SECURITIES AND EXCHANGE COMMIISSSION
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 June 30, 1998
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
Registrant's telephone number, including area code: (512) 478-5788
FM Properties Inc.
1615 Poydras Street
New Orleans, Louisiana 70112
(Former name and address, if changed since last report)
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 June 30, 1998, 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
Remarks 8
Report of Independent Public Accountants 9
Management's Discussion and Analysis
of Financial Condition and Results of
Operations 10
Part II. Other Information 13
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)
June 30, December 31,
1998 1997
--------- ----------
(In Thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 1,900 $ 873
Accounts receivable:
Property sales 766 1,265
Other, including income tax of $140,000 724 316
Prepaid expenses 301 473
-------- ----------
Total current assets 3,691 2,927
Real estate and facilities, net 103,411 105,274
Other assets 6,934 4,553
-------- ----------
Total assets $114,036 $ 112,754
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 1,558 $ 1,231
Accrued interest, property taxes and other 1,091 1,789
-------- ----------
Total current liabilities 2,649 3,020
Long-term debt 31,118 37,118
Other liabilities 5,704 6,009
Mandatorily redeemable preferred stock 10,000 -
Stockholders' equity 64,565 66,607
-------- ----------
Total liabilities and stockholders' equity $114,036 $ 112,754
======== ==========
The accompanying notes are an integral part of these financial
statements.
3
STRATUS PROPERTIES INC.
STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------- -----------------
1998 1997 1998 1997
------- ------- ------- -------
(In Thousands, Except Per Share Amounts)
Revenues $ 3,408 $ 5,191 $ 6,063 $20,261
Costs and expenses:
Cost of sales 3,005 2,752 4,653 14,535
General and administrative
expenses 1,107 683 2,499 1,479
------- ------- ------- -------
Total costs and expenses 4,112 3,435 7,152 16,014
------- ------- ------- -------
Operating income (loss) (704) 1,756 (1,089) 4,247
Interest expense, net (478) (524) (985) (1,061)
Other income, net 22 736 31 758
------- ------- ------- -------
Income (loss) before
income taxes and minority
interest (1,160) 1,968 (2,043) 3,944
Income tax provision - (220) - (220)
Minority interest - (4) - (8)
------- ------- ------- -------
Net income (loss) $(1,160) $ 1,744 $(2,043) $ 3,716
======= ======= ======= =======
Net income (loss) per share:
Basic $(0.08) $0.12 $(0.14) $0.26
====== ===== ====== =====
Diluted $(0.08) $0.12 $(0.14) $0.26
====== ===== ====== =====
Average shares outstanding:
Basic 14,288 14,286 14,288 14,286
====== ====== ====== ======
Diluted 14,288 14,468 14,288 14,444
====== ====== ====== ======
The accompanying notes are an integral part of these financial
statements.
4
STRATUS PROPERTIES INC.
STATEMENTS OF CASH FLOW (Unaudited)
Six Months Ended
June 30,
--------------------
1998 1997
------- -------
(In Thousands)
Cash flow from operating activities:
Net income (loss) $(2,043) $ 3,716
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 36 58
Cost of real estate sold 4,939 16,207
Minority interest share of net income - 8
(Increase) decrease in working capital:
Accounts receivable and other 263 1,619
Accounts payable and accrued liabilities (370) (3,296)
Other (2,687) (226)
------- -------
Net cash provided by operating activities 138 18,086
------- -------
Cash flow from investing activities:
Real estate and facilities (3,111) (4,891)
------- -------
Net cash used in investing activities (3,111) (4,891)
------- -------
Cash flow from financing activities:
Proceeds from preferred stock issuance 10,000 -
Repayment of debt, net (6,000) (12,632)
------- -------
Net cash provided by (used in) financing activities 4,000 (12,632)
------- -------
Net increase in cash and cash equivalents 1,027 563
Cash and cash equivalents at beginning of year 873 2,108
------- -------
Cash and cash equivalents at end of period $ 1,900 $ 2,671
======= =======
The accompanying notes are an integral part of these financial
statements.
5
STRATUS PROPERTIES INC.
NOTES TO THE FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Stratus Properties Inc. (STRS or the Company) formerly FM
Properties Inc., operates through a partnership in which STRS
owned a 99.8 percent interest until December 1997 when STRS
acquired the remaining 0.2 percent interest from the outside
managing partner (See Note 1 of "Notes to Financial Statements"
in the 1997 Annual Report on Form 10-K). As a result of this
acquisition, STRS restated previously reported interim 1997
financial results to reflect application of consolidation
accounting for its partnership investment rather than the equity
method.
2. NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) 128,
"Earnings Per Share," which simplifies the computation of
earnings per share (EPS). STRS adopted SFAS 128 in the fourth
quarter of 1997 and restated prior years' EPS data as required by
SFAS 128.
Basic net income (loss) per share was calculated by dividing
net income applicable to common stock by the weighted-average
number of common shares outstanding during the period. Diluted
net income (loss) per share of common stock was calculated by
dividing net income applicable to common stock by the weighted-
average number of common shares outstanding during the period
plus the net effect of dilutive stock options, which represented
approximately 182,000 and 158,000 shares in the second quarter
and six months of 1997, respectively. The Company had options
outstanding to purchase a total of approximately 320,000 and
345,000 common shares excluded from the calculation as anti-
dilutive considering the losses reported in the second quarter
and six month periods of 1998, respectively.
Outstanding options to purchase 514,000 and 225,000 shares
of common stock at average exercise prices of $5.78 and $5.25 per
share for the second quarter of 1998 and 1997, respectively, and
outstanding options to purchase 289,000 and 225,000 shares of
common stock at average exercise prices of $6.19 and $5.25 per
share for the six months ended June 30, 1998 and 1997,
respectively, were not included in the computation of diluted net
income (loss) per share because exercise prices were greater than
the average market price for the periods presented.
In June 1998, the FASB issued SFAS 133, "Accounting for
Derivative Instruments and Hedging Activity," which establishes
accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. SFAS
133 is effective for fiscal years beginning after June 15, 1999
with earlier application permitted beginning as early as July 1,
1998. As STRS does not currently have any derivative instruments
adoption of this standard would not have any impact on its
financial statements, financial position or results of
operations.
3. LONG-TERM DEBT
In December 1997, STRS entered into a restructured credit
facility consisting of a $35.0 million revolving credit facility
and a $15.0 million term loan facility, with individual
borrowings bearing interest at rates based on the lead lender's
prime rate or LIBOR, at STRS' option. The aggregate commitment
will decline to $35.0 million on January 1, 1999, $15.0 million
on January 1, 2000 and will be eliminated on January 1, 2001.
Accordingly, the Company would classify any borrowings in excess
of $35 million as current maturities of long-term debt during
1998. As of June 30, 1998, borrowings totaled $31.1 million.
IMC Global Inc. (IGL) has guaranteed amounts borrowed under the
facility in exchange for an annual fee, payable quarterly, equal
to the difference between STRS' cost of LIBOR-funded borrowings
before the assumption of the guarantee by IGL and the rate on the
LIBOR-funded loans under the new facility. STRS cannot amend or
refinance the facility without IGL's consent. As of June 30,
1998, $17.9 million of additional borrowing was available under
the facility through December 31, 1998. For further discussion of
the restructured credit facility, see Note 4 of "Notes to the
Financial Statements" in STRS' 1997 Annual Report on Form 10-K.
6
4. OLYMPUS TRANSACTION
On May 26, 1998, STRS and Olympus Real Estate Corporation, an
affiliate of Hicks, Muse, Tate & Furst strategic alliance to develop
certain of STRS' 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 STRS
mandatorily redeemable preferred stock, provided a $10 million
convertible debt financing facility to STRS and agreed to make
available up to $50 million of additional capital representing
its share of direct investments in joint STRS/Olympus projects.
Olympus has the right to nominate up to 20 percent of STRS' Board
of Directors.
The $10 million mandatorily redeemable preferred stock was
issued at a stated of $5.84 per share, the average closing price
of STRS common stock during the 30 trading days ended March 2,
1998. STRS used the proceeds from the sale of these securities to
repay debt. For further discussion about mandatorily redeemable
preferred stock see Note 5 below.
The $10 million convertible debt facility is available to
STRS in whole or in part for a period of six years from May 22,
1998 and is intended to fund STRS' equity investment in new
STRS/Olympus joint venture opportunities involving properties not
currently owned by STRS. There have been no borrowings on this
convertible debt facility through July 20, 1998. The interest
rate on any amounts outstanding under this facility is 12 percent
per year and is payable quarterly or accrued and added to
principal at Olympus' option. Outstanding principal under the
facility is convertible at any time by the holder into STRS
common stock at a conversion price of $7.31, which is 125 percent
of the average closing price of STRS common stock during the 30
trading days ended March 2, 1998. If not converted into common
stock, the convertible debt must mature on May 22, 2004. If the
combination of interest at 12 percent and the value of the
conversion right does not provide Olympus with at least a 15
percent annual return on the convertible debt, STRS must pay
Olympus additional interest upon retirement of the convertible
debt in an amount necessary to yield a 15 percent annual return.
The convertible debt is non-recourse to STRS and will be secured
solely by STRS' interest in STRS/Olympus joint venture
opportunities financed with the proceeds of the convertible debt.
Through May 22, 2001, Olympus has agreed to make available
up to $50 million for its share of capital for direct investments
in STRS/Olympus joint acquisition and development activities. In
return, STRS has provided Olympus with a right of first refusal
to participate for no less than a 50 percent interest in all new
acquisition and development projects on properties not currently
owned by STRS, as well as development opportunities on existing
properties in which STRS seeks third-party equity participation.
5. MANDATORILY REDEEMABLE PREFERRED STOCK
STRS has outstanding 1,712,328 shares of mandatorily redeemable
preferred stock, stated value of $5.84 per share. Each share of
preferred stock will share dividends and distributions, if any,
ratably with STRS common stock. The preferred stock is
redeemable at the holder's option at any time after May 22, 2001,
for cash in an amount per share equal to 95 percent of the
average closing price per share of common stock for the 10
trading days preceding the redemption date (the "common stock
equivalent value") or, at STRS' option, after May 22, 2003 for
the greater of the common stock equivalent value or their stated
value per share, plus accrued and unpaid dividends, if any. The
preferred stock must be redeemed no later than May 22, 2004.
STRS has the option to satisfy the redemption with shares of its
common stock on a one-for-one share basis, subject to certain
limitations.
6. LITIGATION
STRS is involved in numerous pending litigation matters with the
City of Austin and others, which may affect its property
development entitlements and ability to secure reimbursement of
approximately $25 million relating to development of its Circle
C property. Refer to Item 3 "Legal Proceedings" and Note 3 "Real
Estate" in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 for a detailed discussion of such
litigation matters. For discussion of litigation events
subsequent to the Annual Report on Form 10-K refer to "Capital
Resources and Liquidity" and Part II - Other information, "Legal
Proceedings" included elsewhere in this interim report on Form
10-Q.
7
--------------------
Remarks
The information furnished herein should be read in conjunction
with STRS' financial statements contained in its 1997 Annual
Report to stockholders included in its Annual Report on 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. (the Company), a Delaware corporation, as
of June 30, 1998, and the related statements of operations for
the three and six-month periods ended June 30, 1998 and 1997, and
the statements of cash flow for the six-month periods ended June
30, 1998 and 1997. 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 generally accepted auditing
standards, 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 generally
accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the balance sheet of Stratus Properties Inc.
as of December 31, 1997, 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 20,
1998, 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, 1997, is fairly stated, in all material respects, in relation
to the balance sheet from which it has been derived.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
July 21, 1998
9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
OVERVIEW
Stratus Properties Inc. (STRS or the Company) is engaged in
the acquisition, development and sale of commercial and
residential real estate properties. STRS' principal real estate
holdings are in the Austin, Texas area and consist of
approximately 2,500 acres of undeveloped residential, multifamily
and commercial property within the Barton Creek development,
approximately 1,300 acres of undeveloped commercial and multi-
family property within the Circle C Ranch development, and
approximately 500 acres of undeveloped residential, multi-family
and commercial property known as the Lantana tract, south of and
adjacent to the Barton Creek development.
STRS also owns or has interests in approximately 190
developed lots, 200 acres of undeveloped residential property and
75 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
professional real estate developers who have been retained to
provide master planning, zoning, permitting, development,
construction and marketing services for the properties. Under
the terms of these agreements, operating expenses and development
costs, net of revenues, are funded by STRS, and the developers
are entitled to a management fee and a 25 percent interest in the
net profits, after recovery by STRS of its investments and a
stated return, resulting from the sale of properties under their
management.
DEVELOPMENT ACTIVITIES
STRS is currently developing ABC West-Phase I of its Barton
Creek project, which is expected to yield approximately 85 new
single-family homesites in early 1999. Development is
progressing at several other sections of the Barton Creek
project, including the construction of utility infrastructure
which will serve a significant portion of the 2,500 acres of
undeveloped property at Barton Creek, and preliminary development
of approximately 200 new single-family homesites, located
adjacent to a new Tom Fazio-designed golf course. STRS expects
these homesites to be available for sale in 1999. STRS expects
to complete these projects as scheduled, however permitting and
entitlement issues now being litigated raise uncertainty about
the timing of completion of the projects.
At the Lantana project, STRS is nearing completion on
construction of a water system that will provide the required
water volume and pressure to serve the approximately 500
undeveloped acres remaining in the project. The property is
planned to accommodate up to 2.5 million square feet of
commercial space, 1,100 multi-family units, and 330 single-family
lots. STRS expects to commence site work in August on the 70,000
square foot first phase of its 140,000 square foot Lantana
Corporate Center. The project has received from the City of
Austin final zoning, subdivision plat and site plan approvals.
STRS is currently pursuing the final development permits for the
330 lots which represent the residential component of the Lantana
project. STRS anticipates the first phase of this project being
completed during 1999.
RESULTS OF OPERATIONS
STRS' summary operating results follow (In Thousands):
Second Quarter Six Months
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
Revenues:
Developed properties $ 3,408 $ 1,351 $ 5,793 $ 5,190
Undeveloped properties
and other - 3,840 270 15,071
-------- -------- -------- --------
Total revenues 3,408 5,191 6,063 20,261
Operating income (loss) (704) 1,756 (1,089) 4,247
Net income (loss) (1,160) 1,744 (2,043) 3,716
10
Revenues from developed properties represented the sale of
64 and 108 single-family units during the second quarter and six-
month periods of 1998, respectively, compared with the sale of 24
and 85 single-family homesites, respectively, during the 1997
periods. The increase in sales of single-family homesites from
prior years levels represented sales primarily in Houston and
Dallas. Undeveloped property revenues for the six-month period
of 1998 were the result of the first quarter 1998 sale of two
acres of undeveloped commercial property, compared with the sale
of 68 and 194 acres of undeveloped commercial and multi-family
property during the second-quarter and six-month periods of 1997,
respectively. Reduced revenues during the second quarter and six
months ended June 30, 1998 resulted from lower sales of
undeveloped properties. The Company, has initiated a business
strategy to develop single-family homesites and is evaluating
several commercial development opportunities rather than selling
undeveloped property. This strategy will enable the Company to
capture the development profits associated with its undeveloped
properties, but will result in relatively low revenues in the
short term.
Operating results were adversely affected by an increase in
general and administrative expenses resulting primarily from the
Company's ongoing efforts to resolve through litigation attempts
by the City of Austin to restrict the Company's development
entitlements and to secure reimbursements of approximately $25
million of infrastructure costs incurred in the development of
the Circle C property. Legal expenses for the second quarter and
six months of 1998 totaled approximately $0.4 million and $1.0
million, respectively. The increased general and administrative
expenses were partially offset by reimbursement of infrastructure
costs, which were previously charged to expense, relating to
properties previously sold of approximately $0.8 million, which
reduced cost of sales in the first quarter of 1998 (see
discussion below).
During 1995, legislation was enacted that enabled the
Company 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 the
Company for costs related to the installation of major utility,
drainage and water quality infrastructure. During the first six
months of 1998, the Company received approximately $2.8 million
in partial reimbursement of infrastructure costs relating to the
Barton Creek and Circle C developments. The proceeds were used
in part to fund current development expenditures and to repay
debt. The Company expects to receive additional reimbursements
for previously incurred infrastructure costs related to the
Barton Creek development from the proceeds of MUD bonds issued in
the future. However, the timing and the amount of future
reimbursements are uncertain. See Part II, Item 1, "Legal
Proceedings" for information regarding litigation concerning
these reimbursable costs.
Net interest expense totaled $478,000 and $985,000 in the
1998 second quarter and six-months periods, respectively,
compared to $524,000 and $1,061,000 during the same periods one
year ago. The decrease reflects lower average debt outstanding in
the current year. In addition, capitalized interest for the
second quarter and six-months periods of 1997 was $(418,000) and
$(870,000), respectively, compared to $(144,000) and $(294,000)
for the comparable periods of 1998.
CAPITAL RESOURCES AND LIQUIDITY
Net cash provided by operations totaled $0.1 million during
the six months ended June 30, 1998 compared with $18.1 million
during the six months ended June 30, 1997. The decrease reflects
the substantial reduction of undeveloped commercial properties
sold during the first six months of 1998. Financing activities
provided cash of $4.0 million during the six months ended June
30, 1998 from the issuance of the mandatorily redeemable
preferred stock associated with the Olympus deal (see Note 4)
offset in part by net repayments of debt. The excess proceeds
were used to fund real estate development expenditures. Debt
repayments of $12.6 million were made during the six months ended
June 30, 1997. Higher revenues in the prior year, mainly from the
sale of undeveloped properties, allowed the Company to repay
outstanding debt.
The Company's sales activity slowed substantially in early
1998 and will continue at reduced levels during the remainder of
the year because of the Company's strategy to develop single-
family homesites while evaluating certain commercial properties,
as indicated in "Results of Operations" above.
11
Development expenditures during the first six months of 1998 were funded
largely from borrowings under the Company's credit facility,
which provides aggregate available credit of $50 million through
December 31, 1998, reducing to $35 million through December 31,
1999 and $15 million through December 31, 2000. At June 30,
1998, outstanding debt totaled $31.1 million and the amount
available under the facility through December 31, 1998 was $17.9
million. Anticipated capital expenditures for the remainder of
1998 are expected to be funded by operating cash flow and
additional borrowings, with the level of such capital
expenditures subject to change based on the resolution of
ownership of certain reimbursements of previously incurred
infrastructure costs and other legal and regulatory issues, as
further discussed in Part II, Item 1, "Legal Proceedings."
In April 1998, STRS and Olympus entered into an agreement
for STRS to manage Olympus' newly acquired wholly owned Walden on
Lake Houston real estate development project in Houston. The
development includes 900 developed lots and 80 acres of
undeveloped real estate. STRS will receive a fixed management
fee plus commissions on new lot sales. As of June 30, 1998, STRS
had negotiated agreements that provide for the sale of
approximately 90 percent of the developed lots. The agreements
require the purchasers to close sales on the lots pursuant to a
specific schedule, which is expected not to exceed four years.
Under the terms of the STRS/Olympus alliance, STRS has the option
to purchase up to a 50 percent interest in the project, which
STRS anticipates would be funded from the $10 million convertible
debt facility available under terms of the Olympus transaction
(see Note 4).
The future performance of STRS continues to be dependent on
future cash flows from real estate sales, which will be
significantly affected by future real estate values, regulatory
issues, development costs, the ability of the Company to continue
to protect its land use and development entitlements, and
interest rate levels. Significant development expenditures remain
to be incurred for STRS' Austin-area properties prior to their
eventual sale. These factors, combined with the debt reduction
requirements under the credit facility, could impede STRS'
ability to develop its properties and expand its business. The
closing of the Olympus transaction (see Note 4) improved the
Company's capital resources by providing the Company $10 million
from equity proceeds and provides for up to an additional $60
million of capital in the future, subject to certain conditions.
The Company is continuing to consider a number of other capital
raising alternatives, including equity sales, various forms of
debt financing and other means. While bank financing for
development of the Company's existing properties is available,
obtaining financing for undeveloped land purchases is generally
expensive and remains uncertain. Although STRS believes its
efforts will successfully address the capital resource needs
discussed above, there can be no assurance that STRS will
generate sufficient cash flow or obtain sufficient funds to make
required interest and principal payments under the facility.
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 and the IGL guarantee, the
anticipated outcome of the litigation and regulatory matters, the
expected results of STRS' 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 STRS' expectations include, economic and business
conditions, business opportunities that may be presented to and
pursued by the Company, changes in laws or regulations and other
factors, many of which are beyond the control of the Company and
other factors that as described in more detail under the heading
"Cautionary Statements" in STRS' Form 10-K for the year ended
December 31, 1997.
----------------------------
The results of operations reported and summarized above are not
necessarily indicative of future operating results.
12
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is involved in various regulatory matters and
litigation involving development of its Austin properties. For a
detailed discussion on these matters see Item 3, "Legal
Proceedings" and Note 3, "Real Estate" in STRS' 1997 Annual
Report on Form 10-K.
Below is a partial list of the cases in which the Company is
currently involved. The current status is summarized and should
be read in conjunction with the above referenced sections of the
STRS 1997 Annual Report on Form 10-K.
Annexation Litigation: Circle C Land Corp. v. The City of Austin,
Texas, Cause No. 97-13994 (Travis County 53rd Judicial District Court,
TX filed 12/19/97).
In December 1997, the City of Austin (the "City") enacted
an ordinance purporting to annex all land within the Southwest
Travis County Water District, including the Company's Circle C
lands. The Company filed suit seeking reimbursement of developer
funded municipal utility districts ("MUD") infrastructure costs
that the City is required to pay the Company as a result of the
annexation. A summary judgement hearing has been set for August
26, 1998 to establish the City's liability for developer
reimbursements. A jury trial, if necessary, is scheduled for
January 20, 1999.
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, TX filed 10/31/97).
In November 1997, the Company sought a declatory judgement
in the Hays County District Court confirming the validity of the
Circle C Water Quality Protection Zone ("WQPZ"), which includes
approximately 553 acres owned by the Company and located outside
the boundaries of any MUD. The City contested the Hays County
District Court's jurisdiction but was denied in its motion to
transfer venue and all other requested relief. The City appealed
the trial court's decision to the Third Court of Appeals. The
City also requested that the Third Court of Appeals stay any
action in the Hays County District Court, including the Company's
motion for summary judgment, pending the Third Court of Appeals'
review of the District Court's denial of the plea to the
jurisdiction. The Third Court of Appeals refused to stay the
summary judgment and, in response, the City filed a writ with the
Texas Supreme Court. The Supreme Court accepted the writ and
stayed all underlying litigation. Subsequently, the Third Court
of Appeals confirmed the trial court's denial of the plea to the
jurisdiction. The Company then filed a motion to lift the stay
with the Supreme Court. The Supreme Court issued an order
lifting the stay allowing the Hays County District Court
litigation to proceed to summary judgment and resolution. A
summary judgement hearing is scheduled for September 4, 1998.
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, TX filed 1/9/98).
On January 9, 1998, the City filed a lawsuit (the "Travis
County Suit") in the Travis County District Court against 14
water quality zones and their owners, including the Barton Creek
WQPZ. The City challenges the constitutionally of the
legislation authorizing the creation of water quality zones. The
Attorney General of Texas agreed to intervene in the Travis
County suit and the Circle C WPQZ litigation above, to defend the
legislation. The City filed a motion for partial summary
judgement against one defendant and against the State of Texas.
All defendant parties filed motions with regard to summary
judgement. A summary judgment hearing was conducted in the
Travis County District Court on July 9, 1998. The Travis County
District Court entered an order granting the City of Austin's
summary judgment motion and declaring the water quality zone
legislation unconstitutional. All parties agreed to the form of
an order which permits an expedited appeal directly to the
Supreme Court of Texas. The Company, and other defendant
parties, have filed appeals. A hearing is expected during the
first half of 1999.
MUD Reimbursement Litigation: Circle C Land Corp. v. Phoenix
Holdings, Ltd., Cause No. 97-01388 (Travis County 261st Judicial
District Court, TX filed 2/5/97).
During February 1997, STRS filed a petition for declaratory
judgement against Phoenix Holding Ltd. ("Phoenix") in order to
secure its ownership of approximately $25 million of MUD
13
reimbursements that pertain to existing infrastructure that
serves the Circle C development. Phoenix filed a counter claim
against Circle C in June 1997. On February 20, 1998 the District
Court granted the Company's motion for summary judgement on the
primary case and Phoenix dismissed its counterclaims with
prejudice, but reserved the right to appeal the summary judgement
of the primary case. On April 10, 1998, Phoenix appealed the
summary judgement on the primary case to the Third Court of
Appeals. A hearing is expected to be scheduled during the fourth
quarter of 1998.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders of the Company was
held on May 14, 1998 (the "Annual Meeting"). Proxies were
solicited pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended.
(b) At the Annual Meeting, Richard C. Adkerson was elected
to serve until the 2001 annual meeting of stockholders. In
addition to the director elected at the Annual Meeting, the terms
of James C. Leslie and Michael D. Madden continued after the
Annual Meeting.
(c) At the Annual Meeting, holders of shares of the
Company's Common Stock elected one director with the number of
votes cast for or withheld from such nominee as follows:
Name For Withheld
Richard C. Adkerson 13,366,192 281,580
With respect to the election of the director, there were no abstentions
or broker non-votes.
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 the financial
statements of the Company and its subsidiaries for the year 1998.
Holders of 13,610,458 shares voted for, holders of 20,828 shares
voted against and holders of 16,486 shares abstained from voting
on such proposal. There were no broker non-votes with respect to
such proposal.
At the Annual Meeting, the stockholders voted on and
approved a proposal to approve the Company's 1998 Stock Option
Plan in the form presented in the corporation's proxy statement
dated March 30, 1998. Holders of 7,847,198 shares voted for,
holders of 811,869 shares voted against and holders of 122,680
shares abstained from voting on such proposal. There were broker
non-votes consisting of 4,866,025 shares with respect to such
proposal.
At the Annual Meeting, the stockholders voted on and
approved the proposal to amend the corporation's Amended and
Restated Certificate of Incorporation to change the name of the
corporation from FM Properties Inc. to Stratus Properties Inc.
Holders of 13,262,002 shares voted for, holders of 332,959 shares
voted against and holders of 52,811 shares abstained from voting
on such proposal. There were no broker non-votes with respect to
such proposal.
14
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) Two Current Reports on Form 8-K, were filed by the
registrant reporting events under Items 5 and 7 on the
June 3, 1998 and Item 5 on June 25, 1998, during the
period covered by this Quarterly Report on Form 10-Q.
15
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: August 13, 1998
16
STRATUS PROPERTIES INC.
EXHIBIT INDEX
Exhibit
Number
3.1 Amended and Restated Certificate of
Incorporation of the Company. Incorporated
by reference to Exhibit 3.1 to the Company's
1992 Form 10-K.
3.2 By-laws of the Company, as amended.
Incorporated by reference to Exhibit 3.2 to
the Company's 1992 Form 10-K.
4.1 The Company's Certificate of Designations of
Series A Participating Cumulative Preferred
Stock. Incorporated by reference to Exhibit
4.1 to the Company's 1992 Form 10-K.
4.2 Rights Agreement dated as of May 28, 1992
between the Company and Mellon Securities
Trust Company, as Rights Agent. Incorporated
by reference to Exhibit 4.2 to the Company's
1992 Form 10-K.
4.3 Amendment No. 1 to Rights Agreement dated as
of April 21, 1997 between the Company and the
Rights Agent. Incorporated by reference to
Exhibit 4 to the Company's Current Report on
Form 8-K dated April 21, 1997.
4.4 Amended, Restated and Consolidated Credit
Agreement dated as of December 15, 1997 among
the Partnership, Circle C Land Corp., certain
banks, and The Chase Manhattan Bank, as
Administrative Agent and Document Agent.
Incorporated by reference to Exhibit 4.4 to
the 1997 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 the Company's 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
the Company's 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 the Company's Current Report
on Form 8-K dated June 3, 1998.
10.1 Second Amended and Restated Agreement of
General Partnership of FM Properties
Operating Co. dated as of December 15, 1997
between the Company and STRS L.L.C.
Incorporated by reference to Exhibit 10.1 to
the Company's 1997 Form 10-K.
10.2 Amended and Restated Services Agreement,
dated as of December 23, 1997 between FM
Services Company and the Company.
Incorporated by reference to Exhibit 10.2 to
the Company's 1997 Form 10-K.
10.3 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 the Company's 1992 Form 10-K.
E-1
10.4 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 the Company's
1992 Form 10-K.
10.5 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
the Company's 1992 Form 10-K.
10.6 STRS Guarantee Agreement dated as of December
15, 1997 by the Company. Incorporated by
reference to Exhibit 10.6 to the Company's
1997 Form 10-K.
10.7 Amended and Restated IGL Guarantee Agreement
dated as of December 22, 1997 by IMC Global
Inc. Incorporated by reference to Exhibit
10.7 to the Company's 1997 Form 10-K.
10.8 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
the Company's Current Report on Form 8-K
dated June 3, 1998.
10.9 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
the Company's Current Report on Form 8-K
dated June 3, 1998.
Executive Compensation Plans and Arrangements
(Exhibits 10.10 through 10.13)
10.10 The Company's Performance Incentive
Awards Program, as amended. Incorporated by
reference to Exhibit 10.21 to the STRS Annual
Report on Form 10-K for the fiscal year ended
December 31, 1994.
10.11 STRS Stock Option Plan, as amended.
Incorporated by reference to Exhibit 10.9 to
the Company's 1997 Form 10-K.
10.12 STRS Stock Option Plan for Non-Employee Directors,
as amended. Incorporated by reference to Exhibit 10.10
to the Company's 1997 Form 10-K.
.
10.13 Stratus Properties Inc. 1998 Stock Option Plan.
15.1 Letter dated July 21, 1998 from Arthur
Andersen LLP regarding unaudited interim
financial statement.
27.1 Financial Data Schedule.
E-2