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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): August 31, 1997
CRESCENT OPERATING, INC.
(Exact name of Registrant as specified in its Charter)
Delaware 333-25223 75-2701931
(State of Organization) (Commission File Number) (IRS Employer
Identification Number)
777 Main Street
Fort Worth, Texas 76102
(Address of Principal (Zip Code)
Executive Offices)
(817) 877-0477
(Registrant's telephone number, including area code)
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
BACKGROUND
On August 31, 1997 and effective as of July 31, 1997, Crescent Operating,
Inc. (the "Company") entered into a series of transactions (the "RoseStar
Transactions"), pursuant to which the Company acquired for $2 million in cash
the following assets: (i) 100% of the membership interests in RoseStar
Management LLC ("RoseStar"); and (ii) all of the common stock, $.01 par value,
of each of RSSW Corp. ("RSSW") and RSCR Arizona Corp. ("RSCR"), affiliates of
RoseStar. The acquired assets previously were owned by each of Gerald W.
Haddock, John C. Goff and Sanjay Varma (collectively, the "Sellers") in the
ratios of 4.5%, 4.5% and 91%, respectively. Mister Haddock is the President,
Chief Executive Officer and a director, and Mr. Goff is Vice Chairman and a
director, of each of the Company and Crescent Real Estate Equities Company
("Crescent"). Sanjay Varma, together with his wife, Johanna Varma, are the
principals of The Varma Group, Inc. (the "Varma Group"), a corporation that
provides asset management services to RoseStar and certain of its subsidiaries
in connection with their leasehold interests in certain hotel leases.
Prior to the consummation of the RoseStar Transactions, the Company
obtained a valuation of RoseStar, RSSW and RSCR from an independent national
accounting firm. After considering the valuation and terms of the RoseStar
Transactions, including the $2,000,000 aggregate purchase price, the
disinterested directors of the Company determined that the RoseStar
Transactions were fair to the Company and in the best interest of its
shareholders.
ROSESTAR
RoseStar is a Texas limited liability company which owns (i) a 99%
non-managing membership interest in RoseStar Southwest, LLC, a Texas limited
liability company ("RoseStar Southwest"), (ii) a 99% managing membership
interest in Canyon Ranch Leasing, LLC, an Arizona limited liability company
("Canyon Ranch") and (iii) 100% of the membership interests in Wine Country
Hotel, LLC, a Delaware limited liability company, doing business as Vintage
Resorts ("Vintage"). Immediately prior to the consummation of the RoseStar
Transactions, and effective as of July 31, 1997, RoseStar acquired its interest
in Vintage from the Sellers for a purchase price of $25,000 cash. The
properties and business of RoseStar and its subsidiaries consist exclusively of
lessee interests in certain hotel and resort properties within the United
States.
LESSEE INTERESTS OF ROSESTAR AND ITS SUBSIDIARIES
RoseStar is lessee under a lease agreement (the "Marriott Lease") with
Crescent Real Estate Equities Limited Partnership, a subsidiary of Crescent
(the "Operating Partnership"), pursuant to which RoseStar leases from the
Operating Partnership, on a triple net basis, a hotel and certain related
assets located in Denver, Colorado. The Operating Partnership assigned to
RoseStar substantially all of its interest in and to third party contracts and
agreements relating to
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the leased property for the 120-month term of the Marriott Lease which expires
on June 30, 2005. The Marriott Lease provides for the payment of base rent in
amounts ranging from approximately $4.3 million to $4.8 million per year, and
percentage rent of 4% of gross receipts from the sale of food and beverages and
22.5% of gross receipts from room rentals for each calendar month in which
gross receipts from food and beverage sales or room rentals at the property
exceed a floor amount to be determined in accordance with a formula based on
actual monthly gross receipts and estimated annual gross receipts. Throughout
the term of the Marriott Lease, RoseStar must maintain a net worth of at least
$200,000.
RoseStar Southwest is the lessee of the Hyatt Regency Beaver Creek in
Avon, Colorado under a lease with Crescent Real Estate Funding II ("Funding
II"), a subsidiary of Crescent, as lessor. Pursuant to the lease agreement (the
"Beaver Creek Lease"), Funding II has assigned to RoseStar Southwest
substantially all of its interest in and to third party contracts and
agreements relating to the operation of the Hyatt Regency property. RoseStar
Southwest leases the hotel and certain related assets on a triple net basis and
will pay base rent of between approximately $3.2 million and $3.9 million per
year during the 120-month term of the lease which expires on December 31, 2004.
The lease also provides for the quarterly payment of percentage rent of 2.5% of
gross receipts from sales of food and beverages and 17.5% of gross receipts from
room rentals for each calendar month in which gross receipts from the sale of
food and beverages or room rentals at the property exceed a floor amount to be
determined in accordance with a formula based on actual monthly gross receipts
and estimated annual gross receipts. The annual floor amounts for gross receipts
from the sale of food and beverages and room rentals are $3.0 million and $9.3
million, respectively. RoseStar Southwest is required to maintain a net worth
of at least $200,000 throughout the lease term.
RoseStar Southwest is also the lessee of the Hyatt Regency Albuquerque
in Albuquerque, New Mexico under a separate lease agreement (the "Albuquerque
Lease") with Funding II as lessor. The provisions of the Albuquerque Lease are
substantially similar to those of the Beaver Creek Lease, with the exception
that RoseStar Southwest is obligated under the Albuquerque Lease to pay annual
base rent of between approximately $3.3 million and $3.6 million and the annual
floor amounts for gross receipts from the sale of food and beverages and room
rentals are $2.0 million and $6.0 million, respectively.
Canyon Ranch is the lessee of Canyon Ranch-Tucson under a lease with
the Operating Partnership as lessor (the "Canyon Ranch Lease"). Canyon Ranch
leases the Canyon Ranch-Tucson hotel and related assets on a triple net basis
and will pay base rent in amounts ranging from approximately $3.7 million to
$4.3 million per year during the 120-month term which expires on June 30, 2006.
The Canyon Ranch Lease also provides for the payment of percentage rent ranging
from 8.5% to 20% for each calendar year in which gross receipts from the
operation of the Canyon Ranch-Tucson property exceed amounts ranging from $29.0
million to $40.0 million; provided however, that in no event will percentage
rent payments exceed certain ceiling amounts to be determined in accordance with
a formula based on estimated and actual annual gross receipts. Pursuant to the
Canyon Ranch Lease, the Operating Partnership has assigned to Canyon Ranch
substantially all of its interest in and to third party contracts and
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agreements relating to the operation of the Canyon Ranch-Tucson property.
Throughout the term of the lease, Canyon Ranch must maintain a net worth of at
least $200,000.
Vintage is lessee under a lease agreement (the "Sonoma Lease") with
the Operating Partnership pursuant to which Vintage leases the Sonoma Mission
Inn & Spa on a triple net basis during a 120-month term which expires on
October 31, 2006. Pursuant to the Sonoma Lease, the Operating Partnership has
assigned to Vintage substantially all of its interest in and to third party
contracts and agreements relating to the operation of the Sonoma Mission Inn
property. The Sonoma Lease provides for annual base rent payments in amounts
ranging from approximately $5.3 million to $5.7 million and the quarterly
payment of percentage rent of 30% of monthly gross hotel receipts (from sources
other than the sale of food and beverages) in excess of a floor amount
determined in accordance with a formula based on actual and estimated gross
hotel receipts, and 10% of gross receipts from the sale of food and beverages.
The annual floor amount for gross hotel receipts is $17.5 million and no
percentage rent will be paid during the last two months of the lease term.
Vintage is required to maintain a net worth of at least $200,000 throughout the
lease term.
Vintage is also the lessee of the Canyon Ranch-Lenox in Lenox,
Massachusetts, under a separate lease agreement (the "Lenox Lease") with
Crescent Real Estate Funding VI, L.P., a subsidiary of Crescent, as lessor. The
provisions of the Lenox Lease are substantially similar to those of the Sonoma
Lease, with the exception that Vintage is obligated under the Lenox Lease to
pay monthly base rent of $200,000 and percentage rent ranging from 15% to 28%
for each calendar year in which gross receipts from the operation of the Canyon
Ranch-Lenox property exceed amounts ranging from $20.0 million to $35.0
million; provided however, that in no event will percentage rent exceed a
ceiling amount to be determined in accordance with a formula based on estimated
and actual annual gross receipts.
ASSET MANAGEMENT AGREEMENTS BY ROSESTAR AND ITS SUBSIDIARIES
Each of RoseStar, RoseStar Southwest and Vintage (the "Lessees") is a
party to separate asset management agreements (the "Asset Management
Agreements") with The Varma Group, Inc. (the "Varma Group"), pursuant to which
the Varma Group has been engaged to be the exclusive manager of certain of the
Lessees' assets, including their interests in the leases discussed in the
preceding paragraphs, other than the Lenox Lease (the "Leases"). Under the
Asset Management Agreements, the Varma Group's duties include, among others:
(i) obtaining required government licenses, permits, consents and approvals;
(ii) obtaining required consents and approvals of associations or other private
entities or persons necessary for the operation of the hotel properties and
related assets; (iii) preparing operating and capital budgets for the leased
properties; (iv) assembling, organizing and maintaining records of the
properties' operations and activities; (v) preparing written progress reports
reflecting significant developments affecting the properties; and (vi)
formulating policies, strategies and tactics for carrying out the Lessees'
duties under the Leases.
As consideration for its services under the Asset Management
Agreements (which expire on July 31, 2002), the Varma Group will receive an
annual base fee of $165,000 per hotel, plus annual cost of living adjustments.
In addition, the Varma Group will be considered for a cash
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bonus or other remuneration in the event its performance under the individual
Asset Management Agreements so warrants in the discretion of the Lessee, and
the Varma Group will be entitled to reimbursement of travel expense in excess
of $20,900 per property per year. The Asset Management Agreements may be
terminated without cause by any party upon giving prior notice as specified in
the Asset Management Agreements. In the event a Lessee exercises it rights to
terminate an Asset Management Agreement without cause before January 31, 2000,
however, such Lessee must deliver, or cause to be delivered, to the Varma
Group, a termination fee in an amount to be determined in accordance with a
formula based on the value of the unexpired contract.
ACQUISITION OF STOCK OF RSSW AND RSCR
As mentioned above, the Company also purchased all of the common stock,
$.01 par value of each of RSSW and RSCR. RSSW owns a 1% managing interest in
RoseStar Southwest and RSCR owns a 1% non-managing interest in Canyon Ranch.
Such limited liability company holdings constitute all of the assets of RSSW
and RSCR.
FUNDING FOR THE ROSESTAR TRANSACTIONS
The purchase price of the acquired assets was funded with proceeds of
the Company's $15 million short-term unsecured bank line of credit provided by
NationsBank of Texas, N.A. The line of credit, which was obtained on August 27,
1997, has a one-year term (subject to the Company's right to renew the term for
an additional one-year period) and bears interest at the LIBOR rate plus 1%.
The primary source of repayment of the line of credit is anticipated to
be a future equity offering, which the Company has agreed to use its best
efforts to complete prior to maturity. The Company has obtained an agreement
from Richard Rainwater, Gerald Haddock and John Goff (each a stockholder,
director and/or officer of the Company) which provides that, if the Company
does not raise from an equity offering funds sufficient to pay the bank debt
when due (a "Successful Offering"), each of Messrs. Rainwater, Haddock and Goff
jointly and severally agree to purchase the number of additional shares of the
Company's common stock necessary to fund repayment of the line of credit (the
"Support Payment"). The Company has agreed to sell such additional shares of
common stock to Messrs. Rainwater, Haddock, and Goff at a price equal to the
average closing bid price of the Company's common stock 10 days immediately
preceding the date NationsBank notifies Messrs. Rainwater, Haddock and Goff
that the Company has not completed a Successful Offering prior to maturity.
The financial statements required to be filed with this Form 8-K,
pursuant to Item 7 of Form 8-K, will be filed by the Company in a Form 8-K/A
within 60 days after the filing of this Form 8-K, in accordance with Item
7(a)(4) and Item 7(b)(2) of Form 8-K.
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: September 15, 1997 CRESCENT OPERATING, INC.
By: /s/ JEFFREY L. STEVENS
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Jeffrey L. Stevens
Treasurer, Chief Financial
Officer and Secretary
