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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
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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ITEM 5. OTHER EVENTS
PROPOSED SPIN-OFF
Crescent Real Estate Equities Company ("Crescent Equities"), which operates
as a real estate investment trust (a "REIT") for federal income tax purposes,
intends to establish a new corporation ("Crescent Affiliate") that will obtain
certain rights pursuant to the terms of an intercompany agreement to be entered
into with the Company (as defined below) in connection with the spin-off. The
shares of Crescent Affiliate will be distributed by Crescent Real Estate
Equities Limited Partnership, which is the operating partnership of Crescent
Equities (the "Operating Partnership"), to its partners (including Crescent
Equities). Crescent Equities will then distribute the shares of Crescent
Affiliate as a dividend to its shareholders in a spin-off.
It is anticipated that, under the intercompany agreement, the Company and
Crescent Affiliate will agree to provide each other with rights to participate
in certain transactions and to make certain investments. For example, Crescent
Affiliate will agree not to acquire or make investments in real estate unless
it has offered the acquisition or investment opportunity to the Company and the
Company has determined not to pursue such acquisition or investment. Crescent
Affiliate also will agree to assist the Company in structuring and consummating
any such acquisition or investment which the Company elects to pursue, on terms
determined by the Company. Similarly, the Company will provide Crescent
Affiliate with a right of first offer (i) to become lessee of any property
acquired by the Company as to which the Company, consistent with its status as
a REIT, must enter into a master lease arrangement and (ii) to participate in
transactions or make investments where the Company is unwilling or unable to
consummate the entire transaction or investment. The Company may, but will not
be required to, offer Crescent Affiliate the opportunity to participate in
transactions, or co-invest with the Company in investments, where the Company
is willing and able to pursue the entire transaction or investment. In
addition, each party will notify the other party of, and make available to the
other party, investment opportunities developed by such party or of which such
party becomes aware but is unable or unwilling to pursue. The Company, in its
sole discretion, will make all decisions as to its ability or inability to
participate in transactions or make investments.
Prior to the spin-off, Crescent Equities and its subsidiaries
(collectively, the "Company") will contribute to Crescent Affiliate a minimum of
approximately $20 million and a maximum of approximately $68 million in the form
of assets, cash to acquire assets and loans. This amount is expected to include
(i) $7.5 million (in the form of cash or loans) to be used by Crescent Affiliate
to make an investment in a limited liability company ("CBHS") that will be owned
approximately 50% by Crescent Affiliate and approximately 50% by Magellan Health
Services, Inc. ("Magellan"), subject to potential dilution of each of Magellan
and Crescent Affiliate by up to 5% in connection with future incentive
compensation of management of CBHS, and (ii) $17.5 million (in the form of cash
or loans) to be used by Crescent Affiliate to satisfy its obligation to loan
funds to CBHS under certain circumstances. CBHS will operate (but will not own)
approximately 90 acute care psychiatric hospitals and similar facilities (the
"Facilities") that the Company will acquire from Magellan, as described in more
detail under "Proposed Magellan Transaction." This amount also is expected to
include the Company's contribution to Crescent Affiliate (or the acquisition
directly by Crescent Affiliate with funds supplied by the Company) of up to
approximately $43 million in assets to be acquired from Carter-Crowley
Properties, Inc. ("Carter-Crowley") prior to or immediately following the
spin-off, as described in more detail under "Proposed Carter-Crowley
Transaction."
The spin-off is designed to provide the shareholders of the Company at the time
of the spin-off with the ability to benefit from both the real estate operations
of the Company and the related business operations of Crescent Affiliate. The
spin-off of Crescent Affiliate will result in Crescent Affiliate's becoming a
public company, the shares of which are expected to be publicly traded no later
than the effective date of the spin-off.
PROPOSED MAGELLAN TRANSACTION
On January 29, 1997, the Company entered into a definitive agreement with
Magellan to acquire substantially all of the real estate assets of Magellan's
domestic hospital provider business as currently owned and operated by a wholly
owned subsidiary of Magellan. The Magellan transaction involves various
components, certain of which will relate to the Company and certain of which
will relate to Crescent Affiliate. None of the Magellan transactions will be
consummated unless all of the transactions are consummated. Closing of the
transactions is subject to customary closing conditions and to approval of the
transactions by the stockholders of Magellan, and is expected to occur by the
end of May 1997.
As to the Company, the principal transaction is the Company's acquisition
of the Facilities, with the Facilities to be leased to CBHS, and the
subsidiaries of CBHS, under a triple-net lease. The lease will require the
payment of annual base rent in the amount of $40 million, increasing in each
subsequent year at a 5% compounded annual rate during the 12-year term. All
maintenance and capital improvement costs will be the responsibility of CBHS
during the term of the lease. In addition, CBHS will
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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 will receive warrants to purchase 1,283,311
shares of Magellan's common stock, at an exercise price of $30 per share, with
such warrants becoming exercisable, in increments, during the period from May
1998 through May 2009. The total amount to be paid by the Company in
connection with the transaction is $395 million.
Crescent Affiliate will acquire its interest in CBHS in connection with the
Magellan transaction in exchange for an initial payment of $5 million, with an
additional $2.5 million payable by each of Crescent Affiliate and Magellan
within five days following the closing of the transaction. In addition, each
of Crescent Affiliate and Magellan will agree to lend to CBHS, upon request by
Magellan during the five years following the closing, up to an aggregate of
$17.5 million. Any such loans will bear interest at the rate of 10% per annum
and have a term of five years. CBHS, which will be the lessee under the lease
of the Facilities from the Company as lessor, will be responsible for operating
the Facilities. CBHS will derive assistance in its role as operator of the
Facilities through a franchise arrangement with an initial term of 12 years to
be entered into between CBHS (and its subsidiaries), as franchisees, and
Magellan, as franchisor. Pursuant to this franchise arrangement, Magellan will
provide certain services necessary or desirable for the operation of the
business to be conducted at the Facilities (including the provision of
policies, procedures and protocols for operation of the Facilities and of a
toll-free patient referral number) in exchange for an annual franchise fee of,
initially, $81 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 Magellan of the annual franchise fee will be
subordinated to the payment by CBHS to the Company of annual base rent, with
Magellan having the right to assume an increasing level of the management
functions associated with the operation of CBHS if the annual franchise fee is
in arrears by $6 million or more and to assume all such management functions if
the annual franchise fee is in arrears by $24 million or more. In connection
with the Magellan transaction, Crescent Affiliate will also receive, on the same
terms as described for the Company, warrants to purchase 1,283,311 shares of
Magellan's common stock. In addition, Crescent Affiliate will issue to Magellan
warrants to purchase up to 2.5% of its common stock outstanding on the closing
date, with such warrants exercisable only at the times, and in the proportions,
that the Company and Crescent Affiliate exercise their warrants to purchase
common stock of Magellan. The exercise price for the warrants will reflect the
same premium as used to calculate the exercise price for the warrants issued to
the Company and Crescent Affiliate by Magellan, based upon a valuation of
Crescent Affiliate conducted by a mutually agreed upon independent appraiser.
PROPOSED ACQUISITION OF CARTER-CROWLEY PORTFOLIO
General. On February 10, 1997, the Company entered into a contract to
acquire, for $383 million, substantially all of the assets of Carter-Crowley,
an unaffiliated company controlled by the family of Donald J. Carter. These
assets (the "Carter-Crowley Portfolio") include 14 office properties, with an
aggregate of approximately 3.0 million square feet of rentable space, located
in submarkets of suburban Dallas, approximately 1,216 acres of commercially
zoned, undeveloped land located in the Dallas-Fort Worth metroplex, two
multifamily residential properties located in the Dallas metropolitan area,
marketable securities, an approximately 12% equity interest in the limited
partnership that owns the Dallas Mavericks NBA basketball franchise, secured
and unsecured promissory notes, and certain other assets (including operating
businesses).
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The Company anticipates that it will acquire assets from the Carter-Crowley
Portfolio, with an aggregate purchase price of up to approximately $340 million,
consisting primarily of the 14 office properties (the "CC Office Portfolio"),
the two multifamily residential properties, 208 acres of the undeveloped land in
the Dallas-Fort Worth metroplex, marketable securities and the secured and
unsecured promissory notes relating primarily to the Dallas Mavericks. The
Company has preliminarily allocated approximately $205 million and $4 million of
the $383 million purchase price to the CC Office Portfolio and the multifamily
residential properties, respectively.
The remainder of the Carter-Crowley Portfolio will either be contributed to
Crescent Affiliate by the Company prior to completion of the spin-off or
purchased by Crescent Affiliate utilizing equity and loan proceeds that will be
provided to Crescent Affiliate by the Company. These assets, which have an
estimated value of up to approximately $43 million, are expected to consist
primarily of approximately 1,008 acres of the undeveloped land, the
approximately 12% limited partner interest in the limited partnership that owns
the Dallas Mavericks, an approximately 1% interest in a private venture capital
fund, 100% of a construction equipment, sale, leasing and services company,
certain direct non-operating working interests in various oil and gas wells and
an approximately 35% limited partner interest in two oil and gas limited
partnerships that own working interests in various oil and gas wells, will be
acquired by Crescent Affiliate. It is anticipated that any of such assets not
acquired by Crescent Affiliate will be acquired by the Company.
CC Office Portfolio. The CC Office Portfolio is located within seven
Dallas submarkets and consists of approximately 2.3 million net rentable square
feet of Class A office space and .7 million net rentable square feet of Class B
office space. The office properties were constructed principally between 1980
and 1986 and range in size from 40,000 to 634,000 net rentable square feet.
The CC Office Portfolio will be owned in fee simple along with the rights
appurtenant and related thereto, except for one office property which is
subject to a 99-year ground lease that expires in May 2079. Management
believes that the CC Office Portfolio are suitable and adequate for continued
use as Class A and Class B office properties.
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The following table provides information for the CC Office Portfolio by
submarket as of December 31, 1996.
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OFFICE QUOTED
AVERAGE BASE RENT SUBMARKET MARKET
PERCENT BASE RENT PER LEASED PERCENT RENTAL RATE
CLASSIFICATION, NUMBER OF TOTAL NET LEASED AT PER LEASED SQ. FT. AS OF LEASED/ PER SQUARE
SUBMARKET PROPERTIES RENTABLE AREA PROPERTIES SQ. FT. (1) 12/31/96 (2) OCCUPIED (3) FOOT (3)
--------- ---------- ------------- ---------- ----------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS A
Far North Dallas 3 494,496 98% $12.51 $12.43 98% $20.88
Uptown/Turtle Creek 2 485,088 79 12.63 12.14 86 22.99
Richardson/Plano 2 418,234 100 12.62 12.93 98 19.14
LBJ Freeway 1 213,915 89 12.53 13.05 95 20.32
Las Colinas 1 74,861 99 11.54 11.86 95 23.14
Stemmons Freeway 1 634,381 92 10.31 12.42 60 16.87
----- --------- ------ ------ ------ ----- ------
Subtotal/Weighted 10 2,320,975 92% $11.93 $12.51 92% $19.93
Average ===== ========= ====== ====== ====== ===== ======
CLASS B
Far North Dallas 1 40,525 100% $10.44 $10.75 90% $15.56
LBJ Freeway 1 244,879 92 9.56 9.49 91 14.92
Central Expressway 2 413,721 85 10.42 10.83 82 13.82
----- --------- ------ ------ ------ ----- ------
Subtotal/Weighted 4 699,125 88% $10.11 $10.33 89% $14.31
Average ===== ========= ====== ====== ====== ===== ======
Total/Weighted Average 14 3,020,100 91% $11.52 $12.02 91% $18.63
===== ========= ====== ====== ====== ===== ======
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(1) Represents 1996 annual base rental revenues (excluding scheduled rent
increases and free rent that would be taken into account under
generally accepted accounting principles) divided by average occupancy
in square footage for the year.
(2) Calculated based on base rent payable as of December 31, 1996, without
giving effect to free rent or scheduled rent increases that would be
taken into account under generally accepted accounting principles.
(3) Source -- Jamison Research, Inc.
The CC Office Portfolio is leased to more than 450 tenants, the major
tenants having principal businesses in the industry sectors of technology,
financial services and media services. None of the tenants in the fourteen
office properties comprising the CC Office Portfolio lease over 10% of the net
rentable square footage of the CC Office Portfolio.
The aggregate tax basis for the CC Office Portfolio of depreciable real
property and personal property is not available at this time since the
acquisition has not closed.
The 1996 realty tax rate for the CC Office Portfolio was $2.52 per $100 of
the $148.5 million assessed value. The total amount of tax at this rate for
1996 was approximately $3.7 million.
For the year ended December 31, 1996, utility expense for the CC Office
Portfolio was approximately $5.0 million and expenses for repairs, maintenance
and contract services were approximately $4.4 million.
The Company has no immediate plans to redevelop any of the properties
within the CC Office Portfolio and believes such properties are adequately
covered by insurance. The seller of the CC Office Portfolio has acquired the
14 office properties at different
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times over the last seven years; therefore, the year-end occupancy and average
base rent per leased square foot for the CC Office Portfolio is only available
for 1996. See table above.
The following table sets forth for the CC Office Portfolio a schedule of
lease expirations for leases in place as of January 1, 1997 for each of the 10
years beginning with January 1, 1997, assuming that none of the tenants
exercises renewal options and excluding 290,590 square feet of unleased space.
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<CAPTION>
PERCENTAGE PERCENTAGE OF ANNUAL BASE
NUMBER OF NET RENTABLE OF LEASED TOTAL ANNUAL RENT PER
TENANTS AREA SUBJECT NET RENTABLE ANNUAL BASE BASE RENT SQUARE FOOT
WITH TO EXPIRING AREA SUBJECT RENT UNDER REPRESENTED BY FOR NET
EXPIRING LEASES TO EXPIRING EXPIRING EXPIRING RENTABLE AREA
YEAR AND LEASE EXPIRATION LEASES (SQUARE FEET) LEASES LEASES(1) LEASES EXPIRING(1)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 91 176,724 6.5% $2,015,800 5.5% $11.41
1998 111 419,145 15.4 5,281,006 14.4 12.60
1999 102 389,846 14.3 4,829,621 13.2 12.39
2000 78 591,687 21.7 8,180,128 22.4 13.83
2001 58 413,361 15.1 5,703,691 15.6 13.80
2002 15 183,282 6.7 2,423,756 6.6 13.22
2003 7 366,656 13.4 5,201,805 14.2 14.19
2004 5 100,041 3.7 1,398,813 3.8 13.98
2005 0 0 0 0 0 0
2006 2 41,072 1.5 635,055 1.8 15.46
2007 and thereafter 1 47,696 1.7 906,224 2.5 19.00
</TABLE>
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(1) Based on base rent payable as of the expiration date of the lease, for net
rentable square feet expiring, without giving effect to free rent or
scheduled rent increases that would be taken into account under generally
accepted accounting principles and excluding (i) operating costs (such as
utilities, real estate taxes and/or insurance) payable by the tenants and
(ii) expense reimbursements received from the tenants.
The pro forma financial information reflects the acquisition of the CC
Office Portfolio and the two multifamily residential properties.
EFFECT OF CONSUMMATION OF PROPOSED TRANSACTIONS
General. Upon completion of the spin-off, the Magellan transaction, and
the acquisition of the Carter-Crowley portfolio, the Company and Crescent
Affiliate will exist as separate public companies that, on an aggregate basis,
will own the assets acquired as a result of the consummation of the Magellan
transaction and the acquisition of the Carter-Crowley portfolio, as described
herein.
The Company. The Company will have purchased approximately $735 million
of assets, consisting primarily of the 90 Facilities acquired from Magellan
and the 14 office properties included in the CC Office Portfolio.
These assets also will include warrants to purchase 1,283,311 shares of
Magellan's common stock, approximately 208 acres of commercially zoned,
undeveloped land located in the Dallas-Fort Worth metroplex, two multifamily
residential properties located in the Dallas metropolitan area, marketable
securities and secured and unsecured promissory notes relating primarily to the
Dallas Mavericks. The Company anticipates that it will finance these
acquisitions (as well as its obligations to Crescent Affiliate, as described
below) through new or existing financing arrangements,
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through public or private issuances of debt or equity securities, or a
combination thereof. At this time, the Company has no such arrangements.
Crescent Affiliate. Crescent Affiliate will be a public company, the
securities of which initially will be owned by the shareholders of the Company
and the limited partners of the Operating Partnership on the date of the
spin-off. The assets of Crescent Affiliate will be provided by the Company
through the Company's contribution to Crescent Affiliate of assets and funds to
be used to acquire assets in the aggregate amount of up to approximately $68
million, up to $39 million of which will be in the form of loans from the
Company. Crescent Affiliate's up to approximately $68 million of total assets
will consist of (i) acquired or contributed assets with an aggregate purchase
price of up to approximately $50.5 million (approximately $7.5 million
attributable to Crescent Affiliate's interest in CBHS and approximately $43
million attributable to assets from the Carter-Crowley Portfolio) and (ii)
working capital sufficient to satisfy Crescent Affiliate's obligation to loan up
to $17.5 million to CBHS. The acquired/contributed assets are expected to
consist primarily of an approximately 50% interest in CBHS, warrants to purchase
1,283,311 shares of Magellan's common stock, approximately 1,008 acres of
commercially zoned, undeveloped land located in the Dallas-Fort Worth metroplex,
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, 100% of a construction equipment, sale, leasing and services
company, certain direct non-operating working interests in various oil and gas
wells and an approximately 35% limited partner interest in two oil and gas
limited partnerships that own working interests in various oil and gas wells.
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ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) FINANCIAL STATEMENTS UNDER RULE 3-14 OF REGULATION S-X
Carter-Crowley Operating Real Estate Portfolio.
Report of Independent Public Accountants.
Statement of Excess of Revenues Over Specific Operating Expenses for
the Year Ended December 31, 1996.
Notes to Statement.
(b) PRO FORMA FINANCIAL INFORMATION
Pro Forma Consolidated Balance Sheet as of December 31, 1996
(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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<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
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23.01 Consent of Arthur Andersen LLP, Independent Public
Accountants, dated March 20, 1997 (filed herewith).
</TABLE>
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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: March 21, 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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CARTER-CROWLEY OPERATING REAL ESTATE PORTFOLIO
Report of Independent Public Accountants ................................................... F-2
Statement of Excess of Revenues Over Specific Operating Expenses for the
Year Ended December 31, 1996 ............................................................... F-3
Notes to Statement ......................................................................... F-4
PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
Pro Forma Consolidated Balance Sheet as of December 31, 1996 and notes thereto ............. F-7
Pro Forma Consolidated Statement of Operations for the Year Ended December 31, 1996 and
notes thereto .............................................................................. F-9
</TABLE>
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CARTER-CROWLEY OPERATING REAL ESTATE PORTFOLIO
STATEMENT OF EXCESS OF REVENUES OVER
SPECIFIC OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
F-1
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Crescent Real Estate Equities Limited Partnership:
We have audited the accompanying statement of excess of revenues over specific
operating expenses (as defined in Note 2) of Carter-Crowley Operating Real
Estate Portfolio for the year ended December 31, 1996. This statement is the
responsibility of the Property's management. Our responsibility is to express
an opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement is free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the statement referred to above presents fairly, in all
material respects, the excess of revenues over specific operating expenses of
Carter-Crowley Operating Real Estate Portfolio for the year ended December 31,
1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
March 18, 1997
F-2
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CARTER-CROWLEY OPERATING REAL ESTATE PORTFOLIO
STATEMENT OF EXCESS OF
REVENUES OVER SPECIFIC OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
REVENUES:
Office rent $31,191,267
Residential rent 881,509
Recoveries 383,872
Other 355,157
-----------
32,811,805
SPECIFIC OPERATING EXPENSES:
Utilities 5,085,564
Repairs, maintenance, and contract services 4,493,230
Real estate taxes 3,924,737
Salaries 2,954,502
General and administrative 526,811
Insurance 272,421
Ground lease 154,104
Management fees 44,322
-----------
17,455,691
-----------
EXCESS OF REVENUES OVER SPECIFIC
OPERATING EXPENSES $15,356,114
===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-3
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CARTER-CROWLEY OPERATING REAL ESTATE PORTFOLIO
NOTES TO STATEMENT OF EXCESS
OF REVENUES OVER SPECIFIC OPERATING EXPENSES
DECEMBER 31, 1996
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Description of Portfolio
Carter-Crowley Operating Real Estate Portfolio (the "Portfolio") consists of
14 office buildings (the "Buildings") and two apartment/condominium complexes
(the "Apartments") located in Dallas, Texas, and surrounding suburbs. The
Properties contain approximately 3 million rentable square feet. The Portfolio,
including the land on which the Buildings and Apartments are located (with the
exception of one office building subject to a ground lease expiring May, 2079),
are owned fee simple.
Use of Estimates
The preparation of statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Rental Income and Deferred Rent Concessions
In connection with obtaining certain tenants under long-term leases, property
management grants rent concessions. The aggregate rental payments due over the
terms of the leases are recognized as rental income on a straight-line basis
over the full term of the leases, including the periods of rent concessions.
Recoveries
A portion of the operating expenses is charged back to tenants on a monthly
basis based upon estimated expenses. These charges are adjusted at period-end,
based upon actual expenses.
2. BASIS OF ACCOUNTING:
The accompanying statement of excess of revenues over specific operating
expenses is presented on the accrual basis of accounting. This statement is
not intended to be a complete presentation of revenues and operating expenses
for the year ended December 31, 1996, as certain items such as depreciation,
amortization, interest, and partnership administrative expenses have been
excluded since they are not comparable to the proposed future operations of the
Properties. This statement has been prepared in accordance with requirements
for financial information required by Form 8-K and Rule 3.14 of Regulation S-X
of the Securities and Exchange Commission. Accordingly, the statement does not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
F-4
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3. PROPERTY MANAGEMENT:
The Buildings are managed internally and are allocated a management fee of 4%
of gross rental receipts. Total management fees allocated to the Buildings for
the year ended December 31, 1996, were approximately $1.3 million and are
eliminated against the corresponding fees recorded by the Portfolio in the
accompanying statement of excess of revenues over specific operating expenses.
Approximately $1.1 million of home office salary expenses related to Building
management are included in salaries in the accompanying statement of excess of
revenues over specific operating expenses.
The Portfolio entered into a management agreement with Columbus Management
Services, Inc. (the "Manager") on January 1, 1996, relating to the management
of the Apartments. The agreement with the Manager requires a monthly
management fee of $200 and 5% of gross revenues, as defined. Total management
fees for the year ended December 31, 1996, were approximately $44,000. The
agreement may be terminated at any time by either party in accordance with the
management agreement. If terminated, the management fees must be paid through
the month in which the Manager's service will extend.
4. INTENT TO SELL:
On February 10, 1997, the fee owner of the Properties entered into a contract
to sell its interest in the Portfolio to an unaffiliated third party.
F-5
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CRESCENT REAL ESTATE EQUITIES COMPANY
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma Consolidated Balance Sheet of
Crescent Real Estate Equities Company (the "Company") as of December 31, 1996,
assumes completion of (i) the acquisition of CC Office Portfolio and the two
multi-family residential properties (collectively referred to as the "CC
Rental Properties") and the Trammell Crow Center office property ("TCC"), all
acquired subsequent to December 31, 1996 and the associated financing, in each
case as of December 31, 1996. The pro forma Consolidated Statement of
Operations for the year ended December 31, 1996 assumes the completion, as of
January 1, 1996, of (i) the October 1996 Offering of the Company's common
stock and the use of the net proceeds therefrom to repay approximately $168
million of indebtedness and to fund approximately $289 million of subsequent
acquisitions and (ii) the acquisition of the Properties acquired during 1996
and CC Rental Properties and TCC acquired during 1997.
The unaudited pro forma Consolidated Balance Sheet and Statement of
Operations should be read in conjunction with the historical financial
statements of the Company. In management's opinion, all adjustments necessary
to reflect the above discussed transactions have been made. The unaudited pro
forma Consolidated Balance Sheet and Statement 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-6
<PAGE> 17
CRESCENT REAL ESTATE EQUITIES COMPANY
PRO FORMA CONSOLIDATED BALANCE SHEET
FOR THE YEAR ENDED DECEMBER 31, 1996
(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 $ 1,732,626 $ 371,000(B) $ 2,103,626
Less - Accumulated depreciation (208,808) -- (208,808)
----------- ----------- -----------
1,523,818 371,000 1,894,818
Cash and cash equivalents 25,592 -- 25,592
Restricted cash and cash equivalents 36,882 -- 36,882
Accounts receivable, net 15,329 -- 15,329
Deferred rent receivable 16,217 -- 16,217
Investments in real estate mortgages and common
stock of residential development corporations 37,069 -- 37,069
Notes receivable 28,890 -- 28,890
Other assets, net 47,125 -- 47,125
----------- ----------- -----------
Total assets $ 1,730,922 $ 371,000 $ 2,101,922
=========== =========== ===========
LIABILITIES:
Borrowings under Credit Facility $ 40,000 $ 12,000(C) $ 52,000
Notes payable 627,808 359,000(D) 986,808
Accounts payable, accrued expenses and other liabilities 48,462 -- 48,462
----------- ----------- -----------
Total liabilities 716,270 371,000 1,087,270
----------- ----------- -----------
MINORITY INTERESTS:
Operating Partnership 120,227 -- 120,227
Investment Joint Ventures 29,265 -- 29,265
----------- ----------- -----------
Total minority interests 149,492 -- 149,492
----------- ----------- -----------
STOCKHOLDERS' EQUITY:
Common stock 361 -- 361
Additional paid-in capital 905,724 -- 905,724
Deferred compensation on restricted shares (364) -- (364)
Retained deficit (40,561) -- (40,561)
----------- ----------- -----------
Total stockholders' equity 865,160 -- 865,160
----------- ----------- -----------
Total liabilities and stockholders' equity $ 1,730,922 $ 371,000 $ 2,101,922
=========== =========== ===========
</TABLE>
See accompanying notes to Pro Forma Consolidated Balance Sheet.
F-7
<PAGE> 18
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
ADJUSTMENTS
(Dollars in Thousands)
<S> <C>
(A) Reflects Crescent Real Estate Equities Company audited consolidated historical
balance sheet at December 31, 1996 --
(B) Increase reflects the following:
Acquisition of CC Rental Properties $209,000
Acquisition of TCC 162,000
--------
$371,000
========
(C) Increase in borrowings under the Credit Facility as a result
of the acquisition of TCC $ 12,000
========
(D) Increase in short-term borrowings for the following:
Acquisition of CC Rental Properties $209,000
Acquisition of TCC 150,000
--------
$359,000
========
</TABLE>
F-8
<PAGE> 19
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
Equities Company Rental 1996 Acquired Other Pro Forma
Historical (A) Properties (B) TCC (C) Properties (D) Adjustments Consolidated
---------------- -------------- ------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Rental property $ 202,003 $32,812 $23,005 $ 89,185 $ -- $ 347,005
Interest and other income 6,858 -- -- -- -- 6,858
--------- ------- ------- -------- -------- ---------
Total revenues 208,861 32,812 23,005 89,185 -- 353,863
--------- ------- ------- -------- -------- ---------
EXPENSES:
Real estate taxes 20,606 3,925 2,208 8,176 -- 34,915
Repairs and maintenance 12,292 4,493 1,916 8,403 -- 27,104
Other rental property operating 40,915 9,038 6,141 21,346 (1,700)(E) 75,740
Corporate general and administrative 4,674 -- -- -- -- 4,674
Interest expense 42,926 -- -- -- 36,591 (F) 79,517
Depreciation and amortization 40,535 5,575 4,050 12,727 -- 62,887
Amortization of deferred financing costs 2,812 -- -- -- -- 2,812
--------- ------- ------- -------- -------- ---------
Total expenses 164,760 23,031 14,315 50,652 34,891 287,649
--------- ------- ------- -------- -------- ---------
Operating income (loss) 44,101 9,781 8,690 38,533 (34,891) 66,214
OTHER INCOME:
Equity in net income of residential
development corporations 3,850 -- -- -- -- 3,850
--------- ------- ------- -------- -------- ---------
INCOME (LOSS) BEFORE MINORITY INTERESTS
AND EXTRAORDINARY ITEM 47,951 9,781 8,690 38,533 (34,891) 70,064
Minority interests (9,510) -- -- (533) (1,719)(G) (11,762)
--------- ------- ------- -------- -------- ---------
INCOME BEFORE EXTRAORDINARY ITEM 38,441 9,781 8,690 38,000 (36,610) 58,302
Extraordinary item (1,306) -- -- -- -- (1,306)
--------- ------- ------- -------- -------- ---------
NET INCOME (LOSS) $ 37,135 $ 9,781 $ 8,690 $ 38,000 $(36,610) $ 56,996
========= ======= ======= ======== ======== =========
PER SHARE DATA (H):
Income before extraordinary item $ 1.61
Extraordinary item (0.04)
---------
Net income $ 1.57
=========
</TABLE>
See adjustments to Pro Forma Consolidated Statement of Operations on
following page.
F-9
<PAGE> 20
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
ADJUSTMENTS
(Dollars in Thousands)
<S> <C> <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 the CC Rental Properties, proposed
to be acquired in the second quarter of 1997, assuming the properties
were acquired at the beginning of the period. ---
(C) Reflects the historical incremental rental income and operating
expenses, including an adjustment for depreciation based on
acquisition price associated with TCC acquired on February 28, 1997,
assuming the property was 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 1996,
assuming the properties were acquired at the beginning of the
period. ---
</TABLE>
<TABLE>
<CAPTION>
PROPERTY ACQUISITION DATE
-------- ----------------
<S> <C>
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
Canon 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
</TABLE>
(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 defined in the lease agreements).
(iii) The Company has a 75% interest in the partnership that owns
these properties.
F-10
<PAGE> 21
<TABLE>
<S> <C> <C>
(E) Reflects the elimination of historical ground lessee's expense,
assuming TCC was acquired at the beginning of the period. $ (1,700)
==========
(F) Net increase as a result of interest costs for long and short-term
financing, as follows, assuming the borrowings to finance property
acquisitions and assumption of debt had all occurred at the beginning
of the period.
Credit Facility - $ 52,000 @ 7.75% = $ 4,030
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 @ 7.51% = 8,637
Nomura Funding VI Note - $ 8,780 @ 10.07% = 884
Northwestern Loan - $ 26,000 @ 7.65% = 1,989
Woodlands Note - $ 12,411 @ 8.875% = 1,101
TCB Construction Loan - $ 2,117 @ 7.39% = 156
FNBB Short-term Loan - $ 359,000 @ 7.75% = 27,823
----------
Total Annual Amount $ 80,619
Less: Capitalized interest (1,102)
Historical interest expense (42,926)
----------
$ 36,591
==========
(G) Reflects adjustment needed to reflect minority partners' weighted
average 15.56% interest in the net income of the Operating Partnership
less joint venture minority interests assuming completion of the
October 1996 Offering at the beginning of the period. $ (1,719)
==========
(H) Reflects net income per share based on 36,121,355 weighted average
shares of Common Stock assumed to be outstanding during the year ended
December 31, 1996. --
</TABLE>
F-11
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<S> <C>
23.01 Consent of Arthur Andersen LLP, Independent Public
Accountants, dated March 20, 1997 (filed herewith).
</TABLE>
<PAGE> 1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated March 18, 1997 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
Dallas, Texas,
March 20, 1997
