SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 220549
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, 2000
Commission File Number: 0-19989
Stratus Properties Inc.
Incorporated in Delaware 72-1211572
(IRS Employer Identification No.)
98 San Jacinto Blvd., Suite 220, Austin, Texas 78701
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 June 30, 2000, there were issued and outstanding 14,298,270
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 Income 4
Statements of Cash Flow 5
Notes to Financial Statements 6
Remarks 9
Report of Independent Public Accountants 9
Management's Discussion and Analysis
of Financial Condition and Results of
Operations 10
Part II. Other Information 14
Signature 16
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)
June 30, December 31,
2000 1999
--------- ---------
(In Thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents, including
restricted cash of $3.6 million and
$2.1 million, respectively (Note 4) $ 4,458 $ 3,964
Accounts receivable:
Property sales 44 149
Other 1,212 1,160
Prepaid expenses 404 375
--------- ---------
Total current assets 6,118 5,648
Real estate and facilities, net 90,371 91,664
Investment in and advances to
unconsolidated affiliates 8,515 7,254
Other assets 6,886 11,106
--------- ---------
Total assets $ 111,890 $ 115,672
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 775 $ 900
Accrued interest, property taxes and other 914 1,537
--------- ---------
Total current liabilities 1,689 2,437
Long-term debt 16,709 16,562
Other liabilities 8,781 19,833
Mandatorily redeemable preferred stock 10,000 10,000
Stockholders' equity 74,711 66,840
--------- ---------
Total liabilities and stockholders' equity $ 111,890 $ 115,672
========= =========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE> 3
<TABLE>
<CAPTION>
STRATUS PROPERTIES INC.
STATEMENTS OF INCOME (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------- -----------------
2000 1999 2000 1999
------- ------- ------- -------
(In Thousands, Except
Per Share Amounts)
<S> <C> <C> <C> <C>
Revenues $ 2,909 $ 2,744 $ 4,969 $ 4,330
Costs and expenses:
Cost of sales 1,736 1,007 3,337 2,077
General and administrative expenses 809 1,004 1,790 1,738
------- ------- ------- -------
Total costs and expenses 2,545 2,011 5,127 3,815
------- ------- ------- -------
Operating income (loss) 364 733 (158) 515
Interest expense (194) (233) (387) (502)
Other income, net 3 133 7,808 104
------- ------- ------- -------
Income before income taxes and
equity in affiliates 173 633 7,263 117
Income tax provision - - (40) (14)
Equity in unconsolidated affiliates
income (loss) 402 (98) 630 (47)
------- ------- ------- -------
Net income $ 575 $ 535 $ 7,853 $ 56
======= ======= ======= =======
Net income per share:
Basic $0.04 $0.04 $0.55 $-
===== ===== ===== ==
Diluted $0.04 $0.03 $0.48 $-
===== ===== ===== ==
Average shares outstanding:
Basic 14,295 14,288 14,291 14,288
====== ====== ====== ======
Diluted 16,282 16,254 16,658 16,235
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE> 4
<TABLE>
<CAPTION>
STRATUS PROPERTIES INC.
STATEMENTS OF CASH FLOW (Unaudited)
Six Months Ended
June 30,
---------------------
2000 1999
-------- -------
(In Thousands)
<S> <C> <C>
Cash flow from operating activities:
Net income $ 7,853 $ 56
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 53 42
Cost of real estate sold 557 3,072
Recognition of deferred Circle C municipal
utility reimbursements (7,430) -
Equity in unconsolidated affiliates' (income) loss (630) 47
Long-term receivable and other 1,984 (208)
(Increase) decrease in working capital:
Accounts receivable and other 1,227 30
Accounts payable and accrued liabilities (691) (919)
-------- -------
Net cash provided by operating activities 2,923 2,120
-------- -------
Cash flow from investing activities:
Real estate and facilities costs (2,429) (4,110)
-------- -------
Net cash used in investing activities (2,429) (4,110)
-------- -------
Cash flow from financing activities:
Payments on term loan (2,857) -
Proceeds from credit facility 2,839 1,000
Exercised stock options 18 -
-------- -------
Net cash provided by financing activities - 1,000
-------- -------
Net increase (decrease) in cash and cash equivalents 494 (990)
Cash and cash equivalents at beginning of year 3,964 5,169
--------- -------
Cash and cash equivalents at end of period $ 4,458 $ 4,179
========= =======
</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
Following is a reconciliation of net income and weighted average
common shares outstanding for purposes of calculating basic and
diluted net income per share (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------ ------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Basic net income per share of
common stock:
Net income $ 575 $ 535 $ 7,853 $ 56
------- ------- ------- -------
Weighted average common shares
outstanding 14,295 14,288 14,291 14,288
------- ------- ------- -------
Basic net income per share of
common stock $0.04 $0.04 $0.55 $-
===== ===== ===== ==
Diluted net income per share of
common stock:
Net income $ 575 $ 535 $ 7,853 $ 56
Interest on convertible debt - - 164 -
------- ------- ------- -------
Income for purpose of computing
diluted net income per share $ 575 $ 535 $ 8,017 $ 56
======= ======= ======= =======
Weighted average common shares
outstanding 14,295 14,288 14,291 14,288
Dilutive stock options 275 254 262 235
Assumed redemption of preferred stock 1,712 1,712 1,712 1,712
Assumed redemption of convertible debt - - 393 -
------- ------ ------- -------
Weighted average common shares
outstanding for purposes of
calculating diluted net income
per share 16,282 16,254 16,658 16,235
------- ------ ------- -------
Diluted net income per share $0.04 $0.03 $0.48 $-
===== ===== ===== ==
</TABLE>
Interest accrued on the convertible debt outstanding totaled
approximately $83,000 for the second quarter of 2000, $63,000 for
the second quarter of 1999 and $125,000 for the six months ended
June 30, 1999. There have been no dividends accrued on Stratus'
mandatorily redeemable preferred stock through June 30, 2000.
The debt was convertible into 393,000 shares in the second
quarter of 2000 and 299,000 shares for the second quarter and six
month 1999 period. These amounts were excluded from the
computation of diluted net income per share because they were
anti-dilutive.
Outstanding stock options excluded from the computation
of diluted net income per share of common stock because their
exercise prices were greater than the average market price of the
common stock during the period are as follows:
<TABLE>
<CAPTION>
Second Quarter Six Months
---------------- ----------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Outstanding options 293,000 295,000 515,000 295,000
Average exercise price $6.14 $6.14 $5.37 $6.14
</TABLE>
2. OLYMPUS RELATIONSHIP and INVESTMENT IN UNCONSOLIDATED
AFFILIATES
In May 1998, Stratus and Olympus Real Estate Corporation
(Olympus), an affiliate of Hicks, Muse, Tate & Furst
Incorporated, formed a strategic alliance to develop certain of
Stratus' existing properties and to pursue new real estate
acquisition and development opportunities. Under the terms of
the agreement, Olympus made a $10 million investment in Stratus'
mandatorily redeemable preferred stock, provided a $10 million
convertible debt financing facility to Stratus and agreed to make
available up to $50 million of additional capital representing
its share of direct investments in joint Stratus/Olympus
projects. As of June 30, 2000, Stratus had outstanding borrowings
of $2.9 million on the convertible debt facility and Olympus had
invested approximately $13.4 million in joint Stratus/Olympus
projects, as further discussed below.
<PAGE> 6
Stratus has investments in three joint ventures. Stratus
owns a 49.9 percent interest in each joint venture and Olympus
owns the remaining 50.1 percent interest. Accordingly, Stratus
accounts for its investments in the joint ventures utilizing the
equity method of accounting. Stratus develops and manages each
project undertaken by these joint ventures and receives
development fees, sales commissions, and other management fees
for its services.
Stratus' three joint ventures are: the Oly Stratus Barton
Creek I Joint Venture (Barton Creek Joint Venture), the Oly
Walden General Partnership (Walden Partnership) and the Stratus
7000 West Joint Venture (7000 West Joint Venture). The Barton
Creek Joint Venture currently consists of two separate
subdivisions located southwest of Austin, Texas: "Wimberly Lane"
and "Escala Drive." At June 30, 2000 there were 12 remaining
single-family homesites at the Wimberly Lane subdivision and
there were 39 remaining single-family homesites at the Escala
Drive subdivision. The Walden Partnership had approximately 540
single-family homesites available at the Walden on Lake Houston
development in Houston, Texas at June 30, 2000. The 7000 West
Joint Venture consists of two completed and fully leased 70,000
square foot office buildings. During the first quarter of 2000,
Stratus completed a previous sale of 5.5 acres of commercial real
estate to the 7000 West Joint Venture. Stratus recognized an
approximate gain of $0.4 million, representing the gain
attributable to Olympus' 50.1 percent joint venture interest,
during the second quarter of 2000 when it completed construction
and leasing activities for the second 70,000 square foot office
building.
For a detailed discussion of the Olympus alliance and the
initial formation and subsequent transactions of the joint
ventures and partnership, see Notes 2, 3 and 4 of the "Notes To
Financial Statements" included in Stratus' 1999 Annual Report on
Form 10-K. Also refer to "Transactions With Olympus Real Estate
Corporation" and "Capital Resources and Liquidity" included in
Items 7 and 7A "Management's Discussion and Analysis of
Financial Condition and Results of Operations and Disclosures of
Market Risks" included in Stratus' 1999 Annual Report on Form 10-K.
The Barton Creek Joint Venture distributed approximately
$5.5 million to the partners during the second quarter of 2000
and $7.5 million for the six months ended June 30, 2000 ($8.3
million from inception through June 30, 2000). Stratus recorded
its portion of these distributions, approximately 50 percent, as
a reduction of its note receivable and related accrued interest
associated with its initial sales of land to the joint venture. The
other joint ventures have not yet made any distributions. The
summarized unaudited financial information of Stratus'
unconsolidated affiliates is shown below (in thousands):
<TABLE>
<CAPTION>
Barton Creek Walden 7000
Joint Venture Partnership West Total
------------ ---------- ------- --------
<S> <C> <C> <C> <C>
Earnings data for the quarter
ended June 30, 2000:
Revenues $ 4,724 $ 904 $ 242 $ 5,870
Operating income (loss) 894 - (177) 717
Net income (loss) 891 59 (176) 774
Stratus' equity in net
income (loss) 445 45a (88) 402a
Earnings data for the quarter
ended June 30, 1999:
Revenues $ 495 $ 600 $ - $ 1,095
Operating income (loss) 4 (213) - (209)
Net income (loss) 4 (199) - (195)
Stratus' equity in net
income (loss) 2 (100) - (98)
Earnings data for the six months
ended June 30, 2000:
Revenues $ 8,154 $ 1,353 $ 412 $ 9,919
Operating income (loss) 1,807 (218) (525) 1,064
Net income (loss) 1,868 (133) (521) 1,214
Stratus' equity in net
income (loss) 933 (43)a (260) 630a
</TABLE>
<PAGE> 7
<TABLE>
<CAPTION>
Barton Creek Walden 7000
Joint Venture Partnership West Total
----------- ---------- ------- --------
<S> <C> <C> <C> <C>
Earnings data for the six months
ended June 30, 1999:
Revenues $ 1,269 $ 990 $ - $ 2,259
Operating income (loss) 252 (346) - (94)
Net income (loss) 252 (345) - (93)
Stratus' equity in net
income (loss) 126 (173) - (47)
</TABLE>
a. Includes recognition of deferred income totaling $15,000 in
the second quarter of 2000 and $23,000 for the six months
period of 2000. Stratus will recognize the remaining deferred
income as the related real estate is sold. Through June 30,
2000, Stratus has recognized $90,000 of a total of $337,000 of
deferred income associated with the Walden Partnership.
3. COMMITMENTS and CONTINGENCIES
In late October 1999, Circle C Land Corp. (Circle C), a wholly
owned subsidiary of Stratus, and the City of Austin (the City)
reached an agreement regarding a portion of Circle C's claims
against the City involving the reimbursement of certain
previously incurred water, wastewater and drainage infrastructure
expenditures following the City's December 1997 annexation of all
land lying within the Circle C community. As a result of this
agreement, Stratus received approximately $9.8 million, including
$1.0 million in interest, representing a partial payment of these
claims. Stratus has collected a total of $10.5 million of
reimbursements from the City as of June 30, 2000. Stratus used
the proceeds to reduce its outstanding debt. Stratus will
continue to pursue vigorously its approximate $9.0 million of
remaining claims against the City.
The partial payment settlement agreement included a
contingency provision requiring Stratus to return all reimbursed
money to the City and the City to return the related utility
infrastructure to Stratus if the City's annexation of the Circle
C municipal utility districts (MUD) was reversed or otherwise
rescinded, whether by legislative action, final action of the
appellate court, or other legal process. In March 2000, the City
approved a settlement agreement of all disputes between the City
and certain third party real estate developers and landowners
involved in the Circle C community. Under terms of this
settlement, the lawsuits contesting the City's December 1997
annexation of all land within the four Circle C MUDs and the
dissolution of the four MUDs have been dismissed with prejudice.
As a result, the refund contingency included in the City's
partial settlement of Stratus' reimbursement claim has been
eliminated. Stratus has recorded a gain of approximately $7.4
million in the first quarter of 2000, representing that portion
of the reimbursed infrastructure expenditures in excess of
Stratus' remaining basis in these assets and related interest
income. The remaining $3.1 million of the proceeds reduced
Stratus' investment in Circle C.
4. RESTRICTED CASH
Stratus' existing credit facility requires it to deposit funds
into an interest reserve account with the lending bank, Comerica
Bank-Texas. The amount in this account must be sufficient to
fund Stratus' debt service for both its term loan and revolving
line of credit for the ensuing twelve-month period, adjusted
quarterly, or Stratus' availability under its revolving line of
credit will be reduced by the amount of the shortfall. At June
30, 2000 Stratus had deposits totaling $2.2 million in the
interest reserve account, which represent the full amount
required at that date. In addition, on June 30, 2000 Stratus
had $0.3 million deposited in a separate restricted account with
Comerica, which Comerica appropriately applied against Stratus'
outstanding term loan debt in early July. For additional
discussion of Stratus' credit facility and its interest reserve
requirements see Note 5 of the "Notes To Financial Statements"
included in its 1999 Annual Report on Form 10-K.
At June 30, 2000, Stratus had other restricted cash
deposits totaling $1.1 million related to additional collateral
associated with the Walden Partnership's project development
loan. This deposit is reduced by $0.30 for every $1.00 in
principal the Walden Partnership repays on the loan. For
additional discussion of the Walden Partnership project
development loan, see Item 2. "Management's Discussion and
Analysis of Financial Condition and Results of Operations"
included elsewhere in this Form 10-Q and Note 4 of "Notes To
Financial Statements" included in Stratus' 1999 Annual Report on
Form 10-K.
<PAGE> 8
5. LITIGATION
In June 2000, the Texas Supreme Court affirmed a prior district
court decision that certain state legislation enabling the
creation of water quality protection zones was unconstitutional.
This decision primarily affects Stratus' future development
plans for certain areas within the southern portion of its Barton
Creek community. Stratus has initiated development plans that
will meet the development requirements under existing laws.
Stratus also is involved in pending litigation involving the City
relating to its remaining reimbursements from the City of
approximately $9.0 million, relating to development of its
Circle C property. Refer to Item 3 "Legal Proceedings" and Note 6
"Real Estate" in the Stratus' 1999 Annual Report on Form 10-K for
a detailed discussion of such litigation matters. For discussion
of litigation events subsequent to the Form 10-K, refer to Part
II - Other Information, "Legal Proceedings" included elsewhere in
this Form 10-Q.
--------------------
Remarks
The information furnished herein should be read in conjunction
with Stratus' financial statements contained in its 1999 Annual
Report 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.
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 June 30,
2000, the related statements of income for the three and six
month periods ended June 30, 2000 and 1999, and the statements of
cash flow for the six-month periods ended June 30, 2000 and 1999.
These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with auditing standards generally
accepted in the United States, the objective of which is the
expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to the financial statements
referred to above for them to be in conformity with accounting
principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards
generally accepted in the United States, the balance sheet of
Stratus Properties Inc. as of December 31, 1999, and the related
statements of operations, stockholders' equity and cash flow for
the year then ended (not presented herein), and in our report
dated January 19, 2000, based on our audit, we expressed an
unqualified opinion on those financial statements. In our
opinion, the information set forth in the accompanying condensed
balance sheet as of December 31, 1999, is fairly stated, in all
material respects, in relation to the balance sheet from which it
has been derived.
/s/ ARTHUR ANDERSEN LLP
Austin, Texas
July 25, 2000
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
OVERVIEW
Management's discussion and analysis presented below should
be read in conjunction with our discussion and analysis and
financial results contained in our 1999 Annual Report on Form 10-K.
The operating results summarized in this report are not
necessarily indicative of our future operating results.
We acquire, develop, manage and sell commercial and
residential real estate. We conduct real estate operations on
properties we own and through unconsolidated affiliates we
jointly own with Olympus Real Estate Corporation (Olympus)
pursuant to a strategic alliance formed in May 1998 (see Note 2).
DEVELOPMENT ACTIVITIES
Stratus Properties
Development is progressing at several sections of the Barton
Creek community, including the completion of utility
infrastructure to serve a significant portion of the 2,300 acres
of undeveloped property at Barton Creek and preliminary
development of approximately 200 new single-family homesites in
the vicinity of the new Tom Fazio-designed "Fazio Canyons" golf
course completed in September 1999. We expect that a number of
these homesites will be available for sale during 2001.
In April 2000, we received final subdivision plat approval
from the City of Austin (the City) to develop approximately 160
acres of commercial and multi-family real estate within our
Lantana development. Development activities, expected to
commence during the third quarter of 2000, will consist of over
800,000 square feet of office and retail development and over 400
multi-family units.
Unconsolidated Affiliates
We own 49.9 percent of three joint ventures and Olympus owns
the remaining 50.1 percent interest. Accordingly, we account for
our investments in these joint ventures using the equity method
of accounting. We develop and manage each project undertaken by
these joint ventures and receive development fees, sales
commissions, and other management fees for our services. See
Note 2 included elsewhere in this Form 10-Q for the summarized
unaudited results of operations of our unconsolidated affiliates
for the second-quarter and six-month periods ended June 30, 2000
and 1999.
Barton Creek Joint Venture
--------------------------
The Oly Stratus Barton Creek I Joint Venture (Barton Creek
Joint Venture) currently consists of two separate subdivisions:
"Wimberly Lane" and "Escala Drive." Construction of the Wimberly
Lane subdivision, consisting of 75 developed residential lots,
was completed during the first quarter of 1999. Only 12 of these
developed lots remain to be sold at June 30, 2000. We sold nine
of the Wimberly Lane lots during the second quarter of 2000 for
$1.1 million and 17 lots during the six months ended June 30,
2000 representing $2.4 million of the Barton Creek Joint
Venture's revenues for the period. During the second quarter of
1999, we sold five lots at the Wimberly Lane subdivision for $0.5
million and a total of 13 lots during the six months ended June
30, 1999 for $1.3 million, which represented all of the Barton
Creek Joint Venture's revenues for the 1999 periods.
Construction of the Escala Drive subdivision was completed during
the second quarter of 2000. As of June 30, 2000, 15 of the
original 54 multi-acre residential lots had been sold. These
residential lots are the largest developed to date within the
Barton Creek community. We sold ten of the Escala Drive
residential lots during the second quarter of 2000 for $3.7
million and a total of 15 lots during the six months ended June
30, 2000 for $5.8 million. The Barton Creek Joint Venture
distributed approximately $5.5 million to the partners in the
second quarter of 2000 ($7.5 million for the six months ended
June 30, 2000). We recorded our 50 percent share of these
distributions as reductions of our notes receivable and related
accrued interest associated with the initial sale of land to the
joint venture.
Walden Partnership
------------------
The Walden Partnership is currently marketing single-family
homesites at the Walden on Lake Houston development in Houston,
Texas. The Partnership sold 32 single-family homesites during the
second quarter of 2000 and a total of 49 single-family homesites
during the six months ended June 30, 2000, compared with 21 and
37 single-family homesites during the comparable periods last
year. At June 30, 2000, the Walden
<PAGE> 10
Partnership's outstanding
borrowings under its project development loan facility totaled
$2.6 million. In September 1998, we deposited $2.5 million of
restricted cash as additional collateral for the related project
development loan facility. For every $1.00 of this facility's
principal that is repaid by the Partnership, there is a $0.30
reduction of our restricted amount. There was $1.1 million
deposited in the restricted cash account at June 30, 2000 and
$1.5 million at December 31, 1999.
7000 West
---------
The first 70,000 square foot office building at the Lantana
Corporate Center, known as 7000 West, is fully leased and
occupied. During the first quarter of 2000, we completed a
transaction with Olympus to be our joint venture partner in a
second 70,000 square foot office building at 7000 West. In this
transaction we completed a prior sale of 5.5 acres of commercial
real estate to the joint venture, for which we received $0.5
million in early April 2000. This amount was used to reduce
outstanding borrowings on our term loan (see Note 5 of "Notes To
Financial Statements" included in our 1999 Annual Report on Form
10-K). In June 2000, we completed the construction and leasing of
the second building. As a result, we recognized a previously
deferred gain of approximately $0.4 million associated with
Olympus' 50.1 percent interest in the second building. In our
role as manager, we arranged for a $6.6 million project loan
facility for 7000 West, to finance construction of the first
office building. The construction of the second building required
additional financing, which was provided by an additional $7.7
million financing under the 7000 West development loan facility
negotiated in the first quarter of 2000. Outstanding borrowings
under 7000 West's project loan facility totaled $9.5 million at
June 30, 2000.
RESULTS OF OPERATIONS
Summary operating results follow (in thousands):
<TABLE>
<CAPTION>
Second-Quarter Six-Months
---------------- -----------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Undeveloped properties:
Unrelated parties $ 331 $ 873 $ 331 $ 873
Recognition of deferred revenues 1,699 89 2,510 244
Developed properties 177 1,527 527 2,679
Commissions, management fees and other 702 225 1,601 534
------- ------- ------- -------
Total revenues 2,909 2,744 4,969 4,330
Operating income (loss) 364 733 (158) 515
Net income 575 535 7,853 56
</TABLE>
Operating Results
-----------------
During the second quarter and six months ended June 30,
2000, our undeveloped property revenues include primarily the
recognition of previously deferred revenues from the sale of
undeveloped real estate to unconsolidated affiliates. The
remaining undeveloped properties revenues reflects the
approximate one acre of multi-family property sold during the
second quarter of 2000. During the second quarter and six months
ended June 30, 1999 we sold 28 acres of undeveloped real estate
in Houston to an unrelated third party. When we sell real estate
to a joint venture in which we own an interest, we defer
recognizing the portion of revenues from the sale related to our
interest until all or a portion of the real estate is ultimately
sold to unrelated parties. See "Unconsolidated Affiliates" above
for information related to sales of real estate to unrelated
parties by the joint ventures. At June 30, 2000, deferred
revenues related to the Wimberly Lane and Escala Drive
subdivisions totaled $4.2 million and will be recognized as the
related acreage is developed and sold by the Barton Creek Joint
Venture. In addition, our retained interests in the 7000 West
buildings totaled $0.8 million.
Revenues from developed properties represented the sale of 6
single-family homesites during the second quarter of 2000 and 21
single-family homesites for the six months ended June 30, 2000.
Sales of developed properties totaled 33 single-family homesites
during the second quarter of 1999 and 54 single-family homesites
for the six months ended June 30, 1999. We have no remaining
developed lots in our Austin, Dallas, and Houston developments
and only three remaining developed lots in our San Antonio
development.
<PAGE> 11
Lots available for sale by our unconsolidated
affiliates are not included in these amounts (see "Unconsolidated
Affiliates" above).
Commissions, management fees and other revenue have
increased in the 2000 periods primarily because of significant
increases in sales commissions on properties we sold for the
Barton Creek Joint Venture.
Cost of sales increased to $1.7 million in the second
quarter of 2000 from $1.0 million during the second quarter of
1999 and to $3.3 million during the six months ended June 30,
2000 from $2.1 million during the comparable six-month period in
1999. The increase primarily reflects reimbursements in 1999 of
certain infrastructure costs previously charged to expense or
relating to properties previously sold, which reduced cost of
sales by $2.0 million during the second-quarter and $2.8 million
for the six months ended June 30, 1999. Cost of sales in 2000
reflects the decrease in sales of developed lots reflecting the
reduction in Stratus' existing developed lot inventory.
General and administrative expenses totaled $0.8 million
during the second quarter of 2000 compared to $1.0 million during
the second quarter of 1999. During the six months ended June 30,
2000, general and administrative expenses totaled $1.8 million
compared to $1.7 million for the comparable period last year.
During 1995, the Texas State legislature enacted legislation
that enabled us to create a series of municipal utility districts
(MUDs) to serve the Barton Creek development. Once established,
the MUDs issue bonds, the proceeds of which are used to reimburse
us for costs related to the installation of major utility,
drainage and water quality infrastructure. During the first
quarter of 2000, we received the second of three $1.0 million
payments from the City as reimbursement for the costs associated
with the construction of the Lantana Pump Station. We used the
proceeds from this reimbursement to reduce our outstanding
borrowings under our term loan. During the first quarter of
1999, we received approximately $1.1 million in partial
reimbursement of infrastructure costs relating to the Barton
Creek development, which included $0.8 million related to costs
previously expensed (see discussion above). We expect to receive
additional reimbursements in the future for infrastructure costs
related to the Barton Creek development from the proceeds of MUD
bonds issued. However, the timing and the amount of future
Barton Creek MUD reimbursements are uncertain. For information
concerning Circle C MUD reimbursements currently being litigated,
see "Non-Operating Results" below and Part II, Item 1, "Legal
Proceedings."
Non-Operating Results
Interest expense totaled $0.2 during the second quarter of
2000 and $0.3 million for the six months ended June 30 2000
compared to $0.2 million during the second quarter of 1999 and
$0.5 million for the six months ended June 30, 1999. Capitalized
interest totaled $0.3 million for the second quarter of 2000 and
$0.7 million for the six-month 2000 period compared to $0.3
million during the second quarter of 1999 and $0.5 million during
the six months ended June 30, 1999.
In March 2000, the City approved a settlement agreement of
all disputes between the City and other Austin-area real estate
developers and landowners concerning the Circle C community.
Under terms of this settlement, the lawsuits contesting the
City's December 1997 annexation of all land within the four
Circle C MUDs and the dissolution of the four MUDs have been
dismissed with prejudice. Accordingly, the City's partial
payments of our reimbursement claim, currently totaling $10.5
million, are no longer subject to a repayment contingency and we
recorded approximately $7.4 million of these previously deferred
proceeds in other income during the first quarter of 2000. This
amount represents that portion of the reimbursed infrastructure
expenditures in excess of our remaining basis in these assets, as
well as related interest income on the reimbursements. The
remaining $3.1 million was recorded as a reduction of our
investment in Circle C. We are continuing to pursue vigorously
our approximate $9.0 million remaining claim against the City,
however no amounts have been recorded for these claims as of June
30, 2000.
CAPITAL RESOURCES AND LIQUIDITY
Net cash provided by operating activities totaled $2.9
million during the six months ended June 30, 2000 compared to
$2.1 million during the comparable 1999 period. The increase
primarily reflects distributions received from the Barton Creek
Joint Venture, which were recorded as reductions in our related
notes
<PAGE> 12
receivable and accrued interest. Cash used in investing
activities totaled $2.4 million for the six months ended June 30,
2000 compared with $4.1 million during the same period in 1999,
reflecting our net real estate and facilities expenditures. Real
estate and facilities costs in 1999 included the construction
costs of the first 70,000 square foot office building at 7000
West prior to formation of the 7000 West Joint Venture in August
1999, which have subsequently been reported under the equity
method of accounting (Note 2). Financing activities provided
cash of $1.0 million during the first six months of 1999,
reflecting borrowings on the lines of credit available at the
time.
At June 30, 2000, we had debt of $16.7 million compared to
debt of $30.5 million at June 30, 1999. Our outstanding debt at
June 30, 2000 included $11.0 million under our term loan and $2.8
million under our $10 million revolver, both of which mature in
December 2002, and $2.9 million under our $10 million convertible
debt facility with Olympus (see Note 2), which matures in May
2004. As of June 30, 2000, our restricted cash included $2.2
million to fully fund our interest reserve requirement under our
loan agreement. For a complete discussion of our bank facility
see Note 5 included in the "Notes To Financial Statements"
included in our 1999 Annual Report on Form 10-K.
Our future operating cash flows and, ultimately, our ability
to develop our properties and expand our business will be largely
dependent on the level of our real estate sales. In turn, these
sales will be significantly affected by future real estate market
conditions in the area of our properties, regulatory issues,
development costs, interest rate levels and our ability to
continue to protect our land use and development entitlements.
Significant development expenditures remain to be incurred for
our Austin area properties prior to their eventual sale. In June
2000, the Texas Supreme Court ruled that the legislation creating
the water quality protection zones was unconstitutional, as more
fully explained in Part II Item 1, "Legal Proceedings." This
decision primarily affects development of the southern portion of
our Barton Creek property. We have initiated plans that will
meet development requirements under existing laws and
regulations. Certain of our properties contain grandfathered
entitlements that are not subject to the stricter development
requirements currently in effect. Resolving our entitlement and
reimbursement issues with the City remains our primary near-term
objective.
We are continuing to pursue additional development and
management fee opportunities, both individually and through our
existing relationships with Olympus and other institutional
capital sources. Our relationship with Olympus provides us with
a potential source of capital for the development of existing
properties in which we desire third-party equity participation.
We believe we can obtain bank financing at a reasonable cost for
developing our properties. However, obtaining land acquisition
financing is generally expensive and uncertain.
CAUTIONARY STATEMENT
Management's discussion and analysis of financial condition
and results of operations contains forward-looking statements
regarding future reimbursement for infrastructure costs, future
events related to financing, the anticipated outcome of
litigation and regulatory matters, the expected results of our
business strategy and other plans and objectives of management
for future operations and activities. Important factors that
could cause actual results to differ materially from our
expectations include economic and business conditions, business
opportunities that may be presented to and pursued by us, changes
in laws or regulations and other factors, many of which are
beyond our control and other factors that are described in more
detail under the heading "Cautionary Statements" in our Annual
Report on Form 10-K for the year ended December 31, 1999.
<PAGE> 13
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings.
We are involved in various regulatory matters and litigation
involving entitlement and/or development of our Austin-area
properties. For a detailed discussion on these matters see Item
3, "Legal Proceedings" and Note 6, "Real Estate" included in our
1999 Annual Report on Form 10-K. Below is a summary of the cases
in which we are currently involved.
The City's WQPZ Action: The City of Austin, Texas v. Horse Thief
Hollow Ranch, Ltd., et al., Cause No. 98-00248 (Travis County
345th Judicial District Court, Texas filed 1/9/98). On January
9, 1998, the City filed suit in Travis County District Court
against 14 water quality protection zones (WQPZs) and their
owners, including the Barton Creek WQPZ. The City challenged
the constitutionality of the legislation authorizing the creation
of water quality zones. The District Court entered an order
granting the City's motion for summary judgement and declared the
WQPZ legislation unconstitutional. All parties agreed to the
form of an order which permitted an expedited appeal directly to
the Texas Supreme Court. Oral argument was presented to the
Texas Supreme Court on December 9, 1998. On June 19, 2000, the
Texas Supreme Court, in a 6 to 3 decision, affirmed the District
Court's decision that the Texas Water Code Section 26,179
enabling the creation of the water quality protection zones is
unconstitutional. A Motion for Reconsideration has been filed by
another party to the litigation, however, the majority opinion is
not expected to change.
Circle C WQPZ Litigation: L.S. Ranch, Ltd. And Circle C Land
Corp., v. The City of Austin, Texas, Cause No. 97-1048 (Hays
County 207th Judicial District Court, Texas filed 10/31/97).
Circle C Land Corp., a wholly owned subsidiary of Stratus, filed
a WQPZ (Circle C WQPZ) covering all of its 553 acres in the
Circle C development located outside the boundaries of any
municipal utility district. In November 1997, Stratus sought a
declaratory judgment in the Hays County District Court to confirm
the validity of the Circle C WQPZ. On September 4, 1998, the Hays
County District Court ruled that the WQPZ enabling legislation
was constitutional and that the Circle C WQPZ was validly
created. The City appealed the Hays County District Court's
ruling to the Texas Third Court of Appeals. As a result of the
Texas Supreme Court's decision in The City of Austin v. Horse
Thief Hallow Ranch, Ltd. et. al. case, the Third Court of Appeals
reversed the Hays County District Court decision, finding the
zone legislation unconstitutional. No appeal will be filed.
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. Stratus' property located within Circle C's
municipal utility districts (MUD) and annexed by the City is
subject to the City's zoning and development regulations.
Additionally, the City is required to assume all MUD debt and
reimburse Stratus for a significant portion of the costs incurred
for water, wastewater and drainage infrastructure. Because the
City failed to pay these costs upon annexation, as required by
statute, Stratus sued the City. The City paid a portion of
Stratus' claim, as described below. To accommodate settlement
discussions with the City, a trial of the balance of Stratus'
claim has been postponed. If a settlement is not reached by
October 15, 2000, it is anticipated that trial will begin in late
October or early November 2000.
The City's total reimbursement obligation to the Circle C
developers, resulting from its annexation, is estimated at $22
million. On October 29, 1999, Circle C Land Corp. and the City
reached an agreement in which Stratus received $9.8 million
(including $1 million of interest) as partial payment of its MUD
reimbursement claims. On January 14, 2000, Stratus received an
additional $0.3 million from the City resulting from both parties
agreeing to the adjustment of prior engineering and accounting
estimates. Stratus has received a total of $10.5 million under
this partial payment settlement as of June 30, 2000. Under the
terms of the agreement, Stratus would have been required to
return the money to the City and the City would have been
required to return the utility infrastructure to Stratus if the
City's annexation was reversed or otherwise legally rescinded,
whether by legislative action, final action of the appellate
court or other legal process.
In March 2000, the City approved a settlement agreement of
all disputes between the City and certain third party developers
and landowners involved in Circle C. Under the terms of this
settlement, the lawsuits contesting the City's December 1997
annexation of all land within the four Circle C MUDs and the
dissolution of the four MUDs have been dismissed with prejudice.
As a result, Stratus' agreement with the City is no longer
<PAGE> 14
subject to recission. Stratus will continue to pursue vigorously
its approximate $9.0 million of remaining Circle C MUD
reimbursements.
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 one Current Report on Form 8-K
dated June 19, 2000 reporting an event under Item 5,
filed on June 22, 2000.
<PAGE> 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 8, 2000
<PAGE> 16
STRATUS PROPERTIES INC.
EXHIBIT INDEX
Exhibit
Number
3.1 Amended and Restated Certificate of Incorporation
of Stratus. Incorporated by reference to Exhibit 3.1
to Stratus' 1998 Form 10-K.
3.2 By-laws of Stratus, as amended as of February 11,
1999. Incorporated by Reference to Exhibit 3.2 to
Stratus' 1998 Form 10-K.
4.1 Stratus' Certificate of Designations of Series A
Participating Cumulative Preferred Stock. Incorporated
by reference to Exhibit 4.1 to Stratus' 1992 Form 10-K.
4.2 Rights Agreement dated as of May 28, 1992 between
Stratus and Mellon Securities Trust Company, as Rights
Agent. Incorporated by reference to Exhibit 4.2 to
Stratus' 1992 Form 10-K.
4.3 Amendment No. 1 to Rights Agreement dated as of
April 21, 1997 between Stratus and the Rights Agent.
Incorporated by reference to Exhibit 4 to Stratus'
Current Report on Form 8-K dated April 21, 1997.
4.4 The loan agreement by and between Comerica Bank-
Texas and Stratus Properties Inc., Stratus Properties
Operating Co., L.P., Circle C Land Corp. and Austin 290
Properties Inc. dated December 21, 1999. Incorporated
by reference to Exhibit 4.4 to Stratus 1999 Form 10-K.
4.5 Certificate of Designations of the Series B
Participating Preferred Stock of Stratus Properties
Inc. Incorporated by reference to Exhibit 4.1 to
Stratus' Current Report on Form 8-K dated June 3, 1998.
4.6 Investor Rights Agreement, dated as of May 22,
1998, by and between Stratus Properties Inc. and
Oly/Stratus Equities, L.P. Incorporated by reference to
Exhibit 4.2 to Stratus' Current Report on Form 8-K
dated June 3, 1998.
4.7 Loan Agreement, dated as of May 22, 1998, by and
among Stratus Ventures I Borrower L.L.C., Oly Lender
Stratus, L.P. and Stratus Properties Inc. Incorporated
by reference to Exhibit 4.3 to Stratus' Current Report
on Form 8-K dated June 3, 1998.
10.1 Amended and Restated Services Agreement, dated as of
December 23, 1997 between FM Services Company and
Stratus. Incorporated by reference to Exhibit 10.2 to
Stratus' 1997 Form 10-K.
10.2 Joint Venture Agreement between Freeport-McMoRan
Resource Partners, Limited Partnership and the
Partnership, dated June 11, 1992. Incorporated by
reference to Exhibit 10.3 to Stratus' 1992 Form 10-K.
10.3 Development and Management Agreement dated and
effective as of June 1, 1991 by and between Longhorn
Development Company and Precept Properties, Inc. (the
"Precept Properties Agreement"). Incorporated by
reference to Exhibit 10.8 to Stratus' 1992 Form 10-K.
10.4 Assignment dated June 11, 1992 of the Precept
Properties Agreement by and among FTX (successor by
merger to FMI Credit Corporation, as successor by
merger to Longhorn Development Company), the
Partnership and Precept Properties, Inc. Incorporated
by reference to Exhibit 10.9 to Stratus' 1992 Form 10-K.
10.5 Master Agreement, dated as of May 22, 1998, by and
among Oly Fund II GP Investments, L.P., Oly Lender
Stratus, L.P., Oly/Stratus Equities, L.P., Stratus
Properties Inc. and Stratus Ventures I Borrower L.L.C.
Incorporated by reference to Exhibit 99.1 to Stratus'
Current Report on Form 8-K dated June 3, 1998.
10.6 Securities Purchase Agreement, dated as of May 22,
1998, by and between Oly/Stratus Equities, L.P. and
Stratus Properties Inc. Incorporated by reference to
Exhibit 99.2 to Stratus' Current Report on Form 8-K
dated June 3, 1998.
10.7 Oly Stratus Barton Creek I Amended and Restated Joint
Venture Agreement between Oly ABC West I, L.P. and
Stratus ABC West I, L.P. dated December 28, 1999.
Incorporated by reference to Exhibit 10.7 to the
Stratus 1999 Form 10-K.
<PAGE> E-1
10.8 Amendment No. 1 to the Oly Stratus ABC West I Joint
Venture Agreement dated November 9, 1998. Incorporated
by reference to Exhibit 10.11 to the Stratus 1998 Third
Quarter 10-Q.
10.9 Management Agreement between Oly Stratus ABC West I
Joint Venture and Stratus Management L.L.C. dated
September 30, 1998. Incorporated by reference to
Exhibit 10.12 to the Stratus 1998 Third Quarter 10-Q.
10.10 Loan Agreement dated September 30, 1998 between
Oly Stratus ABC West I Joint Venture and Oly Lender
Stratus, L.P. Incorporated by reference to Exhibit
10.13 to the Stratus 1998 Third Quarter 10-Q.
10.11 General Partnership Agreement dated April 8, 1998
by and between Oly/Houston Walden, L.P. and Oly/FM
Walden, L.P. Incorporated by reference to Exhibit 10.14
to the Stratus 1998 Third Quarter 10-Q.
10.12 Amendment No. 1 to the General Partnership
Agreement dated September 30, 1998 by and among
Oly/Houston Walden, L.P., Oly/FM Walden, L.P. and
Stratus Ventures I Walden, L.P. Incorporated by
reference to Exhibit 10.15 to the Stratus 1998 Third
Quarter 10-Q.
10.13 Development Loan Agreement dated September 30,
1998 by and between Oly Walden General Partnership and
Bank One, Texas, N.A. Incorporated by reference to
Exhibit 10.16 to the Stratus 1998 Third Quarter 10-Q.
10.14 Guaranty Agreement dated September 30, 1998 by and
between Oly Walden General Partnership and Bank One,
Texas, N.A. Incorporated by reference to Exhibit 10.17
to the Stratus 1998 Third Quarter 10-Q.
10.15 Management Agreement dated April 9, 1998 by and
between Oly/FM Walden, L.P. and Stratus Management,
L.L.C. Incorporated by reference to Exhibit 10.18 to
the Stratus 1998 Third Quarter 10-Q.
10.16 Amended and Restated Joint Venture Agreement dated
August 16, 1999 by and between Oly Lantana, L.P., and
Stratus 7000 West, Ltd. Incorporated by reference to
Exhibit 10.18 to the Quarterly Report on Form 10-Q of
Stratus for the Quarter ended September 30, 1999.
10.17 Guaranty Agreement dated December 31, 1999 by and
between Stratus Properties Inc. and Comerica Bank-
Texas. Incorporated by reference to Stratus' Quarterly
Report on Form 10-Q for the Quarter ended March 31,
2000.
10.18 Guaranty Agreement dated February 24, 2000 by and
between Stratus Properties Inc. and Comerica Bank-
Texas. . Incorporated by reference to Stratus'
Quarterly Report on Form 10-Q for the Quarter ended
March 31, 2000.
Executive Compensation Plans and Arrangements (Exhibits
10.19 through 10.22)
10.19 Stratus' Performance Incentive Awards Program, as
amended effective February 11, 1999. Incorporated by
reference to Exhibit 10.18 to Stratus' 1998 Form 10-K.
10.20 Stratus Stock Option Plan, as amended.
Incorporated by reference to Exhibit 10.9 to Stratus'
1997 Form 10-K.
10.21 Stratus 1996 Stock Option Plan for Non-Employee
Directors, as amended. Incorporated by reference to Exhibit
10.10 to Stratus' 1997 Form 10-K.
10.22 Stratus Properties Inc. 1998 Stock Option Plan as
amended effective February 11, 1999. Incorporated by
reference to Exhibit 10.21 to Stratus' 1998 Form 10-K.
15.1 Letter dated July 25, 2000 from Arthur Andersen LLP
regarding the unaudited financial statements.
27.1 Financial Data Schedule.
<PAGE> E-2
