<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): July 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)
306 West 7th Street
Suite 1025
Fort Worth, Texas 76102
(Address of Principal Executive (Zip code)
offices)
(817) 339-1010
(Registrant's telephone number, including area code)
<PAGE> 2
On August 14, 1997, Crescent Operating, Inc. (the "Company" or "Crescent
Operating") filed a Form 8-K dated July 31, 1997, containing a description of
(i) The Woodlands Operating transaction (pursuant to which WOCOI Investment
Company, a subsidiary of the Company, aquired a 42.5% general partner interest
in The Woodlands Operating Company, L.P.("TWOC")) and (ii) a then-pending
investment in The Woodlands Land Company, Inc. ("LandCo") in Item 2. This
Form 8-K/A amends the previously filed Form 8-K to reflect the Company's
acquisition of an interest in LandCo and to include the financial statements
and pro forma disclosure required by Item 7 of Form 8-K. TWOC and LandCo are
collectively referred to as "The Woodlands Entities" throughout this document.
<PAGE> 3
Page 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On September 29, 1997, Crescent Operating, Inc. (the "Company") acquired from
Crescent Real Estate Equities Limited Partnership ("Crescent Operating
Partnership"), for approximately $2.0 million (the "Purchase Price"), all of
the voting stock, representing a 5% equity interest in The Woodlands Land
Company, Inc. ("LandCo"). The Purchase Price for the Company's interest in
LandCo represents 5% of the total amount invested in LandCo by Crescent
Operating Partnership. The Company also will reimburse Crescent Operating
Partnership for the expenses, legal fees, and transaction costs incurred by
Crescent Operating Partnership in connection with Crescent Operating
Partnerships previous investment in LandCo's voting stock.
LandCo is a newly-formed residential development corporation which was formerly
wholly owned by Crescent. LandCo holds a 42.5% general partner interest in, and
is the managing general partner of, The Woodlands Land Development Company,
L.P. ("Landevco"), a Texas limited partnership in which certain Morgan Stanley
funds hold a 57.5% partner interest. LandCo's general partner interest in
Landevco is subject to adjustment to up to 52.5%, in the event LandCo achieves
certain levels of profitability and the Morgan Stanley funds receive certain
rates of return on their investment in Landevco. Landevco primarily owns (i)
approximately 6,400 acres of land capable of supporting the development of more
than 20,000 lots for single-family homes, (ii) approximately 2,500 acres
capable of supporting more than 21.5 million net rentable square feet of
commercial development, (iii) a realty office, (iv) contract rights relating to
the operation of its property, (v) an athletic center, (vi) a 49% interest in a
mortgage company and (vii) a 50% interest in a title company.
Funds used to acquire the Company's interest in LandCo were obtained with
proceeds from the $20.4 million line of credit (the "Line of Credit") provided
by Crescent Operating Partnership. The Line of Credit bears interest at the
rate of 12% per annum and is payable on an interest only basis during its term,
which expires on the later of (i) May 21, 2002 or (ii) five years after the
last draw under the Line of Credit. Draws may be made under the Line of Credit
until June 22, 2002. The Line of Credit is a recourse obligation and amounts
outstanding thereunder are or will be secured to the extent not prohibited by
preexisting arrangements, by a first lien on the assets owned by the Company
now or in the future (other than assets acquired after June 30, 1997, which may
be pledged in the future to secure nonrecourse loans).
<PAGE> 4
PAGE 3
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) FINANCIAL STATEMENTS UNDER RULE 3-05 OF REGULATION S-X
The Woodlands Corporation and subsidiaries
Report of Independent Public Accountants.
Consolidated Balance Sheets as of January 31, 1997 and 1996
(audited) and July 31, 1997 (unaudited).
Consolidated Statements of Earnings (Loss) for the years ended
January 31, 1997 and 1996 (audited) and the six months ended
July 31, 1997 and 1996 (unaudited).
Consolidated Statements of Changes in Stockholder's Equity for
the years ended January 31, 1997 and 1996 (audited) and the six
months ended July 31, 1997 (unaudited).
Consolidated Statements of Cash Flows for the years ended January
31, 1997 and 1996 (audited) and the six months ended July 31, 1997
and 1996 (unaudited).
Notes to Consolidated Financial Statements.
(b) PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
Crescent Operating, Inc.
Pro Forma Consolidated Balance Sheet as of June 30, 1997
and notes thereto.
Pro Forma Consolidated Statement of Operations for the year
ended December 31, 1996 and notes thereto.
Pro Forma Consolidated Statement of Operations for the six
months ended June 30, 1997 and notes thereto.
The Woodlands Entities
Pro Forma Combined Statement of Operations for the year
ended January 31, 1997 and notes thereto.
Pro Forma Combined Statement of Operations for the six
months ended July 31, 1997 and notes thereto.
(c) EXHIBITS
The following is a list of all exhibits filed as a part of this
Form 8-K/A
<PAGE> 5
Page 4
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<S> <C>
23.01 Consent of Arthur Andersen LLP, Independent Public
Accountants, dated October 10, 1997 (filed herewith).
</TABLE>
<PAGE> 6
Page 5
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: October 14, 1997 CRESCENT OPERATING, INC.
By: /s/ JEFFREY L. STEVENS
----------------------
Jeffrey L. Stevens
Treasurer, Chief Financial
Officer and Secretary
<PAGE> 7
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
The Woodlands Corporation and Subsidiaries
Report of Independent Public Accountants..................................................................F-2
Consolidated Balance Sheets as of January 31, 1997 and 1996 (audited) and July 31, 1997
(unaudited)...............................................................................................F-3
Consolidated Statements of Earnings (Loss) for the year ended January 31, 1997 and 1996 (audited)
and the six months ended July 31, 1997 and 1996 (unaudited)...............................................F-4
Consolidated Statement of Changes in Stockholder's Equity for the years ended
January 31, 1997 and 1996 (audited) and the six months ended July 31, 1997 (unaudited)....................F-5
Consolidated Statement of Cash Flows for the year ended January 31, 1997 and 1996
(audited) and the six months ended July 31, 1997 and 1996 (unaudited).....................................F-6
Notes to Consolidated Financial Statements................................................................F-7
PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
Crescent Operating, Inc.
Pro Forma Consolidated Balance Sheet as of June 30, 1997 and notes thereto................................F-18
Pro Forma Consolidated Statement of Operations for the Year Ended
December 31, 1996 and notes thereto.......................................................................F-20
Pro Forma Consolidated Statement of Operations for the Six Months Ended
June 30, 1997 and notes thereto...........................................................................F-22
The Woodlands Entities
Pro Forma Combined Statement of Operations for the Year Ended
January 31, 1997 and notes thereto........................................................................F-25
Pro Forma Combined Statement of Operations for the Six Months Ended
July 31, 1997 and notes thereto...........................................................................F-28
</TABLE>
F-1
<PAGE> 8
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors,
The Woodlands Corporation:
We have audited the accompanying consolidated balance sheets of The Woodlands
Corporation (a Delaware corporation and a wholly-owned subsidiary of Mitchell
Energy & Development Corp.) and subsidiaries (the Company) as of January 31,
1997 and 1996, and the related consolidated statements of earnings (loss),
changes in stockholder's equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Woodlands Corporation and
subsidiaries as of January 31, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
-----------------------------
Houston, Texas
March 14, 1997
F-2
<PAGE> 9
THE WOODLANDS CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF MITCHELL ENERGY & DEVELOPMENT CORP.)
CONSOLIDATED BALANCE SHEETS
JULY 31, 1997 AND JANUARY 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 31,
JULY 31, -------------------------
1997 1997 1996
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS .................................. $ 1,858 $ 23,856 $ 3,469
---------- ---------- ----------
RECEIVABLES
Notes and contracts receivable, net of allowance for
doubtful accounts of $1,646, $1,524 and $576 ......... 44,348 37,092 35,045
Accounts receivable, net of allowance for
doubtful accounts of $593, $474 and $634 ............. 7,065 5,966 3,451
Mitchell Mortgage Company short-term receivables ......... -- -- 13,732
---------- ---------- ----------
51,413 43,058 52,228
---------- ---------- ----------
REAL ESTATE
The Woodlands
Land development ..................................... 507,969 509,069 502,121
Commercial properties, net of accumulated
depreciation of $34,526, $33,370 and $35,544 .... 88,143 80,515 93,029
Equity investments and property management .......... 25,581 26,307 22,051
Other assets ......................................... 1,797 3,043 13,940
---------- ---------- ----------
623,490 618,934 631,141
Other properties, primarily held for disposal ............ 27,713 30,887 89,293
---------- ---------- ----------
651,203 649,821 720,434
---------- ---------- ----------
OTHER ASSETS ............................................... 6,195 8,193 9,704
---------- ---------- ----------
$ 710,669 $ 724,928 $ 785,835
========== ========== ==========
Liabilities and Stockholder's Equity
LIABILITIES
Accounts payable and accrued liabilities ................. $ 27,778 $ 33,230 $ 25,459
Short-term debt, repaid in January 1997 .................. -- -- 13,732
Mortgages and notes payable .............................. 1,072 1,271 32,875
Subordinated note payable to Mitchell .................... 377,152 393,328 419,273
Deferred income taxes .................................... 120,554 118,416 127,212
Deferred income .......................................... 15,498 18,421 17,950
Other .................................................... 12,419 13,106 19,103
---------- ---------- ----------
554,473 577,772 655,604
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY
Common stock, $1.00 par value, 1,000 shares
authorized, issued and outstanding .................. 1 1 1
Contributed capital ...................................... 134,374 134,374 134,374
Retained earnings (deficit) .............................. 21,821 12,781 (4,144)
---------- ---------- ----------
156,196 147,156 130,231
---------- ---------- ----------
$ 710,669 $ 724,928 $ 785,835
========== ========== ==========
</TABLE>
F-3
<PAGE> 10
THE WOODLANDS CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF MITCHELL ENERGY & DEVELOPMENT CORP.)
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
FOR THE SIX MONTHS ENDED JULY 31, 1997 AND 1996
AND YEARS ENDED JANUARY 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JULY 31, YEAR ENDED JANUARY 31,
-------------------------- --------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
REVENUES
The Woodlands
Land development ..................................... $ 31,254 $ 36,441 $ 62,341 $ 50,569
Commercial properties ................................ 29,470 27,220 53,670 57,696
Equity investments and property management ........... 5,303 3,719 7,338 6,682
Gains on commercial property asset sales ............. 572 1,205 8,627 20,313
Other ................................................ 1,873 5,253 9,720 6,716
---------- ---------- ---------- ----------
68,472 73,838 141,696 141,976
Other properties ......................................... 6,688 11,047 58,488 32,423
---------- ---------- ---------- ----------
75,160 84,885 200,184 174,399
---------- ---------- ---------- ----------
OPERATING COSTS AND EXPENSES
The Woodlands
Land development ..................................... 20,663 74,376 42,348 34,444
Commercial properties ................................ 23,451 21,009 43,659 47,789
Equity investments and property management ........... 2,437 1,490 3,169 2,401
Other ................................................ 2,593 5,365 11,860 8,467
---------- ---------- ---------- ----------
49,144 52,310 101,036 93,101
Other properties ......................................... 5,612 11,492 58,924 32,450
---------- ---------- ---------- ----------
54,756 63,802 159,960 125,551
---------- ---------- ---------- ----------
SEGMENT OPERATING EARNINGS BEFORE UNUSUAL ITEMS ............ 20,404 21,083 40,224 48,848
UNUSUAL ITEMS
Gains from sales of non-core assets ...................... -- -- 2,507 --
Write-downs of properties ................................ -- -- -- (123,916)
Personnel reduction program costs ........................ -- -- -- (3,000)
---------- ---------- ---------- ----------
SEGMENT OPERATING EARNINGS (LOSS) .......................... 20,404 21,083 42,731 (78,068)
GENERAL AND ADMINISTRATIVE EXPENSE ......................... 3,865 5,625 7,841 9,061
---------- ---------- ---------- ----------
TOTAL OPERATING EARNINGS (LOSS) ............................ 16,539 17,458 34,890 (87,129)
---------- ---------- ---------- ----------
OTHER (INCOME) EXPENSE
Interest expense ......................................... 15,150 16,938 32,805 36,831
Interest capitalized ..................................... (11,524) (12,398) (24,953) (26,919)
Other .................................................... (817) 607 1,199 760
---------- ---------- ---------- ----------
2,809 5,147 9,051 10,672
---------- ---------- ---------- ----------
EARNINGS (LOSS) BEFORE INCOME TAXES ........................ 13,730 12,311 25,839 (97,801)
INCOME TAXES ............................................... 4,690 4,515 8,914 (34,218)
---------- ---------- ---------- ----------
NET EARNINGS (LOSS) ........................................ $ 9,040 $ 7,798 $ 16,925 $ (63,583)
========== ========== ========== ==========
</TABLE>
F-4
<PAGE> 11
THE WOODLANDS CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF MITCHELL ENERGY & DEVELOPMENT CORP.)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED JANUARY 31, 1997 AND 1996 AND
THE SIX MONTHS ENDED JULY 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Retained
Common Contributed Earnings
Stock Capital (Deficit) Total
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance, January 31, 1995 .... $ 1 $ 134,374 $ 59,439 $ 193,814
Net loss ..................... -- -- (63,583) (63,583)
---------- ---------- ---------- ----------
Balance, January 31, 1996 .... 1 134,374 (4,144) 130,231
Net earnings ................. -- -- 16,925 16,925
---------- ---------- ---------- ----------
Balance, January 31, 1997 .... 1 134,374 12,781 147,156
Net Earnings (Unaudited) .... -- -- 9,040 9,040
---------- ---------- ---------- ----------
Balance, July 31, 1997 ...... $ 1 $ 134,374 $ 21,821 $ 156,196
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-5
<PAGE> 12
THE WOODLANDS CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF MITCHELL ENERGY & DEVELOPMENT CORP.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JULY 31, 1997 AND 1996
AND THE YEARS ENDED JANUARY 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JULY 31, YEAR ENDED JANUARY 31,
------------------------- --------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss) ............................................. $ 9,040 $ 7,798 $ 16,925 $ (63,583)
Adjustments to reconcile net earnings (loss)
to cash provided by operating activities
Write-downs of properties ............................... -- -- -- 123,916
Cost of land sold ....................................... 18,871 22,992 40,399 33,404
Deferred income taxes ................................... 2,138 3,593 (8,796) (36,267)
Depreciation and amortization ........................... 2,519 2,877 5,388 7,223
Residential and commercial land development
expenditures, net of reimbursements .................. (6,987) (5,890) (12,776) (14,642)
Gains from sales of commercial properties ............... (572) (1,206) (8,627) (20,101)
Gains from sales of non-core assets ..................... -- -- (2,507) --
Other ................................................... (1,941) 1,042 3,192 637
---------- ---------- ---------- ----------
23,068 31,206 33,198 30,587
Changes in operating assets and liabilities
Receivables ......................................... (5,690) (229) (2,093) (393)
Accounts payable and accrued liabilities ............ (3,845) (4,107) 2,371 1,971
Other assets ........................................ 689 (5) (445) 1,748
---------- ---------- ---------- ----------
Cash provided by operating activities .......................... 14,222 26,865 33,031 33,913
---------- ---------- ---------- ----------
INVESTING ACTIVITIES
Capital additions
Total on accrual basis ..................................... (27,419) (29,280) (59,312) (59,990)
Residential land development expenditures deducted above ... 6,987 5,890 12,776 14,642
Adjustment to cash basis ................................... (1,607) (120) 2,329 (1,778)
---------- ---------- ---------- ----------
(22,039) (23,510) (44,207) (47,126)
Proceeds from sales of properties .............................. 2,299 16,175 85,301 62,176
Other .......................................................... (105) (171) (457) (50)
---------- ---------- ---------- ----------
Cash provided by (used for) investing activities ............... (19,845) (7,506) 40,637 15,000
---------- ---------- ---------- ----------
FINANCING ACTIVITIES
Change in subordinated note payable to Mitchell ................ (16,176) 29,070 (25,945) 5,462
Proceeds from issuance of debt ................................. -- -- -- 123
Debt repayments ................................................ (199) (32,378) (27,336) (53,650)
---------- ---------- ---------- ----------
Cash used for financing activities ............................. (16,375) (3,308) (53,281) (48,065)
---------- ---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................... (21,998) 16,051 20,387 848
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ....................... 23,856 3,469 3,469 2,621
---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ........................... $ 1,858 $ 19,520 $ 23,856 $ 3,469
========== ========== ========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest payments, exclusive of amounts capitalized ............. $ 4,362 $ 5,548 $ 9,664 $ 11,644
Non-cash activities related to sales of properties
Notes receivable from purchaser ........................... -- -- 8,805 3,797
Mortgage obligation assumed by purchaser .................. -- -- -- 12,796
Deferred income recognized ................................ -- -- -- 2,517
</TABLE>
F-6
<PAGE> 13
THE WOODLANDS CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF MITCHELL ENERGY & DEVELOPMENT CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONTROL. The Woodlands Corporation (TWC) is a wholly-owned subsidiary of
Mitchell Energy & Development Corp. (Mitchell). Mitchell and its subsidiaries
have engaged in transactions characteristic of group administration and
operation, including (a) borrowings under a subordinated note agreement
discussed in Note 6, (b) the allocation of Federal income taxes discussed
under the caption "Income taxes" in this note and Note 2, (c) the leasing of
office space discussed in Note 4 and (d) the allocation of general and
administrative expenses. The form and manner of execution of intercompany
transactions could be affected by considerations involving the overall
operations of Mitchell and its subsidiaries.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of TWC and its subsidiaries (collectively called the Company).
All significant intercompany accounts and transactions are eliminated in
consolidation. The Company follows the equity method of accounting for its
investments in 20% to 50% owned entities.
BUSINESS. The Company's real estate activities are concentrated in The
Woodlands, a planned community located north of Houston, which is being
developed on approximately 25,000 acres. Consequently, these operations and
the associated credit risks may be affected, either positively or negatively,
by changes in economic conditions in this geographical area. Activities
associated with The Woodlands include residential and commercial land sales and
the construction and operation of office and industrial buildings, apartments,
retail shopping centers, golf courses and a conference center.
REAL ESTATE. Costs associated with the acquisition and development of real
estate, including holding costs consisting principally of interest and ad
valorem taxes, are capitalized as incurred. Capitalization of such holding
costs is limited to properties for which active development continues.
Capitalized carrying costs have represented, and are expected to continue to
represent, a significant portion of real estate capital additions.
Capitalization ceases upon completion of a property or cessation of development
activities. Where practicable, capitalized costs are specifically assigned to
individual assets; otherwise, costs are allocated based on estimated values of
the affected assets.
Real estate held for investment or development is carried at historical
cost. Real estate held for disposal is carried at the lower of historical cost
or fair value less costs to sell.
WRITE-DOWNS OF PROPERTIES. In August 1995, the Company completed a real
estate asset management study and adopted a revised business plan that called
for the disposal within the near term of most of its properties outside The
Woodlands. Because of the revised business plan, it was
F-7
<PAGE> 14
necessary to reduce the carrying values of these properties to their estimated
fair market values, net of disposition costs. As a result, property
write-downs of $112,794,000 were recorded in fiscal 1996's second quarter and
were subsequently increased by $11,122,000 in the fourth quarter to lower the
estimated fair market values, net of disposition costs, for certain of the
properties.
ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS) NO.121.
Effective January 31, 1996 (after completion of an asset management study and
the recording of the property write-downs discussed above), the Company
adopted SFAS No.121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." The adoption of SFAS No. 121 did not
have a material impact on the Company's financial statements.
LAND SALES. Earnings from sales of real estate are recognized when the
buyer has made an adequate cash down payment and has attained the attributes of
ownership. Notes received in connection with land sales are discounted when
the stated purchase prices are significantly different from those which would
have resulted from similar cash transactions. The cost of land sold is
generally determined as a specific percentage of the sales revenues recognized
for each land development project. These percentages are based on total
estimated development costs and sales revenues for each project.
DEPRECIATION. Depreciation of operating assets is provided on the
straight-line method over the estimated useful lives of the assets, which range
from three to fifty years.
INCOME TAXES. The Company is included in Mitchell's consolidated Federal
income tax return. Each subsidiary of Mitchell with taxable income is charged
an amount equal to the Federal income taxes it would pay if a separate return
were filed, including adjustments for certain tax preference items. If a
subsidiary has a taxable loss, it receives a credit for its prorata share of
the tax savings to the consolidated group. Each subsidiary also provides
deferred income taxes on temporary differences between the book and tax bases
of its assets and liabilities.
STATEMENTS OF CASH FLOWS. Short-term investments with maturities of three
months or less are considered to be cash equivalents. The reported amounts for
proceeds from issuance of debt and debt repayments exclude the impact of
borrowings with initial terms of three months or less.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
STATEMENT PRESENTATION. Certain reclassifications of amounts previously
reported have been made to conform to the current year presentation.
F-8
<PAGE> 15
(2) INCOME TAXES
Income taxes for the years ended January 31, 1997 and 1996 consist of the
following (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Current
Federal ...... $ 17,633 $ 1,983
State ........ 77 66
-------- --------
17,710 2,049
-------- --------
Deferred
Federal ...... (8,796) (36,267)
State ........ -- --
-------- --------
(8,796) (36,267)
-------- --------
$ 8,914 $(34,218)
======== ========
</TABLE>
Reconciliations from the 35% statutory Federal income tax rate to the
Company's effective income tax rate for the years ended January 31, 1997 and
1996 follow:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Statutory Federal income tax rate ...... 35.0% 35.0%
Other, net ............................. (0.5) --
-------- --------
34.5% 35.0%
======== ========
</TABLE>
The principal components of the Company's deferred income tax liability
include interest and ad valorem taxes for certain properties, which are
capitalized for financial reporting purposes and expensed for income tax
purposes, and excess depreciation deductions for income tax reporting purposes.
(3) FINANCE OPERATIONS
Notes receivable are carried at cost, net of discounts in the accompanying
consolidated balance sheets. In October 1996, the Company repurchased notes
receivable for $14,028,000 that had previously been sold, with recourse to the
Company in the event of defaults, to a third party. The Company then sold
substantially all of these notes, without recourse, to another third party bank
and recognized a profit of $1,360,000, which is included in the caption
"Unusual Items -- Gains from sales of non-core assets" on the consolidated
statements of earnings (loss).
In January 1997, the Company sold a 51% interest in its finance subsidiary,
Mitchell Mortgage Company (MMC), to a financial institution. The Company
recognized as revenue the $1,417,000 gain on the sale attributable to
purchaser's interest. The Company paid off MMC's debt, which was refinanced
by MMC without recourse to the Company.
F-9
<PAGE> 16
Notes and contracts receivable at January 31, 1997 consist of notes
receivable totaling $15,528,000 and contracts receivable from utility districts
totaling $21,564,000 which are included in the caption "Receivables -- Notes
and contracts receivable" on the consolidated balance sheets. Substantially
all of the notes receivable are collateralized by real estate. Stated interest
rates vary between 7.0% and 12.5%, with an average effective yield of
approximately 8.3% at January 31, 1997. Contractual maturities for the five
fiscal years subsequent to January 31, 1997 total approximately $3,100,000;
$7,900,000; $300,000; $200,000; and $200,000. Delinquent notes totaled
$483,000 and $2,230,000 at January 31, 1997 and 1996. Contracts receivable,
the collection of which is dependent on the ability of utility districts in The
Woodlands to sell bonds, have a market interest rate of approximately 5.5% at
January 31, 1997.
Because they represented the principal revenues and costs for these
operations, interest income and interest expense of the Company's finance
operations were reported as revenues and operating costs and expenses in the
accompanying consolidated statements of earnings (loss). Such interest income
aggregated $3,258,000 and $2,852,000 and interest expense aggregated $1,603,000
and $1,630,000 for the years ended January 31, 1997 and 1996. For these same
periods, revenues from finance operations totaled $7,605,000 and $6,793,000 and
operating earnings totaled $958,000 and $421,000.
(4) LEASES
Commercial, industrial and retail properties owned or leased by the Company
in The Woodlands are leased to 125 third-party tenants and to Mitchell.
Remaining lease terms range from month-to-month to 8 years with an average term
of four years. Leases are accounted for under the operating method. The net
book value of assets under operating leases was $14,179,000 at January 31,
1997. This amount is included in the caption "The Woodlands -- Commercial
Properties" on the consolidated balance sheets. Minimum future lease revenues
from noncancelable operating leases and subleases for the five fiscal years
subsequent to January 31, 1997 total approximately $3,100,000; $2,600,000;
$2,300,000; $1,900,000; and $900,000. These amounts exclude contingent rentals
which may be received under certain lease agreements.
F-10
<PAGE> 17
Revenues from tenants, which are reported in the revenue caption "The
Woodlands" in the accompanying consolidated statements of earnings (loss), for
the years ended January 31, 1997 and 1996 include the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Third party
Tenant rents ......... $ 5,573 $ 8,607
Contingent rents ..... 1,022 1,045
--------- ---------
6,595 9,652
--------- ---------
Mitchell
Tenant rents ......... 203 5,871
Contingent rents ..... 31 619
--------- ---------
234 6,490
--------- ---------
$ 6,829 $ 16,142
========= =========
</TABLE>
Tenant rents include rentals received from noncancelable operating leases,
cancelable leases, and month-to-month rents. Contingent rents include
pass-throughs of incremental operating costs and rents based on a percentage of
tenants' sales offset by certain leasing costs.
In October 1996, the Company sold several retail buildings located in The
Woodlands for $26,362,000. The purchaser, Woodlands Retail Equities - '96
Limited, is 75% owned by Crescent Real Estate Equities, Inc. (Crescent) and 25%
owned by the Company. The Company recognized as revenue the $6,004,000 gain on
the sale attributable to Crescent's interest in the partnership.
In July 1996, the Company sold two office buildings located in The
Woodlands for $9,059,000. The purchaser, Woodlands Office Equities - '95
Limited, is 75% owned by Crescent and 25% owned by the Company. The Company
recognized as revenue the $233,000 gain on the sale attributable to Crescent's
interest in the partnership. In July 1995 the Company sold ten office/service
buildings located in The Woodlands to the partnership for $47,678,000. The
partnership assumed an existing mortgage on these properties of $12,796,000.
The Company recognized as revenue the $312,000 gain on the sale attributable to
Crescent's interest in the partnership.
F-11
<PAGE> 18
(5) JOINT VENTURES AND PARTNERSHIPS
During the years ended January 31, 1997 and 1996, the Company's principal
partnership interests included the following:
<TABLE>
<CAPTION>
Ownership Nature of Operations
-------- ------------------------------------
<S> <C> <C>
Grogan's Mill Apartments 50% Apartments in The Woodlands
The Woodlands Mall Associates 50% Regional mall in The Woodlands
Woodlands Office Equities -'95 Limited 25% Office buildings in The Woodlands
Woodlands Retail Equities -'96 Limited
(formed during fiscal 1997) 25% Retail properties in The Woodlands
Mitchell Mortgage Company LLC
(formed in December 1996) 49% Mortgage lending
Lake Catamount Joint Venture
(sold in October 1996) 50% Colorado land
The Fort Crockett Hotel Limited (liquidated
after the hotel was sold in January 1996) 50% Resort hotel in Galveston, Texas
</TABLE>
Other partnerships own various commercial properties, most of which are located
in The Woodlands.
The Company's net investment in each of these entities is included in the
applicable caption of real estate on the consolidated balance sheets. The
Company's equity in their pretax earnings is included in the applicable
revenues caption of the consolidated statements of earnings (loss) and its
equity in their pretax losses is included in the applicable operating costs and
expenses caption. A summary of the Company's net investment in equity
investees at January 31, 1997 and 1996 and its equity in their pretax earnings
(losses) for the years then ended follows (in thousands):
<TABLE>
<CAPTION>
Equity in Pretax
Net Investment Earnings (Losses)
--------------------- ----------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Grogan's Mill Apartments ......................... $ 1,160 $ 1,316 $ 271 $ 338
The Woodlands Mall Associates .................... 4,218 7,737 481 898
Woodlands Office Equities -'95 Limited ........... 11,514 9,202 595 818
Woodlands Retail Equities -'96 Limited ........... 5,252 -- 83 --
Mitchell Mortgage Company LLC .................... 1,089 -- -- --
Lake Catamount Joint Venture ..................... -- 11,504 (201) (639)
Others, which own properties in The Woodlands .... 1,183 3,349 855 593
The Fort Crockett Hotel Limited .................. -- -- -- (763)
-------- -------- -------- --------
$ 24,416 $ 33,108 $ 2,084 $ 1,245
======== ======== ======== ========
</TABLE>
F-12
<PAGE> 19
Summarized financial information, which is generally reported on a
one-month lag, for partnerships and joint ventures in which the Company has an
ownership interest as of January 31, 1997 and 1996 and for the years then ended
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Assets .................................................... $284,186 $241,193
Debt payable to third parties
The Company's proportionate share
Recourse to the Company ............................. 4,186 33,823
Nonrecourse to the Company .......................... 68,728 26,194
Other parties' proportionate share, of which $3,289
and $32,908 was guaranteed by the Company ........... 100,942 88,098
Notes payable to the Company .............................. 8,589 18,660
Accounts payable and deferred credits ..................... 6,190 10,893
Owners' equity ............................................ 95,551 63,525
Revenues .................................................. 46,174 57,242
Operating earnings ........................................ 17,951 19,995
Pretax earnings ........................................... 4,193 5,240
The Company's proportionate share of pretax earnings ...... 2,083 1,245
</TABLE>
In October 1996, the Company and its partner sold their interests in Lake
Catamount Joint Venture (the Venture) for $14,500,000. The Company received
cash proceeds of $4,700,000 and notes receivable totaling $8,805,000. The
Company recognized a gain of $1,147,000 which is included in the caption
"Unusual Items -- Gains from sales of non-core assets" in the consolidated
statements of earnings (loss).
During January 1996, The Fort Crockett Hotel Limited partnership sold its
assets, principally The San Luis Hotel, and the partnership was liquidated.
The Company recorded losses of $763,000 and made advances to the partnership
totaling $795,000 during the year ended January 31, 1996.
The Woodlands Mall Associates is owned equally by the Company and
GGP/Homart, Inc., which operates the 345,000 square foot gross leasable area
owned by the partnership which is part of a one million square foot regional
mall that opened in October 1994. The partnership's 7.9% fixed rate loan is
due in quarterly installments of interest only through November 1999 and then
amortizes on a 27-year basis, with a call provision in November 2006.
During October 1995, the Company sold its remaining 50% interest in a cable
television system in The Woodlands and recognized a gain on the sale of
$19,449,000, including $2,517,000 of previously deferred profits from an
earlier sale of a 50% interest.
F-13
<PAGE> 20
(6) Mortgages and notes payable and subordinated note payable to Mitchell
A summary of the Company's outstanding debt at January 31, 1997 and 1996
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Mortgages and notes payable
Bank revolving credit agreements, unsecured
Real estate, $50 million committed .............. $ -- $ 30,000
Mitchell Mortgage Company ....................... -- 15,000
Mortgages payable, 8.2 % average rate, due in
installments through fiscal 2008 ................ 1,271 1,607
-------- --------
1,271 46,607
Less -- Short-term debt ............................... -- 13,732
-------- --------
1,271 32,875
Subordinated note payable to Mitchell, 7.7% ........... 393,328 419,273
-------- --------
$394,599 $452,148
======== ========
</TABLE>
The Company's real estate bank revolving credit agreement was revised in
April 1996 to provide a committed facility of $50,000,000. Borrowings then
outstanding under this facility are payable in April 2000. Interest rates are
generally based on spreads over the London Interbank Offered Rate. The bank
revolving credit agreement contains certain restrictions which, among other
things, require the maintenance of specified financial ratios, restrict the
sale or lease of certain assets, require the maintenance of minimum equity by
Mitchell and limit the right of the Company or certain subsidiaries to merge
with other companies.
In January 1997 the Company sold a 51% interest in MMC's assets (see Note
3), repaid the $18,000,000 bank revolving credit agreement borrowings, canceled
the credit agreement and eliminated the Mitchell guarantee.
The Company's subordinated note payable to Mitchell is convertible into a
four-year term loan in January 2001. The term loan conversion date is
automatically extended annually unless Mitchell gives notice to the contrary.
FIVE-YEAR MATURITIES. Maturities of mortgages and notes payable, excluding
the subordinated note payable to Mitchell, for the five fiscal years subsequent
to January 31, 1997, based on current revolving credit agreement maturities,
are approximately $221,000; $208,000; $50,000; $50,000; and $50,000.
GUARANTEES. Mitchell has guaranteed none of the Company's notes payable.
F-14
<PAGE> 21
(7) COMMITMENTS AND CONTINGENCIES
CONTINGENT LIABILITIES. At January 31, 1997 the Company had contingent
liabilities totaling approximately $9,000,000, consisting primarily of
guarantees of third party debt.
DEBT GUARANTEES. In April 1996 in connection with the execution of a
$150,000,000 bank revolving credit facility by a subsidiary of Mitchell, the
Company guaranteed the repayment of amounts, if any, drawn under this facility.
LEASES. The Company has various noncancelable equipment and facilities
lease agreements which provide for future payments of approximately
$52,800,000. Minimum rentals for each of the five fiscal years subsequent to
January 31, 1997 total $4,114,000; $4,225,000; $4,014,000; $4,326,000; and
$4,326,000. Rental expense for operating leases was $4,541,000 and $4,451,000
for the years ended January 31, 1997 and 1996. These lease payments are
substantially offset by revenues from a sublease to Mitchell.
LEGAL ACTIONS. Legal actions have been brought or threatened against the
Company and third-party realtors and engineers by 72 home owners in The
Woodlands and against certain developers, governmental entities and the Company
by 67 property owners in surrounding communities related to flooding in the
North Houston area in October 1994. These claimants generally are seeking
reimbursements for property damages, but some are making claims for deceptive
trade practices or mental anguish or are claiming that the Company contributed
to the flooding of their homes. The Company contends that it was not
responsible for these damages, which it believes resulted from a record, near
500-year flood and were not preventable with the exercise of ordinary care and
generally accepted drainage design, development and maintenance.
The Company also is party to other claims and legal actions arising in the
ordinary course of its business and to recurring examinations by the Internal
Revenue Service and other regulatory agencies.
Management believes that adequate financial statement accruals have been
provided for these litigation contingencies. Since the ultimate cost will
depend on the outcomes of the uncertainties discussed in this note, it is
possible, however, that additional future charges might be required that would
be significant to the operating results of a particular period. Based on the
status of the litigation, the Company is unable to determine a range of such
possible additional losses, if any, that might be incurred. The Company and
its outside counsel believe it is not probable that the ultimate resolution of
this litigation will have a material adverse effect on the Company's financial
position.
(8) RELATED PARTY TRANSACTIONS
The Company provides construction loans and sells residential lots in The
Woodlands to Life Forms, Inc. (Life Forms), a company in which G. Scott
Mitchell and M. Kent Mitchell, adult sons of George P. Mitchell (Chairman of
the Board and majority stockholder of Mitchell), have ownership interests. The
terms of these loans and sales are comparable to those given to unrelated third
parties. Revenues from lot sales to Life Forms totaled $5,551,000 and
$4,797,000 during the years ended
F-15
<PAGE> 22
January 31, 1997 and 1996. MMC provided construction financing to Life Forms
in the aggregate amounts of $22,235,000 and $17,956,000 during the years ended
January 31, 1997 and 1996.
(9) PERSONNEL REDUCTION PROGRAM COSTS
During April 1995, Mitchell implemented a personnel reduction program which
resulted in the elimination of approximately 300 jobs within Mitchell. Mitchell
offered a voluntary incentive retirement program to qualifying employees and
paid severance benefits to terminated employees not eligible for that program.
The Company's share of these costs totaled $4,133,000.
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of the Company's financial
instruments as of January 31, 1997 and 1996 follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------------------------- -------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amounts Values Amounts Values
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Notes and contracts receivable .............. $ 37,092 $ 32,987 $ 35,045 $ 40,932
Short-term debt ............................. -- -- 13,732 13,732
Mortgages and notes payable ................. 1,271 1,272 32,875 32,883
Subordinated note payable to Mitchell........ 393,328 399,489 419,273 447,297
Contingent liabilities
Financial guarantees and commitments ..... -- 5,549 -- 5,940
</TABLE>
Fair values of notes and contracts receivable were estimated by discounting
future cash flows using interest rates at which similar loans currently could
be made for similar maturities to borrowers with comparable credit ratings.
Fair values of fixed-rate, long-term debt were based on current interest rates
offered to the Company for debt with similar remaining maturities. For
floating-rate debt obligations, carrying amounts and fair values were assumed
to be equal because of the nature of these obligations. The carrying amounts
of the Company's other on-balance-sheet financial instruments approximate their
fair values.
Fair values of financial guarantees and commitments were based on the
estimated costs of obtaining third-party letters of credit to relieve the
Company of its obligations under such agreements.
(11) EVENT OCCURRING AFTER THE DATE OF AUDITOR'S REPORT (UNAUDITED)
On July 31, 1997, 100% of the stock of the Company was acquired by Cresent
Real Estate Equities Company and Morgan Stanley Real Estate Fund II, L.P. for
approximately $543 million. The accompanying financial statements reflect the
financial position, results of operations and cash flows of the Company on a
preacquisition basis. No adjustments have been made to historical amounts to
reflect the effect of the acquistion on the Company's financial position,
results of operations or cash flows.
F-16
<PAGE> 23
CRESCENT OPERATING, INC.
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited Pro Forma Statements of Crescent Operating, Inc.
(the "Company") include the completion of (i) the acquisition of a 42.5%
interest in The Woodlands Operating Company, L.P. ("TWOC"), an entity which
owns MND Hospitality, Inc., a payroll entity the assets of which are solely
related to its employee benefit plans, MND Hospitality Services Corp., an
entity used to record the expenses of temporary employees, BOCH General
Partnership, the assets of which include certain equipment, personal property
and contract rights, and WECCR General Partnership which leases the Woodlands
Conference Center and certain related assets and WECCR, Inc. which owns 1%
general partner interests in both BOCH General Partnership and WECCR General
Partnership and (ii) the acquisition of 100% of the voting common stock,
representing a 5% equity interest in The Woodlands Land Co., Inc. ("LandCo"),
an entity which owns 42.5% of The Woodlands Land Development Company, LP, (TWOC
and LandCo collectively referred to as "The Woodlands Entities"), as of June
30, 1997 as it relates to the balance sheet, as of January 1, 1996, as it
relates to the statement of operations for the year ended December 31, 1996 and
as of January 1, 1997 as it relates to the statement of operations for the six
months ended June 30, 1997.
In management's opinion, all adjustments necessary to reflect the above
discussed transactions have been made. The unaudited proforma 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-17
<PAGE> 24
CRESCENT OPERATING, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CRESCENT ACQUISITION OF
OPERATING, INC. THE WOODLANDS PRO FORMA
HISTORICAL (A) ENTITIES (B) CONSOLIDATED
---------------- -------------- ------------
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents $ 1,207 $ -- $ 1,207
Accounts receivable 1,113 -- 1,113
Inventories 1,862 -- 1,862
Prepaid expenses and other
current assets 214 -- 214
---------- ---------- ----------
Total current assets 4,396 -- 4,396
Property and equipment,
net 2,355 -- 2,355
Investments 29,754 38,739(C) 68,493
Other assets 684 -- 684
---------- ---------- ----------
Total assets $ 37,189 $ 38,739 $ 75,928
========== ========== ==========
LIABILITIES:
Accounts payable and accrued
liabilities $ 1,776 $ -- $ 1,776
Notes payable 292 -- 292
---------- ---------- ----------
Total current liabilities 2,068 -- 2,068
Long-term debt 25,905 2,346(D) 28,251
Minority interest -- 36,393(E) 36,393
---------- ---------- ----------
Total liabilities 27,973 38,739 66,712
---------- ---------- ----------
STOCKHOLDERS' EQUITY:
Common stock 110 -- 110
Paid in capital 9,368 -- 9,368
Retained deficit (262) -- (262)
---------- ---------- ----------
Total stockholders' equity 9,216 -- 9,216
---------- ---------- ----------
Total liabilities and
stockholders' equity $ 37,189 $ 38,739 $ 75,928
========== ========== ==========
</TABLE>
F-18
<PAGE> 25
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
(A) Reflects Crescent Operating's unaudited June 30, 1997 balance sheet as
filed on Form 10-Q on August 14, 1997.
(B) Increase reflects the acquisition of a 42.5% interest in TWOC and the
acquisition of 100% of the voting stock (representing a 5% equity
interest) of LandCo.
These balances reflect The Woodlands Entities' July 31, 1997 balances
adjusted for the pro forma effects of this acquisition.
(C) Represents the following:
Purchase price of LandCo $38,308
Purchase price of TWOC 431
-------
$38,739
(D) The Company borrowed against the Line of Credit to fund the acquisitions
as follows:
5% of purchase price of LandCo $ 1,915
Purchase price of TWOC 431
-------
$ 2,346
(E) Represents Crescent's and Morgan Stanley Real Estate Fund II, L.P.'s
interest in LandCo calculated as 95% of LandCo purchase price.
F-19
<PAGE> 26
CRESCENT OPERATING, INC.
PRO FORMA 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 ACQUISITION OF
OPERATING, INC. CARTER-CROWLEY OTHER CARTER-CROWLEY 50% INTEREST
HISTORICAL (A) ASSET GROUP (B) ADJUSTMENTS ASSET GROUP IN CBHS (E)
-------------- -------------- ----------- ---------------------- --------------
<S> <C> <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 -- -- -- -- 8,860
Equity in income of The
Woodlands Entities -- -- -- -- --
Selling, general and
administrative expenses -- 1,748 506 (C) 2,254 --
-------------- -------------- ----------- ---------- -------------
Income (loss) from operations -- 109 (506) (397) (8,860)
Other (income) expenses:
Interest expenses -- 356 2,768 (D) 3,124 --
Other -- (79) -- (79) --
-------------- -------------- ----------- ---------- -------------
Total other expense, net -- 277 2,768 3,045 --
-------------- -------------- ----------- ---------- -------------
Minority interest -- -- -- -- --
Income (loss) before income taxes -- (168) (3,274) (3,442) (8,860)
Income tax provision (benefit) -- (57) -- (57) --
-------------- -------------- ----------- ---------- -------------
Net income (loss) $ -- $ (111) $ (3,274) $ (3,385) $ (8,860)
============== ============== =========== ========== =============
Net income (loss) per share
<CAPTION>
CRESCENT AQUISITION OF
OPERATING, INC. THE WOODLANDS PRO FORMA PRO FORMA
PRIOR PRO FORMA (F) ENTITIES (G) ADJUSTMENTS CONSOLIDATED
------------------- ------------- ----------- ------------
<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 8,860 -- -- 8,860
Equity in income of The
Woodlands Entities -- (11,232) (H) -- (11,232)
Selling, general and
administrative expenses 2,254 -- -- 2,254
------------ ------------ ----------- ------------
Income (loss) from operations (9,257) 11,232 -- 1,975
Other (income) expenses:
Interest expenses 3,124 -- 282 (J) 3,406
Other (79) -- -- (79)
------------ ------------ ----------- ------------
Total other expense, net 3,045 -- 282 3,327
------------ ------------ ----------- ------------
Minority interest 10,355 (I) -- 10,355
Income (loss) before income
taxes (12,302) 877 (282) (7,028)
Income tax provsion (benefit) (57) 303 (303) (K) (57)
------------ ------------ ----------- ------------
Net income (loss) $ (12,245) $ 574 21 $ (11,650)
============ ============ =========== ============
Net income (loss) per share $ (1.11) $ (1.06)
------------ ------------
</TABLE>
F - 20
<PAGE> 27
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS)
(A) The Company had no operations prior to the acquisition
of Moody-Day Inc. and a 1.21% investment in Hicks Muse Tate
& Furst Equity Fund II (collectively 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)
-------
(D) Increase is a result of interest expense for long term $ 506
financing in conjunction with the capitalization of the -------
Company, assuming it occurred at the beginning of the
period.
$26,037 loan at a rate of 12% ........................ $ 3,124
Less historical interest expense ..................... (356)
-------
Incremental interest expense ......................... $ 2,768
-------
(E) Reflects the Company's 50% share of net loss of Charter
Behavioral Health Services ("CBHS") (accounted for on the equity
method of accounting since the Company does not control CBHS;
the four member board consists of two directors named by the
Company and two directors named by Megellan) ................. $(8,860)
(F) Reflects the Company's pro forma consolidated statement
of operations for the year ended December 31, 1996 previously
filed on Form 8-K/A filed on July 30, 1997.
(G) Increase reflects the acquisition of a 42.5% interest in TWOC
and the acquisition of 100% of the voting stock (Representing a
5% equity interest) in LandCo.
Amounts represent the operations for the year ended January 31,
1997 for TWOC and LandCo.
(H) Amount is comprised of the following:
Equity in income LandCo. $10,900
Equity in income of TWOC 332
-------
$11,232
=======
(I) Amount represents Crescent's and Morgan Stanley Real Estate
Fund II, L.P.'s 95% interest of the equity in income of LandCo.
(J) Amount represents additional interest expense that would have
been incurred had The Woodlands Entities transactions occurred
on January 1, 1996. Amount was calculated as additional borrowing
of $2,346 at 12% interest rate.
(K) Amount represents the elimination of tax expense related to the
Woodlands Entities as their income will be offset against other
Company losses.
F-21
<PAGE> 28
CRESCENT OPERATING, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CRESCENT ACQUISITION OF ACQUISITION OF
OPERATING, INC. CARTER-CROWLEY 50% INTEREST
HISTORICAL (A) ASSET GROUP (B) IN CBHS (C)
-------------- --------------- --------------
<S> <C> <C> <C>
Revenues $ 1,708 $ 4,190 $ --
Cost of sales 990 3,393 --
-------------- -------------- --------------
Gross profit 718 797 --
Equity in loss of CBHS 399 -- 3,477
Equity in income of The Woodlands Entities -- -- --
Selling, general and administrative expenses 435 636 --
-------------- -------------- --------------
Income (loss) from operations (116) 161 (3,477)
Other (income) expense:
Interest expense 309 135 --
Other (163) (14) --
-------------- -------------- --------------
Total other expense, net 146 121 0
-------------- -------------- --------------
Minority interest -- -- --
Income (loss) before income taxes (262) 40 (3,477)
Income tax provision -- 14 --
-------------- -------------- --------------
Net income (loss) $ (262) $ 26 $ (3,477)
============== ============== ==============
Net income (loss) per share (0.02)
===============
<CAPTION>
ACQUISITION OF
THE WOODLANDS PRO FORMA PRO FORMA
ENTITIES ADJUSTMENTS CONSOLIDATED
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues $ -- $ -- $ 5,898
Cost of sales -- -- 4,383
-------------- -------------- --------------
Gross profit -- -- 1,515
Equity in loss of CBHS -- -- 3,876
Equity in income of The Woodlands Entities (3,786) (D) -- (3,786)
Selling, general and administrative
expenses -- 169 (F) 1,240
-------------- -------------- --------------
Income (loss) from operations 3,786 (169) 185
Other (income) expense:
Interest expense -- 1,251 (G) 1,695
Other -- -- (177)
-------------- -------------- --------------
Total other expense, net 0 1,251 1,518
-------------- -------------- --------------
Minority interest 3,287 (E) -- 3,287
Income (loss) before income taxes 499 (1,420) (4,620)
Income tax provision 172 (172)(H) 14
-------------- -------------- --------------
Net income (loss) $ 327 $ (1,248) $ (4,634)
============== ============== ==============
Net income (loss) per share $ (0.42)
==============
</TABLE>
F-22
<PAGE> 29
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(AMOUNTS IN THOUSANDS)
(A) Reflects the unaudited income and expenses for the period from May 9, 1997
through June 30, 1997 reported on Form 10-Q dated August 14, 1997.
(B) Reflects the incremental historical income and expenses associated with
the Carter-Crowley Asset Group acquisition, assuming it occurred at the
beginning of the period as reported on Form 10-Q dated August 14, 1997.
(C) Reflects the Company's 50% share of net loss of CBHS (accounted for on the
equity method of accounting since the Company does not control CBHS).
(D) Amount is comprised of the following:
Equity in income of LandCo ................... $3,460
Equity in income of TWOC ................... 326
---------
$3,786
=========
(E) Amount represents 95% of the equity in income of LandCo.
(F) Reflects the incremental:
Corporate general and administrative expenses related to the
formation and operation of the Company as follows:
Salaries and benefits ................................... $ 83
Rent and other office supplies .......................... 67
Professional fees ....................................... 51
Depreciation and amoritization of the purchase price
adjustment as a result of the acquisition of the
Carter-Crowley Asset Group .............................. (32)
---------
169
(G) 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.
$28,251 loan at a rate of 12% ............... $1,695
Less historical interest expense ............. (444)
---------
Incremental interest expense ................. $1,251
=========
(H) Amount represents the elimination of tax expense related to the Woodlands
Entities as their income will be offset against other Company losses.
F-23
<PAGE> 30
THE WOODLANDS ENTITIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
JANUARY 31, 1997
The following unaudited proforma statement of operations of The Woodlands
Entities for the year ended January 31, 1997, assumes the following: (i) the
elimination of The Woodlands Commercial Properties Company, L.P. which will not
be acquired by Crescent Operating and corporate overhead and other adjustments
necessary to eliminate revenue and expenses of non-acquired assets and (ii) the
completion of The Woodlands transaction, including the execution of the service
agreements, as if they had occurred on February 1, 1996.
F-24
<PAGE> 31
THE WOODLANDS ENTITIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
UNAUDITED
THE WOODLANDS ---------------------------------------------------------
CORPORATION AND PROFORMA THE WOODLANDS
SUBSIDIARIES CARVE OUT (A) SUBTOTAL ADJUSTMENTS ENTITIES
--------------- ------------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Revenues $ 200,184 $ 156,619 15,565 $ 622 (B) 44,187
Operating costs and expenses 159,960 126,022 22,938 9,130 (C) 43,068
---------- ---------- ---------- ---------- ----------
Gross profit 40,224 30,597 9,627 (8,508) 1,119
Equity in The Woodlands Land
Development Company, L.P. -- -- -- 10,900 (D) 10,900
Selling, general and
administrative expenses 7,841 7,503 228 -- 338
---------- ---------- ---------- ---------- ----------
Income (loss) from operations 32,383 (23,094) 9,289 2,392 11,681
Other (income) expenses:
Interest expenses 7,852 7,852 -- -- --
Other (1,308) 1,308 -- -- --
---------- ---------- ---------- ---------- ----------
Total other expense, net 6,544 6,544 -- -- --
Income (loss) before income
taxes 25,839 16,550 9,289 2,392 11,681
Income tax expense 8,914 5,710 3,204 825(E) 4,029
---------- ---------- ---------- ---------- ----------
Net income $ 16,925 $ 10,840 $ 6,085 $ 1,567 $ 7,652
========== ========== ========== ========== ==========
</TABLE>
F-25
<PAGE> 32
THE WOODLANDS ENTITIES
NOTES TO PRO FORMA COMBINED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 31, 1997
(A) Includes the elimination of The Woodlands Commercial Properties Company,
L.P. which will not be acquired by the Company, and corporate overhead
and other adjustments necessary to eliminate revenues and expenses
related to non-acquired assets.
(B) Represents management fees of $622 payable by non-acquired entities to
TWOC for corporate functions including human resources, maintenance,
legal, finance and accounting.
(C) Reflects increase in expenses pursuant to lease agreements payable to The
Woodlands Commercial Properties Company, L.P. for lease of the conference
center and other facilities
(D) Amount represents LandCo.'s equity in income of Landevco.
(E) Amount represents tax effects of pro forma adjustments at an effective
tax rate of 34.5%.
F-26
<PAGE> 33
THE WOODLANDS ENTITIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
JULY 31, 1997
The following unaudited proforma statement of operations of The Woodlands
Entities for the six months ended July 31, 1997, assumes the following: (i) the
elimination of The Woodlands Commercial Properties Company, L.P. which will not
be acquired by the Company and corporate overhead and other adjustments
necessary to eliminate revenue and expenses of non-acquired assets and (ii) the
completion of The Woodlands transaction, including the execution of the service
agreements, as if they had occurred on February 1, 1997.
F-27
<PAGE> 34
THE WOODLANDS ENTITIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JULY 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
UNAUDITED
THE WOODLANDS -----------------------------------------------------------
CORPORATION AND PRO FORMA THE WOODLANDS
SUBSIDIARIES CARVE OUT (A) SUBTOTAL ADJUSTMENTS ENTITIES
--------------- ------------- ---------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues $ 75,160 $ 47,928 $ 27,232 $ 311 (B) $ 27,543
Operating costs and expenses 54,756 34,429 20,237 6,289 (C) 26,616
---------- ---------- ---------- ---------- ----------
Gross profit 20,404 13,499 6,905 (5,978) 927
Equity in The Woodlands Land
Development Company, L.P. -- -- (3,460) (D) 3,460
Selling, general and
administrative expenses 3,865 3,704 161 -- 161
---------- ---------- ---------- ---------- ----------
Income (Loss) from operations 16,539 9,795 6,744 (2,518) 4,226
Other (Income) expenses:
Interest expenses 3,626 3,626 -- -- --
Other (817) (817) -- -- --
---------- ---------- ---------- ---------- ----------
Total other expense, net 2,809 2,809 -- -- --
Income (Loss) before income
taxes 13,730 6,986 6,744 (2,518) 4,226
Income tax expense (benefit) 4,690 2,410 2,280 (869) (E) 1,411
---------- ---------- ---------- ---------- ----------
Net income (loss) $ 9,040 $ 4,576 $ 4,464 $ (3,387) $ 2,815
========== ========== ========== =========== ==========
</TABLE>
F-28
<PAGE> 35
THE WOODLANDS ENTITIES
NOTES TO PRO FORMA COMBINED
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JULY 31, 1997
(A) Includes the elimination of The Woodlands Commercial Properties Company,
L.P. which will not be acquired by the Company, and corporate overhead
and other adjustments necessary to eliminate revenues and expenses
related to non-acquired assets.
(B) Represents management fees of $311 payable by non-acquired entities to
TWOC for corporate functions including human resources, maintenance,
legal, finance and accounting.
(C) Reflects increase in expenses pursuant to lease agreements payable to The
Woodlands Commercial Properties Company, L.P. for lease of the conference
center and other facilities
(D) Amount represents LandCo's equity in income of Landevco.
(E) Amount represents tax effects of pro forma adjustments at an effective
tax rate of 34.5%.
F-29
<PAGE> 36
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<S> <C>
23.01 Consent of Arthur Andersen LLP, Independent Public
Accountants, dated October 10, 1997 (filed herewith).
</TABLE>
<PAGE> 1
EXHIBIT 23.01
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in this
Form 8-K/A of our report dated March 14, 1997 on the financial statements of
The Woodlands Corporation. It should be noted that we have not audited any
financial statements of the Woodlands Corporation subsequent to January 31, 1997
or performed any audit procedures subsequent to the date of our report.
Arthur Andersen, LLP
Houston, Texas
October 10, 1997
