<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 15, 1997
REGISTRATION NO. 33-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------
CRESCENT OPERATING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 6531/9999 PENDING
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
777 MAIN STREET GERALD W. HADDOCK, ESQ.
SUITE 2100 777 MAIN STREET, SUITE 2100
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)
</TABLE>
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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
(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
<TABLE>
<CAPTION>
==================================================================================================================
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE(1) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value.... (2) (2) $12,160,000.00 $3,685.00
==================================================================================================================
</TABLE>
(1) Computed based on the book value as of December 31, 1996 of the net assets
to be contributed to the Registrant in accordance with Rule 457 under the
Securities Act.
(2) Omitted pursuant to Rule 457(o) under the Securities Act.
------------------
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.
================================================================================
<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 APRIL 15, 1997
CRESCENT OPERATING, INC.
[LOGO]
COMMON STOCK
PREFERRED SHARE PURCHASE RIGHTS
This Prospectus is being furnished to both the shareholders of Crescent
Real Estate Equities Company, a Texas real estate investment trust ("Crescent"),
and the limited partners (the "Limited Partners") of Crescent Real Estate
Equities Limited Partnership, a Delaware limited partnership ("Crescent
Operating Partnership"), in connection with the distribution (the
"Distribution") by Crescent Operating Partnership and Crescent of all of the
outstanding shares of common stock, par value $.01 per share (the "Crescent
Operating Common Stock"), of Crescent Operating, Inc., a Delaware corporation
("Crescent Operating" or the "Company").
SEE "RISK FACTORS" BEGINNING ON PAGE 7 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 , 1997 (the
"Partnership Record Date"), and for shareholders of Crescent, the Distribution
will be made on the basis of one share of Crescent Operating Common Stock for
every 10 common shares, $.01 par value, of Crescent (the "Crescent Common
Shares") held on , 1997 (the "Crescent Record Date" and, together
with the Partnership Record Date, the "Record Date"). No certificates
representing fractional shares of Crescent will be issued in connection with the
Distribution. In lieu of fractional shares, the distribution agent will pay to
any holder who would be entitled to a fractional share of Crescent Operating
Common Stock an amount of cash (without interest) equal to $0. per share.
No payment need be made by, or will be accepted from, Crescent shareholders
or Limited Partners for the Crescent Operating Common Stock to be received by
them in the Distribution. Crescent shareholders will not be required to
surrender or exchange Crescent Common Shares, and Limited Partners will not be
required to surrender or exchange Units, in order to receive Crescent Operating
Common Stock. Each share of Crescent Operating Common Stock issued in the
Distribution will be accompanied by one Preferred Share Purchase Right.
There is currently no public market for Crescent Operating Common Stock.
Shares of Crescent Operating Common Stock have not yet been approved for listing
on any national securities exchange.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY.
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.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Available Information....................................... 1
Summary..................................................... 2
The Distribution.......................................... 2
Crescent Operating........................................ 3
Summary Pro Forma Financial Data.......................... 6
Risk Factors................................................ 7
No History of Operations; Capitalization.................. 7
Risks Associated with the Carter-Crowley Assets........... 7
Risks Associated with the CBHS Interest................... 7
Restrictions on Crescent Operating's Opportunities........ 8
Dependence upon Crescent; Growth through New
Opportunities.......................................... 9
Potential Conflicts of Interest........................... 9
Risk of Unrelated Investments; Competition................ 9
Limited Future Funding Commitments; Future Capital
Requirements........................................... 9
Absence of a Public Market for Crescent Operating Common
Stock.................................................. 10
Certain Antitakeover Provisions........................... 10
Federal Income Tax Risks.................................. 10
The Distribution............................................ 11
Background of and Reasons for the Distribution............ 11
Manner of Effecting the Distribution...................... 11
Certain Federal Income Tax Consequences of the
Distribution........................................... 12
Listing and Trading of Crescent Operating Common Stock.... 14
Shares Available for Future Sale.......................... 14
Dividend Policy............................................. 15
Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................. 15
Liquidity................................................. 15
Results of Operations -- Short-Term Cash Generation....... 15
Capital Resources -- Long-Term Cash Generation............ 15
Business.................................................... 16
Overview.................................................. 16
Strategy.................................................. 16
The Intercompany Agreement................................ 16
The Carter-Crowley Assets................................. 17
The CBHS Interest......................................... 18
Property.................................................. 24
Employees................................................. 24
Management.................................................. 25
Directors and Executive Officers of Crescent Operating.... 25
Committees of the Board of Directors...................... 26
Compensation of Directors................................. 27
Annual Meeting............................................ 27
Security Ownership of Certain Beneficial Owners and
Management............................................. 27
Executive Compensation.................................... 28
Crescent Operating Incentive Stock Plan................... 28
Certain Transactions........................................ 29
Formation of Crescent Operating and the Intercompany
Agreement.............................................. 29
Crescent.................................................. 29
Interests Relating to Magellan............................ 29
Contract with Affiliate of Director....................... 30
</TABLE>
i
<PAGE> 4
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Description of Crescent Operating Capital Stock............. 31
Authorized Capital Stock.................................. 31
Common Stock.............................................. 31
Preferred Stock........................................... 31
Certain Antitakeover Provisions............................. 32
Staggered Board of Directors.............................. 32
Number of Directors; Removal; Filling Vacancies........... 32
No Stockholder Action by Written Consent; Special
Meetings............................................... 32
Advance Notice Provisions for Stockholder Nominations and
Stockholder Proposals.................................. 33
Relevant Factors To Be Considered by the Crescent
Operating Board........................................ 33
Amendment................................................. 34
Rights Plan............................................... 34
Delaware Business Combination Statute..................... 36
Control Share Acquisitions................................ 37
Liability of Directors and Officers; Indemnification...... 37
Experts..................................................... 38
Legal Matters............................................... 38
Index to Financial Statements...............................
</TABLE>
ii
<PAGE> 5
AVAILABLE INFORMATION
Crescent Operating has filed with the Securities and Exchange Commission
(the "Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to Crescent Operating Common Stock and Preferred Share Purchase
Rights described herein. This Prospectus does not contain all of the information
set forth in the Registration Statement and the exhibits and schedules thereto.
For further information, reference is made hereby to the Registration Statement,
exhibits and schedules. Statements contained herein concerning any documents are
not necessarily complete and, in each instance, reference is made to the copies
of such documents filed as exhibits to the Registration Statement. Each such
statement is qualified in its entirety by such reference. Copies of these
documents may be inspected without charge at the principal office of the
Commission at 450 5th Street, N.W., Washington, D.C. 20549, and at the Regional
Offices of the Commission at 7 World Trade Center, Suite 1300, New York, New
York 10048, at Citicorp Center, Suite 1400, 500 West Madison Street, Chicago,
Illinois 60661, and at 5670 Wilshire Boulevard, Suite 1100, Los Angeles,
California 90036, and copies of all or any part thereof may be obtained from the
Commission upon payment of the charges prescribed by the Commission. Copies of
such material may also be obtained from the Commission's Web Site
(http://www.sec.gov).
Following the Distribution, Crescent Operating will be required to comply
with the reporting requirements of the Securities Exchange Act of 1934 (the
"Exchange Act") and will file annual, quarterly and other reports with the
Commission. The Company will also be subject to the proxy solicitation
requirements of the Exchange Act and, accordingly, will furnish audited
financial statements to its stockholders in connection with its annual meetings
of stockholders. The Company will also file with the securities exchange on
which it is then listed copies of such reports, proxy statements and other
information which subsequently can be inspected at the offices of such
securities exchange.
NO PERSON IS AUTHORIZED BY CRESCENT OR CRESCENT OPERATING TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED.
This Prospectus contains trademarks, service marks or registered marks of
Crescent Operating.
<PAGE> 6
SUMMARY
This summary is qualified by the more detailed information set forth
elsewhere in this Prospectus, which should be read in its entirety, including
the discussion of certain factors set forth under "Risk Factors." Unless the
context requires otherwise, reference to "Crescent" herein includes Crescent
Real Estate Equities Company; its predecessor, Crescent Real Estate Equities,
Inc.; and its direct and indirect subsidiaries, including Crescent Real Estate
Equities Limited Partnership (the "Crescent Operating Partnership"), Crescent
Real Estate Equities, Ltd. ("Crescent Ltd."), which is the general partner of
Crescent Operating Partnership, and 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 shares of Crescent Operating
Common Stock, representing all of the outstanding
shares of Crescent Operating Common Stock.
Distribution Ratio One share of Crescent Operating Common Stock for
every 10 Crescent Common Shares, and one share of
Crescent Operating Common Stock for every 5 Units.
The difference in the distribution ratios reflects
a two-for-one stock split with respect to Crescent
Common Shares, effective as of March 26, 1997, for
which there was not a corresponding split of Units.
No certificates representing fractional shares of
Crescent will be issued in connection with the
Distribution. In lieu of fractional shares, the
Distribution Agent (as defined below) will pay to
any holder who would be entitled to a fractional
share of Crescent Operating Common Stock an amount
of cash (without interest) equal to $0. per
share. No payment need be made by, or will be
accepted from, Crescent shareholders or Limited
Partners for Crescent Operating Common Stock to be
received by them in the Distribution, nor will
Crescent shareholders be required to surrender or
exchange Crescent Common Shares, or Limited
Partners be required to surrender or exchange
Units, in order to receive Crescent Operating
Common Stock. See "The Distribution -- Manner of
Effecting the Distribution."
Federal Income Tax
Consequences For Crescent shareholders, the Distribution
generally should only result in additional taxable
income to the extent the value of the Crescent
Operating Common Stock distributed by Crescent
exceeds the basis of Crescent's share of the assets
contributed by Crescent Operating Partnership to
Crescent Operating. Management anticipates that the
amount of such income will be nominal. As a result,
management anticipates that, for a typical Crescent
shareholder, the result of the Distribution, as
compared to what would occur in the absence of the
Distribution, will be to increase the shareholder's
tax-free return of capital, but this result cannot
be assured. The Distribution will generally be
taxable to Limited Partners only if and to the
extent the value of the Crescent Operating Common
Stock distributed to them exceeds their respective
bases in their partnership interests. See "The
Distribution -- Certain Federal Income Tax
Consequences of the Distribution."
Risk Factors Shareholders and Limited Partners should consider
certain factors discussed under "Risk Factors,"
including risks associated with the assets that
Crescent Operating will acquire and own, Crescent
Operating's lack of operating history, potential
conflicts of interest and Crescent Operating's
dependence on Crescent.
2
<PAGE> 7
Background of and Reasons
for the Distribution Crescent Operating has been formed to become a
lessee and operator of various assets and to
perform an agreement between Crescent Operating and
Crescent (the "Intercompany Agreement") pursuant to
which Crescent Operating and Crescent have agreed
to provide each other with rights to participate in
certain transactions and to make certain
investments. Under the Intercompany Agreement,
Crescent Operating and Crescent have agreed to
provide each other with rights to participate in
certain transactions and to make certain
investments. In particular, Crescent Operating will
have the right to pursue certain opportunities that
Crescent may determine it is unable to pursue
(whether due to its status as a real estate
investment trust for federal income tax purposes (a
"REIT") or for other reasons) or that Crescent may
elect not to pursue. See "Business -- The
Intercompany Agreement."
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 Boston EquiServe Limited Partnership will be the
Distribution Agent for the Distribution.
Record Date , 1997 (the "Record Date).
Distribution Date , 1997 (the "Distribution Date").
Commencing on or about the Distribution Date, the
Distribution Agent will begin mailing account
statements reflecting ownership of Crescent
Operating Common Stock to Limited Partners on the
Record Date and, subsequently, to holders of
Crescent Common Shares. Crescent shareholders and
Limited Partners will not be required to make any
payment or to take any other action to receive the
Crescent Operating Common Stock to which they are
entitled in the Distribution. See "The
Distribution -- Manner of Effecting the
Distribution."
Trading Market There is currently no public market for Crescent
Operating Common Stock. The Crescent Operating
Common Stock has not yet been approved for listing
on any national securities exchange. 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. In
connection with the formation and capitalization of
Crescent Operating, Crescent Operating Partnership
contributed cash and advanced funds to Crescent
Operating, in the aggregate amount of $40.8
million, which Crescent Operating used or expects
to use to purchase the following assets
(collectively, the "Assets"):
- various assets acquired from Carter-Crowley
Properties, Inc. ("Carter-Crowley"), including
(i) a construction equipment sales, leasing and
servicing company; (ii) a direct minority
interest in the partnership which holds the
National Basketball Association ("NBA") franchise
for the Dallas Mavericks; (iii) a 1.42% limited
partner interest in a private venture capital
fund investing in companies operating in a
variety of industries, including broadcasting,
con-
3
<PAGE> 8
sumer product manufacturing and real estate; and
(iv) certain direct, non-operating working
interests in various oil and gas wells and a
limited partner interest in two private oil and
gas limited partnerships which own working
interests in various oil and gas wells
(collectively, the "Carter-Crowley Assets"); and
- a 50% member interest (the "CBHS Interest") in
Charter Behavioral Health Systems, LLC ("CBHS"),
a newly formed limited liability company which
will operate approximately 90 behavioral health
care facilities (the "Facilities") which Magellan
Health Services, Inc. ("Magellan") is expected to
sell to Crescent (the "CBHS Interest") as a part
of a transaction with Magellan Health Services,
Inc., an unaffiliated entity (the "Magellan
Transaction"), and certain warrants to acquire up
to 1,283,311 shares of Magellan Common Stock. See
"Business -- The CBHS Interest."
The purchase price associated with, and allocated
to, the Assets has been preliminarily determined
but is subject to adjustment prior to closing of
the acquisition of the Assets.
Crescent Operating's certificate of incorporation
(the "Charter") provides that one of Crescent
Operating's corporate purposes is to perform the
Intercompany Agreement, pursuant to which Crescent
Operating and Crescent have agreed to provide each
other with rights to participate in certain
transactions and to make certain investments. In
addition, the Charter prohibits Crescent Operating
from engaging in activities or making investments
that a REIT could make, unless Crescent 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, Suite
2100, Forth Worth, Texas 76102, and its telephone
number at that location is (817) 877-0477. Crescent
Operating was incorporated in Delaware in April
1997.
Business Strategy Crescent Operating intends to manage the Assets,
enter into certain of the businesses to which the
Assets relate and pursue additional opportunities.
Crescent Operating believes that it has, or will
have access to, sufficient liquidity and management
expertise to manage the Assets successfully.
Crescent Operating's investment and operating
strategies are to acquire and operate a
complementary group of businesses which are aligned
with certain of the investments and businesses of
Crescent. To pursue additional opportunities,
Crescent Operating plans to capitalize on its
relationship with Crescent and Crescent's ability
to structure transactions creatively. Crescent
Operating also plans to explore the possibility of
providing to Crescent certain lessee and
operational services currently provided by others
to Crescent. In this regard, Crescent Operating
plans to enter into negotiations to acquire or
replace the current tenants of certain hotels and
resorts owned by Crescent and leased to third
parties. No such negotiations are currently
ongoing, however, and there is no assurance that
any such agreements will be reached. The additional
opportunities Crescent Operating may pursue are
expected to be varied and may be unrelated to any
business in which Crescent Operating will be
engaged initially. Accordingly, Crescent Operating
expects that, in
4
<PAGE> 9
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 are Chairman of the Board of Directors,
Vice Chairman and the President and Chief Executive
Officer, respectively, of Crescent Operating. Each
currently serves in the same capacity at Crescent.
See "Management."
Preferred Share Purchase
Rights Crescent Operating expects to adopt a Preferred
Share Purchase Rights Plan (the "Rights Plan") on
or prior to the Distribution Date. If so adopted,
certificates issued in the Distribution
representing Crescent Operating Shares will also
initially represent an equivalent number of
associated Preferred Share Purchase Rights of
Crescent Operating (the "Rights"). See "Certain
Antitakeover Provisions -- Rights Plan."
Certain Antitakeover
Provisions Certain provisions of Crescent Operating's Charter
and Crescent Operating's Bylaws (the "Bylaws"), as
each will be in effect as of the Distribution, and
of applicable Delaware state corporation law, have
the effect of making more difficult an acquisition
of control of Crescent Operating in a transaction
not approved by the Crescent Operating Board of
Directors (the "Board"). See "Description of
Crescent Operating Capital Stock" and "Certain
Antitakeover Provisions." The Rights Plan will also
make more difficult an acquisition of control of
Crescent Operating in a transaction not approved by
the Crescent Operating Board. The Rights Plan and
certain provisions of the Charter do not apply to
Crescent and its affiliates. See "Certain
Antitakeover Provisions -- Rights Plan."
Post-Distribution Dividend
Policy Crescent Operating intends to use its available
funds to pursue investment and business
opportunities and, therefore, does not anticipate
the payment of any cash dividends on Crescent
Operating Common Stock in the foreseeable future.
Payment of dividends on Crescent Operating Common
Stock is subject to limitations under loans from
Crescent and will also be subject to such
limitations as may be imposed by any 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. See "Dividend Policy."
Interests of Richard E.
Rainwater and Affiliates Richard E. Rainwater, John C. Goff and Gerald W.
Haddock are Chairman of the Board of Directors,
Vice Chairman and the President and Chief Executive
Officer, respectively, of Crescent Operating and
Crescent. Each is also a director of Crescent
Operating and Crescent. Mr. Rainwater and certain
of his affiliates have a significant interest in
Crescent, Crescent Operating and Magellan. See
"Risk Factors -- Potential Conflicts of Interest"
and "Certain Transactions."
Transfer Agent and
Registrar Boston EquiServe Limited Partnership will be the
Transfer Agent and Registrar for Crescent Operating
after the Distribution.
5
<PAGE> 10
SUMMARY PRO FORMA FINANCIAL DATA
The following table sets 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,
and, in each case as of December 31, 1996, in determining balance sheet data, of
(i) the formation and capitalization of Crescent Operating, (b) the acquisition
of the Carter-Crowley Assets and the recording of the transaction under the
purchase method of accounting, and (c) the acquisition of a 50% interest in CBHS
and the related acquisition of warrants to purchase 1,283,311 shares of
Magellan's common stock.
<TABLE>
<CAPTION>
CRESCENT
OPERATING, INC.
AS ADJUSTED FOR
CRESCENT ACQUISITION OF ACQUISITION OF ACQUISITION OF
OPERATING, INC. CARTER CROWLEY CARTER CROWLEY 50% INTEREST PRO FORMA
HISTORICAL ASSET GROUP ASSET GROUP IN CBHS(1) CONSOLIDATED
--------------- -------------- --------------- -------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating data:
Revenues.................................. $ -- $10,503 $10,503 $ -- $ 10,503
Gross Profit.............................. -- 1,966 1,966 -- 1,966
Equity in loss of CBHS.................... -- -- -- (7,659) (7,659)
Income (loss) from Operations............. -- 878 178 (7,659) (7,481)
---- ------- ------- ------- --------
Net income (Loss)......................... $ -- $ 389 $(3,748) $(7,659) $(11,407)
Balance Sheet Data:
Total assets.............................. $ 1 NA $47,424 $ -- $ 47,424
Total debt................................ -- NA 34,046 -- 34,046
Total stockholder equity.................. 1 NA 12,160 -- 12,160
</TABLE>
- ---------------
(1) Represents Crescent Operating's share of the pro forma loss of CBHS
primarily as a result of the anticipated $81.0 million franchise fee and the
$63.0 million payable under lease arrangements with Crescent, reduced by
depreciation relating to the Facilities. See "Business -- The CBHS
Interest."
6
<PAGE> 11
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. Crescent Operating disclaims any intent or
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise.
NO HISTORY OF OPERATIONS; CAPITALIZATION
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. In connection with the formation and capitalization of Crescent
Operating, Crescent Operating borrowed from Crescent Operating Partnership
approximately $28.6 million under a five-year term loan and obtained a line of
credit for up to $20.0 million from Crescent Operating Partnership. See "Certain
Transactions -- Formation of Crescent Operating and the Intercompany Agreement."
The loan and credit facility are payable only to the extent of net cash flow but
are payable in full in 2002. There can be no assurance that the Company will be
able to satisfy all of its obligations under the loan and credit facility at the
end of the five-year term of the loan and credit facility.
RISKS ASSOCIATED WITH THE CARTER-CROWLEY ASSETS
The Carter-Crowley Assets consist of a variety of assets purchased from
Carter-Crowley, including a direct minority (12.38%) limited partner interest in
Dallas Basketball Ltd., the entity that holds the NBA franchise for the Dallas
Mavericks, a construction equipment sales, leasing and service company, a
limited partner interest in a private venture capital fund, and certain direct,
non-operating working interests in various oil and gas wells and a limited
partner interest in two oil and gas limited partnerships. The Carter-Crowley
Assets are varied, unrelated to one another, and may be unrelated to any future
business in which Crescent Operating invests. Certain of the Carter-Crowley
Assets are relatively illiquid. For example, the transfer of Crescent
Operating's direct minority limited partnership interest in Dallas Basketball
Ltd. is restricted by the terms of the Dallas Basketball Ltd. partnership
agreement and by the NBA. The value of these assets, including any income that
may be derived from them, may be adversely affected by various factors specific
to the industries relating to the assets, including the win-loss record of the
Dallas Mavericks during a particular season, economic conditions in the
construction and utility industries, conditions in the securities markets, and
conditions in the oil and gas industry. See "Business -- The Carter-Crowley
Assets."
RISKS ASSOCIATED WITH THE CBHS INTEREST
The Magellan Transaction cannot be consummated, and therefore the CBHS
Interest cannot be acquired, until several conditions have been satisfied. See
"Business -- The CBHS Interest." Among these conditions is the approval of the
requisite percentage of the Magellan stockholders. There is no assurance that
such approval will be obtained. In addition, the Magellan Transaction is
conditioned upon the closing of each component transaction, including the
purchase of the Facilities by Crescent.
If acquired, the CBHS Interest presents the following risks to stockholders
of Crescent Operating.
Franchise Agreement Risks. The Master Franchise Agreement is for an initial
term of 12 years, and CBHS will have the right to renew the Master Franchise
Agreement for four additional five-year terms, for a maximum of 32 years. At the
end of the initial term and each renewal term the franchise fees will be
adjusted
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to reflect the fair market value of the franchise. Notwithstanding that the
Master Franchise Agreement provides for an appraisal mechanism for determining
the fair market value of the franchise fees, Magellan will have the right not to
consent to the fee adjustment, and can terminate the Master Franchise Agreement,
at the end of the initial or any renewal term. If Magellan terminates the Master
Franchise Agreement prior to the full 32-year term, CBHS will be subject to a
three-year covenant not to engage in the hospital-based behavioral healthcare
business except pursuant to a written agreement with Magellan. Accordingly,
Magellan could extract franchise fees in excess of the fair market value of the
franchise, or CBHS could be precluded from being in the hospital-based
behavioral healthcare business for a significant period of time. Either result
could materially adversely affect the value of Crescent Operating's investment
in CBHS.
CBHS Reliance on Magellan and Crescent Operating. CBHS will rely on
Magellan to extend a line of credit in the principal amount of up to $55 million
secured by CBHS's receivables, for up to one year after the Magellan Closing or,
under certain circumstances, provide a guarantee not to exceed $65 million for a
CBHS bank line of credit secured by receivables of CBHS. Each of Crescent
Operating and Magellan also will be required to contribute an additional $2.5
million to CBHS in cash five days after the Magellan Closing, and to lend CBHS
up to $17.5 million upon Magellan's request during the five years following the
closing of the Magellan Transaction. In addition, Magellan will be required to
provide various assets and services to CBHS under the Master Franchise Agreement
and to CBHS subsidiaries under Subsidiary Franchise Agreements. Accordingly,
CBHS' ability to operate the Facilities as contemplated by the Magellan
Transaction will depend in part upon Magellan's and Crescent Operating's
financial status.
Lack of Control of CBHS; Management Deadlock. CBHS will be governed by a
four-member board (the "CBHS Board"), two of which will be appointed by each of
Crescent Operating and Magellan. A significant number of decisions require 80%
CBHS Board approval (the approval of all four directors). Accordingly, the
directors appointed by Crescent Operating will be unable to exercise control of
CBHS without the concurrence of the directors appointed by Magellan. The CBHS
Operating Agreement provides that a deadlock of the CBHS Board will be deemed to
exist if the CBHS Board is unable to reach agreement by the required vote at two
successive meetings on (i) a decision requiring 80% CBHS Board approval; (ii) a
decision involving the expenditure of more than a specified amount; or (iii) a
decision relating to the executive officers. Further, an unresolved deadlock
could lead either to the forced sale of Crescent Operating's interest in CBHS,
or the required purchase by Crescent Operating of Magellan's interest in CBHS.
In the latter case, Crescent Operating would be faced with funding the purchase
of Magellan's interest and subsequently operating the Facilities, through CBHS,
without Magellan's healthcare experience.
CBHS Conflicts of Interest. With the exception of John C. Goff, who will
become Chairman of the CBHS Board, all of the executive officers of CBHS upon
formation of CBHS will be former employees of Magellan, and therefore may be
subject to conflicts of interests in matters in which Crescent Operating and
Magellan have conflicting interests.
Possible Violation of Government Regulations. The operation of healthcare
facilities such as the Facilities is subject to substantial federal, state and
local regulation, including federal Medicare law. In addition to other laws and
regulations with which CBHS will be required to comply, CBHS will be subject to
federal and state laws that govern financial arrangements between healthcare
providers. Any failure to comply with these laws or regulations could have an
adverse effect on the operations of CBHS.
RESTRICTIONS ON CRESCENT OPERATING'S OPPORTUNITIES
Crescent Operating's Charter provides that Crescent Operating is prohibited
from engaging in activities or making investments that a REIT could make unless
Crescent 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. Under the Intercompany Agreement, Crescent Operating has
agreed not to acquire or make investments in real estate (which, for purposes of
the Intercompany Agreement, includes the provision of services related to real
estate) unless it has notified Crescent of the acquisition or investment
opportunity, and Crescent has determined not to pursue such acquisition or
investment. Crescent Operating also has agreed to assist Crescent in structuring
any such acquisition or investment which Crescent elects to pursue, on terms
determined by Crescent.
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Further, Crescent is not required to offer Crescent Operating the opportunity to
participate in transactions, or make investments, where Crescent is able to
pursue the entire transaction or investment. To the extent that Crescent is
obligated by the Intercompany Agreement to offer certain transactions or
investments to Crescent Operating, it is required to do so only if it has
determined, in its sole discretion, that it is unable to pursue the entire
transaction or investment. 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; GROWTH THROUGH NEW OPPORTUNITIES
Due to Crescent Operating's restricted corporate purpose and the
Intercompany Agreement, Crescent Operating will rely significantly on Crescent
to identify business opportunities for Crescent Operating. There is no assurance
that Crescent will identify opportunities for Crescent Operating or that any
opportunities that Crescent identifies will be within Crescent Operating's
financial, operational or management parameters. In addition, there is no
assurance that Crescent Operating will have sufficient capital resources to
pursue additional opportunities, or that opportunities it pursues will be
integrated, perform as expected or contribute significant revenues or profits to
Crescent Operating.
POTENTIAL CONFLICTS OF INTEREST
Richard E. Rainwater is Chairman of the Boards of Crescent and Crescent
Operating. John C. Goff is 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 Mr. Rainwater, Mr. Goff or Mr. 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.
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.
RISK OF UNRELATED INVESTMENTS; COMPETITION
Either through management of the Assets or through implementing its
strategy and corporate purpose of carrying out the Intercompany Agreement,
Crescent Operating will pursue a variety of opportunities. Although Crescent
Operating intends to acquire and operate a complementary group of businesses,
there may be differences among the businesses in which it engages that may
require a wide range of skills and qualifications, and there is no assurance
that Crescent Operating management or employees will have, or that Crescent
Operating will be able to hire and retain employees with, such skills and
qualifications. 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 FUTURE FUNDING COMMITMENTS; FUTURE CAPITAL REQUIREMENTS
Crescent Operating will be in a position to manage the Carter-Crowley
Assets and acquire the CBHS Interest because of funds, including loans, provided
to it by Crescent Operating Partnership in connection with the formation and
capitalization of Crescent Operating. Crescent Operating intends to utilize
funds borrowed
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under the $20.0 million credit facility 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.
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. Crescent currently is not obligated to provide
any additional funds to Crescent Operating or to assist it in obtaining
additional financing.
ABSENCE OF A PUBLIC MARKET FOR CRESCENT OPERATING COMMON STOCK
There is currently no public market for Crescent Operating Common Stock.
Although Crescent Operating intends to list the Crescent Operating Common Stock,
it has not yet been approved for listing on any national securities exchange,
and there can be no assurance as to the prices at which trading in Crescent
Operating Common Stock will occur after the Distribution. Until the Crescent
Operating Common Stock is fully distributed and an orderly trading market
develops, the prices at which trading in 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 or as
to the price at which the Crescent Operating Common Stock may trade. Volatility
in the market and other factors may materially adversely affect the market price
of Crescent Operating Common Stock.
CERTAIN ANTITAKEOVER PROVISIONS
The Charter and Bylaws, the Rights Plan and applicable sections of the
Delaware General Corporation Law (the "DGCL") contain several provisions that
may make more difficult the acquisition of control of Crescent Operating without
the approval of the Crescent Operating Board. Certain provisions of Crescent
Operating's Charter and the Bylaws, among other things: (i) classify the
Crescent Operating Board into three classes, each of which serves for staggered
three-year terms; (ii) provide that a director of Crescent Operating may be
removed by the stockholders only for cause; (iii) provide that only the
Chairman, Vice-Chairman, President or the Crescent Operating Board may call
special meetings of the stockholders; (iv) provide that the stockholders may
take action only at a meeting of Crescent Operating stockholders, not by written
consent; (v) provide that stockholders must comply with certain advance notice
procedures in order to nominate candidates for election to the Crescent
Operating Board or to place stockholders' proposals on the agenda for
consideration at meetings of the stockholders; (vi) provide that, under certain
circumstances, the affirmative vote of the holders of two-thirds of the Crescent
Operating Common Stock is required to approve any merger or similar business
combination involving Crescent Operating (the "control shares provision"); and
(vii) 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. 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. 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. See "Description of Crescent
Operating Capital Stock" and "Certain Antitakeover Provisions."
FEDERAL INCOME TAX RISKS
On the Distribution, Crescent will recognize gain measured by the
difference between the value of the Crescent Operating Common Stock distributed
by Crescent and the basis of Crescent in such stock, which will depend in turn
on the basis of Crescent's share of the Assets contributed by the Crescent
Operating Partnership to Crescent Operating. Although management anticipates
that any such gain would be nominal, the Internal Revenue Service (the
"Service") may be able to assert successfully that the gain is not
insubstantial. Under the REIT rules, Crescent's gain, if any, would be passed
through to the Crescent
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shareholders. The value of the Crescent Operating Common Stock distributed, plus
any cash distributed in lieu of fractional shares, would be treated under the
rules generally applicable to cash distributions. Management anticipates that,
for a typical Crescent shareholder, the result of the Distribution, as compared
to what would occur in the absence of the Distribution, will be to increase the
shareholder's tax-free return of capital, but this result cannot be assured.
With respect to Limited Partners, the contribution by the Crescent Operating
Partnership into Crescent Operating should not constitute a taxable event, but
the Service may successfully assert the contrary, and in any event the
Distribution will be taxable to a Limited Partner if and to the extent the value
of the Crescent Operating Stock received by the Limited Partner exceeds the
Limited Partner's basis in the Limited Partner's partnership interest. See "The
Distribution -- Certain Federal Income Tax Consequences of the Distribution."
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 will agree to provide each other with
rights to participate in certain transactions and to make certain investments.
In particular, Crescent Operating will have the right to pursue certain
opportunities that Crescent may determine it is unable to pursue (whether due to
its status as a REIT for federal income tax purposes or for other reasons), or
that Crescent may elect not to pursue. 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 benefit from activities Crescent elects
not to pursue due to its REIT status or for other reasons. On ,
1997, Crescent Operating Partnership contributed cash and advanced funds in the
aggregate amount of $40.8 million in exchange for all of the outstanding shares
of Crescent Operating Common Stock which are being distributed by Crescent
Operating Partnership to its partners, including Crescent, and by Crescent to
its shareholders in connection with the Distribution.
MANNER OF EFFECTING THE DISTRIBUTION
It is expected that the Distribution Date will be , 1997. At
the time of the Distribution, share certificates for Crescent Operating Common
Stock will be delivered to the Distribution Agent. Commencing on or about the
date of the Distribution, the Distribution Agent will begin mailing account
statements reflecting ownership of Crescent Operating Common Stock to holders of
Crescent Common Shares and Units as of the close of business on the Record Date.
The Distribution will be made on the basis of one share of Crescent Operating
Common Stock for every 10 Crescent Common Shares held on the Record Date and one
share of Crescent Operating Common Stock for every 5 Units held on the Record
Date. The difference in the Distribution ratio as between the Crescent
shareholders and the Limited Partners is due to a two-for-one stock split with
respect to Crescent Common Shares, effective as of March 26, 1997, for which
there was not a corresponding split of Units. No certificates representing
fractional shares of Crescent 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 $0. per share.
All shares of Crescent Operating Common Stock will be fully paid and
nonassessable. See "Description of Crescent Operating Capital Stock."
Prior to the Distribution Date, inquiries relating to the Distribution
should be directed to the Distribution Agent at Monday through Friday,
a.m. to p.m. (Eastern time), toll-free at . After the
Distribution Date, inquiries may be directed to the Distribution Agent or
Crescent Operating Investor Relations, at ; or by telephone at
, Monday through Friday, a.m. to p.m. ( time).
NO HOLDER OF CRESCENT COMMON SHARES OR OF UNITS WILL BE REQUIRED TO MAKE
ANY PAYMENT FOR THE SHARES OF CRESCENT OPERATING COMMON STOCK TO BE RECEIVED IN
THE DISTRIBUTION OR TO SURRENDER OR EXCHANGE CRESCENT
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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.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
Taxation of Crescent. On the Distribution, Crescent will recognize gain on
the Distribution to the extent the value of the Crescent Operating Common Stock
distributed by Crescent exceeds the basis of Crescent in such stock, which will
depend in turn on the basis of Crescent's share of the Assets contributed by the
Crescent Operating Partnership to Crescent Operating. Because the Assets consist
primarily of cash and recently negotiated contract rights, management
anticipates that any such gain will be nominal, but the Service may be able to
assert successfully that the gain is not insubstantial. The amount of gain, if
any, will increase Crescent's current or accumulated earnings and profits.
Taxation of Taxable Domestic 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 value thereof at the time of the Distribution. As long as
Crescent qualifies as a REIT, distributions (including the Distribution) made to
Crescent's taxable U.S. shareholders 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. 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. 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
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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 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 shares of
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 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. The contribution of the Assets by the
Crescent Operating Partnership into Crescent Operating should qualify as a
tax-free contribution of assets to a controlled corporation for federal income
tax purposes. The Service may, however, be able to challenge this conclusion
successfully, and if the contribution were taxable it would result in gain equal
to the excess, if any, of the Crescent Operating Partnership's basis in the
Assets over the value of the Crescent Operating stock received by the Crescent
Operating Partnership. Limited Partners would be taxable on their distributable
share of such gain, if any. Because the Assets consist primarily of cash and
recently negotiated contract rights, management anticipates that any such gain
would be nominal, but the Service may be able to assert successfully that the
gain is not insubstantial. Furthermore, under tax rules which pertain to the
distribution by partnerships of marketable securities, whether or not the
contribution by the Crescent Operating Partnership is taxable, the distribution
of
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Crescent Operating Common Stock to a Limited Partner will be taxable to such
Limited Partner if and to the extent that the value of the Crescent Operating
Common Stock distributed exceeds the basis of such Limited Partner in such
Limited Partner's partnership interest immediately prior to the distribution.
ALL CRESCENT SHAREHOLDERS AND LIMITED PARTNERS ARE URGED TO CONSULT THEIR
OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES OF THE DISTRIBUTION TO
THEM, INCLUDING THE APPLICATION OF STATE, LOCAL AND FOREIGN TAX LAWS.
LISTING AND TRADING OF CRESCENT OPERATING COMMON STOCK
There is currently no public market for Crescent Operating Common Stock.
Although Crescent Operating intends to list the Crescent Operating Common Stock,
it has not yet been approved for listing on any national securities exchange,
and there can be no assurance as to the prices at which trading in Crescent
Operating Common Stock will occur after the Distribution. Until Crescent
Operating Common Stock is fully distributed and an orderly trading 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 stockholders of record,
based on the number of record holders of Crescent Common Shares on the Record
Date and the number of Limited Partners. The Transfer Agent and Registrar for
the Crescent Operating Common Stock will be Boston EquiServe Limited
Partnership. For certain information regarding options and other equity-based
employee benefit awards involving Crescent Operating Common Stock that may
become outstanding after the Distribution, see "Management."
SHARES AVAILABLE FOR FUTURE SALE
Crescent Operating Common Stock distributed in the Distribution
(approximately shares) will be freely transferable, except for
securities received by persons who may be deemed to be "affiliates" of Crescent
Operating under the Securities Act of 1933, as amended (the "Securities Act").
Persons who may be deemed to be affiliates of Crescent Operating after the
Distribution generally include individuals or entities that control, are
controlled by, or are under common control with, Crescent Operating and may
include certain officers and directors of Crescent Operating as well as
principal stockholders of Crescent Operating, if any. Persons who are affiliates
of Crescent Operating will be permitted to sell their shares of Crescent
Operating Common Stock only pursuant to an effective registration statement
under the Securities Act or an exemption from the registration requirements of
the Securities Act, such as the exemption afforded by Section 4(2) of the
Securities Act (relating to private sales) or by Rule 144 under the Securities
Act. Neither Crescent nor Crescent Operating is able to predict whether
substantial amounts of Crescent Operating Common Stock will be sold in the open
market following the Distribution. Sale of substantial amounts of Crescent
Operating Common Stock in the public market, or the perception that such sales
might occur, could adversely affect the market price of Crescent Operating
Common Stock.
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DIVIDEND POLICY
Crescent Operating intends to use its available funds to pursue investment
and business opportunities and, therefore, does not anticipate the payment of
any cash dividends on Crescent Operating Common Stock in the foreseeable future.
Payment of dividends on Crescent Operating Common Stock is subject to
limitations under the loans from Crescent 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Crescent Operating has only recently been formed and has no operating
history. The Company has financed the acquisition of the Assets in part through
borrowings, and may under certain circumstances borrow for the purpose of making
additional investments or to provide working capital for operations. Crescent
Operating's Assets may not be readily marketable and their values may be
affected by general market conditions. Nevertheless, the Company believes that
its capital and revenues will be sufficient to fund the Company's anticipated
investments and proposed operations.
LIQUIDITY
In connection with the formation and capitalization of the Company, the
Company received approximately $12.2 million in cash from Crescent Operating
Partnership and borrowed approximately $28.6 million from Crescent Operating
Partnership pursuant to a five-year term loan. The Company also obtained a $20.0
million line of credit which bears interest at the same rate, and is payable on
the same basis, as the term loan. The terms of the loan and the line of credit
are more fully described in "Certain Transactions -- Formation of Crescent
Operating and the Intercompany Agreement." The proceeds of the loan were used to
acquire the Carter-Crowley Assets and are expected to be used both to acquire
the CBHS Interest and the warrants to acquire shares of Magellan's common stock.
The line of credit is expected to be used to support future funding obligations
associated with the Assets and cash requirements. The purchase price associated
with, and allocated to, the Assets has been preliminarily determined but is
subject to adjustment prior to closing of the acquisition of the Assets.
RESULTS OF OPERATIONS -- SHORT-TERM CASH GENERATION
Crescent Operating has no external sources of financing except as described
above in "Liquidity." 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.
CAPITAL RESOURCES -- LONG-TERM CASH GENERATION
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. 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 changes 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.
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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 various assets, including an equipment sales, leasing and service
company, an interest in a limited partnership that owns the NBA franchise for
the Dallas Mavericks, an interest in a private venture capital fund, and
interests in oil and gas limited partnerships. If Crescent Operating acquires
the CBHS Interest, it will become a 50% owner of CBHS which will operate the
Facilities.
Crescent Operating's Charter provides that one of its corporate purposes is
to perform the Intercompany Agreement between Crescent Operating and Crescent,
pursuant to which Crescent Operating and Crescent have agreed to provide each
other with rights to participate in certain transactions and to make certain
investments. In addition, the Charter prohibits Crescent Operating from engaging
in activities or making investments that a REIT could make unless Crescent was
first given the opportunity but elected not to pursue such activities or
investments.
STRATEGY
Crescent Operating intends to manage the Assets, enter into certain of the
businesses to which the Assets relate and pursue additional opportunities.
Crescent Operating believes that it has, or will have access to, sufficient
liquidity and management expertise to manage the Assets successfully.
Crescent Operating's investment and operating strategies are to acquire and
operate a complementary group of businesses which are aligned with certain of
the investments and businesses of Crescent. To pursue additional opportunities,
Crescent Operating plans to capitalize on its relationship with Crescent and
Crescent's ability to structure transactions creatively. It also plans to
determine whether Crescent Operating could provide to Crescent certain lessee
and operator functions currently provided by others to Crescent. In this regard,
it plans to negotiate to replace the tenants of certain hotels and resorts owned
by Crescent and leased to third parties. No such negotiations are currently
ongoing, however, and there is no assurance that any such agreements will be
reached. The additional opportunities Crescent Operating may pursue are expected
to be varied and may be unrelated to any business in which Crescent Operating is
then engaged or may be engaged at any future date. Crescent Operating also
expects that, in the future, it may sell existing assets that are inconsistent
with its long-term strategies. To the extent any such sales are made at a time
when Crescent Operating has outstanding indebtedness, Crescent Operating
anticipates that it will use the proceeds of any such sales of assets to reduce
the amount of any such indebtedness.
Crescent Operating also intends to pursue additional and similar
opportunities with Crescent and others in the future. The Distribution of
Crescent Operating Common Stock will provide Crescent shareholders and the
Limited Partners as of the Record Date with the opportunity to benefit from
activities Crescent elects not to pursue due to its REIT status, or for other
reasons.
THE INTERCOMPANY AGREEMENT
Crescent Operating and Crescent have entered into the Intercompany
Agreement to provide each other with rights to participate in certain
transactions and make certain investments. The Intercompany Agreement provides,
subject to certain terms, that Crescent will provide Crescent Operating with a
right of first refusal (i) to become the lessee of any real property acquired by
Crescent if Crescent determines that, consistent with its status as a REIT, it
is required to enter into a "master" lease arrangement, and (ii) to participate
in transactions or make investments where Crescent is unable to pursue the
entire transaction or investment. Crescent may, but will not be required to,
offer Crescent Operating the opportunity to participate in transactions, or make
investments, where Crescent is able to pursue the entire transaction or
investment. Under the Intercompany Agreement, Crescent Operating has agreed not
to acquire or make investments in real estate (which, for purposes of the
Intercompany Agreement, includes the provision of services related to
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real estate) unless it has notified Crescent of the acquisition or investment
opportunity, and Crescent has determined not to pursue such acquisitions or
investments. Crescent Operating also has agreed to assist Crescent in
structuring any such acquisition or investment which Crescent elects to pursue,
on terms determined by Crescent. Crescent, in its sole discretion, will make all
decisions as to its ability or inability to pursue transactions or investments.
In addition, Crescent and Crescent Operating each agree to notify the other of,
and make available to the other, investment opportunities developed by such
party or of which such party becomes aware but is unable or unwilling to pursue.
THE CARTER-CROWLEY ASSETS
Pursuant to an Acquisition Agreement among Carter-Crowley, various of its
affiliated entities (collectively, the "Carter-Crowley Sellers"), and Crescent,
Crescent Operating purchased from the Carter-Crowley Sellers 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 documentation was
issued by the State of Texas, regulations applicable to removal of the tank were
modified to require testing and monitoring procedures. A remedial plan for the
installation of test wells was prepared by Moody-Day and accepted by the State
of Texas, and monitoring of the groundwater currently is in process.
Moody-Day competes with various large and small companies in its business.
Among its primary competitors are national firms such as A-1, Prime Equipment
Company and Hertz, and local firms such as Gaedcke Equipment Company, a Texas
company with four locations. Moody-Day believes that the principal competitive
factors in its markets for sale and rental of the construction equipment and
accessories it offers are availability of requested equipment, price and product
features. Moody-Day's products and services are marketed directly by its
11-person sales force. No customer accounted for more than 10% of Moody-Day's
gross sales for the twelve-month period ended December 31, 1996, with the
exception of Austin Commercial, a commercial construction contractor, which
accounted for approximately 11% of Moody-Day's sales for that period.
Day-to-day operations and management will be the responsibility of Mark
Roberson, who has been employed by Moody-Day since 1989. From 1989 through 1991,
Mr. Roberson served as Moody-Day's general rental manager. Since 1991, he has
served as the general manager of operations. Prior to joining Moody-Day, Mr.
Roberson had a total of six years of similar industry experience.
At March 1, 1997, Moody-Day had 32 employees, all of whom worked full time.
Of this number, 6 were involved in corporate administrative and support
functions and the remainder were employed in the sales, leasing and service
operations of the business. Moody-Day is currently not a party to any collective
bargaining agreements covering its employees, has not experienced any work
stoppages, and believes that relations with its employees are good. Moody-Day is
not a party to any material pending litigation.
Dallas Mavericks Interest. Crescent Operating owns a 12.38% limited partner
interest in Dallas Basketball, Ltd., a Texas limited partnership that owns the
Dallas Mavericks basketball team, the related rights in the NBA franchise and
various other related rights and interests. The Dallas Basketball, Ltd.
partnership agreement sets forth the rights and obligations of the partners,
including rights and restrictions regarding transferring interests in the
partnership and future capital contributions. If the General Partner does
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not waive the provision, transfers of interests to a person or entity not
related to an existing partner must be offered to the existing partners who have
the right to accept, in the aggregate, all of the interests offered. If the
offerees elect to take less than all of the offered interests, the offer is
deemed to be rejected. When a contract for the sale of the interests has been
entered into, the general partner will review the contract and any additional
information regarding the character and financial capacity of the proposed
purchaser, and determine whether it will consent to the transfer. This consent
may not be unreasonably withheld, assuming the interest to be transferred is
less than 25% of the partnership interests. Any transfer is subject to all
relevant restrictions on such transfer as may be contained in the Constitution
and Bylaws of the NBA.
The partnership agreement does not contain any additional capital
contribution requirements. A limited partner, however, may make voluntary
contributions when and if requested by the general partner. Any such
contributions are subject to a preferential return.
Generally, the general partner has full control over the activities of the
partnership and has and can exercise full management powers and control.
However, until three promissory notes (aggregating approximately $47 million,
excluding a contingent $10 million note, all of which are held by Crescent) are
paid or otherwise retired or canceled, a "majority interest" must consent to the
general partner taking various actions, including incurring debt in excess of
$10 million, mortgaging or otherwise encumbering any or all of the material
assets of the partnership, agreeing to the transfer of certain limited partner
interests and certain mergers or consolidations. "Majority interest" means 50%
of the 33% of limited partner interests not affiliated with the general partner.
There are six limited partners not affiliated with the general partner
(including Crescent Operating), four of which each own a 4.13% limited partner
interest and one of which owns a 4.10% limited partner interest. Accordingly,
the other limited partners could combine, or Crescent Operating with one of the
4.13% limited partners could combine, to constitute a majority interest.
Hicks Muse Tate & Furst Equity Fund II, LP. Hicks Muse Tate & Furst Equity
Fund II, LP is a private venture capital fund in which Crescent Operating owns a
1.42% limited partner interest. 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, approximately 38% of the Hicks-Muse portfolio
consisted of stock in Chancellor Broadcasting, an owner of 53 radio stations in
15 markets. Chancellor's stock, which is traded in the over-the-counter market,
has fallen in recent months. This decline has been reported to be in response to
concern over Chancellor's debt levels. The value of Crescent Operating's
investment in Hicks-Muse will depend upon whether Chancellor's stock price will
increase, which in turn may depend on whether Chancellor will be successful in
servicing its debt. The remainder of the Hicks-Muse portfolio, as of December
31, 1996, is comprised of investments in companies that make chocolate, grocery
products, wire and cable, polyurethane foam, toys, tools and beer products, and
that invest in real estate.
Oil and Gas Interests. The Carter-Crowley Assets include certain direct,
non-operating working interests in various oil and gas wells and a limited
partner interest in two private oil and gas limited partnerships which own
working interests in various oil and gas wells. Additional capital contributions
are not required with respect to the partnership interests except to the extent
necessary to fund expenses approved by the limited partners. Either of the
partnerships has the right to agree to fund additional drilling costs. Crescent
Operating is not required to share such drilling costs, but has the option to do
so. To the extent that Crescent Operating does not participate in any such
additional costs, it will not participate in the revenues from the respective
wells. If a partnership agrees to fund additional drilling costs, such
partnership's ability to make distributions could be adversely affected.
THE CBHS INTEREST
Crescent Operating expects to become an operator of behavioral healthcare
and related facilities through an ownership interest in CBHS. The CBHS Interest
is part of the Magellan Transaction. Each of the transactions, as identified
below, that forms a part of the Magellan Transaction is conditioned upon the
closing of the other transactions. Accordingly, Crescent Operating's ability to
acquire the CBHS Interest is contingent upon the closing of the Magellan
Transaction. Officers and Directors of Crescent Operating and their affiliates
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and associates have significant interests in Crescent and Magellan. See "Certain
Transactions." It is expected that the Magellan Transaction will close (the
"Magellan Closing") in the second quarter of 1997.
The Magellan Transaction includes:
- the purchase by Crescent of the Facilities, pursuant to a Real Estate
Purchase and Sale Agreement between Crescent and Magellan;
- the capitalization and initial business arrangement of CBHS, to be set
forth in a Contribution Agreement between Crescent Operating and
Magellan;
- the formation of CBHS pursuant to an Operating Agreement to be entered
into between Crescent Operating and Magellan;
- the lease of the Facilities from Crescent to CBHS, pursuant to a
Facilities Lease;
- the license to CBHS of various assets currently used by Magellan in the
operation of the Facilities but not otherwise contributed to CBHS or sold
to Crescent, pursuant to the Master Franchise Agreement and the
Subsidiary Franchise Agreement; and
- the option of Crescent and Crescent Operating to become equity holders of
Magellan, and the option of Magellan to become an equity holder of
Crescent Operating, pursuant to warrant agreements.
Purchase Agreement. Crescent will acquire from Magellan the Facilities,
which consist of approximately 90 behavioral healthcare or similar facilities
and related medical office buildings. The obligations of both Crescent and
Magellan to consummate the Purchase Agreement include the transfer of all
material permits, licenses and approvals, the absence of material regulatory or
contractual impediments and governmental proceedings respecting the operation of
the Facilities, the receipt of all necessary approvals and other material
consents, regulatory and other approvals, licenses and permits and the
compliance with all federal and state laws applicable to the execution of the
Master Franchise Agreement. In addition, Crescent's obligation to consummate the
Purchase Agreement is subject to conditions that include the absence of material
adverse changes in the business or financial condition of Magellan and the
absence of any withdrawal of Crescent's "fairness" opinion from its investment
bankers, and Magellan's obligation to consummate the Purchase Agreement is
subject to conditions that include the absence of any withdrawal of Magellan's
"fairness" opinion from its investment bankers and approval by Magellan's
stockholders.
Contribution Agreement. For its 50% interest in CBHS, Crescent Operating
will make an initial cash contribution to CBHS in the amount of $5 million, to
be used by CBHS to purchase certain information systems-related assets from a
Magellan subsidiary. For its 50% interest in CBHS, Magellan will contribute to
CBHS certain assets related to the Facilities, and to certain leased facilities
operated by subsidiaries of Magellan, such as patient medical records, licenses
and permits used in the operation of the Facilities, to the extent they are
transferable, leasehold interests, as lessee, in the leased facilities and in
certain medical office buildings, and certain other assets.
On the Magellan Closing Date, CBHS will acquire from Magellan for $8
million various working capital assets related to the Facilities and the leased
facilities such as supplies and inventory, notes receivable, prepaid assets and
expenses, lease deposits and utility deposits, subject to a post-closing
adjustment. Magellan will retain certain assets used in the operation of the
Facilities, including those to be provided to CBHS under the Master Franchise
Agreement. CBHS will assume all debts, obligations, duties and liabilities
relating to, or arising out of, the operation of the Facilities and business
related thereto after the Magellan Closing, including obligations that require
performance after the Magellan Closing, liabilities and obligations relating to
the assets contributed to CBHS and liabilities relating to employee accrued
vacation time and sick days.
At the Magellan Closing, either (i) Magellan will provide CBHS with bridge
financing for a one-year term in the maximum amount of $55 million to fund CBHS'
reasonable working capital needs during its first year of operation, including
funding of CBHS' purchase of working capital assets from Magellan's subsidiaries
pursuant to the CBHS Contribution Agreement in the amount of approximately $8
million; or alternatively, (ii) the bridge financing may be provided by a bank
line of credit secured by receivables and guaranteed by Magellan under certain
circumstances. A group of commercial banks has agreed to issue a loan commitment
to CBHS for a line of credit of up to $100 million pursuant to a five-year
revolving credit facility.
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Prior to the Magellan Closing, Magellan, in its capacity as a joint
venturer, will cause its subsidiaries which are joint venturers in a joint
venture owning or operating a domestic hospital to enter into a services
agreement with CBHS for each hospital owned or operated by a joint venture,
pursuant to which CBHS will perform, to the extent possible, all of Magellan's
obligations under the joint venture agreement in exchange for the payment to
CBHS by Magellan of all distributions and fees paid to Magellan by or on behalf
of the joint venture. The services agreement will continue in effect until
termination of the Facilities Lease.
CBHS Operating Agreement. The CBHS Operating Agreement provides that, in
addition to the contributions made by Crescent Operating and Magellan under the
CBHS Contribution Agreement, both Crescent Operating and Magellan will
contribute an additional $2.5 million in cash to the capital of CBHS within five
days after the Magellan Closing, and will agree to lend, in equal amounts, up to
an additional $17.5 million to CBHS upon demand by Magellan within five years of
the Magellan Closing.
The management of CBHS will be vested in the CBHS Board, a four-member
governing board of directors, with Crescent Operating and Magellan each
designating two individuals as directors. Each director will have one vote and,
except in the event of certain decisions described below, the CBHS Board will
act by the affirmative vote of a majority of the directors. John C. Goff, Vice
Chairman of Crescent and Crescent Operating, will be Chairman of the CBHS Board.
John M. DeStefanis, an executive officer of Magellan, is expected to resign from
his positions with Magellan and become the Chief Executive Officer of CBHS. The
initial officers of CBHS are expected to be former employees of Magellan.
Certain decisions will require 80% CBHS Board approval, including, among
others, any transfer or other disposition of any asset of CBHS in an amount in
excess of $50,000 (unless approved in CBHS' annual budget), the acquisition of
any stock or interest in any corporation, partnership or other business entity,
causing or permitting CBHS to engage in activities other than the behavioral
healthcare business, CBHS' entry into certain agreements proposed between CBHS
and Magellan or Crescent Operating or their affiliates, entering into contracts
not in the ordinary course of business or contracts requiring payments in a
single fiscal year in excess of $10,000 or such other amount authorized by the
CBHS Board, unless approved in CBHS' annual budget, incurring certain
indebtedness or granting certain security interests, the admission of any person
as an additional member to CBHS or the issuance of any additional interests in
CBHS, unless provided for in the CBHS Operating Agreement, employment of any
person whose annual compensation is likely to exceed $150,000, unless approved
in CBHS' annual budget, any distributions to Crescent Operating or Magellan,
selecting executive officers or removing the chairman of the CBHS Board or CBHS'
President, and the decision to renew the Facilities Lease, the Master Franchise
Agreement or the Subsidiary Franchise Agreement.
Crescent Operating and Magellan will not have any right or power to take
part in the management or control of CBHS in any way, except to the extent set
forth in the CBHS Operating Agreement. Crescent Operating and Magellan will only
have voting rights with respect to matters specifically reserved for their vote
in the CBHS Operating Agreement and each will have one vote for each percentage
interest in CBHS. The following actions may be taken only with the approval of
CBHS members owning at least 80% of CBHS' percentage interests: (i) causing or
permitting CBHS to engage in any activity not consistent with the purposes of
CBHS; (ii) the performance of any act in contravention of the CBHS Operating
Agreement; (iii) causing CBHS to reorganize, recapitalize, merge or consolidate
with another entity; (iv) electing to dissolve or liquidate CBHS; (v) causing
CBHS to take any action that would cause a bankruptcy; (vi) possessing CBHS
assets or assigning rights in CBHS assets other than for a CBHS purpose; (vii)
confessing a judgment against CBHS; (viii) changing the percentage interest of
any CBHS member without the consent of the affected member; or (ix) amending the
CBHS Operating Agreement. Crescent Operating and Magellan will not be liable for
a judgment, decree or order of a court, or any other debt, obligation or
liability of CBHS solely by reason of being a member of CBHS.
Except for certain transfers permitted in the CBHS Operating Agreement
under certain conditions, a CBHS member may not transfer all or any portion of
its interest in CBHS. Permitted transfers include transfers to (i) a wholly
owned subsidiary; (ii) the transferor's administrator or trustee if transferred
involuntarily by operation of law; (iii) any transferee if the transfer is
approved by all CBHS members having
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a 20% or greater interest in CBHS; (iv) in the case of Crescent Operating, to a
single transferee if necessary for Crescent to avoid jeopardizing its status as
a REIT (subject to certain conditions); and (v) to any person upon compliance
with the right of first refusal provision in the CBHS Operating Agreement. In
the event a CBHS member has a binding offer from an unrelated person for the
transfer of its interest in CBHS, other than pursuant to the permitted transfers
described above, the non-selling CBHS member and, in the event there are more
than two CBHS members, CBHS, will have a right of first refusal to purchase all
of the selling CBHS member's interest. In the event that Crescent Operating's or
Magellan's percentage interest in CBHS decreases to less than 25%, (i) the other
party may not transfer its CBHS interest without allowing the other CBHS members
to sell to the proposed transferee, on the same terms and conditions, their CBHS
interests; and (ii) the other party may require the other CBHS members to sell
their CBHS interests to a proposed transferee, on the same terms and conditions.
A deadlock of the CBHS Board will be deemed to exist if the CBHS Board will
be unable to reach agreement by the required vote at two successive meetings on
(i) a decision requiring 80% board approval; (ii) a decision involving the
expenditure of more than an amount to be specified; or (iii) a decision relating
to the election of executive officers. The CBHS Operating Agreement contains
provisions requiring CBHS' members, the CBHS Board and chief executive officers
of Crescent Operating and Magellan to use their best efforts to resolve a
deadlock. In the event of a failure to resolve a deadlock pursuant to these
procedures, either Crescent Operating or Magellan will be authorized to offer to
purchase all of the interest of the other, and the non-offering member must
either sell on the offered terms or purchase the offering member's interest on
such terms.
Facilities Lease. CBHS will establish a wholly-owned subsidiary to operate
each Facility. At the Magellan Closing, Crescent, CBHS and CBHS' subsidiaries
will enter into the Facilities Lease, which will be a triple-net lease
structured as an operating lease under which all of the Facilities will be
leased by Crescent to CBHS and its subsidiaries.
The initial term of the Facilities Lease will be twelve years, with four
renewal terms of five years each. CBHS may renew the lease as to all, but not
less than all, of the Facilities at its option upon notice at least one year
prior to the end of the initial term or any renewal term.
The base rent for the first year of the initial term will be $40 million
plus ten percent of any increase in the purchase price for the Facilities
resulting from the acquisition of additional facilities by Magellan after the
execution of the Purchase Agreement and prior to the Magellan Closing. The base
rent will increase by 5% compounded annually. At the commencement of any renewal
term of the Facilities Lease, a new fair market rent for the renewal term will
be determined by agreement of the parties, or if the parties are unable to agree
on a fair market rent, then by an appraisal mechanism. Following appraisal,
Crescent will have the right to render void the exercise of the option to extend
the Facilities Lease if Crescent is not satisfied with the fair market value
rent as determined by the appraiser. In addition, CBHS will pay annually an
additional $20 million under the Facilities Lease (the "Additional $20 Million
Amount"), at least $10 million of which must be used, as directed by CBHS, for
capital expenditures each year and up to $10 million of which may be used, if
requested by CBHS, to cover capital expenditures, property taxes, insurance
premiums and franchise fees. CBHS' failure to pay the Additional $20 Million
Amount is not a default under the Facilities Lease unless Crescent has expended
funds for capital expenditures, property taxes, insurance premiums or franchise
fees.
CBHS will have the right to pledge its leasehold interest to secure senior
indebtedness provided that such pledge is subordinate to any lien placed on the
Facilities by Crescent to secure financing for Crescent.
CBHS will have the right to sublease all or any of the Facilities, or to
assign the Facilities Lease, to any affiliate of CBHS or joint venture in which
it owns at least a 25% interest provided that CBHS remains liable for all
obligations under the Facilities Lease and the Franchise Agreement is assigned
to the sublessee or assignee.
At the termination of the Facilities Lease, any improvements to real estate
revert to Crescent. CBHS will agree that upon expiration of the Facilities
Lease, supplies and inventory that are, in the aggregate, the
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equivalent amount in value to that reasonably established for use by the
Facilities in the immediately preceding lease year, will remain at the leased
premises.
Master Franchise Agreement. Under the Master Franchise Agreement, Magellan
will grant a franchise for each Facility, and CBHS agrees to enter into and
cause each subsidiary/lessee of a Facility to enter into a franchise agreement
for such Facility. Magellan has agreed to grant franchises for facilities
subsequently acquired, developed or leased by CBHS provided such facilities meet
reasonable requirements of Magellan and that Magellan is not contractually or
legally prevented from granting such franchise. CBHS will guarantee all
obligations of its subsidiaries under the Subsidiary Franchise Agreements.
Franchise fees payable by CBHS under the Master Franchise Agreement will be
the greater of (i) $81 million, subject to increases for inflation; or (ii) $81
million, plus 3% of CBHS Gross Revenues (as defined in the agreement) over $1
billion and not exceeding $1.2 billion and 5% of CBHS Gross Revenues over $1.2
billion. Franchise fees are payable monthly. Interest will accrue on past due
franchise fees, but only to the extent that such franchise fees are not past due
as a result of either the operation of the Subordination Agreement or the
failure of CBHS to achieve earnings sufficient to pay such amounts. Franchise
fees are subordinated in payment to the annual base rent due Crescent under the
Facilities Lease.
In addition to other remedies, if franchise fees are past due for any
reason in the amount of $6 million or more, Magellan will have the right to
prohibit any incentive compensation to CBHS management and prohibit any vesting
of CBHS management equity. If they are past due in the amount of $18 million or
more, Magellan will have the right to prohibit any salary increases for key
personnel of CBHS, prohibit any additional hiring by CBHS and prohibit any new
hospital acquisitions/joint ventures, directly or indirectly. If they are past
due in an amount greater than $24 million, Magellan will have the right to
require a 5% cutback on budgeted expenses under the then-current approved CBHS
annual budget, require monthly approval of expenditures of CBHS by Magellan,
including capital and operating expenditures, and require transfer of control
and management of CBHS and CBHS franchisees to Magellan.
CBHS will agree during the term of the Master Franchise Agreement that it
will not engage as an owner, as an operator, in any managerial capacity or
otherwise in any business except (i) as a franchisee of Magellan; (ii) in
certain other businesses in the behavioral healthcare business pursuant to
existing contracts or contracts approved by Magellan; or (iii) in the management
and administration of businesses franchised by Magellan or conducted by a CBHS
subsidiary franchisee for new products. CBHS will not, directly or through any
subsidiary or other affiliate, engage in the hospital-based behavioral
healthcare business, except pursuant to a written agreement with Magellan, for
three years if the Master Franchise Agreement is terminated by Magellan prior to
the thirty-second anniversary of the Master Franchise Agreement. CBHS will keep
confidential the confidential information provided by Magellan and not use such
information other than to operate the franchised businesses. Magellan agrees
that CBHS will be a third party beneficiary of, and may enforce, Magellan's
covenants not to compete as set forth in the Subsidiary Franchise Agreement.
CBHS will have the right to use the "CHARTER" System in connection with its
business of the management and administration of the franchised businesses,
existing joint venture arrangements, existing businesses that are the subject of
management agreements, other businesses franchised by Magellan and new
arrangements. Magellan will continue to operate or provide a toll free "800"
telephone number and call center to provide substantially the same service to
the CBHS franchisees as provided by the call center to the Facilities when
operated by Magellan. The CBHS franchisees will advertise the "800" telephone
number and otherwise use the call center as a means of assisting customers to
locate the places of business of franchisees of Magellan.
CBHS will have the right to assign its rights under the Master Franchise
Agreement only (i) with the consent of Magellan (which consent may not be
unreasonably withheld, conditioned or delayed); (ii) to an entity which
simultaneously acquires all or substantially all of CBHS' business and assets,
provided, in each instance, that such assignee also acquires or assumes CBHS'
rights and obligations under the Facilities Lease; or (iii) if the Facilities
Lease is terminated as a result of an event of default thereunder, and Crescent
elects to assume all of CBHS' obligations under the Master Franchise Agreement
and all other agreements specified in the Facilities Lease, to Crescent or a
designee of Crescent. Magellan has the right to assign its obligations
22
<PAGE> 27
under the Master Franchise Agreement with the prior written consent of CBHS and
Crescent, which consent may not be unreasonably withheld, or to an entity which
simultaneously therewith acquires all or substantially all of Magellan's
business and assets.
In the event the Master Franchise Agreement is assigned to Crescent as a
result of the early termination of the Facilities Lease upon an event of
default, Magellan may terminate the Master Franchise Agreement and all of
Crescent's rights thereunder for "good cause," which includes the assignee's
insolvency or bankruptcy; violation of any transfer and assignment provision
contained in the Master Franchise Agreement; the assignee's noncompliance with
any law, rule or regulation applicable to the operation of its business (subject
to reasonable attempts to cure); material violations of confidentiality or
nondisclosure covenants; the assignee's failure to perform or the breach of any
covenant, obligation, term, condition, warranty or certification in the Master
Franchise Agreement (subject to reasonable cure periods); and the assignee's
failure to pay certain fees owed to Magellan under the Master Franchise
Agreement within ten days.
CBHS will indemnify and defend Magellan from all losses and liabilities
arising directly or indirectly as a result of, arising out of or in connection
with the operation of CBHS' business, except those directly resulting from
Magellan's willful misconduct or fraud, and Magellan will indemnify CBHS from
all losses and liabilities arising directly or indirectly as a result of,
arising out of or in connection with the operation of CBHS' business or from
Magellan's willful misconduct or fraud.
The initial term of the Master Franchise Agreement is 12 years. CBHS has
the right to renew the Master Franchise Agreement for four additional five-year
renewal terms, provided that at the end of the initial term and each renewal
term, the fees will be adjusted to reflect the fair market value of the
franchise utilized by the Facilities as of the renewal date for the
then-applicable renewal term. The Master Franchise Agreement includes an
appraisal mechanism for determining fair market value franchise fees.
Notwithstanding the foregoing, if the fair market value franchise fee as so
determined is not acceptable to Magellan, then Magellan will have the option to
terminate the Master Franchise Agreement at the end of the then-current term and
the Master Franchise Agreement will not be further extended. In all other
events, Magellan will not have the right to terminate the Master Franchise
Agreement (whether for breach or otherwise) without the consent of CBHS and
Crescent. CBHS will not have the right to terminate the Master Franchise
Agreement (whether for breach or otherwise) without the consent of Magellan and
Crescent.
Subsidiary Franchise Agreement. Each CBHS subsidiary that operates a
Facility (each, a "franchisee") will enter into a Subsidiary Franchise Agreement
with Magellan. Each franchisee will be granted the right to engage in the
business of providing behavioral healthcare utilizing the "CHARTER" System from
facilities in the territory defined in the Subsidiary Franchise Agreement. The
"CHARTER" System is a system for the operation of behavioral healthcare
businesses under the "CHARTER" names and marks, including the right to use
existing computer software, existing treatment programs and procedures, existing
quality standards, existing quality assessment methods, existing performance
improvement and monitoring programs, advertising and marketing assistance,
promotional materials, consultation and other matters relating to the operation
of the business. The rights granted under each Subsidiary Franchise Agreement
will relate solely to a defined territory.
Each Subsidiary Franchise Agreement will have the same term as the Master
Franchise Agreement. CBHS will pay Magellan, pursuant to the Master Franchise
Agreement, all franchise fees on behalf of each franchisee.
During the term of each Subsidiary Franchise Agreement, Magellan will
provide franchisees advertising and marketing assistance including (i)
consultation, access to media buying programs and access to broadcast 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.
23
<PAGE> 28
During the term of the Subsidiary Franchise Agreement, franchisees will be
prohibited from engaging in the hospital-based behavioral healthcare business
except under franchise from Magellan. For a period expiring on the earlier of
three years after expiration or termination of the Subsidiary Franchise
Agreement or the thirty-second anniversary of the Magellan Closing, the
franchisee agrees not to engage in its exclusive territory in the operation of a
hospital/residential treatment center-based, behavioral healthcare business. The
franchisees agree to keep confidential the confidential information provided by
Magellan and not use such information other than to operate its franchised
business.
The franchisee may not terminate a Subsidiary Franchise Agreement without
the consent of Magellan. Each Subsidiary Franchise Agreement will be subject to
termination by Magellan for "good cause," which includes certain acts of
bankruptcy or insolvency of the franchisee; violation of any transfer and
assignment provision contained in the Master Franchise Agreement; the
franchisee's noncompliance with any law, rule or regulation applicable to the
operation of its business (subject to reasonable attempts to cure); material
violations of confidentiality or nondisclosure covenants; the franchisee's
failure to perform or the breach of any covenant, obligation, term, condition,
warranty or certification in the Master Franchise Agreement (subject to
reasonable cure periods); and the franchisee's failure to pay certain fees owed
to Magellan under the Master Franchise Agreement within ten days.
Subordination Agreement
Magellan, CBHS and Crescent will enter into a Subordination Agreement at
the Magellan Closing, which will provide, in general, that franchise fees are
subordinated to base rent, the annual 5% increase (the "Minimum Escalator Rent")
and the first $10 million of the Additional $20 Million Amount due annually
under the Facilities Lease (including all renewals). If, however, the accrued
and unpaid franchise fees, including interest thereon, if any, equals or exceeds
$15 million, then CBHS's available cash generally will first be applied to base
rent and Minimum Escalator Rent, but not to the Additional $20 Million Amount,
under the Facilities Lease (including all renewals). To the extent, however,
that CBHS (with the consent of Magellan) informs Crescent that capital
expenditures are required and Crescent funds or makes an irrevocable commitment
to fund such capital expenditures, then franchise fees will be subordinated to
such amounts paid or committed by Crescent, and CBHS's available cash will first
be applied to base rent, Minimum Escalator Rent and the portion of the
Additional $20 Million Amount necessary to fund such capital expenditures, and
Crescent will have no obligation to refund any amounts paid by CBHS as the
Additional $20 Million Amount.
The subordination arrangement provided for in the Subordination Agreement
will continue as long as any base rent, Minimum Escalator Rent or the Additional
$20 million Amount is unpaid under the Facilities Lease if such base rent,
Minimum Escalator Rent or the Additional $20 Million Amount would have been
entitled to the benefits of the subordination described above.
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.
Crescent Operating Warrant Purchase Agreement. Under the Crescent Operating
Warrant Purchase Agreement, Magellan will receive warrants to acquire up to 2.5%
of Crescent Operating Common Stock (the "Crescent Operating Warrants")
outstanding as of the Magellan Closing Date. The Crescent Operating Warrants are
exercisable only at the times, and in the proportions, that Crescent or Crescent
Operating exercises its Magellan Warrants. The exercise price for the Crescent
Operating Warrants will reflect the same premium as used to calculate the
exercise price of the Magellan Warrants, based upon a valuation of Crescent
Operating conducted by a mutually agreed upon independent appraiser.
24
<PAGE> 29
PROPERTY
Crescent Operating maintains its principal corporate office in Fort Worth,
Texas, which it leases from Crescent pursuant to a -year lease. The space
consists of approximately square feet of office space. In addition,
Crescent Operating owns approximately acres in Dallas, Texas from which
Moody-Day conducts its operations. This property consists of a -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 , 1997, Crescent Operating had approximately employees, all
of whom were officers of Crescent Operating.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF CRESCENT OPERATING
As of April 15, 1997, Gerald W. Haddock was the sole director of Crescent
Operating and served as its President, Chief Executive Officer and Chief
Financial Officer. 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 April 15, 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
John C. Goff 2000 41 Vice Chairman
Gerald W. Haddock 1999 49 President, Chief Executive Officer
and Director
Anthony M. Frank 2000 65 Director
Paul E. Rowsey, III 1998 42 Director
Carl F. Thorne 1999 56 Director
Jeffrey L. Stevens 2000 48 Treasurer, Chief Financial
Officer, Secretary and Director
</TABLE>
Richard E. Rainwater has been an independent investor since 1986. Mr.
Rainwater has been Chairman of the Board of Crescent since its formation in
1994. From 1970 to 1986, he served as the chief investment advisor to the Bass
family, whose overall wealth increased dramatically during his tenure. During
that time he was principally responsible for numerous major corporate and real
estate acquisitions and dispositions. Immediately after beginning his
independent investment activities, he founded ENSCO International Incorporated,
in 1986. Additionally, in 1990 he co-founded Columbia Hospital Corporation and
in 1989 participated in a management-led buyout of HCA-Hospital Corporation of
America; both of these companies owned and operated for-profit hospitals. In
1992, Mr. Rainwater was one of the founders of Mid Ocean Limited, a provider of
casualty re-insurance. In February 1994, he assisted in the merger of Columbia
Hospital Corporation and HCA-Hospital Corporation that created Columbia/HCA
Healthcare Corporation, the world's largest hospital company. Mr. Rainwater is a
graduate of the University of Texas at Austin and the Graduate School of
Business at Stanford University. Mr. Rainwater has served as the Chairman of the
Board of Trust Managers of Crescent, which he founded in 1994.
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.
25
<PAGE> 30
in 1987, Mr. Goff was employed by the accounting firm of KPMG Peat Marwick LLP
from 1981 to 1987. Before joining KPMG Peat Marwick LLP, Mr. Goff was employed
by Century Development Corporation, a major Houston-based office developer and
property management company. Mr. Goff is a director and the Vice Chairman of the
Board of Crescent. Mr. Goff is a graduate of the University of Texas at Austin
and is a Certified Public Accountant. From 1994 to 1996, Mr. Goff was Chief
Executive Officer and a director of Crescent. Since December 19, 1996, Mr. Goff
has served as Vice Chairman of the Board of Trust Managers of Crescent. Mr. Goff
will also serve as Chairman of the CBHS Board.
Gerald W. Haddock, prior to joining Crescent in 1994, was in the private
practice of law, pursuant to which, among other things, he served as primary
outside legal counsel to, and investor with, Mr. Rainwater and Rainwater, Inc.
Mr. Haddock is President, Chief Executive Officer and a director of Crescent.
Mr. Haddock was vice president of Rainwater, Inc. from 1990 to 1994 and was the
lead transactional attorney for Mr. Rainwater from 1986 to 1994. Mr. Haddock
presently is a member of the board of directors of AmeriCredit Corporation, a
company engaged in the financing of automobile dealer paper, and ENSCO
International Incorporated, an oil field service and offshore drilling company,
of which he was one of the three founding directors. In addition, Mr. Haddock
serves as general counsel for the Texas Rangers baseball club. Mr. Haddock
earned both Bachelor of Business Administration (B.B.A.) and Juris Doctor (J.D.)
degrees from Baylor University. He also holds a Master of Laws (L.L.M.) degree
in taxation from New York University and has served as the Chairman of the Tax
Section of the State Bar of Texas. From 1994 through December 18, 1996, Mr.
Haddock served as President, Chief Operating Officer and a director of Crescent.
Since December 19, 1996 Mr. Haddock has served as President, Chief Executive
Officer and a director of Crescent.
Anthony M. Frank served as Postmaster General of the United States from
1988 to 1992. Prior to that time, Mr. Frank served as chairman and chief
executive officer of First Nationwide Bank, chairman of the Federal Home Loan
Bank of San Francisco, chairman of the California Housing Finance Agency, and as
the chairman of the Federal Home Loan Mortgage Corporation Advisory Board. Since
1992, he has served as the founding chairman of Independent Bancorp of Arizona
until October 1993 and currently serves as a consultant and director of
TransAmerica HomeFirst, a mortgage company specializing in loans to the elderly.
Mr. Frank currently serves as a director of Crescent and of Acrogen, Inc. a
biotechnology company. Irvine Apartment Communities, a large California-based
apartment REIT, and Charles Schwab & Co., one of the nation's largest discount
brokerages. He is also a director of Temple Inland, Inc., a manufacturer of
paper and timber products, Bedford Property Investors, Inc., an office and
commercial property REIT investing primarily on the West Coast, General American
Investors Company, Inc., a closed-end investment company, Financial Security
Assurance, a company providing credit enhancement for municipal bond issuers,
Cotelligent, Inc., a provider of temporary office support services, and Living
Centers of America, Inc., an operator of nursing homes. Mr. Frank received a
Bachelor of Arts (B.A.) degree from Dartmouth College and a Master of Business
Administration (M.B.A.) degree from the Amos Tuck School of Business at
Dartmouth where he currently serves as overseer.
Paul E. Rowsey, III is president of the commercial real estate group of
Rosewood Property Company, a commercial real estate development and investment
company, a position he has held for the past six years, and a member of the
board of directors of Rosewood Property Company. Mr. Rowsey is a director of
Crescent. Mr. Rowsey began his career in 1980 as an attorney specializing in
commercial real estate. Mr. Rowsey holds a Bachelor of Arts (B.A.) degree from
Duke University and a Juris Doctor (J.D.) degree from Southern Methodist
University School of Law.
Carl F. Thorne has been a director of ENSCO International Incorporated
("ENSCO"), 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
26
<PAGE> 31
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. The Audit Committee consists of Anthony M. Frank, Chairman, and Carl
F. Thorne, and the Compensation Committee consists of Carl F. Thorne, Chairman,
and Paul E. Rowsey, III. 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 a meeting fee of $ 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 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
Executive officers and directors of Crescent Operating 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. 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 Incentive Stock Plan as described below. The following table sets
forth the number of Crescent Common Shares and Units beneficially owned on
, 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.
27
<PAGE> 32
BENEFICIAL OWNERSHIP
<TABLE>
<CAPTION>
NUMBER PERCENT
NAME AND ADDRESS OF OF OF
BENEFICIAL OWNER(1) SHARES(2) SHARES(3)
------------------- ------------- ---------
<S> <C> <C>
Richard E. Rainwater
John C. Goff
Gerald W. Haddock
Anthony M. Frank
Paul E. Rowsey, III
Carl F. Thorne
Jeffrey L. Stevens
FMR Corp.
82 Devonshire Street
Boston, Massachusetts 02109
The Prudential Insurance
Company of America
Prudential Plaza
Newark, New Jersey 07102-3777
Cohen & Steers Capital Management, Inc.
757 Third Avenue
New York, New York 10017
Trust Managers and Executive Officers as a Group
(7 persons)
</TABLE>
- ---------------
* Less than 1%.
(1) Unless otherwise indicated, the address of each beneficial owner is
.
(2) All information is as of , 1997. As of such date,
Common Shares ("Shares") and Units were outstanding. For purposes
of this table, a person is deemed to have "beneficial ownership" of the
number of Shares that such person has the right to acquire within 60 days
of , 1997 upon exercise of options to purchase Common Shares
("Options") granted pursuant to the Company's Stock Incentive Plan.
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.
The following table provides certain information regarding options held by
the Company's named executive officers at , 1997. The Company has
not granted any SARs.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES PRICE 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................
John C. Goff........................
Gerald W. Haddock...................
</TABLE>
28
<PAGE> 33
- ---------------
* Potential Realizable Value is based on the assumed annual growth rates shown
over their ten-year option term. For example, a 5% growth rate compounded
annually, for Mr. Goff's grant results in a stock price of $ per share
and a 10% growth rate, compounded annually, results in a stock price of
$ per share. These Potential Realizable Values are listed to comply
with the regulations of the Securities and Exchange Commission, and the
Company cannot predict whether these values will be achieved. Actual gains,
if any, on stock option exercises are dependent on the future performance of
the stock.
CRESCENT OPERATING INCENTIVE STOCK PLAN
Crescent Operating has adopted an Incentive Stock Plan pursuant to which
grants of options ("Options") to purchase a specified number of shares of
Crescent Operating Common Stock and Restricted Stock to employees, officers and
advisors of Crescent Operating or its subsidiaries were made in order to provide
each holder of shares of restricted stock in Crescent or options in Crescent or
Crescent Operating Partnership with an equivalent number of shares of Restricted
Stock or Options in Crescent Operating, based on a ratio of one share of
Restricted Stock or Option to purchase Crescent Operating Common Stock for each
10 shares of restricted stock in Crescent or options for Crescent Common Shares
and one Option to purchase Crescent Operating Common Stock for each 5 options
for Units. Under the Incentive Stock Plan, shares of Crescent
Operating Common Stock are authorized for issuance. No shares of Crescent
Operating Common Stock are available under the Incentive Stock Plan, and no
further grants of Options or Restricted Stock will be made under the Incentive
Stock Plan. The Incentive Stock Plan expires on June 11, 2005.
The Compensation Committee of Crescent Operating has authority to determine
the employees, officers and advisors to be granted Options or Restricted Stock,
to interpret the Incentive Stock Plan, to prescribe, amend and rescind any rules
and regulations necessary or appropriate for the administration of the Incentive
Stock Plan, to determine and interpret the details and provisions of each Option
agreement and Restricted Stock agreement, to modify or amend any Option
agreement or Restricted Stock agreement or waive any conditions or restrictions
applicable to any Option (or the exercise thereof) or to Restricted Stock, and
to make all other determinations necessary or advisable for the administration
of the Incentive Stock Plan. With respect to any provisions of the Incentive
Stock 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 Incentive
Stock Plan does not extend to Options granted to outside directors.
29
<PAGE> 34
CERTAIN TRANSACTIONS
FORMATION OF CRESCENT OPERATING AND THE INTERCOMPANY AGREEMENT
In connection with the formation and capitalization of Crescent Operating,
Crescent Operating Partnership provided cash and advanced funds in the aggregate
amount of $40.8 million in exchange for all of the outstanding shares of
Crescent Operating Common Stock. The $40.8 million was or is expected to be used
to purchase the Assets and to support future funding obligations and cash
requirements. The purchase price associated with, and allocated to, the Assets
has been preliminarily determined but is subject to adjustment prior to closing
of the acquisition of the Assets.
Of the $40.8 million provided by Crescent Operating Partnership,
approximately $12.2 million was contributed in cash and approximately $28.6
million was loaned to Crescent Operating pursuant to a five-year term loan. The
loan is a recourse loan secured by a first lien on the Assets. The loan will
bear interest at the rate of 12% per annum, compounded annually, and is payable
quarterly in an amount equal to the lesser of (i) the net cash flow for the
preceding quarter and (ii) the total amount of principal and accrued interest
outstanding on the loan. Net cash flow will be computed by subtracting the total
costs incurred by Crescent Operating from its gross receipts. The loan matures
on , 2002.
The Company has also obtained a line of credit for up to $20.0 million from
Crescent Operating Partnership which bears interest at the same rate and is
payable on the same terms as the loan.
The Intercompany Agreement sets forth the basis on which Crescent Operating
and Crescent 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 Directors, John C. Goff, Vice Chairman, and Gerald W. Haddock,
President and Chief Executive Officer. The sole general partner of Crescent
Operating Partnership is Crescent Ltd., which is a wholly-owned subsidiary of
Crescent. Mr. Haddock is the sole director of Crescent Ltd. The persons who are
executive officers of Crescent hold the same offices in Crescent Ltd., except
that Messrs. Rainwater and Goff are not directors or officers of Crescent Ltd.
Messrs. Rainwater, Goff and Haddock owned 15.5%, 2.5% and 1.9% of Crescent as of
March 31, 1997, which interests consist of Crescent Common Shares and units of
ownership in Crescent Operating Partnership (including vested options to acquire
Crescent Common Shares and Units). In connection with the Magellan Transaction,
Mr. Goff will become Chairman of CBHS. Mr. Rainwater is an affiliate of Crescent
Operating Partnership, Crescent Ltd. and Crescent.
INTERESTS RELATING TO MAGELLAN
The CBHS Interest. The CBHS Interest is a part of the Assets expected to be
purchased by Crescent Operating and is a component of the Magellan Transaction.
The CBHS Interest cannot be acquired unless all of the transactions that
comprise the Magellan Transaction are consummated, including the acquisition by
Crescent of the Facilities, the lease of the Facilities from Crescent to CBHS
and the subordination of franchise fees to payments under the Facilities Lease.
Management of CBHS will be vested in the CBHS Board. Crescent Operating and
Magellan will each have the right to designate two members to the CBHS Board. It
is expected that Crescent Operating will designate John C. Goff and Gerald W.
Haddock as its two designees to the CBHS Board, and that Mr. Goff will serve as
Chairman of the CBHS Board.
Ownership of Magellan Securities. Messrs. Rainwater, Goff and Haddock and
Mr. Rainwater's children own shares of Magellan common stock and warrants to
acquire Magellan common stock. Mr. Rainwater, either directly or indirectly,
owns approximately 2,474,000 shares, and warrants to acquire 1,237,000 shares,
of Magellan common stock. Mr. Rainwater's children, either directly or
indirectly, own approximately 320,000 shares, and warrants to acquire 160,000
shares, of Magellan common stock. Messrs. Goff and Haddock each own, directly or
indirectly, approximately 57,000 shares, and warrants to acquire 28,000 shares,
of Magellan common stock. The Magellan Transaction is subject to the approval of
Magellan's stockholders.
30
<PAGE> 35
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 the Rainwater
Group continues to own beneficially a specified minimum number of shares of
Magellan common stock. Rainwater-Magellan proposed Ms. Moore as its nominee for
director, and Ms. Moore was elected a director by the Magellan Board on February
22, 1996.
As part of the Private Placement, Magellan agreed (i) to pay a transaction
fee of $150,000; (ii) to reimburse certain expenses of Rainwater, Inc. in
connection with the Private Placement; (iii) to pay Mr. Rainwater and his
affiliates (collectively, 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 Act 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 -year contract with Petroleum
Financial Inc., a company owned by Jeffrey Stevens, a director and the Chief
Financial Officer, Treasurer and Secretary of the Company, pursuant to which
Petroleum Financial will provide certain services to Crescent Operating. These
services include accounting services, review or initial preparation of reports
required to be filed with the Commission, reports to shareholders, and similar
matters. Crescent Operating will pay Petroleum Financial an annual fee in an
amount to be determined.
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DESCRIPTION OF CRESCENT OPERATING CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
Crescent Operating's authorized capital stock consists of shares of
preferred stock, par value $.01 per share (the "Preferred Stock"), and
shares of Crescent Operating Common Stock. Immediately following the
Distribution, approximately shares of Crescent Operating Common Stock will
be outstanding. All of the shares of Crescent Operating Common Stock that will
be outstanding immediately following the Distribution will be validly issued,
fully paid and nonassessable.
COMMON STOCK
The holders of Crescent Operating Common Stock will be entitled to one vote
for each share on all matters voted on by stockholders, including elections of
directors, and, except as otherwise required by law or provided in any
resolution adopted by Crescent Operating's Board with respect to any series of
Preferred Stock, the holders of such shares will possess all voting power. The
Charter does not provide for cumulative voting in the election of directors.
Subject to any preferential rights of any outstanding series of Preferred Stock
created by the Crescent Operating Board from time to time, the holders of
Crescent Operating Common Stock will be entitled to such dividends as may be
declared from time to time by the Crescent Operating Board from funds available
therefor, and upon liquidation will be entitled to receive pro rata all assets
of the Company available for distribution to such holders.
PREFERRED STOCK
The Charter authorizes the Crescent Operating Board to establish one or
more series of Preferred Stock and to determine, with respect to any series of
Preferred Stock, the terms and rights of such series, including (i) the
designation of the series, (ii) the number of shares of the series, which number
the Crescent Operating Board may thereafter (except where otherwise provided in
the applicable certificate of designation) increase or decrease (but not below
the number of shares thereof then outstanding), (iii) whether dividends, if any,
will be cumulative or noncumulative, and, in the case of shares of any series
having cumulative dividend rights, the date or dates or method of determining
the date or dates from which dividends on the shares of such series shall be
cumulative, (iv) the rate of any dividends (or method of determining such
dividends) payable to the holders of the shares of such series, any conditions
upon which such dividends will be paid and the date or dates or the method for
determining the date or dates upon which such dividends will be payable, (v) the
redemption rights and price or prices, if any, for shares of the series, (vi)
the terms and amounts of any sinking fund provided for the purchase or
redemption of shares of the series, (vii) the amounts payable on and the
preferences, if any, of shares of the series in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of Crescent
Operating, (viii) whether the shares of the series will be convertible or
exchangeable into shares of any other class or series, or any other security, of
Crescent Operating or any other corporation, and, if so, the specification of
such other class or series or such other security, the conversion or exchange
price or prices or rate or rates, any adjustments thereof, the date or dates as
of which such shares will be convertible or exchangeable and all other terms and
conditions upon which such conversion or exchange may be made, (ix) restrictions
on the issuance of shares of the same series or of any other class or series,
(x) the voting rights, if any, of the holders of the shares of the series, and
(xi) any other relative rights, preferences and limitations of such series.
Crescent Operating believes that the ability of the Crescent Operating
Board to issue one or more series of Preferred Stock will provide it with
flexibility in structuring possible future financings and acquisitions, and in
meeting other corporate needs which might arise. The authorized shares of
Preferred Stock, as well as shares of Crescent Operating Common Stock, will be
available for issuance without further action by Crescent Operating's
stockholders, unless such action is required by applicable law or the rules of
any stock exchange or automated quotation system on which Crescent Operating's
securities may be listed or traded. If the approval of Crescent Operating's
stockholders is not required for the issuance of shares of Preferred Stock or
Crescent Operating Common Stock, the Crescent Operating Board may determine not
to seek stockholder approval.
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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.
The Company expects to reserve Junior Preferred Shares (as described in
"Certain Antitakeover Provisions -- Rights Plan") for issuance upon exercise of
the Rights.
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
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effected by any consent in writing by such holders. Except as otherwise required
by law and subject to the rights of the holders of any Preferred Stock, special
meetings of stockholders of Crescent Operating for any purpose or purposes may
be called only by the Chairman, Vice Chairman, President or the Crescent
Operating Board pursuant to a resolution stating the purpose or purposes
thereof, and any power of stockholders to call a special meeting is specifically
denied. No business other than that stated in the notice shall be transacted at
any special meeting. These provisions may have the effect of delaying
consideration of a stockholder proposal until the next annual meeting unless a
special meeting is called by the Chairman, Vice Chairman, President or the
Crescent Operating Board.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND STOCKHOLDER PROPOSALS
The Bylaws establish an advance notice procedure for stockholders to make
nominations of candidates for directors or bring other business before an annual
meeting of stockholders of Crescent Operating (the "Stockholder Notice
Procedure").
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,
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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 holders of at least 80% of the voting
power of the outstanding shares of Voting Stock, voting together as a single
class. In all cases, amendments to the Charter require that the Crescent
Operating Board determine that the proposed amendment is advisable.
RIGHTS PLAN
The Crescent Operating Board currently expects to adopt a Share Purchase
Rights Plan (the "Rights Plan") on or prior to the Distribution Date. Pursuant
to the Rights Plan, the Crescent Operating Board will cause to be issued one
preferred share purchase right (a "Right") for each outstanding share of
Crescent Operating Common Stock. Each Right will entitle the registered holder
to purchase from Crescent Operating one-hundredth of a share of a new series of
junior preferred stock, par value $.01 per share (the "Junior Preferred
Shares"), of Crescent Operating at a price of $ (the "Purchase Price"),
subject to adjustment. The description and terms of the Rights will be set forth
in a Rights Agreement (the "Rights Agreement"), between Crescent Operating and
the designated Rights Agent (the "Rights Agent"). The description set forth
below is intended as a summary only and is qualified in its entirety by
reference to the form of the Rights Agreement, which will be filed as an exhibit
to the Registration Statement. See "Available Information."
Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") has acquired beneficial ownership of 10% or more of the outstanding
shares of Crescent Operating Common Stock or (ii) 10 business days (or such
later date as may be determined by action of the Crescent Operating Board prior
to such time as any person becomes an Acquiring Person) following the
commencement of, or announcement of an intention to make, a tender offer or
exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 10% or more of such outstanding shares of
Crescent Operating Common Stock (the earlier of such dates being called the
"Rights Distribution Date"), the Rights will be evidenced by the certificates
representing the Crescent Operating Common Stock.
The Rights Agreement will provide that, until the Rights Distribution Date
(or earlier redemption or expiration of the Rights), the Rights will be
transferred with and only with the Crescent Operating Common Stock. Until the
Rights Distribution Date (or earlier redemption or expiration of the Rights),
the Crescent Operating Common Stock certificates will contain a notation
incorporating the Rights Agreement by reference. As soon as practicable
following the Rights Distribution Date, separate certificates evidencing the
Rights (the "Right Certificates") will be mailed to holders of record of the
Crescent Operating Common Stock as of the close of business on the Rights
Distribution Date and such separate Right Certificates alone will evidence the
Rights.
The Rights will not be exercisable until the Rights Distribution Date. The
Rights will expire on the 10th anniversary of the date of issuance (the "Final
Expiration Date"), unless the Final Expiration Date is extended or unless the
Rights are earlier redeemed or exchanged by Crescent Operating, in each case, as
summarized below.
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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 become void), in whole or in part, at an
exchange ratio of one share of Crescent Operating Common Stock, or one-hundredth
of a Junior Preferred Share (or of a share of a class or series of the Preferred
Stock having equivalent rights, preference and privileges) per Right (subject to
adjustment).
At any time prior to the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 10% or more of the outstanding
Crescent Operating Common Stock, the Crescent Operating Board may redeem the
Rights in whole, but not in part, at a price of $.01 per Right (the "Redemption
Price"). The redemption of the Rights may be made effective at such time on such
basis and with such conditions as the Crescent Operating Board, in its sole
discretion, may establish. Immediately upon any redemption of the Rights, the
right to exercise the Rights will terminate and the holders of the Rights then
will be eligible to receive only the Redemption Price.
The terms of the Rights may be amended by the Crescent Operating Board
without the consent of the holders of the Rights; provided, however, that from
and after such time as any person or group of affiliated or associated persons
becomes an Acquiring Person, no such amendment may adversely affect the
interests of the holders of the Rights.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of Crescent Operating, including, without limitation,
the right to vote or to receive dividends.
The number of outstanding Rights and the number of one-hundredths of a
Junior Preferred Share issuable upon exercise of each Right also will be subject
to adjustment in the event of a split of the Crescent Operating Common Stock, or
a stock dividend on the Crescent Operating Common Stock payable in Crescent
Operating Common Stock or subdivisions, consolidations or combinations of the
Crescent Operating Common Stock occurring, in any such case, prior to the Rights
Distribution Date.
The Purchase Price payable, and the number of Junior Preferred Shares or
other securities or property issuable, upon exercise of the Rights will be
subject to adjustment from time to time to prevent dilution (i) in the event of
a stock dividend on, or a subdivision, combination or reclassification of, the
Junior Preferred Shares, (ii) upon the grant to holders of the Junior Preferred
Shares of certain rights or warrants to subscribe for or purchase Junior
Preferred Shares at a price, or securities convertible into Junior Preferred
Shares with a conversion price, less than the then-current market price of the
Junior Preferred Shares or (iii) upon the distribution to holders of the Junior
Preferred Shares of evidences of indebtedness or assets (excluding regular
periodic cash dividends paid out of earnings or retained earnings or dividends
payable in Junior Preferred Shares) or of subscription rights or warrants (other
than those referred to above).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least one
percent in such Purchase Price. No fractional Junior Preferred Shares will be
issued (other than fractions which are integral multiples of one-hundredth of a
Junior Preferred Share, which may, at the election of the Company, be evidenced
by depositary receipts) and in lieu
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thereof, an adjustment in cash will be made based on the market price of the
Junior Preferred Shares on the last trading day prior to the date of exercise.
Junior Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each Junior Preferred Share will be entitled to a minimum
preferential quarterly dividend payment of $ per share but will be
entitled to an aggregate dividend of 100 times the dividend declared per share
of Crescent Operating Common Stock. In the event of liquidation, the holders of
the Junior Preferred Shares will be entitled to a minimum preferential
liquidation payment of $ per share but will be entitled to an aggregate
payment of 100 times the payment made per share of Crescent Operating Common
Stock. Each Junior Preferred Share will have 100 votes voting together with the
Crescent Operating Common Stock. Finally, in the event of any merger,
consolidation or other transaction in which shares of Crescent Operating Common
Stock are exchanged, each Junior Preferred Share will be entitled to receive 100
times the amount received per share of Crescent Operating Common Stock. These
rights are protected by customary anti-dilution provisions.
Due to the nature of the Junior Preferred Shares' dividend, liquidation and
voting rights, the value of the one-hundredth interest in a Junior Preferred
Share purchasable upon exercise of each Right should approximate the value of
one share of Crescent Operating Common Stock.
The Rights have certain antitakeover effects. The Rights will cause
substantial dilution to a person or group of persons that attempts to acquire
Crescent Operating on terms not approved by the Crescent Operating Board. The
Rights should not interfere with any merger or other business combination
approved by the Crescent Operating Board prior to the time that a person or
group has acquired beneficial ownership of 10% or more of the Crescent Operating
Common Stock since the Rights may be redeemed by Crescent Operating at the
Redemption Price until such time.
The Rights contain certain provisions to exclude Crescent and its
affiliates from the operative provisions thereof.
DELAWARE BUSINESS COMBINATION STATUTE
Section 203 of the DGCL provides that, subject to certain exceptions
specified therein, an "interested stockholder" of a Delaware corporation shall
not engage in any business combination, including mergers or consolidations or
acquisitions of additional shares of the corporation, with the corporation for a
three-year period following the date that such stockholder becomes an interested
stockholder unless (i) prior to such date, the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
"interested stockholder," the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding certain shares), or (iii) on or subsequent to such date,
the business combination is approved by the board of directors of the
corporation and authorized at an annual or special meeting of stockholders by
the affirmative vote of at least 66 2/3% of the outstanding voting stock which
is not owned by the interested stockholder. Except as otherwise specified in
Section 203, an interested stockholder is defined to include (x) any person that
is the owner of 15% or more of the outstanding voting stock of the corporation,
or is an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation at any time within three
years immediately prior to the date of determination and (y) the affiliates and
associates of any such person.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an interested stockholder to effect various business
combinations with a corporation for a three-year period. Crescent Operating has
not elected to be exempt from the restrictions imposed under Section 203.
However, the Charter excludes Crescent and its affiliates from the definition of
"interested stockholder" pursuant to the terms of Section 203. The provisions of
Section 203 may encourage persons interested in acquiring Crescent Operating to
negotiate in advance with the Crescent Operating Board, since the stockholder
approval requirement would be avoided if a majority of the directors then in
office approves either the business combination or the transaction which results
in any such person becoming an interested shareholder. Such
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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 "control shares" of Crescent Operating acquired
in a control share acquisition have no voting rights 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.
Accordingly, "control shares" are shares which, if aggregated with all other
shares previously acquired which the person is entitled to vote, would entitle
the acquiror to vote (i) 20% or more but less than one-third, (ii) one-third or
more but less than a majority, or (iii) a majority of the outstanding shares.
Control shares do not include shares that the acquiring person is entitled to
vote on the basis of prior stockholder approval. A "control share acquisition"
means the acquisition of control shares subject to certain exceptions.
The Charter provides that a person who has made or proposed to make a
control share acquisition and who has obtained a definitive financing agreement
with a responsible financial institution providing for any 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 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 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 such
shares are considered and not approved. Under the Charter, if voting rights for
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,
all other stockholders will have the rights of dissenting stockholders under the
DGCL. The Charter provides that the fair value of the shares for purposes of
such appraisal rights may not be less than the highest price per share paid by
the acquiror in the control share acquisition, and that certain limitations and
restrictions of the DGCL otherwise applicable to the exercise of dissenters'
rights do not apply.
The control share acquisition provision does not apply to 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
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availability of equitable remedies such as an injunction or rescission based on
a director's breach of his or her duty of care.
The Charter provides that each person who was threatened to be made a party
to or is involved in any proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such person, or a person of whom such
person is the legal representative, is or was a director or officer of Crescent
Operating or is or was serving at the request of Crescent Operating as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is alleged action
in an official capacity as a director, officer, employee or agent or in any
other capacity while serving as a director, officer, employee or agent, will be
indemnified and held harmless by Crescent Operating to the fullest extent
authorized by the DGCL, as the same exists or may hereafter be amended (but, in
the case of any such amendment, only to the 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 Common Stock to be
distributed in the Distribution will be passed upon for the Company by Shaw,
Pittman, Potts & Trowbridge, Washington, D.C.
39
<PAGE> 44
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HISTORICAL FINANCIAL STATEMENTS
CRESCENT OPERATING, INC. --
Report of Independent Public Accountants............... F-1
Balance Sheet as of April 3, 1997...................... F-2
Notes to Balance Sheet................................. F-3
CARTER-CROWLEY ASSET GROUP --
Report of Independent Public Accountants............... F-4
Combined Balance Sheets as of December 31, 1996 and
1995.................................................. F-5
Combined Statements of Operations for the years ended
December 31, 1996, 1995 and 1994...................... F-6
Combined Statements of Shareholder's Equity for the
years ended December 31, 1996, 1995 and 1994.......... F-7
Combined Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994...................... F-8
Notes to Combined Financial Statements................. F-9
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC. --
Report of Independent Public Accountants............... F-15
Combined Balance Sheets as of September 30, 1995 and
1996 (audited) and December 31, 1996 (unaudited)...... F-16
Combined Statements of Operations for the years ended
September 30, 1994, 1995 and 1996 (audited) and the
three months ended December 31, 1995 and 1996
(unaudited)........................................... F-18
Combined Statements of Changes in Stockholder's Deficit
for the years ended September 30, 1994, 1995 and 1996
(audited) and the three months ended December 31, 1995
and 1996 (unaudited).................................. F-19
Combined Statements of Cash Flows for the years ended
September 30, 1994, 1995 and 1996 (audited) and the
three months ended December 31, 1995 and 1996
(unaudited)........................................... F-20
Notes to Combined Financial Statements................. F-21
PROFORMA CONSOLIDATING FINANCIAL INFORMATION
Crescent Operating, Inc................................... F-31
Charter Behavioral Health Systems, LLC.................... F-36
</TABLE>
<PAGE> 45
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-1
<PAGE> 46
CRESCENT OPERATING, INC.
BALANCE SHEET
APRIL 3, 1997
<TABLE>
<S> <C>
Cash........................................................ $1,000
======
Shareholder'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-2
<PAGE> 47
CRESCENT OPERATING, INC.
NOTES TO BALANCE SHEET
APRIL 3, 1997
(1) Crescent Operating, Inc. ("Crescent Operating" or the "Company"), a
Delaware corporation and wholly owned subsidiary of Crescent Real
Estate Equities Limited Partnership ("Crescent Operating Partnership"),
was formed on April 1, 1997, to become a lessee and operator of various
assets and to perform an agreement between Crescent Operating and
Crescent (the "Intercompany Agreement"). Under the Intercompany
Agreement, Crescent Operating and Crescent Real Estate Equities Company
("Crescent") agree, subject to certain terms, to provide each other
with rights to participate in certain transactions and to make certain
investments. In particular, Crescent Operating will have the right to
pursue certain opportunities that Crescent may determine it is unable
to pursue, due to its status as a real estate investment trust for
federal income tax purposes, or that it may elect not to pursue.
Crescent Operating also intends to pursue additional and similar
opportunities with Crescent and others in the future. Additionally,
Crescent Operating has agreed to give Crescent a right of first refusal
with respect to certain opportunities and has agreed to assist Crescent
in structuring acquisitions and investments on terms determined by
Crescent.
Subsequent to registration of the Company's Common Stock, the Crescent
Operating Common Stock will be distributed (the "Distribution") to
holders of Crescent common shares and Crescent Real Estate Equities
Limited Partnership Units on the basis of one share of the Company's
common stock for every 10 shares of Crescent common stock 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 which will be used primarily to
(i) acquire certain assets owned by Carter Crowley Properties, Inc.
(the "Carter Crowley Assets"), (ii) acquire and fund ongoing
obligations and cash requirements relating to, among other things, a
50% interest in CBHS, an operator of behavioral healthcare and related
facilities, and acquire certain warrants as part of a larger sale,
leaseback and license transaction (the "Magellan Transaction") among
Crescent, CBHS and Magellan Health Services, Inc. ("Magellan"). The
right to acquire 50% of CBHS cannot be consummated unless the Magellan
Transaction is consummated.
The Carter Crowley Assets consist primarily of a construction equipment
sales, leasing and servicing company, a minority interest in the
limited partnership which holds the National Basketball Association
franchise for the Dallas Mavericks, a limited partner interest in a
private venture capital fund, and certain direct non-operating working
interests in oil and gas wells and a limited partner interest in two
private oil and gas limited partnerships which own working interests in
oil and gas wells.
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's Common Stock.
(2) Upon formation, Crescent Operating Partnership contributed $1,000 cash
to the Company for 100% of its outstanding Common Stock. Crescent
Operating Partnership has also agreed to provide approximately $12.2
million equity and $28.6 million debt to be utilized in the acquisition
of the Carter-Crowley Assets and the assets to be acquired pursuant to
the Magellan transaction. Additionally, the Company has agreed to
provide CBHS with a line of credit of $20.0 million to be used
primarily in conjunction with the Magellan Transaction.
(3) 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 in the same proportion as Crescent and Crescent
Operating, in the aggregate, have exercised their Warrants to purchase
shares of common stock of Magellan. 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 conducted by a mutually agreed upon independent
appraiser.
F-3
<PAGE> 48
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 defined 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,
April 3, 1997
F-4
<PAGE> 49
CARTER-CROWLEY ASSET GROUP
COMBINED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............. $ 22,335 $ 352,577
Accounts receivable --
Trade, net of allowance for doubtful
accounts of $30,645 and $16,334 in
1996 and 1995, respectively........ 1,030,648 1,307,729
Affiliate........................... -- 14,096
Other............................... 42,641 36,669
Inventories........................... 1,612,952 736,024
Investment in sales-type leases,
net................................. 212,320 311,777
Deferred income tax asset............. 30,705 22,823
Prepaid expenses and other current
assets.............................. 6,164 4,062
----------- -----------
Total current assets........... 2,957,765 2,785,757
PROPERTY AND EQUIPMENT, at cost:
Rental equipment...................... 7,733,007 4,568,970
Land.................................. 452,397 451,647
Building and improvements............. 680,895 648,772
Transportation equipment.............. 375,721 465,529
Office furniture and other
equipment........................... 368,752 346,841
----------- -----------
9,610,772 6,481,759
Less -- Accumulated depreciation...... (2,927,314) (2,240,524)
----------- -----------
Net property and equipment..... 6,683,458 4,241,235
INVESTMENTS:
Investment in Hicks, Muse, Tate and
Furst Equity Fund II................ 7,593,493 5,915,749
Investment in oil and gas interests... 2,282,185 2,001,380
Investment in Dallas Basketball,
Ltd. ............................... -- 263,353
Investments in sales-type leases,
net................................. 118,721 287,275
----------- -----------
$19,635,622 $15,494,749
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
liabilities --
Affiliate........................... $ 65,631 $ --
Trade............................... 782,567 540,523
Notes payable, current portion --
Affiliate........................... 1,941,606 1,182,319
Other............................... 264,136 108,307
----------- -----------
Total current liabilities...... 3,053,940 1,831,149
LONG-TERM LIABILITIES:
Long-term debt, affiliate, net of
current portion..................... 3,199,607 1,830,070
Deferred income taxes................. 369,806 210,746
----------- -----------
Total liabilities.............. 6,623,353 3,871,965
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY.................... 13,012,269 11,622,784
----------- -----------
$19,635,622 $15,494,749
=========== ===========
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
F-5
<PAGE> 50
CARTER-CROWLEY ASSET GROUP
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Sales and service................................. $ 2,998,880 $ 2,873,657 $ 2,897,085
Equipment sales................................... 4,364,039 4,237,337 2,810,132
Rental............................................ 3,030,764 2,036,248 1,963,530
Oil and gas....................................... 109,435 -- --
----------- ----------- -----------
Total revenues............................ 10,503,118 9,147,242 7,670,747
COST OF SALES:
Sales and service................................. 2,535,525 2,412,289 2,373,603
Equipment sales................................... 4,049,563 3,571,092 2,446,801
Rental............................................ 1,951,783 1,466,242 1,393,085
----------- ----------- -----------
Total cost of sales....................... 8,536,871 7,449,623 6,213,489
----------- ----------- -----------
GROSS PROFIT........................................ 1,966,247 1,697,619 1,457,258
EQUITY IN (INCOME) LOSS OF INVESTMENTS IN LIMITED
PARTNERSHIPS...................................... (659,363) 237,717 --
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES....... 1,747,839 1,608,226 1,374,410
----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS....................... 877,771 (148,324) 82,848
OTHER (INCOME) EXPENSE:
Interest expense.................................. 356,517 152,631 28,995
Interest income................................... (51,881) (50,394) (10,819)
Other............................................. (27,202) (136,783) (2,977)
----------- ----------- -----------
Total other (income) expense.............. 277,434 (34,546) 15,199
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES................... 600,337 (113,778) 67,649
INCOME TAX PROVISION (BENEFIT)...................... 211,403 (38,418) 24,331
----------- ----------- -----------
NET INCOME (LOSS)................................... $ 388,934 $ (75,360) $ 43,318
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-6
<PAGE> 51
CARTER-CROWLEY ASSET GROUP
COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<S> <C>
BALANCE, December 31, 1993.............. $ 3,812,189
Net income............................ 43,318
Distributions......................... (166,121)
Net book value of assets
contributed........................ 5,500
-----------
BALANCE, December 31, 1994.............. 3,694,886
Net loss.............................. (75,360)
Contributions......................... 8,806,593
Distributions......................... (828,184)
Net book value of assets
contributed........................ 24,849
-----------
BALANCE, December 31, 1995.............. 11,622,784
Net income............................ 388,934
Contributions......................... 3,933,870
Distributions......................... (2,933,319)
-----------
BALANCE, December 31, 1996.............. $13,012,269
===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-7
<PAGE> 52
CARTER-CROWLEY ASSET GROUP
COMBINED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)................................... $ 388,934 $ (75,360) $ 43,318
Adjustments to reconcile net income (loss) to net
cash provided by operating activities --
Depreciation and amortization.................... 1,556,507 1,082,901 971,724
Equity in (income) loss of investments in limited
partnerships................................... (659,363) 237,717 --
Provision (benefit) for deferred income taxes.... 151,178 29,421 (38,985)
Gain on sale of rental equipment................. (103,968) (443,735) (242,756)
(Increase) decrease in accounts receivable,
net............................................ 350,836 (741,731) 75,333
Increase in inventories.......................... (876,928) (110,770) (152,538)
(Increase) decrease in prepaid expenses and other
current assets................................. (2,102) 24,646 (24,188)
Increase in accounts payable and accrued
liabilities.................................... 242,044 26,232 177,434
----------- ----------- -----------
Net cash provided by operating activities... 1,047,138 29,321 809,342
----------- ----------- -----------
INVESTING ACTIVITIES:
Purchases of rental equipment....................... (4,296,971) (2,351,439) (2,121,839)
Purchases of fixed assets........................... (78,822) (283,120) (49,383)
Proceeds from sale of rental equipment.............. 981,771 1,343,032 1,241,773
----------- ----------- -----------
Net cash used in investing activities....... (3,394,022) (1,291,527) (929,449)
----------- ----------- -----------
FINANCING ACTIVITIES:
Proceeds from issuance of notes payable............. 4,885,240 3,288,642 --
Reduction in notes payable.......................... (2,600,587) (1,492,969) (57,522)
Increase (decrease) in investment in sales-type
leases, net...................................... (268,011) (599,052) --
----------- ----------- -----------
Net cash provided by (used in) financing
activities................................ 2,016,642 1,196,621 (57,522)
----------- ----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS........... (330,242) (65,585) (177,629)
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, beginning of year.......... 352,577 418,162 595,791
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year................ $ 22,335 $ 352,577 $ 418,162
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid (refunded)........................ $ (19,502) $ (22,462) $ (92,673)
=========== =========== ===========
Interest paid....................................... $ 352,773 $ 144,039 $ 29,522
=========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Investments contributed by CCP...................... $ 3,933,870 $ 8,806,593 $ --
=========== =========== ===========
Distributions from investments to CCP............... $(2,933,319) $ (828,184) $ (166,121)
=========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Purchase of inventory and equipment held for rental
in which short-term liabilities were assumed..... $ -- $ -- $ 532,823
=========== =========== ===========
Transfer of fixed assets from CCP (net book
value)........................................... $ -- 24,849 $ 5,500
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-8
<PAGE> 53
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, investments in oil and gas interests, a minority investment in
a National Basketball Association (NBA) franchise, and a minority investment in
a venture capital fund. The Portfolio represents the businesses and investments
owned by CCP which are in the process of being sold to Crescent Operating, Inc.
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 10 pursuant to
Section 12(b) or 12(g) of the Securities Exchange Act of 1934.
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.
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.
F-9
<PAGE> 54
CARTER-CROWLEY ASSET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION
Revenues from equipment rentals under operating leases are recognized as
the revenue is billed under lease contracts. 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 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 receivable -- affiliate and accounts payable-affiliate in
the accompanying balance sheets.
The Portfolio's current provision (benefit) for income taxes is generally
based on income before taxes adjusted for permanent differences between
financial reporting and taxable income. Deferred income taxes are provided for
temporary differences between financial reporting and taxable income (see Note
7).
FINANCIAL INSTRUMENTS
During 1995, the Portfolio adopted Statement of Financial Accounting
Standards (SFAS) No. 107, "Disclosures About Fair Value of Financial
Instruments." This statement requires disclosure of the fair value of financial
instruments for which it is practicable to estimate as well as the methods and
significant assumptions used to estimate that value. The carrying amounts of
cash and cash equivalents and accounts receivable approximate fair value due to
the short maturity of those instruments. Notes payable bear interest at variable
rates which fluctuate based upon comparable market rates, and, therefore,
carrying amounts approximate fair value.
LONG-LIVED ASSETS
During 1996, the Portfolio adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
which establishes methods of valuation for the impairment of Long-Lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used. The adoption of this statement had no material impact on the
accompanying financial statements.
3. DESCRIPTION OF PORTFOLIO BUSINESSES AND INVESTMENTS:
MOODY-DAY, INC.
Moody-Day, Inc. ("Moody-Day") is a wholly owned Texas corporation engaged
in the sale, leasing, and service of construction equipment and accessories to
the construction and utility industries located primarily in Texas. Effective
December 31, 1994, Moody-Day became a wholly owned subsidiary of CCP pursuant to
a corporate reorganization. Moody-Day and CCP had previously both been wholly
owned subsidiaries of a common parent (the "Former Parent").
INVESTMENT IN DALLAS BASKETBALL, LTD.
The Portfolio includes a 12.38% limited partner minority interest in Dallas
Basketball, Ltd. ("Mavericks"), a Texas limited partnership that owns the Dallas
Mavericks basketball team, the related rights in the NBA franchise and various
related rights and interests. The Portfolio's interest is recorded in the
accompanying combined financial statements on the cost recovery basis.
F-10
<PAGE> 55
CARTER-CROWLEY ASSET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
INVESTMENT IN HICKS MUSE FURST & TATE EQUITY FUND II
Effective January 1, 1995, the Portfolio subscribed to a 1.42% limited
partner minority interest in Hicks Muse Furst & Tate Equity Fund II (the
"Fund"), a private venture capital fund. The Portfolio has an unpaid balance due
of approximately $2.2 million on the original commitment to invest $10 million
in the Fund. Approximately 38% of the Fund's investments consist of stock in
Chancellor Broadcasting, an owner of radio stations located in several markets.
The remainder of Fund investments is comprised of investments in companies
making/selling chocolate, grocery products, wire and cable, polyurethane foam,
toys, tools, and investments in real estate. The Portfolio's interest in the
Fund is recorded in the accompanying combined financial statements on the cost
basis
INVESTMENT IN OIL AND GAS INTERESTS
The Portfolio has investments in, nonoperating working interests in various
oil and gas wells and a 35% limited partnership interest in two private oil and
gas limited partnerships, Rising Star I and Rising Star II (collectively,
"Rising Star"), which own working interests in various oil and gas wells. Rising
Star I was formed August 11, 1995 and Rising Star II was formed September 11,
1995. The Portfolio's limited partner interest in Rising Star is recorded in the
accompanying combined financial statements using the equity method. Accordingly,
the Portfolio's investment is adjusted to reflect its proportionate share of
Rising Star's net income or loss.
4. INVENTORIES:
Inventories at Moody-Day consisted of the following at December 31, 1996
and 1995:
<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, 1996 and 1995:
<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>
F-11
<PAGE> 56
CARTER-CROWLEY ASSET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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>
DECEMBER 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Notes payable to a finance company,
maturities through June 1997,
collateralized by equipment........... $ 264,136 $ 108,307
----------- -----------
Note payable to CCP due December 1997,
interest at prime plus 1/2%, with
monthly principal and interest
payments, collateralized by land and
building.............................. 266,163 322,739
Note payable to CCP due March 1998,
interest at prime plus 1%, with
monthly principal and interest
payments, collateralized by
equipment............................. 197,213 392,168
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, affiliated............... 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> <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>
F-12
<PAGE> 57
CARTER-CROWLEY ASSET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES:
The deferred tax balances in the accompanying balance sheet includes 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 -- non-current....................... (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.
The Components of the net deferred tax liability are as follows:
<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 (benefit) are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Federal:
Current provision (benefit)..................... $ 60,225 $(67,839) $ 63,316
Deferred tax provision (benefit)................ 151,178 29,421 (38,985)
--------- -------- --------
Total provision (benefit)............... $ 211,403 $(38,418) $ 24,331
========= ======== ========
</TABLE>
The Portfolio's income tax provision (benefit) differed from the statutory
federal rate of 35% due primarily to non deductible 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.
F-13
<PAGE> 58
CARTER-CROWLEY ASSET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
9. RELATED-PARTY TRANSACTIONS:
Effective January 1, 1993, the Former Parent transferred the land and
building which Moody-Day occupies to Moody-Day in exchange for a note. The note
has an annual interest rate of prime + 1/2% and calls for monthly payments of
$7,000. The note, as further discussed in Note 6, had a balance of $266,163 at
December 31, 1996. Additionally, CCP has provided financing to Moody-Day (see
Note 6). The total outstanding principal to CCP at December 31, 1996, is
$5,141,213. The Company had a (payable) receivable for an income tax provision
(benefit) from CCP of $(65,631) and $14,096, respectively, at December 31, 1996
and 1995. In 1996, CCP charged Moody-Day $188,000 for management fees. Prior to
1996, no management fees were charged to Moody-Day. In 1996, CCP charged its oil
and gas interests an approximate $380,000 management fee; no management fees
were charged prior to 1996.
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-14
<PAGE> 59
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-15
<PAGE> 60
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------- DECEMBER 31,
1995 1996 1996
--------- --------- ------------
(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 $ 78,254
Accounts receivable, less allowance for doubtful
accounts of $47,851 in 1995 and $48,299 in 1996.... 170,728 148,805 139,070
Supplies.............................................. 5,768 4,753 4,913
Other current assets.................................. 13,064 20,120 22,948
--------- --------- ---------
Total Current Assets.......................... 293,295 245,500 245,185
Assets restricted for settlement of unpaid claims and
other long-term liabilities........................... 94,138 105,303 94,786
Property and Equipment:
Land.................................................. 88,019 83,431 82,751
Buildings and improvements............................ 377,169 388,821 388,832
Equipment............................................. 107,681 122,927 123,282
--------- --------- ---------
572,869 595,179 594,865
Accumulated depreciation.............................. (89,046) (118,937) (126,038)
--------- --------- ---------
483,823 476,242 468,827
Construction in progress.............................. 2,902 1,879 2,838
--------- --------- ---------
Total Property and Equipment.................. 486,725 478,121 471,665
Other Long-Term Assets.................................. 36,846 34,923 33,433
Goodwill, net of accumulated amortization of $944 in
1995 and $1,147 in 1996............................... 18,208 18,800 18,648
Other Intangible Assets, net of accumulated amortization
of $1,362 in 1995 and $2,958 in 1996.................. 5,394 6,258 5,187
--------- --------- ---------
$ 934,606 $ 888,905 $ 868,904
========= ========= =========
</TABLE>
The accompanying Notes to Combined Financial Statements are an integral part of
these balance sheets.
F-16
<PAGE> 61
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDER'S DEFICIT
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------- DECEMBER 31,
1995 1996 1996
--------- --------- ------------
(AUDITED) (AUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current Liabilities:
Accounts payable...................................... $ 69,726 $ 61,685 $ 58,901
Accrued liabilities................................... 116,380 117,214 102,672
Current maturities of long-term debt and capital lease
obligations........................................ 2,799 2,751 2,785
--------- --------- ---------
Total Current Liabilities..................... 188,905 181,650 164,358
Long-Term Debt and Capital Lease Obligations............ 77,111 73,620 73,086
Reserve for Unpaid Claims............................... 100,125 73,040 70,449
Deferred Credits and Other Long-Term Liabilities........ 34,455 36,506 26,782
Minority Interest....................................... 7,486 21,421 22,113
Due to Parent........................................... 666,349 619,556 622,794
Commitments and Contingencies
Stockholder's Deficit:
Accumulated deficit................................... (139,003) (114,906) (110,036)
Cumulative foreign currency adjustments............... (822) (1,982) (642)
--------- --------- ---------
(139,825) (116,888) (110,678)
--------- --------- ---------
$ 934,606 $ 888,905 $ 868,904
========= ========= =========
</TABLE>
The accompanying Notes to Combined Financial Statements are an integral part of
these balance sheets.
F-17
<PAGE> 62
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
----------------------------------- -------------------------
1994 1995 1996 1995 1996
--------- ---------- ---------- ----------- -----------
(AUDITED) (AUDITED) (AUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue......................... $904,646 $1,106,975 $1,044,345 $264,750 $242,427
-------- ---------- ---------- -------- --------
Costs and expenses
Salaries, supplies and other
operating expenses............. 661,436 825,468 800,912 204,778 190,496
Bad debt expense.................. 70,623 91,652 79,930 19,264 20,229
Depreciation and amortization..... 28,354 36,029 37,108 8,974 9,237
Amortization of reorganization
value in excess of amounts
allocable to identifiable
assets......................... 31,200 26,000 -- -- --
Interest, unaffiliated............ 6,364 5,421 5,492 1,425 1,351
Allocated interest, net from
Parent......................... 33,030 48,756 42,123 11,922 12,277
ESOP expense...................... 49,197 73,527 -- -- --
Stock option expense (credit)..... 10,614 (467) 914 1,823 604
Unusual items..................... 71,287 57,437 37,271 -- --
-------- ---------- ---------- -------- --------
962,105 1,163,823 1,003,750 248,186 234,194
-------- ---------- ---------- -------- --------
Income (loss) before income taxes
and minority interest............. (57,459) (56,848) 40,595 16,564 8,233
Provision for (benefit from) income
taxes............................. (10,504) (12,934) 14,883 6,703 2,948
-------- ---------- ---------- -------- --------
Income (loss) before minority
interest.......................... (46,955) (43,914) 25,712 9,861 5,285
Minority interest................... 48 340 1,615 754 415
-------- ---------- ---------- -------- --------
Net income (loss)................... $(47,003) $ (44,254) $ 24,097 $ 9,107 $ 4,870
======== ========== ========== ======== ========
</TABLE>
The accompanying Notes to Combined Financial Statements are an integral part of
these statements.
F-18
<PAGE> 63
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
--------------------------------- -------------------------
1994 1995 1996 1995 1996
--------- --------- --------- ----------- -----------
(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 9,107 4,870
-------- --------- --------- --------- ---------
Balance, end of period............. (94,749) (139,003) (114,906) (129,896) (110,036)
-------- --------- --------- --------- ---------
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) (268) 1,340
-------- --------- --------- --------- ---------
Balance, end of period............. (2,454) (822) (1,982) (1,090) (642)
-------- --------- --------- --------- ---------
Total Stockholder's Deficit.......... $(97,203) $(139,825) $(116,888) $(130,986) $(110,678)
======== ========= ========= ========= =========
</TABLE>
The accompanying Notes to Combined Financial Statements are an integral part of
these statements.
F-19
<PAGE> 64
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
--------------------------------- -------------------------
1994 1995 1996 1995 1996
--------- --------- --------- ----------- -----------
(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 $ 9,107 $ 4,870
--------- --------- -------- -------- --------
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Gain on sale of assets.......................... -- (2,961) (1,697) (139) (493)
Depreciation and amortization................... 59,554 62,029 37,108 8,974 9,237
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 1,823 604
Non-cash interest expense....................... 2,005 2,735 2,424 600 483
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 (3,953) 9,735
Other current assets........................ 4,563 8,273 575 (1,400) (2,852)
Other long-term assets...................... 2,860 (5,726) 5,496 (1,045) (322)
Accounts payable and accrued liabilities.... 2,683 (15,192) (16,917) (20,575) (16,844)
Reserve for unpaid claims................... 1,215 (5,885) (29,985) (1,690) (2,351)
Other liabilities........................... (8,249) (21,127) (18,968) (1,311) (9,729)
Minority interest, net of dividends paid.... 80 22 1,596 866 692
Due to Parent -- interest and income
taxes..................................... (42,459) (11,966) 19,618 (3,203) (6,809)
Other....................................... 613 285 1,022 168 216
--------- --------- -------- -------- --------
Total adjustments........................... 145,350 138,771 55,297 (20,885) (18,433)
--------- --------- -------- -------- --------
Net cash provided by (used in) operating
activities.............................. 98,347 94,517 79,394 (11,778) (13,563)
--------- --------- -------- -------- --------
Cash Flows From Investing Activities
Capital expenditures................................ (14,626) (19,354) (30,978) (4,090) (3,738)
Acquisitions of businesses, net of cash acquired.... (130,550) (62,125) (235) (368) (170)
Decrease (increase) in assets restricted for
settlement of unpaid claims and other long-term
liabilities....................................... 7,076 (19,606) (17,732) (3,614) 10,381
Proceeds from sale of assets........................ 16,584 5,879 5,098 503 4,822
Investment in Parent................................ -- (4,736) -- -- --
Other............................................... -- (1,050) -- -- --
--------- --------- -------- -------- --------
Net cash provided by (used in) investing
activities.............................. (121,516) (100,992) (43,847) (7,569) 11,295
--------- --------- -------- -------- --------
Cash Flows From Financing Activities
Change in Due to Parent............................. 86,612 (16,970) (62,625) (21,255) 9,727
Payments on debt and capital lease obligations...... (19,842) (2,423) (4,835) (448) (1,027)
--------- --------- -------- -------- --------
Net cash provided by (used in) financing
activities.............................. 66,770 (19,393) (67,460) (21,703) 8,700
--------- --------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents......................................... 43,601 (25,868) (31,913) (41,050) 6,432
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 $ 62,685 $ 78,254
========= ========= ======== ======== ========
</TABLE>
The accompanying Notes to Combined Financial Statements are an integral part of
these statements.
F-20
<PAGE> 65
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
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 three months ended December 31, 1995 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
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, respectively, for the settlement and adjustment
of reimbursement issues related to earlier fiscal periods.
F-21
<PAGE> 66
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-22
<PAGE> 67
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 5)
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 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
F-23
<PAGE> 68
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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").
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
F-24
<PAGE> 69
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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-25
<PAGE> 70
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-26
<PAGE> 71
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.
The following table presents net revenue, salaries, supplies and other
operating expenses and bad debt expenses and loss before income taxes, excluding
unusual items, of the Closed Facilities (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1994 1995 1996
------- -------- -------
<S> <C> <C> <C>
Net revenue........................................... $74,574 $104,239 $34,984
Salaries, supplies and other operating expenses and
bad debt expenses................................... 71,900 102,744 39,295
Loss before income taxes.............................. (6,403) (8,638) (9,337)
</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.
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.
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.
F-27
<PAGE> 72
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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.
F-28
<PAGE> 73
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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>
THREE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
------------------------ ---------------
1994 1995 1996 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Cash paid for interest, net of amounts
capitalized...................................... $5,842 $5,303 $5,680 $1,027 $1,312
====== ====== ====== ====== ======
</TABLE>
F-29
<PAGE> 74
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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. 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.
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-30
<PAGE> 75
CRESCENT OPERATING, INC.
PRO FORMA CONSOLIDATING FINANCIAL INFORMATION
The following unaudited proforma Statements of Crescent Operating, Inc.,
assumes completion of (i) the formation and capitalization of the Company, (ii)
the acquisition of the Carter Crowley Asset Group, (iii) the acquisition of a
50% equity interest in Charter Behavioral Health Systems LLC and the related
acquisition of 1,238,311 warrants to purchase 1,238,311 common shares of
Magellan Health Services, Inc., as of December 31, 1996 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-31
<PAGE> 76
CRESCENT OPERATING, INC.
PROFORMA CONSOLIDATED BALANCE SHEET
AS OF APRIL 3, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CRESCENT OPERATING, INC.
CRESCENT CAPITALIZATION OF ACQUISITION OF AS ADJUSTED FOR
OPERATING, INC. CRESCENT CARTER CROWLEY ACQUISITION OF CARTER
HISTORICAL(A) OPERATING, INC.(B) ASSET GROUP(C) CROWLEY ASSET GROUP
--------------- ------------------ -------------- ------------------------
<S> <C> <C> <C> <C>
ASSETS:
Cash........................................... $ 1 $40,799 $(28,278) $12,522
A/R............................................ -- -- 1,073 1,073
Inventory...................................... -- -- 1,613 1,613
Other assets................................... -- -- 249 249
---- ------- -------- -------
Total current assets....................... 1 40,799 (25,343) 15,457
Property and equipment, net.................... -- -- 7,648 7,648
Investments.................................... -- -- 24,319 24,319
---- ------- -------- -------
Total assets............................... 1 40,799 6,624 47,424
==== ======= ======== =======
LIABILITIES:
Accounts payable and accrued liabilities....... -- -- 848 848
Notes payable, current......................... -- -- 2,206 2,206
---- ------- -------- -------
Total current.............................. -- -- 3,054 3,054
Long-term notes payable........................ 28,640 3,200 31,840
Deferred income taxes.......................... -- -- 370 370
------- -------- -------
Total liabilities.......................... 28,640 6,624 35,264
SHAREHOLDER'S EQUITY:
Common stock................................... -- -- --
Additional Paid in Capital..................... 1 12,159 -- 12,160
Retained Earnings.............................. -- -- -- --
------- -------- -------
Total shareholder's equity................. 1 12,159 -- 12,160
---- ------- -------- -------
Total liabilities and shareholder's
equity................................... $ 1 $40,799 $ 6,624 $47,424
==== ======= ======== =======
<CAPTION>
ACQUISITION OF 50% PROFORMA
INTEREST IN CBHS(D) CONSOLIDATED
-------------------- -------------
<S> <C> <C>
ASSETS:
Cash........................................... $(12,500) $ 22
A/R............................................ -- 1,073
Inventory...................................... -- 1,613
Other assets................................... -- 249
-------- -------
Total current assets....................... (12,500) 2,957
Property and equipment, net.................... -- 7,648
Investments.................................... 12,500 36,819
-------- -------
Total assets............................... -- 47,424
======== =======
LIABILITIES:
Accounts payable and accrued liabilities....... -- 848
Notes payable, current......................... -- 2,206
-------- -------
Total current.............................. -- 3,054
Long-term notes payable........................ -- 31,840
Deferred income taxes.......................... -- 370
-------- -------
Total liabilities.......................... 35,264
SHAREHOLDER'S EQUITY:
Common stock...................................
Additional Paid in Capital..................... -- 12,160
Retained Earnings.............................. -- --
-------- -------
Total shareholder's equity................. -- 12,160
-------- -------
Total liabilities and shareholder's
equity................................... $ -- $47,424
======== =======
</TABLE>
F-32
<PAGE> 77
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
(A) Reflects Crescent Operating, Inc.'s audited historical balance sheet at
April 3, 1997.
(B) Reflects capitalization of Crescent Operating, Inc. to provide approximately
$12.2 million equity and $28.6 million debt to be utilized in the
acquisition of the various assets.
(C) Amounts reflect the acquisition of the Carter Crowley Asset Group, including
liabilities assumed, accounted for as a purchase transaction. Amounts
reflect the preliminary purchase price allocation.
(D) Increase reflects the acquisition of a 50% interest in Charter Behavioral
Health Systems LLC ("CBHS") and the related acquisition of 1,283,311 million
warrants to purchase 1,283,311 million common shares of Magellan Health
Services, Inc. based on a preliminary valuation, as follows (in thousands):
<TABLE>
<S> <C>
Investments in CBHS..................... $ 7,500
Acquisition of warrants................. 5,000
=======
$12,500
=======
</TABLE>
F-33
<PAGE> 78
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................................. $ -- $10,503 $ -- $10,503
Cost of Sales............................ -- 8,537 -- 8,537
---- ------- ------- -------
Gross Profit............................. -- 1,966 -- 1,966
Equity in loss of CBHS................... -- -- -- --
Equity in (income) of Limited
Partnerships........................... -- (660) -- (660)
Selling, General and Administrative
Expenses............................... -- 1,748 700(C) 2,448
---- ------- ------- -------
Income from Operations................... -- 878 (700) 178
Other (Income) Expense:
Interest Expense....................... -- 357 3,437(D) 3,794
Other.................................. -- (79) -- (79)
---- ------- ------- -------
Total Other Expense, net......... -- 278 3,437 3,715
---- ------- ------- -------
Income (Loss) Before Income Taxes...... -- 600 (4,137) (3,537)
Income Tax Provision................... -- 211 211
---- ------- ------- -------
Net Loss............................... $ -- $ 389 $(4,137) $(3,748)
==== ======= ======= =======
<CAPTION>
ACQUISITION OF
50% INTEREST PRO FORMA
IN CBHS(E) CONSOLIDATED
-------------- ------------
<S> <C> <C>
Revenues................................. $ -- $ 10,503
Cost of Sales............................ -- 8,537
------- --------
Gross Profit............................. -- 1,966
Equity in loss of CBHS................... 7,659 7,659
Equity in (income) of Limited
Partnerships........................... -- (660)
Selling, General and Administrative
Expenses............................... -- 2,448
------- --------
Income from Operations................... (7,659) (7,481)
Other (Income) Expense:
Interest Expense....................... -- 3,794
Other.................................. -- (79)
------- --------
Total Other Expense, net......... -- 3,715
------- --------
Income (Loss) Before Income Taxes...... (7,659) (11,196)
Income Tax Provision................... -- 211
------- --------
Net Loss............................... $(7,659) $(11,407)
======= ========
</TABLE>
F-34
<PAGE> 79
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<S> <C> <C>
(A) Crescent Operating, Inc. had no operations prior to the
acquisition of the Carter-Crowley Asset Group
(B) Reflects the historical income and expenses associated with
the acquired company, assuming it occurred at the beginning
of the period...............................................
(C) Reflects the incremental:
corporate general and administrative expenses related to the
formation and operation of the Company...................... $ 600
depreciation and amortization of the purchase price
adjustment as a result of the acquisition of the
Carter-Crowley Asset Group.................................. 100
-------
700
(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.
$28,640 loan at a rate of 12%............................... $ 3,437
-------
(E) Reflects the Company's 50% share of net loss of Charter
Behavioral Health System LLC (accounted for on the equity
method of accounting since the Company does not control
CBHS; the four member board consists of two directors named
by the Company and two directors named by Magellan)......... $(7,659)
</TABLE>
F-35
<PAGE> 80
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
PROFORMA CONSOLIDATING FINANCIAL INFORMATION
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-36
<PAGE> 81
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
<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................. 800,912 196,586 605,327 152,312(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
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-37
<PAGE> 82
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
NOTES TO PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
(A) Includes the elimination of the European Hospitals, and JV Hospitals and
other operations which will not be part of CBHS after the Crescent
Transaction, and corporate overhead and other adjustments necessary to
eliminate revenues and expenses related to non-acquired assets
(B) Represents management fees of $10.6 million payable by Magellan to CBHS for
the management of hospital based businesses controlled and less than
wholly-owned by Magellan which will not be part of CBHS after the Crescent
Transaction.
(C) Reflects increase in expenses pursuant to franchise fees of $81.0 million
payable under the Master Franchise Agreement, rent expense of $63.0 million
payable to Crescent for hospital-based real estate and equipment computed
on a straight-line basis over the 12 year term under the Facility Lease
Agreement, and $8.3 million of corporate general and administrative
expenses for necessary CBHS corporate functions formerly performed by
Magellan including human resources, legal, and finance and accounting.
(D) Reflects decrease in historical depreciation and amortization expense as a
result of the sale of fixed assets and the Facility Lease Agreement.
(E) Reflects decrease in interest expense based on the following assumptions
(in thousands):
<TABLE>
<S> <C> <C>
Old interest expense, net.............................. $ (4,852)
Expected average borrowings -- working capital......... 45,000
Estimated borrowing rate............................... 8.0%
------
3,600
--------
Pro forma adjustment................................... $ (1,252)
========
</TABLE>
(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-38
<PAGE> 83
============================================================
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.....................................
Risk Factors................................
The Distribution............................
Dividend Policy.............................
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................
Management..................................
Certain Transactions........................
Description of Crescent Operating Capital
Stock.....................................
Certain Antitakeover Provisions.............
Experts.....................................
Legal Matters...............................
Index to Financial Statements...............
---------------------
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>
============================================================
============================================================
17,500,000 SHARES
CRESCENT
OPERATING, INC.
[LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
, 1997
============================================================
<PAGE> 84
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 Common Stock registered
hereby, all of which expenses, except for the SEC registration fee, are
estimates:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
----------- ---------
<S> <C>
SEC Registration Fee........................................ $3,685.00
Listing Fee................................................. $
Transfer Agent's and Registrar's Fee........................ $ *
Printing and Engraving Fees................................. $ *
Legal Fees and Expenses..................................... $ *
Accounting Fees and Expenses................................ $ *
Miscellaneous............................................... $ *
---------
Total............................................. $ *
=========
</TABLE>
- ---------------
* To be furnished by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law (the "Delaware Law") provides that a
corporation may limit the liability of each director to the corporation or its
stockholders for monetary damages except for liability (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders; (ii) for acts
or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law; (iii) in respect of certain unlawful dividend payments
or stock redemptions or repurchases, and (iv) for any transaction from which the
director derives an improper personal benefit. The Certificate of Incorporation
and Bylaws provide for the elimination and limitation of the personal liability
of directors of the Company for monetary damages to the fullest extent permitted
by the Delaware Law. In addition, the Certificate of Incorporation and Bylaws
provide that if the Delaware Law is amended to authorize the further elimination
or limitation of the liability of a director, then the liability of the
directors shall be eliminated or limited to the fullest extent permitted by the
Delaware Law, as so amended. The effect of this provision is to eliminate the
rights of the Company and its stockholders (through stockholders' derivative
suits on behalf of the Company) to recover monetary damages against a director
for breach of the fiduciary duty of care as a director (including breaches
resulting from negligent or grossly negligent behavior) except in the situations
described in clauses (i) through (iv) above. The provision does not limit or
eliminate the rights of the Company or any stockholder to seek non-monetary
relief such as an injunction or rescission in the event of a breach of a
director's duty of care. In addition, the Bylaws provide that the Company shall,
to the full extent permitted by the Delaware Law, as amended from time to time,
indemnify and advance expenses to each of its currently acting and former
directors, officers, employees and agents.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In connection with the formation of the Company, Crescent Real Estate
Equities Limited Partnership, a Delaware limited partnership (the "Operating
Partnership"), became the Company's sole stockholder by acquiring 100% of its
outstanding common stock for $1,000. The Operating Partnership also has agreed
to provide approximately $12.2 million in equity and $28.6 million in loans to
the Company, at which time the Company will issue to the Operating Partnership
additional shares of Common Stock. Both issuances of Common Stock to the
Operating Partnership are claimed to be exempt from the registration provisions
of the Securities Act of 1933 pursuant to Section 4(2) of the Act.
II-1
<PAGE> 85
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<S> <S>
3.1* -- Form of Amended and Restated Certificate of Incorporation
3.2* -- Form of Amended and Restated Bylaws
4.1* -- Specimen stock certificate
4.2* -- Form of Preferred Share Purchase Rights Plan
5* -- Opinion of Shaw, Pittman, Potts and Trowbridge as to the
legality of the Common Stock being registered
10.1* -- Incentive Stock Plan
10.2* -- Intercompany Agreement, dated as of , 1997,
between Crescent 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
23.1* -- Consent of Shaw, Pittman, Potts & Trowbridge (included as
part of Exhibit 5)
23.2 -- Consent of Arthur Andersen LLP
99.1 -- Consents of Certain Persons Named as Directors (filed
herewith)
</TABLE>
- ---------------
* To be filed by amendment.
(b) Financial Statement Schedules.
Not applicable.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-2
<PAGE> 86
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 April 15, 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 April 15, 1997
- ------------------------------------------------ Executive Officer (Principal
GERALD W. HADDOCK Executive Officer and Principal
Financial Officer)
</TABLE>
II-3
<PAGE> 87
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
3.1* -- Form of Amended and Restated Certificate of Incorporation
3.2* -- Form of Amended and Restated Bylaws
4.1* -- Specimen stock certificate
4.2* -- Form of Preferred Share Purchase Rights Plan
5* -- Opinion of Shaw, Pittman, Potts and Trowbridge as to the
legality of the Common Stock being registered
10.1* -- Incentive Stock Plan
10.2* -- Intercompany Agreement, dated as of , 1997,
between Crescent 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
23.1* -- Consent of Shaw, Pittman, Potts & Trowbridge (included as
part of Exhibit 5)
23.2 -- Consent of Arthur Andersen LLP
99.1 -- Consents of Certain Persons Named as Directors (filed
herewith)
</TABLE>
- ---------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated April 3, 1997, on the balance sheet of Crescent Operating, Inc., included
in this Registration Statement.
Arthur Andersen
Dallas, Texas,
April 15, 1997
<PAGE> 1
EXHIBIT 99.1
To Crescent Operating, Inc.
The undersigned, in accordance with Rule 438 under the Securities Act
of 1933, as amended, hereby consents to the inclusion of his or her name as a
person who has agreed to be a Director of Crescent Operating, Inc., a Delaware
corporation ("Crescent Operating"), in the Registration Statement on Form S-1
of Crescent Operating.
Dated as of April 14, 1997
/s/ Richard E. Rainwater
----------------------------------
/s/ John C. Goff
-----------------------------------
/s/ Jeffrey L. Stevens
-----------------------------------
/s/ Carl F. Thorne
-----------------------------------
/s/ Anthony M. Frank
-----------------------------------
/s/ Paul E. Rowsey, III
-----------------------------------
