UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 28, 2007
Crescent Real Estate Equities Company
(Exact name of registrant as specified in its charter)
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Texas
(State or other jurisdiction
of organization)
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1-13038
(Commission
File Number)
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52-1862813
(IRS Employer
Identification No.) |
777 Main Street, Suite 2100
Fort Worth, Texas 76102
(817) 321-2100
(Address,
including zip code, and telephone number, including area code, of registrants principal
executive offices)
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the
filing obligation of the registrant under any of the following provisions:
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Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
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Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 230.14a-12) |
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Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17
CFR 230.14d-2(b)) |
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Pre-commencement communications pursuant to Rule 13e-4(c) under the Securities Act
(17 CFR 230.13e-4(c)) |
Item 4.02. Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or
Completed Interim Review.
In connection with the closing of the financial records of Crescent Real Estate Equities
Company (the Company) for the fiscal year ended December 31, 2006, our management, in
conjunction with our independent registered public accounting firm, Ernst & Young LLP, identified
the accounting-related items discussed below that affect the Companys financial statements. In
light of these accounting items, on February 28, 2007, the Audit Committee of the Board of Trust
Managers of the Company determined that readers should no longer rely on our previously filed
financial statements and other financial information for the fiscal years 2005, 2004, 2003, 2002
and 2001, and component fiscal quarters, as well as for the first, second and third quarters of
fiscal year 2006. We have just completed our review of these items in conjunction with our auditors
and, as a result, will defer the filing of our Annual Report on Form 10-K for the year ended
December 31, 2006 until not later than March 16, 2007, in accordance with Rule 12b-25 of the
Securities and Exchange Act of 1934, in order to give us the opportunity to incorporate the
indicated changes in our financial statements. We will reflect all required restatements in our
Form 10-K.
Anticipated Impact. Management anticipates that the cumulative impact of these restatements
will result in an approximately $9.6 million increase in Net Income Available to Common
Shareholders for the years ending 1997 through 2005. We will reflect this impact as a cumulative
adjustment to decrease Retained Earnings as of December 31, 2003 by approximately $2.5 million and
have restated our Net Income Available to Common Shareholders, increasing the amounts by
approximately $6.2 million and $5.9 million for the years ended December 31, 2005 and 2004,
respectively.
Calculation of Minority Interest to Unitholders. In February 1998, the Company completed its
first offering of Series A Preferred Shares. In connection with this offering, the Companys
operating partnership, Crescent Real Estate Limited Partnership (the Operating
Partnership), issued Series A Preferred Units to the Company in exchange for the Companys
contribution of the proceeds from the offering to the Operating Partnership. Subsequent Series A
Preferred Share Offerings in April 2002 and January 2004 and the Series B Preferred Share Offering
in May 2002 were recorded in the same manner as the February 1998 offering. In association with
these offerings, the limited partnership agreement of the Operating Partnership outlines terms of
the allocation of distributions between the Company and the other limited partners of the Operating
Partnership, whom we refer to as unitholders. Following a recent review of the limited partnership
agreement of the Operating Partnership, the Company determined that distributions on the preferred
units held by the Company occur prior to distributions to the unitholders. Therefore, net income
would first be allocated to cover the dividend on the preferred shares and then an allocation
should be made to the unitholders.
Our calculation of minority interest has incorrectly allocated net income between the Company
and unitholders based on respective ownership percentages and then deducting the preferred dividend
against the allocation to the Company. The cumulative impact of the restatement, whereby the
calculation deducts the preferred dividend from net income and then allocates the remaining net
income between the Company and unitholders, results in an approximately $14.6 million increase in
Net Income Available to Common Shareholders for the years ended December 31, 1998 through 2005.
We will reflect this impact as a cumulative adjustment to increase Retained Earnings as of December
31, 2003 by approximately $5.0 million and have restated our Net Income Available to Common Shareholders,
increasing the amounts by approximately $4.8 million for each of the years ended December 31, 2005
and 2004.
Refundable Fees for Club Member Services. One of our golf clubs has a limited number of
non-equity club members who are entitled to repayment of a portion of their dues up to a fixed
amount per member upon surrender of their memberships. We are required to deposit a fixed percent
of all dues collected from these members into a separate cash fund and then use this fund to make
payments to members who choose to surrender their membership. Our obligation for payment for
surrendered memberships is limited only to amounts deposited into the separate cash fund.
In prior years, consistent with SFAS No. 5, Accounting for Contingencies, the liability
associated with these memberships was based on the maximum amount at the balance sheet date that we
could be required to pay upon surrender of a membership. As we are only obligated to make surrender
payments to the extent cash is available in
the separate cash fund, the liability recorded was equal to the cash fund balance. We have
determined that the appropriate methodology associated with refundable fees for club member
services is outlined in Staff Accounting Bulletin No. 104, Revenue Recognition, under which revenue
related to refundable fees for services should not be recognized until the fee is fixed and
determinable. For these memberships, member dues should not be recognized as revenue until the dues
paid exceed the maximum refund amount available to the member. This results in a liability for
these members at each balance sheet date equal to the maximum amount that could potentially be paid
due to future membership surrenders without consideration of the amount of funds available in the
separate cash account that will allow payments to be made. Application of the guidance under SAB
No. 104 results in an approximately $4.7 million decrease in Net Income Available to Common
Shareholders for the years ended December 31, 1997 through 2005. We will reflect this impact as a
cumulative adjustment to decrease Retained Earnings as of December 31, 2003 by approximately $4.1
million and have restated our Net Income Available to Common Shareholders, decreasing amounts by
approximately $0.2 million and $0.4 million for the years ended December 31, 2005 and 2004,
respectively.
Classification of Club Membership Intangible Asset. At the time of acquisition of one of our
golf clubs, a portion of the purchase price was recorded as a membership intangible asset related
to the acquired right to sell a predetermined number of equity memberships in the club. Since
acquisition of the club, we have amortized the membership intangible asset based upon the sale of
those equity memberships. We have determined that the right to sell a predetermined number of
equity club memberships does not meet the criteria established under SFAS No. 141, Business
Combinations, for the recording of an intangible asset. We have determined that the membership
intangible asset should instead be recorded as goodwill and therefore not be amortized but instead
evaluated for impairment. The cumulative impact of the restatement results in an approximately
$0.3 million decrease in Net Income Available to Common
Shareholders for the years ended 1997
through 2005. We have reflected this impact as a cumulative adjustment to decrease Retained
Earnings as of December 31, 2003 by approximately $3.4 million and have restated our Net Income
Available to Common Shareholders, increasing the amounts by approximately $1.6 million and $1.5
million for the years ended December 31, 2005 and 2004, respectively.