<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 333-25223
--------------------------------
CRESCENT OPERATING, INC.
(Exact name of Registrant as specified in its charter)
STATE OF DELAWARE 75-2701931
(State or other incorporation) (I.R.S. Employer
Identification No.)
777 MAIN STREET
FORT WORTH, TEXAS 76102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (817) 339-1020
Indicate by check mark whether the registrant (1) has filed all reports
required by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X]
The number of shares of Common Stock, $.01 par value, outstanding on June 30,
1997 was 11,025,547.
<PAGE> 2
On August 14, 1997, Crescent Operating, Inc. (the "Company") filed a
Form 10-Q for the quarter ended June 30, 1997. The attached Form 10-Q/A amends
the previously filed Form 10-Q to correct amounts reflected in the unaudited
Statement of Operations of the Carter Crowley Asset Group (the "Predecessor")
for the three months ended June 30, 1996.
<PAGE> 3
CRESCENT OPERATING, INC.
CONSOLIDATED BALANCE SHEET
AT JUNE 30, 1997 AND
CARTER CROWLEY ASSET GROUP
COMBINED BALANCE SHEET AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
PREDECESSOR
------------
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
(unaudited) (audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalent $ 1,207,307 $ 22,335
Accounts Receivable
Trade, net of allowance for doubtful accounts of $45,360
and $30,645 in 1997 and 1996, respectively 1,112,548 1,030,648
Affiliate -- 129,296
Other -- 42,641
Inventories 1,862,406 1,612,952
Investment in sales-type leases, net -- 212,320
Deferred income tax asset -- 30,705
Prepaid expenses and other current assets 214,131 6,164
------------ ------------
Total current assets 4,396,392 3,087,061
------------ ------------
PROPERTY AND EQUIPMENT, at cost
Rental equipment 2,134,943 7,733,007
Land 31,687 452,397
Building and improvements 156,213 680,895
Transportation equipment 16,530 375,721
Office furniture and other equipment 19,140 368,752
------------ ------------
Less - accumulated depreciation (3,518) (2,927,314)
------------ ------------
Net property and equipment 2,354,995 6,683,458
------------ ------------
INVESTMENTS:
Investment in Hicks, Muse, Tate and Furst Equity Fund II 10,153,304 7,593,493
Investments in Charter Behavioral Health Systems, LLC 7,101,000 --
Investment in Magellan Warrants 12,500,000 --
Investments in sales-type leases, net -- 118,721
------------ ------------
Total Investments 29,754,304 7,712,214
------------ ------------
OTHER ASSETS
Organizational Cost and other 684,140 --
------------ ------------
TOTAL ASSETS $ 37,189,831 $ 17,482,733
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 1,776,091 $ 782,567
Notes payable, current portion
Affiliate -- 1,941,606
Other 292,217 264,136
------------ ------------
Total current liabilities 2,068,308 2,988,309
LONG-TERM LIABILITIES
Long-term debt, net of current portion 25,905,000 3,199,607
Deferred income taxes -- 369,806
------------ ------------
Total liabilities 27,973,308 6,557,722
------------ ------------
COMMITMENTS AND CONTINGENCIES (SEE NOTE 8)
SHAREHOLDERS' EQUITY
Common Stock, $0.01 par value; authorized 22,500,000 shares;
outstanding 11,025,547 at June 30,1997 110,255 12,500
Paid in Capital 9,368,246 14,425,687
Retained Deficit (261,978) (3,513,176)
------------ ------------
Total Shareholders' Equity $ 9,216,523 $ 10,925,011
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 37,189,831 $ 17,482,733
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
and combined condensed financial information.
<PAGE> 4
CRESCENT OPERATING, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM MAY 9, 1997 TO JUNE 30, 1997 AND
CARTER CROWLEY ASSET GROUP
STATEMENTS OF OPERATIONS FOR THE PERIOD APRIL 1, 1997 TO MAY 8, 1997 AND
FOR THE THREE MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Predecessor
----------------------------
For the For the For the
Period from Period from Three Months
May 9, 1997- April 1, 1997- Ended
June 30, 1997 May 8, 1997 June 30, 1996
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Sales and service ................... $ 527,542 $ 376,891 $ 971,670
Equipment sales ..................... 551,881 378,294 659,859
Rental .............................. 628,157 395,037 671,864
------------ ------------ ------------
Total revenues .................... $ 1,707,580 $ 1,150,222 $ 2,303,393
------------ ------------ ------------
COST OF SALES:
Sales and service ................... 418,516 344,633 786,469
Equipment sales ..................... 492,536 343,450 589,741
Rental .............................. 78,503 243,077 498,520
------------ ------------ ------------
Total cost of sales ............... 989,555 931,160 1,874,730
------------ ------------ ------------
GROSS PROFIT ........................... $ 718,025 $ 219,062 $ 428,663
------------ ------------ ------------
SELLING, GENERAL, AND
ADMINISTRATIVE
EXPENSES ............................ $ 435,327 $ 197,587 $ 474,993
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS .......... $ 282,698 $ 21,475 $ (46,330)
------------ ------------ ------------
OTHER (INCOME) EXPENSE:
Equity in loss of CBHS .............. 399,000 -- --
Interest expense .................... 308,825 22,115 70,826
Interest income ..................... (3,888) (3,166) (12,143)
Gain on sale of partnership ......... (150,000) -- --
Other ............................... $ (9,261) $ (1,055) $ 1,856
------------ ------------ ------------
Total other (income)
expense ......................... $ 544,676 $ 17,894 $ 60,539
------------ ------------ ------------
INCOME (LOSS) BEFORE
INCOME TAXES ....................... (261,978) 3,581 (106,869)
INCOME TAX PROVISION (BENEFIT) ......... $ -- $ 1,253 $ (37,407)
------------ ------------ ------------
NET INCOME (LOSS) ...................... $ (261,978) $ 2,328 $ (69,462)
============ ============ ============
NET INCOME (LOSS)
PER SHARE .............................. $ (.02) -- --
WEIGHTED AVERAGE
SHARES OUTSTANDING ..................... 11,025,547 -- --
</TABLE>
The accompanying notes are an integral part of the consolidated and
combined condensed financial information.
3
<PAGE> 5
CRESCENT OPERATING, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM MAY 9, 1997 TO JUNE 30, 1997 AND
CARTER CROWLEY ASSET GROUP
STATEMENTS OF OPERATIONS FOR THE PERIOD JANUARY 1, 1997 TO MAY 8, 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Predecessor
----------------------------
For the For the For the
Period from Period from Six Months
May 9, 1997- January 1, 1997- Ended
June 30, 1997 May 8, 1997 June 30, 1996
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Sales and service ................ $ 527,542 $ 1,209,271 $ 1,828,386
Equipment sales .................. 551,881 1,727,602 1,919,057
Rental ........................... 628,157 1,252,844 1,279,253
------------ ------------ ------------
Total revenues ................. $ 1,707,580 $ 4,189,717 $ 5,026,696
------------ ------------ ------------
COST OF SALES:
Sales and service ................ 418,516 1,527,183 1,469,613
Equipment sales .................. 492,536 1,024,310 1,746,346
Rental ........................... 78,503 841,651 924,365
------------ ------------ ------------
Total cost of sales ............ 989,555 3,393,144 4,140,324
------------ ------------ ------------
GROSS PROFIT ........................ $ 718,025 $ 796,573 $ 886,372
------------ ------------ ------------
SELLING, GENERAL, AND
ADMINISTRATIVE
EXPENSES ......................... $ 435,327 $ 635,993 $ 864,400
------------ ------------ ------------
INCOME FROM OPERATIONS .............. $ 282,698 $ 160,580 $ 21,972
------------ ------------ ------------
OTHER (INCOME) EXPENSE:
Equity in loss of CBHS ........... 399,000 -- --
Interest expense ................. 308,825 135,369 135,693
Interest income .................. (3,888) (12,884) (27,778)
Gain on sale of partnership ...... (150,000) -- --
Other ............................ $ (9,261) $ (996) $ 487
------------ ------------ ------------
Total other (income) expense ... $ 544,676 $ 121,489 $ 108,402
------------ ------------ ------------
INCOME (LOSS) BEFORE
INCOME TAXES .................... (261,978) 39,091 (86,430)
INCOME TAX PROVISION (BENEFIT) ...... $ -- $ 13,681 $ (30,253)
------------ ------------ ------------
NET INCOME (LOSS) ................... $ (261,978) $ 25,410 $ (56,177)
============ ============ ============
NET INCOME (LOSS)
PER SHARE ........................... $ (.02) -- --
WEIGHTED AVERAGE
SHARES OUTSTANDING .................. 11,025,547 -- --
</TABLE>
The accompanying notes are an integral part of the consolidated
and combined condensed financial information
4
<PAGE> 6
CRESCENT OPERATING, INC
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM MAY 9, 1997 TO JUNE 30, 1997 AND
CARTER CROWLEY ASSET GROUP
STATEMENT OF CASH FLOWS FOR THE PERIOD FROM JANUARY 1, 1997 TO MAY 8, 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Predecessor
------------------------------
For the For the For the
Period from Period from Six Months
May 9, 1997- January 1, 1997- Ended
June 30, 1997 May 8, 1997 June 30, 1996
------------- ---------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (261,978) $ 25,410 $ (56,177)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and Amortization 3,518 747,503 434,124
Equity in loss of CBHS 399,000 -- --
Gain on sale of fixed asset -- (133,607) --
Gain on sale of partnership (150,000) -- --
Accounts receivable - Trade (82,388) 488 447,831
Accounts receivable - Inter-company -- 129,296 93,655
Accounts receivable - Other 20,194 22,447 16,689
Inventory (364,857) 115,403 (305,934)
Prepaid Expenses and other assets 208,552 (125,205) (380,872)
Accounts payable and accrued expenses 112,000 197,384 66,805
------------ ----------- -----------
CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES $ (115,959) $ 979,119 $ 316,121
============ =========== ===========
INVESTING ACTIVITIES:
Purchases of rental equipment & fixed
assets (1,857,421) -- (1,337,811)
Proceeds from sale of rental equipment
and fixed assets 79,177 309,890 --
Investment in Hicks Muse (689,175) (1,870,636) --
Investment in CBHS (7,500,000) -- --
Purchase of Megellan Warrants (12,500,000) -- --
Changes in investments in sales type
leases -- -- 599,052
------------ ----------- -----------
CASH USED IN INVESTING ACTIVITIES $(22,467,419) $(1,560,746) $ (738,759)
============ =========== ===========
FINANCING ACTIVITIES:
Proceeds of notes payable 35,825,000 408,320 545,066
Reductions in notes payable (9,920,000) (848,310) --
Capital contributions 100,000 1,164,967 --
Dividend (2,380,000) -- --
------------ ----------- -----------
CASH PROVIDED BY FINANCING ACTIVITIES $ 23,625,000 $ 724,977 $ 545,066
============ =========== ===========
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 1,041,622 $ 143,350 $ 122,428
============ =========== ===========
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 165,685 22,335 352,577
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 1,207,307 $ 165,685 $ 475,005
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
and combined condensed financial information
5
<PAGE> 7
CRESCENT OPERATING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND NATURE OF BUSINESS
Crescent Operating, Inc. ("Crescent" or the "Company") was formed on April
1, 1997, by Crescent Real Estate Equities Limited Partnership ("Crescent
Operating Partnership") and Crescent Real Estate Equities Company
("Crescent REIT") to become a lessee and operator of various assets owned
by Crescent REIT and perform an agreement ("Intercompany Agreement")
between Crescent and Crescent Operating Partnership, a wholly owned
partnership of Crescent REIT, pursuant to which each has agreed to provide
the other with rights to participate in certain transactions. On June 12,
1997, the Company distributed shares of its Common Stock to shareholders of
Crescent REIT and Unit holders of Crescent Operating Partnership of record
on May 30, 1997. Each holder of 10 shares of common stock of Crescent
REIT received one share of Crescent Common Stock and each holder of five
Units (or equivalent partnership interest) of Crescent Operating
Partnership received one share of Crescent Common Stock.
On June 12, 1997, Crescent's registration statement was declared effective
and Crescent became a public company. The shares of Crescent were accepted
for quotation on the OTC Bulletin Board and began trading on a when-issued
basis on June 13, 1997.
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to the Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In management's opinion, all
adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation of the unaudited interim financial
statements have been included. Operating results for interim periods
reflected are not necessarily indicative of the results that may be
expected for a full fiscal year. These financial statements and notes
should be read in conjunction with Crescent's Form S-1, dated June 12,
1997.
Moody-Day Inc., which is a wholly-owned subsidiary of Crescent, is
consolidated and the Company's 1.21% investment in Hicks Muse Tate & Furst
Equity Fund II, LP ("Hicks-Muse") is shown at cost. Crescent's 50% interest
in Charter Behavioral Health Systems, LLC ("CBHS") is shown on the equity
method of accounting.
The financial statements were prepared on the basis that the "Predecessor"
is a combination of Moody-Day, Inc. and Hicks-Muse (collectively, the
"Carter Crowley Asset Group"). As the Company did not have any activities
until May 9, 1997, the comparative data relating to 1996 and the period
prior to May 9, 1997 is only with regard to the Predecessor. The assets of
Carter Crowley Asset Group were adjusted to reflect the purchase price
allocation.
3. NEW ACCOUNTING PRONOUNCEMENT
In February, 1997, the Financial Accounting Standard Board issued Statement
for Financial Accounting Standards No. 128, "Earnings Per Share" ("EPS")
("SFAS 128") which supersedes APB No. 15 for periods ending after December
15, 1997. SFAS 128 specifies the computation, presentation and disclosure
requirements for earnings per share. Primary EPS and Fully Diluted EPS are
replaced by Basic EPS and Diluted EPS, respectively. Basic EPS, unlike
Primary EPS, excludes all dilution while Diluted EPS, like Fully Diluted
EPS, reflects the potential dilution that could occur if securities or
other contracts to issue common shares were exercised or converted into
common shares. The Company does not expect the effect of its adoption of
SFAS 128 to be material.
6
<PAGE> 8
4. INDEBTEDNESS
Crescent Operating Partnership agreed to lend Crescent approximately $35.9
million pursuant to a five-year term loan ("Term Loan"). At June 30, 1997,
the Company has drawn $35.8 million against this Term Loan and repaid $9.9
million. The Term Loan is a recourse loan that is secured, to the extent
not prohibited by pre-existing arrangements, by a first lien on the assets
owned by Crescent now or in the future (other than assets of Crescent
acquired after June 30, 1997, which may be pledged in the future to secure
non-recourse loans to Crescent). The Term Loan bears interest at the rate
of 12% per annum, compounded annually, and is payable quarterly in an
amount equal to the lesser of (i) the net cash flow for the preceding
quarter and (ii) the quarterly amount of principal due, together with
interest accrued on the loan. Net cash flow will be computed by subtracting
the total costs incurred by Crescent from its gross receipts. The Term Loan
will mature on May 8, 2002. The Company also has obtained from Crescent
Operating Partnership a $20.4 million line of credit ("Line of Credit")
which bears interest at the same rate as the Term Loan. The Line of Credit
is payable on an interest-only basis during its term, which expires on the
later of (i) May 21, 2002 or (ii) five years after the last draw under the
Line of Credit. Draws may be made under the Line of Credit until June 22,
2002. The Line of Credit is a recourse obligation and amounts outstanding
thereunder are or will be secured, to the extent not prohibited by
pre-existing arrangements, by a first lien on the assets owned by Crescent
now or in the future (other than assets of Crescent acquired after June 30,
1997, which may be pledged in the future to secure non-recourse loans to
Crescent). As of June 30, 1997, no amounts were outstanding under the Line
of Credit.
5. SHAREHOLDERS' EQUITY
COMMON STOCK
The Company's authorized capital stock consists of 10 million shares of
preferred stock, par value $.01 per share and 22.5 million shares of
Common Stock, par value $.01 per share. At June 30, 1997, there were
11,025,547 shares of Common Stock outstanding.
PREFERRED SHARE PURCHASE RIGHTS
The Board of Directors has adopted a rights plan that provides that each
holder of Common Stock also receives a right to purchase from the Company
one-hundredth of a share of Series A Junior Preferred Stock, par value
$.01, of the Company at a price of $5 per share, subject to adjustment.
These rights can only be exercised in certain events and are intended to
provide the Company certain anti-takeover protection. The Company has
reserved 225,000 shares of series A junior preferred stock for this plan.
WARRANTS
The Company, in conjunction with the acquisition of its 50% interest in
CBHS, has issued warrants ("Warrants") to acquire up to 2.5% of the
Company's Common Stock outstanding (including the shares covered by the
Warrants) to Magellan Health Services, Inc. ("Magellan") on June 16, 1997
at a price to be determined by multiplying a factor of 1.25% by the average
of the daily high and low sales prices of the Company's Common Stock for
each trading day, beginning on the trading day immediately following June
17, 1997, and ending 30 consecutive trading days thereafter. As of July 30,
1997, the exercise price of the Warrants was determined to be $18.29.
7
<PAGE> 9
6. ACQUISITION AND DIVESTITURE ACTIVITIES
On May 9, 1997, Crescent acquired (i) all of the stock in Moody-Day, Inc.,
a construction equipment sales, leasing and servicing company, (ii) a 1.21%
interest in Hicks-Muse, a private venture capital fund and (iii) a 12.38%
interest in Dallas Basketball Limited, a partnership that holds the
National Basketball Association franchise for the Dallas Mavericks. The
purchase price was approximately $4.1 million for Moody-Day, Inc.,
approximately $9.6 million for the Hicks-Muse interest and approximately
$12.4 million for the interest in the Dallas Basketball partnership. The
interest in the Dallas Basketball partnership was subsequently sold for
approximately $12.55 million.
On June 17, 1997, Crescent acquired for $7.5 million a 50% member
interest in CHBS and issued Warrants to purchase up to 2.5% of Crescent
Common Stock. CHBS is a newly formed limited liability company which
operates 92 behavioral healthcare facilities (See Footnote 7.). Crescent
also purchased as part of this acquisition warrants to acquire 1,283,311
shares of Magellan common stock for $12.5 million. The exercise price of
the Warrants is $30 per share, exercisable in varying increments beginning
on May 31, 1998 and ending on May 31, 2009.
7. INVESTMENT IN CBHS
The Company owned a 50% interest in CBHS at June 30, 1997. The Company
accounts for its investment in CBHS using the equity method. A summary of
financial information for the Company's investment in CBHS is as follows
<TABLE>
<CAPTION>
(in thousands):
JUNE 30, 1997
------------
<S> <C>
Current assets $ 59,870
--------------
Property and equipment, net 18,863
Other noncurrent assets 3,340
------------
Total assets $ 82,073
============
Current liabilities $ 40,980
-------------------
Long-term debt (2) 25,875
Other noncurrent liabilities 1,016
Member capital 14,202
------------
Total liabilities and member capital $ 82,073
============
Crescent equity investment $ 7,101
============
</TABLE>
<TABLE>
<CAPTION>
14 DAYS ENDED
JUNE 30, 1997
------------
<S> <C>
Net revenue $ 29,865
------------
Operating expenses (1) 30,565
Interest, net 98
------------
Net loss $ (798)
============
Cash used in operating activities $ (13,996)
============
Crescent equity loss $ (399)
============
</TABLE>
(1) Includes salaries, supplies and other operating expenses, bad debt expense,
depreciation and amortization.
(2) As of August 11, 1997, CBHS had $65 million of outstanding borrowings under
its revolving credit agreement and had received $20 million of advances
from its members, including $10 million from the Company.
8
<PAGE> 10
8. COMMITMENTS AND CONTINGENCIES
The Hicks-Muse interest includes a commitment that the Company invest an
additional $2.1 million in the fund which is required to be paid by the Company
when called.
9. PROFORMA FINANCIALS
The following Table assumes that the acquisitions occurred at January 1,
1997 (in thousands).
<TABLE>
<S> <C>
Revenues $2,857
Gross Profit $937
Income from Operations $304
Equity In Loss of CBHS $(3,432)
Net Loss $(3,295)
Net Loss Per Share $(.30)
</TABLE>
10. SUBSEQUENT EVENTS
BACKGROUND
On July 31, 1997, the Company, through its newly-formed subsidiary, WOCOI
Investment Company, acquired for approximately $425,000, a 42.5% general
partner interest in The Woodlands Operating Company, L.P. ("Woodlands
Operating"). The acquisition was part of a larger transaction (the
"Transaction"), pursuant to which Crescent REIT and certain of its
subsidiaries, and certain Morgan Stanley funds (the "Morgan Stanley
Group") acquired The Woodlands Corporation. The purchase price of the
Company's interest in Woodlands Operating was determined by mutual
agreement of the parties to the Transaction. WOCOI Investment Company will
serve as the managing general partner of Woodlands Operating.
The Woodlands Corporation is the principal owner, developer and operator
of The Woodlands, an approximately 27,000 acre master-planned residential
and commercial community located approximately 27 miles north of Houston,
Texas. The Woodlands includes a shopping mall, retail centers, office
buildings, a Conference Center and Country Club and other amenities. The
Company obtained the opportunity to purchase its interest in Woodlands
Operating from Crescent pursuant to the Intercompany Agreement between the
Company and Crescent Operating Partnership. The Intercompany Agreement
gives the Company the right of first refusal to become a lessee of real
property acquired by Crescent Operating Partnership under certain
circumstances, and permits Crescent Operating Partnership to offer the
Company other investment opportunities, in Crescent Operating
Partnership's discretion.
WOODLANDS OPERATING AND ITS SUBSIDIARIES
Woodlands Operating was formed to provide management, advisory,
landscaping and maintenance services to entities affiliated with the
Company and Crescent as well as to third parties. Pursuant to the terms of
five written service agreements, Woodlands Operating will perform general
management, landscaping and maintenance, construction, design, sales,
promotional and other marketing services for the properties in which
Crescent acquired a direct or indirect interest as a result of the
Transaction. In addition, Woodlands Operating will monitor certain of the
real estate investments of, and provide advice regarding real estate and
development issues to, such entities. As compensation for its management
and advisory services, Woodlands Operating will be paid a monthly advisory
fee in an amount equal to 3% of all costs and expenses incurred by
Woodlands Operating in providing such services. As compensation for its
landscaping and maintenance services, Woodlands Operating will receive a
monthly fee in an amount equal to 5% of the cost per month of performing
the required landscaping and maintenance services. Each service agreement
provides for an initial term of at least 12 months (subject to earlier
termination under certain circumstances) and will be renewed
automatically, unless terminated by either party upon giving prior notice
as specified in each agreement.
9
<PAGE> 11
CRESCENT OPERATING, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
STRATEGY
Crescent intends to manage its assets, which as of June 30, 1997 consisted
of (i) Moody Day, Inc. ("Moody-Day"), a construction equipment sales,
leasing and service company, (ii) a 1.21% limited partner interest in Hicks
Muste Tate & Furst Equity Fund II, LP ("Hicks-Muse"), a private venture
capital fund (together with Moody Day, the "Carter Crowley Asset Group")
and (iii) a 50% member interest in Charter Behavioral Health Systems, LLC
("CBHS"), a limited liability company which operates 92 healthcare
facilities (collectively, the "Assets"), enter into certain of the
businesses to which the Assets relate and pursue additional opportunities.
Crescent believes that it has, or will have access to, sufficient liquidity
and management expertise to manage the assets successfully.
Crescent'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 REIT. To pursue additional
opportunities, Crescent plans to capitalize on its relationship with
Crescent REIT and Crescent REIT's ability to structure transactions
creatively. Crescent also plans to determine whether it could provide to
Crescent REIT certain lessee and operator functions currently provided by
others to Crescent REIT. In this regard, it plans to negotiate to acquire
or replace the tenants of certain hotels and resorts owned by Crescent REIT
and leased to third parties. As of June 30, 1997, no such tenants have been
acquired or replaced, however, and there is no assurance that such
agreements will be reached. The additional opportunities Crescent may
pursue are expected to be varied and may be unrelated to any business in
which Crescent is then engaged or may be engaged at any future date.
Crescent 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 REIT has outstanding indebtedness,
Crescent anticipates that it will use the proceeds of any such sales of
assets to reduce the amount of any such indebtedness.
Crescent also intends to pursue additional and similar opportunities with
Crescent REIT and others in the future. The distribution of Crescent Common
Stock will provide Crescent shareholders and the Limited Partners who
received Common Stock in connection with the initial distribution in June
1997 and who retain their Crescent REIT common shares with the opportunity
to participate in the benefits both of the real estate operations of
Crescent REIT (including ownership of real property) and of the lease of
certain of such assets and the ownership of other non-real estate assets.
There can be no assurance, however, that any such opportunities will arise
in the future.
THE INTERCOMPANY AGREEMENT
Crescent and Crescent Operating Partnership have entered into the
Intercompany Agreement to provide each other with rights to participate in
certain transactions. The Intercompany Agreement provides, subject to
certain terms, that Crescent Operating Partnership will provide Crescent
with a right of first refusal to become the lessee of any real property
acquired by Crescent Operating Partnership if Crescent Operating
Partnership determines that, consistent with Crescent REIT's status as a
REIT, it is required to enter into a "master" lease arrangement, provided
that Crescent and Crescent Operating Partnership negotiate a mutually
satisfactory lease arrangement and Crescent Operating Partnership
determines, in its sole discretion, that Crescent is qualified to be the
lessee. For example, Crescent REIT generally would be required, consistent
with its status as a REIT, to enter into a master lease arrangement as to
hotels and behavioral healthcare facilities. In general, a master lease
arrangement is an arrangement pursuant to which an entire property or
project (or a group of related properties or projects) is leased to a
single lessee. As to opportunities for Crescent to become the lessee of any
assets under a master lease arrangement, the Intercompany Agreement
provides that Crescent Operating Partnership must provide Crescent with
written notice of the lessee opportunity. During the 30 days following such
notice, Crescent has a right of first refusal with regard to the offer to
become a lessee and the right to negotiate with Crescent Operating
Partnership on an exclusive basis regarding the terms and conditions of the
lease. If a mutually satisfactory agreement cannot be reached within the
30-day period (or such longer period to which Crescent and Crescent
Operating Partnership may agree), Crescent Operating Partnership may offer
the opportunity to others for a period of one year thereafter before it
must again offer the
10
<PAGE> 12
opportunity to Crescent in accordance with the procedures specified above.
Crescent Operating Partnership may, in its discretion, offer any
investment opportunity other than a lessee opportunity to Crescent , upon
such notice and other terms as Crescent Operating Partnership may
determine.
Under the Intercompany Agreement, Crescent has agreed not to acquire or
make (i) investments in real estate which, for purposes of the
Intercompany Agreement, includes the provision of services related to real
estate and investment in hotel properties, real estate mortgages, real
estate derivatives or entities that invest in real estate assets or (ii)
any other investments that may be structured in a manner that qualifies
under the federal income tax requirements applicable to REITs unless it
has provided written notice to Crescent Operating Partnership of the
material terms and conditions of the acquisition or investment
opportunity, and Crescent Operating Partnership has determined not to
pursue such acquisitions or investments either by providing written notice
to Crescent rejecting the opportunity within 10 days from the date of
receipt of notice of the opportunity or by allowing such 10-day period to
lapse. Crescent also has agreed to assist Crescent Operating Partnership
in structuring and consummating any such acquisition or investment which
Crescent Operating Partnership elects to pursue, on terms determined by
Crescent Operating Partnership. In addition, Crescent has agreed to notify
Crescent Operating Partnership of, and make available to Crescent
Operating Partnership, investment opportunities developed by Crescent or
of which Crescent becomes aware but is unable or unwilling to pursue.
HISTORICAL RESULTS OF OPERATIONS
On May 9, 1997, the Company acquired the Carter Crowley Asset Group. The
Company's financial statements have been prepared on the basis that the
"Predecessor" consists of the Carter Crowley Asset Group. As the Company
did not have any activities until May 9, 1997, the comparative data
relating to 1996 and the period prior to May 9, 1997 is only with regard to
the Predecessor.
Three Months Ended June 30, 1997 Compared to Three Months Ended June 30,
1996. Total revenues of the Company increased approximately $600,000,
or 24.1% to $2.9 million for the three months ended June 30, 1997, compared
with $2.3 million for the three months ended June 30, 1996. This increase
was due to an increase in customer construction projects and a
corresponding increase in demand for Moody-Day equipment and services, an
increase in the amount of equipment Moody-Day had available to meet sale
and rental demand and the favorable introduction by Moody-Day of new lines
of equipment available for sale and rental.
Total cost of sales for the Company increased approximately $50,000, or
2.5%, to $1.9 million for the three months ended June 30, 1997, compared
with $1.9 million for the three months ended June 30, 1996. This increase
is due primarily to increase in demand for Moody-Day equipment offset by
lower depreciation of new and used equipment as a result of the purchase
price allocation.
Selling, general and administrative and other expense for the Company
increased approximately $158,000, or 33.2%, in the aggregate, due
primarily to increases in interest expense attributable to increases in
corporate borrowing and in general corporate expenses.
Other expenses of the Company increased approximately $502,000 for the
three months ended June 30, 1997, compared with June 30, 1996, due
primarily to a $260,000 increase in interest expense resulting from an
increase in corporate borrowings, a $399,000 equity loss in CBHS, and a
$150,000 gain on sale of partnership.
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996.
Total revenues of the Company increased approximately $900,000 or 16%,
to $5.9 million for the six months ended June 30, 1997, compared with $5.0
million for the six months ended June 30, 1996. The increase is primarily
the result of an increase in customer construction projects and a
corresponding increase in demand for Moody-Day's equipment and services,
an increase in the amount of equipment Moody-Day had available to meet
sale and rental demand and the favorable introduction by Moody-Day of new
lines of equipment available for sale and rental.
Total cost of sales for the Company increased approximately $300,000, or
7.3%, to $4.4 million for the six months ended June 30, 1997, compared
with $4.1 million for the six months ended June 30, 1996. This increase is
due primarily to an increase in depreciation expense as a result of
inventory purchased by Moody-Day to meet customer demand for rental
equipment and an increase in cost of sales as a result of the new
equipment lines available for sale.
Selling, general and administrative expense of the Company increased
approximately $200,000, or 22.2%, to $1.1 million for the year ended June
30, 1997, compared with $900,000 for the six months ended June 30, 1996,
due to increases in general corporate expenses and sales commissions.
11
<PAGE> 13
Other expenses of the Company increased approximately $600,000, for the
six months ended June 30, 1997, compared with the six months ended June
30, 1996 due primarily to a $300,000 increase in interest expense
resulting from an increase in corporate borrowings.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the formation and capitalization of Crescent, Crescent
has received approximately $14.1 million in cash from Crescent Operating
Partnership and Crescent Operating Partnership agreed to lend Crescent
approximately $35.9 million pursuant to a five-year term loan
(approximately $35.8 million of which was funded through June 30, 1997 and
approximately $25.9 million of which was outstanding as of such date). The
loan is a recourse loan that is or will be secured, to the extent not
prohibited by pre-existing arrangements, by a first lien on the investments
and all other assets owned by Crescent now or in the future (other than
assets of Crescent acquired after June 30, 1997, which may be pledged in
the future to secure non-recourse loans to Crescent). The loan bears
interest at the rate of 12% per annum, compounded annually, and is payable
quarterly in an amount equal to the lesser of (i) the net cash flow for the
preceding quarter and (ii) the quarterly amount of principal due, together
with interest accrued on the loan. Net cash flow will be computed by
subtracting the total costs incurred by Crescent from its gross receipts.
The loan will mature on May 8, 2002. The Company also has obtained a $20.4
million line of credit which bears interest at the same rate as the term
loan. The line of credit is payable on an interest-only basis during its
term, which expires on the later of (i) May 21, 2002 or (ii) five years
after the last draw under the line of credit. Draws may be made under the
line of credit until June 22, 2002. The line of credit is a recourse
obligation and amounts outstanding thereunder are or will be secured, to
the extent not prohibited by pre-existing arrangements, by a first lien on
the investments and all other assets owned by Crescent now or in the future
(other than assets of Crescent acquired after June 30, 1997, which may be
pledged in the future to secure non-recourse loans to Crescent). As of June
30, 1997, no amounts were outstanding under the line of credit.
Approximately $12.6 million in cash and the proceeds of approximately
$15.3 million of loans were used to acquire the Carter-Crowley Assets and
the 12.38% limited partner interest in the partnership that owns the
Dallas Mavericks. The remaining approximately $1.5 million previously
funded in the form of cash, together with the remaining approximately
$20.6 million advanced in the form of loans, was used both to acquire, and
make an additional contribution relating to, the CBHS Interest and to
acquire the warrants to acquire shares of Magellan common stock for an
aggregate of approximately $20.0 million, and to fund an obligation of
Moody-Day to purchase construction equipment for approximately $2.1
million. The line of credit will be used to support future funding
obligations associated with these investments (consisting of approximately
$2.1 million relating to Crescent's investment in Hicks-Muse and
approximately $17.5 million relating to the CBHS Interest) and other cash
requirements.
12
<PAGE> 14
On June 11, 1997, Crescent sold the 12.38% limited partner interest in the
partnership that owns the Dallas Mavericks to an affiliated entity and
received proceeds from the sale in the amount of approximately $12.55
million. The limited partner interest was originally purchased by Crescent
for approximately $12.4 million and the sale resulted in a gain to Crescent
of approximately $.15 million. Of the approximately $12.55 million proceeds
from the sale of the limited partner interest, Crescent used approximately
$9.9 million to repay outstanding principal and $.2 million to pay accrued
and unpaid interest on the term loan from Crescent Operating Partnership.
Additionally, Crescent paid a dividend of approximately $2.4 million to
Crescent Operating Partnership, its sole stockholder at that time.
PRO FORMA CAPITAL RESOURCES
The Company currently has no commitments to purchase any assets. Crescent
has no external sources of financing except as described above in "Liquidity and
Capital Resources." The purchase of additional assets will be contingent upon
securing adequate funding on terms acceptable to the Company. The Company is not
aware of any material unfavorable trends in either capital resources or the
outlook for long-term cash generation, nor does it expect any material change in
the availability and relative cost of such capital resources.
CHARTER BEHAVIORAL HEALTH SYSTEMS, LLC
The Company acquired its 50% member interest in CBHS on June 17, 1997.
Summarized below are operating statistics for the quarter ended June 30,
1997.
<TABLE>
<S> <C>
Facilities in Operation 81
Patient Days 50,424
Equivalent Patient Days 53,716
Admissions 4,221
Average Length of Stay 13.1
</TABLE>
The Facilities' hospital business is seasonal in nature, with a reduced
demand of certain services generally occurring in the first fiscal quarter
around major holidays, such as Thanksgiving and Christmas, and during the
summer months comprising the Company's third quarter. CBHS's business is
also subject to general economic conditions and other factors.
Accordingly, the results of operations for the interim periods are not
necessarily indicative of the actual results expected for the year.
The Facilities provide inpatient and outpatient behavioral healthcare
services. The inpatient treatment includes acute and residential programs
serving adults, adolescents and children. Third party payers include
governmental, commercial, managed care and private payers. The Facilities
are experiencing a shift in payer mix to managed care payers from other
payers. The Company on August 1, 1997, advanced CBHS $10 million pursuant
to its agreement to provide working capital. This loan bears interest at
10% per annum.
13
<PAGE> 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
14
<PAGE> 16
CRESCENT OPERATING, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
BACKGROUND
On July 31, 1997, the Company, through its newly-formed subsidiary, WOCOI
Investment Company, acquired for approximately $425,000, a 42.5% general
partner interest in The Woodlands Operating Company, L.P. ("Woodlands
Operating"). The acquisition was part of a larger transaction (the
"Transaction"), pursuant to which Crescent REIT and certain of its
subsidiaries, and certain Morgan Stanley funds (the "Morgan Stanley
Group") acquired The Woodlands Corporation. The purchase price of the
Company's interest in Woodlands Operating was determined by mutual
agreement of the parties to the Transaction. WOCOI Investment Company will
serve as the managing general partner of Woodlands Operating.
The Woodlands Corporation is the principal owner, developer and operator
of The Woodlands, an approximately 27,000 acre master-planned residential
and commercial community located approximately 27 miles north of Houston,
Texas. The Woodlands includes a shopping mall, retail centers, office
buildings, a Conference Center and Country Club and other amenities. The
Company obtained the opportunity to purchase its interest in Woodlands
Operating from Crescent pursuant to the Intercompany Agreement between the
Company and Crescent Operating Partnership. The Intercompany Agreement
gives the Company the right of first refusal to become a lessee of real
property acquired by Crescent Operating Partnership under certain
circumstances, and permits Crescent Operating Partnership to offer the
Company other investment opportunities, in Crescent Operating
Partnership's discretion.
WOODLANDS OPERATING AND ITS SUBSIDIARIES
Woodlands Operating was formed to provide management, advisory,
landscaping and maintenance services to entities affiliated with the
Company and Crescent as well as to third parties. Pursuant to the terms of
five written service agreements, Woodlands Operating will perform general
management, landscaping and maintenance, construction, design, sales,
promotional and other marketing services for the properties in which
Crescent acquired a direct or indirect interest as a result of the
Transaction. In addition, Woodlands Operating will monitor certain of the
real estate investments of, and provide advice regarding real estate and
development issues to, such entities. As compensation for its management
and advisory services, Woodlands Operating will be paid a monthly advisory
fee in an amount equal to 3% of all costs and expenses incurred by
Woodlands Operating in providing such services. As compensation for its
landscaping and maintenance services, Woodlands Operating will receive a
monthly fee in an amount equal to 5% of the cost per month of performing
the required landscaping and maintenance services. Each service agreement
provides for an initial term of at least 12 months (subject to earlier
termination under certain circumstances) and will be renewed
automatically, unless terminated by either party upon giving prior notice
as specified in each agreement.
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<PAGE> 17
The assets of Woodlands Operating consist primarily of the following
direct and indirect subsidiaries: (I) MND Hospitality, Inc., a payroll
entity the assets of which are solely related to its employee benefit
plans; (ii) MND Hospitality Services Corp., a payroll entity used to
record the expenses of temporary employees; (iii) BOCH General
Partnership, the assets of which include certain equipment, personal
property and contract rights; (iv) WECCR General Partnership (AWECCR GP@)
which leases certain assets described below; and (v) WECCR, Inc., a Texas
corporation which owns 1% general partner interests in both BOCH General
Partnership and WECCR GP.
WECCR GP leases the Woodlands Conference Center and Country Club, a
364-room executive conference center with a private golf and tennis club
serving approximately 1,600 members and offering 81 holes of golf, and
certain related assets (the "Facility") from The Woodlands Commercial
Properties Company, L.P. ("Woodlands Commercial"), a partnership the
interests of which are owned by Crescent and the Morgan Stanley Group.
Pursuant to the lease agreement, Woodlands Commercial has assigned to
WECCR GP substantially all of its interest in and to third-party contracts
and agreements relating to the operation of the Facility. WECCR GP leases
the Facility on a triple net basis and will pay base rent in the amount of
$750,000 per month during the eight-year term of the lease. The lease also
provides for the payment of percentage rent ranging from 23% to 35% for
each calendar year in which gross receipts from the operation of the
Facility exceed amounts ranging from $38,000,000 to $54,000,000; provided,
however, that in no event will percentage rent payments exceed a ceiling
amount to be determined in accordance with a formula based on actual and
estimated annual gross receipts. Under the lease, WECCR GP must maintain a
net worth of at least $400,000 and is responsible for the payment of
maintenance costs.
FUNDING FOR THE ACQUISITION OF WOODLANDS OPERATING
Funds used to acquire the Company's general partner interest in Woodlands
Operating were obtained through an advance on a $35.9 million term note
from Crescent Operating Partnership, pursuant to a term note agreement
between the two companies. The term note is a recourse obligation which
bears interest at the rate of 12% per annum, compounded annually, and is
payable quarterly in an amount equal to the lesser of (I) the net cash
flow for the preceding quarter and (ii) the quarterly amount of principal
due, together with interest accrued on the loan. Net cash flow will be
computed by subtracting the total costs incurred by the Company from its
gross receipts. The loan will mature on May 8, 2002.
PENDING INVESTMENT
Crescent REIT has offered the Company the opportunity to acquire, for
approximately $1 million, all of the voting stock, representing a 5%
equity interest, in The Woodlands Land Company, Inc. ("Landevco"), a
newly-formed residential development corporation which is currently wholly
owned by Crescent REIT Landevco holds a 42.5% general partner interest in,
and is the managing general partner of, The Woodlands Land Development
Company, L.P., which owns, among other assets, certain residential
property, a realty office, contract rights relating to the operation of
its properties and a 50% interest in a title company. The Company has
accepted the offer to acquire the interest in Landevco and anticipates it
will consummate the acquisition in the near future.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits.
3.4 Amended and Restated Bylaws
4.2 Preferred Share Purchase Rights Agreement
10.2 Intercompany Agreement between Crescent Operating, Inc. and
Crescent Operating Partnership
10.3 Amended and Restated Operating Agreement of Charter Behavioral
Health Systems, LLC
10.4 Warrant Purchase Agreement between Crescent Operating, Inc. and
Magellan Health Services, Inc.
10.5 Amended and Restated Credit and Security Agreement
10.6 Line of Credit and Security Agreement
10.7 Charter Behavioral Health Systems, LLC Promissory Note
27 Financial Data Schedule
b. Reports on Form 8-K. Not Applicable
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<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CRESCENT OPERATING, INC.
(Registrant)
By: /s/ RICHARD P. KNIGHT
-----------------------------------
Richard P. Knight
Chief Financial Officer
Date: April 17, 1998
17
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
3.4 Amended and Restated Bylaws
4.2 Preferred Share Purchase Rights Agreement
10.2 Intercompany Agreement
10.3 Amended and Restated Operating Agreement of Charter
Behavioral Health Systems, LLC
10.4 Warrant Purchase Agreement
10.5 Amended and Restated Credit and Security Agreement
10.6 Credit and Security Agreement
10.7 Promissory Note
27 Financial Data Schedule
</TABLE>
