<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 11, 1997
REGISTRATION NO. 333-25223
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 4 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 75-2701931
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
INCORPORATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
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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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CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE(1) REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------------
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Common Stock, $0.01 par value.......... (2) (2) $14,101,000 $4,274.00(3)
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(1) Computed based on the book value as of March 31, 1997 of the net assets to
be contributed to the Registrant in accordance with Rule 457 under the
Securities Act. The book value of the net assets to be contributed as of
December 31, 1996, on which the registration fee was calculated at the time
of the initial filing of the Form S-1, was $12,160,000.
(2) Omitted pursuant to Rule 457(o) under the Securities Act.
(3) Of this amount, $589.00 has been paid in connection with this Amendment No.
4 to Form S-1 and $3,685.00 was paid in connection with the initial filing
of the Form S-1 on April 15, 1997.
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 11, 1997
CRESCENT OPERATING, INC.
COMMON STOCK
PREFERRED SHARE PURCHASE RIGHTS
This Prospectus is being furnished to both the shareholders of Crescent
Real Estate Equities Company, a Texas real estate investment trust ("Crescent"),
and the limited partners (the "Limited Partners") of Crescent Real Estate
Equities Limited Partnership, a Delaware limited partnership ("Crescent
Operating Partnership"), in connection with the distribution (the
"Distribution") by Crescent Operating Partnership and Crescent of all of the
outstanding shares of common stock, par value $.01 per share (the "Crescent
Operating Common Stock"), of Crescent Operating, Inc., a Delaware corporation
("Crescent Operating" or the "Company").
SEE "RISK FACTORS" BEGINNING ON PAGE 11 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS RELEVANT TO THE OWNERSHIP OF CRESCENT OPERATING COMMON STOCK.
It is expected that the Distribution will be made on , 1997.
For Limited Partners, the Distribution will be made on the basis of one share of
Crescent Operating Common Stock for every 5 units of limited partner interest
(the "Units") in Crescent Operating Partnership held on May 30, 1997 (the
"Partnership Record Date"), and for shareholders of Crescent, the Distribution
will be made on the basis of one share of Crescent Operating Common Stock for
every 10 common shares of beneficial interest, $.01 par value, of Crescent (the
"Crescent Common Shares") held on May 30, 1997 (the "Crescent Record Date" and,
together with the Partnership Record Date, the "Record Date"). No certificates
representing fractional shares of Crescent Operating will be issued in
connection with the Distribution. In lieu of fractional shares, the distribution
agent will pay to any holder who would be entitled to a fractional share of
Crescent Operating Common Stock an amount of cash (without interest) equal to
$.99 per share.
No payment need be made by, or will be accepted from, Crescent shareholders
or Limited Partners for the Crescent Operating Common Stock to be received by
them in the Distribution. Crescent shareholders will not be required to
surrender or exchange Crescent Common Shares, and Limited Partners will not be
required to surrender or exchange Units, in order to receive Crescent Operating
Common Stock. Each share of Crescent Operating Common Stock issued in the
Distribution will be accompanied by one Preferred Share Purchase Right.
There is currently no public market for Crescent Operating Common Stock.
Crescent Operating has applied for quotation of the Crescent Operating Common
Stock on the Nasdaq National Market and expects to apply for quotation of the
Crescent Operating Common Stock on the OTC Bulletin Board, although there is no
assurance that shares of Crescent Operating Common Stock will be approved for
listing on any national securities exchange, automated quotation system or
over-the-counter market.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION
OF AN OFFER TO BUY ANY SECURITIES. ANY SUCH OFFERING MAY ONLY BE MADE BY MEANS
OF A SEPARATE PROSPECTUS PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND
OTHERWISE IN COMPLIANCE WITH APPLICABLE LAW.
The date of this Prospectus is , 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
Summary Selected Financial Data........................... 10
Risk Factors................................................ 11
Lack of Operating History................................. 11
Risks Associated with the Carter-Crowley Assets........... 11
Risks Associated with the CBHS Interest................... 11
Restrictions on Crescent Operating's Business and Future
Opportunities.......................................... 13
Dependence upon Crescent; Limited Resources for Growth
through New Opportunities.............................. 13
Potential Conflicts of Interest........................... 14
Risks Associated with Unrelated Investments and Ability to
Manage Unrelated Investments; Competition.............. 14
Limited Financial Resources; Obligations under Financing
Arrangements; Limited Future Funding Commitments; Need
for Future Capital..................................... 15
Absence of a Public Market for Crescent Operating Common
Stock.................................................. 15
Absence of Dividends on Crescent Operating Common Stock
Following the Distribution............................. 15
Reliance on Key Personnel................................. 16
Certain Antitakeover Provisions........................... 16
Federal Income Tax Risks.................................. 17
The Distribution............................................ 17
Background of and Reasons for the Distribution............ 17
Manner of Effecting the Distribution...................... 18
Federal Income Tax Consequences........................... 18
Listing and Trading of Crescent Operating Common Stock.... 22
Shares Available for Future Sale.......................... 22
Dividend Policy............................................. 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................. 23
Business.................................................... 27
Overview.................................................. 27
Strategy.................................................. 27
The Intercompany Agreement................................ 28
The Carter-Crowley Assets................................. 29
The CBHS Interest......................................... 30
Property.................................................. 38
Employees................................................. 38
Management.................................................. 39
Directors and Executive Officers of Crescent Operating.... 39
Committees of the Board of Directors...................... 40
Compensation of Directors................................. 41
Annual Meeting............................................ 41
Security Ownership of Certain Beneficial Owners and
Management After the Distribution...................... 41
Executive Compensation.................................... 42
Crescent Operating Stock Incentive Plan................... 43
Certain Transactions........................................ 44
Interests Relating to Crescent Operating Partnership...... 44
Crescent.................................................. 45
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Interests Relating to Magellan............................ 45
Contract with Affiliate of Director....................... 46
Description of Crescent Operating Capital Stock............. 47
Authorized Capital Stock.................................. 47
Common Stock.............................................. 47
Preferred Stock........................................... 47
Series A Junior Preferred Stock........................... 48
Warrants.................................................. 49
Certain Antitakeover Provisions............................. 50
Staggered Board of Directors.............................. 50
Number of Directors; Removal; Filling Vacancies........... 50
No Stockholder Action by Written Consent; Special
Meetings............................................... 50
Advance Notice Provisions for Stockholder Nominations and
Stockholder Proposals.................................. 50
Relevant Factors To Be Considered by the Crescent
Operating Board........................................ 51
Amendment................................................. 51
Rights Plan............................................... 52
Delaware Business Combination Statute..................... 54
Control Share Acquisitions................................ 54
Liability of Directors and Officers; Indemnification...... 55
Experts..................................................... 56
Legal Matters............................................... 56
Index to Financial Statements............................... F-1
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ii
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AVAILABLE INFORMATION
Crescent Operating has filed with the Securities and Exchange Commission
(the "Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to Crescent Operating Common Stock and Preferred Share Purchase
Rights described herein. This Prospectus does not contain all of the information
set forth in the Registration Statement and the exhibits and schedules thereto.
For further information, reference is made hereby to the Registration Statement,
exhibits and schedules. Statements contained herein concerning any documents are
not necessarily complete and, in each instance, reference is made to the copies
of such documents filed as exhibits to the Registration Statement. Each such
statement is qualified in its entirety by such reference. Copies of these
documents may be inspected without charge at the principal office of the
Commission at 450 5th Street, N.W., Washington, D.C. 20549, and at the Regional
Offices of the Commission at 7 World Trade Center, Suite 1300, New York, New
York 10048, at Citicorp Center, Suite 1400, 500 West Madison Street, Chicago,
Illinois 60661, and at 5670 Wilshire Boulevard, Suite 1100, Los Angeles,
California 90036, and copies of all or any part thereof may be obtained from the
Commission upon payment of the charges prescribed by the Commission. Copies of
such material may also be obtained from the Commission's Web Site
(http://www.sec.gov).
Following the Distribution, Crescent Operating will be required to comply
with the reporting requirements of the Securities Exchange Act of 1934 (the
"Exchange Act") and will file annual, quarterly and other reports with the
Commission. The Company will also be subject to the proxy solicitation
requirements of the Exchange Act and, accordingly, will furnish audited
financial statements to its stockholders in connection with its annual meetings
of stockholders.
NO PERSON IS AUTHORIZED BY CRESCENT OR CRESCENT OPERATING TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED.
<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 (subject to reduction to the extent that cash
payments are made in lieu of the issuance of
fractional shares of Crescent Operating Common
Stock).
Distribution Ratio One share of Crescent Operating Common Stock for
every 10 Crescent Common Shares held on the Record
Date (as defined below), and one share of Crescent
Operating Common Stock for every 5 Units held on
the Record Date. The difference in the distribution
ratios reflects a two-for-one stock split with
respect to Crescent Common Shares, effective as of
March 26, 1997, for which there was not a
corresponding split of Units. No certificates
representing fractional shares of Crescent
Operating will be issued in connection with the
Distribution. In lieu of fractional shares, the
Distribution Agent (as defined below) will pay to
any holder who would be entitled to a fractional
share of Crescent Operating Common Stock an amount
of cash (without interest) equal to $.99 per share.
No payment need be made by, or will be accepted
from, Crescent shareholders or Limited Partners for
Crescent Operating Common Stock to be received by
them in the Distribution. Crescent shareholders
will not be required to surrender or exchange
Crescent Common Shares and Limited Partners will
not be required to surrender or exchange Units, in
order to receive Crescent Operating Common Stock.
See "The Distribution -- Manner of Effecting the
Distribution."
Federal Income Tax
Consequences For Crescent shareholders, the Distribution
generally should only result in additional taxable
income to the extent the value of the Crescent
Operating Common Stock distributed by Crescent
exceeds the basis of Crescent's share of the assets
contributed by Crescent Operating Partnership to
Crescent Operating. Management anticipates that the
amount of such income will be nominal. As a result,
management anticipates that, for a typical Crescent
shareholder, the result of the Distribution, as
compared to what would occur in the absence of the
Distribution, will be to increase the shareholder's
tax-free return of capital, but this result cannot
be assured. The Distribution will generally be
taxable to Limited Partners only if and to the
extent the value of the Crescent Operating Common
Stock distributed to them exceeds their respective
bases in their partnership interests. See "The
Distribution -- Federal Income Tax Consequences."
Risk Factors Shareholders and Limited Partners should consider
certain factors discussed under "Risk Factors,"
including risks associated with the assets that
Crescent Operating will acquire and own, Crescent
Operating's lack
2
<PAGE> 7
of operating history, potential conflicts of
interest and Crescent Operating's dependence on
Crescent.
Background of and Reasons
for the Distribution Crescent Operating has been formed to become a
lessee and operator of various assets and to
perform an agreement between Crescent Operating and
Crescent Operating Partnership (the "Intercompany
Agreement") pursuant to which Crescent Operating
and Crescent Operating Partnership have agreed to
provide each other with rights to participate in
certain transactions. In particular, Crescent
Operating will have the right to become the lessee
under a "master" lease arrangement of any property
owned or subsequently acquired by Crescent
Operating Partnership if Crescent Operating
Partnership determines that, consistent with the
status of Crescent as a real estate investment
trust for federal income tax purposes (a "REIT"),
Crescent Operating Partnership is required to enter
into such a lease and certain other conditions are
met. For example, Crescent generally would be
required, consistent with its status as a REIT, to
enter into a master lease arrangement as to hotels
and behavioral healthcare facilities. In general, a
master lease arrangement is an arrangement pursuant
to which an entire property or project (or a group
of related properties or projects) is leased to a
single lessee.
The formation of Crescent Operating and the
execution of the Intercompany Agreement will permit
stockholders of Crescent Operating who also own
Crescent Common Shares to participate in the
benefits both of the real estate operations of
Crescent (including ownership of real property) and
of the lease of certain of such assets and the
ownership of other non-real estate assets. No such
opportunities to benefit from the lease of any
assets or the ownership of any non-real estate
assets other than those identified herein have been
identified at this time (see "-- Crescent
Operating," below), and there can be no assurance
that any such opportunities will arise in the
future. In the case of opportunities for Crescent
Operating to become the lessee of any assets under
a master lease arrangement, the Intercompany
Agreement provides that Crescent Operating
Partnership must provide Crescent Operating with
written notice of the lessee opportunity. During
the 30 days following such notice, Crescent
Operating has a right of first refusal with regard
to the offer to become a lessee and the right to
negotiate with Crescent Operating Partnership on an
exclusive basis regarding the terms and conditions
of the lease. If a mutually satisfactory agreement
cannot be reached within the 30-day period,
Crescent Operating Partnership may offer the
opportunity to others for a period of one year
thereafter. Any investment opportunity other than a
lessee opportunity may be offered by Crescent
Operating Partnership to Crescent Operating in the
discretion of Crescent Operating Partnership, upon
such notice and other terms as Crescent Operating
Partnership may determine. See "Business -- The
Intercompany Agreement."
Richard E. Rainwater, John C. Goff and Gerald W.
Haddock will serve as Chairman of the Board, Vice
Chairman and President and Chief Executive Officer,
respectively, of both Crescent and Crescent
Operating. Messrs. Rainwater, Goff and Haddock all
are limited partners in Crescent Operating
Partnership and shareholders of Crescent, and Mr.
Haddock also serves as President and Chief
Executive Officer and the sole director of Crescent
Ltd., which is the general partner of Crescent
Operating Partnership. Messrs. Rainwater, Goff and
Haddock therefore will be subject to conflicts of
interest in connection with the business
relationships, and the allocation of investment
opportunities, between Crescent Operating, on the
one hand, and Crescent and Crescent Operating
Partnership, on the other.
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Crescent Operating is intended to function
principally as an operating company, in contrast to
Crescent's principal focus on investment in real
estate assets. The operating activities and
operating assets made available to Crescent
Operating by Crescent are designed to provide
Crescent's existing shareholders with the long-term
benefits of ownership in an entity devoted to the
conduct of operating business activities in
addition to their principal investment interest in
Crescent itself. A small number of REITs, operating
under tax provisions that no longer are available
to newly formed REITs, have shares that are
"paired" or "stapled" with shares of a related
operating company, and therefore cannot be owned or
transferred independently. The shares of Crescent
and Crescent Operating are not, and will not be,
paired or stapled in any manner. Because the shares
of Crescent and Crescent Operating can be owned and
transferred separately and independently of each
other, Crescent and Crescent Operating will not
provide a paired investment on an ongoing basis to
investors who purchase shares of only one company
or the other.
The Distribution of Crescent Operating Common Stock
will provide Crescent shareholders and the Limited
Partners as of the Record Date with the ability to
benefit from both the real estate operations of
Crescent and the business operations of Crescent
Operating.
Distribution Agent BankBoston, N.A. will be the Distribution Agent for
the Distribution.
Record Date May 30, 1997 (the "Record Date").
Distribution Effective Date , 1997 (the "Distribution Effective
Date"). Commencing on or about the Distribution
Effective Date, the Distribution Agent will begin
mailing account statements reflecting ownership of
Crescent Operating Common Stock to holders of
Crescent Common Shares and Units as of the Record
Date. Crescent shareholders and Limited Partners
will not be required to make any payment or to take
any other action to receive the Crescent Operating
Common Stock to which they are entitled in the
Distribution. See "The Distribution -- Manner of
Effecting the Distribution."
Trading Market There is currently no public market for Crescent
Operating Common Stock. Crescent Operating has
applied for quotation of the Crescent Operating
Common Stock on the Nasdaq National Market and
expects to apply for quotation of the Crescent
Operating Common Stock on the OTC Bulletin Board,
although there is no assurance that the Crescent
Operating Common Stock will be approved for listing
on any national securities exchange, automated
quotation system or over-the-counter market or that
a public market will develop. See "Risk Factors --
Absence of a Public Market for Crescent Operating
Common Stock" and "The Distribution -- Listing and
Trading of Crescent Operating Common Stock."
CRESCENT OPERATING
Crescent Operating Crescent Operating has been formed to become a
lessee and operator of various types of assets,
including real property owned by Crescent and
others, and to perform the Intercompany Agreement
between Crescent Operating and Crescent Operating
Partnership. In connection with the formation and
capitalization of Crescent Operating, Crescent
Operating Partnership contributed approximately
$14.1 million in cash and agreed to advance to
Crescent Operating an aggregate of approximately
$35.9 million in the form of loans (approximately
$15.3 million of which was funded on May 8, 1997),
which Crescent Operating has used or
4
<PAGE> 9
expects to use to purchase the following assets
(collectively, the "Assets"):
- assets acquired from Carter-Crowley Properties,
Inc., an unaffiliated entity, ("Carter-Crowley"),
consisting of (i) Moody-Day, Inc. ("Moody-Day"),
a construction equipment sales, leasing and
servicing company acquired for approximately $4.1
million; and (ii) a 1.21% limited partner
interest in Hicks Muse Tate & Furst Equity Fund
II, LP ("Hicks-Muse"), a private venture capital
fund acquired for approximately $9.6 million,
through which Crescent Operating has invested in
companies operating in a variety of industries,
including manufacturing, communications, real
estate, financial services and food
(collectively, the "Carter-Crowley Assets"); and
- a 50% member interest (the "CBHS Interest"), to
be acquired for approximately $7.5 million, in
Charter Behavioral Health Systems, LLC ("CBHS"),
a newly formed limited liability company which
will operate approximately 90 behavioral
healthcare facilities (the "Facilities") which
Magellan Health Services, Inc. ("Magellan"), an
unaffiliated entity, and its wholly owned
subsidiaries are expected to sell to Crescent as
a part of a transaction with Magellan (the
"Magellan Transaction"), and certain warrants to
acquire up to 1,283,311 shares of Magellan common
stock valued by Crescent Operating at
approximately $12.5 million. See "Business -- The
CBHS Interest." Richard E. Rainwater, John C.
Goff and Gerald W. Haddock, who will serve as the
Chairman of the Board, the Vice Chairman of the
Board and the President and Chief Executive
Officer of Crescent Operating and Crescent,
respectively, and each of whom will serve as
directors of Crescent and Crescent Operating,
beneficially own shares of Magellan common stock.
Mr. Rainwater beneficially owns, directly
(including shares held directly or indirectly by
his spouse and children) and indirectly through a
limited partnership of which a corporation owned
by Mr. Rainwater is the sole general partner,
approximately 19.1% of the outstanding Magellan
common stock. Each of Messrs. Goff and Haddock
beneficially owned less than one percent of the
common stock of Magellan as of December 31, 1996.
Darla D. Moore, the spouse of Mr. Rainwater, is a
director of Magellan.
Crescent Operating obtained the rights to purchase
the Assets from Crescent Operating Partnership, and
on May 9, 1997, Crescent Operating, utilizing funds
contributed to Crescent Operating by Crescent
Operating Partnership, purchased (i) the
Carter-Crowley Assets for approximately $13.7
million and (ii) a 12.38% limited partner interest
in Dallas Basketball Limited, the partnership that
holds the National Basketball Association franchise
for the Dallas Mavericks, for approximately $12.4
million.
As of June 11, 1997, Crescent Operating sold, for
approximately $12.55 million, the limited partner
interest in the partnership that owns the Dallas
Mavericks to a newly formed corporation wholly
owned by Crescent Operating Partnership. Richard E.
Rainwater, John C. Goff and Gerald W. Haddock, each
of whom will serve as a director of Crescent
Operating, also are limited partners of Crescent
Operating Partnership. As of May 30, 1997, Messrs.
Rainwater, Goff and Haddock beneficially owned
Units representing approximately 6.2%, 1.1% and
.9%,
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<PAGE> 10
respectively, of the partnership interests in
Crescent Operating Partnership outstanding as of
such date. In addition, Mr. Haddock serves as
President and Chief Executive Officer and the sole
director of Crescent Ltd., which is the general
partner of Crescent Operating Partnership, and will
serve in the same capacities in the newly formed
corporation. See "-- Interests of Richard E.
Rainwater and Affiliates," below, and "Certain
Transactions." Crescent Operating had purchased the
limited partner interest in the partnership that
owns the Dallas Mavericks from Carter-Crowley for
approximately $12.4 million utilizing a combination
of cash payments and proceeds of borrowings from
Crescent Operating Partnership. Crescent Operating
used the proceeds of the sale of the interest (i)
to pay all accrued interest under the term loan
from Crescent Operating Partnership, in the amount
of approximately $.2 million, (ii) to make a
payment of principal under the term loan of
approximately $9.9 million, and (iii) to pay a
dividend to its sole stockholder, Crescent
Operating Partnership, of approximately $2.4
million. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
An additional approximately $20.6 million will be
advanced to Crescent Operating by Crescent
Operating Partnership in the form of loans.
Crescent Operating will use approximately $20.0
million to acquire the CBHS Interest and the
warrants to acquire Magellan common stock. Crescent
Operating will use approximately $1.5 million in
cash and the remaining $.6 million in loans to fund
certain obligations to purchase construction
equipment of Moody-Day.
Crescent Operating participates in Hicks-Muse on an
investment-by-investment basis and does not own an
interest in all investments included in the
Hicks-Muse portfolio. The purchase price of the
1.21% limited partner interest in the Hicks-Muse
fund does not include Crescent Operating's
obligation to invest an additional $2.2 million in
the fund. This amount is required to be paid when
called.
Crescent Operating's certificate of incorporation,
as amended and restated (the "Charter"), provides
that one of Crescent Operating's corporate purposes
is to perform the Intercompany Agreement, pursuant
to which Crescent Operating and Crescent Operating
Partnership have agreed to provide each other with
rights to participate in certain transactions. In
addition, the Charter generally prohibits Crescent
Operating, for so long as the Intercompany
Agreement remains in effect, from engaging in
activities or making investments that a REIT could
make, unless Crescent Operating Partnership was
first given the opportunity but elected not to
pursue such activities or investments.
The principal executive offices of Crescent
Operating are located at 777 Main Street, Forth
Worth, Texas 76102, and its telephone number at
that location is (817) 877-0477. Crescent Operating
was incorporated in Delaware in April 1997.
Business Strategy Crescent Operating intends to manage the Assets,
enter into certain of the businesses to which the
Assets relate and pursue additional opportunities.
Crescent Operating believes that it has, or will
have access to, sufficient liquidity and management
expertise to manage the Assets successfully.
6
<PAGE> 11
Crescent Operating's investment and operating
strategies are to acquire and operate a
complementary group of businesses which are aligned
with certain of the investments and businesses of
Crescent. To pursue additional opportunities,
Crescent Operating plans to capitalize on its
relationship with Crescent and Crescent's ability
to structure transactions creatively. Crescent
Operating also plans to explore the possibility of
providing to Crescent certain lessee and
operational services currently provided by others
to Crescent. In this regard, Crescent Operating
plans to enter into negotiations to acquire or
replace the current tenants of certain hotels and
resorts owned by Crescent and leased to third
parties. No such negotiations are currently
ongoing, however, and there is no assurance that
any such agreements will be reached. The additional
opportunities Crescent Operating may pursue are
expected to be varied and may be unrelated to any
business in which Crescent Operating will be
engaged initially. Accordingly, Crescent Operating
expects that, in the future, it may sell existing
assets that are inconsistent with its long-term
strategies.
Management of Crescent
Operating Richard E. Rainwater, John C. Goff and Gerald W.
Haddock will serve as Chairman of the Board, Vice
Chairman and the President and Chief Executive
Officer, respectively, of Crescent Operating. Each
currently serves in the same capacity at Crescent.
See "Management."
Preferred Share Purchase
Rights Crescent Operating expects to adopt a Preferred
Share Purchase Rights Plan (the "Rights Plan") on
or prior to the Distribution Effective Date. If so
adopted, certificates issued in the Distribution
representing Crescent Operating Common Stock will
also initially represent an equivalent number of
associated Preferred Share Purchase Rights of
Crescent Operating (the "Rights"). See "Certain
Antitakeover Provisions -- Rights Plan."
Certain Antitakeover
Provisions Certain provisions of Crescent Operating's Charter
and Crescent Operating's bylaws, as amended and
restated (the "Bylaws"), as each will be in effect
as of the Distribution, and of the Delaware General
Corporation Law (the "DGCL"), have the effect of
making more difficult an acquisition of control of
Crescent Operating in a transaction not approved by
the Crescent Operating Board of Directors. These
provisions include (i) a provision for a classified
Board, with only approximately one-third of the
Board to be elected in any year, to serve for
three-year terms, (ii) a requirement that directors
be removed only for cause upon the affirmative vote
of holders of at least 80% of the total voting
power, (iii) a requirement that actions of
stockholders be taken at a meeting of stockholders,
rather than by written consent, (iv) a prohibition
on the stockholders' ability to call a special
meeting, (v) an advance notice requirement for
stockholders to make nominations of candidates for
directors or to bring other business before an
annual meeting of stockholders, and (vi) a
requirement that certain amendments to the Charter
be approved by the affirmative vote of 80% of the
total voting power. See "Description of Crescent
Operating Capital Stock" and "Certain Antitakeover
Provisions." The Rights Plan will also make more
difficult an acquisition of control of Crescent
Operating in a transaction not approved by the
Crescent Operating Board. The Rights Plan and
certain provisions of the Charter do not apply to
Crescent and its affiliates. See "Certain
Antitakeover Provisions -- Rights Plan."
7
<PAGE> 12
Post-Distribution Dividend
Policy Following the Distribution, Crescent Operating
intends to use its available funds to pursue
investment and business opportunities and,
therefore, does not anticipate the payment of any
cash dividends on Crescent Operating Common Stock
in the foreseeable future. Payment of dividends on
Crescent Operating Common Stock is prohibited under
loans from Crescent Operating Partnership until all
amounts outstanding thereunder are paid in full and
will also be subject to such limitations as may be
imposed by any other credit facilities that
Crescent Operating may obtain from time to time. As
of June 11, 1997, the outstanding principal balance
of loans from Crescent Operating Partnership to
Crescent Operating was approximately $5.4 million.
The declaration of dividends will be subject to the
discretion of the Crescent Operating Board. See
"Dividend Policy."
Interests of Richard E.
Rainwater
and Affiliates Richard E. Rainwater, John C. Goff and Gerald W.
Haddock will serve as Chairman of the Board, Vice
Chairman and the President and Chief Executive
Officer, respectively, of Crescent Operating and
Crescent. Each also will serve as a director of
Crescent Operating and Crescent. Mr. Rainwater has
a significant interest in Crescent, Crescent
Operating and Magellan through Mr. Rainwater's
positions as an officer or director of Crescent and
Crescent Operating and through his direct and
indirect ownership of common equity of each of
these entities and his ownership of Units of
Crescent Operating Partnership. Mr. Haddock is the
sole director of Crescent Ltd., which is the sole
general partner of Crescent Operating Partnership.
Crescent Ltd. is a wholly owned subsidiary of
Crescent. As of May 30, 1997, Messrs. Rainwater,
Goff and Haddock beneficially owned approximately
12.5%, 2.0%, and 1.5% of Crescent, respectively,
which interests consist of Crescent Common Shares
and Units of Crescent Operating Partnership, a
portion of which may be held by partnerships or
trusts as to which Messrs. Rainwater, Goff and
Haddock have voting control. Immediately following
the Distribution, each of Messrs. Rainwater, Goff
and Haddock is expected to beneficially own
approximately 12.5%, 2.0%, and 1.5% of the
then-outstanding shares of Crescent Operating
Common Stock. See "Management -- Security Ownership
of Certain Beneficial Owners and Management After
the Distribution." In addition, Mr. Rainwater
beneficially owns approximately 19.1% of the
outstanding Magellan common stock, the substantial
portion of which is attributable to his ownership
of 100% of the stock of the sole general partner of
a limited partnership that beneficially owned
3,885,832 shares of Magellan common stock as of
December 31, 1996. See "Risk Factors -- Potential
Conflicts of Interest" and "Certain Transactions."
Transfer Agent and
Registrar BankBoston, N.A. will be the Transfer Agent and
Registrar for Crescent Operating after the
Distribution.
8
<PAGE> 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, (iii) the purchase and subsequent sale of the
12.38% limited partner interest in the partnership that owns the Dallas
Mavericks, and (iv) the acquisition of the CBHS Interest, which is a 50%
interest in CBHS.
<TABLE>
<CAPTION>
CRESCENT
OPERATING, INC.
AS ADJUSTED FOR
CRESCENT ACQUISITION OF ACQUISITION OF ACQUISITION OF
OPERATING, INC. CARTER-CROWLEY CARTER-CROWLEY 50% INTEREST PRO FORMA
HISTORICAL ASSET GROUP(1) ASSET GROUP(1) IN CBHS(2) CONSOLIDATED
--------------- -------------- --------------- -------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating Data:
Revenues............................. $ -- $10,394 $10,394 $ -- $ 10,394
Gross Profit......................... -- 1,857 1,857 -- 1,857
Equity in loss of CBHS............... -- -- -- 7,659 7,659
Income (loss) from Operations........ -- 109 (397) (7,659) (8,056)
Net loss............................. -- (111) (3,162) (7,659) (10,821)
Weighted average shares
outstanding........................ 11,025,547
Net loss per share................... $ (.98)
</TABLE>
- ---------------
(1) For purposes of this table, the "Carter-Crowley Asset Group" consists of
Moody-Day and Hicks-Muse.
(2) Represents Crescent Operating's share of the pro forma loss of CBHS
primarily as a result of the anticipated $78.2 million franchise fee and the
$63.0 million payable under lease arrangements with Crescent, reduced by
depreciation relating to the Facilities. See "Business -- The CBHS
Interest."
The pro forma information for the three months in the period ended March
31, 1997, assumes completion, in each case as of January 1, 1997 in determining
operating data, and, in each case as of December 31, 1996, in determining
balance sheet data, of (i) the formation and capitalization of Crescent
Operating, (ii) the acquisition of the Carter-Crowley Assets and the recording
of the transaction under the purchase method of accounting, and (iii) the
purchase and subsequent sale of the 12.38% limited partner interest in the
partnership that owns the Dallas Mavericks, (iv) the acquisition of the CBHS
Interest, which is a 50% interest in CBHS, and the related acquisition of
warrants to purchase 1,283,311 shares of Magellan common stock.
<TABLE>
<CAPTION>
CRESCENT
OPERATING, INC.
ACQUISITION OF AS ADJUSTED FOR
CRESCENT CARTER- ACQUISITION OF ACQUISITION OF
OPERATING, INC. CROWLEY CARTER-CROWLEY 50% INTEREST PRO FORMA
HISTORICAL ASSET GROUP(1) ASSET GROUP(1) IN CBHS(2) CONSOLIDATED
--------------- -------------- --------------- -------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating Data:
Revenues................................. $ -- $ 3,039 $ 3,039 $ -- $ 3,039
Gross Profit............................. -- 577 577 -- 577
Equity in loss of CBHS................... -- -- -- 2,416 2,416
Income (loss) from Operations............ -- 139 13 (2,416) (2,403)
Net income (loss)........................ -- 23 (715) (2,416) (3,131)
Weighted average shares outstanding...... 11,025,547
Net loss per share....................... $ (.28)
Balance Sheet Data:
Total assets............................. $ 1 NA $37,364 -- $ 37,364
Total debt............................... -- NA 24,226 -- 24,226
Total stockholder equity................. 1 NA 11,721 -- 11,721
</TABLE>
- ---------------
(1) For purposes of this table, the "Carter-Crowley Asset Group" consists of
Moody-Day and Hicks-Muse.
(2) Represents Crescent Operating's share of the pro forma loss of CBHS
primarily as a result of the anticipated $78.2 million franchise fee and the
$63.0 million payable under lease arrangements with Crescent, reduced by
depreciation relating to the Facilities. See "Business -- The CBHS
Interest."
9
<PAGE> 14
SUMMARY SELECTED FINANCIAL DATA
The following table sets forth certain summary historical financial
information for the Carter-Crowley Asset Group. This summary information is
qualified by and should be used in conjunction with the Carter-Crowley Asset
Group financial statements and notes thereto included elsewhere in this
Prospectus. For purposes of this table, the "Carter-Crowley Asset Group"
consists of Moody-Day and Hicks-Muse.
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------------- -----------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------- ------- ------- ------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Revenues.............................................. $ 3,039 $ 2,723 $10,394 $ 9,147 $ 7,671 $ 6,979 $ 5,831
Gross Profit.......................................... 577 458 1,857 1,698 1,457 1,303 1,206
Income (loss) from Operations......................... 139 68 109 89 83 89 (45)
Net income (loss)..................................... 23 13 (111) 79 43 36 (90)
Balance Sheet Data:
Total assets.......................................... $18,677 $14,475 $17,483 $13,230 $ 5,348 $ 4,578 $ 4,017
Total debt............................................ 4,863 3,127 5,405 3,121 1,375 850 466
Total stockholder equity.............................. 12,397 10,476 10,925 9,358 3,338 3,289 3,661
</TABLE>
10
<PAGE> 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 construction equipment sales,
leasing and service company and a 1.21% limited partner interest in a private
venture capital fund purchased from Carter-Crowley. The Carter-Crowley Assets
are unrelated to one another and possibly unrelated to any future business in
which Crescent Operating will invest. The Carter-Crowley Assets are relatively
illiquid. See "Business -- The Carter-Crowley Assets."
Construction Equipment Sales, Leasing and Service Company. Moody-Day sells,
leases and services construction equipment primarily to the construction and
utility industries in Texas. An economic downturn or recession in these
industries may adversely affect Moody-Day's operating results. Moody-Day has
several competitors, some of which are larger or better capitalized and may be
better-positioned to acquire a larger share of the market. Moreover, equipment
shortages have and may continue to have a negative impact on operations.
Moody-Day also faces exposure for claims of injury incurred in connection with
the use of the equipment it sells, leases and services.
Limited Partner Interest in Private Venture Capital Fund. Hicks-Muse is a
private venture capital fund in which Crescent Operating owns a 1.21% limited
partner interest. The unpaid principal balance due on the original commitment by
Carter-Crowley to invest $10 million in Hicks-Muse was $2.2 million as of
December 31, 1996, and Crescent Operating has assumed this obligation in
connection with the acquisition of its interest in Hicks-Muse. Investments of
Crescent Operating through Hicks-Muse consist of, among other things,
investments in a manufacturer of wire and cable and a cable television operator
(which investments account for approximately 56% of Crescent Operating's
investments through Hicks-Muse). In addition to such investments in the
manufacturing and communications industries, Crescent Operating has investments,
through Hicks-Muse in the real estate, financial services and food industries.
Volatility in the securities markets, interest rate increases and unfavorable
conditions in the economy generally, and in the manufacturing and communications
industries in particular, may have a negative impact on Hicks-Muse's
performance.
RISKS ASSOCIATED WITH THE CBHS INTEREST
The Magellan Transaction cannot be consummated, and therefore the CBHS
Interest cannot be acquired, until the Distribution is effective and customary
closing conditions have been satisfied. See "Business -- The CBHS Interest." On
May 30, 1997, the requisite percentage of the Magellan stockholders approved the
Magellan Transaction. In addition, the Magellan Transaction is conditioned upon
the closing of each component transaction, including the purchase of the
Facilities by Crescent.
11
<PAGE> 16
If acquired, the CBHS Interest presents the following risks to stockholders
of Crescent Operating.
Franchise Agreement Risks. The Master Franchise Agreement to be entered
into between CBHS and Magellan, through a wholly owned subsidiary, is for an
initial term of 12 years, and CBHS will have the right to renew the Master
Franchise Agreement for four additional five-year terms, for a maximum of 32
years. At the end of the initial term and each renewal term the franchise fees
will be adjusted to reflect the fair market value of the franchise.
Notwithstanding that the Master Franchise Agreement provides for an appraisal
mechanism for determining the fair market value of the franchise fees, Magellan
will have the right not to consent to the fee adjustment, and can terminate the
Master Franchise Agreement, at the end of the initial or any renewal term. If
Magellan terminates the Master Franchise Agreement prior to the full 32-year
term, CBHS will be subject to a three-year covenant not to engage in the
hospital-based behavioral healthcare business except pursuant to a written
agreement with Magellan. Accordingly, Magellan could extract franchise fees in
excess of the fair market value of the franchise, or CBHS could be precluded
from being in the hospital-based behavioral healthcare business for a
significant period of time. Either result could materially adversely affect the
value of Crescent Operating's investment in CBHS.
Reliance of CBHS on Magellan and Crescent Operating. CBHS will rely on
Magellan to extend a line of credit in the principal amount of up to $55 million
secured by CBHS's receivables, for up to one year after the closing of the
Magellan Transaction (the "Magellan Closing") or, under certain circumstances,
provide a guarantee not to exceed $65 million for a CBHS bank line of credit
secured by receivables of CBHS. Each of Crescent Operating and a wholly owned
subsidiary of Magellan ("Magellan Affiliate") also will be required to
contribute an additional $2.5 million to CBHS in cash five days after the
Magellan Closing, and to lend CBHS up to $17.5 million upon the request of
Magellan Affiliate during the five years following the Magellan Closing. In
addition, Magellan will be required to provide various assets and services to
CBHS under the Master Franchise Agreement and to CBHS subsidiaries under
Subsidiary Franchise Agreements. Accordingly, CBHS' ability to operate the
Facilities as contemplated by the Magellan Transaction will depend in part upon,
Magellan Affiliate's and Crescent Operating's financial status.
Lack of Control of CBHS; Management Deadlock. CBHS will be governed by a
four-member board (the "CBHS Board"), two of which will be appointed by each of
Crescent Operating and Magellan Affiliate. A significant number of decisions
require 80% CBHS Board approval (specifically, the approval of all four
directors). Accordingly, the directors appointed by Crescent Operating will be
unable to exercise control of CBHS without the concurrence of the directors
appointed by Magellan Affiliate. The CBHS Operating Agreement provides that a
deadlock of the CBHS Board will be deemed to exist if the CBHS Board is unable
to reach agreement by the required vote at two successive meetings on (i) a
decision requiring 80% CBHS Board approval; (ii) a decision involving the
expenditure of more than a specified amount; or (iii) a decision relating to the
executive officers. Further, an unresolved deadlock could lead either to the
forced sale of Crescent Operating's interest in CBHS, or the required purchase
by Crescent Operating of Magellan Affiliate's interest in CBHS. In the latter
case, Crescent Operating would be faced with funding the purchase of Magellan
Affiliate's interest and subsequently operating the Facilities, through CBHS,
without Magellan's healthcare experience.
CBHS Conflicts of Interest. With the exception of John C. Goff, who will
become Chairman of the CBHS Board, all of the executive officers of CBHS upon
formation of CBHS will be former employees of Magellan, and therefore may be
subject to conflicts of interests in matters in which Crescent Operating and
Magellan have conflicting interests.
Possible Violation of Government Regulations. The operation of healthcare
facilities such as the Facilities is subject to substantial federal, state and
local regulation, including federal Medicare law. In addition to other laws and
regulations with which CBHS will be required to comply, CBHS will be subject to
federal and state laws that govern financial arrangements between healthcare
providers. Any failure to comply with these laws or regulations could have an
adverse effect on the operations of CBHS.
The laws governing financial arrangements between healthcare providers
generally prohibit certain direct and indirect payments and/or fee-splitting
arrangements between healthcare providers that are designed to induce, are in
exchange for, or encourage patient referrals. The Medicare Law Amendments, which
are among the most prominent of laws of this type, prohibit the offering,
paying, soliciting or receiving of any form of
12
<PAGE> 17
remuneration in return for referring federal healthcare patients, or in return
for purchasing, leasing, ordering or arranging for, or recommending purchasing,
leasing or ordering any good, facility, service or item for which payment may be
made under federal healthcare programs. Violations of the Medicare Law
Amendments may result in criminal and civil sanctions, including exclusion from
the Medicare and/or Medicaid programs.
Following the consummation of the Magellan Transaction, CBHS will pay fixed
franchise fees to Magellan, subject to increase in certain circumstances. See
"Business -- The CBHS Interest -- Master Franchise Agreement." CBHS will receive
from Magellan an array of services, including advertising and marketing
assistance, risk management services, outcomes monitoring, consultation with
respect to matters relating to CBHS' business in which Magellan has expertise
and Magellan's operation of a telephone call center utilizing an "800" telephone
number. Magellan has advised Crescent Operating that it believes that the
franchise fee arrangements described herein are consistent with the Medicare Law
Amendments because such arrangements do not involve CBHS's receipt of referrals
of patients from Magellan. There can be no assurance, however, that regulatory
agencies or private parties will not challenge the arrangement and Crescent
Operating based on alleged violations of the Medicare Law Amendments.
RESTRICTIONS ON CRESCENT OPERATING'S BUSINESS AND FUTURE OPPORTUNITIES
Crescent Operating's Charter provides that, for so long as the Intercompany
Agreement remains in effect, Crescent Operating is prohibited from engaging in
activities or making investments that a REIT could make unless Crescent
Operating Partnership was first given the opportunity but elected not to pursue
such activities or investments. Crescent Operating's Charter also provides that
a corporate purpose of Crescent Operating is to perform its obligations under
the Intercompany Agreement. The formation of Crescent Operating and the
execution of the Intercompany Agreement will permit stockholders of Crescent
Operating who also own Crescent Common Shares to participate in the benefits
both of the real estate operations of Crescent (including ownership of real
property) and of the lease of certain of such assets and the ownership of other
non-real estate assets. Under the Charter and the Intercompany Agreement,
Crescent Operating has agreed not to acquire or make (i) investments in real
estate (which, for purposes of the Intercompany Agreement, includes the
provision of services related to real estate and investment in hotel properties,
real estate mortgages, real estate derivatives or entities that invest in real
estate assets) or (ii) any other investments that may be structured in a manner
that qualifies under the federal income tax requirements applicable to REITs,
unless it has notified Crescent Operating Partnership of the acquisition or
investment opportunity, in accordance with the terms of the Intercompany
Agreement, and Crescent Operating Partnership has determined not to pursue such
acquisition or investment. See "Business -- The Intercompany Agreement."
Crescent Operating also has agreed to assist Crescent Operating Partnership in
structuring and consummating any such acquisition or investment which Crescent
Operating Partnership elects to pursue, on terms determined by Crescent
Operating Partnership. Further, Crescent Operating Partnership is not required
to offer Crescent Operating the opportunity to participate in transactions or
make investments other than pursuant to Crescent Operating's right of first
refusal to become the lessee of any real property acquired by Crescent Operating
Partnership as to which Crescent Operating Partnership determines that,
consistent with Crescent's status as a REIT, it is required to enter into a
master lease arrangement. This lessee opportunity will be available to Crescent
Operating only if Crescent Operating Partnership determines, in its sole
discretion, that Crescent Operating is qualified to be the lessee. Because of
the provisions of the Intercompany Agreement and Crescent Operating's Charter,
the nature of Crescent Operating's business and the opportunities it may pursue
are restricted.
DEPENDENCE UPON CRESCENT; LIMITED RESOURCES FOR GROWTH THROUGH NEW OPPORTUNITIES
Due to Crescent Operating's restricted corporate purpose and the
Intercompany Agreement, Crescent Operating will rely significantly on Crescent
and Crescent Operating Partnership to identify business opportunities for
Crescent Operating. There is no assurance that Crescent or Crescent Operating
Partnership will identify opportunities for Crescent Operating or that any
opportunities that either identifies will be within Crescent Operating's
financial, operational or management parameters. In addition, Crescent Operating
Partnership will provide the lessee opportunities described in the Intercompany
Agreement only if it is
13
<PAGE> 18
necessary for Crescent, consistent with its status as a REIT, to enter into a
master lease arrangement and only if Crescent Operating and Crescent Operating
Partnership negotiate a mutually satisfactory master lease arrangement. If
Crescent in the future should fail to qualify as a REIT, such failure could have
a substantial adverse effect on those aspects of Crescent Operating's business
operations and business opportunities that are dependent upon Crescent. See "The
Distribution -- Federal Income Tax Considerations -- Taxation of Crescent in
General" for a discussion of Crescent's status as a REIT. For example, the
Intercompany Agreement remains effective even if Crescent ceases to qualify as a
REIT, with Crescent Operating's rights relating to lessee opportunities under
the Intercompany Agreement continuing to be based on Crescent's need to create a
master lease structure due to its status as a REIT. Accordingly, if Crescent
failed to qualify as a REIT and thereafter acquired a property, Crescent would
have the right under the Intercompany Agreement to lease the property to any
person or entity pursuant to any type of lease (including a master lease
arrangement) or to operate the property itself. Crescent Operating, however,
would remain subject to all of the limitations on its operations contained in
the Charter and the Intercompany Agreement. In addition, although it is
anticipated that any master lease arrangement involving Crescent Operating
generally will provide that Crescent Operating's rights will continue following
a sale of the property or an assignment of the lease (with the likelihood of a
sale or assignment of lease possibly increasing if Crescent fails to qualify as
a REIT), Crescent Operating could lose its rights under any such master lease
arrangement upon the expiration of the lease. If Crescent Operating and Crescent
Operating Partnership do not negotiate a mutually satisfactory lease arrangement
within 30 days after Crescent Operating Partnership provides Crescent Operating
with written notice of the lessee opportunity (or such longer period to which
Crescent Operating and Crescent Operating Partnership may agree), Crescent
Operating Partnership may offer the opportunity to others for a period of one
year before it must again offer the opportunity to Crescent Operating.
POTENTIAL CONFLICTS OF INTEREST
Richard E. Rainwater will serve as Chairman of the Boards of Crescent and
Crescent Operating. John C. Goff will serve as Vice Chairman of Crescent and of
Crescent Operating. Gerald W. Haddock is President, Chief Executive Officer and
a director of Crescent and of Crescent Operating. Although each of them is
committed to the success of Crescent Operating, they are also committed to the
success of Crescent. None of Messrs. Rainwater, Goff or Haddock is committed to
spending a particular amount of time on Crescent Operating's affairs, nor will
any of them devote his full time to Crescent Operating. Five of the members of
the Crescent Board will also be members of the Crescent Operating Board. In
addition, it is anticipated that the Crescent Operating Board will include two
members who are unaffiliated with Crescent.
In addition to his positions with Crescent Operating and Crescent Operating
Partnership, Mr. Rainwater is the beneficial owner of approximately 19.1% of the
outstanding Magellan common stock. Mr. Rainwater's spouse, Darla D. Moore,
serves as a director of Magellan. Through these relationships, Mr. Rainwater may
have the ability to influence decisions of Magellan in a manner that may benefit
Magellan to the detriment of Crescent Operating or vice versa.
Officers and directors of a corporation owe fiduciary duties to the
stockholders of that corporation. There is a risk that the common membership of
management and members of the Boards of Crescent Operating and Crescent will
lead to conflicts of interest in connection with transactions between the two
companies. Crescent Operating was formed with specific purpose clauses in its
Charter in an effort to avoid conflicts of interest issues by identifying at the
outset which types of opportunities will be pursued by each company. These
clauses provide that Crescent Operating's purposes include performing the
Intercompany Agreement and refraining from engaging in activities or making
investments that a REIT could make until Crescent has been offered the
opportunity and has declined to pursue such activities or investments.
RISKS ASSOCIATED WITH UNRELATED INVESTMENTS AND ABILITY TO MANAGE UNRELATED
INVESTMENTS; COMPETITION
Either through management of the Assets or through implementing its
strategy and corporate purpose of carrying out the Intercompany Agreement,
Crescent Operating will pursue a variety of opportunities. Although Crescent
Operating intends to acquire and operate a complementary group of businesses,
there may be differences among the businesses in which it engages that may
require a wide range of skills and qualifications, and there is no assurance
that the management or employees of Crescent Operating will have,
14
<PAGE> 19
or that Crescent Operating will be able to hire and retain employees with, such
skills and qualifications. There also is no assurance that the opportunities
Crescent Operating pursues will be integrated, perform as expected or contribute
significant revenues or profits to Crescent Operating. The industries in which
Crescent Operating will compete may be subject to government regulation and
restrictions, some of which may be significant and burdensome. The businesses
with which it will compete may be better capitalized or have other features that
will make it difficult for Crescent Operating to compete effectively.
LIMITED FINANCIAL RESOURCES; OBLIGATIONS UNDER FINANCING ARRANGEMENTS; LIMITED
FUTURE FUNDING COMMITMENTS; NEED FOR FUTURE CAPITAL
Crescent Operating will be in a position to manage the Carter-Crowley
Assets and acquire the CBHS Interest because of funds, including loans and a
line of credit, provided to it by Crescent Operating Partnership in connection
with the formation and capitalization of Crescent Operating. In connection with
the formation and capitalization of Crescent Operating, Crescent Operating
obtained from Crescent Operating Partnership (i) a five-year term loan pursuant
to which it has the right to borrow from Crescent Operating Partnership an
aggregate of approximately $35.9 million (approximately $15.3 million of which
was funded on May 8, 1997 and approximately $9.9 million of which was repaid on
June 11, 1997, as a result of the sale to an affiliated entity of the limited
partner interest in the partnership that owns the Dallas Mavericks, as described
in "Certain Transactions") and (ii) a line of credit for up to $20.4 million. As
a result of the repayment of a portion of the amounts outstanding under the term
loan on June 11, 1997, it is anticipated that the maximum borrowings under the
term loan will be approximately $26.0 million. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Crescent
Operating -- Liquidity and Capital Resources." Prior to maturity the loan and
line of credit will be payable only to the extent of net cash flow, with the
line of credit payable on an interest-only basis during its term. There can be
no assurance that the Company will be able to satisfy all of its obligations
under the loan and line of credit at the time that they mature.
Crescent Operating intends to utilize any funds it may borrow under the
$20.4 million line of credit primarily to meet its requirements under the CBHS
Operating Agreement. Crescent Operating has not received any commitment with
respect to any additional borrowing. There is no assurance that Crescent
Operating will have sufficient working capital to finance future acquisitions or
pursue additional opportunities. Crescent Operating expects to be able to access
capital markets or to seek other financing, including financing from Crescent or
with Crescent's assistance, but there is no assurance that it will be able to do
so at all or in amounts or on terms acceptable to the Company, and currently the
$20.4 million line of credit is the Company's only external source of financing.
Crescent currently is not obligated to provide any additional funds to Crescent
Operating or to assist it in obtaining additional financing.
ABSENCE OF A PUBLIC MARKET FOR CRESCENT OPERATING COMMON STOCK
There is currently no public market for Crescent Operating Common Stock.
Crescent Operating has applied for quotation of the Crescent Operating Common
Stock on the Nasdaq National Market and expects to apply for quotation of the
Crescent Operating Common Stock on the OTC Bulletin Board, although there is no
assurance that the Crescent Operating Common Stock will be approved for listing
on any national securities exchange, automated quotation system or
over-the-counter market. There can be no assurance as to the prices at which
trading in Crescent Operating Common Stock will occur after the Distribution.
Until the Crescent Operating Common Stock is fully distributed and an orderly
trading market develops, the prices at which trading in the Crescent Operating
Common Stock occurs may fluctuate significantly. In the event no regular trading
market develops for Crescent Operating Common Stock, holders of Crescent
Operating Common Stock may not be able to sell their shares promptly at a
desired price. Accordingly, holders of Crescent Operating Common Stock should
consider such shares a long-term investment.
ABSENCE OF DIVIDENDS ON CRESCENT OPERATING COMMON STOCK FOLLOWING THE
DISTRIBUTION
Following the Distribution, Crescent Operating intends to use its available
funds to pursue investment and business opportunities and, therefore, does not
anticipate the payment of any cash dividends on Crescent
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Operating Common Stock in the foreseeable future. On June 11, 1997, Crescent
Operating paid a one-time dividend of approximately $2.4 million to its sole
stockholder, Crescent Operating Partnership, in connection with the sale of the
limited partner interest in the partnership that owns the Dallas Mavericks.
Payment of dividends on Crescent Operating Common Stock is prohibited under
the loan and line of credit from Crescent Operating Partnership until all
amounts outstanding thereunder have been paid in full, and will also be subject
to such limitations as may be imposed by any other credit facilities that
Crescent Operating may obtain from time to time. See "Dividend Policy."
RELIANCE ON KEY PERSONNEL
The success of Crescent Operating depends to a significant degree upon the
contribution of its executive officers and other key personnel. None of the
Crescent Operating executive officers has an employment agreement with Crescent
Operating. There can be no assurance that the Company will be able to retain its
key managerial and other key personnel or to attract suitable replacements or
additional personnel if required. Crescent Operating has not obtained key-man
insurance for any of its executive officers and other key personnel.
CERTAIN ANTITAKEOVER PROVISIONS
The Charter and Bylaws, the Rights Plan and applicable sections of the DGCL
contain several provisions that may make more difficult the acquisition of
control of Crescent Operating without the approval of the Crescent Operating
Board. Certain provisions of Crescent Operating's Charter and the Bylaws, among
other things: (i) classify the Crescent Operating Board into three classes, each
of which serves for staggered three-year terms; (ii) provide that a director of
Crescent Operating may be removed by the stockholders only for cause; (iii)
provide that only the Chairman of the Board, Vice Chairman, President or the
Crescent Operating Board may call special meetings of the stockholders; (iv)
provide that the stockholders may take action only at a meeting of Crescent
Operating stockholders, not by written consent; (v) provide that stockholders
must comply with certain advance notice procedures in order to nominate
candidates for election to the Crescent Operating Board or to place
stockholders' proposals on the agenda for consideration at meetings of the
stockholders; (vi) provide that, under certain circumstances, the affirmative
vote of the holders of two-thirds of the Crescent Operating Common Stock is
required to approve any merger or similar business combination involving
Crescent Operating; (vii) provide that the holder of "control shares" of
Crescent Operating acquired in a control share acquisition have no voting rights
with respect to such control shares except to the extent approved by the vote of
the holders of two-thirds of the Crescent Operating Common Stock (the "control
shares provision"); and (viii) provide that the stockholders may amend or repeal
any of the foregoing provisions of the Charter or the Bylaws only by a vote of
80% of the stock entitled to vote generally in the election of directors. With
certain exceptions, Section 203 of the DGCL ("Section 203") imposes certain
restrictions on mergers and other business combinations between Crescent
Operating and any holder of 15% or more of the Crescent Operating Common Stock.
The Charter provides that the control shares provision, the Rights Plan and
Section 203 do not apply to Crescent and its affiliates. Accordingly, Crescent
and its affiliates will be in a position to effect a business combination or
other transaction with Crescent Operating in situations where others would be
restricted from effecting a similar transaction. The Charter authorizes the
Board of Directors to issue up to 10 million shares of preferred stock, par
value $.01 per share, in series, and to establish the rights and preferences
(including the convertibility of such shares of preferred stock into shares of
Crescent Operating Common Stock) of any series of preferred stock so issued. The
issuance of preferred stock could have the effect of delaying or preventing a
change in control of Crescent Operating, even if such a change in control were
in the best interests of some, or a majority, of Crescent Operating's
stockholders. See "Description of Crescent Operating Capital Stock" and "Certain
Antitakeover Provisions."
The Rights Plan would cause substantial dilution to a person or group that
attempts to acquire Crescent Operating on terms not approved in advance by the
Crescent Operating Board. Under the Rights Plan, until 10 business days
following such time as a person or group has acquired beneficial ownership of,
or has proposed a tender offer or exchange offer that would result in a person
or group's owning, 10% or more of the outstanding shares of Crescent Operating
Common Stock, (the "Rights Distribution Effective Date") the
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Rights will be transferred only with the Crescent Operating Common Stock.
Following the Rights Distribution Effective Date, separate certificates
evidencing the Rights will be mailed to each holder of record on the Rights
Distribution Effective Date. Thereafter, each holder of a Right (other than the
person or group) will thereafter have the right to receive, upon exercise of
such Right, that number of shares of Crescent Operating Common Stock having a
market value equal to two times the exercise price of the Right. Similar
provisions apply in the event of a merger or other business combination as a
result of which a person or group will own 10% or more of the outstanding shares
of Crescent Operating Common Stock. Prior to the time that any such person or
group acquires 10% or more of the outstanding shares of Crescent Operating
Common Stock, the Board of Directors may redeem the Rights in whole for $.01 per
Right. After the time that any such person or group acquires 10% or more, but
less than 50%, of the outstanding shares of Crescent Operating Common Stock, the
Board of Directors may exchange the Rights, in whole or in part, at an exchange
ratio of one share of Crescent Operating Common Stock, or one-hundredth of a
share of Series A Junior Preferred Stock per Right. See "Description of Crescent
Operating Capital Stock -- Series A Junior Preferred Stock."
FEDERAL INCOME TAX RISKS
On the Distribution Effective Date, Crescent will, in the opinion of Shaw,
Pittman, Potts & Trowbridge, tax counsel to Crescent Operating and Crescent
("Tax Counsel"), recognize gain measured by the difference between the value of
the Crescent Operating Common Stock distributed by Crescent and the basis of
Crescent in such stock, which will depend in turn on the basis of Crescent's
share of the assets contributed by Crescent Operating Partnership to Crescent
Operating. Although management anticipates that any such gain would be nominal,
the Internal Revenue Service (the "Service") may be able to assert successfully
that the gain is not insubstantial. Because of the factual nature of valuation,
Tax Counsel is not able to render an opinion on it. Under the REIT rules,
Crescent's gain, if any, would be passed through to the Crescent shareholders.
The value of the Crescent Operating Common Stock distributed, plus any cash
distributed in lieu of fractional shares, would be treated under the rules
generally applicable to cash distributions. Management anticipates that, for a
typical Crescent shareholder, the result of the Distribution, as compared to
what would occur in the absence of the Distribution, will be to increase the
shareholder's tax-free return of capital, but this result cannot be assured.
With respect to Limited Partners, the contribution by Crescent Operating
Partnership into Crescent Operating should not constitute a taxable event, but
the Service may successfully assert the contrary, and in any event the
Distribution will be taxable to a Limited Partner if and to the extent the value
of the Crescent Operating Stock received by the Limited Partner exceeds the
Limited Partner's basis in the Limited Partner's partnership interest. See "The
Distribution -- Federal Income Tax Consequences."
THE DISTRIBUTION
BACKGROUND OF AND REASONS FOR THE DISTRIBUTION
Crescent Operating has been formed to become a lessee and operator of
various assets and to perform the Intercompany Agreement. Under the Intercompany
Agreement, Crescent Operating and Crescent Operating Partnership will agree to
provide each other with rights to participate in certain transactions. In
particular, Crescent Operating will have a right of first refusal to become the
lessee of any real property acquired by Crescent Operating Partnership if
Crescent Operating Partnership determines that, consistent with Crescent's
status as a REIT, it is required to enter into a "master" lease arrangement,
provided that Crescent Operating Partnership determines, in its sole discretion,
that Crescent Operating is qualified to be the lessee. See "Business -- The
Intercompany Agreement." In addition, Crescent Operating intends to pursue
additional opportunities with others in the future. The Distribution of Crescent
Operating Common Stock will enable Crescent shareholders and the Limited
Partners as of the Record Date with the opportunity to participate in the
benefits both of the real estate operations of Crescent (including ownership of
real property) and of the lease of certain of such assets and the ownership of
other non-real estate assets.
Crescent Operating is intended to function principally as an operating
company, in contrast to Crescent's principal focus on investment in real estate
assets. The operating activities and operating assets made available to Crescent
Operating by Crescent are designed to provide Crescent's existing shareholders
with the long-term
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benefits of ownership in an entity devoted to the conduct of operating business
activities in addition to their investment interest in Crescent itself. A small
number of REITs, operating under tax provisions that no longer are available to
newly formed REITs, have shares that are "paired" or "stapled" with shares of a
related operating company, and therefore cannot be owned or transferred
independently. The shares of Crescent Operating and Crescent are not, and will
not be, paired or stapled in any manner. Because the shares of Crescent and
Crescent Operating can be owned and transferred separately and independently of
each other, Crescent and Crescent Operating will not provide a paired investment
on an ongoing basis to investors who purchase shares of only one company or the
other.
Crescent Operating Partnership has contributed cash in the amount of
approximately $14.1 million in exchange for all of the outstanding shares of
Crescent Operating Common Stock which are being distributed by Crescent
Operating Partnership to its partners, including Crescent, and by Crescent to
its shareholders in connection with the Distribution.
MANNER OF EFFECTING THE DISTRIBUTION
It is expected that the Distribution Effective Date will be ,
1997. At the time of the Distribution, share certificates for Crescent Operating
Common Stock will be delivered to the Distribution Agent. Commencing on or about
the date of the Distribution, the Distribution Agent will begin mailing account
statements reflecting ownership of Crescent Operating Common Stock to holders of
Crescent Common Shares and Units as of the Record Date. The Distribution will be
made on the basis of one share of Crescent Operating Common Stock for every 10
Crescent Common Shares held on the Record Date and one share of Crescent
Operating Common Stock for every 5 Units held on the Record Date. The difference
in the distribution ratio as between the Crescent shareholders and the Limited
Partners is due to a two-for-one stock split with respect to Crescent Common
Shares, effective as of March 26, 1997, for which there was not a corresponding
split of Units. No certificates representing fractional shares of Crescent
Operating will be issued in connection with the Distribution. In lieu of
fractional shares, the Distribution Agent will pay to any holder who would be
entitled to a fractional share of Crescent Operating Common Stock an amount of
cash (without interest) equal to $.99 per share. All shares of Crescent
Operating Common Stock will be fully paid and nonassessable. See "Description of
Crescent Operating Capital Stock."
Prior to the Distribution Effective Date, inquiries relating to the
Distribution should be directed to the Distribution Agent at 150 Royall, Canton,
Massachusetts 02021, or by telephone at 617-575-4190, Monday through Friday,
9:00 a.m. to 5:00 p.m. (Eastern time). After the Distribution Effective Date,
inquiries may be directed to the Distribution Agent or Crescent Operating
Investor Relations, at 777 Main Street, Fort Worth, Texas 76102, or by telephone
at 817-877-0477, Monday through Friday, 9:00 a.m. to 5:00 p.m. (Dallas time).
NO HOLDER OF CRESCENT COMMON SHARES OR UNITS WILL BE REQUIRED TO MAKE ANY
PAYMENT FOR THE SHARES OF CRESCENT OPERATING COMMON STOCK TO BE RECEIVED IN THE
DISTRIBUTION OR TO SURRENDER OR EXCHANGE CRESCENT COMMON SHARES OR UNITS OR TO
TAKE ANY OTHER ACTION IN ORDER TO RECEIVE CRESCENT OPERATING COMMON STOCK TO
WHICH THE HOLDER IS ENTITLED IN THE DISTRIBUTION.
FEDERAL INCOME TAX CONSEQUENCES
Introduction. The following is a summary of the material federal income tax
considerations associated with the Distribution prepared by Shaw, Pittman, Potts
& Trowbridge, Tax Counsel. This discussion is based upon the laws, regulations
and reported rulings and decisions in effect as of the date of this Prospectus,
all of which are subject to change, retroactively or prospectively, and to
possibly differing interpretations. This discussion does not purport to deal
with the federal income or other tax consequences applicable to all investors in
light of their particular investment circumstances or to all categories of
investors, some of whom may be subject to special rules (including, for example,
insurance companies, tax-exempt organizations, financial institutions,
broker-dealers, foreign corporations and persons who are not citizens or
residents of the United States). No ruling on the federal, state or local tax
considerations relevant to the operation of Crescent
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or Crescent Operating or to the Distribution is being requested from the Service
or from any other tax authority. Tax Counsel has rendered certain opinions
discussed herein, which Tax Counsel believes address the material issues with
respect to the Distribution and with respect to the qualification of Crescent as
a REIT which are raised by the structure and currently anticipated activities of
Crescent Operating. Tax Counsel believes that if the Service were to challenge
the conclusions of Tax Counsel, such conclusions would prevail in court.
However, opinions of counsel are not binding on the Service or on the courts,
and no assurance can be given that the conclusions reached by Tax Counsel would
be sustained in court.
Taxation of Crescent in General. Crescent has made an election to be
treated as a real estate investment trust under Sections 856 through 860 of the
Code (as used in this section, a "REIT"), commencing with its taxable year ended
December 31, 1994. Crescent believes that it was organized and has operated in
such a manner so as to qualify as a REIT, and Crescent intends to continue to
operate in such a manner, but no assurance can be given that it has operated in
a manner so as to qualify, or will operate in a manner so as to continue to
qualify as a REIT.
The sections of the Code relating to qualifications and operation as a REIT
are highly technical and complex. In the opinion of Tax Counsel, Crescent
qualified as a REIT under the Code with respect to its taxable years ending on
or before December 31, 1996, and is organized in conformity with the
requirements for qualification as a REIT, its manner of operation has enabled it
to meet the requirements for qualification as a REIT as of the date of this
Prospectus, and its proposed manner of operation will enable it to meet the
requirements for qualification as a REIT in the future. It must be emphasized
that this opinion is based on various assumptions relating to the organization
and operation of Crescent and Crescent Operating Partnership and is conditioned
upon certain representations made by Crescent and Crescent Operating Partnership
as to certain relevant factual matters, including matters related to the
organization, expected operation, and assets of Crescent and Crescent Operating
Partnership. Moreover, continued qualification as a REIT will depend upon
Crescent's ability to meet, through actual annual operating results, the
distribution levels, stock ownership requirements and the various qualification
tests and other requirements imposed under the Code, as discussed below.
Accordingly, no assurance can be given that the actual stock ownership of
Crescent, the mix of its assets, or the results of its operations for any
particular taxable year will satisfy such requirements.
Tax Counsel has also addressed what Tax Counsel believes to be the material
issues with respect to the qualification of Crescent as a REIT which are raised
by the structure and currently anticipated activities of Crescent Operating. In
particular, Tax Counsel has opined that Crescent and Crescent Operating will be
treated as separate corporate entities, that Crescent Operating will not be
treated as the agent of Crescent, that Crescent and Crescent Operating will not
be considered to constitute a stapled entity under Section 269B, that rent paid
by affiliates of Crescent Operating should not be considered to be rent from
related parties which does not qualify as rent from real property under Section
856(d), and that the temporary ownership of Crescent Operating by the Crescent
Operating Partnership will not cause Crescent to be considered to have violated
the requirement under Section 856(c)(5) that Crescent not own, at the close of
each quarter of the taxable year, more than 10 percent of the outstanding voting
securities of an issuer.
Income Recognition by Crescent as a Result of the Distribution. On the
Distribution Effective Date, Crescent will, in the opinion of Tax Counsel,
recognize gain on the Distribution to the extent the value of the Crescent
Operating Common Stock distributed by Crescent exceeds the basis of Crescent in
such stock, which will depend in turn on the basis of Crescent's share of the
assets contributed by Crescent Operating Partnership to Crescent Operating.
Because the assets consist primarily of cash and recently negotiated rights to
acquire the Assets, management anticipates that any such gain will be nominal,
but the Service may be able to assert successfully that the gain is not
insubstantial. Because of the factual nature of the valuation issue, Tax Counsel
is unable to render an opinion on it. The amount of gain, if any, will increase
Crescent's current or accumulated earnings and profits.
Taxation of Taxable Domestic Shareholders of Crescent as a Result of the
Distribution. The Distribution will be treated as a distribution whose amount
equals the value of the Crescent Operating Common Stock distributed plus any
cash in lieu of fractional shares, and Crescent shareholders will receive a
basis in Crescent Operating Common Stock equal to the value thereof at the time
of the Distribution. As long as Crescent
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qualifies as a REIT, distributions (including the Distribution) made to
Crescent's taxable U.S. shareholders out of Crescent's current or accumulated
earnings and profits (and not designated as capital gain dividends) will be
taken into account by such U.S. shareholders as ordinary income and, for
corporate shareholders, will not be eligible for the dividends received
deduction. Distributions in excess of current and accumulated earnings and
profits will not be taxable to a shareholder to the extent that they do not
exceed the adjusted basis of the shareholder's Crescent Common Shares, but
rather will reduce the adjusted basis of such shares. To the extent that
distributions in excess of current and accumulated earnings and profits exceed
the adjusted basis of a shareholder's Crescent Common Shares, such distributions
will be included in income as long-term capital gain (or short-term capital gain
if the shares have been held for one year or less) assuming the shares are a
capital asset in the hands of the shareholder. In addition, any distribution
declared by Crescent in October, November or December of any year payable to a
shareholder of record on a specified date in any such month shall be treated as
both paid by Crescent and received by the shareholder on December 31 of such
year, provided that the distribution is actually paid by Crescent during January
of the following calendar year. Shareholders may not include any net operating
losses or capital losses of Crescent in their respective income tax returns. In
general, any loss upon a sale or exchange of shares by a stockholder who has
held such shares for six months or less (after applying certain holding period
rules) will be treated as a long-term capital loss to the extent of
distributions from Crescent required to be treated by such shareholder as
long-term capital gain.
Based upon the above, management anticipates that for a typical Crescent
shareholder, the result of the Distribution, as opposed to what would occur in
the absence of the Distribution, will be to increase the shareholder's tax-free
return of capital, but this result cannot be assured.
Taxation of Tax-Exempt Shareholders of Crescent as a Result of the
Distribution. Most tax-exempt employees' pension trusts are not subject to
federal income tax except to the extent of their receipt of "unrelated business
taxable income" as defined in Section 512(a) of the Code ("UBTI"). The
Distribution to a shareholder that is a tax-exempt entity should not constitute
UBTI, provided that the tax-exempt entity has not financed the acquisition of
its Crescent Common Shares with "acquisition indebtedness" within the meaning of
the Code and the Crescent Common Shares are not otherwise used in an unrelated
trade or business of the tax-exempt entity. In addition, certain pension trusts
that own more than 10% of a "pension-held REIT" must report a portion of the
dividends that they receive from such a REIT as UBTI. Crescent has not been and
does not expect to be treated as a pension-held REIT for purposes of this rule.
Taxation of Foreign Stockholders of Crescent as a Result of the
Distribution. The rules governing United States federal income taxation of
nonresident alien individuals, foreign corporations, foreign partnerships and
other foreign stockholders (collectively, "Non-U.S. Stockholders") are complex,
and no attempt will be made in this Prospectus to provide more than a summary of
such rules. Non-U.S. Stockholders should consult with their own tax advisors to
determine the impact of federal, state and local tax laws with regard to the
Distribution, including any reporting requirements. In general, as is the case
with domestic taxable shareholders of Crescent, the Distribution is treated as a
distribution whose amount equals the value of the Crescent Operating Common
Stock distributed plus any cash in lieu of fractional shares, and Crescent
shareholders will receive a basis in Crescent Operating Common Stock equal to
the fair market value thereof at the time of the Distribution.
Distributions that are not attributable to gain from sales or exchanges by
Crescent of United States real property interests and not designated by Crescent
as capital gain dividends will be treated as dividends of ordinary income to the
extent that they are made out of current and accumulated earnings and profits of
Crescent. Such distributions ordinarily will be subject to a withholding tax
equal to 30% of the gross amount of the distribution, unless an applicable tax
treaty reduces or eliminates that tax. Crescent expects to withhold U.S. income
tax at the rate of 30% on the gross amount of any such distribution made to a
Non-U.S. Stockholder unless (i) a lower treaty rate applies and the Non-U.S.
Stockholder has filed the required IRS Form 1001 with Crescent or (ii) the
Non-U.S. Stockholder files an IRS Form 4224 with Crescent claiming that the
distribution is effectively connected with the Non-U.S. Stockholder's conduct of
a U.S. trade or business. Distributions in excess of Crescent's current and
accumulated earnings and profits will be subject to a 10% withholding
requirement but will not be taxable to a shareholder to the extent that such
distributions do not exceed the adjusted basis of the stockholder's Crescent
Common Shares, but rather will reduce the
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adjusted basis of such shares. To the extent that distributions in excess of
current and accumulated earnings and profits exceed the adjusted basis of a
Non-U.S. Stockholder's shares, such distributions will give rise to tax
liability if the Non-U.S. Stockholder would otherwise be subject to tax on any
gain from the sale or disposition of the Crescent Common Shares, as described
below. If it cannot be determined at the time a distribution is made whether or
not such distribution will be in excess of current and accumulated earnings and
profits, the distributions would be subject to withholding at the same rate as
dividends. However, a Non-U.S. Stockholder may seek a refund of such amounts
from the Service if it is subsequently determined that such distribution was, in
fact, in excess of Crescent's current and accumulated earnings and profits.
Gain recognized by a Non-U.S. Stockholder upon a sale of Crescent Common
Shares generally will not be taxed under the provisions of the Foreign
Investment in Real Property Tax Act of 1980, as amended ("FIRPTA"), if Crescent
is a "domestically controlled REIT," defined generally as a REIT in which at all
times during a specified testing period less than 50% in value of the stock was
held directly or indirectly by foreign persons. Crescent is and currently
expects to continue to be a "domestically controlled REIT," and in such case the
sale of Crescent Common Shares would not be subject to taxation under FIRPTA.
However, gain not subject to FIRPTA nonetheless will be taxable to a Non-U.S.
Stockholder if (i) investment in the Crescent stock is treated as effectively
connected with the Non-U.S. Stockholder's U.S. trade or business, in which case
the Non-U.S. Stockholder will be subject to the same treatment as U.S.
shareholders with respect to such gain or (ii) the Non-U.S. Stockholder is a
nonresident alien individual who was present in the United States for 183 days
or more during the taxable year and either the individual has a "tax home" in
the United States or the gain is attributable to an office or other fixed place
of business maintained by the individual in the United States, in which case
gains will be subject to a 30% tax. If the gain on the sale of Crescent Common
Shares were to be subject to taxation under FIRPTA, the Non-U.S. Stockholder
would be subject to the same treatment as U.S. shareholders with respect to such
gain (subject to applicable alternative minimum tax and a special alternative
minimum tax in the case of nonresident alien individuals), and the purchaser of
the Crescent Common Shares would be required to withhold and remit to the IRS
10% of the purchase price.
Taxation of Limited Partners of Crescent Operating Partnership as a Result
of the Distribution. In the opinion of Tax Counsel, the contribution of cash and
recently acquired rights to acquire the Assets by Crescent Operating Partnership
into Crescent Operating should qualify as a tax-free contribution of assets to a
controlled corporation for federal income tax purposes. The Service may,
however, be able to challenge this conclusion successfully, and if the
contribution were taxable it would result in gain equal to the excess, if any,
of Crescent Operating Partnership's basis in the assets over the value of
Crescent Operating Common Stock received by Crescent Operating Partnership.
Limited Partners would be taxable on their distributable share of such gain, if
any. Because the assets contributed by Crescent Operating Partnership consist
primarily of cash and recently negotiated rights to acquire the Assets,
management anticipates that any such gain would be nominal, but the Service may
be able to assert successfully that the gain is not insubstantial. Because of
the factual nature of the valuation issue, Tax Counsel is unable to render an
opinion on it. Furthermore, under tax rules which pertain to the distribution by
partnerships of marketable securities, whether or not the contribution by
Crescent Operating Partnership is taxable, the distribution of Crescent
Operating Common Stock to a Limited Partner will, in the opinion of Tax Counsel,
be taxable to such Limited Partner if and to the extent that the value of the
Crescent Operating Common Stock distributed exceeds the basis of such Limited
Partner in such Limited Partner's partnership interest immediately prior to the
distribution.
ALL CRESCENT SHAREHOLDERS AND LIMITED PARTNERS ARE URGED TO CONSULT THEIR
OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES OF THE DISTRIBUTION TO
THEM, INCLUDING THE APPLICATION OF STATE, LOCAL AND FOREIGN TAX LAWS.
LISTING AND TRADING OF CRESCENT OPERATING COMMON STOCK
There is currently no public market for Crescent Operating Common Stock.
Crescent Operating has applied to the Nasdaq National Market for quotation of
the Crescent Operating Common Stock and expects to apply for quotation of the
Crescent Operating Common Stock on the OTC Bulletin Board, although there is no
assurance that the Crescent Operating Common Stock will be approved for listing
on any national
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securities exchange, automated quotation system or over the-the-counter market.
There can be no assurance as to the prices at which trading in Crescent
Operating Common Stock will occur after the Distribution. Until Crescent
Operating Common Stock is fully distributed and an orderly trading market
develops, the prices at which trading in such stock occurs may fluctuate
significantly. There can be no assurance that an active trading market in
Crescent Operating Common Stock will develop or be sustained in the future.
The prices at which Crescent Operating Common Stock trades will be
determined by the marketplace and may be influenced by many factors, including,
among others, Crescent Operating's performance and prospects, the depth and
liquidity of the market for Crescent Operating Common Stock, investor perception
of Crescent Operating and of the industries in which the Company operates and
economic conditions in general, Crescent Operating's dividend policy, and
general financial and other market conditions. In addition, financial markets
have experienced extreme price and volume fluctuations that have affected the
market price of many stocks and that, at times, could be viewed as unrelated or
disproportionate to the operating performance of such companies. Such
fluctuations have also affected the share prices of many newly public issuers.
Such volatility and other factors may materially adversely affect the market
price of Crescent Operating Common Stock.
Crescent Operating will have approximately 400 stockholders of record,
based on the number of record holders of Crescent Common Shares and the number
of Limited Partners on the Record Date . The Transfer Agent and Registrar for
the Crescent Operating Common Stock will be BankBoston, N.A. For certain
information regarding options and other equity-based employee benefit awards
involving Crescent Operating Common Stock that may become outstanding after the
Distribution, see "Management."
SHARES AVAILABLE FOR FUTURE SALE
Crescent Operating Common Stock distributed in the Distribution, which
based on a Record Date of May 30, 1997, is approximately 11,025,547 shares
(subject to reduction to the extent that cash payments are made in lieu of the
issuance of fractional shares of Crescent Operating Common Stock), will be
freely transferable, except for securities received by persons who may be deemed
to be "affiliates" of Crescent Operating under the Securities Act. Persons who
may be deemed to be affiliates of Crescent Operating after the Distribution
generally include individuals or entities that control, are controlled by, or
are under common control with, Crescent Operating and may include certain
officers and directors of Crescent Operating as well as principal stockholders
of Crescent Operating. Persons who are affiliates of Crescent Operating will be
permitted to sell their shares of Crescent Operating Common Stock only pursuant
to an effective registration statement under the Securities Act or an exemption
from the registration requirements of the Securities Act, such as the exemption
afforded by Section 4(2) of the Securities Act (relating to private sales) or by
Rule 144 under the Securities Act. Neither Crescent nor Crescent Operating is
able to predict whether substantial amounts of Crescent Operating Common Stock
will be sold in the open market following the Distribution. Sale of substantial
amounts of Crescent Operating Common Stock in the public market, or the
perception that such sales might occur, could adversely affect the market price
of Crescent Operating Common Stock.
DIVIDEND POLICY
Following the Distribution, Crescent Operating intends to use its available
funds to pursue investment and business opportunities and, therefore, does not
anticipate the payment of any cash dividends on Crescent Operating Common Stock
in the foreseeable future. Payment of dividends on Crescent Operating Common
Stock is prohibited under the loans and line of credit from Crescent Operating
Partnership until all amounts outstanding thereunder are paid in full, and will
also be subject to such limitations as may be imposed by any other credit
facilities that Crescent Operating may obtain from time to time. The declaration
of dividends will be subject to the discretion of the Crescent Operating Board.
On June 11, 1997, Crescent Operating paid a one-time dividend of
approximately $2.4 million to its sole stockholder, Crescent Operating
Partnership, in connection with the sale of the limited partner interest in the
partnership that owns the Dallas Mavericks.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Summary
Pro Forma Financial Data," "Summary Selected Financial Data," and the financial
statements appearing elsewhere in this Prospectus.
This discussion is based on the Combined Financial Statements of the
Carter-Crowley Asset Group, which is a portfolio of businesses and investments
wholly owned by Carter-Crowley and the Pro Forma Consolidating Financial
Information of Crescent Operating. This discussion does not include an analysis
of the historical operating results of the Provider Segment of Magellan
primarily because Crescent Operating is not acquiring the Provider Segment of
Magellan. Crescent Operating instead is acquiring (but has not yet acquired) the
CBHS Interest, which represents an interest in 50% of certain assets of the
Provider Segment of Magellan, after various adjustments. In addition, Crescent
Operating will account for the CBHS Interest under the equity method of
accounting. For these reasons, an analysis of the financial condition and
results of operations of the Provider Segment of Magellan would not be
meaningful in the context of the financial condition and operating results of
Crescent Operating.
The pro forma effects of the acquisition of the Carter-Crowley Assets and
the CBHS Interest are set forth in the Pro Forma Financial Statements of
Crescent Operating, which are included elsewhere in this Prospectus.
CRESCENT OPERATING
Crescent Operating has only recently been formed and has no operating
history. The Company has financed the acquisition of the Carter-Crowley Assets,
in part through borrowings, and intends to finance through borrowings, the
acquisition of the CBHS Interest and the warrants to purchase Magellan common
stock, and may under certain circumstances borrow for the purpose of satisfying
commitments relating to the Assets (see "-- Liquidity and Capital Resources,"
below), making additional investments or providing working capital for
operations. Crescent Operating obtained the rights to acquire the Assets from
Crescent Operating Partnership. The Assets may not be readily marketable and
their values may be affected by general market conditions. The Company believes,
however, that its capital resources and revenues will be sufficient to fund the
Company's anticipated investments and proposed operations.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the formation and capitalization of Crescent Operating,
Crescent Operating has received approximately $14.1 million in cash from
Crescent Operating Partnership and Crescent Operating Partnership agreed to lend
Crescent Operating approximately $35.9 million pursuant to a five-year term loan
(approximately $15.3 million of which was funded on May 8, 1997). The loan is a
recourse loan that is or will be secured, to the extent not prohibited by
pre-existing arrangements, by a first lien on the Assets and all other assets
owned by Crescent Operating now or in the future (other than assets of Crescent
Operating acquired after June 30, 1997, which may be pledged in the future to
secure non-recourse loans to Crescent Operating). The loan bears interest at the
rate of 12% per annum, compounded annually, and is payable quarterly in an
amount equal to the lesser of (i) the net cash flow for the preceding quarter
and (ii) the quarterly amount of principal due, together with interest accrued
on the loan. Net cash flow will be computed by subtracting the total costs
incurred by Crescent Operating from its gross receipts. The loan will mature on
May 8, 2002. The Company also has obtained a $20.4 million line of credit which
bears interest at the same rate as the term loan. The line of credit is payable
on an interest-only basis during its term, which expires on the later of (i) May
21, 2002 or (ii) five years after the last draw under the line of credit. Draws
may be made under the line of credit until June 22, 2002. The line of credit is
a recourse obligation and amounts outstanding thereunder are or will be secured,
to the extent not prohibited by pre-existing arrangements, by a first lien on
the Assets and all other assets owned by Crescent Operating now or in the future
(other than assets of Crescent Operating acquired after June 30, 1997, which may
be pledged in the future to secure non-recourse loans to Crescent Operating). As
of June 11, 1997, no amounts were outstanding under the line of credit.
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Approximately $12.6 million in cash and the proceeds of approximately $15.3
million of loans were used to acquire the Carter-Crowley Assets and the 12.38%
limited partner interest in the partnership that owns the Dallas Mavericks. The
remaining approximately $1.5 million previously funded in the form of cash,
together with the remaining approximately $20.6 million to be advanced in the
form of loans, is expected to be used both to acquire, and make an additional
contribution relating to, the CBHS Interest and to acquire the warrants to
acquire shares of Magellan common stock for an aggregate of approximately $20.0
million, and to fund an obligation of Moody-Day (the construction equipment
sales, leasing and servicing company acquired from Carter-Crowley) to purchase
construction equipment for approximately $2.1 million. The line of credit is
expected to be used to support future funding obligations associated with the
Assets (consisting of approximately $2.2 million relating to Crescent
Operating's investment in Hicks-Muse and approximately $17.5 million relating to
the CBHS Interest) and other cash requirements.
On June 11, 1997, Crescent Operating sold the 12.38% limited partner
interest in the partnership that owns the Dallas Mavericks to an affiliated
entity (see "Certain Transactions," below) and received proceeds from the sale
in the amount of approximately $12.55 million. The limited partner interest was
originally purchased by Crescent Operating for approximately $12.4 million and
the sale resulted in a gain to Crescent Operating of approximately $.15 million.
Of the approximately $12.55 million proceeds from the sale of the limited
partner interest, Crescent Operating used approximately $9.9 million to repay
outstanding principal and $.2 million to pay accrued and unpaid interest on the
$15.3 million advance on the term loan from Crescent Operating Partnership,
thereby reducing the outstanding principal balance of the term loan to $5.4
million as of June 11, 1997. Additionally, Crescent Operating paid a dividend of
approximately $2.4 million to Crescent Operating Partnership, its sole
stockholder. As a result of the sale of the limited partner interest, the
payment of principal and interest on the loan and the distribution to Crescent
Operating Partnership, the pro forma consolidated balance sheet reflects (i) a
decrease in total assets of approximately $12.3 million (reflecting a $12.4
million decrease in investments, partially offset by a $.1 million increase in
cash), (ii) a decrease in total liabilities of approximately $9.9 million
(reflecting a $9.9 million decrease in long-term notes payable) and (iii) a
decrease in stockholder's equity of approximately $2.4 million.
PRO FORMA CAPITAL RESOURCES
As of the date of this Prospectus, the Company has no commitments to
purchase any assets, although it has the right to acquire the CBHS Interest.
Crescent Operating has no external sources of financing except as described
above in "Liquidity and Capital Resources." The purchase of additional assets
will be contingent upon securing adequate funding on terms acceptable to the
Company. The Company is not aware of any material unfavorable trends in either
capital resources or the outlook for long-term cash generation, nor does it
expect any material change in the availability and relative cost of such capital
resources.
There are currently no material changes being considered in the objectives
and policies of the Company as set forth in this Prospectus.
PRO FORMA RESULTS OF OPERATIONS
Three Months Ended March 31, 1997. On a pro forma basis, after giving
effect to the completion of the formation and capitalization of Crescent
Operating, the acquisition of the Carter-Crowley Assets and the acquisition of
the CBHS Interest, Crescent Operating would have experienced a net loss of $3.1
million for the three months ended March 31, 1997. This pro forma net loss
reflects the historical operating results of the Carter-Crowley Asset Group
adjusted to reflect a decrease in historical net income as a result of (i) an
increase in interest expense of $.6 million on long-term financing incurred in
connection with the capitalization of Crescent Operating, and (ii) incremental
general and administrative expenses of $.1 million related to the operation of
Crescent Operating. The $3.1 million pro forma net loss also reflects the $2.4
million net loss related to Crescent Operating's 50% interest in the pro forma
operating results of CBHS. Crescent Operating's 50% interest in CBHS reflects
50% of the historical net income of the Provider Segment of Magellan for the
period which is $4.5 million, as adjusted to reflect (i) an increase in such net
income as a result of (a) the elimination of $2.3 million of expenses
attributable to the European Hospitals and other operations which will not be
acquired by CBHS (and in which Crescent Operating therefore will have no
interest as a result of its
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acquisition of the CBHS Interest) (b) reductions in depreciation and
amortization expenses of $3.0 million, (c) a net decrease of $4.4 million,
attributable to a decrease in tax expenses partially offset by an increase in
interest expense; and (d) an increase in management fees of $1.8 million payable
by Magellan to CBHS for the management of hospital-based businesses which will
not be owned by CBHS (and therefore will not be part of the CBHS Interest), and
(ii) offset completely by an increase in franchise fees, rent expense and
corporate overhead payable by CBHS of $18.4 million.
Year Ended December 31, 1996. On a pro forma basis, Crescent Operating
would have experienced a net loss of $10.8 million for the year ended December
31, 1996. This pro forma net loss reflects the historical operating results of
the Carter-Crowley Asset Group adjusted to reflect an increase in historical net
loss as a result of (i) an increase in interest expense on long-term financing
incurred in connection with the capitalization of Crescent Operating of $2.5
million, and (ii) incremental general and administrative expenses of $.5 million
related to the operation of Crescent Operating. The $10.8 million pro forma net
loss also reflects the $7.7 million net loss related to Crescent Operating's 50%
interest in the pro forma operating results of CBHS. Crescent Operating's 50%
interest in CBHS reflects 50% of the historical net income of the Provider
Segment of Magellan for the period which is $12.1 million, as adjusted to
reflect (i) an increase in such net income as a result of (a) the elimination of
$17.6 million of expenses attributable to the European Hospitals and other
operations which will not be acquired by Crescent Operating as part of the CBHS
Interest, (b) a decrease in tax expense of $19.7 million, (c) reductions in
depreciation, amortization and interest expenses of $13.8 million, and (d) an
increase in management fees payable by Magellan to CBHS for the management of
hospital-based businesses which will not be part of the CBHS Interest of $5.3
million, and (ii) a decrease in net income as a result of an increase in
franchise fees, rent expense and corporate overhead payable by CBHS of $76.2
million.
The Company is not aware of any known trends or uncertainties, other than
national economic conditions, which have had or which may reasonably be expected
to have a material impact, favorable or unfavorable, on revenues or income from
the acquisition of the Assets and operations of its business, other than those
referred to in this Prospectus.
THE CARTER-CROWLEY ASSET GROUP (THE "PORTFOLIO")
HISTORICAL RESULTS OF OPERATIONS
Three Months Ended March 31, 1997 and 1996. Total revenues of the Portfolio
increased approximately $.3 million, or 11.1% to $3.0 million for the three
months ended March 31, 1997, compared with $2.7 million for the three months
ended March 31, 1996. This increase was due to an increase in customer
construction projects and a corresponding increase in demand for Moody-Day's
equipment and services, an increase in the amount of equipment Moody-Day had
available to meet sale and rental demand and the favorable introduction by
Moody-Day of new lines of equipment available for sale and rental.
Total cost of sales for the Portfolio increased approximately $.2 million,
or 8.7%, to $2.5 million for the three months ended March 31, 1997, compared
with $2.3 million for the three months ended March 31, 1996. This increase is
due primarily to an increase in depreciation expense as a result of inventory
purchased by Moody-Day to meet customer demand for rental equipment and an
increase in cost of sales as a result of the new equipment lines available for
sale.
Selling, general and administrative and other expense for the Portfolio
increased approximately $.1 million, or 25.0%, in the aggregate, due primarily
to increases in interest expense attributable to increases in corporate
borrowing and in general corporate expenses.
Year Ended December 31, 1996 Compared to Year Ended December 31,
1995. Total revenues of the Portfolio increased approximately $1.3 million, or
14.3%, to $10.4 million for the year ended December 31, 1996, compared with $9.1
million for the year ended December 31, 1995. The increase is primarily the
result of an increase in customer construction projects and a corresponding
increase in demand for Moody-Day's equipment and services, an increase in the
amount of equipment Moody-Day had available to meet sale and
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rental demand and the favorable introduction by Moody-Day of new lines of
equipment available for sale and rental.
Total cost of sales for the Portfolio increased approximately $1.1 million,
or 14.9%, to $8.5 million for the year ended December 31, 1996, compared with
$7.4 million for the year ended December 31, 1995. This increase is due
primarily to an increase in depreciation expense as a result of inventory
purchased by Moody-Day to meet customer demand for rental equipment and an
increase in cost of sales as a result of the new equipment lines available for
sale.
Selling, general and administrative expense of the Portfolio increased
approximately $.1 million, or 6.3%, to $1.7 million for the year ended December
31, 1996, compared with $1.6 million for the year ended December 31, 1995, due
to increases in general corporate expenses and sales commissions.
Other expense of the Portfolio increased approximately $.3 million, for the
year ended December 31, 1996, compared with December 31, 1995 due primarily to a
$.2 million increase in interest expense resulting from an increase in corporate
borrowings.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994.
Total revenues of the Portfolio increased approximately $1.4 million, or
18.2%, to $9.1 million for the year ended December 31, 1995, compared with $7.7
million for the year ended December 31, 1994. This increase was due to the
implementation of improved revenue-generating strategies and an increase in the
amount of equipment inventory Moody-Day had available to meet the increased
customer sales and rental demand.
Total cost of sales for the Portfolio increased approximately $1.2 million,
or 19.4% to $7.4 million for the year ended December 31, 1995, as compared with
$6.2 million for the year ended December 31, 1994. The increase is the result of
an increase in the volume of sales and rentals.
Selling, general and administrative expense of the Portfolio increased
approximately $.2 million, or 14.3%, to $1.6 million in the year ended December
31, 1995, compared with $1.4 million in the year ended December 31, 1994. The
increase is due to increases in general corporate expenses and sales
commissions.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were approximately $.1 million and $22,000 at
March 31, 1997 and December 31, 1996, respectively. The approximately $.1
million increase is attributable to approximately $.7 million and $11,000 of
cash provided by financing and operating activities, respectively, offset by
approximately $.6 million used in investing activities. Cash provided by
financing activities is primarily attributable to proceeds received from
Carter-Crowley in the form of capital contributions totaling approximately $1.2
million and proceeds from notes payable totaling approximately $.3 million,
primarily (approximately $.2 million) relating to Ingersoll-Rand. Cash used for
financing activities included repayments of notes issued to Carter-Crowley
totaling approximately $.8 million. The Portfolio used cash to fund the purchase
of $.9 million in assets, $.3 million of which was provided by proceeds from the
sale of certain rental equipment.
To the extent the Portfolio's cash flow from operating activities was
insufficient to finance certain capital expenditures, the Portfolio financed
such activities with proceeds available through a line of credit with
Carter-Crowley. The Portfolio expects to meet its liquidity requirements
primarily through cash flow provided by operating activities, which the
Portfolio believes will be adequate to fund normal recurring operating expenses,
debt service requirements and certain capital expenditures.
In April 1997, the line of credit and note payable with Carter-Crowley were
contributed by Carter-Crowley to the Portfolio as a capital contribution
resulting in the removal of all of the Portfolio's notes payable to affiliates.
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BUSINESS
OVERVIEW
Crescent Operating expects to become a lessee and operator of various types
of assets, including real property owned by Crescent and others. Crescent
Operating has had no operations to date. It owns the Carter-Crowley Assets and
anticipates that it will acquire the CBHS Interest. The Carter-Crowley Assets
consist of a construction equipment sales, leasing and service company and an
interest in a private venture capital fund. If Crescent Operating acquires the
CBHS Interest, it will become a 50% owner of CBHS which will operate the
Facilities.
Crescent Operating's Charter provides that one of its corporate purposes is
to perform the Intercompany Agreement between Crescent Operating and Crescent
Operating Partnership, pursuant to which Crescent Operating and Crescent
Operating Partnership have agreed to provide each other with rights to
participate in certain transactions. In addition, the Charter prohibits, for so
long as the Intercompany Agreement remains in effect, Crescent Operating from
engaging in activities or making investments that a REIT could make unless, in
accordance with the terms of the Intercompany Agreement, Crescent Operating
Partnership was first given the opportunity but elected not to pursue such
activities or investments.
Crescent Operating is intended to function principally as an operating
company, in contrast to Crescent's principal focus on investment in real estate
assets. The operating activities and operating assets made available to Crescent
Operating by Crescent are designed to provide Crescent's existing shareholders
with the long-term benefits of ownership in an entity devoted to the conduct of
operating business activities in addition to their investment interest in
Crescent itself. A small number of REITs, operating under tax provisions that no
longer are available to newly formed REITs, have shares that are "paired" or
"stapled" with shares of a related operating company, and therefore cannot be
owned or transferred independently. Because the shares of Crescent and Crescent
Operating can be owned and transferred separately and independently of each
other and are not, and will not be, paired or stapled, Crescent and Crescent
Operating will not provide a paired investment on an ongoing basis to investors
who purchase shares of only one company or the other.
STRATEGY
Crescent Operating intends to manage the Assets, enter into certain of the
businesses to which the Assets relate and pursue additional opportunities.
Crescent Operating believes that it has, or will have access to, sufficient
liquidity and management expertise to manage the Assets successfully.
Crescent Operating's investment and operating strategies are to acquire and
operate a complementary group of businesses which are aligned with certain of
the investments and businesses of Crescent. To pursue additional opportunities,
Crescent Operating plans to capitalize on its relationship with Crescent and
Crescent's ability to structure transactions creatively. Crescent Operating also
plans to determine whether it could provide to Crescent certain lessee and
operator functions currently provided by others to Crescent. In this regard, it
plans to negotiate to acquire or replace the tenants of certain hotels and
resorts owned by Crescent and leased to third parties. No such negotiations are
currently ongoing, however, and there is no assurance that any such agreements
will be reached. The additional opportunities Crescent Operating may pursue are
expected to be varied and may be unrelated to any business in which Crescent
Operating is then engaged or may be engaged at any future date. Crescent
Operating also expects that, in the future, it may sell existing assets that are
inconsistent with its long-term strategies. To the extent any such sales are
made at a time when Crescent Operating has outstanding indebtedness, Crescent
Operating anticipates that it will use the proceeds of any such sales of assets
to reduce the amount of any such indebtedness.
Crescent Operating also intends to pursue additional and similar
opportunities with Crescent and others in the future. The Distribution of
Crescent Operating Common Stock will provide Crescent shareholders and the
Limited Partners as of the Record Date who retain their Crescent Common Shares
with the opportunity to participate in the benefits both of the real estate
operations of Crescent (including ownership of real property) and of the lease
of certain of such assets and the ownership of other non-real estate assets. No
such opportunities to benefit from the lease of any assets or the ownership of
any non-real estate assets other than
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those identified herein have been identified at this time, and there can be no
assurance that any such opportunities will arise in the future.
THE INTERCOMPANY AGREEMENT
Crescent Operating and Crescent Operating Partnership have entered into the
Intercompany Agreement to provide each other with rights to participate in
certain transactions. The Intercompany Agreement is designed to permit investors
who purchase or retain equity interests in both Crescent and Crescent Operating
to participate in the benefits of investments in both companies in a manner
similar to holders of shares in "paired share" REITs. See "-- Overview," above.
The Intercompany Agreement provides, subject to certain terms, that Crescent
Operating Partnership will provide Crescent Operating with a right of first
refusal to become the lessee of any real property acquired by Crescent Operating
Partnership if Crescent Operating Partnership determines that, consistent with
Crescent's status as a REIT, it is required to enter into a "master" lease
arrangement, provided that Crescent Operating and Crescent Operating Partnership
negotiate a mutually satisfactory lease arrangement and Crescent Operating
Partnership determines, in its sole discretion, that Crescent Operating is
qualified to be the lessee. For example, Crescent generally would be required,
consistent with its status as a REIT, to enter into a master lease arrangement
as to hotels and behavioral healthcare facilities. In general, a master lease
arrangement is an arrangement pursuant to which an entire property or project
(or a group of related properties or projects) is leased to a single lessee. As
to opportunities for Crescent Operating to become the lessee of any assets under
a master lease arrangement, the Intercompany Agreement provides that Crescent
Operating Partnership must provide Crescent Operating with written notice of the
lessee opportunity. During the 30 days following such notice, Crescent Operating
has a right of first refusal with regard to the offer to become a lessee and the
right to negotiate with Crescent Operating Partnership on an exclusive basis
regarding the terms and conditions of the lease. If a mutually satisfactory
agreement cannot be reached within the 30-day period (or such longer period to
which Crescent Operating and Crescent Operating Partnership may agree), Crescent
Operating Partnership may offer the opportunity to others for a period of one
year thereafter before it must again offer the opportunity to Crescent Operating
in accordance with the procedures specified above. Crescent Operating
Partnership may, in its discretion, offer any investment opportunity other than
a lessee opportunity to Crescent Operating, upon such notice and other terms as
Crescent Operating Partnership may determine.
Under the Intercompany Agreement, Crescent Operating has agreed not to
acquire or make (i) investments in real estate which, for purposes of the
Intercompany Agreement, includes the provision of services related to real
estate and investment in a hotel properties, real estate mortgages, real estate
derivatives or entities that invest in real estate assets or (ii) any other
investments that may be structured in a manner that qualifies under the federal
income tax requirements applicable to REITs unless it has provided written
notice to Crescent Operating Partnership of the material terms and conditions of
the acquisition or investment opportunity, and Crescent Operating Partnership
has determined not to pursue such acquisitions or investments either by
providing written notice to Crescent Operating rejecting the opportunity within
10 days from the date of receipt of notice of the opportunity or by allowing
such 10-day period to lapse. Crescent Operating also has agreed to assist
Crescent Operating Partnership in structuring and consummating any such
acquisition or investment which Crescent Operating Partnership elects to pursue,
on terms determined by Crescent Operating Partnership. In addition, Crescent
Operating has agreed to notify Crescent Operating Partnership of, and make
available to Crescent Operating Partnership, investment opportunities developed
by Crescent Operating or of which Crescent Operating becomes aware but is unable
or unwilling to pursue.
THE CARTER-CROWLEY ASSETS
On February 10, 1997, Crescent Operating Partnership entered into a
contract with Carter-Crowley and various of its affiliated entities
(collectively, the "Carter-Crowley Sellers"), all of whom are unaffiliated with
Crescent and Crescent Operating, to acquire for approximately $383.3 million,
substantially all of the assets (the "Carter-Crowley Portfolio") of
Carter-Crowley. At the time the contract was executed, the Carter-Crowley
Portfolio included 14 office properties (the "Carter-Crowley Office Portfolio"),
with an aggregate of approximately 3.0 million net rentable square feet,
approximately 1,216 acres of commercially zoned,
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undeveloped land located in the Dallas/Fort Worth metropolitan area, two
multifamily residential properties located in the Dallas/Fort Worth metropolitan
area, marketable securities, secured and unsecured promissory notes, certain
direct non-operating working interests in various oil and gas wells, an
approximately 35% limited partner interest in two oil and gas limited
partnerships, an approximately 12.38% limited partner interest in the
partnership that owns the Dallas Mavericks and the Carter-Crowley Assets.
Pursuant to an agreement between Carter-Crowley and Crescent Operating
Partnership, Carter-Crowley liquidated approximately $51.0 million of such
assets originally included in the Carter-Crowley Portfolio, consisting primarily
of the marketable securities and the oil and gas investments, resulting in a
reduction in the total purchase price by a corresponding amount to approximately
$332.3 million. On May 9, 1997, Crescent Operating Partnership and Crescent
Operating acquired the remaining assets in the Carter-Crowley Portfolio.
Crescent Operating Partnership acquired certain assets from the
Carter-Crowley Portfolio, with an aggregate purchase price of approximately
$306.3 million, consisting primarily of the Carter-Crowley Office Portfolio, the
two multifamily residential properties, the approximately 1,216 acres of
undeveloped land and the secured and unsecured promissory notes relating
primarily to the Dallas Mavericks. In addition to the promissory notes relating
to the Dallas Mavericks, Crescent Operating Partnership obtained rights from the
current holders of the majority interest in the Dallas Mavericks to a contingent
$10.0 million payment if a new arena is built within a 75-mile radius of Dallas.
The remainder of the Carter-Crowley Portfolio, consisting of the
Carter-Crowley Assets and the limited partner interest in the partnership that
owns the Dallas Mavericks, was purchased by Crescent Operating utilizing cash
contributions and loan proceeds that were provided to Crescent Operating by
Crescent Operating Partnership. As of June 11, 1997, Crescent Operating sold,
for approximately $12.55 million, the limited partner interest in the
partnership that owns the Dallas Mavericks to a newly formed corporation wholly
owned by Crescent Operating Partnership. Richard E. Rainwater, John C. Goff and
Gerald W. Haddock, each of whom will serve as a director of Crescent Operating,
also are limited partners of Crescent Operating Partnership. As of May 30, 1997,
Messrs. Rainwater, Goff and Haddock beneficially owned Units representing
approximately 6.2%, 1.1% and .9%, respectively, of the partnership interests in
Crescent Operating Partnership outstanding as of such date. In addition, Mr.
Haddock serves as President and Chief Executive Officer and the sole director of
Crescent Ltd., which is the general partner of Crescent Operating Partnership,
and will serve in the same capacities in the newly formed corporation. See
"Certain Transactions." Crescent Operating had purchased the limited partner
interest in the partnership that owns the Dallas Mavericks from Carter-Crowley
for approximately $12.4 million utilizing a combination of cash payments and
proceeds of borrowings from Crescent Operating Partnership. Crescent Operating
used the proceeds of the sale of the interest (i) to pay all accrued interest
under the term loan from Crescent Operating Partnership, in the amount of
approximately $.2 million, (ii) to make a payment of principal under the term
loan of approximately $9.9 million, and (iii) to pay a dividend to its sole
stockholder, Crescent Operating Partnership, of approximately $2.4 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Carter-Crowley Assets held by Crescent Operating, which have an
allocated cost of approximately $13.7 million, consist of the assets described
below.
Moody-Day, Inc. Moody-Day is a Texas corporation, wholly owned by Crescent
Operating, engaged in the sale, leasing and service of construction equipment
and accessories to the construction and utility industries located primarily in
Texas. Moody-Day's leasing activities consist principally of leasing
construction equipment and accessories under various leases, including certain
non-cancelable operating leases and sales-type leases.
Moody-Day's inventory available for sale or lease is supplied pursuant to
various distributor or dealer agreements. Moody-Day believes that the terms and
conditions of these agreements are consistent with industry standards.
Moody-Day's operations are not notably seasonal, although adverse weather
conditions, such as extended periods of precipitation, could adversely affect
its operations.
The business is operated from a building and the adjacent property in
Dallas, Texas. An underground gasoline and diesel storage tank was previously
removed from the property, but prior to the time case closure
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documentation was issued by the State of Texas, regulations applicable to
removal of the tank were modified to require testing and monitoring procedures.
A remedial plan for the installation of test wells was prepared by Moody-Day and
accepted by the State of Texas, and monitoring of the groundwater currently is
in process.
Moody-Day competes with various large and small companies in its business.
Among its primary competitors are national firms such as A-1, Prime Equipment
Company and Hertz, and local firms such as Gaedcke Equipment Company, a Texas
company with four locations. Moody-Day believes that the principal competitive
factors in its markets for sale and rental of the construction equipment and
accessories it offers are availability of requested equipment, price and product
features. Moody-Day's products and services are marketed directly by its
11-person sales force. No customer accounted for more than 10% of Moody-Day's
gross sales for the twelve-month period ended December 31, 1996, with the
exception of Austin Commercial, a commercial construction contractor, which
accounted for approximately 11% of Moody-Day's sales for that period.
Day-to-day operations and management will be the responsibility of Mark
Roberson, who has been employed by Moody-Day since 1989. From 1989 through 1991,
Mr. Roberson served as Moody-Day's general rental manager. Since 1991, he has
served as the general manager of operations. Prior to joining Moody-Day, Mr.
Roberson had a total of six years of similar industry experience.
At March 1, 1997, Moody-Day had 32 employees, all of whom worked full time.
Of this number, 6 were involved in corporate administrative and support
functions and the remainder were employed in the sales, leasing and service
operations of the business. Moody-Day is currently not a party to any collective
bargaining agreements covering its employees, has not experienced any work
stoppages, and believes that relations with its employees are good. Moody-Day is
not a party to any material pending litigation.
Hicks Muse Tate & Furst Equity Fund II, LP. Hicks-Muse is a private venture
capital fund in which Crescent Operating owns a 1.21% limited partner interest.
Crescent Operating participates in Hicks-Muse on an investment-by-investment
basis and does not own an interest in all investments included in the Hicks-Muse
portfolio. As of December 31, 1996, the unpaid principal balance due on the
original commitment by Carter-Crowley to invest $10 million in Hicks-Muse was
approximately $2.2 million. This amount is required to be paid by Crescent
Operating when called.
As of December 31, 1996, Crescent Operating's investments in the Hicks-Muse
portfolio consisted of investments in the following industries: (i)
manufacturing (37.4%, 22.5% of which consisted of investments in a company that
manufactures copper wire); (ii) communications (33.9%, 33.1% of which consisted
of investments in a cable television operator); (iii) real estate (13.2%, all of
which consisted of investments in a company that provides debt and equity
capital to real estate owners and developers); (iv) financial services (10.5%,
all of which consisted of investments in a foreign insurance company and a small
business investment company); and (v) food (5.0%, all of which consisted of
investments in a chocolate company).
THE CBHS INTEREST
Crescent Operating expects to participate in the operations of behavioral
healthcare and related facilities through its acquisition of an ownership
interest in CBHS pursuant to the Magellan Transaction. Each of the transactions,
as identified below, that forms a part of the Magellan Transaction is
conditioned upon the closing of the other transactions. Accordingly, Crescent
Operating's ability to acquire the CBHS Interest is contingent upon the Magellan
Closing. Officers and directors of Crescent Operating and their affiliates and
associates have significant interests in Crescent and Magellan. See "Certain
Transactions." It is expected that the Magellan Closing will occur in June 1997.
The Magellan Transaction includes:
- the purchase of the Facilities, which consist of approximately 90
behavioral healthcare facilities, by a newly formed affiliated limited
partnership of Crescent Operating Partnership ("Crescent Affiliate"),
pursuant to a Real Estate Purchase and Sale Agreement between Crescent
and Magellan;
- the formation of CBHS pursuant to an Operating Agreement to be entered
into between Crescent Operating and CBHS, Inc.;
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- the capitalization of CBHS, as set forth in a Contribution Agreement to
be entered into among Crescent Operating, Magellan and CBHS;
- the lease of the Facilities from Crescent Affiliate to CBHS and its
wholly-owned subsidiaries, pursuant to the Facilities Lease;
- the grant of rights to CBHS with respect to various assets currently used
by Magellan in the operation of the Facilities but not otherwise
contributed to CBHS or sold to Crescent Affiliate, pursuant to the Master
Franchise Agreement and the Subsidiary Franchise Agreement; and
- the grant by Magellan of an option to Crescent and Crescent Operating to
become equity holders of Magellan, and the grant by Crescent Operating to
Magellan to become an equity holder of Crescent Operating, pursuant to
warrant agreements.
Crescent Affiliate will acquire the Facilities (including the related
medical office buildings) and substantially all of the fixtures, furniture and
equipment currently owned by separate indirect subsidiaries of Magellan and used
in the operation of the Facilities. CBHS will be formed as a joint venture
between Magellan Affiliate and Crescent Operating to operate the Facilities
pursuant to the Facilities Lease, utilizing the franchise services to be
provided to CBHS by Magellan (through a wholly owned subsidiary) for an annual
fee that initially will be approximately $78.2 million pursuant to the Master
Franchise Agreement.
As a result of the Magellan Transaction, Crescent Operating will acquire an
interest in CBHS, through which Crescent Operating will participate in the
operations of CBHS. Initially, each of Magellan Affiliate and Crescent Operating
will own 50% of CBHS, subject to CBHS' right to grant up to 10% of the equity
interest in CBHS to CBHS management as incentive compensation, with any such
grant to reduce the relative ownership interests of Crescent Operating and
Magellan Affiliate on an equal basis. CBHS will continue the operations of the
Provider Segment of Magellan's former business and will focus its business
strategy on the provider segment of the behavioral healthcare industry.
Magellan will contribute to CBHS certain property and intangible rights
used in connection with the Facilities for the interest in CBHS to be held by
Magellan Affiliate, including interests in five behavioral healthcare facilities
and other ancillary real property. Crescent Operating will contribute $5 million
in exchange for its interest. CBHS will purchase certain assets relating to
Magellan's information systems for approximately $5 million. The assets
contributed or sold to CBHS by Magellan and its subsidiaries will include all
supplies and inventory and certain equipment, contract rights and business
records. CBHS will assume the liabilities associated with these assets.
Through its interest in CBHS, Crescent Operating will also participate in
the management of CBHS. Each of Magellan Affiliate and Crescent Operating will
appoint two directors to the four-member board of directors, and all "major
decisions," as described below, must be made by unanimous consent.
Crescent Operating also will have the right, pursuant to warrants granted
by Magellan (see "Magellan Warrant Purchase Agreement," below) to acquire up to
1,283,311 shares of Magellan common stock at an exercise price of $30 per share
during the 12-year period after the Magellan Closing. In addition, Crescent
Operating has granted warrants to purchase up to 2.5% of Crescent Operating
Common Stock on similar terms (see "Crescent Operating Purchase Agreement,"
below).
Real Estate Purchase and Sale Agreement. Crescent Affiliate will acquire
the Facilities from Magellan and its subsidiaries. The obligations of both
Crescent and Magellan to consummate the Real Estate Purchase and Sale Agreement
include the transfer of all material permits, licenses and approvals, the
absence of material regulatory or contractual impediments and governmental
proceedings respecting the operation of the Facilities, the receipt of all
necessary approvals and other material consents, regulatory and other approvals,
licenses and permits and the compliance with all federal and state laws
applicable to the execution of the Master Franchise Agreement. In addition,
Crescent's obligation to consummate the Real Estate Purchase and Sale Agreement
is subject to conditions that include the absence of material adverse changes in
the business or financial condition of Magellan and the absence of any
withdrawal of Crescent's "fairness" opinion from its investment bankers, and
Magellan's obligation to consummate the Real Estate Purchase and Sale Agreement
is subject to conditions that include the absence of any withdrawal of
Magellan's "fairness" opinion from its investment bankers and approval by
Magellan's stockholders.
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Contribution Agreement. For its 50% interest in CBHS, Crescent Operating
will make an initial cash contribution to CBHS in the amount of $5 million, to
be used by CBHS to purchase certain information systems-related assets from a
Magellan subsidiary. For Magellan Affiliate's 50% interest in CBHS, Magellan
will contribute to CBHS certain assets related to the Facilities, and to certain
leased facilities operated by subsidiaries of Magellan, such as patient medical
records, licenses and permits used in the operation of the Facilities, to the
extent they are transferable, leasehold interests, as lessee, in the leased
facilities and in certain medical office buildings, and certain other assets.
On the Magellan Closing Date, CBHS will acquire from Magellan for $8
million various working capital assets related to the Facilities and certain
additional facilities leased to Magellan such as supplies and inventory, notes
receivable, prepaid assets and expenses, lease deposits and utility deposits,
subject to a post-closing adjustment. Magellan will retain certain assets used
in the operation of the Facilities, including those to be provided to CBHS under
the Master Franchise Agreement. CBHS will assume all debts, obligations, duties
and liabilities relating to, or arising out of, the operation of the Facilities
and business related thereto after the Magellan Closing, including obligations
that require performance after the Magellan Closing, liabilities and obligations
relating to the assets contributed to CBHS and liabilities relating to employee
accrued vacation time and sick days.
At the Magellan Closing, at Magellan's option, either (i) Magellan will
provide CBHS with bridge financing for a one-year term in the maximum amount of
$55 million to fund CBHS' reasonable working capital needs during its first year
of operation, including funding of CBHS' purchase of working capital assets from
Magellan's subsidiaries pursuant to the CBHS Contribution Agreement in the
amount of approximately $8 million; or alternatively, (ii) the bridge financing
may be provided by a bank line of credit secured by receivables and guaranteed
by Magellan under certain circumstances. A group of commercial banks has agreed
to issue a loan commitment to CBHS for a line of credit of up to $100 million
pursuant to a five-year revolving credit facility.
Prior to the Magellan Closing, Magellan will cause its subsidiaries which
are joint venturers in a joint venture owning or operating a domestic hospital
to enter into a services agreement with CBHS for each hospital owned or operated
by a joint venture, pursuant to which CBHS will perform, to the extent possible,
all of Magellan's obligations under the joint venture agreement in exchange for
the payment to CBHS by Magellan of all distributions and fees paid to Magellan
by or on behalf of the joint venture. The services agreement will continue in
effect until termination of the Facilities Lease.
CBHS Operating Agreement. The CBHS Operating Agreement provides that, in
addition to the contributions made by Crescent Operating and Magellan under the
CBHS Contribution Agreement, both Crescent Operating and Magellan Affiliate will
contribute an additional $2.5 million in cash to the capital of CBHS within five
days after the Magellan Closing, and will agree to lend, in equal amounts, up to
an additional $17.5 million to CBHS upon demand by Magellan Affiliate within
five years of the Magellan Closing.
The management of CBHS will be vested in the CBHS Board, a four-member
governing board of directors, with Crescent Operating and CBHS, Inc. each
designating two individuals as directors. Each director will have one vote and,
except in the event of certain decisions described below, the CBHS Board will
act by the affirmative vote of a majority of the directors. John C. Goff, Vice
Chairman of Crescent and Crescent Operating, will be Chairman of the CBHS Board.
John M. DeStefanis, an executive officer of Magellan, is expected to resign from
his positions with Magellan and become the President and Chief Executive Officer
of CBHS. With the exception of Mr. Goff, all of initial officers of CBHS are
expected to be former employees of Magellan.
Certain decisions will require 80% CBHS Board approval, including, among
others, any transfer or other disposition of any asset of CBHS in an amount in
excess of $50,000 (unless approved in CBHS' annual budget), the acquisition of
any stock or interest in any corporation, partnership or other business entity,
causing or permitting CBHS to engage in activities other than the behavioral
healthcare business, CBHS' entry into certain agreements proposed between CBHS
and Magellan or Crescent Operating or their affiliates, entering into contracts
not in the ordinary course of business or contracts requiring payments in a
single fiscal
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year in excess of $10,000 or such other amount authorized by the CBHS Board,
unless approved in CBHS' annual budget, incurring certain indebtedness or
granting certain security interests, the admission of any person as an
additional member to CBHS or the issuance of any additional interests in CBHS,
unless provided for in the CBHS Operating Agreement, employment of any person
whose annual compensation is likely to exceed $150,000, unless approved in CBHS'
annual budget, any distributions to Crescent Operating or Magellan Affiliate,
selecting executive officers or removing the chairman of the CBHS Board or CBHS'
President, and the decision to renew the Facilities Lease, the Master Franchise
Agreement or the Subsidiary Franchise Agreement.
Crescent Operating and Magellan Affiliate will not have any right or power
to take part in the management or control of CBHS in any way, except to the
extent set forth in the CBHS Operating Agreement. Crescent Operating and
Magellan Affiliate will only have voting rights with respect to matters
specifically reserved for their vote in the CBHS Operating Agreement and each
will have one vote for each percentage interest in CBHS. The following actions
may be taken only with the approval of CBHS members owning at least 80% of CBHS'
percentage interests: (i) causing or permitting CBHS to engage in any activity
not consistent with the purposes of CBHS; (ii) the performance of any act in
contravention of the CBHS Operating Agreement; (iii) causing CBHS to reorganize,
recapitalize, merge or consolidate with another entity; (iv) electing to
dissolve or liquidate CBHS; (v) causing CBHS to take any action that would cause
a bankruptcy; (vi) possessing CBHS assets or assigning rights in CBHS assets
other than for a CBHS purpose; (vii) confessing a judgment against CBHS; (viii)
changing the percentage interest of any CBHS member without the consent of the
affected member; or (ix) amending the CBHS Operating Agreement. Crescent
Operating and Magellan Affiliate will not be liable for a judgment, decree or
order of a court, or any other debt, obligation or liability of CBHS solely by
reason of being a member of CBHS.
Except for certain transfers permitted in the CBHS Operating Agreement
under certain conditions, a CBHS member may not transfer all or any portion of
its interest in CBHS. Permitted transfers include transfers to (i) a wholly
owned subsidiary; (ii) the transferor's administrator or trustee if transferred
involuntarily by operation of law; (iii) any transferee if the transfer is
approved by all CBHS members having a 20% or greater interest in CBHS; (iv) in
the case of Crescent Operating, to a single transferee if necessary for Crescent
to avoid jeopardizing its status as a REIT (subject to certain conditions); and
(v) to any person upon compliance with the right of first refusal provision in
the CBHS Operating Agreement. In the event a CBHS member has a binding offer
from an unrelated person for the transfer of its interest in CBHS, other than
pursuant to the permitted transfers described above, the non-selling CBHS member
and, in the event there are more than two CBHS members, CBHS, will have a right
of first refusal to purchase all of the selling CBHS member's interest. In the
event that Crescent Operating's or Magellan Affiliate's percentage interest in
CBHS decreases to less than 25%, (i) the other party may not transfer its CBHS
interest without allowing the other CBHS members to sell to the proposed
transferee, on the same terms and conditions, their CBHS interests; and (ii) the
other party may require the other CBHS members to sell their CBHS interests to a
proposed transferee, on the same terms and conditions.
A deadlock of the CBHS Board will be deemed to exist if the CBHS Board will
be unable to reach agreement by the required vote at two successive meetings on
(i) a decision requiring 80% board approval; (ii) a decision involving the
expenditure of more than an amount to be specified; or (iii) a decision relating
to the election of executive officers. The CBHS Operating Agreement contains
provisions requiring the members of CBHS, the CBHS Board and chief executive
officers of Crescent Operating and Magellan Affiliate to use their best efforts
to resolve a deadlock. In the event of a failure to resolve a deadlock pursuant
to these procedures, either Crescent Operating or Magellan Affiliate will be
authorized to offer to purchase all of the interest of the other, and the
non-offering member must either sell on the offered terms or purchase the
offering member's interest on such terms.
Facilities Lease. CBHS will establish a wholly owned subsidiary to operate
each Facility. At the Magellan Closing, Crescent Affiliate, CBHS and
subsidiaries of CBHS will enter into the Facilities Lease, which will be a
triple-net lease structured as an operating lease under which all of the
Facilities will be leased by Crescent Affiliate to CBHS and its subsidiaries.
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The initial term of the Facilities Lease will be 12 years, with four
renewal terms of five years each. CBHS may renew the lease as to all, but not
less than all, of the Facilities at its option upon notice at least one year
prior to the end of the initial term or any renewal term.
The base rent for the first year of the initial term will be $40 million
plus 10% of any increase in the purchase price for the Facilities resulting from
the acquisition of additional facilities by Magellan after the execution of the
Real Estate Purchase and Sale Agreement and prior to the Magellan Closing. The
base rent will increase by 5% compounded annually. At the commencement of any
renewal term of the Facilities Lease, a new fair market rent for the renewal
term will be determined by agreement of the parties, or if the parties are
unable to agree on a fair market rent, then by an appraisal mechanism. Following
appraisal, Crescent Affiliate will have the right to render void the exercise of
the option to extend the Facilities Lease if Crescent Affiliate is not satisfied
with the fair market value rent as determined by the appraiser. In addition,
CBHS will pay annually an additional $20 million under the Facilities Lease (the
"Additional $20 Million Amount"), at least $10 million of which must be used, as
directed by CBHS, for capital expenditures each year and up to $10 million of
which may be used, if requested by CBHS, to cover capital expenditures, property
taxes, insurance premiums and franchise fees. CBHS' failure to pay the
Additional $20 Million Amount is not a default under the Facilities Lease unless
Crescent has expended funds for capital expenditures, property taxes, insurance
premiums or franchise fees.
CBHS will have the right to pledge its leasehold interest to secure senior
indebtedness provided that such pledge is subordinate to any lien placed on the
Facilities by Crescent Affiliate to secure financing for Crescent Affiliate.
CBHS will have the right to sublease all or any of the Facilities, or to
assign the Facilities Lease, to any affiliate of CBHS or joint venture in which
it owns at least a 25% interest provided that CBHS remains liable for all
obligations under the Facilities Lease and the Franchise Agreement is assigned
to the sublessee or assignee.
At the termination of the Facilities Lease, any improvements to real estate
revert to Crescent Affiliate. CBHS will agree that upon expiration of the
Facilities Lease, supplies and inventory that are, in the aggregate, the
equivalent amount in value to that reasonably established for use by the
Facilities in the immediately preceding lease year, will remain at the leased
premises.
Master Franchise Agreement. Under the Master Franchise Agreement, Magellan
(through a wholly owned subsidiary) will grant a franchise for each Facility,
and CBHS agrees to enter into and cause each subsidiary/lessee of a Facility to
enter into a franchise agreement for such Facility. Magellan has agreed to grant
franchises for facilities subsequently acquired, developed or leased by CBHS
provided such facilities meet reasonable requirements of Magellan and that
Magellan is not contractually or legally prevented from granting such franchise.
CBHS will guarantee all obligations of its subsidiaries under the Subsidiary
Franchise Agreements.
Franchise fees payable by CBHS under the Master Franchise Agreement will be
the greater of (i) $78.2 million, subject to increases for inflation; or (ii)
$78.2 million, plus 3% of CBHS Gross Revenues (as defined in the agreement) over
$1 billion and not exceeding $1.2 billion and 5% of CBHS Gross Revenues over
$1.2 billion. Franchise fees are payable monthly. Interest will accrue on past
due franchise fees, but only to the extent that such franchise fees are not past
due as a result of either the operation of the Subordination Agreement or the
failure of CBHS to achieve earnings sufficient to pay such amounts. Franchise
fees are subordinated in payment to the annual base rent due Crescent Affiliate
under the Facilities Lease.
In addition to other remedies, if franchise fees are past due for any
reason in the amount of $6 million or more, Magellan will have the right to
prohibit any incentive compensation to CBHS management and prohibit any vesting
of CBHS management equity. If they are past due in the amount of $18 million or
more, Magellan will have the right to prohibit any salary increases for key
personnel of CBHS, prohibit any additional hiring by CBHS and prohibit any new
hospital acquisitions/joint ventures, directly or indirectly. If they are past
due in an amount greater than $24 million, Magellan will have the right to
require a 5% cutback on budgeted expenses under the then-current approved CBHS
annual budget, require monthly approval of expenditures of
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CBHS by Magellan, including capital and operating expenditures, and require
transfer of control and management of CBHS and CBHS franchisees to Magellan.
CBHS will agree during the term of the Master Franchise Agreement that it
will not engage as an owner, as an operator, in any managerial capacity or
otherwise in any business except (i) as a franchisee of Magellan; (ii) in
certain other businesses in the behavioral healthcare business pursuant to
existing contracts or contracts approved by Magellan; or (iii) in the management
and administration of businesses franchised by Magellan or conducted by a CBHS
subsidiary franchisee for new products. CBHS will not, directly or through any
subsidiary or other affiliate, engage in the hospital-based behavioral
healthcare business, except pursuant to a written agreement with Magellan, for
three years if the Master Franchise Agreement is terminated by Magellan prior to
the thirty-second anniversary of the Master Franchise Agreement. CBHS will keep
confidential the confidential information provided by Magellan and not use such
information other than to operate the franchised businesses. Magellan agrees
that CBHS will be a third party beneficiary of, and may enforce, Magellan's
covenants not to compete as set forth in the Subsidiary Franchise Agreement.
CBHS will have the right to use the "CHARTER" System in connection with its
business of the management and administration of the franchised businesses,
existing joint venture arrangements, existing businesses that are the subject of
management agreements, other businesses franchised by Magellan and new
arrangements. Magellan will continue to operate or provide a toll free "800"
telephone number and call center to provide substantially the same service to
the CBHS franchisees as provided by the call center to the Facilities when
operated by Magellan. The CBHS franchisees will advertise the "800" telephone
number and otherwise use the call center as a means of assisting customers to
locate the places of business of franchisees of Magellan.
CBHS will have the right to assign its rights under the Master Franchise
Agreement only (i) with the consent of Magellan (which consent may not be
unreasonably withheld, conditioned or delayed); (ii) to an entity which
simultaneously acquires all or substantially all of CBHS' business and assets,
provided, in each instance, that such assignee also acquires or assumes CBHS'
rights and obligations under the Facilities Lease; or (iii) if the Facilities
Lease is terminated as a result of an event of default thereunder, and Crescent
Affiliate elects to assume all of CBHS' obligations under the Master Franchise
Agreement and all other agreements specified in the Facilities Lease, to
Crescent Affiliate or a designee of Crescent Affiliate. Magellan has the right
to assign its obligations under the Master Franchise Agreement with the prior
written consent of CBHS and Crescent Affiliate, which consent may not be
unreasonably withheld, or to an entity which simultaneously therewith acquires
all or substantially all of Magellan's business and assets.
In the event the Master Franchise Agreement is assigned to Crescent
Affiliate as a result of the early termination of the Facilities Lease upon an
event of default, Magellan may terminate the Master Franchise Agreement and all
of Crescent Affiliate's rights thereunder for "good cause," which includes the
assignee's insolvency or bankruptcy; violation of any transfer and assignment
provision contained in the Master Franchise Agreement; the assignee's
noncompliance with any law, rule or regulation applicable to the operation of
its business (subject to reasonable attempts to cure); material violations of
confidentiality or nondisclosure covenants; the assignee's failure to perform or
the breach of any covenant, obligation, term, condition, warranty or
certification in the Master Franchise Agreement (subject to reasonable cure
periods); and the assignee's failure to pay certain fees owed to Magellan under
the Master Franchise Agreement within ten days.
CBHS will indemnify and defend Magellan from all losses and liabilities
arising directly or indirectly as a result of, arising out of or in connection
with the operation of CBHS' business, except those directly resulting from
Magellan's willful misconduct or fraud, and Magellan will indemnify CBHS from
all losses and liabilities arising directly or indirectly as a result of,
arising out of or in connection with the operation of CBHS' business or from
Magellan's willful misconduct or fraud.
The initial term of the Master Franchise Agreement is 12 years. CBHS has
the right to renew the Master Franchise Agreement for four additional five-year
renewal terms, provided that at the end of the initial term and each renewal
term, the fees will be adjusted to reflect the fair market value of the
franchise utilized by the Facilities as of the renewal date for the
then-applicable renewal term. The Master Franchise Agreement
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includes an appraisal mechanism for determining fair market value franchise
fees. Notwithstanding the foregoing, if the fair market value franchise fee as
so determined is not acceptable to Magellan, then Magellan will have the option
to terminate the Master Franchise Agreement at the end of the then-current term
and the Master Franchise Agreement will not be further extended. In all other
events, Magellan will not have the right to terminate the Master Franchise
Agreement (whether for breach or otherwise) without the consent of CBHS and
Crescent Affiliate. CBHS will not have the right to terminate the Master
Franchise Agreement (whether for breach or otherwise) without the consent of
Magellan and Crescent Affiliate.
Subsidiary Franchise Agreement. Magellan (through a wholly owned
subsidiary) will grant each CBHS subsidiary that operates a Facility (each, a
"franchisee") a franchise pursuant to a Subsidiary Franchise Agreement. Each
franchisee will be granted the right to engage in the business of providing
behavioral healthcare utilizing the "CHARTER" System from facilities in the
territory defined in the Subsidiary Franchise Agreement. The "CHARTER" System is
a system for the operation of behavioral healthcare businesses under the
"CHARTER" names and marks, including the right to use existing computer
software, existing treatment programs and procedures, existing quality
standards, existing quality assessment methods, existing performance improvement
and monitoring programs, advertising and marketing assistance, promotional
materials, consultation and other matters relating to the operation of the
business. The rights granted under each Subsidiary Franchise Agreement will
relate solely to a defined territory.
Each Subsidiary Franchise Agreement will have the same term as the Master
Franchise Agreement. CBHS will pay Magellan, pursuant to the Master Franchise
Agreement, all franchise fees on behalf of each franchisee.
During the term of each Subsidiary Franchise Agreement, Magellan will
provide franchisees advertising and marketing assistance including (i)
consultation, access to media buying programs and access to broadcast and other
advertising materials produced by Magellan from time to time for franchisees;
(ii) risk management services, including risk financial planning, loss control
and claims management; (iii) outcomes monitoring; (iv) national and regional
contracting services; and (v) consultation by telephone or at Magellan's offices
with respect to matters relating to the franchisee's business in which Magellan
has expertise, including reimbursement, government relations, clinical
strategies, regulatory matters, strategic planning and business development.
During the term of the Subsidiary Franchise Agreement, franchisees will be
prohibited from engaging in the hospital-based behavioral healthcare business
except under franchise from Magellan. For a period expiring on the earlier of
three years after expiration or termination of the Subsidiary Franchise
Agreement or the thirty-second anniversary of the Magellan Closing, the
franchisee agrees not to engage in its exclusive territory in the operation of a
hospital/residential treatment center-based, behavioral healthcare business. The
franchisees agree to keep confidential the confidential information provided by
Magellan and not use such information other than to operate its franchised
business.
The franchisee may not terminate a Subsidiary Franchise Agreement without
the consent of Magellan. Each Subsidiary Franchise Agreement will be subject to
termination by Magellan for "good cause," which includes certain acts of
bankruptcy or insolvency of the franchisee; violation of any transfer and
assignment provision contained in the Master Franchise Agreement; the
franchisee's noncompliance with any law, rule or regulation applicable to the
operation of its business (subject to reasonable attempts to cure); material
violations of confidentiality or nondisclosure covenants; the franchisee's
failure to perform or the breach of any covenant, obligation, term, condition,
warranty or certification in the Master Franchise Agreement (subject to
reasonable cure periods); and the franchisee's failure to pay certain fees owed
to Magellan under the Master Franchise Agreement within ten days.
Subordination Agreement
Magellan, CBHS and Crescent Affiliate will enter into a Subordination
Agreement at the Magellan Closing, which will provide, in general, that
franchise fees are subordinated to base rent, the annual 5% increase (the
"Minimum Escalator Rent") and the first $10 million of the Additional $20
Million Amount due annually under the Facilities Lease (including all renewals).
If, however, the accrued and unpaid
36
<PAGE> 41
franchise fees, including interest thereon, if any, equals or exceeds $15
million, then CBHS's available cash generally will first be applied to base rent
and Minimum Escalator Rent, but not to the Additional $20 Million Amount, under
the Facilities Lease (including all renewals). To the extent, however, that CBHS
(with the consent of Magellan) informs Crescent Affiliate that capital
expenditures are required and Crescent Affiliate funds or makes an irrevocable
commitment to fund such capital expenditures, then franchise fees will be
subordinated to such amounts paid or committed by Crescent Affiliate, and CBHS's
available cash will first be applied to base rent, Minimum Escalator Rent and
the portion of the Additional $20 Million Amount necessary to fund such capital
expenditures, and Crescent Affiliate will have no obligation to refund any
amounts paid by CBHS as the Additional $20 Million Amount.
The subordination arrangement provided for in the Subordination Agreement
will continue as long as any base rent, Minimum Escalator Rent or the Additional
$20 Million Amount is unpaid under the Facilities Lease if such base rent,
Minimum Escalator Rent or the Additional $20 Million Amount would have been
entitled to the benefits of the subordination described above.
Magellan Warrant Purchase Agreement. Under the Magellan Warrant Purchase
Agreement, Crescent Operating and Crescent will each receive warrants (the
"Magellan Warrants") to acquire 1,283,311 shares of Magellan common stock at a
warrant exercise price of $30 per share (subject to adjustment pursuant to
antidilution provisions). The Magellan Warrants will be exercisable in varying
increasing amounts beginning on May 31, 1998 and ending on May 31, 2009 as set
forth below.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
DATE FIRST MAGELLAN COMMON STOCK END OF
EXERCISABLE ISSUABLE UPON EXERCISE EXERCISE PERIOD
MAY 31 OF MAGELLAN WARRANTS MAY 31
- ----------- ---------------------- ---------------
<C> <C> <C>
1998 30,000 2001
1999 62,325 2002
2000 97,114 2003
2001 134,513 2004
2002 174,678 2005
2003 217,770 2006
2004 263,961 2007
2005 313,433 2008
2006 366,376 2009
2007 422,961 2009
2008 483,491 2009
</TABLE>
The Magellan Warrant Purchase Agreement provides that, at least 90 days
prior to the first date on which shares of Magellan common stock are issuable
upon exercise of Magellan Warrants, Magellan shall file with the SEC a
registration statement under the Securities Act with respect to the issuance of
Magellan common stock upon exercise of the Magellan Warrants and the resale of
such shares and any other Magellan common stock or other equity securities
issued with respect thereto by way of stock dividend or stock split or in
connection with a recapitalization or reorganization or otherwise. The Magellan
Warrant Purchase Agreement also provides that Magellan shall keep such
registration statement effective on a continual basis so long as Crescent
Operating owns Magellan Warrants pursuant to which Magellan common stock may be
purchased upon exercise thereof, provided that Magellan is not required to
maintain the effectiveness of any registration statement for more than 12 years
and 60 days after the Magellan Closing. Crescent Operating is also given the
right to have shares of Magellan common stock issuable upon exercise of Magellan
Warrants included in certain other registration statements filed by Magellan
under the Securities Act.
Magellan, Crescent Operating and Crescent have valued the Magellan Warrants
at $25.0 million ($12.5 million for the Magellan Warrants issued to Crescent
Operating and $12.5 million for the Magellan Warrants issued to Crescent).
Crescent Operating Warrant Purchase Agreement. Under the Crescent Operating
Warrant Purchase Agreement, Magellan will receive warrants to acquire up to 2.5%
of Crescent Operating Common Stock (the
37
<PAGE> 42
"Crescent Operating Warrants") outstanding as of the date of the Magellan
Closing. The Crescent Operating Warrants are exercisable only at the times, and
in the proportions, that Crescent Operating exercises its Magellan Warrants. The
exercise price for the Crescent Operating Warrants will reflect the same premium
as used to calculate the exercise price of the Magellan Warrants, based upon a
valuation of Crescent Operating once a trading market for Crescent Operating
Common Stock has been established.
Prior to the first date on which Magellan exercises its right to acquire
shares of Crescent Operating Common Stock upon exercise of Crescent Warrants
under the Warrant Purchase Agreement, Crescent Operating will use its best
efforts to obtain effectiveness of a registration statement under the Securities
Act with respect to the issuance of the shares of Crescent Operating Common
Stock upon exercise of Crescent Operating Warrants and the resale of such shares
and any other Crescent Operating Common Stock or other equity securities of
Crescent Operating issued with respect thereto by way of stock dividend or stock
split or in connection with a recapitalization or reorganization or otherwise.
Crescent Operating also agrees to keep such registration statement effective on
a continual basis as long as Magellan owns Crescent Operating Warrants pursuant
to which shares of Crescent Operating Common Stock may be purchased upon
exercise thereof, provided that Crescent Operating is not required to maintain
the effectiveness of any registration statement for more than 12 years and 90
days after the Magellan Closing.
PROPERTY
Crescent has agreed to make available to Crescent Operating, at Crescent's
principal office in Fort Worth, Texas, space for Crescent Operating's principal
corporate office. In addition, Crescent Operating owns the property in Dallas,
Texas from which Moody-Day conducts its operations. This property consists of a
one-story office building and a lot and related buildings where equipment is
stored and serviced. Crescent Operating believes that its facilities are
adequate to meet its expected requirements for the coming year.
EMPLOYEES
As of June 11, 1997, Crescent Operating had no employees.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF CRESCENT OPERATING
As of June 11, 1997, Gerald W. Haddock was the sole director of Crescent
Operating and served as its President and Chief Executive Officer. Jeffrey L.
Stevens served as the Treasurer, Chief Financial Officer and Secretary as of
such date. The following table sets forth certain information concerning those
persons who have agreed to serve as executive officers and directors of Crescent
Operating commencing subsequent to June 11, 1997 and prior to the Distribution.
<TABLE>
<CAPTION>
TERM
NAME EXPIRES AGE POSITION
---- ------- --- --------
<S> <C> <C> <C>
Richard E. Rainwater 1998 52 Chairman of the Board of Directors Nominee
John C. Goff 2000 41 Vice Chairman Nominee
Gerald W. Haddock 1999 49 President, Chief Executive Officer and
Director
Anthony M. Frank 2000 66 Director Nominee
Paul E. Rowsey, III 1998 42 Director Nominee
Carl F. Thorne 1999 56 Director Nominee
Jeffrey L. Stevens 2000 48 Treasurer, Chief Financial Officer,
Secretary and Director Nominee
</TABLE>
Richard E. Rainwater has been an independent investor since 1986. Mr.
Rainwater founded Crescent in 1994 and has served as its Chairman of the Board
since its formation. From 1970 to 1986, he served as the chief investment
advisor to the Bass family, whose overall wealth increased dramatically during
his tenure.
38
<PAGE> 43
During that time he was principally responsible for numerous major corporate and
real estate acquisitions and dispositions. Immediately after beginning his
independent investment activities, he founded ENSCO International Incorporated,
an oil field service and offshore drilling company, in 1986. Additionally, in
1990 he co-founded Columbia Hospital Corporation and in 1989 participated in a
management-led buyout of HCA-Hospital Corporation of America; both of these
companies owned and operated for-profit hospitals. In 1992, Mr. Rainwater was
one of the founders of Mid Ocean Limited, a provider of casualty re-insurance.
In February 1994, he assisted in the merger of Columbia Hospital Corporation and
HCA-Hospital Corporation that created Columbia/HCA Healthcare Corporation, the
world's largest hospital company. Mr. Rainwater is a graduate of the University
of Texas at Austin and the Graduate School of Business at Stanford University.
John C. Goff, from 1987 to 1994, served as a senior investment advisor to,
and investor with, Mr. Rainwater, as well as a vice president of Rainwater,
Inc., a management operating company wholly owned by Mr. Rainwater. In those
capacities, he has been involved in, and principally responsible for, numerous
acquisitions and financings involving corporate, debt and real estate interests.
Prior to joining Rainwater, Inc. in 1987, Mr. Goff was employed by the
accounting firm of KPMG Peat Marwick LLP from 1981 to 1987. Before joining KPMG
Peat Marwick LLP, Mr. Goff was employed by Century Development Corporation, a
major Houston-based office developer and property management company. Mr. Goff
is a director and the Vice Chairman of the Board of Crescent. Mr. Goff is a
graduate of the University of Texas at Austin and is a Certified Public
Accountant. From 1994 to 1996, Mr. Goff was Chief Executive Officer and a
director of Crescent. Since December 19, 1996, Mr. Goff has served as Vice
Chairman of the Board of Trust Managers of Crescent. Mr. Goff will also serve as
Chairman of the CBHS Board.
Gerald W. Haddock, prior to joining Crescent in 1994, was in the private
practice of law, pursuant to which, among other things, he served as primary
outside legal counsel to, and investor with, Mr. Rainwater and Rainwater, Inc.
Mr. Haddock is President, Chief Executive Officer and a director of Crescent.
Mr. Haddock was vice president of Rainwater, Inc. from 1990 to 1994 and was the
lead transactional attorney for Mr. Rainwater from 1986 to 1994. Mr. Haddock
presently is a member of the board of directors of AmeriCredit Corporation, a
company engaged in the financing of automobile dealer paper, and ENSCO
International Incorporated, an oil field service and offshore drilling company,
of which he was one of the three founding directors. In addition, Mr. Haddock
serves as general counsel for the Texas Rangers baseball club. Mr. Haddock
earned both Bachelor of Business Administration (B.B.A.) and Juris Doctor (J.D.)
degrees from Baylor University. He also holds a Master of Laws (L.L.M.) degree
in taxation from New York University and has served as the Chairman of the Tax
Section of the State Bar of Texas. From 1994 through December 18, 1996, Mr.
Haddock served as President, Chief Operating Officer and a director of Crescent.
Since December 19, 1996, Mr. Haddock has served as President, Chief Executive
Officer and a director of Crescent.
Anthony M. Frank served as Postmaster General of the United States from
1988 to 1992. Prior to that time, Mr. Frank served as chairman and chief
executive officer of First Nationwide Bank, chairman of the Federal Home Loan
Bank of San Francisco, chairman of the California Housing Finance Agency, and as
the chairman of the Federal Home Loan Mortgage Corporation Advisory Board. Since
1992, he has served as the founding chairman of Independent Bancorp of Arizona
until October 1993 and currently serves as a consultant and director of
TransAmerica HomeFirst, a mortgage company specializing in loans to the elderly.
Mr. Frank currently serves as a director of Crescent and of Acrogen, Inc. a
biotechnology company. Irvine Apartment Communities, a large California-based
apartment REIT, and Charles Schwab & Co., one of the nation's largest discount
brokerages. He is also a director of Temple Inland, Inc., a manufacturer of
paper and timber products, Bedford Property Investors, Inc., an office and
commercial property REIT investing primarily on the West Coast, General American
Investors Company, Inc., a closed-end investment company, Financial Security
Assurance, a company providing credit enhancement for municipal bond issuers,
Cotelligent, Inc., a provider of temporary office support services, and Living
Centers of America, Inc., an operator of nursing homes. Mr. Frank received a
Bachelor of Arts (B.A.) degree from Dartmouth College and a Master of Business
Administration (M.B.A.) degree from the Amos Tuck School of Business at
Dartmouth where he currently serves as overseer.
39
<PAGE> 44
Paul E. Rowsey, III is president of the commercial real estate group of
Rosewood Property Company, a commercial real estate development and investment
company, a position he has held for the past six years, and a member of the
board of directors of Rosewood Property Company. Mr. Rowsey is a director of
Crescent. Mr. Rowsey began his career in 1980 as an attorney specializing in
commercial real estate. Mr. Rowsey holds a Bachelor of Arts (B.A.) degree from
Duke University and a Juris Doctor (J.D.) degree from Southern Methodist
University School of Law.
Carl F. Thorne has been a director of ENSCO International Incorporated, an
oilfield service and offshore drilling company, since December 1986. He was
elected President and Chief Executive Officer of ENSCO in May 1987 and was
elected Chairman of the Board of Directors of ENSCO in November 1987. Mr. Thorne
holds a Bachelor of Science Degree in Petroleum Engineering from the University
of Texas and a Juris Doctorate Degree from Baylor University College of Law.
Jeffrey L. Stevens is the founder, President and Chief Executive Officer of
Petroleum Financial Inc., a firm providing accounting and financial services to
the oil and gas industry. Mr. Stevens has held this position since its inception
in 1991. Mr. Stevens is also a director of Amerac Energy Corporation, an oil and
gas acquisition, production and development company and has held various
positions with Amerac Energy Corporation since 1974. His last position was
Senior Vice President and Chief Financial Officer and Secretary which he held
until January 1997. Mr. Stevens is also a director of Gorilla Capital Limited, a
Canadian firm providing merger and acquisition services. Mr. Stevens is a
Certified Public Accountant.
COMMITTEES OF THE BOARD OF DIRECTORS
The Crescent Operating Board has standing Audit and Compensation
Committees. Anthony M. Frank, Chairman, and Carl F. Thorne will serve as the
members of the Audit Committee and Carl F. Thorne, Chairman, and Paul E. Rowsey,
III will serve as the members of the Compensation Committee. The Audit Committee
makes recommendations concerning the engagement of independent public
accountants, reviews with the independent public accountants the plans and
results of the audit engagement, reviews the independence of the independent
public accountants, considers the range of audit and non-audit fees and reviews
the adequacy of the Company's internal controls. The Compensation Committee is
responsible for establishing salaries, bonuses and other compensation for the
Company's officers and administering the Company's stock option plans.
COMPENSATION OF DIRECTORS
Each director other than Messrs. Rainwater, Goff and Haddock will receive
from the Company an annual fee of $7,500 or a meeting fee of $500 for each
Crescent Operating Board or Committee meeting attended and reimbursements of
expenses incurred in attending meetings.
ANNUAL MEETING
Crescent Operating's Bylaws provide that its annual meeting of stockholders
will be held in June of each year at its principal office or on such other date
and at such other place and time as may be fixed by resolution of Crescent
Operating's Board. The first annual meeting for which proxies will be solicited
from stockholders will be held in 1998.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AFTER THE
DISTRIBUTION
Executive officers and directors will receive shares of Crescent Operating
Common Stock in the Distribution in respect of Crescent Common Shares and Units
held by them on the Record Date. The Distribution will be made on the basis of
one share of Crescent Operating Common Stock for every 10 Crescent Common Shares
held on the Record Date and one share of Crescent Operating Common Stock for
every 5 Units held on the Record Date. In addition, existing incentive plan
awards under Crescent incentive plans will be converted into comparable awards
based on Crescent Operating Common Stock under the Crescent Operating Stock
Incentive Plan as described below.
For purposes of providing an indication of the beneficial ownership of
certain persons following the Distribution, the following table sets forth the
number of shares of Crescent Operating Common Stock that
40
<PAGE> 45
will be beneficially owned immediately following the Distribution, based on a
Record Date of May 30, 1997, by each person then serving as an executive officer
and director of Crescent Operating, all such executive officers and directors of
Crescent Operating as a group, and persons or entities owning 5% or more of the
outstanding Crescent Common Shares and Units.
BENEFICIAL OWNERSHIP
<TABLE>
<CAPTION>
NUMBER PERCENT
NAME AND ADDRESS OF OF OF
BENEFICIAL OWNER(1) SHARES(2) SHARES(2)
------------------- ------------- ---------
<S> <C> <C>
Richard E. Rainwater 1,388,887 12.5%
John C. Goff 227,605 2.0%
Gerald W. Haddock 169,362 1.5%
Anthony M. Frank 1,980 *
Paul E. Rowsey, III 3,398 *
Carl F. Thorne -- *
Jeffrey L. Stevens -- *
FMR Corp. 719,080 6.5%
82 Devonshire Street
Boston, Massachusetts 02109
The Prudential Insurance 516,170 4.7%
Company of America
Prudential Plaza
Newark, New Jersey 07102-3777
Cohen & Steers Capital Management, Inc. 532,120 4.8%
757 Third Avenue
New York, New York 10017
Directors and Executive Officers as a Group
(7 persons) 1,791,232 15.7%
</TABLE>
- ---------------
* Less than 1%.
(1) Unless otherwise indicated, the address of each beneficial owner is 777
Main Street, Fort Worth, Texas 76102.
(2) As of May 30, 1997, 96,993,199 Crescent Common Shares and 6,631,133 Units
were outstanding. Based on the Record Date of May 30, 1997, such amounts of
Crescent Common Shares and Units outstanding would result in the
distribution of approximately 11,025,547 shares of Crescent Operating
Common Stock (subject to reduction to the extent that cash payments are
made in lieu of the issuance of fractional shares of Crescent Operating
Common Stock). For purposes of this table, a person is deemed to have
"beneficial ownership" of the number of shares of Crescent Operating Common
Stock that such person would have had the right to acquire within 60 days
of May 30, 1997 upon exercise of options to purchase Crescent Common Shares
granted pursuant to Crescent's stock incentive plans. For purposes of
computing the percentage of outstanding shares held by each person, all
shares of Crescent Operating Common Stock that such person has the right to
acquire within 60 days pursuant to the exercise of options for shares are
deemed to be outstanding, but are not deemed to be outstanding for the
purpose of computing the ownership percentage of any other person.
EXECUTIVE COMPENSATION
Crescent Operating was recently formed. None of the Company's executive
officers has received compensation from or on behalf of Crescent Operating since
its formation. The Company has no employment agreements with any person and will
not pay a salary or other compensation to any executive officer for his
41
<PAGE> 46
services in such capacity, although options have been, and in the future may be,
granted to executive officers. See "Certain Transactions -- Contract with
Affiliate of Director."
The following table provides certain information regarding options granted
to the Company's named executive officers at June 11, 1997. None of the options
is exercisable until the Distribution Effective Date. The Company has not
granted any SARs.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF STOCK PRICE
SECURITIES APPRECIATION FOR
UNDERLYING EXERCISE OPTION TERM*
OPTIONS OR BASE EXPIRATION --------------------
NAME GRANTED PRICE ($/SH.) DATE 5% 10%
---- ---------- ------------- -------------------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Richard E. Rainwater........... 116,562 (1) April 2004 $ 72(1) $184(1)
John C. Goff................... 289,190 (1) April 2004/July 2006 179(1) 457(1)
Gerald W. Haddock.............. 265,247 (1) April 2004/July 2006 164(1) 419(1)
</TABLE>
- ---------------
* Potential Realizable Value is based on the assumed annual growth rates shown
over their 10-year option term. For example, a 5% growth rate compounded
annually, for Mr. Goff's grant results in a stock price of $1.61 per share
and a 10% growth rate, compounded annually, results in a stock price of
$2.57 per share. These Potential Realizable Values are listed to comply with
the regulations of the Commission, and the Company cannot predict whether
these values will be achieved. Actual gains, if any, on stock option
exercises are dependent on the future performance of the stock.
(1) The exercise price per share will equal the approximately $11.7 million in
equity contributed by Crescent Operating Partnership (the $14.1 million
contributed originally less the approximately $2.4 million dividend from
Crescent Operating to Crescent Operating Partnership) divided by the sum of
(i) the number of shares of Crescent Operating Common Stock to be
distributed in the Distribution and (ii) the number of shares of Crescent
Operating Common Stock underlying options granted as of June 11, 1997 to all
persons (approximately 862,538 shares). Based on the Record Date of May 30,
1997, approximately 11,025,547 shares of Crescent Operating Common Stock
will be distributed in the Distribution (subject to reduction to the extent
that cash payments are made in lieu of the issuance of fractional shares of
Crescent Operating Common Stock), and the exercise price per share will be
$.99, which the Company's Board of Directors has determined represents the
fair market value as of the date of grant.
CRESCENT OPERATING STOCK INCENTIVE PLAN
Crescent Operating has adopted a Stock Incentive Plan pursuant to which
grants of options ("Options") to purchase a specified number of shares of
Crescent Operating Common Stock and shares of restricted stock in Crescent
Operating ("Restricted Stock") were made in order to provide each holder of
shares of restricted stock in Crescent or options in Crescent or Crescent
Operating Partnership with an equivalent number of shares of Restricted Stock or
Options in Crescent Operating, based on a ratio of one share of Restricted Stock
or Option to purchase Crescent Operating Common Stock for each 10 shares of
restricted stock in Crescent or options for Crescent Common Shares and one
Option to purchase Crescent Operating Common Stock for each 5 options for Units.
None of the Options is exercisable until the Distribution Effective Date. Under
the Stock Incentive Plan, 1,000,000 shares of Crescent Operating Common Stock
are authorized for issuance. Non-employee directors of Crescent Operating will
receive annual grants of Options to purchase 1,400 shares of Crescent Operating
Common Stock (including an initial grant of an Option to purchase 1,400 shares
of Crescent Operating Common Stock upon appointment of any non-employee
director). In addition, non-employee directors of Crescent received a one-time
grant of 1,400 shares of Crescent Operating Common Stock as of May 13, 1997. No
further grants of Options or Restricted Stock will be made under the Stock
Incentive Plan. The Stock Incentive Plan expires on May 7, 2007.
The Compensation Committee of Crescent Operating has authority to determine
the employees, officers and advisors to be granted Options or Restricted Stock,
to interpret the Stock Incentive Plan, to prescribe, amend and rescind any rules
and regulations necessary or appropriate for the administration of the Stock
Incentive Plan, to determine and interpret the details and provisions of each
Option agreement and Restricted Stock agreement, to modify or amend any Option
agreement or Restricted Stock agreement or waive any conditions or restrictions
applicable to any Option (or the exercise thereof) or to Restricted Stock, and
to
42
<PAGE> 47
make all other determinations necessary or advisable for the administration of
the Stock Incentive Plan. With respect to any provisions of the Stock Incentive
Plan granting the Compensation Committee the right to agree, in its sole
discretion, to further extend the term of any award, the Compensation Committee
may exercise such right at the time of grant, in the agreement relating to such
award, or at any time or from time to time after the grant of any award
thereunder. The discretion of the Compensation Committee under the Stock
Incentive Plan does not extend to Options granted to outside directors.
CERTAIN TRANSACTIONS
INTERESTS RELATING TO CRESCENT OPERATING PARTNERSHIP
Management and Certain Beneficial Owners of Crescent Operating Partnership.
Gerald W. Haddock is the sole director of Crescent Ltd., the sole general
partner of Crescent Operating Partnership, and also serves as the President and
Chief Executive Officer of Crescent Ltd. Additionally, each of Messrs.
Rainwater, Goff and Haddock beneficially owns Units representing approximately
6.2%, 1.1% and 0.9%, respectively, of the partnership interests in Crescent
Operating Partnership outstanding as of such date, and will own Crescent
Operating Common Stock following the Distribution, as set forth above under
"Management -- Security Ownership of Certain Beneficial Owners and Management
After the Distribution."
Formation and Equity Capitalization of Crescent Operating; Ownership of
Crescent Operating Common Stock. Crescent Operating Partnership is the sole
stockholder of Crescent Operating as of the date hereof. On April 1, 1997,
Crescent Operating Partnership acquired 1,000 shares of the Crescent Operating
Common Stock for $1,000. In order to permit Crescent Operating to acquire the
Assets and the limited partner interest in the partnership that owns the Dallas
Mavericks, Crescent Operating Partnership contributed to Crescent Operating cash
totaling $14.1 million. In consideration of the aggregate cash contributions of
approximately $14.1 million from Crescent Operating Partnership, Crescent
Operating has issued to Crescent Operating Partnership the number of shares of
Crescent Operating Common Stock required to make the Distribution to holders of
record of Crescent Common Shares and Units on the Record Date (which is
11,025,547 shares, subject to reduction to the extent that cash payments are
made in lieu of the issuance of fractional shares of Crescent Operating Common
Stock).
Loans from Crescent Operating Partnership. In connection with the
capitalization of Crescent Operating, Crescent Operating Partnership agreed to
advance funds in the form of loans in the aggregate amount of $35.9 million, to
be used to purchase the Assets, the limited partner interest in the partnership
that owns the Dallas Mavericks and to support future funding obligations and
cash requirements. As a result of the repayment of a portion of the funds
borrowed, it is anticipated that the maximum borrowings under the term loan will
be approximately $26.0 million, approximately $5.4 million of which was
outstanding as of June 11, 1997.
Of the $35.9 million that Crescent Operating Partnership agreed to lend to
Crescent Operating, approximately $15.3 million was funded on May 8, 1997 and
approximately $9.9 million of which was repaid on June 11, 1997 as a result of
the sale of the limited partner interest in the partnership that owns the Dallas
Mavericks to an affiliate, as described under "-- Sale of Limited Partner
Interest to Affiliate," below. The loan is a five-year, recourse term loan that
is or will be secured, to the extent not prohibited by pre-existing
arrangements, by a first lien on the Assets and all other assets owned by
Crescent Operating now or in the future (other than assets of Crescent Operating
acquired after June 30, 1997, which may be pledged in the future to secure
non-recourse loans to Crescent Operating). The loan will bear interest at the
rate of 12% per annum, compounded annually, and is payable quarterly in an
amount equal to the lesser of (i) the net cash flow for the preceding quarter
and (ii) the quarterly amount of principal due, together with interest accrued
on the loan. Net cash flow will be computed by subtracting the total costs
incurred by Crescent Operating from its gross receipts. The loan will mature on
May 8, 2002.
The Company has also obtained a line of credit for up to $20.4 million from
Crescent Operating Partnership which shall bear interest at the same rate as the
term loan. The line of credit is payable on an interest-only basis during its
term, which expires on the later of (i) May 21, 2002 or (ii) five years after
the last draw under the line of credit. Draws may be made under the line of
credit until June 22, 2002. The line of
43
<PAGE> 48
credit is a recourse obligation and amounts outstanding thereunder are or will
be secured, to the extent not prohibited by pre-existing arrangements, by a
first lien on the Assets and all other assets owned by Crescent Operating now or
in the future (other than assets of Crescent Operating acquired after June 30,
1997, which may be pledged in the future to secure non-recourse loans to
Crescent Operating). As of June 11, 1997, no amounts were outstanding under the
line of credit.
Sale of Limited Partner Interest to Affiliate. As of June 11, 1997,
Crescent Operating sold, for approximately $12.55 million, the limited partner
interest in the partnership that owns the Dallas Mavericks to a newly formed
corporation wholly owned by Crescent Operating Partnership. Richard E.
Rainwater, John C. Goff and Gerald W. Haddock, each of whom will serve as a
director of Crescent Operating, also are limited partners of Crescent Operating
Partnership. As of May 30, 1997, Messrs. Rainwater, Goff and Haddock
beneficially owned Units representing approximately 6.2%, 1.1% and .9%,
respectively, of the partnership interests in Crescent Operating Partnership
outstanding as of such date. In addition, Mr. Haddock serves as President and
Chief Executive Officer and the sole director of Crescent Ltd., which is the
general partner of Crescent Operating Partnership, and will serve in the same
capacities in the newly formed corporation. See "-- Management and Certain
Beneficial Owners of Crescent Operating Partnership," above, and "-- Crescent,"
below. Crescent Operating had purchased the limited partner interest in the
partnership that owns the Dallas Mavericks from Carter-Crowley for approximately
$12.4 million utilizing a combination of cash payments and proceeds of
borrowings from Crescent Operating Partnership. Crescent Operating used the
proceeds of the sale of the interest (i) to pay all accrued interest under the
term loan from Crescent Operating Partnership, in the amount of approximately
$.2 million, (ii) to make a payment of principal under the term loan of
approximately $9.9 million, and (iii) to pay a dividend to its sole stockholder,
Crescent Operating Partnership, of approximately $2.4 million.
The Intercompany Agreement. The Intercompany Agreement between the Company
and Crescent Operating Partnership sets forth the basis on which Crescent
Operating and Crescent Operating Partnership will refer opportunities to one
another. See "Business -- The Intercompany Agreement."
CRESCENT
The officers of Crescent include Richard E. Rainwater, Chairman of the
Board of Trust Managers, John C. Goff, Vice Chairman, and Gerald W. Haddock,
President and Chief Executive Officer. The sole general partner of Crescent
Operating Partnership is Crescent Ltd., which is a wholly owned subsidiary of
Crescent. Mr. Haddock is the sole director of Crescent Ltd. The persons who are
executive officers of Crescent hold the same offices in Crescent Ltd., except
that Messrs. Rainwater and Goff are not directors or officers of Crescent Ltd.
Messrs. Rainwater, Goff and Haddock owned approximately 12.5%, 2.0% and 1.5% of
Crescent as of May 30, 1997, which interests consist of Crescent Common Shares
and Units (including vested options to acquire Crescent Common Shares and
Units). In connection with the Magellan Transaction, Mr. Goff will become
Chairman of CBHS. Mr. Rainwater is an affiliate of Crescent Operating
Partnership, Crescent Ltd. and Crescent.
INTERESTS RELATING TO MAGELLAN
The CBHS Interest. The CBHS Interest is a part of the Assets expected to be
purchased by Crescent Operating and is a component of the Magellan Transaction.
The CBHS Interest cannot be acquired unless customary closing conditions are
satisfied and all of the transactions that comprise the Magellan Transaction are
consummated, including the acquisition by Crescent Affiliate of the Facilities,
the lease of the Facilities from Crescent Affiliate to CBHS and the
subordination of franchise fees to payments under the Facilities Lease. On May
30, 1997, the requisite percentage of Magellan stockholders approved the
Magellan Transaction. Management of CBHS will be vested in the CBHS Board.
Crescent Operating and Magellan Affiliate will each have the right to designate
two members to the CBHS Board. It is expected that Crescent Operating will
designate John C. Goff and Gerald W. Haddock as its two designees to the CBHS
Board, and that Mr. Goff will serve as Chairman of the CBHS Board.
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Ownership of Magellan Securities. Messrs. Rainwater, Goff and Haddock and
Mr. Rainwater's children own shares of Magellan common stock and warrants to
acquire Magellan common stock. Mr. Rainwater, either directly or indirectly,
owns approximately 2,474,000 shares, and warrants to acquire 1,237,000 shares,
of Magellan common stock. Mr. Rainwater's children, either directly or
indirectly, own approximately 320,000 shares, and warrants to acquire 160,000
shares, of Magellan common stock. Messrs. Goff and Haddock each own, directly or
indirectly, approximately 57,000 shares, and warrants to acquire 28,000 shares,
of Magellan common stock.
The warrants entitle the warrant holders to purchase, at any time until the
January 25, 2000 expiration date, up to 2,000,000 shares of Magellan common
stock at a purchase price of $26.15 per share. Agreements executed in connection
with the acquisition of the warrants (the "Private Placement") provide, among
other things, for the adjustment of the number of shares of Magellan common
stock that can be purchased under the warrants and the purchase price,
respectively, for certain dilutive events, for registration rights for shares,
including the shares of Magellan common stock underlying the warrants, which
registration rights have been exercised, and for a variety of other customary
provisions, including, without limitation, certain restrictions on the private
sale of such shares, certain preemptive rights to acquire additional securities
issued by Magellan for cash in a private placement transaction (which have been
waived to the extent they may apply to the Magellan Transaction), and standstill
covenants restricting the purchase of additional shares of Magellan common stock
by Mr. Rainwater and his affiliates in certain circumstances.
Darla D. Moore is married to Mr. Rainwater and is a director of Magellan.
As part of the arrangements pursuant to which Mr. Rainwater acquired securities
of Magellan, Mr. Rainwater has the right to designate a nominee acceptable to
Magellan for election as a director of Magellan for so long as Mr. Rainwater and
his affiliates (collectively, the "Rainwater Group") continue to own
beneficially a specified minimum number of shares of Magellan common stock. A
limited partnership of which a corporation owned by Mr. Rainwater is the sole
general partner proposed Ms. Moore as its nominee for director, and Ms. Moore
was elected a director by the Magellan Board on February 22, 1996.
As part of the Private Placement, Magellan agreed (i) to pay a transaction
fee of $150,000; (ii) to reimburse certain expenses of Rainwater, Inc. in
connection with the Private Placement; (iii) to pay the Rainwater Group an
annual monitoring fee of $75,000 commencing on March 31, 1996; and (iv) to
reimburse the Rainwater Group for reasonable fees and expenses (up to a maximum
of $25,000 annually) incurred in connection with its ownership of the Magellan
common stock and the warrants. Magellan also agreed to reimburse the Rainwater
Group in the future for one additional filing under the Hart-Scott Rodino
Anti-Trust Improvements Act of 1976 if such a filing is required in connection
with an exercise of the warrants.
From January 25, 1996 through December 31, 1996, Magellan paid to the
Rainwater Group under the Private Placement an aggregate of $306,344, consisting
of a transaction fee of $150,000, expense reimbursement in connection with the
Private Placement of $86,156, and monitoring fees and expenses of $70,188.
Excluded from these amounts are directors' fees and expense reimbursement paid
to Ms. Moore in her capacity as a director of Magellan.
CONTRACT WITH AFFILIATE OF DIRECTOR
Crescent Operating has entered into a one-year contract (subject to
automatic renewal for one-year terms unless terminated by either party 60 days
prior to any anniversary date of the contract) with Petroleum Financial Inc., a
company owned by Jeffrey L. Stevens, a director nominee and the Treasurer, Chief
Financial Officer and Secretary of the Company, pursuant to which Petroleum
Financial will provide certain services to Crescent Operating. These services
include accounting services, review or initial preparation of reports required
to be filed with the Commission, reports to shareholders, and similar matters.
Crescent Operating will pay Petroleum Financial an annual fee in an amount to be
determined.
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DESCRIPTION OF CRESCENT OPERATING CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
Crescent Operating's authorized capital stock consists of 10,000,000 shares
of preferred stock, par value $.01 per share (the "Preferred Stock"), and
22,500,000 shares of Crescent Operating Common Stock. Immediately following the
Distribution, approximately 11,025,547 shares of Crescent Operating Common Stock
will be outstanding (subject to reduction to the extent that cash payments are
made in lieu of the issuance of fractional shares of Crescent Operating Common
Stock). All of the shares of Crescent Operating Common Stock that will be
outstanding immediately following the Distribution will be validly issued, fully
paid and nonassessable.
COMMON STOCK
The holders of Crescent Operating Common Stock will be entitled to one vote
for each share on all matters voted on by stockholders, including elections of
directors, and, except as otherwise required by law or provided in any
resolution adopted by Crescent Operating's Board with respect to any series of
Preferred Stock, the holders of such shares will possess all voting power. The
Charter does not provide for cumulative voting in the election of directors.
Subject to any preferential rights of any outstanding series of Preferred Stock
created by the Crescent Operating Board from time to time, the holders of
Crescent Operating Common Stock will be entitled to such dividends as may be
declared from time to time by the Crescent Operating Board from funds available
therefor, and upon liquidation will be entitled to receive pro rata all assets
of the Company available for distribution to such holders.
PREFERRED STOCK
The Charter authorizes the Crescent Operating Board to establish one or
more series of Preferred Stock and to determine, with respect to any series of
Preferred Stock, the terms and rights of such series, including (i) the
designation of the series, (ii) the number of shares of the series, which number
the Crescent Operating Board may thereafter (except where otherwise provided in
the applicable certificate of designation) increase or decrease (but not below
the number of shares thereof then outstanding), (iii) whether dividends, if any,
will be cumulative or noncumulative, and, in the case of shares of any series
having cumulative dividend rights, the date or dates or method of determining
the date or dates from which dividends on the shares of such series shall be
cumulative, (iv) the rate of any dividends (or method of determining such
dividends) payable to the holders of the shares of such series, any conditions
upon which such dividends will be paid and the date or dates or the method for
determining the date or dates upon which such dividends will be payable, (v) the
redemption rights and price or prices, if any, for shares of the series, (vi)
the terms and amounts of any sinking fund provided for the purchase or
redemption of shares of the series, (vii) the amounts payable on and the
preferences, if any, of shares of the series in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of Crescent
Operating, (viii) whether the shares of the series will be convertible or
exchangeable into shares of any other class or series, or any other security, of
Crescent Operating or any other corporation, and, if so, the specification of
such other class or series or such other security, the conversion or exchange
price or prices or rate or rates, any adjustments thereof, the date or dates as
of which such shares will be convertible or exchangeable and all other terms and
conditions upon which such conversion or exchange may be made, (ix) restrictions
on the issuance of shares of the same series or of any other class or series,
(x) the voting rights, if any, of the holders of the shares of the series, and
(xi) any other relative rights, preferences and limitations of such series.
Crescent Operating believes that the ability of the Crescent Operating
Board to issue one or more series of Preferred Stock will provide it with
flexibility in structuring possible future financings and acquisitions, and in
meeting other corporate needs which might arise. The authorized shares of
Preferred Stock, as well as shares of Crescent Operating Common Stock, will be
available for issuance without further action by Crescent Operating's
stockholders, unless such action is required by applicable law or the rules of
any stock exchange or automated quotation system on which Crescent Operating's
securities may be listed or traded. If the approval
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of Crescent Operating's stockholders is not required for the issuance of shares
of Preferred Stock or Crescent Operating Common Stock, the Crescent Operating
Board may determine not to seek stockholder approval.
Although the Crescent Operating Board has no intention at the present time
of doing so, it could issue a series of Preferred Stock that could, depending on
the terms of such series, impede the completion of a merger, tender offer or
other takeover attempt. The Crescent Operating Board will make any determination
to issue such shares based on its judgment as to the best interests of Crescent
Operating and its stockholders. The Crescent Operating Board, in so acting,
could issue Preferred Stock having terms that could discourage an acquisition
attempt through which an acquiror may be able to change the composition of the
Crescent Operating Board, including a tender offer or other transaction that
some, or a majority, of Crescent Operating's stockholders might believe to be in
their best interests or in which such stockholders might receive a premium for
their stock over the then-current market price of such stock.
SERIES A JUNIOR PREFERRED STOCK
The Company expects to reserve 225,000 shares of Series A Junior Preferred
Stock for issuance upon exercise of the Rights. The Series A Junior Preferred
Stock will not be redeemable and will rank, with respect to the payment of
dividends and the distribution of assets, junior to any other series of any
other classes of Preferred Stock that may exist from time to time. Generally,
each share of Series A Junior Preferred Stock will entitle its holder to 100
votes on all matters submitted to a vote of the Company's stockholders.
Subject to the rights of holders of any shares of any series of Preferred
Stock ranking prior and superior to the Series A Junior Preferred Stock with
respect to dividends, holders of shares of Series A Junior Preferred Stock, in
preference to holders of Crescent Operating Common Stock and any other junior
stock, will be entitled to receive, when, as and if declared by the Crescent
Operating Board, quarterly cash dividends, in an amount per share equal to the
greater of (i) $1 or (ii) subject to adjustment as set forth herein, 100 times
the aggregate per share amount of all cash dividends and 100 times the aggregate
per share amount (payable in kind) of all non-cash dividends or other
distributions (other than dividends payable in Crescent Operating Common Stock
or a subdivision of outstanding shares of Crescent Operating Common Stock)
declared on the Crescent Operating Common Stock since the immediately preceding
quarterly dividend payment date, or since the first issuance of any share of
Series A Junior Preferred Stock, in the case of the first quarterly dividend
payment date. In the event the Board declares or pays a dividend on the Crescent
Operating Common Stock payable in shares of Crescent Operating Common Stock or
subdivides, combines or consolidates the outstanding shares of Crescent
Operating Common Stock into a greater or lesser number of shares of Crescent
Operating Common Stock, the amount of in-kind dividend payable to holders of
Series A Junior Preferred Stock will be adjusted for such dividend on, or
subdivision, combination or consolidation of, shares of Crescent Operating
Common Stock. Dividends on the Series A Junior Preferred Stock generally will be
declared immediately following a dividend declaration on the Crescent Operating
Common Stock, and will be cumulative. Accrued but unpaid dividends will not bear
interest.
During such times as dividends payable on the Series A Junior Preferred
Stock are in arrears, and until such averages have been paid in full, Crescent
Operating will be prohibited from (i) declaring or paying dividends, or making
other distributions on any shares of stock ranking junior to the Series A Junior
Preferred Stock, (ii) declaring or paying dividends, or making other
distributions on any shares of stock ranking on a parity with the Series A
Junior Preferred Stock, except dividends paid ratably on the Series A Junior
Preferred Stock and all such parity stock, in proportion to the amounts to which
holders of all such shares are then entitled, (iii) redeeming or otherwise
acquiring for value any stock ranking junior to the Series A Junior Preferred
Stock, and (iv) redeeming or otherwise acquiring for value any shares of Series
A Junior Preferred Stock, or any shares of stock ranking on a parity with the
Series A Junior Preferred Stock, except in accordance with a purchase offer made
under certain limited circumstances. Redemptions and other acquisitions of stock
ranking junior to the Series A Junior Preferred Stock will be permissible if
such redemptions or acquisitions are made in exchange for shares of any stock of
Crescent Operating ranking junior to the Series A Junior Preferred Stock.
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In the event of any liquidation, dissolution or winding up of Crescent
Operating, no distribution will be made to the holders of shares of stock
ranking junior to the Series A Junior Preferred Stock unless and until the
holders of the Series A Junior Preferred Stock have received $100 per share,
plus an amount equal to accrued and unpaid dividends and distributions thereon.
Holders of Series A Junior Preferred Stock will be entitled to receive an
aggregate amount per share equal to 100 times the aggregate amount to be
distributed per share to holders of Crescent Operating Common Stock. Further, no
distribution will be made to the holders of shares of stock ranking on a parity
with the Series A Junior Preferred Stock, except distributions made ratably on
the Series A Junior Preferred Stock and all such parity stock in proportion to
the totals to which the holders are entitled upon such liquidation, dissolution
or winding up. In the event the Board declares or pays a dividend payable in
shares of Crescent Operating Common Stock or subdivides, combines or
consolidates the outstanding shares of Crescent Operating Common Stock into a
greater or lesser number of shares of Crescent Operating Common Stock, the
amount of the liquidating distribution payable to holders of Series A Junior
Preferred Stock will be adjusted for such dividend on, or subdivision,
combination or consolidation of, shares of Crescent Operating Common Stock.
In the event Crescent Operating enters into a consolidation, merger,
combination or other transaction pursuant to which shares of Crescent Operating
Common Stock are exchanged for or changed into other stock or securities, cash
or other property, each share of Series A Junior Preferred Stock must be
similarly exchanged or changed into an amount per share equal to 100 times the
aggregate amount of stock, securities, cash or other property (payable in kind)
into which or for which each share of Crescent Operating Common Stock is changed
or exchanged. In the event the Board declares or pays a dividend payable in
shares of Crescent Operating Common Stock or subdivides, combines or
consolidates the outstanding shares of Crescent Operating Common Stock into a
greater or lesser number of shares of Crescent Operating Common Stock, the
amount payable to holders of Series A Junior Preferred Stock in respect of a
consolidation, merger, combination or other such transaction will be adjusted
for such dividend on, or subdivision, combination or consolidation of, shares of
Crescent Operating Common Stock.
WARRANTS
Crescent Operating Warrant Purchase Agreement. Under the Crescent Operating
Warrant Purchase Agreement, Magellan will receive warrants to acquire up to 2.5%
of Crescent Operating Common Stock outstanding as of the date of the Magellan
Closing. The Crescent Operating Warrants are exercisable only at the times, and
in the proportions, that Crescent or Crescent Operating exercises its Magellan
Warrants. The exercise price for the Crescent Operating Warrants will reflect
the same premium as used to calculate the exercise price of the Magellan
Warrants, based upon a valuation of Crescent Operating to be conducted by a
mutually agreed upon independent appraiser once a trading market for Crescent
Operating Common Stock has been established. See "Business -- The CBHS
Interest -- Crescent Operating Warrant Purchase Agreement" for a more detailed
description of the terms of the Crescent Operating Warrants.
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CERTAIN ANTITAKEOVER PROVISIONS
STAGGERED BOARD OF DIRECTORS
The Charter and the Bylaws provide that the Crescent Operating Board will
be divided into three classes of directors, each class constituting
approximately one-third of the total number of directors, with the classes
serving staggered three-year terms. The classification of the Crescent Operating
Board will have the effect of making it more difficult for stockholders to
change the composition of the Crescent Operating Board, because only a minority
of the directors are up for election, and the Crescent Operating Board may not
be replaced by vote of the stockholders, at any one time. Crescent Operating
believes, however, that the longer terms associated with the classified Crescent
Operating Board will help to ensure continuity and stability of the Company's
management and policies.
The classification provisions also could have the effect of discouraging a
third party from accumulating a large block of Crescent Operating Common Stock
or attempting to obtain control of Crescent Operating, even though such an
attempt might be beneficial to the Company and some, or a majority, of its
stockholders. Accordingly, under certain circumstances stockholders could be
deprived of opportunities to sell their shares of Crescent Operating Common
Stock at a higher price than might otherwise be available.
NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES
The Charter provides that, subject to any rights of holders of Preferred
Stock to elect additional directors under specified circumstances ("Preferred
Holders' Rights"), the number of directors will be fixed by the Bylaws. The
Bylaws provide that, subject to any Preferred Holders' Rights, the number of
directors will be fixed by the Crescent Operating Board, but must not be more
than 25 nor less than three. In addition, the Bylaws provide that, subject to
any Preferred Holders' Rights, and unless the Crescent Operating Board otherwise
determines, any vacancies (other than vacancies created by an increase in the
total number of directors) will be filled by the affirmative vote of a majority
of the remaining directors, though less than a quorum, and any vacancies created
by an increase in the total number of directors may be filled by a majority of
the entire Crescent Operating Board. Accordingly, the Crescent Operating Board
could temporarily prevent any stockholder from enlarging the Crescent Operating
Board and then filling the new directorship with such stockholder's own
nominees.
The Charter and the Bylaws provide that, subject to any Preferred Holders'
Rights, directors may be removed only for cause upon the affirmative vote of
holders of at least 80% of the entire voting power of all the then-outstanding
shares of stock entitled to vote generally in the election of directors, voting
together as a single class.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS
The Charter and Bylaws provide that any action required or permitted to be
taken by the stockholders of Crescent Operating must be effected at a duly
called annual or special meeting of such holders and may not be effected by any
consent in writing by such holders. Except as otherwise required by law and
subject to the rights of the holders of any Preferred Stock, special meetings of
stockholders of Crescent Operating for any purpose or purposes may be called
only by the Chairman of the Board, Vice Chairman, President or the Crescent
Operating Board pursuant to a resolution stating the purpose or purposes
thereof, and any power of stockholders to call a special meeting is specifically
denied. No business other than that stated in the notice shall be transacted at
any special meeting. These provisions may have the effect of delaying
consideration of a stockholder proposal until the next annual meeting unless a
special meeting is called by the Chairman of the Board, Vice Chairman, President
or the Crescent Operating Board.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND STOCKHOLDER PROPOSALS
The Bylaws establish an advance notice procedure for stockholders to make
nominations of candidates for directors or bring other business before an annual
meeting of stockholders of Crescent Operating (the "Stockholder Notice
Procedure").
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The Stockholder Notice Procedure provides that (i) only persons who are
nominated by, or at the direction of, the Crescent Operating Board, or by a
stockholder who has given timely written notice containing specified information
to the Secretary of Crescent Operating prior to the meeting at which directors
are to be elected, will be eligible for election as directors of Crescent
Operating and (ii) at an annual meeting, only such business may be conducted as
has been brought before the meeting by, or at the direction of the Chairman or
the Crescent Operating Board or by a stockholder who has given timely written
notice to the Secretary of Crescent Operating of such stockholder's intention to
bring such business before such meeting. In general, for notice of stockholder
nominations or proposed business to be conducted at an annual meeting to be
timely, such notice must be received by the Company not less than 70 days nor
more than 90 days prior to the first anniversary of the previous year's annual
meeting.
The purpose of requiring stockholders to give the Company advance notice of
nominations and other business is to afford the Crescent Operating Board a
meaningful opportunity to consider the qualifications of the proposed nominees
or the advisability of the other proposed business and, to the extent deemed
necessary or desirable by the Crescent Operating Board, to inform stockholders
and make recommendations about such nominees or business, as well as to ensure
an orderly procedure for conducting meetings of stockholders. Although the
Bylaws do not give the Crescent Operating Board power to block stockholder
nominations for the election of directors or proposal for action, they may have
the effect of discouraging a stockholder from proposing nominees or business,
precluding a contest for the election of directors or the consideration of
stockholder proposals if procedural requirements are not met, and deterring
third parties from soliciting proxies for a non-management slate of directors or
proposal, without regard to the merits of such slate or proposal.
RELEVANT FACTORS TO BE CONSIDERED BY THE CRESCENT OPERATING BOARD
The Charter, which provides that one of the purposes of Crescent Operating
is to perform the Intercompany Agreement, also provides that, in determining
what is in the best interest of Crescent Operating in evaluating a "business
combination," "change in control" or other transaction, a director of Crescent
Operating shall consider all of the relevant factors, which may include (i) the
immediate and long-term effects of the transaction on Crescent Operating's
stockholders, including stockholders, if any, who do not participate in the
transaction; (ii) the social and economic effects of the transaction on the
Company's employees, suppliers, creditors and customers and others dealing with
the Company and on the communities in which the Company operates and is located;
(iii) whether the transaction is acceptable, based on the historical and current
operating results and financial condition of the Company; (iv) whether a more
favorable price would be obtained for the Company's stock or other securities in
the future; (v) the reputation and business practices of the other party or
parties to the proposed transaction, including its or their management and
affiliates, as they would affect employees of the Company; (vi) the future value
of the Company's securities; (vii) any legal or regulatory issues raised by the
transactions; (viii) the effect on the Intercompany Agreement; and (ix) the
business and financial condition and earnings prospects of the other party or
parties to the proposed transactions including, without limitation, debt service
and other existing financial obligations, financial obligations to be incurred
in connection with the transaction and other foreseeable financial obligations
of such other party or parties. Pursuant to this provision, the Crescent
Operating Board may consider subjective factors affecting a proposal, including
certain nonfinancial matters, and on the basis of these considerations, may
oppose a business combination or other transaction which, evaluated only in
terms of its financial merits, might be attractive to some, or a majority, of
the Company's stockholders.
AMENDMENT
The Charter provides that the affirmative vote of the holders of at least
80% of the stock entitled to vote generally in the election of directors (the
"Voting Stock"), voting together as a single class, is required to amend
provisions of the Charter relating to stockholder action without a meeting; the
calling of special meetings; the number, election and term of the Company's
directors; the filling of vacancies; and the removal of directors. The Charter
further provides that the related Bylaws described above (including the
Stockholder Notice Procedure) may be amended only by the Crescent Operating
Board or by the affirmative vote of the
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holders of at least 80% of the voting power of the outstanding shares of Voting
Stock, voting together as a single class. In all cases, amendments to the
Charter require that the Crescent Operating Board determine that the proposed
amendment is advisable.
RIGHTS PLAN
The Crescent Operating Board currently expects to adopt the Rights Plan on
or prior to the Distribution Effective Date. Pursuant to the Rights Plan, the
Crescent Operating Board will cause to be issued one Right for each share of
Crescent Operating Common Stock outstanding on the Distribution Effective Date.
Each Right will entitle the registered holder to purchase from Crescent
Operating one-hundredth of a share of Series A Junior Preferred Stock, par value
$.01 per share, of Crescent Operating at a price of $5 (the "Purchase Price"),
subject to adjustment. The description and terms of the Rights will be set forth
in a Rights Agreement (the "Rights Agreement"), between Crescent Operating and
the designated Rights Agent (the "Rights Agent"). The description set forth
below is intended as a summary only and is qualified in its entirety by
reference to the form of the Rights Agreement filed as an exhibit to the
Registration Statement. See "Available Information."
Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") has acquired beneficial ownership of 10% or more of the outstanding
shares of Crescent Operating Common Stock or (ii) 10 business days (or such
later date as may be determined by action of the Crescent Operating Board prior
to such time as any person becomes an Acquiring Person) following the
commencement of, or announcement of an intention to make, a tender offer or
exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 10% or more of such outstanding shares of
Crescent Operating Common Stock (the earlier of such dates being called the
"Rights Distribution Effective Date"), the Rights will be evidenced by the
certificates representing the Crescent Operating Common Stock.
The Rights Agreement will provide that, until the Rights Distribution
Effective Date (or earlier redemption or expiration of the Rights), the Rights
will be transferred with and only with the Crescent Operating Common Stock.
Until the Rights Distribution Effective Date (or earlier redemption or
expiration of the Rights), the Crescent Operating Common Stock certificates will
contain a notation incorporating the Rights Agreement by reference. As soon as
practicable following the Rights Distribution Effective Date, separate
certificates evidencing the Rights (the "Right Certificates") will be mailed to
holders of record of the Crescent Operating Common Stock as of the close of
business on the Rights Distribution Effective Date and such separate Right
Certificates alone will evidence the Rights.
The Rights will not be exercisable until the Rights Distribution Effective
Date. The Rights will expire on the 10th anniversary of the Distribution
Effective Date (the "Final Expiration Date"), unless the Final Expiration Date
is extended or unless the Rights are earlier redeemed or exchanged by Crescent
Operating, in each case, as summarized below.
In the event that any person or group of affiliated or associated persons
becomes an Acquiring Person, proper provision shall be made so that each holder
of a Right, other than Rights beneficially owned by the Acquiring Person (which
will thereafter be void), will thereafter have the right to receive upon
exercise that number of shares of Crescent Operating Common Stock having a
market value of two times the exercise price of the Right. In the event that
Crescent Operating is acquired in a merger or other business combination
transaction or 50% or more of its consolidated assets or earning power are sold
after a person or group of affiliated or associated persons becomes an Acquiring
Person, proper provision will be made so that each holder of a Right will
thereafter have the right to receive, upon the exercise thereof at the
then-current exercise price of the Right, that number of shares of common stock
of the acquiring company which at the time of such transaction will have a
market value of two times the exercise price of the Right.
At any time after the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 10% or more of the outstanding
Crescent Operating Common Stock and prior to the acquisition by such person or
group of 50% or more of the outstanding Crescent Operating Common Stock, the
Crescent Operating Board may exchange the Rights (other than Rights owned by
such person or group which have
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become void), in whole or in part, at an exchange ratio of one share of Crescent
Operating Common Stock, or one-hundredth of a share of Series A Junior Preferred
Stock (or of a share of a class or series of the Preferred Stock having
equivalent rights, preference and privileges) per Right (subject to adjustment).
At any time prior to the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 10% or more of the outstanding
Crescent Operating Common Stock, the Crescent Operating Board may redeem the
Rights in whole, but not in part, at a price of $.01 per Right (the "Redemption
Price"). The redemption of the Rights may be made effective at such time on such
basis and with such conditions as the Crescent Operating Board, in its sole
discretion, may establish. Immediately upon any redemption of the Rights, the
right to exercise the Rights will terminate and the holders of the Rights then
will be eligible to receive only the Redemption Price.
The terms of the Rights may be amended by the Crescent Operating Board
without the consent of the holders of the Rights; provided, however, that from
and after such time as any person or group of affiliated or associated persons
becomes an Acquiring Person, no such amendment may adversely affect the
interests of the holders of the Rights.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of Crescent Operating, including, without limitation,
the right to vote or to receive dividends.
The number of outstanding Rights and the number of one-hundredths of a
share of Series A Junior Preferred Stock issuable upon exercise of each Right
also will be subject to adjustment in the event of a split of the Crescent
Operating Common Stock, or a stock dividend on the Crescent Operating Common
Stock payable in Crescent Operating Common Stock or subdivisions, consolidations
or combinations of the Crescent Operating Common Stock occurring, in any such
case, prior to the Rights Distribution Effective Date.
The Purchase Price payable, and the number of shares of Series A Junior
Preferred Stock or other securities or property issuable, upon exercise of the
Rights will be subject to adjustment from time to time to prevent dilution (i)
in the event of a stock dividend on, or a subdivision, combination or
reclassification of, the shares of Series A Junior Preferred Stock, (ii) upon
the grant to holders of shares of Series A Junior Preferred Stock of certain
rights or warrants to subscribe for or purchase shares of Series A Junior
Preferred Stock at a price, or securities convertible into shares of Series A
Junior Preferred Stock with a conversion price, less than the then-current
market price of shares of Series A Junior Preferred Stock or (iii) upon the
distribution to holders of shares of Series A Junior Preferred Stock of
evidences of indebtedness or assets (excluding regular periodic cash dividends
paid out of earnings or retained earnings or dividends payable in shares of
Series A Junior Preferred Stock) or of subscription rights or warrants (other
than those referred to above).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least one
percent in such Purchase Price. No fractional shares of Series A Junior
Preferred Stock will be issued (other than fractions which are integral
multiples of one-hundredth of a share of Series A Junior Preferred Stock, which
may, at the election of the Company, be evidenced by depositary receipts) and in
lieu thereof, an adjustment in cash will be made based on the market price of
shares of Series A Junior Preferred Stock on the last trading day prior to the
date of exercise.
Shares of Series A Junior Preferred Stock purchasable upon exercise of the
Rights will not be redeemable. Each share of Series A Junior Preferred Stock
will be entitled to a minimum preferential quarterly dividend payment of $1 per
share but will be entitled to an aggregate dividend of 100 times the dividend
declared per share of Crescent Operating Common Stock. In the event of
liquidation, the holders of shares of Series A Junior Preferred Stock will be
entitled to a minimum preferential liquidation payment of $100 per share but
will be entitled to an aggregate payment of 100 times the payment made per share
of Crescent Operating Common Stock. Each share of Series A Junior Preferred
Stock will have 100 votes voting together with the Crescent Operating Common
Stock. Finally, in the event of any merger, consolidation or other transaction
in which shares of Crescent Operating Common Stock are exchanged, each share of
Series A Junior Preferred Stock will be entitled to receive 100 times the amount
received per share of Crescent Operating Common Stock. These rights are
protected by customary anti-dilution provisions.
52
<PAGE> 57
Due to the nature of the shares of Series A Junior Preferred Stock's
dividend, liquidation and voting rights, the value of the one-hundredth interest
in a share of Series A Junior Preferred Stock purchasable upon exercise of each
Right should approximate the value of one share of Crescent Operating Common
Stock.
The Rights have certain antitakeover effects. The Rights will cause
substantial dilution to a person or group of persons that attempts to acquire
Crescent Operating on terms not approved by the Crescent Operating Board. The
Rights should not interfere with any merger or other business combination
approved by the Crescent Operating Board prior to the time that a person or
group has acquired beneficial ownership of 10% or more of the Crescent Operating
Common Stock since the Rights may be redeemed by Crescent Operating at the
Redemption Price until such time.
The Rights Plan contains certain provisions to exclude Crescent and its
affiliates from the operative provisions thereof.
DELAWARE BUSINESS COMBINATION STATUTE
Section 203 of the DGCL provides that, subject to certain exceptions
specified therein, an "interested stockholder" of a Delaware corporation shall
not engage in any business combination, including mergers or consolidations or
acquisitions of additional shares of the corporation, with the corporation for a
three-year period following the date that such stockholder becomes an interested
stockholder unless (i) prior to such date, the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
"interested stockholder," the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding certain shares), or (iii) on or subsequent to such date,
the business combination is approved by the board of directors of the
corporation and authorized at an annual or special meeting of stockholders by
the affirmative vote of at least 66 2/3% of the outstanding voting stock which
is not owned by the interested stockholder. Except as otherwise specified in
Section 203, an interested stockholder is defined to include (x) any person that
is the owner of 15% or more of the outstanding voting stock of the corporation,
or is an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation at any time within three
years immediately prior to the date of determination and (y) the affiliates and
associates of any such person.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an interested stockholder to effect various business
combinations with a corporation for a three-year period. Crescent Operating has
not elected to be exempt from the restrictions imposed under Section 203.
However, the Charter excludes Crescent and its affiliates from the definition of
"interested stockholder" pursuant to the terms of Section 203. The provisions of
Section 203 may encourage persons interested in acquiring Crescent Operating to
negotiate in advance with the Crescent Operating Board, since the stockholder
approval requirement would be avoided if a majority of the directors then in
office approves either the business combination or the transaction which results
in any such person becoming an interested shareholder. Such provisions also may
have the effect of preventing changes in the management of Crescent Operating.
It is possible that such provisions could make it more difficult to accomplish
transactions which the Company's stockholders may otherwise deem to be in their
best interests.
CONTROL SHARE ACQUISITIONS
The Charter provides that the holder of "control shares" of Crescent
Operating acquired in a control share acquisition have no voting rights with
respect to such control shares except to the extent approved by a vote of
two-thirds of the votes entitled to be cast by stockholders, excluding shares
owned by the acquiror, officers of Crescent Operating and employees of Crescent
Operating who are also directors. "Control shares" are shares which, if
aggregated with all other shares previously acquired which the person is
entitled to vote, would entitle the acquiror to vote (i) 20% or more but less
than one-third, (ii) one-third or more but less than a majority, or (iii) a
majority of the outstanding shares. Control shares do not include shares that
the acquiring
53
<PAGE> 58
person is entitled to vote on the basis of prior stockholder approval. A
"control share acquisition" means the acquisition of control shares subject to
certain exceptions.
The Charter provides that a person who has made or proposed to make a
control share acquisition and who has obtained a definitive financing agreement
with a responsible financial institution providing for any amount of financing
not to be provided by the acquiring person may compel the Crescent Operating
Board to call a special meeting of stockholders to be held within 50 days of
demand to consider the voting rights of the holder in respect of such control
shares. If no request for a meeting is made, the Charter permits Crescent
Operating itself to present the question at any stockholders' meeting.
Pursuant to the Charter, if voting rights are not approved at a
stockholders' meeting or if the acquiring person does not deliver an acquiring
person's statement, which would disclose certain information about the
particular control share acquisition, as required by the Charter, then, subject
to certain conditions and limitations set forth in the Charter, Crescent
Operating may redeem any or all of the control shares, except those for which
voting rights have previously been approved, for "fair value." Fair value is
determined, without regard to the absence of voting rights, as of the date of
the last control share acquisition or of any meeting of stockholders at which
the voting rights of the holder in respect of such control shares are considered
and not approved, and means, for purposes of the redemption, the highest closing
sale price during the 30-day period immediately prior to and including the date
in question, of a share of such stock on the exchange on which the shares are
listed or, if not so listed, the highest closing bid quotation during such
30-day period or, if no such quotations are available, the fair market value as
determined by the Crescent Operating Board. Under the Charter, if voting rights
of the holder in respect of such control shares are approved at a stockholders'
meeting and, as a result, the acquiror would be entitled to vote a majority of
the shares entitled to vote, then the Charter shall be amended to so state, and
all other stockholders will have the rights of dissenting stockholders under the
DGCL. The Charter provides that the fair value of the shares for purposes of
such appraisal rights may not be less than the highest price per share paid by
the acquiror in the control share acquisition, and that certain limitations and
restrictions of the DGCL otherwise applicable to the exercise of dissenters'
rights do not apply.
The control share acquisition provisions do not apply to the holder in
respect of control shares acquired in a merger, consolidation or share exchange
if Crescent Operating is a party to the transaction, or if the acquisition is
approved or excepted by the Charter or Bylaws prior to a control share
acquisition. The control share provisions in the Charter do not apply to
Crescent and its affiliates.
LIABILITY OF DIRECTORS AND OFFICERS; INDEMNIFICATION
The Charter provides that a director of Crescent Operating will not be
personally liable to Crescent Operating or its stockholders for monetary damages
for breach of fiduciary duty as a director, except, if required by the DGCL, as
amended from time to time, for liability (i) for any breach of the director's
duty of loyalty to Crescent Operating or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the DGCL, which concerns unlawful
payments of dividends, stock purchases or redemptions, or (iv) for any
transaction from which the director derived an improper personal benefit.
Neither the amendment nor repeal of such provision will eliminate or reduce the
effect of such provision in respect of any matter occurring, or any cause of
action, suit or claim that, but for such provision, would accrue or arise prior
to such amendment or repeal.
While the Charter provides directors with protection from awards for
monetary damages for breaches of their duty of care, it does not eliminate such
duty. Accordingly, the Charter will have no effect on the availability of
equitable remedies such as an injunction or rescission based on a director's
breach of his or her duty of care.
The Charter provides that each person who was threatened to be made a party
to or is involved in any proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such person, or a person of whom such
person is the legal representative, is or was a director or officer of Crescent
Operating or is or was serving at the request of Crescent Operating as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
54
<PAGE> 59
employee benefit plans, whether the basis of such proceeding is alleged action
in an official capacity as a director, officer, employee or agent or in any
other capacity while serving as a director, officer, employee or agent, will be
indemnified and held harmless by Crescent Operating to the fullest extent
authorized by the DGCL, as the same exists or may hereafter be amended (but, in
the case of any such amendment, only to the extent that such amendment permits
Crescent Operating to provide broader indemnification rights than said law
permitted Crescent Operating to provide prior to such amendment), against all
expense, liability and loss reasonably incurred or suffered by such person in
connection therewith. Such right to indemnification includes the right to have
Crescent Operating pay the expenses incurred in defending any such proceeding in
advance of its final disposition, subject to the provisions of the DGCL. Such
rights are not exclusive of any other right which any person may have or
thereafter acquire under any statute, provision of the Charter, Bylaw,
agreement, vote of stockholders or disinterested directors or otherwise. No
repeal or modification of such provision will in any way diminish or adversely
affect the rights of any director, officer, employee or agent of Crescent
Operating thereunder in respect of any occurrence or matter arising prior to any
such repeal or modification. The Charter also specifically authorizes Crescent
Operating to maintain insurance and to grant similar indemnification rights to
employees or agents of Crescent Operating.
Crescent Operating has entered into indemnification agreements with each of
its executive officers and directors. The indemnification agreements require,
among other things, that Crescent Operating indemnify its officers and directors
to the fullest extent permitted by law, and advance to the officers and
directors all related expenses, subject to reimbursement if it is subsequently
determined that the indemnification is not permitted. The Company also must
indemnify and advance expenses incurred by officers and directors seeking to
enforce their rights under the indemnification agreements and cover officers and
directors under the Company's directors' and officers' liability insurance.
Although the indemnification agreements offer substantially the same scope of
coverage afforded by provisions in the Charter and Bylaws, they provide greater
assurance to directors and executive officers that indemnification will be
available, because, as contracts, they cannot be modified unilaterally in the
future by the Board of Directors or by the stockholders to alter, limit or
eliminate the rights they provide.
EXPERTS
The financial statements included in this Prospectus and elsewhere in the
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
LEGAL MATTERS
The legality of the issuance of the shares of Crescent Operating Common
Stock to be distributed in the Distribution and certain legal matters relating
to federal income tax considerations will be passed upon for the Company by
Shaw, Pittman, Potts & Trowbridge, Washington, D.C., a partnership including
professional corporations.
55
<PAGE> 60
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> 61
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> 62
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> 63
CRESCENT OPERATING, INC.
NOTES TO BALANCE SHEET
APRIL 3, 1997
(1) SUMMARY OF SIGNIFICANT TRANSACTIONS:
Crescent Operating, Inc. ("Crescent Operating" or the "Company"), a
Delaware corporation wholly owned by Crescent Real Estate Equities
Limited Partnership ("Crescent Operating Partnership"), was formed on
April 1, 1997, to become a lessee and operator of various assets and to
perform an agreement between Crescent Operating and Crescent Operating
Partnership (the "Intercompany Agreement"). Under the Intercompany
Agreement, Crescent Operating and Crescent Operating Partnership agree,
subject to certain terms, to provide each other with rights to
participate in certain transactions.
Subsequent to effectiveness of the Company's Registration Statement on
Form S-1, the Crescent Operating Common Stock will be distributed (the
"Distribution") to holders of common shares of beneficial interest of
Crescent Real Estate Equities Company ("Crescent") and Units of Crescent
Operating Partnership on the basis of one share of the Company's Common
Stock for every 10 Crescent common shares held, and one share of the
Company's Common Stock for every 5 Units held. Each share of the
Company's Common Stock issued in the distribution is expected to be
accompanied by one Preferred Share Purchase Right.
Crescent Operating Partnership has provided the Company with a
combination of debt and equity capital (i) of which a portion will be
used to acquire certain assets owned by Carter Crowley Properties, Inc.,
an unrelated party (the "Carter-Crowley Assets") and (ii) of which a
portion will be used primarily to acquire and fund ongoing obligations
and cash requirements relating to, among other things, a 50% interest in
Charter Behavioral Health Systems, LLC ("CBHS"), an operator of
behavioral healthcare and related facilities, and acquire certain
warrants as part of a larger sale, leaseback and license transaction
(the "Magellan Transaction") among Crescent, CBHS and Magellan Health
Services, Inc. ("Magellan"). The right to acquire 50% of CBHS cannot be
consummated unless the Magellan Transaction is consummated.
The Carter-Crowley Assets consist primarily of Moody-Day, Inc.
("Moody-Day"), a construction equipment sales, leasing and servicing
company, and a limited partner interest in Hicks, Muse, Tate & Furst
Equity Fund II (the "Fund"), a private venture capital fund.
Pursuant to the Magellan Transaction, the Company will acquire a 50%
interest in CBHS and warrants to acquire up to 1,283,311 shares of
Magellan common stock.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company intends to adopt the same accounting policies as
Carter-Crowley Asset Group as described below:
USE OF ESTIMATES
The financial statements include estimates and assumptions made by
management that affect the carrying amounts of assets and liabilities,
reported amounts of revenues and expenses and the disclosure of
contingent assets and liabilities. Actual results may differ from these
estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less to be cash equivalents.
F-4
<PAGE> 64
PROPERTY AND EQUIPMENT
The Company uses the straight-line and accelerated methods of
depreciation for financial statement purposes. The estimated useful
lives used in computing depreciation are as follows:
<TABLE>
<S> <C>
Rental equipment............................................ 2-7 years
Building and improvements................................... 30 years
Transportation equipment.................................... 3-5 years
Office furniture and other equipment........................ 5-10 years
</TABLE>
Expenditures for maintenance and repairs are charged to expense as
incurred. Expenditures for renewals or betterments are capitalized. The
cost of property replaced, retired, or otherwise disposed of is removed
from the asset account along with the related accumulated depreciation.
Gains or losses on the disposal of rental equipment are recorded in
gross profit and for other assets are recorded as other income or
expense in the year of disposal.
INVENTORIES
Inventories consist of new equipment held for sale, construction
accessories, and equipment parts and are stated at the lower of average
cost or market.
REVENUE RECOGNITION
Revenues from equipment rentals under operating leases are recognized as
the revenue becomes receivable according to the provisions of the lease.
Revenues from equipment rentals under sales-type lease agreements are
capitalized and recognized over the life of the contract.
FINANCIAL INSTRUMENTS
At inception, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 107, "Disclosures About Fair Value of Financial
Instruments." This statement requires disclosure of the fair value of
financial instruments for which it is practicable to estimate as well as
the methods and significant assumptions used to estimate that value. The
carrying amounts of cash and cash equivalents and accounts receivable
approximate fair value due to the short maturity of those instruments.
LONG-LIVED ASSETS
At inception, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," which establishes methods of valuation for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used. The adoption of this
statement had no material impact on the accompanying financial
statements.
INVESTMENTS
Upon completion of the acquisition of Moody-Day and the 1.21% limited
partner interest in the Fund, the Company intends to account for such
investments in the same manner as they were recorded in the
Carter-Crowley Asset Group. Accordingly, Moody-Day will be fully
consolidated, and the investment in the Fund will be recorded on the
cost basis. The Company will account for CBHS on the equity method.
F-5
<PAGE> 65
(3) STOCKHOLDER'S EQUITY:
Upon formation, Crescent Operating Partnership contributed $1,000 cash
to the Company for 100% of the outstanding Crescent Operating Common
Stock. In exchange for a contribution of approximately $14.1 million,
Crescent Operating Partnership issued all of the outstanding shares of
Crescent Operating Common Stock to Crescent Operating Partnership.
Crescent Operating Partnership also agreed to lend Crescent Operating up
to $35.9 million. The total of $50.0 million was or is expected to be
used to purchase the assets and to support future funding obligations
and cash requirements. The certificate of incorporation, as amended and
restated, authorizes the Crescent Operating Board to establish one or
more series of Preferred Stock. The Company expects to reserve 225,000
shares of Series A Junior Preferred Stock for issuance upon exercise of
the rights pursuant to the Preferred Share Purchase Rights Plan.
(4) MAGELLAN WARRANT PURCHASE AGREEMENT:
Under the Magellan Warrant Purchase Agreement, Crescent Operating and
Crescent will each receive warrants (the "Magellan Warrants") to acquire
1,283,311 shares of Magellan common stock at a warrant exercise price of
$30 per share (subject to adjustment pursuant to antidilution
provisions). The Magellan Warrants will be exercisable in varying
increasing amounts beginning on May 31, 1998 and ending on May 31, 2009
as set forth below.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
DATE FIRST MAGELLAN COMMON STOCK END OF
EXERCISABLE ISSUABLE UPON EXERCISE EXERCISE PERIOD
MAY 31 OF MAGELLAN WARRANTS MAY 31
- ----------- ---------------------- ---------------
<C> <C> <C>
1998 30,000 2001
1999 62,325 2002
2000 97,114 2003
2001 134,513 2004
2002 174,678 2005
2003 217,770 2006
2004 263,961 2007
2005 313,433 2008
2006 366,376 2009
2007 422,961 2009
2008 483,491 2009
</TABLE>
The Magellan Warrant Purchase Agreement provides that, at least 90 days
prior to the first date on which shares of Magellan common stock are
issuable upon exercise of Magellan Warrants, Magellan shall file with
the SEC a registration statement under the Securities Act with respect
to the issuance of Magellan common stock upon exercise of the Magellan
Warrants and the resale of such shares and any other Magellan common
stock or other equity securities issued with respect thereto by way of
stock dividend or stock split or in connection with a recapitalization
or reorganization or otherwise. The Magellan Warrant Purchase Agreement
also provides that Magellan shall keep such registration statement
effective on a continual basis so long as Crescent Operating owns
Magellan Warrants pursuant to which Magellan common stock may be
purchased upon exercise thereof, provided that Magellan is not required
to maintain the effectiveness of any registration statement for more
than 12 years and 60 days after the Magellan Closing. Crescent Operating
is also given the right to have shares of Magellan common stock issuable
upon exercise of Magellan Warrants included in certain other
registration statements filed by Magellan under the Securities Act.
(5) CRESCENT OPERATING WARRANT PURCHASE AGREEMENT:
Under the Crescent Operating Warrant Purchase Agreement, Magellan will
receive warrants to acquire up to 2.5% of Crescent Operating Common
Stock outstanding as of the Magellan Transaction closing date. The
Crescent Operating Warrants are exercisable only at the times, and in
the proportions that Crescent Operating, exercises its Magellan
Warrants. The exercise price for the
F-6
<PAGE> 66
Crescent Operating Warrants will reflect the same premium as used to
calculate the exercise price of the Magellan Warrants, based upon a
valuation of Crescent Operating conducted by a mutually agreed upon
independent appraiser once a trading market for Crescent Operating
Common Stock has been established.
(6) SUBSEQUENT EVENTS (Unaudited):
Subsequent to formation, approximately $14.1 million of equity was
contributed and approximately $15.3 million of debt was funded to
Crescent Operating by Crescent Operating Partnership to be utilized in
the acquisition of the Carter-Crowley Assets and a 12.38% limited
partner interest in Dallas Basketball Limited, the partnership that owns
the Dallas Mavericks.
Additionally, the Company authorized 10 million shares of preferred
stock, $.01 par value per share, of which no shares have been issued.
The Company also authorized an additional 22,499,000 shares of common
stock (total authorized of 22.5 million), par value $.01 per share. No
additional common shares have been issued since inception.
The assets acquired from Carter-Crowley consisted of 100% of the stock
of Moody-Day, a 1.21% limited partner interest in the Fund and a 12.38%
limited partner interest in the partnership that owns the Dallas
Mavericks.
As of June 11, 1997, Crescent Operating sold, for approximately $12.55
million, the limited partner interest in the partnership that owns the
Dallas Mavericks to a newly formed corporation wholly owned by Crescent
Operating Partnership. Richard E. Rainwater, John C. Goff and Gerald W.
Haddock, each of whom will serve as a director of Crescent Operating,
also are limited partners of Crescent Operating Partnership. As of May
30, 1997, Messrs. Rainwater, Goff and Haddock beneficially owned Units
representing approximately 6.2%, 1.1% and .9%, respectively, of the
partnership interests in Crescent Operating Partnership outstanding as
of such date. In addition, Mr. Haddock serves as President and Chief
Executive Officer and the sole director of Crescent Ltd., which is the
general partner of Crescent Operating Partnership, and will serve in the
same capacities in the newly formed corporation. Crescent Operating had
purchased the limited partner interest in the partnership that owns the
Dallas Mavericks from Carter-Crowley for approximately $12.4 million
utilizing a combination of cash payments and proceeds of borrowings from
Crescent Operating Partnership. Crescent Operating used the proceeds of
the sale of the interest (i) to pay all accrued interest under the term
loan from Crescent Operating Partnership, in the amount of approximately
$.2 million, (ii) to make a payment of principal under the term loan of
approximately $9.9 million, and (iii) to pay a dividend to its sole
stockholder, Crescent Operating Partnership, of approximately $2.4
million.
Crescent Operating has adopted a Stock Incentive Plan pursuant to which
grants of options ("Options") to purchase 862,538 shares, at an exercise
price of $.99 per share, of Crescent Operating Common Stock and shares
of restricted stock in Crescent Operating ("Restricted Stock") were made
on May 13, 1997 based on the fair value on the date of grant in order to
provide each holder of shares of restricted stock in Crescent or options
in Crescent or Crescent Operating Partnership with an equivalent number
of shares of Restricted Stock or Options in Crescent Operating, based on
a ratio of one share of Restricted Stock or Option to purchase Crescent
Operating Common Stock for each 10 shares of restricted stock in
Crescent or options for Crescent Common Shares and one Option to
purchase Crescent Operating Common Stock for each 5 options for Units.
Under the Stock Incentive Plan, 1,000,000 shares of Crescent Operating
Common Stock are authorized for issuance. The Stock Incentive Plan
expires on June 11, 2005.
F-7
<PAGE> 67
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Carter-Crowley Properties, Inc.:
We have audited the accompanying combined balance sheets of Carter-Crowley
Asset Group (the "Portfolio") as described in Notes 1 and 3, as of December 31,
1996 and 1995, and the related combined statements of operations, shareholder's
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Portfolio's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Carter-Crowley Asset Group
as of December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
May 14, 1997
F-8
<PAGE> 68
CARTER-CROWLEY ASSET GROUP
COMBINED BALANCE SHEETS -- DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
------------------------- -------------------------
1997 1996 1996 1995
----------- ----------- ----------- -----------
(UNAUDITED) (AUDITED)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.............. $ 123,888 $ 510,154 $ 22,335 $ 352,577
Accounts receivable --
Trade, net of allowance for doubtful
accounts of $30,645 and $16,334 in
1996 and 1995, respectively....... 1,617,876 748,784 1,030,648 1,307,729
Affiliate........................... 211,766 138,131 129,296 14,096
Other............................... 56,333 26,930 42,641 36,669
Inventories............................ 1,611,083 1,174,080 1,612,952 736,024
Investment in sales-type leases, net... 152,751 152,609 212,320 311,777
Deferred income tax asset.............. 30,705 22,823 30,705 22,823
Prepaid expenses and other current
assets.............................. 9,283 10,265 6,164 4,062
----------- ----------- ----------- -----------
Total current assets........... 3,813,685 2,783,776 3,087,061 2,785,757
PROPERTY AND EQUIPMENT, at cost:
Rental equipment....................... 8,308,889 4,974,818 7,733,007 4,568,970
Land................................... 452,397 452,397 452,397 451,647
Building and improvements.............. 680,895 648,772 680,895 648,772
Transportation equipment............... 376,691 468,101 375,721 465,529
Office furniture and other equipment... 369,169 363,533 368,752 346,841
----------- ----------- ----------- -----------
10,188,041 6,907,621 9,610,772 6,481,759
Less -- Accumulated depreciation......... (3,238,060) (2,399,941) (2,927,314) (2,240,524)
----------- ----------- ----------- -----------
Net property and equipment..... 6,949,981 4,507,680 6,683,458 4,241,235
INVESTMENTS:
Investment in Hicks, Muse, Tate and
Furst Equity Fund II................ 7,794,478 6,896,186 7,593,493 5,915,749
Investments in sales-type leases,
net................................. 118,721 287,275 118,721 287,275
----------- ----------- ----------- -----------
$18,676,865 $14,474,917 $17,482,733 $13,230,016
=========== =========== =========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
liabilities......................... 1,047,342 661,608 782,567 540,523
Notes payable, current portion --
Affiliate........................... 1,874,100 1,941,606 1,941,606 1,182,319
Other............................... 299,188 176,240 264,136 108,307
----------- ----------- ----------- -----------
Total current liabilities...... 3,220,630 2,779,454 2,988,309 1,831,149
LONG-TERM LIABILITIES:
Long-term debt, affiliate, net of
current portion..................... 2,689,910 1,008,907 3,199,607 1,830,070
Deferred income taxes.................. 369,806 210,746 369,806 210,746
----------- ----------- ----------- -----------
Total liabilities.............. 6,280,346 3,999,107 6,557,722 3,871,965
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY..................... 12,396,519 10,475,810 10,925,011 9,358,051
----------- ----------- ----------- -----------
$18,676,865 $14,474,917 $17,482,733 $13,230,016
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
F-9
<PAGE> 69
CARTER-CROWLEY ASSET GROUP
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, DECEMBER 31,
----------------------- ------------------------------------
1997 1996 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(UNAUDITED) (AUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Sales and service.............. $ 832,378 $ 856,716 $2,998,880 $2,873,657 $2,897,085
Equipment sales................ 1,349,310 1,259,198 4,364,039 4,237,337 2,810,132
Rental......................... 857,807 607,389 3,030,764 2,036,248 1,963,530
---------- ---------- ---------- ---------- ----------
Total revenues......... 3,039,495 2,723,303 10,393,683 9,147,242 7,670,747
COST OF SALES:
Sales and service.............. 679,676 683,144 2,535,525 2,412,289 2,373,603
Equipment sales................ 1,183,733 1,156,605 4,049,563 3,571,092 2,446,801
Rental......................... 598,574 425,845 1,951,783 1,466,242 1,393,085
---------- ---------- ---------- ---------- ----------
Total cost of sales.... 2,461,983 2,265,594 8,536,871 7,449,623 6,213,489
---------- ---------- ---------- ---------- ----------
GROSS PROFIT..................... 577,512 457,709 1,856,812 1,697,619 1,457,258
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES........ 438,406 389,407 1,747,839 1,608,226 1,374,410
---------- ---------- ---------- ---------- ----------
INCOME FROM OPERATIONS........... 139,106 68,302 108,973 89,393 82,848
OTHER (INCOME) EXPENSE:
Interest expense............... 113,253 64,867 356,517 152,631 28,995
Interest income................ (9,718) (15,635) (51,881) (50,394) (10,819)
Other.......................... 58 (1,369) (27,202) (136,783) (2,977)
---------- ---------- ---------- ---------- ----------
Total other (income)
expense.............. 103,593 47,863 277,434 (34,546) 15,199
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME
TAXES.......................... 35,513 20,439 (168,461) 123,939 67,649
INCOME TAX PROVISION (BENEFIT)... 12,428 7,154 (57,677) 44,783 24,331
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS)................ $ 23,085 $ 13,285 $ (110,784) $ 79,156 $ 43,318
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-10
<PAGE> 70
CARTER-CROWLEY ASSET GROUP
COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, DECEMBER 31,
------------------------- --------------------------------------
1997 1996 1996 1995 1994
----------- ----------- ----------- ----------- ----------
(UNAUDITED) (AUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE, beginning of period.. $10,925,011 $ 9,358,051 $ 9,358,051 $ 3,338,297 $3,289,479
Net income (loss)........... 23,085 13,285 (110,784) 79,156 43,318
Contributions............... 1,552,820 1,509,449 3,355,290 6,328,366 --
Distributions............... (104,397) (404,975) (1,677,546) (412,617) --
Net book value of assets
contributed.............. -- -- -- 24,849 5,500
----------- ----------- ----------- ----------- ----------
BALANCE, end of period........ $12,396,519 $10,475,810 $10,925,011 $ 9,358,051 $3,338,297
=========== =========== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-11
<PAGE> 71
CARTER-CROWLEY ASSET GROUP
COMBINED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, DECEMBER 31,
----------------------- --------------------------------------
1997 1996 1996 1995 1994
---------- ---------- ----------- ---------- -----------
(UNAUDITED) (AUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.......................................... $ 23,085 $ 13,285 $ (110,784) $ 79,156 $ 43,318
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization..................... 504,225 283,453 1,367,579 1,166,102 971,724
Provision (benefit) for deferred income taxes..... -- -- 151,178 29,421 (38,985)
Gain on sale of rental equipment.................. (96,921) (46,282) (103,968) (443,735) (242,756)
(Increase) decrease in accounts receivable, net... (683,390) 444,649 (155,909) (741,731) 75,333
(Increase) decrease in inventories................ 1,869 (438,056) (876,928) (110,770) (152,538)
(Increase) decrease in prepaid expenses and other
current assets.................................. (3,119) (6,203) (2,102) 24,646 (24,188)
Increase in accounts payable and accrued
liabilities..................................... 264,775 121,085 242,044 26,232 177,434
---------- ---------- ----------- ---------- -----------
Net cash provided by operating activities..... 10,524 371,931 511,110 29,321 809,342
INVESTING ACTIVITIES:
Purchases of rental equipment....................... (860,270) (572,040) (4,296,971) (2,351,439) (2,121,839)
Purchases of fixed assets........................... (1,387) (20,014) (78,822) (283,120) (49,383)
Proceeds from sale of rental equipment.............. 270,301 212,475 981,777 1,343,032 1,241,773
---------- ---------- ----------- ---------- -----------
Net cash used in investing activities......... (591,356) (379,579) (3,394,016) (1,291,527) (929,449)
---------- ---------- ----------- ---------- -----------
FINANCING ACTIVITIES:
Proceeds from issuance of notes payable............. 299,188 670,229 4,885,240 3,288,642 --
Reduction in notes payable.......................... (841,339) (664,172) (2,600,587) (1,492,969) (57,522)
Capital contributions............................... 1,164,967 -- -- -- --
(Increase) decrease in investment in sales-type
leases, net....................................... 59,569 159,168 268,011 (599,052) --
---------- ---------- ----------- ---------- -----------
Net cash provided by (used in) financing
activities.................................. 682,385 165,225 2,552,664 1,196,621 (57,522)
---------- ---------- ----------- ---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS......................................... 101,553 157,577 (330,242) (65,585) (177,629)
CASH AND CASH EQUIVALENTS, beginning of period........ 22,335 352,577 352,577 418,162 595,791
---------- ---------- ----------- ---------- -----------
CASH AND CASH EQUIVALENTS, end of period.............. $ 123,888 $ 510,154 $ 22,335 $ 352,577 $ 418,162
========== ========== =========== ========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid (refunded)........................ $ -- $ -- $ (19,502) $ (22,462) $ (92,673)
========== ========== =========== ========== ===========
Interest paid....................................... $ 113,253 $ 64,867 $ 352,773 $ 144,039 $ 29,522
========== ========== =========== ========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Investments contributed by CCP...................... $ 387,853 $1,509,449 $ 3,355,290 $6,328,366 $ --
========== ========== =========== ========== ===========
Distributions from investments to CCP............... $ (104,397) $ (404,975) $(1,677,546) $ (412,617) $ --
========== ========== =========== ========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Purchase of inventory and equipment held for rental
in which short-term liabilities were assumed...... $ -- $ -- $ -- $ -- $ 532,823
========== ========== =========== ========== ===========
Transfer of fixed assets from CCP (net book
value)............................................ $ -- $ -- $ -- $ 24,849 $ 5,500
========== ========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-12
<PAGE> 72
CARTER-CROWLEY ASSET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. DESCRIPTION OF PORTFOLIO AND NATURE OF OPERATIONS:
The Carter-Crowley Asset Group (the "Portfolio") is a portfolio of
businesses and investments wholly owned by Carter-Crowley Properties, Inc. (CCP)
which include ownership of a construction equipment and accessories sales and
leasing company, and a minority investment in a venture capital fund. The
Portfolio represents businesses and investments owned by CCP which were sold to
Crescent Operating, Inc. on May 9, 1997, excluding the 12.38% interest in the
limited partnership which owns the Dallas Mavericks basketball team which as of
June 11, 1997 was sold to an affiliated entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION AND PRINCIPLES OF COMBINATION
The accompanying combined financial statements have been presented on a
combined historical cost basis because of the affiliated ownership and
management. All significant intercompany balances and transactions have been
eliminated. These combined financial statements have been prepared in accordance
with requirements for financial information required by Form S-1. The
accompanying combined financial statements for the three months ended March 31,
1997 and 1996, have been prepared in accordance with generally accepted
accounting principles for interim financial information. Accordingly, they do
not include all of the information required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments, consisting of normal recurring adjustments considered necessary for
a fair presentation have been included.
USE OF ESTIMATES
The financial statements include estimates and assumptions made by
management that affect the carrying amounts of assets and liabilities, reported
amounts of revenues and expenses and the disclosure of contingent assets and
liabilities. Actual results may differ from these estimates.
CASH AND CASH EQUIVALENTS
The Portfolio considers all highly liquid investments with a maturity of
three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
The Portfolio uses the straight-line and accelerated methods of
depreciation for financial statement purposes. The estimated useful lives used
in computing depreciation are as follows:
<TABLE>
<S> <C>
Rental equipment............................................ 2-7 years
Building and improvements................................... 30 years
Transportation equipment.................................... 3-5 years
Office furniture and other equipment........................ 5-10 years
</TABLE>
Expenditures for maintenance and repairs are charged to expense as
incurred. Expenditures for renewals or betterments are capitalized. The cost of
property replaced, retired, or otherwise disposed of is removed from the asset
account along with the related accumulated depreciation. Gains or losses on the
disposal of rental equipment are recorded in gross profit and for other assets
are recorded as other income or expense in the year of disposal. During 1996,
the Portfolio changed the estimated useful lives of certain rental equipment.
This change resulted in a decrease in 1996 depreciation expense of approximately
$157,000.
F-13
<PAGE> 73
CARTER-CROWLEY ASSET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
INVENTORIES
Inventories consist of new equipment held for sale, construction
accessories, and equipment parts and are stated at the lower of average cost or
market.
REVENUE RECOGNITION
Revenues from equipment rentals under operating leases are recognized as
the revenue becomes receivable according to the provisions of the lease.
Revenues from equipment rentals under sales-type lease agreements are
capitalized and recognized over the life of the contract.
INCOME TAXES
The taxable income or loss of the Portfolio is included in the consolidated
federal income tax return filed by CCP. The Portfolio's income tax provision
(benefit) is determined as if the Portfolio had filed a separate income tax
return on a separate company basis. Taxes currently payable or receivable are
recorded as accounts receivables-affiliate and accounts payable-affiliate in the
accompanying balance sheets.
The Portfolio's current provision (benefit) for income taxes is generally
based on income before taxes adjusted for permanent differences between
financial reporting and taxable income. Deferred income taxes are provided for
temporary differences between financial reporting and taxable income (see Note
7).
FINANCIAL INSTRUMENTS
During 1995, the Portfolio adopted Statement of Financial Accounting
Standards (SFAS) No. 107, "Disclosures About Fair Value of Financial
Instruments." This statement requires disclosure of the fair value of financial
instruments for which it is practicable to estimate as well as the methods and
significant assumptions used to estimate that value. The carrying amounts of
cash and cash equivalents and accounts receivable approximate fair value due to
the short maturity of those instruments. Notes payable bear interest at variable
rates which fluctuate based upon comparable market rates, and, therefore,
carrying amounts approximate fair value.
LONG-LIVED ASSETS
During 1996, the Portfolio adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
which establishes methods of valuation for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used. The adoption of this statement had no material impact on the
accompanying financial statements.
3. DESCRIPTION OF PORTFOLIO BUSINESSES AND INVESTMENTS:
MOODY-DAY, INC.
Moody-Day, Inc. ("Moody-Day") is a wholly owned Texas corporation engaged
in the sale, leasing, and service of construction equipment and accessories to
the construction and utility industries located primarily in Texas. Effective
December 31, 1994, Moody-Day became a wholly owned subsidiary of CCP pursuant to
a corporate reorganization. Moody-Day and CCP had previously both been wholly
owned subsidiaries of a common parent (the "Former Parent").
INVESTMENT IN HICKS MUSE TATE & FURST EQUITY FUND II
Effective January 1, 1995, CCP subscribed to a 1.42% limited partner
minority interest in Hicks Muse Tate & Furst Equity Fund II (the "Fund"), a
private venture capital fund. CCP has the option to participate on an investment
by investment basis within the Fund. As of December 31, 1996, CCP owns a 1.21%
overall
F-14
<PAGE> 74
CARTER-CROWLEY ASSET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
limited partner interest in the Fund. During 1995 and 1996, CCP contributed its
subscribed limited partner interest to the Portfolio. Accordingly, contributions
and distributions between CCP and the Fund are reflected in the accompanying
combined financial statements as adjustments to equity. The Portfolio's interest
in the Fund is recorded in the accompanying combined financial statements based
upon CCP's contributed historical cost basis. Contributions of $3,355,290, and
$6,328,366 were made by CCP to the Fund in 1996 and 1995, respectively.
Distributions of $1,677,546 and $412,617 were made to CCP from the Fund in 1996
and 1995 respectively. There was no income or loss from the Portfolio's
investment in the Fund for the years ended December 31, 1996 or 1995. The
Portfolio has an unpaid balance due of approximately $2.2 million on the
original commitment to invest $10 million in the Fund. The remaining $2.2
million commitment is due upon capital calls at the discretion of Hicks, Muse,
Tate & Furst, subject to certain morality exemptions (as an example the
portfolio is not required to invest in any company producing alcoholic
beverages).
As of December 31, 1996, Crescent Operating's investments in the Fund
consisted of investments in the following industries: (i) manufacturing (37.4%,
22.5% of which consisted of investments in the common stock, preferred stock and
warrants of a company that manufactures copper wire); (ii) communications
(33.9%, 33.1% of which consisted of an investment of a partnership interest in a
cable television operator); (iii) real estate (13.2%, all of which consisted of
an investment in a company which owns partnership interests in partnerships that
provide debt and equity capital to real estate owners and developers); (iv)
financial services (10.5%, all of which consisted of investments of partnership
interests in a foreign insurance company and a small business investment
company); and (v) food (5.0%, all of which consisted of an investment in the
common stock of a chocolate company).
The following represents companies or partnerships in which CCP has a
significant interest through its ownership interest in the Fund. CCP's interest
in the Fund is recorded based upon CCP's contributed historical cost basis. The
Fund determines the current market value of the underlying securities and
investments by using quoted rates for securities that are publicly traded and as
determined by the general partner of the Fund for securities that are not
publicly traded. For each investment CCP has contributed to within the Fund, the
number of shares or partnership interest owned by CCP is calculated by the
number of shares or partnership interest owned by the Fund multiplied by CCP's
ownership percentage as determined based on contributions by CCP divided by
total contributions to the Fund.
<TABLE>
<CAPTION>
SHARES, FAIR MARKET
PUBLICLY WARRANTS OR VALUE AT
TRADED TYPE OF PARTNERSHIP DECEMBER 31,
COMPANY/PARTNERSHIP SECURITIES INVESTMENT INTEREST INDUSTRY COST 1996
------------------- ---------- ----------------- -------------- ------------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Marcus Cable Company, L.P.(1) No Partnership 0.33% Communications $2,002,574 $ 3,393,193
International Wire Group, No Common Stock/ 1,725,738 Manufacturing 1,725,738 2,201,318
Inc.(1)
Preferred Stock/ 3,480 80,321 100,634
Warrants 5,920 5,383 6,744
Olympus Partnerships No Various .19% to 2.08% Real Estate 1,059,199 1,347,198
Partnerships
Crain Holdings Corp. No Common Stock 425,253 Manufacturing 479,723 981,130
Seguros Comer. Amer., SA de Yes Common Stock 229,340 Financial Services 725,883 739,665
CV(1)
Other Investments 1,514,672 1,474,776
---------- -----------
$7,593,493 $10,244,658
========== ===========
</TABLE>
- ---------------
(1) This company files periodic reports with the Securities and Exchange
Commission.
F-15
<PAGE> 75
CARTER-CROWLEY ASSET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVENTORIES:
Inventories at Moody-Day consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
New equipment............................................... $ 995,306 $291,099
Light equipment and accessories............................. 453,567 308,623
Equipment parts............................................. 152,891 121,777
Other....................................................... 11,188 14,525
---------- --------
Total inventory................................... $1,612,952 $736,024
========== ========
</TABLE>
5. INVESTMENTS IN SALES-TYPE LEASES, NET:
Although Moody-Day's leasing operations consist primarily of leasing
construction equipment and accessories under operating leases (see Note 10),
Moody-Day occasionally enters into leases which are accounted for as sales-type
leases. At December 31, 1996, Moody-Day had approximately 18 sales-type leases
with expirations through 1999. The following is a summary of Moody-Day's
investment in sales-type leases, net at December 31:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Total minimum lease payments to be received................ $ 372,436 $ 676,594
Unearned income............................................ (41,395) (77,542)
--------- ---------
Net investment........................................... 331,041 599,052
Less -- Current amount................................ (212,320) (311,777)
--------- ---------
Long-term amount...................................... $ 118,721 $ 287,275
========= =========
</TABLE>
Minimum lease payments to be received as of December 31, 1996, for each of
the next five years and in the aggregate on sales-type leases are:
<TABLE>
<S> <C>
1997........................................................ $212,320
1998........................................................ 92,727
1999........................................................ 67,389
2000........................................................ --
2001........................................................ --
Subsequent to 2001.......................................... --
--------
Total minimum future rentals...................... $372,436
========
</TABLE>
6. NOTES PAYABLE AND LONG-TERM DEBT:
The following summarizes the Portfolio's debt financing at December 31:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Notes payable to a finance company, maturities through
June 1997, collateralized by equipment............... $ 264,136 $ 108,307
Note payable to CCP due December 1997, interest at
prime plus 1/2%, with monthly principal and interest
payments, collateralized by land and building........ 266,163 322,739
</TABLE>
F-16
<PAGE> 76
CARTER-CROWLEY ASSET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Note payable to CCP due March 1998, interest at prime
plus 1%, with monthly principal and interest
payments, collateralized by equipment................ 197,213 392,168
Note payable to CCP due March 1996, interest at 10%,
with monthly principal and interest payments,
collateralized by equipment.......................... -- 28,705
Line of credit with CCP, interest at prime plus 1%,
with monthly principal and interest payments through
December 1999, collateralized by land and
equipment............................................ 4,677,837 2,268,777
----------- -----------
Notes payable, affiliate............................... 5,141,213 3,012,389
----------- -----------
Total notes payable.................................... 5,405,349 3,120,696
Less -- Current maturities............................. (2,205,742) (1,290,626)
----------- -----------
$ 3,199,607 $ 1,830,070
=========== ===========
</TABLE>
MATURITIES OF LONG-TERM DEBT ARE AS FOLLOWS:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
1997..................................................... $2,205,742
1998..................................................... 1,388,197
1999..................................................... 991,968
2000..................................................... 558,727
2001..................................................... 196,167
Thereafter............................................... 64,548
----------
Total............................................. $5,405,349
==========
</TABLE>
7. INCOME TAXES:
The deferred tax balances in the accompanying balance sheets include the
following amounts of deferred tax assets and liabilities:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax asset -- current............................... $ 92,712 $ 105,768
Valuation allowance......................................... (62,007) (82,945)
Deferred tax liability -- noncurrent........................ (369,806) (210,746)
--------- ---------
Net deferred tax liability................................ $(339,101) $(187,923)
========= =========
</TABLE>
The Portfolio has net operating loss carryforwards (NOLs) of approximately
$193,851 which will expire in years 2003 through 2005. Accordingly, a valuation
allowance was established for NOLs not expected to be utilizable.
F-17
<PAGE> 77
CARTER-CROWLEY ASSET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes the components of the net deferred tax liability
at December 31:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Assets:
Inventories............................................... $ 11,220 $ 8,346
Allowance for doubtful accounts........................... 10,725 5,717
Net operating loss carryforwards, net of allowance........ 8,760 8,760
--------- ---------
Deferred tax asset................................ 30,705 22,823
--------- ---------
Liabilities:
Rental equipment.......................................... (366,251) (205,966)
Property and equipment.................................... (3,555) (4,780)
--------- ---------
Deferred tax liability............................ (369,806) (210,746)
--------- ---------
Net deferred tax liability........................ $(339,101) $(187,923)
========= =========
</TABLE>
The components of income tax provision are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- ------- ---------
<S> <C> <C> <C>
Federal:
Current provision (benefit)....................... $(208,855) $15,362 $ 63,316
Deferred tax provision (benefit).................. 151,178 29,421 (38,985)
--------- ------- ---------
Total provision (benefit)................. $ (57,677) $44,783 $ 24,331
========= ======= =========
</TABLE>
The Portfolio's income tax provision differed from the statutory federal
rate of 35% due primarily to nondeductible expenses for federal income tax
purposes.
8. PROFIT SHARING PLAN:
Prior to 1996, Moody-Day had a noncontributory profit sharing plan (the
"Plan") covering substantially all of its full-time employees who have completed
one year of service. Contributions to the Plan were at the discretion of the
Board of Directors. Moody-Day made no contributions to the Plan in 1995 or 1994.
The Plan was terminated in 1995. Additionally, a loan from Moody-Day to the Plan
of $135,000 that was previously written off by Moody-Day was paid back and
included as other income on the December 31, 1995, income statement.
9. RELATED-PARTY TRANSACTIONS:
Effective January 1, 1993, the Former Parent transferred the land and
building which Moody-Day occupies to Moody-Day in exchange for a note. The note
has an annual interest rate of prime + 1/2% and calls for monthly payments of
$7,000. The note, as further discussed in Note 6, had a balance of $266,163 at
December 31, 1996. Additionally, CCP has provided financing to Moody-Day (see
Note 6). The total outstanding principal to CCP at December 31, 1996, is
$5,141,213. The Company had a net receivable relating to income taxes with CCP
of $129,296 and $14,096, respectively, at December 31, 1996 and 1995. Prior to
1996, Moody-Day was managed on a decentralized basis and had relatively no
senior management involvement from the parent company. Therefore, no management
fee has been allocated to the accompanying financial statements for 1995 or
1994. Beginning in the fourth quarter of 1995, senior management of the parent
company became more involved in Moody-Day's daily operational decision making as
a result of an increased activity in the construction industry and a management
reorganization. In 1996, CCP charged Moody-Day approximately $188,000 for
management fees which represents the cost of the parent company's involvement
which began in 1996.
F-18
<PAGE> 78
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> 79
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> 80
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> 81
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> 82
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> 83
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> 84
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> 85
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> 86
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> 87
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> 88
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> 89
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> 90
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> 91
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> 92
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> 93
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> 94
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> 95
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> 96
CRESCENT OPERATING, INC.
PRO FORMA CONSOLIDATING FINANCIAL INFORMATION
The following unaudited proforma Statements of Crescent Operating, Inc.
(the "Company" or "Crescent Operating"), assumes completion of (i) the formation
and capitalization of the Company, (ii) the acquisition of the Carter-Crowley
Asset Group, (iii) the purchase and subsequent sale of the 12.38% limited
partner interest in the partnership that owns the Dallas Mavericks, (iv) the
acquisition of a 50% equity interest in Charter Behavioral Health Systems LLC
and the related acquisition of 1,238,311 warrants to purchase 1,238,311 common
shares of Magellan Health Services, Inc., as of March 31, 1997 as it relates to
the balance sheet, and as of January 1, 1996, in each case, as it relates to the
statement of operations.
In management's opinion, all adjustments necessary to reflect the above
discussed transactions have been made. The unaudited pro forma Consolidated
Balance Sheet and Statements of Operations are not necessarily indicative of
what actual results of operations of the Company would have been for the period,
nor does it purport to represent the Company's results of operations for future
periods.
F-37
<PAGE> 97
CRESCENT OPERATING, INC.
PROFORMA CONSOLIDATED BALANCE SHEET
AS OF APRIL 3, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CRESCENT CAPITALIZATION OF ACQUISITION OF
OPERATING, INC. CRESCENT CARTER-CROWLEY ACQUISITION OF SALE OF
HISTORICAL(A) OPERATING, INC.(B) ASSET GROUP(C) INVESTMENT(D) INVESTMENT(D)
--------------- ------------------ -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash......................... $ 1 $47,947 $(15,423) $(12,400) $ 100
A/R.......................... -- -- 1,886 -- --
Inventory.................... -- -- 1,611 -- --
Other assets................. -- -- 193 -- --
---- ------- -------- -------- --------
Total current assets..... 1 47,947 (11,733) (12,400) 100
Property and equipment,
net........................ -- -- 3,860 -- --
Investments.................. -- -- 9,589 12,400 (12,400)
---- ------- -------- -------- --------
Total assets............. $ 1 $47,947 $ 1,716 $ -- $(12,300)
==== ======= ======== ======== ========
LIABILITIES:
Accounts payable and accrued
liabilities................ $ -- $ -- $ 1,047 $ -- $ --
Notes payable, current....... -- -- 299 -- --
---- ------- -------- -------- --------
Total current............ -- -- 1,346 -- --
Long-term notes payable, net
of current portion......... 33,847 -- -- (9,920)
Deferred income taxes........ -- -- 370 -- --
---- ------- -------- -------- --------
Total liabilities........ -- 33,847 1,716 -- (9,920)
---- ------- -------- -------- --------
STOCKHOLDER'S EQUITY:
Common stock................. -- -- -- --
Additional Paid in Capital... 1 14,100 -- -- (2,380)
Retained Earnings............ -- -- -- --
---- ------- -------- -------- --------
Total stockholder's
equity................. 1 14,100 -- -- (2,380)
---- ------- -------- -------- --------
Total liabilities and
stockholder's equity... $ 1 $47,947 $ 1,716 $ -- $(12,300)
==== ======= ======== ======== ========
<CAPTION>
CRESCENT OPERATING, INC.
AS ADJUSTED FOR
ACQUISITION OF CARTER- ACQUISITION OF 50% PROFORMA
CROWLEY ASSET GROUP INTEREST IN CBHS(E) CONSOLIDATED
------------------------ -------------------- -------------
<S> <C> <C> <C>
ASSETS:
Cash......................... $20,225 $(20,000) $ 225
A/R.......................... 1,886 -- 1,886
Inventory.................... 1,611 -- 1,611
Other assets................. 193 -- 193
------- -------- -------
Total current assets..... 23,915 (20,000) 3,915
Property and equipment,
net........................ 3,860 -- 3,860
Investments.................. 9,589 20,000 29,589
------- -------- -------
Total assets............. $37,364 $ -- $37,364
======= ======== =======
LIABILITIES:
Accounts payable and accrued
liabilities................ 1,047 $ -- $ 1,047
Notes payable, current....... 299 -- 299
------- -------- -------
Total current............ 1,346 -- 1,346
Long-term notes payable, net
of current portion......... 23,927 -- 23,927
Deferred income taxes........ 370 -- 370
------- -------- -------
Total liabilities........ 25,643 -- 25,643
------- -------- -------
STOCKHOLDER'S EQUITY:
Common stock................. -- -- --
Additional Paid in Capital... 11,721 -- 11,721
Retained Earnings............ -- --
------- -------- -------
Total stockholder's
equity................. 11,721 -- 11,721
------- -------- -------
Total liabilities and
stockholder's equity... $37,364 $ -- $37,364
======= ======== =======
</TABLE>
F-38
<PAGE> 98
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
(A) Reflects Crescent Operating's audited historical balance sheet at April 3,
1997.
(B) Reflects capitalization of Crescent Operating to provide approximately $14.1
million equity and $33.8 million debt to be utilized in the acquisition of
the various assets.
(C) Amounts reflect the acquisition of the Carter-Crowley Asset Group, an
unrelated party, reflected at fair value based upon the acquisition
transaction of $13.7 million, including liabilities assumed, accounted for
as a purchase transaction. Amounts reflect the preliminary purchase price
adjustments as follows (in thousands):
<TABLE>
<S> <C>
Property and equipment, net................................ $(3,090)
Investments:
Hicks, Muse, Tate & Furst Equity Fund II................. 1,905
Notes payable, current..................................... (1,874)
Long-term Notes payable.................................... (2,690)
</TABLE>
Fair values assigned were based upon the following methodologies:
Dallas Basketball Limited (DBL) -- Sales of comparable sports franchises
and a recent limited partnership transaction within DBL. (See Note D).
Hicks, Muse, Tate & Furst Equity Fund II (the "Fund") -- Recorded based
upon the purchase price paid by Crescent Operating to Carter-Crowley for
its ownership interest in the Fund. Current values of traded securities
are based upon quoted rates and current values of non-traded securities
are determined by the general partner of the Fund.
As of March 31, 1997, Crescent Operating's investments in the Fund
portfolio consisted of investments in the following industries: (i)
manufacturing (36.6%, 22.0% of which consisted of investments in the
common stock, preferred stock and warrants of a company that
manufactures copper wire); (ii) communications (33.2%, 32.4% of which
consisted of an investment of a partnership interest in a cable
television operator); (iii) real estate (15.0%, all of which consisted
of an investment in a company which owns partnership interests in
partnerships that provide debt and equity capital to real estate owners
and developers); (iv) financial services (10.3%, all of which consisted
of investments of partnership interests in a foreign insurance company
and a small business investment company); and (v) food (4.9%, all of
which consisted of an investment in the common stock of a chocolate
company).
The following represents companies or partnerships in which Crescent
Operating has a significant interest through its ownership interest in
the Fund. Crescent Operating's interest in the Fund is recorded based
upon the purchase price paid by Crescent Operating to Carter-Crowley for
its ownership interest in the Fund. The Fund determines the current
market value of the underlying securities and investments by using
quoted rates for securities that are publicly traded and as determined
by the general partner of the Fund for securities that are not publicly
traded. For each investment Crescent Operating (or previously by
Carter-Crowley) has contributed to within the Fund, the number of shares
or partnership interest owned by Crescent Operating is calculated by the
number of shares or partnership interest owned by the Fund multiplied by
Crescent Operating's
F-39
<PAGE> 99
ownership percentage as determined based on contributions by Crescent
Operating (or previously by Carter-Crowley) divided by total
contributions to the Fund.
<TABLE>
<CAPTION>
CRESCENT
SHARES, OPERATING CARTER-
PUBLICLY WARRANTS OR PURCHASE CROWLEY
TRADED TYPE OF PARTNERSHIP PRICE COST
COMPANY/PARTNERSHIP SECURITIES INVESTMENT INTEREST INDUSTRY ALLOCATION BASIS
- ---------------------- ---------- ----------------- -------------- ------------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Marcus Cable Company, No Partnership
L.P.(1) 0.33% Communications $3,110,724 $2,002,574
International Wire No Common Stock/
Group, Inc.(1) 1,725,738 Manufacturing 2,107,965 1,725,738
Debt Securities/ -- -- 80,321
Warrants 5,920 -- 5,383
Olympus Partnerships No Various 0.19% to 2.08% Real Estate 1,434,263 1,277,062
Partnerships
Crain Holdings Corp. No Common Stock 425,253 Manufacturing 899,455 479,423
Seguros Comer. Amer.,
SA de CV(1) Yes Common Stock 229,340 Financial Services 691,629 725,883
Other Investments 1,345,260 1,498,094
---------- ----------
$9,589,296 $7,794,478
========== ==========
<CAPTION>
FAIR
MARKET
VALUE AT
MARCH 31,
COMPANY/PARTNERSHIP 1997
- ---------------------- -----------
<S> <C>
Marcus Cable Company,
L.P.(1) $ 3,393,193
International Wire
Group, Inc.(1) 2,201,318
91,316
6,744
Olympus Partnerships 1,564,501
Crain Holdings Corp. 981,130
Seguros Comer. Amer.,
SA de CV(1) 754,432
Other Investments 1,467,416
-----------
$10,460,050
===========
</TABLE>
- ---------------
(1) This company files periodic reports with the Securities and Exchange
Commission.
Moody-Day -- A multiple of historical cash flow.
Notes payable, current and long-term notes payable -- adjustments
represent historical liabilities of Carter-Crowley not being assumed.
Property and equipment, net -- in applying the provisions of APB No. 16,
the book value of assets acquired in excess of purchase price has been
recorded as a reduction in long-term assets.
(D) Reflects the acquisition and subsequent sale of the investment in DBL,
repayment of debt and capital distribution to Crescent Operating
Partnership. Crescent Operating recognized a $150,000 gain on the sale of
DBL. (See Note 6 to Crescent Operating, Inc. historical financial
statements).
(E) Increase reflects the acquisition of a 50% interest in Charter Behavioral
Health Systems LLC ("CBHS") and the related acquisition of 1,283,311 million
warrants to purchase 1,283,311 million common shares of Magellan Health
Services, Inc. ("Magellan Warrants") based on a preliminary valuation, as
follows (in thousands):
<TABLE>
<S> <C>
Investments in CBHS..................... $ 7,500
Acquisition of Magellan Warrants........ 12,500
=======
$20,000
=======
</TABLE>
Crescent Operating and Crescent have valued the Magellan Warrants at $25.0
million ($12.5 million for the Magellan Warrants issued to Crescent Operating
and $12.5 million for the Magellan Warrants issued to Crescent), based upon a
Black Shoales valuation performed by an independent third party.
F-40
<PAGE> 100
The following is a pro forma condensed balance sheet of CBHS as of March
31, 1997:
<TABLE>
<CAPTION>
MARCH 31,
1997
---------
<S> <C>
Current assets.............................................. $ 9,657
Property and equipment, net................................. 18,418
Other long-term assets...................................... 343
-------
$28,418
=======
Accrued liabilities......................................... $ 6,984
Capital lease obligation.................................... 53
Note Payable -- Magellan.................................... 10,000
-------
Total current liabilities......................... 17,037
Capital lease obligation.................................... 888
Member capital.............................................. 10,493
-------
Total liabilities and member capital.............. $28,418
=======
</TABLE>
F-41
<PAGE> 101
CRESCENT OPERATING, INC.
PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CRESCENT OPERATING, INC.
AS ADJUSTED FOR
CRESCENT ACQUISITION OF ACQUISITION OF
OPERATING, INC. CARTER-CROWLEY OTHER CARTER-CROWLEY
HISTORICAL(A) ASSET GROUP(B) ADJUSTMENTS ASSET GROUP
--------------- -------------- ----------- ------------------------
<S> <C> <C> <C> <C>
Revenues................................. $ -- $10,394 $ -- $10,394
Cost of Sales............................ -- 8,537 -- 8,537
---- ------- ------- -------
Gross Profit............................. -- 1,857 -- 1,857
Equity in loss of CBHS................... -- -- -- --
Selling, General and Administrative
Expenses............................... -- 1,748 506(C) 2,254
---- ------- ------- -------
Income (Loss) from Operations............ -- 109 (506) (397)
Other (Income) Expense:
Interest Expense....................... -- 356 2,545(D) 2,901
Other.................................. -- (79) -- (79)
---- ------- ------- -------
Total Other Expense, net......... -- 277 2,545 2,822
---- ------- ------- -------
Income (Loss) Before Income Taxes...... -- (168) (3,051) (3,219)
Income Tax Benefit..................... -- (57) -- (57)
---- ------- ------- -------
Net Income (Loss)...................... $ -- $ (111) $(3,051) $(3,162)
==== ======= ======= =======
Net Income (Loss) per Share............
<CAPTION>
ACQUISITION OF
50% INTEREST PRO FORMA
IN CBHS(E) CONSOLIDATED
-------------- ------------
<S> <C> <C>
Revenues................................. $ -- $ 10,394
Cost of Sales............................ -- 8,537
------- --------
Gross Profit............................. -- 1,857
Equity in loss of CBHS................... 7,659 7,659
Selling, General and Administrative
Expenses............................... -- 2,254
------- --------
Income (Loss) from Operations............ (7,659) (8,056)
Other (Income) Expense:
Interest Expense....................... -- 2,901
Other.................................. -- (79)
------- --------
Total Other Expense, net......... -- 2,822
------- --------
Income (Loss) Before Income Taxes...... (7,659) (10,878)
Income Tax Benefit..................... -- (57)
------- --------
Net Income (Loss)...................... $(7,659) $(10,821)
======= ========
Net Income (Loss) per Share............ $ (.98)
========
</TABLE>
F-42
<PAGE> 102
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS)
<TABLE>
<S> <C> <C>
(A) Crescent Operating had no operations prior to the
acquisition of the Carter-Crowley Asset Group
(B) Reflects the historical income and expenses associated with
the acquired company, assuming it occurred at the beginning
of the period...............................................
(C) Reflects the incremental:
Corporate general and administrative expenses related to the
formation and operation of the Company as follows:
Salaries and benefits....................................... $ 250
Rent and other office supplies.............................. 200
Professional fees........................................... 150
Depreciation and amortization of the purchase price
adjustment as a result of the acquisition of the
Carter-Crowley Asset Group.................................. (94)
-------
$ 506
-------
(D) Increase is a result of interest expense for long term
financing in conjunction with the capitalization of the
Company, assuming it occurred at the beginning of the
period.
$23,927 loan at a rate of 12%............................... $ 2,901
Less historical interest expense............................ (356)
-------
Incremental interest expense................................ $ 2,545
=======
(E) Reflects the Company's 50% share of net loss of CBHS
(accounted for on the equity method of accounting since the
Company does not control CBHS; the four member board
consists of two directors named by the Company and two
directors named by Magellan) (see F-46)..................... $(7,659)
</TABLE>
F-43
<PAGE> 103
CRESCENT OPERATING, INC.
PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS IN THE PERIOD ENDED MARCH 31, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CRESCENT OPERATING, INC.
AS ADJUSTED FOR
CRESCENT ACQUISITION OF ACQUISITION OF
OPERATING, INC. CARTER-CROWLEY OTHER CARTER-CROWLEY
HISTORICAL(A) ASSET GROUP(B) ADJUSTMENTS ASSET GROUP
--------------- -------------- ----------- ------------------------
<S> <C> <C> <C> <C>
Revenues................................. $ -- $3,039 $ -- $3,039
Cost of Sales............................ -- 2,462 -- 2,462
---- ------ ----- ------
Gross Profit............................. -- 577 -- 577
Equity in loss of CBHS................... -- -- -- --
Selling, General and Administrative
Expenses............................... -- 438 126(C) 564
---- ------ ----- ------
Income (loss) from Operations............ -- 139 (126) 13
Other (Income) Expense:
Interest Expense....................... -- 113 612(D) 725
Other.................................. -- (9) -- (9)
---- ------ ----- ------
Total Other Expense, net......... -- 104 612 716
---- ------ ----- ------
Income (Loss) Before Income Taxes...... -- 35 (738) (703)
Income Tax Provision................... -- 12 -- 12
---- ------ ----- ------
Net Income (Loss)...................... $ -- $ 23 $(738) $ (715)
==== ====== ===== ======
Net Income (Loss) per Share............
<CAPTION>
ACQUISITION OF
50% INTEREST PRO FORMA
IN CBHS(E) CONSOLIDATED
-------------- ------------
<S> <C> <C>
Revenues................................. $ -- $ 3,039
Cost of Sales............................ -- 2,462
------- -------
Gross Profit............................. -- 577
Equity in loss of CBHS................... 2,416 2,416
Selling, General and Administrative
Expenses............................... -- 564
------- -------
Income (loss) from Operations............ (2,416) (2,403)
Other (Income) Expense:
Interest Expense....................... -- 725
Other.................................. -- (9)
------- -------
Total Other Expense, net......... -- 716
------- -------
Income (Loss) Before Income Taxes...... (2,416) (3,119)
Income Tax Provision................... -- 12
------- -------
Net Income (Loss)...................... $(2,416) $(3,131)
======= =======
Net Income (Loss) per Share............ $ (.28)
=======
</TABLE>
F-44
<PAGE> 104
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS IN THE PERIOD ENDED MARCH 31, 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<S> <C> <C>
(A) Crescent Operating had no operations prior to the
acquisition of the Carter-Crowley Asset Group
(B) Reflects the historical income and expenses associated with
the acquired company, assuming it occurred at the beginning
of the period...............................................
(C) Reflects the incremental:
Corporate general and administrative expenses related to the
formation and operation of the Company as follows:
Salaries and benefits....................................... $ 62
Rent and other office supplies.............................. 50
Professional fees........................................... 38
Depreciation and amortization of the purchase price
adjustment as a result of the acquisition of the
Carter-Crowley Asset Group.................................. (24)
-------
126
(D) Increase is a result of interest expense for long term
financing in conjunction with the capitalization of the
Company, assuming it occurred at the beginning of the
period.
$23,927 loan at a rate of 12%............................... $ 725
Less historical interest expense............................ (113)
-------
Incremental interest expense................................ $ (612)
=======
(E) Reflects the Company's 50% share of net loss of CBHS
(accounted for on the equity method of accounting since the
Company does not control CBHS; the four member board
consists of two directors named by the Company and two
directors named by Magellan) (see F-49)..................... $(2,416)
</TABLE>
F-45
<PAGE> 105
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS
SEPTEMBER 30, 1996
The following unaudited proforma statement of operations of Charter
Behavioral Health Systems, LLC (CBHS) for the year ended September 30, 1996,
assumes the following: (i) the elimination of the European Hospitals, JV
Hospitals not being acquired by CBHS and other operations and overhead and (ii)
the completion of the Crescent Transaction, including the execution of the
Facility Lease Agreement and Master Franchise Agreement, as if they had occurred
on October 1, 1995.
F-46
<PAGE> 106
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
(The investment in this entity will be reflected in the financial
statements of Crescent Operating, Inc. on the equity method of accounting. (See
F-42 Note E)
<TABLE>
<CAPTION>
PRO FORMA
CHARTER CHARTER
PROVIDER BEHAVIORAL BEHAVIORAL
SEGMENT HEALTH PRO FORMA HEALTH
AS REPORTED CARVE OUT(A) SYSTEMS, LLC ADJUSTMENTS SYSTEMS, LLC
----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Net Revenue............... $1,044,345 $235,601 $808,744 $ 10,615(B) $819,359
---------- -------- -------- -------- --------
Salaries, supplies and
other operating
expense................. 800,912 195,585 605,327 152,312(C) 757,639
Bad debt expense.......... 79,930 9,909 70,021 0 70,021
Depreciation and
amortization............ 37,108 8,245 28,863 (26,444)(D) 2,419
Interest, net............. 47,615 42,763 4,852 (1,252)(E) 3,600
Stock option expense...... 914 914 0 0 0
Unusual items............. 37,271 36,274 997 0 997
---------- -------- -------- -------- --------
1,003,750 293,690 710,060 124,616 834,676
---------- -------- -------- -------- --------
Income before income taxes
and minority interest... 40,595 (58,089) 98,684 (114,001) (15,317)
Provision for income
taxes................... 14,883 (24,591) 39,474 (39,474)(F) --
---------- -------- -------- -------- --------
Income before minority
interest................ 25,712 (33,498) 59,210 (74,527) (15,317)
Minority interest......... 1,615 1,615 0 -- --
---------- -------- -------- -------- --------
Net income................ $ 24,097 $(35,113) $ 59,210 $(74,527) $(15,317)
========== ======== ======== ======== ========
</TABLE>
F-47
<PAGE> 107
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
NOTES TO PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
(A) Includes the elimination of the European Hospitals, and JV Hospitals and
other operations, including closed facilities, which will not be part of
CBHS after the Crescent Transaction, and corporate overhead and other
adjustments necessary to eliminate revenues and expenses related to
non-acquired assets.
(B) Represents management fees of $10.6 million payable by Magellan to CBHS for
the management of hospital based businesses controlled and less than
wholly-owned by Magellan which will not be part of CBHS after the Crescent
Transaction.
(C) Reflects increase in expenses pursuant to franchise fees of $78.2 million
payable under the Master Franchise Agreement, rent expense of $63.0 million
payable to Crescent for hospital-based real estate and equipment computed
on a straight-line basis over the 12 year term under the Facility Lease
Agreement, and $11.1 million of corporate general and administrative
expenses for necessary CBHS corporate functions formerly performed by
Magellan including human resources, legal, and finance and accounting.
(D) Reflects decrease in historical depreciation and amortization expense as a
result of the sale of fixed assets and the Facility Lease Agreement.
(E) Reflects decrease in interest expense based on the following assumptions
(in thousands):
<TABLE>
<S> <C> <C>
Old interest expense, net................................ $ (4,852)
Expected average borrowings -- working capital........... 45,000
Estimated borrowing rate................................. 8.0%
------
3,600
--------
Pro forma adjustment..................................... $ (1,252)
========
</TABLE>
Borrowing rate estimates the rate on a loan commitment received from a
group of commercial banks to provide a line of credit of up to $100 million
pursuant to a 5-year revolving credit facility.
(F) Pro forma adjustment reflects the elimination of the provision for income
taxes as Charter Behavioral Health Systems, LLC is a limited liability
company and is not subject to federal income tax.
F-48
<PAGE> 108
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS
MARCH 31, 1997
The following unaudited proforma statement of operations of Charter
Behavioral Health Systems, LLC (CBHS) for the three months in the period ended
March 31, 1997, assumes the following: (i) the elimination of the European
Hospitals, JV Hospitals not being acquired by CBHS and other operations and
overhead and (ii) the completion of the Crescent Transaction, including the
execution of the Facility Lease Agreement and Master Franchise Agreement, as if
they had occurred on October 1, 1996.
F-49
<PAGE> 109
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS IN THE PERIOD ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
CHARTER CHARTER
PROVIDER BEHAVIORAL BEHAVIORAL
SEGMENT HEALTH PRO FORMA HEALTH
AS REPORTED CARVE OUT(A) SYSTEMS, LLC ADJUSTMENTS SYSTEMS, LLC
----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Net Revenue................ $236,862 $ 42,075 $194,787 $ 3,541(B) $198,328
-------- -------- -------- -------- --------
Salaries, supplies and
other operating
expense.................. 181,705 34,210 147,495 36,696(C) 184,191
Bad debt expense........... 14,826 690 14,136 0 14,136
Depreciation and
amortization............. 9,329 2,099 7,230 (6,097)(D) 1,133
Interest, net.............. 13,176 12,231 945 255(E) 1,200
Stock option expense....... 829 829 0
Unusual items.............. 1,395 (1,105) 2,500 0 2,500
-------- -------- -------- -------- --------
221,260 48,954 172,306 30,854 203,160
-------- -------- -------- -------- --------
Income before income taxes
and minority interest.... 15,602 (6,879) 22,481 (27,313) (4,832)
Provision for income
taxes.................... 5,938 (3,054) 8,992 (8,992)(F) --
-------- -------- -------- -------- --------
Income before minority
interest................. 9,664 (3,825) 13,489 (18,321) (4,832)
Minority interest.......... 693 693 0 -- --
-------- -------- -------- -------- --------
Net income................. $ 8,971 $ (4,518) $ 13,489 $(18,321) $ (4,832)
======== ======== ======== ======== ========
</TABLE>
F-50
<PAGE> 110
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
NOTES TO PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS IN THE PERIOD ENDED MARCH 31, 1997
(A) Includes the elimination of the European Hospitals, and JV Hospitals and
other operations, including closed facilities, which will not be part of
CBHS after the Crescent Transaction, and corporate overhead and other
adjustments necessary to eliminate revenues and expenses related to
non-acquired assets.
(B) Fees from Magellan for the management of hospital-based businesses
controlled by Magellan that are less than wholly-owned by Magellan.
(C) The pro forma adjustments to salaries, supplies and other operating
expenses are as follows (000's):
<TABLE>
<S> <C>
Franchise Fees.............................................. $19,550
Rent Expense under the Facilities Lease..................... 15,764
Additional Corporate Overhead............................... 1,382
-------
$36,696
=======
</TABLE>
(D) The pro forma adjustment to depreciation and amortization expense
represents the decrease in depreciation expense as a result of the sale of
property and equipment to Crescent by Magellan and the elimination of
amortization expense related to impaired intangible assets.
(E) The pro forma adjustment to interest, net, is computed as follows (000's):
<TABLE>
<S> <C>
Interest expense on serviced IRB's.......................... $ (945)
Interest expense for new borrowings......................... 1,200
--------
$ 255
========
Average borrowings.......................................... 60,000
Borrowing rate.............................................. 8.0%
--------
Annual Interest................................... 4,800
========
Quarterly Interest................................ 1,200
========
</TABLE>
(F) CBHS will be formed as a limited liability company. Accordingly, no tax
benefit is presented as the tax consequences will pass through to Magellan
and COI.
F-51
<PAGE> 111
============================================================
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............................. 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 23
Business.................................... 27
Management.................................. 39
Certain Transactions........................ 44
Description of Crescent Operating Capital
Stock..................................... 47
Certain Antitakeover Provisions............. 50
Experts..................................... 56
Legal Matters............................... 56
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.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
, 1997
============================================================
<PAGE> 112
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........................................ $ 4,274
Listing Fee................................................. $ 13,250
Transfer Agent's and Registrar's Fee........................ $ 10,000
Printing and Engraving Fees................................. $200,000
Legal Fees and Expenses..................................... $150,000
Accounting Fees and Expenses................................ $ 75,000
Miscellaneous............................................... $ 47,476
--------
Total............................................. $500,000
========
</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
3.4* -- Form of Amended and Restated Bylaws
4.1 -- Form of Specimen stock certificate (filed herewith)
4.2 -- Form of Preferred Share Purchase Rights Plan (filed
herewith)
5* -- Opinion of Shaw, Pittman, Potts and Trowbridge as to the
legality of the Crescent Operating Common Stock being
registered
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
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 (filed herewith)
10.7* -- Acquisition Agreement, dated as of February 10, 1997,
between Crescent Operating Partnership and the
Carter-Crowley Sellers
10.8 -- Assignment of Limited Partnership Interest (filed
herewith)
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.
(b) Financial Statement Schedules.
Not applicable.
II-1
<PAGE> 113
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 11, 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 11, 1997
- ------------------------------------------------ Executive Officer (Principal
GERALD W. HADDOCK Executive Officer)
/s/ JEFFREY L. STEVENS Chief Financial Officer, Treasurer June 11, 1997
- ------------------------------------------------ and Secretary (Principal Financial
JEFFREY L. STEVENS and Accounting Officer)
</TABLE>
II-2
<PAGE> 114
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
3.4* -- Form of Amended and Restated Bylaws
4.1 -- Form of Specimen stock certificate (filed herewith)
4.2 -- Form of Preferred Share Purchase Rights Plan (filed
herewith)
5* -- Opinion of Shaw, Pittman, Potts and Trowbridge as to the
legality of the Crescent Operating Common Stock being
registered
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
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 (filed herewith)
10.7* -- Acquisition Agreement, dated as of February 10, 1997,
between Crescent Operating Partnership and the
Carter-Crowley Sellers
10.8 -- Assignment of Limited Partnership Interest (filed
herewith)
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.
<PAGE> 1
CRESCENT OPERATING, INC. STOCK CERTIFICATE
Exhibit 4.1
[CERTIFICATE OMITTED: THE FACE OF THE CERTIFICATE HAS A COLORED BORDER DESIGN
APPROXIMATELY ONE-HALF INCH IN WIDTH. THE CERTIFICATE NUMBER AND THE NUMBER OF
SHARES ALSO HAVE A BORDER DESIGN]
CRESCENT OPERATING, INC.
INCORPORATED UNDER LAWS OF
THE STATE OF DELAWARE
COMMON STOCK PAR VALUE $.01
THIS CERTIFICATE IS TRANSFERABLE CUSIP 22575M 10 0
IN NEW YORK, NEW YORK SEE REVERSE SIDE FOR CERTAIN DEFINITIONS
OR BOSTON, MASS.
This certifies that
is the owner of
FULLY PAID AND NON-ASSESSABLE COMMON SHARES, $.01 PAR VALUE OF
CRESCENT OPERATING, INC.
transferable on the records of the corporation in person or by duly authorized
attorney upon surrender of this certificate properly endorsed. This
certificate is not valid unless countersigned by a Transfer Agent and
registered by a Registrar.
WITNESS the seal of said corporation and the signatures of its duly authorized
officers.
DATED:
/s/ Gerald W. Haddock PRESIDENT AND Countersigned and Registered:
CHIEF EXECUTIVE OFFICER
/s/ Jeffrey L. Stevens TREASURER BANKBOSTON, N.A.
TRANSFER AGENT AND REGISTRAR
By:
---------------------------
AUTHORIZED SIGNATURE
CRESCENT OPERATING, INC.
CORPORATE SEAL
1997 DELAWARE
<PAGE> 2
CRESCENT OPERATING, INC.
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS
A STATEMENT OF THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE,
PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR
SERIES THEREOF OF THE CORPORATION AND THE QUALIFICATIONS, LIMITATIONS OR
RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS. SUCH REQUEST MAY BE MADE TO
THE TRANSFER AGENT.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF Gift MIN ACT - __________Custodian____________
(Cust) (Minor)
TEN ENT - as tenants by the entireties under Uniform Gifts to Minors
JT TEN - as joint tenants with right Act_____________________
of survivorship and not (State)
as tenants in common
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFICATION NUMBER OF ASSIGNEE
-----------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING POSTAL ZIP CODE, OR
ASSIGNEE
Shares
of the Common Stock represented by the within Certificate and do hereby
irrevocably constitute and appoint _____________________________________
Attorney to transfer the said stock on the books of the within-named Corporation
with full power of substitution in the premises.
Dated:
By:
NOTICE: THE SIGNATURE(S) TO THIS THE SIGNATURE(S) SHOULD BE GUARANTEED BY
ASSIGNMENT MUST CORRESPOND AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
WITH THE NAME(S) AS WRITTEN UPON STOCKBROKERS, SAVINGS AND LOAN
THE FACE OF THE CERTIFICATE IN ASSOCIATIONS AND CREDIT UNIONS WITH
EVERY PARTICULAR WITHOUT MEMBERSHIP IN AN APPROVED SIGNATURE
ALTERATION OR ENLARGEMENT OR GUARANTEE MEDALLION PROGRAM) PURSUANT
ANY CHANGE WHATEVER TO S.E.C. RULE 17 Ad-15.
This certificate also evidences and entitles the holder hereof to certain rights
as set forth in a Rights Agreement between Crescent Operating, Inc. and
BankBoston, N.A., dated as of June 11, 1997 (the "Rights Agreement"), the terms
of which are hereby incorporated herein by reference and a copy of which is on
file at the principal executive offices of Crescent Operating, Inc. Under
certain circumstances as set forth in the Rights Agreements, such Rights will be
evidenced by separate certificates and will no longer be evidenced by this
certificate. Crescent Operating, Inc. will mail to the holder of this
certificate a copy of the Rights Agreement without charge after receipt of a
written request therefor. Under certain circumstances as set forth in the
Rights Agreement, Rights issued to any Person who becomes an Acquiring Person
(as defined in the Rights Agreement) may become null and void.
<PAGE> 1
Exhibit 4.2
FORM OF PREFERRED SHARE PURCHASE RIGHTS AGREEMENT
Dated as of June 11, 1997
Between
CRESCENT OPERATING, INC.
and
BANKBOSTON, N.A.
Rights Agent
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Section 1. Certain Definitions 1
Section 2. Appointment of Rights Agent 4
Section 3. Issue of Right Certificates 5
Section 4. Form of Right Certificates 6
Section 5. Countersignature and Registration 6
Section 6. Transfer, Split Up, Combination and Exchange of Right
Certificates; Mutilated, Destroyed, Lost or Stolen Right
Certificates 7
Section 7. Exercise of Rights; Purchase Price; Expiration
Date of Rights 8
Section 8. Cancellation and Destruction of Right Certificates 9
Section 9. Availability of Preferred Shares 9
Section 10. Preferred Shares Record Date 9
Section 11. Adjustment of Purchase Price, Number of Shares or
Number of Rights 10
Section 12. Certificate of Adjusted Purchase Price or Number
of Shares 16
Section 13. Consolidation, Merger or Sale or Transfer of Assets
or Earning Power 16
</TABLE>
i
<PAGE> 2
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Section 14. Fractional Rights and Fractional Shares 17
Section 15. Rights of Action 18
Section 16. Agreement of Right Holders 18
Section 17. Right Certificate Holder Not Deemed a Stockholder 19
Section 18. Concerning the Rights Agent 19
Section 19. Merger or Consolidation or Change of
Name of Rights Agent 19
Section 20. Duties of Rights Agent 20
Section 21. Change of Rights Agent 22
Section 22. Issuance of New Right Certificates 22
Section 23. Redemption 22
Section 24. Exchange 23
Section 25. Notice of Events 24
Section 26. Notices 25
Section 27. Supplements and Amendments 25
Section 28. Successors 26
Section 29. Benefits of this Agreement 26
Section 30. Severability 26
Section 31. Governing Law 26
Section 32. Counterparts 26
Section 33. Descriptive Headings 26
Signatures. 27
Exhibit A Form of Certificate of Designations 28
Exhibit B Form of Right Certificate 35
Exhibit C Summary of Rights to Purchase Preferred Shares 41
</TABLE>
ii
<PAGE> 3
This Rights Agreement (the "Agreement"), dated as of June 11, 1997, between
Crescent Operating, Inc., a Delaware corporation (the "Company"), and
BankBoston, N.A. as Rights Agent (the "Rights Agent").
The board of directors of the Company (the "Board of Directors") has authorized
and declared a dividend of one preferred share purchase right (a "Right") for
each Common Share (as hereinafter defined) of the Company outstanding on the
date specified as the "Distribution Date" in the Company's registration
statement on Form S-1 (file no. 333-25223) is declared effective by the
Securities and Exchange Commission (the "Record Date"), each Right representing
the right to purchase one one-hundredth of a Preferred Share (as hereinafter
defined), upon the terms and subject to the conditions herein set forth, and
has further authorized and directed the issuance of one Right with respect to
each Common Share that shall become outstanding between the Record Date and the
earliest of the Distribution Date, the Redemption Date and the Final Expiration
Date (as such terms are hereinafter defined).
Accordingly, in consideration of the premises and the mutual agreements herein
set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the
following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person who or which, together with
all Affiliates and Associates of such Person, shall be the Beneficial
Owner of 10% or more of the Common Shares of the Company then outstanding
but shall not include (i) the Company, (ii) any Subsidiary of the Company,
(iii) any employee benefit plan of the Company or of any Subsidiary of the
Company, or any entity holding Common Shares for or pursuant to the terms
of any such plan, or (iv) Crescent and its affiliates. Notwithstanding
anything in this definition of Acquiring Person to the contrary, no Person
shall become an "Acquiring Person" as the result of an acquisition of
Common Shares by the Company which, by reducing the number of shares
outstanding, increases the proportionate number of shares beneficially
owned by such Person to 10% or more of the Common Shares of the Company
then outstanding; provided, however, that if a Person shall become the
Beneficial Owner of 10% or more of the Common Shares of the Company then
outstanding by reason of share purchases by the Company and shall, after
such share purchases by the Company, become the Beneficial Owner of any
additional Common Shares of the Company, then such Person shall be deemed
to be an "Acquiring Person." Notwithstanding anything in this definition
of Acquiring Person to the contrary, if the Board of Directors determines
in good faith that a Person who would otherwise be an "Acquiring Person,"
as defined pursuant to the foregoing provisions of this paragraph (a), has
become such inadvertently, and such Person divests as promptly as
practicable a sufficient number of Common Shares so that such Person would
no longer be an "Acquiring Person," as defined pursuant to the foregoing
provisions of this paragraph (a), then such Person shall not be deemed to
be an "Acquiring Person" for any purposes of this Agreement.
1
<PAGE> 4
(b) "Affiliate" shall have the meaning ascribed to such term in Rule 12b-2
of the General Rules and Regulations under the Exchange Act as in effect
on the date of this Agreement .
(c) "Associate" shall have the meaning ascribed to such term in Rule 12b-2
of the General Rules and Regulations under the Exchange Act as in effect
on the date of this Agreement.
(d) A Person shall be deemed the "Beneficial Owner" of and shall be deemed
to "beneficially own" any securities:
(i) which such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly:
(ii) which such Person or any of such Person's Affiliates or
Associates has (A) the right to acquire (whether such right is
exercisable immediately or only after the passage of time) pursuant
to any agreement, arrangement or understanding (other than customary
agreements with and between underwriters and selling group members
with respect to a bona fide public offering of securities), or upon
the exercise of conversion rights, exchange rights, rights (other
than these Rights), warrants or options, or otherwise; provided,
however, that a Person shall not be deemed the Beneficial Owner of,
or to beneficially own, securities tendered pursuant to a tender or
exchange offer made by or on behalf of such Person or any of such
Person's Affiliates or Associates until such tendered securities are
accepted for purchase or exchange; or (B) the right to vote, or the
right to direct the vote, pursuant to any agreement, arrangement or
understanding; provided, however, that a Person shall not be deemed
the Beneficial Owner of, or to beneficially own, any security, if the
agreement, arrangement or understanding to vote, or direct the vote
of, such security (1) arises solely from a revocable proxy or consent
given to such Person in response to a public proxy or consent
solicitation made pursuant to, and in accordance with, the applicable
rules and regulations promulgated under the Exchange Act and (2) is
not also then reportable on Schedule 13D under the Exchange Act (or
any comparable or successor report); or
(iii) which are beneficially owned, directly or indirectly, by any
other Person with which such Person or any of such Person's
Affiliates or Associates has any agreement, arrangement or
understanding (other than customary agreements with and between
underwriters and selling group members with respect to a bona fide
public offering of securities) for the purpose of acquiring, holding,
voting (except to the extent contemplated by the proviso to Section
1(d)(ii)(B)) or disposing of any securities of the Company.
Notwithstanding anything in this definition of Beneficial Ownership to the
contrary, no Person (and no Affiliate or Associate of any Person) shall at any
time be deemed to be the "Beneficial
2
<PAGE> 5
Owner" of or to "beneficially own" any securities if such Person is the
Beneficial Owner of or "beneficially owns" such securities as a result of one
or more agreements, arrangements or understandings with any Crescent Affiliate
(whether or not the Company or any other Person is a party thereto) and if such
Person would not be the Beneficial Owner of or "beneficially own" such
securities if such agreements, arrangements or understandings were not then in
effect. Notwithstanding anything in this definition of Beneficial Ownership to
the contrary, the phrase "then outstanding," when used with reference to a
Person's Beneficial Ownership of securities of the Company, shall mean the
number of such securities then issued and outstanding together with the number
of such securities not then actually issued and outstanding which such Person
would be deemed to own beneficially hereunder.
(e) "Board of Directors" shall have the meaning set forth in the preamble
hereof.
(f) "Business Day" shall mean any day other than a Saturday, a Sunday, or
a day on which banking institutions in New York are authorized or
obligated by law or executive order to close.
(g) "Close of Business" on any given date shall mean 5:00 P.M., New York
Time, on such date; provided, however, that, if such date is not a
Business Day, it shall mean 5:00 P.M., New York Time, on the next
succeeding Business Day.
(h) "Common Shares" when used with reference to the Company shall mean the
shares of common stock, par value $.01 per share, of the Company. "Common
Shares" when used with reference to any Person other than the Company
shall mean the capital stock (or equity interest) with the greatest voting
power of such other Person or, if such other Person is a Subsidiary of
another Person, the Person or Persons which ultimately control such
first-mentioned Person.
(i) "Company" shall have the meaning set forth in the preamble hereof.
(j) "Current Per Share Market Price" shall have the meaning set forth in
Section 11(d)(i) hereof.
(k) "Rights Distribution Date" shall have the meaning set forth in Section
3 hereof.
(l) "Equivalent Preferred Shares" shall have the meaning set forth in
Section 11(b) hereof.
(m) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(n) "Exchange Ratio" shall have the meaning set forth in Section 24(a)
hereof.
(o) "Final Expiration Date" shall have the meaning set forth in Section
7(a) hereof.
3
<PAGE> 6
(p) "Person" shall mean any individual, firm, corporation or other entity,
and shall include any successor (by merger or otherwise) of such entity.
(q) "Preferred Shares" shall mean shares of Series A Junior Participating
Preferred Stock, par value $.01 per share, of the Company having the
rights and preferences set forth in the Form of Certificate of
Designations attached to this Agreement as Exhibit A.
(r) "Purchase Price" shall have the meaning set forth in Section 4 hereof.
(s) "Record Date" shall have the meaning set forth in the preamble hereof.
(t) "Redemption Date" shall have the meaning set forth in Section 7(a)
hereof.
(u) "Redemption Price" shall have the meaning set forth in Section 23(a)
hereof.
(v) "Right" shall have the meaning set forth in the preamble hereof.
(w) "Right Certificate" shall have the meaning set forth in Section 3(a)
hereof.
(x) "Rights Agent" shall have the meaning set forth in the preamble
hereof.
(y) "Security" shall have the meaning set forth in Section 11(d) hereof.
(z) "Shares Acquisition Date" shall mean the first date of public
announcement by the Company or an Acquiring Person that an Acquiring
Person has become such.
(aa) "Subsidiary" of any Person shall mean any corporation or other entity
of which a majority of the voting power of the voting equity securities or
equity interest is owned, directly or indirectly, by such Person.
(bb) "Summary of Rights" shall have the meaning set forth in Section 3(b)
hereof.
(cc) "Trading Day" shall have the meaning set forth in Section 11(d)
hereof.
Section 2. Appointment of Rights Agent. The Company hereby appoints the Rights
Agent to act as agent for the Company and the holders of the Rights (who, in
accordance with Section 3 hereof, shall, prior to the Rights Distribution Date
also be the holders of the Common Shares) in accordance with the terms and
conditions hereof, and the Rights Agent hereby accepts such appointment. The
Company may from time to time appoint such co-Rights Agents as it may deem
necessary or desirable, upon ten (10) days' prior written notice to the Rights
Agent. The Rights Agent shall have no duty to supervise, and in no event be
liable for, the acts or omissions of any such co-Rights Agent.
4
<PAGE> 7
Section 3. Issue of Right Certificates.
(a) Until the earlier of (i) the tenth day after the Shares Acquisition
Date or (ii) the tenth Business Day (or such later date as may be
determined by action of the Board of Directors prior to such time as any
Person becomes an Acquiring Person) after the date of the commencement by
any Person (other than the Company, any Subsidiary of the Company, any
employee benefit plan of the Company or of any Subsidiary of the Company,
any entity holding Common Shares for or pursuant to the terms of any such
plan, or, any Crescent Affiliate) of, or of the first public announcement
of the intention of any Person (other than the Company, any Subsidiary of
the Company, any employee benefit plan of the Company or of any Subsidiary
of the Company, any entity holding Common Shares for or pursuant to the
terms of any such plan or, any Crescent Affiliate) to commence, a tender
or exchange offer the consummation of which would result in any Person
becoming the Beneficial Owner of Common Shares aggregating 10% or more of
the then outstanding Common Shares (the earlier of such dates being herein
referred to as the "Rights Distribution Date"), (x) the Rights will be
evidenced (subject to the provisions of Section 3(b) hereof) by the
certificates for Common Shares registered in the names of the holders
thereof (which certificates shall also be deemed to be Right Certificates)
and not by separate Right Certificates, and (y) the right to receive Right
Certificates will be transferable only in connection with the transfer of
Common Shares. As soon as practicable after the Rights Distribution Date,
the Company will prepare and execute, the Rights Agent will countersign,
and the Company will send or cause to be sent (and the Rights Agent will,
if requested, send) by first-class, postage-prepaid mail, to each record
holder of Common Shares as of the Close of Business on the Rights
Distribution Date, at the address of such holder shown on the records of
the Company, a Right Certificate, in substantially the form of Exhibit B
hereto (a "Right Certificate"), evidencing one Right for each Common Share
so held. From and after the Rights Distribution Date, the Rights will be
evidenced solely by such Right Certificates.
(b) On the Record Date, or as soon as practicable thereafter, the Company
will send a copy of a Summary of Rights to Purchase Preferred Shares, in
substantially the form of Exhibit C hereto (the "Summary of Rights"), by
first-class, postage-prepaid mail, to each record holder of Common Shares
as of the Close of Business on the Record Date, at the address of such
holder shown on the records of the Company. With respect to certificates
for Common Shares outstanding as of the Record Date, until the Rights
Distribution Date, the Rights will be evidenced by such certificates
registered in the names of the holders thereof together with a copy of the
Summary of Rights attached thereto. Until the Rights Distribution Date (or
the earlier of the Redemption Date or the Final Expiration Date), the
surrender for transfer of any certificate for Common Shares outstanding on
the Record Date, with or without a copy of the Summary of Rights attached
thereto, shall also constitute the transfer of the Rights associated with
the Common Shares represented thereby.
5
<PAGE> 8
(c) Certificates for Common Shares which become outstanding (including,
without limitation, reacquired Common Shares referred to in the last
sentence of this paragraph (c)) after the Record Date but prior to the
earliest of the Rights Distribution Date, the Redemption Date or the Final
Expiration Date, shall have impressed on, printed on, written on or
otherwise affixed to them the following legend:
This certificate also evidences and entitles the holder hereof to
certain rights as set forth in a Rights Agreement between Crescent
Operating, Inc. and BankBoston, N.A. dated as of June 11, 1997
Rights Agreement"), the terms of which are hereby incorporated
herein by reference and a copy of which is on file at the principal
executive offices of Crescent Operating, Inc. Under certain
circumstances, as set forth in the Rights Agreement, such Rights will
be evidenced by separate certificates and will no longer be evidenced
by this certificate. Crescent Operating, Inc. will mail to the holder
of this certificate a copy of the Rights Agreement without charge
after receipt of a written request therefor. Under certain
circumstances, as set forth in the Rights Agreement, Rights issued to
any Person who becomes an Acquiring Person (as defined in the Rights
Agreement) may become null and void.
With respect to such certificates containing the foregoing legend, until the
Rights Distribution Date, the Rights associated with the Common Shares
represented by such certificates shall be evidenced by such certificates alone,
and the surrender for transfer of any such certificate shall also constitute
the transfer of the Rights associated with the Common Shares represented
thereby. In the event that the Company purchases or acquires any Common Shares
after the Record Date but prior to the Rights Distribution Date, any Rights
associated with such Common Shares shall be deemed cancelled and retired so
that the Company shall not be entitled to exercise any Rights associated with
the Common Shares which are no longer outstanding.
Section 4. Form of Right Certificates. The Right Certificates (and the forms of
election to purchase Preferred Shares and of assignment to be printed on the
reverse thereof) shall be substantially the same as Exhibit B hereto and may
have such marks of identification or designation and such legends, summaries or
endorsements printed thereon as the Company may deem appropriate and as are not
inconsistent with the provisions of his Agreement, or as may be required to
comply with any applicable law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange or automated
quotation system on which the Rights may from time to time be listed, or to
conform to usage. Subject to the provisions of Section 22 hereof, the Right
Certificates shall entitle the holders thereof to purchase such number of one
one-hundredths of a Preferred Share as shall be set forth therein at the price
per one one-hundredth of a Preferred Share set forth therein (the "Purchase
Price"), but the number of such one one-hundredths of a Preferred Share and the
Purchase Price shall be subject to adjustment as provided herein.
Section 5. Countersignature and Registration. The Right Certificates shall be
executed on behalf of the Company by its Chairman of the Board, its Vice
Chairman of the Board, its Chief Executive Officer, its President, any of its
Vice Presidents, or its Treasurer, either manually or by
6
<PAGE> 9
facsimile signature, shall have affixed thereto the Company's seal or a
facsimile thereof, and shall be attested by the Secretary or an Assistant
Secretary of the Company, either manually or by facsimile signature. The Right
Certificates shall be manually countersigned by the Rights Agent and shall not
be valid for any purpose unless countersigned. In case any officer of the
Company who shall have signed any of the Right Certificates shall cease to be
such officer of the Company before countersignature by the Rights Agent and
issuance and delivery by the Company, such Right Certificates, nevertheless,
may be countersigned by the Rights Agent and issued and delivered by the
Company with the same force and effect as though the individual who signed such
Right Certificates had not ceased to be such officer of the Company; and any
Right Certificate may be signed on behalf of the Company by any individual who,
at the actual date of the execution of such Right Certificate, shall be a
proper officer of the Company to sign such Right Certificate although at the
date of the execution of this Agreement any such individual was not such an
officer.
Following the Rights Distribution Date, the Rights Agent will keep or cause to
be kept, at its principal office, books for registration and transfer of the
Right Certificates issued hereunder. Such books shall show the names and
addresses of the respective holders of the Right Certificates, the number of
Rights evidenced on its face by each of the Right Certificates and the date of
each of the Right Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of Right Certificates;
Mutilated, Destroyed, Lost or Stolen Right Certificates. Subject to the
provisions of Section 14 hereof, at any time after the Close of Business on the
Rights Distribution Date, and at or prior to the Close of Business on the
earlier of the Redemption Date or the Final Expiration Date, any Right
Certificate or Right Certificates (other than Right Certificates representing
Rights that have become void pursuant to Section 11(a)(ii) hereof or that have
been exchanged pursuant to Section 24 hereof) may be transferred, split up,
combined, or exchanged for another Right Certificate or other Right
Certificates entitling the registered holder to purchase a like number of one
one-hundredths of a Preferred Share as the Right Certificate or Right
Certificates surrendered then entitled such holder to purchase. Any registered
holder desiring to transfer, split up, combine or exchange any Right
Certificate or Right Certificates shall make such request in writing delivered
to the Rights Agent, and shall surrender the Right Certificate or Right
Certificates to be transferred, split up, combined or exchanged at the
principal office of the Rights Agent. Thereupon the Rights Agent shall
countersign and deliver to the Person entitled thereto a Right Certificate or
Right Certificates, as the case may be, as so requested. The Company may
require payment of a sum sufficient to cover any tax or governmental charge
that may be imposed in connection with any transfer, split up, combination or
exchange of Right Certificates.
Upon receipt by the Company and the Rights Agent of evidence reasonably
satisfactory to them of the loss, theft, destruction or mutilation of a Right
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and, at the Company's request,
reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and cancellation of
the Right Certificate if mutilated, the Company will make and deliver a new
Right Certificate of like tenor
7
<PAGE> 10
to the Rights Agent for delivery to the registered holder in lieu of the Right
Certificate so lost, stolen, destroyed or mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Right .
(a) The registered holder of any Right Certificate may exercise the Rights
evidenced thereby (except as otherwise provided herein), in whole or in
part, at any time after the Rights Distribution Date, upon surrender of
the Right Certificate, with the form of election to purchase on the
reverse side thereof duly executed, to the Rights Agent at the principal
office of the Rights Agent, together with payment of the purchase Price
for each one one-hundredth of a Preferred Share as to which the Rights are
exercised, at or prior to the earliest of (i) the Close of Business on the
date which is the tenth anniversary of the Record Date (the "Final
Expiration Date"), (ii) the time at which the Rights are redeemed as
provided in Section 23 hereof (the "Redemption Date"), or (iii) the time
at which such Rights are exchanged as provided in Section 24 hereof.
(b) The Purchase Price for each one one-hundredth of a Preferred Share
purchasable pursuant to the exercise of a Right shall initially be $5,
and shall be subject to adjustment from time to time as provided in
Section 11 or 13 hereof and shall be payable in lawful money of the United
States of America in accordance with paragraph (c) below.
(c) Upon receipt of a Right Certificate representing exercisable Rights,
with the form of election to purchase duly executed, accompanied by
payment of the Purchase Price for the shares to be purchased and an amount
equal to any applicable transfer tax required to be paid by the holder of
such Right Certificate in accordance with Section 9 hereof by certified
check, cashier's check or money order payable to the order of the Company,
the Rights Agent shall thereupon promptly (i)(A) requisition from any
transfer agent of the Preferred Shares certificates for the number of
Preferred Shares to be purchased and the Company hereby irrevocably
authorizes any such transfer agent to comply with all such requests, or
(B) requisition from the depositary agent depositary receipts representing
such number of one one-hundredths of a Preferred Share as are to be
purchased (in which case certificates for the Preferred Shares represented
by such receipts shall be deposited by the transfer agent of the Preferred
Shares with such depositary agent) and the Company hereby directs such
depositary agent to comply with such request; (ii) when appropriate,
requisition from the Company the amount of cash to be paid in lieu of
issuance of fractional shares in accordance with Section 14 hereof; (iii)
promptly after receipt of such certificates or depositary receipts, cause
the same to be delivered to or upon the order of the registered holder of
such Right Certificate, registered in such name or names as may be
designated by such holder; and (iv) when appropriate, after receipt,
promptly deliver such cash to or upon the order of the registered holder
of such Right Certificate.
(d) In case the registered holder of any Right Certificate shall exercise
less than all the Rights evidenced thereby, a new Right Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be
issued by the Rights Agent to the registered holder
8
<PAGE> 11
of such Right Certificate or to his duly authorized assigns, subject to
the provisions of Section 14 hereof.
Section 8. Cancellation and Destruction of Right Certificates. All Right
Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or to any of its
agents, be delivered to the Rights Agent for cancellation or in cancelled form,
or, if surrendered to the Rights Agent, shall be cancelled by it, and no Right
certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Agreement. The Company shall deliver to the
Rights Agent for cancellation and retirement, and the Rights Agent shall so
cancel and retire, any other Right Certificate purchased or acquired by the
Company otherwise than upon the exercise thereof. The Rights Agent shall
deliver all cancelled Right Certificates to the Company, or shall, at the
written request of the Company, destroy such cancelled Right Certificates, and,
in such case, shall deliver a certificate of destruction thereof to the
Company.
Section 9. Availability of Preferred Shares. The Company covenants and agrees
that it will cause to be reserved and kept available out of its authorized and
unissued Preferred Shares or any Preferred Shares held in its treasury, the
number of Preferred Shares that will be sufficient to permit the exercise in
full of all outstanding Rights in accordance with Section 7. The Company
covenants and agrees that it will take all such action as may be necessary to
ensure that all Preferred Shares delivered upon exercise of Rights shall, at
the time of delivery of the certificates for such Preferred Shares (subject to
payment of the Purchase Price), be duly and validly authorized and issued and
fully paid and nonassessable shares.
The Company further covenants and agrees that it will pay when due and payable
any and all federal and state transfer taxes and charges which may be payable
in respect of the issuance or delivery of the Right Certificates or of any
Preferred Shares upon the exercise of Rights. The Company shall not, however,
be required to pay any transfer tax which may be payable in respect of any
transfer or delivery of Right Certificates to a Person other than, or the
issuance or delivery of certificates or depositary receipts for the Preferred
Shares in a name other than that of, the registered holder of the Right
Certificate evidencing Rights surrendered for exercise or to issue or to
deliver any certificates or depositary receipts for Preferred Shares upon the
exercise of any Rights until any such tax shall have been paid (any such tax
being payable by the holder of such Right Certificate at the time of surrender)
or until it has been established to the Company's reasonable satisfaction that
no such tax is due.
Section 10. Preferred Shares Record Date. Each Person in whose name any
certificate for Preferred Shares is issued upon the exercise of Rights shall
for all purposes be deemed to have become the holder of record of the Preferred
Shares represented thereby on, and such certificate shall be dated, the date
upon which the Right Certificate evidencing such Rights was duly surrendered
and payment of the Purchase Price (and any applicable transfer taxes) was made;
provided, however, that if the date of such surrender and payment is a date
upon which the Preferred Shares transfer books of the Company are closed, such
Person shall be deemed to have become the record holder of such shares on, and
such certificate shall be dated, the next succeeding Business Day on which the
Preferred Shares transfer books of the Company are open.
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<PAGE> 12
Prior to the exercise of the Rights evidenced thereby, the holder of a Right
Certificate shall not be entitled to any rights of a holder of Preferred Shares
for which the Rights shall be exercisable, including, without limitation, the
right to vote, to receive dividends or other distributions or to exercise any
preemptive rights, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided herein.
Section 11. Adjustment of Purchase Price, Number of Shares or Number of Rights.
The Purchase Price, the number of Preferred Shares covered by each Right and
the number of Rights outstanding are subject to adjustment from time to time as
provided in this Section 11.
(a) (i) In the event the Company shall at any time after the date of this
Agreement (A) declare a dividend on the Preferred Shares payable in
Preferred Shares, (B) subdivide the outstanding Preferred Shares, (C)
combine the outstanding Preferred Shares into a smaller number of
Preferred Shares or (D) issue any shares of its capital stock in a
reclassification of the Preferred Shares (including any such
reclassification in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation), except as otherwise
provided in this Section 11(a), the Purchase Price in effect at the time
of the record date for such dividend or of the effective date of such
subdivision, combination or reclassification, and the number and kind of
shares of capital stock issuable on such date, shall be proportionately
adjusted so that the holder of any Right exercised after such time shall
be entitled to receive the aggregate number and kind of shares of capital
stock which, if such Right had been exercised immediately prior to such
date and at a time when the Preferred Shares transfer books of the Company
were open, he would have owned upon such exercise and been entitled to
receive by virtue of such dividend, subdivision, combination or
reclassification; provided, however, that in no event shall the
consideration to be paid upon the exercise of one Right be less than the
aggregate par value of the shares of capital stock of the Company issuable
upon exercise of one Right.
(ii) Subject to Section 24 of this Agreement, in the event any Person
becomes an Acquiring Person, each holder of a Right shall thereafter
have a right to receive, upon exercise thereof at a price equal to the
then current Purchase Price multiplied by the number of one
one-hundredths of a Preferred Share for which a Right is then
exercisable, in accordance with the terms of this Agreement and in
lieu of Preferred Shares, such number of Common Shares of the Company
as shall equal the result obtained by (A) multiplying the then current
Purchase Price by the number of one one-hundredths of a Preferred
Share for which a Right is then exercisable and dividing that product
by (B) 50% of the then Current Per Share Market Price of the Company's
Common Shares (determined pursuant to Section 11(d)(i) hereof) on the
date of the occurrence of such event. In the event that any Person
shall become an Acquiring Person and the Rights shall then be
outstanding, the Company shall not take any action which would
eliminate or diminish the benefits intended to be afforded by the
Rights.
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<PAGE> 13
From and after the occurrence of such event, any Rights that are or were
acquired or beneficially owned by any Acquiring Person (or any Associate or
Affiliate of such Acquiring Person) shall be void and any holder of such Rights
shall thereafter have no right to exercise such Rights under any provision of
this Agreement. No Right Certificate shall be issued pursuant to Section 3 that
represents Rights beneficially owned by an Acquiring Person whose Rights would
be void pursuant to the preceding sentence, or any Associate or Affiliate
thereof; no Right Certificate shall be issued at any time upon the transfer of
any Rights to an Acquiring Person whose Rights would be void pursuant to the
preceding sentence or any Associate or Affiliate thereof or to any nominee of
such Acquiring Person, Associate or Affiliate; and any Right Certificate
delivered to the Rights Agent for transfer to an Acquiring Person whose Rights
would be void pursuant to the preceding sentence shall be cancelled.
(iii) In the event that there shall not be sufficient Common Shares
issued but not outstanding or authorized but unissued to permit the
exercise in full of the Rights in accordance with the foregoing
subparagraph (ii), the Company shall take all such action as may be
necessary to authorize additional Common Shares for issuance upon
exercise of the Rights. In the event the Company shall, after good
faith effort, be unable to take all such action as may be necessary
to authorize such additional Common Shares, the Company shall
substitute, for each Common Share that would otherwise be issuable
upon exercise of a Right, a number of Preferred Shares or fraction
thereof such that the Current Per Share Market Price of one Preferred
Share multiplied by such number or fraction is equal to the Current
Per Share Market Price of one Common Share as of the date of
issuances of such Preferred Shares or fraction thereof.
(b) In case the Company shall fix a record date for the issuance of
rights, options or warrants to all holders of Preferred Shares entitling
them (for a period expiring within 45 calendar days after such record
date) to subscribe for or purchase Preferred Shares (or shares having the
same rights, privileges and preferences as the Preferred Shares
("equivalent preferred shares")) or securities convertible into Preferred
Shares or equivalent preferred shares at a price per Preferred Share or
equivalent preferred share (or having a conversion price per share, if a
security convertible into Preferred Shares or equivalent preferred shares)
less than the then Current Per Share Market Price of the Preferred Shares
on such record date, the Purchase Price to be in effect after such record
date shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of
which shall be the number of Preferred Shares outstanding on such record
date plus the number of Preferred Shares which the aggregate offering
price of the total number of Preferred Shares and/or equivalent preferred
shares so to be offered (and/or the aggregate initial conversion price of
the convertible securities so to be offered) would purchase at such
current market price and the denominator of which shall be the number of
Preferred Shares outstanding on such record date plus the number of
additional Preferred Shares and/or equivalent preferred shares to be
offered for subscription or purchase (or into which the convertible
securities so to be offered are initially convertible); provided, however,
that in no event shall the
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<PAGE> 14
consideration to be paid upon the exercise of one Right be less than the
aggregate par value of the shares of capital stock of the Company issuable
upon exercise of one Right. In case such subscription price may be paid in
a consideration part or all of which shall be in a form other than cash,
the value of such consideration shall be as determined in good faith by
the Board of Directors, whose determination shall be described in a
statement filed with the Rights Agent and shall be binding on the Rights
Agent and holders of the Rights. Preferred Shares owned by or held for the
account of the Company shall not be deemed outstanding for the purpose of
any such computation. Such adjustment shall be made successively whenever
such a record date is fixed; and in the event that such rights, options or
warrants are not so issued, the Purchase Price shall be adjusted to be the
Purchase Price which would then be in effect if such record date had not
been fixed.
(c) In case the Company shall fix a record date for the making of a
distribution to all holders of the Preferred Shares (including any such
distribution made in connection with a consolidation or merger in which
the Company is the continuing or surviving corporation) of evidences of
indebtedness or assets (other than a regular quarterly cash dividend or a
dividend payable in Preferred Shares) or subscription rights or warrants
(excluding those referred to in Section 11(b) hereof), the Purchase Price
to be in effect after such record date shall be determined by multiplying
the Purchase Price in effect immediately prior to such record date by a
fraction, the numerator of which shall be the then Current Per Share
Market Price of the Preferred Shares on such record date, less the fair
market value (as determined in good faith by the Board of Directors, whose
determination shall be described in a statement filed with the Rights
Agent and shall be binding on the Rights Agent and holders of the Rights)
of the portion of the assets or evidences of indebtedness so to be
distributed or of such subscription rights or warrants applicable to one
Preferred Share and the denominator of which shall be such Current Per
Share Market Price of the Preferred Shares; provided, however, that in no
event shall the consideration to be paid upon the exercise of one Right be
less than the aggregate par value of the shares of capital stock of the
Company to be issued upon exercise of one Right. Such adjustments shall be
made successively whenever such a record date is fixed; and in the event
that such distribution is not so made, the Purchase Price shall again be
adjusted to be the Purchase Price which would then be in effect if such
record date had not been fixed.
(d) (i) For the purpose of any computation hereunder, the "Current Per
Share Market Price" of any security (a "Security" for the purpose of this
Section 11(d)(i)) on any date shall be deemed to be the average of the
daily closing prices per share of such Security for the 30 consecutive
Trading Days immediately prior to such date; provided, however, that in
the event that the Current Per Share Market Price of the Security is
determined during a period following the announcement by the issuer of
such Security of (A) a dividend or distribution on such Security payable
in shares of such Security or securities convertible into such shares, or
(B) any subdivision, combination or reclassification of such Security and
prior to the expiration of 30 Trading Days after the ex-dividend date for
such dividend or distribution, or the record date for such Subdivision,
combination or reclassification, then, and in each such case, the Current
Per Share Market Price shall be
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<PAGE> 15
appropriately adjusted to reflect the current market price per share
equivalent of such Security. The closing price for each day shall be the
last sale price, regular way, or, in case no such sale takes place on such
day, the average of the closing bid and asked prices, regular way, in
either case, as reported in the principal consolidated transaction
reporting system with respect to securities listed or admitted to trading
on the New York Stock Exchange or, if the Security is not listed or
admitted to trading on the New York Stock Exchange, as reported in the
principal consolidated transaction reporting system with respect to
securities listed on the principal national securities exchange on which
the Security is listed or admitted to trading or, if the Security is not
listed or admitted to trading on any national securities exchange, the
last quoted price or, if not so quoted, the average of the high bid and
low asked prices in the over-the-counter market, as reported on the Nasdaq
National Market or such other system then in use, or, if on any such date
the Security is not quoted by, any such organization, the average of the
closing bid and asked prices as furnished by a professional market maker
making a market in the Security selected by the Board of Directors. The
term "Trading Day" shall mean a day on which the principal national
securities exchange on which the Security is listed or admitted to trading
is open for the transaction of business or, if the Security is not listed
or admitted to trading on any national Securities exchange, a Business
Day.
(ii) For the purpose of any computation hereunder, the "Current Per
Share Market Price" of the Preferred Shares shall be determined in
accordance with the method set forth in Section 11(d)(i). If the
Preferred Shares are not publicly traded, the "Current Per Share
Market Price" of the Preferred Shares shall be conclusively deemed to
be the Current Per Share Market Price of the Common Shares as
determined pursuant to Section 11(d)(i) (appropriately adjusted to
reflect any stock split, stock dividend or similar transaction
occurring after the date hereof), multiplied by one hundred. If
neither the Common Shares nor the Preferred Shares are publicly held
or so listed or traded, "Current Per Share Market Price" shall mean
the fair value per share as determined in good faith by the Board of
Directors, whose determination shall be described in a statement
filed with the Rights Agent and shall be binding on the Rights Agent
and the holders of the Rights.
(e) No adjustment in the Purchase Price shall be required unless such
adjustment would require an increase or decrease of at least 1% in the
Purchase Price; provided, however, that any adjustments which by reason of
this Section 11(e) are not required to be made shall be carried forward
and taken into account in any subsequent adjustment. All calculations
under this Section 11 shall be made to the nearest cent or to the nearest
one one-millionth of a Preferred Share or one ten-thousandth of any other
share or security as the case may be. Notwithstanding the first sentence
of this Section 11(e), any adjustment required by this Section 11 shall be
made no later than the earlier of (i) three years from the date of the
transaction which requires such adjustment or (ii) the date of the
expiration of the right to exercise any Rights.
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<PAGE> 16
(f) If as a result of an adjustment made pursuant to Section 11(a) hereof,
the holder of any Right thereafter exercised shall become entitled to
receive any shares of capital stock of the Company other than Preferred
Shares, thereafter the number of such other shares so receivable upon
exercise of any Right shall be subject to adjustment from time to time in
a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Preferred Shares contained in Section 11(a)
through (c), inclusive, and the provisions of Sections 7, 9, 10 and 13
with respect to the Preferred Shares shall apply on like terms to any such
other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right
to purchase, at the adjusted Purchase Price, the number of one
one-hundredths of a Preferred Share purchasable from time to time
hereunder upon exercise of the Rights, all subject to further adjustment
as provided herein.
(h) Unless the Company shall have exercised its election as provided in
Section 11(i), upon each adjustment of the Purchase Price as a result of
the calculations made in Sections 11 (b) and (c), each Right outstanding
immediately prior to the making of such adjustment shall thereafter
evidence the right to purchase, at the adjusted Purchase Price, that
number of one one-hundredths of a Preferred Share (calculated to the
nearest one one-millionth of a Preferred Share) obtained by (A)
multiplying (x) the number of one one-hundredths of a share covered by a
Right immediately prior to this adjustment by (y) the Purchase Price in
effect immediately prior to such adjustment of the Purchase Price and (B)
dividing the product so obtained by the Purchase Price in effect
immediately after such adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment of the
Purchase Price to adjust the number of Rights in substitution for any
adjustment in the number of one one-hundredths of a Preferred Share
purchasable upon the exercise of a Right. Each of the Rights outstanding
after such adjustment of the number of Rights shall be exercisable for the
number of one one-hundredths of a Preferred Share for which a Right was
exercisable immediately prior to such adjustment. Each Right held of
record prior to such adjustment of the number of Rights shall become that
number of Rights (calculated to the nearest one ten-thousandth) obtained
by, dividing the Purchase Price in effect immediately prior to adjustment
of the Purchase Price by the Purchase Price in effect immediately after
adjustment of the Purchase Price. The Company shall make a public
announcement of its election to adjust the number of Rights, indicating
the record date for the adjustment, and, if known at the time, the amount
of the adjustment to be made. This record date may be the date on which
the Purchase Price is adjusted or any day thereafter, but, if the Right
Certificates have been issued, shall be at least 10 days later than the
date of the public announcement. If Right Certificates have been issued,
upon each adjustment of the number of Rights pursuant to this Section
11(i), the Company shall, as promptly as practicable, cause to be
distributed to holders of record of Right Certificates on such record date
Right Certificates evidencing, subject to Section 14 hereof, the
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<PAGE> 17
additional Rights to which such holders shall be entitled as a result of
such adjustment, or, at the option of the Company, shall cause to be
distributed to such holders of record in substitution and replacement for
the Right Certificates held by such holders prior to the date of
adjustment, and upon surrender thereof, if required by the Company, new
Right Certificates evidencing all the Rights to which such holders shall
be entitled after such adjustment. Right Certificates so to be distributed
shall be issued, executed and countersigned in the manner provided for
herein and shall be registered in the names of the holders of record of
Right Certificates on the record date specified in the public
announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or the
number of one one-hundredths of a Preferred Share issuable upon the
exercise of the Rights, the Right Certificates theretofore and thereafter
issued may continue to express the Purchase Price and the number of one
one-hundreths of a Preferred Share which were expressed in the initial
Right Certificates issued hereunder.
(k) Before taking any action that would cause an adjustment reducing the
Purchase Price below one one-hundredth of the then par value, if any, of
the Preferred Shares issuable upon exercise of the Rights, the Company
shall take any corporate action which may, in the opinion of its counsel,
be necessary in order that the Company may validly and legally issue fully
paid and nonassessable Preferred Shares at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an adjustment
in the Purchase Price be made effective as of a record date for a specified
event, the Company may elect to defer until the occurrence of such event
the issuing to the holder of any Right exercised after such record date of
the Preferred Shares and other capital stock or securities of the
Company, if any, issuable upon such exercise over and above the Preferred
Shares and other capital stock or securities of the Company, if any,
issuable upon such exercise on the basis of the Purchase Price in effect
prior to such adjustment; provided, however, that the Company shall
deliver to such holder a due bill or other appropriate instrument
evidencing such holder's right to receive such additional shares upon the
occurrence of the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary notwithstanding, the
Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as
and to the extent that it, in its sole discretion, shall determine to be
advisable in order that any consolidation or subdivision of the Preferred
Shares, issuance wholly for cash of any Preferred Shares at less than the
current market price, issuance wholly for cash of Preferred Shares or
securities which by their terms are convertible into or exchangeable for
Preferred Shares, dividends on Preferred Shares payable in Preferred
Shares or issuance of rights, options or warrants referred to hereinabove
in Section 11(b), hereafter made by the Company to holders of its
Preferred Shares shall not be taxable to such stockholders.
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<PAGE> 18
(n) In the event that at any time after the date of this Agreement and
prior to the Rights Distribution Date, the Company shall (i) declare or
pay any dividend on the Common Shares payable in Common Shares, or (ii)
effect a subdivision, combination or consolidation of the Common Shares
(by reclassification or otherwise than by payment of dividends in Common
Shares) into a greater or lesser number of Common Shares, then in any such
case (A) the number of one one-hundredths of a Preferred Share purchasable
after such event upon proper exercise of each Right shall be determined by
multiplying the number of one one-hundredths of a Preferred Share so
purchasable immediately prior to such event by a fraction, the numerator
of which is the number of Common Shares outstanding immediately before
such event and the denominator of which is the number of Common Shares
outstanding immediately after such event, and (B) each Common Share
outstanding immediately after such event shall have issued with respect to
it that number of Rights which each Common Share outstanding immediately
prior to such event had issued with respect to it. The adjustments
provided for in this Section 11(n) shall be made successively whenever
such a dividend is declared or paid or such a subdivision, combination or
consolidation is effected.
Section 12. Certificate of Adjusted Purchase Price or Number of Shares.
Whenever an adjustment is made as provided in Section 11 or 13 hereof the
Company shall promptly (a) prepare a certificate setting forth such adjustment,
and a brief statement of the facts accounting for such adjustment, (b) file
with the Rights Agent and with each transfer agent for the Common Shares or the
Preferred Shares a copy of such certificate and (c) mail a brief summary
thereof to each holder of a Right Certificate in accordance with Section 25
hereof.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning
Power. In the event, directly or indirectly, at any time after a Person has
become an Acquiring Person, (a) the Company shall consolidate with, or merge
with and into, any other Person, (b) any Person shall consolidate with the
Company, or merge with and into the Company and the Company shall be the
continuing or surviving corporation of such merger and, in connection with such
merger, all or part of the Common Shares shall be changed into or exchanged for
stock or other securities of any other Person (or the Company) or cash or any
other property, or (c) the Company shall sell or otherwise transfer (or one or
more of its Subsidiaries shall sell or otherwise transfer), in one or more
transactions, assets or earning power aggregating 50% or more of the assets or
earning power of the Company and its Subsidiaries (taken as a whole) to any
other Person other than the Company or one or more of its wholly owned
Subsidiaries (except, in the case of each of (a), (b) and (c) above, where such
other Person is a Crescent Affiliate), then, and in each such case, proper
provision shall be made so that (i) each holder of a Right (except as otherwise
provided herein) shall thereafter have the right to receive, upon the exercise
thereof at a price equal to the then current Purchase Price multiplied by the
number of one one-hundredths of a Preferred Share for which a Right is then
exercisable, in accordance with the terms of this Agreement and in lieu of
Preferred Shares, such number of Common Shares of such other Person (including
the Company as successor thereto or as the surviving corporation) as shall
equal the result obtained by (A) multiplying the then current Purchase Price by
the number of one one-hundredths of a Preferred Share for which a Right is then
exercisable and dividing that product by (B) 50% of the then
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<PAGE> 19
Current Per Share Market Price of the Common Shares of such other Person
(determined pursuant to Section 11(d) hereof) on the date of consummation of
such consolidation, merger, sale or transfer; (ii) the issuer of such Common
Shares shall thereafter be liable for, and shall assume, by virtue of such
consolidation, merger, sale or transfer, all the obligations and duties of the
Company pursuant to this Agreement; (iii) the term "Company" shall thereafter
be deemed to refer to such issuer; and (iv) such issuer shall take such steps
(including, but not limited to, the reservation of a sufficient number of its
Common Shares in accordance with Section 9 hereof) in connection with such
consummation as may be necessary to assure that the provisions hereof shall
thereafter be applicable, as nearly as reasonably may be, in relation to the
Common Shares thereafter deliverable upon the exercise of the Rights. The
Company shall not consummate any such consolidation, merger, sale or transfer
unless prior thereto the Company and such issuer shall have executed and
delivered to the Rights Agent a supplemental agreement so providing. The
Company shall not enter into any transaction of the kind referred to in this
Section 13 if at the time of such transaction there are any rights, warrants,
instruments or securities outstanding or any agreements or arrangements which,
as a result of the consummation of such transaction, would eliminate or
substantially diminish the benefits intended to be afforded by the Rights. The
provisions of this Section 13 shall similarly apply to successive mergers or
consolidations or sales or other transfers.
Section 14. Fractional Rights and Fractional Shares. (a) The Company shall not
be required to issue fractions of Rights or to distribute Right Certificates
which evidence fractional Rights. In lieu of such fractional Rights, there
shall be paid to the registered holders of the Right Certificates with regard
to which such fractional Rights would otherwise be issuable, an amount in cash
equal to the same fraction of the Current market value of a whole Right. For
the purposes of this Section 14(a), the current market value of a whole Right
shall be the closing price of the Rights for the Trading Day immediately prior
to the date on which such fractional Rights would have been otherwise issuable.
The closing price for any day shall be the last sale price, regular way, or, in
case no such sale takes place on such day, the average of the closing bid and
asked prices, regular way, in either case, as reported in the principal
consolidated transaction reporting system with respect to securities listed or
admitted to trading on the New York Stock Exchange or, if the Rights are not
listed or admitted to trading on the New York Stock Exchange, as reported in
the principal consolidated transaction reporting system with respect to
securities listed on the principal national securities exchange on which the
Rights are listed or admitted to trading or, if the Rights are not listed or
admitted to trading on any national securities exchange, the last quoted price
or, if not so quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported on the Nasdaq National Market or such
other system then in use or, if on any such date the Rights are not quoted by
any such organization, the average of the closing bid and asked prices as
furnished by a professional market maker making a market in the Rights selected
by the Board of Directors. If on any such date no such market maker is making a
market in the Rights, the fair value of the Rights on such date as determined
in good faith by the Board of Directors shall be used.
(b) The Company shall not be required to issue fractions of Preferred
Shares (other than fractions which are integral multiples of one
one-hundredth of a Preferred Share)
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<PAGE> 20
upon exercise of the Rights or to distribute certificates which evidence
fractional Preferred Shares (other than fractions which are integral
multiples of one one-hundredth of a Preferred Share). Fractions of
Preferred Shares in integral multiples of one one-hundredth of a Preferred
Share may, at the election of the Company, be evidenced by depositary
receipts, pursuant to an appropriate agreement between the Company and a
depositary selected by it; provided that such agreement shall provide that
the holders of such depositary receipts shall have all the rights,
privileges and preferences to which they are entitled as beneficial owners
of the Preferred Shares represented by such depositary receipts. In lieu
of fractional Preferred Shares that are not integral multiples of one
one-hundredth of a Preferred Share, the Company shall pay to the
registered holders of Right Certificates at the time such Rights are
exercised as herein provided an amount in cash equal to the same fraction
of the Current market value of one Preferred Share. For the purposes of
this Section 14(b), the Current market value of a Preferred Share shall be
the closing price of a Preferred Share (as determined pursuant to the
second sentence of Section 11(d)(i) hereof) for the Trading Day
immediately prior to the date of such exercise.
(c) The holder of a Right by the acceptance of the Right expressly waives
his right to receive any fractional Rights or any fractional shares upon
exercise of a Right (except as provided above).
Section 15. Rights of Action. All rights of action in respect of this
Agreement, excepting the rights of action given to the Rights Agent under
Section 18 hereof, are vested in the respective registered holders of the Right
Certificates (and, prior to the Rights Distribution Date, the registered
holders of the Common Shares), and any registered holder of any Right
Certificate (or, prior to the Rights Distribution Date, of the Common Shares),
without the consent of the Rights Agent or of the holder of any other Right
Certificate (or, prior to the Rights Distribution Date, of the Common Shares),
may, in his own behalf and for his own benefit, enforce, and may institute and
maintain any suit, action or proceeding against the Company to enforce, or
otherwise act in respect of his right to exercise the Rights evidenced by such
Right Certificate in the manner provided in such Right Certificate and in this
Agreement. Without limiting the foregoing or any remedies available to the
holders of Rights, it is specifically acknowledged that the holders of Rights
would not have an adequate remedy at law for any breach of this Agreement and
will be entitled to specific performance of the obligations under, and
injunctive relief against actual or threatened violations of the obligations of
any Person subject to, this Agreement.
Section 16. Agreement of Right Holders. Every holder of a Right, by accepting
the same, consents and agrees with the Company and the Rights Agent and with
every other holder of a Right that:
(a) prior to the Rights Distribution Date, the Rights will be transferable
only in connection with the transfer of the Common Shares;
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<PAGE> 21
(b) after the Rights Distribution Date, the Right Certificates are
transferable only on the registry books of the Rights Agent if surrendered
at the principal office of the Rights Agent, duly endorsed or accompanied
by a proper instrument of transfer; and
(c) the Company and the Rights Agent may deem and treat the person in
whose name the Right Certificate (or, prior to the Rights Distribution
Date, the associated Common Shares Certificate) is registered as the
absolute owner thereof and of the Rights evidenced thereby
(notwithstanding any notations of ownership or writing on the Right
Certificate or the associated Common Shares Certificate made by anyone
other than the Company or the Rights Agent) for all purposes whatsoever,
and neither the Company nor the Rights Agent shall be affected by any
notice to the contrary.
Section 17. Right Certificate Holder Not Deemed a Stockholder. No holder, as
such, of any Right Certificate shall be entitled to vote, receive dividends or
be deemed for any purpose the holder of the Preferred Shares or any other
securities of the Company which may at any time be issuable on the exercise of
the Rights represented thereby, nor shall anything contained herein or in any
Right Certificate be construed to confer upon the holder of any Right
Certificate, as such, any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
stockholders (except as provided in Section 25 hereof), or to receive dividends
or subscription rights, or otherwise, until the Right or Rights evidenced by
such Right Certificate shall have been exercised in accordance with the
provisions hereof.
Section 18. Concerning the Rights Agent. The Company agrees to pay to the
Rights Agent reasonable compensation for all services tendered by it hereunder
and, from time to time, on demand of the Rights Agent, its reasonable expenses
arid counsel fees and other disbursements incurred in the administration and
execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Rights Agent for, and to
hold it harmless against, any loss, liability, or expense incurred without gross
negligence, bad faith or willful misconduct on the part of the Rights Agent,
for anything done or omitted by the Rights Agent in connection with the
acceptance and administration of this Agreement, including the costs and
expenses of defending against any claim of liability in the premises. The
Rights Agent shall be protected and shall incur no liability for, or in respect
of any action taken, suffered or omitted by it in connection with its
administration of this Agreement in reliance upon any Right Certificate or
certificate for the Preferred Shares or Common Shares or for other securities
of the Company, instrument of assignment or transfer, power of attorney,
endorsement, affidavit, letter, notice, direction, consent, certificate,
statement, or other paper or document believed by it to be genuine and to be
signed, executed and, where necessary, verified or acknowledged, by the proper
person or persons, or otherwise upon the advice of counsel as set forth in
Section 20 hereof.
Section 19. Merger or Consolidation or Change of Name of Rights Agent. Any
corporation into which the Rights Agent or any successor Rights Agent may
be merged or with which it may
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<PAGE> 22
be consolidated, or any corporation resulting from any merger or consolidation
to which the Rights Agent or any successor Rights Agent shall be a party, or
any corporation succeeding to the stock transfer or corporate trust powers of
the Rights Agent or any successor Rights Agent, shall be the successor to the
Rights Agent under this Agreement without the execution or filing of any paper
or any further act on the part of any of the parties hereto; provided that such
corporation would be eligible for appointment as a successor Rights Agent under
the provisions of Section 21 hereof. In case at the time such successor Rights
Agent shall succeed to the agency created by this Agreement, any of the Right
Certificates shall have been countersigned but not delivered, and such
successor Rights Agent may adopt the countersignature of the predecessor Rights
Agent and deliver such Right Certificates so countersigned; and, in case at
that time any of the Right Certificates shall not have been countersigned, any
successor Rights Agent may countersign such Right Certificates either in the
name of the predecessor Rights Agent or in the name of the successor Rights
Agent, and in all such cases such Right Certificates shall have the full force
provided in the Right Certificates and in this Agreement. In case at any time
the name of the Rights Agent shall be changed and at such time any of the Right
Certificates shall have been countersigned but not delivered, the Rights Agent
may adopt the countersignature under its prior name and deliver Right
Certificates so countersigned; and in case at that time any of the Right
Certificates shall not have been countersigned, the Rights Agent may
countersign such Right Certificates either in its prior name or in its changed
name, and in all such cases such Right Certificates shall have the full force
provided in the Right Certificates and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the duties and
obligations imposed by this Agreement upon the following terms and conditions,
by all of which the Company and the holders of Right Certificates, by their
acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be legal
counsel for the Company), and the opinion of such counsel shall be full
and complete authorization and protection to the Rights Agent as to any
action taken or omitted by it in good faith and in accordance with such
opinion.
(b) Whenever in the performance of its duties under this Agreement the
Rights Agent shall deem it necessary or desirable that any fact or matter
be proved or established by the Company prior to taking or suffering any
Section hereunder, such fact or matter (unless other evidence in respect
thereof be herein specifically prescribed) may be deemed to be
conclusively proved and established by a certificate signed by any one of
the Chairman of the Board, the Chief Executive Officer, the President, any
Vice President, the Treasurer or the Secretary of the Company and
delivered to the Rights Agent and such certificate shall be full
authorization to the Rights Agent for any action taken or suffered in good
faith by it under the provisions of this Agreement in reliance upon such
certificate.
(c) The Rights Agent shall be liable hereunder to the Company and any
other Person only for its own gross negligence, bad faith or willful
misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of the
statements of fact or recitals contained in this Agreement or in the Right
Certificates (except its
20
<PAGE> 23
countersignature thereof) or be required to verify the same, but all such
statements and recitals are and shall be deemed to have been made by the
Company only.
(e) The Rights Agent shall not be under any responsibility in respect of
the validity of this Agreement or the execution and delivery hereof
(except the due execution hereof by the Rights Agent) or in respect of the
validity or execution of any Right Certificate (except its
countersignature thereof; nor shall it be responsible for any breach by
the Company of any covenant or condition contained in this Agreement or in
any Right Certificate, nor shall it be responsible for any change in the
exercisability of the Rights (including the Rights becoming void pursuant
to Section 11(a)(ii) hereof) or any adjustment in the terms of the Rights
(including the manner, method or amount thereof) provided for in Section
3, 11, 13, 23 or 24, or the ascertaining of the existence of facts that
would require any such change or adjustment (except with respect to the
exercise of Rights evidenced by Right Certificates after actual notice
that such change or adjustment is required); nor shall it by any act
hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any Preferred Shares to be issued pursuant
to this Agreement or any Right Certificate or as to whether any Preferred
Shares will, when issued, be validly authorized and issued, fully paid and
nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all
such further and other acts, instruments and assurances as may reasonably
be required by the Rights Agent for the carrying out or performing by the
Rights Agent of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from
any one of the Chairman of the Board, the Chief Executive Officer, the
President, any Vice President, the Secretary or the Treasurer of the
Company, and to apply to such officers for advice or instructions in
connection with its duties, and it shall not be liable for any action
taken or suffered by it in good faith in accordance with instructions of
any such officer or for any delay in acting while waiting for those
instructions.
(h) The Rights Agent and any stockholder, director, officer or employee of
the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any
transaction in which the Company may be interested, or contract with or
lend money to the Company or otherwise act as fully and freely as though
it were not Rights Agent under this Agreement. Nothing herein shall
preclude the Rights Agent from acting in any other capacity for the
Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights or powers
hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys or agents, and the Rights Agent shall not be
answerable or accountable for any act, default, neglect or misconduct of
any such attorneys or agents or for any loss to the Company
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<PAGE> 24
resulting from any such act, default, neglect or misconduct, provided
reasonable care was exercised in the selection and continued employment
thereof.
Section 21. Change of Rights Agent. The Rights Agent or any successor Rights
Agent may resign and be discharged from its duties under this Agreement upon 30
days' notice in writing mailed to the Company and to each transfer agent of the
Common Shares or Preferred Shares by registered or certified mail, and to the
holders of the Right Certificates by first-class mail. The Company may remove
the Rights Agent or any successor Rights Agent upon 30 days' notice in writing,
mailed to the Rights Agent or successor Rights Agent, as the case may be, and
to each transfer agent of the Common Shares or Preferred Shares by registered
or certified mail, and to the holders of the Right Certificates by first-class
mail. If the Rights Agent shall resign or be removed or shall otherwise become
incapable of acting, the Company shall appoint a successor to the Rights Agent.
If the Company shall fail to make such appointment within a period of 30 days
after giving notice of such removal or after it has been notified in writing of
such resignation or incapacity by the resigning or incapacitated Rights Agent
or by the holder of a Right Certificate (who shall, with such notice, submit
his Right Certificate for inspection by the Company), then the registered
holder of any Right Certificate may apply to any court of competent
jurisdiction for the appointment of a new Rights Agent. Any appointment of a
successor Rights Agent by such a court shall be subject to the prior approval
of the Company, which approval shall not be unreasonably withheld. After
appointment, the successor Rights Agent shall be vested with the same powers,
rights, duties and responsibilities as if it had been originally named, as
Rights Agent without further act or deed; but the predecessor Rights Agent
shall deliver and transfer to the successor Rights Agent any property at the
time held by it hereunder, and execute and deliver any further assurance,
conveyance, act or deed necessary for the purpose. Not later than the effective
date of any such appointment, the Company shall file notice thereof in writing
with the predecessor Rights Agent and each transfer agent of the Common Shares
or Preferred Shares, and mail a notice thereof in writing to the registered
holders of the Right Certificates. Failure to give any notice provided for in
this Section 21, however, or any defect therein, shall not affect the legality
or validity of the resignation or removal of the Rights Agent or the
appointment of the successor Rights Agent, as the case may be.
Section 22. Issuance of New Right Certificates. Notwithstanding any of the
provisions of this Agreement or of the Rights to the contrary, the Company may,
at its option, issue new Right Certificates evidencing Rights in such form as
may be approved by the Board of Directors to reflect any adjustment or change
in the Purchase Price and the number or kind or class of shares or other
securities or property purchasable under the Right Certificates made in
accordance with the provisions of this Agreement.
Section 23. Redemption. (a) The Board of Directors may, at its option, at any
time prior to such time as any Person becomes an Acquiring Person, redeem all
but not less than all the then outstanding Rights at a redemption price of $.01
per Right, appropriately adjusted to reflect any stock split, stock dividend or
similar transaction occurring after the date
hereof (such redemption price being hereinafter referred to as the "Redemption
Price"). The redemption of the Rights by
22
<PAGE> 25
the Board of Directors may be made effective at such time, on such basis and
with such conditions as the Board of Directors, in its sole discretion, may
establish.
(b) Immediately upon the action of the Board of Directors ordering the
redemption of the Rights pursuant to paragraph (a) of this Section 23, and
without any further action and without any notice, the right to exercise
the Rights will terminate and the only right thereafter of the holders of
Rights shall be to receive the Redemption Price. The Company shall
promptly give public notice of any such redemption; provided, however,
that the failure to give, or any defect in, any such notice shall not
affect the validity of such redemption. Within 10 days after such action
of the Board of Directors ordering the redemption of the Rights, the
Company shall mail a notice of redemption to all the holders of the then
outstanding Rights at their last addresses as they appear upon the
registry books of the Rights Agent or, prior to the Rights Distribution
Date, on the registry books of the transfer agent for the Common Shares.
Any notice which is mailed in the manner herein provided shall be deemed
given, whether or not the holder receives the notice. Each such notice of
redemption will state the method by which the payment of the Redemption
Price will be made. Neither the Company nor any of its Affiliates or
Associates may redeem, acquire or purchase for value any Rights at any
time in any manner other than that specifically set forth in this Section
23 or in Section 24 hereof, and other than in connection with the purchase
of Common Shares prior to the Rights Distribution Date.
Section 24. Exchange. (a) The Board of Directors may, at its option, at any
time after any Person becomes an Acquiring Person, exchange all or part of the
then outstanding and exercisable Rights (which shall not include Rights that
have become void pursuant to the provisions of Section 11(a)(ii) hereof) for
Common Shares at an exchange ratio of one Common Share per Right, appropriately
adjusted to reflect any stock split, stock dividend or similar transaction
occurring after the date hereof (such exchange ratio being hereinafter referred
to as the "Exchange Ratio"). Notwithstanding the foregoing, the Board of
Directors shall not be empowered to effect such exchange at any time after any
Person (other than the Company, any Subsidiary of the Company, any employee
benefit plan of the Company or of any Subsidiary of the Company or any entity
holding Common Shares for or pursuant to the terms of any such plan or, any
Crescent Affiliate), together with all Affiliates and Associates of such Person,
becomes the Beneficial Owner of 50% or more of the Common Shares then
outstanding.
(b) Immediately upon the action of the Board of Directors ordering the
exchange of any Rights pursuant to paragraph (a) of this Section 24 and
without any further action and without any notice, the right to exercise
such Rights shall terminate and the only right thereafter of a holder of
such Rights shall be to receive that number of Common Shares equal to the
number of such Rights held by such holder multiplied by the Exchange
Ratio. The Company shall promptly give public notice of any such exchange;
provided, however, that the failure to give, or any defect in, such notice
shall not affect the validity of such exchange. The Company promptly shall
mail a notice of any such exchange to all of the holders of such Rights at
their last addresses as they appear upon the registry books
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<PAGE> 26
of the Rights Agent. Any notice which is mailed in the manner herein
provided shall be deemed given, whether or not the holder receives the
notice. Each such notice of exchange will state the method by which the
exchange of the Common Shares for Rights will be effected and, in the
event of any partial exchange, the number of Rights which will be
exchanged. Any partial exchange shall be effected pro rata based on the
number of Rights (other than Rights which have become void pursuant to the
provisions of Section 11(a)(ii) hereof) held by each holder of Rights.
(c) In the event that there shall not be sufficient Common Shares issued
but not outstanding or authorized but unissued to permit any exchange of
Rights as contemplated in accordance with this Section 24, the Company
shall take all such action a may be necessary to authorize additional
Common Shares for issuance upon exchange of the Rights. In the event the
Company shall, after good faith effort, be unable to take all such action
as may be necessary to authorize such additional Common Shares, the
Company shall substitute, for each Common Share that would otherwise be
issuable upon exchange of a Right, a number of Preferred Shares or
fraction thereof such that the Current Per Share Market Price of one
Preferred Share multiplied by such number or fraction is equal to the
Current Per Share Market Price of one Common Share as of the date of
issuance of such Preferred Shares or fraction thereof.
(d) The Company shall not be required to issue fractions of Common Shares
or to distribute certificates which evidence fractional Common Shares. In
lieu of such fractional Common Shares, the Company shall pay to the
registered holders of the Right Certificates with regard to which such
fractional Common Shares would otherwise be issuable an amount in cash
equal to the same fraction of the current market value of a whole Common
Share. For the purposes of this paragraph (d), the current market value of
a whole Common Share shall be the closing price of a Common Share (as
determined pursuant to the second sentence of Section 11(d)(i) hereof) for
the Trading Day immediately prior to the date of exchange pursuant to this
Section 24.
Section 25. Notice of Events. (a) In case the Company shall propose (i) to pay
any dividend payable in stock of any class to the holders of its Preferred
Shares or to make any other distribution to the holders of its Preferred Shares
(other than a regular quarterly cash dividend), (ii) to offer to the holders of
its Preferred Shares rights or warrants to subscribe for or to purchase any
additional Preferred Shares or shares of stock of any class or any other
securities, rights or options, (iii) to effect any reclassification of its
Preferred Shares (other than a reclassification involving only the subdivision
of outstanding Preferred Shares), (iv) to effect any consolidation or merger
into or with, or to effect any sale or other transfer (or to permit one or more
of its Subsidiaries to effect any sale or other transfer), in one or more
transactions, of 50% or more of the assets or earning power of the Company and
its Subsidiaries (taken as a whole) to, any other Person, (v) to effect the
liquidation, dissolution or winding up of the Company, or (vi) to declare or
pay any dividend on the Common Shares payable in Common Shares or to effect a
subdivision, combination or consolidation of the Common Shares (by
reclassification or otherwise than by payment of dividends in Common Shares),
then, in each such case, the Company shall give to each holder of a Right
Certificate, in accordance with Section 26 hereof, a
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<PAGE> 27
notice of such proposed action, which shall specify the record date for the
purposes of such Stock dividend, or distribution of rights or warrants, or the
date on which such reclassification, consolidation, merger, sale, transfer,
liquidation, dissolution, or winding up is to take place and the date of
participation therein by the holders of the Common Shares and/or Preferred
Shares, if any such date is to be fixed, and such notice shall be so given in
the case of any action covered by clause (i) or (ii) above at least 10 days
prior to the record date for determining holders of the Preferred Shares for
purposes of such action, and in the case of any such other action, at least 10
days prior to the date of the taking of such proposed action or the date of
participation therein by the holders of the Common Shares and/or Preferred
Shares, whichever shall be the earlier.
(b) In case the event set forth in Section 11(a)(ii) hereof shall occur,
then the Company shall as soon as practicable thereafter give to each
holder of a Right Certificate, in accordance with Section 26 hereof, a
notice of the occurrence of such event, which notice shall describe such
event and the consequences of such event to holders of Rights under
Section 11(a)(ii) hereof.
Section 26. Notices. Notices or demands authorized by this Agreement to be
given or made by the Rights Agent or by the holder of any Right Certificate to
or on the Company shall be sufficiently given or made if sent by first-class
mail, postage prepaid, addressed (until another address is filed in writing
with the Rights Agent) as follows:
Crescent Operating, Inc.
777 Main Street
Fort Worth, Texas 76102
Attention: Corporate Secretary
Subject to the provisions of Section 21 hereof, any notice or demand authorized
by this Agreement to be given or made by the Company or by the holder of any
Right Certificate to or on the Rights Agent shall be sufficiently given or made
it sent by first-class mail, postage prepaid, addressed (until another address
is filed in writing with the Company) as follows:
BankBoston, N.A.
c/o Boston EquiServe Limited Partnership
150 Royall Street
Canton, MA 02021
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Right Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Rights Agent.
Section 27. Supplements and Amendments. The Company may from time to time
supplement or amend this Agreement without the approval of any holders of Right
Certificates in order to cure any ambiguity, to correct or supplement any
provision contained herein which may be defective or inconsistent with any
other provisions herein, or to make any other provisions with
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<PAGE> 28
respect to the Rights which the Company may deem necessary or desirable, any
such supplement or amendment to be evidenced by a writing signed by the Company
and the Rights Agent; provided, however, that from and after such time as any
Person becomes an Acquiring Person, this Agreement shall not be amended in any
manner which would adversely affect the interests of the holders of Rights.
Section 28. Successors. All the covenants and provisions of this Agreement by
or for the benefit of the Company or the Rights Agent shall bind and inure to
the benefit of their respective successors and assigns hereunder.
Section 29. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any Person other than the Company, the Rights Agent and
the registered holders of the Right Certificates (and, prior to the Rights
Distribution Date, the Common Shares) any legal or equitable right, remedy or
claim under this Agreement, but this Agreement shall be for the sole and
exclusive benefit of the Company, the Rights Agent and the registered holders
of the Right Certificates (and, prior to the Rights Distribution Date, the
Common Shares).
Section 30. Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction or other authority
to be invalid, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated.
Section 31. Governing Law. This Agreement and each Right Certificate issued
hereunder shall be deemed to be a contract made under the laws of the State of
Delaware and for all purposes shall be governed by and construed in accordance
with the laws of such State applicable to contracts to be made and performed
entirely within such State.
Section 32. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
Section 33. Descriptive Headings. Descriptive headings of the several Sections
of this Agreement are inserted for convenience only and shall not control or
affect the meaning or construction of any of the provisions hereof.
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<PAGE> 29
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed and attested, all as of the day and year first above written.
Attest: CRESCENT OPERATING, INC.
By By
Name: Name:
Title: Title:
Attest: BANKBOSTON, N.A.
By By
Name: Name:
Title: Title:
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<PAGE> 30
Exhibit A
FORM
of
CERTIFICATE OF DESIGNATIONS
of
SERIES A JUNIOR PREFERRED STOCK
of
CRESCENT OPERATING, INC.
(Pursuant to Section 151 of the Delaware General Corporation Law)
Crescent Operating, Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware (hereinafter called the
"Corporation"), hereby certifies that the following resolution was adopted by
unanimous written consent of the Board of Directors of the Corporation as of
June 3, 1997:
RESOLVED, that pursuant to the authority granted to and vested in the Board of
Directors of this Corporation (hereinafter called the "Board of Directors" or
the "Board") in accordance with the provisions of the Certificate of
Incorporation, the Board of Directors hereby creates a series of Preferred
Stock, par value $.01 per share, of the Corporation (the "Preferred Stock") and
hereby states the designation and number of shares, and fixes the relative
rights, preferences, and limitations thereof as follows:
Series A Junior Preferred Stock:
Section 1. Designation and Amount. The shares of such series shall be
designated as "Series A Junior Preferred Stock" (the "Series A Preferred
Stock") and the number of shares constituting the Series A Preferred Stock
shall be 225,000. Such number of shares may be increased or decreased by
resolution of the Board of Directors; provided, that no decrease shall reduce
the number of shares of Series A Preferred Stock to a number less than the
number of shares then outstanding plus the number of shares reserved for
issuance upon the exercise of outstanding options, rights or warrants or upon
the conversion of any outstanding securities issued by the Corporation
convertible into Series A Preferred Stock.
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<PAGE> 31
Section 2. Dividends and Distributions.
(a) Subject to the rights of the holders of any shares of any series of
Preferred Stock (or any similar stock) ranking prior and superior to the
Series A Preferred Stock with respect to dividends, the holders of shares
of Series A Preferred Stock, in preference to the holders of Common Stock,
par value $.01 per share (the "Common Stock"), of the Corporation, and of
any other junior stock, shall be entitled to receive, when, as and if
declared by the Board of Directors out of funds legally available for the
purpose, quarterly dividends payable in cash on the first day of March,
June, September and December in each year (each such date being referred
to herein as a "Quarterly Dividend Payment Date"), commencing on the first
Quarterly Dividend Payment Date after the first issuance of a share or
fraction of a share of Series A Preferred Stock, in an amount per share
(rounded to the nearest cent) equal to the greater of (i) $1 or (ii)
subject to the provision for adjustment hereinafter set forth, 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 a dividend payable in shares of Common
Stock or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date or, with respect to
the first Quarterly Dividend Payment Date, since the first issuance of any
share or fraction of a share of Series A Preferred Stock. In the event the
Corporation shall at any time declare or pay any dividend on the Common
Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of
Common Stock) into a greater or lesser number of shares of Common Stock,
then in each such case the amount to which holders of shares of Series A
Preferred Stock were entitled immediately prior to such event under clause
(ii) of the preceding sentence shall be adjusted by multiplying such
amount by a fraction, the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator
of which is the number of shares of Common Stock that were outstanding
immediately prior to such event.
(b) The Corporation shall declare a dividend or distribution on the Series
A Preferred Stock as provided in paragraph (a) of this Section immediately
after it declares a dividend or distribution on the Common Stock (other
than a dividend payable in shares of Common Stock); provided that, in the
event no dividend or distribution shall have been declared on the Common
Stock during the period between any Quarterly Dividend Payment Date and
the next subsequent Quarterly Dividend Payment Date, a dividend of $1 per
share on the Series A Preferred Stock shall nevertheless be payable on
such subsequent Quarterly Dividend Payment Date.
(c) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Preferred Stock from the Quarterly Dividend Payment
Date next preceding the date of issue of such shares, unless the date of
issue of such shares is prior to the record date for
29
<PAGE> 32
the first Quarterly Dividend Payment Date, in which case dividends on such
shares shall begin to accrue from the date of issue of such shares, or
unless the date of issue is a Quarterly Dividend Payment Date or is a date
after the record date for the determination of holders of shares of Series
A Preferred Stock entitled to receive a quarterly dividend and before such
Quarterly Dividend Payment Date, in either of which events such dividends
shall begin to accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall not bear interest.
Dividends paid on the shares of Series A Preferred Stock in an amount less
than the total amount of such dividends at the time accrued and payable on
such shares shall be allocated pro rata on a share-by-share basis among
all such shares at the time outstanding. The Board of Directors may fix a
record date for the determination of holders of shares of Series A
Preferred Stock entitled to receive payment of a dividend or distribution
declared thereon, which record date shall be not more than 60 days prior
to the date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series A Preferred Stock
shall have the following voting rights:
(a) Subject to the provision for adjustment hereinafter set forth, each
share of Series A Preferred Stock shall entitle the holder thereof to 100
votes on all matters submitted to a vote of the stockholders of the
Corporation. In the event the Corporation shall at any time declare or pay
any dividend on the Common Stock payable in shares of Common Stock, or
effect a subdivision or combination or consolidation of the outstanding
shares of Common Stock (by reclassification or otherwise than by payment
of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the number of votes per
share to which holders of shares of Series A Preferred Stock were entitled
immediately prior to such event shall be adjusted by multiplying such
number by a fraction, the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator
of which is the number of shares of Common Stock that were outstanding
immediately prior to such event.
(b) Except as otherwise provided herein, in any other Certificate of
Designations creating a series of Preferred Stock or any similar stock, or
by law, the holders of shares of Series A Preferred Stock and the holders
of shares of Common Stock and any other capital stock of the Corporation
having general voting rights shall vote together as one class on all
matters submitted to a vote of stockholders of the Corporation.
(c) Except as set forth herein, or as otherwise provided by law, holders
of Series A Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to
vote with holders of Common Stock as set forth herein) for taking any
corporate action.
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Section 4. Certain Restrictions.
(a) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preferred Stock as provided in Section 2 are in
arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series A Preferred
Stock outstanding shall have been paid in full, the Corporation shall not:
(i) declare or pay dividends, or make any other distributions, on
any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred
Stock;
(ii) declare or pay dividends, or make any other distributions, on
any shares of stock ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up) with the Series A
Preferred Stock, except dividends paid ratably on the Series A
Preferred Stock and all such parity stock on which dividends are
payable or in arrears in proportion to the total amounts to which the
holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred
Stock, provided that the Corporation may at any time redeem, purchase
or otherwise acquire shares of any such junior stock in exchange for
shares of any stock of the Corporation ranking junior (either as to
dividends or upon dissolution, liquidation or winding up) to the
Series A Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for consideration any
shares of Series A Preferred Stock, or any shares of stock ranking on
a parity with the Series A Preferred Stock, except in accordance with
a purchase offer made in writing or by publication (as determined by
the Board of Directors) to all holders of such shares upon such terms
as the Board of Directors, after consideration of the respective
annual dividend rates and other relative rights and preferences of
the respective series and classes, shall determine in good faith will
result in fair and equitable treatment among the respective series or
classes.
(b) The Corporation shall not permit any subsidiary of the Corporation to
purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (a) of this
Section 4, purchase or otherwise acquire such shares at such time and in
such manner.
Section 5. Reacquired Shares. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
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<PAGE> 34
subject to the conditions and restrictions on issuance set forth herein, in the
Certificate of Incorporation, or in any other Certificate of Designations
creating a series of Preferred Stock or any similar stock or as otherwise
required by law.
Section 6. Liquidation, Dissolution or Winding Up. Upon any liquidation,
dissolution or winding up of the Corporation, no distribution shall be made (1)
to the holders of shares of stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding up) to the Series A Preferred Stock
unless, prior thereto, the holders of shares of Series A Preferred Stock shall
have received $100 per share, plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not declared, to the date of
such payment, provided that the holders of shares of Series A Preferred Stock
shall be entitled to receive an aggregate amount per share, subject to the
provision for adjustment hereinafter set forth, equal to 100 times the
aggregate amount to be distributed per share to holders of shares of Common
Stock, or (2) to the holders of shares of stock ranking on a parity (either as
to dividends or upon liquidation, dissolution or winding up) with the Series A
Preferred Stock, except distributions made ratably on the Series A Preferred
Stock and all such parity stock in proportion to the total amounts to which the
holders of all such shares are entitled upon such liquidation, dissolution or
winding up. In the event the Corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock,
then in each such case the aggregate amount to which holders of shares of
Series A Preferred Stock were entitled immediately prior to such event under
the proviso in clause (1) of the preceding sentence shall be adjusted by
multiplying such amount by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the Corporation shall enter into
any consolidation, merger, combination or other transaction in which the shares
of Common Stock are exchanged for or changed into other stock or securities,
cash and/or any other property, then in any such case each share of Series A
Preferred Stock shall at the same time be similarly exchanged or changed into
an amount per share, subject to the provision for adjustment hereinafter set
forth, equal to 100 times the aggregate amount of stock, securities, cash
and/or any other property (payable in kind), as the case may be, into which or
for which each share of Common Stock is changed or exchanged. In the event the
Corporation shall at any time declare or pay any dividend on the Common Stock
payable in shares of Common Stock or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the
amount set forth in the preceding sentence with respect to the exchange or
change of shares of Series A Preferred Stock shall be adjusted by multiplying
such amount by a fraction the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the
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<PAGE> 35
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 8. No Redemption. The shares of Series A Preferred Stock shall not be
redeemable.
Section 9. Rank. The Series A Preferred Stock shall rank, with respect to the
payment of dividends and the distribution of assets, junior to all series of
any other class of the Corporation's Preferred Stock.
Section 10. Amendment. The Certificate of Incorporation of the Corporation
shall not be amended in any manner which would materially alter or change the
powers, preferences or special rights of the Series A Preferred Stock so as to
affect them adversely without the affirmative vote of the Holders of at least
two-thirds of the outstanding shares of Series A Preferred Stock, voting
together as a single class.
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<PAGE> 36
IN WITNESS WHEREOF, this Certificate of Designations is executed on behalf of
the Corporation by its _______________________ and attested by its
_________________ this ____ day of _________________, 1997.
Attest:
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<PAGE> 37
Exhibit B
Form of Right Certificate
Certificate No. R-
_________________ Rights
NOT EXERCISABLE AFTER _____ __, 2007 OR EARLIER IF
REDEMPTION OR EXCHANGE OCCURS. THE RIGHTS ARE
SUBJECT TO REDEMPTION AT $.01 PER RIGHT AND TO
EXCHANGE ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT.
Right Certificate
CRESCENT OPERATING, INC.
This certifies that ______________ or registered assigns, is the registered
owner of the number of Rights set forth above, each of which entities the owner
thereof, subject to the terms, provisions and conditions of the Rights
Agreement, dated as of _____ __, 1997 (the "Rights Agreement"), between
Crescent Operating, Inc., a Delaware corporation (the "Company"), and The First
National Bank Of Boston (the "Rights Agent"), to purchase from the Company at
any time after the Rights Distribution Date (as such term is defined in the
Rights Agreement) and prior to 5:00 P.M., New York time, on _____ __, 2007 at
the principal office of the Rights Agent, or at the office of its successor as
Rights Agent, one one-hundredth of a fully paid non-assessable share of Series
A Junior Participating Preferred Stock, par value $.01 per share, of the
Company (the "Preferred Shares"), at a purchase price of $__ per one
one-hundredth of a Preferred Share (the "Purchase Price"), upon presentation
and surrender of this Right Certificate with the Form of Election to Purchase
duly executed. The number of Rights evidenced by this Right Certificate (and
the number of one one-hundredths of a Preferred Share which may be purchased
upon exercise hereof) set forth above, and the Purchase Price set forth above,
are the number and Purchase Price as of _____ __, 1997, based on the Preferred
Shares as constituted at such date. As provided in the Rights Agreement, the
Purchase Price and the number of one one-hundredths of a Preferred Share which
may be purchased upon the exercise of the Rights evidenced by this Right
Certificate are subject to modification and adjustment upon the happening of
certain events.
This Right Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Right Certificates. Copies of
the Rights Agreement are on file at the principal executive offices of the
Company and the offices of the Rights Agent.
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<PAGE> 38
This Right Certificate, with or without other Right Certificates, upon
surrender at the principal office of the Rights Agent, may be exchanged for
another Right Certificate or Right Certificates of like tenor and date
evidencing Rights entitling the holder to purchase a like aggregate number of
Preferred Shares as the Rights evidenced by the Right Certificate or Right
Certificates surrendered shall have entitled such holder to purchase. If this
Right Certificate shall be exercised in part, the holder shall be entitled to
receive upon surrender hereof another Right Certificate or Right Certificates
for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced by this
Right Certificate (i) may be redeemed by the Company at a redemption price of
$.01 per Right or (ii) may be exchanged in whole or in part for Preferred
Shares or shares of the Company's Common Stock.
No fractional Preferred Shares will be issued upon the exercise of any Right or
Rights evidenced hereby (other than fractions which are integral multiples of
one one-hundredth of a Preferred Share, which may, at the election of the
Company, be evidenced by depositary receipts), but, in lieu thereof, a cash
payment will be made, as provided in the Rights Agreement.
No holder of this Right Certificate shall be entitled to vote or receive
dividends or be deemed for any purpose the holder of the Preferred Shares or of
any other securities of the Company which may at any time be issuable on the
exercise hereof, nor shall anything contained in the Rights Agreement or herein
be construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors
or upon any matter submitted to stockholders at any meeting thereof, or to give
or withhold consent to any corporate action, or to receive notice of meetings
or other actions affecting stockholders (except as provided in the Rights
Agreement), or to receive dividends or subscription rights, or otherwise, until
the Right or Rights evidenced by this Right Certificate shall have been
exercised as provided in the Rights Agreement.
This Right Certificate shall not be valid or obligatory for any purpose until
it shall have been countersigned by the Rights Agent.
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<PAGE> 39
WITNESS the facsimile signature of the proper officers of the Company and its
corporate seal. Dated as of ________________________.
ATTEST: CRESCENT OPERATING, INC.
By: By:
Name: Name:
Title: Title:
Countersigned: BANKBOSTON, N.A.
By:
Name:
Title:
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<PAGE> 40
Form of Reverse Side of Right Certificate
FORM OF ASSIGNMENT
(To be executed by the registered holder if
such holder desires to transfer the Right Certificate.)
FOR VALUE RECEIVED __________________ hereby sells, assigns and transfers unto
________________________________________________________________________________
(Please print name and address of transferee)
this Right Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint Attorney, to transfer the
within Right certificate on the books of the within-named Company, with full
power of substitution.
Dated: ____________________________
Signature
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a registered national
securities exchange, a member of the National Association of Securities
Dealers, Inc., or a commercial bank or trust company having an office or
correspondent in the United States or by another eligible guarantor
institution, as defined in Rule 17Ad-15 under the Securities Exchange Act of
1934.
The undersigned hereby certifies that the Rights evidenced by this Right
Certificate are not beneficially owned by an Acquiring Person or an Affiliate
or Associate thereof (as defined in the Rights Agreement).
Signature
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<PAGE> 41
Form of Reverse Side of Right Certificate -- continued
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise
Rights represented by the Right Certificate.)
To: CRESCENT OPERATING, INC.
The undersigned hereby irrevocably elects to exercise ______________ Rights
represented by this Right Certificate to purchase the Preferred Shares issuable
upon the exercise of such Rights and requests that certificates for such
Preferred Shares be issued in the name of:
Please insert social security or other identifying number
(Please print name and address)
If such number of Rights shall not be all the Rights evidenced by this Right
Certificate, a new Right Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social security or other identifying number
(Please print name and address)
Dated: ________________________
Signature
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a registered national
securities exchange, a member of the National Association of Securities
Dealers, Inc., or a commercial bank or trust company having an office or
correspondent in the United States or by another eligible guarantor
institution, as defined in Rule 17Ad-15 under the Securities Exchange Act of
1934.
The undersigned hereby certifies that the Rights evidenced by this Right
Certificate are not beneficially owned by an Acquiring Person or an Affiliate
or Associate thereof (as defined in the Rights Agreement).
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<PAGE> 42
Signature
NOTICE
The signature in the Form of Assignment or Form of Election to Purchase, as the
case may be, must conform to the name as written upon the face of this Right
Certificate in every particular, without alteration or enlargement or any
change whatsoever.
In the event the certification set forth above in the Form of Assignment or the
Form of Election to Purchase, as the case may be, is not completed, the Company
and the Rights Agent will deem the beneficial owner of the Rights evidenced by
this Right Certificate to be an Acquiring Person or an Affiliate or Associate
thereof (as defined in the Rights Agreement) and such Assignment or Election to
Purchase will not be honored.
40
<PAGE> 43
Exhibit C
FORM OF
SUMMARY OF RIGHT TO PURCHASE
PREFERRED SHARES
On _____ __, 1997, the Board of Directors of Crescent Operating, Inc. (the
"Company") declared a dividend of one preferred share purchase right (a
"Right") for each outstanding share of common stock, par value $.01 per share,
of the Company (the "Common Shares"). The dividend is payable on _____ __, 1997
(the "Record Date") to the stockholders of record on that date. Each Right
entitles the registered holder to purchase from the Company one one-hundredth
of a share of Series A Junior Participating Preferred Stock, par value $.01 per
share, of the Company (the "Preferred Shares") at a price of $5 per one
one-hundredth of a Preferred Share (the "Purchase Price"), subject to
adjustment. The description and terms of the Rights are set forth in a Rights
Agreement (the "Rights Agreement") between the Company and The First National
Bank Of Boston, as Rights Agent (the "Rights Agent").
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 Common
Shares or (ii) 10 business days (or such later date as may be determined by
action of the Board of Directors of the Company prior to such time as any
person or group of affiliated persons 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 the outstanding Common Shares
(the earlier of such dates being the "Rights Distribution Date"), the Rights
will be evidenced, with respect to any of the Common Share certificates
Outstanding as of the Record Date, by such Common Share certificate with a copy
of this Summary of Rights attached thereto. The Rights Agreement contains
exceptions from its operating provision for Crescent and its affiliates and
associates.
The Rights Agreement provides that, until the Rights Distribution Date (or
earlier redemption or expiration of the Rights), the Rights will be transferred
with and only with the Common Shares. Until the Rights Distribution Date (or
earlier redemption or expiration of the Rights), new Common Share certificates
issued after the Record Date upon transfer or new issuance of Common Shares
will contain a notation incorporating the Rights Agreement by reference. Until
the Rights Distribution Date (or earlier redemption or expiration of the
Rights), the surrender for transfer of any certificates for Common Shares
outstanding as of the Record Date, even without such notation or a copy of this
Summary of Rights being attached thereto, will also constitute the transfer of
the Rights associated with the Common Shares represented by such certificates.
As soon as practicable following the Rights Distribution Date, separate
certificates evidencing the Rights ("Right Certificates") will be mailed to
holders of record of the Common Shares as of the close of business on the
Rights Distribution Date and such separate Right Certificates alone will
evidence the Rights.
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<PAGE> 44
The Rights are not exercisable until the Rights Distribution Date. The Rights
will expire on the date which is the tenth anniversary of the Record Date
(the "Final Expiration Date"), unless the Final Expiration Date is extended or
unless the Rights are earlier redeemed or exchanged by the Company, in each
case, as described below.
The Purchase Price payable, and the number of Preferred Shares or other
securities or property issuable, upon exercise of the Rights are 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
Preferred Shares; (ii) upon the grant to holders of the Preferred Shares of
certain rights or warrants to subscribe for or purchase Preferred Shares at a
price, or securities convertible into Preferred Shares with a conversion price,
less than the then-current market price of the Preferred Shares; or (iii) upon
the distribution to holders of the Preferred Shares of evidences of
indebtedness or assets (excluding regular periodic cash dividends paid out of
earnings or retained earnings or dividends payable in Preferred Shares) or of
subscription rights or warrants (other than those referred to above).
The number of outstanding Rights and the number of one one-hundredths of a
Preferred Share issuable upon exercise of each Right are also subject to
adjustment in the event of a stock split of the Common Shares or a stock
dividend on the Common Shares payable in Common Shares or subdivisions,
consolidations or combinations of the Common Shares occurring, in any such
case, prior to the Rights Distribution Date.
Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each 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 Common Share. In the event of
liquidation, the holders of the Preferred Shares will be entitled to a minimum
preferential liquidation payment of $100 per share but will be entitled to an
aggregate payment of 100 times the payment made per Common Share. Each
Preferred Share will have 100 votes, voting together with the Common Shares.
Finally, in the event of any merger, consolidation or other transaction in
which Common Shares are exchanged, each Preferred Share will be entitled to
receive 100 times the amount received per Common Share. These rights are
protected by customary antidilution provisions.
Because of the nature of the Preferred Shares' dividend, liquidation and voting
rights, the value of the one one-hundredth interest in a Preferred Share
purchasable upon exercise of each Right should approximate the value of one
Common Share.
In the event that the Company 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 has become 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. In the event that any person or group of
affiliated or associated persons becomes an Acquiring Person,
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<PAGE> 45
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
Common Shares having a market value of two times the exercise price of the
Right.
At any time after any person or group becomes an Acquiring Person and prior to
the acquisition by such person or group of 50% or more of the outstanding
Common Shares, the Board of Directors of the Company may exchange the Rights
(other than Rights owned by such person or group which will have become void),
in whole or in part, at an exchange ratio of one Common Share, or one
one-hundredth of a Preferred Share, per Right (subject to adjustment).
With certain exceptions, no adjustment in the Purchase Price will be required
until cumulative adjustments require an adjustment of at least 1% in such
Purchase Price.
No fractional Preferred Shares will be issued (other than fractions which are
integral multiples of one one-hundredth of a 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
Preferred Shares on the last trading day prior to the date of exercise.
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 then
Outstanding Common Shares, the Board of Directors of the Company 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 with such conditions as the Board of Directors in its sole
discretion may establish. Immediately upon any redemption of the Rights, the
right to exercise the Rights will terminate and the only right of the holders
of Rights will be to receive the Redemption Price.
The terms of the Rights may be amended by the Board of Directors of the Company
without the consent of the holders of the Rights, except 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 the Company, including, without limitations the right to vote
or to receive dividends.
A copy of the Rights Agreement has been filed with the Securities and Exchange
Commission as an Exhibit to a Registration Statement on Form S-1 (Registration
No. 333-25223). A copy of the Rights Agreement is available free of charge from
the Company. This summary description of the Rights does not purport to be
complete and is qualified in its entirety by reference to the Rights Agreement,
which is hereby incorporated herein by reference.
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<PAGE> 1
EXHIBIT 8
June 11, 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, as amended. 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 $29.4 million. Of that
amount, approximately $14.1 million was contributed in cash and approximately
$15.3 million was loaned to Crescent Operating pursuant to a five-year term
loan (the "Note"). Approximately $9.9 million outstanding under the Note was
repaid on June 11, 1997 as a result of the sale by Crescent Operating to an
affiliated entity of a 12.38% limited partner interest in the partnership that
owns the Dallas Mavericks. The Note is recourse and is secured, directly or
through negative pledges, by the 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 11, 1997
Page 2
Inc. and owned by Crescent Operating and, upon acquisition, 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
$20.4 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 to be held by a wholly owned subsidiary of Magellan, 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 11, 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, Crescent
Operating and CBHS
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 (File No. 333-25223), as amended;
<PAGE> 4
Crescent Operating, Inc.
June 11, 1997
Page 4
7. the Certificate of Incorporation of Crescent Operating dated
April 1, 1997;
8. the First Amended and Restated Certificate of Incorporation
of Crescent Operating (the "Restated Certificate");
9. the 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 11, 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 rights contributed to Crescent Operating to acquire the Assets were
recently acquired as part of 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 11, 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 11, 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 11, 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 11, 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 11, 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 11, 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 11, 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 of the Company 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 Board or
Committee fails to so comply, it will be deemed null and void to the extent
permitted by law and deemed advisable by the Board or 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 Board or Committee may grant Options to Employees and
Advisors in accordance with such determinations as the Board or 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 Board or 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 Board or 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
-3-
<PAGE> 4
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 Board or 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, and each Outside Director of
Crescent Real Estate Equities Company shall be granted an Option to purchase one
thousand four hundred (1,400) shares of Common Stock on May 13, 1997. Each
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 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 Board or 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 Board or 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,
directly 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.
AMENDED 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
of the Company 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 of the Company 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 May 7,
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 or a member of the Board of Trust Managers of Crescent Real Estate
Equities 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 8, 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 (as defined under Section 3401(c) of
the Code and the regulations thereunder) of the Company or of any of the
Subsidiaries of the Company, or any Affiliated Company.
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 or an Employee of a Subsidiary or Affiliated Company.
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. Amended 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 10.6
LINE OF CREDIT
CREDIT AND SECURITY AGREEMENT
THIS LINE OF CREDIT 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 has requested that the Lender extend a credit
facility (the "Loan") in the maximum aggregate principal amount of $20,000,000
for the purpose of permitting the Borrower to make certain investments
identified herein;
WHEREAS, the Lender is willing to extend 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:
"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.
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"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.
"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.
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"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.
"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.
"Loan" has the meaning set forth in the recitals hereto.
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"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 the later to occur of (a) May 21, 2002 or (b) the
fifth anniversary of the date of the last Application for Advance funded
by the Lender hereunder; provided, however, that in no event shall the Maturity
Date be later than June 22, 2007.
"Note" means the promissory note of the Borrower payable to the order of
the Lender under the terms of this Agreement, 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 Twenty Million Dollars ($20,000,000.00), 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 dated May 8, 1997 executed
and delivered by the Borrower, as the same may be amended, supplemented or
otherwise modified from time to time.
"Secured Obligations" means the collective reference to the unpaid
principal of and interest on the 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 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.
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"Term Loan Credit and Security Agreement" means the Credit and Security
Agreement dated as of May 8, 1997 between the Borrower and the Lender, as such
agreement may be amended, supplemented or otherwise modified from time to time.
"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.
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") each such Advance to be a minimum
amount of $1,000,000.00), not more than once per month, up to an
aggregate amount of Twenty Million Four Hundred Thousand Dollars
($20,400,000.00) (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.
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(b) Within the limits of this Section 2.1, during the term hereof, the
Borrower may borrow, repay, and reborrow in accordance with the terms
and conditions of this Agreement.
(c) For each Advance, 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.
(f) The Borrower shall have the right to make requests for Advances
during the period beginning on the date hereof and continuing through
June 15, 2002. The Lender shall have no obligation to fund any
Applications for Advance submitted after such date.
SECTION 2.2 The Note.
(a) The Loan will be evidenced by the Note. 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.
(b) Notwithstanding any other provision of this Agreement, 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
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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) 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.
(d) Notwithstanding Section 2.3(c), if the sum of (i) the amount of
interest to be paid by the Borrower to the Lender pursuant to this
Agreement and (ii) the amount of principal and interest to be paid by
the Borrower to the Lender pursuant to the Term Loan Credit and
Security Agreement, 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 interest otherwise due pursuant to
the terms hereof in excess of the amount of EBITDA of the Borrower
for the immediately preceding calendar quarter.
(e) Accrued interest not paid when due shall be compounded quarterly and
added to the outstanding principal amount of the Loan.
(f) 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).
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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., Dallas Basketball Limited, Hicks Muse Tate &
Furst Equity Fund II, LP, Charter Behavioral Health Systems, LLC (including
the satisfaction of obligations to make ongoing investments in such entities),
and (ii) 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 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;
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(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 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 C 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,
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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 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.
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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 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
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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
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,
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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
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
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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 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
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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 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
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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.
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.
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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
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.
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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.
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
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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:
(a) 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.
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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
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.
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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.
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.
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(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
(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
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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:
(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)
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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) any Default or Event of Default shall have occurred and be continuing
under the Term Loan Credit and Security Agreement.
(g) 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;
(h) 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 under the federal bankruptcy laws or any state
insolvency laws as now or hereafter in effect;
(i) a 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
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Borrower; provided that in the case of any of the Events of Default
specified in clause (f) or (g) 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 8.26 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 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
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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 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
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<PAGE> 27
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 Term Loan Credit and
Security Agreement, in its sole discretion, against the Secured Obligations
under the Term Loan Credit and Security Agreement or the Secured Obligations
under this Agreement.
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> 29
Exhibits and Schedules:
Exhibit A: Application for Advance
Exhibit B: Note
Exhibit C: Certificate
Schedule 1: Location of the Inventory and Equipment
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<PAGE> 30
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 Line of Credit 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> 31
May 21, 1997
LINE OF CREDIT NOTE
$20,400,000.00
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 Twenty Million Four
Hundred Thousand and No/100 Dollars ($20,400,000.00), 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 Line of Credit
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 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> 32
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> 33
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
-3-
<PAGE> 34
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 10.8
ASSIGNMENT OF LIMITED PARTNERSHIP INTEREST
THIS ASSIGNMENT OF LIMITED PARTNERSHIP INTEREST ("Assignment") is made
effective the 11th day of June, 1997 from CRESCENT OPERATING, INC.
("Assignor"), a Delaware corporation, to DBL HOLDINGS, INC., a Texas
corporation ("Assignee") whose address is 777 Main Street, Suite 2700, Fort
Worth, Texas 76102, Attn: Gerald Haddock.
For Ten Dollars ($10.00) and other good and valuable consideration,
the receipt and sufficiency of which are acknowledged by Assignor, Assignor and
Assignee hereby agree as follows:
1. Transfer and Assignment. Assignor hereby transfers, grants,
bargains, sells, conveys, and assigns to Assignee all of Assignor's interest
(the "Interests") in the limited partnership (the "Partnership") which has been
formed and is existing pursuant to the agreement(s) set forth in Exhibit "A",
together with all of Assignor's rights and interest, as a limited partner or
otherwise, which exist pursuant to each other agreement listed in Exhibit "A"
or which are otherwise related to the Interests transferred hereby, TO HAVE AND
TO HOLD the Interests unto Assignee and its successors and assigns forever.
Assignor and Assignee agree that this Assignment includes all rights and
interests that may be allocable to the Interests including all of Assignor's
proportionate right, title and interest in and to the business, properties and
assets of the Partnership and to the capital, distributions, profits and losses
of the Partnership or its successors, allocable or attributable to the
Interests, as a limited partner in the Partnership or as an assignee of
Assignor's Interests pursuant hereto. Assignee hereby assumes all of
Assignor's obligations accruing under the agreements set forth in Exhibit "A"
or otherwise required by law of a partner owning the Interests.
2. Warranty. Assignor represents and warrants that title to the
Interests is free and clear of all liens, encumbrances, security interests,
restrictions, limitations or other claims of any kind whatsoever arising by,
through or under Assignor and/or Dallas Mavericks, Inc, a Texas corporation
("DMI", Assignor's immediate predecessor in interest with regard to the
Interests), but not otherwise, and Assignor shall warrant and defend the title
of Assignee and its successors and assigns against every person whomsoever
lawfully claiming or to claim the same or any part thereof, by through or under
Assignor and/or DMI, but not otherwise; provided, however, that the warranty
contained herein with regard to the ownership by through or under DMI is
limited to the recourse available to Assignor as to DMI under and pursuant to
that certain "Assignment of Limited Partnership Interest" from DMI to Assignor
dated to be effective April 21, 1997 (the "Prior Assignment").
3. Limitations on Warranties. Any and all warranties made by DMI
to Assignor, if any, pursuant to the Prior Assignment are hereby made and given
to Assignee; provided, however, any representations and warranties are
expressly limited to the warranties contained in paragraph 2, above and such
warranties and no others.
DBL Limited
<PAGE> 2
4. Miscellaneous.
(a) Assignor hereby grants and transfers to Assignee, its
successors and assigns, to the extent so transferable, right of full
substitution and subrogation and the benefit of and the right to enforce the
covenants and warranties, if any, which Assignor is entitled to enforce with
respect to the Interests.
(b) The reference herein to all liens, encumbrances,
security interests, restrictions, limitations and other claims are for the
purpose of defining the nature and extent of Assignor's warranty and shall not
be deemed to ratify or create any rights in third parties.
(c) Each party hereto agrees to execute, acknowledge and
deliver any and all further instruments and take or perform such other acts as
may be necessary or expedient to fully implement and further the purposes of
this Assignment and the transactions contemplated hereby and to assure to
Assignee or its successors or assigns, all the properties, rights, titles,
interests, estates, remedies, powers and privileges by this instrument granted,
bargained, sold and conveyed, or otherwise vested in Assignee or intended so to
be.
(d) This Assignment may be executed in any number of
counterparts, and each counterpart hereof shall be deemed to be an original
instrument, but all such counterparts shall constitute but one assignment.
(e) This Assignment shall bind and inure to the benefit
of Assignor and Assignee and their respective successors and assigns.
(f) This Assignment shall be governed by and construed
and interpreted in accordance with the substantive laws of the State of Texas.
[SIGNATURE PAGE FOLLOWS]
2 DBL Limited
<PAGE> 3
EXECUTED this 11th day of June, 1997, to be effective as of June 11th,
1997.
ASSIGNOR:
CRESCENT OPERATING, INC.,
a Delaware corporation
By:
-------------------------------------------
Name:
-----------------------------------------
Title:
----------------------------------------
ASSIGNEE:
DBL HOLDINGS, INC.,
a Texas corporation
By:
-------------------------------------------
Name:
-----------------------------------------
Title:
----------------------------------------
3 DBL Limited
<PAGE> 4
EXHIBIT A
DBL PARTNERSHIP INTERESTS/AGREEMENTS
The limited partnership interest in Dallas Basketball Limited, a Texas
limited partnership ("DBL Limited") (the same being a 12.38% limited partnership
interest) and any and all rights and/or obligations related thereto owned or
owing by Crescent Operating, Inc. ("Assignor"), a Delaware corporation, and
described in the following documents, among others:
1. Third Amended and Restated Agreement of Limited Partnership of Dallas
Basketball Limited dated July 1, 1996, among Hillwood DBL, Ltd., a
Texas limited partnership; Hillwood DBL Partners, Inc., a Delaware
corporation ("Hillwood"), as withdrawing general partner; Hillwood
Basketball Partners, Ltd., a Texas limited partnership ("HWLP");
Dallas Mavericks, Inc., a Texas corporation ("DMI"); Donald J. Carter
("Carter"); Hal Browning ("Browning"); James L. Embrey ("Embrey"); and
H.T. Ardinger & Son Company ("Ardinger").(1)
2. Registration Rights Agreement dated June 28, 1996, among DBL Limited,
DMI, Carter, Browning, Embrey and Ardinger;
3. Amended and Restated Right of First Refusal Agreement dated July 1,
1996, among DMI, DBL Limited, Hillwood and HWLP, as amended by that
certain First Amendment to Amended and Restated Right of First Refusal
Agreement dated effective as of May 9, 1997, among Hillwood, HWLP, DBL
Limited, Assignor and Crescent Real Estate Equities Limited
Partnership, a Delaware limited partnership ("Crescent"); provided,
however, that the rights pursuant to Paragraph 3 of such agreement are
not transferred and assigned hereby;
4. Voting Agreement dated effective as of April 21, 1997, among Donald J.
Carter, Assignor and Crescent;
5. Agreement and Undertaking dated May 9, 1997, among Crescent, Assignor,
DBL and Hillwood;
6. Consent Agreement dated May 1, 1997, among DMI, Crescent and Hillwood;
7. Agreement and Undertaking among DBL Limited, Crescent, Assignor, DMI,
Carter-Crowley Properties, Inc., Donald J. Carter, the National
Basketball Association and certain related parties dated May 9, 1997;
and
8. Letter Agreement dated May 9, 1997 between Assignor and DBL;
provided, however, that nothing contained herein shall be construed as
granting any interest in or to any rights pursuant to that certain
Amended and Restated Linda Carter Agreement Regarding Arena Suite
dated July 1, 1996, among DMI, Hillwood and HWLP.
- ---------------
(1) DMI transferred and assigned a 4.10% interest in DBL Limited to Joseph
L. Williams and Gretchen M. Williams pursuant to that certain Assignment of
Partnership Interest and Related Rights dated as of October 28, 1996 (and
assigned seats 50 through 55 in the VIP section to such persons).
4 DBL Limited
<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 11, 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 11, 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 11, 1997
