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Filed Pursuant to Rule 424(b)(5)
Registration No: 333-38071
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED DECEMBER 12, 1997)
747,598 SHARES
[CRESCENT LOGO]
COMMON SHARES
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Crescent Real Estate Equities Company is a fully integrated real estate
company operated as a real estate investment trust for federal income tax
purposes. We are offering all 747,598 Common Shares, par value $.01 per share,
to Warburg Dillon Read LLC, as agent for UBS AG, London Branch, in satisfaction
of certain obligations to UBS, and we will not receive any cash proceeds from
this offering other than $7,476, which represents the aggregate par value of the
Common Shares offered to UBS.
Our Common Shares are listed on the New York Stock Exchange under the
symbol "CEI." On April 28, 1999, the closing sales price of the Common Shares on
the NYSE was $22.375 per share. We expect to deliver the Common Shares offered
hereby in New York, New York, on or about April 30, 1999.
SEE "RISK FACTORS" BEGINNING ON PAGE 2 IN THE ACCOMPANYING PROSPECTUS FOR A
DISCUSSION OF CERTAIN FACTORS YOU SHOULD CONSIDER BEFORE YOU DECIDE TO MAKE AN
INVESTMENT IN THE COMPANY.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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The date of this Prospectus Supplement is April 29, 1999.
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THE COMPANY
The term "Company" includes, unless the context otherwise requires,
Crescent Real Estate Equities Company, a Texas real estate investment trust
("Crescent Equities"), Crescent Real Estate Equities Limited Partnership, a
Delaware limited partnership (the "Operating Partnership"), Crescent Real Estate
Equities, Ltd., a Delaware corporation which is the sole general partner of the
Operating Partnership ("CREE Ltd."), and the other subsidiaries of Crescent
Equities.
The Company is a fully integrated real estate company, operated as a real
estate investment trust for federal income tax purposes (a "REIT"), which owns a
portfolio of real estate assets (the "Properties") located primarily in 17
metropolitan submarkets in Texas. The Properties include 89 office properties
(the "Office Properties") with an aggregate of approximately 31.8 million net
rentable square feet, 89 behavioral healthcare facilities (the "Behavioral
Healthcare Properties"), seven full-service hotels with a total of 2,257 rooms
and two destination health and fitness resorts that can accommodate up to 462
guests daily (collectively, the "Hotel Properties"), real estate mortgages
relating to and non-voting common stock in five unconsolidated residential
development corporations (the "Residential Development Corporations"), which in
turn, through joint venture or partnership arrangements, own interests in 13
residential development properties (the "Residential Development Properties"),
and seven retail properties with an aggregate of approximately .8 million net
rentable square feet (the "Retail Properties"). The Company also owns an
indirect 39.6% interest in three partnerships, each of which owns one or more
corporations or limited liability companies (the "Refrigerated Storage
Corporations") that own 92 refrigerated warehouses with an aggregate of
approximately 19.2 million square feet (the "Refrigerated Storage Properties").
The Company owns its assets and carries on its operations and other
activities, including providing management, leasing and development services for
certain of its Properties, through the Operating Partnership and its other
subsidiaries. The Company also has an economic interest in the development
activities of the Residential Development Corporations. The structure of the
Company is designed to facilitate and maintain its qualification as a REIT and
to permit persons contributing Properties (or interests therein) to the Company
to defer some or all of the tax liability that they otherwise might incur.
As of April 28, 1999, 126,072,457 common shares of beneficial interest, par
value $.01 per share (the "Common Shares"), 6,503,431 units of ownership
interest in the Operating Partnership ("Units"), which are exchangeable into
Common Shares on a one-for-two basis, and 8,000,000 shares of 6 3/4% Series A
Convertible Cumulative Preferred Shares of beneficial interest, par value $.01
per share (the "Series A Preferred Shares") were outstanding.
The Company's executive offices are located at 777 Main Street, Suite 2100,
Fort Worth, Texas 76102, and its telephone number is (817) 321-2100.
RECENT DEVELOPMENTS
On April 14, 1999, the Company and Station Casinos, Inc. ("Station")
announced that they had entered into an agreement (the "Settlement Agreement")
for the mutual settlement and release of all claims between the Company and
Station arising out of the Agreement and Plan of Merger between the Company and
Station, which was terminated by the Company in August 1998. As part of the
Settlement Agreement, the Company paid $15 million to Station.
USE OF PROCEEDS
The Company is issuing the Common Shares in satisfaction of certain
obligations to UBS AG, London Branch ("UBS"), as successor to Union Bank of
Switzerland, London Branch ("UBS-LB") under a forward share purchase agreement
between the Company and UBS-LB entered into as of August 12, 1997 (the "Forward
Share Purchase Agreement"). Accordingly, the Company will not receive any cash
proceeds from this offering except $7,476 in payment of the aggregate par value
of the Common Shares offered hereby. Such proceeds will be used for working
capital.
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STRUCTURE OF THE COMPANY
The Company is a fully integrated real estate company operating as a REIT
for federal income tax purposes. The Company provides management, leasing and
development services with respect to certain of its Properties. The direct and
indirect subsidiaries of Crescent Equities include the Operating Partnership;
CREE Ltd.; seven single purpose limited partnerships in which the Operating
Partnership owns substantially all of the economic interests directly through
its approximately 99% limited partner interest in such seven limited
partnerships, with the remaining interests owned indirectly by the Company
through seven separate corporations, each of which is a wholly owned subsidiary
of CREE Ltd. and is also the approximately 1% general partner of one of the
seven limited partnerships. The Company conducts all of its business through the
Operating Partnership and its other subsidiaries. The Company also has an
economic interest in the development activities of the Residential Development
Corporations. The Company owns the real estate mortgages and non-voting common
stock representing interests ranging from approximately 40% to 95% in the
Residential Development Corporations. In addition, the Company owns an indirect
39.6% interest in three partnerships, each of which owns one or more of the
Refrigerated Storage Corporations. The Refrigerated Storage Corporations own the
Refrigerated Storage Properties. The Company also has a 42.5% partnership
interest in a partnership whose primary holdings consist of a 364-room executive
conference center and general partner interests ranging from one percent to 50%
in additional office, retail, multi-family and industrial properties.
The following table sets forth, by subsidiary, the Properties owned by such
subsidiary:
<TABLE>
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Operating Partnership: The Addison, Addison Tower, The Amberton, AT&T Building,
Austin Centre, Bank One Center(1), Bank One Tower, BP Plaza,
Canyon Ranch-Tucson, Cedar Springs Plaza, Central Park
Plaza, Chancellor Park(2), Concourse Office Park, Datran
Center, Denver Marriott City Center, Energy Centre, Fountain
Place, Four Seasons-Houston, Frost Bank Plaza, Greenway I,
Greenway IA, Greenway II, Houston Center Office Properties,
MCI Tower, The Meridian, Miami Center, Omni Austin Hotel,
One Preston Park, Palisades Central I, Palisades Central II,
The Park Shops at Houston Center, Post Oak Central,
Reverchon Plaza, Sonoma Mission Inn & Spa, Spectrum
Center(3), Stemmons Place, Three Westlake Park(4), Trammell
Crow Center(5), Washington Harbour, The Woodlands Office
Properties(6), The Woodlands Retail Properties(6), Valley
Centre, Ventana Country Inn, Walnut Green, 44 Cook, 55
Madison, 160 Spear Street, 301 Congress Avenue(7), 1615
Poydras, 1800 West Loop South, 3333 Lee Parkway, 5050 Quorum
and 6225 North 24th Street
Crescent Real Estate The Aberdeen, The Avallon, Caltex House, The Citadel, The
Funding I, L.P. ("Funding Crescent Atrium, The Crescent Office Towers, Regency Plaza
I"): One, UPR Plaza and Waterside Commons
Crescent Real Estate Albuquerque Plaza, Barton Oaks Plaza One, Briargate Office
Funding II, L.P. and Research Center, Hyatt Regency Albuquerque, Hyatt
("Funding II") Regency Beaver Creek, Las Colinas Plaza, Liberty Plaza I &
II, MacArthur Center I & II, Ptarmigan Place, Stanford
Corporate Centre, Two Renaissance Square and 12404 Park
Central
Crescent Real Estate Greenway Plaza Portfolio(8)
Funding III, IV and
V, L.P. ("Funding III,
IV and V"):
Crescent Real Estate Canyon Ranch-Lenox
Funding VI, L.P.
("Funding VI"):
Crescent Real Estate Behavioral Healthcare Properties
Funding VII, L.P.
("Funding VII"):
</TABLE>
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(1) The Company has a 49.5% limited partner interest and a .5% general partner
interest in the partnership that owns Bank One Center.
(2) The Company owns Chancellor Park through its ownership of the mortgage note
secured by the building and through its direct and indirect interests in the
partnership which owns the building.
(3) The Company owns the principal economic interest in Spectrum Center through
an interest in Spectrum Mortgage Associates, L.P., which owns both a
mortgage note secured by the building and the ground lessor's interest in
the land underlying the building.
(4) The Company owns the principal economic interest in Three Westlake Park
through its ownership of a mortgage note secured by the building.
(5) The Company owns the principal economic interest in Trammell Crow Center
through its ownership of fee simple title to the Property (subject to a
ground lease and a leasehold estate regarding the building) and two mortgage
notes encumbering the leasehold interests in the land and building.
(6) The Company owns a 75% limited partner interest and an approximate 10%
indirect general partner interest in the partnerships that own The Woodlands
Office and Retail Properties.
(7) The Company owns a 1% general partner interest and a 49% limited partner
interest in the partnership that owns 301 Congress Avenue.
(8) Funding III owns the Greenway Plaza Portfolio, except for the central heated
and chilled water plant building and Coastal Tower office building, both
located within Greenway Plaza, which are owned by Funding IV and Funding V,
respectively.
FEDERAL INCOME TAX CONSIDERATIONS
INTRODUCTION
The following is a summary of the material federal income tax
considerations associated with an investment in the Common Shares offered hereby
prepared by Shaw Pittman Potts & Trowbridge, tax counsel to Crescent Equities
("Tax Counsel"). This discussion is based upon the laws, regulations and
reported rulings and decisions in effect as of the date of this Prospectus
Supplement, all of which are subject to change, retroactively or prospectively,
and to possibly differing interpretations. This discussion does not purport to
deal with the federal income or other tax consequences applicable to all
investors in light of their particular investment circumstances or to all
categories of investors, some of whom may be subject to special rules
(including, for example, insurance companies, tax-exempt organizations,
financial institutions, broker-dealers, foreign corporations and persons who are
not citizens or residents of the United States). No ruling on the federal, state
or local tax considerations relevant to the operation of Crescent Equities or
the Operating Partnership or to the purchase, ownership or disposition of the
Common Shares is being requested from the Internal Revenue Service (the "IRS")
or from any other tax authority. Tax Counsel has rendered certain opinions
discussed herein and believes that if the IRS were to challenge the conclusions
of Tax Counsel, such conclusions would prevail in court. Opinions of counsel are
not binding on the IRS or on the courts, however, and no assurance can be given
that the conclusions reached by Tax Counsel would be sustained in court.
EACH PROSPECTIVE PURCHASER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF THE COMMON SHARES IN AN ENTITY ELECTING TO BE TAXED AS A REAL
ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER
TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, DISPOSITION AND ELECTION AND OF
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF CRESCENT EQUITIES
Crescent Equities has made an election to be treated as a real estate
investment trust under Sections 856 through 860 of the Code (as used in this
section, a "REIT"), commencing with its taxable year ended December 31, 1994.
Crescent Equities believes that it was organized and has operated in such a
manner so as to qualify as a REIT, and Crescent Equities intends to continue to
operate in such a manner, but no assurance can be given that it has operated in
a manner so as to qualify, or will operate in a manner so as to continue to
qualify as a REIT.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal
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income tax treatment of a REIT and its shareholders. This summary is qualified
in its entirety by the applicable Code sections, rules and regulations
promulgated thereunder, and administrative and judicial interpretations thereof.
In the opinion of Tax Counsel, Crescent Equities qualified as a REIT under
the Code with respect to its taxable years ending on or before December 31,
1998, and is organized in conformity with the requirements for qualification as
a REIT, its manner of operation has enabled it to meet the requirements for
qualification as a REIT as of the date of this Prospectus Supplement, and its
proposed manner of operation will enable it to meet the requirements for
qualification as a REIT in the future. It must be emphasized that this opinion
is based on various assumptions relating to the organization and operation of
Crescent Equities and the Operating Partnership and is conditioned upon certain
representations made by Crescent Equities and the Operating Partnership as to
certain relevant factual matters, including matters related to the organization,
expected operation, and assets of Crescent Equities and the Operating
Partnership. Moreover, continued qualification as a REIT will depend upon
Crescent Equities' ability to meet, through actual annual operating results, the
distribution levels, stock ownership requirements and the various qualification
tests and other requirements imposed under the Code, as discussed below.
Accordingly, no assurance can be given that the actual stock ownership of
Crescent Equities, the mix of its assets, or the results of its operations for
any particular taxable year will satisfy such requirements. For a discussion of
the tax consequences of failing to qualify as a REIT, see "-- Taxation of
Crescent Equities -- Failure to Qualify," below.
If Crescent Equities qualifies for taxation as a REIT, it generally will
not be subject to federal corporate income taxes on its net income that is
currently distributed to shareholders. This treatment substantially eliminates
the "double taxation" (at the corporate and shareholder levels) that generally
results from investments in a corporation. However, Crescent Equities will be
subject to federal income tax in the following circumstances. First, Crescent
Equities will be taxed at regular corporate rates on any undistributed "real
estate investment trust taxable income," including undistributed net capital
gains. Second, under certain circumstances, Crescent Equities may be subject to
the "alternative minimum tax" on its items of tax preference. Third, if Crescent
Equities has "net income from foreclosure property," it will be subject to tax
on such income at the highest corporate rate. "Foreclosure property" generally
means real property and any personal property incident to such real property
which is acquired as a result of a default either on a lease of such property or
on indebtedness which such property secured and with respect to which an
appropriate election is made, except that property ceases to be foreclosure
property (i) after a three-year period (which in certain cases may be extended
by the IRS) or, if earlier, (ii) when the REIT engages in construction on the
property (other than for completion of certain improvements) or for more than 90
days uses the property in a business conducted other than through an independent
contractor. "Net income from foreclosure property" means (a) the net gain from
disposition of foreclosure property which is held primarily for sale to
customers in the ordinary course of business or (b) other net income from
foreclosure property which would not satisfy the 75% gross income test
(discussed below). Property is not eligible for the election to be treated as
foreclosure property if the loan or lease with respect to which the default
occurs (or is imminent) was made, entered into or acquired by the REIT with an
intent to evict or foreclose or when the REIT knew or had reason to know that
default would occur. Fourth, if Crescent Equities has "net income derived from
prohibited transactions," such income will be subject to a 100% tax. The term
"prohibited transaction" generally includes a sale or other disposition of
property (other than foreclosure property) that is held primarily for sale to
customers in the ordinary course of business. Fifth, if Crescent Equities should
fail to satisfy the 75% gross income test or the 95% gross income test (as
discussed below), but has nonetheless maintained its qualification as a REIT
because certain other requirements have been met, it will be subject to a 100%
tax on the net income attributable to the greater of the amount by which
Crescent Equities fails the 75% or 95% test. Sixth, if, during each calendar
year, Crescent Equities fails to distribute at least the sum of (i) 85% of its
"real estate investment trust ordinary income" for such year, (ii) 95% of its
"real estate investment trust capital gain net income" for such year, and (iii)
any undistributed taxable income from prior periods, Crescent Equities will be
subject to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed. Seventh, if Crescent Equities acquires any asset
from a C corporation (i.e., a corporation generally subject to full corporate
level tax) in a transaction in which the basis of the asset in Crescent
Equities' hands is determined by reference to the basis of the asset (or any
other property) in the hands of the corporation, and
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Crescent Equities recognizes gain on the disposition of such asset during the
10-year period beginning on the date on which such asset was acquired by
Crescent Equities, then, to the extent of such property's "built-in" gain (the
excess of the fair market value of such property at the time of acquisition by
Crescent Equities over the adjusted basis in such property at such time), such
gain will be subject to tax at the highest regular corporate rate applicable (as
provided in regulations that have not yet been promulgated by the United States
Department of Treasury under the Code ("Treasury Regulations"). (The results
described above with respect to the recognition of "built-in gain" assume that
Crescent Equities will make an election pursuant to IRS Notice 88-19.)
Requirements of Qualification. The Code defines a REIT as a corporation,
trust or association (1) which is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares, or by
transferable certificates of beneficial interest; (3) which would be taxable as
a domestic corporation, but for Sections 856 through 860 of the Code; (4) which
is neither a financial institution nor an insurance company subject to certain
provisions of the Code; (5) the beneficial ownership of which is held (without
reference to any rules of attribution) by 100 or more persons; (6) during the
last half of each taxable year, not more than 50% in value of the outstanding
stock of which is owned, directly or indirectly, by five or fewer individuals
(as defined in the Code); and (7) which meets certain other tests, described
below, regarding certain distributions and the nature of its income and assets
and properly files an election to be treated as a REIT. The Code provides that
conditions (1) through (4), inclusive, must be met during the entire taxable
year and that condition (5) must be met during at least 335 days of a taxable
year of 12 months (or during a proportionate part of a taxable year of less than
12 months).
Crescent Equities issued sufficient Common Shares pursuant to the Initial
Offering to satisfy the requirements described in (5) and (6) above. While the
existence of the rights granted to limited partners of the Operating Partnership
("Limited Partners") to exchange their Units for Common Shares (the "Exchange
Rights") may cause Limited Partners to be deemed to own the Common Shares they
could acquire through the Exchange Rights, the amount of Common Shares that can
be acquired at any time through the Exchange Rights is limited to an amount
which, together with any other Common Shares actually or constructively deemed,
under the Declaration of Trust, to be owned by any person, does not exceed the
Ownership Limit (as defined in the accompanying Prospectus). See "Description of
Common Shares -- Ownership Limits and Restrictions on Transfer" in the
accompanying Prospectus. Moreover, the ownership of Common Shares generally is
limited under the Ownership Limit to no more than 8.0% of the outstanding Common
Shares. In addition, the Declaration of Trust provides for restrictions
regarding the ownership or transfer of Common Shares in order to assist Crescent
Equities in continuing to satisfy the share ownership requirements described in
(5) and (6) above. See "Description of Common Shares -- Ownership Limits and
Restrictions on Transfer" in the accompanying Prospectus.
If a REIT owns a "qualified REIT subsidiary," the Code provides that the
qualified REIT subsidiary is disregarded for federal income tax purposes, and
all assets, liabilities and items of income, deduction and credit of the
qualified REIT subsidiary are treated as assets, liabilities and such items of
the REIT itself. A qualified REIT subsidiary is a corporation all of the capital
stock of which has been owned by the REIT from the commencement of such
corporation's existence. CREE Ltd., CRE Management I Corp. ("Management I"), CRE
Management II Corp. ("Management II"), CRE Management III Corp. ("Management
III"), CRE Management IV Corp. ("Management IV"), CRE Management V Corp.
("Management V"), CRE Management VI Corp. ("Management VI"), CRE Management VII
Corp. ("Management VII"), CresCal Properties, Inc. and Crescent Commercial
Realty Corp. are qualified REIT subsidiaries, and thus all of the assets (i.e.,
the respective partnership interests in the Operating Partnership, Funding I,
Funding II, Funding III, Funding IV, Funding V, Funding VI, Funding VII, CresCal
Properties, L.P. and Crescent Commercial Realty Holdings, L.P.), liabilities and
items of income, deduction and credit of CREE Ltd., Management I, Management II,
Management III, Management IV, Management V, Management VI, Management VII,
CresCal Properties, Inc. and Crescent Commercial Realty Corp. are treated as
assets and liabilities and items of income, deduction and credit of Crescent
Equities. Unless otherwise required, all references to Crescent Equities in this
"Federal Income Tax Considerations" section refer to Crescent Equities and its
qualified REIT subsidiaries.
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In the case of a REIT which is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the assets and gross
income (as defined in the Code) of the partnership attributed to the REIT shall
retain the same character as in the hands of the partnership for purposes of
Section 856 of the Code, including satisfying the gross income tests and the
assets tests described below. Thus, Crescent Equities' proportionate share of
the assets, liabilities and items of income of the Operating Partnership and its
subsidiary partnerships are treated as assets, liabilities and items of income
of Crescent Equities for purposes of applying the requirements described herein.
Income Tests. In order for Crescent Equities to achieve and maintain its
qualification as a REIT, there are currently two requirements relating to
Crescent Equities' gross income that must be satisfied annually. First, at least
75% of Crescent Equities' gross income (excluding gross income from prohibited
transactions) for each taxable year must consist of temporary investment income
or of certain defined categories of income derived directly or indirectly from
investments relating to real property or mortgages on real property. These
categories include, subject to various limitations, rents from real property,
interest on mortgages on real property, gains from the sale or other disposition
of real property (including interests in real property and in mortgages on real
property) not primarily held for sale to customers in the ordinary course of
business, income from foreclosure property, and amounts received as
consideration for entering into either loans secured by real property or
purchases or leases of real property. Second, at least 95% of Crescent Equities'
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived from income qualifying under the 75% test and from
dividends, other types of interest and gain from the sale or disposition of
stock or securities, or from any combination of the foregoing. In addition, for
each taxable year before 1998, gain from the sale or other disposition of stock
or securities held for less than one year, gain from prohibited transactions and
gain on the sale or other disposition of real property held for less than four
years (apart from involuntary conversions and sales of foreclosure property)
must have represented less than 30% of Crescent Equities' gross income
(including gross income from prohibited transactions) for such taxable year.
Crescent Equities, through its partnership interests in the Operating
Partnership and all subsidiary partnerships, believes it satisfied all three of
these income tests for 1994, 1995, 1996 and 1997, satisfied the two current
tests for 1998 and expects to satisfy the two current tests for 1999 and
subsequent taxable years.
The bulk of the Operating Partnership's income is currently derived from
rents with respect to the Office Properties, the Behavioral Healthcare
Facilities, the Hotel Properties and the Retail Properties. Rents received by
Crescent Equities will qualify as "rents from real property" in satisfying the
gross income requirements for a REIT described above only if several conditions
are met. First, the amount of rent must not be based in whole or in part on the
income or profits of any person. An amount received or accrued generally will
not be excluded from the term "rents from real property" solely by reason of
being based on a fixed percentage or percentages of receipts or sales. Second,
the Code provides that rents received from a tenant will not qualify as "rents
from real property" if the REIT, or an owner of 10% or more of the REIT,
directly or constructively, owns 10% or more of such tenant (a "Related Party
Tenant"). Third, if rent attributable to personal property leased in connection
with a lease of real property is greater than 15% of the total rent received
under the lease, then the portion of rent attributable to such personal property
will not qualify as "rents from real property." Finally, for rents to qualify as
"rents from real property," a REIT generally must not operate or manage the
property or furnish or render services to the tenants of such property, other
than through an independent contractor from whom the REIT derives no revenue,
except that a REIT may directly perform services which are "usually or
customarily rendered" in connection with the rental of space for occupancy,
other than services which are considered to be rendered to the occupant of the
property. However, a REIT is currently permitted to earn up to one percent of
its gross income from tenants, determined on a property-by-property basis, by
furnishing services that are noncustomary or provided directly to the tenants,
without causing the rental income to fail to qualify as rents from real
property.
Crescent Equities, based in part upon opinions of Tax Counsel as to whether
various tenants, including CBHS and the lessees of the Hotel Properties,
constitute Related Party Tenants, believes that the income it received in 1994,
1995, 1996, 1997 and 1998 and will receive in subsequent taxable years from (i)
charging rent for any property that is based in whole or in part on the income
or profits of any person (except by reason
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of being based on a percentage or percentages of receipts or sales, as described
above); (ii) charging rent for personal property in an amount greater than 15%
of the total rent received under the applicable lease; (iii) directly performing
services considered to be rendered to the occupant of property or which are not
usually or customarily furnished or rendered in connection with the rental of
real property; or (iv) entering into any lease with a Related Party Tenant, will
not cause Crescent Equities to fail to meet the gross income tests. Opinions of
counsel are not binding upon the IRS or any court, and there can be no assurance
that the IRS will not assert a contrary position successfully.
The Operating Partnership will also receive fixed and contingent interest
on the Residential Development Property Mortgages. Interest on mortgages secured
by real property satisfies the 75% and 95% gross income tests only if it does
not include any amount the determination of which depends in whole or in part on
the income of any person, except that (i) an amount is not excluded from the
term "interest" solely by reason of being based on a fixed percentage or
percentages of receipts or sales and (ii) income derived from a shared
appreciation provision in a mortgage is treated as gain recognized from the sale
of the secured property. Certain of the Residential Development Property
Mortgages contain provisions for contingent interest based upon property sales.
In the opinion of Tax Counsel, each of the Residential Development Property
Mortgages constitutes debt for federal income tax purposes, any contingent
interest derived therefrom will be treated as being based on a fixed percentage
of sales, and therefore all interest derived therefrom will constitute interest
received from mortgages for purposes of the 75% and 95% gross income tests. If,
however, the contingent interest provisions were instead characterized as shared
appreciation provisions, any resulting income would, because the underlying
properties are primarily held for sale to customers in the ordinary course, be
subject to a 100% tax.
In connection with the 1997 distribution by Crescent Equities of the common
stock of Crescent Operating, Inc., Crescent Equities was required to recognize
gain equal to the excess, if any, of the fair market value of the assets
distributed over the basis of Crescent Equities in them. In the opinion of Tax
Counsel, such gain constituted gain on the sale of stock or securities for
purposes of the gross income tests. Opinions of counsel are not binding upon the
IRS or any court, and there can be no assurance that the IRS will not assert a
contrary position successfully.
In applying the 95% and 75% gross income tests to Crescent Equities, it is
necessary to consider the form in which certain of its assets are held, whether
that form will be respected for federal income tax purposes, and whether, in the
future, such form may change into a new form with different tax attributes (for
example, as a result of a foreclosure on debt held by the Operating
Partnership). For example, the Residential Development Properties are primarily
held for sale to customers in the ordinary course of business, and the income
resulting from such sales, if directly attributed to Crescent Equities, would
not qualify under the 75% and 95% gross income tests. In addition, such income
would be considered "net income from prohibited transactions" and thus would be
subject to a 100% tax. The income from such sales, however, will be earned by
the Residential Development Corporations rather than by the Operating
Partnership and will be paid to the Operating Partnership in the form of
interest and principal payments on the Residential Development Property
Mortgages or distributions with respect to the stock in the Residential
Development Corporations held by the Operating Partnership. In similar fashion,
the income earned by the Hotel Properties, if directly attributed to Crescent
Equities, would not qualify under the 75% and 95% gross income tests because it
would not constitute "rents from real property." Such income is, however, earned
by the lessees of these Hotel Properties and what the Operating Partnership
receives from the lessees of these Hotel Properties is rent. Comparable issues
are raised by the Operating Partnership's acquisition of subordinated debt
secured by a Florida hotel and by the acquisition of an interest in the
partnership which owns the hotel by Crescent Development Management Corporation
("CDMC"), one of the Residential Development Corporations. If such debt were
recharacterized as equity, or if the ownership of the partnership were
attributed from CDMC to the Operating Partnership, the Operating Partnership
would be treated as receiving income from hotel operations rather than interest
income on the debt or dividend income from CDMC. Furthermore, if Crescent
Operating, Inc. were treated for federal income tax purposes as not separate
from or an agent of either Crescent Equities or the Operating Partnership, or if
Crescent Equities and Crescent Operating, Inc. were treated as a "stapled
entity," the income, assets and activities of Crescent Operating, Inc. would be
considered to be the income, assets and
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activities of Crescent Equities, with the result that Crescent Equities would
fail to meet the 95% and 75% gross income tests or the asset tests discussed
below. A similar consequence might follow if the loan of approximately $35.9
million from the Operating Partnership to Crescent Operating, Inc. does not
constitute debt for federal income tax purposes.
Tax Counsel is of the opinion that (i) the Residential Development
Properties or any interest therein will be treated as owned by the Residential
Development Corporations, (ii) amounts derived by the Operating Partnership from
the Residential Development Corporations under the terms of the Residential
Development Property Mortgages will qualify as interest or principal, as the
case may be, paid on mortgages on real property for purposes of the 75% and 95%
gross income tests, (iii) amounts derived by the Operating Partnership with
respect to the stock of the Residential Development Corporations will be treated
as distributions on stock (i.e., as dividends, a return of capital, or capital
gain, depending upon the circumstances) for purposes of the 75% and 95% gross
income tests, (iv) the leases of the Hotel Properties will be treated as leases
for federal income tax purposes, and the rent payable thereunder will qualify as
"rents from real property," (v) the subordinated debt secured by the Florida
hotel will be treated as debt for federal income tax purposes, the income
payable thereunder will qualify as interest, and CDMC's ownership of the
partnership interest in the partnership which owns the hotel will not be
attributed to the Operating Partnership, (vi) Crescent Operating, Inc. will be
treated for federal income tax purposes as a corporate entity separate from and
not an agent of either Crescent Equities or the Operating Partnership, and
Crescent Operating, Inc. and Crescent Equities will not be treated as a stapled
entity for federal income tax purposes; and (vii) the loan of approximately
$35.9 million from the Operating Partnership to Crescent Operating, Inc. will
constitute debt for federal income tax purposes. Tax Counsel has provided
opinions similar to those provided with respect to the Operating Partnership's
investment in the Residential Development Corporations with respect to its
investments in certain other entities through non-voting securities and secured
debt. Investors should be aware that there are no controlling Treasury
Regulations, published rulings, or judicial decisions involving transactions
with terms substantially the same as those with respect to the Residential
Development Corporations, the leases of the Hotel Properties and the
relationship among Crescent Equities, the Operating Partnership and Crescent
Operating, Inc. Therefore, the opinions of Tax Counsel with respect to these
matters are based upon all of the facts and circumstances and upon rulings and
judicial decisions involving situations that are considered to be analogous.
Opinions of counsel are not binding upon the IRS or any court, and there can be
no assurance that the IRS will not assert successfully a contrary position. If
one or more of the leases of the Hotel Properties is not a true lease, part or
all of the payments that the Operating Partnership receives from the respective
lessee may not satisfy the various requirements for qualification as "rents from
real property," or the Operating Partnership might be considered to operate the
Hotel Properties directly. In that case, Crescent Equities likely would not be
able to satisfy either the 75% or 95% gross income tests and, as a result,
likely would lose its REIT status. Similarly, if the IRS were to challenge
successfully the arrangements with the Residential Development Corporations or
Crescent Operating, Inc., Crescent Equities' qualification as a REIT could be
jeopardized.
If any of the Residential Development Properties were to be acquired by the
Operating Partnership as a result of foreclosure on any of the Residential
Development Property Mortgages, or if any of the Hotel Properties were to be
operated directly by the Operating Partnership or a subsidiary partnership as a
result of a default by the lessee under the lease, such property would
constitute foreclosure property for three years following its acquisition (or
for up to an additional three years if an extension is granted by the IRS),
provided that (i) the Operating Partnership or its subsidiary partnership
conducts sales or operations through an independent contractor; (ii) the
Operating Partnership or its subsidiary partnership does not undertake any
construction on the foreclosed property other than completion of improvements
which were more than 10% complete before default became imminent; and (iii)
foreclosure was not regarded as foreseeable at the time Crescent Equities
acquired the Residential Development Property Mortgages or leased the Hotel
Properties. For so long as any of these properties constitutes foreclosure
property, the income from such sales would be subject to tax at the maximum
corporate rates and would qualify under the 75% and 95% gross income tests.
However, if any of these properties does not constitute foreclosure property at
any time in the future, income earned from the disposition or operation of such
property will not qualify under the 75% and 95% gross income tests.
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With regard to this and the prior sale of the Common Shares to Warburg
Dillon Read LLC, as agent for UBS, it is possible that Crescent Equities may
receive certain payments in Common Shares, depending on the market price of the
Common Shares upon settlement of the forward share purchase agreements. In the
opinion of Tax Counsel, such payments will not constitute gross income and
therefore will not be taken into account in the application of gross income
tests.
Crescent Equities anticipates that it will have certain income which will
not satisfy the 75% or the 95% gross income test. For example, income from
dividends on the stock of the Residential Development Corporations and any gain
recognized upon the distribution of the common stock of Crescent Operating, Inc.
will not satisfy the 75% gross income test. Furthermore, the amount of gain
Crescent Equities recognized upon this distribution depended upon the fair
market value of the common stock of Crescent Operating, Inc. at the time of the
distribution. Prior to the distribution, the Board of Trust Managers of Crescent
Equities determined that the value of this stock was $.99 per share but there
can be no assurance that the IRS will agree with this determination in light of
various factors including subsequent trading prices. It is also possible that
certain income resulting from the use of creative financing or acquisition
techniques would not satisfy the 75% or 95% gross income tests. Crescent
Equities believes, however, that the aggregate amount of nonqualifying income
will not cause Crescent Equities to exceed the limits on nonqualifying income
under the 75% or 95% gross income tests.
If Crescent Equities fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
These relief provisions generally will be available if Crescent Equities'
failure to meet such tests is due to reasonable cause and not to willful
neglect, Crescent Equities attaches a schedule of the sources of its income to
its tax return, and any incorrect information on the schedule is not due to
fraud with intent to evade tax. It is not possible, however, to state whether in
all circumstances Crescent Equities would be entitled to the benefit of these
relief provisions. As discussed above, even if these relief provisions apply, a
tax equal to approximately 100% of the corresponding net income would be imposed
with respect to the excess of 75% or 95% of Crescent Equities' gross income over
Crescent Equities' qualifying income in the relevant category, whichever is
greater.
Asset Tests. Crescent Equities, at the close of each quarter of its taxable
year, must also satisfy three tests relating to the nature of its assets. First,
at least 75% of the value of Crescent Equities' total assets must be represented
by real estate assets (including (i) its allocable share of real estate assets
held by the Operating Partnership, any partnerships in which the Operating
Partnership owns an interest, or qualified REIT subsidiaries of Crescent
Equities and (ii) stock or debt instruments held for not more than one year
purchased with the proceeds of a stock offering or long-term (at least five
years) debt offering of Crescent Equities), cash, cash items and government
securities. Second, not more than 25% of Crescent Equities' total assets may be
represented by securities other than those in the 75% asset class. Third, of the
investments included in the 25% asset class, the value of any one issuer's
securities owned by Crescent Equities may not exceed 5% of the value of Crescent
Equities' total assets, and Crescent Equities may not own more than 10% of any
one issuer's outstanding voting securities. The 25% and 5% tests generally must
be met for any quarter in which Crescent Equities acquires securities of an
issuer. Thus, this requirement must be satisfied not only on the date Crescent
Equities first acquires corporate securities, but also each time Crescent
Equities increases its ownership of corporate securities (including as a result
of increasing its interest in the Operating Partnership either with the proceeds
of the Offering or by acquiring Units from Limited Partners upon the exercise of
their Exchange Rights).
The Operating Partnership owns 100% of the non-voting stock of each
Residential Development Corporation. In addition, the Operating Partnership owns
the Residential Development Property Mortgages. As stated above, in the opinion
of Tax Counsel each of these mortgages will constitute debt for federal income
tax purposes and therefore will be treated as a real estate asset; however, the
IRS could assert that such mortgages should be treated as equity interests in
their respective issuers, which would not qualify as real estate assets. By
virtue of its ownership of partnership interests in the Operating Partnership,
Crescent Equities will be considered to own its pro rata share of these assets.
Neither Crescent Equities nor the Operating Partnership, however, will directly
own more than 10% of the voting securities of any Residential
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Development Corporation at the end of any quarter of Crescent Equities' taxable
year, and, in the opinion of Tax Counsel, Crescent Equities will not be
considered to own any of such voting securities. In addition, Crescent Equities
and its senior management believe that Crescent Equities' pro rata shares of the
value of the securities of each Residential Development Corporation do not
separately exceed 5% of the total value of Crescent Equities' total assets. This
belief is based in part upon its analysis of the estimated values of the various
securities owned by the Operating Partnership relative to the estimated value of
the total assets owned by the Operating Partnership. No independent appraisals
will be obtained to support this conclusion, and Tax Counsel, in rendering its
opinion as to the qualification of Crescent Equities as a REIT, is relying on
the conclusions of Crescent Equities and its senior management as to the value
of the various securities and other assets. There can be no assurance, however,
that the IRS might not contend that the values of the various securities held by
Crescent Equities through the Operating Partnership separately exceed the 5%
value limitation or, in the aggregate, exceed the 25% value limitation or that
the voting securities of the Residential Development Corporations should be
considered to be owned by Crescent Equities. Finally, if the Operating
Partnership were treated for tax purposes as a corporation rather than as a
partnership, Crescent Equities would violate the 10% of voting securities and 5%
of value limitations, and the treatment of any of the Operating Partnership's
subsidiary partnerships as a corporation rather than as a partnership could also
violate one or the other, or both, of these limitations. In the opinion of Tax
Counsel, for federal income tax purposes the Operating Partnership and all the
subsidiary partnerships will be treated as partnerships and not as either
associations taxable as corporations or publicly traded partnerships. See
"-- Tax Aspects of the Operating Partnership and the Subsidiary Partnerships"
below.
As noted above, the 5% and 25% value requirements must be satisfied not
only on the date Crescent Equities first acquires corporate securities, but also
each time Crescent Equities increases its ownership of corporate securities
(including as a result of increasing its interest in the Operating Partnership
either with the proceeds of the Offering or by acquiring Units from Limited
Partners upon the exercise of their Exchange Rights). Although Crescent Equities
plans to take steps to ensure that it satisfies the 5% and 25% value tests for
any quarter with respect to which retesting is to occur, there can be no
assurance that such steps (i) will always be successful; (ii) will not require a
reduction in Crescent Equities' overall interest in the various corporations; or
(iii) will not restrict the ability of the Residential Development Corporations
to increase the sizes of their respective businesses, unless the value of the
assets of Crescent Equities is increasing at a commensurate rate.
Annual Distribution Requirements. In order to qualify as a REIT, Crescent
Equities is required to distribute dividends (other than capital gain dividends)
to its shareholders in an amount at least equal to (A) the sum of (i) 95% of the
"real estate investment trust taxable income" of Crescent Equities (computed
without regard to the dividends paid deduction and Crescent Equities' net
capital gain) and (ii) 95% of the net income (after tax), if any, from
foreclosure property, minus (B) certain excess noncash income. Such
distributions must be paid in the taxable year to which they relate, or in the
following taxable year if declared before Crescent Equities timely files its tax
return for such year, and if paid on or before the date of the first regular
dividend payment after such declaration. To the extent that Crescent Equities
does not distribute all of its net capital gain or distributes at least 95%, but
less than 100%, of its "real estate investment trust taxable income," as
adjusted, it will be subject to tax thereon at regular capital gains and
ordinary corporate tax rates. Furthermore, if Crescent Equities should fail to
distribute, during each calendar year, at least the sum of (i) 85% of its "real
estate investment trust ordinary income" for such year; (ii) 95% of its "real
estate investment trust capital gain income" for such year; and (iii) any
undistributed taxable income from prior periods, Crescent Equities would be
subject to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed.
Crescent Equities believes that it has made and intends to make timely
distributions sufficient to satisfy all annual distribution requirements. In
this regard, the limited partnership agreement of the Operating Partnership (the
"Operating Partnership Agreement") authorizes CREE Ltd., as general partner, to
take such steps as may be necessary to cause the Operating Partnership to
distribute to its partners an amount sufficient to permit Crescent Equities to
meet these distribution requirements. It is possible, however, that, from time
to time, Crescent Equities may experience timing differences between (i) the
actual receipt of income and actual
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payment of deductible expenses and (ii) the inclusion of such income and
deduction of such expenses in arriving at its "real estate investment trust
taxable income." Issues may also arise as to whether certain items should be
included in income. For example, Tax Counsel has opined that the Operating
Partnership should include in income only its share of the interest income
actually paid on the two mortgage notes secured by Spectrum Center and Three
Westlake Park, respectively, and the two mortgage notes secured by Trammell Crow
Center, all of which were acquired at a substantial discount, rather than its
share of the amount of interest accruing pursuant to the terms of these
investments, but opinions of counsel are not binding on the IRS or the courts.
In this regard, the IRS has taken a contrary view in a recent technical advice
memorandum concerning the accrual of original issue discount. The Company
believes, however, that even if the Operating Partnership were to include in
income the full amount of interest income accrued on these notes, and the
Operating Partnership were not allowed any offsetting deduction for the amount
of such interest to the extent it is uncollectible, the Company nonetheless
would be able to satisfy the 95% distribution requirement without borrowing
additional funds or distributing stock dividends (as discussed below). In
addition, it is possible that certain creative financing or creative acquisition
techniques used by the Operating Partnership may result in income (such as
income from cancellation of indebtedness or gain upon the receipt of assets in
foreclosure whose fair market value exceeds the Operating Partnership's basis in
the debt which was foreclosed upon) which is not accompanied by cash proceeds.
In this regard, the modification of a debt can result in taxable gain equal to
the difference between the holder's basis in the debt and the principal amount
of the modified debt. Tax Counsel has opined that the four mortgage notes
secured by Spectrum Center, Three Westlake Park and Trammell Crow Center, were
not modified in the hands of the Operating Partnership. Based on the foregoing,
Crescent Equities may have less cash available for distribution in a particular
year than is necessary to meet its annual 95% distribution requirement or to
avoid tax with respect to capital gain or the excise tax imposed on certain
undistributed income for such year. To meet the 95% distribution requirement
necessary to qualify as a REIT or to avoid tax with respect to capital gain or
the excise tax imposed on certain undistributed income, Crescent Equities may
find it appropriate to arrange for borrowings through the Operating Partnership
or to pay distributions in the form of taxable share dividends.
Under certain circumstances, Crescent Equities may be able to rectify a
failure to meet the distribution requirement for a year by paying "deficiency
dividends" to stockholders in a later year, which may be included in Crescent
Equities' deduction for dividends paid for the earlier year. Thus, Crescent
Equities may be able to avoid being taxed on amounts distributed as deficiency
dividends; however, Crescent Equities will be required to pay interest based
upon the amount of any deduction taken for deficiency dividends.
Ownership Information. Pursuant to applicable Treasury Regulations, in
order to be treated as a REIT, Crescent Equities must maintain certain records
and request certain information from its shareholders designed to disclose the
actual ownership of its Equity Shares (as defined in the accompanying
Prospectus). Crescent Equities believes that it has complied and intends to
continue to comply with such requirements.
Failure to Qualify. If Crescent Equities fails to qualify as a REIT in any
taxable year and the relief provisions do not apply, Crescent Equities will be
subject to tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. Distributions to shareholders in any year in
which Crescent Equities fails to qualify as a REIT will not be deductible by
Crescent Equities; nor will they be required to be made. If Crescent Equities
fails to qualify as a REIT, then, to the extent of Crescent Equities' current
and accumulated earnings and profits, all distributions to shareholders will be
taxable as ordinary income and, subject to certain limitations of the Code,
corporate distributees may be eligible for the dividends received deduction.
Unless entitled to relief under specific statutory provisions, Crescent Equities
will also be disqualified from electing to be treated as a REIT for the four
taxable years following the year during which it ceased to qualify as a REIT. It
is not possible to state whether in all circumstances Crescent Equities would be
entitled to such statutory relief.
Pending Legislation. On February 1, 1999, President Clinton submitted to
the Congress a proposed budget for fiscal year 2000. The budget proposal
included a variety of proposed income tax changes, not yet reduced to statutory
language, three of which pertain directly to REITs. First, a regular corporation
with a fair market value of more than $5,000,000 that elects REIT status or
merges into a REIT would be treated as if it had liquidated and distributed all
of its assets to its shareholders, and its shareholders had then contributed the
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assets to the electing or existing REIT. This deemed liquidation would cause the
regular corporation to be taxed as if it had sold its assets for fair market
value and would cause its shareholders to be taxed as if they had sold their
stock for fair market value. This proposal would be effective for elections that
are first effective for a taxable year beginning after January 1, 2000, and for
mergers after December 31, 1999. Second, a new ownership restriction would be
placed on REITs; any one person would be prohibited from owning, directly or
through attribution, more than 50 percent of the total combined voting power of
all voting stock or more than 50 percent of the total value of shares of all
classes of stock of a REIT. This proposal would be effective for entities
electing REIT status for taxable years beginning on or after the date of first
congressional committee action with respect to the budget proposal and for
entities that have elected REIT status but do not have significant business
assets or activities as of such date. Third, the ownership by REITs of
subsidiaries would be limited. Under current law, REITs may not own more than 10
percent of the voting stock of a regular corporation, and many REITs (including
Crescent Equities) own, in compliance with this rule, nonvoting interests that
represent a significant portion of the value of certain subsidiaries
("Noncontrolled Subsidiaries"). Under the proposal, REITs also would not be
permitted to own more than 10 percent of the value of all classes of stock of a
corporation, thereby prohibiting the current business structures of Crescent
Equities and many other REITs. The proposal would, at the same time, authorize
the ownership by REITs of certain "taxable REIT subsidiaries," but would impose
on such corporations certain unfavorable features, such as the inability to
deduct any interest paid to the REIT. This proposal would be effective after the
date of enactment. There would be no grandfathered status for Noncontrolled
Subsidiaries currently in existence, but the proposal would provide a transition
period, as yet unspecified, to allow for conversion of Noncontrolled
Subsidiaries into taxable REIT subsidiaries.
It is not clear whether any of these proposals will be enacted and, if they
are, what their effective dates will be. Additional proposals may be made by the
Administration or by members of Congress. It is impossible to predict the nature
of those proposals, whether they would be enacted, and their effect on Crescent
Equities. There can be no assurance, however, that changes in legislation would
not have a material adverse effect on Crescent Equities.
TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS
For purposes of this summary, a "U.S. Shareholder" means a beneficial owner
of Common Shares, who or that is for U.S. federal income tax purposes (i) a
citizen or resident of the United States, (ii) a corporation created or
organized in or under the laws of the United States or any state or political
subdivision thereof, (iii) an estate the income of which is subject to United
States federal income taxation regardless of its source, (iv) a trust if a court
within the United States is able to exercise primary jurisdiction over
administration of the trust and one or more U.S. persons have authority to
control all substantial decisions of the trust, or (v) a partnership to the
extent the interest therein is owned by any of the persons described in clauses
(i), (ii), (iii), or (iv) above. As used herein, the term "Non-U.S. Shareholder"
means a beneficial owner of Common Shares, that is not a U.S. Shareholder.
Any distribution declared by Crescent Equities in October, November or
December of any year payable to a shareholder of record on a specified date in
any such month shall be treated as both paid by Crescent Equities and received
by the shareholder on December 31 of such year, provided that the distribution
is actually paid by Crescent Equities during January of the following calendar
year. As long as Crescent Equities qualifies as a REIT, distributions made to
Crescent Equities' taxable U.S. Shareholders out of Crescent Equities' current
or accumulated earnings and profits (and not designated as capital gain
dividends) will be taken into account by such U.S. Shareholders as ordinary
income and, for corporate U.S. Shareholders, will not be eligible for the
dividends received deduction. Distributions that are properly designated as
capital gain dividends will be taxed as long-term capital gains (to the extent
they do not exceed Crescent Equities' actual net capital gain for the taxable
year) without regard to the period for which the U.S. Shareholder has held its
Common Shares. However, corporate U.S. Shareholders may be required to treat up
to 20% of certain capital gain dividends as ordinary income. In addition,
Crescent Equities may elect to retain and pay income tax on its net long-term
capital gains. If Crescent Equities so elects, each U.S. Shareholder will take
into income the U.S. Shareholder's share of the retained capital gain as
long-term capital gain and will receive a credit or
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refund for that U.S. Shareholder's share of the tax paid by Crescent Equities.
The U.S. Shareholder will increase the basis of such U.S. Shareholder's shares
by an amount equal to the excess of the retained capital gain included in the
U.S. Shareholder's income over the tax deemed paid by such U.S. Shareholder.
Distributions in excess of current and accumulated earnings and profits will not
be taxable to a U.S. Shareholder to the extent that they do not exceed the
adjusted basis of the shareholder's Common Shares, but rather will reduce the
adjusted basis of such shares. To the extent that distributions in excess of
current and accumulated earnings and profits exceed the adjusted basis of a U.S.
Shareholder's Common Shares, such distributions will be included in income as
long-term capital gain (or short-term capital gain if the shares have been held
for one year or less) assuming the shares are a capital asset in the hands of
the U.S. Shareholder. U.S. Shareholders may not include any net operating losses
or capital losses of Crescent Equities in their respective income tax returns.
In general, any loss upon a sale or exchange of shares by a U.S.
Shareholder who has held such shares for six months or less (after applying
certain holding period rules) will be treated as a long-term capital loss to the
extent of distributions from Crescent Equities required to be treated by such
U.S. Shareholder as long-term capital gain.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Most tax-exempt employees' pension trusts are not subject to federal income
tax except to the extent of their receipt of "unrelated business taxable income"
as defined in Section 512(a) of the Code ("UBTI"). Distributions by the Company
to a shareholder that is a tax-exempt entity should not constitute UBTI,
provided that the tax-exempt entity has not financed the acquisition of its
Common Shares with acquisition indebtedness" within the meaning of the Code and
the Common Shares and not otherwise used in an unrelated trade or business of
the tax-exempt entity. In addition, certain pension trusts that own more than
10% of a "pension-held REIT" must report a portion of the dividends that they
receive from such a REIT as UBTI. The Company has not been and does not expect
to be treated as a pension-held REIT for purposes of this rule.
TAXATION OF FOREIGN SHAREHOLDERS
The rules governing United States federal income taxation of Non-U.S.
Shareholders are complex, and no attempt will be made herein to provide more
than a summary of such rules. Prospective Non-U.S. Shareholders should consult
with their own tax advisors to determine the impact of federal, state and local
tax laws with regard to an investment in Common Shares, including any reporting
requirements.
Distributions that are not attributable to gain from sales or exchanges by
Crescent Equities of United States real property interests and not designated by
Crescent Equities as capital gain dividends will be treated as dividends of
ordinary income to the extent that they are made out of current or accumulated
earnings and profits of Crescent Equities. Such distributions ordinarily will be
subject to a withholding tax equal to 30% of the gross amount of the
distribution, unless an applicable tax treaty reduces that tax. A number of U.S.
tax treaties that reduce the rate of withholding tax on corporate dividends do
not reduce, or reduce to a lesser extent, the rate of withholding applied to
dividends from a REIT. Crescent Equities expects to withhold U.S. income tax at
the rate of 30% on the gross amount of any such distribution made to a Non-U.S.
Shareholder unless (i) a lower treaty rate applies (and, with regard to payments
on or after January 1, 1999, the Non-U.S. Shareholder (1) files IRS Form W-8
with Crescent Equities and, (2) if the Common Shares are not traded on an
established securities market, acquires a taxpayer identification number from
the IRS) or (ii) the Non-U.S. Shareholder has filed an IRS Form 4224 (or, with
respect to payments on or after January 1, 1999, files IRS Form W-8) with
Crescent Equities claiming that the distribution is effectively connected with
the Non-U.S. Shareholder's conduct of a U.S. trade or business. Distributions in
excess of Crescent Equities' current and accumulated earnings and profits will
be treated as a return of capital to the extent of the adjusted basis of a
Non-U.S. Shareholder's shares and thereafter as capital gain, which will be
taxable to the extent that the Non-U.S. Shareholder would otherwise be subject
to tax on any gain from the sale or disposition of the Common Shares, as
described below. Distributions in excess of current and accumulated earnings and
profits are currently subject to withholding at the same 30% or lower treaty
rate applicable to ordinary income
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dividends, but a Non-U.S. Shareholder may seek a refund of amounts of tax
withheld in excess of the Non-U.S. Shareholder's actual U.S. tax liability,
provided the required information is furnished to the IRS. Beginning with
payments made on or after January 1, 1999, Crescent Equities will be permitted,
but not required, to make reasonable estimates of the extent to which
distributions exceed current and accumulated earnings and profits. Such
distributions will generally be subject to a 10% withholding tax, which may be
refunded to the extent it exceeds the shareholder's actual U.S. tax liability,
provided the required information is furnished to the IRS.
For any year in which Crescent Equities qualifies as a REIT, distributions
that are attributable to gain from sales or exchanges by Crescent Equities of
United States real property interests will be taxed to a Non-U.S. Shareholder
under the provisions of the Foreign Investment in Real Property Tax Act of 1980,
as amended ("FIRPTA"). Under FIRPTA, distributions attributable to gain from
sales of United States real property interests are taxed to a Non-U.S.
Shareholder as if such gain were effectively connected with a United States
business. Non-U.S. Shareholders would thus be taxed at the normal capital gain
rates applicable to U.S. shareholders (subject to applicable alternative minimum
tax and a special alternative minimum tax in the case of nonresident alien
individuals). Also, distributions subject to FIRPTA may be subject to a 30%
branch profits tax in the hands of a foreign corporate shareholder, subject to
possible exemption or rate reduction under an applicable tax treaty. Crescent
Equities is required to withhold 35% of any distribution that could be
designated by Crescent Equities as a capital gain dividend. This amount is
creditable against the Non-U.S. Shareholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of Common Shares
generally will not be taxed under FIRPTA if Crescent Equities is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the shares was held directly
or indirectly by foreign persons. Crescent Equities believes that it is, and
currently expects to continue to be, a "domestically controlled REIT," and in
such case the sale of Common Shares would not be subject to taxation under
FIRPTA. However, gain not subject to FIRPTA nonetheless will be taxable to a
Non-U.S. Shareholder if (i) investment in the Common Shares is treated as
effectively connected with the Non-U.S. Shareholder's U.S. trade or business or
(ii) the Non-U.S. Shareholder is a nonresident alien individual who was present
in the United States for 183 days or more during the taxable year and certain
other conditions are met. Effectively connected gain realized by a foreign
corporate shareholder may be subject to an additional 30% branch profits tax,
subject to possible exemption or rate reduction under an applicable tax treaty.
If the gain on the sale of Common Shares is subject to taxation under FIRPTA,
the Non-U.S. Shareholder would be subject to the same treatment as U.S.
Shareholders with respect to such gain (subject to the additional 30% branch
profits tax and a special alternative minimum tax in the case of nonresident
alien individuals), and the purchaser of the Common Shares would be required to
withhold and remit to the IRS 10% of the purchase price.
TAX ASPECTS OF THE OPERATING PARTNERSHIP AND THE SUBSIDIARY PARTNERSHIPS
The following discussion summarizes certain federal income tax
considerations applicable solely to Crescent Equities' investment in the
Operating Partnership and its subsidiary partnerships and represents the views
of Tax Counsel. The discussion does not cover state or local tax laws or any
federal tax laws other than income tax laws.
Classification of the Operating Partnership and its Subsidiary Partnerships
for Tax Purposes. In the opinion of Tax Counsel, based on the provisions of the
Operating Partnership Agreement and the partnership agreements of the various
subsidiary partnerships, certain factual assumptions and certain representations
described in the opinion, the Operating Partnership and the subsidiary
partnerships will each be treated as a partnership and neither an association
taxable as a corporation for federal income tax purposes, nor a "publicly traded
partnership" taxable as a corporation. Unlike a ruling from the IRS, however, an
opinion of counsel is not binding on the IRS or the courts, and no assurance can
be given that the IRS will not challenge the status of the Operating Partnership
and its subsidiary partnerships as partnerships for federal income tax purposes.
If for any reason the Operating Partnership were taxable as a corporation rather
than as a partnership for federal income tax purposes, Crescent Equities would
fail to qualify as a REIT because it would not be able to satisfy
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the income and asset requirements. See "-- Taxation of Crescent Equities,"
above. In addition, any change in the Operating Partnership's status for tax
purposes might be treated as a taxable event, in which case Crescent Equities
might incur a tax liability without any related cash distributions. See
"-- Taxation of Crescent Equities," above. Further, items of income and
deduction for the Operating Partnership would not pass through to the respective
partners, and the partners would be treated as shareholders for tax purposes.
The Operating Partnership would be required to pay income tax at regular
corporate tax rates on its net income, and distributions to partners would
constitute dividends that would not be deductible in computing the Operating
Partnership's taxable income. Similarly, if any of the subsidiary partnerships
were taxable as a corporation rather than as a partnership for federal income
tax purposes, such treatment might cause Crescent Equities to fail to qualify as
a REIT, and in any event such partnership's items of income and deduction would
not pass through to its partners, and its net income would be subject to income
tax at regular corporate rates.
Income Taxation of the Operating Partnership and its Subsidiary
Partnerships. A partnership is not a taxable entity for federal income tax
purposes. Rather, Crescent Equities will be required to take into account its
allocable share of the Operating Partnership's income, gains, losses, deductions
and credits for any taxable year of such partnership ending within or with the
taxable year of Crescent Equities, without regard to whether Crescent Equities
has received or will receive any cash distributions. The Operating Partnership's
income, gains, losses, deductions and credits for any taxable year will include
its allocable share of such items from its subsidiary partnerships.
Tax Allocations with Respect to Pre-Contribution Gain. Pursuant to Section
704(c) of the Code, income, gain, loss and deduction attributable to appreciated
property that is contributed to a partnership in exchange for an interest in the
partnership must be allocated for federal income tax purposes in a manner such
that the contributor is charged with the unrealized gain associated with the
property at the time of the contribution. The amount of such unrealized gain is
generally equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution (the "Book-Tax Difference"). In
general, the fair market value of the properties initially contributed to the
Operating Partnership were substantially in excess of their adjusted tax bases.
The Operating Partnership Agreement requires that allocations attributable to
each item of initially contributed property be made so as to allocate the tax
depreciation available with respect to such property first to the partners other
than the partner that contributed the property, to the extent of, and in
proportion to, such partners' share of book depreciation, and then, if any tax
depreciation remains, to the partner that contributed the property. Accordingly,
the depreciation deductions allocable will not correspond exactly to the
percentage interests of the partners. Upon the disposition of any item of
initially contributed property, any gain attributable to an excess at such time
of basis for book purposes over basis for tax purposes will be allocated for tax
purposes to the contributing partner and, in addition, the Operating Partnership
Agreement provides that any remaining gain will be allocated for tax purposes to
the contributing partners to the extent that tax depreciation previously
allocated to the noncontributing partners was less than the book depreciation
allocated to them. These allocations are intended to be consistent with Section
704(c) of the Code and with Treasury Regulations thereunder. The tax treatment
of properties contributed to the Operating Partnership subsequent to its
formation is expected generally to be consistent with the foregoing.
In general, the contributing partners will be allocated lower amounts of
depreciation deductions for tax purposes and increased taxable income and gain
on sale by the Operating Partnership of one or more of the contributed
properties. These tax allocations will tend to reduce or eliminate the Book-Tax
Difference over the life of the Operating Partnership. However, the special
allocation rules of Section 704(c) of the Code do not always entirely rectify
the Book-Tax Difference on an annual basis. Thus, the carryover basis of the
contributed assets in the hands of the Operating Partnership will cause Crescent
Equities to be allocated lower depreciation and other deductions. This may cause
Crescent Equities to recognize taxable income in excess of cash proceeds, which
might adversely affect Crescent Equities' ability to comply with the REIT
distribution requirements. See "-- Taxation of Crescent Equities," above.
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<PAGE> 17
SALE OF PROPERTY
Generally, any gain realized by the Operating Partnership on the sale of
real property, if the property is held for more than one year, will be long-term
capital gain, except for any portion of such gain that is treated as
depreciation or cost recovery recapture.
Crescent Equities' share of any gain realized on the sale of any property
held by the Operating Partnership as inventory or other property held primarily
for sale to customers in the ordinary course of the Operating Partnership's
business, however, will be treated as income from a prohibited transaction that
is subject to a 100% penalty tax. See "-- Taxation of Crescent Equities," above.
Such prohibited transaction income will also have an adverse effect upon
Crescent Equities' ability to satisfy the income tests for status as a REIT for
federal income tax purposes. Under existing law, whether property is held as
inventory or primarily for sale to customers in the ordinary course of the
Operating Partnership's business is a question of fact that depends on all the
facts and circumstances with respect to the particular transaction. The
Operating Partnership intends to hold its properties for investment with a view
to long-term appreciation, to engage in the business of acquiring, developing,
owning and operating the properties, and to make such occasional sales of
properties as are consistent with these investment objectives.
TAXATION OF THE RESIDENTIAL DEVELOPMENT CORPORATIONS
A portion of the amounts to be used to fund distributions to shareholders
is expected to come from the Residential Development Corporations through
dividends on non-voting common stock thereof held by the Operating Partnership
and interest on the Residential Development Property Mortgages held by the
Operating Partnership. The Residential Development Corporations will not qualify
as REITs and will pay federal, state and local income taxes on their taxable
incomes at normal corporate rates, which taxes will reduce the cash available
for distribution by Crescent Equities to its shareholders. Crescent Equities
anticipates that, initially, deductions for interest and amortization will
largely offset the otherwise taxable income of the Residential Development
Corporations, but there can be no assurance that this will be the case or that
the IRS will not challenge such deductions. Any federal, state or local income
taxes that the Residential Development Corporations are required to pay will
reduce the cash available for distribution by Crescent Equities to its
shareholders.
STATE AND LOCAL TAXES
Crescent Equities and its shareholders may be subject to state and local
tax in various states and localities, including those states and localities in
which it or they transact business, own property, or reside. The tax treatment
of Crescent Equities and the shareholders in such jurisdictions may differ from
the federal income tax treatment described above. Consequently, prospective
shareholders should consult their own tax advisors regarding the effect of state
and local tax laws upon an investment in the Common Shares.
In particular, the State of Texas imposes a franchise tax upon corporations
and limited liability companies that do business in Texas. The Texas franchise
tax is imposed on each such entity with respect to the entity's "net taxable
capital" and its "net taxable earned surplus" (generally, the entity's federal
taxable income, with certain adjustments). The franchise tax on net taxable
capital is imposed at the rate of 0.25% of an entity's net taxable capital. The
franchise tax rate on "net taxable earned surplus" is 4.5%. The Texas franchise
tax is generally equal to the greater of the tax on "net taxable capital" and
the tax on "net taxable earned surplus." The Texas franchise tax is not applied
on a consolidated group basis. Any Texas franchise tax that Crescent Equities is
indirectly required to pay will reduce the cash available for distribution by
Crescent Equities to shareholders. Even if an entity is doing business in Texas
for Texas franchise tax purposes, the entity is subject to the Texas franchise
tax only on the portion of the taxable capital or taxable earned surplus
apportioned to Texas.
As a Texas real estate investment trust, Crescent Equities will not be
subject directly to the Texas franchise tax. However, Crescent Equities will be
subject indirectly to the Texas franchise tax as a result of its interests in
CREE Ltd., Management I, Management II, Management III, Management IV,
Management V and Management VII, which will be subject to the Texas franchise
tax because they are general partners of
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<PAGE> 18
the Operating Partnership, Funding I, Funding II, Funding III, Funding IV,
Funding V and Funding VII, and the Operating Partnership, Funding I, Funding II,
Funding III, Funding IV, Funding V and Funding VII will be doing business in
Texas.
It is anticipated that Crescent Equities' Texas franchise tax liability
will not be substantial because CREE Ltd., Management I, Management II,
Management III, Management IV, Management V and Management VII are allocated
only a small portion of the taxable income of the Operating Partnership, Funding
I, Funding II, Funding III, Funding IV, Funding V and Funding VII. In addition,
Management VI and Funding VI are not anticipated to be subject to the Texas
franchise tax.
The Operating Partnership, Funding I, Funding II, Funding III, Funding IV,
Funding V and Funding VII will not be subject to the Texas franchise tax, under
the laws in existence at the time of this Prospectus Supplement because they are
partnerships instead of corporations. There is no assurance, however, that the
Texas legislature will not expand the scope of the Texas franchise tax to apply
to limited partnerships such as the Operating Partnership, Funding I, Funding
II, Funding III, Funding IV, Funding V and Funding VII or enact other
legislation which may result in subjecting Crescent Equities to the Texas
franchise tax. Any statutory change by the Texas legislature may be applied
retroactively.
In addition, it should be noted that three of the Residential Development
Corporations will be doing business in Texas and will be subject to the Texas
franchise tax. Further, Crescent/301, L.L.C. will be subject to the Texas
franchise tax because it is doing business in Texas and limited liability
companies are subject to Texas franchise tax. However, this franchise tax should
not be substantial because Crescent/301, L.L.C. owns a 1% interest in 301
Congress Avenue, L.P. Other entities that will be subject to the Texas franchise
tax include CresTex Development, LLC and its member CresCal Properties, Inc. and
any other corporations or limited liability companies doing business in Texas
with Texas receipts. It is expected that the franchise tax liability of these
entities will not be substantial.
The Texas legislature considered in its 1997 regular session proposals for
property tax relief in Texas. Such relief would have required increasing the
proportion of education funding costs paid by the State of Texas and reducing
the proportion paid by local property taxes. Alternatives for increasing State
of Texas revenues that have been considered include broadening the franchise tax
base to include other entities such as partnerships and real estate investment
trusts, enactment of a new gross receipts tax, enactment of a new business
activity tax, an increase in the sales tax and/or broadening the sales tax base.
The Texas House of Representatives and the Texas Senate both passed different
bills that would have broadened the franchise tax base to apply the franchise
tax to business trusts such as Crescent Equities and partnerships such as the
Operating Partnership, Funding I, Funding II, Funding III, Funding IV, Funding V
and Funding VII. However, the conference committee was not able to work out the
differences between these two bills and the Texas legislature adjourned the 1997
regular session without adopting such legislation. There can be no assurance
that the Texas legislature will not enact similar legislation in its current
regular session.
Locke Liddell & Sapp LLP, special tax counsel to the Company ("Special Tax
Counsel"), has reviewed the discussion in this section with respect to Texas
franchise tax matters and is of the opinion that, based on the current structure
of Crescent Equities and based upon current law, it accurately summarizes the
Texas franchise tax matters expressly described herein. Special Tax Counsel
expresses no opinion on any other tax considerations affecting Crescent Equities
or a holder of Common Shares, including, but not limited to, other Texas
franchise tax matters not specifically discussed above.
Tax Counsel has not reviewed the discussion in this section with respect to
Texas franchise tax matters and has expressed no opinion with respect thereto.
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PLAN OF DISTRIBUTION
On August 12, 1997, the Company entered into two transactions with
affiliates of the predecessor of UBS. In one transaction, the Company sold
4,700,000 Common Shares to UBS for approximately $148 million and received
approximately $145 million in net proceeds. In the other transaction, the
Company entered into the Forward Share Purchase Agreement. On August 11, 1998,
the Company paid a fee of approximately $3.0 million to UBS in connection with
the exercise by the Company and UBS of the right to extend the term of the
Forward Share Purchase Agreement until August 12, 1999. The Company is
delivering the additional 747,598 Common Shares offered hereby pursuant to its
obligations under the Forward Share Purchase Agreement.
Under the Forward Share Purchase Agreement, the Company is committed to
settle its obligations under the agreement by purchasing 4,700,000 Common Shares
from UBS by August 12, 1999. The price to be paid by the Company for the
4,700,000 Common Shares (the "Settlement Price") will be determined on the date
the Company settles the Forward Share Purchase Agreement and will be calculated
based on the gross proceeds received by Company from the original issuance of
common shares to UBS, plus a forward accretion component equal to 90-day LIBOR
plus 75 basis points, minus an adjustment for the Company's distributions paid
to UBS. The forward accretion component represents a guaranteed rate of return
to UBS.
The Company may fulfill its settlement obligations under the Forward Share
Purchase Agreement in cash or Common Shares, at its option, on or before August
12, 1999. The Company currently intends to fulfill its settlement obligations in
cash, which will decrease the Company's liquidity. The Company, however, will
continue to evaluate its sources of capital and the potential uses of its
capital until the time that settlement is required under the Forward Share
Purchase Agreement or until such earlier time as it determines to settle the
agreement. The Company is currently evaluating various alternatives that would
result in the settlement of the agreement prior to the expiration date on August
12, 1999.
In addition, UBS has the right to require the Company to settle all or a
portion of the Forward Share Purchase Agreement under certain circumstances,
including upon the occurrence of certain events of default under the Company's
unsecured financing arrangements or upon a decline in the market price of the
Common Shares below certain levels. In the event that the Company elects to
fulfill its settlement obligations in Common Shares, UBS will sell, on behalf of
the Company, a sufficient number of Common Shares to realize the Settlement
Price. If, as a result of an increase in the market price of the Common Shares,
the number of Common Shares required to be sold to achieve the Settlement Price
is less than the number of Common Shares previously issued to UBS, UBS will
deliver Common Shares to the Company. In contrast, if, as a result of a decrease
in the market price of the Common Shares, such number of Common Shares is
greater than the number of Common Shares previously issued to UBS, the Company
will deliver additional Common Shares to UBS.
On a quarterly basis, if the number of Common Shares previously delivered
to UBS is not sufficient to permit UBS to realize the Settlement Price through
the sale of such Common Shares, the Company is obligated to deliver additional
Common Shares to UBS. Under certain circumstances, the Company may deliver cash
collateral in lieu of additional Common Shares. On February 18, 1999, as a
result of a decline in the market price of the Common Shares, the Company
delivered cash collateral of $14,739,576, as permitted under the Forward Share
Purchase Agreement, in lieu of the issuance of additional Common Shares. As
permitted under the Forward Share Purchase Agreement, the Company has elected at
this time to substitute the 747,598 Common Shares offered hereby for the
$14,739,576 of cash collateral delivered in February 1998. Accordingly, the
Company is delivering the additional 747,598 Common Shares offered hereby to
Warburg Dillon Read LLC, as agent for UBS.
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<PAGE> 20
LEGAL MATTERS
The legality of the Common Shares offered hereby will be passed upon for
the Company by Shaw Pittman Potts & Trowbridge, Washington, D.C. Certain legal
matters described under "Federal Income Tax Considerations" will be passed upon
for the Company by Shaw Pittman Potts & Trowbridge, which will rely, as to all
Texas franchise tax matters, upon the opinion of Locke Liddell & Sapp LLP,
Dallas, Texas.
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YOU SHOULD RELY ONLY ON THE INFORMATION PROVIDED OR INCORPORATED BY REFERENCE IN
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE
ELSE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT MAKING AN OFFER OF
THE COMMON SHARES IN ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT
ASSUME THAT THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS
ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THESE DOCUMENTS.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
The Company................................. S-2
Recent Developments......................... S-2
Use of Proceeds............................. S-2
Structure of the Company.................... S-3
Federal Income Tax Considerations........... S-4
Plan of Distribution........................ S-19
Legal Matters............................... S-20
PROSPECTUS
The Company................................. 2
Risk Factors................................ 2
Use of Proceeds............................. 7
Ratios of Earnings to Fixed Charges and
Preferred Shares Dividends................ 7
Description of Preferred Shares............. 7
Description of Common Shares................ 12
Description of Common Share Warrants........ 14
Certain Provisions of the Declaration of
Trust, Bylaws and Texas Law............... 15
ERISA Considerations........................ 19
Plan of Distribution........................ 20
Available Information....................... 21
Incorporation of Certain Documents by
Reference................................. 21
Experts..................................... 23
Legal Matters............................... 23
</TABLE>
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747,598 SHARES
[CRESCENT LOGO]
COMMON SHARES
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PROSPECTUS SUPPLEMENT
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April 29, 1999
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