Crescent Real Estate Equities Company
May 23, 2002
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
Attention: Mr. Jonathan G. Katz, Secretary
E-mail address: email@example.com
Re: Commission File No. S7-08-02
Ladies and Gentlemen:
We are pleased to have this opportunity to respond to the Commission's request for comments on Securities Act Release No. 33-8089 (April 12, 2002), entitled Acceleration of Periodic Report Filing Dates and Disclosure Concerning Website Access to Reports (the "Release"). In the Release, the Commission proposes to accelerate the filing deadlines for Annual Reports on Form 10-K from 90 days to 60 days after the end of the fiscal year and for Quarterly Reports on Form 10-Q from 45 days to 30 days after the end of the fiscal quarter.
Crescent Real Estate Equities Company (the "Company") is a real estate investment trust that has been subject to the Commission's periodic reporting requirements since its initial public offering in May 1994. Our securities are listed on the New York Stock Exchange (NYSE:CEI). The Company conducts its business operations through a limited partnership (the "Operating Partnership") which also is subject to the Commission's periodic reporting requirements.
We appreciate the opportunity to comment on the proposed rules and hope these comments will be useful to the Commission and its Staff. As a participant in the disclosure process, we support the Commission's goals of modernizing the periodic reporting system and improving the usefulness of quarterly and annual reports to investors in order to ensure that investors and the markets have access to information that is clear, accurate and timely. As set forth in detail in this letter, however, we believe that the proposal to accelerate periodic report filing dates will result in disclosure that is neither so clear nor so accurate as disclosure submitted in accordance with the current filing schedules. We believe that this proposal underestimates the demands of the diligence process required to comply with today's complex periodic reporting requirements in an accurate and understandable format and overemphasizes the value of efficiencies resulting from technological developments.
Our Periodic Review Requires Thorough Diligence
Although advances in communications and information technology have made it easier for us to disseminate information to our stockholders, the structure of our organization, coupled with the increasing complexity of periodic reporting requirements, requires that our auditors spend significant amounts of time reviewing our financials. For example, we operate in four distinct investment segments. These segments generate a significant amount of financial data over the course of a quarter or a year, and it takes a significant amount of time for us to analyze the data.
The real estate industry is cyclical, and periods of heavy acquisition are often accompanied by periods of capital-raising to facilitate the acquisitions. At times when we are engaged in substantial acquisitions and capital-raising, our periodic filings contain disclosure for many complex transactions, all of which must be reviewed thoroughly by our independent auditors and outside counsel. As an example, our 1998 annual report on Form 10-K included disclosure relating to (i) common share offerings in 1997 pursuant to which an aggregate of 39,350,000 common shares were issued and an aggregate of $1,107,022,000 in net proceeds was received; (ii) the issuance of $400,000,000 in notes payable; (iii) significant acquisitions in each of our operating segments, including a pending investment; (iv) two preferred stock offerings; and (v) the termination of a swap agreement. Pro forma financial information was required, which assumed the completion of various transactions, in each case as of January 1, 1997. These transactions and the required disclosures required significant testing by our independent accountants and intense scrutiny by our outside counsel.
In February 2002, we executed an agreement with Crescent Operating, Inc. ("COPI"), pursuant to which COPI transferred to certain of our subsidiaries COPI's lessee interests in eight of our hotel properties and voting interests in three of our residential development corporations. As a result, we are required to consolidate the operations of the eight hotels and three residential development corporations, each of which conduct their operations through separate entities. Although this is not a recurring transaction, it has significantly increased the preparation time of our financial statements, and will continue to do so on an ongoing basis.
Further, we must receive financial statements from our subsidiaries and other entities to complete our consolidated financial statements. Many of these entities are relatively small companies and do not have the resources available to support a large accounting department. These companies generally are unable to provide their financial statements to us less than 30 days after a quarter end; accordingly, if the proposed filing deadlines are adopted, we may be required to use forecasted or estimated financial information from these entities. While this does not mean that the financial statements will not be materially correct, this practice would be inconsistent with the SEC's desire for more accurate and informative periodic disclosure. Further, our MD&A includes market data obtained from independent research firms and is generally available no sooner than 30 days after a quarter end.
In addition to the Company's quarterly and annual filing requirements, our Operating Partnership also is required to file periodic reports. Although these reports are similar to those of the Company, the financial statements and much of the footnote disclosure is different. The preparation of the Operating Partnership's reports does not require as much time as the Company's, but does require dedicated resources for completion. If, as a result of a reduced filing period, we were required to prepare these reports concurrently with those of the Company, greater resources would be required and the level of scrutiny by outside counsel and auditors would be further constrained.
In order to ensure our compliance with the current periodic reporting requirements, we undergo an extensive procedure in which we review and question our own financials, submit our financials to an external review by our accountants, submit our financials and proposed MD&A disclosure to review by our outside counsel and, of course, provide this information to our Audit Committee for its review, in conjunction with our management and our independent accountants. Although this procedure takes a considerable amount of the time of the participants involved, we regard this process as necessary to provide appropriate and accurate disclosure.
The task of preparing our periodic reports has been further complicated by the release of SFAS 133, SFAS 142 and SFAS 144, which require substantial research and testing time for implementation and compliance. Additional review time is also required for our external auditors to ensure proper compliance with these statements. We anticipate the FASB will release more pronouncements in the near future, which will take more time from our already tight schedule for closing our books and completing the reports.
The Proposed Deadlines Will Not Allow Us Enough Time to Conduct Our Diligence
We fear that an accelerated periodic filing reporting requirement will not allow us enough time to incorporate the efforts of everyone that participates in our current review process. The Commission has cautioned public companies against presenting statements about financial results that are literally true, or that comply with GAAP and SEC Regulation S-X, but that nonetheless are misleading because the complexity of the rules may produce a result that is not connected to economic reality. Rather than assume that our investors possess the financial sophistication of an industry analyst and can readily discern such dangers, we undertake a thorough process to identify and disclose material information, and then subject our results to the review of independent accountants and counsel to confirm that we present our financial statement and MD&A disclosure in a manner that will be accurate and clear to an individual investor lacking financial expertise. We take great care in describing the controlling principles and methodology that form the basis of our presentation. We understand that by doing so we educate our investors, allowing them to compare our financial information with previous reporting periods and with the financial information provided by our competitors.
We are concerned that an accelerated periodic reporting requirement will require that we seek out efficiencies which necessarily will compromise our ability to conduct our review in an accurate manner. We also believe that the time constraints of the proposed filing deadlines would both curtail the involvement of our outside advisors in the review process and reduce our ability to monitor their efforts and ensure the accuracy of their work. Our outside accountants could no longer enjoy the luxury of last minute reviews of the notes to our financial statements to ensure their accuracy. In addition, our attorneys could no longer be afforded the time we currently allow to revise financial disclosures into language easily understood by the less experienced investor. Ultimately, we fear that we will not be able to produce the quality of disclosure that we produce in our current periodic reporting filings.
Better Technology Will Not Permit Compliance with the Accelerated Schedule
We do not believe that improved technology can permit us to accelerate our review efforts sufficiently to meet the proposed schedule. Improved technology does little to facilitate thoughtful and thorough review. For instance, our Form 10-K has grown to approximately 120 pages and our Forms 10-Q are now approximately 75 pages as a result of the complexity of our business, compliance with recent FASB pronouncements, and our efforts to craft disclosure that is both comprehensive and clear.
The review process for documents with such content is a time-consuming task. Our independent auditors must check all of the numbers to ascertain that they agree with their testing. They also are required to make certain that our footnote disclosures are in conformity with GAAP and the related SEC regulations and that our MD&A properly reflects the activity of our Company for the period under review. Our outside counsel reviews our reporting documents to determine that disclosures are consistent and that they properly disclose the facts and circumstances surrounding our significant transactions. Given the complexity of our reports, this review by our outside advisors is critical to our reporting process and cannot be curtailed without damage to the process.
Aside from the time required for substantive review, EDGAR filing requirements impose certain unavoidable delays on our document preparation. Once our Forms 10-Q or 10-K are complete, we send them to an outside firm to be converted to the EDGAR format. Our most recent Form 10-Q required a 16-hour turnaround. After we receive the reports in EDGAR format, they require an intensive review, which takes between 10 and 16 hours. This process is required for both our Company and our Operating Partnership. If the deadline for filing is reduced, it is likely that the outside firm that does the EDGAR conversion will have a larger backlog, as more companies will file near the end of the filing deadline. This increased backlog will likely increase the time it takes to have our reports converted to EDGAR.
We recognize that computers, sophisticated financial software, electronic mail, teleconferencing, videoconferencing and other technologies available today have replaced the paper and pencil, typewriter, adding machines, carbon paper, mail system, travel and face-to-face meetings our predecessors relied on when the Commission drafted the current periodic filing requirements nearly thirty years ago. While this technology may facilitate the ability of our accountants and counsel to communicate and deliver the results of their review, however, it cannot replace the time required to digest our financial statements and draft disclosure that adequately describes our current financial condition.
We believe that advances in technology over the last 30 years, by easing the process of document preparation and review, have made it possible for the Commission and accounting standards boards gradually to increase the volume and complexity of information and analysis that is contained in periodic reports. Advances in communication technology, which permit documents to be transferred easily among distant parties, have resulted in increased involvement of outside parties to monitor compliance with increasingly complex reporting rules. While technology facilitates the ability of all parties to communicate their ideas, it does not serve as a substitute for the effort required to review financial data and draft disclosure adequately communicating our financial situation to the everyday investor in a manner that complies with current periodic filing requirements.
We appreciate the Commission's consideration of our comments on the proposed rules, and would welcome the opportunity to discuss this letter with the staff if that would be helpful.
Crescent Real Estate Equities Company
By /s/ Jerry R. Crenshaw, Jr.
Jerry R. Crenshaw, Jr.
Senior Vice President and
Chief Financial Officer