent of the Facilities, the lease of the Facilities from Crescent to CBHS
and the subordination of franchise fees to payments under the Facilities Lease.
Management of CBHS will be vested in the CBHS Board. Crescent Operating and
Magellan 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.
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 Magellan Transaction is subject to the approval of
Magellan's stockholders.
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.
Rainwater-Magellan 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
44
<PAGE> 49
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 Stevens, a director nominee and the Chief Financial
Officer, Treasurer 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.
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. 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
45
<PAGE> 50
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 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.
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.
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 Board of
Directors, quarterly cash dividends, in an amount per share equal to the greater
of (i) $1 or (ii) 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) 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 of Directors
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 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.
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
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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.
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 of Directors 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 of Directors 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 Date. 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, 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, 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 a Share Purchase
Rights Plan (the "Rights Plan") on or prior to the Distribution Date. Pursuant
to the Rights Plan, the Crescent Operating Board will cause to be issued one
preferred share purchase right (a "Right") for each outstanding share of
Crescent Operating Common Stock. Each Right will entitle the registered holder
to purchase from Crescent Operating one-hundredth of a share of a new series of
junior preferred stock, par value $.01 per share (the "Junior Preferred
Shares"), 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, which will be 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 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 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 Date (or earlier redemption or expiration of the Rights),
the Crescent Operating Common Stock certificates will contain a notation
incorporating the Rights Agreement by reference. As soon as practicable
following the Rights Distribution Date, separate certificates evidencing the
Rights (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 Date and such separate Right Certificates alone will evidence the
Rights.
The Rights will not be exercisable until the Rights Distribution Date. The
Rights will expire on the 10th anniversary of the date of issuance (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 Junior Preferred Share (or of a
share of a class or series of the Preferred Stock having equivalent rights,
preference and privileges) per Right (subject to adjustment).
At any time prior to the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 10% or more of the outstanding
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
Junior Preferred Share 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 Date.
The Purchase Price payable, and the number of Junior Preferred Shares or
other securities or property issuable, upon exercise of the Rights will be
subject to adjustment from time to time to prevent dilution (i) in the event of
a stock dividend on, or a subdivision, combination or reclassification of, the
Junior Preferred Shares, (ii) upon the grant to holders of the Junior Preferred
Shares of certain rights or warrants to subscribe for or purchase Junior
Preferred Shares at a price, or securities convertible into Junior Preferred
Shares with a conversion price, less than the then-current market price of the
Junior Preferred Shares or (iii) upon the distribution to holders of the Junior
Preferred Shares of evidences of indebtedness or assets (excluding regular
periodic cash dividends paid out of earnings or retained earnings or dividends
payable in Junior Preferred Shares) or of subscription rights or warrants (other
than those referred to above).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least one
percent in such Purchase Price. No fractional Junior Preferred Shares will be
issued (other than fractions which are integral multiples of one-hundredth of a
Junior Preferred Share, which may, at the election of the Company, be evidenced
by depositary receipts) and in lieu thereof, an adjustment in cash will be made
based on the market price of the Junior Preferred Shares on the last trading day
prior to the date of exercise.
Junior Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each Junior Preferred Share will be entitled to a minimum
preferential quarterly dividend payment 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 the Junior
Preferred Shares will be entitled to a minimum preferential liquidation payment
of $500 per share but will be entitled to an aggregate payment of 100 times the
payment made per share of Crescent Operating Common Stock. Each Junior Preferred
Share will have 100 votes voting together with the Crescent Operating Common
Stock. Finally, in the event of any merger, consolidation or other transaction
in which shares of Crescent Operating Common Stock are exchanged, each Junior
Preferred Share will be entitled to receive 100 times the amount received per
share of Crescent Operating Common Stock. These rights are protected by
customary anti-dilution provisions.
Due to the nature of the Junior Preferred Shares' dividend, liquidation and
voting rights, the value of the one-hundredth interest in a Junior Preferred
Share purchasable upon exercise of each Right should approximate the value of
one share of Crescent Operating Common Stock.
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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 contain 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 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
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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 provision does 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
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
53
<PAGE> 58
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 will be passed upon for the Company
by Shaw, Pittman, Potts & Trowbridge, Washington, D.C., a partnership including
professional corporations.
54
<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 and wholly owned subsidiary of 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 Real Estate Equities Company ("Crescent") (the "Intercompany
Agreement"). Under the Intercompany Agreement, Crescent Operating and
Crescent agree, subject to certain terms, to provide each other with
rights to participate in certain transactions.
Subsequent to registration of the Company's Common Stock, the Crescent
Operating Common Stock will be distributed (the "Distribution") to
holders of Crescent common shares and Crescent Real Estate Equities
Limited Partnership Units 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
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 a construction equipment
sales, leasing and servicing company, a minority interest in the limited
partnership which holds the National Basketball Association franchise
for the Dallas Mavericks and a limited partner interest in 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, Inc. the 12.38% limited
partner minority interest in Dallas Basketball, Ltd. (DBL), and the
1.21% limited partner interest in the Hicks, Muse, Tate & Furst Fund II
(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, while the investment
in DBL will be recorded on the cost-recovery method, 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 $12.6 million,
and in consideration of Crescent Operating Partnership's commitment to
contribute approximately $1.5 million in equity, Crescent Operating
Partnership issued all of the outstanding shares of Crescent Operating
Common Stock to Crescent Operating Partnership. The $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, 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):
On May 8, 1997, approximately $12.6 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.
Additionally, the Company authorized 10 million shares of $.01 par value
per share preferred stock, 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 Carter-Crowley assets acquired consisted of 100% of the stock of
Moody-Day, Inc. (a corporation engaged in the sale, leasing and service
of construction equipment and accessories to the construction and
utility industries located primarily in Texas), a 12.38% limited partner
interest in Dallas Basketball, Ltd. (a Texas limited partnership that
owns the Dallas Mavericks basketball team, the related rights in the NBA
franchise and various other rights and obligations of the partners) and
a 1.21% limited partner interest in Hicks Muse Tate & Furst Equity Fund
II (a private venture capital fund).
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 $1.19 per share, of Crescent Operating Common Stock and shares
of restricted stock in Crescent Operating ("Restricted Stock") were made
on June 2, 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.
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........................... -- 138,131 -- 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........... 3,601,919 2,783,776 2,957,765 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
Investment in Dallas Basketball,
Ltd................................. -- -- -- 263,353
Investments in sales-type leases,
net................................. 118,721 287,275 118,721 287,275
----------- ----------- ----------- -----------
$18,465,099 $14,474,917 $17,353,437 $13,493,369
=========== =========== =========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
liabilities --
Affiliate........................... $ 54,294 $ -- $ 136,764 $ --
Trade............................... 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...... 3,274,924 2,779,454 3,125,073 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.............. 6,334,640 3,999,107 6,694,486 3,871,965
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY..................... 12,130,459 10,475,810 10,658,951 9,621,404
----------- ----------- ----------- -----------
$18,465,099 $14,474,917 $17,353,437 $13,493,369
=========== =========== =========== ===========
</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
DISTRIBUTIONS IN EXCESS OF
INVESTMENT IN LIMITED
PARTNERSHIP.................... -- -- (760,170) -- --
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES........ 438,406 389,407 1,747,839 1,608,226 1,374,410
---------- ---------- ---------- ---------- ----------
INCOME FROM OPERATIONS........... 139,106 68,302 869,143 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 BEFORE INCOME TAXES....... 35,513 20,439 591,709 123,939 67,649
INCOME TAX PROVISION............. 12,428 7,154 208,383 44,783 24,331
---------- ---------- ---------- ---------- ----------
NET INCOME....................... $ 23,085 $ 13,285 $ 383,326 $ 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... $10,658,951 $ 9,621,404 $ 9,621,404 $3,694,886 $3,812,189
Net income................... 23,085 13,285 383,326 79,156 43,318
Contributions................ 1,552,820 1,509,449 3,355,290 6,328,366 --
Distributions................ (104,397) (668,328) (2,701,069) (505,853) (166,121)
Net book value of assets
contributed............... -- -- -- 24,849 5,500
----------- ----------- ----------- ---------- ----------
BALANCE, end of period......... $12,130,459 $10,475,810 $10,658,951 $9,621,404 $3,694,886
=========== =========== =========== ========== ==========
</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 $ 383,326 $ 79,156 $ 43,318
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization..................... 504,225 283,453 1,055,761 1,166,102 971,724
Distributions in excess of investment in limited
partnership..................................... -- -- (760,170) -- --
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) 444,649 421,969 (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) $ (668,328) $(2,701,069) $ (505,853) $ (166,121)
========== ========== =========== ========== ===========
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, a minority investment in a National Basketball Association
(NBA) franchise, and a minority investment in a venture capital fund. The
Portfolio represents the businesses and investments owned by CCP which were sold
to Crescent Operating, Inc. on May 9, 1997.
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 DALLAS BASKETBALL, LTD.
The Portfolio includes a 12.38% limited partner minority interest in Dallas
Basketball, Ltd. ("Mavericks"), a Texas limited partnership that owns the Dallas
Mavericks basketball team, the related rights in the NBA franchise and various
related rights and interests. The Portfolio's interest in Mavericks was
contributed
F-14
<PAGE> 73
CARTER-CROWLEY ASSET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
by CCP. CCP's interest in Mavericks was approximately 80% in 1980. In 1996, CCP
sold all but 12.38% of its investment which has been accounted for herein as if
it was the percentage acquired in 1980. Accordingly, contributions and
distributions between CCP and Mavericks are reflected in the accompanying
combined financial statements as adjustments to equity. The Portfolio's interest
is recorded in the accompanying combined financial statements on the cost
recovery basis. Distributions in excess of the Portfolio's investment in
Mavericks have been included in the accompanying combined statements of
operations within distributions in excess of investment in limited partnership.
The significant distribution recorded in 1996 resulted from the non-recurring
payment received by CCP from the NBA, representing its share of the franchise
fees paid by the two recently admitted expansion teams.
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 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. 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 Hicks-Muse
portfolio 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).
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>
F-15
<PAGE> 74
CARTER-CROWLEY ASSET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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
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
</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 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................................... $ 57,205 $15,362 $ 63,316
Deferred tax provision (benefit).................... 151,178 29,421 (38,985)
-------- ------- --------
Total provision............................. $208,383 $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 (payable) receivable for an income tax provision
(benefit) with CCP of $(65,631) 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.,
assumes completion of (i) the formation and capitalization of the Company, (ii)
the acquisition of the Carter Crowley Asset Group, (iii) 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 OPERATING, INC.
CRESCENT CAPITALIZATION OF ACQUISITION OF AS ADJUSTED FOR
OPERATING, INC. CRESCENT CARTER CROWLEY ACQUISITION OF CARTER
HISTORICAL(A) OPERATING, INC.(B) ASSET GROUP(C) CROWLEY ASSET GROUP
--------------- ------------------ -------------- ------------------------
<S> <C> <C> <C> <C>
ASSETS:
Cash........................................... $ 1 $47,947 $(27,823) $20,125
A/R............................................ -- -- 1,674 1,674
Inventory...................................... -- -- 1,611 1,611
Other assets................................... -- -- 193 193
---- ------- -------- -------
Total current assets....................... 1 47,947 (24,345) 23,603
Property and equipment, net.................... -- -- 4,126 4,126
Investments.................................... -- -- 21,989 21,989
---- ------- -------- -------
Total assets............................... $ 1 $47,947 $ 1,770 $49,718
==== ======= ======== =======
LIABILITIES:
Accounts payable and accrued liabilities....... $ -- $ -- $ 1,101 $ 1,101
Notes payable, current......................... -- -- 299 299
---- ------- -------- -------
Total current.............................. -- -- 1,400 1,400
Long-term notes payable, net of current
portion...................................... 33,847 -- 33,847
Deferred income taxes.......................... -- -- 370 370
---- ------- -------- -------
Total liabilities.......................... -- 33,847 1,770 35,617
STOCKHOLDER'S EQUITY:
Common stock................................... -- -- --
Additional Paid in Capital..................... 1 14,100 -- 14,101
Retained Earnings.............................. -- -- -- --
---- ------- -------- -------
Total stockholder's equity................. 1 14,100 -- 14,101
---- ------- -------- -------
Total liabilities and stockholder's
equity................................... $ 1 $47,947 $ 1,770 $49,718
==== ======= ======== =======
<CAPTION>
ACQUISITION OF 50% PROFORMA
INTEREST IN CBHS(D) CONSOLIDATED
-------------------- -------------
<S> <C> <C>
ASSETS:
Cash........................................... $(20,000) $ 125
A/R............................................ -- 1,674
Inventory...................................... -- 1,611
Other assets................................... -- 193
-------- -------
Total current assets....................... (20,000) 3,603
Property and equipment, net.................... -- 4,126
Investments.................................... 20,000 41,989
-------- -------
Total assets............................... $ -- $49,718
======== =======
LIABILITIES:
Accounts payable and accrued liabilities....... $ -- $ 1,101
Notes payable, current......................... -- 299
-------- -------
Total current.............................. -- 1,400
Long-term notes payable, net of current
portion...................................... -- 33,847
Deferred income taxes.......................... -- 370
-------- -------
Total liabilities.......................... -- 35,617
STOCKHOLDER'S EQUITY:
Common stock................................... -- --
Additional Paid in Capital..................... -- 14,101
Retained Earnings.............................. -- --
-------- -------
Total stockholder's equity................. -- 14,101
-------- -------
Total liabilities and stockholder's
equity................................... $ -- $49,718
======== =======
</TABLE>
F-38
<PAGE> 97
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
(A) Reflects Crescent Operating, Inc.'s audited historical balance sheet at
April 3, 1997.
(B) Reflects capitalization of Crescent Operating, Inc. 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 $26.189 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................................ $(2,824)
Investments:
Hicks, Muse, Tate & Furst Equity Fund II................. 1,745
Dallas Basketball, Ltd................................... 12,450
Notes payable, current................................... (1,874)
Long-term Notes payable.................................... (2,690)
</TABLE>
Fair values assigned were based upon the following methodologies:
Dallas Basketball, Ltd. (DBL) -- Sales of comparable sports franchises
and a recent limited partnership transaction within DBL.
Hicks, Muse, Tate & Furst Equity Fund II (the "Fund") -- current market
value of the underlying securities and investments. 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 Hicks-Muse
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).
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) 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. based on a preliminary valuation, as follows (in thousands):
<TABLE>
<S> <C>
Investments in CBHS..................... $ 7,500
Acquisition of warrants................. 12,500
=======
$20,000
=======
</TABLE>
F-39
<PAGE> 98
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.
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-40
<PAGE> 99
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................... -- -- -- --
Distributions in Excess of Investment in
Limited Partnership.................... -- (760) -- (760)
Selling, General and Administrative
Expenses............................... -- 1,748 506(C) 2,254
---- ------- ------- -------
Income from Operations................... -- 869 (506) 363
Other (Income) Expense:
Interest Expense....................... -- 357 3,584(D) 3,941
Other.................................. -- (79) -- (79)
---- ------- ------- -------
Total Other Expense, net......... -- 278 3,584 3,862
---- ------- ------- -------
Income (Loss) Before Income Taxes...... -- 591 (4,090) (3,499)
Income Tax Provision................... -- 208 -- 208
---- ------- ------- -------
Net Loss............................... $ -- $ 383 $(4,090) $(3,707)
==== ======= ======= =======
<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
Distributions in Excess of Investment in
Limited Partnership.................... -- (760)
Selling, General and Administrative
Expenses............................... -- 2,254
------- --------
Income from Operations................... (7,659) (7,296)
Other (Income) Expense:
Interest Expense....................... -- 3,941
Other.................................. -- (79)
------- --------
Total Other Expense, net......... -- 3,862
------- --------
Income (Loss) Before Income Taxes...... (7,659) (11,158)
Income Tax Provision................... -- 208
------- --------
Net Loss............................... $(7,659) $(11,366)
======= ========
</TABLE>
F-41
<PAGE> 100
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, Inc. 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.
$29,867 loan at a rate of 12%............................... $ 3,584
-------
(E) Reflects the Company's 50% share of net loss of Charter
Behavioral Health System LLC (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-42
<PAGE> 101
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....................... -- 113 896(D) 1,009
Other.................................. -- (9) -- (9)
---- ------ ------- -------
Total Other Expense, net......... -- 104 896 1,000
---- ------ ------- -------
Income (Loss) Before Income Taxes...... -- 35 (1,022) (987)
Income Tax Provision................... -- 12 -- 12
---- ------ ------- -------
Net Income (Loss)...................... $ -- $ 23 $(1,022) $ (999)
==== ====== ======= =======
<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....................... -- 1,009
Other.................................. -- (9)
------- -------
Total Other Expense, net......... -- 1,000
------- -------
Income (Loss) Before Income Taxes...... (2,416) (3,403)
Income Tax Provision................... -- 12
------- -------
Net Income (Loss)...................... $(2,416) $(3,415)
======= =======
</TABLE>
F-43
<PAGE> 102
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, Inc. 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.
$29,867 loan at a rate of 12%............................... $ 896
-------
(E) Reflects the Company's 50% share of net loss of Charter
Behavioral Health System LLC (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-44
<PAGE> 103
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-45
<PAGE> 104
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-46
<PAGE> 105
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 $81.0 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 $8.3 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-47
<PAGE> 106
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-48
<PAGE> 107
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-49
<PAGE> 108
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.............................................. $20,250
Rent Expense under the Facilities Lease..................... 15,764
Additional Corporate Overhead............................... 682
-------
$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-50
<PAGE> 109
============================================================
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.................................... 26
Management.................................. 38
Certain Transactions........................ 43
Description of Crescent Operating Capital
Stock..................................... 45
Certain Antitakeover Provisions............. 48
Experts..................................... 54
Legal Matters............................... 54
Index to Financial Statements............... F-1
---------------------
UNTIL , 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.
[LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
, 1997
============================================================
<PAGE> 110
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses expected to be incurred in
connection with the issuance and distribution of the Crescent Operating Common
Stock registered hereby, all of which expenses, except for the SEC registration
fee, are estimates:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
----------- --------
<S> <C>
SEC Registration Fee........................................ $ 3,685
Listing Fee................................................. $ 13,250
Transfer Agent's and Registrar's Fee........................ $ 10,000
Printing and Engraving Fees................................. $ 50,000
Legal Fees and Expenses..................................... $100,000
Accounting Fees and Expenses................................ $ 75,000
Miscellaneous............................................... $ 48,065
--------
Total............................................. $300,000
========
</TABLE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<S> <S>
3.1* -- Certificate of Incorporation
3.2* -- Bylaws
3.3 -- First Amended and Restated Certificate of Incorporation
(filed herewith)
3.4* -- Form of Amended and Restated Bylaws
4.1** -- Specimen stock certificate
4.2* -- Form of Preferred Share Purchase Rights Plan
5 -- Opinion of Shaw, Pittman, Potts and Trowbridge as to the
legality of the Crescent Operating Common Stock being
registered (filed herewith)
8 -- Opinion of Shaw Pittman, Potts & Trowbridge relating to
certain material tax issues (filed herewith)
10.1 -- Amended Stock Incentive Plan (filed herewith)
10.2* -- Form of Intercompany Agreement between Crescent Operating
Partnership and Crescent Operating
10.3* -- Form of Operating Agreement of Charter Behavioral Health
Systems, LLC
10.4* -- Form of Warrant Purchase Agreement between Crescent
Operating and Magellan with respect to Crescent Operating
securities
10.5 -- First Amendment to Amended and Restated Credit and
Security Agreement, dated as of May 30, 1997, between
Crescent Operating Partnership and Crescent Operating,
together with related Note (filed herewith)
10.6* -- Line of Credit and Security Agreement, dated as of May
21, 1997, between Crescent Operating Partnership and
Crescent Operating, together with related Line of Credit
Note
10.7* -- Acquisition Agreement, dated as of February 10, 1997,
between Crescent Operating Partnership and the
Carter-Crowley Sellers
23.1 -- Consent of Shaw, Pittman, Potts & Trowbridge (included in
its exhibits filed as part of Exhibits 5 and 8)
23.2 -- Consent of Arthur Andersen LLP (filed herewith)
23.3 -- Consent of Arthur Andersen LLP (filed herewith)
23.4 -- Consent of Arthur Andersen LLP (filed herewith)
99.1* -- Consents of Certain Persons Named as Directors
</TABLE>
- ---------------
* Filed previously.
** To be filed by amendment.
(b) Financial Statement Schedules.
Not applicable.
II-1
<PAGE> 111
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Fort Worth, State of
Texas, on June 2, 1997.
CRESCENT OPERATING, INC.
(Registrant)
By: /s/ GERALD W. HADDOCK
-------------------------------------
GERALD W. HADDOCK
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ GERALD W. HADDOCK Director, President and Chief June 2, 1997
- ------------------------------------------------ Executive Officer (Principal
GERALD W. HADDOCK Executive Officer)
/s/ JEFFREY L. STEVENS Chief Financial Officer, Treasurer and June 2, 1997
- ------------------------------------------------ Secretary (Principal Financial and
JEFFREY L. STEVENS Accounting Officer)
</TABLE>
II-2
<PAGE> 112
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
3.1* -- Certificate of Incorporation
3.2* -- Bylaws
3.3 -- First Amended and Restated Certificate of Incorporation
(filed herewith)
3.4* -- Form of Amended and Restated Bylaws
4.1** -- Specimen stock certificate
4.2* -- Form of Preferred Share Purchase Rights Plan
5 -- Opinion of Shaw, Pittman, Potts and Trowbridge as to the
legality of the Crescent Operating Common Stock being
registered (filed herewith)
8 -- Opinion of Shaw Pittman, Potts & Trowbridge relating to
certain material tax issues (filed herewith)
10.1 -- Amended Stock Incentive Plan (filed herewith)
10.2* -- Form of Intercompany Agreement between Crescent Operating
Partnership and Crescent Operating
10.3* -- Form of Operating Agreement of Charter Behavioral Health
Systems, LLC
10.4* -- Form of Warrant Purchase Agreement between Crescent
Operating and Magellan with respect to Crescent Operating
securities
10.5 -- First Amendment to Amended and Restated Credit and
Security Agreement, dated as of May 30, 1997, between
Crescent Operating Partnership and Crescent Operating,
together with related Note (filed herewith)
10.6* -- Line of Credit and Security Agreement, dated as of May
21, 1997, between Crescent Operating Partnership and
Crescent Operating, together with related Line of Credit
Note
10.7* -- Acquisition Agreement, dated as of February 10, 1997,
between Crescent Operating Partnership and the
Carter-Crowley Sellers
23.1 -- Consent of Shaw, Pittman, Potts & Trowbridge (included in
its exhibits filed as part of Exhibits 5 and 8)
23.2 -- Consent of Arthur Andersen LLP (filed herewith)
23.3 -- Consent of Arthur Andersen LLP (filed herewith)
23.4 -- Consent of Arthur Andersen LLP (filed herewith)
99.1* -- Consents of Certain Persons Named as Directors
</TABLE>
- ---------------
* Filed previously.
** To be filed by amendment
<PAGE> 1
EXHIBIT 3.3
FIRST AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
CRESCENT OPERATING, INC.
It is hereby certified that:
1. The present name of the corporation (hereinafter called the
"Corporation") is Crescent Operating, Inc., which is the name under
which the Corporation was originally incorporated; and the date of
filing the original certificate of incorporation of the Corporation
with the Secretary of State of the State of Delaware is April 1, 1997.
2. The certificate of incorporation is hereby amended and restated in its
entirety as set forth in the First Amended and Restated Certificate of
Incorporation hereinafter provided for.
3. The provisions of the certificate of incorporation of the Corporation
as herein amended are hereby restated and integrated into the single
instrument which is hereinafter set forth, and which is entitled First
Amended and Restated Certificate of Incorporation of Crescent
Operating, Inc., without any further amendments other than the
amendments herein certified.
4. As of the date this restatement of the certificate of incorporation is
filed with the Secretary of State of the State of Delaware, the
Corporation has received payment for its outstanding capital stock.
5. This First Amended and Restated Certificate of Incorporation has been
duly adopted by the Corporation in accordance with the provisions of
Sections 103, 242 and 245 of the General Corporation Law of the State
of Delaware, and by the sole shareholder in accordance with Section 228
of the General Corporation Law of the State of Delaware.
6. The certificate of incorporation of the Corporation, as amended and
restated herein, shall at the effective time of this First Amended and
Restated Certificate of Incorporation, read as follows:
<PAGE> 2
ARTICLE I
NAME
The name of the corporation is: Crescent Operating, Inc. (the
"Corporation").
ARTICLE II
REGISTERED OFFICE AND REGISTERED AGENT
The address of the Corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle. The name of its registered agent at such
address is The Corporation Trust Company.
ARTICLE III
PURPOSE
The purposes for which the Corporation is organized are (a) to become
a lessee and operator of various types of assets, including certain real estate
owned or to be owned directly or indirectly by (i) Crescent Real Estate
Equities Company, a Texas real estate investment trust ("Crescent Equities"),
its successor, or Crescent Real Estate Equities Limited Partnership, a Delaware
limited partnership ("CREELP", and collectively with Crescent Equities or its
successors, "Crescent") or (ii) other persons or entities whether or not
affiliated with Crescent; (b) to perform an agreement to be entered into by and
between the Corporation and CREELP (the "Intercompany Agreement"), pursuant to
which the Corporation and CREELP agree to provide each other with rights of
first opportunity with respect to certain transactions and investments; (c) to
be prohibited, in accordance with the Intercompany Agreement, from developing,
pursuing or taking advantage of opportunities to acquire or otherwise make an
2
<PAGE> 3
investment in real estate (including, but not limited to the provision of
services related to real estate and investment in hotel properties, investments
in real estate mortgages, real estate derivatives, or entities that invest
primarily in or have a substantial portion of their assets in the
aforementioned types of real estate assets) or any other investment which may
be structured in a manner that qualifies under the federal income tax
requirements applicable to REITs, for so long as the Intercompany Agreement
remains effective, unless and until the Corporation, in accordance with the
terms of the Intercompany Agreement, has offered any such opportunity to CREELP
and CREELP has rejected that opportunity; and (d) to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware as from time to time amended (the
"DGCL").
ARTICLE IV
CAPITAL STOCK
The Corporation shall have the authority to issue a total of 32,500,000
shares of capital stock, each with a par value of $.01, consisting of
22,500,000 shares of Common Stock and 10,000,000 shares of Preferred Stock.
ARTICLE V
COMMON STOCK
Section A. Common Stock Subject to Terms of Preferred Shares.
Common Stock shall be subject to the express terms of any series of Preferred
Stock.
3
<PAGE> 4
Section B. Dividend Rights. The holders of Common Stock shall
be entitled to receive such dividends as may be declared by the board of
directors out of funds legally available therefor.
Section C. Rights Upon Liquidation. In the event of any
voluntary or involuntary liquidation, dissolution or winding up, or any
distribution of the assets in connection therewith, of the Corporation, the
aggregate assets available for distribution to holders of Common Stock shall be
determined in accordance with applicable law. Each holder of Common Stock
shall be entitled to receive, ratably with each other holder of Common Stock,
that portion of such aggregate assets available for distribution as the number
of outstanding Common Stock held by such holder bears to the total number of
outstanding Common Stock.
Section D. Voting Rights. Except as may be provided in this
First Amended and Restated Certificate of Incorporation, and subject to the
express terms of any series of Preferred Stock, the holders of Common Stock
shall have the exclusive right to vote on all matters (as to which a holder of
common stock shall be entitled to vote pursuant to applicable law) at all
meetings of the stockholders of the Corporation, and shall be entitled to one
(1) vote for each share of Common Stock entitled to vote at such meeting.
ARTICLE VI
PREFERRED STOCK
Preferred Stock may be issued from time to time in one or more series
as authorized by the board of directors. The board of directors is hereby
authorized, by filing a certificate
4
<PAGE> 5
pursuant to the DGCL (hereinafter, the "Preferred Stock Designation"), to
establish from time to time the number of shares to be included in each series,
and to fix the designations, voting powers, privileges, preferences, terms, and
rights, and the limitations, restrictions and qualifications of the shares of
each series. The authority of the board of directors with respect to each
series shall include, but not be limited to, determination of the following:
(a) the designation of the series, which may be by distinguishing
number, letter or title;
(b) the number of shares of the series, which number the board of
directors may thereafter (except where otherwise provided in
the Preferred Stock Designation) increase or decrease (but not
below the number of shares thereof then outstanding);
(c) whether dividends, if any, shall 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;
(d) 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 shall be paid
and the date or dates or the method for determining the date
or dates upon which such dividends shall be payable;
(e) the price or prices (or method of determining such price or
prices) at which, the form of payment of such price or prices
(which may be cash, property or rights, including securities
of the same or another corporation or other entity) for which,
the period or periods within which and the terms and
conditions upon which the shares of such series may be
redeemed or exchanged, in whole or in part, at the option of
the Corporation or at the option of the holder or holders
thereof or upon the happening of a specified event or events,
if any;
(f) the obligation, if any, of the Corporation to purchase,
exchange or redeem shares of such series pursuant to a sinking
fund or otherwise and the price or prices at which, the form
of payment of such price or prices (which may be cash,
property or rights, including securities of the same or
another corporation or other entity) for which, the period or
periods within which and the terms and conditions upon which
the shares of such series shall be redeemed, exchanged or
purchased, in whole or in part, pursuant to such obligation;
(g) the amount payable out of the assets of the Corporation to the
holders of shares of the series in the event of any voluntary
or involuntary liquidation, dissolution or winding up of the
affairs of the Corporation;
5
<PAGE> 6
(h) provisions, if any, for the conversion or exchange of the
shares of such series, at any time or times at the option of
the holder or holders thereof or at the option of the
Corporation or upon the happening of a specified event or
events, into shares of any other class or classes or any other
series of the same or any other class or classes of stock, or
any other security, of the Corporation, or any other
corporation or other entity, and the price or prices or rate
or rates of conversion or exchange and any adjustments
applicable thereto, and all other terms and conditions upon
which such conversion or exchange may be made;
(i) restrictions on the issuance of shares of the same series or
of any other class or series, if any;
(j) the voting powers, if any, of the holders of shares of the
series; and
(k) any other relative rights, preferences and limitations on
that series.
Subject to the express provisions of any other series of Preferred
Stock then outstanding, and notwithstanding any other provision of this First
Amended and Restated Certificate of Incorporation, the board of directors may
increase or decrease (but not below the number of shares of such series then
outstanding) the number of shares, or amend the voting powers, designations,
preferences and relative, participating, optional or other rights, if any, or
the qualifications, limitations or restrictions thereof of the shares of any
such series of Preferred Stock.
ARTICLE VII
SOLE INCORPORATOR
The name and mailing address of the incorporator is as follows:
Name Mailing Address
---- ---------------
Donna Guihon 2300 N Street, N.W.
Washington, D.C. 20037
The powers of the incorporator are to terminate upon the filing of the
Certificate of Incorporation.
6
<PAGE> 7
ARTICLE VIII
BOARD OF DIRECTORS
Section A. Initial Director. The name and mailing address of
the person who is to serve as the initial director until the first annual
meeting of stockholders or until his successor is elected and qualifies is as
follows:
7
<PAGE> 8
Name Mailing Address
---- ---------------
Gerald W. Haddock 777 Main Street
Fort Worth, Texas
Section B. Powers of the Board of Directors. The business of
the Corporation shall be managed by the board of directors.
Section C. Number of Directors Constituting the Board. Subject
to any rights of holders of any class or series of stock having a preference
over the Common Stock as to dividends or liquidation to elect additional
directors under specified circumstances (herein referred to as "Preferred
Holders' Rights"), the number of directors that shall constitute the full board
of directors shall be fixed from time to time by the board of directors of the
Corporation.
Section D. Election and Terms of Directors. The directors,
other than any directors elected by the holders of any class or series of stock
having a preference over the Common Stock as to dividends or upon liquidation,
shall be classified, with respect to the time for which they severally hold
office, into three classes, as nearly equal in number as possible. One class
will be originally elected for a term expiring at the annual meeting of
stockholders to be held in 1998, another class will be originally elected for a
term expiring at the annual meeting of stockholders to be held in 1999, and
another class will be originally elected for a term expiring at the annual
meeting of stockholders to be held in 2000, with directors in each class to
hold office until a successor is duly elected and qualified. At each
succeeding annual meeting of stockholders, directors elected to succeed those
directors whose terms then expire shall be elected for a term of office to
expire
8
<PAGE> 9
at the third succeeding annual meeting of stockholders after their election,
with each director to hold office until such person's successor shall have been
duly elected and qualified.
Section E. Vacancies. Except as otherwise provided for or fixed
pursuant to the provisions of Article VI hereof relating to the rights of the
holders of any class or series of stock having a preference over the Common
Stock as to dividends or upon liquidation to elect additional directors under
specified circumstances, newly created directorships resulting from any
increase in the authorized number of directors and any vacancies on the board
of directors resulting from death, resignation, disqualification, removal or
other cause shall only be filled by the board of directors.
Section F. Election of Directors. The directors of the
Corporation shall not be required to be elected by written ballots unless the
Bylaws of the Corporation so provide.
Section G. Removal of Directors. 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 (the "Voting Stock"), voting together as a single class.
Section H. Relevant Factors to be Considered by the Board of
Directors. In determining what is in the best interest of the Corporation, a
director of the Corporation shall consider all of the relevant factors, which
may include (i) the immediate and long-term effects of the transaction on the
Corporation's stockholders, including stockholders, if any, who do not
participate in the transaction; (ii) the social and economic effects of the
transaction on the
9
<PAGE> 10
Corporation's employees, suppliers, creditors and customers and others dealing
with the Corporation and on the communities in which the Corporation operates
and is located; (iii) whether the transaction is acceptable, based on the
historical and current operating results and financial condition of the
Corporation; (iv) whether a more favorable price would be obtained for the
Corporation'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 Corporation; (vi) the future value of the Corporation'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.
Section I. Amendment of Certain Provisions of Article VIII.
Notwithstanding anything contained in this First Amended and Restated
Certificate of Incorporation to the contrary, the affirmative vote of the
holders of at least 80% of the Voting Stock then outstanding, voting together
as a single class, shall be required to alter, amend or adopt any provision
inconsistent with or repeal this Article VIII.
10
<PAGE> 11
ARTICLE IX
STOCKHOLDER ACTION
Any action required or permitted to be taken by the stockholders of the
Corporation 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 provided for herein or required by law and subject to the
rights of any class or series of stock having a preference over the Common
Stock as to dividends or upon liquidation, special meetings of stockholders of
the Corporation for any purpose or purposes may be called only by the Chairman
of the Board, the Vice Chairman of the Board, the President or the board of
directors pursuant to a resolution stating the purpose or purposes thereof
approved by a majority of the total number of directors which the Corporation
would have if there were no vacancies (the "Whole Board"). 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. Notwithstanding anything contained in this First Amended and Restated
Certificate of Incorporation to the contrary, the affirmative vote of the
holders of at least 80% of the Voting Stock, voting together as a single
class, shall be required to alter, amend, or adopt any provision inconsistent
with or repeal this Article IX.
ARTICLE X
RESTRICTION ON BUSINESS COMBINATIONS
The Corporation will be governed by Del. Code Ann. tit. 8, Section 203
(1991); provided, however, that the restrictions contained in Section 203 shall
not apply to any transaction with Crescent and any Crescent affiliate. For
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purposes of this First Amended and Restated Certificate of Incorporation,
"affiliate" shall have the meaning set forth in Rule 405 of Regulation C
promulgated under the Securities Act of 1933, as amended.
ARTICLE XI
DURATION OF CORPORATE EXISTENCE
The Corporation is to have perpetual existence.
ARTICLE XII
BY-LAWS
The Bylaws may be altered or repealed and new Bylaws may be adopted (i)
at any annual or special meeting of stockholders, by the affirmative vote of
the holders of a majority of the Voting Stock, provided, however, that any
proposed alteration or repeal of, or the adoption of any Bylaw inconsistent
with, Sections 5 and 11 of Article II of the Bylaws; Sections 1, 2, 10 and 12
of Article V of the Bylaws; or this sentence, by the stockholders shall require
the affirmative vote of the holders of at least 80% of the Voting Stock,
voting together as a single class; and provided, further, however, that in the
case of any such stockholder action at a special meeting of stockholders,
notice of the proposed alteration, repeal or adoption of the new Bylaw or
Bylaws must be contained in the notice of such special meeting, or (ii) by the
affirmative vote of a majority of the board of directors.
Notwithstanding anything contained in this First Certificate of
Incorporation to the contrary, the affirmative vote of the holders of at least
80% of the Voting Stock, voting together as a single class, shall be required
to alter, amend, adopt any provision inconsistent with or repeal this Article
XII.
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ARTICLE XIII
DIRECTOR LIABILITY
Section A. LIMITED LIABILITY OF DIRECTORS. A director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except, 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 the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the DGCL, or (iv) for any transaction from which the director derived an
improper personal benefit. Neither the amendment nor repeal of Section A of
this Article XIII shall eliminate or reduce the effect of Section A of this
Article XIII in respect of any matter occurring, or any cause of action, suit
or claim that, but for Section A of this Article XIII would accrue or arise,
prior to such amendment or repeal.
Section B. INDEMNIFICATION AND INSURANCE.
(1) Right to Indemnification. Each person who was or is made a party
or is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), 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 the Corporation or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation or
of a partnership, joint venture, trust or other
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enterprise, including service with respect to employee benefit plans, whether
the basis of such proceeding is alleged action in an official capacity as a
director, officer, employee or agent or in any other capacity while serving as
a director, officer, employee or agent, shall be indemnified and held harmless
by the Corporation 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 the Corporation to provide
broader indemnification rights than said law permitted the Corporation to
provide prior to such amendment), against all expense, liability and loss
(including attorneys' fees, judgments, fines, amounts paid or to be paid in
settlement, and excise taxes or penalties arising under the Employee Retirement
Income Security Act of 1974, as in effect from time to time) reasonably
incurred or suffered by such person in connection therewith and such
indemnification shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of such person's
heirs, executors and administrators; provided, however, that, except as
provided in paragraph (2) hereof, the Corporation shall indemnify any such
person seeking indemnification in connection with a proceeding (or part
thereof) initiated by such person only if such proceeding (or part thereof) was
authorized by the board of directors. The right to indemnification conferred
in this Section shall be a contract right and shall include the right to have
the Corporation pay the expenses incurred in defending any such proceeding in
advance of its final disposition; any advance payments to be paid by the
Corporation within 20 calendar days after the receipt by the Corporation of a
statement or statements from the claimant requesting such advance or advances
from time to time; provided, however, that, if and to the extent the DGCL
requires, the payment of such expenses incurred by a director or officer in
such person's capacity as a director or officer
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(and not in any other capacity in which service was or is rendered by such
person while a director or officer, including, without limitation, service to
an employee benefit plan) in advance of the final disposition of a proceeding,
shall be made only upon delivery to the Corporation of an undertaking, by or on
behalf of such director or officer, to repay all amounts so advanced if it
shall ultimately be determined that such director or officer is not entitled to
be indemnified under this Section or otherwise. The Corporation may, to the
extent authorized from time to time by the board of directors, grant rights to
indemnification, and rights to have the Corporation pay the expenses incurred
in defending any proceeding in advance of its final disposition, to any
employee or agent of the Corporation to the fullest extent of the provisions of
this Article with respect to the indemnification and advancement of expenses of
directors and officers of the Corporation.
(2) Right of Claimant to Bring Suit. If a claim under paragraph (a)
of this Section is not paid in full by the Corporation within 30 calendar days
after a written claim has been received by the Corporation, the claimant may at
any time thereafter bring suit against the Corporation to recover the unpaid
amount of the claim and, if successful in whole or in part, the claimant shall
be entitled to be paid also the expense of prosecuting such claim to the extent
successful therein. It shall be a defense to any such action (other than an
action brought to enforce a claim for expenses incurred in defending any
proceeding in advance of its final disposition where the required undertaking,
if any is required, has been tendered to the Corporation) that the claimant has
not met the standard of conduct which makes it permissible under the DGCL for
the Corporation to indemnify the claimant for the amount, but the burden of
proving such defense shall be on the Corporation. Neither the failure of the
Corporation (including its directors, independent legal counsel,
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or its stockholders) to have made a determination prior to the commencement of
such action that indemnification of the claimant is proper in the circumstances
because the claimant has met the applicable standard of conduct set forth in
the DGCL, nor an actual determination by the Corporation (including its
directors, independent legal counsel, or its stockholders) that the claimant
has not met such applicable standard of conduct, shall be a defense to the
action or create a presumption that the claimant has not met the applicable
standard of conduct.
(3) Non-Exclusivity of Rights. The right to indemnification and the
payment of expenses incurred in defending a proceeding in advance of its final
disposition conferred in this Section shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, provision of
the Certificate of Incorporation, Bylaw, agreement, vote of stockholders or
disinterested directors or otherwise. No repeal or modification of this
Article shall in any way diminish or adversely affect the rights of any
director, officer, employee or agent of the Corporation hereunder in respect of
any occurrence or matter arising prior to any such repeal or modification.
(4) Insurance. The Corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any such expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the DGCL.
(5) Severability. If any provision or provisions of this Article XIII
shall be held to be invalid, illegal or unenforceable for any reason
whatsoever, (i) the validity, legality and
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enforceability of the remaining provisions of this Article XIII (including,
without limitation, each portion of any paragraph of this Article XIII
containing any such provision held to be invalid, illegal or unenforceable,
that is not itself held to be invalid, illegal or unenforceable) shall not in
any way be affected or impaired thereby; and (ii) to the fullest extent
possible, the provisions of this Article XIII (including, without limitation,
each such portion of any paragraph of this Article XIII containing any such
provision held to be invalid, illegal or unenforceable) shall be construed so
as to give effect to the intent manifested by the provision held invalid,
illegal or unenforceable.
ARTICLE XIV
AMENDMENT OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
The Corporation reserves the right at any time from time to time to
amend, alter, change or repeal any provision contained in this First Amended
and Restated Certificate of Incorporation, and any other provisions authorized
by the law of the State of Delaware at the time in force may be added or
inserted, in the manner now or hereafter prescribed by law; and, except as set
forth in Article XIII, all rights, preferences and privileges of whatsoever
nature conferred upon stockholders, directors or any other persons whomsoever
by and pursuant to this First Amended and Restated Certificate of Incorporation
in its present form or as hereafter amended are granted subject to the rights
reserved in this Article. Notwithstanding anything contained in this First
Amended and Restated Certificate of Incorporation to the contrary, the
affirmative vote of the holders of at least 80% of the Voting Stock, voting
together as a single class, shall be required to alter, amend, or adopt any
provision inconsistent with or repeal Article VIII, IX, XII or this sentence.
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ARTICLE XV
VOTING RIGHTS OF CERTAIN CONTROL SHARES
Section A. Definitions. In this Article XV, the following
words have the meanings indicated:
1. "Acquiring person" means a person who makes or proposes to
make a control share acquisition.
2. "Associate," when used to indicate a relationship with any
person, means:
(a) Any corporation, entity or organization
(other than the Corporation or a subsidiary
of the Corporation) of which such person is an
officer, director, or partner or is, directly
or indirectly, the beneficial owner of 10
percent or more of any class of equity
securities;
(b) Any trust or other estate in which such
person has a substantial beneficial interest
or as to which such person serves as trustee
or in a similar fiduciary capacity; and
(c) Any relative or spouse of such person, or any
relative of such spouse, who has the same
home as such person or who is a director or
officer of the corporation or any of its
affiliates; or
(d) A person that:
(i) Directly or indirectly controls, or
is controlled by, or is under common
control with, the person specified;
or
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(ii) Is acting or intends to act jointly
or in concert with the person
specified.
3. "Control shares"
(a) means shares of stock that, except for this
Article, would, if aggregated with all other
shares of stock of the Corporation (including
shares of stock the acquisition of which is
excluded from the definition of "control
share acquisition" in subsection (A)(4) of
this section) owned by a person or in respect
of which that person is entitled to exercise
or direct the exercise of voting power,
except solely by virtue of a revocable
proxy, entitle that person, directly or
indirectly, to exercise or direct the
exercise of the voting power of shares of
stock of the Corporation in the election of
directors within any of the following
ranges of voting power:
(i) One-fifth or more, but less than
one-third of all voting power,
(ii) One-third or more, but less than a
majority of all voting power, or
(iii) A majority or more of all voting
power;
(b) includes shares of stock of the Corporation
only to the extent that the acquiring person,
following the acquisition of the shares, is
entitled, directly or indirectly, to
exercise or direct the exercise of voting
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power within any level of voting power set
forth in this section for which approval has
not been obtained previously under Section B
of this Article;
(c) does not include shares of stock of the
Corporation owned by Crescent or any Crescent
affiliate, or in respect of which Crescent or
any Crescent affiliate is entitled to
exercise or direct the exercise of the voting
power of such shares of the Corporation in
the election of directors.
4. "Control share acquisition"
(a) means the acquisition, directly or
indirectly, by any person, of ownership of,
or the power to direct the exercise of voting
power with respect to, issued and outstanding
control shares.
(b) does not include the acquisition of shares of
stock:
(i) Under the laws of descent and
distribution;
(ii) Under the satisfaction of a pledge or
other security interest charged in
good faith and not for the purpose of
circumventing this Article; or
(iii) Under a merger, consolidation, or
share exchange if the Corporation is
a party to the merger, consolidation,
or share exchange.
(c) Unless the acquisition entitles any person,
directly or indirectly, to exercise or direct
the exercise of voting power in the election
of directors in excess of the range of voting
power previously authorized or attained
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under an acquisition that is exempt under
paragraph (b) of this subsection, "control
share acquisition" does not include the
acquisition of shares of the Corporation in
good faith and not for the purpose of
circumventing this Article by or from:
(i) Any person whose voting rights have
previously been authorized by
stockholders in compliance with this
Article; or
(ii) Any person whose previous acquisition
of shares of beneficial interest of
the Corporation would have
constituted a control share
acquisition but for paragraph (b) of
this subsection.
5. "Interested shares" means shares of voting stock of the
Corporation in respect of which any of the following persons
is entitled to exercise or direct the exercise of the voting
power of shares of voting stock of the Corporation in
the election of directors:
(a) An acquiring person;
(b) An officer of the Corporation; or
(c) An employee of the Corporation who is also a
Director of the Corporation.
6. "Person" includes an associate of the person.
Section B. Voting Rights
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1. Approval by Stockholders. Holders of control shares of the
Corporation acquired in a control share acquisition have no voting rights or
powers (collectively, "voting rights") in respect of such control shares except
to the extent approved by the stockholders at a meeting held under Section D of
this Article by the affirmative vote of two-thirds of all the votes entitled to
be cast on the matter, excluding all interested shares.
2. Acquisition of Shares; Voting Power. For the purposes of Section
A(3) of this Article:
(a) Shares of stock acquired within 90 days of
shares acquired under a plan to make a
control share acquisition are considered to
have been acquired in the same acquisition;
and
(b) A person may not be deemed to be entitled to
exercise or direct the exercise of voting
power with respect to shares of stock held
for the benefit of others if the person:
(i) Is acting in the ordinary course of
business, in good faith and not for
the purpose of circumventing the
provisions of this section; and
(ii) Is not entitled to exercise or to
direct the exercise of the voting
power of the shares unless the person
first seeks to obtain the instruction
of another person.
Section C. Acquiring Person Statement. Any person who proposes
to make or who has made a control share acquisition may deliver an acquiring
person statement to the Corporation at
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the Corporation's principal office. The acquiring person statement shall set
forth all of the following:
1. The identity of the acquiring person and each other member of
any group of which the person is a part for purposes of determining control
shares;
2. A statement that the acquiring person statement is given under
this Article;
3. The number of shares of the Corporation owned (directly or
indirectly) by the acquiring person and each other member of any group;
4. The applicable range of voting power as set forth in Section
A(3) of this Article; and
5. If the control share acquisition has not occurred:
(a) A description in reasonable detail of the
terms of the proposed control share
acquisition; and
(b) Representations of the acquiring person,
together with a statement in reasonable
detail of the facts on which they are based,
that:
(i) The proposed control share
acquisition, if consummated, will not
be contrary to law; and
(ii) The acquiring person has the
financial capacity, through financing
to be provided by the acquiring
person and any additional specified
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sources of financing required under
Section E of this Article, to make
the proposed control share
acquisition.
Section D. Special Meeting
1. Request by Acquiring Person. Except as provided in Section E of this
Article, if the acquiring person requests, at the time of delivery of an
acquiring person statement, and gives a written undertaking to pay the
Corporation's expenses of a special meeting, except the expenses of opposing
approval of the voting rights of the holder in respect of such control shares,
of the control shares of the holder or holders thereof within 10 days after the
day on which the Corporation receives both the request and undertaking, the
directors of the Corporation shall call a special meeting of stockholders of
the Corporation for the purpose of considering the voting rights to be accorded
with respect to the shares acquired or to be acquired in the control share
acquisition.
2. Bond. The Corporation may require the acquiring person to give bond,
with sufficient surety, to reasonably assure the Corporation that this
undertaking will be satisfied.
3. Time for Meeting. Unless the acquiring person agrees in writing to
another date, the special meeting of stockholders shall be held within 50 days
after the day on which the Corporation has received both the request and the
undertaking.
4. Delay at Request of Acquiring Person. If the acquiring person makes
a request in writing at the time of delivery of the acquiring person statement,
the special meeting may not be held sooner than 30 days after the day on which
the Corporation receives the acquiring person statement.
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5. In Absence of Request.
(a) If no request is made under subsection 1 of
this Section, the issue of the voting rights
to be accorded to the holder in respect of
such control shares acquired in the control
shares acquisition may, at the option of the
Corporation, be presented for consideration
at any meeting of stockholders.
(b) If no request is made under subsection 1 of
this Section and the Corporation proposes to
present the issue of the voting rights to be
accorded to the holder in respect of such
control shares acquired in a control share
acquisition for consideration at any meeting
of stockholders, the Corporation shall
provide the acquiring person with written
notice of the proposal not less than 20 days
before the date on which notice of the
meeting is given.
Section E. Calls. A call of a special meeting of stockholders
of the Corporation is not required to be made under Section D(1) of this
Article unless, at the time of delivery of an acquiring person statement under
Section C of this Article, the acquiring person has:
1. Entered into a definitive financing agreement or agreements
with one or more responsible financial institutions or other
entities that have the necessary financial capacity, providing
for any amount of financing of the control share acquisition
not to be provided by the acquiring person; and
2. Delivered a copy of the agreements to the Corporation.
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Section F. Notice of Meeting.
1. In General. If a special meeting of stockholders is requested,
notice of the special meeting shall be given as promptly as reasonably
practicable by the Corporation to all stockholders of record as of the record
date set for the meeting, whether or not the stockholder is entitled to vote at
the meeting.
2. Contents. Notice of the special or annual meeting of stockholders at
which the voting rights of the holder in respect of such control shares control
shares are to be considered shall include or be accompanied by the following:
(a) A copy of the acquiring person statement delivered to
the Corporation under Section C of this Article; and
(b) A statement by the board of directors of the
Corporation setting forth the position or
recommendation of the board, or stating that the
board is taking no position or making no
recommendation, with respect to the issue of voting
rights to be accorded the control shares.
Section G. Redemption Rights.
1. Upon delivery of acquiring person statement. If an acquiring
person statement has been delivered on or before the 10th day
after the control share acquisition, the Corporation at its
option, shall have the right to redeem for "fair value" (as
defined herein) any or all control shares, except control
shares for which voting rights in respect of the holder
thereof have been previously approved under Section B of this
Article, at any time during a 60-day period commencing on the
day
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of a meeting at which voting rights are considered under
Section D of this Article and are not approved.
2. In absence of delivery of acquiring person statement. In
addition to the redemption rights authorized under subsection
1 of this Section, if an acquiring person statement has not
been delivered on or before the 10th day after the control
share acquisition, the Corporation, at its option, shall have
the right to redeem any or all control shares, except control
shares for which voting rights have been previously approved
under Section B of this Article, at any time during a period
commencing on the 11th day after the control share acquisition
and ending 60 days after a statement has been delivered.
3. Fair value. Any redemption of control shares under this
section shall be at the fair value of the shares, is
determined by the board of directors in its discretion. For
purposes of this section, "fair value" shall be determined:
(a) As of the date of the last acquisition of
control shares by the acquiring person in a
control share acquisition or, if a meeting is
held under Section D of this Article, as of
the date of the meeting;
(b) Without regard to the absence of voting
rights of the holders of such control shares;
and
(c) "Fair Market Value" means, in the case of the
stock, the highest closing sale price during
the 30-day period immediately prior to and
including the date in question of a share of
stock on the principal United States
securities exchange registered under the 1934
Act (or any subsequent provisions replacing
such Act or the rules and regulations
promulgated thereunder) on which such stock
is listed, or, if such stock is not listed on
any such exchange, the highest closing bid
quotation with respect to a share of such
stock during the 30-day period immediately
prior to and including the date in question
on the National Association of Securities
Dealers Automated Quotation System or any
comparable system then in use, or if no such
quotations are available, the fair market
value on the date in question of a share of
such stock as determined by the affirmative
vote of a majority of the board of directors
in good faith; and
Section H. Status as Dissenting Stockholders.
1. In General. Before a control share acquisition has occurred,
if voting rights for an acquiring person's control shares are
approved at a meeting held under Section D of this Article
and the
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acquiring person is entitled to exercise or direct the
exercise of a majority or more of all voting power in respect
of such control share, then the Certificate of Incorporation
of the Corporation shall be amended to so state and all
stockholders of the Corporation (other than the acquiring
person) have the rights of dissenting stockholders under the
DGCL.
2. Corporation Deemed Successor. For purposes of applying the
provisions of the DGCL to stockholders under this Section H,
the Corporation shall be deemed to be a successor in a merger
and the date of the most recent approval of voting rights
referred to in subsection 1 of this Section shall be deemed to
be the date of filing of a certificate of merger or
corresponding document for record as therein provided.
3. Status To Be Contained In Notice. The notice required by
Section F of this Article shall also state that stockholders
(other than the acquiring person) are entitled to the rights
of dissenting shareholders under the DGCL and shall include a
copy the applicable provisions thereof.
4. Application of DGCL. For purposes of applying the provisions
of Section 262 of the DGCL to this Section:
(a) "Fair value" may not be less than the highest
price per share paid by the acquiring person
in the control share acquisition;
(b) Section 262(b)(1) and the second, third,
fourth and fifth sentences of Section
262(d)(1) of the DGCL do not apply; and
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(c) There shall be no requirement that the
dissenting stockholder shall not have voted
in favor of the action.
IN WITNESS WHEREOF, Crescent Operating, Inc. has caused this First
Amended and Restated Certificate of Incorporation to be signed in its name and
on its behalf on this 30th day of May, 1997, by its President and Chief
Executive Officer, who acknowledges that this First Amended and Restated
Certificate of Incorporation is the act of the Corporation and that, to the
best of his knowledge, information and belief, and under penalties of perjury,
all matters and facts contained in this First Amended and Restated Certificate
of Incorporation are true in all material respects.
/s/ GERALD W. HADDOCK
-----------------------------------------
Gerald W. Haddock
President and Chief Executive Officer
29
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EXHIBIT 5
[SHAW, PITTMAN, POTTS & TROWBRIDGE LETTERHEAD]
June 2, 1997
Crescent Operating, Inc.
777 Main Street
Fort Worth, Texas 76102
Ladies and Gentlemen:
We have acted as counsel to Crescent Operating, Inc., a Delaware
corporation (the "Company"), in connection with the registration of shares of
the Company's common stock, par value $0.01 per share (the "Common Stock"),
pursuant to a Registration Statement on Form S-1 (Registration No. 333-25223),
including the prospectus and all amendments, exhibits and documents related
thereto (collectively, the "Registration Statement"), under the Securities Act
of 1933, as amended, and with the proposed distribution of the Common Stock to
shareholders of Crescent Real Estate Equities Company, a Delaware corporation
and the holders of units of limited partner interest in Crescent Real Estate
Equities Limited Partnership, a Delaware limited partnership in a spin-off in
accordance with the terms of the Registration Statement.
Based upon our examination of the originals or copies of such
documents, corporate records, certificates of officers of the Company and other
instruments as we have deemed necessary and upon the laws as presently in
effect, we are of the opinion that the Common Stock has been duly authorized
for issuance by the Company, and that, upon issuance and delivery in accordance
with the terms of the Registration Statement, the Common Stock will be validly
issued, fully paid and nonassessable.
We hereby consent to the incorporation by reference of this opinion as
an exhibit to the Registration Statement. We also consent to the reference to
Shaw, Pittman, Potts & Trowbridge under the caption "Legal Matters" in the
prospectus.
Very truly yours,
SHAW, PITTMAN, POTTS & TROWBRIDGE
<PAGE> 1
EXHIBIT 8
June 2, 1997
Crescent Operating, Inc.
777 Main Street
Fort Worth, TX 76102
Ladies and Gentlemen:
You have requested opinions as to the current status of Crescent Real
Estate Equities Company ("Crescent Equities") as a real estate investment trust
(a "REIT") under sections 856-860 of the Internal Revenue Code of 1986, as
amended (the "Code"),(1) and as to certain of the federal income tax
consequences of a series of transactions involving (i) the acquisition by
Crescent Real Estate Funding VII, L.P. ("Funding VII"), a partnership of which
Crescent Real Estate Equities Limited Partnership (the "Crescent Operating
Partnership") is a limited partner, of certain real property and improvements
(the "Facilities") from subsidiaries of Magellan Health Services, Inc.
("Magellan") and (ii) the formation and spin-off of Crescent Operating, Inc.
("Crescent Operating"). The spin-off of Crescent Operating is described in the
Form S-1 filed on April 15, 1997. All capitalized terms not otherwise defined
herein have the meaning set forth in the Form S-1.
Crescent Operating was formed on April 1, 1997, by the Crescent
Operating Partnership. Prior to completing the purchase of the Facilities, the
Crescent Operating Partnership will spin off Crescent Operating to its 84
percent partner, Crescent Equities, to Crescent Real Estate Equities, Ltd.
("Crescent Ltd."), the subsidiary of Crescent Equities that is the Crescent
Operating Partnership's general partner, and to the Crescent Operating
Partnership's other limited partners. Crescent Ltd. will in turn distribute
its stock in Crescent Operating to Crescent Equities, which will then
distribute all of its stock in Crescent Operating to its shareholders.
Crescent Operating's senior management will be the same as Crescent Equities.
Five members of the Crescent Operating Board also will be the same as the
members of the Crescent Equities Board, but it is anticipated that the Crescent
Operating Board will include two members who are unaffiliated with Crescent
Equities.
In connection with the formation and capitalization of Crescent
Operating, the Crescent Operating Partnership contributed cash and advanced
funds to Crescent Operating in the aggregate amount of $40.8 million. Of that
amount, approximately $12.2 million was contributed in cash and approximately
$28.6 million was loaned to Crescent Operating pursuant to a five-year term
loan (the "Note"). The Note is recourse and is secured, directly or through
negative pledges, by the various assets acquired from Carter-Crowley
Properties,
- --------------------
(1) All section references herein, unless otherwise noted, are to the Code or
to the regulations issued thereunder.
<PAGE> 2
Crescent Operating, Inc.
June 2, 1997
Page 2
Inc. and the CBHS Interest (defined below) (collectively, the "Assets"). The
Note will bear interest at the rate of 12 percent 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 total amount of principal
and accrued interest outstanding on the loan. Crescent Operating has also
obtained a line of credit for up to $20 million from the Crescent Operating
Partnership that bears interest at the same rate and is payable on similar
terms as the Note, except that it will mature five years after the last draw.
As a condition to the consummation of the Real Estate Purchase and Sales
Agreement, as amended (the "Agreement"), and the other Transaction Documents,
Magellan formed Charter Behavioral Health Systems, LLC ("CBHS"). Crescent
Operating and Magellan will enter into a Contribution Agreement with CBHS.
This agreement will provide that in consideration for a 50 percent interest in
CBHS, Magellan will contribute a number of assets related to the operation of
the Facilities. In addition, Crescent Operating will contribute $5 million
cash to CBHS. In consideration of the cash contribution, CBHS will deliver to
Crescent Operating 50 percent of the issued and outstanding capital equity
interests in CBHS (the "CBHS Interest"). Following the closing of the
Agreement, CBHS and its affiliates will lease the Facilities from Funding VII.
You have requested that we render opinions addressing the following
federal income tax issues:
1. Whether Crescent Equities 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;
2. Whether the Distribution will be taxable to Crescent Equities, to
its shareholders, and to the limited partners of the Crescent
Operating Partnership;
3. Whether Crescent Operating will be treated for federal income tax
purposes as a corporate entity separate from and not an agent of
either Crescent Equities or the Crescent Operating Partnership in
light of Crescent Operating's proposed relationship with Crescent
Equities and the Crescent Operating Partnership;
4. Whether Crescent Operating and Crescent Equities will be treated
as a stapled entity for federal income tax purposes under section
269B(a)(3) of the Code;
<PAGE> 3
Crescent Operating, Inc.
June 2, 1997
Page 3
5. Whether the rents received by Crescent Equities from CBHS and its
affiliates will constitute "rents from real property" under
section 856(b) of the Code;
6. Whether the Note will constitute debt for federal income tax
purposes; and
7. Whether Crescent Equities will be considered to have met the
requirements of section 856(c)(5) of the Code for the quarter
during which it held Crescent Operating stock.
Our opinions are based upon the provisions of the Code, Treasury
Regulations, and the reported interpretations thereof by the Internal Revenue
Service ("IRS") and by the courts in effect as of the date hereof, all of which
are subject to change, both retroactively or prospectively, and to possibly
different interpretations. We assume no obligation to update the opinion set
forth in this letter. We believe that the conclusions expressed herein, if
challenged by the IRS, would be sustained in court. Because our opinion is not
binding upon the IRS or the courts, however, there can be no assurance that a
contrary position may not be asserted successfully by the IRS.
I. Documents and Representations
For the purpose of rendering these opinions, we have examined and relied
on originals, or copies certified or otherwise identified to our satisfaction,
of the following:
1. the Real Estate Purchase and Sale Agreement between Magellan and
the Crescent Operating Partnership dated January 29, 1997;
2. the First Amendment to the Real Estate Purchase and Sale
Agreement between Magellan and the Crescent Operating Partnership
dated February 28, 1997;
3. the Warrant Purchase Agreement between Magellan and the Crescent
Operating Partnership dated January 29, 1997;
4. a Form of Contribution Agreement between Magellan and Crescent
Operating;
5. a Form of Intercompany Agreement between the Crescent Operating
Partnership and Crescent Operating (the "Intercompany
Agreement");
6. the Registration Statement of Crescent Operating Filed on Form
S-1 dated April 15, 1997;
<PAGE> 4
Crescent Operating, Inc.
June 2, 1997
Page 4
7. the Certificate of Incorporation of Crescent Operating dated
April 1, 1997;
8. a Form of First Amended and Restated Certificate of Incorporation
of Crescent Operating (the "Restated Certificate");
9. a Form of Amended and Restated Bylaws of Crescent Operating;
10. a Form of Master Lease Agreement;
11. a list of tenants under leases at each Facility; and
12. such other documents or information as we have deemed necessary
for the opinions set forth below.
In our examination, we have assumed the genuineness of all signatures,
the legal capacity of natural persons, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified or photostatic copies, and the
authenticity of the originals of such copies.
II. Opinions
A. Overall Status of Crescent Equities as a REIT
We hereby reconfirm the opinions expressed in our letter of May 8, 1997,
a copy of which was filed as Exhibit 8.01 to a Form 8-K filed May 8, 1997, by
Crescent Equities. Accordingly, we are of the opinion that Crescent Equities
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.
B. Taxability of Distribution to Crescent Equities, to its
Shareholders, and to the Limited Partners of the Crescent
Operating Partnership
The contribution of cash and assets by Crescent Operating Partnership
into Crescent Operating will itself be tax-free if it qualifies under section
351, which provides that a transfer to a corporation in exchange for its stock
will be tax-free provided that the transferor is in control of the corporation
following the transfer. For this purpose "control" is defined as the ownership
of stock possessing at least 80 percent of the total combined voting power of
<PAGE> 5
Crescent Operating, Inc.
June 2, 1997
Page 5
all classes of stock entitled to vote. Section 368(c). Because, however, it
is planned that the stock of Crescent Operating will be distributed, first by
Crescent Operating Partnership to its partners, and then by Crescent to its
shareholders, it is necessary to take into account such distributions.
Although not directly on point, section 351(c) provides that for
purposes of determining control, a distribution by any corporate transferor of
part or all of the stock which it receives in the exchange to its shareholders
shall not be taken into account. Furthermore, the IRS has ruled that, in the
context of a complete liquidation of a partnership, the distribution by the
partnership of stock received in an exchange otherwise complying with section
351 did not violate the control requirement. Rev. Rul. 84-111, 1984-2 C.B. 88.
We also note that in the instant situation, the parties could have the Crescent
Operating Partnership distribute the assets and cash to its partners and have
had them contribute the cash and assets directly into Crescent Operating, and
so the situation does not suggest that the redistribution of the stock in
Crescent Operating is in any way abusive. Based upon the foregoing, it is our
opinion that the transfer of cash and assets into Crescent Operating satisfies
the requirements of section 351.
Nevertheless, under section 311, the distribution of the Crescent
Operating stock by Crescent Equities to its shareholders will cause Crescent
Equities to recognize taxable income corresponding to the difference, if any,
between its basis in such Crescent Operating stock and the fair market value
thereof at the time of the distribution. The basis of Crescent Equities in the
stock will equal its pro rata share of the basis of the Crescent Operating
Partnership in the cash and assets transferred into Crescent Operating. In the
judgment of the management of Crescent Equities, the value of Crescent
Operating should correspond to the amount of the cash contributed to it, since
the contract rights contributed to Crescent Operating were recently acquired as
part or arm's length transactions. There can be no assurance, however, that
the IRS will not assert that the value of Crescent Operating 's stock is
higher. Because of the factual nature of valuation, we are unable to render an
opinion on it; however, we have no reason, based upon its experience, to
believe that management's assessment of the valuation of Crescent Operating
stock is incorrect.
With respect to the Limited Partners of the Crescent Operating
Partnership, the Crescent Operating stock will, in our opinion, be deemed to
constitute marketable securities for purposes of section 731(c) and the
regulations thereunder. As a result, the distribution of such stock will be
taxable to any Limited Partner under section 731(a)(1) if and to the extent
that the value of such stock exceeds the Limited Partner's basis in his
partnership interest in the Crescent Operating Partnership.
<PAGE> 6
Crescent Operating, Inc.
June 2, 1997
Page 6
C. Separate Corporate Entities
Because many, if not all, of the activities in which Crescent Operating
will undertake would have an adverse impact on the status of Crescent Equities
as a REIT for federal income tax purposes were such activities to be engaged in
by the Crescent Operating Partnership, it is necessary to address the question
of whether Crescent Operating and Crescent Equities will be treated as a
corporate entity separate from and not an agent of either Crescent Equities or
the Crescent Operating Partnership for federal income tax purposes. The
Crescent Operating Partnership and Crescent Operating intend to establish a
long-term business relationship. The facts as we understand them to be are
discussed below.
According to the Restated Certificate, Crescent Operating will serve the
purpose of acting as lessee and/or operator of properties owned or to be owned
by Crescent Equities, the Crescent Operating Partnership, and other property
owners. The Restated Certificate also provides that one of Crescent Operating's
corporate purposes is to perform the Intercompany Agreement, pursuant to which
Crescent Operating and the Crescent Operating Partnership have agreed to
provide each other with rights of first opportunity and notification with
respect to certain transactions and investments. In addition, the Restated
Certificate and Intercompany Agreement prohibit Crescent Operating from
engaging in activities or making investments that a REIT could make, unless the
Crescent Operating Partnership was first given the opportunity but elected not
to pursue such activities or investments.
Some similarities in the day-to-day operations of the entities will
exist. For instance, Crescent Operating's senior management will be the same
as that of Crescent Equities. Five members of the Crescent Operating board
will be the same as members of the Crescent Equities board, but the Crescent
Operating board will include two members unaffiliated with Crescent Equities.
In addition, both entities may have some or all of the same employees,
especially at the inception of Crescent Operating. Furthermore, at least
initially, Crescent Operating's ownership will be the same as the ownership of
Crescent Equities and the Crescent Operating Partnership. The Crescent
Operating Partnership and Crescent Operating will hold themselves out to the
public as separate entities, however, and will not characterize their
relationship as one between principal and agent. In addition, it is
contemplated that each corporation will be responsible for its own contractual
obligations, although certain payment obligations of Crescent Operating related
to its CBHS investment have been guaranteed by the Crescent Operating
Partnership. Furthermore, the Securities and Exchange Commission has required
that Crescent Operating file a registration statement on Form S-1 because its
securities will be distributed to the public. Finally, and perhaps most
important, the stock of Crescent Operating will be traded separately from that
of Crescent Equities.
<PAGE> 7
Crescent Operating, Inc.
June 2, 1997
Page 7
The general principle of separate corporate entities was advanced by the
Supreme Court in Moline Properties v. Commissioner, 319 U.S. 436 (1943), where
a taxpayer sought to have the gain on sales of its real property treated as the
gain of its sole shareholder and have its corporate existence ignored as merely
fictitious. In Moline, the Court stated that "so long as [its] purpose is the
equivalent of a business activity or is followed by the carrying on of business
by the corporation, the corporation remains a separate taxable entity." Id. at
439. The Tax Court has described the degree of corporate purpose and activity
requiring recognition of the corporation as a separate entity as "extremely
low" and has held that mortgaging corporate property is a sufficient business
activity to avoid classification as a dummy corporation. Strong v.
Commissioner, 66 T.C. 12, 24 (1976). Upholding the independent existence of a
one-person personal service corporation, the Tax Court concluded that "[t]he
policy favoring the recognition of corporations as entities independent of
their shareholders requires that we not ignore the corporate form so long as
the corporation actually conducts business." Keller v. Commissioner, 77 T.C.
1014, 1031 (1981), aff'd, 723 F.2d 58 (10th Cir. 1983).
Some of the activities leading courts to conclude that two entities
constitute separate corporations have included having separate checking
accounts, contracting in their own names, and holding themselves out to the
public as separate corporate businesses. See, e.g., Schuerholz v.
Commissioner, 35 T.C.M. (CCH) 726 (1976) (refusing to ignore the existence
separate from a partnership of an incorporated entity that engaged in such
activities, despite the absence of any annual meetings, failure to issue stock,
and lack of election of directors). Other business activities leading to
recognition of a company as a corporate entity have included the hiring and
contracting with employees, the keeping of its own books, and paying taxes.
See, e.g., Silvano Achiro v. Commissioner, 77 T.C. 881 (1981) (finding a
landfill management company that engaged in such activities to be a corporate
entity entitled to recognition). The Tenth Circuit found a business purpose to
be lacking and disregarded corporations that "paid no dividends, had no
employees, maintained no telephones, telephone listings, or separate business
addresses, and engaged in no substantive business activities." Lloyd F. Noonan
v. Commissioner, 451 F.2d 992 (9th Cir. 1971) (ignoring four corporations that
lacked a business purpose and concluding that partnership income attributed to
the corporations was properly attributable to the sole shareholders of such
corporations). Similarly, the Tax Court found bookkeeping entries and bank
accounts insufficient indicators of corporate existence where a corporation
owned no property, had no contracts except with a shareholder-employee, and did
not enter into its own arrangements with customers to whom its
shareholder-employee rendered services. Roubik v. Commissioner, 53 T.C. 365
(1969).
<PAGE> 8
Crescent Operating, Inc.
June 2, 1997
Page 8
Applying these indicia of corporate existence to the proposed activities
of Crescent Operating and its relationship with Crescent Equities and the
Crescent Operating Partnership supports the conclusion that Crescent Operating
will be considered a corporate entity separate from Crescent Equities and the
Crescent Operating Partnership. Crescent Operating will enter into contracts,
hire at least some of its own employees, and, most important, hold itself out
to the public as a separate corporate entity. In fact, its stock will be
publicly traded separately from the stock of Crescent Equities. As the court
stated in Love v. United States, "[t]he decision to recognize or not to
recognize the tax identity of a corporation depends upon what the corporation
does, not what it is called, how many or how few own it, or how they regard
it." 96 F. Supp. 919, 922 (Ct. Cl. 1951).
Even if Crescent Equities and Crescent Operating are treated as separate
entities, the non-REIT-qualified activities of Crescent Operating could be
attributed to Crescent Equities if Crescent Operating were regarded as an agent
for the Crescent Operating Partnership. In Commissioner v. Bollinger, the
Supreme Court discussed the tax treatment of corporations purporting to be
agents for their shareholders. 485 U.S. 340 (1988). The Court enumerated
three factors that will lead to the finding of an agency relationship with
respect to an asset: (1) the corporation acquires the asset with a written
agency agreement in place; (2) the corporation functions as an agent and not as
a principal; and (3) the corporation is held out to third parties as an agent.
Id. at 349-50.
According to the Restated Certificate, Crescent Operating will serve the
purpose of acting as lessee and/or operator of properties owned or to be owned
by Crescent Equities, the Crescent Operating Partnership, and other property
owners unaffiliated with Crescent Equities. An application of the Bollinger
factors to this broad language should not result in a characterization of the
relationship between Crescent Operating and the Crescent Operating Partnership
as one between agent and principal, especially because the Crescent Operating
Partnership and Crescent Operating will not hold themselves out to the public
as principal and agent.
Based upon the foregoing, it is our opinion that Crescent Operating will
be treated as a corporate entity separate from and not an agent of Crescent
Equities and the Crescent Operating Partnership for federal income tax
purposes.
D. Paired Share Issue
Section 269B(a)(3) of the Code requires that all entities that are
stapled entities be treated as a single entity for purposes of determining
whether any stapled entity is a REIT. A
<PAGE> 9
Crescent Operating, Inc.
June 2, 1997
Page 9
"stapled entity" is defined as any group of two or more entities if more than
50 percent of the beneficial ownership in each of the entities consists of
stapled interests, which are interests that, by reason of form of ownership,
restrictions on transfer, or other terms or conditions, are transferred or
required to be transferred in connection with the transfer of the other such
interests.
If shares of Crescent Operating were characterized as "stapled" to
shares of Crescent Equities, then the REIT status of Crescent Equities could be
in jeopardy because the two entities would be treated as a single entity for
tax purposes. Shares of Crescent Operating will be issued independently of
Crescent Equities shares and will be publicly traded separately as well,
however. Furthermore, in a ruling in which the shareholders of a REIT were
identical to the shareholders of its lessee, the IRS stated in dicta that
having the same shareholders was not a sufficient condition to characterize the
entities as stapled. P.L.R. 8705084 (Oct. 31, 1986).(2)
Based on the foregoing, it is our opinion that the shares of Crescent
Operating and Crescent Equities are not stapled interests, and that Crescent
Operating and Crescent Equities will not be treated as stapled entities under
section 269B(a)(3) of the Code.
E. Related Party Tenant Issue
In signing the Agreement, the Crescent Operating Partnership entered
into an agreement involving the purchase of an entity that could cause related
party rent problems under section 856(d)(2)(B) of the Code. Although there is
a possibility that a binding contract is not subject to the application of the
section rules, (3) we are not relying on that position. The purpose of section
318 is to indicate in what circumstances taxpayers will be deemed to have
ownership interests that they do not actually have. We believe that, whether a
binding contract constitutes an option, or, arguably, actual current ownership,
a court would be likely to determine that there is no attribution where there
are significant contingencies
- --------------------
(2) Private letter rulings do not have precedential effect, but do shed light
on the thinking of the Internal Revenue Service and do constitute substantial
authority under section 6662.
(3) Revenue Ruling 89-64, 1989-1 C.B. 91, (Jan. 1, 1989), distinguished between
an option and a binding contract for attribution rule purposes. The ruling
held that a taxpayer whose option was not exercisable for a stated period of
time was nevertheless considered to have an option that resulted in tax
attribution. Consequently, the language distinguishing bilateral contracts was
dictum. We believe, therefore, that reliance on this ruling would be risky.
<PAGE> 10
Crescent Operating, Inc.
June 2, 1997
Page 10
that must be satisfied prior to closing, but that there is attribution where
any contingencies are viewed as temporary or minor.(4)
The Agreement states that the formation of Crescent Operating is a
condition precedent to closing and that the failure of Crescent Equities to
cause the formation and distribution of Crescent Operating will not be
considered a breach entitling Magellan to specific performance. The
requirement of the formation of a new corporate entity, which must be
independently approved by the Securities and Exchange Commission, is clearly a
significant contingency. In addition, acknowledging that ownership by Crescent
Equities of an ownership interest in CBHS or entities owned by CBHS might lead
to a violation of the REIT requirements of section 856 of the Code, Section 8.4
of the Agreement states that neither Crescent Equities nor any entity the
assets of which would be attributed to Crescent Equities has the right, option
or obligation to enter into the Contribution Agreement or to own any entities
owned by CBHS and that any attempt to do so would be null and void.
Based on the foregoing, it is our opinion that execution of the Real
Estate Purchase and Sale Agreement will not be subject to the section 318
attribution rules causing Crescent Equities to be considered the owner of the
Tenants and that, therefore, the rents from the Tenants should constitute rents
from real property under section 856(d).
D. Characterization of Debt
Debt instruments, especially instruments that are held by persons
related to the debtor, may under certain circumstances be characterized for
income tax purposes as equity, rather than as debt. The characterization of an
instrument as debt or equity is a question of fact to be determined from all
surrounding facts and circumstances, no one of which is conclusive. See
Kingbay v. Commissioner, 46 T.C. 147 (1966); Hambuechen v. Commissioner, 43
T.C. 90 (1964). Among the criteria that have been found relevant in
characterizing such instruments are the following: (1) the intent of the
parties, (2) the extent of participation in management by the holder of the
instrument, (3) the ability of the corporation to obtain funds from outside
sources, (4) the "thinness" of the capital structure in relation to debt, (5)
the risk involved, (6) the formal indicia of the arrangement, (7) the relative
position of the obligees as to other creditors regarding payment of interest
and principal, (8) the voting power of the holder of the instrument, (9) the
provision of a fixed
- --------------------
(4) While the Code and Treasury Regulations do not indicate the likely effect
on the attribution rules of restrictions on the exercise of an option, some
authority does exist. In Rev. Rul. 89-64, for instance, the IRS held that the
requirement that a certain period of time pass before an option would be
exercisable was not a sufficient contingency to prevent attribution. 1989-1
C.B. 91. In contrast, in a private letter ruling, the IRS ruled that a right
of first refusal would not trigger attribution because the right to purchase
was subject to a contingency (i.e., the obligor's decision to sell).
P.L.R. 8106008 (Oct. 21, 1980).
<PAGE> 11
Crescent Operating, Inc.
June 2, 1997
Page 11
rate of interest, (10) the contingency of the obligation to repay, (11) the
source of the interest payments, (12) the presence or absence of a fixed
maturity date, (13) a provision for redemption by the corporation, (14) a
provision for redemption at the option of the holder, and (15) the timing of
the advance with reference to the organization of the corporation. Fin Hay
Realty Co. v. United States, 398 F.2d 694 (3d Cir. 1968).
The Note possesses a number of attributes weighing in favor of debt
treatment. For instance, the Note is clearly denominated as debt, has a fixed
maturity date of five years, provides for the return of interest on the
principal amount at a rate of 12 percent per annum, and is secured by the
Assets. In addition, Crescent Equities and the Crescent Operating Partnership
have represented that the value of the Assets exceeds the outstanding balance
of the Note and that, based upon internal projections, they anticipate that the
Note will be repaid in accordance with its terms. Crescent Equities and the
Crescent Operating Partnership have also represented that the interest provided
for under the Note represents a commercially reasonable rate of interest. In
addition, based on our experience and an examination of the Note, the interest
appears to represent a commercially reasonable rate of interest.
Based on the foregoing, it is our opinion that the Note constitutes debt
for federal income tax purposes. Accordingly, it will not constitute an
ownership interest which could cause Crescent Equities to be considered an
owner of the Tenants under the section 318 attribution rules. Further, it is
our opinion that amounts designated as interest by the Note will be treated as
interest for purposes of the 75 percent and 95 percent gross income tests of
section 856(c).
F. Asset Test
Under section 856(c)(5)(B) of the Code, a REIT cannot own more than 10
percent of the outstanding voting securities of a single issuer. Since April
1, 1997, Crescent Equities has held more than 10 percent of the outstanding
securities of Crescent Operating through the Crescent Operating Partnership.
Section 856(c) also provides, however, that a REIT that does not meet the asset
test requirements at the end of a quarter due to a discrepancy existing
immediately after the acquisition of property will not lose its status as a
REIT provided that it eliminates the discrepancy within 30 days after the close
of the quarter. Example 4 of section 1.856-2(d)(4) of the Treasury Regulations
describes a situation where a REIT violates the 25 percent asset test of
section 856(c)(5)(B) for a certain quarter by acquiring additional securities,
but, because the REIT eliminates the discrepancy within 30 days after the end
of the quarter, it will be considered to have met the requirements of section
856(c)(5) for such quarter.
<PAGE> 12
Crescent Operating, Inc.
June 2, 1997
Page 12
Based on the foregoing, because Crescent Equities will distribute the
stock in Crescent Operating to its shareholders within thirty days of the close
of the quarter during which it acquired such stock, Crescent Equities will be
considered to have met the requirements of section 856(c)(5) of the Code for
such quarter.
III. Additional Limitations
The foregoing opinions are limited to the specific matters covered
thereby and should not be interpreted to imply that the undersigned has offered
its opinion on any other matter.
Very truly yours,
SHAW, PITTMAN, POTTS & TROWBRIDGE
By: /s/ CHARLES B. TEMKIN, P.C.
------------------------------------
Charles B. Temkin, P.C.
<PAGE> 1
EXHIBIT 10.1
1997 CRESCENT OPERATING, INC.
AMENDED STOCK INCENTIVE PLAN
ARTICLE I
THE PLAN
1.1 NAME. This plan will be known as the "1997 Crescent Operating,
Inc. Amended Stock Incentive Plan." Capitalized terms used herein are defined
in Article X hereof.
1.2 PURPOSE. The purpose of the Plan is to promote the growth and
general prosperity of the Company by permitting the Company, its Subsidiaries,
and Affiliated Companies to grant Options to their Employees, Outside Directors
and Advisors and Restricted Stock to their Employees and Advisors. The Plan is
designed to help the Company, its Subsidiaries, and Affiliated Companies
attract and retain superior personnel for positions of substantial
responsibility and to provide Employees (including officers), Outside Directors
and Advisors with an additional incentive to contribute to the success of the
Company, its Subsidiaries, and Affiliated Companies. The Company intends that
Incentive Stock Options granted pursuant to Article IV will qualify as
"incentive stock options" within the meaning of Section 422 of the Code.
Subject to Article VII, Outside Directors may elect to receive Common Stock in
lieu of Director's Fees. With respect to Reporting Participants, transactions
under the Plan are intended to comply with all applicable conditions of Rule
16b-3 or its successors under the Exchange Act. To the extent that any
provision of the Plan or action by the Committee fails to so comply, it will be
deemed null and void to the extent permitted by law and deemed advisable by the
Committee.
1.3 EFFECTIVE DATE. The Plan will become effective upon the
Effective Date.
1.4 ELIGIBILITY TO PARTICIPATE. Any Employee, Outside Director or
Advisor will be eligible to participate in the Plan; provided that Incentive
Stock Options may be granted only to persons who are Employees of the Company
and its Subsidiaries. The Committee may grant Options to Employees and
Advisors in accordance with such determinations as the Committee from time to
time in its sole discretion may make.
1.5 MAXIMUM NUMBER OF SHARES OF COMMON STOCK SUBJECT TO AWARDS. The
shares of Common Stock subject to Awards pursuant to the Plan may be either
authorized and unissued shares or shares issued and thereafter acquired by the
Company. Subject to adjustment pursuant to the provisions of Section 8.2, and
subject to any additional restrictions elsewhere in the Plan, the maximum
aggregate number of shares of Common Stock that may be issued from time to time
pursuant to the Plan shall be 1,000,000. Subject to adjustment pursuant to the
provisions of Section 8.2, and subject to any additional restrictions elsewhere
in the Plan, the maximum aggregate number of shares of Common Stock that may be
issued under the Plan shall increase automatically on January 1 of each year by
an amount equal to 8.5% of the increase in
<PAGE> 2
the number of shares of Common Stock outstanding since January 1 of the
preceding year. The maximum number of shares of Common Stock with respect to
which Awards may be granted to any Reporting Participant during any calendar
year shall be five hundred thousand (500,000) shares under this Plan. The
maximum number of shares of Common Stock which may be subject to Incentive
Stock Options during the life of the Plan shall be fifty thousand (50,000)
shares. If shares of Restricted Stock are reacquired by the Company pursuant
to the provisions of Section 6.1 of the Plan or if an Option expires or
terminates for any reason without having been exercised in full, the reacquired
shares and/or the shares not purchased or distributed will again be available
for issuance under the Plan.
1.6 CONDITIONS PRECEDENT. The Company will not issue or deliver any
certificate for Plan Shares pursuant to the Plan prior to fulfillment of all of
the following conditions:
(a) The admission of the Plan Shares to listing on all stock
exchanges on which the Common Stock is then listed, unless the Committee
determines in its sole discretion that such listing is neither necessary
nor advisable;
(b) The completion of any registration or other qualification
of the sale of the Plan Shares under any federal or state law or under
the rulings or regulations of the Securities and Exchange Commission or
any other governmental regulatory body that the Committee in its sole
discretion deems necessary or advisable; and
(c) The obtaining of any approval or other clearance from any
federal or state governmental agency that the Committee in its sole
discretion determines to be necessary or advisable.
1.7 RESERVATION OF SHARES OF COMMON STOCK. During the term of the
Plan, the Company will at all times reserve and keep available such number of
shares of Common Stock as may be necessary to satisfy the requirements of the
Plan as to the number of Plan Shares. In addition, the Company will from time
to time, as is necessary to accomplish the purposes of the Plan, use its best
efforts to obtain from any regulatory agency having jurisdiction any requisite
authority necessary to issue Plan Shares hereunder. The inability of the
Company to obtain from any regulatory agency having jurisdiction the authority
deemed by the Company's counsel to be necessary for the lawful issuance of any
Plan Shares will relieve the Company of any liability in respect of the
nonissuance of Plan Shares as to which the requisite authority has not been
obtained.
1.8 TAX WITHHOLDING.
(a) Condition Precedent. The issuances of Plan Shares
pursuant to Awards under the Plan are subject to the condition that if
at any time the Committee determines, in its discretion, that the
satisfaction of withholding tax or other withholding liabilities under
any federal, state or local law is necessary or desirable as a condition
of, or in connection with such issuances, then the issuances will not be
effective unless the withholding has been effected or obtained in a
manner acceptable to the Committee. Each Option
-2-
<PAGE> 3
granted to a Reporting Participant shall contain a provision in the
related Option Agreement making any required withholding tax or other
withholding liability mandatory, and specifying that the Company
withhold a portion of the Plan Shares as specified in clause (iv) of
paragraph (b) below.
(b) Manner of Satisfying Withholding Obligation. When a
Participant is required to pay to the Company an amount required to be
withheld under applicable income tax laws in connection with an Award,
such payment may be made (i) in cash, (ii) by check, (iii) by delivery
to the Company of shares of Common Stock already owned by the
Participant having a Fair Market Value on the date the amount of tax to
be withheld is to be determined (the "Tax Date") equal to the amount
required to be withheld, (iv) with respect to Options, through the
withholding by the Company ("Company Withholding") of a portion of the
Plan Shares acquired upon the exercise of the Options (provided that,
with respect to any Option held by a Reporting Participant, at least six
months has elapsed between the grant of such Option and the exercise
involving tax withholding) having a Fair Market Value on the Tax Date
equal to the amount required to be withheld or (v) in any other form of
valid consideration, as permitted by the Committee in its discretion.
(c) Notice of Disposition of Stock Acquired Pursuant to
Incentive Stock Options. The Company may require as a condition to the
issuance of Plan Shares covered by any Incentive Stock Option that the
party exercising such Option give a written representation to the
Company, which is satisfactory in form and substance to its counsel and
upon which the Company may reasonably rely, that he will report to the
Company any disposition of such shares prior to the expiration of the
holding periods specified by Section 422(a)(1) of the Code. If and to
the extent that the realization of income in such a disposition imposes
upon the Company federal, state or local withholding tax requirements,
or any such withholding is required to secure for the Company an
otherwise available tax deduction, the Company will have the right to
require that the recipient remit to the Company an amount sufficient to
satisfy those requirements; and the Company may require as a condition
to the issuance of Plan Shares covered by an Incentive Stock Option that
the party exercising such Option give a satisfactory written
representation promising to make such a remittance.
1.9 ACCELERATION IN CERTAIN EVENTS. The Committee may accelerate the
exercisability of any Option or waive any restrictions with respect to shares
of Restricted Stock in whole or in part at any time. Notwithstanding the
provisions of any Option Agreement or Restricted Stock Agreement, the following
provisions will apply:
(a) Mergers and Reorganizations. If the Company or its
shareholders enter into an agreement to dispose of all or substantially
all of the assets of the Company by means of a sale, merger or other
reorganization, liquidation or otherwise in a transaction in which the
Company is not the surviving corporation, any Option will become
immediately exercisable with respect to the full number of shares
subject to that Option and all restrictions will lapse with respect to
an Award of Restricted Stock during the period
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commencing as of the date of the agreement to dispose of all or
substantially all of the assets of the Company and ending when the
disposition of assets contemplated by that agreement is consummated or
the Award is otherwise terminated in accordance with its provisions or
the provisions of the Plan, whichever occurs first; provided that no
Reporting Participant may exercise an Option and no restrictions will
lapse with respect to an Award of Restricted Stock to a Reporting
Participant unless at least six months have elapsed since the grant of
such Option or Award; provided, further, that no Option will be
immediately exercisable and no restrictions will lapse with respect to
an Award of Restricted Stock under this Section on account of any
agreement of merger or other reorganization when the shareholders of the
Company immediately before the consummation of the transaction will own
at least fifty percent of the total combined voting power of all classes
of stock entitled to vote of the surviving entity immediately after the
consummation of the transaction. An Option will not become immediately
exercisable and no restrictions will lapse with respect to an Award of
Restricted Stock if the transaction contemplated in the agreement is a
merger or reorganization in which the Company will survive.
(b) Change in Control. In the event of a change in control or
threatened change in control of the Company, all Options granted prior
to the change in control or threatened change in control will become
immediately exercisable, and all restrictions will lapse with respect to
awards of Restricted Stock granted prior to the change in control or
threatened change in control, provided that no Reporting Participant may
exercise an Option and no restriction will lapse with respect to an
Award of Restricted Stock to a Reporting Participant unless at least six
months have elapsed since the grant of such Option or Award. The term
"change in control" for purposes of this Section refers to the
acquisition of 15% or more of the voting securities of the Company by
any person or by persons acting as a group within the meaning of Section
13(d)(3) of the Exchange Act (other than an acquisition by (i) a person
or group meeting the requirements of clauses (i) and (ii) of Rule
13d-l(b)(1) promulgated under the Exchange Act, (ii) or any employee
pension benefit plan (within the meaning of Section 3(2) of ERISA) of
the Company or of its Subsidiaries, including a trust established
pursuant to such plan); provided that no change in control or threatened
change in control will be deemed to have occurred (i) if prior to the
acquisition of, or offer to acquire, 15% or more of the voting
securities of the Company, the full Board has adopted by not less than
two-thirds vote a resolution specifically approving such acquisition or
offer or (ii) from (A) a transfer of the Company's voting securities by
Richard E. Rainwater ("Rainwater") to (i) a member of Rainwater's
immediate family (within the meaning of Rule 16a-1(e) of the Exchange
Act) either during Rainwater's lifetime or by will or the laws of
descent and distribution; (ii) any trust as to which Rainwater or a
member (or members) of his immediate family (within the meaning of Rule
16a-1(e) of the Exchange Act) is the beneficiary; (iii) any trust as to
which Rainwater is the settlor with sole power to revoke; (iv) any
entity over which Rainwater has the power, directly or indirectly, to
direct or cause the direction of the management and policies of the
entity, whether through the ownership of voting securities, by contract
or otherwise; or (v) any charitable trust, foundation or corporation
under Section 501(c)(3) of the Code that is funded by Rainwater; or (B)
the acquisition of voting securities of the
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Corporation by either (i) Rainwater or (ii) a person, trust or other
entity described in the foregoing clauses (A)(i)-(v) of this subsection.
The term "person" for purposes of this Section refers to an individual
or a corporation, partnership, trust, association, joint venture, pool,
syndicate, sole proprietorship, unincorporated organization or any other
form of entity not specifically listed herein. Whether a change in
control is threatened will be determined solely by the Committee.
1.10 COMPLIANCE WITH SECURITIES LAWS. Plan Shares will not be issued
with respect to any Award unless the issuance and delivery of the Plan Shares
(and the exercise of an Option, if applicable) complies with all relevant
provisions of federal and state law, including without limitation the
Securities Act, the rules and regulations promulgated thereunder and the
requirements of any stock exchange upon which the Plan Shares may then be
listed, and will be further subject to the approval of counsel for the Company
with respect to such compliance. The Committee may also require a Participant
to furnish evidence satisfactory to the Company, including, without limitation,
a written and signed representation letter and consent to be bound by any
transfer restrictions imposed by law, legend, condition or otherwise, and a
representation that the Plan Shares are being acquired only for investment and
without any present intention to sell or distribute the shares in violation of
any federal or state law, rule or regulation. Further, each Participant will
consent to the imposition of a legend on the certificate representing the Plan
Shares issued pursuant to an Award restricting their transferability as
required by law or by this Section.
1.11 EMPLOYMENT OF PARTICIPANT. Nothing in the Plan or in any Award
granted hereunder will confer upon any Participant any right to continued
employment by the Company, any of its Subsidiaries, or any Affiliated Company
or to continued service as a Director or Advisor or limit in any way the right
of the Company, any Subsidiary, or any Affiliated Company at any time to
terminate or alter the terms of that employment or services as a Director or
Advisor.
1.12 INFORMATION TO PARTICIPANTS. The Company will furnish to each
Participant copies of annual reports, proxy statements and all other reports
sent to the Company's shareholders. Upon written request, the Company will
furnish to each Participant a copy of its most recent Annual Report on Form
10-K and each quarterly report to shareholders issued since the end of the
Company's most recent fiscal year.
ARTICLE II
ADMINISTRATION
2.1 COMMITTEE. The Plan will be administered by the Board or by a
Committee of not fewer than two directors appointed by the Board. As used
herein, if the Company has any class of common equity securities required to be
registered under Section 12 of the Exchange Act, as to any grant to a Reporting
Participant, "Committee" shall mean a committee consisting of two or more
Directors, each of whom shall be an "outside director" as defined in Section
162(m) of the Code. Subject to the provisions of the Plan, the Board or
Committee will have the sole discretion and authority to determine from time to
time the Employees and Advisors to whom Awards will be granted and the number
of Plan Shares subject to each Award, to interpret the Plan, to prescribe,
amend and rescind any rules and regulations necessary or appropriate for
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the administration of the 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 any shares of Restricted Stock, and to make all other determinations
advisable for the administration of the Plan. With respect to any provision of
the Plan granting the Board or the Committee the right to agree, in its sole
discretion, to further extend the term of any Award hereunder, the Board or
the Committee may exercise such right at the time of grant, in the Option
Agreement relating to such Award, or at any time or from time-to-time after the
grant of any Award hereunder. Notwithstanding any other provision of this
Section 2.1 or this Plan, all Awards made to Outside Directors shall be
automatic and nondiscretionary as set forth in this Plan.
2.2 MAJORITY RULE; UNANIMOUS WRITTEN CONSENT. A majority of the
members of the Board or the Committee will constitute a quorum, and any action
taken by a majority present at a meeting at which a quorum is present or any
action taken without a meeting evidenced by a writing executed by all members
of the Board or the Committee will constitute the action of the Board or the
Committee. Meetings of the Committee may take place by telephone conference
call.
2.3 COMPANY ASSISTANCE. The Company will supply full and timely
information to the Committee on all matters relating to Employees, Outside
Directors and Advisors, their employment, death, Retirement, Disability or
other termination of employment, and such other pertinent facts as the Board or
the Committee may require. The Company will furnish the Board or the Committee
with such clerical and other assistance as is necessary to the performance of
its duties.
ARTICLE III
OPTIONS
3.1 METHOD OF EXERCISE. Each Option will be exercisable at any time
and from time in whole or in part in accordance with the terms of the Option
Agreement pursuant to which the Option was granted. No Option may be exercised
for a fraction of a Plan Share.
3.2 PAYMENT OF PURCHASE PRICE. The purchase price of any Plan Shares
purchased will be paid at the time of exercise of the Option either (i) in
cash, (ii) by certified or cashier's check, (iii) by shares of Common Stock, if
permitted by the Committee, (iv) as to Outside Directors, by cash or certified
or cashier's check for the par value of the Plan Shares plus a recourse
promissory note for the balance of the purchase price, such note to provide for
the right to repay the note partially or wholly with Common Stock and with an
interest rate based on the current dividend yield of the Common Stock, (v) as
to Employees and Advisors, by cash or certified or cashier's check for the par
value of the Plan Shares plus a promissory note for the balance of the purchase
price, which note will contain such terms and provisions as the Board or the
Committee may approve, including without limitation the right to repay the note
partially or wholly with Common Stock and to base the interest rate on the
current dividend yield of the Common Stock, (vi) by delivery of a copy of
irrevocable instructions from the Optionee to a broker or dealer,
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reasonably acceptable to the Company, to sell certain of the Plan Shares upon
exercise of the Option or to pledge them as collateral for a loan and promptly
deliver to the Company the amount of sale or loan proceeds necessary to pay
such purchase price or (vii) as to Employees and Advisors, in any other form of
valid consideration, as permitted by the Board or the Committee in its
discretion. If any portion of the purchase price or a note given at the time
of exercise is paid in shares of Common Stock, those shares will be valued at
the then Fair Market Value.
3.3 WRITTEN NOTICE REQUIRED. Any Option will be deemed to be
exercised for purposes of the Plan when written notice of exercise has been
received by the Company at its principal office from the person entitled to
exercise the Option and payment for the Plan Shares with respect to which the
Option is exercised has been received by the Company in accordance with Section
3.2.
3.4 RIGHTS OF OPTIONEES UPON TERMINATION OF EMPLOYMENT OR SERVICE.
(a) In the event an Optionee ceases to be an Employee and
Advisor, and does not continue to be a Director, for any reason other than
death, Retirement, Disability or for Cause, (i) the Board or the Committee
shall have the ability to accelerate the vesting of the Optionee's Option in
its sole discretion, and (ii) such Optionee's Option shall be exercisable (to
the extent exercisable on the date of termination of employment or service as
an Employee or Advisor, or, if the Committee, in its discretion, has
accelerated the vesting of such Option, to the extent exercisable following
such acceleration) (a) if such Option is an Incentive Stock Option, at any time
within three months after the date of termination of employment with the
Company or any Subsidiary, unless by its terms the Option expires earlier; or
(b) if such Option is a Nonqualified Stock Option, at any time within one year
after the date of termination of employment or service as an Employee or
Advisor, unless by its terms the Option expires earlier or unless the Committee
agrees, in its sole discretion, to further extend the term of such Nonqualified
Stock Option; provided that the term of any such Nonqualified Stock Option
shall not be extended beyond its initial term. An Employee or Advisor who
continues to be a Director shall not be deemed to have terminated employment
or service as to any Nonqualified Stock Option. A Participant shall not be
deemed to have terminated employment or service as to any Nonqualified Stock
Option solely because an Affiliated Company ceases to own, directly or
indirectly, more than 50% of the Company's Common Stock. Notwithstanding any
provision in this Plan to the contrary, no Option granted to a Reporting
Participant may be exercised unless at least six months have elapsed since the
grant of such Option.
(b) In addition, unless the Board or the Committee agrees, in
its sole discretion, to extend the term of a Nonqualified Stock Option granted
to an Employee or Advisor (provided that the term of any such Option shall not
be extended beyond its initial term), an Optionee's Option may be exercised as
follows in the event such Optionee ceases to serve as an Employee, Outside
Director or Advisor due to death, Disability, Retirement or for Cause:
(i) Death. If an Optionee dies while serving as an Employee,
Outside Director or Advisor, or within three months after ceasing to be
an Employee, Outside Director or Advisor, his option shall become fully
exercisable on the date of his death and shall expire 12 months
thereafter, unless by its terms it expires sooner. During such period,
the Option may be fully exercised, to the extent that it remains
unexercised on the date of death, by the Optionee's personal
representative or by the distributees to whom the
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Optionee's rights under the Option shall pass by will or by the laws of
descent and distribution.
(ii) Retirement. If an Optionee ceases to serve as an
Employee, Outside Director or Advisor as a result of Retirement, his
Option shall become fully exercisable on the date of his Retirement and
(a) if such Option is an Incentive Stock Option, such Option will be
exercisable at any time within three months after the effective date of
such Retirement, unless by its terms the Option expires earlier, and (b)
if such Option is a Nonqualified Stock Option, such Option will be
exercisable at any time within one year after the effective date of such
Retirement, unless by its terms the Option expires sooner.
(iii) Disability. If an Optionee ceases to serve as an
Employee, Outside Director or Advisor as a result of Disability, the
Optionee's Option shall become fully exercisable and shall expire 12
months thereafter, unless by its terms it expires sooner.
(iv) Cause. If an Optionee ceases to serve as an Employee,
Outside Director or Advisor, because the Optionee is terminated for
Cause, the Optionee's Option shall automatically expire. If any facts
that would constitute Cause for termination or removal of an Employee or
Advisor are discovered after the Optionee's relationship with the
Company has ended, any Options then held by the Optionee may be
immediately terminated by the Committee. Notwithstanding the foregoing,
if an Optionee is an Employee employed pursuant to a written employment
agreement, or is an Advisor retained pursuant to a written agreement,
the Optionee's relationship with the Company will be deemed terminated
for 'Cause' for purposes of the Plan only if the Optionee is considered
under the circumstances to have been terminated for cause for purposes
of such written agreement.
3.5 TRANSFERABILITY OF OPTIONS. Options shall not be transferable
other than pursuant to a qualified domestic relations order, by will or by the
laws of descent and distribution and, with respect to an Incentive Stock
Option, may be exercised during the lifetime of an Optionee only by that
Optionee or by his legally authorized representative.
ARTICLE IV
INCENTIVE STOCK OPTIONS
4.1 OPTION TERMS AND CONDITIONS. The terms and conditions of Options
granted under this Article may differ from one another as the Board or the
Committee may, in its discretion, determine, as long as all Options granted
under this Article satisfy the requirements of this Article.
4.2 DURATION OF OPTIONS. Each Option granted under this Article will
expire on the date determined by the Committee, but in no event will any Option
granted under this Article expire earlier than one year or later than ten years
after the date on which the Option is granted. In addition, each Option will
be subject to early termination as provided elsewhere in the Plan.
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4.3 PURCHASE PRICE. The purchase price for Plan Shares acquired
pursuant to the exercise, in whole or in part, of any Option granted under this
Article will not be less than the Fair Market Value of the Plan Shares at the
time of the grant of the Option.
4.4 MAXIMUM AMOUNT OF OPTIONS FIRST EXERCISABLE IN ANY CALENDAR YEAR.
The maximum aggregate Fair Market Value of Plan Shares (determined at the time
the Option is granted) with respect to which Options issued under this Article
are exercisable for the first time by any Employee during any calendar year
under all incentive stock option plans of the Company and its Subsidiaries and
affiliates may not exceed $100,000. Any portion of an Option granted under the
Plan and first exercisable in excess of the foregoing limitations will be
considered granted under Article V.
4.5 REQUIREMENTS AS TO CERTAIN OPTIONS. In the event of the grant of
any Option to an individual who, at the time the Option is granted, owns shares
of stock possessing more than ten percent of the total combined voting power of
all classes of stock of the Company or any of its Subsidiaries or affiliates
within the meaning of Section 422 of the Code, the purchase price for the Plan
Shares subject to that Option must be at least 110% of the Fair Market Value of
those Plan Shares at the time the Option is granted, and the Option must not be
exercisable after the expiration of five years from the date of its grant.
4.6 INDIVIDUAL OPTION AGREEMENTS. Each Employee receiving Options
under this Article will be required to enter into a written Option Agreement
with the Company. In such Option Agreement, the Employee will agree to be
bound by the terms and conditions of the Plan and such other matters as the
Committee deems appropriate.
ARTICLE V
NONQUALIFIED STOCK OPTIONS
5.1 OPTION TERMS AND CONDITIONS. The terms and conditions of Options
granted under this Article may differ from one another as the Committee may, in
its discretion, determine, as long as all Options granted under this Article
satisfy the requirements of this Article.
5.2 OUTSIDE DIRECTOR OPTION TERMS AND CONDITIONS. Each new Outside
Director of the Company shall be granted an Option to purchase one thousand
four hundred (1,400) shares of Common Stock on the date of his initial
appointment or election to the position of Outside Director. Each Outside
Director shall be granted an Option to purchase one thousand four hundred
(1,400) shares of Common Stock on the date of commencement of each regular
annual stockholders' meeting beginning with the 1998 Annual Stockholder's
meeting. Each Option granted under this Section 5.2 shall vest on the
schedule determined by the Board or the Committee. Notwithstanding the
preceding sentence, each Option granted under this Section 5.2 shall vest if
the Outside Director dies while serving as an Outside Director, or ceases to
serve as an Outside Director as a result of Retirement or Disability as
provided in Section 3.4(b). Each Option granted to an Outside Director shall
expire no later than ten (10) years from the date of grant, subject to early
termination as provided elsewhere in the Plan.
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5.3 DURATION OF OPTIONS. Each Option granted to an Employee or
Advisor under this Article and all rights thereunder will expire on the date
determined by the Committee, but in no event will any Option granted under this
Article expire later than ten years after the date on which the Option is
granted. In addition, each Option will be subject to early termination as
provided elsewhere in the Plan.
5.4 PURCHASE PRICE. The purchase price for Plan Shares acquired
pursuant to the exercise, in whole or in part, of any Option granted under this
Article shall be the Fair Market Value of the Plan Shares at the time of the
grant of the Option.
5.5 INDIVIDUAL OPTION AGREEMENTS. Each Employee, Outside Director or
Advisor receiving Options under this Article will be required to enter into a
written Option Agreement with the Company. In such Option Agreement, the
Employee, Outside Director or Advisor will agree to be bound by the terms and
conditions of the Plan and such other matters as the Committee deems
appropriate.
ARTICLE VI
RESTRICTED STOCK
6.1 TERMS AND CONDITIONS. Each Restricted Stock Grant confers upon
the recipient thereof the right to receive a specified number of shares of
Common Stock of the Company in accordance with the terms and conditions of each
Participant's individual written agreement as set forth in Section 6.2. The
general terms and conditions of the Restricted Stock awards shall be as
follows:
(a) Any shares of Common Stock awarded hereunder to a
Participant shall be restricted for a period of time to be determined by
the Committee for each participant at the time of the Award, which
period shall be not less than one year or more than ten years. The
restrictions shall prohibit the sale, assignment, transfer, pledge or
other encumbrance of such shares, and will provide for possible
reversion thereof to the Company in accordance with subparagraph (b)
during the period of restriction.
(b) All Restricted Stock awarded under this Plan to a
Participant shall be forfeited and returned to the Company in the event
the Participant ceases to be employed by, serve as a Director of, or
serve as an Advisor to the Company, one of its Subsidiaries, or any
Affiliated Company prior to the expiration of the period of restriction,
unless the Participant's termination of employment is due to his or her
death, Disability or Retirement. An Employee or Advisor who continues
to be a Director shall not be deemed to have terminated employment or
service. A Participant shall not be deemed to have terminated
employment or service solely because an Affiliated Company ceases to own,
direcly or indirectly, more than fifty percent (50%) of the Company's
Common Stock.
(c) In the event of a Participant's death or Disability, the
restrictions under subparagraph (a) will lapse with respect to all
Restricted Stock awarded to the Participant under this Plan prior to any
such event, and the shares of Common Stock involved shall cease to be
Restricted Stock within the meaning of this Plan and shall no longer be
subject to forfeiture to the Company pursuant to subparagraph (b).
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(d) In the event of a Participant's Retirement, the
restrictions under subparagraph (a) shall continue to apply unless the
Board or the Committee in its discretion shall shorten the restriction
period.
(e) Stock certificates issued with respect to awards of
Restricted Stock made under this Plan shall be registered in the name of
the Participant, but shall be delivered by him or her to the Company
together with a stock power endorsed in blank. Each such certificate
shall bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
FORFEITURE, RESTRICTIONS ON TRANSFER AND CERTAIN OTHER TERMS AND
CONDITIONS SET FORTH IN THE 1997 CRESCENT OPERATING, INC. STOCK
INCENTIVE PLAN AND THE AGREEMENT BETWEEN THE REGISTERED OWNER OF
THE SHARES REPRESENTED BY THIS CERTIFICATE AND CRESCENT
OPERATING, INC. ENTERED INTO PURSUANT TO SUCH PLAN."
(f) Upon the lapse of a restriction period as determined
pursuant to subparagraph (a), the Company will return the stock
certificates representing the shares with respect to which the
restriction has lapsed to the Participant or his or her legal
representative, and pursuant to the instruction of the Participant or
his or her legal representative will issue a certificate for such shares
which does not bear the legend set forth in subparagraph (e).
(g) Any other securities or assets (other than ordinary cash
dividends) which are received by a Participant with respect to
Restricted Stock awarded to him, which is still subject to restrictions
provided for in subparagraph (a), will be subject to the same
restrictions and shall be delivered by the Participant to the Company as
provided in subparagraph (e).
(h) From the time of grant of the Restricted Stock Award, the
Participant shall be entitled to exercise all rights attributable to the
Restricted Stock, subject to forfeiture of such rights and the stock as
provided in subparagraph (b).
6.2 INDIVIDUAL AGREEMENTS. Each Participant receiving an Award of
Restricted Stock under this Article will be required to enter into a written
Restricted Stock Agreement with the Company. In such Restricted Stock
Agreement, the Participant will agree to be bound by the terms and conditions
of the Plan and such other matters as the Board or the Committee deems
appropriate.
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ARTICLE VII
OUTSIDE DIRECTOR STOCK-FOR-FEES ELECTIONS
7.1 OUTSIDE DIRECTOR STOCK-FOR-FEES ELECTION. Each Outside Director
shall be permitted to receive Director's Fees in the form of Common Stock
rather than cash in accordance with the following provisions:
(a) Each Outside Director shall have the right to elect to
receive one-half or all of such Outside Director's Fees in the form of
Common Stock rather than cash by tendering an irrevocable written
election to the Secretary of the Company pursuant to which all
Director's Fees otherwise payable to the Outside Director shall be paid
in the form of Common Stock as provided in (b) below. Such election
shall become effective six (6) months after its delivery to the
Secretary of the Company by the Outside Director. Such election shall
remain in effect until the earlier of (i) the date six (6) months after
such Outside Director shall have delivered to the Secretary of the
Company irrevocable written notice that his or her election to receive
Common Stock shall cease as of the date six months following delivery of
the notice, or (ii) the date on which such Outside Director terminates
as a member of the Board of Directors by reason of resignation,
non-reelection, death, or disability. Any Outside Director who having
terminated an election to receive Common Stock or having failed to elect
to receive Common Stock rather than cash may elect to receive Director's
Fees in the form of Common Stock as of the date six (6) months following
delivery of irrevocable written notice of such election to the Secretary
of the Company. An Outside Director who does not elect to have
Director's Fees paid in Common Stock shall receive his or her
remuneration in cash at such times that such remuneration is otherwise
due.
(b) If an Outside Director elects to receive payment of
Director's Fees in the form of Common Stock, such Common Stock shall be
issued as soon as practicable after the annual meeting of shareholders
or meeting of the Board or Committee of the Board to which such
remuneration relates. The number of shares of Common Stock to be issued
to such Outside Director shall be determined by dividing:
(i) the remuneration otherwise payable to the Outside
Director, by
(ii) ninety percent (90%) of the Fair Market Value of the
Company's Common Stock on the determination date on the rounding up or
down of any fractional share to the nearest whole share.
The determination date shall be the date that the relevant payment of
Director's Fees is payable.
(c) Shares of Common Stock issued under this Article VII shall
be free of any restrictions except for restrictions applicable under the
Exchange Act.
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7.2 INCOME TAX. Each Outside Director who elects to receive
Director's Fees in the form of Common Stock rather than cash shall be
responsible for payment of federal, state, and local income taxes on the Fair
Market Value of such Common Stock.
ARTICLE VIII
TERMINATION, AMENDMENT AND ADJUSTMENT
8.1 TERMINATION AND AMENDMENT. The Plan will terminate on March 31,
2007. No Awards will be granted under the Plan after that date of termination,
although Awards granted prior to such date shall remain outstanding in
accordance with their terms. Subject to the limitations contained in this
Section 8.1, the Board or the Committee may at any time amend or revise the
terms of the Plan, including the form and substance of the Option Agreements
and Restricted Stock Agreements to be used in connection herewith; provided
that, without shareholder approval, no amendment or revision may (i) increase
the maximum aggregate number of Plan Shares, except as permitted under Section
1.5 and Section 8.2, (ii) change the minimum purchase price for shares under
Article IV or Article V or (iii) permit the granting of an Award to anyone
other than as provided in the Plan. No amendment, suspension or termination of
the Plan may, without the consent of the Optionee who has received an Award
hereunder, alter or impair any of that Participant's rights or obligations
under any Award granted under the Plan prior to that amendment, suspension or
termination.
8.2 ADJUSTMENT. If the outstanding Common Stock is increased,
decreased, changed into or exchanged for a different number or kind of shares
or securities through merger, consolidation, combination, exchange of shares,
other reorganization, recapitalization, reclassification, stock dividend, stock
split or reverse stock split, an appropriate and proportionate adjustment will
be made in the maximum number and kind of Plan Shares as to which Awards may be
granted under the Plan. A corresponding adjustment will be made in the number
or kind of shares allocated to and purchasable under unexercised Options or
shares of Restricted Stock with respect to which restrictions have not yet
lapsed prior to any such change. Any such adjustment in outstanding Options
will be made without change in the aggregate purchase price applicable to the
unexercised portion of the Option, but with a corresponding adjustment in the
price for each share purchasable under the Option. Any new or additional or
different class of securities that are distributed to a Participant in his
capacity as the owner of Restricted Stock as granted hereunder shall be
considered to be Restricted Stock and shall be subject to all of the conditions
and restrictions provided herein applicable to Restricted Stock. The foregoing
adjustments and the manner of application of the foregoing provisions will be
determined solely by the Board or the Committee, and any such adjustment may
provide for the elimination of fractional share interests.
ARTICLE IX
MISCELLANEOUS
9.1 OTHER COMPENSATION PLANS. The adoption of the Plan will not
affect any other stock option or incentive or other compensation plans in
effect for the Company, any of its Subsidiaries, or any Affiliated Company, nor
will the Plan preclude the Company, any of its
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Subsidiaries, or any Affiliated Company from establishing any other forms of
incentive or other compensation for Employees.
9.2 PLAN BINDING ON SUCCESSORS. The Plan will be binding upon the
successors and assigns of the Company and any of its Subsidiaries that adopt
the Plan.
9.3 NUMBER AND GENDER. Whenever used herein, nouns in the singular
will include the plural where appropriate, and the masculine pronoun will
include the feminine gender.
9.4 HEADINGS. Headings of articles and sections hereof are inserted
for convenience of reference and constitute no part of the Plan.
ARTICLE X
DEFINITIONS
As used herein with initial capital letters, the following terms have the
meanings set forth unless the context clearly indicates to the contrary:
10.1 "Advisor" means any person performing advisory or consulting
services for the Company, any Subsidiary of the Company, or any Affiliated
Company, with or without compensation, to whom the Company chooses to grant
Options in accordance with the Plan, provided that bona fide services must be
---- ----
rendered by such person and such services shall not be rendered in connection
with the offer or sale of securities in a capital raising transaction.
10.2 "Affiliated Company" means any entity that owns, directly or
indirectly, more than fifty percent (50%) of the Company's Common Stock as of
the later of the Effective Date or the date on which an award is made.
10.3 "Award" means a grant of Options under Articles IV and V of the
Plan or an Award of Restricted Stock under Article VI of the Plan.
10.4 "Board" means the Board of Directors of the Company, provided
that, if the Board delegates all or any part of its authority to a committee
composed of one or more directors, then the term "Board" shall be deemed to
refer to such committee to the extent of such delegation.
10.5 "Cause" will mean an act or acts involving a felony, fraud,
willful misconduct, commission of any act that causes or reasonably may be
expected to cause substantial injury to the Company or other good cause. The
term "other good cause" as used in this Section will include, but shall not be
limited to, habitual impertinence, a pattern of conduct that tends to hold the
Company up to ridicule in the community, conduct disloyal to the Company,
conviction of any crime of moral turpitude and substantial dependence, as
judged by the Committee, on alcohol or any controlled substance. "Controlled
substance" means a drug, immediate precursor or other substance listed in
Schedules I-V of the Federal Comprehensive Drug Abuse Prevention Control Act of
1970, as amended.
10.6 "Code" means the Internal Revenue Code of 1986, as amended.
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10.7 "Committee" shall have the meaning set forth in Section 2.1.
10.8 "Common Stock" means the Common Stock, par value $.01 per share,
of the Company or, in the event that the outstanding shares of such Common
Stock are hereafter changed into or exchanged for shares of a different stock
or security of the Company or some other corporation, such other stock or
security.
10.9 "Company" means Crescent Operating, Inc., a Delaware corporation.
10.10 "Director" means a member of the Board of Directors of the
Company.
10.11 "Director's Fees" means the remuneration otherwise payable to an
Outside Director as an annual retainer and for attending meetings of the Board
and meetings of the committees of the Board.
10.12 "Disability" of a Participant shall be deemed to occur whenever a
Participant is rendered unable to engage in any substantial gainful activity by
reason of any medically determinable physical or mental impairment which can be
expected to result in death or which has lasted or can be expected to last for
a continuing period of not less than 12 months.
10.13 "Effective Date" means May 1, 1997, or, if later, the date on
which an amendment to this Plan is approved by the shareholders of the Company
in accordance with the provisions of Sections 162(m) and 422 of the Code and
Rule 16b-3 under the Exchange Act.
10.14 "Employee" means an employee of the Company (including an
officer) or of any of the Subsidiaries of the Company, or any Affiliated
Company, as defined under Section 3401(c) of the Code and the regulations
promulgated thereunder.
10.15 "ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
10.16 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
10.17 "Fair Market Value" means such value as will be determined by the
Board or the Committee on the basis of such factors as it deems appropriate;
provided that if the Common Stock is traded on a national securities exchange,
such value will be determined by the Committee on the basis of the closing
price for the Common Stock on the date for which such determination is
relevant, as reported on the exchange and further provided that if there should
be no sales on such date, such value shall be deemed equal to the closing price
on the last preceding date on which sales of Common Stock were reported. If
the Common Stock is traded on more than one exchange, such value will be
determined on the basis of the exchange trading the greatest volume of shares
on such date. In no event shall "Fair Market Value" be less than the par value
of the Common Stock.
10.18 "Incentive Stock Option" means an Option granted under Article
IV.
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10.19 "Nonqualified Stock Option" means an Option granted under Article
V.
10.20 "Option" means an Incentive Stock Option or a Nonqualified Stock
Option granted under the Plan.
10.21 "Option Agreement" means an agreement between the Company and a
Participant with respect to one or more Options.
10.22 "Outside Director" means a Director who is not an employee of the
Company (other than an officer who may qualify as an Outside Director) or an
Employee of a Subsidiary.
10.23 "Participant" means an Employee, Director or Advisor to whom an
Award has been granted hereunder.
10.24 "Plan" means the 1997 Crescent Operating, Inc. Stock Incentive
Plan, as amended from time to time.
10.25 "Plan Shares" means shares of Common Stock issuable pursuant to
the Plan.
10.26 "Reporting Participant" means a Participant who is subject to the
reporting requirements of Section 16 of the Exchange Act or who is a "covered
employee" within the meaning of Section 162(m) of the Code.
10.27 "Restricted Stock" means an Award of Common Stock granted under
Article VI.
10.28 "Restricted Stock Agreement" means an agreement between the
Company and a Participant with respect to an Award of Restricted Stock.
10.29 "Retirement" means termination of employment or service as a
Director on or after the date on which a Participant attains age 70.
10.30 "Securities Act" means the Securities Act of 1933, as amended.
10.31 "Subsidiary" means a subsidiary corporation of the Company, as
defined in Section 424(f) of the Code.
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EXHIBIT 10.5
Execution Copy
AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT
THIS AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT (as it may be
modified, supplemented or amended from time to time, this "Agreement") is made
and entered into as of May 21, 1997 between CRESCENT REAL ESTATE EQUITIES
LIMITED PARTNERSHIP, a Delaware limited partnership (the "Lender"), and
CRESCENT OPERATING, INC., a Delaware corporation (the "Borrower").
RECITALS
WHEREAS, the Borrower requested that the Lender extend a credit
facility (the "Loan") in the original maximum aggregate principal amount of
$30,400,000 for the purpose of permitting the Borrower to make certain
investments identified herein;
WHEREAS, the parties entered into that Credit and Security Agreement
dated as of May 8, 1997 (the "Original Agreement");
WHEREAS, the parties desire to amend and restate the Original
Agreement in its entirety to increase the maximum aggregate principal amount of
the Loan to $35,900,000 and to modify certain of the terms and provisions
thereof;
WHEREAS, the Lender is willing to extend and modify the Loan for such
purpose on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing and of the
agreements, covenants and conditions contained herein, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 Definitions.
(a) The following terms which are defined in the Uniform
Commercial Code in effect in the State of Texas on the date
hereof are used herein as so defined: Accounts, Chattel
Paper, Documents, Equipment, Farm Products, General
Intangibles, Instruments, Inventory and Proceeds.
(b) The following terms, as used herein, have the following
meanings:
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"Agreement" has the meaning set forth in the initial paragraph hereof.
"Application for Advance" has the meaning set forth in Section 2.1(a)
hereof.
"Bankruptcy Event of Default" has the meaning set forth in Section
7.1.
"Borrower" means Crescent Operating, Inc., and its permitted
successors and assigns.
"Business Day" means any day except a Saturday, Sunday, or other day
on which commercial banks in Texas are authorized by law to close.
"Cash Equivalents" means (a) securities with maturities of one year or
less from the date of acquisition issued or fully guaranteed or insured by the
United States Government or any agency thereof, (b) certificates of deposit and
eurodollar time deposits with maturities of one year or less from the date of
acquisition and overnight bank deposits of any commercial bank having capital
and surplus in excess of $500,000,000, (c) repurchase obligations of any
commercial bank or investment bank satisfying the requirements of clause (b) of
this definition, having a term of not more than 30 days with respect to
securities issued or fully guaranteed or insured by the United States
Government or any agency thereof, (d) commercial paper issued in the United
States which is rated at least A-2 by Standard and Poor's Services or P-2 by
Moody's Investors Service, (e) securities with maturities of one year or less
from the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States, by any political subdivision or
taxing authority of any such state, commonwealth or territory or by any foreign
government, the securities of which state, commonwealth, territory, political
subdivision, taxing authority or foreign government are rated at least A by
Standard and Poor's Services or A by Moody's Investors Service, (f) securities
with maturities of one year or less from the date of acquisition backed by
standby letters of credit issued by any commercial bank satisfying the
requirements of clause (b) of this definition, or (g) shares of money market
mutual or similar funds which invest substantially exclusively in assets
satisfying the requirements of clauses (a) through (f) of this definition.
"Closing Date" means the date this Agreement becomes effective in
accordance with Section 3.1, and each other date on which an advance is made by
the Lender to the Borrower.
"Code" means the Uniform Commercial Code as from time to time in
effect in the State of Texas.
"Collateral" has the meaning set forth in Section 4.1.
"Collateral Account" has the meaning set forth in Section 4.2.
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"Consolidated Net Income" or "Consolidated Net Loss" for any fiscal
period, means the amount which, in conformity with GAAP, would be set forth
opposite the caption "net income" (or any like caption), as the case may be, on
a consolidated statement of earnings of the Borrower and its Subsidiaries, if
any, for such fiscal period.
"Debt" of any Person means at any date, (i) all obligations of such
Person which in accordance with GAAP would be classified on a balance sheet of
such Person as liabilities of such Person ("debt"), (ii) all debt of others
secured by a Lien on any asset of such Person, whether or not such debt is
assumed by such Person, and (iii) all debt of others guaranteed by such Person.
"Default" means any condition or event which constitutes an Event of
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.
"Default Rate" has the meaning set forth in Section 2.3(b).
"EBITDA" means for any fiscal period, the Consolidated Net Income or
Consolidated Net Loss, as the case may be, for such fiscal period, after
restoring thereto amounts deducted for (a) extraordinary losses (or deducting
therefrom any amounts included therein on account of extraordinary gains) and
special charges, (b) depreciation and amortization (including write-offs or
write-downs) and special charges, (c) the amount of interest expense of the
Borrower and its Subsidiaries, if any, determined on a consolidated basis in
accordance with GAAP, for such period on the aggregate principal amount of
their consolidated indebtedness, (d) the amount of tax expense of the Borrower
and its Subsidiaries, if any, determined on a consolidated basis in accordance
with GAAP, for such period and (e) the aggregate amount of fixed and contingent
rentals payable by the Borrower and its Subsidiaries, if any, determined on a
consolidated basis in accordance with GAAP, for such period with respect to
leases of real and personal property.
"Event of Default" has the meaning set forth in Section 7.1.
"GAAP" means generally accepted accounting principles in effect from
time to time.
"Interest Rate" has the meaning set forth in Section 2.3(a).
"Internal Revenue Code" means the Internal Revenue Code of 1986, as
amended, or any successor statute.
"Lender" means Crescent Real Estate Equities Limited Partnership, a
Delaware limited partnership, and its successors and assigns.
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<PAGE> 4
"Lien" means, with respect to any asset, any mortgage, deed of trust,
lien pledge, charge, security interest, or encumbrance of any kind in respect
of such asset.
"Line of Credit Credit Agreement" means the Line of Credit Credit and
Security Agreement between the Borrower and the Lender of even date herewith
relating to the loan evidenced by the Line of Credit Term Loan.
"Line of Credit Note" means the Line of Credit Note from the Borrower
to the Lender of even date herewith in the maximum principal amount of Twenty
Million Dollars ($20,000,000.00).
"Loan" has the meaning set forth in the recitals hereto.
"Loan Commitment" has the meaning set forth in Section 2.1.
"Loan Documents" means this Agreement, the Note, the Pledge Agreement
and all other documents, agreements, and instruments referred to in or required
to be delivered or actually delivered in connection herewith or therewith, as
any of them may be modified, supplemented, or amended from time to time.
"Material Debt" means Debt (other than the Note) of the Borrower,
arising in one or more related or unrelated transactions, in an aggregate
principal amount exceeding $50,000.
"Maturity Date" means May 8, 2002.
"Note" means the amended and restated promissory note of the Borrower
payable to the order of the Lender under the terms of this Agreement dated as
of May 21, 1997, as the same may be modified, supplemented, or amended from time
to time, and any note or notes issued in substitution or replacement therefor
or in addition thereto, substantially in the form of Exhibit B hereto, in the
maximum principal amount from time to time outstanding of up to Thirty Five
Million Nine Hundred Thousand Dollars ($35,900,000.00), evidencing the
obligation of the Borrower to repay the Loan, as modified, supplemented or
amended from time to time.
"Person" means an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a
government or political subdivision or any agency or instrumentality thereof.
"Pledge Agreement" means the Pledge Agreement to be executed and
delivered by the Borrower, substantially in the form of Exhibit C hereto, as
the same may be amended, supplemented or otherwise modified from time to time.
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"Secured Obligations" means the collective reference to the unpaid
principal of and interest on the Note, the Line of Credit Note and all other
obligations and liabilities of the Borrower to the Lender whether direct or
indirect, absolute or contingent, due or to become due, or now existing or
hereafter incurred, which may arise under, out of, or in connection with, this
Agreement, the Line of Credit Credit Agreement, the Note, the Line of Credit
Note, the Pledge Agreement or any other document, made, delivered or given in
connection therewith, in each case whether on account of principal, interest,
reimbursement obligations, fees, indemnities, costs, expenses or otherwise.
"Subsidiary" means, with respect to any Person, any corporation,
association, partnership or other business entity of which such Person owns
directly or indirectly through one or more intermediaries 50% or more of the
voting stock, partnership interests or other interests thereof or which is
controlled or capable of being controlled, directly or indirectly, by that
Person or one or more of the other Subsidiaries of that Person or a combination
thereof.
"Termination Date" shall mean the date 95 days from the date upon
which the Loan has been satisfied in full.
SECTION 1.2 Rules of Construction.
(a) Words of the masculine gender shall be deemed and construed to
include correlative words of the feminine and neuter genders.
Unless the context shall otherwise indicate, words importing
the singular number shall include the plural and vice versa.
(b) Reference to a section number, such as this Section 1.2, shall
mean and include all provisions within that section of this
Agreement, unless a particular subsection, paragraph or
subparagraph is specified.
(c) Unless otherwise specified herein, all accounting terms used
herein shall be interpreted, all accounting determinations
hereunder shall be made, and all financial statements required
to be delivered hereunder shall be prepared in accordance with
GAAP as in effect from time to time, except as otherwise
specified herein, applied on a basis consistent (except for
changes concurred in by the Borrower's independent public
accountants) with the most recent audited consolidated
financial statements of the Borrower delivered to the Lender.
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ARTICLE II
COMMITMENT, ADVANCE PROCEDURE, AND NOTES
SECTION 2.1 Commitment and Advance Procedure.
(a) The Lender agrees, on and subject to the terms and conditions
set forth in this Agreement, to make advances to the Borrower
during the term hereof (each, an "Advance") in up to five
installments (not more often than once per month), up to an
aggregate amount of Thirty Five Million Nine Hundred Thousand
Dollars ($35,900,000.00) (the "Loan Commitment"), following
the Lender's receipt of a written request from the Borrower
made to the Lender in the form set forth in Exhibit A hereto
(an "Application for Advance"), and delivered in accordance
with this Section 2.1 and Section 8.1 hereof.
(b) On the date that this Agreement becomes effective in
accordance with Section 3.1, the Lender shall advance to the
Borrower the principal amount of Fifteen Million Four Hundred
Thousand Dollars ($15,400,000.00).
(c) Other than the advance provided for in (b) of this Section
2.1, the Borrower shall provide the Lender with an Application
for Advance, specifying (i) the amount of the Advance
requested, and (ii) the requested date of such Advance (which
shall be at least that number of Business Days after delivery
of such Application for Advance as specified in (e) below).
(d) Notwithstanding any provision hereof to the contrary, the
Lender shall have no obligation at any time to make any
Advances to the Borrower hereunder unless, on the date of the
Lender's receipt of a properly completed and executed
Application for Advance, the Borrower shall have certified to
the Lender in writing that the Borrower is not in Default
hereunder.
(e) The Lender shall have the obligation to make an advance in
accordance with the provisions hereof, including the
provisions of this Section 2.1, within five (5) Business Days
after its receipt of a properly completed and executed
Application for Advance that, together with all other advances
and Applications for Advance, requests advances totaling no
more than the Loan Commitment.
SECTION 2.2 The Note.
(a) The Loan will be evidenced by the Note. The outstanding
principal amount of the Loan shall be payable as follows:
twenty consecutive quarterly
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installments of principal, each consisting of the Amortization
Amount (as defined below) and payable on the first Business
Day of August 1997 and on the first Business Day of each
November, February, May and August thereafter. The
"Amortization Amount" shall be determined by dividing the
outstanding principal amount of the loan on the payment date
in question by the number of payment dates occurring prior to
the Maturity Date. The Amortization Amount shall be
recalculated each time an advance of the Loan is made, but not
when accrued but unpaid interest is added to principal as
provided herein.
(b) Notwithstanding Section 2.2(a), if the amount of principal and
interest to be paid by the Borrower to the Lender exceeds the
amount of EBITDA of the Borrower for the immediately preceding
calendar quarter (ending the last day of September, December,
March, or June), the Borrower shall not be obligated to repay
the amount of principal and interest in excess of EBITDA of
the Borrower for such period. Any such amount of principal
shall continue to be outstanding principal and accrue interest
thereon; any such amount of unpaid interest shall be added to
principal and shall accrue interest thereon. Payments under
the Note shall be applied first to any fees, costs or expenses
due under the Note or hereunder, then to interest, and then to
principal.
(c) Notwithstanding any other provision of this Section 2.2, all
outstanding principal and interest of the Loan and all other
amounts payable hereunder, if not sooner paid, shall be due
and payable on the Maturity Date.
SECTION 2.3 Interest Rate and Payments.
(a) Unless an Event of Default shall have occurred and be
continuing, the Loan shall bear interest on the outstanding
principal amount thereof until paid in full, at a rate per
annum equal to Twelve Percent (12%) (the "Interest Rate").
(b) Upon and after an Event of Default, the Loan shall accrue
interest on the outstanding principal balance of the Loan and,
to the extent permitted by applicable law, on the unpaid
interest, at a rate per annum equal to the Interest Rate plus
an additional 5.0% per annum (the "Default Rate"), provided
that in no event shall the Default Rate exceed the maximum
rate of interest permitted by applicable law.
(c) Subject to the provisions of Section 2.2(b), interest shall be
due during the term hereof on the first Business Day of each
August, November, February and May, or such other date as the
Borrower and the Lender may mutually agree in writing.
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(d) Accrued interest not paid when due shall be compounded
quarterly and added to the outstanding principal amount of the
Loan.
(e) On the Maturity Date, the Borrower shall repay in full all
accrued but unpaid interest and the entire unpaid principal
amount of the Loan.
SECTION 2.4 General Provisions as to Payments.
The Borrower shall make each payment of principal of, and interest on,
the Loan not later than 11:00 A.M. Fort Worth, Texas time on the date when due,
to the Lender at the Lender's office at 777 Main Street, Suite 2100, Fort
Worth, Texas 76102 in same day or other immediately available funds. Whenever
any payment of principal of, or interest on, any Loan shall be due on a day
which is not a Business Day, the date for payment thereof shall be extended to
the next succeeding Business Day. If the date for any payment of principal is
extended by operation of law or otherwise, interest thereon shall be payable
for such extended time. All such payments shall be made without setoff or
counterclaim and without reduction for, and free from, any and all present or
future taxes, levies, imposts, duties, fees, charges, deductions, withholdings,
restrictions or conditions of any nature imposed by any government or political
subdivision or taking authority thereof (but excluding any taxes imposed on or
measured by the overall net income of the Lender).
SECTION 2.5 Computation of Interest.
All interest shall be computed on the basis of a year of 360 days and
paid for the actual number of days elapsed (including the first day, but
excluding the last day).
SECTION 2.6 Use of Proceeds.
The proceeds of the Loan shall be used solely to enable the Borrower
to invest in (i) Moody-Day, Inc., (ii) Dallas Basketball, Ltd, (iii) Hicks Muse
Tate & Furst Equity Fund II, LP, (iv) Charter Behavioral Health Systems, LLC
and (v) such other investments as the Lender may consent to in writing, which
consent may be withheld in the Lender's sole discretion.
SECTION 2.7 Evidence of Debt.
(a) The Lender shall record (i) the amount of each advance made
hereunder, (ii) the amount of any principal or interest due
and payable or to become due and payable from the Borrower to
the Lender hereunder and (iii) the amount of any sum received
by the Lender hereunder from the Borrower.
(b) The entries recorded by the Lender shall, to the extent
permitted by applicable law, be prima facie evidence of the
existence and amounts of the
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obligations of the Borrower therein recorded; provided,
however, that the failure of the Lender to record or any error
in any record shall not in any manner affect the obligation of
the Borrower to repay (with applicable interest) the Loans
made to such Borrower in accordance with the terms of this
Agreement.
ARTICLE III
CONDITIONS TO BORROWING
SECTION 3.1 Conditions to Effectiveness and Further Borrowings.
(a) This Agreement shall become effective on the date that each of
the conditions set forth below shall have been satisfied (or
waived in accordance with Section 8.3):
(i) The Lender shall have received this Agreement, duly
executed by the Borrower;
(ii) The Lender shall have received from the Borrower a
certificate that each of the representations and
warranties of the Borrower contained in this
Agreement is true, correct, and complete as of the
Closing Date;
(iii) The Lender shall have received a duly executed Note
dated as of the Closing Date;
(iv) The Lender shall have received a duly executed Pledge
Agreement dated as of the Closing Date and such other
documents relating to the Pledge Agreement as
reasonably required by the Lender;
(v) The Lender shall have received proper financing
statements (Forms UCC-1 or the appropriate
equivalent) necessary to perfect the security
interest in the Borrower's interest in the Collateral
(or such part thereof in which a security interest
can be perfected thereby);
(vi) The Lender shall have received the following: (A)
the articles of incorporation of the Borrower as in
effect on the Closing Date, certified as of a recent
date by the Secretary of State of Delaware, (B) the
bylaws of the Borrower as in effect on the Closing
Date, certified as of a recent date by the Secretary
of the Borrower, (C) resolutions of the board of
directors of the Borrower authorizing the execution,
delivery and performance of this Agreement, certified
as of the Closing Date
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by its corporate secretary, (D) certificates as to
the incumbency of the officers of the Borrower,
certified by its corporate secretary, and (E)
certificates of good standing of the Borrower issued
as of a recent date by the Secretary of State of
Delaware; and
(vii) No event, which, after execution of this Agreement,
would constitute an Event of Default hereunder shall
have occurred and be continuing.
(b) As of any other Closing Date, each of the conditions set forth
below shall have been satisfied (or waived in accordance with
Section 8.3):
(i) The Lender shall have received from the Borrower a
certificate that each of the representations and
warranties of the Borrower contained in this
Agreement is true, correct and complete as of the
Closing Date;
(ii) The Lender shall have received a certificate in the
form of Exhibit D hereto enclosing the following:
(A) a representation that there has been no change in
the articles of incorporation of the Borrower since
the Closing Date, or if changes have occurred since
the Closing Date, the articles of incorporation of
the Borrower as in effect , certified as of a recent
date by the Secretary of State of Delaware, (B) a
representation that there has been no change in the
bylaws of the Borrower since the Closing Date, or if
changes have occurred since the Closing Date, the
bylaws of the Borrower as in effect, certified as of
a recent date by the Secretary of the Borrower, (C)
resolutions of the board of directors of the Borrower
authorizing the execution, delivery and performance
of the Application for Advance, certified as of the
Closing Date by its corporate secretary, (D)
certificates as to the incumbency of the officers of
the Borrower, certified by its corporate secretary,
and (E) certificates of good standing of the Borrower
issued as of a recent date by the Secretary of State
of Delaware; and
(iii) No event which constitutes an Event of Default
hereunder shall have occurred and be continuing.
ARTICLE IV
SECURITY INTEREST
SECTION 4.1 Grant of Security Interest.
(a) As security for the prompt payment, performance, and
observance in full of the Loan, the Borrower hereby pledges
and assigns to the Lender, and grants
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to the Lender a continuing security interest in and lien on
all of the following property now owned or at any time
hereafter acquired by the Borrower or in which the Borrower
now has or at any time in the future may acquire any right,
title or interest (the "Collateral"):
(i) all Accounts;
(ii) all Chattel Paper;
(iii) all Documents;
(iv) all Equipment;
(v) all General Intangibles;
(vi) all Instruments;
(vii) all Inventory;
(viii) all books and recordings pertaining to the
Collateral; and
(ix) to the extent not otherwise included, all Proceeds
and products of any of the foregoing, in any form
(whether cash or non-cash) and all collateral
security and guarantees given by any Person with
respect to any of the foregoing.
SECTION 4.2 Collateral Account
(a) Establishment of Collateral Account. Upon the execution
hereof, there shall be established and at all times thereafter
there shall be maintained by the Borrower, a non-interest
bearing cash collateral account with a financial institution
approved by the Lender (the "Collateral Account") subject to
the terms of this Agreement.
(b) Rights, Title and Interest of Collateral Account. All right,
title and interest in and to the Collateral Account shall vest
exclusively in the Lender. The Borrower shall have no rights
with respect to the Collateral Account and the Lender shall
have sole dominion and control over the Collateral Account and
the monies deposited therein. Monies deposited in the
Collateral Account shall constitute security for the Secured
Obligations. The Borrower hereby pledges and assigns to the
Lender and hereby grants to the Lender a security interest in,
all right, title or interest (if any) which the Borrower
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now has or may hereafter have or purport or claim to have in
or to the Collateral Account and all monies held therein, any
investments made with such monies and any and all certificates
or instruments from time to time representing or evidencing
such investments (and all proceeds thereof).
(c) Maintaining the Collateral Account. Until the Termination
Date of this Agreement:
(i) The Borrower will maintain the Collateral Account
with a financial institution approved by the Lender.
(ii) All monies received by the Lender while a Default or
an Event of Default has occurred and is continuing,
and any monies received as a result of investments
made as contemplated by subsection 4.2(c)(iii)
hereof, shall be deposited in the Collateral Account.
(iii) Pending the disbursement thereof pursuant to the
terms of this Agreement, all monies in the Collateral
Account shall (to the extent it is practical to do
so) be invested by the Lender in Cash Equivalents.
All such investments shall be evidenced either (a) by
negotiable certificates or instruments which are held
by or for the account of the Lender or (b) by book
entries maintained in a State in which the Lender may
be granted by book entries a security interest in the
securities relating thereto. In the absence of its
gross negligence or willful misconduct, the Lender
shall not have any liability out of or in connection
with any investment made in accordance with the
provisions herein or for any loss or decline in value
of any investment or from any loss resulting directly
or indirectly from any investment made pursuant to
and in accordance with the provisions hereof.
SECTION 4.3 Remedies.
(a) Proceeds to be Turned Over To the Lender. When a Default or
an Event of Default has occurred and is continuing all
Proceeds (as defined in the Code) received by the Borrower
consisting of cash, checks and other near-cash items shall be
held by the Borrower in trust for the Lender, segregated from
other funds of the Borrower, and shall, forthwith upon receipt
by the Borrower, be turned over to the Lender in the exact
form received by the Borrower (duly indorsed by the Borrower
to the Lender, if required) and held by the Lender in the
Collateral Account. All Proceeds while held by the Lender in
the Collateral Account (or by the Borrower in trust for the
Lender) shall continue to be held as collateral security for
all the Secured
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<PAGE> 13
Obligations and shall not constitute payment thereof until
applied as provided in subsection 4.3(b).
(b) Application of Proceeds. At such intervals as may be agreed
upon by the Borrower and the Lender, or, if an Event of
Default has occurred and is continuing at any time at the
Lender's election, the Lender may apply all or any part of
Proceeds held in any Collateral Account in payment of the
Secured Obligations in such order as the Lender may elect, and
any part of such funds which the Lender elects not so to apply
and deems not required as collateral security for the Secured
Obligations shall be paid over from time to time by the Lender
to the Borrower or to whomsoever may be lawfully entitled to
receive the same. Any balance of such Proceeds remaining
after the Secured Obligations shall have been paid in full and
the Commitment shall have expired or otherwise been terminated
shall be paid over to the Borrower or to whomsoever may be
lawfully entitled to receive the same.
(c) Code Remedies. If an Event of Default has occurred and is
continuing, the Lender may exercise, in addition to all other
rights and remedies granted to it in this Agreement and in any
other instrument or agreement securing, evidencing or relating
to the Secured Obligations, all rights and remedies of a
secured party under the Code. Without limiting the generality
of the foregoing, the Lender, without demand of performance or
other demand, presentment, protest, advertisement or notice of
any kind (except any notice required by law referred to below)
to or upon the Borrower or any other Person (all and each of
which demands, defenses, advertisements and notices are hereby
waived), may in such circumstances forthwith collect, receive,
appropriate and realize upon the Collateral, or any part
thereof, and/or may forthwith sell, lease, assign, give option
or options to purchase, or otherwise dispose of and deliver
the Collateral or any part thereof (or contract to do any of
the foregoing), in one or more parcels at public or private
sale or sales, at any exchange, broker's board or office of
the Lender or elsewhere upon such terms and conditions as it
may deem advisable and at such prices as it may deem best, for
cash or on credit or for future delivery without assumption of
any credit risk. The Lender shall have the right upon any
such public sale or sales, and, to the extent permitted by
law, upon any such private sale or sales, to purchase the
whole or any part of the Collateral so sold, free of any right
or equity of redemption in the Borrower, which right or equity
is hereby waived or released. The Borrower further agrees, at
the Lender's request, to assemble the Collateral and make it
available to the Lender at places which the Lender shall
reasonably select, whether at the Borrower's premises or
elsewhere. To the extent permitted by applicable law, the
Borrower
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<PAGE> 14
waives all claims, damages and demands it may acquire against
the Lender arising out of the exercise by them of any rights
hereunder. If any notice of a proposed sale or other
disposition of Collateral shall be required by law, such
notice shall be deemed reasonable and proper if given at least
10 days before such sale or other disposition.
(d) The exercise by the Lender of or failure or refusal to so
exercise any right, remedy or power granted under this
Agreement or available to the Lender at law or in equity or
under statute shall in no manner affect the Borrower's
liability to the Lender, and the Lender shall be under no
obligation or duty to exercise any of the rights, remedies or
powers conferred upon it hereby or by applicable law, and it
shall incur no liability for any act or failure to act in
connection with the collection of, or the preservation of any
rights under, any of the Collateral.
SECTION 4.4 Lender Appointment as Attorney-in-Fact; Lender Performance of
Borrower's Obligations.
(a) Powers. The Borrower hereby irrevocably constitutes and
appoints the Lender and any officer or agent thereof, with
full power of substitution, as its true and lawful
attorney-in-fact with full irrevocable power and authority in
the place and stead of the Borrower and in the name of the
Borrower or in its own name, for the purpose of carrying out
the terms of this Agreement, to take any and all appropriate
action and to execute any and all documents and instruments
which may be necessary or desirable to accomplish the purposes
of this Agreement, and, without limiting the generality of the
foregoing, the Borrower hereby gives the Lender the power and
right, on behalf of the Borrower, without notice to or assent
by the Borrower, to do any or all of the following:
(i) at any time when an Event of Default has occurred and
is continuing in the name of the Borrower or its own
name, or otherwise, take possession of and indorse
and collect any checks, drafts, notes, acceptances or
other instruments for the payment of moneys due with
respect to any Collateral and file any claim or take
any other action or proceeding in any court of law or
equity or otherwise deemed appropriate by the Lender
for the purpose of collecting any and all such moneys
due with respect to any Collateral whenever payable;
(ii) pay or discharge taxes and Liens levied or placed on
or threatened against the Collateral, effect any
repairs or any insurance called for by
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<PAGE> 15
the terms of this Agreement and pay all or any part
of the premiums therefor and the costs thereof;
(iii) execute, in connection with any sale provided for in
subsection 4.3(c), any endorsements, assignments or
other instruments of conveyance or transfer with
respect to the Collateral; and
(iv) at any time when an Event of Default has occurred and
is continuing (1) direct any party liable for any
payment under any of the Collateral to make payment
of any and all moneys due or to become due thereunder
directly to the Lender or as the Lender shall direct;
(2) ask or demand for, collect, receive payment of
and receipt for, any and all moneys, claims and other
amounts due or to become due at any time in respect
of or arising out of any Collateral; (3) sign and
indorse any invoices, freight or express bills, bills
of lading, storage or warehouse receipts, drafts
against debtors, assignments, verifications, notices
and other documents in connection with any of the
Collateral; (4) commence and prosecute any suits,
actions or proceedings at law or in equity in any
court of competent jurisdiction to collect the
Collateral or any thereof and to enforce any other
right in respect of any Collateral; (5) defend any
suit, action or proceeding brought against the
Borrower with respect to any Collateral (other than
any such suit, action or proceeding brought by the
Lender); (6) settle, compromise or adjust any such
suit, action or proceeding (other than any such suit,
action or proceeding brought by the Lender) and, in
connection therewith, to give such discharges or
releases as the Lender may deem appropriate; (7)
generally, sell, transfer, pledge and make any
agreement with respect to or otherwise deal with any
of the Collateral as fully and completely as though
the Lender were the absolute owner thereof for all
purposes, and do, at the Lender's option and the
Borrower's expense, at any time, or from time to
time, all acts and things which the Lender deems
necessary to protect, preserve or realize upon the
Collateral and the Lender's security interests
therein and to effect the intent of this Agreement,
all as fully and effectively as the Borrower might
do.
(b) Ratification; Power Coupled With An Interest. The Borrower
hereby ratifies all that said attorneys shall lawfully do or
cause to be done by virtue hereof in accordance with the terms
of this Agreement, absent gross negligence or willful
misconduct on the part of the Lender. All powers,
authorizations and agencies contained in this Agreement are
coupled with an
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interest and are irrevocable until this Agreement is
terminated and the security interests created hereby are
released.
SECTION 4.5 Performance by Lender of Borrower's Obligations. If the
Borrower fails to perform or comply with any of its agreements contained in
this Article IV, the Lender, at its option, but without any obligation so to
do, may perform or comply, or otherwise cause performance or compliance, with
such agreement.
SECTION 4.6 Borrower's Reimbursement Obligation. The expenses of the
Lender incurred in connection with actions undertaken as provided in this
Article IV, together with interest thereon at a rate equal to the rate per
annum at which interest would then be payable on past due Loans under this
Agreement, from the date of payment by the Lender to the date reimbursed by the
Borrower, shall be payable by the Borrower to the Lender on demand.
SECTION 4.7 Duty of the Lender. The Lender's sole duty with respect to
the custody, safekeeping and physical preservation of the Collateral in its
possession, under Section 9-207 of the Code or otherwise, shall be to deal with
it in the same manner as the Lender deals with similar property for its own
account. Neither the Lender, nor any of its respective officers, directors,
employees or agents shall be liable for failure to demand, collect or realize
upon any of the Collateral or for any delay in doing so or shall be under any
obligation to sell or otherwise dispose of any Collateral upon the request of
the Borrower or any other Person or to take any other action whatsoever with
regard to the Collateral or any part thereof. The powers conferred on the
Lender hereunder are solely to protect the Lender's interests in the Collateral
and shall not impose any duty upon the Lender to exercise any such powers. The
Lender shall be accountable only for amounts that its actually receives as a
result of the exercise of such powers, and neither it nor any of its officers,
directors, employees or agents shall be responsible to the Borrower for any act
or failure to act hereunder, except for their own gross negligence or willful
misconduct.
SECTION 4.8 Execution of Financing Statements. Pursuant to Section 9-402
of the Code, the Borrower authorizes the Lender to file financing statements
with respect to the Collateral without the signature of the Borrower in such
form and in such filing offices as the Lender reasonably determines appropriate
to perfect the security interests of the Lender under this Agreement. The
Lender shall provide the Borrower with copies of any such financing statements.
A carbon, photographic or other reproduction of this Agreement shall be
sufficient as a financing statement for filing in any jurisdiction.
SECTION 4.9 The Pledge Agreement.
In addition to the security interest granted hereunder, the Borrower
shall grant to the Lender a security interest in the Pledged Partnership
Interests and the Pledged Stock (as those terms are defined in the Pledge
Agreement) pursuant to the Pledge Agreement.
SECTION 4.10 Pledged Notes.
With respect to any promissory notes now or hereinafter owned by or
owing to the Borrower, including, without limitation, the promissory note from
Charter Behavioral Health Systems, LLC, such notes shall be promptly endorsed
in blank and delivered to the Lender.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants that:
SECTION 5.1 Existence and Power.
The Borrower is a corporation duly organized, validly existing, and in
good standing under the laws of the State of Delaware, and has all corporate
power and authority, and all material governmental licenses, authorizations,
consents, and approvals required to carry on its business as now conducted.
SECTION 5.2 Corporate and Government Authorization; No Contravention.
The execution, delivery, and performance by the Borrower of this
Agreement, the Pledge Agreement and the Note are within the scope of the
Borrower's power and authority, have been duly authorized by all necessary
corporate action of the Borrower, require no action by or in respect of, or
filing with any governmental body, agency, or official and do not contravene,
or constitute a default under, the Certificate of Incorporation or By-Laws of
the Borrower or under any provision of applicable law or regulation to which
the Borrower is subject, or of any judgment, injunction, order, or decree,
binding upon the Borrower, except for such contraventions as will not, singly
or in the aggregate, have a material adverse effect on the ability of the
Borrower to perform its obligations under this Agreement, the Pledge Agreement
or the Note.
SECTION 5.3 Binding Effect.
This Agreement constitutes the legal, valid, binding, and enforceable
agreement of the Borrower, except as (i) the enforceability thereof may be
limited by bankruptcy, insolvency or similar laws affecting creditors' rights
generally and (ii) rights of acceleration and the availability of equitable
remedies may be limited by equitable principles of general applicability.
SECTION 5.4 Litigation.
There is no action, suit or proceeding pending against, or to the
knowledge of the Borrower, threatened against or affecting the Borrower before
any court or arbitrator or any governmental body, agency or official which
could materially adversely affect the business, financial position, results of
operations, or prospects of the Borrower or which could materially adversely
affect the ability of the Borrower to perform its obligations under this
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Agreement, the Pledge Agreement or the Note or which in any manner draws into
question the validity of this Agreement, the Pledge Agreement or the Note.
SECTION 5.5 Taxes.
The Borrower has filed all material tax returns and reports required
by law to have been filed and has paid all taxes and governmental charges
thereby shown to be due and payable.
SECTION 5.6 Debt.
Except as set forth in the financial statements delivered to the
Lender pursuant to Section 5.10, the Borrower has and will have no Debt
outstanding on a Closing Date other than (i) the Debt outstanding hereunder,
(ii) Debt that has previously been disclosed to the Lender in writing, and
(iii) Debt that will not, in the aggregate, have a material adverse effect on
the business, operations, or prospects of the Borrower.
SECTION 5.7 Title to Assets.
(a) The Borrower has legal title to or a legal and valid leasehold
interest in all property and assets owned by it on the date
hereof, and will have legal title to all property and assets
acquired by it at any time subsequent to the date hereof, free
and clear of all Liens, except Liens in favor of the Lender.
(b) Except for the security interest granted to the Lender
pursuant to this Agreement, the Borrower owns each item of the
Collateral free and clear of any and all Liens or claims of
others. No financing statement or other public notice with
respect to all or any part of the Collateral is on file or of
record in any public office, except such as have been filed in
favor of the Lender pursuant to this Agreement or the Pledge
Agreement.
SECTION 5.8 Perfected First Priority Liens.
The security interests granted pursuant to this Agreement (a)
constitute perfected security interests in the Collateral in favor of the
Lender, as collateral security for the Secured Obligations and (b) are prior to
all other Liens on the Collateral in existence on the date hereof.
SECTION 5.9 Inventory and Equipment.
The Inventory and the Equipment are kept at the locations listed on
Schedule 1.
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SECTION 5.10 Chief Executive Office.
The Borrower's chief executive office is located at 777 Main St.,
Fort Worth, Texas 76102.
SECTION 5.11 Farm Products.
None of the Collateral constitutes, or is the Proceeds of, Farm
Products.
SECTION 5.12 No Subsidiaries.
The Borrower has no Subsidiaries on the date hereof.
SECTION 5.13 Financial Information.
All financial information which has been or shall hereafter be
furnished by or on behalf of the Borrower or by any other Person at the
Borrower's direction to the Lender for the purposes of or in connection with
this Agreement present fairly the financial condition as at the dates thereof
(subject to normal year end adjustments in the case of unaudited financial
statements).
SECTION 5.14 No Material Adverse Change.
There has been no material adverse change in the business, financial
condition, operations, assets, revenues, properties, or prospects of the
Borrower taken as a whole from the financial information previously provided to
Lender.
ARTICLE VI
COVENANTS
The Borrower agrees that, so long as any amount payable hereunder
remains unpaid:
SECTION 6.1 Conduct of Business and Maintenance of Existence.
The Borrower will perform an intercompany agreement to be entered into
between the Lender and the Borrower and such activities as are necessary or
incidental thereto, and will preserve, renew and keep in full force and effect
its existence.
SECTION 6.2 Financial Information.
The Borrower will deliver to the Lender:
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(a) as soon as available, but in no event more than one hundred
twenty (120) days after the end of each fiscal year of the
Borrower, financial statements of the Borrower containing a
balance sheet and the related statements of operations and
cash flows, showing the financial condition of the Borrower at
the close of and for such year; and
(b) as soon as available, but in no event more than sixty (60)
days after the end of each of the first three quarters of each
fiscal year of the Borrower, financial statements of the
Borrower, containing a balance sheet and the related
statements of income prepared or a cash basis, showing the
financial condition of the Borrower at the close of and for
such period.
The financial statements delivered pursuant to subsections (a) and (b)
of this Section 6.2 shall be certified by the president or chief financial
officer of the Borrower as true, complete, and correct and, as to the financial
statements delivered pursuant to subsection (a) of this Section 6.2, as having
been prepared in accordance with generally accepted accounting principles.
SECTION 6.3 Compliance with Laws.
The Borrower will comply with all applicable laws, ordinances, rules,
regulations, and requirements of governmental authorities except where the
necessity of compliance therewith is contested in good faith by appropriate
proceedings or where the failure to comply therewith will not materially
adversely affect the business, operations, or financial condition of the
Borrower or the ability of the Borrower to perform its obligations under this
Agreement, the Pledge Agreement or the Note.
SECTION 6.4 Incurrence of Debt.
The Borrower will not issue, assume, guarantee, incur, or otherwise be
or become liable in respect of Debt, other than (i) Debt expressly approved by
the Lender in writing, which approval may be withheld in the Lender's sole
discretion, or (ii) non-recourse Debt financing secured by property of the
Borrower not constituting Collateral prior to or as of June 30, 1997 (the
Lender hereby agreeing to cooperate with the Borrower to subordinate or release
its Lien on such property to permit any lender of such financing to obtain a
first lien thereon).
SECTION 6.5 Limitation on Liens.
The Borrower will not create, incur, assume or suffer to exist any
Lien upon or with respect to any of its assets, whether now or hereafter
acquired, or assign or otherwise convey any right to receive income, except (i)
Liens in favor of the Lender; (ii) Liens expressly approved by the Lender,
which approval shall not be unreasonably withheld; (iii) Liens imposed by any
governmental authority for taxes, assessments or charges not yet due or which
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are being contested in good faith and by appropriate proceedings if adequate
reserves with respect thereto are maintained on the books of the Borrower in
accordance with generally accepted accounting principles, and (iv) Liens
disclosed to the Lender on or before the Closing Date that would not, in the
aggregate, have a material adverse effect on the business, operations, or
prospects of the Borrower.
SECTION 6.6 Consolidations, Mergers, and Sales of Assets.
The Borrower will not wind up, liquidate or dissolve its affairs or
convey, sell, lease or otherwise dispose of (or agree to do any of the
foregoing at any future time), whether in one or a series of transactions, all
or any substantial part of its assets, unless such transaction or series of
transactions are expressly approved by the Lender, which approval shall not be
unreasonably withheld.
SECTION 6.7 Books and Records.
The Borrower will keep books and records which accurately reflect all
of its business affairs and transactions in all material respects. The Borrower
will permit the Lender at reasonable times and intervals during normal business
hours to examine and photocopy extracts from any of its books or other
corporate records.
SECTION 6.8 Lien on Collateral.
The Borrower shall, at its sole cost and expense, perform all acts and
execute all documents requested by the Lender at any time to evidence, perfect,
maintain and enforce the Lender's security interest and the first priority
thereof in the Collateral. Upon the Lender's request, at any time and from
time to time, the Borrower shall, at its sole cost and expense, execute and
deliver to the Lender one or more financing statements (in form and substance
satisfactory to the Lender) pursuant to the Code and, where permitted by law,
the Borrower hereby authorizes the Lender to execute and file one or more
financing statements signed only by the Lender or to file a copy of this
Agreement as a financing statement.
SECTION 6.9 Restriction on Dividends.
The Borrower will not make dividend distributions to its shareholders
at any time when there exists an outstanding balance on the Loan.
SECTION 6.10 Restriction on Certain Amendments.
The Borrower will not amend its organizational documents without the
prior written consent of the Lender, which consent shall not be unreasonably
withheld.
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SECTION 6.11 Delivery of Instruments and Chattel Paper.
If any amount payable under or in connection with any of the
Collateral shall be or become evidenced by any Instrument or Chattel Paper,
such Instrument or Chattel Paper shall be immediately delivered to the Lender,
duly indorsed in a manner satisfactory to the Lender, to be held as Collateral
pursuant to this Agreement.
SECTION 6.12 Maintenance of Insurance.
The Borrower will maintain, with financially sound and reputable
companies, insurance policies (1) insuring the Inventory and Equipment against
loss by fire, explosion, theft and such other casualties as may be reasonably
satisfactory to the Lender, such policies to be in such form and amounts and
having such coverage as may be reasonably satisfactory to the Lender, with
losses payable to the Borrower and the Lender as their respective interests may
appear.
(a) All such insurance shall (1) provide that no cancellation,
material reduction in amount or material change in coverage
thereof shall be effective until at least 30 days after
receipt by the Lender of written notice thereof, (2) name the
Lender as an insured party and (3) be reasonably satisfactory
in all other respects to the Lender.
(b) The Borrower shall deliver to the Lender a report of a
reputable insurance broker with respect to such insurance in
each calendar year and such supplemental reports with respect
thereto as the Lender may from time to time reasonably
request.
SECTION 6.13 Changes in Locations, Name, etc.
The Borrower will not unless it shall have given the Lender at least
30 days prior written notice of such change (or, in the case of Inventory and
Equipment, at least 10 days prior written notice, to the extent that the
Borrower has taken such action as reasonably may be required of it to maintain
the continuous perfection of the Lender's security interest in such Inventory
or Equipment, as the case may be):
(a) permit any of the Inventory (other than goods-in-transit and
immaterial amounts of goods in temporary locations in the
ordinary course of business) or Equipment to be kept at a
location other than those listed on Schedule 1;
(b) change the location of its chief executive office from that
specified in subsection 5.10; or
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(c) change its name, identity or corporate structure to such an
extent that any financing statement filed by the Lender in
connection with this Agreement would become seriously
misleading.
SECTION 6.14 Further Identification of Collateral.
The Borrower will furnish to the Lender from time to time statements
and schedules further identifying and describing the Collateral and such other
reports in connection with the Collateral as the Lender may reasonably request,
all in reasonable detail.
SECTION 6.15 Notices.
The Borrower will advise the Lender promptly, in reasonable detail, of
(a) any Lien (other than security interests created hereby or Liens permitted
under this Agreement) on any of the Collateral and (b) the occurrence of any
other event which could reasonably be expected to have a material adverse
effect on the aggregate value of the Collateral or on the security interests
created hereby.
SECTION 6.16 Additional Collateral.
With respect to any Person other than Charter Behavioral Health
Systems, LLC (being specifically excluded) that, subsequent to the Closing
Date, becomes a Subsidiary, the Borrower will promptly cause such new
Subsidiary to (i) execute and deliver to the Lender a guaranty of the Loan in
form and substance satisfactory to the Lender, and a new pledge agreement or
such amendments to the existing Pledge Agreement as the Lender shall deem
necessary or reasonably advisable to grant to the Lender, for the benefit of
the Lender, a Lien on the capital stock of such Subsidiary which is owned by
the Borrower or any of its Subsidiaries, (ii) deliver to the Lender the
certificates representing such capital stock, together with undated stock
powers executed and delivered in blank by a duly authorized officer of the
Borrower or such Subsidiary, as the case may be, (iii) take all actions
necessary or advisable to grant a security interest to the Lender in the
property and assets of such Subsidiary, including, without limitation, the
filing of financing statements in such jurisdictions as may be requested by the
Lender and the execution and delivery by such Subsidiary of a security
agreement in a form acceptable to the Lender.
ARTICLE VII
DEFAULTS
SECTION 7.1 Events of Default.
If one or more of the following events ("Events of Default") shall
have occurred and be continuing:
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(a) except as permitted pursuant to Section 2.2(b), the Borrower
shall fail to pay within five Business Days of the due date
any principal or interest on the Loan;
(b) any representation or warranty made by the Borrower hereunder
or in any certificate furnished by or on behalf of the
Borrower shall be incorrect when made in any material respect;
(c) the Borrower shall fail to observe or perform the provisions
of Section 6.9 hereof for five Business Days;
(d) the Borrower shall fail to observe or perform any covenant or
agreement contained in this Agreement, the Pledge Agreement,
the Note (other than those covered by clause (a), (b) or (c)
above), or any other Loan Document for 30 days (or, with
respect to Section 6.2 of this Agreement, for 30 days after
written notice thereof has been given to the Borrower by the
Lender); provided however, if such default is capable of cure
and the Borrower is diligently proceeding to cure such
default, the cure period in this subsection (d) shall be
extended for such additional time, not to exceed 30 days, as
is reasonably necessary to complete such cure;
(e) the Borrower shall fail to make any payment in respect of any
Material Debt other than the Debt of the Borrower under this
Agreement and the Note when due or within any applicable grace
period;
(f) the Borrower shall commence a voluntary case or other
proceeding seeking liquidation, reorganization, or other
relief with respect to itself or its debts under any
bankruptcy, insolvency, or other similar law now or hereafter
in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian, or other similar official of it or any
substantial part of its property, or shall consent to any such
relief or to the appointment of or taking possession by any
such official in an involuntary case or other proceeding
commenced against it, or shall make a general assignment for
the benefit of creditors, or shall fail generally to pay its
debts as they become due, or shall take any action to
authorize any of the foregoing;
(g) an involuntary case or other proceeding shall be commenced
against the Borrower seeking liquidation, reorganization,
rehabilitation, conservation, or other relief with respect to
it or its debts under any bankruptcy, insolvency or other
similar law now or hereafter in effect or seeking the
appointment of a trustee, receiver, liquidator, custodian,
rehabilitator, conservator, or other similar official of it or
any substantial part of its property, and such involuntary
case or other proceeding shall remain undismissed and unstayed
for a period of 120 days; or an order for relief shall be
entered against the Borrower
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<PAGE> 25
under the federal bankruptcy laws or any state insolvency laws
as now or hereafter in effect;
(h) judgment or order for the payment of money in excess of
$500,000 shall be rendered against the Borrower and such
judgment or order shall continue unsatisfied, unstayed and
unbonded for a period of 30 days; provided, however that a
judgment or order fully covered by insurance, which coverage
has not been disputed by the insurer, shall not be considered
a Default;
then, and in every such event, the Lender may, by notice to the
Borrower declare the Note (together with accrued interest thereon) to
be, and the Note shall thereupon become, immediately due and payable
without presentment, demand, protest, or other notice of any kind, all
of which are hereby waived by the Borrower; provided that in the case
of any of the Events of Default specified in clause (e) or (f) above
(each, a "Bankruptcy Event of Default"), without any notice to the
Borrower or any other act by the Lender, the Note (together with
accrued interest thereon) shall become immediately due and payable
without presentment, demand, protest, or other notice of any kind, all
of which are hereby waived by the Borrower.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.1 Notices.
All notices, requests and other communications to any party hereunder
shall be in writing (including bank wire, telex, facsimile transmission or
similar writing) and shall be given to such party: (i) in the case of the
Borrower or the Lender at their respective addresses, telex numbers or
facsimile numbers set forth on the signature pages hereof or (ii) in the case
of any party, such other address, telex number or facsimile number as such
party may hereafter specify for the purpose by notice to the other party in
accordance with this Section. All notices shall be effective when received.
SECTION 8.2 Expenses; Indemnification.
(a) The Borrower shall pay (i) all out-of-pocket expenses
reasonably incurred by the Lender, including reasonable fees
and disbursements of counsel in connection with any waiver or
consent hereunder or any amendment hereof or any Default or
alleged Default hereunder, and (ii) if an Event of Default
occurs, all out-of-pocket expenses incurred by the Lender,
including reasonable fees and disbursements of counsel in
connection with such Event of Default and collection,
bankruptcy, insolvency, and other enforcement proceedings
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<PAGE> 26
resulting therefrom. The Borrower shall indemnify the Lender
against any transfer taxes, documentary taxes, assessments or
charges made by any governmental authority by reason of the
execution and delivery of this Agreement, the Pledge Agreement
or the Note.
(b) The Borrower agrees to indemnify the Lender and hold the
Lender harmless from and against any and all liabilities,
losses, damages, costs and expenses of any kind (other than
general overhead and administrative expenses), including,
without limitation, the reasonable fees and disbursements of
counsel, which may be incurred by the Lender in connection
with any investigative, administrative, or judicial proceeding
(whether or not the Lender shall be designated a party
thereto) relating to or arising out of this Agreement, the
Pledge Agreement or the Note or any actual or proposed use of
proceeds of the Loan hereunder; provided that the Lender shall
not have the right to be indemnified hereunder for (i) any
proceeding against the Lender by any governmental authority
charged with the supervision of the Lender or (ii) its own
gross negligence or willful misconduct as determined by a
court of competent jurisdiction.
SECTION 8.3 Amendments and Waivers.
Any provision of this Agreement, the Pledge Agreement, the Note or any
other Loan Document may be amended or waived if, but only if, such amendment or
waiver is in writing and is signed by the Lender and the Borrower.
SECTION 8.4 Successors and Assigns.
The provisions of this Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and assigns,
except that the Borrower may not assign or otherwise transfer any of its rights
under this Agreement without the prior written consent of the Lender. The
purchaser, assignee, transferee, or pledgee of any of the Lender's rights under
the Lender's security interest hereunder shall forthwith become vested with and
entitled to exercise all the rights, powers, and remedies given under this
Agreement to the Lender, as if said purchaser, assignee, transferee, or pledgee
were originally named as secured party herein.
SECTION 8.5 Governing Law; Submission to Jurisdiction.
THIS AGREEMENT, THE PLEDGE AGREEMENT, THE NOTE AND THE OTHER LOAN
DOCUMENTS SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
TEXAS WITHOUT GIVING EFFECT TO THE CHOICE OF LAW RULES THEREOF. The Borrower
hereby submits to the
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<PAGE> 27
nonexclusive jurisdiction of the United States District Court for the Northern
District of Texas and of any Texas state court for purposes of all legal
proceedings arising out of or relating to this Agreement or the transactions
contemplated hereby. The Borrower irrevocably waives, to the fullest extent
permitted by law, any objection which it may now or hereafter have to the
laying of the venue of any such proceeding brought in such a court and any
claim that any such proceeding brought in such a court has been brought in an
inconvenient forum.
SECTION 8.6 Counterparts; Integration.
This Agreement may be signed in any number of counterparts, each of
which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument. This Agreement constitutes the
entire agreement and understanding among the parties hereto and supersedes any
and all prior agreements and understandings, oral or written, relating to the
subject matter hereof.
SECTION 8.7 WAIVER OF JURY TRIAL.
THE BORROWER AND THE LENDER HEREBY IRREVOCABLY WAIVE ANY AND ALL RIGHT
TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. This waiver of right to a
trial by jury is separately given, knowingly and voluntarily, by the Borrower
and the Lender, and this waiver is intended to encompass individually each
instance and each issue as to which the right to a trial by jury would
otherwise accrue. The Borrower and the Lender are hereby authorized and
requested to submit this Agreement to any court having jurisdiction over the
subject matters and the parties hereto, so as to serve as conclusive evidence
of the parties' herein contained waiver of the right to trial by jury.
Further, the Borrower and the Lender hereby certify that no representative,
attorney or agent of any other party has represented, expressly or otherwise,
to the Borrower, or the Lender that any other party will not seek to enforce
this waiver of right to trial by jury provision.
SECTION 8.8 Termination; Release.
Until the Termination Date, this Agreement shall be a continuing
agreement, shall remain in full force and effect. After the Termination Date,
this Agreement shall terminate, and the Lender, at the request and expense of
the Borrower, will execute and deliver to Borrower a proper instrument or
instruments acknowledging the satisfaction and termination of this Agreement,
and will duly assign, transfer and deliver to the Borrower (without recourse
and without any representation or warranty) at the expense of the Lender the
Collateral if in the possession of the Lender or its agents and not theretofore
sold or otherwise applied or released pursuant to this Agreement).
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<PAGE> 28
SECTION 8.9 Effect of Headings.
The Article and Section headings herein are for convenience of
reference only and shall not affect the construction hereof.
SECTION 8.10 Severability of Provisions.
Any provision of this Agreement which is prohibited or unenforceable
in any jurisdiction shall not invalidate the remaining provisions hereof or
affect the validity or enforceability of such provisions in any other
jurisdiction.
SECTION 8.11 Application of Proceeds.
The parties agree that the Lender shall have the right to apply the
proceeds of any Collateral under this Agreement or the Line of Credit Credit
Agreement, in its sole discretion, against the Secured Obligations under this
Agreement or the Secured Obligations under the Line of Credit Credit Agreement.
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<PAGE> 29
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective authorized officers as of the day and year
first above written.
CRESCENT OPERATING, INC.
By:
-----------------------------------
Name:
Title:
Notice Address:
--------------------------------------
--------------------------------------
--------------------------------------
Facsimile:
----------------------------
CRESCENT REAL ESTATE EQUITIES
LIMITED PARTNERSHIP
By: Crescent Real Estate Equities,
Ltd., its general partner
By:
-----------------------------------
Name:
Title:
Notice Address:
777 Main Street
Suite 2100
Fort Worth, Texas 76102
Facsimile: (817) 878-0429
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<PAGE> 30
Exhibits and Schedules:
Exhibit A: Application for Advance
Exhibit B: Note
Exhibit C: Pledge Agreement
Exhibit D: Certificate
Schedule 1: Location of the Inventory and Equipment
<PAGE> 31
EXHIBIT A
APPLICATION FOR ADVANCE
This Application for Advance is submitted by the undersigned to
Crescent Real Estate Equities Limited Partnership (the "Lender") pursuant to
that certain Amended and Restated Credit and Security Agreement, dated as of
May 21, 1997, between the Lender and the undersigned (the "Credit Agreement").
Each capitalized term used herein and not otherwise defined shall have the
respective meaning ascribed to such term in the Credit Agreement.
1. The undersigned hereby requests an Advance under the Credit
Agreement in the amount of: ($________________.00).
2. The undersigned hereby requests that such Advance be made on:
_______________, 199_.
3. The undersigned hereby represents and warrants to the Lender
as follows:
(a) The undersigned is not in Default under the Credit Agreement.
(b) No Event of Default has occurred or is continuing.
(c) Both before and after giving effect to the advance requested
hereby, the representations and warranties set forth in
Section 3.1(b) of the Credit Agreement are true and correct,
with the same effect as if made on the date hereof.
Unless the undersigned has otherwise notified the Lender in
writing prior to the Closing Date and the making of the advance requested
hereby, each of such representations and warranties is true and correct as of
the date hereof and as of the Closing Date.
CRESCENT OPERATING, INC.
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
<PAGE> 32
May 21, 1997
AMENDED AND RESTATED
NOTE
$35,900,000.00
FOR VALUE RECEIVED, CRESCENT OPERATING, INC.., a Delaware corporation
("Borrower") promises to pay to CRESCENT REAL ESTATE EQUITIES LIMITED
PARTNERSHIP, a Delaware limited partnership ("Lender"), at 777 Main Street,
Suite 2100, Fort Worth, Texas 76102, the principal sum of Thirty Five Million
Nine Hundred Thousand and No/100 Dollars ($35,900,000.00), with interest on the
principal balance from time to time remaining unpaid at the rates hereinafter
provided.
The Borrower promises to pay interest on the unpaid principal balance
hereof from the date hereof until paid in full pursuant to the Amended and
Restated Credit and Security Agreement, dated as of May 21, 1997, between the
Borrower and the Lender (as the same may be amended, modified or supplemented
from time to time, the "Credit Agreement"). The Borrower promises to pay the
aggregate outstanding principal amount of the Loan together with interest
thereon, on the dates, in the amounts and at the rate or rates provided in the
Credit Agreement; provided that the interest payable shall not exceed the
maximum rate permitted by applicable law (the "Maximum Rate"). Interest on the
principal hereof from time to time remaining unpaid and, to the extent
permitted by applicable law, interest on the unpaid interest, shall bear
interest from and after an Event of Default at the Default Rate provided that
in no event shall the Default Rate be more than the Maximum Rate.
This Note amends and restates, and supersedes, in its entirety, that
Note dated May 8, 1997 from Borrower to Lender in the maximum aggregate
principal amount of Thirty Million Four Hundred Thousand Dollars ($30,400,000).
This note is the Note referred to in the Credit Agreement. This Note
and the holder hereof are entitled to all of the benefits provided for thereby
or referred to therein. Reference is hereby made to the Credit Agreement for a
statement of such benefits. Terms defined in the Credit Agreement are used
herein with the same meanings. Reference is made to the Credit Agreement for
provisions for the acceleration of the maturity hereof.
This Note shall be payable as provided in the Credit Agreement.
Upon the occurrence of any Event of Default (after the giving of any
notice required in the Credit Agreement and the expiration of any applicable
grace periods provided for in the Credit Agreement), all amounts then remaining
unpaid on this Note shall become immediately due and payable, and the holder
hereof shall have all rights and remedies of Lender under the Credit Agreement
and other Loan Documents. The failure to exercise the option to accelerate the
maturity of this Note upon the happening of any one or more of the Events of
Default hereunder shall not constitute a waiver of the right with respect to
such uncured
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<PAGE> 33
default or any other event of uncured default hereunder or under any other of
the Loan Documents. The remedies of the holder hereof, as provided in the Note
and in any other of the Loan Documents, shall be cumulative and concurrent and
may be pursued separately, successively or together, as often as occasion
therefor shall arise, at the sole discretion of the holder. The acceptance by
the holder hereof of any payment under this Note which is less than payment in
full of all amounts due and payable at the time of such shall not constitute a
waiver of or impair, reduce, release, or extinguish any of the rights or
remedies of the holder hereof to exercise the foregoing option or any other
option granted to the holder in this Note or in any other of the Loan
Documents, at that time or at any subsequent time, or nullify any prior
exercise of any such option.
The undersigned and all other parties now or hereafter liable for the
payment hereof, whether as endorser, surety, or otherwise, except as provided
in the Credit Agreement, severally waive demand, presentment, notice of
dishonor, notice of intention to accelerate the indebtedness evidenced hereby,
notice of the acceleration of the maturity hereof, diligence in collecting,
grace, notice and protest, and consent to all extensions which from time to
time may be granted by the holder hereof and to all partial payments hereon,
whether before or after maturity.
If this Note is not paid when due, whether at maturity or by
acceleration, or if it is collected through a bankruptcy, or other court,
whether before or after maturity, the undersigned agrees to pay all costs of
collection, including, but not limited to, reasonable attorneys' fees and
expenses incurred by the holder hereof.
All agreements between the undersigned and the holder hereof, whether
now existing or hereafter arising and whether written or oral, are hereby
limited so that in no contingency, whether by reason of acceleration of the
maturity hereof or otherwise, shall the interest contracted for, charged,
received, paid, or agreed to be paid to the holder hereof exceed the maximum
amount permissible under applicable law. If from any circumstance the holder
hereof shall ever receive anything of value deemed interest by applicable law
in excess of the maximum lawful amount, an amount equal to any excess interest
shall be applied to the reduction of the principal hereof and not to the
payment of interest, or if such excess interest exceeds the unpaid balance of
principal hereof, such excess shall be refunded to the undersigned. All
interest paid or agreed to be paid to the holder hereof shall, to the extent
permitted by applicable law, be amortized, prorated, allocated, and spread
throughout the full period until payment in full of the principal so that the
interest hereon for such full period shall not exceed the maximum amount
permitted by applicable law. This paragraph shall control all agreements
between the undersigned and the holder hereof.
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<PAGE> 34
The loan transaction evidenced hereby shall not be governed by, or be
subject to, Chapter 15 of the Texas Credit Code (Title 79, Revised Civil
Statutes of Texas, 1925, as amended).
EXCEPT WHERE FEDERAL LAW IS APPLICABLE (INCLUDING, WITHOUT LIMITATION,
ANY FEDERAL USURY CEILING OR OTHER FEDERAL LAW WHICH, FROM TIME TO TIME, IS
APPLICABLE TO THE INDEBTEDNESS EVIDENCED HEREIN AND WHICH PREEMPTS STATE USURY
LAWS), THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
TEXAS AND THE LAWS OF THE UNITED STATES APPLICABLE TO TRANSACTIONS IN SUCH
STATE.
CRESCENT OPERATING, INC.
By:
-----------------------------------
Name:
Title:
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<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in this
Registration Statement of our report dated April 3, 1997, on the balance sheet
of Crescent Operating, Inc. and to all references to our Firm included in this
Registration Statement.
Dallas, Texas
June 2, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in this
Registration Statement of our report dated May 14, 1997, on the combined
financial statements of Carter-Crowley Asset Group and to all references to our
Firm included in this Registration Statement.
Dallas, Texas
June 2, 1997
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in this
Registration Statement of our report dated November 7, 1996, on the Provider
Segment of Magellan Health Services, Inc. and to all references to our Firm
included in this Registration Statement.
Atlanta, Georgia
June 2, 1997
