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, 1999
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
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, 1999, 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
of Financial Condition and Results of
Operations 10
Part II. Other Information 15
Signature 17
Exhibit Index E-1
<PAGE> 2
STRATUS PROPERTIES INC.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
<CAPTION>
STRATUS PROPERTIES INC.
CONDENSED BALANCE SHEETS (Unaudited)
March 31, December 31,
1999 1998
--------- ---------
(In Thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,949 $ 5,169
Accounts receivable:
Property sales 670 525
Other 1,320 408
Prepaid expenses 335 361
--------- ---------
Total current assets 7,274 6,463
Real estate and facilities, net 96,899 96,556
Investment in and advances to
unconsolidated affiliates 2,519 2,468
Other assets 5,292 6,342
--------- ---------
Total assets $ 111,984 $ 111,829
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 700 $ 583
Accrued interest, property taxes and other 459 1,861
Current portion of long-term debt 14,118 -
--------- ---------
Total current liabilities 15,277 2,444
Long-term debt 17,122 29,178
Other liabilities 6,095 6,238
Mandatorily redeemable preferred stock 10,000 10,000
Stockholders' equity 63,490 63,969
--------- ---------
Total liabilities and stockholders' equity $ 111,984 $ 111,829
========= =========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE> 3
<TABLE>
<CAPTION>
STRATUS PROPERTIES INC.
STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended
March 31,
------------------
1999 1998
-------- -------
(In Thousands,Except
Per Share Amounts)
<S> <C> <C>
Revenues $ 1,586 $ 2,655
Costs and expenses:
Cost of sales 1,070 1,648
General and administrative expenses 734 1,392
------- -------
Total costs and expenses 1,804 3,040
------- -------
Operating loss (218) (385)
Interest expense, net (269) (507)
Other income (loss), net (29) 9
------- -------
Loss before income taxes and
equity in affilities (516) (883)
Income tax provision (14) -
Equity in unconsolidated affiliates'income 51 -
------- -------
Net loss $ (479) $ (883)
======= =======
Basic and diluted net loss per share $(0.03) $(0.06)
====== ======
Basic and diluted average shares outstanding 14,288 14,288
====== ======
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE> 4
<TABLE>
<CAPTION>
STRATUS PROPERTIES INC.
STATEMENTS OF CASH FLOW (Unaudited)
Three Months Ended
March 31,
--------------------
1999 1998
------- -------
(In Thousands)
<S> <C> <C>
Cash flow from operating activities:
Net loss $ (479) $ (883)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 21 14
Cost of real estate sold 1,003 2,091
Equity in unconsolidated affiliates income (51) -
(Increase) decrease in working capital:
Accounts receivable and other (41) 417
Accounts payable and accrued liabilities (1,222) (514)
Long term receivable and other (85) (584)
------- -------
Net cash provided by (used in) operating activities (854) 541
------- -------
Cash flow from investing activities:
Real estate and facilities (1,366) (1,979)
------- -------
Net cash used in investing activities (1,366) (1,979)
------- -------
Cash flow from financing activities:
Proceeds from credit facility, net 2,000 3,000
------- -------
Net cash provided by financing activities 2,000 3,000
------- -------
Net increase (decrease) in cash and cash equivalents (220) 1,562
Cash and cash equivalents at beginning of year 5,169 873
------- -------
Cash and cash equivalents at end of period $ 4,949 $ 2,435
======= =======
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE> 5
STRATUS PROPERTIES INC.
NOTES TO FINANCIAL STATEMENTS
1. EARNINGS PER SHARE
Basic and diluted net 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 the
period. STRS had options outstanding to purchase a total of
approximately 191,000 shares for the first quarter of 1999 and
372,000 shares for the first quarter of 1998 excluded from the
diluted net loss per share of common stock computation as anti-
dilutive considering the losses reported during each quarter
presented. Additionally STRS' outstanding mandatorily redeemable
preferred stock, convertible into approximately 1.7 million
shares of common stock, and its outstanding convertible debt,
convertible into approximately 290,000 shares of common stock,
were also excluded from the diluted net loss per share
calculation because the inclusion of such shares would decrease
the net loss per share for the first quarter of 1999. During the
first quarter of 1999, there were no dividends accrued on the
mandatorily redeemable preferred stock and interest expense on
the convertible debt totaled approximately $62,000. There was no
outstanding mandatorily redeemable preferred stock or convertible
debt during the first quarter of 1998.
Outstanding options to purchase approximately 476,000 shares
at an average exercise price of $5.29 per share during the first
quarter of 1999 were excluded from the computation of diluted EPS
because their exercise prices were greater than the average
market price for the quarter and because of the net loss recorded
during the quarter. During the first quarter of 1998 all options
outstanding had exercise prices below the average market price
for the quarter; however, the options were excluded from the
diluted EPS computation because of STRS' net loss for the
quarter.
2. LONG-TERM DEBT
STRS has a $35.0 million revolving credit facility with
individual borrowings bearing interest at rates based on the lead
lender's prime rate or LIBOR, at STRS' option. The aggregate
commitment decreased to $35.0 million on January 1, 1999. It
will be reduced further to $15.0 million on January 1, 2000 and
will terminate on January 1, 2001. STRS will classify any
borrowings on this credit facility in excess of $15 million as
current maturities of long-term debt. As of March 31, 1999,
credit facility borrowings totaled $29.1 million of STRS' $31.2
million outstanding debt. 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 current rate on the LIBOR-funded loans
under the facility. STRS cannot amend the facility without IGL's
consent. For further discussion of this credit facility, see
Note 5 of "Notes to Financial Statements" in STRS' 1998 Annual
Report on Form 10-K. STRS had $2.1 million of additional long-
term debt outstanding on March 31, 1999 resulting from borrowings
on its convertible debt facility (see Note 3 below).
STRS believes its near-term capital resource needs can be
met adequately during 1999 from operating cash flows and
additional borrowings under its existing debt facilities.
However, the debt reduction required under its revolving credit
facility (see above) will require raising additional capital by
no later than January 1, 2000. Accordingly, STRS is currently
exploring capital raising alternatives, including various forms
of debt and/or equity financing. STRS continues to pursue
financing for the development of individual projects through both
commercial bank facilities and in accordance with its alliance
with Olympus, (see Note 3 below). While there can be no
assurance that STRS will have the necessary funds, management
believes that STRS has the ability to effectively address its
capital resource needs and debt reduction requirements.
3. OLYMPUS RELATIONSHIP
On May 22, 1998, STRS and Olympus Real Estate Corporation
(Olympus), an affiliate of Hicks, Muse, Tate & Furst
Incorporated, formed a 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.
<PAGE> 6
The $10 million convertible debt facility is available to
STRS in whole or in part until May 22, 2004 and is intended to
fund STRS' equity investments in new STRS/Olympus joint venture
opportunities involving properties not currently owned by STRS.
Interest under this facility accrues at 12 percent and is payable
quarterly or added to principal at Olympus' option. As of March
31, 1999, Olympus had elected to add all interest to the
principal ($2.0 million), resulting in an outstanding amount of
$2.1 million.
Through May 22, 2001, Olympus 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.
As of March 31, 1999 Olympus had invested approximately $3.6
million of such funds in STRS/Olympus joint ventures. For further
discussion of STRS' alliance and its subsequent formation of
joint ventures with Olympus see Note 4 below and Notes 2, 3 and 4
of "Notes to Financial Statements" included in STRS' 1998 Annual
Report on Form 10-K.
4. INVESTMENT IN UNCONSOLIDATED AFFILIATES
On September 30, 1998, STRS entered into two separate
transactions with Olympus. The first provided for the
development of a 75 residential lot project at the Barton Creek
ABC West Phase I subdivision currently referred to as Wimberly
Lane. In this transaction STRS sold the land to the Oly/Stratus
ABC West I Joint Venture, ("ABC Joint Venture") for approximately
$3.3 million, of which $1.65 million attributable to its 50
percent equity interest was deferred for financial accounting
purposes, and invested approximately $0.5 million in the now
fully developed project. The other transaction involved
approximately 700 developed lots and 80 acres of platted but
undeveloped real estate at the Walden on Lake Houston project.
Olympus originally purchased this project in April 1998 when it
contained 930 developed lots and 80 acres of undeveloped
property. STRS has served as manager of this project since
Olympus' purchase. STRS acquired its 50 percent interest in the
Oly Walden Partnership ("Walden Partnership") borrowing $2.0
million of funds available under its convertible debt facility
with Olympus (see Note 3 above). STRS accounts for its investment
in both of these affiliated entities using the equity method.
The Walden Partnership and the ABC Joint Venture each have
existing project development loan facilities with the same
commercial bank. These facilities, totaling $8.2 million for the
Walden Partnership and $3.9 million for the ABC Joint Venture,
are non-recourse to the partners and secured by the assets of the
respective projects. At March 31, 1999, borrowings of $5.6
million and $1.3 million were outstanding on these respective
facilities. Additionally, these facilities required that a
wholly owned subsidiary of STRS deposit a total of $3.0 million
of restricted cash with the bank as additional collateral for the
loan. The loan agreement for the Walden Partnership permits a
$0.30 reduction of this restricted cash deposit for every $1.00
principal repaid on the Walden Partnership loan. However, the
restriction on the $0.5 million deposited as collateral for the
ABC Joint Venture loan will not be removed until the entire loan
is repaid. At March 31, 1999, STRS had approximately $2.6
million of restricted cash pursuant to these project development
loan facilities agreements.
For a detailed discussion of the joint venture and
partnership transactions with Olympus see Note 4 "Investment in
Unconsolidated Affiliates" and "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 STRS' 1998 Annual Report on Form 10-K.
There have been no dividends received from either
unconsolidated affiliate since their inception through March 31,
1999. The summarized unaudited financial information of STRS'
unconsolidated affiliates is shown below (in thousands):
<PAGE> 7
<TABLE>
<CAPTION>
ABC Walden
Joint Venture Partnership Total
------------- ----------- ------
<S> <C> <C> <C>
Earnings data for the quarter
ended March 31, 1999:
Revenue $ 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
</TABLE>
5. LITIGATION
STRS is involved in numerous pending litigation matters with the
City of Austin and others, which may affect its property
development entitlements and its ability to secure reimbursement
of approximately $22 million, of which STRS' portion is estimated
to be approximately $18 million, relating to development of its
Circle C property. Refer to Item 3 "Legal Proceedings" and Note 6
"Real Estate" in the STRS Annual Report on Form 10-K for the year
ended December 31, 1998 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.
--------------------
Remarks
The information furnished herein should be read in conjunction
with STRS' financial statements contained in its 1998 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.
<PAGE> 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,
1999, and the related statements of operations and cash flow for
the three-month periods ended March 31, 1999 and 1998. 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, 1998, 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,
1999, 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, 1998, 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
April 20, 1999
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
OVERVIEW
Stratus Properties Inc. (STRS) 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 2,450
acres of undeveloped residential, multi-family 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 73 developed lots, 169 acres of undeveloped
residential property and 75 acres of undeveloped commercial and
multi-family property located in Dallas, Houston and San Antonio,
Texas that 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.
INVESTMENT IN UNCONSOLIDATED AFFILIATES
On September 30, 1998, STRS and Olympus agreed to enter into
two separate 50 percent owned joint real estate transactions,
pursuant to a strategic alliance entered into on May 22, 1998
(see Notes 3 and 4 above).
During the first quarter of 1999, STRS, as developer,
completed the development of 75 residential lots at the Oly
Stratus ABC West I Joint Venture ("ABC Joint Venture"). STRS, as
manager, closed on the initial sale of eight lots on March 31,
1999 resulting in revenues of $0.8 million to the joint venture.
The net proceeds from these sales were used to reduce outstanding
borrowings under the ABC Joint Venture development project loan facility,
which at March 31, 1999, totaled $1.3 million. STRS will continue its
marketing efforts and anticipates substantial sales during the
remainder of 1999 and into early 2000. All sales proceeds will
initially be used to repay the outstanding project loan prior to
any distributions to STRS and Olympus. STRS will have access to
$0.5 million that it funded to a restricted account as additional
collateral for the loan facility upon the ABC Joint Venture's
full repayment of the project loan, which is anticipated by early
2000.
STRS is continuing its management of the Oly Walden
Partnership, which currently includes approximately 680 developed
lots and 80 acres of platted but undeveloped real estate. STRS
receives management fees and commissions for its services. STRS
has negotiated agreements that provide for the sale of
approximately 90 percent of the developed lots. These agreements
require the purchasers to close on the lots pursuant to a
specific schedule, which STRS anticipates will result in the sale
of all such lots over a period not to exceed four years.
Approximately 250 lots have already closed and funded under these
agreements.
DEVELOPMENT ACTIVITIES
Development is progressing at several sections of the
Barton Creek project, including the construction of utility
infrastructure which will serve a significant portion of the
2,450 acres of undeveloped property at Barton Creek, and
preliminary development of approximately 200 new single-family
homesites surrounding a new Tom Fazio-designed golf course, which
is expected to be completed in the third quarter of 1999. STRS
expects these homesites to be available for sale by late 2000.
Permitting and entitlement issues now being litigated, however,
raise uncertainty about the timing of completion of the projects
at Barton Creek.
At the Lantana project, STRS has completed construction of a
$3.0 million water system to serve the approximate 500
undeveloped acres remaining in the project. The City of Austin
(the City) has approved the completion of this water system and
reimbursed STRS $1.0 million of the system's costs in December
1998, with the remaining balance to be reimbursed ratably in 1999 and
2000. 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 has commenced site work on the
140,000 square foot Lantana Corporate Center (7000 West) and
secured a $6.6 million project loan commitment for the 70,000
square foot first phase (see "Capital Resources and Liquidity"
<PAGE> 10
below). Construction on the first 7000 West building is presently
scheduled to be completed in late 1999 and STRS is actively pre-
leasing the building.
STRS is currently entitling approximately 250 acres within
Barton Creek for the development of 54 single family homesites.
The proposed development is being permitted in accordance with
the City sponsored Save Our Spring (SOS) ordinance. The
developed lots could be marketed as early as year-end 1999
pending timely approval of the project by the City.
STRS has finalized plans for the development of its 46 acre
Bee Cave tract, which is outside of the City's jurisdictional
area. This development project is anticipated to yield up to 39
developed lots and 30,000 square feet of commercial space.
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
STRS' summary operating results follow (In Thousands):
First Quarter
-----------------
1999 1998
------- -------
<S> <C> <C>
Revenues:
Developed properties $ 1,152 $ 2,385
Undeveloped properties 155 270
Commissions, management fees and other 279 -
------- -------
Total revenues 1,586 2,655
Operating loss (218) (385)
Net loss (479) (883)
</TABLE>
Revenues during the first quarter of 1999 represented the
sale of 21 single-family units, while first quarter of 1998
revenues resulted from the sale of 44 single-family homesites,
and two acres of undeveloped property. Additionally, revenues
from undeveloped properties during the first quarter of 1999
reflect STRS' recognition of previously deferred revenues from
the sale of the initial eight lots at the ABC Joint Venture.
These subsequent lot sales to unrelated third parties permitted
STRS to recognize $155,000 of $1,647,500 in previously deferred
revenues and $56,000 of related profit, which resulted from STRS'
initial sale of the 28 acres of undeveloped property to the ABC
Joint Venture. STRS' commissions, management fees and other
revenue reflect its increasing involvement in that aspect of the
real estate business and reflects its managerial role in the
joint ventures with Olympus as well as its being the manager of
the 2,200 acre Lakeway project near Austin.
Cost of sales decreased to $1.1 million for the three months
ended March 31, 1999 from $1.7 million for the same period last
year. The decrease resulted primarily from the reduction in
sales. Reimbursement of certain infrastructure costs, which were
previously charged to expense and/or related to properties
previously sold, reduced cost of sales by approximately $0.8
million during both the 1999 and 1998 periods.
General and administrative expenses decreased during the
three months ended March 31, 1999, to $0.7 million from $1.4
million during the comparable period last year. The decrease
resulted primarily from reduced legal costs in connection with
STRS' ongoing efforts to resolve, through litigation, attempts by
the City and others to restrict STRS' development entitlements
and to secure reimbursement of approximately $22 million relating
to infrastructure costs incurred in the development of the Circle
C property. STRS' share of these costs, currently estimated at
approximately $18 million, are not recorded as an asset in STRS'
balance sheet. In December 1998, the Texas Supreme Court heard
oral argument on a legal brief that may resolve various issues
between STRS and the City. A ruling is anticipated during 1999.
Lower legal costs during the first quarter of 1999 reflect the
relative inactivity associated with timing of the Texas Supreme
Court's ruling. See Part II, Item 1 "Legal Proceedings" for
further discussion of legal matters concerning STRS. Legal
expenses for the three months of 1999 and 1998 totaled
approximately $0.2 million and $0.6 million, respectively.
<PAGE> 11
During 1995, legislation was enacted that enabled STRS 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 STRS for costs
related to the installation of major utility, drainage and water
quality infrastructure. During the first quarter of 1999 STRS
received approximately $1.1 million in partial reimbursement of
infrastructure costs relating to the Barton Creek development
compared with $1.0 million collected during the first quarter of
1998. The proceeds were used in part to fund current development
expenditures and to repay debt. STRS received approximately
$2.0 million of additional Barton Creek MUD reimbursements during
early April 1999 and 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 Barton
Creek MUD reimbursements are uncertain. For information
concerning Circle C MUD reimbursements currently being litigated,
see Part II, Item 1, "Legal Proceedings".
Net interest expense totaled $269,000 during the first
quarter of 1999 compared to $507,000 during first-quarter of
1998. The decrease reflects lower average debt outstanding in the
current year and an increase in capitalized interest.
CAPITAL RESOURCES AND LIQUIDITY
Net cash used in operating activities totaled $0.9 million
during the first quarter of 1999 compared with cash provided from
operations of $0.5 million during the first quarter of 1998. The
decrease reflects the substantial reduction of sales revenues and
STRS' payment of outstanding accounts payable and accrued
liabilities subsequent to December 31, 1998. Cash used in
investing activities totaled $1.4 million during the first
quarter of 1999 compared with $2.0 million during the first
quarter of 1998, reflecting STRS' net real estate and facilities
expenditures. Financing activities provided cash of $2.0 million
from increased borrowings during the first quarter of 1999
compared with $3.0 million during the first quarter of 1998. STRS
used the proceeds to fund real estate development expenditures
and fund operations.
STRS development expenditures during the first quarter of
1999 were funded largely from borrowings under its credit
facility, which provides aggregate available credit of $35
million through December 31, 1999 and $15 million through
December 31, 2000 (see Note 2). At March 31, 1999, outstanding
debt on this credit facility totaled $29.1 million. Anticipated
capital expenditures for the remainder of 1999 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 1999, STRS and a wholly owned subsidiary finalized
a $6.6 million project development loan facility with a
commercial bank for the development of the 70,000 square foot
first phase of the 7000 West project at Lantana. STRS is
guarantor of the completion of the project and unpaid interest
and certain other limited obligations. The 18 month variable
rate loan is secured by the approximate 11 acres of land at 7000
West and related improvements, as well as the approximate $2.0
million of reimbursements due from the City of Austin for the
Lantana water pump station (see "Development Activities" above).
Interest is payable monthly and accrues at the bank's prime rate
or LIBOR plus 250 basis points at STRS' option. STRS is
anticipating refinancing this bridge financing upon the
completion of the pre-leasing activities that are currently
underway.
STRS' future operating cash flows and, ultimately, its
ability to develop its properties and expand its business will be
largely dependent on the level of its real estate sales. In
turn, these sales will be significantly affected by future real
estate values, regulatory issues, development costs, interest
rate levels and the ability of STRS to continue to protect its
land use and development entitlements. Significant development
expenditures remain to be incurred for STRS' Austin-area
properties prior to their eventual sale. STRS' anticipated 1999
capital expenditures will be limited to essential levels as STRS
works to preserve its land use and related rights in various
disputes with the City and others, as more fully explained in
Part II Item 1, "Legal Proceedings." As a result, property sales
during the remainder of 1999 are expected to be lower than in
previous years. STRS believes its near-term capital resource
needs can be met adequately during 1999 from operating cash flows
and additional borrowings under its debt facilities. However, the
debt reduction required under its revolving credit facility will
require raising additional capital by no later than January 1,
2000. STRS therefore is considering other capital raising
alternatives, including various forms of debt and/or equity
<PAGE> 12
financing and other means. STRS is able to obtain up to $50
million in capital from Olympus for the development of existing
properties in which it desires third-party equity participation,
and also believes it can obtain bank financing at a reasonable
cost for refinancing its existing credit facility. However, while
financing for development of STRS' existing properties is
available (see discussion above), obtaining land acquisition
financing is generally expensive and uncertain. While there can
be no assurance that STRS will generate sufficient cash flow or
obtain sufficient funds to make the required debt reduction to
$15 million by January 1, 2000 under its existing revolving
credit facility, STRS believes it can meet the capital resource
needs discussed above. Resolving its entitlement and
reimbursement disputes with the City and establishing a long-term
capital structure remain STRS' primary objectives for the
remainder of 1999.
IMPACT OF YEAR 2000 COMPLIANCE
The Year 2000 ("Y2K") issue is the result of computerized systems
being written to store and process the year portion of dates
using two digits rather than four. Date-aware systems (i.e. any
system or component that performs calculations, comparisons,
sequencing or other operations involving dates) may fail or
produce erroneous results on or before January 1, 2000 because
the year 2000 will be interpreted as the year 1900.
STRS' State of Readiness. STRS has been pursuing a strategy to
ensure all its significant computer systems will be Y2K
compliant, i.e., able to process dates from and after January 1,
2000, including leap years, without critical systems failure (Y2K
Compliant or Y2K Compliance). Certain computerized business
systems and related services are provided under contract by a
services company of which STRS owns 10 percent (the Services
Company) which is responsible for ensuring Y2K Compliance for the
systems it manages. The Services Company has separately prepared
a plan for its Y2K Compliance. Progress of the Y2K plan is being
monitored by STRS' executive management and reported to the Audit
Committee of the STRS Board of Directors. In addition, the
independent accounting firm functioning as STRS' internal
auditors is assisting management in monitoring the progress of
the Y2K plan. STRS believes all critical components of the plan
are on schedule for completion by the end of the second quarter
of 1999. Like other companies, STRS cannot, however, make Y2K
Compliance certifications because the ability of any
organization's systems to operate reliably after midnight on
December 31, 1999 is dependent upon factors that may be outside
the control of, or unknown to, the organization.
The majority of computerized date-sensitive hardware and software
components used by STRS or the Services Company are covered by
maintenance contracts with the vendors who originally implemented
them. Almost all of these vendors have already been contacted
regarding Y2K Compliance of their products. Where necessary,
software modifications to ensure compliance will be provided by
the appropriate vendors under their maintenance contracts.
Information Technology (IT) Systems. With the exception of
testing interfaces to computerized disbursement systems provided
by its primary bank, STRS and the Services Company have completed
Y2K remediation and testing work for critical business and office
automation systems. Testing of the banking interfaces are
scheduled for the second quarter of 1999 after the bank completes
its own internal Y2K testing.
Non-IT Systems. With a few minor exceptions involving water
quality and other environmental monitoring and associated
laboratory analysis systems, STRS does not rely upon process
control, engineering, or other "Non-IT" systems in its business.
STRS completed an assessment of this area and does not believe
overall risk is significant.
Third Party Risks. STRS computer systems are not widely
integrated with the systems of its suppliers or customers. The
primary potential risk attributable to third parties would be
from a temporary disruption of STRS operations due to a failure
by a supplier to meet its contractual obligations for services
and/or materials (rather than a failure associated with
integrated computer systems). An assessment of third party risk
has been completed. Based on this assessment, STRS does not
believe overall risk from third parties is significant.
The Costs to Address STRS' Y2K Issues Expenditures for the
necessary Y2K related modifications will largely be funded by
routine software and hardware maintenance fees paid by STRS or
the Services Company to the related software providers. Based on
current information, STRS believes that the incremental cost of
<PAGE> 13
Y2K Compliance not covered by routine software and hardware
maintenance fees will be less than $0.1 million, most of which is
expected to be incurred in 1999. If the software modifications
and conversions referred to above are not made, or are delayed,
the Y2K issue could have a material impact on STRS' operations.
Additionally, current estimates are based on management's best
estimates, which are derived using numerous assumptions of future
events including the continued availability of certain resources,
third party modification plans and other factors. There also can
be no assurance that the systems of other companies will be
converted on a timely basis or that failure to convert will not
have a material adverse effect on STRS.
The Risks of STRS Y2K Issues Based on its detailed risk
assessment work conducted thus far, STRS believes the most likely
Y2K-related failures would probably be temporary disruption in
certain materials and services provided by third parties, which
would not be expected to have a material adverse effect on STRS'
financial condition or results of operations.
STRS' Contingency Plans Although STRS believes the likelihood
of any or all of the above risks occurring to be low, specific
contingency plans are being developed to address certain risk
areas. Initial contingency plans have been developed and will
continue be updated based on changing business requirements.
While there can be no assurances that STRS will not be materially
adversely affected by Y2K problems, it is committed to ensuring
that it is fully Y2K ready and believes its plans adequately
address the above-mentioned risks.
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, Y2K Compliance 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 STRS, changes in laws or
regulations and other factors, many of which are beyond the
control of STRS and other factors that are described in more
detail under the heading "Cautionary Statements" in STRS' Form
10-K for the year ended December 31, 1998.
----------------------------
The results of operations reported and summarized above are not
necessarily indicative of future operating results.
<PAGE> 14
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings.
STRS is involved in various regulatory matters and
litigation involving entitlement and/or development of its Austin
properties. For a detailed discussion on these matters see Item
3, "Legal Proceedings" and Note 6, "Real Estate" included in
STRS' 1998 Annual Report on Form 10-K.
Below is a summary of the cases in which STRS is currently
involved. The current status is summarized and should be read in
conjunction with the above referenced sections of the STRS 1998
Annual Report on Form 10-K.
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 ("WQPZ") 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 defend the legislation.
The City filed a motion for partial summary judgment against one
defendant and against the State of Texas. All defendant parties
filed motions with regard to summary judgment. 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 motion 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. STRS and other
defendants filed appeals. The Texas Supreme Court noted probable
jurisdiction and set an expedited briefing and hearing schedule.
Oral argument was presented to the Texas Supreme Court on
December 9, 1998. A ruling is expected in 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, Texas filed 10/31/97).
Circle C Land Corp., a wholly owned subsidiary of STRS, filed a
WQPZ (Circle C WQPZ) covering all of its 553 acres in the Circle
C development located outside the boundaries of any MUD. In
November 1997, STRS sought a declaratory judgment in the Hays
County District Court to confirm the validity of the Circle C
WQPZ. On September 4, 1998, after numerous attempts by the City,
to transfer venue, deny jurisdiction or to stay the proceedings,
the Hays County District Court ruled that the WQPZ enabling
legislation was constitutional and that the Circle C WQPZ was
validly created. The City filed a petition for writ of injunction
with the Texas Supreme Court requesting a stay of the District
Court's ruling. On October 22, 1998, the Texas Supreme Court
granted a temporary stay. The City has appealed the Hays County
District Court's ruling to the Texas Third Court of Appeals. The
appellate court set the case for submission, without oral
argument, on April 30, 1999. Both parties submitted briefs and
filed motions for oral argument. On April 30, 1999, the Third
Court of Appeals granted the motions for oral argument and the
case is expected to be reset for submission during the second
quarter of 1999. 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
enabling legislation is determined to be constitutional, certain
important collateral issues will be addressed by the Third Court
of Appeals. Those issues, which involve the application of the
WQPZ enabling legislation to Circle C, are expected to be
resolved in STRS' 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, STRS'
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 STRS 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, STRS sued the City. The
City's total reimbursement obligation to the Circle C developers
is currently estimated at $22 million, of which STRS' share is
currently estimated at approximately $18 million. These proceeds
are also subject to the Phoenix litigation described below. The
City's and STRS' engineers and accountants are reviewing
financial and engineering materials in an effort to reach
agreement on the proper amount of STRS' reimbursement claim.
<PAGE> 15
Both parties have filed motions for summary judgment. The hearing set
for May 18, 1999 and the trial setting, previously scheduled for
May 24, 1999, have both been temporarily continued. STRS will
continue to pursue this action vigorously.
Phoenix Litigation: Circle C Land Corp. v. Phoenix Holdings,
Ltd., Cause No. 97-10388 (Travis County 261st Judicial District
Court, Texas filed 2/5/97). In February 1997, Circle C filed a
petition for declaratory judgment against Phoenix, which
purchased the residential portion of Circle C's lands, seeking a
declaration that Circle C is entitled to most of the MUD
reimbursements for infrastructure cost incurred at Circle C.
Phoenix filed a counterclaim in June 1997. In February 1998, the
District Court granted Circle C's summary judgment motion on the
primary case and Phoenix dismissed its counterclaim with
prejudice, but reserved the right to appeal the summary judgment
of the primary case. On April 10, 1998, Phoenix appealed. In
March 1999, the Texas Third Court of Appeals upheld the District
Court's ruling in favor of Circle C. On March 18, 1999, Phoenix
filed a motion for rehearing with the Texas Third Court of
Appeals, which was denied on April 29, 1999. As a final effort,
Phoenix may file a writ with the Texas Supreme Court, which if
filed is also expected to be denied . See "Annexation/Circle C
MUD Reimbursement Suit" above for the estimated amount of MUD
reimbursement currently due to STRS.
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) which established the 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 has attempted to apply these regulations to
portions of STRS' Circle C property and Lantana. In response,
STRS will vigorously assert and defend its grandfathered
entitlements. In April 1999, the Texas State House of
Representatives and Senate overwhelmingly approved H.B. 1704,
which on May 11, 1999 became law effective immediately upon
receiving the Governor's signature.
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.
<PAGE> 16
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 14, 1999
<PAGE> 17
STRATUS PROPERTIES INC.
EXHIBIT INDEX
Exhibit
Number
3.1 Amended and Restated Certificate of Incorporation
of STRS. Incorporated by reference to STRS' Exhibit
3.1 to 1998 Form 10-K.
3.2 By-laws of STRS, as amended as of February 11,
1999. Incorporated by Reference to Exhibit 3.2 to STRS'
1998 Form 10-K.
4.1 STRS' Certificate of Designations of Series A
Participating Cumulative Preferred Stock. Incorporated
by reference to Exhibit 4.1 to STRS' 1992 Form 10-K.
4.2 Rights Agreement dated as of May 28, 1992 between
STRS and Mellon Securities Trust Company, as Rights
Agent. Incorporated by reference to Exhibit 4.2 to
STRS' 1992 Form 10-K.
4.3 Amendment No. 1 to Rights Agreement dated as of
April 21, 1997 between STRS and the Rights Agent.
Incorporated by reference to Exhibit 4 to STRS' 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 STRS' 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 STRS'
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 STRS' 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 STRS' 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 STRS.
Incorporated by reference to Exhibit 10.2 to STRS' 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 STRS' 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 STRS' 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 STRS' 1992 Form 10-K.
10.5 STRS Guarantee Agreement dated as of December 15, 1997
by STRS. Incorporated by reference to Exhibit 10.6 to
STRS' 1997 Form 10-K.
10.6 Amended and Restated IGL Guarantee Agreement dated as
of December 22, 1997 by IMC Global Inc. Incorporated
by reference to Exhibit 10.7 to STRS' 1997 Form 10-K.
<PAGE> E-1
10.7 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 STRS'
Current Report on Form 8-K dated June 3, 1998.
10.8 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 STRS' Current Report on Form 8-K dated
June 3, 1998.
10.9 Oly Stratus ABC West I Joint Venture Agreement between
Oly ABC West I, L.P. and Stratus West I.L.P. dated
September 30, 1998. Incorporated by reference to
Exhibit 10.10 to the Quarterly Report on Form 10-Q of
STRS for the Quarter ended September 30, 1998 ("the
STRS Third Quarter 10-Q")
10.10 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 STRS
Third Quarter 10-Q.
10.11 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 STRS Third Quarter 10-Q.
10.12 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 STRS Third Quarter 10-Q.
10.13 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 STRS Third Quarter 10-Q.
10.14 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 STRS Third Quarter
10-Q.
10.15 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 STRS Third Quarter 10-Q.
10.16 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 STRS Third Quarter 10-Q.
10.17 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 STRS Third Quarter 10-Q.
Executive Compensation Plans and Arrangements (Exhibits
10.18 through 10.21)
10.18 STRS' Performance Incentive Awards Program, as
amended effective February 11, 1999. Incorporated by
reference to Exhibit 10.18 to STRS' 1998 Form 10-K.
10.19 STRS Stock Option Plan, as amended. Incorporated
by reference to Exhibit 10.9 to STRS's 1997 Form 10-K.
10.20 STRS 1996 Stock Option Plan for Non-Employee
Directors, as amended. Incorporated by reference to Exhibit
10.10 to STRS' 1997 Form 10-K.
10.21 Stratus Properties Inc. 1998 Stock Option Plan as
amended effective February 11, 1999. Incorporated by
reference to Exhibit 10.21 to STRS' 1998 Form 10-K.
15.1 Letter dated April 20, 1999 from Arthur Andersen LLP
regarding unaudited interim financial statements.
27.1 Financial Data Schedule.
Exhibit 15.1
April 20, 1999
Stratus Properties Inc.
98 San Jacinto Blvd.
Austin, TX 78701
Gentlemen:
We are aware that Stratus Properties Inc. has incorporated by reference
in its Registration Statements (File Nos. 33-78798, 333-31059 and 333-
52995) its Form 10-Q for the quarter ended March 31, 1999, which
includes our report dated April 20, 1999 covering the unaudited interim
financial information contained therein. Pursuant to Regulation C of
the Securities Act of 1933 (the Act), this report is not considered a
part of the registration statements prepared or certified by our firm
or a report prepared or certified by our firm within the meaning of
Sections 7 and 11 of the Act.
Very truly yours,
/s/ Arthur Andersen LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Stratus
Properties Inc. financial statements at December 31, 1998 and the year then
ended, and is qualified in its entirety by reference to such statements. The
earnings per share (EPS) data shown was prepared in accordance with FASB No. 128
"Earning Per Share." Basic and diluted EPS have been entered under the captions
primary and diluted, respectively.
</LEGEND>
<CIK> 0000885508
<NAME> STRATUS PROPERTIES INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,949
<SECURITIES> 0
<RECEIVABLES> 670
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,274
<PP&E> 97,041
<DEPRECIATION> 142
<TOTAL-ASSETS> 111,984
<CURRENT-LIABILITIES> 15,277
<BONDS> 17,122
10,000
0
<COMMON> 143
<OTHER-SE> 63,347
<TOTAL-LIABILITY-AND-EQUITY> 111,984
<SALES> 1,586
<TOTAL-REVENUES> 1,586
<CGS> 1,070
<TOTAL-COSTS> 1,070
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 269
<INCOME-PRETAX> (516)
<INCOME-TAX> 14
<INCOME-CONTINUING> (479)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (479)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
