<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [ ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-2.
</TABLE>
Crescent Real Estate Equities Company
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-12.
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
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<PAGE> 2
CRESCENT REAL ESTATE EQUITIES COMPANY
777 Main Street, Suite 2100
Fort Worth, Texas 76102
---------------
PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS
To Be Held On June 8, 1998
This Proxy Statement is furnished to shareholders of Crescent Real Estate
Equities Company, a Texas real estate investment trust (the "Company"), in
connection with the solicitation of proxies by the board of trust managers of
the Company (the "Board of Trust Managers") for use at the 1998 Annual Meeting
of Shareholders (the "Meeting") of the Company to be held on Monday, June 8,
1998, at 10:00 a.m., Central Daylight Savings Time, for the purposes set forth
in the Notice of Annual Meeting. The Proxy Statement and the accompanying form
of proxy are first being sent or given to shareholders on or about April 28,
1998.
The Company owns its assets and conducts its operations through Crescent
Real Estate Equities Limited Partnership (the "Operating Partnership"), a
Delaware limited partnership, and its other subsidiaries. The sole general
partner of the Operating Partnership is Crescent Real Estate Equities, Ltd. (the
("General Partner"), a Delaware corporation which is a wholly owned subsidiary
of the Company.
RECORD DATE AND OUTSTANDING CAPITAL SHARES
The record date for determination of the shareholders entitled to notice of
and to vote at the Meeting is the close of business April 9, 1998 (the "Record
Date"). At the close of business on the Record Date, the Company had 118,729,510
common shares of beneficial interest, par value $.01 per share ("Common Shares")
issued and outstanding and entitled to vote at the Meeting.
PROCEDURAL MATTERS
Any proxy, if received in time, properly signed and not revoked, will be
voted at the Meeting in accordance with the directions of the shareholder. If no
directions are specified, the proxy will be voted FOR each of the Proposals set
forth in this Proxy Statement. If any other matter or business is brought before
the Meeting or any adjournment thereof, the proxy holders may vote the proxy at
their discretion. The Board of Trust Managers does not know of any such matter
or business to be presented for consideration.
A proxy may be revoked (i) by delivering a written statement to the
Secretary of the Company stating that the proxy is revoked, (ii) by presenting
at the Meeting a subsequent proxy executed by the person executing the prior
proxy, or (iii) by attending the Meeting and voting in person.
QUORUM AND VOTING
The presence, in person or by proxy, of the holders of a majority of the
Common Shares outstanding as of the Record Date is necessary to constitute a
quorum for the transaction of business at the Meeting. In deciding all
questions, a holder of Common Shares is entitled to one vote, in person or by
proxy, for each Common Share held in his or her name on the Record Date.
REQUIRED AFFIRMATIVE VOTE AND VOTING PROCEDURES
The vote required to elect the nominees as trust managers is a majority of
the votes cast in favor of the nominees at the Meeting by the holders of Common
Shares entitled to vote in the election of trust managers, and the vote
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<PAGE> 3
required to ratify the appointment of independent auditors is the affirmative
vote of the holders of a majority of the votes cast by the holders of Common
Shares entitled to vote on the matter. Common Shares held by shareholders
present at the Meeting in person who do no vote and ballots marked "abstain" or
"withhold authority" will be counted as present at the Meeting for quorum
purposes. Under the Company's Restated Declaration of Trust, Amended and
Restated Bylaws and applicable law, abstentions and broker non-votes with
respect to the election of trust managers or the ratification of the appointment
of independent auditors will not constitute votes cast and, as a result, will
have no effect on the outcome of the vote.
COSTS OF PROXY SOLICITATION
The Company will bear the cost of preparing, assembling and mailing the
proxy material. In an effort to have as large of a representation at the Meeting
as possible, special solicitation of proxies may, in certain instances, be made
personally, or by telephone, telegraph, or mail by one or more employees of the
General Partner. The Company will also reimburse brokers, banks, nominees and
other fiduciaries for postage and reasonable clerical expenses of forwarding the
proxy materials to their principals, the beneficial owners of the Common Shares.
PROPOSAL NO. 1
ELECTION OF TRUST MANAGERS
BOARD OF TRUST MANAGERS
The trust managers of the Company are divided into three classes, with
approximately one-third of the trust managers elected by the shareholders
annually. The trust managers whose terms will expire at the Meeting are Gerald
W. Haddock and Morton H. Meyerson. Messrs. Haddock and Meyerson have been
nominated for election at the Meeting as trust managers to hold office until the
Annual Meeting of Shareholders in 2001, or until their successors are elected
and qualify.
The nominees who receive a majority of the votes cast by shareholders
present or represented by proxy at the Meeting, and entitled to vote on the
election of trust managers, will be elected as trust managers of the Company.
The Board of Trust Managers of the Company recommends a vote FOR Gerald W.
Haddock and Morton H. Meyerson as trust managers to hold office until the Annual
Meeting of Shareholders in 2001, or until their successors are elected and
qualify. Should one or both of these nominees become unable to serve for any
reason, the Board of Trust Managers may designate substitute nominees, in which
event the persons named in the enclosed proxy will vote for the election of such
substitute nominee or nominees, or may reduce the number of trust managers on
the Board of Trust Managers.
Set forth below is information with respect to the eight trust managers,
including the current nominees, all of whom joined the Company as directors in
1994 (except Melvin Zuckerman who was first elected as a director in 1996), and
the executive officers.
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<TABLE>
<CAPTION>
TERM
NAME EXPIRES AGE POSITION
----- ------- --- --------
<S> <C> <C> <C>
Richard E. Rainwater......... 2000 53 Chairman of the Board of Trust Managers of
the Company
John C. Goff................. 1999 42 Vice Chairman of the Board of Trust Managers
of the Company
Gerald W. Haddock............ 1998 50 President and Chief Executive Officer of the
Company and the General Partner, Trust
Manager of the Company, and Director of
the General Partner
Anthony M. Frank............. 2000 66 Trust Manager of the Company
Morton H. Meyerson........... 1998 59 Trust Manager of the Company
William F. Quinn............. 2000 50 Trust Manager of the Company
Paul E. Rowsey, III.......... 1999 43 Trust Manager of the Company
Melvin Zuckerman............. 1999 69 Trust Manager of the Company
Dallas E. Lucas.............. N/A 36 Senior Vice President, Chief Financial and
Accounting Officer of the Company and
the General Partner
David M. Dean................ N/A 37 Senior Vice President, Law, and Secretary of
the Company and the General Partner
James M. Eidson, Jr.......... N/A 43 Senior Vice President, Acquisitions, of the
General Partner
William D. Miller............ N/A 39 Senior Vice President, Administration, of the
General Partner
Bruce A. Picker.............. N/A 33 Vice President and Treasurer of the Company
and the General Partner
Joseph D. Ambrose, III....... N/A 47 Vice President, Administration, of the
General Partner
Jerry R. Crenshaw, Jr........ N/A 34 Vice President and Controller of the General
Partner
Barry L. Gruebbel............ N/A 43 Vice President, Property Management, of the
General Partner
Howard W. Lovett............. N/A 41 Vice President, Corporate Leasing, of the
General Partner
Murphy Yates.................. N/A 51 Director of Leasing and Operations of the
General Partner
John L. Zogg, Jr............. N/A 34 Vice President, Leasing and Marketing, of
the General Partner
</TABLE>
TRUST MANAGERS AND EXECUTIVE OFFICERS
The Board of Trust Managers consists of eight members, divided into three
classes serving staggered three-year terms.
The following is a summary of the experience of the current and proposed
trust managers and the current executive officers.
Richard E. Rainwater has been an independent investor since 1986. From 1970
to 1986, he served as the chief investment advisor to the Bass family, whose
overall wealth increased dramatically during his tenure. During that time he was
principally responsible for numerous major corporate and real estate
acquisitions and dispositions. Immediately after beginning his independent
investment activities, he founded ENSCO International Incorporated, an oil field
service and offshore drilling company, in 1986. Additionally, in 1987 he
co-founded Columbia Hospital Corporation, and in 1989 participated in a
management-led buyout of HCA-Hospital Corporation of America. In 1992, Mr.
Rainwater was one of the founders of Mid Ocean Limited, a provider of casualty
re-insurance. In February 1994, he assisted in the merger of Columbia Hospital
Corporation and HCA-Hospital Corporation of America that created Columbia/HCA
Healthcare Corporation. Mr. Rainwater serves as a director of Pioneer Natural
Resources ("Pioneer"), one of the largest oil and gas companies in the United
States. In 1996, Mr. Rainwater led a recapitalization of Mesa, Inc. (Pioneer's
predecessor), and a partnership controlled by Mr. Rainwater became a major
shareholder in July 1996. Mr. Rainwater is also chairman of the board of
directors of Crescent Operating, Inc. ("COI"). Mr. Rainwater is a graduate of
the University of Texas at Austin and the Graduate School of Business at
Stanford University. Mr. Rainwater has served as the Chairman of the Board of
Trust Managers since the Company's inception in 1994.
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John C. Goff, prior to joining the Company in 1994, served as a senior
investment advisor to, and investor with, Mr. Rainwater, as well as a vice
president of Rainwater, Inc., a company wholly owned by Mr. Rainwater. In those
capacities, he has been involved in, and principally responsible for, numerous
acquisitions and financings involving corporate, debt and real estate interests.
Mr. Goff currently is a member of the boards of directors of The Staubach
Company and Gainsco, Inc. In 1997, Mr. Goff was appointed chairman of the board
of Charter Behavioral Health Systems, L.L.C ("CBHS"). Mr. Goff is also vice
chairman of the board of directors of COI. Prior to joining Rainwater, Inc. in
1987, Mr. Goff was employed by the accounting firm of KPMG Peat Marwick LLP from
1981 to 1987. Before joining KPMG Peat Marwick LLP, Mr. Goff was employed by
Century Development Corporation, a major Houston-based office developer and
property management company. Mr. Goff is a graduate of the University of Texas
at Austin and is a Certified Public Accountant. From the Company's inception in
1994 through December 19, 1996, Mr. Goff served as Chief Executive Officer.
Since December 19, 1996, Mr. Goff has served as Vice Chairman of the Board of
Trust Managers.
Gerald W. Haddock, prior to joining the Company, was a vice president of
Rainwater, Inc. from 1990 to 1994 and was the lead transactional attorney for
Mr. Rainwater from 1986 to 1994. During this period, he was in the private
practice of law, pursuant to which, among other things, he served as primary
outside legal counsel to, and investor with, Mr. Rainwater and primary outside
legal counsel to Rainwater, Inc. Mr. Haddock currently is a member of the board
of directors of AmeriCredit Corporation, a company engaged in the financing of
automobile dealer paper, and ENSCO International Incorporated, of which he was
one of the three founding directors. Mr. Haddock has also been nominated to
serve on the board of directors of Automotive Realty Trust of America, a car
dealership real estate investment trust ("REIT"), and he is also the president,
chief executive officer and a director of COI. In addition, Mr. Haddock serves
as general counsel for the Texas Rangers baseball club. Mr. Haddock earned both
Bachelor of Business Administration (B.B.A.) and Juris Doctor (JD) degrees from
Baylor University. He also holds a Master of Laws (L.L.M.) degree in taxation
from New York University and has served as the chairman of the Tax Section of
the State Bar of Texas. From the Company's inception in 1994 through December
19, 1996, Mr. Haddock served as President and Chief Operating Officer. Since
December 19, 1996, Mr.
Haddock has served as President and Chief Executive Officer.
Anthony M. Frank served as Postmaster General of the United States from 1988
to 1992. Prior to that time, Mr. Frank served as chairman and chief executive
officer of First Nationwide Bank, chairman of the Federal Home Loan Bank of San
Francisco, chairman of the California Housing Finance Agency and chairman of the
Federal Home Loan Mortgage Corporation Advisory Board. From 1992 until 1993, he
served as the founding chairman of Independent Bancorp of Arizona. Mr. Frank
also serves as a director of Irvine Apartment Communities, a large California
based apartment REIT; Charles Schwab & Co., one of the nation's largest discount
brokerages; Temple Inland, Inc., a manufacturer of paper and timber products;
Bedford Property Investors, Inc., an office and commercial property REIT
investing primarily on the West Coast; General American Investors Company, Inc.,
a closed-end investment company; Financial Security Assurance, a company
providing credit enhancement for municipal bond issuers; Cotelligent, Inc., a
provider of temporary office support services; and COI. Mr. Frank also serves as
chairman of Belvedere Capital Partners, general partner of the California
Community Financial Institutions Fund LP. He received a Bachelor of Arts (BA)
degree from Dartmouth College and a Master of Business Administration (MBA)
degree from the Amos Tuck School of Business at Dartmouth.
Morton H. Meyerson is chairman and chief executive officer of 2M Companies,
Inc., a private investment firm. Mr. Meyerson has in excess of 32 years
experience in the information technology services industry. Before beginning his
career, he served as a lieutenant in the U.S. Army on active duty from 1961 to
1963. Mr. Meyerson joined Bell Helicopter in 1964 and later joined EDS as a
Systems Engineer trainee in 1966. He subsequently served as systems engineer,
senior systems engineer, project manager, group manager, and vice president. Mr.
Meyerson took a leave of absence from EDS to become president and later chairman
of the Wall Street firm Dupont Glore, Forgan, Inc. He returned to EDS in 1975.
In 1979, he assumed the office of president and in May of 1986, became vice
chairman of the board. In December of 1986, Mr. Meyerson retired from EDS to
become a private investor. In 1992, he began serving as chairman and chief
executive officer of Perot Systems Corporation until his retirement in December
1997. He is a director of ENSCO International Incorporated and TeleTech
Holdings, Inc. Mr. Meyerson holds Bachelor of Arts (BA) degrees in economics and
philosophy from the University of Texas at Austin.
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<PAGE> 6
William F. Quinn currently serves as president of AMR Investment Services,
Inc., the investment services affiliate of American Airlines, with
responsibility for the management of pension and short-term fixed income assets.
In addition, Mr. Quinn is chairman of the board of American Airlines Employees
Federal Credit Union, president and a trustee of the American Advantage Mutual
Funds and serves on the advisory boards for ARCO's pension plans and Southern
Methodist University's Endowment Fund. Prior to being named to his current
position in 1986, Mr. Quinn held several management positions with American
Airlines and its subsidiaries. Before joining American Airlines in 1974, Mr.
Quinn was employed with the accounting firm of Arthur Young & Company. He holds
a Bachelor of Science (BS) degree in accounting from Fordham University and is a
Certified Public Accountant.
Paul E. Rowsey, III is president and a member of the board of directors of
Rosewood Property Company, a real estate investment company, a position he has
held for the past eight years. Mr. Rowsey is also a member of the board of
directors of COI. Mr. Rowsey began his career in 1980 as an attorney
specializing in commercial real estate. Mr. Rowsey holds a Bachelor of Arts (BA)
degree from Duke University and a Juris Doctor (JD) degree from Southern
Methodist University School of Law.
Melvin Zuckerman is the founder and developer of the Canyon Ranch health and
fitness resorts. Mr. Zuckerman opened the original Canyon Ranch in Tucson,
Arizona in 1979 and opened a second Canyon Ranch in the Berkshire Mountains in
Lenox, Massachusetts in 1989. The Company acquired Canyon Ranch-Tucson in July
1996 and Canyon Ranch-Lenox in December 1996. Mr. Zuckerman also serves as a
director of the University of Arizona Foundation, and he serves as a director
and holds the lifetime title of President Emeritus of the Wellness Council of
Tucson (WELCOT), an organization fostering wellness in the workplace and founded
by Mr. Zuckerman in 1984. Prior to the opening of Canyon Ranch-Tucson, Mr.
Zuckerman was a builder and real estate developer in the Tucson area for 20
years. Prior to 1958, Mr. Zuckerman worked as a Certified Public Accountant. Mr.
Zuckerman holds a Bachelor of Science (BS) degree from New York University.
Dallas E. Lucas, prior to joining the Company, was a financial consulting
and audit manager in the real estate services group of Arthur Andersen LLP in
Dallas. Mr. Lucas was employed by Arthur Andersen LLP for nine years, until
December 1993. Mr. Lucas holds a Bachelor of Business Administration (B.B.A.)
degree in accounting from the University of Oklahoma and is a Certified Public
Accountant. Mr. Lucas has served as the Senior Vice President and Chief
Financial and Accounting Officer since the Company's inception in 1994.
David M. Dean, prior to joining the Company, was an attorney for Burlington
Northern Railroad Company from 1992 to 1994, and served as Assistant General
Counsel in 1994. At Burlington Northern, he was responsible for the majority of
that company's transactional and general corporate legal work. Mr. Dean was
previously engaged in the private practice of law from 1986 to 1990 with Kelly,
Hart & Hallman and from 1990 to 1992 with Jackson & Walker, L.L.P., where he
worked primarily with Mr. Haddock on acquisition, financing and venture capital
transactions for Mr. Rainwater and related investor groups. Mr. Dean graduated
with honors from Texas A&M University with Bachelor of Arts (BA) degrees in
English and philosophy in 1983. He also holds a Juris Doctor (JD) degree and a
Master of Laws (L.L.M.) degree in taxation from Southern Methodist University
School of Law. Mr. Dean has served as the Senior Vice President, Law, and
Secretary since August 1994.
James M. Eidson, Jr. has twenty years of experience in the commercial real
estate business. Prior to joining the Company, he owned an investment company,
specializing in investment grade commercial properties, from 1992 to 1994. From
1989 to 1992, he was associated with CB Commercial Real Estate Group, Inc.,
where he was a Senior Investment Specialist in their investment grade commercial
property group, and from 1982 to 1989 he owned a real estate company through
which he provided brokerage and investment services for individuals and large
corporate investors and made investments in commercial properties for his own
account. He gained his early experience in real estate acquisitions,
dispositions, leasing, marketing and consulting while a broker and investment
specialist for three years with Hank Dickerson & Company. Mr. Eidson is a former
professional football player who played with the Dallas Cowboys from 1976
through 1978. Mr. Eidson holds a Bachelor of Science (BS) degree from
Mississippi State University and a Master of Business Administration (MBA)
degree from Southern Methodist University. Mr. Eidson has served as the Senior
Vice President, Acquisitions, since May 1995.
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<PAGE> 7
William D. Miller, prior to joining the Company, served as vice president,
legal affairs of the Texas Rangers major league baseball club beginning in March
1994. While with the Rangers, Mr. Miller managed all legal matters concerning
the senior management of the baseball club and the partnerships that owned or
were affiliated with the owners of the club. Mr. Miller was also a member of the
senior management of the Rangers and certain partnerships affiliated with the
Rangers. In addition, Mr. Miller functioned as the primary lawyer responsible
for the Rangers' interest in the development of The Ballpark in Arlington
project. Prior to joining the Rangers, Mr. Miller practiced law at Jackson &
Walker, L.L.P. from September 1986, was the lead real estate lawyer for Mr.
Rainwater, Rainwater, Inc. and Mr. Haddock, and was instrumental in the
formation transactions of the Company. Mr. Miller received his Bachelor of
Science (BS) degree with first honors in commerce and engineering sciences from
Drexel University and his Juris Doctor (JD) degree with honors from the
University of Texas School of Law. Mr. Miller has served as Senior Vice
President, Administration, since joining the Company in May 1997.
Bruce A. Picker, prior to joining the Company, worked for Rainwater, Inc.
from 1990 to 1994 as the partnership controller of its first major real estate
acquisition. Previously, Mr. Picker was a senior accountant for Arthur Andersen
LLP in their audit department from 1986 to 1989. Mr. Picker holds a Bachelor of
Business Administration (B.B.A.) degree in accounting from Harding University
and is a Certified Public Accountant. Mr. Picker has served as the Treasurer of
the Company and the General Partner since July 1994 and has been a Vice
President since June 1996.
Joseph D. Ambrose III, prior to joining the Company, served as vice
president of CRC Environmental Risk Management, Inc., an environmental and risk
management consulting firm, from 1993 to 1994. He was responsible for major
client development, development of new risk management initiatives and human
resources. Mr. Ambrose was a vice president of American Real Estate Group
("AREG"), a liquidating real estate company, where he managed the environmental,
insurance and other risks associated with the disposition of a nationwide real
estate portfolio from 1990 to 1993. Prior to joining AREG, he was president of
Ambrose Properties, Inc., which acquired and developed oil and gas and real
estate properties. Mr. Ambrose graduated from Texas Christian University with a
Bachelor of Business Administration (B.B.A.) degree in management and received
his Juris Doctor (JD) and Master of Business Administration (MBA) degrees from
Southern Methodist University. Mr. Ambrose joined the Company in 1994 and has
served as Vice President, Administration, since June 1995.
Jerry R. Crenshaw, Jr. was the controller of Carrington Laboratories, Inc.,
a pharmaceutical and medical device company, from 1991 until February 1994. From
1986 until 1991, Mr. Crenshaw was an audit senior in the real estate services
group of Arthur Andersen LLP. Mr. Crenshaw holds a Bachelor of Business
Administration (B.B.A.) degree in accounting from Baylor University and is a
Certified Public Accountant. Mr. Crenshaw has served as Controller since the
Company's inception in 1994 and has been a Vice President since March 1997.
Barry L. Gruebbel, prior to joining the Company, was involved with the
property and asset management of more than 10 million square feet of Class A
office, retail, industrial and multi-family real estate in Texas and New Mexico
as the vice president of property management with Hines Industrial from 1982 to
1986, the vice president of property management with Southland Investment
Properties from 1986 to 1990, and most recently the director of property
management at The Crescent for Rosewood Property Company. Mr. Gruebbel is a
Certified Property Manager (CPM) and is currently active in the real estate
organizations of the Institute of Real Estate Management ("IREM") and Building
Owners and Managers Association ("BOMA"). Mr. Gruebbel received a Bachelor of
Business Administration (B.B.A.) degree in real estate from the University of
Texas at Arlington in 1977. Mr. Gruebbel has been with the Company since its
inception and became Vice President, Property Management, in February 1997.
Howard W. Lovett, prior to joining the Company, was president of The
Gaineswood Company, a private investment company specializing in real estate and
venture capital investments, from January 1989 to August 1995. Previously, Mr.
Lovett was vice president of Morgan & Company, a Houston-based real estate
development company, where he was responsible for income property acquisitions
and the acquisition, development and management of Wildcat Ranch, an exclusive
residential development outside Aspen, Colorado. Mr. Lovett graduated from
Carleton College with a Bachelor of Arts (BA) degree in English in 1980.
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He also holds a Master of Business Administration (MBA) degree from Harvard
University. Mr. Lovett has served as Vice President, Corporate Leasing, since
June 1996.
Murphy C. Yates has more than 22 years of experience in the commercial real
estate business. His emphasis is in the managing and leasing of Class A office
projects. Prior to joining the Company, Mr. Yates was employed in the real
estate business by Metro Inns Management Company from 1973 to 1978, Carrozza
Investment Company from 1980 to 1983, Rosewood Property Company from 1983 to
1990, and Trisept Inc. from 1990 to 1994. Mr. Yates holds a Texas Real Estate
License, is an active member and former President of the Fort Worth Chapter of
BOMA and is involved with IREM. He received his Bachelor of Business
Administration (B.B.A.) degree from Texas Tech University in 1969. Mr. Yates has
been with the Company since May 1994 and has held the position of Director of
Leasing and Operations since April 1997.
John L. Zogg, Jr. served as vice president of the commercial real estate
group of Rosewood Property Company, responsible for marketing and leasing office
space in the Dallas and Denver areas from January 1989 to May 1994. For three
years prior to joining Rosewood Property Company, Mr. Zogg worked as marketing
manager of Gerald D. Hines Interests, responsible for office leasing in the
Dallas metropolitan area. He graduated from the University of Texas at Austin
with a Bachelor of Arts (BA) degree in economics and holds a Master of Business
Administration (MBA) degree from the University of Dallas. Mr. Zogg has served
as Vice President, Leasing and Marketing, since May 1994.
TRUST MANAGERS COMPENSATION
Each trust manager who is not also an officer of the Company receives an
annual fee of $20,000 (payable in cash or, at the election of the trust manager,
in Common Shares in an amount determined by dividing the fees otherwise payable
by 90% of the fair market value of the stock), a meeting fee of $1,000 for each
Board of Trust Managers (but not committee) meeting attended (in person or by
telephone), and reimbursement of expenses incurred in attending meetings. Trust
Managers who are also officers receive no separate compensation for their
service as trust managers.
COMMITTEES OF THE BOARD OF TRUST MANAGERS
Audit Committee. The Audit Committee consists of Anthony M. Frank, Chairman,
and William F. Quinn. The Audit Committee, which held three meetings in 1997,
makes recommendations concerning the engagement of independent public
accountants, reviews with the independent public accountants the plans and
results of the audit engagement, approves professional services provided by the
independent public accountants, reviews the independence of the public
accountants, considers the range of audit and non-audit fees and reviews the
adequacy of the Company's internal accounting controls.
Executive Compensation Committee. The Executive Compensation Committee
consists of Morton H. Meyerson, Chairman, and Paul E. Rowsey, III. The Executive
Compensation Committee, which held one meeting in 1997, determines compensation
for the Company's executive officers and administers the stock incentive and
other compensation plans adopted by the Company. The Executive Compensation
Committee also nominates persons to serve as members of the Board of Trust
Managers. The Executive Compensation Committee will consider nominees
recommended by management, shareholders and others, and such recommendations may
be delivered in writing to the attention of the Executive Compensation Committee
in care of the Company Secretary at the Company's principal executive offices.
Intercompany Evaluation Committee. The Intercompany Evaluation Committee
consists of Morton H. Meyerson, William F. Quinn and Melvin Zuckerman. The
Intercompany Evaluation Committee was appointed by the Board of Trust Managers
on November 3, 1997 to review, confirm and ratify, in the Company's capacity as
sole stockholder of the General Partner, all determinations and acts of the
Operating Partnership, the General Partner and the sole director of the General
Partner relating to the Intercompany Agreement between the Operating Partnership
and COI, dated June 3, 1997 (the "Intercompany Agreement"), or any other
transactions with COI or its affiliate as
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<PAGE> 9
may be presented to the Company by the General Partner from time to time.
The Intercompany Evaluation Committee did not have any meetings in 1997.
During the last fiscal year, the Board of Trust Managers held three meetings
and no trust manager attended fewer than 85% of the aggregate of all meetings of
the Board of Trust Managers and the committees, if any, upon which such trust
manager served and which were held during the period of time that such person
served on the Board of Trust Managers or such committee.
PROPOSAL NO. 2
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
Arthur Andersen LLP has served as the Company's independent auditors from
inception through the fiscal year ended December 31, 1997 and has been appointed
by the Board of Trust Managers to continue as the Company's independent auditors
for the fiscal year ending December 31, 1998. In the event that ratification of
this appointment of auditors is not approved by the affirmative vote of a
majority of the votes cast on the matter, then the appointment of independent
auditors will be reconsidered by the Board of Trust Managers.
A representative of Arthur Andersen LLP is expected to be present at the
Meeting. The representative will have an opportunity to make a statement and
will be able to respond to appropriate questions.
The Board of Trust Managers recommends a vote FOR ratification of the
appointment of Arthur Andersen LLP as the Company's independent auditors for the
year ending December 31, 1998.
VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS
The following table sets forth the beneficial ownership of Common Shares for
(i) each shareholder of the Company who beneficially owns more than 5% of the
Common Shares, (ii) each trust manager and named executive officer of the
Company or the General Partner, and (iii) the trust managers and executive
officers of the Company or the General Partner as a group. Unless otherwise
indicated in the footnotes, all Common Shares and all Units are owned directly
by the listed beneficial owner.
BENEFICIAL OWNERSHIP(1)
<TABLE>
<CAPTION>
PERCENT OF
COMMON SHARES
NAME AND ADDRESS OF COMMON OWNERSHIP (5)
BENEFICIAL OWNER(2) SHARES(3)(4)
- ---------------------- ------------
<S> <C> <C>
Richard E. Rainwater.. 13,883,418 (6) 11.0%
John C. Goff.......... 2,491,413 (7) 2.1%
Gerald W. Haddock..... 1,881,291(8) 1.6%
Dallas E. Lucas....... 106,312 (9) *
David M. Dean......... 83,740(10) *
James M. Eidson, Jr... *
87,652
Anthony M. Frank...... *
25,400
Morton H. Meyerson.... *
164,765(10)
William F. Quinn...... *
28,907
Paul E. Rowsey, III... *
40,307
Melvin Zuckerman...... 1,009,658 *
FMR Corp.............. 10,186,700(11) 7.5%
82 Devonshire Street
Boston,
Massachusetts
02109
Trust Managers and
Executive Officers as a 19,989,015(5)(6)(7) 15.1%
Group (18 persons) (8)(9)(10)
</TABLE>
- ----------
* Less than 1%
8
<PAGE> 10
(1) All information is as of April 9, 1998 unless otherwise indicated. The
number of Common Shares beneficially owned is reported on the basis of
regulations of the Securities and Exchange Commission (the "Commission")
governing the determination of beneficial ownership of securities.
[Accordingly, the number of Common Shares beneficially owned by a person
includes (i) the number of Common Shares that such person has the right to
acquire within 60 days of April 9, 1998 upon the exercise of options to
purchase Common Shares ("Stock Options") granted pursuant to the 1994
Crescent Real Estate Equities, Inc. Stock Incentive Plan (the "1994 Plan")
and the 1995 Crescent Real Estate Equities, Inc. Stock Incentive Plan (as
amended, the "1995 Plan"), (ii) the number of Common Shares issuable upon
exchange of Units owned by such person for Common Shares, with such exchange
made on the basis of two Common Shares for each Unit exchanged (assuming the
Company elects to issue Common Shares rather than pay cash upon such
exchange), and (iii) the number of Common Shares issuable upon exercise of
options (the "Unit Options") granted under the 1996 Crescent Real Estate
Equities Limited partnership Unit Incentive Plan (the "Unit Plan") to
purchase partnership units of the Operating Partnership ("Units") and the
subsequent exchange of such Units for Common Shares, with such exchange made
on the basis of two Common Shares for each Unit exchanged (assuming the
Company elects to issue Common Shares rather than pay cash upon such
exchange). In addition, a person is deemed to have beneficial ownership of
the Company's 6 3/4% Series A Convertible Cumulative Preferred Shares (the
"Preferred Shares"), each of which is currently convertible into .6119
Common Shares. As of April 9, 1998, none of the persons listed in the table
beneficially own any Preferred Shares. All information as to number of Units
contained in the footnotes to this table reflects the number of Common
Shares for each Unit issuable upon the exchange of Units (on a two Common
Shares for each Unit basis) assuming the Company elects to issue Common
Shares rather than pay cash upon such exchange).
(2) Unless otherwise indicated, the address of each beneficial owner is 777 Main
Street, Suite 2100, Fort Worth, Texas 76102.
(3) The number of Common Shares beneficially owned by the following persons
includes the number of Common Shares indicated due to the vesting of Stock
Options: Richard E. Rainwater -- 1,165,624; John C. Goff -- 891,904; Gerald
W. Haddock -- 652,472; Dallas E. Lucas -- 87,800; David M. Dean -- 77,600;
James M. Eidson, Jr. -- 66,000; Anthony M. Frank -- 5,600; Morton H.
Meyerson -- 2,800; William F. Quinn -- 23,400; Paul E. Rowsey, III -- 5,600;
Melvin Zuckerman -- 2800; and Trust Managers and Executive Officers as a
Group -- 3,139,150.
(4) The number of Common Shares beneficially owned by the following persons
includes the number of Common Shares indirectly owned through participation
in the General Partner's 401(k) Plan as of December 31, 1997, as follows:
John C. Goff -- 1,579; Gerald W. Haddock -- 1,695; Dallas E. Lucas -- 914;
David M. Dean -- 1,028; James M. Eidson, Jr. -- 604; and Trust Managers and
Executive Officers as a Group -- 12,401.
(5) The percentage of Common Shares beneficially owned by a person assumes that
(i) as to any person listed in the table, all Stock Options exercisable
within 60 days of April 9, 1998 are exercised, all Unit Options exercisable
within 60 days of April 9, 1998 are exercised and the Units so acquired are
subsequently exchanged for Common Shares, and all Units are exchanged for
Common Shares, and (ii) as to all other persons, no Stock Options or Unit
Options are exercised, and no Units are exchanged for Common Shares. Common
Shares issuable upon conversion of the Preferred Shares are not included
because none of the persons listed in the table has beneficial ownership of
any Preferred Shares.
(6) The number of Common Shares and Units beneficially owned by Richard E.
Rainwater includes 1,200,000 Common Shares and 126,588 Units owned by trusts
established for the benefit of Mr. Rainwater's children, and 460,000 Common
Shares and 1,652 Units owned by Darla Moore, who is Mr. Rainwater's spouse.
Mr. Rainwater disclaims beneficial ownership as to all such 1,660,000 Common
Shares and 128,240 Units. In addition, the number of Common Shares and Units
beneficially owned by Mr. Rainwater includes 2,206,374 Common Shares and
6,335,126 Units owned indirectly by Mr. Rainwater, including (i) 12,346
Common Shares and 49,506 Units owned by Rainwater, Inc., a Texas
corporation, of which Mr. Rainwater is the sole
9
<PAGE> 11
director and owner, (ii) 10,070 Units owned by Tower Holdings, Inc., a Texas
corporation, of which Mr. Rainwater is the sole director and owner, (iii)
33,296 Units owned by 777 Main Street Corporation, a Texas corporation, of
which Mr. Rainwater is the sole director and owner, (iv) 2,425,836 Units
owned by Rainwater Investor Partners, Ltd., a Texas limited partnership, of
which Rainwater, Inc. is the sole general partner, (v) 555,424 Units owned
by Rainwater RainAm Investors, L.P., a Texas limited partnership, of which
Rainwater, Inc. is the sole general partner, (vi) 3,260,994 Units owned by
Office Towers LLC, a Nevada limited liability company, of which Mr.
Rainwater and Rainwater, Inc. own an aggregate 100% interest, and (vii)
2,194,028 Common Shares owned by the Richard E. Rainwater 1995 Charitable
Remainder Unitrust No. 1, of which Mr. Rainwater is the sole trustee.
(7) The number of Units beneficially owned by John C. Goff includes 152,560
Units owned by Goff Family, L.P., a Delaware limited partnership, of which
Mr. Goff is a general partner, and includes 714,286 Units due to the vesting
of Unit Options. Mr. Goff disclaims beneficial ownership of the Units owned
by Goff Family, L.P. in excess of his pecuniary interest in such Units.
(8) The number of Units beneficially owned by Gerald W. Haddock includes 101,706
Units owned by Haddock Family, L.P., a Delaware limited partnership, of
which Mr. Haddock is a general partner, and includes 714,286 Units due to
the vesting of Unit Options. Mr. Haddock disclaims beneficial ownership as
to 50,853 of the Units owned by Haddock Family, L.P. in excess of his
pecuniary interest in such Units.
(9) The number of Common Shares beneficially owned by Dallas E. Lucas and David
M. Dean includes 9,959 and 3,984 Restricted Shares, respectively, which
restrictions will lapse in equal amounts during the next three years. Each
of Mr. Lucas and Mr. Dean has sole voting power with respect to all of his
Restricted Shares.
(10) The number of Common Shares beneficially owned by Morton H. Meyerson
includes 80,000 Common Shares owned by trusts established for the benefit of
Mr. Meyerson's children; Mr. Meyerson disclaims beneficial ownership as to
all of such 80,000 Common Shares. The number of Units beneficially owned by
Morton H. Meyerson includes 16,880 Units owned by trusts established for the
benefit of Mr. Meyerson's children; Mr. Meyerson disclaims beneficial
ownership as to all of such Units.
(11) As reported in the Schedule 13G dated February 14, 1998, filed by FMR
Corp., Fidelity Management & Research Company ("Fidelity"), a registered
investment adviser and a wholly owned subsidiary of FMR Corp., is the
beneficial owner of 9,780,000 Common Shares, none of which it has the power
to vote. In addition to such 9,780,000 Common Shares, Fidelity Management
Trust Company ("Fidelity Management"), a wholly owned subsidiary of FMR
Corp., is the beneficial owner of 406,700 Common Shares, each of which it
has the sole power to vote. Fidelity is the beneficial owner of 9,780,000
Common Shares as a result of its serving as investment adviser to various
registered investment companies (the "Funds"). Each of Edward C. Johnson
III, chairman of FMR Corp., Abigail P. Johnson, a director of FMR Corp., FMR
Corp., through its control of Fidelity, and the Funds has sole power to
dispose of such Common Shares owned by the Funds. Neither FMR Corp., nor
Edward C. Johnson III nor Abigail Johnson has the sole power to vote or
direct the voting of the Common Shares owned directly by the Funds, which
power resides with the Funds' boards of trustees. Fidelity carries out the
voting of the Common Shares under written guidelines established by the
Funds' boards of trustees. In addition to such 9,780,000 Common Shares,
Fidelity Management is the beneficial owner of 406,700 Common Shares as a
result of its serving as investment manager of the institutional account(s).
Edward C. Johnson III, Abigail Johnson and FMR Corp., through their control
of Fidelity Management, have sole voting and dispositive power over such
406,700 Common Shares owned by the institutional account(s) as reported
above. All information presented herein relating to FMR Corp. and Fidelity
is based solely on the Schedule 13G/A filed by FMR Corp.
(12) The number of shares beneficially owned by the trust managers and executive
officers as a group includes an aggregate of 4,183 Restricted Shares held by
two executive officers other than Messrs. Lucas and Dean. The restrictions
on such Restricted Shares will lapse in equal amounts during the next three
years. Each such executive officer has sole voting power with respect to all
of his Restricted Shares.
10
<PAGE> 12
EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION TABLES
The following table sets forth the annual and long-term compensation paid or
awarded to the Company's chief executive officer and the four most highly
compensated executive officers of the Company and the General Partner for the
years ended December 31, 1997, 1996 and 1995, respectively. As a result of the
Company's UPREIT structure, no employees are compensated by the Company but are
compensated by the General Partner. The Company has not granted any stock
appreciation rights ("SARs").
TABLE 1
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
AWARDS PAYOUTS
OTHER RESTRICTED SECURITIES ALL OTHER
NAME AND ANNUAL STOCK UNDERLYING LTIP COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) AWARDS($) OPTIONS(#) PAYOUTS ($)(1)
- ----------------------- ---- --------- -------- -------------- --------- ---------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gerald W. Haddock 1997 380,772 500,000 56,553(2) -- -- -- 1,600
President and Chief 1996 286,165 1,500,000 -- -- 2,000,000(3) -- 960
Executive Officer (4) 1995 200,000 125,000 -- -- 250,000 -- 1,005
John C. Goff 1997 230,772 -- 50,203(2) -- -- -- 1,600
Vice Chairman of the 1996 286,165 1,500,000 -- -- 2,000,000(3) -- 960
Board of Trust 1995 200,000 125,000 -- -- 250,000 -- 1,005
Managers (5)
Dallas E. Lucas 1997 169,375 200,000 -- -- 90,000(6) -- 1,600
Senior Vice President 1996 141,300 81,000 -- -- 120,000 -- 960
and Chief Financial 1995 131,250 52,500 -- 250,007(7) 60,000(8) -- 1,005
and Accounting
Officer
David M. Dean 1997 169,375 150,000 -- -- 80,000(6) -- 1,600
Senior Vice President, 1996 141,300 81,000 -- -- 120,000 -- 960
Law, and Secretary 1995 131,250 52,500 -- 100,015(7) 60,000(8) -- 1,005
James M. Eidson, Jr. 1997 168,865 200,000 -- -- 80,000(6) -- 1,600
Senior Vice President, 1996 138,740 331,000 -- -- 210,000 -- 960
Acquisitions 1995 117,949 392,442 273,758(9) -- 60,000(8) -- --
</TABLE>
- ---------
(1) All amounts in this column represent matching contributions to the Crescent
Real Estate Equities, Ltd. 401(k) Plan.
(2) Amounts represent salaries and benefits paid by the Company for the personal
accountants for Messrs. Goff and Haddock.
(3) The number of securities underlying options granted represent the number of
Common Shares issuable following (i) exercise of Unit Options for Units on a
one-for-one basis and (ii) the exchange of Units for Common Shares on the
basis of two Common Shares for each Unit.
(4) Mr. Haddock served as President and Chief Operating Officer of the Company
from the Company's inception in 1994 to December 19, 1996.
(5) Mr. Goff served as Chief Executive Officer of the Company from the Company's
inception in 1994 to December 19, 1996.
(6) Represents Common Shares underlying Stock Options granted in March 1998
based on individual's performance in 1997.
11
<PAGE> 13
(7) The Company issued 16,598 and 6,640 Restricted Shares on June 12, 1995 at a
market price of $15.0625, which restrictions lapse annually in equal
one-fifth installments to Mr. Lucas and Mr. Dean, respectively. Dividends
are paid on the Restricted Shares to the holder of the Restricted Shares.
(8) Represents Common Shares underlying Stock Options granted in March 1996
based on individual's performance in 1995.
(9) The Company issued 19,044 Units valued at $14.375 to Mr. Eidson as non-cash
bonus compensation.
The following table provides certain information regarding Stock Options
granted to the named executive officers for the year ended December 31, 1997.
The Company has not granted any SARs.
TABLE 2
OPTION/SAR GRANTS FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE AT
ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM*
OPTIONS EMPLOYEES IN OR BASE EXPIRATION ------------------
NAME GRANTED(#) FISCAL YEAR PRICE($/SH.) DATE 5% 10%
---- ---------- ----------- ------------ -------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Gerald W. Haddock..... -- -- -- -- -- --
John C. Goff.......... -- -- -- -- -- --
Dallas E. Lucas....... 90,000(1) 6.6% $35.25 March 2008 $1,995 $ 5,056
David M. Dean......... 80,000(1) 5.9% $35.25 March 2008 $1,774 $ 4,494
James M. Eidson,
Jr.................... 80,000(1) 5.9% $35.25 March 2008 $1,774 $ 4,494
</TABLE>
- ----------
* Potential Realizable Value is the change in share price of securities
underlying options granted, based on the assumed annual growth rates shown
over their 10-year option term. For example, a 5% growth rate, compounded
annually, for Mr. Lucas' grant results in a share price of $57.42 per share
and a 10% growth rate, compounded annually, results in a share price of
$91.43 per share. These potential realizable values are listed to comply
with the regulations of the Securities and Exchange Commission (the
"Commission"), and the Company cannot predict whether these values will be
achieved. Actual gains, if any, on stock option exercise are dependent on
the future performance of the shares.
(1) Vest in equal one-fifth installments on March 9, 1999, 2000, 2001, 2002, and
2003.
The following table provides information about Stock Option exercises by the
named executive officers during the year ended December 31, 1997 and Stock
Options held by each of them at December 31, 1997. The Company has not granted
any SARs.
TABLE 3
OPTION VALUES AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
SHARES FISCAL YEAR END(#) AT FISCAL YEAR END($)(1)
ACQUIRED ON VALUE ----------------------------- -----------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------- ------------ ----------- ----------- ------------- ----------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Gerald W. Haddock -- -- 1,366,758(2) 1,285,714(3) $32,475 $ 28,045
John C. Goff........ -- -- 1,606,190(2) 1,285,714(3) $38,910 $ 28,045
Dallas E. Lucas..... 15,000 232,463 74,200 238,800 $ 1,725 $ 3,298
David M. Dean....... 5,200 71,000 64,000 238,800 $ 1,438 $ 3,520
James M. Eidson, Jr -- -- 54,000 296,000 $ 1,067 $ 4,598
</TABLE>
- ---------
12
<PAGE> 14
(1) Market value of securities underlying in-the-money options based on the
closing price of the Company's Common Shares on December 31, 1997 (the last
trading day of the fiscal year) on the New York Stock Exchange of $39.375,
minus exercise price.
(2) The number of securities underlying unexercisable and unexercised options
includes 1,285,714 Common Shares. Such Common Shares may be issued following
vesting and exercise of Unit Options for Units on a one-for-one basis and
the exchange of Units for Common Shares on the basis of two Common Shares
for each Unit.
(3) The number of securities underlying exercisable but unexercised options
includes 714,286 Common Shares. Such Common Shares may be issued following
exercise of Unit Options for Units on a one-for-one basis and the exchange
of Units for Common Shares on the basis of two Common Shares for each Unit.
EMPLOYMENT AGREEMENTS
As part of the transactions in connection with the formation of the Company,
the Operating Partnership assumed Employment Agreements between Rainwater, Inc.
and each of John C. Goff and Gerald W. Haddock. Such Employment Agreements also
require that Messrs. Goff and Haddock enter into the Noncompetition Agreements
described below. See " -- Agreements Not to Compete," below. The Employment
Agreements for Messrs. Goff and Haddock initially provided that each of them
receive annual compensation of $160,000 per annum. On July 1, 1995, the General
Partner's Board of Directors increased the salary for each of Messrs. Goff and
Haddock to $240,000 per annum. On March 5, 1996, the General Partner's Board of
Directors increased the salary for each of Messrs. Goff and Haddock to $300,000
per annum and, on March 3, 1997, to $400,000 per annum. On June 23, 1997, Mr.
Goff agreed to a reduction in his salary from the Operating Partnership to
$100,000 per annum to reflect his agreement to devote a significant amount of
his time to his duties as Chairman of CBHS. On March 9, 1998, the General
Partner's Board of Directors increased the salary for each of Messrs. Goff and
Mr. Haddock by 5% per annum to $105,000 per annum for Mr. Goff and $420,000 per
annum for Mr. Haddock. The term of each of the Employment Agreements expires on
April 14, 1999, subject to automatic renewal for one-year terms unless
terminated by the Operating Partnership or Messrs. Goff or Haddock, as the case
may be. The salaries under the Employment Agreements, which are not subject to a
cap, may be increased at the discretion of the Operating Partnership, although
it is the Operating Partnership's practice to have increases in such salaries
reviewed by the Executive Compensation Committee of the Board of Trust Managers
of the Company. Bonuses under the Employment Agreements are similarly determined
by the Operating Partnership, although it is the practice of the General Partner
to have such bonuses reviewed by the Executive Compensation Committee of the
Board of Trust Managers of the Company.
AGREEMENTS NOT TO COMPETE
The Operating Partnership is dependent on the services of Richard E.
Rainwater, John C. Goff and Gerald W. Haddock. Messrs. Goff and Haddock are
employees of the Operating Partnership. Mr. Rainwater serves as Chairman of the
Board of Trust Managers of the Company but has no employment agreement with the
Company and, therefore, is not obligated to remain with the Company for any
specified term. In connection with the initial public offering of the Company's
Common Shares in May 1994 (the "Initial Offering"), each of Messrs. Rainwater,
Goff and Haddock entered into a Noncompetition Agreement with the Company that
restricts him from engaging in certain real estate related activities during
specified periods of time. The restrictions imposed by Mr. Rainwater's
Noncompetition Agreement will terminate one year after the later to occur of (i)
the date on which Mr. Rainwater ceases to serve as a trust manager of the
Company and (ii) the date on which Mr. Rainwater's beneficial ownership of the
Company (including Common Shares and Units) first represents less than a 2.5%
ownership interest in the Company. The restrictions imposed by Mr. Goff's and
Mr. Haddock's Noncompetition Agreements will terminate one year after the
subject individual first ceases to be a trust manager or an executive officer of
the Company. The Noncompetition Agreements do not, among other things, prohibit
Messrs. Rainwater, Goff and Haddock from engaging in certain activities in which
they were engaged at the time of formation of the Company in 1994 or from making
certain passive real estate investments.
13
<PAGE> 15
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's officers, trust
managers and persons who own more than 10% of the Company's Common Shares to
file reports of ownership on Form 3 and changes in ownership on Form 4 or 5 with
the Commission and the New York Stock Exchange. Such officers, trust managers
and 10% holders are also required by the Commission rules to furnish the Company
with copies of all Section 16(a) forms that they file.
Based solely on its review of copies of such reports received or written
representations from certain reporting persons, the Company believes that all
Section 16(a) filing requirements applicable to its officers, trust managers and
10% shareholders were complied with during the fiscal year ended December 31,
1997, except Joseph D. Ambrose, III failed to file on a timely basis his change
of ownership on Form 4 when his wife acquired 40 Common Shares, and John Walker
(who resigned from his position as an executive officer and employee of the
General Partner effective March 31, 1998) and John Zogg failed to file on a
timely basis their change of ownership on Form 5 for their receipt each of 33
Common Shares from the Company.
REPORT OF THE EXECUTIVE COMPENSATION COMMITTEE
The Executive Compensation Committee is comprised of Messrs. Meyerson and
Rowsey. Members of the Executive Compensation Committee are selected by a
majority of the full Board of Trust Managers.
Compensation Philosophy and Objectives. The Executive Compensation Committee
of the Company determines the compensation for the Company's executive officers
and administers the stock incentive and other compensation plans adopted by the
Company. In addition, the Executive Compensation Committee, acting for the
Company in its capacity as the sole stockholder of the General Partner, reviews
and ratifies, where appropriate, decisions of the board of directors of the
General Partner with respect to the compensation of the executive officers of
the General Partner.
The philosophy of the Company's compensation program is to employ, retain
and reward executives capable of leading the Company in achieving its business
objectives. These objectives include enhancing shareholder value, maximizing
financial performance, preserving a strong financial posture, increasing the
Company's assets and positioning its assets and business in geographic markets
offering long-term growth opportunities. The accomplishment of these objectives
is measured against the conditions characterizing the industry within which the
Company and the Operating Partnership operate. In implementing the Company's
compensation program, it generally is the policy of the Executive Compensation
Committee to seek to qualify executive compensation for deductibility by the
Company for purposes of Section 162(m) of the Internal Revenue Code to the
extent that such policy is consistent with the Company's overall objectives and
executive compensation policy.
Executive Officer Compensation. In addition to their regular salary, the
executive officers of the General Partner may be compensated in the form of cash
bonus awards and restricted stock grants and stock options under the 1995 Plan.
Executive officers of the General Partner are eligible to participate, on the
same basis as other employees, in the employer matching provision of the Profit
Sharing Plan and Trust established by the General Partner Savings Plan, whereby
employees may save for their future retirement on a tax-deferred basis through
the Section 401(k) savings feature of the plan with the General Partner
contributing an additional percentage of the amount saved by each employee. Such
executive officers are also eligible to participate in the other employee
benefit and welfare plans maintained by the General Partner on the same terms as
non-executive personnel who meet applicable eligibility criteria, subject to any
legal limitations on the amounts that may be contributed or the benefits that
may be payable under such plans.
Performance of the Company and the Operating Partnership was a key
consideration in the deliberations of the Executive Compensation Committee
regarding executive compensation for 1997. The Executive Compensation Committee
recognizes that share price is one measure of performance, but also that other
factors, including industry business conditions and the Company's success in
achieving short-term and long-term goals and objectives, must be evaluated in
arriving at a meaningful analysis of performance. Accordingly, the Executive
Compensation
14
<PAGE> 16
Committee also gave consideration to the Company's achievement of specified
business objectives when reviewing 1997 executive officer compensation. An
additional objective of the Executive Compensation Committee has been to reward
executive officers with equity compensation in addition to salary, in keeping
with the Company's overall compensation philosophy of placing equity in the
hands of its employees in an effort to further instill shareholder
considerations and values in the actions of all employees and executive
officers.
Base Salary. The 1997, base annual salaries of the Vice Chairman of the
Board of Trust Managers (the "Vice Chairman") and the President and Chief
Executive Officer (the "CEO") were based upon employment contracts between such
officers and the Operating Partnership. In March 1997, the General Partner
approved, and the Board of Trust Managers of the Company ratified, an increase
from the $300,000 annual salary provided in each such contract to $400,000 per
annum for each of the Vice Chairman and CEO. On June 23, 1997, Mr. Goff agreed
to a reduction in his salary from the Operating Partnership to $100,000 per
annum to reflect his agreement to devote a significant amount of his time to his
duties as chairman of CBHS. On March 9, 1998, the General Partner approved, and
the Executive Compensation Committee ratified, a 5% increase for each of the
Vice Chairman and CEO to $105,000 per annum for the Vice Chairman and $420,000
per annum for the CEO. These employment agreements, which provide for bonuses to
be determined by the board of directors of the General Partner, expire in April
1999, subject to automatic renewal for successive one-year periods unless
terminated by the Operating Partnership or Messrs. Goff and Haddock. The 1997
compensation paid to the other executive officers of the General Partner was
based upon a salary structure administered for consistency for each position
relative to its authority and responsibility and in comparison to industry
peers.
Annual Incentive. The General Partner paid cash bonuses to its executive
officers and other key personnel in recognition of the Company's strong
performance within its industry and increased return to shareholders, as well as
the substantial personal contributions to the aggressive acquisition strategies
of the Operating Partnership. Both of these developments have a significant
impact on the Company's profitability and long-term performance. For a
discussion of the bonus paid to the CEO, see "Vice Chairman and CEO
Compensation" below.
Long-Term Incentive. Stock Options were used in 1997 to reward and
incentivize executive officers and other key personnel and to retain them
through the potential of capital gains and equity buildup in the Company. The
number of Stock Options granted was determined by the Executive Compensation
Committee based upon its evaluation of performance criteria mentioned above,
along with the Executive Compensation Committee's subjective evaluation of each
executive's ability to influence the Company's long-term growth and
profitability. All Stock Options were issued at a price not less than the market
price of the Common Shares on the date of grant. Because the value of the Stock
Option should, over time, bear a direct relationship to the Company's share
price, the Executive Compensation Committee believes the award of Stock Options
represents an effective incentive to create value for the shareholders. During
1997, the Executive Compensation Committee granted Stock Options to purchase
134,000 Common Shares to four persons who currently serve as officers of the
General Partner. In addition, on March 9, 1998, the Company granted Stock
Options to purchase 380,000 Common Shares to ten persons who serve as officers
of the Company, the General Partner, or both.
Vice Chairman and CEO Compensation. On March 9, 1998, the Executive
Compensation Committee and the Board of Trust Managers approved and ratified the
authorization by the General Partner of a cash bonus in the amount of $500,000
to the CEO. In approving such bonus, the Executive Compensation Committee gave
substantial weight to the critical contributions made by the CEO to the
development and execution of the Company's aggressive acquisition program and
the impact of the acquisition program on shareholder value. The Company has
completed more than $5.8 billion in acquisitions since the Initial Offering in
1994 and has increased its quarterly distributions by approximately 64.3% since
the Initial Offering. The Executive Compensation Committee also noted that the
stock price has increased from $12.50 per share since the Initial Offering to
$35.25 at the time of the approval of the bonus on March 9, 1998. The Company's
stock price increased by more than 49% during 1997, a rate of increase
substantially in excess of the Company's peer group. Further, total return to
shareholders (consisting of appreciation in share price and distributions paid)
increased by 246% from the Initial Offering through December 31, 1997. The
Executive Compensation Committee also considered the amount and nature of
compensation paid to similarly situated executives at other major office REITs
and at other companies in the Dallas-Fort Worth area.
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<PAGE> 17
On July 16, 1996, the Executive Compensation Committee and the Board of
Trust Managers of the Company approved and ratified adoption by the General
Partner of the Unit Plan and the grant to each of the Vice Chairman and CEO of
Unit Options to acquire 1,000,000 Units. The Unit Plan provided for a seven-year
vesting period and accelerated vesting of 250,000 Unit Options in the event the
fair market value of the Common Shares equaled or exceeded $25.00 for each of
ten consecutive trading days (determined based on the closing price on each such
day), which it did on January 7, 1997. On June 9, 1997, the shareholders of the
Company approved granting to the Vice Chairman and CEO the right to exchange
Units acquired upon the exercise of Unit Options for Common Shares (on the basis
of two Common Shares for each Unit exchanged, to account for the stock split
without a corresponding unit split). Effective March 9, 1998, the Compensation
Committee of the General Partner, which consists of Messrs. Meyerson and Rowsey,
amended the vesting schedule of Mr. Haddock's Unit Option to provide for (i) the
vesting of 107,143 Unit Options per year for the remainder of the term of such
Unit Option, (ii) accelerated vesting of 250,000 Unit Options at the time that
the Fair Market Value of the Common Shares first equals or exceeds $50.00 per
Common Share, and (iii) accelerated vesting of all remaining unvested Unit
Options at the time that the Fair Market Value of the Common Shares first equals
or exceeds $60.00 per Common Share. The Fair Market Value of the Common Shares
is defined as the average closing price of the Common Shares for the preceding
ten consecutive trading days. The closing price of the Common Shares on the date
of amendment of the vesting schedule was $35.3125. The Executive Compensation
Committee believes that the exercise price, vesting provisions and other terms
of the Unit Options provide a strong link between the future value of the Unit
Options and the long-term value of the Common Shares, which will provide further
incentives for the Vice Chairman and CEO to establish financial and operational
objectives designed to further increase the value of the Company.
EXECUTIVE COMPENSATION COMMITTEE
Morton H. Meyerson
Paul E. Rowsey, III
PERFORMANCE GRAPH
The following line graph sets forth a comparison of the percentage change in
the cumulative total shareholder return on the Company's Common Shares compared
to the cumulative total return of NAREIT Equity REIT Return Index, the S&P 500
Index and SNL Securities LP Office REITs Index for the period April 28, 1994,
the date on which trading of the Common Shares commenced, through December 31,
1997. The graph assumes an investment of $100 on April 28, 1994, a reinvestment
of dividends and actual increase of the market value of the Common Shares
relative to an initial investment of $100.
<TABLE>
<CAPTION>
CRESCENT
REAL ESTATE NAREIT SNL SECURITIES
MEASUREMENT PERIOD EQUITIES EQUITY LP OFFICE
(FISCAL YEAR COVERED) COMPANY REIT S&P 500 INDEX REITS INDEX
<S> <C> <C> <C> <C>
4/28/94 100.00 100.00 100.00 100.00
12/31/94 111.73 98.11 104.40 104.81
12/31/95 150.81 113.09 143.63 145.14
12/31/96 248.14 158.97 176.47 219.48
12/31/97 386.62 183.96 235.36 285.09
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For purposes of the following discussion, the term "Company" includes,
unless the context otherwise requires, the Operating Partnership and the other
subsidiaries of the Company, in addition to the Company.
In July 1996, in connection with the acquisition of Canyon Ranch-Tucson, the
Company obtained from Melvin Zuckerman, who became a trust manager of the
Company in November 1996, and Jerrold Cohen an option to acquire up to 30% of a
management company to be formed by Messrs. Zuckerman and Cohen. The management
company will have all rights to develop and manage new Canyon Ranch resorts,
both within the United States and internationally, and to use and sublicense the
Canyon Ranch name and trademarks. The Company must exercise the
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<PAGE> 18
option on or before July 26, 1998, either in full or in three increments,
for an aggregate maximum price of $6,000,000.
Effective March 14, 1996, March 14, 1997 and March 30, 1998, the Company
loaned to Morton H. Meyerson, an independent trust manager of the Company,
$187,425, $45,311 and $45,297, respectively, on a recourse basis, pursuant the
1994 Plan and the 1995 Plan. Mr. Meyerson used the proceeds of the first loan,
with $75.00 in cash, to acquire 15,000 Common Shares pursuant to the exercise of
15,000 Stock Options that were granted to him on May 5, 1994 under the 1994
Plan. Mr. Meyerson used the proceeds of the second loan, together with $14.00 in
cash, to acquire 2,800 Common Shares pursuant to the exercise of 2,800 Stock
Options that were granted to him on March 14, 1996 under the 1995 Plan. Mr.
Meyerson used the proceeds of the third loan, together with $28.00 in cash, to
acquire 2,800 Common Shares pursuant to the exercise of 2,800 Stock Options that
were granted to him on March 14, 1996 under the 1995 Plan. In addition,
effective July 17, 1996 and February 2, 1998, the Company loaned to Anthony M.
Frank, an independent trust manager of the Company, $187,425 and $45,298 on a
recourse basis. Mr. Frank used the proceeds of the first loan, together with
$75.00 in cash, to acquire 15,000 Common Shares pursuant to the exercise of
15,000 Stock Options that were granted to him on May 5, 1994 under the 1994
Plan. Mr. Frank used the proceeds of his second loan, together with $28.00 in
cash, to acquire 2,800 Common Shares pursuant to the exercise of 2,800 Stock
Options that were granted to him on March 14, 1996 under the 1995 Plan. In
addition, effective June 10, 1997, the Company loaned to Paul E. Rowsey, III, an
independent trust manager of the Company, $419,997 on a recourse basis. Mr.
Rowsey used the proceeds of his loan, together with $328.00 in cash, to acquire
30,000 Common Shares pursuant to the exercise of 30,000 Stock Options which were
granted to him on May 5, 1994 under the 1994 Plan, and 2,800 Common Shares
pursuant to the exercise of 2,800 Options which were granted to him on March 14,
1996 under the 1995 Plan. Each of the loans bears interest at a fixed annual
rate equal to the distribution yield on the Common Shares as of March 14, 1996,
March 14, 1997 and March 30, 1998 (for Mr. Meyerson's respective loans), July
17, 1996 and February 2, 1998 (for Mr. Frank's respective loans) and June 10,
1997 (for Mr. Rowsey's loan), the effective date of the applicable loan. Each
loan is payable, interest only, on a quarterly basis from distributions paid
with respect to such Common Shares, with a final payment of all accrued and
unpaid interest plus the entire original principal balance due on March 14,
2001, March 14, 2002, and March 30, 2003 (for Mr. Meyerson's respective loans),
July 17, 2001 and February 2, 2003 (for Mr. Frank's respective loans) and June
10, 2002 (for Mr. Rowsey's loan). Mr. Meyerson's loans are secured by 7,500
Units, 2,800 Common Shares and 2,800 Common Shares respectively, owned by Mr.
Meyerson; Mr. Frank's loans are secured by 15,000 Common Shares and 2,800 Common
Shares respectively, owned by Mr. Frank; and Mr. Rowsey's loan is secured by
32,800 Common Shares owned by Mr. Rowsey.
On September 13, 1996, the Company purchased 1,187,906 shares of the Series
B Non-Voting Participating Convertible Preferred Stock of Fresh Choice, Inc.
("Fresh Choice"), a chain of upscale casual restaurants, for a total of
approximately $5.5 million ($4.63 per share). Richard E. Rainwater, the Chairman
of the Board of the Company, is currently the holder of approximately 8.7% of
the voting common stock of Fresh Choice. The Company also acquired an
immediately exercisable option to purchase up to an additional 593,953 shares of
the Series C Non-Voting Participating Convertible Preferred Stock of Fresh
Choice at a price of $6.00 per share for a period of three years following the
closing of the initial purchase of preferred stock (the "Series C Stock
Option"). The Series C preferred stock is senior to the common stock of Fresh
Choice and all other preferred stock of Fresh Choice and is convertible into
shares of the common stock of Fresh Choice on a one-for-one basis. The Series B
preferred stock is senior to the common stock of Fresh Choice and the Series A
Voting Participating Convertible Preferred Stock of Fresh Choice. The Series B
preferred stock also is convertible into shares of Series A preferred stock of
Fresh Choice (which would then be convertible into shares of common stock) on a
one-for-one basis (and, under certain conditions relating to the earnings of
Fresh Choice, the holders of Series A preferred stock may elect a majority of
the directors of Fresh Choice), provided that, in order to preserve the
Company's REIT status, conversion is not permitted if it would cause the Company
to be treated as the owner of more than 10% of the outstanding voting securities
of Fresh Choice for federal income tax purposes. Outstanding Series A preferred
stock may be converted into common stock at Fresh Choice's election if the
common stock trades at $15.00 per share. On August 11, 1997, the Company entered
into a Call Option Agreement (the "Option Agreement") with Mr. Rainwater whereby
Mr. Rainwater granted to the Company an option (the "Fresh Choice Option"),
exercisable at any time through September 12, 2006, to purchase all, but not
less than all, of the 496,400 shares of common stock of Fresh Choice owned by
Mr. Rainwater (the "Fresh Choice Common Shares") at Mr. Rainwater's investment
cost in the Fresh
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<PAGE> 19
Choice Shares ($3.6 million, plus incidental expenses, plus Mr. Rainwater's
cost of funds at the rate of LIBOR plus 50 basis points, with interest adjusted
and compounded quarterly). During the pendency of the Fresh Choice Option, Mr.
Rainwater retains sole beneficial ownership of the Fresh Choice Common Shares
unless and until the Fresh Choice Common Shares are sold. Prior to selling any
of the Fresh Choice Common Shares, Mr. Rainwater must give the Company notice of
his intention to sell so that the Company may exercise the Fresh Choice Option;
if the Company fails to exercise the Fresh Choice Option within two business
days, Mr. Rainwater may sell the Fresh Choice Common Shares but must remit to
the Company the cash proceeds from the sale, net of his investment cost in the
Fresh Choice Shares sold. Also on August 11, 1997, as compensation for services
rendered in connection with the Fresh Choice investment, the Company entered
into an Agreement of Assignment with Mr. Rainwater's wholly owned corporation,
Rainwater, Inc., pursuant to which the Company assigned to Rainwater, Inc. the
Series C Stock Option with respect to 80,000 shares of Series C preferred stock
covered by that option. According to Mr. Rainwater's Schedule 13D amendment
filed on November 16, 1997, Rainwater, Inc. assigned its interest in the Series
C Stock Option to two individuals associated with it on August 11, 1997.
In April 1997, the Company established COI. COI was formed to be the lessee
and operator of certain assets to be acquired by the Company and to perform the
Intercompany Agreement, pursuant to which each has agreed to provide the other
with rights to participate in certain transactions. Mr. Rainwater and John C.
Goff are, respectively, the Chairman of the Board and the Vice Chairman of the
Board of both the Company and COI, and Gerald W. Haddock serves as the
President, Chief Executive Officer and a member of the Board of the Company, COI
and the General Partner. Messrs. Frank and Rowsey are Members of the Board of
the Company and of COI. In addition, as of April 9, 1998, Messrs. Rainwater,
Goff and Haddock, together with the other management of the Company,
beneficially own an approximately 14.3% equity interest in the Company, both
directly through their ownership of 9,190,948 Common Shares of the Company
(inclusive of vested Stock Options) and indirectly through their ownership of
9,529,030 Unit (inclusive of vested Unit Options). Messrs. Rainwater, Goff and
Haddock own approximately 15% of the outstanding common stock of COI through
their ownership of 1,281,189 shares of COI common stock and 413,857 shares
underlying vested stock options. COI was spun off as a separate public company
effective June 12, 1997.
Pursuant to a Purchase Agreement dated as of September 29, 1997, the Company
sold to COI, for approximately $2.2 million, 100% of the voting stock of Desert
Mountain Development Corporation ("DM Development"), which holds a 93% general
partner interest in the partnership which owns Desert Mountain, a
master-planned, luxury residential and recreational community in Scottsdale,
Arizona. The Company retained all of the non-voting stock, representing a 95%
economic interest, in DM Development.
Pursuant to a Purchase Agreement dated as of September 29, 1997, the Company
sold to COI, for approximately $2.2 million, 100% of the voting stock of The
Woodlands Land Company, Inc., which holds a 42.5% general partner interest in a
partnership that owns approximately 8,900 acres zoned for commercial and
residential development, as well as a realty office, an athletic center and
interests in both a title company and mortgage company. The Company retained all
of the non-voting stock, representing a 95% economic interest, in The Woodlands
Land Company, Inc.
Effective December 30, 1997, the Company sold to COI, for approximately $8.0
million, 100% of the voting stock of two corporations, one of which owns a 40%
interest in the partnership that owns Americold Corporation ("Americold") and
the other of which owns a 40% interest in the partnership that owns URS
Logistics, Inc. ("URS"). Americold and URS are owners and operators of 80
refrigerated warehouses. The Company retained all of the non-voting stock,
representing a 95% economic interest, in each of the two corporations.
In connection with the formation and capitalization of COI, the Company
contributed $14.1 million to COI and loaned to COI approximately $35.9 million
pursuant to a five-year loan (the "Term Loan"), which bears interest at 12% per
annum and is collateralized by a lien on certain assets which COI now owns or
may acquire in the future. Also in connection with COI's formation, the Company
loaned to COI approximately $20.4 million pursuant to a line of credit (the
"Line of Credit"), which bears interest at 12% per annum and is collateralized
by a lien on certain assets which COI now owns or may acquire in the future. As
of December 31, 1997, the outstanding balances on the Term Loan and the Line of
Credit were approximately $26.0 million and $13.7 million, respectively.
18
<PAGE> 20
In connection with the acquisition by COI, effective July 31, 1997, of the
companies that leased the hotel properties owned by the Company as of July 31,
1997 (as discussed below), COI acquired 100% of an entity which has outstanding
debt under notes of approximately $2.4 million and $.65 million (the "CR Notes")
payable to the Company in connection with acquisition of Canyon Ranch-Tucson.
The CR Notes bear interest at a rate of 10.75% per annum, are secured by deeds
of trust for certain real and personal property and mature in August 2003. The
outstanding balance at December 31, 1997 on the CR Notes was approximately $2.66
million. In addition, in connection with this transaction, COI acquired 100% of
an entity which has outstanding debt under a promissory note of approximately
$.19 million payable to the Company in connection with acquisition of Sonoma
Mission Inn & Spa. This note bears interest at a rate of 7.5% per annum and
matures in November 2006. The outstanding balance of the note at December 31,
1997 was approximately $0.19 million.
In connection with COI's acquisition on September 22, 1997 of a two-thirds
interest in the joint venture that owns the Houston Center Athletic Club and a
$5.0 million note receivable from the joint venture, the Company made loans to
COI of $0.8 million and $1.0 million, each of which bears interest at 8.5% per
annum. The $1.0 million note is secured by the $5.0 million note receivable from
the joint venture and matures on September 21, 1998. The $0.8 million note is
secured by COI's interest in the joint venture and matures on September 22,
2002. The outstanding balances at December 31, 1997 on the $0.8 million and $1.0
million loans were approximately $0.79 million and $1.0 million, respectively.
On June 11, 1997, DBL Holdings, Inc. ("DBL"), a wholly owned subsidiary of
the Company, was formed and acquired from COI a 12.39% limited partner interest
in the partnership that owns the Dallas Mavericks for approximately $12.6
million. COI originally acquired the limited partner interest from an unrelated
party for approximately $12.4 million. The voting common stock, which represents
a 5% economic interest in DBL, was sold to Gerald W. Haddock and John C. Goff
for $126,000 on June 27, 1997. The Company retained all non-voting common stock,
representing a 95% economic interest in DBL.
On June 17, 1997, the Company acquired, for an aggregate purchase price of
approximately $387.2 million, the 90 behavioral healthcare facilities (the
"Behavioral Healthcare Facilities") (and two additional behavioral healthcare
facilities that subsequently were sold) that were previously owned and operated
by a subsidiary of Magellan Health Services, Inc. ("Magellan") and warrants to
purchase shares of Magellan's common stock. The purchase price was determined as
the result of negotiations between the Vice Chairman and the Chief Executive
Officer of the Company and Magellan. The warrants permit the Company to purchase
up to 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 May 1998 through May 2009. In connection with the transaction, COI
and Magellan formed CBHS to operate the Behavioral Healthcare Facilities. COI
and Magellan each own a 50% interest in CBHS. CBHS leases the Behavioral
Healthcare Facilities from the Company pursuant to a lease with an initial
12-year term (subject to four, five-year renewal options at fair market value
for annual minimum rent of approximately $41.7 million, increasing annually at a
5% compounded annual rate; additionally, CBHS pays $20 million annually, at
least $10 million of which must be used for capital expenditures and up to $10
million of which may be used for capital expenditures and other purposes.
Effective March 3, 1998, COI entered into a definitive agreement to acquire
Magellan's 50% interest in CBHS in exchange for $30 million in common stock of
COI. In a related transaction, CBHS executed a definitive agreement to purchase
from Magellan, for approximately $280 million, certain assets and intellectual
property rights used by Magellan to supply franchise services to CBHS. The
agreement provides for the elimination of the franchise fee that is payable by
CBHS to Magellan. The transactions are subject to a number of conditions,
including customary closing conditions, a condition that CBHS obtain funds
sufficient to finance the purchase and certain regulatory conditions. The
transactions, as currently structured, will not affect the arrangements pursuant
to which CBHS leases the Behavioral Healthcare Facilities from the Company.
A limited partnership, the sole general partner of which is Rainwater, Inc.,
owns warrants to acquire 1,942,996 shares of Magellan common stock (the
"Warrants"). Mr. Rainwater, either directly or indirectly, owns 2,457,278 shares
of Magellan, and warrants to acquire approximately 1,212,483 of the Warrants.
Messrs. Goff and Haddock each own, directly or indirectly, approximately 42,000
shares and 57,000 shares, respectively, and approximately
19
<PAGE> 21
28,500 shares, of Magellan common stock. These warrants entitle the warrant
holders to purchase, at any time until the January 25, 2000 expiration date,
shares of Magellan common stock at a purchase price of $26.15 per share.
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, an affiliate of 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 continue to own beneficially a specified minimum
number of shares of Magellan common stock. Mr. Rainwater's affiliate proposed
Ms. Moore as its nominee for director, and Ms. Moore was elected a director by
the Magellan Board on February 22, 1996.
As of July 31, 1997, the Company owned four full-service/luxury hotels,
Hyatt Regency Beaver Creek, Denver Marriott City Center, Hyatt Regency
Albuquerque and Sonoma Mission Inn & Spa, and two destination health and fitness
resorts, Canyon Ranch-Tucson and Canyon Ranch-Lenox (collectively, the "July
1997 Hotel Properties"). As of December 31, 1997, the Company owned eight hotel
properties consisting of the July 1997 Hotel Properties, the Four Seasons
Hotel-Houston (acquired September 22, 1997) and Ventana Country Inn (acquired
December 19, 1997) (collectively, the "Hotel Properties"). Through July 30,
1997, the Company leased each of the July 1997 Hotel Properties to independent
companies pursuant to six separate leases. These companies were owned 4.5% by
each of John C. Goff and Gerald W. Haddock, each of whom is an officer and
member of the Board of the Company, and 91% by other persons. Effective July 31,
1997, COI acquired each of these companies. The terms of the leases of the Hotel
Properties were not modified in connection with the acquisition. As of December
31, 1997, the Company has leased each of the Hotel Properties to subsidiaries of
COI (the "Hotel Lessees") pursuant to eight separate leases. Under the leases,
each having a term of 10 years, the Hotel Lessees have assumed the rights and
obligations of the property owner under the management agreement with the hotel
operators, as well as the obligation to pay all property taxes and other charges
against the property. Each of the leases provides for the payment by the
respective Hotel Lessee of (i) base rent, with periodic rent increases, and (ii)
percentage rent based on a percentage of gross revenues, room revenues, food and
beverage revenues, or a combination thereof, above a specified amount. Under the
leases, the former hotel lessees paid an aggregate of approximately $19.0
million in rent to the Company during the seven months ended July 31, 1997. The
Hotel Lessees of the eight Hotel Properties owned as of December 31, 1997 paid
an aggregate of approximately $16.2 million in rent to the Company during the
five months ended December 31, 1997. In addition, on January 23, 1998, a
subsidiary of COI entered into a 10-year lease agreement with the Company with
respect to the Omni Austin Hotel. The terms of the Omni Austin Hotel lease are
substantially similar to those for the other Hotel Properties. The Company
expects to receive minimum lease payments from COI during 1998 under all of the
Hotel Property leases of approximately $34.8 million.
Management believes that the foregoing transactions are on terms no less
favorable than those that could have been obtained in comparable transactions
with unaffiliated parties.
SHAREHOLDER PROPOSALS AT THE COMPANY'S 1998
ANNUAL MEETING OF SHAREHOLDERS
Shareholders who intend to submit proposals for consideration at the
Company's 1999 annual meeting of shareholders must submit such proposals to the
Company no later than December 15, 1998, in order to be considered for inclusion
in the proxy statement and form of proxy to be distributed by the Board of Trust
Managers in connection with that meeting. Shareholder proposals should be
submitted to David M. Dean, Senior Vice President, Law, and Secretary, 777 Main
Street, Suite 2100, Fort Worth, Texas 76102.
ANNUAL REPORT AND FINANCIAL INFORMATION
The Company's 1997 Annual Report to Shareholders for the year ended December
31, 1997, this Proxy Statement and the form of proxy will all be mailed together
to shareholders on or about April 28, 1998. The principal executive offices of
the Company are located at 777 Main Street, Suite 2100, Fort Worth, Texas 76102.
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<PAGE> 22
The information concerning the Company's consolidated and combined financial
statements, selected financial data and management's discussion and analysis of
financial condition and results of operations is incorporated by reference to
the Company's Annual Report.
