SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2000
Commission File Number: 0-19989
Stratus Properties Inc.
Incorporated in Delaware 72-1211572
(IRS Employer Identification No.)
98 San Jacinto Blvd., Suite 220, Austin, Texas 78701
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _
On March 31, 2000, there were issued and outstanding 14,288,270
shares of the registrant's Common Stock, par value $0.01 per
share.
STRATUS PROPERTIES INC.
TABLE OF CONTENTS
Page
Part I. Financial Information
Financial Statements:
Condensed Balance Sheets 3
Statements of Operations 4
Statements of Cash Flow 5
Notes to Financial Statements 6
Report of Independent Public Accountants 9
Management's Discussion and Analysis
of Financial Condition and Results of
Operations 9
Part II. Other Information 14
Signature 16
Exhibit Index E-1
2
STRATUS PROPERTIES INC.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
STRATUS PROPERTIES INC.
CONDENSED BALANCE SHEETS (Unaudited)
March 31, December 31,
2000 1999
--------- ---------
(In Thousands)
ASSETS
Current assets:
Cash and cash equivalents,including
restricted cash of $2.6 million and
$2.1 million, respectively, (Note 4) $ 3,333 $ 3,964
Accounts receivable:
Property sales 15 149
Other 1,427 1,160
Prepaid expenses 345 375
--------- ---------
Total current assets 5,120 5,648
Real estate and facilities, net 89,120 91,664
Investment in and advances to
unconsolidated affiliates 8,547 7,254
Other assets 8,963 11,106
--------- ---------
Total assets $ 111,750 $ 115,672
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 445 $ 900
Accrued interest, property taxes and other 590 1,537
--------- ---------
Total current liabilities 1,035 2,437
Long-term debt 16,828 16,562
Other liabilities 9,769 19,833
Mandatorily redeemable preferred stock 10,000 10,000
Stockholders' equity 74,118 66,840
--------- ---------
Total liabilities and stockholders' equity $ 111,750 $ 115,672
========= =========
The accompanying notes are an integral part of these financial
statements.
3
STRATUS PROPERTIES INC.
STATEMENT OF OPERATIONS (Unaudited)
Three Months Ended
March 31,
---------------------
(In Thousands, Except
Per Share Amounts)
Revenues $ 2,060 $ 1,586
Costs and expenses:
Cost of sales 1,601 1,070
General and administrative expenses 981 734
-------- -------
Total costs and expenses 2,582 1,804
Operating loss (522) (218)
Interest expense (193) (269)
Other income (loss), net 7,805 (29)
-------- -------
Income (loss) before income taxes
and equity in affiliates 7,090 (516)
Income tax provision (40) (14)
Equity in unconsolidated affiliates'
income 228 51
-------- -------
Net income (loss) $ 7,278 $ (479)
======== =======
Net income (loss) per share
Basic $0.51 $(0.03)
===== ======
Diluted $0.44 $(0.03)
===== ======
Average shares outstanding
Basic 14,288 14,288
====== ======
Diluted 16,635 14,288
====== ======
The accompanying notes are an integral part of these financial
statements.
4
STRATUS PROPERTIES INC.
STATEMENTS OF CASH FLOW (Unaudited)
Three Months Ended
March 31,
------------------
2000 1999
------- --------
(In Thousands)
Cash flow from operating activities:
Net income (loss) $ 7,278 $ (479)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 24 21
Cost of real estate sold 300 1,003
Recognition of deferred Circle C municipal
utility reimbursements (7,430) -
Equity in unconsolidated affiliates income (228) (51)
Long term receivable and other 567 (85)
(Increase) decrease in working capital:
Accounts receivable and other 888 (41)
Accounts payable and accrued liabilities (1,322) (1,222)
------- -------
Net cash provided by (used in) operating activities 77 (854)
------- -------
Cash flow from investing activities:
Real estate and facilities (893) (1,366)
------- -------
Net cash used in investing activities (893) (1,366)
------- -------
Cash flow from financing activities:
Proceeds from credit facility, net 185 2,000
------- -------
Net cash provided by financing activities 185 2,000
------- -------
Net decrease in cash and cash equivalents (631) (220)
Cash and cash equivalents at beginning of year 3,964 5,169
------- -------
Cash and cash equivalents at end of period $ 3,333 $ 4,949
======= =======
The accompanying notes are an integral part of these financial
statements.
5
STRATUS PROPERTIES INC.
NOTES TO FINANCIAL STATEMENTS
1. EARNINGS PER SHARE
Basic net income (loss) per share of common stock was calculated
by dividing net loss applicable to common stock by the weighted-
average number of common shares outstanding during each period
presented. Diluted net income (loss) per share was calculated by
dividing net income (loss) by the weighted-average of common
shares outstanding plus the effects of dilutive stock options
during each period presented.
Stratus Properties Inc.'s (Stratus) first-quarter 2000
diluted net income per share includes the following:
. Dilutive options representing 254,000 shares of
Stratus' common stock.
. The assumed redemption of 1,712,000 shares of Stratus'
preferred stock for 1,712,000 shares of its common
stock.
. The assumed redemption of Stratus' $2.8 million of
outstanding convertible debt at March 31, 2000 for
381,000 shares of its common stock.
Stratus' first-quarter 1999 diluted net loss per share
excluded the following because of their anti-dilutive effect on
the loss incurred during the period:
. Dilutive options representing 191,000 shares of
Stratus' common stock.
. The assumed redemption of 1,712,000 shares of Stratus'
preferred stock for 1,712,000 shares of its common
stock.
. The assumed redemption of Stratus' $2.1 million of
outstanding convertible debt at March 31, 1999 for
290,000 shares of its common stock.
Interest accrued on the convertible debt outstanding totaled
approximately $81,000 for the first quarter of 2000 and $62,000
for the first quarter of 1999. There have been no dividends
accrued on Stratus' mandatorily redeemable preferred stock as of
March 31, 2000.
Outstanding options to purchase approximately 515,000 shares
of common stock, at an average exercise price of $5.37 during the
first quarter of 2000, and 476,000 shares of common stock, at an
average exercise price of $5.29 during the first quarter of 1999,
were not included in the computation of diluted income (loss) per
share. These options were excluded because their exercise prices
were greater than the average market price for the respective
periods presented.
2. OLYMPUS RELATIONSHIP and INVESTMENT IN UNCONSOLIDATED AFFILIATES
In May 1998, Stratus and Olympus Real Estate Corporation
(Olympus), an affiliate of Hicks, Muse, Tate & Furst
Incorporated, formed a strategic alliance to develop certain of
Stratus' existing properties and to pursue new real estate
acquisition and development opportunities. Under the terms of
the agreement, Olympus made a $10 million investment in Stratus'
mandatorily redeemable preferred stock, provided a $10 million
convertible debt financing facility to Stratus and agreed to make
available up to $50 million of additional capital representing
its share of direct investments in joint Stratus/Olympus
projects. As of March 31, 2000, Stratus had outstanding
borrowings of $2.8 million on the convertible debt facility and
Olympus had invested approximately $13.4 million in joint
Stratus/Olympus projects, as further discussed below.
Stratus has investments in three joint ventures. Stratus
owns a 49.9 percent interest in each joint venture and Olympus
owns the remaining 50.1 percent interest. Accordingly, Stratus
accounts for its investments in the joint ventures utilizing the
equity method of accounting. Stratus develops and manages each
project undertaken by these joint ventures and receives
development fees, sales commissions, and other management fees
for its services.
Stratus' three joint ventures are: the Oly Stratus Barton
Creek I Joint Venture (Barton Creek Joint Venture), the Oly
Walden General Partnership (Walden Partnership) and the Stratus
7000 West Joint Venture (7000 West). The Barton Creek Joint
Venture currently consists of two separate subdivisions located
in southwest Austin, Texas: "Wimberly Lane" and "Escala Drive."
At March 31, 2000 there were 21 remaining single-family homesites
at the Wimberly Lane subdivision and there were 49 remaining
single-family homesites at the Escala Drive subdivision, some of
which are still being developed. The Walden Partnership had
6
approximately 570 single-family homesites available at the Walden
on Lake Houston development in Houston, Texas at March 31, 2000.
The 7000 West Joint Venture has completed and leased the first
of two 70,000 square foot office buildings and construction of
the second office building is proceeding as scheduled. During
the first quarter of 2000, Stratus finalized a previous sale of
5.5 acres of commercial real estate to the 7000 West Joint
Venture. Stratus will recognize an approximate gain of $0.5
million associated with this sale, representing Olympus' 50.1
percent joint venture interest, when the second 70,000 square
foot office building is fully constructed and leased.
For a detailed discussion of the Olympus alliance and the
initial formation and subsequent transactions of the joint
ventures and partnership see Notes 2, 3 and 4 of the "Notes To
Financial Statements" included in Stratus' 1999 Annual Report and
Form 10-K. Also refer to "Transactions With Olympus Real Estate
Corporation" and "Capital Resources and Liquidity" included in
Items 7 and 7A "Management's Discussion and Analysis of
Financial Condition and Results of Operations and Disclosures of
Market Risks" included in Stratus' 1999 Annual Report and Form
10-K.
The Barton Creek Joint Venture distributed approximately
$2.0 million to the partners during the first quarter of 2000
($2.4 million from inception through March 31, 2000). Stratus
recorded its portion of the distribution, $1.0 million, as a
reduction of its note receivable and related accrued interest
relating to its initial sale of land to the joint venture. The
other joint ventures have yet to make any distributions. The
summarized unaudited financial information of Stratus'
unconsolidated affiliates is shown below (in thousands):
Barton Creek Walden 7000
Joint Venture Partnership West Total
------------- ----------- -------- --------
Earnings data for the three
months ended March 31, 2000:
Revenues $ 3,249 $ 449 $ 170 $ 3,868
Operating income (loss) 913 (218) (349) 346
Net income (loss) 977 (192) (345) 440
Stratus' equity in net
income (loss) 488 (88)a (172) 228a
Earnings data for the three
months ended March 31, 1999:
Revenues $ 774 $ 390 $ - $ 1,164
Operating income (loss) 248 (133) - 115
Net income (loss) 248 (146) - 102
STRS' equity in net
income (loss) 124 (73) - 51
a. Includes recognition of $8,000 of deferred income,
representing the difference in Stratus' investment in the
Walden Partnership and its underlying equity at the date of
acquisition. Stratus will recognize the remaining difference
as the related real estate is sold. Through March 31, 2000,
Stratus has recognized $52,000 of a total of $337,000 of
deferred income associated with the Walden Partnership.
3. COMMITMENTS and CONTINGENCIES
In late October 1999, Circle C Land Corp. (Circle C), a wholly
owned subsidiary of Stratus, and the City of Austin (the City)
reached an agreement regarding a portion of Circle C's claims
against the City involving the reimbursement of certain
previously incurred water, wastewater and drainage infrastructure
expenditures following the City's December 1997 annexation of all
land lying within the Circle C cmuunniittyy.. AAss aa result of tis
agreement, Stratus received approximaatteely $9.8 million, including
$1.0 million in interest, representing a partial payment of these
claims. Stratus has collected a total of $10.5 million of
reimbursements from the City as of March 31, 2000. Stratus will
continue to pursue vigorously its approximate $9.0 million,
exclusive of penalties and interest, of remaining claims against
the City. Stratus used the proceeds to reduce its outstanding
debt.
The partial payment settlement agreement included a
contingency provision requiring Stratus to return all reimbursed
money to the City and the City to return the related utility
infrastructure to Stratus if the City's annexation of the Circle
C municipal utility districts (MUD) was reversed or otherwise
rescinded, whether by legislative action, final action of the
appellate court, or other legal process. In March 2000, the City
approved a
7
settlement agreement of all disputes between the City
and certain third party real estate developers and landowners
involved in the Circle C community. Under terms of this
settlement, the lawsuits contesting the City's December 1997
annexation of all land within the four Circle C MUDs and the
dissolution of the four MUDs have been dismissed with prejudice.
As a result, the refund contingency included in the City's
partial settlement of Stratus' reimbursement claim has been
eliminated. Stratus has recorded a gain of approximately $7.4
million in the first quarter of 2000, representing that portion
of the reimbursed infrastructure expenditures in excess of
Stratus' remaining basis in these assets and related interest
income. The remaining $3.1 million of the proceeds reduced
Stratus' investment in Circle C.
4. RESTRICTED CASH
Stratus has a requirement under its existing credit facility to
deposit funds into an interest reserve account with the lending
bank, Comerica. The amount in this account must be sufficient to
carry Stratus' debt service for both its term loan and revolving
line of credit for the ensuing twelve-month period, adjusted
quarterly. Stratus had deposits totaling $1.3 million in the
interest reserve account at March 31, 2000. For additional
discussion of Stratus' credit facility and its interest reserve
requirements see Note 5 of the "Notes To Financial Statements"
included in its 1999 Annual Report and Form 10-K.
At March 31, 2000, Stratus had additional restricted
cash deposits totaling $1.3 million related to additional
collateral associated with the Walden Partnership's project
development loan. This deposit is reduced by $0.30 for every
$1.00 in principal the Walden Partnership repays on the loan. For
additional discussion of the Walden Partnership project
development loan see Item 2. "Management Discussion and Analysis
of Financial Condition and Results of Operations" included
elsewhere in this Form 10-Q and Note 4 of the "Notes To Financial
Statements" included in Stratus' 1999 Annual Report and Form 10-K.
5. LITIGATION
Stratus is involved in pending litigation involving the City and
others, which may affect its property development entitlements
and its ability to secure its remaining reimbursements from the
City of approximately $9.0 million, exclusive of penalties and
interest, relating to development of its Circle C property. Refer
to Item 3 "Legal Proceedings" and Note 6 "Real Estate" in the
Stratus' 1999 Annual Report and Form 10-K for a detailed
discussion of such litigation matters. For discussion of
litigation events subsequent to the Form 10-K refer to Part II -
Other Information, "Legal Proceedings" included elsewhere in this
Form 10-Q.
--------------------
Remarks
The information furnished herein should be read in conjunction
with Stratus' financial statements contained in its 1999 Annual
Report and Form 10-K. The information furnished herein reflects
all adjustments which are, in the opinion of management,
necessary for a fair statement of the results for the periods.
All such adjustments are, in the opinion of management, of a
normal recurring nature
8
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Stratus Properties Inc.:
We have reviewed the accompanying condensed balance sheet of
Stratus Properties Inc. (a Delaware corporation), as of March 31,
2000, the related statements of operations and cash flow for the
three month periods ended March 31, 2000 and 1999. These
financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with auditing standards generally
accepted in the United States, the objective of which is the
expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to the financial statements
referred to above for them to be in conformity with accounting
principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards
generally accepted in the United States, the balance sheet of
Stratus Properties Inc. as of December 31, 1999, and the related
statements of operations, stockholders' equity and cash flow for
the year then ended (not presented herein), and in our report
dated January 19, 2000, based on our audit, we expressed an
unqualified opinion on those financial statements. In our
opinion, the information set forth in the accompanying condensed
balance sheet as of December 31, 1999, is fairly stated, in all
material respects, in relation to the balance sheet from which it
has been derived.
/s/ ARTHUR ANDERSEN LLP
Austin, Texas
May 1, 2000
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
OVERVIEW
We are engaged in the acquisition, development, management
and sale of commercial and residential real estate. We conduct
real estate operations on properties we own and through
unconsolidated affiliates we jointly own with Olympus Real
Estate Corporation (Olympus) pursuant to a strategic alliance
formed in May 1998 (see Note 2).
Our principal real estate holdings are in the Austin, Texas
area and consist of approximately 2,300 acres of undeveloped
residential, multi-family and commercial property located in
southwest Austin within the Barton Creek community and 500 acres
of undeveloped residential, multi-family and commercial property
known as the Lantana tract, south of and adjacent to the Barton
Creek community. Our remaining Austin acreage consists of about
1,300 acres of undeveloped commercial and multi-family property
within the Circle C Ranch development, also located in southwest
Austin.
As of March 31, 2000, we also own nine developed lots, 120
acres of undeveloped residential property and 33 acres of
undeveloped commercial and multi-family property located in
Dallas, Houston and San Antonio, Texas, which are being actively
marketed. These real estate interests are managed by unaffiliated
professional real estate developers who have been retained to
provide master planning, zoning, permitting, development,
construction and marketing services for the properties.
9
DEVELOPMENT ACTIVITIES
Stratus Properties
Development is progressing at several sections of the Barton
Creek community, including the completion of utility
infrastructure that will serve a significant portion of the 2,300
acres of undeveloped property at Barton Creek, and preliminary
development of approximately 200 new single-family homesites in
the vicinity of the new Tom Fazio-designed "Fazio Canyons" golf
course, which was completed in September 1999. We expect that a
number of these homesites will be available for sale by late
2000.
In April 2000, we received final subdivision plat approval
from the City of Austin (the City) to develop approximately 160
acres of commercial and multi-family real estate within the
Lantana community. Development activities at this commercial
development, which we anticipate will include office, retail and
multi-family sites, are expected to commence during the second
quarter of 2000.
Unconsolidated Affiliates
We have investments in three joint ventures in which we own
a 49.9 percent interest and Olympus owns the remaining 50.1
percent interest. Accordingly, we account for our investments in
the joint ventures utilizing the equity method of accounting. We
develop and manage each project undertaken by these joint
ventures and receive development fees, sales commissions, and
other management fees for our services. See Note 2 included
elsewhere in this Form 10-Q for the summarized unaudited results
of operations of our unconsolidated affiliates' for the first
quarters of 2000 and 1999.
Barton Creek Joint Venture
- --------------------------
The Oly Stratus Barton Creek I Joint Venture (Barton Creek
Joint Venture) currently consists of two separate subdivisions:
"Wimberly Lane" and "Escala Drive." The Wimberly Lane
subdivision, in which we completed construction of 75 developed
residential lots during the first quarter of 1999, had 21 of
these developed lots remaining at March 31, 2000. We sold 12 of
the Wimberly Lane lots during the first quarter of 2000, which
represented $1.3 million of the Barton Creek Joint Venture's
revenues for the period. In the first quarter of 1999, we sold
eight of the Wimberly Lane developed residential lots for $0.8
million, which represented all of Barton Creek Joint Venture's
revenues for that period. The Escala Drive subdivision, which we
are currently developing, will consist of 54 multi-acre
residential lots when completed. These residential lots will be
the largest developed to date within the Barton Creek community.
Construction of the final of these 54 planned lots is
anticipated to be completed by mid-2000. We sold the initial
five Escala Drive residential lots in the first quarter of 2000
which contributed $2.1 million to the Barton Creek Joint
Venture's revenues. The Barton Creek Joint Venture distributed
approximately $2.0 million to the partners in the first quarter
of 2000. We recorded our share of the distribution, $1.0 million,
as a reduction of our notes receivable and related accrued
interest relating to the initial sale of land to the joint
venture.
Walden Partnership
- ------------------
The Walden Partnership is currently marketing single-family
homesites at the Walden on Lake Houston development in Houston,
Texas. During the three months ended March 31, 2000, the
Partnership sold 17 single-family homesites compared with eight
single-family homesites during the comparable period last year.
At March 31, 2000, the Walden Partnership's outstanding
borrowings totaled $3.5 million on its project development loan
facility. In September 1998, we deposited $2.5 million of
restricted cash with the bank as additional collateral for the
related project development loan facility. However, for every
$1.00 of facility's principal that is repaid by the Partnership,
the bank allows for a $0.30 reduction of our restricted amount.
Accordingly, we had a total of $1.3 million deposited within the
bank's restricted account at March 31, 2000 and $1.5 million at
December 31, 1999.
7000 West
- ---------
The first 70,000 square foot office building at the 140,000
square foot Lantana Corporate Center, which is commonly referred
to as 7000 West, is fully leased and occupied. During the first
quarter of 2000, we completed a transaction admitting Olympus as
our joint venture partner in the second 70,000 square foot office
building at 7000 West. In this transaction, we finalized the
second phase of a prior sale of 5.5 acres of commercial real
estate to the joint venture. In early April 2000, we received
approximately $0.5 million, which we used to repay outstanding
borrowings on our term loan (see Note 5 of "Notes To Financial
Statements"
10
included in our 1999 Annual Report and Form 10-K).
Revenues from this sale of $1.1 million and the related gain of
approximately $0.9 million have been deferred until the
completion of construction and leasing of the second building,
which is anticipated to occur by the third quarter of 2000. At
that time we anticipate recognizing Olympus' 50.1 percent of the
sale and related gain of $0.5 million. In our role as manager,
we arranged for a $6.6 million project loan facility for 7000
West, which was utilized to construct the first office building.
The construction of the second building required additional
financing, which was provided when we arranged for an additional
$7.7 million of availability on the 7000 West development loan
facility in the first quarter of 2000. Outstanding borrowings
under 7000 West's project loan facility totaled $6.3 million at
March 31, 2000.
RESULTS OF OPERATIONS
Summary operating results follow (in thousands):
First Quarter
-----------------
2000 1999
------- -------
Revenues:
Undeveloped properties:
Recognition of deferred revenues $ 811 $ 155
Developed properties 350 1,152
Commissions, management fees and other 899 279
------- -------
Total revenues 2,060 1,586
Operating loss (522) (218)
Net income (loss) 7,278 (479)
Operating Results
- -----------------
During the first quarters of 2000 and 1999 our
undeveloped property revenues consisted solely of the recognition
of previously deferred revenues from the sale of undeveloped real
estate to unconsolidated affiliates. When we sell real estate to
an entity we jointly own with Olympus, we defer recognizing the
portion of revenues from the sale related to our interest until
all or a portion of the real estate is ultimately sold to
unrelated parties. Our recognition of deferred revenues resulted
from the Barton Creek Joint Venture's sale of 12 Wimberly Lane
single family homesites and five Escala Drive homesites during
the first quarter of 2000 compared with sales of eight Wimberly
Lane homesites during the first quarter of 1999. The remaining
$5.4 million of deferred revenues, which originally totaled $7.1
million and resulted from our retained interest in the sales of
28 acres and 174 acres of undeveloped residential real estate in
the Wimberly Lane and Escala Drive subdivisions, respectively, to
the Barton Creek Joint Venture, will be recognized as this
acreage is developed and sold by the Barton Creek Joint Venture.
Revenues from developed properties represented the sale of
15 single-family homesites during the first quarter of 2000 and
21 single-family homesites for the first quarter of 1999. We
have no remaining developed lots in our Austin or Dallas
developments andd oonly nine remaining developed lots in our
Houston and San Antonio developments. Lots available for sale by
our unconsolidated affiliates are not included in these amounts
(see "Unconsolidated Affiliates" aboe).
Commissions, management fees and other revenue totaled $0.8
million for the first quarter of 2000 compared to $0.3 million
for the first quarter of 1999. This increase primarily reflects
the increase in sales commissions on properties we sold for the
Barton Creek Joint Venture during the first quarter of 2000
compared with the same period last year.
Cost of sales increased to $1.6 million for the first
quarter of 2000 compared with $1.1 million for the first quarter
of 1999. The increase primarily reflects a reimbursement of
certain infrastructure costs previously charged to expense or
relating to properties previously sold, which reduced cost of
sales by $0.8 million during the first quarter of 1999.
11
General and administrative expenses increased to $1.0
million in the first quarter of 2000 from $0.7 million during the
first quarter of 1999. The increase primarily reflects increased
personnel costs offset in part by a decrease in legal expenses.
Legal expense has decreased to $0.1 million for the first quarter
of 2000 from $0.2 million for the first quarter of 1999. The
decrease in legal expense reflects reduced activities associated
with the anticipated ruling from the Texas Supreme Court related
to a hearing presented in December 1998, that may resolve various
issues between the City and us.
During 1995, the Texas State legislature enacted legislation
that enabled us to create a series of municipal utility districts
(MUDs) to serve the Barton Creek development. Once established,
the MUDs issue bonds, the proceeds of which are used to reimburse
us for costs related to the installation of major utility,
drainage and water quality infrastructure. During the first
quarter of 2000, we received the second of three $1.0 million
payments from the City as reimbursement for the costs associated
with the construction of the Lantana Pump Station. We used the
proceeds from this reimbursement to reduce our outstanding
borrowings under our term loan. During the first quarter of
1999, we received approximately $1.1 million in partial
reimbursement of infrastructure costs relating to the Barton
Creek development, which included $0.8 million related to costs
previously expensed (see discussion above). We expect to receive
additional reimbursements in the future for infrastructure costs
related to the Barton Creek development from the proceeds of MUD
bonds issued. However, the timing and the amount of future
Barton Creek MUD reimbursements are uncertain. For information
concerning Circle C MUD reimbursements currently being litigated,
see "Non-Operating Results" below and Part II, Item 1, "Legal
Proceedings."
Non-Operating Results
- ---------------------
Interest expense totaled $193,000 during the first quarter
of 2000 and $269,000 for the first quarter of 1999. The decrease
reflects an increase in capitalized interest, which totaled
$346,000 during the first quarter of 2000 and $253,000 during the
first quarter of 1999.
In March 2000, the City approved a settlement agreement of
all disputes between the City and other Austin-area real estate
developers and landowners concerning the Circle C community.
Under terms of this settlement, the lawsuits contesting the
City's December 1997 annexation of all land within the four
Circle C MUDs and the dissolution of the four MUDs have been
dismissed with prejudice. Accordingly, the City's partial
payments of our reimbursement claim, currently totaling $10.5
million, are no longer subject to a repayment contingency and we
have recorded approximately $7.4 million of these previously
deferred proceeds in other income. This amount represents that
portion of the reimbursed infrastructure expenditures in excess
of our remaining basis in these assets as well as related
interest income on the reimbursements. The remaining $3.1 million
was recorded as a reduction of our investment in Circle C. We
are continuing to pursue vigorously our remaining $9.0 million claim,
exclusive of penalties and interest, against the City,
however no amounts have been recorded for these claims as of
March 31, 2000.
CAPITAL RESOURCES AND LIQUIDITY
Net cash provided by operating activities totaled $0.1
million during the first quarter of 2000 compared with a use of
$0.9 million during the first quarter of 1999. The increase
primarily reflects a distribution received from the Barton Creek
Joint Venture, which was recorded as a reduction of our related
notes receivable. Cash used in investing activities totaled $0.9
million during the first quarter of 2000 compared with $1.4
million during the same period in 1999, reflecting our net real
estate and facilities expenditures. The decrease in our real
estate and facilities costs reflect the construction costs of the
first 70,000 square foot office building at 7000 West being
included in our consolidated results until the formation of the
7000 West Joint Venture in August 1999. Financing activities
provided cash of $0.2 million during the first quarter of 2000
and $2.0 million during the first quarter of 1999 reflecting
borrowings on the respective lines of credit available at the
time.
At March 31, 2000, we had debt of $16.8 million compared to
debt of $31.2 million at March 31, 1999. Our outstanding debt at
March 31, 2000 included $12.5 million outstanding on our term
loan, $1.5 million of borrowings under our $10 million revolver,
both of which mature in December 2002, and $2.8 million of
borrowings under our $10 million convertible debt facility with
Olympus (see Note 2), which matures in May 2004. Our revolving
line of credit's availability has been reduced by $0.9 million at
March 31, 2000 in order to make up the shortfall in an interest
reserve account. The balance of funds we deposited into this
restricted interest reserve account totaled $1.3 million at March
31, 2000. We anticipate fully funding the interest reserve
12
account during the second quarter making the entire $10 million
revolving line of credit available. For a complete discussion of
our bank facility see Note 5 included in the "Notes To Financial
Statements" included in our 1999 Annual Report and Form 10-K.
Our future operating cash flows and, ultimately, our ability
to develop our properties and expand our business will be largely
dependent on the level of our real estate sales. In turn, these
sales will be significantly affected by future real estate
values, regulatory issues, development costs, interest rate
levels and our ability to continue to protect our land use and
development entitlements. Significant development expenditures
remain to be incurred for our Austin-area properties prior to
their eventual sale. Our capital expenditures during the
remainder of 2000 will be limited to essential levels as we work
to preserve our land use and related rights in various disputes
with the City and others, as more fully explained in Part II Item
1, "Legal Proceedings." Resolving our entitlement and
reimbursement issues with the City remains our primary near-term
objective. The timing of our future capital expenditures could
be accelerated if disputes over our land use and related rights
were to be satisfactorily resolved.
We are continuing to actively pursue additional development
and management fee opportunities, both individually and through
our existing relationships with Olympus and other institutional
capital sources. We continue to be able to obtain capital from
Olympus for the development of existing properties in which we
desire third-party equity participation, and also believe we can
obtain bank financing at a reasonable cost for developing our
properties. However, obtaining land acquisition financing is
generally expensive and uncertain.
CAUTIONARY STATEMENT
Management's discussion and analysis of financial condition
and results of operations contains forward-looking statements
regarding future reimbursement for infrastructure costs, future
events related to financing, the anticipated outcome of
litigation and regulatory matters, the expected results of our
business strategy and other plans and objectives of management
for future operations and activities. Important factors that
could cause actual results to differ materially from our
expectations include economic and business conditions, business
opportunities that may be presented to and pursued by us, changes
in laws or regulations and other factors, many of which are
beyond our control and other factors that are described in more
detail under the heading "Cautionary Statements" in our Annual
Report and Form 10-K for the year ended December 31, 1999.
----------------------------
The results of operations reported and summarized above are not
necessarily indicative of future operating results.
13
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings.
We are involved in various regulatory matters and litigation
involving entitlement and/or development of our Austin-area
properties. For a detailed discussion on these matters see Item
3, "Legal Proceedings" and Note 6, "Real Estate" included in our
1999 Annual Report and Form 10-K. Below is a summary of the
cases in which we are currently involved.
The City's WQPZ Action: The City of Austin, Texas v. Horse Thief
Hollow Ranch, Ltd., et al., Cause No. 98-00248 (Travis County
345th Judicial District Court, Texas filed 1/9/98). On January
9, 1998, the City filed suit in Travis County District Court
against 14 Water Quality Protection Zones (WQPZs) and their
owners, including the Barton Creek WQPZ, challenging the
constitutionality of the legislation authorizing the creation of
water quality zones. The Attorney General of Texas intervened in
this suit and the Circle C WQPZ litigation, described below, to
join in the defense of the legislation. A summary judgment
hearing was conducted in the Travis County District Court on July
9, 1998. The District Court entered an order granting the City's
motion for summary judgment and declaring the WQPZ legislation
unconstitutional. All parties agreed to the form of an order
which permitted an expedited appeal directly to the Texas Supreme
Court. Oral argument was presented to the Texas Supreme Court on
December 9, 1998. A ruling is expected in the near future.
Circle C WQPZ Litigation: L.S. Ranch, Ltd. And Circle C Land
Corp., v. The City of Austin, Texas, Cause No. 97-1048 (Hays
County 207th Judicial District Court, Texas filed 10/31/97).
Circle C Land Corp., a wholly owned subsidiary of Stratus, filed
a WQPZ (Circle C WQPZ) covering a portion of the Circle C
development, consisting of 554 acres located outside the
boundaries of any municipal utility district. In November 1997,
Stratus sought a declaratory judgment in the Hays County District
Court to confirm the validity of the Circle C WQPZ.
On September 4, 1998, the Hays County District Court ruled
that the WQPZ enabling legislation was constitutional and that
the Circle C WQPZ was validly created. The City has appealed the
Hays County District Court's ruling to the Texas Third Court of
Appeals. Both parties submitted briefs and on September 15, 1999
oral argument was presented to the Third Court of Appeals.
The principal issue involved in this case, the
constitutionality of the enabling legislation authorizing the
creation of WQPZs, is already pending before the Texas Supreme
Court in the City's WQPZ action described above and is expected
to be resolved in connection with that case. Assuming the Texas
Supreme Court determines that the enabling legislation is
constitutional, certain important collateral issues are pending
before the Third Court of Appeals. Those issues, which involve
the application of the WQPZ enabling legislation to Stratus' WQPZ
at Circle C, are expected to be resolved in Stratus' favor.
Annexation/Circle C MUD Reimbursement Suit: Circle C Land Corp.
v. The City of Austin, Texas, Cause No. 97-13994 (Travis County
53rd Judicial District Court, Texas filed 12/19/97). On December
19, 1997, the City annexed all land formerly lying within the
Circle C project. If the City's annexation is valid, Stratus'
property located within Circle C's municipal utility districts
(MUD) and annexed by the City is subject to the City's zoning and
development regulations. Additionally, the City is required to
assume all MUD debt and reimburse Stratus for a significant
portion of the costs incurred for water, wastewater and drainage
infrastructure. Because the City failed to pay these costs upon
annexation, as required by statute, Stratus sued the City. The
City paid a portion of Stratus' claim, as described below. A
trial of the balance of Stratus' claim has been set for August 1,
2000.
The City's total reimbursement obligation to the Circle C
developers, resulting from its annexation, is estimated at $22
million. On October 29, 1999, Circle C Land Corp. and the City
reached an agreement in which Stratus received $9.8 million
(including $1 million of interest) as partial payment of its MUD
reimbursement claims. On January 14, 2000, Stratus received an
additional $0.3 million from the City resulting from both parties
agreeing to the adjustment of prior engineering and accounting
estimates. Stratus has received a total of $10.5 million under
this partial payment settlement as of March 31, 2000. Under the
terms of the agreement, Stratus would be required to return the
money to the City and the City would be required to
14
return the
utility infrastructure to Stratus if the City's annexation is
reversed or otherwise legally rescinded, whether by legislative
action, final action of the appellate court or other legal
process.
In March 2000, the City approved a settlement agreement of
all disputes between the City and certain third party developers
and landowners involved in Circle C. Under the terms of this
settlement, the lawsuits contesting the City's December 1997
annexation of all land within the four Circle C MUDs and the
dissolution of the four MUDs have been dismissed with prejudice.
As a result, Stratus' agreement with the City is no longer
subject to recission.
During the 1999 legislative session two laws were enacted
enhancing Stratus' MUD reimbursement claim against the City, as
described in "Legislative Matters" below. These laws became
effective on September 1, 1999, and Stratus is accordingly
entitled to penalties and interest on its remaining outstanding
delinquent Circle C MUD reimbursements, which are estimated at
approximately $9.0 million, exclusive of penalties and interest.
Stratus will continue to pursue this action vigorously.
Legislative Matters: In the 1997 Texas State legislative
session, a bill to reorganize a state governmental agency
inadvertently repealed the provisions of law (H.B. 4 and S.B.
1704), that established grandfathered rights for previously
permitted lands. In response to the legislature's inadvertent
repeal, the City enacted an ordinance establishing regulations on
land development that effectively eliminated the grandfathered
rights. The City attempted to apply these regulations to
portions of Stratus' Circle C and Lantana properties. In
response, Stratus undertook to assert and defend its
grandfathered entitlements vigorously. In April 1999, the Texas
State House of Representatives and Senate vveerrwwhheellmingly approved
H.B. 1704, which reinstated the grandfathered rights previously
inadvertently repealed. This bill became law effective on May
11, 1999.
Three other laws were enacted during the second quarter of
1999, which are expected to have a positive impact on Stratus'
development rights for its Austin-area properties and strengthen
its position in collecting the Circle C MUD reimbursements
currently being litigated (see "Annexation/Circle C MUD
Reimbursements Suit" above). The three laws enacted are: S.B.
262, which requires a municipality that annexed property in a MUD
to pay penalties and interest on utility infrastructure
reimbursements associated with the annexed properties that are
not timely paid by the municipality; S.B. 1165, which validates
the creation of existing water quality protection zones; and S.B.
89, which requires a municipality to pay developers for utility
infrastructure within a MUD controlled and operated by a
municipality in conjunction with an annexation, regardless of
whether or not the municipality's annexation is ultimately
validated.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) Our Annual Meeting of Stockholders was held May 11,
2000 (the Annual Meeting). Proxies were solicited pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as
amended.
(b) At the Annual Meeting James C. Leslie was elected to
serve until the 2003 Annual Meeting of Stockholders. In addition
to the director elected at the Annual Meeting, the terms of the
following directors continued after the Annual Meeting: Robert L.
Adair III, William H. Armstrong III, and Michael D. Madden.
(c) At the Annual Meeting, holders of Stratus' Common Stock
elected one director with the number of votes cast for or
withheld from the nominee as follows:
Name For Withheld
- --------------- ---------- ---------
James C. Leslie 13,610,839 51,912
With respect to the election of the director, there were no abstentions.
At the Annual Meeting, the stockholders also voted on and
approved a proposal to ratify the appointment of Arthur Andersen
LLP to act as the independent auditors to audit our and our
subsidiaries' financial statements for the year 2000. Holders of
13,600,954 shares voted for, holders of 41,415 shares voted
against and holders of 20,382 shares abstained from voting on,
such proposal.
15
Item 6. Exhibits and Reports on Form 8-K.
(a) The exhibits to this report are listed in the Exhibit
Index appearing on page E-1 hereof.
(b) The registrant filed no Current Reports on Form 8-K
during the period covered by this Quarterly Report on
Form 10-Q.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
STRATUS PROPERTIES INC.
By: /s/ C. Donald Whitmire, Jr.
----------------------------
C. Donald Whitmire Jr.
Vice President & Controller
(authorized signatory and
Principal Accounting Officer)
Date: May 12, 2000
17
STRATUS PROPERTIES INC.
EXHIBIT INDEX
Exhibit
Number
3.1 Amended and Restated Certificate of Incorporation
of Stratus. Incorporated by reference to Stratus'
Exhibit 3.1 to 1998 Form 10-K.
3.2 By-laws of Stratus, as amended as of February 11,
1999. Incorporated by Reference to Exhibit 3.2 to
Stratus' 1998 Form 10-K.
4.1 Stratus' Certificate of Designations of Series A
Participating Cumulative Preferred Stock. Incorporated
by reference to Exhibit 4.1 to Stratus' 1992 Form 10-K.
4.2 Rights Agreement dated as of May 28, 1992 between
Stratus and Mellon Securities Trust Company, as Rights
Agent. Incorporated by reference to Exhibit 4.2 to
Stratus' 1992 Form 10-K.
4.3 Amendment No. 1 to Rights Agreement dated as of
April 21, 1997 between Stratus and the Rights Agent.
Incorporated by reference to Exhibit 4 to Stratus'
Current Report on Form 8-K dated April 21, 1997.
4.4 The loan agreement by and between Comerica Bank-
Texas and Stratus Properties Inc., Stratus Properties
Operating Co., L.P., Circle C Land Corp. and Austin 290
Properties Inc. dated December 21, 1999. Incorporated
by reference to Exhibit 4.4 to Stratus 1999 Form 10-K.
4.5 Certificate of Designations of the Series B
Participating Preferred Stock of Stratus Properties
Inc. Incorporated by reference to Exhibit 4.1 to
Stratus' Current Report on Form 8-K dated June 3, 1998.
4.6 Investor Rights Agreement, dated as of May 22,
1998, by and between Stratus Properties Inc. and
Oly/Stratus Equities, L.P. Incorporated by reference to
Exhibit 4.2 to Stratus' Current Report on Form 8-K
dated June 3, 1998.
4.7 Loan Agreement, dated as of May 22, 1998, by and
among Stratus Ventures I Borrower L.L.C., Oly Lender
Stratus, L.P. and Stratus Properties Inc. Incorporated
by reference to Exhibit 4.3 to Stratus' Current Report
on Form 8-K dated June 3, 1998.
10.1 Amended and Restated Services Agreement, dated as of
December 23, 1997 between FM Services Company and
Stratus. Incorporated by reference to Exhibit 10.2 to
Stratus' 1997 Form 10-K.
10.2 Joint Venture Agreement between Freeport-McMoRan
Resource Partners, Limited Partnership and the
Partnership, dated June 11, 1992. Incorporated by
reference to Exhibit 10.3 to Stratus' 1992 Form 10-K.
10.3 Development and Management Agreement dated and
effective as of June 1, 1991 by and between Longhorn
Development Company and Precept Properties, Inc. (the
"Precept Properties Agreement"). Incorporated by
reference to Exhibit 10.8 to Stratus' 1992 Form 10-K.
10.4 Assignment dated June 11, 1992 of the Precept
Properties Agreement by and among FTX (successor by
merger to FMI Credit Corporation, as successor by
merger to Longhorn Development Company), the
Partnership and Precept Properties, Inc. Incorporated
by reference to Exhibit 10.9 to Stratus' 1992 Form 10-K.
10.5 Master Agreement, dated as of May 22, 1998, by and
among Oly Fund II GP Investments, L.P., Oly Lender
Stratus, L.P., Oly/Stratus Equities, L.P., Stratus
Properties Inc. and Stratus Ventures I Borrower L.L.C.
Incorporated by reference to Exhibit 99.1 to Stratus'
Current Report on Form 8-K dated June 3, 1998.
10.6 Securities Purchase Agreement, dated as of May 22,
1998, by and between Oly/Stratus Equities, L.P. and
Stratus Properties Inc. Incorporated by reference to
Exhibit 99.2 to Stratus' Current Report on Form 8-K
dated June 3, 1998.
E-1
10.7 Oly Stratus Barton Creek I Amended and Restated Joint
Venture Agreement between Oly ABC West I, L.P. and
Stratus ABC West I, L.P. dated December 28, 1999.
Incorporated by reference to Exhibit 10.7 to the
Stratus 1999 Form 10-K.
10.8 Amendment No. 1 to the Oly Stratus ABC West I Joint
Venture Agreement dated November 9, 1998. Incorporated
by reference to Exhibit 10.11 to the Stratus 1998 Third
Quarter 10-Q.
10.9 Management Agreement between Oly Stratus ABC West I
Joint Venture and Stratus Management L.L.C. dated
September 30, 1998. Incorporated by reference to
Exhibit 10.12 to the Stratus 1998 Third Quarter 10-Q.
10.10 Loan Agreement dated September 30, 1998 between
Oly Stratus ABC West I Joint Venture and Oly Lender
Stratus, L.P. Incorporated by reference to Exhibit
10.13 to the Stratus 1998 Third Quarter 10-Q.
10.11 General Partnership Agreement dated April 8, 1998
by and between Oly/Houston Walden, L.P. and Oly/FM
Walden, L.P. Incorporated by reference to Exhibit 10.14
to the Stratus 1998 Third Quarter 10-Q.
10.12 Amendment No. 1 to the General Partnership
Agreement dated September 30, 1998 by and among
Oly/Houston Walden, L.P., Oly/FM Walden, L.P. and
Stratus Ventures I Walden, L.P. Incorporated by
reference to Exhibit 10.15 to the Stratus 1998 Third
Quarter 10-Q.
10.13 Development Loan Agreement dated September 30,
1998 by and between Oly Walden General Partnership and
Bank One, Texas, N.A. Incorporated by reference to
Exhibit 10.16 to the Stratus 1998 Third Quarter 10-Q.
10.14 Guaranty Agreement dated September 30, 1998 by and
between Oly Walden General Partnership and Bank One,
Texas, N.A. Incorporated by reference to Exhibit 10.17
to the Stratus 1998 Third Quarter 10-Q.
10.15 Management Agreement dated April 9, 1998 by and
between Oly/FM Walden, L.P. and Stratus Management,
L.L.C. Incorporated by reference to Exhibit 10.18 to
the Stratus 1998 Third Quarter 10-Q.
10.16 Amended and Restated Joint Venture Agreement dated
August 16, 1999 by and between Oly Lantana, L.P., and
Stratus 7000 West, Ltd. Incorporated by reference to
Exhibit 10.18 to the Quarterly Report on Form 10-Q of
Stratus for the Quarter ended September 30, 1999. ("the
Stratus 1999 Third Quarter 10-Q".)
10.17 The Reimbursement Claim Agreement dated October
29, 1999 by an between Circle C Land Corp. and the City
of Austin. Incorporated by reference to Exhibit 10.19
to the Stratus 1999 Third Quarter 10-Q.
10.18 Guaranty Agreement dated December 31, 1999 by and
between Stratus Properties Inc. and Comerica Bank-
Texas.
10.19 Guaranty Agreement dated February 24, 2000 by and
between Stratus Properties Inc. and Comerica Bank-
Texas.
Executive Compensation Plans and Arrangements (Exhibits
10.20 through 10.23)
10.20 Stratus' Performance Incentive Awards Program, as
amended effective February 11, 1999. Incorporated by
reference to Exhibit 10.18 to Stratus' 1998 Form 10-K.
10.21 Stratus Stock Option Plan, as amended.
Incorporated by reference to Exhibit 10.9 to Stratus'
1997 Form 10-K.
10.22 Stratus 1996 Stock Option Plan for Non-Employee
Directors, as amended. Incorporated by reference to
Exhibit 10.10 to Stratus' 1997 Form 10-K.
10.23 Stratus Properties Inc. 1998 Stock Option Plan as
amended effective February 11, 1999. Incorporated by
reference to Exhibit 10.21 to Stratus' 1998 Form 10-K.
E-2
15.1 Letter dated May 1, 2000 from Arthur Andersen LLP
regarding the unaudited financial statements.
27.1 Financial Data Schedule.
E-3