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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From .......... to ..........
Commission file number 0-19989
Stratus Properties Inc.
(Exact name of Registrant as specified in Charter)
Delaware 72-1211572
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
98 San Jacinto Blvd., Suite 220
Austin, Texas 78701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (512) 478-5788
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock Par Value $0.01 per Share
Preferred Stock Purchase Rights
(Title of Each Class)
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 _
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. _
The aggregate market value of the voting stock held by non-
affiliates of the registrant was approximately $49,300,000 on
March 15, 2001.
On March 15, 2001, 14,298,270 shares of Common Stock, par
value $0.01 per share, of the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement to be submitted
to the registrant's stockholders in connection with its 2001
Annual Meeting to be held on May 10, 2001, are incorporated by
reference into Part III of this Report.
TABLE OF CONTENTS
Page
Part I 1
Item 1. Business 1
Overview 1
Company Strategies 1
Credit Facility 2
Transactions with Olympus Real Estate Corporation 2
Regulation and Environmental Matters 3
Employees 3
Cautionary Statements 3
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 6
Executive Officers of the Registrant 6
Part II 7
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 7
Item 6. Selected Financial Data 7
Items 7. and 7A.
Management's Discussion and Analysis of Financial
Condition and Results of Operations and Disclosures
about Market Risks 8
Item 8. Financial Statements and Supplementary Data 15
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 28
Part III 28
Item 10.Directors and Executive Officers of the Registrant 28
Item 11.Executive Compensation 28
Item 12.Security Ownership of Certain Beneficial Owners
and Management 28
Item 13.Certain Relationships and Related Transactions 28
Part IV 29
Item 14.Exhibits, Financial Statement Schedules and Reports
on Form 8-K 29
Signatures S-1
Financial Statement Schedules F-1
Exhibits E-1
PART I
Item 1. Business
Overview
We are engaged in the acquisition, development, management
and sale of commercial and residential real estate properties. We
conduct real estate operations on properties we own and through
unconsolidated affiliates that we jointly own with Olympus Real
Estate Corporation (see "Transactions with Olympus Real Estate
Corporation" below). All subsequent references to "Notes" refer
to the Notes to Financial Statements located in Item 8 elsewhere
in this Annual Report on Form 10-K.
Our principal real estate holdings are currently in the
Austin, Texas area. Our most significant acreage includes
approximately 2,300 acres of undeveloped residential, multi-
family and commercial property located in southwest Austin within
the Barton Creek community and 465 acres of undeveloped
residential, multi-family and commercial property known as the
Lantana project, located south of and adjacent to the Barton
Creek community. Our remaining Austin acreage consists of about
1,300 acres of undeveloped commercial and multi-family property
within the Circle C community, also located in southwest Austin.
We also own 120 acres of undeveloped residential property
and 31 acres of undeveloped commercial and multi-family property
located in Dallas, Houston and San Antonio, Texas, which are
being actively marketed.
Company Strategies
Since our formation, our primary objective has been to
reduce our indebtedness and increase our financial flexibility.
Our debt totaled $8.4 million at December 31, 2000 compared with
$493.3 million in March 1992. We have negotiated a new expanded
$30 million credit facility, which is available to us through
December 16, 2002 (see "Credit Facility" and Note 5). The new
credit facility has increased our financial flexibility, allowing
us to fully concentrate our efforts on developing our properties
and increasing shareholder value. Key factors in accomplishing
these goals include:
* Our overall strategy is to enhance the value of our Austin
properties by securing and maintaining development entitlements
and developing and building real estate projects for sale or
investment, thereby increasing the potential return from our core
assets. We may own these future developments outright or they may
be developed through joint ventures with others. Over the last
two years, we have had significant joint venture development
activity (see below).
During 1999, we completed the development of the 75
residential lots at the Wimberly Lane subdivision at Barton
Creek and by the end of 2000, 72 of the lots had been sold
with the balance under contract to close during the first half
of 2001. Also during 1999, we completed and leased the first
70,000 square foot office building at the 140,000 square foot
Lantana Corporate Center. Construction and leasing of the
second 70,000 square foot office building was completed during
the third quarter of 2000. We are continuing to develop
several new subdivisions around the new Tom Fazio designed
"Fazio Canyons" golf course, which included the construction
of 54 multi-acre residential lots during the first half of
2000 at the Escala Drive subdivision at Barton Creek. We
closed on the sale of 32 of the Escala Drive lots during 2000,
with the remaining 22 lots expected to close during 2001.
* We are currently permitting additional residential property
at Barton Creek and office, multi-family and retail space at
Lantana.
We commenced construction of a new subdivision within the
Barton Creek community during the fourth quarter of 2000.
This subdivision, Mirador, adjoins the successful Escala Drive
subdivision. Our development plan for the Mirador subdivision
consists of 34 estate lots, averaging 3.5 acres in size, to be
completed by mid-2001.
We have received final subdivision plat approval from the
City of Austin (the City) to develop approximately 170 acres
of commercial and multi-family real estate within our Lantana
development and we commenced initial development activities at
this site during the fourth quarter of 2000. Full development
on the 170 acres is expected to consist of over 800,000 square
feet of office and retail space and approximately 400 multi-
family units. A 36.4-acre multi-family site was sold to an
apartment developer in December 2000 and is currently under
construction (see Items 7. and 7A. "Results of Operations"
located elsewhere in this Annual Report on Form 10-K).
* We believe that we have the right to receive up to $32
million of future reimbursements associated with previously
incurred Barton Creek utility infrastructure development costs.
At December 31, 2000, we had approximately $14 million of these
expected future reimbursement recorded as a component of "Real
estate and facilities" on our balance sheet. The remaining $18
million of these reimbursements have not been recorded in our
financial
1
statements because of uncertainties associated with
their ultimate realizability. Additionally, substantial
additional costs eligible for reimbursement will be incurred in
the future as our development activities at Barton Creek
continue. We received a total of $7.1 million of Circle C
Municipal Utility District (MUD) reimbursements during 2000 (in
addition to the $10.3 million received during 1999) in full and
final settlement of our remaining Circle C infrastructure claim
against the City. See Item 3, "Legal Proceedings," for more
details on that matter.
* We will continue to vigorously defend our rights to the
development entitlements of all our properties, but aggressive
attempts to restrict growth in the area of our holdings have had
and may continue to have a negative effect on near term
development and sales activities.
* We are expanding our real estate management activities,
primarily as a result of our role as manager in the various joint
venture projects. We also continue to be retained by third
parties to provide management and development assistance on
selective real estate projects, including the Lakeway project,
near Austin. In the first quarter of 2001 we expanded our
participation in the Lakeway project by agreeing to fund
approximately $2.0 million of the project's future development
costs in return for a net profits interest, which includes
enhanced management and development fees and sales commissions.
* We also continue to investigate and pursue opportunities for
new projects that would require minimal capital from us yet offer
the possibility of acceptable returns and limited risk.
Credit Facility
In December 1999, we established a bank credit facility with
Comerica Bank-Texas, which provided for a $20 million term loan
and a $10 million revolving line of credit. We borrowed $20
million under the term loan portion of the facility and repaid
all our borrowings outstanding under the previous credit
facility, which was then terminated. In December 2000, we repaid
the remaining borrowings under the existing Comerica facility and
then negotiated an expanded $30 million credit facility with
Comerica, with improved terms and a December 16, 2002 maturity.
Under terms of this new credit facility, we now have a $20
million revolving line of credit and a $10 million term loan
commitment specifically designated for a potential future
redemption of our mandatorily redeemable preferred stock (Note
3). For a further discussion of the credit facility see Note 5,
and Items 7. and 7A. "Capital Resources and Liquidity" located
elsewhere in this Annual Report on Form 10-K.
Transactions with Olympus Real Estate Corporation
On May 22, 1998, we formed a strategic alliance with Olympus
Real Estate Corporation, an affiliate of Hicks, Muse, Tate and
Furst Incorporated (Olympus), to develop certain of our existing
properties and to pursue new real estate acquisition and
development opportunities. Under the terms of the agreement,
Olympus purchased $10 million of our mandatorily redeemable
preferred stock, provided us a $10 million convertible debt
facility and agreed to make available up to $50 million of
additional capital representing its share of direct investments
in joint Stratus/Olympus projects.
We have entered into three joint ventures with Olympus. We
own 49.9 percent of each joint venture and Olympus owns the
remaining 50.1 percent. We are the developer and manager for each
of the joint venture projects. Accordingly, in addition to
partnership distributions, we receive various development fees,
sales commissions and other management fees for our services.
The first two joint ventures were formed on September 30,
1998. The first provided for the development of a 75 residential
lot project at the Barton Creek Wimberly Lane subdivision. We
sold the land to the joint venture for approximately $3.2 million
and paid approximately $0.5 million for our equity interest. The
other transaction involved approximately 700 developed lots and
80 acres of platted but undeveloped real estate at the Walden on
Lake Houston project, which Olympus purchased in April 1998 and
we have managed ever since. We acquired our interest in the
related partnership utilizing $2.0 million of funds available
under the Olympus convertible debt facility. During the third
quarter of 1999, we formed a third joint venture associated with
the construction of the first 70,000 square foot office building
at the Lantana Corporate Center (7000 West). In this transaction,
we sold 5.5 acres of commercial real estate to the joint venture
for $1.0 million. In December 1999, we sold 174 acres of our
Barton Creek residential property to the joint venture initially
formed to develop the lots at the Wimberly Lane subdivision (see
above) for $11.0 million. The land was developed into 54 multi-
acre single-family residential lots, which are the largest lots
developed to date within the Barton Creek community. In the
first quarter of 2000, we sold an additional 5.5 acres of
commercial real estate to 7000 West for $1.1 million.
Construction of the second 70,000 square foot office building was
completed in the third quarter of 2000. For a detailed
discussion of these transactions see Items 7. and 7A. "Joint
Ventures with Olympus Real Estate Corporation" and Note 4 located
elsewhere in this Annual Report on Form 10-K.
2
Regulation and Environmental Matters
Our real estate investments are subject to extensive local,
city, county and state rules and regulations regarding
permitting, zoning, subdivision, utilities and water quality as
well as federal rules and regulations regarding air and water
quality and protection of endangered species and their habitats.
Such regulation has delayed and may continue to delay development
of our properties and result in higher developmental and
administrative costs. See Item 3, "Legal Proceedings."
We are making, and will continue to make, expenditures for
the protection of the environment with respect to our real estate
development activities. Emphasis on environmental matters will
result in additional costs in the future. Based on an analysis of
our operations in relation to current and presently anticipated
environmental requirements, we currently do not anticipate that
these costs will have a material adverse effect on our future
operations or financial condition.
Employees
At December 31, 2000, we had 22 employees, who manage our
operations. We currently own 10 percent of a corporation that
provides us with certain management and administrative services,
including technical, administrative, accounting, financial, tax,
and other services, under a management services agreement. We may
terminate this contract at any time upon 90 days notice to the
affiliated corporation. These services are provided on a cost
reimbursement basis, which totaled $1.0 million in 2000, $0.9
million in 1999 and $1.0 million in 1998. As a result of an
expected reduction in the level of services to be provided to us
under the management services agreement, the agreement was
amended effective January 1, 2001, with our fees for 2001
estimated at $0.4 million.
Cautionary Statements
This report includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. Forward-looking
statements are all statements other than statements of historical
fact included in this report, including, without limitation, the
statements under the headings "Business," "Properties," "Market
for Registrant's Common Equity and Related Stockholder Matters,"
and "Management's Discussion and Analysis of Financial Condition
and Results of Operations and Disclosures About Market Risks"
regarding our financial position and liquidity, payment of
dividends, strategic plans, future financing plans, development
and capital expenditures, business strategies, and our other
plans and objectives for future operations and activities.
Forward-looking statements are based on our assumptions and
analysis made in light of our experience and perception of
historical trends, current conditions, expected future
developments and other factors that we believe are appropriate
under the circumstances. These statements are subject to a
number of assumptions, risks and uncertainties, including the
risk factors discussed below and in our other filings with the
Securities and Exchange Commission, general economic and business
conditions, the 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. Readers are
cautioned that forward-looking statements are not guarantees of
future performance and the actual results or developments may
differ materially from those projected, predicted or assumed in
the forward-looking statements. Important factors that could
cause actual results to differ materially from our expectations
include, among others, the following:
If we are unable to generate sufficient cash from operations, we
may find it necessary to curtail our development operations. We
have made substantial reductions in debt since our formation in
1992. However, significant capital resources will be required to
fund our development expenditures. Our performance continues to
be dependent on future cash flows from real estate sales, and
there can be no assurance that we will generate sufficient cash
flow or otherwise obtain sufficient funds to meet the expected
development plans for our properties.
Our real estate operations are also dependent upon the
availability and cost of mortgage financing for potential
customers, to the extent they finance their purchases, and for
buyers of the potential customers' existing residences.
Our results of operations and financial condition are greatly
affected by the performance of the real estate industry. Our
real estate activities are subject to numerous factors beyond our
control, including local real estate market conditions (both
where our properties are located and in areas where our potential
customers reside), substantial existing and potential
competition, general national, regional and local economic
conditions, fluctuations in interest rates and mortgage
availability and changes in demographic conditions. Real estate
markets have historically been subject to strong periodic cycles
driven by numerous factors beyond the control of market
participants.
3
Real estate investments often cannot easily be converted
into cash and market values may be adversely affected by these
economic circumstances, market fundamentals, competition and
demographic conditions. Because of the effect these factors have
on real estate values, it is difficult to predict with certainty
the level of future sales or sales prices that will be realized
for individual assets.
Our operations are subject to an intensive regulatory approval
process. Before we can develop a property we must obtain a
variety of approvals from local and state governments with
respect to such matters as zoning, density, parking, subdivision,
site planning and environmental issues. Certain of these
approvals are discretionary by nature. Because certain
government agencies and special interest groups have expressed
concerns about our development plans in or near Austin, our
ability to develop these properties and realize future income
from our properties could be delayed, reduced, prevented or made
more expensive.
Certain special interest groups have long opposed certain of
our plans in the Austin area and have taken various actions to
partially or completely restrict development in certain areas,
including areas where some of our most valuable properties are
located. We are actively opposing these actions. We currently
do not believe unfavorable rulings would have a significant long-
term adverse effect on the overall value of our property
holdings. However, because of the regulatory environment that
exists in the Austin area and the intensive opposition of certain
interest groups, there can be no assurance that such expectations
will prove correct.
Our operations are subject to governmental environmental
regulation, which can change at any time and generally would
result in an increase to our costs. Real estate development is
subject to state and federal regulations and to possible
interruption or termination because of environmental
considerations, including, without limitation, air and water
quality and protection of endangered species and their habitats.
Certain of the Barton Creek properties include nesting
territories for the Golden Cheek Warbler, a federally listed
endangered species. In February 1995, we received a permit from
the U.S. Wildlife Service pursuant to the Endangered Species Act,
which to date has allowed the development of the Barton Creek and
Lantana properties free of restrictions under the Endangered
Species Act related to the maintenance of habitat for the Golden
Cheek Warbler.
Additionally, in April 1997, the U.S. Department of Interior
listed the Barton Springs Salamander as an endangered species
after a federal court overturned a March 1997 decision by the
Department of Interior not to list the Barton Springs Salamander
based on a conservation agreement between the State of Texas and
federal agencies. The listing of the Barton Springs Salamander
has not affected, nor do we anticipate it will affect, our Barton
Creek and Lantana properties for several reasons, including the
results of technical studies and our U.S. Fish and Wildlife
Service 10(a) permit obtained in 1995. Our Circle C properties
may, however, be affected, although the extent of any impact
cannot be determined at this time. Special interest groups
provided written notice of their intention to challenge our 10(a)
permit and compliance with water quality regulations, but no
challenge has yet occurred.
We are making, and will continue to make, expenditures with
respect to our real estate development for the protection of the
environment. Emphasis on environmental matters will result in
additional costs in the future.
The real estate business is very competitive and many of our
competitors are larger and financially stronger than we are. The
real estate business is highly competitive. We compete with a
large number of companies and individuals, and many of them have
significantly greater financial and other resources than we have.
Our competitors include local developers who are committed
primarily to particular markets and also against national
developers who acquire properties throughout the United States.
We are vulnerable to risks because our operations are currently
exclusive to the Texas market. Our real estate activities are
located entirely in the Austin, Dallas, Houston and San Antonio,
Texas areas. Because of our geographic concentration and limited
number of projects, our operations are more vulnerable to local
economic downturns and adverse project-specific risks than those
of larger, more diversified companies.
The performance of the Texas economy and more specifically
the Austin economy, affects our sales and consequently the
underlying values of our properties. While the Texas economy
has remained healthy in recent years, its economy has
historically been subject to cyclical downturns primarily as a
result of adverse economic conditions within the oil and gas
industry. The Austin economy is heavily influenced by conditions
in the technology industry. As the technology market weakens, as
is the current condition, we experience reduced sales, primarily
affecting our "high-end" properties, which can significantly
affect our financial condition and results of operations.
4
Our operations are subject to natural risks. Our performance may
be adversely affected by weather conditions that delay
development or damage property.
Item 2. Properties
Our acreage to be developed, excluding our holdings in joint
ventures, is provided in the following table. The acreage to be
developed is broken down into anticipated uses for single-family
lots, multi-family units and commercial development based upon
our understanding of the properties' existing entitlements.
However, there is no assurance that the undeveloped acreage will
be so developed because of the nature of the approval and
development process and market demand for a particular use. We
currently have no developed lots available for sale. For
information concerning our unconsolidated affiliates' real estate
holdings, see "Transaction with Olympus Real Estate Corporation"
above and Items 7. and 7A. "Joint Ventures with Olympus Real
Estate Corporation" located elsewhere in this Annual Report on
Form 10-K.
Potential Development Acreage
-----------------------------------------
Single
Family Multi-family Commercial Total
------ ------------ ---------- -----
Austin
Barton Creek 1,354 249 673 2,276
Lantana 154 - 311 465
Circle C - 212 1,062 1,274
Dallas
Bent Tree - 10 - 10
Houston
Copper Lakes 120 - - 120
San Antonio
Camino Real - 21 - 21
----- --- ----- -----
Total 1,628 492 2,046 4,166
===== === ===== =====
Item 3. Legal Proceedings
Various regulatory matters and litigation involving the
development of our Austin properties are summarized below.
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 of Austin (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.
In late October 1999, Circle C Land Corp., a wholly owned
subsidiary of Stratus, and the City reached an agreement
regarding a portion of Circle C's claims against the City. As a
result of this agreement, Stratus received approximately $10.3
million, including $1.0 million in interest, of partial
settlement claims through December 31, 1999 and received an
additional $0.2 million payment in January 2000.
In March 2000, the City settled its disputes with certain
third party real estate developers and landowners at 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 were
dismissed with prejudice. As a result, a refund contingency
included in the City's partial settlement of Stratus'
reimbursement claim was eliminated. Stratus recorded a gain of
approximately $7.4 million in the first quarter of 2000,
representing that portion of the reimbursement 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.
In December 2000, Stratus received $6.9 million, including
$0.6 million of interest, from the City as full and final
settlement of Stratus' remaining Circle C MUD reimbursement
claim. Stratus recorded a gain of $6.9 million during the fourth
quarter associated with its receipt of these proceeds.
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
5
WQPZ challenging 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 judgment and declared the WQPZ
legislation unconstitutional. The District Court ruling was
appealed to the Texas Supreme Court. 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, filed by another
party, was denied and the ruling is final.
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. 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's WQPZ
Action discussed above, the Third Court of Appeals reversed the
Hays County District Court decision, finding the zone legislation
unconstitutional. The ruling is final.
The above two court decisions primarily affect our future
development plans for certain areas within the southern portion
of our Barton Creek community real estate. A significant portion
of our properties contain grandfathered entitlements that are not
subject to the development requirements currently in effect. We
have initiated development plans for these areas that will meet
the grandfathered ordinance requirements or current ordinances,
as applicable.
Although the proceedings discussed above have now all been
resolved and we are no longer involved in any material
litigation, we may from time to time be involved in various legal
proceedings of a character normally incident to the ordinary
course of our business. We believe that potential liability from
any of these pending or threatened proceedings will not have a
material adverse effect on our financial condition or results of
operations. We maintain liability insurance to cover some, but
not all, potential liabilities normally incident to the ordinary
course of our business as well as other insurance coverage
customary in our business, with such coverage limits as
management deems prudent.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Executive Officers of the Registrant
Certain information, as of March 16, 2001, regarding our
executive officers is set forth in the following table and
accompanying text.
Name Age Position or Office
---- --- ------------------
William H. Armstrong III 36 Chairman of the Board, President
and Chief Executive Officer
Kenneth N. Jones 41 General Counsel
Mr. Armstrong has been employed by us since our inception in
1992. He has served us as Chairman of the Board since August
1998, Chief Executive Officer since May 1998 and President since
August 1996. Previously Mr. Armstrong served as Chief Operating
Officer from August 1996 to May 1998 and as Chief Financial
Officer from May 1996 to August 1996. He served as Executive
Vice President from August 1995 to August 1996.
Mr. Jones has served as our General Counsel since August
1998. Mr. Jones is a partner with the law firm of Armbrust Brown
& Davis, L.L.P. and he provides legal and business advisory
services under a consulting arrangement with his firm.
6
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Our common stock trades on Nasdaq under the symbol STRS.
The following table sets forth, for the periods indicated, the
range of high and low sales prices, as reported by Nasdaq.
2000 1999
------------ -------------
High Low High Low
----- ----- ----- -----
First Quarter $4.75 $3.50 $4.63 $3.13
Second Quarter 5.13 4.00 5.00 2.88
Third Quarter 5.00 4.13 5.25 3.75
Fourth Quarter 5.03 4.00 4.88 3.75
As of March 15, 2001 there were 7,685 holders of record of
our common stock. We have not in the past paid, and do not
anticipated in the future paying, cash dividends on our common
stock. The decision whether or not to pay dividends and in what
amounts is solely within the discretion of our Board of
Directors. However, our current ability to pay dividends is also
restricted by terms of our credit agreement, as discussed in Note
5.
Item 6. Selected Financial Data
The following table sets forth our selected historical
financial data for each of the five years in the period ended
December 31, 2000. The historical financial information is
derived from our audited financial statements and is not
necessarily indicative of our future results. You should read
the information in the table below together with Items 7. and 7A.
"Management's Discussion and Analysis of Financial Condition and
Results of Operations and Disclosures About Market Risks" and
Item 8. "Financial Statements and Supplemental Data."
2000 1999 1998 1997 1996a
-------- -------- -------- -------- --------
(In Thousands, Except Per Share Amounts)
Years Ended December 31:
Revenues $ 10,099 $ 15,252 $ 18,535 $ 31,495 $ -
Loss from Partnership - - - - (346)
Operating income (loss) (2,446) 3,350 (572) 3,907 (566)
Equity in unconsolidated
affiliates' income
(loss) 1,372 307 (26) - -
Net income (loss) 14,222b 2,871 (2,638) 7,006c 76
Basic net income (loss)
per share 0.99 0.20 (0.18) 0.49 0.01
Diluted net income (loss)
per share 0.87 0.18 (0.18) 0.48 0.01
Basic average shares
outstanding 14,295 14,288 14,288 14,288 14,286
Diluted average shares
outstanding 16,711d 16,238d 14,288 14,517 14,390
At December 31:
Real estate and
facilities, net 93,005 91,664 96,556 105,274 -
Investment in the
Partnership - - - - 56,055
Total assets 111,893 115,672 111,829 112,754 60,985
Long-term debt 8,440 16,562 29,178 37,118 - e
Stockholders' equity 81,080 66,840 63,969 66,607 59,599
a. Prior to 1997, our operating results were reported under the
equity basis of accounting, reflecting our investment in an
operating partnership through which we conducted our operations
(see Note 1).
b. Includes $14.3 million ($0.85 per share) associated with
final settlement of our Circle C Municipal Utility District claim
against the City of Austin (see Note 6).
c. Includes a $4.5 million ($0.31 per share) gain from sale of
all remaining oil and gas property interests.
d. Assumes the redemption of our 1.7 million shares of
outstanding mandatorily redeemable preferred stock for 1.7
million shares of common stock.
e. Long-term debt was not reflected in our consolidated
financial position because our investment in the operating
partnership was recorded under the equity method (see Note 1).
The debt amount included in Investment in the Partnership was
$58.3 million for 1996.
7
Items 7. and 7A. Management's Discussion and Analysis of Financial
Condition and Results of Operations and Disclosures About Market Risks
Overview
We are engaged in the acquisition, development, management
and sale of commercial and residential real estate properties. We
conduct real estate operations on properties we own and through
unconsolidated affiliates we jointly own with Olympus Real Estate
Corporation (see "Joint Ventures with Olympus Real Estate
Corporation" below), pursuant to a strategic alliance formed in
May 1998.
Our principal real estate holdings are currently in the
Austin, Texas area. Our most significant acreage includes
approximately 2,300 acres of undeveloped residential, multi-
family and commercial property located in southwest Austin within
the Barton Creek community and 465 acres of undeveloped
residential, multi-family and commercial property known as the
Lantana project, located south of and adjacent to the Barton
Creek community. Our remaining Austin acreage consists of about
1,300 acres of undeveloped commercial and multi-family property
within the Circle C community, also located in southwest Austin.
We also own 120 acres of undeveloped residential property,
which are under contract for sale during 2001, and 31 acres of
undeveloped commercial and multi-family property located in
Dallas, Houston and San Antonio, Texas, which are being activity
marketed. Unaffiliated professional real estate developers who
have been retained to provide master planning, zoning,
permitting, development, construction and marketing services for
the properties manage these real estate interests. Under the
terms of these agreements, we fund operating expenses and
development costs associated with these properties, net of
revenues. Also, the developers are entitled to a management fee
and a 25 percent interest in the net profits, after we recover
our investments and a stated rate of return, resulting from the
sale of properties under their management. As of December 31,
2000, no amounts have been or are expected to be paid in
connection with these net profit arrangements.
Joint Ventures with Olympus Real Estate Corporation (Olympus)
We have entered into three joint ventures with Olympus, an
affiliate of Hicks, Muse, Tate & Furst Incorporated, pursuant to
a strategic alliance entered into in May 1998 (see Note 2). All
subsequent references to "Notes" refer to the Notes to Financial
Statements located in Item 8, found elsewhere in this Annual
Report on Form 10-K.
Olympus owns a 50.1 percent interest and we own a 49.9
percent interest in each joint venture. The first two joint
ventures were formed on September 30, 1998 and the third was
formed in the third quarter of 1999. Subsequently, two of the
joint ventures were expanded to encompass new projects. See Note
4 for financial information, including condensed income statement
and balance sheet data, about our unconsolidated affiliates.
Barton Creek Joint Venture
The first joint venture involved our sale of the Wimberly
Lane tract within the Barton Creek community near Austin, Texas
to the Oly Stratus Barton Creek I Joint Venture (Barton Creek
Joint Venture) on September 30, 1998. The Barton Creek Joint
Venture agreed to pay $3.3 million for the 28-acre tract. We
received $2.1 million, a note for $1.2 million and made an equity
contribution of $0.5 million upon formation of the joint venture.
In the transaction, we deferred $1.6 million of revenues and $0.6
million of related gain associated with our 49.9 percent
ownership interest in the joint venture. As manager of the
project, we secured a $3.9 million project loan facility for the
joint venture. The initial proceeds from this facility were used
to reimburse the $1.9 million of development costs that we
incurred on the project prior to the formation of the joint
venture. Subsequent borrowings on the facility were used to
complete the development of 75 residential lots at the "Wimberly
Lane" subdivision of Barton Creek. As developer, we completed 75
residential lots during the first quarter of 1999 and immediately
began marketing the lots. As manager, we sold 42 of the
Wimberly Lane lots during 1999 for $4.8 million, which enabled us
to repay all the borrowings outstanding under the project loan
facility and to partially fund the development of 54 additional
lots in the "Escala Drive" subdivision of the Barton Creek Joint
Venture (see below). We sold 30 additional Wimberly Lane
residential lots during 2000 for $3.5 million. The three
remaining Wimberly Lane lots are scheduled to close and fund by
mid-2001.
In December 1999, we sold the Barton Creek Joint Venture
174 acres of land encompassing 54 platted lots, within the
"Escala Drive" subdivision of the Barton Creek community. Upon
closing of the sale, we received $6.0 million and a $5.0 million
note. We deferred $5.5 million of the $11.0 million of sales
proceeds and $3.0 million of the $6.0 million related gain
attributable to our ownership interest. The 54 lots, completed
during the first half of 2000, were developed pursuant to the
more restrictive development requirements of the city of Austin
(the City). Each lot averages over three acres in size, making
them the largest lots developed to date within the Barton Creek
community. All of the lots have scenic hill country settings and
some overlook the new Tom Fazio-designed "Fazio Canyons" golf
course. The development of these lots was funded through the
initial equity contributions of the partners and proceeds from
sales of
8
lots at the Wimberly Lane subdivision of the Barton
Creek Joint Venture (see above). As manager, we sold 32 Escala
Drive lots for $14.0 million during 2000. We expect the
remaining 22 lots will close and fund during 2001.
As manager of the Barton Creek Joint Venture, we receive
sales commissions and management fees for our services. We
earned fees totaling $1.2 million in 2000 and $0.3 million in
1999 related to our Barton Creek Joint Venture activities. We
also received a development fee upon completing the respective
subdivisions in 1999 and 2000.
The Barton Creek Joint Venture has distributed approximately
$16.4 million to the partners as of December 31, 2000. Our share
of these distributions, approximately $8.2 million, was initially
recorded as a reduction of the related Barton Creek Joint Venture
notes receivable ($6.2 million) and the related accrued interest
($0.7 million). The remaining $1.3 million of distribution
proceeds represented a return of equity and reduced our
investment in the Barton Creek Joint Venture. Future
distributions will further reduce our investment in the Barton
Creek Joint Venture, which at December 31, 2000 was $4.1 million.
Walden Partnership
The second joint venture, also formed on September 30, 1998,
involved us acquiring a 49.9 percent interest in the Oly Walden
General Partnership (the Walden Partnership), which owns the
Walden on Lake Houston project in Houston, Texas, which Olympus
purchased in April 1998. We have managed this project on
Olympus' behalf under the terms of a management agreement since
April 1998. We paid $2.0 million for our share of the Walden
Partnership, borrowing funds available to us under the $10
million convertible debt facility with Olympus (see Note 2). We
will continue to manage this property, which at December 31,
2000, included 497 developed lots and 80 acres of platted but
undeveloped real estate, and receive management fees and
commissions for our services. During the second quarter of 1998,
we negotiated agreements with homebuilders providing for the sale
of approximately 90 percent of the developed lots at that time.
These agreements require the purchasers to close on the lots
pursuant to a specific schedule that extends through 2002. As of
December 31, 2000, 433 lots have already closed and funded under
these agreements. The Walden Partnership project loan, which
originally totaled $8.2 million, is nonrecourse to the partners
and is secured by the assets of the project. At December 31,
2000, borrowings outstanding on this project loan totaled $1.7
million. In connection with obtaining the Walden Partnership
project loan, we were required to make an initial restricted cash
deposit of $2.5 million as additional collateral, of which $0.6
million was still restricted at December 31, 2000.
7000 West
On August 16, 1999, we sold Olympus a 50.1 percent interest
in the first 70,000 square foot office building (Phase I) of the
planned 140,000 square foot Lantana Corporate Center (7000 West).
Upon closing, we received $1.1 million and recognized a $0.5
million gain. We deferred our retained interest, or $0.5
million, of the sales proceeds and related gain associated with
the sale of the 5.5 acres of commercial real estate associated
with Phase I of the project. As developer, we completed
construction on Phase I in November 1999, and as manager, we
secured third party lease agreements that have fully occupied the
building. During the first quarter of 2000, we completed a
transaction admitting Olympus as our joint venture partner in the
second 70,000 square foot office building (Phase II) at 7000
West. In this transaction, we finalized the second phase of a
prior sale of an additional 5.5 acres of commercial real estate
to the joint venture. Revenues from this sale of $1.1 million
and the related gain of $0.9 million were deferred until
construction and leasing of the building was completed, which
occurred during the third quarter of 2000. At that time, we
recognized $0.5 million related to Olympus' 50.1 percent share of
the revenues and related gain. In our role as manager, we
arranged for a $6.6 million project loan for 7000 West, which was
utilized to construct Phase I. The construction of Phase II
required additional financing, which was provided when we
arranged for an additional $7.7 million of availability on the
7000 West development loan. The variable rate, non-recourse loan
is secured by the 11 acres of land at 7000 West and both 70,000
square foot office buildings. The loan will mature in August
2001; however, we are actively pursuing a long-term financing
agreement on behalf of 7000 West. At December 31, 2000,
borrowings outstanding on this development loan totaled $12.0
million.
Stratus' Development Activities
Development is progressing at several sections of the Barton
Creek community including the preliminary development of 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.
We commenced construction of a new subdivision within the
Barton Creek community during the fourth quarter of 2000. This
subdivision, Mirador, adjoins the successful Escala Drive
subdivision, which is owned by our Barton Creek Joint Venture
(see above). Our development plan for the Mirador subdivision
consists of 34 estate lots, averaging 3.5 acres in size, to be
completed by mid-2001.
9
We have received final subdivision plat approval from the
City to develop approximately 170 acres of commercial and multi-
family real estate within our Lantana development and we
commenced initial development activities at this site during the
fourth quarter of 2000. Full development on the 170 acres is
expected to consist of over 800,000 square feet of office and
retail space and approximately 400 multi-family units. A 36.4-
acre multi-family site was sold to an apartment developer in
December 2000 and is currently under construction (see "Results
of Operations" below).
Results of Operations
We are continually evaluating the development potential of
our properties and will continue to consider opportunities to
enter into significant transactions involving our properties. As
a result, and because of numerous other factors affecting our
business activities as described herein, our past operating
results are not necessarily indicative of our future results.
Summary operating results follow (in thousands):
2000 1999 1998
------- ------- -------
Revenues:
Undeveloped properties
Unrelated parties $ 2,101 $ 3,279 $ 1,115
Olympus 533 6,020 1,651
Recognition of deferred revenues 4,026 904 -
Total undeveloped properties 6,660 10,203 2,766
Developed properties 709 3,692 15,303
Commissions, management fees and other 2,730 1,357 466
Total revenues $10,099 $15,252 $18,535
Operating income (loss) $(2,446)a $ 3,350a,b $ (572)a,b
Net income (loss) 14,222c 2,871 (2,638)
a. Includes $0.5 million of recognized gain associated with the
7000 West (Phase II) transaction in 2000, $3.5 million of
recognized gains associated with transactions involving the 7000
West (Phase I) and Barton Creek Joint Ventures in 1999 and a $0.6
million recognized gain in 1998 from the formation of the Barton
Creek Joint Venture.
b. Includes reimbursement of infrastructure costs expensed in
prior years of $2.8 million in 1999 and $0.8 million in 1998.
c. Includes $14.3 million of recognized gains associated with
the settlement of our Circle C infrastructure reimbursement claim
against the City (see "Non-Operating Results," Note 6 and Item 3.
"Legal Proceedings").
Our undeveloped property revenues include both sales of
undeveloped real estate to unrelated parties and to our
unconsolidated affiliates (see "Joint Ventures with Olympus Real
Estate Corporation" above). When we sell real estate to an
entity owned jointly with Olympus, we defer recognizing revenue
from the sale related to our ownership interest until sales are
made to unrelated parties. Our undeveloped properties revenues
for 2000 primarily reflect the recognition of previously deferred
revenues from the sale of undeveloped real estate to our
unconsolidated affiliates. We recognized $4.0 million of
previously deferred gains as a result of sales of 30 Wimberly
Lane lots and 32 Escala Drive lots at the Barton Creek Joint
Venture. Our remaining undeveloped properties revenues include
the sale of one acre of multi-family property in San Antonio,
Texas and the 36.4-acre multi-family Lantana tract in Austin,
which was sold in December 2000 for $5.3 million. In the Lantana
multi-family sales transaction, we deferred recognition on
approximately $3.5 million of the sales proceeds, including $1.6
million of related gain which will be recognized pro-rata as
development of the related infrastructure is completed. Our sales
to Olympus included its 50.1 percent interest in the 5.5 acres of
commercial real estate sold to 7000 West for construction of the
second 70,000 square foot building. We sold all 24 of our
remaining developed lots during 2000.
Our 1999 undeveloped property revenues to unrelated parties
included (1) the sale of 44 acres of residential property in
Houston, (2) the sale of 34 acres of multi-family real estate in
San Antonio and (3) the sale of 8 acres of multi-family real
estate in Dallas. Sales of real estate to joint ventures with
Olympus included the sale of 174 acres of residential property to
the Barton Creek Joint Venture and the sale of 5.5 acres of
commercial real estate to 7000 West (see "Joint Ventures with
Olympus Real Estate Corporation" above). Our recognition of
deferred revenues resulted from the sale of 42 Wimberly Lane
developed lots by the Barton Creek Joint Venture. Sales of 75
single-family homesites represent our 1999 developed property
revenues.
10
By comparison, our 1998 undeveloped real estate sales to
unrelated parties included the sale of 2 acres of commercial real
estate in Dallas, 27 acres of residential property in San Antonio
and 17 acres of residential property in Barton Creek. Our Olympus
revenues resulted from the sale of 28 acres of Barton Creek
residential real estate to the Barton Creek Joint Venture, of
which $1.6 million was originally deferred. Our 1998 developed
property revenues resulted from the sale of 213 single-family
homesites.
Commissions, management fees and other income have increased
steadily over the three-year period ending December 31, 2000,
reflecting our efforts to expand this part of our business. The
substantial revenues during 2000 primarily reflect our increased
sales commissions from the Barton Creek Joint Venture. We sold
lots at both the Escala Drive and Wimberly Lane subdivisions
during 2000 and we sold the initial Wimberly Lane lots during
1999. Our management fees revenue for the past two years also
includes our fees associated with the management of the 2,200-
acre Lakeway project near Austin.
Costs of sales were $8.8 million in 2000, $8.4 million in
1999 and $15.1 million in 1998. The increase in 2000 from 1999
primarily reflects the recognition of previously deferred costs
related to the sales of land to the Barton Creek Joint Venture,
which totaled $1.9 million in 2000 and $0.6 million in 1999.
This increase was partially offset by the reduction in sales
during 2000. The decrease in 1999 from 1998 resulted from the
reimbursement of certain infrastructure costs previously charged
to expense or related to properties previously sold, which
reduced cost of sales by $2.8 million during 1999 and $0.8
million in 1998. Additionally, the variance also reflects the
substantial reduction in sales, particularly those related to the
sales of developed lots.
Our general and administrative expenses totaled $3.7 million
in 2000, $3.5 million in 1999 and $4.0 million in 1998. Our
general and administrative expenses over the past three years
reflect increasing costs associated with our managerial and
administrative duties, primarily those associated with our
unconsolidated operations. This increase was partially offset by
reduced legal expenses, which totaled $0.5 million in 2000
compared to $0.8 million in 1999 and $1.5 million during 1998.
Legal costs have been decreasing as we worked to resolve our
Circle C disputes with the City, which have been settled (see
"Non-Operating Results" and "Capital Resources and Liquidity"
below).
Non-Operating Results
Net interest expense totaled $1.3 million in 2000, $0.8
million in 1999 and $2.0 million in 1998 (see Note 5).
Capitalized interest totaled $1.3 million in 2000, $1.2 million
in 1999 and $0.4 million in 1998.
In March 2000, the City approved a settlement agreement
involving 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 Municipal Utility Districts (MUD) and the
dissolution of the four MUDs have been dismissed with prejudice.
Accordingly, the City's cumulative partial payments of our Circle
C MUD reimbursement claim, totaling $10.5 million, were 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. In
December 2000, we received an additional $6.9 million, including
$0.6 million of interest, from the City as full and final
settlement of the City's obligations in this matter. We recorded
the proceeds as a gain during the fourth quarter of 2000. Also
see Item 3. "Legal Proceedings" for further discussion concerning
our legal matters.
We previously accrued liabilities totaling $5.1 million in
the connection with the previous operation of certain oil and gas
properties that were sold during 1993. During 2000, management
completed a review of these amounts and determined that current
conditions warranted reversal of $2.1 million of these accruals.
Accordingly, other income of $2.1 million is reflected in the
Statement of Operations for the year ending December 31, 2000.
The remaining liability represents our indemnification of the
purchaser for any future abandonment costs in excess of net
revenues received by the purchaser in connection with the sale of
one oil and gas property in 1993. We accrued $3.0 million
relating to this liability at the time of the purchase, which is
included in "Other liabilities" in the accompanying balance
sheet. We periodically assesses the reasonableness of amounts
recorded for this liability through the use of information
provided by the owner of the property, including its net
production revenues. The carrying value of this liability may be
adjusted or eliminated, as additional information becomes
available.
11
Capital Resources and Liquidity
Net cash provided by operating activities totaled $17.9
million in 2000, $20.6 million in 1999 and $11.1 million in 1998.
The decrease in 2000 compared with 1999 reflects our receipt of
$7.1 million from the City in settlement of our Circle C
infrastructure reimbursement claim in 2000 compared with the
$10.3 million we received from the City as partial settlement of
our claim during 1999 (see below and Item 3. "Legal
Proceedings"). The decrease also reflects our reduced sales
activity during 2000. The 2000 decrease was partially offset by
receipt of $6.5 million from the Barton Creek Joint Venture in
fulfillment of its remaining obligations to us under terms of its
initial land purchases in 1999 and 1998 (see "Joint Ventures with
Olympus Real Estate Corporation" above). We also received
distributions from our unconsolidated affiliates totaling $1.4
million, which represents a return on our equity investment in
the joint ventures. The increase during 1999 compared to 1998
resulted primarily from the $10.3 million partial settlement from
the City. The increase also reflects our receipt of previously
expensed infrastructure cost reimbursements totaling $2.8 million
during 1999 compared to $0.8 million for similar reimbursements
in 1998. The increase was partially offset by the decrease in
sales revenues during 1999.
Net cash used in investing activities totaled $5.4 million
in 2000, $8.9 million in 1999 and $8.8 million in 1998. Investing
activities for all three years reflect real estate and facilities
capital expenditure payments, net of any related capitalized MUD
reimbursements. In addition, 1999 investing activities included a
$0.4 million additional investment in the Walden Partnership. Our
1998 investing activities include a $2.5 million investment in
two joint ventures (see "Joint Ventures with Olympus Real Estate
Corporation" above and Note 4). Real estate and facility capital
expenditures have been moderate, reflecting the constraints on
our development activities resulting from disputes with the City
and others. Additionally, our joint ventures' capital
expenditures are not reflected directly in the accompanying
financial statements, as the joint ventures' results are
presented using the equity method of accounting (see Note 1).
Financing activities used cash totaling $8.4 million in 2000
and $12.9 million in 1999 and provided cash of $2.1 million in
1998. We reduced our net outstanding borrowings by $8.5 million
in 2000, $12.9 million in 1999 and $7.9 million in 1998. Our net
reductions in outstanding borrowings included proceeds of $0.4
million during 1999 and $2.0 million during 1998 from borrowings
on our convertible debt facility with Olympus (see Note 2).
Additionally, our financing activities during 1998 reflect $10.0
million from the issuance of mandatorily redeemable preferred
stock (see Note 3). The mandatorily redeemable preferred stock
proceeds were used to reduce outstanding bank debt, and the
convertible debt proceeds were used to fund our investment in the
Walden Partnership (see Note 4).
On October 29, 1999, the City agreed to pay us $9.8 million,
including interest of $1.0 million, as partial payment of our
Circle C MUD reimbursement claim. We received a total of $10.3
million of partial payments from the City on our Circle C MUD
reimbursement claim through December 31, 1999. We received a
total of $7.1 million of additional settlement proceeds from the
City in 2000, including its final settlement payment of $6.9
million (including interest of $0.6 million) in December 2000.
We used all $17.4 million of these proceeds to reduce our
borrowings outstanding under the applicable credit facilities.
Sales, limited development expenditures and the receipt of
the settlement proceeds related to our Circle C MUD reimbursement
claim enabled us to generate cash flow during the three years
ended December 31, 2000. We used these operating cash flows to
reduce our outstanding debt from $37.1 million at December 31,
1997 to $8.4 million at December 31, 2000. Historically, our
funding needs were met largely from borrowings under revolving
credit facilities and term loan agreements, which have been
renegotiated over the past two years (see below and Note 5).
In December 1999, we established a new bank credit facility
with Comerica Bank-Texas, which provided for a term loan and a
revolving line of credit. We borrowed $20 million under the term
loan portion of the facility and used the proceeds to repay all
borrowings outstanding under our previous credit facility. The
facility also made available up to an additional $10 million of
borrowings under a revolving line of credit. In December 2000, we
used the proceeds from our Lantana multi-family tract sale (see
"Results of Operations") to repay all remaining borrowings
outstanding under the existing Comerica facility and then
negotiated an expanded $30 million credit facility with Comerica,
with improved terms and a December 16, 2002 maturity. The new
facility consists of a $20 million revolving line of credit
available for general corporate purposes and a $10 million term
loan commitment especially designed for potential future
redemption obligations related to our mandatorily redeemable
equity securities held by Olympus (see Note 3). At December 31,
2000, we had $0.4 million of borrowings outstanding on the
facility, which were repaid in full in early January 2001.
Borrowings outstanding on our Comerica facility totaled $1.5
million as of February 28, 2001.
Under the terms of the Comerica facility, we are required to
carry an interest reserve account with the bank. The amount in
this account must be sufficient to carry the potential debt
service for both the term loan and the revolving line of credit
for the ensuing twelve month period, adjusted quarterly. At
December 31, 2000, the amount required to be
12
included in the
interest reserve account totaled approximately $2.0 million.
This amount can be funded directly or treated as a reduction of
our availability under the revolving line of credit. As of
December 31, 2000, we had funded $1.1 million into the interest
reserve account and the remaining $0.9 million needed to meet the
$2.0 million requirement reduced our availability under the
revolving line of credit to $19.1 million. We are able to
withdraw amounts funded into the interest reserve account as
needed.
In December 2000, we also borrowed $5.0 million under a new
five-year unsecured term loan from First American Asset
Management (Note 5). The proceeds of the loan are being used to
fund our operations and for other general corporate purposes. We
also have $3.0 million of borrowings outstanding on our
convertible debt facility with Olympus (see Note 2).
We have pursued various financing arrangements available
through our relationship with Olympus. On September 30, 1998, the
Walden Partnership, an unconsolidated subsidiary in which we own
49.9 percent, (see "Joint Ventures with Olympus Real Estate
Corporation" above and Note 4), entered into an $8.2 million
project loan agreement with a commercial bank to fund the
remaining development of the Walden on Lake Houston project. The
three-year, variable rate loan is secured by the assets of the
Walden Partnership and is nonrecourse to the partners. In
addition, we secured the loan with a restricted cash deposit (see
discussion below). Interest is payable monthly and is based on
the bank's prime rate or the LIBOR rate at the Walden
Partnership's option. In October 1998, the Walden Partnership
borrowed $6.1 million on this loan and used the proceeds to repay
its outstanding bank debt associated with land acquisition and
development costs incurred on the project. At December 31, 2000,
borrowings outstanding on this project loan totaled $1.7 million.
Restricted cash deposited with the bank for the Walden
Partnership project loan totaled $0.6 million at December 31,
2000 and $1.5 million at December 31, 1999.
In April 1999, we and one of our wholly owned subsidiaries
finalized a $6.6 million project development loan facility with
Comerica Bank-Texas for the development of the first 70,000
square foot office building at the 140,000 square foot Lantana
Corporate Center (7000 West). In August 1999, as part of the
joint venture agreement with Olympus, we sold a 50.1 percent
interest in the subsidiary that held the project loan.
Accordingly, the project loan is now recorded by the joint
venture (see "Joint Ventures with Olympus Real Estate
Corporation" above and Note 4). In the first quarter of 2000, as
manager of the 7000 West project, we obtained an additional $7.7
million of availability under the 7000 West development facility
to provide the funding necessary to construct the second 70,000
square foot office building at the site. The variable rate,
nonrecourse loan is secured by the approximate 11 acres of real
estate at 7000 West and the two completed office buildings. The
loan will mature in August 2001; however, we are actively
pursuing long term financing options for the project. At
December 31, 2000, borrowings outstanding on the project
development facility totaled $12.0 million.
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.
As discussed in "Cautionary Statements" located elsewhere in this
Annual Report on Form 10-K, our financial condition and results
of operations are highly dependent upon the market conditions in
Austin. Currently the Austin real estate market appears to be
experiencing a slowdown, which will likely affect our near-term
results. We cannot at this time project how long or to what
extent this current slowdown will last in Austin.
Significant development expenditures must be incurred and
permits secured for certain of our Austin area properties prior
to their eventual sale. In June 2000, the Texas Supreme Court
ruled that the legislation creating water quality protection
zones was unconstitutional (see Item 3. "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 benefit from grandfathered
entitlements that are not subject to the development requirements
currently in effect. We continue to have a positive and
cooperative dialogue with the City concerning land use and
development permit issues.
We are continuing to pursue additional development and
management fee opportunities, both individually and through our
existing relationships with institutional capital sources. We
also believe that we can obtain bank financing at a reasonable
cost for developing our properties. However, obtaining land
acquisition financing is generally expensive and uncertain.
In February 2001, our Board of Directors authorized an open
market stock purchase program for up to 1.4 million shares of our
common stock representing approximately 10 percent of our then
outstanding common stock. The
13
purchases may occur over time
depending on many factors: including the market price of our
common stock; our operating results, cash flow and financial
position; possible redemption of the mandatorily redeemable
preferred stock held by Olympus; and general economic and market
conditions.
Disclosures About Market Risks
We derive our revenues from the management, development and
sale of our real estate holdings. Our net income can vary
significantly with fluctuations in the market prices of real
estate, which are influenced by numerous factors, including
interest rate levels. Changes in interest rates also affect
interest expense on our debt. At the present time, we do not
hedge our exposure to changes in interest rates. Based on the
bank debt outstanding at December 31, 2000, a change of 100 basis
points in applicable annual interest rates would have an
approximate $0.1 million impact on year 2001 net income.
Environmental
Increasing emphasis on environmental matters is likely to
result in additional costs. Our future operations may require
substantial capital expenditures, which could adversely affect
the development of our properties and results of operations.
Additional costs will be charged against our operations in future
periods when such costs can be reasonably estimated. We cannot at
this time accurately predict the cost associated with future
environment obligations.
Cautionary Statement
Management's Discussion and Analysis of Financial Condition
and Results of Operations and Disclosures about Market Risks
contains forward-looking statements regarding future
reimbursement for infrastructure costs, future events related to
financing and the anticipated outcome of the 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 Item 1,
"Cautionary Statements."
14
Item 8. Financial Statements and Supplementary Data
REPORT OF MANAGEMENT
Stratus Properties Inc. (Stratus) is responsible for the
preparation of the financial statements and all other information
contained in this Annual Report. The financial statements have
been prepared in conformity with accounting principles generally
accepted in the United States and include amounts that are based
on management's informed judgments and estimates.
Stratus maintains a system of internal accounting controls
designed to provide reasonable assurance at reasonable costs that
assets are safeguarded against loss or unauthorized use, that
transactions are executed in accordance with management's
authorization and that transactions are recorded and summarized
properly. The system is tested and evaluated on a regular basis
by Stratus' internal auditors, PricewaterhouseCoopers LLP. In
accordance with auditing standards generally accepted in the
United States, Stratus' independent public accountants, Arthur
Andersen LLP, have developed an overall understanding of our
accounting and financial controls and have conducted other tests
as they consider necessary to support their opinion on the
financial statements.
The Board of Directors, through its Audit Committee composed
solely of independent non-employee directors, is responsible for
overseeing the integrity and reliability of Stratus' accounting
and financial reporting practices and the effectiveness of its
system of internal controls. Arthur Andersen LLP and
PricewaterhouseCoopers LLP meet regularly with, and have access
to, this committee, with and without management present, to
discuss the results of their audit work.
William H. Armstrong III
Chairman of the Board, President
and Chief Executive Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF STRATUS PROPERTIES INC.:
We have audited the accompanying balance sheets of Stratus
Properties Inc. (a Delaware Corporation) as of December 31, 2000
and 1999, and the related statements of operations, changes in
stockholders' equity, and cash flow for each of the three years
in the period ended December 31, 2000. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing
standards generally accepted in the United States. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Stratus Properties Inc. as of December 31, 2000 and 1999, and
the results of its operations and its cash flow for each of the
three years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United
States.
/s/Arthur Andersen LLP
Austin, Texas
January 25, 2001
15
STRATUS PROPERTIES INC.
BALANCE SHEETS
December 31,
-------------------
2000 1999
-------- --------
(In Thousands)
ASSETS
Current assets:
Cash and cash equivalents, including
restricted cash of $0.6 million and
$2.1 million, respectively (Notes 4 and 5) $ 7,996 $ 3,964
Accounts receivable:
Property sales 43 149
Other 553 1,160
Prepaid expenses 218 375
-------- --------
Total current assets 8,810 5,648
Real estate and facilities, net (Note 6) 93,005 91,664
Investments in and advances to
unconsolidated affiliates (Note 4) 7,596 7,254
Other assets, including related
party receivable (Note 4) 2,482 11,106
-------- --------
Total assets $111,893 $115,672
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 1,920 $ 900
Accrued interest, property taxes and other 1,486 1,537
-------- --------
Total current liabilities 3,406 2,437
Long-term debt (Note 5) 8,440 16,562
Other liabilities 8,967 19,833
Mandatorily redeemable preferred stock (Note 3) 10,000 10,000
Stockholders' equity:
Preferred stock, par value $0.01,
50,000,000 shares authorized and unissued - -
Common stock, par value $0.01, 150,000,000
shares authorized, 14,298,270 and 14,288,270
issued and outstanding, respectively 143 143
Capital in excess of par value of common stock 176,465 176,447
Accumulated deficit (95,528) (109,750)
-------- --------
Total stockholders' equity 81,080 66,840
-------- --------
Total liabilities and stockholders' equity $111,893 $115,672
======== ========
The accompanying notes are an integral part of these financial
statements.
16
STRATUS PROPERTIES INC.
STATEMENTS OF OPERATIONS
Years Ended December 31,
---------------------------
2000 1999 1998
------- ------- -------
(In Thousands, Except
Per Share Amounts)
Revenues $10,099 $15,252 $18,535
Costs and expenses:
Cost of sales 8,810 8,395 15,063
General and administrative expenses 3,735 3,507 4,044
------- ------- -------
Total costs and expenses 12,545 11,902 19,107
------- ------- -------
Operating income (loss) (2,446) 3,350 (572)
Gains on settlement of Circle C
municipal utility district
infrastructure reimbursement
claim (Note 10) 14,295 - -
Other income, net (Note 10) 2,677 133 66
Interest expense, net (1,280) (789) (2,019)
------- ------- -------
Income (loss) before income taxes
and equity in
unconsolidated affiliates 13,246 2,694 (2,525)
Income tax provision (396) (130) (87)
Equity in unconsolidated
affiliates' income (loss) 1,372 307 (26)
------- ------- -------
Net income (loss) $14,222 $ 2,871 $(2,638)
======= ======= =======
Net income (loss) per share:
Basic $0.99 $0.20 $(0.18)
======= ======= =======
Diluted $0.87 $0.18 $(0.18)
======= ======= =======
Average shares outstanding:
Basic 14,295 14,288 14,288
======= ======= =======
Diluted 16,711 16,238 14,288
======= ======= =======
STRATUS PROPERTIES INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands)
Capital
in
Excess
Preferred Common of Par Accumulated
Stock Stock Value Deficit Total
------- ------- -------- --------- -------
Balance at January 1, 1998 $ - $ 143 $176,447 $(109,983) $66,607
Net loss - - - (2,638) (2,638)
----- ------- -------- --------- -------
Balance at December 31, 1998 - 143 176,447 (112,621) 63,969
Net income - - - 2,871 2,871
----- ------- -------- --------- -------
Balance at December 31, 1999 - 143 176,447 (109,750) 66,840
Stock options exercised - - 18 - 18
Net income - - - 14,222 14,222
----- ------- -------- --------- -------
Balance at December 31, 2000 $ - $ 143 $176,465 $ (95,528) $81,080
===== ======= ======== ========= =======
The accompanying notes are an integral part of these financial
statements.
17
STRATUS PROPERTIES INC.
STATEMENTS OF CASH FLOW
Years Ended December 31,
-----------------------------
2000 1999 1998
-------- -------- -------
(In Thousands)
Cash flow from operating activities:
Net income (loss) $ 14,222 $ 2,871 $(2,638)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization 129 87 76
Cost of real estate sales 1,369 10,018 14,989
Equity in (income) loss of
unconsolidated affiliates (1,372) (307) 26
Gain from previously deferred Circle C
reimbursements (7,430) - -
Reduction of other liability (Note 10) (2,140) - -
(Increase) decrease in working capital:
Accounts receivable and prepaid expenses 1,966 600 620
Accounts payable, accrued liabilities
and other 839 (7) (575)
Proceeds from Circle C municipal utility
reimbursement - 10,262 -
Long term receivable and other 10,338 (2,914) (1,422)
-------- -------- -------
Net cash provided by operating activities 17,921 20,610 11,076
-------- -------- -------
Cash flow from investing activities:
Real estate and facilities (5,447) (8,554) (6,346)
Investment in Barton Creek Joint Venture - - (494)
Investment in Oly Walden Partnership - (376) (1,999)
-------- -------- -------
Net cash used in investing activities (5,447) (8,930) (8,839)
-------- -------- -------
Cash flow from financing activities:
Borrowings (repayments) on
credit facilities, net 392 (27,118) (9,940)
Proceeds from term loan 5,000 20,000 -
Repayments of term loan (13,852) (6,143) -
Proceeds from the exercise of stock options 18 - -
Proceeds from convertible debt facility - 376 1,999
Proceeds from preferred stock issuance - - 10,000
-------- -------- -------
Net cash provided by (used in)
financing activities (8,442) (12,885) 2,059
-------- -------- -------
Net increase (decrease) in cash
and cash equivalents 4,032 (1,205) 4,296
Cash and cash equivalents at
beginning of year 3,964 5,169 873
-------- -------- -------
Cash and cash equivalents at end of year $ 7,996 $ 3,964 $ 5,169
======== ======== =======
Interest paid $ 1,631 $ 1,716 $ 2,338
======== ======== =======
Income taxes paid (refunded) $ 142 $ 14 $ (118)
======== ======== =======
The accompanying notes, which include information in Notes 2, 4,
7, 9 and 10 regarding noncash transactions, are an integral part
of these financial statements.
18
STRATUS PROPERTIES INC.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Accounting. The real estate development and marketing
operations of Stratus Properties Inc. (Stratus), a Delaware
Corporation, are conducted in Austin and other urban areas of
Texas through its wholly owned subsidiaries and through certain
joint ventures (see "Investments in Unconsolidated Affiliates"
below). Prior to 1997, Stratus used the equity method of
accounting because the general partner of the general partnership
through which Stratus conducted its operations had certain rights
regarding its operations and guaranteed Stratus' long-term debt.
Stratus purchased its general partner's interest and removed the
general partner's debt guarantee in December 1997. Accordingly,
the accompanying financial statements and related notes reflect
the Stratus' financial position and results of operations under
consolidation accounting effective January 1, 1997.
Reclassifications. Certain prior year amounts have been
reclassified to conform to the year 2000 presentation.
Use of Estimates. The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the amounts reported in these financial
statements and accompanying notes. The more significant
estimates include valuation allowances for deferred tax assets,
estimates of future cash flows from development and sale of real
estate properties, and useful lives for depreciation and
amortization. Actual results could differ from those estimates.
Cash and Cash Equivalents. Highly liquid investments purchased
with a maturity of three months or less are considered cash
equivalents.
Financial Instruments. The carrying amounts of receivables,
other current assets, accounts payable and long-term borrowings
reported in the balance sheet approximate fair value.
Earnings Per Share. The following table 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):
Years Ended December 31,
----------------------------
2000 1999 1998
------- ------- -------
Basic net income per share of common stock:
Net income (loss) $14,222 $ 2,871 $(2,638)
======= ======= =======
Weighted average common shares outstanding 14,295 14,288 14,288
------- ------- -------
Basic net income per share of common stock $0.99 $0.20 $(0.18)
===== ===== ======
Diluted net income (loss) per share
of common stock:
Net income (loss) $14,222 $ 2,871 $(2,638)
Add: Interest expense from assumed
conversion of convertible debt, net of
income tax effect 331 - -
------- ------- -------
$14,553 $ 2,871 $(2,638)
======= ======= =======
Weighted average common shares outstanding 14,295 14,288 14,288
Dilutive stock options 288 238 -
Assumed redemption of preferred stock 1,712 1,712 -
Assumed conversion of convertible debt 416 - -
------- ------- -------
Weighted average common shares outstanding
for purposes of calculating diluted net
income (loss) per share 16,711 16,238 14,288
------- ------- -------
Diluted net income (loss) per share $0.87 $0.18 $(0.18)
===== ===== ======
Interest accrued on the convertible debt outstanding totaled
approximately $338,000 in 2000, $270,000 in 1999 and $61,000 in
1998. There have been no dividends accrued on Stratus'
mandatorily redeemable preferred stock through December 31, 2000.
Although the debt was convertible into 370,000 shares in 1999, it
was excluded from the diluted net income per share calculation
because the effect of an assumed redemption of convertible debt
was anti-dilutive. In 1998, Stratus' diluted loss per share
calculation excluded the effects of
19
options outstanding that
represented 275,000 shares of common stock in 1998, the
conversion of its mandatorily redeemable preferred stock into 1.7
million shares of common stock and its debt convertible into
282,000 shares because of the loss during the year.
Stock options outstanding to purchase approximately 546,000
shares of common stock at an average exercise price of $5.48 per
share in 2000, and options representing approximately 295,000
shares of common stock at an average exercise price of $6.14 per
share for both 1999 and 1998, were excluded from the diluted net
income (loss) per share calculations because their average
exercise prices were higher than the average market price for the
years presented.
Investment in Real Estate. Real estate assets are stated at the
lower of cost or net realizable value and include acreage,
development, construction and carrying costs, and other related
costs through the development stage. Capitalized costs are
assigned to individual components of a project, as practicable,
whereas interest and other common costs are allocated based on
the relative fair value of individual land parcels. Carrying
costs are capitalized on properties currently under active
development. Revenues are recognized when the risks and rewards
of ownership are transferred to the buyer and the consideration
received can be reasonably determined.
When events or circumstances indicate that an asset's
carrying amount may not be recoverable, an impairment test is
performed. If projected undiscounted cash flow from the asset is
less than the related carrying amount then a reduction of the
carrying amount of the long-lived asset to fair value is
required. Measurement of the impairment loss is based on the
fair value of the asset. Generally, Stratus determines fair
value using valuation techniques such as discounted expected
future cash flows. No impairment losses are reflected in the
accompanying financial statements.
Investment in Unconsolidated Affiliates. Stratus' investment in
its affiliated 20 percent to 50 percent owned joint ventures and
partnerships are accounted for on the equity method. Currently,
Stratus owns a 49.9 percent interest in all of its investments in
unconsolidated affiliates (see Note 4). Stratus' real estate
sales to these entities are deferred to the extent of its
ownership interest in the unconsolidated affiliate. The deferred
revenues are recognized ratably as the unconsolidated affiliates
sell the real estate to unrelated third parties.
Recent Accounting Pronouncements. In June 1998, the Financial
Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133, as
subsequently amended, is effective for fiscal years beginning
after June 15, 2000 and establishes accounting and reporting
standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability
measured at its fair value. The accounting for changes in the
fair value of a derivative depends on the intended use of the
derivative and the resulting designation. Stratus adopted SFAS
133 effective January 1, 2001, with its adoption having no impact
on its financial position or results of operations.
In December 1999, the Securities and Exchange Commission
issued Staff Accounting Bulletin ("SAB") No. 101 which summarizes
certain of the staff's views in applying generally accepted
accounting principles to revenue recognition in financial
statements. SAB 101 became effective in the fourth quarter of
2000. The adoption of SAB 101 had no material effect on Stratus'
financial position or results of operations.
2. Olympus Transaction
On May 22, 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. Olympus has the right to nominate one member or up to
20 percent of Stratus' Board of Directors, whichever is greater.
Currently, Stratus has fixed the number of its Board of Directors
at four members, with one member being nominated by Olympus.
The $10 million mandatorily redeemable preferred stock was
issued at a stated value of $5.84 per share, the average closing
price of Stratus' common stock during the 30 trading days ended
March 2, 1998. Stratus used the proceeds from the sale of these
securities to repay debt. For further discussion about
mandatorily redeemable preferred stock, see Note 3 below.
20
The $10 million convertible debt facility is available to
Stratus in whole or in part until May 22, 2004 and is intended to
fund Stratus' equity investment in new Stratus/Olympus joint
venture opportunities involving properties not currently owned by
Stratus. On September 30, 1998, Stratus borrowed $2.0 million
under this convertible debt facility to fund its investment in
the Oly Walden General Partnership (Walden Partnership) (see Note
4). During the third quarter of 1999, Stratus borrowed an
additional $0.4 million under the convertible debt facility to
fund its share of an additional capital contribution to the
Walden Partnership. Interest under this facility accrues at 12
percent and is payable quarterly or added to principal at
Olympus' option. Through December 31, 2000, Olympus had elected
to add the interest to principal, resulting in an outstanding
amount on the facility of approximately $3.0 million. Outstanding
principal under the facility is convertible at any time by the
holder into Stratus' common stock at a conversion price of $7.31,
which is 125 percent of the average closing price of Stratus'
common stock during the 30 trading days ended March 2, 1998. If
not converted into common stock, the convertible debt matures on
May 22, 2004. If the combination of interest at 12 percent and
the value of the conversion right does not provide Olympus with
at least a 15 percent annual return on the convertible debt,
Stratus must pay Olympus additional interest upon retirement of
the convertible debt in an amount necessary to yield a 15 percent
annual return. The convertible debt is nonrecourse to Stratus
and will be secured solely by Stratus' interest in
Stratus/Olympus joint venture opportunities financed with the
proceeds from the convertible debt.
Through May 22, 2001, Olympus has agreed to make available
up to $50 million, of which it had invested approximately $13.4
million as of December 31, 2000, for its share of capital for
direct investments in Stratus/Olympus joint acquisition and
development activities. In return, Stratus 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 Stratus, as well as
development opportunities on existing properties in which Stratus
seeks third-party equity participation.
3. Mandatorily Redeemable Preferred Stock
Stratus has outstanding 1,712,328 shares of mandatorily
redeemable preferred stock, stated value of $5.84 per share.
Each share of preferred stock will share dividends and
distributions, if any, ratably with Stratus' common stock. The
preferred stock is redeemable at the holder's option at any time
after May 22, 2001, for cash in an amount per share equal to 95
percent of the average closing price per share of common stock
for the 10 trading days preceding the redemption date (the
"common stock equivalent value") or, at Stratus' option, after
May 22, 2003 for the greater of the common stock equivalent value
or their stated value per share, plus accrued and unpaid
dividends, if any. The preferred stock must be redeemed no later
than May 22, 2004. Stratus has the option to satisfy the
redemption with shares of its common stock on a one-for-one share
basis, subject to certain limitations. See Note 5 for disclosure
of a loan commitment specifically designated to meet the
potential future redemption obligations related to these shares
of preferred stock.
4. Investment in Unconsolidated Affiliates
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 the joint ventures and receives development fees,
sales commissions, and other management fees for its services.
On September 30, 1998, Stratus entered into two separate
joint ventures with Olympus. The first provided for the
development of 75 residential lots at the Barton Creek
subdivision known as Wimberly Lane. In this transaction, Stratus
sold land to the Oly Stratus Barton Creek I Joint Venture (Barton
Creek Joint Venture), for approximately $3.3 million. Stratus
deferred its equity interest in the sale, or $1.6 million, for
financial accounting purposes, which is being recognized ratably
as the developed lots are sold to unrelated third parties. Upon
closing, Stratus received $2.1 million and a $1.2 million note
and invested approximately $0.5 million in the now fully
developed project. In December 1999, Stratus sold 174 acres of
land encompassing 54 platted lots within the Barton Creek Escala
Drive subdivision to the Barton Creek Joint Venture for $11.0
million. Upon the closing of the sale, Stratus received $6.0
million and a $5.0 million note. Stratus deferred $5.5 million of
the $11.0 million of sales proceeds and $3.0 million of the $6.0
million related gain attributable to our ownership interest.
Stratus is recognizing these deferred amounts as the lots in the
fully developed Escala Drive project are sold to unrelated third
parties. Stratus, as manager of the project, sold 30 Wimberly
Lane lots and 32 Escala Drive lots in 2000 and 42 Wimberly Lane
lots during 1999. Stratus recognized previously deferred gains
totaling $2.1 million in 2000 and $0.3 million in 1999 as a
result of the Barton Creek Joint Venture's lot sales. Deferred
gains remaining to be recognized from Barton Creek Joint Venture
lot sales totaled $1.2 million at
21
December 31, 2000.
In connection with its lots sales during both 2000 and 1999,
the Barton Creek Joint Venture has distributed a total of $16.4
million to the partners. Stratus' portion of the distributions,
approximately $8.2 million, have been recorded as a repayment of
the Barton Creek notes receivable and related accrued interest
($6.9 million) and a $1.3 million reduction of its investment in
the Barton Creek Joint Venture. All future distributions by the
Barton Creek Joint Venture will reduce Stratus' investment in the
joint venture as a return of partners' capital.
The second transaction involved approximately 700 developed
lots and 80 acres of platted but undeveloped real estate at the
Walden on Lake Houston project (Walden). Olympus originally
purchased Walden in April 1998 when it contained 930 developed
lots and 80 acres of undeveloped property. Stratus has served as
manager of this project since Olympus' purchase. Stratus acquired
its interest in the Walden Partnership for $2.0 million of
borrowings under its convertible debt facility with Olympus (see
Note 2). On September 30, 1999, Stratus borrowed an additional
$0.4 million under the convertible debt facility to fund its
share of an additional capital contribution to the Walden
Partnership. The Walden project had 497 developed lots and 80
acres of undeveloped property remaining at December 31, 2000. As
of December 31, 2000, the Walden Partnership had not yet made any
distributions to the partners.
Stratus negotiated an $8.2 million project development loan
for the Walden Partnership, which is nonrecourse to the partners
and is secured by the Walden Partnership's assets. At December
31, 2000, borrowings of $1.7 million were outstanding on the
project loan. The loan also required that a wholly owned
subsidiary of Stratus deposit a total of $2.5 million of
restricted cash with the bank as additional collateral. The project
loan agreement for the Walden Partnership permits a $0.30 reduction of
this restricted cash deposit for every $1.00 of principal repaid
on the Walden Partnership loan. At December 31, 2000, Stratus
had approximately $0.6 million of restricted cash associated with
this agreement.
On August 16, 1999, Stratus sold Olympus a 50.1 percent
interest in a 70,000 square foot office building, which is the
first phase of the 140,000 square foot Lantana Corporate Center
(7000 West). Stratus received $1.1 million upon closing and
recognized a $0.5 million gain relating to Olympus' ownership
interest in the building. Stratus deferred its retained interest,
or $0.5 million, of the sales proceeds and related gain resulting
from the sale of the 5.5 acres of commercial real estate
associated with Phase I of the project. As developer, Stratus
completed construction on the first building in November 1999 and
as manager has secured lease agreements which have fully occupied
the building. During the first quarter of 2000, Stratus completed
a second sale of 5.5 acres of commercial real estate to 7000
West, which was used as the site for the second 70,000 square
foot office building (Phase II). Upon completion and leasing of
Phase II during the second quarter of 2000, Stratus recognized
the $0.5 million of the revenues and related gain associated with
Olympus' ownership interest in 7000 West. The 7000 West Joint
Venture has distributed approximately $0.1 million to the
partners, which has been recorded as a reduction of Stratus'
investment in 7000 West.
Funds for the construction of the first building at 7000 West
were provided by a $6.6 million project loan that Stratus
negotiated in April 1999. During the first quarter of 2000, as
manager of the 7000 West project, Stratus obtained an additional
$7.7 million of availability under the 7000 West development
facility to provide the funding necessary to construct Phase II.
The variable rate, nonrecourse loan is secured by the approximate
11 acres of real estate and the two completed office buildings at
7000 West and is scheduled to mature in August 2001. At December
31, 2000, borrowings outstanding on the 7000 West development
loan totaled $12.0 million.
The summarized unaudited financial information of Stratus'
unconsolidated affiliates as of December 31, 2000 and 1999, and
for the years then ended, and as of December 31, 1998 and for
the period from inception (September 30, 1998) to December 31,
1998, follows (in thousands):
22
Barton Creek Walden 7000
Joint Venture Partnership West Total
------------- ----------- -------- -------
Earnings data
(year ended December 31, 2000):
Revenues $17,454 $ 2,396 $ 1,357 $21,207
Operating income (loss) 4,461 (1,074) (909) 2,478
Net income (loss) 4,580 (1,007) (909) 2,664
Stratus' equity in net income (loss) 2,286 (460)a (454) 1,372
Earnings data
(year ended December 31, 1999):
Revenues 4,787 2,993 21 7,801
Operating income (loss) 1,039 (510) (83) 446
Net income (loss) 1,039 (485) (74) 480
Stratus' equity in net income (loss) 518 (174)a (37) 307
Earnings data
(inception to December 31, 1998):
Revenues - 875 - 875
Operating loss - (75) - (75)
Net loss - (51) - (51)
Stratus' equity in net loss - (26) - (26)
Balance sheet data
(at December 31, 2000):
Current assets $ 3,227 $ 501 $ 1,490 $ 5,218
Real estate and facilities, net 5,181 7,350 14,696 27,227
Total assets 8,408 7,851 16,186 32,445
Current liabilities 177 1,946 12,635 14,758
Total liabilities 177 8,124b 12,635 20,936
Net assets (liabilities) 8,231 (273) 3,551 11,509
Stratus' equity in net assets
(liabilities) 4,107 (136) 1,772 5,743
Balance sheet data
(at December 31, 1999):
Current assets 2,328 1,207 1,069 4,604
Real estate and facilities, net 15,880 8,788 7,584 32,252
Total assets 18,482 10,094 8,999 37,575
Current liabilities 261 2,722 773 3,756
Total liabilities 12,180 9,355b 5,637 27,172
Net assets 6,302 740 3,362 10,404
Stratus' equity in net assets 3,145 369 1,678 5,192
a. Includes recognition of deferred income $42,000 in 2000 and
$67,000 in 1999, representing the difference in Stratus'
investment in the Walden Partnership and its underlying equity at
the date of acquisition. Stratus will recognize the remaining
difference as the related real estate is sold. At December 31,
2000, Stratus had $228,000 of remaining unrecognized Walden
Partnership deferred income
b. Includes a $2.1 million note payable to Stratus.
5. Long-Term Debt
December 31,
----------------
2000 1999
------ -------
(In Thousands)
Comerica facility, average rate 9.5% in 2000
and 9.5% in 1999 $ 397 $13,857
Unsecured term loan, average rate 9.25% in 2000 5,000 -
Convertible debt facility with Olympus,
average rate 12.0% in 2000 and 1999 (Note 2) 3,043 2,705
------ -------
$8,440 $16,562
====== =======
Stratus had a commercial bank credit facility that provided
for borrowings of up to $35 million through December 31, 1999.
Borrowings on this facility yielded an average rate of 5.6
percent in 1999. In December 1999, Stratus negotiated a new
facility agreement with Comerica Bank-Texas. The new facility
provided for a $20 million term loan and a $10 million revolving
line of credit. Stratus borrowed $20 million under the term loan
portion of the facility and used the proceeds to repay all
outstanding borrowings under a previous credit facility
23
(discussed above), which was then terminated. This retirement of
the previous credit facility removed the third-party guarantee of
Stratus' indebtedness (Note 1). As consideration for the
guarantee, Stratus paid the guarantor an annual fee, which
totaled $0.2 million in both 1999 and 1998. In December 2000,
Stratus repaid all remaining borrowings outstanding under the
existing Comerica facility and then negotiated an expanded $30
million facility arrangement, which will mature on December 16,
2002. Under terms of the new agreement, Stratus now has
availability of $20 million under a revolving line of credit and
a $10 million term loan commitment specifically designated for
potential future redemption obligations related to Stratus'
mandatorily redeemable preferred stock held by Olympus (Note 3).
Interest on the Comerica facility is variable and accrues at
either the lender's prime rate plus 1 percent or LIBOR plus 250
basis points at Stratus' option. The term loan and revolving
line of credit contain certain customary restrictions and are
secured by a lien on all of Stratus' real property assets, its
interests in unconsolidated affiliates and the future receipt of
municipal utility district reimbursements and other
infrastructure receivables. The credit facility also contains
covenants, which prohibit the payment of dividends and impose
certain other restrictions. Stratus also is required to deposit
funds into an interest reserve account with the bank. The amount
in this account must be sufficient to carry the potential debt
service for both the term loan and the revolving line of credit
for the ensuing twelve-month period, adjusted quarterly. The
amount of the interest reserve totaled approximately $2.0 million
at December 31, 2000. The amount can be funded directly by
Stratus or by reducing Stratus' availability under the revolving
line of credit. As of December 31, 2000, Stratus has funded the
interest reserve account by depositing $1.1 million into the
account and by reducing its availability under the revolving line
of credit by $0.9 million, which reduced Stratus' availability to
$19.1 million. Stratus is able to withdraw any of the proceeds
it deposits into the interest reserve account. At December 31,
1999, Stratus had deposited $0.6 million within a Comerica
restricted account.
Also in December 2000, Stratus entered into a five-year
unsecured term loan from First American Asset Management.
Interest on the loan, which matures on January 1, 2006, accrues
at an annual rate of 9.25 percent and is payable monthly. The
proceeds of the loan will be used to fund Stratus' ongoing
operations and for other general corporate purposes.
Capitalized interest totaled $1.3 million in 2000, $1.2
million in 1999 and $0.4 million in 1998.
6. Real Estate
December 31,
----------------
2000 1999
------- -------
(In Thousands)
Land held for development or sale:
Austin, Texas area, net of accumulated
depreciation of $189,000 for 2000
and $209,000 for 1999 $88,130 $86,178
Other areas of Texas 4,875 5,486
------- -------
$93,005 $91,664
======= =======
Stratus' investment in real estate includes approximately
4,200 acres of land located in Austin, Dallas, Houston and San
Antonio, Texas. The principal holdings of Stratus are located in
the Austin area and consist of approximately 2,300 acres of
undeveloped residential, multi-family and commercial property
within the Barton Creek community. Stratus' remaining Austin
properties include 465 acres of undeveloped residential, multi-
family and commercial property known as the Lantana tract, south
of and adjacent to the Barton Creek community and the approximate
1,300 acres of undeveloped commercial and multi-family property
within the Circle C Ranch development.
Stratus also owns 120 acres of undeveloped residential
property and 31 acres of undeveloped commercial and multi-family
residential property located in Dallas, Houston and San Antonio,
Texas. These properties are being managed and actively marketed
by unaffiliated professional real estate developers. Under the
terms of the related development agreements, the operating
expenses and development costs, net of revenues, are funded by
Stratus. The developers are entitled to a management fee and a
25 percent interest in the net profits, after Stratus recovers
its investment and a stated rate of return, resulting from the
sale of the managed properties. As of December 31, 2000, no
amounts have been paid in connection with these net profit
arrangements.
Various regulatory matters and litigation involving Stratus'
development of its Austin-area properties were resolved during
2000, as further discussed below.
24
Annexation/Circle C MUD Reimbursement Suit On December 19, 1997,
the City of Austin (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.
In late October 1999, Circle C Land Corp., a wholly owned
subsidiary of Stratus, and the City reached an agreement
regarding a portion of Circle C's claims against the City. As a
result of this agreement, Stratus received approximately $10.3
million, including $1.0 million in interest, of partial
settlement claims through December 31, 1999 and received an
additional $0.2 million payment in January 2000.
In March 2000, the City settled its disputes with certain
third party real estate developers and landowners at 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 were
dismissed with prejudice. As a result, a refund contingency
included in the City's partial settlement of Stratus'
reimbursement claim was eliminated. Stratus recorded a gain of
approximately $7.4 million in the first quarter of 2000,
representing that portion of the reimbursement 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.
In December 2000, Stratus received $6.9 million, including
$0.6 million of interest, from the City as full and final
settlement of Stratus' Circle C MUD reimbursement claim. Stratus
recorded a gain of $6.9 million during the fourth quarter
associated with its receipt of these proceeds.
The City's WQPZ Action On January 9, 1998, the City filed suit in
Travis County District Court against 14 water quality protection
zones (WQPZs) and their owners, including the Barton Creek WQPZ
challenging the constitutionality of the legislation authorizing
the creation of water quality zones. The District Court entered
an order granting the City's motion for summary judgment and
declared the WQPZ legislation unconstitutional. The District
Court ruling was appealed to the Texas Supreme Court. 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, filed by
another party, was denied and the ruling is final.
Circle C WQPZ Litigation Circle C Land Corp. 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's WQPZ Action discussed above, the Third Court of
Appeals reversed the Hays County District Court decision, finding
the zone legislation unconstitutional. The ruling is final.
The above two court decisions primarily affect Stratus'
future development plans for certain areas within the southern
portion of its Barton Creek community. A significant portion of
Stratus' properties contain grandfathered entitlements that are
not subject to the development requirements currently in effect.
Stratus has initiated development plans for these areas that will
meet the grandfathered ordinance requirements or current
ordinances, as applicable.
7. Income Taxes
Income taxes are recorded pursuant to SFAS 109 "Accounting for
Income Taxes." No benefit has been recognized for any period
presented with respect to Stratus' net deferred assets, as a full
valuation allowance has been provided because of Stratus'
operating history and its expectation of incurring tax losses for
the near future. Therefore, the final determination of the gross
deferred tax asset amounts had no impact to Stratus' financial
statements. The components of deferred taxes follow:
25
December 31,
----------------------
2000 1999
-------- --------
(In Thousands)
Deferred tax assets:
Net operating losses (expire 2001-2018) $ 12,167 $ 14,539
Real estate and facilities, net 10,518 11,192
Alternative minimum tax credits
and depletion allowance (no expiration) 496 898
Other future deduction carryforwards
(expire 2001-2003) 52 347
Valuation allowance (23,233) (26,976)
-------- --------
$ - $ -
======== ========
Income taxes charged to income follow:
2000 1999 1998
----- ----- ----
(In Thousands)
Current income tax provision
Federal $(351) $ (60) $-
State (45) (70) (87)
----- ----- ----
(396) (130) (87)
----- ----- ----
Income tax provision $(396) $(130) $(87)
===== ===== ====
Reconciliations of the differences between the income tax
(provision) benefit computed at the federal statutory tax rate
and the income tax provision recorded follow:
2000 1999 1998
--------------- --------------- --------------
Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------ -------
(Dollars In Thousands)
Income tax benefit (provision)
computed at the federal
statutory income tax rate $(5,116) (35)% $(1,050) (35)% $ 893 35%
Increase (decrease)
attributable to:
Change in valuation allowance 3,742 26 1,212 40 (1,521) (59)
State taxes and other 978 6 (292) (9) 541 21
------- --- ------- --- ------ ---
Income tax provision $ (396) (3)% $ (130) (4)% $ (87) (3)%
======== === ======= === ====== ===
8. Transactions with Affiliates
Management Services. Stratus owns 10 percent of FM Services
Company, which provides certain management and administrative
services to Stratus including technical, administrative,
accounting, financial, tax and other services. Services are
provided on a cost reimbursement basis pursuant to a management
services agreement. Fees paid under this services agreement
totaled $1.0 million in 2000, $0.9 million in 1999 and $1.0
million in 1998. Stratus believes the costs of these services do
not differ materially from those costs that would have been
incurred had the relevant personnel providing these services been
employed directly by Stratus. As a result of an expected
reduction in the level of services to be provided to Stratus
under the services agreement, the agreement was amended effective
January 1, 2001, with Stratus' fees for 2001 estimated at $0.4
million.
9. Employee Benefits
Stock Options. Stratus' Stock Option Plan, 1998 Stock Option
Plan and Stock Option Plan for Non-Employee Directors (the Plans)
provide for the issuance of stock options representing 2.0
million shares of common stock and stock appreciation rights at
no less than market value at time of grant. Generally, stock
options are exercisable in 25 percent annual increments beginning
one year from the date of grant and expire 10 years after the
date of grant. At December 31, 2000, 364,250 options were
available for new grants under the Plans. A summary of stock
options, including 100,000 stock appreciation rights
outstanding at December 31, 2000, follows:
26
2000 1999 1998
------------------- ------------------- -------------------
Average Average Average
Number of Option Number of Option Number of Option
Options Price Options Price Options Price
--------- ----- --------- ----- --------- -----
Beginning of year 1,263,875 $3.50 1,067,625 $3.42 1,050,000 $2.98
Granted 473,750 4.54 196,250 3.92 304,000 6.05
Exercised (60,000) 1.76 - - (50,000) 1.75
Expired/Forfeited (4,375) 4.50 - - (236,375) 5.21
--------- --------- ---------
End of year 1,673,250 3.85 1,263,875 3.50 1,067,625 3.42
========= ========= =========
Summary information of fixed stock options outstanding at
December 31, 2000 follows:
Options Outstanding Options Exercisable
---------------------------- --------------------
Weighted Weighted Weighted
Number Average Average Average
Of Remaining Option Number Option
Range of Exercise Prices Options Life Price of Options Price
- ------------------------ ------- --------- ------ ---------- -------
$1.50 to $1.81 270,000 4.8 years $1.56 270,000 $1.56
$2.63 to $3.91 520,625 7.1 years 3.52 319,062 3.37
$4.03 to $4.81 498,750 9.3 years 4.53 11,250 4.55
$6.19 283,875 6.9 years 6.19 142,875 6.19
--------- -------
1,573,250 743,187
========= =======
Stratus has adopted the disclosure-only provisions of SFAS
123, "Accounting for Stock Based Compensation," and continues to
apply Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in
accounting for its stock-based compensation plans. Accordingly,
Stratus has recognized no compensation costs associated with its
stock option grants. If Stratus had determined compensation costs
for its stock option grants based on the fair value of the awards
at their grant dates, its net income would have decreased by
$828,000 ($0.05 per share) in 2000, $752,000 ($0.05 per share) in
1999 and its net loss would have increased by $523,000 ($0.04 per
share) in 1998. For the pro forma computations, the fair values
of the option grants were estimated on the dates of grant using
the Black-Scholes option pricing model. These values totaled
$3.27 in 2000, $2.75 in 1999 and $4.35 per option in 1998. The
weighted average assumptions used include a risk-free interest
rate of 6.0 percent in 2000, 5.4 percent in 1999 and 5.7 percent
in 1998, expected lives of 10 years and expected volatility of 55
percent in 2000, 54 percent in 1999 and 55 percent in 1998. These
pro forma effects are not necessarily representative of future
years. No other discounts or restrictions related to vesting or
the likelihood of vesting of fixed stock options were applied.
10. Commitments and Contingencies. Stratus has made, and will
continue to make, expenditures at its operations for protection
of the environment. Increasing emphasis on environmental matters
can be expected to result in additional costs, which will be
charged against Stratus' operations in future periods. Present
and future environmental laws and regulations applicable to the
Stratus' operations may require substantial capital expenditures,
that could adversely affect the development of its real estate
interests or may affect its operations in other ways that cannot
be accurately predicted at this time.
Stratus previously accrued liabilities totaling $5.1 million
in the connection with the operation of certain oil and gas
properties that were sold during 1993. During 2000 management
completed a review of these amounts and determined that current
conditions warranted reversal of $2.1 million of these accruals.
Accordingly, other income of $2.1 million is reflected in the
Statement of Operations for the year ending December 31, 2000.
The remaining liability represents Stratus' indemnification of
the purchaser for any future abandonment costs in excess of net
revenues received by the purchaser in connection with the sale of
one oil and gas property in 1993. Stratus accrued $3.0 million
relating to this liability at the time of the purchase, which is
included in "Other liabilities" in the accompanying balance
sheets. Stratus periodically assesses the reasonableness of
amounts recorded for this liability through the use of
information provided by the operator of the property, including
its net production revenues. The carrying value of this liability
may be adjusted, as additional information becomes available.
27
11. Quarterly Financial Information (Unaudited)
Operating Net Net Income
Income Income (Loss) Per Share
----------------
Revenues (Loss) (Loss) Basic Diluted
-------- ------- ------- ------ -------
(In Thousands, Except Per Share Amounts)
2000
1st Quarter $ 2,113 $ (522) $ 7,278a $ 0.51 $ 0.44
2nd Quarter 2,942 364 575 0.04 0.04
3rd Quarter 2,019 (492) 164 0.01 0.01
4th Quarter 3,025 (1,796) 6,205b 0.43 0.38
------- ------- -------
$10,099 $(2,446) $14,222 0.99 0.87
======= ======= =======
1999
1st Quarter $ 1,697 $ (218)c $ (479) $(0.03) $(0.03)
2nd Quarter 2,917 733c 535 0.04 0.03
3rd Quarter 1,907 765d 760 0.05 0.05
4th Quarter 8,731 2,070e 2,055 0.14 0.13
------- ------- -------
$15,252 $3,350 $ 2,871 0.20 0.18
======= ======= =======
a. Includes $7.4 million gain ($0.45 per share) recognition associated
with the partial settlement of the Circle C MUD reimbursement claim
(Note 6).
b. Included $6.9 million gain ($0.41 per share) associated with the full
and final settlement of the Circle C MUD reimbursement claim (Note 6).
c. Includes reimbursement of previously expensed infrastructure
costs totaling $0.8 million ($0.06 per share) in the first
quarter and $2.0 million ($0.12 per share) in the second quarter.
d. Includes a $0.5 million gain ($0.03 per share) on the sale
of 50.1 percent of Phase I of the Lantana Corporate Center to
Olympus Real Estate Corporation in connection with the formation
of the 7000 West Joint Venture (see Note 4).
e. Includes a $3.0 million gain ($0.18 per share) on the sale
of 174 acres to the Barton Creek Joint Venture (see Note 4).
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information set forth under the caption "Information
About Nominees and Directors" of the Proxy Statement submitted to
the stockholders of the registrant in connection with its 2001
annual meeting to be held on May 10, 2001, is incorporated herein
by reference.
Item 11. Executive Compensation
The information set forth under the captions "Director
Compensation" and "Executive Officer Compensation" of the Proxy
Statement submitted to the stockholders of the registrant in
connection with its 2001 annual meeting to be held on May 10,
2001, is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The information set forth under the captions "Common Stock
Ownership of Certain Beneficial Owners" and "Common Stock
Ownership of Directors and Executive Officer" of the Proxy
Statement submitted to the stockholders of the registrant in
connection with its 2001 annual meeting to be held on May 10,
2001, is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information set forth under the caption "Certain
Transactions" of the Proxy Statement submitted to the
stockholders of the registrant in connection with its 2001 annual
meeting to be held on May 10, 2001, is incorporated herein by
reference.
28
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a)(1) Financial Statements. Reference is made to the
Financial Statements beginning on page 15 hereof.
(a)(2) Financial Statement Schedules. Reference is made to
the Index to Financial Statements appearing on page F-1
hereof.
(a)(3) Exhibits. Reference is made to the Exhibit Index
beginning on page E-1 hereof.
(b) Reports on Form 8-K. During the last quarter covered
by this report and as of March 28, 2001, the registrant
filed two Current Reports on Form 8-K dated January 5,
2001 and February 9, 2001 reporting events under Item 5.
29
SIGNATURES
Pursuant to the requirements of Section 13 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, on March 28, 2001.
STRATUS PROPERTIES INC.
By: /s/ William H. Armstrong III
William H. Armstrong III
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities
indicated, on March 28, 2001.
/s/ William H. Armstrong III Chairman of the Board, President,
- ------------------------------ and Chief Executive Officer
William H. Armstrong III (Principal Executive and Financial Officer)
*
- ------------------------------ Vice President and Controller
C. Donald Whitmire, Jr. (Principal Accounting Officer)
* Director
- ------------------------------
Robert L. Adair III
* Director
- ------------------------------
James C. Leslie
* Director
- ------------------------------
Michael D. Madden
*By: /s/ William H. Armstrong III
----------------------------
William H. Armstrong III
Attorney-in-Fact
S-1
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.
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.
E-1
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.
10.19 Amended Loan Agreement dated December 27, 2000 by and
between Stratus Properties Inc. and Comerica-Bank
Texas.
10.20 Loan Agreement dated December 28, 2000 by and between
Stratus Properties Inc. and Holliday Fenoglio Fowler,
L.P., subsequently assigned to an affiliate of First
American Asset Management.
10.21 Stratus' Performance Incentive Awards Program, as
amended effective February 11, 1999. Incorporated by
reference to Exhibit 10.18 to Stratus' 1998 Form 10-K.
10.22 Stratus Stock Option Plan, as amended.
Incorporated by reference to Exhibit 10.9 to Stratus'
1997 Form 10-K.
10.23 Stratus 1996 Stock Option Plan for Non-Employee
Directors, as amended. Incorporated by reference to
Exhibit 10.10 to Stratus' 1997 Form 10-K.
10.24 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.
21.1 List of subsidiaries.
23.1 Consent of Arthur Andersen LLP.
24.1 Certified resolution of the Board of Directors of Stratus
authorizing this report to be signed on behalf of any officer or
director pursuant to a Power of Attorney.
24.2 Powers of attorney pursuant to which a report has been
signed on behalf of certain officers and directors of Stratus.
E-2
STRATUS PROPERTIES INC.
INDEX TO FINANCIAL STATEMENTS
The financial statements in the schedule listed below should
be read in conjunction with the financial statements of Stratus
contained elsewhere in this Annual Report on Form 10-K.
Page
Report of Independent Public Accountants F-1
Schedule III-Real Estate and Accumulated Depreciation F-2
Schedules other than the one listed above have been omitted
since they are either not required, not applicable or the
required information is included in the financial statements or
notes thereto.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
of Stratus Properties Inc.:
We have audited, in accordance with auditing standards
generally accepted in the United States, the financial statements
as of December 31, 2000 and 1999 and for each of the three years
in the period ended December 31, 2000 included elsewhere in
Stratus Properties Inc.'s Annual Report on Form 10-K, and have
issued our report thereon dated January 25, 2001. Our audits were
made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The accompanying schedule is the
responsibility of the Company's management and is presented for
the purpose of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial
statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Austin, Texas
January 25, 2001
F-1
Stratus Properties Inc.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2000
(In Thousands)
SCHEDULE III
Cost Gross
Capitalized Amounts at
Subsequent to December 31,
Intial Cost Acquisitions 2000
---------------- ------------ ------------
Building Building
and and
Improve- Improv-
Land ments Land Land ements
-------- ------- -------- ------- -------
Undevloped Acerage
Camino Real, San Antonio, TX $ 311 $ - $ 59 $ 370 $ -
Copper Lakes, Houston, TX 1,922 - 1,710 3,632 -
Bent Tree Apt./ Retail, Dallas TX 873 - - 873 -
Barton Creek, Austin, TX 20,589 - 42,153 62,742 -
Lantana, Austin, TX 3,195 - 3,512 6,707 -
Longhorn Properties, Austin, TX 15,792 - 2,539 18,331 -
Operating Properties
Corporate offices, Austin, TX - 538 - - 538
-------- ------- -------- ------- -------
$42,682 $ 538 $ 49,972 $92,654 $ 538
======== ======= ======== ======= =======
(continued from above)
Stratus Properties Inc.
REAL ESTATE AND ACCUMLATED DEPRECIATION (Continued)
December 31, 2000
Accumulated Year
Total Acres Depreciation Acquired
------- ----- ------------- --------
Undevloped Acerage
Camino Real, San Antonio, TX $ 370 21 $ - 1990
Copper Lakes, Houston, TX 3,632 120 - 1991
Bent Tree Apt./ Retail, Dallas TX 873 10 - 1990
Barton Creek, Austin, TX 62,742 2,273 - 1988
Lantana, Austin, TX 6,707 465 - 1994
Longhorn Properties, Austin, TX 18,331 1,277 - 1992
Operating Properties
Corporate Offices, Austin, TX 538 - 189 -
------- ------ -----
$93,194 4,166 $ 189
======= ====== =====
F-2
Stratus Properties Inc.
Notes to Schedule III
(In Thousands)
(1) Reconciliation of Real Estate Properties:
The changes in real estate assets for the years ended
December 31, 2000 and 1999 are as follows:
2000 1999
-------- --------
(in thousands)
Balance, beginning of year $ 91,873 $ 96,678
Acquisitions 82 40
Improvements and other 2,608 5,173
Cost of real estate sold (1,369) (10,018)
-------- --------
Balance, end of year $ 93,194 $ 91,873
======== ========
The aggregate net book value for federal income tax purposes as
of December 31, 2000 was $111,459,000.
(2) Reconciliation of Accumulated Depreciation:
The changes in accumulated depreciation for the years ended
December 31, 2000 and 1999 are as follows:
2000 1999
-------- --------
(in thousands)
Balance, beginning of year $ 209 $ 122
Retirement of assets (149) -
Depreciation expense 129 87
-------- --------
Balance, end of year $ 189 $ 209
======== ========
Depreciation of buildings and improvements reflected in the
statements of operations is calculated over estimated lives of 30
years.
(3) Concurrent with certain year-end 1994 debt negotiations, the
Partnership analyzed the carrying amount of its real estate
assets, using generally accepted accounting principles, and
recorded a $115 million pre-tax, non-cash write-down. The actual
amounts that will be realized depend on future market conditions
and may be more or less than the amounts recorded in the
Partnership's financial statements.
F-3