<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. FOUR
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): January 29, 1997
CRESCENT REAL ESTATE EQUITIES COMPANY
(Exact name of Registrant as specified in its Charter)
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<S> <C> <C>
Texas 1-13038 52-1862813
(State of Organization) (Commission File Number) (IRS Employer Identification Number)
</TABLE>
<TABLE>
<S> <C>
777 Main Street, Suite 2100
Fort Worth, Texas 76102
(Address of Principal Executive (Zip Code)
Offices)
</TABLE>
(817) 877-0477
(Registrant's telephone number, including area code)
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On March 24, 1997, Crescent Real Estate Equities Company (the "Company")
filed a Form 8-K dated January 29, 1997 containing a description of certain
proposed transactions in Item 5 thereof and certain related financial
information in Item 7 thereof. On April 9 and April 24, 1997, the Company filed
Forms 8-K/A amending and restating the disclosure contained in Item 5 of the
Form 8-K filed on March 24, 1997 to provide updated information. On May 23,
1997, the Company filed Form 8-K/A amending and restating the disclosure in
Item 5 of the prior Form 8-K to provide updated information and to amend and
restate in its entirety the pro forma financial information contained in Item
7(b) of the Company's Form 8-K/A filed on April 24, 1997 to reflect updated
information relating to the acquisition of the Carter-Crowley Portfolio (as
defined herein), the proposed transaction with Magellan Health Services, Inc.
("Magellan"), the proposed spin-off of an affiliated entity, and the financing
of these transactions. This Form 8-K/A amends and restates the disclosure in
Item 2 and Item 7(b) of the Company's Form 8-K/A filed on May 23, 1997 (i) to
reflect the closing of the transactions effective June 17, 1997 and the
effectiveness of the spin-off of the affiliated entity on June 12, 1997 and
(ii) to include financial statements for the Provider Segment of Magellan
Health Services, Inc. and update certain pro forma financial information.
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
Certain matters discussed within this Form 8-K/A are forward-looking
statements within the meaning of the federal securities laws. Although Crescent
Real Estate Equities Company ("Crescent Equities" and, collectively with its
subsidiaries, the "Company"), which operates as a real estate investment trust
(a "REIT") for federal income tax purposes, believes that the expectations
reflected in such forward-looking statements are based upon reasonable
assumptions, there can be no assurance that these expectations will be realized.
Factors that could cause actual results to differ materially from current
expectations include the failure of pending investments to close, changes in
general economic conditions, changes in local real estate conditions, changes in
industries in which the Company's principal tenants compete, the failure to
timely lease unoccupied square footage, the failure to timely re-lease occupied
square footage upon expiration of leases, the inability to generate sufficient
revenues to meet debt service payments and operating expenses, the
unavailability of equity and debt financing and other risks described in this
Form 8-K/A.
FORMATION AND CAPITALIZATION OF CRESCENT OPERATING AND SPIN-OFF
In April 1997, the Company established a new Delaware corporation,
Crescent Operating, Inc. ("Crescent Operating"), to become a lessee and
operator of various assets and to perform an agreement (the "Intercompany
Agreement") between Crescent Operating and Crescent Real Estate Equities
Limited Partnership, which is the operating partnership of Crescent Equities
(the "Operating Partnership"), pursuant to which each has agreed to provide the
other with rights to participate in certain transactions. Crescent Operating's
certificate of incorporation, as amended and restated, generally prohibits
Crescent Operating, for so long as the intercompany agreement remains in
effect, from engaging in activities or making investments that a REIT could
make, unless the Operating Partnership was first given the opportunity but
elected not to pursue such activities or investments.
In connection with the formation and capitalization of Crescent
Operating, the Company provided or made available to Crescent Operating
approximately $50.0 million in the form of cash contributions and loans to be
used by Crescent Operating to acquire certain assets described below. The
Company also made available to Crescent Operating a line of credit in the
amount of $20.4 million to be used by Crescent Operating to fulfill certain
ongoing obligations associated with these assets.
On June 12, 1997, the distribution through a spin-off of all of the
outstanding common stock of Crescent Operating became effective. The
distribution was made to those persons who were limited partners of the
Operating Partnership or shareholders of Crescent Equities on May 30, 1997, on
the basis of one share of common stock of Crescent Operating for every five
units of limited partner interest in the Operating Partnership held on that
date and one share of common stock of Crescent Operating for every ten common
shares of beneficial interest of Crescent Equities held on that date. The
mailing of the shares and account statements representing the ownership of
common stock of Crescent Operating occurred on June 26, 1997.
The distribution of Crescent Operating common stock is designed to
provide the shareholders of Crescent Equities and the limited partners of the
Operating Partnership who retain both their interest in Crescent Equities or
the Operating Partnership and their interest in Crescent Operating with the
ability to benefit from both the real estate operations of Crescent Equities
and the business operations of Crescent Operating.
As a result of the spin-off of Crescent Operating, Crescent Operating
became a public company. The shares of Crescent Operating were accepted for
quotation on the OTC Bulletin Board and began trading on a when-issued basis on
June 13, 1997.
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MAGELLAN TRANSACTION
On January 29, 1997, the Company entered into an agreement with Magellan
to acquire substantially all of the real estate assets of Magellan's domestic
hospital provider business as then owned and operated by a wholly owned
subsidiary of Magellan. The Magellan transaction involves various components,
certain of which relate to the Company and certain of which relate to Crescent
Operating. Closing of the transactions occurred on June 17, 1997.
The total purchase price for the assets acquired in the Magellan
transaction was approximately $417.2 million. Of this amount, the Company paid
approximately $387.2 million for the acquisition of approximately 90
behavioral healthcare facilities (the "Magellan Facilities") and $12.5 million
for the acquisition of certain warrants to purchase shares of common stock of
Magellan, and Crescent Operating paid $5.0 million for its interest in Charter
Behavioral Health Systems, LLC, a limited liability company ("CBHS") and $12.5
million for the acquisition of certain warrants to purchase shares of common
stock of Magellan. CBHS is owned 50% by Crescent Operating and 50% by a wholly
owned subsidiary of Magellan, subject to potential dilution of each by up to 5%
in connection with future incentive compensation of management of CBHS.
The principal component of the transaction is the Company's acquisition of
the Magellan Facilities, which are leased to CBHS, and the subsidiaries of
CBHS, under a triple-net lease. The lease requires the payment of annual
minimum rent in the amount of $41.7 million, increasing in each subsequent year
during the 12-year term at a 5% compounded annual rate. The lease provides for
four, five-year renewal options. All maintenance and capital improvement costs
will be the responsibility of CBHS during the term of the lease. In addition,
CBHS will pay annually an additional $20 million under the lease, 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's failure to pay the additional $20 million is not a default under
the lease unless the Company has expended funds for capital expenditures,
property taxes, insurance premiums or franchise fees. In connection with the
Magellan transaction, the Company also acquired warrants to purchase 1,283,311
shares of common stock of Magellan, at an exercise price of $30.00 per share,
with such warrants exercisable, in increments, during the period from June 17,
1998 through June 17, 2009.
In connection with the closing of the Magellan transaction, Crescent
Operating acquired its interest in CBHS and certain warrants to purchase shares
of common stock of Magellan in exchange for an initial payment of $17.5
million, with an additional $2.5 million paid to CBHS within five days
following the closing. Magellan, through its wholly owned subsidiary, acquired
its interest in CBHS in exchange for the contribution of certain assets, with
an additional $2.5 million paid to CBHS in cash at the closing. In addition,
each of Crescent Operating and Magellan, through its wholly owned subsidiary,
agreed to lend to CBHS, upon request by Magellan during the five years
following the closing, up to an aggregate of $17.5 million. Magellan also
agreed to provide funding to its wholly owned subsidiary if required for its
wholly owned subsidiary to meet its loan obligation. Any such loans will bear
interest at the rate of 10% per annum and have a term of five years. CBHS, as
lessee of the Magellan Facilities, will be responsible for operating the
Magellan Facilities. CBHS will derive assistance in its role as operator of the
Magellan Facilities through a franchise arrangement with an initial term of 12
years (subject to four, five-year renewal options) entered into between CBHS
(and its subsidiaries), as franchisees, and Magellan and a wholly owned
subsidiary of Magellan (collectively, the "Franchisor"), as franchisor. Pursuant
to the franchise arrangement, the Franchisor will provide to CBHS and its
subsidiaries certain services necessary or desirable for the operation of the
business to be conducted at the Magellan Facilities (including the provision of
policies, procedures and protocols for operation of the Magellan Facilities and
of a toll-free patient referral number) in exchange for an annual franchise fee
of $78.3 million plus the greater of annual cost-of-living adjustments or a
percentage of CBHS's gross revenues, as defined in the franchise agreement. The
payment by CBHS to the Franchisor of the annual franchise fee will be
subordinated to the payment by CBHS to the Company of annual minimum rent. In
addition, the Franchisor will not have the right to terminate the franchise
agreement due to the nonpayment of the franchise fee as a result of the
subordination of the franchise fee to the annual minimum rent. In connection
with the Magellan transaction, Crescent Operating also acquired, warrants to
purchase 1,283,311 shares of common stock of Magellan. These warrants have the
same terms as the warrants purchased by the Company from Magellan. In addition,
Crescent Operating issued to Magellan warrants to purchase up to 282,508 shares
of its common stock outstanding (representing approximately 2.5% of its
then-outstanding common stock plus the warrant shares), with such warrants
exercisable only in the same proportion as the Company and Crescent Operating,
in the aggregate, exercise their warrants to purchase common stock of Magellan.
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STRUCTURE OF CRESCENT OPERATING AND CERTAIN RELATIONSHIPS
Intercompany Agreement. Under the Intercompany Agreement entered into by
Crescent Operating and the Operating Partnership, Crescent Operating has agreed
not to acquire or make (i) investments in real estate which, for purposes of
the Intercompany Agreement, includes the provision of services related to real
estate and investment in hotel properties, real estate mortgages, real estate
derivatives or entities that invest in real estate assets or (ii) any other
investments that may be structured in a manner that qualifies under the federal
income tax requirements applicable to REITs unless it has provided written
notice to the Operating Partnership of the material terms and conditions of the
acquisition or investment opportunity, and the Operating Partnership has
determined not to pursue such acquisitions or investments. In addition,
Crescent Operating has agreed to assist the Operating Partnership in
structuring and consummating any such acquisition or investment which the
Operating Partnership elects to pursue, on terms determined by the Operating
Partnership. Further, Crescent Operating has agreed to notify the Operating
Partnership of, and make available to the Operating Partnership, investment
opportunities developed by Crescent Operating or of which Crescent Operating
becomes aware but is unable or unwilling to pursue.
The Intercompany Agreement also provides, subject to certain terms, that the
Operating Partnership will provide Crescent Operating with a right of first
refusal to become the lessee of any real property acquired by the Operating
Partnership if the Operating Partnership determines that, consistent with
Crescent Equities' status as a REIT, it is required to enter into a "master"
lease arrangement, provided that Crescent Operating and the Operating
Partnership negotiate a mutually satisfactory lease arrangement and the
Operating Partnership determines, in its sole discretion, that Crescent
Operating is qualified to be the lessee. It is also anticipated that
Crescent Operating will enter into negotiations with the lessees of certain
hotel properties to acquire the rights of such lessees. No such
negotiations are currently ongoing, however, and there is no assurance that any
such agreements will be reached.
Management and Management Relationships. Messrs. Richard E. Rainwater, John
C. Goff and Gerald W. Haddock hold the same offices with Crescent Operating that
they currently hold with the Company. In addition the board of directors of
Crescent Operating consists of seven members, five of whom (including Messrs.
Rainwater, Goff and Haddock) are currently trust managers of the Company and two
of whom are persons who are not be affiliated with the Company. Although each of
Messrs. Rainwater, Goff and Haddock is committed to the success of Crescent
Operating, they are also committed to the success of Crescent Equities. 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.
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
Equities will lead to conflicts of interests in connection with transactions
between the two companies. Crescent Operating was formed with specific purpose
clauses 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 pursuing REIT-suitable
opportunities, until Crescent Equities has been offered, and has declined, the
opportunities.
Certain Relationships with Magellan. Messrs. Rainwater, Goff and Haddock and
Mr. Rainwater's children own shares of Magellan common stock and warrants to
acquire shares of Magellan common stock. Mr. Rainwater, either directly or
indirectly, owns approximately 2,474,000 shares, and warrants to acquire
1,237,000 shares, of Magellan common stock. Mr. Rainwater's children, either
directly or indirectly, own approximately 320,000 shares, and warrants to
acquire 160,000 shares, of Magellan common stock. Messrs. Goff and Haddock
each own, directly or indirectly, approximately 57,000 shares, and warrants to
acquire 28,000 shares, of Magellan common stock.
The warrants entitle the warrant holders to purchase, at any time until
the January 25, 2000 expiration date, up to 2,000,000 shares of Magellan
common stock at a purchase price of $26.15 per share. Agreements executed in
connection with the acquisition of the warrants (the "Private Placement")
provide, among other things, for the adjustment of the number of shares of
Magellan common stock that can be purchased under the warrants and the purchase
price, respectively, for certain dilutive events, for registration rights for
shares, including the shares of Magellan common stock underlying the warrants,
which registration rights have been exercised, and for a variety of other
customary provisions, including, without limitation, certain restrictions on
the private sale of such shares, certain preemptive rights to acquire
additional securities issued by Magellan for cash in a private placement
transaction (which have been waived to the extent they may apply to the
Magellan transaction), and standstill covenants restricting the purchase of
additional shares of Magellan common stock by Mr. Rainwater and his affiliates
in certain circumstances.
Darla D. Moore is married to Mr. Rainwater and is a director of Magellan.
As part of the arrangements pursuant to which Mr. Rainwater acquired securities
of Magellan, Mr. Rainwater has the right to designate a nominee acceptable to
Magellan for election as a director of Magellan for so long as Mr. Rainwater
and his affiliates (collectively, the "Rainwater Group") continue to own
beneficially a specified minimum number of shares of Magellan common stock. A
limited partnership of which a corporation owned by Mr. Rainwater is the sole
general partner proposed Ms. Moore as its nominee for director, and Ms. Moore
was elected a director by the Magellan Board on February 22, 1996.
As part of the Private Placement, Magellan agreed (i) to pay a
transaction fee of $150,000; (ii) to reimburse certain expenses of Rainwater,
Inc. in connection with the Private Placement; (iii) to pay the Rainwater
Group an annual monitoring fee of $75,000 commencing on March 31, 1996; and
(iv) to reimburse the Rainwater Group for reasonable fees and expenses (up to a
maximum of $25,000 annually) incurred in connection with its ownership of
Magellan common stock and the warrants. Magellan also agreed to reimburse
the Rainwater Group in the future for one additional filing under the
Hart-Scott Rodino Anti-Trust Improvements Act of 1976 if such a filing is
required in connection with an exercise of the warrants.
From January 25, 1996 through December 31, 1996, Magellan paid to the
Rainwater Group under the Private Placement an aggregate of $306,344,
consisting of a transaction fee of $150,000, expense reimbursement in
connection with the Private Placement of $86,156, and monitoring fees and
expenses of $70,188. These amounts exclude directors' fees and expense
reimbursement paid to Ms. Moore in her capacity as a director of Magellan.
EFFECT OF CONSUMMATION OF TRANSACTIONS
General. As a result of the completion of the spin-off effective June 12,
1997, the Company and Crescent Operating exist as separate public companies. The
Company and Crescent Operating consummated the Magellan transactions on June
17, 1997 and acquired the Carter-Crowley Portfolio on May 9, 1997, as described
herein.
The Company has purchased approximately $706.0 million of assets, consisting
primarily of the 90 Magellan Facilities and the warrants to purchase 1,283,311
shares of Magellan common stock and the 14 office properties included in the
Carter-Crowley Office Portfolio and acquired by the Company on May 9, 1997.
These assets also include approximately 1,216 acres of commercially zoned,
undeveloped land located in the Dallas/Fort Worth metropolitan area, two
multifamily residential properties located in the Dallas/Fort Worth
metropolitan area and secured and unsecured promissory notes relating primarily
to the Dallas Mavericks, all of which the Company purchased on May 9, 1997.
Thany has funded these acquisitions (as well as its obligations to Crescent
Operating, as described below) through proceeds of two public offerings of its
Common Shares (as described below) and through additional borrowings under new
or existing financing arrangements. In April and May, 1997, the Company
completed two public offerings of 24,150,000 and 500,000 Common Shares,
respectively, through prospectus supplements to its existing shelf registration
statement. Net proceeds from the offerings were approximately $593.5 million.
The Company used the net proceeds from the offerings and approximately $464.7
million from additional borrowing (i) to fund approximately $30.0 million in
connection with the formation and capitalization of Crescent Operating, (ii) to
reduce, by approximately $281.0 million, amounts outstanding under certain debt
instruments, (iii) to fund approximately $306.3 million of the purchase price
of the Carter-Crowley Portfolio acquired by the Company and (iv) to fund the
commitments of the Company and Crescent Operating related to the Magellan
transaction totaling approximately $419.7 million, including $2.5 million that
was paid within five days following closing. The remaining approximately $21.2
million has been or will be used for working capital purposes.
Crescent Operating. Crescent Operating is a public company, the
securities of which initially were owned by the shareholders of the Company and
the limited partners of the Operating Partnership on May 30, 1997, the record
date for the spin-off. The assets of Crescent Operating were acquired by
Crescent Operating utilizing cash contributions of approximately $14.1 million
and loans of approximately $35.9 million provided to Crescent Operating by the
Company. Crescent Operating used approximately $26.0 million of these funds to
acquire an approximately 12% limited partner interest in the limited partnership
that owns the Dallas Mavericks, an approximately 1% interest in a private
venture capital fund and 100% of a construction equipment sales, leasing and
services company and also used approximately $7.5 million of these funds
primarily to acquire a 50% interest in CBHS and approximately $12.5 million to
acquire warrants to purchase 1,283,311 shares of Magellan common stock. The
approximately $4.0 million of these remaining funds have been used to fund
certain obligations to purchase construction equipment of the construction
equipment sales, leasing and servicing company acquired from Carter-Crowley. In
addition, Crescent Operating will have available to it approximately $20.4
million under a line of credit from the Company to fulfill certain ongoing
obligations associated with these assets.
As of June 11, 1997, Crescent Operating sold, for approximately $12.55
million, the limited partner interest in the partnership that owns the Dallas
Mavericks to DBL Holdings, Inc., a newly formed corporation wholly owned by the
Operating Partnership. In connection with the formation of DBL Holdings, Inc.,
the Operating Partnership acquired all of the voting and non-voting common stock
of DBL Holdings, Inc. for an aggregate purchase price of approximately $2.5
million. In addition, the Operating Partnership loaned DBL Holdings, Inc.
approximately $10.1 million. DBL Holdings, Inc. used these funds, together with
the Operating Partnership's equity contribution, to acquire the interest in the
partnership that owned the interest in the Dallas Mavericks. Crescent Operating
used the proceeds of the sale of the interest (i) to pay all accrued interest
under the loan from the Operating Partnership, in the amount of approximately
$.2 million, (ii) to make a payment of principal under the loan from the
Operating Partnership of approximately $9.9 million, and (iii) to pay a dividend
to its sole stockholder, the Operating Partnership, of approximately $2.4
million.
On June 27, 1997, the Operating Partnership sold (at its aggregate original
cost of $126,000) one-half of the voting capital stock of DBL Holdings, Inc. to
each of Gerald W. Haddock, the President and Chief Executive Officer of Crescent
Equities, and Crescent Operating, and John C. Goff, the Vice Chairman of
Crescent Equities and Crescent Operating. The Operating Partnership has retained
ownership of all of the non-voting capital stock of DBL Holdings, Inc., which
represents 95% of the outstanding equity of that corporation.
The pro forma financial information reflects the completion of the Magellan
transactions, the spin-off and the acquisition of the Carter-Crowley Portfolio.
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ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) FINANCIAL STATEMENTS UNDER RULE 3-05 OF REGULATION S-X
Provider Segment of Magellan Health Services, Inc.
Report of Independent Public Accountants.
Combined Balance Sheets as of September 30, 1995 and 1996
(audited) and March 31, 1997 (unaudited).
Combined Statements of Operations for the years ended
September 30, 1994, 1995 and 1996 (audited) and the six
months ended March 31, 1996 and 1997 (unaudited).
Combined Statements of Changes in Stockholder's Deficit
for the years ended September 30, 1994, 1995 and 1996
(audited) and the six months ended March 31, 1996 and
1997 (unaudited).
Combined Statements of Cash Flows for the years ended
September 30, 1994, 1995 and 1996 (audited) and the
six months ended March 31, 1996 and 1997 (unaudited).
Notes to Combined Financial Statements.
(b) PRO FORMA FINANCIAL INFORMATION
Pro Forma Consolidated Balance Sheet as of March 31, 1997
(unaudited) and notes thereto.
Pro Forma Consolidated Statement of Operations for the Three
Months ended March 31, 1997 (unaudited) and notes thereto.
Pro Forma Consolidated Statement of Operations for the Year
ended December 31, 1996 (unaudited) and notes thereto.
(c) EXHIBITS
The following is a list of all exhibits filed as a part of this
Form 8-K.
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EXHIBIT NO. DESCRIPTION OF EXHIBIT
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23.01 Consent of Arthur Andersen LLP, Independent Public
Accountants, dated July 1, 1997 (filed herewith).
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: July 2, 1997 CRESCENT REAL ESTATE EQUITIES COMPANY
By: /s/ DALLAS E. LUCAS
--------------------------------
Dallas E. Lucas
Senior Vice President and
Chief Financial Officer
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INDEX TO FINANCIAL STATEMENTS
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Provider Segment of Magellan Health Services, Inc.
Report of Independent Public Accountants ................................................... F-2
Combined Balance Sheets as of September 30, 1995 and 1996 (audited) and
March 31, 1997 (unaudited) ............................................................... F-3
Combined Statements of Operations for the years ended September 30, 1994, 1995 and 1996
(audited) and the six months ended March 31, 1996 and 1997 (unaudited).................... F-5
Combined Statements of Changes in Stockholder's Deficit for the years ended September 30,
1994, 1995 and 1996 (audited) and the six months ended March 31, 1996
and 1997 (unaudited) ..................................................................... F-6
Combined Statements of Cash Flows for the years ended September 30, 1994, 1995 and 1996
(audited) and the six months ended March 31, 1996 and 1997 (unaudited) .................. F-7
Notes to Combined Financial Statements...................................................... F-8
PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
Pro Forma Consolidated Balance Sheet as of March 31, 1997 and notes thereto ................ F-20
Pro Forma Consolidated Statement of Operations for the Three Months Ended March 31, 1997
and notes thereto .......................................................................... F-22
Pro Forma Consolidated Statement of Operations for the Year Ended December 31, 1996 and
notes thereto .............................................................................. F-25
</TABLE>
F-1
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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-2
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PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------- MARCH 31,
1995 1996 1997
--------- --------- -----------
(AUDITED) (AUDITED) (UNAUDITED)
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Current Assets:
Cash, including cash equivalents of $60,234 in 1995 and
$20,999 in 1996 at cost which approximates market
value............................................... $ 103,735 $ 71,822 66,151
Accounts receivable, less allowance for doubtful
accounts of $47,851 in 1995 and $48,299 in 1996..... 170,728 148,805 145,296
Supplies............................................... 5,768 4,753 4,465
Other current assets................................... 13,064 20,120 20,074
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Total Current Assets........................... 293,295 245,500 235,986
Assets restricted for settlement of unpaid claims and
other long-term liabilities............................ 94,138 105,303 96,402
Property and Equipment:
Land................................................... 88,019 83,431 82,705
Buildings and improvements............................. 377,169 388,821 393,812
Equipment.............................................. 107,681 122,927 126,549
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572,869 595,179 603,066
Accumulated depreciation............................... (89,046) (118,937) (132,806)
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483,823 476,242 470,260
Construction in progress............................... 2,902 1,879 2,573
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Total Property and Equipment................... 486,725 478,121 472,833
Other Long-Term Assets................................... 36,846 34,923 28,859
Goodwill, net of accumulated amortization of $944 in 1995
and $1,147 in 1996..................................... 18,208 18,800 18,373
Other Intangible Assets, net of accumulated amortization
of $1,362 in 1995 and $2,958 in 1996................... 5,394 6,258 6,370
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$ 934,606 $ 888,905 $ 858,823
========= ========= =========
</TABLE>
The accompanying Notes to Combined Financial Statements are an integral part of
these balance sheets.
F-3
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PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDER'S DEFICIT
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------- MARCH 31,
1995 1996 1997
--------- --------- -----------
(AUDITED) (AUDITED) (UNAUDITED)
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Current Liabilities:
Accounts payable....................................... $ 69,726 $ 61,685 $ 56,154
Accrued liabilities.................................... 116,380 117,214 88,714
Current maturities of long-term debt and capital lease
obligations......................................... 2,799 2,751 2,845
--------- --------- ---------
Total Current Liabilities...................... 188,905 181,650 147,713
Long-Term Debt and Capital Lease Obligations............. 77,111 73,620 72,380
Reserve for Unpaid Claims................................ 100,125 73,040 62,316
Deferred Credits and Other Long-Term Liabilities......... 34,455 36,506 20,925
Minority Interest........................................ 7,486 21,421 21,947
Due to Parent............................................ 666,349 619,556 637,555
Commitments and Contingencies
Stockholder's Deficit:
Accumulated deficit.................................... (139,003) (114,906) (101,065)
Cumulative foreign currency adjustments................ (822) (1,982) (2,948)
--------- --------- ---------
(139,825) (116,888) (104,013)
--------- --------- ---------
$ 934,606 $ 888,905 $ 858,823
========= ========= =========
</TABLE>
The accompanying Notes to Combined Financial Statements are an integral part of
these balance sheets.
F-4
<PAGE> 12
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
----------------------------------- -------------------------
1994 1995 1996 1996 1997
--------- ---------- ---------- ----------- -----------
(AUDITED) (AUDITED) (AUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue......................... $904,646 $1,106,975 $1,044,345 $538,119 $479,289
-------- ---------- ---------- -------- --------
Costs and expenses
Salaries, supplies and other
operating expenses............. 661,436 825,468 800,912 406,471 372,201
Bad debt expense.................. 70,623 91,652 79,930 41,381 35,055
Depreciation and amortization..... 28,354 36,029 37,108 18,720 18,566
Amortization of reorganization
value in excess of amounts
allocable to identifiable
assets......................... 31,200 26,000 -- -- --
Interest, unaffiliated............ 6,364 5,421 5,492 2,872 2,483
Allocated interest, net from
Parent......................... 33,030 48,756 42,123 19,115 24,321
ESOP expense...................... 49,197 73,527 -- -- --
Stock option expense (credit)..... 10,614 (467) 914 1,414 1,433
Unusual items..................... 71,287 57,437 37,271 -- 1,395
-------- ---------- ---------- -------- --------
962,105 1,163,823 1,003,750 489,973 455,454
-------- ---------- ---------- -------- --------
Income (loss) before income taxes
and minority interest............. (57,459) (56,848) 40,595 48,146 23,835
Provision for (benefit from) income
taxes............................. (10,504) (12,934) 14,883 18,920 8,886
-------- ---------- ---------- -------- --------
Income (loss) before minority
interest.......................... (46,955) (43,914) 25,712 29,226 14,949
Minority interest................... 48 340 1,615 1,476 1,108
-------- ---------- ---------- -------- --------
Net income (loss)................... $(47,003) $ (44,254) $ 24,097 $ 27,750 $ 13,841
======== ========== ========== ======== ========
</TABLE>
The accompanying Notes to Combined Financial Statements are an integral part of
these statements.
F-5
<PAGE> 13
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
--------------------------------- -------------------------
1994 1995 1996 1996 1997
--------- --------- --------- ----------- -----------
(AUDITED) (AUDITED) (AUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Accumulated Deficit:
Balance, beginning of period....... $(47,746) $ (94,749) $(139,003) $(139,003) $(114,906)
Net income (loss).................. (47,003) (44,254) 24,097 27,750 13,841
-------- --------- --------- --------- ---------
Balance, end of period............. (94,749) (139,003) (114,906) (111,253) (101,065)
-------- --------- --------- --------- ---------
Cumulative Foreign Currency
Adjustments:
Balance, beginning of period....... (4,660) (2,454) (822) (822) (1,982)
Foreign currency translation gain
(loss).......................... 2,206 1,632 (1,160) (1,045) (966)
-------- --------- --------- --------- ---------
Balance, end of period............. (2,454) (822) (1,982) (1,867) (2,948)
-------- --------- --------- --------- ---------
Total Stockholder's Deficit.......... $(97,203) $(139,825) $(116,888) $(113,120) $(104,013)
======== ========= ========= ========= =========
</TABLE>
The accompanying Notes to Combined Financial Statements are an integral part of
these statements.
F-6
<PAGE> 14
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
--------------------------------- -------------------------
1994 1995 1996 1996 1997
--------- --------- --------- ----------- -----------
(AUDITED) (AUDITED) (AUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net income (loss)................................... $(47,003) $(44,254) $ 24,097 $ 27,750 $ 13,841
-------- -------- -------- -------- --------
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Gain on sale of assets.......................... -- (2,961) (1,697) (138) (3,302)
Depreciation and amortization................... 59,554 62,029 37,108 18,720 18,566
Non-cash portion of unusual items............... 70,207 45,773 31,206 -- --
ESOP expense.................................... 49,197 73,527 -- -- --
Stock option expense (credit)................... 10,614 (467) 914 1,414 1,433
Non-cash interest expense....................... 2,005 2,735 2,424 1,202 882
Cash flows from changes in assets and
liabilities, net of effects from sales and
acquisitions of businesses:
Accounts receivable, net.................... (7,533) 9,451 22,905 (8,828) 3,509
Other current assets........................ 4,563 8,273 575 (2,848) 667
Other long-term assets...................... 2,860 (5,726) 5,496 5,886 (3,350)
Accounts payable and accrued liabilities.... 2,683 (15,192) (16,917) (12,567) (31,536)
Reserve for unpaid claims................... 1,215 (5,885) (29,985) (10,625) (13,694)
Other liabilities........................... (8,249) (21,127) (18,968) (5,669) (15,179)
Minority interest, net of dividends paid.... 80 22 1,596 1,887 1,593
Due to Parent -- interest and income
taxes..................................... (42,459) (11,966) 19,618 11,741 6,402
Other....................................... 613 285 1,022 121 (1,063)
-------- -------- -------- -------- --------
Total adjustments........................... 145,350 138,771 55,297 296 (35,072)
-------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities.............................. 98,347 94,517 79,394 28,046 (21,231)
-------- -------- -------- -------- --------
Cash Flows From Investing Activities
Capital expenditures................................ (14,626) (19,354) (30,978) (10,403) (9,463)
Acquisitions of businesses, net of cash acquired.... (130,550) (62,125) (235) (256) (6,998)
Decrease (increase) in assets restricted for
settlement of unpaid claims and other long-term
liabilities....................................... 7,076 (19,606) (17,732) (6,070) 8,626
Proceeds from sale of assets........................ 16,584 5,879 5,098 503 10,386
Investment in Parent................................ -- (4,736) -- -- --
Other............................................... -- (1,050) -- -- --
-------- -------- -------- -------- --------
Net cash provided by (used in) investing
activities.............................. (121,516) (100,992) (43,847) (16,226) 2,551
-------- -------- -------- -------- --------
Cash Flows From Financing Activities
Change in Due to Parent............................. 86,612 (16,970) (62,625) (30,443) 14,718
Payments on debt and capital lease obligations...... (19,842) (2,423) (4,835) (2,037) (1,709)
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities.............................. 66,770 (19,393) (67,460) (32,480) 13,009
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents......................................... 43,601 (25,868) (31,913) (20,660) (5,671)
Cash and cash equivalents at beginning of period...... 86,002 129,603 103,735 103,735 71,822
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period............ $129,603 $103,735 $ 71,822 $ 83,075 $ 66,151
======== ======== ======== ======== ========
</TABLE>
The accompanying Notes to Combined Financial Statements are an integral part of
these statements.
F-7
<PAGE> 15
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(ALL REFERENCES TO MARCH 31, 1996 AND 1997 FINANCIAL DATA ARE UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The combined financial statements of the Provider Segment of Magellan
Health Services, Inc. ("CBHS" or the "Company") include the accounts of the
Company and its subsidiaries except where control is temporary or does not rest
with the Company. All significant intercompany accounts and transactions have
been eliminated in combination. The accompanying unaudited combined financial
statements for the six months ended March 31, 1996 and 1997 have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring adjustments considered necessary for a fair presentation,
have been included. Magellan Health Services, Inc. ("Magellan" or "Parent") is
an integrated behavioral healthcare company providing behavioral healthcare
services in the United States, the United Kingdom and Switzerland. Magellan
operates through three principal subsidiaries engaging in (i) the provider
business, (ii) the managed care business and (iii) the public sector business.
The Company utilizes certain Parent systems and services ("Magellan
Overhead"), including, but not limited to, risk management, computer systems,
auditing, third-party reimbursement and treasury. The Company procures insurance
("Insurance") for professional liability claims, worker's compensation claims
and general matters through the Parent. The assets, liabilities and operating
expenses for Magellan Overhead and Insurance are included in the combined
financial statements of the Company. The combined financial statements of CBHS
have been prepared in connection with the sale of certain CBHS assets and
related transactions, which are more fully described in Note 2.
The combined financial statements present the historical combined financial
position, results of operations and cash flows of CBHS and, as a result, include
certain assets, liabilities, operations and personnel that will not be included
in the transactions described below in Note 2.
On June 2, 1992, Magellan filed a voluntary petition under Chapter 11 of
the United States Bankruptcy Code. The prepackaged plan of reorganization (the
"Plan") effected a restructuring of Magellan's debt and equity capitalization.
Magellan's Plan was confirmed on July 8, 1992, and became effective on July 21,
1992 (effective on July 31, 1992 for financial reporting purposes). The combined
financial statements for all periods are presented for the Company after the
consummation of the Plan. These financial statements were prepared under the
principles of fresh start accounting. (See Note 4.)
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
NET REVENUE
Net revenue is based on established billing rates, less estimated
allowances for patients covered by Medicare and other contractual reimbursement
programs and discounts from established billing rates. Amounts received by the
Company for treatment of patients covered by Medicare and other contractual
reimbursement programs, which may be based on cost of services provided or
predetermined rates, are generally less than the established billing rates of
the Company's hospitals. Final determination of amounts earned under contractual
reimbursement programs is subject to review and audit by the applicable
agencies. Net revenue for fiscal 1994, 1995 and 1996 included $32.1 million,
$35.6 million and $28.3 million,
F-8
<PAGE> 16
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
respectively, for the settlement and adjustment of reimbursement issues related
to earlier fiscal periods. Net revenue for the six months ended March 31, 1996
and 1997 (unaudited) includes $11.1 million and $13.8 million, respectively for
the settlement and adjustment of reimbursement issues related to earlier fiscal
periods. Management believes that adequate provision has been made for any
adjustments that may result from such reviews.
ADVERTISING COSTS
The production costs of advertising are expensed as incurred. The Company
does not consider any of its advertising costs to be direct-response and,
accordingly, does not capitalize such costs. Advertising costs consist primarily
of radio and television air time, which is amortized as utilized, and printed
media services. Advertising expense was approximately $35.6 million, $33.5
million and $30.3 million for the years ended September 30, 1994, 1995 and 1996,
respectively.
CHARITY CARE
The Company provides healthcare services without charge or at amounts less
than its established rates to patients who meet certain criteria under its
charity care policies. Because the Company does not pursue collection of amounts
determined to be charity care, they are not reported as revenue. For the years
ended September 30, 1994, 1995 and 1996, the Company provided, at its
established billing rates, approximately $29.3 million, $41.2 million and $37.9
million, respectively, of such care.
ALLOCATED INTEREST, NET
Magellan provides financing and cash management services for CBHS.
Magellan's interest expense is allocated to CBHS based on the financing and the
cost of financing provided directly to CBHS. Deferred financing costs and
accrued interest related to such financing is carried on the books of the
Parent.
INCOME TAXES
The operations of CBHS are included in the Magellan consolidated federal
income tax return and in various unitary, foreign and consolidated state income
tax returns. Magellan allocates its consolidated income tax provision or benefit
to CBHS, which approximates income taxes that would be calculated on a
stand-alone basis.
Current and deferred income taxes payable or receivable are settled
currently through the Due to Parent account.
CASH AND CASH EQUIVALENTS
Cash equivalents are short-term, highly liquid interest-bearing investments
with a maturity of three months or less when purchased, consisting primarily of
money market instruments.
CONCENTRATION OF CREDIT RISK
Accounts receivable from patient revenue subject the Company to a
concentration of credit risk with third party payors that include insurance
companies, managed healthcare organizations and governmental entities. The
Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific payors, historical trends and other
information. Management believes the allowance for doubtful accounts is adequate
to provide for normal credit losses.
F-9
<PAGE> 17
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
ASSETS RESTRICTED FOR THE SETTLEMENT OF UNPAID CLAIMS AND OTHER LONG-TERM
LIABILITIES
Assets restricted for the settlement of unpaid claims and other long-term
liabilities include marketable securities which are carried at fair market
value. Transfer of such investments from the Insurance subsidiaries to the
Company or any of its other subsidiaries is subject to approval by certain
regulatory authorities. These assets will remain with Magellan subsequent to the
sale of the psychiatric facilities.
During fiscal 1994, the Company adopted Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Investments in Debt and Equity
Securities" ("FAS 115"). Under FAS 115, investments are classified into three
categories: (i) held to maturity; (ii) available for sale; and (iii) trading.
Unrealized holding gains or losses are recorded for trading and available for
sale securities. The Company's investments are classified as available for sale
and the adoption of FAS 115 did not have a material effect on the Company's
financial statements, financial condition and liquidity or results of
operations. The unrealized gain or loss on investments available for sale was
not material at September 30, 1995 and 1996.
PROPERTY AND EQUIPMENT
As a result of the adoption of fresh start accounting, property and
equipment were adjusted to their estimated fair value as of July 31, 1992 and
historical accumulated depreciation was eliminated. Expenditures for renewals
and improvements are charged to the property accounts. Replacements and
maintenance and repairs that do not improve or extend the life of the respective
assets are expensed as incurred. The Company removes the cost and related
accumulated depreciation from the accounts for property sold or retired, and any
resulting gain or loss is included in operations. Amortization of capital lease
assets is included in depreciation expense. Depreciation is provided on a
straight-line basis over the estimated useful lives of the assets, which is
generally 10 to 40 years for buildings and improvements and three to ten years
for equipment. Depreciation expense was $27.4 million, $34.5 million and $34.9
million for the years ended September 30, 1994, 1995 and 1996, respectively.
INTANGIBLE ASSETS
Intangible assets are composed principally of (i) goodwill and (ii)
non-compete agreements. Goodwill represents the excess of the cost of businesses
acquired over the fair value of the net identifiable assets at the date of
acquisition and is amortized using the straight-line method over 25 to 40 years.
Non-compete agreements are amortized over the term of the related agreements.
The Company continually monitors events and changes in circumstances that
could indicate carrying amounts of intangible assets may not be recoverable.
When events or changes in circumstances are present that indicate the carrying
amount of intangible assets may not be recoverable, the Company assesses the
recoverability of intangible assets by determining whether the carrying value of
such intangible assets will be recovered through the future cash flows expected
from the use of the asset and its eventual disposition. No impairment losses on
intangible assets were recorded by the Company in fiscal 1994 and 1996.
Impairment losses of approximately $4.0 million were recorded in fiscal 1995.
(See Note 4)
FOREIGN CURRENCY
Changes in the cumulative translation of foreign currency assets and
liabilities are presented as a separate component of stockholder's deficit.
Gains and losses resulting from foreign currency transactions, which were not
material, are included in operations as incurred.
RECENT ACCOUNTING PRONOUNCEMENTS
In March, 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121 ("FAS 121"), "Accounting for
the Impairment of Long-Lived Assets and for
F-10
<PAGE> 18
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Long-Lived Assets to be Disposed Of," which became effective for fiscal years
beginning after December 15, 1995. FAS 121 established standards for determining
when impairment losses on long-lived assets have occurred and how impairment
losses should be measured. The Company adopted FAS 121 effective October 1,
1994. The initial financial statement impact of adopting FAS 121 was not
material.
2. SALE OF PSYCHIATRIC FACILITIES (UNAUDITED)
On January 30, 1997, Magellan announced that it had entered into a series
of transactions including an 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's domestic portion of its provider business segment will be operated
as a joint venture, New CBHS, that is initially owned equally by Magellan an
affiliate of Crescent (the "Crescent Operating"). Magellan received $417.2
million in cash (before costs estimated to be $12.5 million), which includes
$17.2 million for hospitals acquired after January 30, 1997, and warrants in
the Crescent Operating for the purchase of 2.5% of the Crescent Operating's
common stock, exercisable over 12 years, as consideration for the Assets. In
addition to the assets, Crescent and the Crescent Operating will each receive
1,283,311 warrants (2,566,622 warrants in aggregate) 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 $41.7 million, which includes
$1.7 million for hospitals acquired after January 30, 1997 that were sold to
Crescent 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 $78 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.
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 Operating.
During fiscal 1994, the Company agreed to acquire 40 psychiatric hospitals
(the "Acquired Hospitals") from Tenet Healthcare Corporation (formerly National
Medical Enterprises). The purchase price for the Acquired Hospitals was
approximately $120.4 million in cash plus an additional cash amount of
approximately $51 million, subject to adjustment, for the net working capital of
the Acquired Hospitals (the "Hospital Acquisition").
F-11
<PAGE> 19
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
On June 30, 1994, the Company completed the purchase of 27 of the Acquired
Hospitals for a cash purchase price of approximately $129.6 million, which
included approximately $39.3 million, subject to adjustment, for the net working
capital of the facilities. On October 31, 1994, the Company completed the
purchase of three additional Acquired Hospitals for a cash purchase price of
approximately $5 million, which included approximately $2.2 million related to
the net working capital of the facilities. On November 30, 1994, the Company
completed the purchase of the remaining ten Acquired Hospitals for a cash
purchase price of approximately $36.8 million, including approximately $9.5
million related to the net working capital of the ten Acquired Hospitals. The
Company accounted for the Hospital Acquisition using the purchase method of
accounting. The operating results of the Acquired Hospitals are included in the
Company's Consolidated Statements of Operations from the respective dates of
acquisition.
JOINT VENTURES
The Company has entered into four hospital-based joint ventures with
Columbia/HCA Healthcare Corporation. Generally, each member of the joint venture
leases and/or contributes certain assets in each respective market to the joint
venture with the Company becoming the managing member.
The joint ventures' results of operations have been included in the
consolidated financial statements since inception, less minority interest. A
summary of the joint ventures is as follows:
<TABLE>
<CAPTION>
MARKET DATE
------ ------------
<S> <C>
Albuquerque, NM................................ May 1995
Raleigh, NC.................................... June 1995
Lafayette, LA.................................. October 1995
Anchorage, AK.................................. August 1996
</TABLE>
Magellan will retain its proportionate ownership interest in these joint
ventures subsequent to the closing of the transactions with Crescent and the
Crescent Operating.
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-12
<PAGE> 20
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 Operating 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-13
<PAGE> 21
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
resulting liability were approximately $1.3 million and $2.9 million in fiscal
1995 and fiscal 1996, respectively. Other exit costs paid and applied against
the resulting liabilities were approximately $212,000 and $1.4 million in fiscal
1995 and fiscal 1996, respectively.
During the six months ended March 31, 1997, (unaudited) the Company
consolidated or closed three psychiatric facilities and its one general hospital
(the "1997 Closed Facilities"). The 1997 Closed Facilities which were owned by
the Company are expected to be sold as part of the Crescent Transactions. The
Company recorded charges of approximately $4.2 million related to facility
closures during the six months ended March 31, 1997, (unaudited) which consisted
of approximately $3.0 million for severance and related benefits and $1.2
million for contract terminations and other costs.
Approximately 700 employees were terminated at the 1997 Closed Facilities.
Severance and related benefits paid and applied against the resulting liability
were approximately $2.3 million during the six months ended March 31, 1997,
(unaudited). Other exit costs paid and applied against the resulting liability
were approximately $280,000.
The following table presents net revenue, salaries, supplies and other
operating expenses and bad debt expenses and depreciation and amortization, of
the 1995 and 1996 Closed Facilities and the 1997 Closed Facilities (in
thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
----------------------------- -------------------------
1994 1995 1996 1996 1997
-------- -------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues..................... $124,185 $156,164 $85,810 $51,649 $20,856
Salaries, supplies and other
operating expenses and bad debt
expenses....................... 119,411 152,065 89,965 54,604 21,649
Depreciation and amortization.... 3,291 3,134 1,870 1,193 299
</TABLE>
The Company also recorded a charge of approximately $2.0 million in fiscal
1996 related to severance and related benefits for approximately 275 employees
who were terminated pursuant to planned overhead reductions.
ASSET IMPAIRMENTS
As a result of the Hospital Acquisition, the Company reassessed its
business strategy in certain markets at the end of fiscal 1994. The Company
established a plan to consolidate services in selected markets and to close or
sell certain facilities owned prior to the Hospital Acquisition. The Company
recorded a charge of $23 million in fiscal 1994 primarily to write down the
property and equipment at these facilities to their net realizable value.
As discussed in Note 1, the Company adopted FAS 121 effective October 1,
1994. During fiscal 1995, the Company recorded impairment losses on property and
equipment and intangible assets of approximately $23.0 million and $4.0 million,
respectively. During fiscal 1996, the Company recorded impairment losses on
property and equipment of approximately $1.2 million. Such losses resulted from
changes in the manner that certain of the Company's assets will be used in
future periods and current period operating losses at certain of the Company's
operating facilities combined with projected future operating losses. Fair
values of the long-lived assets that have been written down were determined
using the best available information in each individual circumstance, which
included quoted market price, comparable sales prices for similar assets or
valuation techniques utilizing present value of estimated expected cash flows.
F-14
<PAGE> 22
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER
During fiscal 1994, the Company recorded a charge of approximately $4.5
million related to the relocation of the Company's executive offices. During
fiscal 1995, the Company recorded a gain of approximately $3.0 million related
to the sale of three psychiatric hospitals.
The Company also sold two psychiatric facilities during the six months
ended March 31, 1997 that were closed during fiscal 1995. The Company received
approximately $5.6 million in proceeds from sales and recorded an aggregate gain
on such sales of approximately $2.8 million during the six months ended March
31, 1997, (unaudited).
6. BENEFIT PLANS
Magellan maintains an Employee Stock Ownership Plan (the "ESOP"), a
noncontributory retirement plan that enables eligible Company employees to
participate in the ownership of Magellan.
Magellan had recorded unearned compensation to reflect the cost of Magellan
Common Stock purchased by the ESOP but not yet allocated to participants'
accounts. In the period that shares are allocated or projected to be allocated
to participants, ESOP expense is recorded and unearned compensation is reduced.
Magellan's ESOP expense is reflected in the Company's statement of operations.
All shares had been allocated to the participants as of September 30, 1995.
During fiscal 1992, Magellan reinstated a defined contribution plan (the
"401-K Plan"). Employee participants can elect to voluntarily contribute up to
6% of their compensation to the 401-K Plan. Effective October 1, 1992, Magellan
began making contributions to the 401-K Plan based on employee compensation and
contributions. Magellan makes a discretionary contribution of 2% of each
employee's compensation and matches 50% of each employee's contribution up to 3%
of their compensation. During the years ended September 30, 1994, 1995 and 1996,
Magellan made contributions of approximately $4.9 million, $5.8 million and $5.3
million, respectively, to the 401-K Plan, which is reflected in salaries,
supplies and other operating expenses.
Magellan maintains five stock option plans that enable key employees and
directors to purchase shares of Magellan Common Stock. Magellan's 1992 stock
option plan allows for the exercise price of certain options to be reduced upon
termination of employment of a certain optionee without cause. Stock option
expense under Magellan's 1992 stock option plan is reflected in the Company's
statement of operations. As of September 30, 1996, 362,990 options were
outstanding at an exercise price of $4.36 and 6,000 options were outstanding at
an exercise price of $22.75. Such options expire in October 2000 and are 100%
vested.
7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Information with regard to the Company's long-term debt and capital lease
obligations at September 30, 1995 and 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1995 1996
------------- -------------
<S> <C> <C>
6.59% to 10.75% Mortgage and other notes payable through
1999..................................................... $ 5,268 $ 3,163
Variable rate secured notes due through 2013 (3.65% to
3.85% at September 30, 1996)............................. 62,025 60,875
3.85% to 11.50% Capital lease obligations due through
2014..................................................... 12,617 12,333
------- -------
79,910 76,371
Less amounts due within one year........................... 2,799 2,751
------- -------
$77,111 $73,620
======= =======
</TABLE>
F-15
<PAGE> 23
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate scheduled maturities of long-term debt and capital lease
obligations during the five years subsequent to September 30, 1996, are as
follows (in thousands): 1997 -- $2,751; 1998 -- $2,273; 1999 -- $2,103;
2000 -- $1,991 and 2001 -- $10,359.
LEASES
The Company leases certain of its operating facilities, some of which may
be purchased during the term or at expiration of the leases. The book value of
capital leased assets was approximately $8.4 million at September 30, 1996. The
leases, which expire at various dates through 2069, generally require the
Company to pay all maintenance, property tax and insurance costs.
At September 30, 1996, aggregate amounts of future minimum payments under
operating leases were as follows: 1997 -- $6.4 million; 1998 -- $4.8 million;
1999 -- $3.6 million; 2000 -- $2.2 million; 2001 -- $1.8 million; subsequent to
2001 -- $47.4 million.
Rent expense for the years ended September 1994, 1995 and 1996 was $11.4
million, $15.4 million and $14.0 million, respectively.
8. INCOME TAXES
The provision (benefit) for income taxes allocated to CBHS by Magellan
consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------
1994 1995 1996
-------- -------- -------
<S> <C> <C> <C>
Income taxes currently payable:
Federal.............................................. $ -- $ 595 $ 977
State, excluding California state refund............. 639 1,694 971
California state refund.............................. -- -- (3,695)
Foreign.............................................. 1,466 1,188 3,779
Deferred income taxes:
Federal.............................................. (11,078) (14,360) 11,214
State................................................ (1,583) (2,051) 1,602
Foreign.............................................. 52 -- 35
-------- -------- -------
$(10,504) $(12,934) $14,883
======== ======== =======
</TABLE>
A reconciliation of the Company's income tax provision (benefit) to that
computed by applying the statutory federal income tax rate is as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------
1994 1995 1996
-------- -------- -------
<S> <C> <C> <C>
Income tax provision (benefit) at federal statutory
income tax rate...................................... $(20,111) $(19,897) $14,208
State income taxes, net of federal income tax benefit
and excluding California state refund................ (616) (232) 1,673
California state refund, net of federal income tax
benefit........................................... -- -- (2,402)
Foreign income taxes, net of federal income tax
benefit.............................................. 987 772 2,479
Amortization of excess reorganization value............ 10,920 9,100 --
Other -- net........................................... (1,684) (2,677) (1,075)
-------- -------- -------
Income tax provision (benefit)......................... $(10,504) $(12,934) $14,883
======== ======== =======
</TABLE>
F-16
<PAGE> 24
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
9. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1995 1996
-------- --------
<S> <C> <C>
Salaries, wages and other benefits.......................... $ 27,386 $ 27,313
Amounts due health insurance programs....................... 10,252 27,146
Other....................................................... 78,742 62,755
-------- --------
$116,380 $117,214
======== ========
</TABLE>
10. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
------------------------ -------------------------
1994 1995 1996 1996 1997
------ ------ ------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash paid for interest, net of amounts
capitalized................................. $5,842 $5,303 $5,680 $2,099 $2,278
====== ====== ====== ====== ======
</TABLE>
The non-cash portion of unusual items for fiscal 1995 and 1996 includes the
unpaid portion of the $29.8 million and $30.0 million insurance settlements that
were recorded during the quarters ended March 31, 1995, and June 30, 1996,
respectively. The payments of the insurance settlements are included in accounts
payable and other accrued liabilities in the statement of cash flows for the
years ended September 30, 1995 and 1996.
11. COMMITMENTS AND CONTINGENCIES
The Company is self-insured for a substantial portion of its general and
professional liability risks through Magellan. The reserves for self-insured
general and professional liability losses, including loss adjustment expenses,
are based on actuarial estimates that are discounted at an average rate of 6% to
their present value based on the Company's historical claims experience adjusted
for current industry trends. The undiscounted amount of the reserve for unpaid
claims at September 30, 1995 and 1996 was approximately $113.1 million and $84.3
million, respectively. The reserve for unpaid claims is adjusted periodically as
such claims mature, to reflect changes in actuarial estimates based on actual
experience. During fiscal 1996, the Company recorded a reduction in malpractice
claim reserves of approximately $15.3 million as a result of updated actuarial
estimates. The Company recorded reductions of expenses of approximately $7.5
million and $5.0 million during the six months ended March 31, 1996 and 1997,
(unaudited) respectively. These reductions resulted primarily from updates to
actuarial assumptions regarding the Company's expected losses for more recent
policy years. These revisions are based on changes in expected values of
ultimate losses resulting from the Company's claim experiences, and increased
reliance on such claim experience. While management and its actuaries believe
that the present reserve is reasonable, ultimate settlement of losses may vary
from the amount recorded.
Certain assets of the Company, including substantially all accounts
receivable and personal property, are pledged to the Parent's bank lenders as
collateral for certain Parent indebtedness. In the opinion of management, the
Parent's obligations under such indebtedness will continue to be serviced from
ongoing operations, thereby mitigating the lenders' potential claims against
these assets.
Certain of the Company's subsidiaries are subject to or parties to claims,
civil suits and governmental investigations and inquiries relating to their
operations and certain alleged business practices. In the opinion of management,
based on consultation with counsel, resolution of these matters will not have a
material adverse effect on the Company's financial position or results of
operations.
F-17
<PAGE> 25
PROVIDER SEGMENT OF MAGELLAN HEALTH SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In January 1996, the Company settled an ongoing dispute with the Resolution
Trust Corporation ("RTC"), for itself or in its capacity as conservator or
receiver for 12 financial institutions, which formerly held certain debt
securities that were issued by the Company in 1988. In connection with the
settlement, the Company, denying any liability or fault, paid $2.7 million to
the RTC in exchange for a release of all claims.
On August 1, 1996, the United States Department of Justice, Civil Division,
filed an Amended Complaint in a civil qui tam action initiated in November of
1994 against Magellan and the Company's Orlando South hospital subsidiary by two
former employees. The Amended Complaint alleges that the hospital violated the
federal False Claims Act ("the Act") in billing for inpatient treatment provided
to elderly patients. The Amended Complaint is based on disputed clinical and
factual issues which the Company believes do not constitute a violation of the
Act. The Company and its subsidiary deny any liability in this matter and will
continue to vigorously defend themselves against the suit. As is its policy, the
Company will continue to cooperate with the government in this matter. The
Company does not believe this matter will have a material adverse effect on its
financial position or results of operations.
F-18
<PAGE> 26
CRESCENT REAL ESTATE EQUITIES COMPANY
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The pro forma information for the year ended December 31, 1996 assumes
completion, in each case as of January 1, 1996 in determining operating data,
of (i) the October 1996 Offering and the additional public offering of 450,000
Common Shares that closed on October 9, 1996 ("October 1996 Offerings") and
the use of the net proceeds therefrom to repay approximately $168 million of
indebtedness and to fund approximately $289 million of Property acquisitions
completed in the fourth quarter of 1996 and the first quarter of 1997, (ii) the
April 1997 Offering and the additional public offering of 500,000 Common Shares
that closed on May 14, 1997 (collectively the "Offerings") and the use of the
$593.5 million net proceeds and approximately $464.7 million from additional
borrowings, (a) to fund approximately $30.0 million in connection with the
formation and capitalization of Crescent Operating, Inc. ("Crescent Operating")
(b) to reduce, by approximately $281.0 million, amounts outstanding under
certain debt instruments, (c) to fund approximately $306.3 million of the
purchase price of the Carter-Crowley Portfolio acquired by the Company (d) to
fund the commitments of the Company and Crescent Operating related to the
Magellan transaction totaling approximately $419.7 million and (e) the
remaining approximately $21.2 million has or will be used for working capital
purposes, and (iii) the acquisition of the Properties acquired during 1996 and
1997.
The pro forma information for the three months ended March 31, 1997
assumes completion, in each case as of January 1, 1997 in determining operating
data and, in each case as of March 31, 1997 in determining balance sheet data,
of (i) the Offerings and the use of the $593.5 million net proceeds and
approximately $464.7 million from additional borrowings, (e) to fund
approximately $30.0 million in connection with the formation and capitalization
of Crescent Operating, (d) to reduce, by approximately $281.0 million, amounts
outstanding under certain debt instruments, (c) to fund approximately $306.3
million of the purchase price of the Carter-Crowley Portfolio acquired by the
Company (d) to fund the commitments of the Company and Crescent Operating
relating to the Magellan transaction totaling approximately $419.7 million.
The remaining approximately $21.2 million has or will be used for working
capital purposes, and (ii) the acquisition of the Properties acquired during
1997.
The unaudited pro forma Consolidated Balance Sheet and Statements of
Operations should be read in conjunction with the historical financial
statements of the Company included in its Annual Report on Form 10-K for the
year ended December 31, 1996. In management's opinion, all adjustments
necessary to reflect the above-referenced 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-19
<PAGE> 27
CRESCENT REAL ESTATE EQUITIES COMPANY
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1997
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Crescent
Real Estate
Equities Company Pro Forma Pro Forma
Historical (A) Adjustments Consolidated
---------------- ------------ ------------
<S> <C> <C> <C>
ASSETS:
Investment properties, at cost $ 1,965,812 $ 633,933(B) $ 2,599,745
Less - Accumulated depreciation (221,730) -- (221,730)
------------ ------------ ------------
1,744,082 633,933 2,378,015
Cash and cash equivalents 42,692 21,247(C) 63,939
Restricted cash and cash equivalents 25,051 -- 25,051
Accounts receivable, net 19,842 -- 19,842
Deferred rent receivable 19,493 -- 19,493
Investments in real estate mortgages and common
stock of residential development corporations 38,091 -- 38,091
Notes receivable 40,532 81,197(D) 121,729
Other assets, net 56,821 29,125(E) 85,946
------------ ------------ ------------
Total assets $ 1,986,604 $ 765,502 $ 2,752,106
============ ============ ============
LIABILITIES:
Borrowings under Credit Facility $ 156,000 $ 173,700 (F) $ 329,700
Notes payable 778,767 10,000 (G) 788,767
Accounts payable, accrued expenses and other liabilities 43,356 -- 43,356
------------ ------------ ------------
Total liabilities 978,123 183,700 1,161,823
------------ ------------ ------------
MINORITY INTERESTS:
Operating Partnership 119,255 -- 119,255
Investment Joint Ventures 28,944 -- 28,944
------------ ------------ ------------
Total minority interests 148,199 -- 148,199
------------ ------------ ------------
STOCKHOLDERS' EQUITY:
Common stock 723 247 970
Additional paid-in capital 905,792 581,555 1,487,347
Deferred compensation on restricted shares (374) -- (374)
Retained deficit (45,859) -- (45,859)
------------ ------------ ------------
Total stockholders' equity 860,282 581,802(H) 1,442,084
------------ ------------ ------------
Total liabilities and stockholders' equity $ 1,986,604 $ 765,502 $ 2,752,106
============ ============ ============
</TABLE>
See accompanying notes to Pro Forma Consolidated Balance Sheet.
F-20
<PAGE> 28
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
ADJUSTMENTS
(Dollars in Thousands)
<TABLE>
<S> <C>
(A) Reflects Crescent Real Estate Equities Company unaudited consolidated
historical balance sheet at March 31, 1997 --
(B) Increase reflects the following:
Acquisition of the Carter-Crowley Real Estate
Assets ("CC Real Estate Assets") $ 246,733
Acquisition of Magellan real estate assets 387,200
---------
$ 633,933
=========
(C) Increase reflects the following:
Net proceeds of the Offerings $ 593,522
Partial repayment of Credit Facility (131,000)
Repayment of short-term borrowings (150,000)
Draw on Credit Facility for Carter-Crowley acquisition and excess
working capital 45,000
Acquisition of the Carter-Crowley Portfolio (306,308)
Cash contributed to Crescent Operating in connection with the formation and
capitalization and the acquisition of certain of the Carter-Crowley assets (29,967)
---------
$ 21,247
=========
(D) Net increase reflects the following:
Note receivable to Crescent Operating $ 35,867
Principal and interest payment from Crescent Operating using proceeds
from the sale of a 12.38% limited partner interest in the partnership
that owns the Dallas Mavericks (10,170)
Acquisition of the Carter-Crowley notes receivable ("CC Notes") 55,500
---------
$ 81,197
=========
(E) Increase reflects the following:
Acquisition of Carter-Crowley Other Assets ("CC Other Assets") $ 4,075
Acquisition of Magellan warrants 12,500
Acquisition from Crescent Operating of a 12.38% limited partner interest
in the partnership that owns the Dallas Mavericks 12,550
---------
$ 29,125
=========
(F) Net increase in borrowing under the Credit Facility as a result of:
Partial repayment of Credit Facility using proceeds of the Offerings $(131,000)
Acquisition of Magellan real estate assets and warrants 239,700
Cash contribution to Crescent Operating for acquisition of Magellan
warrants, 50% interest in CBHS and $2.5 million required 5 days after the
Magellan purchase 20,000
Draw on Credit Facility for Carter-Crowley acquisition and excess
working capital 45,000
---------
$ 173,700
=========
(G) Net increase in short-term borrowings for the following:
Repayment of short-term borrowings using proceeds of
the Offerings $(150,000)
Acquisition of Magellan real estate assets and warrants 160,000
---------
$ 10,000
=========
(H) Net increase reflects the following:
Proceeds of the April 1997 Offering (24.150 million shares
of common stock at $25.375 per share) $ 612,806
Costs of the April 1997 Offering (3,000)
Underwriter's discount for the April 1997 Offering (29,222)
Proceeds of additional Offering on May 14, 1997
(.5 million shares of common stock at $25.875 per share) 12,938
Stock dividend in conjunction with cash contribution
to Crescent Operating (14,100)
Dividend paid by Crescent Operating using proceeds from the sale of a 12.38%
limited partner interest in the partnership
that owns the Dallas Mavericks 2,380
---------
$ 581,802
=========
</TABLE>
F-21
<PAGE> 29
CRESCENT REAL ESTATE EQUITIES COMPANY
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Crescent Real
Estate CC Real
Equities Company Estate Magellan 1997 Acquired Other Pro Forma
Historical(A) Assets(B) Transaction(C) Properties(D) Adjustments Consolidated
---------------- ------------ -------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Rental property $ 79,400 $ 8,203 $ 13,772 $ 4,806 $ -- $ 106,181
Interest and other income 4,674 -- -- -- 2,158(E) 6,832
------------ ------------ ------------ ------------ ----------- ------------
Total revenues 84,074 8,203 13,772 4,806 2,158 113,013
------------ ------------ ------------ ------------ ----------- ------------
EXPENSES:
Real estate taxes 7,925 1,188 -- 475 -- 9,588
Repairs and maintenance 5,151 1,123 -- 503 -- 6,777
Other rental property operating 17,520 2,307 -- 1,225 (283)(F) 20,720
(49)(G)
Corporate general and administrative 4,845 -- -- -- -- 4,845
Interest expense 14,744 -- -- -- 6,002(H) 20,746
Depreciation and amortization 13,952 1,251 3,350 872 -- 19,425
Amortization of deferred financing costs 649 -- -- -- -- 649
------------ ------------ ------------ ------------ ----------- ------------
Total expenses 64,786 5,869 3,350 3,075 5,670 82,750
------------ ------------ ------------ ------------ ----------- ------------
Operating income (loss) 19,288 2,334 10,422 1,731 (3,512) 30,263
OTHER INCOME:
Equity in net income of residential
development corporations 957 -- -- -- -- 957
------------ ------------ ------------ ------------ ----------- ------------
INCOME (LOSS) BEFORE MINORITY INTERESTS 20,245 2,334 10,422 1,731 (3,512) 31,220
Minority interests (3,494) -- -- -- (633)(I) (4,127)
------------ ------------ ------------ ------------ ----------- ------------
NET INCOME (LOSS) $ 16,751 $ 2,334 $ 10,422 $ 1,731 $ (4,145) $ 27,093
============ ============ ============ ============ =========== ============
PER SHARE DATA (J):
Net income $ 0.28
============
</TABLE>
See adjustments to Pro Forma Consolidated Statement
of Operations on following page.
F-22
<PAGE> 30
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS
ADJUSTMENTS
(Dollars in Thousands)
<TABLE>
<S> <C>
(A) Reflects Crescent Real Estate Equities Company unaudited consolidated
historical statement of operations for the three months ended March 31,
1997. --
(B) Reflects the historical incremental rental income and operating expenses,
including an adjustment for depreciation based on acquisition price
associated with CC Real Estate Assets, assuming the acquisition occurred
at the beginning of the period. --
(C) Reflects the historical incremental rental income based on the lease
payment from the behavioral healthcare facilities' lessee to the Company
by applying the rent provisions (as set forth in the facilities lease
agreement) and adjustment for depreciation based on the acquisition price
associated with the Magellan transaction, assuming the assets were
acquired at the beginning of the period. --
(D) Reflects the historical incremental rental income and operating expenses,
including an adjustment for depreciation based on acquisition price
associated with all properties acquired in 1997, assuming the properties
were acquired at the beginning of the period. --
PROPERTY ACQUISITION DATE
-------- ----------------
Greenway II office property 1/17/97
TCC 2/28/97
Three Denver office properties 2/28/97
(E) Increase reflects the incremental interest income associated with the
following, assuming all had occurred at the beginning of the period.
CC Notes ($55,500 @ 10%) $5,550
Crescent Operating Note Receivable ($25,697 @12%) 3,083
------
Total $8,633
Prorated for three months $2,158
$ 2,158
========
(F) Reflects the elimination of historical ground lessee's expense, as a
result of the Company acquiring the land underlying TCC, assuming TCC was
acquired at the beginning of the period. $ (283)
========
(G) Decrease as a result of the elimination of third party property management
fees which terminated after the acquisition of certain of the properties. $ (49)
========
</TABLE>
F-23
<PAGE> 31
<TABLE>
<S> <C> <C>
(H) Net increase as a result of interest costs for long and short-term
financing, net of repayment with proceeds of the Offerings, assuming the
borrowings to finance property acquisitions and the assumption of debt and
repayment, had all occurred at the beginning of the period.
Credit Facility - $ 329,700 @ 7.00% = $ 23,079
Short Term Borrowings - 160,000 @ 7.75% = 12,400
LaSalle Note I - 239,000 @ 7.83% = 18,714
LaSalle Note II - 161,000 @ 7.79% = 12,542
Cigna - 63,500 @ 7.47% = 4,743
LaSalle Note III - 115,000 @ 7.57% = 8,706
Nomura Funding VI Note - 8,772 @ 10.07% = 883
Northwestern Loan - 26,000 @ 7.66% = 1,992
Woodlands Note - 12,338 @ 8.875% = 1,095
TCB Construction Loan- 3,157 @ 7.14% = 225
---------- --------
Total Annual Amount $1,118,467 $ 84,379
Prorated for three months 21,094
Less: Capitalized interest (348)
Historical interest expense (14,744)
--------
$ 6,002
========
(I) Reflects adjustment needed to reflect minority partners' weighted average
12.05% interest in the net income of the Operating Partnership less joint
venture minority interests assuming completion of the Offerings at the
beginning of the period. $ (633)
========
(J) Reflects net income per share based on 96,955,184 weighted average shares
of Common Stock assumed to be outstanding during the three months ended
March 31, 1997. --
</TABLE>
F-24
<PAGE> 32
CRESCENT REAL ESTATE EQUITIES COMPANY
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Crescent Real
Estate CC Real
Equities Company 1996 Acquired Estate Magellan 1997 Acquired
Historical(A) Properties(B) Assets(C) Transaction(D) Properties(E)
---------------- ------------- --------- ------------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Rental property $ 202,003 $ 89,185 $ 32,812 $ 55,089 $ 30,888
Interest and other income 6,858 -- -- -- --
------------ ------------ --------- ------------ ------------
Total revenues 208,861 89,185 32,812 55,089 30,888
------------ ------------ --------- ------------ ------------
EXPENSES:
Real estate taxes 20,606 8,176 4,751 -- 3,022
Repairs and maintenance 12,292 8,403 4,493 -- 3,258
Other rental property operating 40,915 21,346 9,230 -- 7,742
Corporate general and administrative 4,674 -- -- -- --
Interest expense 42,926 -- -- -- --
Depreciation and amortization 40,535 12,727 5,006 13,401 5,571
Amortization of deferred financing costs 2,812 -- -- -- --
------------ ------------ --------- ------------ ------------
Total expenses 164,760 50,652 23,480 13,401 19,593
------------ ------------ --------- ------------ ------------
Operating income (loss) 44,101 38,533 9,332 41,688 11,295
OTHER INCOME:
Equity in net income of residential
development corporations 3,850 -- -- -- --
------------ ------------ --------- ------------ ------------
INCOME (LOSS) BEFORE MINORITY INTERESTS
AND EXTRAORDINARY ITEM 47,951 38,533 9,332 41,688 11,295
Minority interests (9,510) (533) -- -- --
------------ ------------ --------- ------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM 38,441 38,000 9,332 41,688 11,295
Extraordinary item (1,306) -- -- -- --
------------ ------------ --------- ------------ ------------
NET INCOME (LOSS) $ 37,135 $ 38,000 $ 9,332 $ 41,688 $ 11,295
============ ============ ========= ============ ============
PER SHARE DATA (L):
Income before extraordinary item
Extraordinary item
Net income
<CAPTION>
Other Pro Forma
Adjustments Consolidated
----------- ------------
<S> <C> <C>
REVENUES:
Rental property $ -- $ 409,977
Interest and other income 8,633(F) 15,491
------------ ------------
Total revenues 8,633 425,468
------------ ------------
EXPENSES:
Real estate taxes -- 36,555
Repairs and maintenance -- 28,446
Other rental property operating (1,700)(G) 77,081
(452)(H)
Corporate general and administrative 2,326(I) 7,000
Interest expense 40,351(J) 83,277
Depreciation and amortization -- 77,240
Amortization of deferred financing costs -- 2,812
------------ ------------
Total expenses 40,525 312,411
------------ ------------
Operating income (loss) (31,892) 113,057
OTHER INCOME:
Equity in net income of residential
development corporations -- 3,850
------------ ------------
INCOME (LOSS) BEFORE MINORITY INTERESTS
AND EXTRAORDINARY ITEM (31,892) 116,907
Minority interests (4,941)(K) (14,984)
------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM (36,833) 101,923
Extraordinary item -- (1,306)
------------ ------------
NET INCOME (LOSS) $ (36,833) $ 100,617
============ ============
PER SHARE DATA (L):
Income before extraordinary item $ 1.05
Extraordinary item (0.01)
------------
Net income $ 1.04
============
</TABLE>
See adjustments to Pro Forma Consolidated Statement
of Operations on following page.
F-25
<PAGE> 33
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS
ADJUSTMENTS
(Dollars in Thousands)
<TABLE>
<S> <C>
(A) Reflects Crescent Real Estate Equities Company audited consolidated
historical statement of operations for the year ended December 31, 1996. --
(B) Reflects the historical incremental rental income and operating expenses,
including an adjustment for depreciation based on acquisition price
associated with all properties acquired in 1996, assuming the properties
were acquired at the beginning of the period. --
PROPERTY ACQUISITION DATE
-------- ----------------
3333 Lee Parkway office property 1/05/96
301 Congress Avenue office property (i) 4/18/96
Central Park Plaza office property 6/13/96
Canyon Ranch - Tucson resort (ii) 7/26/96
The Woodlands office properties (iii) 7/31/96
Three Westlake Park office property 8/16/96
1615 Poydras office property 8/23/96
Greenway Plaza Portfolio 10/07/96
Chancellor Park office property 10/24/96
The Woodlands retail properties(iii) 10/31/96
Sonoma Mission Inn & Spa (ii) 11/18/96
Canyon Ranch - Lenox resort (ii) 12/11/96
160 Spear Street office property 12/13/96
Greenway I and IA office properties 12/18/96
Bank One Tower office property 12/23/96
Frost Bank Plaza office property 12/27/96
(i) The Company has a 1% general partner and a 49%
limited partner interest in the partnership that
owns 301 Congress Avenue.
(ii) Historical operations of the hotel or resort
property were adjusted to reflect the lease
payments from the hotel lessee to the Company
calculated on a pro forma basis by applying the
rent provisions (as set forth in the lease
agreements).
(iii) The Company has a 75% interest in the partnership
that owns these properties.
(C) Reflects the historical incremental rental income and operating expenses,
including an adjustment for depreciation based on acquisition price
associated with CC Real Estate Assets, assuming the acquisition occurred
at the beginning of the period. --
</TABLE>
F-26
<PAGE> 34
<TABLE>
<S> <C>
(D) Reflects the historical incremental rental income based on the lease
payment from the behavioral healthcare facilities' lessee to the Company
by applying the rent provisions (as set forth in the facilities lease
agreement) and adjustment for depreciation based on the acquisition price
associated with the Magellan transaction, assuming the assets were
acquired at the beginning of the period. --
(E) Reflects the historical incremental rental income and operating expenses,
including an adjustment for depreciation based on acquisition price
associated with all properties acquired in 1997, assuming the properties
were acquired at the beginning of the period. --
PROPERTY ACQUISITION DATE
-------- ----------------
Greenway II office property 1/17/97
TCC 2/28/97
Three Denver office properties 2/28/97
(F) Increase reflects the incremental interest income associated with the
following, assuming all had occurred at the beginning of the period.
CC Notes ($55,500 @ 10%) = $5,550
Crescent Operating Note Receivable ($25,697 @ 12%) = $3,083 $ 8,633
========
(G) Reflects the elimination of historical ground lessee's expense, as a
result of the Company acquiring the land underlying TCC, assuming TCC was
acquired at the beginning of the period. $ (1,700)
========
(H) Decrease as a result of the elimination of third party property management
fees which terminated subsequent to acquisition of certain of the
properties. $ (452)
========
(I) Increase reflects the estimated incremental general and administrative
costs associated with the increase in personnel due to numerous
acquisitions in 1996 and 1997. $ 2,326
========
(J) Net increase as a result of interest costs for long and short-term
financing, net of repayment with proceeds of the Offerings and the October
1996 Offerings, assuming the borrowings to finance property acquisitions
and the assumption of debt and repayment, had all occurred at the
beginning of the period.
Credit Facility - $ 329,700 @ 7.00% = $ 23,079
Short Term Borrowings - 160,000 @ 7.75% = 12,400
LaSalle Note I - 239,000 @ 7.83% = 18,714
LaSalle Note II - 161,000 @ 7.79% = 12,542
Cigna - 63,500 @ 7.47% = 4,743
LaSalle Note III - 115,000 @ 7.57% = 8,706
Nomura Funding VI Note - 8,772 @ 10.07% = 883
Northwestern Loan - 26,000 @ 7.66% = 1,992
Woodlands Note - 12,338 @ 8.875% = 1,095
TCB Construction Loan - 3,157 @ 7.14% = 225
---------- --------
Total Annual Amount $1,118,467 $ 84,379
Less: Capitalized interest (1,102)
Historical interest expense (42,926)
--------
$ 40,351
========
(K) Reflects adjustment needed to reflect minority partners' weighted average
12.05% interest in the net income of the Operating Partnership less joint
venture minority interests assuming completion of the Offerings and the
October 1996 Offerings at the beginning of the period. $ (4,941)
========
(L) Reflects net income per share based on 96,955,184 weighted average shares
of Common Stock assumed to be outstanding during the year ended December
31, 1996. --
</TABLE>
F-27
<PAGE> 35
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
23.01 Consent of Arthur Andersen LLP, Independent Public Accountants,
dated July 1, 1997 (filed herewith).
</TABLE>
<PAGE> 1
EXHIBIT 23.01
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated November 7, 1996 included in this Form 8-K into
Crescent Real Estate Equities Company's previously filed Registration
Statements No. 33-91438, No. 33-92548, No. 333-3450, No. 333-3452, No. 333-3454,
No. 333-13521, No. 333-21905 and No. 333-23005.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
July 1, 1997
