Back to GetFilings.com
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, 2001
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 $37,400,000 on
March 14, 2002.
On March 14, 2002, 7,115,995 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 2002
Annual Meeting to be held on May 16, 2002, 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 3
Transactions with Olympus Real Estate Corporation 3
Regulation and Environmental Matters 4
Employees 4
Risk Factors 4
Item 2. Properties 6
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
Executive Officers of the Registrant 7
Part II 7
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 7
Item 6. Selected Financial Data 8
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 18
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 37
Part III 37
Item 10.Directors and Executive Officers of the Registrant 37
Item 11.Executive Compensation 37
Item 12.Security Ownership of Certain Beneficial Owners
and Management 37
Item 13.Certain Relationships and Related Transactions 37
Part IV 38
Item 14.Exhibits, Financial Statement Schedules and Reports
on Form 8-K 38
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, until
February 27, 2002, through unconsolidated affiliates that we
jointly owned with Olympus Real Estate Corporation (Olympus)
(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 2,039
acres of undeveloped residential, multi-family and commercial
property and 34 developed residential estate lots located in
southwest Austin within the Barton Creek community and 436 acres
of undeveloped residential, multi-family and commercial property
and one substantially complete 75,000-square-foot office building
located south of and adjacent to the Barton Creek community in an
area known as the Lantana project. 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 13 acres of undeveloped commercial property in
Houston, Texas, which we expect to sell in 2002 and 21 acres of
undeveloped multi-family property located in San Antonio, Texas,
which is actively being marketed.
In February 2002, as a result of completing certain
transactions with Olympus (see "Transactions with Olympus Real
Estate Corporation" below and Note 11), we acquired an
additional 22 developed residential lots, including 21 lots that
average over 3 acres each in size, in the Barton Creek
community. We also acquired a 140,000-square-foot office
complex, that consists of two office buildings located in Austin,
Texas that are currently leased at more than 95 percent of their
capacity.
COMPANY STRATEGIES
Since our formation in 1992, our primary objectives have been
to reduce our indebtedness and increase our financial flexibility.
Accordingly, we had reduced our debt to $8.4 million at December
31, 2000 from $493.3 million in March 1992. As a result of the
settlement of certain development related lawsuits (see Note 9)
and to an increasing level of cooperation between the City of
Austin (the City) and us, we substantially increased our development
activities during 2001 (see below), which has resulted in our debt
increasing to $25.6 million at December 31, 2001. Our debt increased
to $46.9 million immediately following our transactions with Olympus
in February 2002 (see "Transactions with Olympus Real Estate
Corporation" below). We have been able to fund our development
activities and our transactions with Olympus primarily through our
expanded credit facility (see "Credit Facility" below and Note 5),
which was established as a result of the positive financing
relationship we have built with Comerica Bank-Texas over the past
several years. This newly expanded credit facility, together
with other sources of financing, 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. In recent years, we 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.
We sold two additional Wimberly Lane lots during 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 sold
32 of the Escala Drive lots during 2000. We sold
one Escala Drive lot during 2001. In February 2002, in
connection with certain transactions with Olympus (see
"Transactions with Olympus Real Estate Corporation" below) we
acquired the remaining residential lots in the Wimberly Lane
and Escala Drive subdivisions, as well as the two office
buildings at Lantana.
* Significant progress has been made in our obtaining the
permitting necessary for additional Austin-area property
development.
1
We have reached agreement with the City concerning
development of a 417-acre portion of the Lantana project. The
agreement reflects a cooperative effort between the City and
us to allow development based on grandfathered entitlements,
while adhering to stringent water quality standards and other
enhancements to protect the environment (Note 9). With this
most recent agreement, we have now completed the core entitlement
process for the entire Lantana project allowing for approximately
2.9 million square feet of office and retail development,
approximately 400 multi-family units (previously sold to an
unrelated third party, see below) and approximately 330 residential
lots.
In the fourth quarter of 2000, we received final subdivision
plat approval from the City to develop approximately 170 acres
of commercial and multi-family real estate within our Lantana
project. The required infrastructure development at the site,
known as "Rialto Drive," was completed during the fourth
quarter of 2001. Construction of the first of two 75,000-
square-foot office buildings at Rialto Drive (7500 Rialto) is
substantially complete. Full development of the 170 acres is
expected to consist of over 800,000 square feet of office and
retail space and 400 multi-family units, which are now being
constructed by an apartment developer pursuant to our sale of
a 36.4-acre multi-family tract in December 2000 (see "Results of
Operations" located in Items 7.and 7A. elsewhere in this Annual
Report on Form 10-K).
We continue to work on residential development plans for
portions of our Circle C project. We have been meeting with
City representatives and with neighborhood and environmental
groups to discuss a plan to modify portions of the land plan
and provide enhanced water quality protection for portions of
the Circle C project. During the fourth quarter of 2001, we
received U.S. Fish and Wildlife Service approval for our plan,
and City Zoning and Planning Commission approval for a 554-
acre planned unit development (PUD) containing 860 residential
units. City Council action on the PUD is expected during
2002.
We commenced construction of a new subdivision within the
Barton Creek community during the fourth quarter of 2000.
This subdivision, Mirador, is now complete and marketing
efforts have commenced. Mirador adjoins the Escala Drive
subdivision, which was previously owned by the Barton Creek
Joint Venture (see "Transactions with Olympus Real Estate
Corporation" below). The Mirador subdivision consists of 34
estate lots, averaging approximately 3.5 acres in size.
During the fourth quarter of 2001, we completed the
permitting for a 114-acre tract within the Barton Creek
community. The plat provides for 54 lots ranging in size from
one-third acre to multi-acre lots, some of which overlook the
Lost Creek Country Club golf course. We are also continuing
our efforts to secure final permitting for a 212-acre tract
within the Barton Creek community, which will include 125
single-family lots and nine acres for condominium development.
Some of these single-family lots will adjoin the Fazio Canyons
golf course. A 19-acre portion of the tract consisting of 66
planned villa units and a fire station received final plat
approval in early January 2002. Development of this area is
expected to commence by April 2002. Development of the
remaining Barton Creek property will be deferred until the
Austin-area economy improves (see "Risk Factors" below and
"Capital Resources and Liquidity" located in Items 7 and 7A.
elsewhere in this Annual Report on Form 10-K).
* We believe that we have the right to receive over $30
million of future reimbursements associated with previously
incurred Barton Creek utility infrastructure development costs.
At December 31, 2001, we had approximately $14 million of these
expected future reimbursements recorded as a component of "Real
estate and facilities" on our balance sheet. The remaining
reimbursements are not recorded on our balance sheet because they
relate to properties previously sold or represent a component of the
$115 million impairment charge we recorded in 1994. 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 (Note 9). In connection with our February 2002
acquisition of certain Barton Creek properties we previously
jointly owned with Olympus, we obtained the right to receive
approximately $2 million of additional Barton Creek
reimbursables.
* We will continue to vigorously defend our rights to the
development entitlements of all our properties, but aggressive
attempts by certain parties 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 and
have been retained by third parties to provide management and
development assistance on selective real estate projects,
including the Lakeway project, near Austin (see below).
2
In January 2001, we entered into an expanded development
management agreement with Commercial Lakeway Limited
Partnership covering a 552-acre portion of the Lakeway
development known as Schramm Ranch, and we contributed $2.0
million as an investment in this project. Under the
agreement, we receive enhanced management and development fees
and sales commissions, as well as a net profits interest in
the project. Lakeway project distributions are made to us as
sales installments close. We are currently receiving a 28
percent share of any Lakeway project distributions and that
rate will continue until we receive proceeds totaling our
initial investment in the project ($2.0 million) plus a
stated annual rate of return, at which time, our share of the
Lakeway project distributions will increase to 40 percent.
During the second quarter of 2001, we negotiated an agreement
to sell the entire Schramm Ranch property to a single
purchaser for $11.0 million, conditioned on obtaining certain
entitlements. During 2001, we secured all the entitlements
necessary for the future development of the Schramm Ranch
property and the purchaser has closed and funded $5.0 million
representing two of the four planned sales installments for the
project. In connection with the second sale installment, which
occurred in December 2001, the Lakeway project distributed
approximately $1.2 million to us. We expect the remaining two
Schramm Ranch sales installments (totaling $6.0 million) will
occur in March 2002 and June 2002 and we expect to receive
approximately $2 million in future cash distributions from the
Lakeway project.
* 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.
However, until the Austin real estate market improves, our
available cash flow and cash flow requirements may preclude any
near-term expansion.
CREDIT FACILITY
We have established a solid banking relationship with
Comerica Bank-Texas that has substantially enhanced our financial
flexibility. Since December 1999, we have had a minimum of $30
million of borrowing availability under a credit facility
agreement with Comerica, subject to certain conditions. The
credit facility has subsequently been amended twice, with each
amendment reducing restrictions for borrowing under the facility.
The most recent credit facility amendment was finalized in
December 2001. Currently, the terms of the credit facility
provide for a $25 million revolving credit facility and a $5
million loan designed to provide funding for certain development
costs. These development costs already have been incurred and
the related development loan proceeds are available for borrowing
at our discretion. At December 31, 2001, we had borrowed $12.1
million under the revolving credit facility but had not borrowed
any amounts under the development loan facility. The credit
facility with Comerica will mature in April 2004. We had $13.5
million of additional long-term debt at December 31, 2001
representing borrowings associated with two $5 million unsecured
term loans and $3.5 million of borrowings on a $9.2 million
project loan facility for the 7500 Rialto Drive office building
project (see "Company Strategies" above). In February 2002, we
borrowed an additional $7.4 million under our revolving credit
facility to fund certain transactions with Olympus Real Estate
Corporation (Olympus). In connection with these transactions, we
assumed $12.9 million of debt associated with the construction of
two office buildings that we previously jointly owned with
Olympus (see "Transactions with Olympus Real Estate Corporation"
below). For a further discussion of the credit facility and our
other long-term financing arrangements, see Note 5 and "Capital
Resources and Liquidity" located in Items 7. and 7A. 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
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 subsequently entered into three joint ventures with
Olympus, in which we owned approximately 49.9 percent of each
joint venture and Olympus owned the remaining 50.1 percent. We
also served as the developer and manager for each of the joint
venture projects. Accordingly, in addition to partnership
distributions, we received 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 managed since Olympus' acquisition through February 2002 (see
below). 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
3
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 "Joint
Ventures with Olympus Real Estate Corporation" located in Items 7.
and 7A. and Note 4 located elsewhere in this Annual Report on
Form 10-K.
We repaid all our borrowings on the convertible debt
facility during the second quarter of 2001, and terminated the
facility on August 15, 2001 (Note 2). In February 2002 we
concluded our business relationship with Olympus, completing the
following transactions:
* We purchased our $10.0 million of mandatorily redeemable
preferred stock held by Olympus for $7.6 million.
* We acquired Olympus' ownership interest in the Barton Creek
Joint Venture for $2.4 million.
* We acquired Olympus' ownership interest in the 7000 West
Joint Venture for $1.5 million. In connection with this
acquisition, we have assumed the debt outstanding for 7000 West,
which at December 31, 2001 totaled $12.9 million. Related
amounts outstanding will be included in our consolidated balance
sheet commencing in the first quarter of 2002.
* We sold our ownership interest in the Walden Partnership to
Olympus for $3.1 million.
We funded the $7.4 million net cash cost for these
transactions, which is net of the approximate $1.0 million of cash
we received by acquiring the Barton Creek and 7000 West Joint
Ventures, through borrowings available to us under our $25 million
revolving credit facility agreement (see above, "Capital Resources
and Liquidity" within Items 7. and 7A. and Note 5 located elsewhere
in this Annual Report on Form 10-K.) At February 28, 2002, our long-
term debt totaled $46.9 million, including the $12.9 million of
debt we assumed in connection with the 7000 West acquisition. Our
remaining availability under our credit facility totaled
approximately $8.0 million at February 28, 2002.
For a detailed discussion of our Olympus transactions see
"Joint Ventures with Olympus Real Estate Corporation" and "Olympus
Relationship" located within Items 7. and 7A. and Notes 2, 3, 4 and
10 located elsewhere in this Annual Report on Form 10-K.
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.
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
We currently have 26 employees, who manage our operations.
We also contract personnel to perform certain management and
administrative services, including administrative, accounting,
financial, tax, and other services, under a management services
agreement. We may terminate this contract at any time upon 90
days notice. These services are provided on a cost reimbursement
basis and totaled $0.4 million in 2001, $1.0 million in 2000
and $0.9 million in 1999.
RISK FACTORS
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.
4
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.
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.
5
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 STONGER 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 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, 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.
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 as of December 31, 2001, 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
Potential Development Acreage
---------------------------------------------
Developed Single Multi-
Lots Family Family Commercial Total
--------- ------ ------- ---------- -------
Austin
Barton Creek 34 1,117 249 673 2,039
Lantana - 154 - 282 436
Circle C - - 212 1,065 1,277
Houston
Copper Lakes - - - 13 13
San Antonio
Camino Real - - 21 - 21
--------- ------ ------- ---------- -------
Total 34 1,272 482 2,032 3,786
========= ====== ======= ========== =======
The table does not include the properties acquired in the
transactions with Olympus (see "Transaction with Olympus Real
Estate Corporation" above, "Capital Resources and Liquidity"
located in Items 7. and 7A. and Note 11 located elsewhere in
this Annual Report on Form 10-K). In connection with the
transactions, we acquired 22 developed residential lots in the
Barton Creek community and a 140,000-square-foot office complex
in Lantana that consists of two buildings that are leased in
excess of 95 percent.
6
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
Various regulatory matters and litigation involving the
development of our Austin properties are summarized below.
Joint Venture Suits: Stratus ABC West I, L.P. v. Oly ABC West I,
L.P. Cause No. GN-104206 (126th Judicial Court of Travis County,
Texas filed December 26, 2001); Stratus Ventures I Walden, L.P.
v. Oly/Houston Walden, L.P. Cause No. GN-104207 (200th Judical
District Court of Travis County, Texas, filed December 26, 2001);
Stratus 7000 West, Ltd. v. Oly Lantana, L.P. Cause No. GN-104208
(201st Judicial District Court of Travis County, Texas, filed
December 26, 2001); Oly ABC West I, L.P., Oly/Houston Walden,
L.P., Oly Lantana, L.P. v. Stratus ABC West I, L.P., Stratus
Ventures I Walden L.P., Stratus 7000 West, Ltd. (191st District
Court of Dallas County, Texas, filed December 26, 2001). In
November 2001, Olympus Real Estate Corporation notified Stratus
that it was exercising the "buy/sell" provisions contained within
the three separate joint venture partnership agreements. Olympus
offered to either sell Stratus its interest in the each of the
three joint ventures or otherwise purchase Stratus' interests in
each of the joint ventures. In December 2001, Stratus notified
Olympus of its election to purchase Olympus' interests in each of
the three joint ventures. A dispute arose over the calculation of
the purchase price for each joint venture interest and both Stratus
and Olympus filed suits. Stratus and Olympus subsequently settled
out of court and closed on multiple transactions in February 2002
that mutually concluded the business relationship between Stratus
and Olympus (see "Transactions with Olympus Real Estate Corporation,"
included in Items 1., 7. and 7A. and Note 11 located elsewhere in this
Annual Report on Form 10-K). These cases have been dismissed with
prejudice.
Although 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 14, 2002, regarding our
executive officers is set forth in the following table and
accompanying text.
Name Age Position or Office
------------------------ ---- -----------------------
William H. Armstrong III 37 Chairman of the Board,
President and
Chief Executive Officer
Kenneth N. Jones 42 General Counsel
John E. Baker 56 Senior Vice President -
Accounting
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, L.L.P. and he provides legal and business advisory
services under a consulting arrangement with his firm.
Mr. Baker has served as our Senior Vice President -
Accounting since May 2001. Previously, he served as our Vice
President - Accounting from August 1996 until May 2001.
7
PART II
ITEM 5. MARKET FOR REGISTRANTS'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. We
have restated the stock prices for all periods prior to May 2001
to reflect the effects of the stock split transaction (see Note 8).
7
2001 2000
----------------- ----------------
High Low High Low
------- ------- ------- ------
First Quarter $ 14.75 $ 10.00 $ 9.00 $ 7.00
Second Quarter 14.00 9.50 10.26 8.00
Third Quarter 11.50 9.00 10.00 8.26
Fourth Quarter 9.88 8.05 10.06 8.00
As of March 14, 2002 there were 1,117 holders of record of our
common stock. We have not in the past paid, and do not anticipate
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, 2001. 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."
2001 2000 1999 1998 1997
--------- --------- -------- -------- ---------
(In Thousands, Except Per Share Amounts)
Years Ended December 31:
Revenues $ 14,829 $ 10,099 $ 15,252 $ 18,535 $ 31,495
Operating income (loss) 2,794 (3,649) 2,006 (1,829) 2,556
Interest income 1,157 1,203 1,344 1,257 1,351
Equity in unconsolidated
affiliates'income(loss) 207 1,372 307 (26) -
Net income (loss) 3,940 14,222 a 2,871 (2,638) 7,006 b
Basic net income
(loss) per share c 0.55 1.99 0.40 (0.37) 0.98
Diluted net income
(loss) per share c 0.48 1.74 0.35 (0.37) 0.97
Basic average shares
outstanding c 7,142 7,148 7,144 7,144 7,144
Diluted average shares
outstanding c 8,204 d 8,351 d 8,114 d 7,144 7,259
At December 31:
Real estate and
facilities, net 110,042 93,005 91,664 96,556 105,274
Total assets 129,478 111,893 115,672 111,829 112,754
Long-term debt 25,576 8,440 16,562 29,178 37,118
Stockholders' equity 84,659 81,080 66,840 63,969 66,607
a. Includes $14.3 million ($1.71 per share) gain associated
with final settlement of our Circle C Municipal Utility District
claim against the City of Austin (see Note 96).
b. Includes a $4.5 million ($0.62 per share) gain from sale of
all remaining oil and gas property interests.
c. Reflects the effects of the stock split transactions
completed in May 2001 (see Note 8).
d. Assumes the redemption of our 1.7 million shares of
outstanding mandatorily redeemable preferred stock for 851,000
shares of our common stock.
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, until
February 2002, through unconsolidated affiliates we jointly
owned with Olympus Real Estate Corporation (Olympus) (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 holdings include 2,039
acres of undeveloped residential, multi-family and commercial
property and 34 developed residential
8
estate lots located in
southwest Austin within the Barton Creek community and 436 acres
of undeveloped residential, multi-family and commercial property
and one substantially complete 75,000-square-foot office
building, located south of and adjacent to the Barton Creek
community in an area known as the Lantana project. 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 13 acres of undeveloped commercial property in
Houston, Texas, which we expect to sell in 2002, and 21 acres of
undeveloped multi-family property located in San Antonio, Texas,
which are being actively marketed. In February 2002, in
connection with transactions that concluded our business
relationship with Olympus (see "Capital Resources and Liquidity"
below and Note 11) we acquired 22 additional residential lots
within the Barton Creek community and a 140,000-square-foot
office complex within the Lantana project consisting of two
buildings that are more than 95 percent leased.
Our sales activities, excluding large undeveloped tract
sales (see "Results from Operations" below), declined
significantly during 2001 reflecting the downturn in the
information technology sector, which has negatively affected
Austin's business climate. Because of this downturn, we are
deferring some of our remaining near-term development plans until
the real estate market improves. The weakness in the Austin
real estate market during 2001 primarily affected the results of
operations of our unconsolidated affiliates (see below).
JOINT VENTURES WITH OLYMPUS REAL ESTATE CORPORATION (OLYMPUS)
We entered into three joint ventures with Olympus subsequent
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 generally owned an approximate 50.1 percent interest
and we owned an approximate 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.
In February 2002, we purchased Olympus' ownership interests
in the two Austin joint ventures and agreed to sell our interest
in the Houston joint venture (see below). These transactions
concluded our business relationship with Olympus (see "Capital
Resources and Liquidity," Item 1. "Transactions with Olympus
Real Estate Corporation," Item 3. "Legal Proceedings," and Note 11).
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 49.99 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
the joint venture 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. We
sold two Wimberly Lane lots during 2001 for $0.2 million and we
currently have one lot remaining for sale in the subdivision.
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, which together with the
similar sized lots in the Mirador subdivision (see "Stratus
Development Activities" below), are among the largest lots
developed to date within the Barton Creek community. All of the
lots have scenic hill country settings and some overlook the
"Fazio Canyons" golf course. The development of these lots was
funded through the initial equity contributions of the partners
9
and proceeds from sales of 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
sold one Escala Drive lot for $0.8 million in 2001. At December
31, 2001, there were 21 lots remaining to be sold at the Escala
Drive subdivision.
As manager of the Barton Creek Joint Venture, we receive
sales commissions and management fees for our services. We
earned fees totaling $0.1 million in 2001, $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 of $0.2
million in 2000 and $0.1 million in 1999 upon completing the
respective subdivisions.
The Barton Creek Joint Venture distributed approximately
$17.1 million to the partners through December 31, 2001. Our
share of these distributions, approximately $8.6 million, was
recorded as a reduction of the related Barton Creek Joint Venture
notes receivable ($6.2 million) and the related accrued interest
($0.7 million), with the remaining $1.7 million of distribution
proceeds representing a return of equity that reduced our
investment in the Barton Creek Joint Venture. Our investment in
the Barton Creek Joint Venture at December 31, 2001 was $3.6
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 managed this project on Olympus'
behalf under the terms of a management agreement since April 1998
and received management fees and commissions for our services.
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). At December 31, 2001,
the Walden Partnership's remaining assets included 404 developed
lots and 80 acres undeveloped real estate. During the second
quarter of 1998, we negotiated agreements with homebuilders
providing for the sale of approximately 90 percent of the 930
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, 2001, 522 lots
have closed and funded under these agreements. During 2001, the
Walden Partnership repaid the remaining $1.7 million outstanding
on its original $8.2 million non-recourse project loan
established on September 30, 1998. In connection with obtaining
the Walden Partnership loan, we were required to make an initial
restricted cash deposit of $2.5 million. At December 31, 2000,
the amount remaining in the restricted account totaled $0.6
million, all of which was released to us during 2001 as the loan
was repaid.
7000 West
- ---------
In August 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 $1.0 million and recognized a $0.4
million gain. We deferred our retained interest of the sales proceeds
($0.5 million) and related gain ($0.4 million) 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 sold 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 $0.8 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 Olympus' 50.1 percent ownership interest
in the revenues($0.5 million) and related gain ($0.4 million).
In connection with the completion of construction of the two office
buildings, we received development fees totaling $0.3 million in 2000
and $0.2 million in 1999. 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 and is guaranteed by us. The loan
was scheduled to mature on August 24, 2001; however, as manager
we negotiated an extension of the term loan to August 24, 2002,
with an option to extend the maturity to August 24, 2003, subject
to certain conditions. The borrowings outstanding on this
development loan totaled $12.9 million at December 31, 2001 and
$12.0 million at December 31, 2000. As a result of our February
2002 acquisition of this office complex from Olympus (see
"Capital Resources and Liquidity," below and Note 11), we will
include this debt on our balance sheet in the future.
STRATUS' DEVELOPMENT ACTIVITIES
We have reached agreement with the City concerning
development of a 417-acre portion of the Lantana project. The
agreement reflects a cooperative effort between the City and us
to allow development based on grandfathered entitlements, while
adhering to stringent water quality standards and other
enhancements to protect the environment (Note 9). With this most
recent agreement, we have now completed the core entitlement
process for
10
the entire Lantana project allowing for approximately
2.9 million square feet of office and retail development,
approximately 400 multi-family units (previously sold to an
unrelated third party, see below), and approximately 330
residential lots.
In the fourth quarter of 2000 we received final subdivision
plat approval from the City to develop approximately 170 acres of
commercial and multi-family real estate within our Lantana
development. The required infrastructure development at the
site, known as "Rialto Drive," was completed during the fourth
quarter of 2001. Construction of the first of two 75,000-square
foot-office buildings at Rialto Drive (7500 Rialto) is
substantially complete. Funding for the construction of the
office buildings at Rialto is available to us under a new project
development loan (see "Capital Resources and Liquidity" below).
Full development of the 170 acres is expected to consist of over
800,000 square feet of office and retail space and 400 multi-
family units, which are now being constructed by an apartment
developer pursuant to our sale of a 36.4-acre multi-family tract
in December 2000 (see "Results of Operations" below).
We continue to work on residential development plans for
portions of our Circle C project. We have been meeting with City
representatives and with neighborhood and environmental groups to
discuss a plan to modify portions of the land plan and provide
enhanced water quality protection for the Circle C project.
During the fourth quarter of 2001, we received U.S. Fish and
Wildlife Service approval for our plan, and City Zoning and
Planning Commission approval for a 554-acre planned unit
development (PUD) containing 860 residential units. City Council
action on the PUD is expected during 2002.
We commenced construction of a new subdivision within the
Barton Creek community during the fourth quarter of 2000. This
subdivision, Mirador, is now complete and marketing efforts have
commenced. Mirador adjoins the Escala Drive subdivision, which
was previously owned by the Barton Creek Joint Venture (see
above). The Mirador subdivision consists of 34 estate lots,
averaging approximately 3.5 acres in size.
During the fourth quarter of 2001, we completed the
permitting for a 114-acre tract within the Barton Creek
community. The plat provides for 54 lots ranging in size from one-
third acre to multi-acre lots, some of which overlook the Lost
Creek Country Club golf course. We are also continuing our
efforts to secure final permitting for a 212-acre tract within
the Barton Creek community, which will include 125 single-family
lots and nine acres for condominium development. Some of these
single-family lots will adjoin the Fazio Canyons golf course. A
19-acre portion of the tract consisting of 66 planned villa units
and a fire station received final plat approval in early January
2002. Development of this area is expected to commence by April
2002. Development of the remaining Barton Creek property will be
deferred until the Austin-area economy improves (see "Capital
Resources and Liquidity" 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:
2001 2000 1999
-------- -------- --------
(In Thousands)
Revenues:
Undeveloped properties
Unrelated parties $ 9,623 $ 2,101 $ 3,279
Olympus - 533 6,020
Recognition of deferred revenues 3,792 4,026 904
-------- -------- --------
Total undeveloped properties 13,415 6,660 10,203
Developed properties - 709 3,692
Commissions, management fees and other 1,414 2,730 1,357
-------- -------- --------
Total revenues $ 14,829 $ 10,099 $ 15,252
======== ======== ========
Operating income (loss) $ 2,794 a $ (3,649)b $ 2,006 a,b
Net income 3,940 14,222 c 2,871
11
a. Includes reimbursement of infrastructure costs expensed in
prior years of $1.3 million in 2001 and $2.6 million in 1999.
There were no reimbursements of infrastructure costs in 2000
except for the Circle C reimbursement as discussed below.
b. Includes $0.4 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.
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," and Note 9).
Our revenues during 2001 primarily reflect the sale of
undeveloped entitled properties to unrelated third parties.
During the third quarter of 2001, we sold a 41-acre undeveloped
tract in Austin, Texas, for $3.3 million. During the first half
of 2001 our undeveloped property revenues included the sale of
112 acres of undeveloped entitled residential property in
Houston, Texas, for $2.7 million, the sale of 10 acres of
undeveloped entitled multi-family property in Dallas, Texas, for
$1.7 million and one 17-acre undeveloped tract sale in Austin,
Texas totaling $2.0 million. In connection with our property
sale during the third quarter of 2001, we financed $2.3 million
of the sale by taking a long-term note from the purchaser. The
amount outstanding on this note totaled $2.2 million at December
31, 2001. We also financed $2.1 million of the undeveloped
residential property sale in Houston, of which $1.9 million was
outstanding at December 31, 2001. We currently anticipate these
notes will be fully collectible.
The majority of the deferred revenue recognized during
2001 was associated with the sale of a 36.4-acre multi-family
tract within the Rialto Drive project in December 2000. In this
transaction we sold the property for $5.3 million but deferred
recognition of $3.6 million of the related sale proceeds. We
recognized this deferred revenue pro rata as the required
infrastructure construction was completed. As discussed in
"Development Activities" above, we recognized the entire $3.6
million of deferred revenues during 2001 as construction at the
Rialto Drive project was completed. The remainder of our
deferred revenue recognition was associated with the sale of two
Escala Drive lots and one Wimberly Lane lot by the Barton Creek
Joint Venture.
Our undeveloped property revenues include both sales of
undeveloped real estate to unrelated parties and to our
previously unconsolidated affiliates (see "Joint Ventures with
Olympus Real Estate Corporation" above). When we sold real estate
to an entity owned jointly with Olympus, we deferred recognizing
revenue from the sale related to our ownership interest until
sales were 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 revenues 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. 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 our 24 remaining
developed lots during 2000. We have subsequently added 34 estate
lots to our inventory with the completion of the Mirador
subdivision within the Barton Creek community during 2001 (see
"Stratus Development Activities" above).
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.
Commissions, management fees and other income reflect our
efforts to expand our services to third parties over the past
three years. The decrease in this type of revenue during 2001
primarily reflects the substantial decrease in sales by our
unconsolidated joint ventures, particularly the Barton Creek
Joint Venture. 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 fee revenue for
the past three years also includes fees associated with our
management of the 2,200-acre Lakeway project near Austin.
Costs of sales were $9.1 million in 2001, $10.0 million in
2000 and $9.7 million in 1999. The decrease in 2001 from 2000
primarily reflects the reduced recognition of previously deferred
costs related to the sales of land to the Barton Creek Joint
Venture, which totaled $0.1 million in 2001, $1.9 million in 2000
and $0.6 million in 1999. Our remaining cost of sales during
2001 reflected the costs associated with the undeveloped
properties sold
12
throughout the year. The increase between the
amount of deferred costs recognized during 2000 and those
recognized during 1999 was partially offset by a reduction in
sales, particularly those related to the sales of developed lots.
Our general and administrative expenses totaled $2.9 million
in 2001, $3.7 million in 2000 and $3.5 million in 1999. The
substantial decrease in our general and administrative costs
during 2001 reflects our implementation of a new information
system and other initiatives to reduce costs, especially during
2001 as sales activity declined. Legal expenses totaled $0.5
million in 2001, $0.5 million in 2000 and $0.8 million in 1999.
Legal costs decreased in 2000 as a result of our resolving our
Circle C disputes with the City (see "Non-Operating Results" and
"Capital Resources and Liquidity" below).
Non-Operating Results
- ---------------------
Interest expense, net of capitalized interest, totaled $0.5
million in 2001, $1.3 million in 2000 and $0.8 million in 1999
(see Note 5). Capitalized interest totaled $1.4 million in 2001,
$1.3 million in 2000 and $1.2 million in 1999.
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 (Note 9).
We previously accrued liabilities totaling $5.1 million in
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
conditions in effect at the time warranted reversal of $2.1
million of these accruals. Accordingly, other income of $2.1
million is reflected in the Statement of Income for the year
ended 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. Future changes in the estimates
of this liability will be reflected in our earnings.
CAPITAL RESOURCES AND LIQUIDITY
Comparison Of Year-To-Year Cash Flows
- -------------------------------------
Net cash provided by operating activities totaled $3.2
million in 2001, $17.9 million in 2000 and $20.6 million in
1999. The decrease in 2001 compared with 2000 primarily reflects
the receipt of certain Circle C reimbursement proceeds (see
below) during 2000 and a reduction in distributions received from
the Barton Creek Joint Venture, including the receipt of proceeds
totaling $6.5 million on their outstanding notes payable to us in
2000. The decrease was offset in part by our increased revenues
from sales of undeveloped properties during the third quarter of
2001 and the Lakeway distribution during the fourth quarter of
2001 (see below). The decrease in 2000 compared with 1999
reflects 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 aforementioned Barton Creek Joint Venture proceeds in
fulfillment of the joint venture's remaining obligations to us
under terms of its initial land purchases in 1999 and 1998 (see
"Joint Ventures with Olympus Real Estate Corporation" above).
During 2000, we also received income distributions from our
unconsolidated affiliates totaling $1.4 million, which represents
a partial return on our equity in the earnings of our previously
unconsolidated affiliates.
Net cash used in investing activities totaled $24.3 million
in 2001, $5.4 million in 2000 and $8.9 million in 1999.
Investing activities for all three years reflect real estate and
facilities capital expenditure payments, net of any related
capitalized MUD reimbursements. Real estate and facility capital
expenditures were moderate during 1999 and 2000, reflecting the
constraints on our development activities resulting from disputes
with the City and
13
others, which have subsequently been settled
(see below). The increase in our investing activities during
2001 reflects the increase in our net real estate and facilities
expenditures (see "Stratus' Development Activities" above) and
the $2.0 million investment in the Lakeway project, near Austin
Texas (see "Lakeway Project" below). We received a $1.2 million
distribution from the Lakeway Project during the fourth quarter
of 2001, of which $0.6 million represented our equity earnings in
the project and the remaining $0.6 million represented a partial
return of our original investment. We also received $0.3 million
in distributions from the 7000 West Joint Venture during 2001,
which represented a return of our investment in the joint
venture. Our investing activities during 1999 included a $0.4
million additional investment in the Walden Partnership.
Additionally, our joint ventures' capital expenditures have not
been reflected in the accompanying financial statements, because
our joint ventures' results have been presented using the equity
method of accounting (see Note 1).
Financing activities provided cash totaling $16.7 million in
2001 and used cash totaling $8.4 million in 2000 and $12.9
million in 1999. Our financing activities during 2001 reflect
borrowings of $11.7 million under our amended Comerica credit
facility, $3.5 million of borrowings under our 7500 Rialto Drive
project loan facility and a second $5.0 million unsecured term
loan, offset in part by the $3.2 million repayment of Olympus'
convertible debt (see "Credit Facilities and Other Financing
Arrangements" below). We reduced our net outstanding borrowings
by $8.5 million in 2000 and $12.9 million in 1999. Our net
reductions in outstanding borrowings included proceeds of $0.4
million during 1999 from borrowings on our convertible debt
facility with Olympus (see Note 2).
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
(see Note 9). We used all $17.4 million of these proceeds to
reduce our borrowings outstanding under the applicable credit
facilities.
Credit Facilities and Other Financing Arrangements
- --------------------------------------------------
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 aggregating to $30 million. We borrowed
$20 million under the facility to repay all borrowings outstanding
under our previous credit facility. In December 2000, we used the
proceeds from our Lantana multi-family tract sale (see
"Results of Operations" above) to repay all remaining borrowings
outstanding under the existing Comerica facility and then
negotiated an amended credit facility with Comerica, with improved
terms and a maturity of December 2002. In December 2001, we
established a new bank credit facility with Comerica. Under terms
of the current facility, we have established an expanded $25 million
revolving line of credit available for general corporate purposes and
an additional $5 million loan specifically designed to provide
funding for certain development costs. These development costs
already have been incurred and the development loan proceeds are
available for borrowing at our discretion. The new facility will
mature in April 2004. At December 31, 2001, we had borrowed $12.1
million under the revolving credit facility but had not yet borrowed
any amount under the development loan facility. During February 2002,
we borrowed $7.4 million under our revolving credit facility to
complete transactions that concluded our business relationship
with Olympus (see "Olympus Relationship" below and Note 11).
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 equal the potential debt service for both the
project loan facility and the revolving line of credit for the
ensuing twelve-month period, adjusted quarterly. At December 31,
2001, the amount required to be included in the interest reserve
account totaled approximately $1.6 million. This amount can be
funded directly or treated as a reduction of our availability
under the revolving line of credit. The aggregate availability
under the $25 million revolving line was reduced to $23.4 million
to satisfy the interest reserve requirement at December 31, 2001.
We are able to withdraw amounts funded into the interest reserve
account as needed. Our remaining availability, net of the
interest reserve requirement and borrowings outstanding, under
our credit facility totaled approximately $8 million at
February 28, 2002.
In December 2000, we borrowed $5.0 million under a new five-
year unsecured term loan from First American Asset Management.
In the third quarter of 2001, we obtained an additional $5.0
million five-year unsecured term loan from First American Asset
Management (Note 5). The proceeds of the loans were used to fund
our operations and for other general corporate purposes.
In the second quarter of 2001, we secured an $18.4 million
project loan facility with Comerica for the construction of the
two office buildings at the 7500 Rialto project (see "Stratus'
Development Activities" above). This variable-rate project loan
facility matures in June 2003, with an option to extend the
maturity by one year. Currently our availability under the
project loan is $9.2 million, which is intended for the
construction of the first
14
75,000-square-foot officebuilding and
a related parking garage. At December 31, 2001 we had borrowings
totaling $3.5 million under this project loan facility.
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
previously owned 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. 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. The Walden Partnership repaid the
remaining $1.7 million of borrowings outstanding under this
project loan during 2001. Under terms of the project loan, we
secured the loan with a restricted cash deposit. All the
remaining restricted cash deposited with the bank, which totaled
$0.6 million at December 31, 2000, was released to us during 2001
as the Walden Partnership loan was repaid.
In April 1999, we and one of our wholly owned subsidiaries
finalized a $6.6 million project development loan facility with
Comerica for the development of the first 70,000-square-foot
office building at the 140,000-square-foot Lantana Corporate
Center (7000 West). 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 and until recently
was guaranteed by us (see "Olympus Relationship" below). The
project loan was scheduled to mature on August 24, 2001.
However, as manager of 7000 West, we successfully negotiated an
extension of the term loan with Comerica to August 24, 2002, with
an option to extend the maturity to August 24, 2003, subject to
certain conditions. Borrowings outstanding under the 7000 West
project loan totaled $12.9 million at December 31, 2001 and $12.0
million at December 31, 2000. Effective February 27, 2002, we
are now required to consolidate this mortgage debt on our balance
sheet as a result of our acquisition of Olympus' 50.1 percent
interest in the 7000 West Joint Venture (see "Olympus
Relationship" below and Note 11). We currently meet all the
conditions necessary to exercise the option to extend the
maturity of the term loan to August 24, 2003, and absent any
negotiations to further extend the term loan, we plan to exercise
our option in July 2002.
Lakeway Project
- ---------------
Since mid-1998, we have provided development, management,
operating and marketing services for the Lakeway project near
Austin, Texas, which is owned by Commercial Lakeway Limited
Partnership, an affiliate of Credit Suisse First Boston, for a
fixed monthly fee. In January 2001, we entered into an expanded
development management agreement with Commercial Lakeway Limited
Partnership covering a 552-acre portion of the Lakeway
development known as Schramm Ranch, and we contributed $2.0
million as an investment in this project. Under the agreement,
we receive enhanced management and development fees and sales
commissions, as well as a net profits interest in the project.
Lakeway project distributions are made to us as sales
installments close. We are currently receiving a 28 percent
share in any Lakeway project distributions and that rate will
continue until we receive proceeds totaling our initial
investment in the project ($2.0 million) plus a stated annual
rate of return, at which time, our share of the Lakeway project
distributions will increase to 40 percent.
During the second quarter of 2001, we negotiated an
agreement to sell the entire Schramm Ranch property to a single
purchaser for approximately $11.0 million, conditioned on
obtaining certain entitlements. As manager of the project, we
obtained subdivision, annexation, zoning and other entitlements
for the first phase of the property. Obtaining these
entitlements allowed for the closing of the sale for the first
phase of the Schramm Ranch property for $1.5 million. The
proceeds from this initial closing were used to obtain the
entitlements necessary to develop the remaining 500-plus acres of
the property. In the fourth quarter of 2001, we secured all the
remaining necessary entitlements for the Schramm Ranch property
and the purchaser closed and funded $3.5 million, representing
the second of four sale installments. In connection with this
second sale installment, the Lakeway Project distributed approximately
$1.2 million to us. We recorded $0.6 million of the distribution as
a partial return of our original investment in the project and $0.6
million as our equity earnings in the project's income for the year,
which was reflected in "Equity in unconsolidated affiliates' income."
We expect the remaining two Schramm Ranch sales installments (totaling
$6.0 million) to occur in March 2002 and June 2002 and we expect to
receive approximately $2 million in future cash distributions
from the Lakeway project.
Olympus Relationship
- --------------------
In May 1998, we formed a strategic alliance with 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 made a $10 million investment in our
mandatorily redeemable preferred stock (see Note 3), provided us
a $10 million convertible debt financing facility (see Note 2)
and agreed to make available up to $50 million of additional
capital representing its share of direct investments in joint
Stratus/Olympus projects.
15
During the second quarter of 2001, we repaid Olympus the
entire $3.2 million balance under the convertible debt financing
facility used to finance our interest in the Walden Partnership
in Houston, Texas, purchased in September 1998. Included in the
$3.2 million payment to Olympus was $0.8 million of accrued
interest that had been added to the principal under the terms of
the facility, and which represented the stated 12 percent annual
rate pursuant to the terms of the convertible debt financing
agreement. We also paid an additional $0.3 million of interest
during the third quarter of 2001 to satisfy the minimum annual
rate of return provision within the convertible debt facility
agreement, which provided that if the combination of interest at
12 percent and the value of the conversion right did not provide
Olympus with at least a 15 percent annual return on the
convertible debt, we would pay Olympus additional interest upon
termination of the convertible debt facility in an amount
necessary to yield a 15 percent return. The convertible debt
facility was terminated on August 15, 2001.
Through our subsidiaries, we previously were involved in three
joint ventures with Olympus (see "Joint Ventures with Olympus Real
Estate Corporation"), each was subject to the terms of their
respective partnership agreements. The partnership agreements of
each of the joint ventures contained similar provisions, including
a "buy/sell option" that could be exercised by either Olympus or
us. After Olympus commenced the process under the "buy/sell
option" for each partnership in mid-November 2001 (see Item 3
"Legal Proceedings"), we initiated additional joint discussions
with Olympus about mutually concluding our ongoing business
relationship, including the purchase of our $10.0 million of
mandatorily redeemable preferred stock held by Olympus. As a
result of these efforts, on February 12, 2002, we agreed to a $7.4
million transaction with Olympus that included the following key
provisions:
* We purchased our $10.0 million of mandatorily redeemable
preferred stock held by Olympus for $7.6 million. The amount of
the discount will be recorded as $2.4 million of additional paid
in capital in our consolidated balance sheet in the first quarter
of 2002.
* We acquired Olympus' 50.01 percent ownership interest in the
Barton Creek Joint Venture for $2.4 million.
* We acquired Olympus' 50.1 percent ownership interest in the
7000 West Joint Venture for $1.5 million. In connection with this
acquisition we have assumed the 7000 West debt and accordingly it
will be included in our consolidated balance sheet commencing in
the first quarter of 2002. At December 31, 2001, borrowings
outstanding under this project loan facility totaled $12.9
million.
* We sold our 49.9 percent ownership interest in the Walden
Partnership to Olympus for $3.1 million. We expect to record an
approximate $0.3 million gain on the sale during the first
quarter of 2002.
* We received a total of $1.0 million in net cash from the two
joint ventures we acquired.
The transaction closed on February 27, 2002. See Note 11 for
additional discussion of these transactions, including the pro
forma effects they have on our 2001 results of operations and
our December 31, 2001 balance sheet.
Common Stock Matters
- ---------------------
In February 2001, our Board of Directors authorized an open
market stock purchase program for up to 0.7 million shares of our
common stock representing approximately 10 percent of our
outstanding common stock, after considering the effects of the
stock split transactions described in the following paragraph.
The purchases may occur over time depending on many factors,
including the market price of our common stock; our operating
results, cash flows and financial position; and general economic
and market conditions. We have yet to make any open market share
purchases under this program as of March 19, 2002 and we are
unlikely to make significant open market purchases in the near
future.
On May 10, 2001, our shareholders approved an amendment to
our certificate of incorporation to permit a reverse 1-for-50
common stock split followed immediately by a forward 25-for-1
common stock split. The effective date of this transaction was
May 25, 2001. This transaction resulted in our shareholders
holding fewer than 50 shares of common stock having their shares
converted into less than one share of our common stock in the
reverse 1-for-50 split. Those shareholders received cash
payments equal to the fair value of those fractional interests.
Our shareholders holding more than 50 shares of our common stock
had their number of shares of common stock reduced by one-half
immediately after this transaction. Shareholders holding an odd
number of shares were entitled to a cash payment equal to the
fair value of the resulting fractional share. The fair value of
the fractional shares was calculated by valuing each outstanding
share of Stratus common stock held at the close of business on
the effective date at the average daily closing price per share
of Stratus' common stock for the ten trading days immediately
preceding the effective date. Accordingly, we funded $0.5
million into a restricted cash
16
account to purchase approximately
42,000 shares of our common stock. As of December 31, 2001,
fractional shares representing approximately 21,000 shares of our
common stock had been purchased for $0.25 million. We expect
this transaction to lower our future reporting and related costs.
Outlook
- --------
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 "Risk Factors" located elsewhere in this
Annual Report on Form 10-K, our financial condition and results
of operations are highly dependent upon market conditions in
Austin. Currently the Austin real estate market has experienced
a slowdown, which has affected and will likely continue to 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.
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, 2001, a change of 100 basis
points in applicable annual interest rates would have an
approximate $0.3 million impact on year 2002 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 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 "Risk Factors",
located in Item 1.
17
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.
Our independent public accountants, Arthur Andersen LLP,
conduct annual audits of our financial statements in accordance
with auditing standards generally accepted in the United States,
which include the review of internal controls for the purpose of
establishing audit scope, and issue an opinion of the fairness of
such statements in accordance with accounting principles
generally accepted in the United States.
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 meets regularly
with, and has 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, 2001
and 2000, and the related statements of income, cash flows and
changes in stockholders' equity for each of the three years in
the period ended December 31, 2001. 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, 2001 and 2000, and
the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United
States.
/s/ Arthur Andersen LLP
Austin, Texas
February 4, 2002 (Except with respect to
Note 11, as to which the
date is February 27, 2002)
18
STRATUS PROPERTIES INC.
BALANCE SHEETS
December 31,
---------------------
2001 2000
--------- ---------
(In Thousands)
ASSETS
Current assets:
Cash and cash equivalents, including
restricted cash of $0.2 million and
$0.6 million, respectively (Notes 4 and 8) $ 3,705 $ 7,996
Accounts receivable 695 596
Current portion of notes receivable
from property sales 45 -
Prepaid expenses 73 218
--------- ---------
Total current assets 4,518 8,810
Real estate and facilities, net (Note 6) 110,042 93,005
Investments in and advances to
unconsolidated affiliates (Note 4) 8,005 7,596
Notes receivable from property sales, net
of current portion (Note 1) 4,083 -
Other assets, including related party
receivables (Note 4) 2,830 2,482
--------- ---------
Total assets $ 129,478 $ 111,893
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 2,482 $ 1,920
Accrued interest, property taxes and other 1,895 1,486
--------- ---------
Total current liabilities 4,377 3,406
Long-term debt (Note 5) 25,576 8,440
Other liabilities (Note 9) 3,002 3,419
Deferred revenues, including related 1,864 5,548
parties (Note 4)
Commitments and contingencies (Note 9)
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, 7,155,077 and 14,298,270 shares
issued and outstanding, respectively 72 143
Capital in excess of par value of common stock 176,658 176,465
Accumulated deficit (91,588) (95,528)
Common stock held in treasury, 42,229 shares
at cost (483) -
--------- ---------
Total stockholders' equity 84,659 81,080
--------- ---------
Total liabilities and stockholders' equity $ 129,478 $ 111,893
========= =========
The accompanying notes are an integral part of these financial
statements.
19
STRATUS PROPERTIES INC.
STATEMENTS OF INCOME
Years Ended December 31,
----------------------------
2001 2000 1999
-------- -------- --------
(In Thousands, Except Per
Share Amounts)
Revenues (Note 1) $ 14,829 $ 10,099 $ 15,252
Costs and expenses:
Cost of sales, net (Note 1) 9,110 10,013 9,739
General and administrative expenses 2,925 3,735 3,507
-------- -------- --------
Total costs and expenses 12,035 13,748 13,246
-------- -------- --------
Operating income (loss) 2,794 (3,649) 2,006
Gains on settlement of Circle C municipal
utility district infrastructure
reimbursement claim (Note 9) - 14,295 -
Interest expense, net of capitalized interest (456) (1,280) (789)
Interest income 1,157 1,203 1,344
Equity in unconsolidated affiliates'
income (Note 4) 207 1,372 307
Other income, net (Note 9) 238 2,677 133
-------- -------- --------
Income before income taxes and equity in
unconsolidated affiliates 3,940 14,618 3,001
Income tax provision - (396) (130)
-------- -------- --------
Net income $ 3,940 $ 14,222 $ 2,871
======== ======== ========
Net income per share of common stock:
Basic $0.55 $1.99 $0.40
===== ===== =====
Diluted $0.48 $1.74 $0.35
===== ===== =====
Average shares outstanding:
Basic 7,142 7,148 7,144
===== ===== =====
Diluted 8,204 8,351 8,114
===== ===== =====
The accompanying notes are an integral part of these financial
statements.
20
STRATUS PROPERTIES INC.
STATEMENTS OF CASH FLOW
Years Ended December 31,
---------------------------
2001 2000 1999
-------- -------- --------
(In Thousands)
Cash flow from operating activities:
Net income $ 3,940 $ 14,222 $ 2,871
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 133 129 87
Cost of real estate sales 5,928 1,369 10,018
Equity in income of unconsolidated affiliates (207) (1,372) (307)
Recognition of previously deferred gains (3,684) (2,079) (327)
Gain from previously deferred Circle C
municipal utility district reimbursements - (7,430) -
Reduction of other liabilities (Note 9) - (2,140) -
(Increase) decrease in working capital:
Accounts receivable and prepaid expenses 1 1,966 600
Accounts payable, accrued liabilities
and other 1,168 839 (7)
Proceeds from Circle C municipal utility
district reimbursements - 10,262 -
Long-term receivables (4,036) 8,210 (3,631)
Distribution of unconsolidated
affiliates' income 969 1,384 -
Other (967) 2,823 1,044
-------- -------- --------
Net cash provided by operating activities 3,245 17,921 20,610
-------- -------- --------
Cash flow from investing activities:
Real estate and facilities (23,097) (5,447) (8,554)
Return of investment in
unconsolidated affiliates 829 - -
Investment in Lakeway Project (2,000) - -
Investment in Walden Partnership - - (376)
-------- -------- --------
Net cash used in investing activities (24,268) (5,447) (8,930)
-------- -------- --------
Cash flow from financing activities:
Borrowings (repayments) on credit
facilities, net 11,683 392 (27,118)
Proceeds from term loans 5,000 5,000 20,000
Repayments of term loans - (13,852) (6,143)
Proceeds from construction loan facility 3,496 - -
Proceeds from the exercise of stock options 35 18 -
Repayment of convertible debt facility (3,240) - -
Proceeds from convertible debt facility - - 376
Purchases of Stratus' common stock, at cost (242) - -
-------- -------- --------
Net cash provided by (used in)
financing activities 16,732 (8,442) (12,885)
-------- -------- --------
Net increase (decrease) increase in
cash and cash equivalents (4,291) 4,032 (1,205)
Cash and cash equivalents at
beginning of year 7,996 3,964 5,169
-------- -------- --------
Cash and cash equivalents at end of year $ 3,705 $ 7,996 $ 3,964
======== ======== ========
Interest paid $ 2,396 $ 1,631 $ 1,716
======== ======== ========
Income taxes paid $ 171 $ 142 $ 14
======== ======== ========
The accompanying notes, which include information in Notes 2, 4,
7 and, 9 and 10 regarding noncash transactions, are an integral
part of these financial statements.
21
STRATUS PROPERTIES INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands)
Capital
in Common
Excess Stock
Preferred Common of Par Accumulated Held in
Stock Stock Value Deficit Treasury Total
------- ------- -------- --------- -------- -------
Balance at January 1, 1999 $ - $ 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
Effective two for one reverse
stock split (Note 8) - (71) 71 - - -
Purchase of 42,299 shares
of Stratus common stock - - - - (483) (483)
Stock options exercised and
other - - 122 - - 122
Net income - - - 3,940 - 3,940
----- ------- -------- --------- -------- -------
Balance at December 31, 2001 $ - $ 72 $176,658 $ (91,588) $ (483)$84,659
===== ======= ======== ========= ======== =======
The accompanying notes are an integral part of these financial
statements.
22
STRATUS PROPERTIES INC.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Operations and 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, until
February 2002, through certain unconsolidated joint ventures (see
"Investments in Unconsolidated Affiliates" below and Notes 4 and
10). The consolidated financial statements include accounts of
those subsidiaries where Stratus has more than 50 percent of the
voting rights and for which the right to participate in
significant management decisions is not shared with other
shareholders. Stratus consolidates its wholly owned
subsidiaries, which include: Stratus Properties Operating Co.,
L.P.; Circle C Land Corp.; Austin 290 Properties, Inc.; Stratus
Management L.L.C.; Stratus Realty Inc.; Longhorn Properties Inc.;
Stratus Investments LLC and STRS L.L.C. All significant
intercompany transactions have been eliminated in consolidation.
Investment in Unconsolidated Affiliates. Stratus' investment in
less than 50 percent owned joint ventures and partnerships are
accounted for under the equity method in accordance with the
provisions of the American Institute of Certified Public
Accountants (AICPA) Statement of Position 78-9, "Accounting for
Investments in Real Estate Ventures." Stratus owns approximately
a 49.9 percent interest in each of its three unconsolidated
affiliates (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 subsequently
are recognized ratably as the unconsolidated affiliates sell the
real estate to unrelated third parties. Although Stratus serves
as manager for these unconsolidated affiliates, all significant
decisions are either shared with its partner or made entirely by
its partner. Stratus also has a net profits interest in the
Lakeway project, as further described in Note 4, in which its
share of the project's earnings or loss is calculated using the
hypothetical liquidation at book value approach. This approach
compares the value of the investment at the beginning of the year
to that at the end of the year, assuming that the project's
assets were liquidated or sold at book value. The difference
represents Stratus' share of the project's earnings or loss.
Reclassifications. Certain prior year amounts have been
reclassified to conform to the year 2001 presentation. The
earnings per share information and the weighted average shares
outstanding have been retroactively adjusted to reflect the
effect of the stock split, which occurred in May 2001 (see Note
8), for all periods presented.
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, capitalization of certain indirect costs, 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,
notes receivable, accounts payable and long-term borrowings
reported in the balance sheet approximate fair value. Stratus
periodically evaluates its ability to collect its receivables.
Stratus provides an allowance for estimated uncollectible amounts
if its evaluation provides sufficient evidence that amounts of its
receivable may be uncollectible. Stratus believes all its
outstanding receivables are collectible and no allowances for
doubtful accounts are included in the accompanying balance sheets.
Notes Receivable from Property Sales. In 2001, Stratus received
two notes totaling $4.4 million, related to two undeveloped
property sales whose gross sale price was $5.9 million. The
purchasers made cash down payments in excess of 20 percent of the
sales price at the closing of each transaction. Both notes have
an annual interest rate of 8 percent and mature in 20 06. One
note requires principal and interest payments of $0.2 million per
year, payable monthly; the other note requires quarterly interest
payments and a $1.5 million principal payment in 2004.
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
23
parcels. Certain
carrying costs are capitalized on properties currently under
active development. Stratus recorded capitalized interest
of $1.4 million in 2001, $1.3 million in 2000 and $1.2 million
in 1999.
In accordance with Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-
Lived Assets and Long-Lived Assets to be Disposed of" 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.
Depreciation. Office buildings are depreciated on a straight-
line basis over their estimated 30 year life.
Revenue Recognition. Revenues from property sales are recognized
in accordance with SFAS No. 66, "Accounting for Sales of Real
Estate" when the risks and rewards of ownership are transferred
to the buyer, the consideration received can be reasonably
determined and when Stratus has completed its obligations to
perform certain supplementary development activities, if any
exist, at the time of the sale. Notes received in connection
with the land sales have not been discounted, as the purchase
price was not significantly different from similar cash
transactions. Stratus recognizes sales commissions and
management and development fees as lots or acreage is sold or
when the services are performed. A summary of Stratus' revenues
follows:
Years Ended December 31,
----------------------------
2001 2000 1999
-------- -------- --------
(In Thousands)
Revenues:
Undeveloped properties
Unrelated parties $ 9,623 $ 2,101 $ 3,279
Olympus - 533 6,020
Recognition of deferred revenues 3,792 4,026 904
-------- -------- --------
Total undeveloped properties 13,415 6,660 10,203
Developed properties - 709 3,692
Commissions, management fees
and other 1,414 2,730 1,357
-------- -------- --------
Total revenues $ 14,829 $ 10,099 $ 15,252
======== ======== ========
Cost of Sales. Cost of sales includes the cost of real estate
sold as well as costs directly attributable to the properties
sold such as marketing and depreciation. A summary of Stratus'
cost of sales follows:
For Years Ended December 31,
-----------------------------
2001 2000 1999
-------- -------- --------
(In Thousands)
Cost of property sales $ 6,261 $ 1,335 $ 4,902
Cost of lots sales - 614 3,166
Recognition of previously
deferred cost of sales 108 1,946 575
Allocation of indirect costs 4,200 6,198 4,651
Municipal utility
district reimbursements (1,312) - (2,589)
Depreciation 133 129 87
Other (280) (209) (1,053)
-------- -------- --------
Total cost of sales $ 9,110 $ 10,013 $ 9,739
======== ======== ========
Advertising Costs. Advertising costs are expensed as incurred
and are included as a component of Cost of Sales. Advertising
costs totaled $0.3 million in 2001 and $0.1 million in 2000. The
advertising costs for 1999 were not significant.
24
Income Taxes. Stratus follows the liability method of accounting
for income taxes in accordance with SFAS No. 109. "Accounting for
Income Taxes." Under this method, deferred assets and
liabilities are recorded for future tax consequences of temporary
differences between the financial reporting and tax basis of
assets and liabilities. See Note 7.
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,
------------------------------
2001 2000 1999
-------- -------- --------
Basic net income per share of
common stock:
Net income $ 3,940 $ 14,222 $ 2,871
======== ======== ========
Weighted average common shares
outstanding 7,142 7,148 7,144
======== ======== ========
Basic net income per share of
common stock $0.55 $1.99 $0.40
===== ===== =====
Diluted net income per share
of common stock:
Net income $ 3,940 $ 14,222 $ 2,871
Add: Interest expense from
assumed conversion of convertible
debt, net of income tax effect - 331 -
-------- -------- --------
$ 3,940 $ 14,553 $ 2,871
======== ======== ========
Weighted average common shares
outstanding 7,142 7,148 7,144
Dilutive stock options 211 144 119
Assumed redemption of
preferred stock 851 851 851
Assumed conversion of
convertible debt - 208 -
-------- -------- --------
Weighted average common shares
outstanding for purposes of
calculating diluted net income
per share 8,204 8,351 8,114
======== ======== ========
Diluted net income per share $0.48 $1.74 $0.35
===== ===== =====
Stratus repaid all borrowings under its convertible debt
facility during 2001 (Note 2). Interest expensed on the
convertible debt outstanding totaled approximately $338,000 in
2000 and $270,000 in 1999. 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. There have
been no dividends accrued on Stratus' mandatorily redeemable
preferred stock through December 31, 2001.
Stock options outstanding to purchase approximately 106,000
shares of common stock at an average exercise price of $12.38 per
share in 2001, 273,000 shares of common stock at an average
exercise price of $10.96 per share in 2000, and approximately
148,000 shares of common stock at an average exercise price of
$12.28 per share in 1999, were excluded from the diluted net
income per share calculations because their average exercise
prices were higher than the average market price for the years
presented.
Recent Accounting Pronouncements. In June 1998, the Financial
Accounting Standards Board (FASB) issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities".
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.
Stratus currently has no derivative instruments, as defined by
SFAS 133.
25
In June 2001, the FASB issued SFAS No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS 141 requires that all business combinations
subsequent to June 30, 2001 be accounted for under the purchase
method of accounting. The pooling-of-interests method is no
longer allowed. SFAS 142 requires that upon adoption,
amortization of goodwill will cease and instead, the carrying
value of goodwill will be evaluated for impairment on at least an
annual basis. SFAS 142 is effective for fiscal years beginning
after December 15, 2001. The adoption of these standards did
not have any affect on Stratus' financial position and results of
operations.
In August 2001, the FASB issued SFAS No. 143, "Accounting for
Asset Retirement Obligations," and SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." SFAS 143,
effective for fiscal years beginning after June 15, 2002,
requires the fair value of liabilities for asset retirement
obligations to be recorded in the period they are incurred. SFAS
144 establishes a single accounting model, based on the framework
established in SFAS 121, for long-lived assets to be disposed of
by sale. SFAS 144 also broadens the presentation of discontinued
operations to include more disposal transactions, and provides
additional implementation guidance for SFAS 121. SFAS 144 is
effective for fiscal years beginning after December 15, 2001.
Stratus does not anticipate the adoption of these standards will have
a material impact on its financial position or results of operations.
2. Olympus Relationship
On May 22, 1998, Stratus and Olympus Real Estate Corporation
(Olympus) 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.
Through December 31, 2001, Stratus had fixed the number of members
of its Board of Directors at four, 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 reduce its debt. In May 2001, in connection with
the stock split transactions (Note 8), the coversion price of the
mandatorily redeemable preferred stock was automatically adjusted
to $11.75 per share. For further discussion about the
mandatorily redeemable preferred stock, see Note 3 below.
The $10 million convertible debt facility was available to
Stratus in whole or in part until May 22, 2004 and was intended
to fund Stratus' equity investment in new Stratus/Olympus joint
venture opportunities involving properties not owned by Stratus
in May 1998. 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. During the second quarter
of 2001, Stratus repaid Olympus the entire $3.2 million balance
under the convertible debt financing facility. Included in the
$3.2 million payment to Olympus was $0.8 million of accrued
interest that had been added to the principal under the terms of
the facility, and which represented the stated 12 percent annual
rate pursuant to the terms of the convertible debt financing
agreement. Stratus paid an additional $0.3 million of interest
during the third quarter of 2001 to satisfy the minimum annual
rate of return provision within the convertible debt facility
agreement, which provided that if the combination of interest at
12 percent and the value of the conversion right did not provide
Olympus with at least a 15 percent annual return on the
convertible debt, Stratus would pay Olympus additional interest
upon termination of the convertible debt facility in an amount
necessary to yield a 15 percent return. The convertible debt
facility was terminated on August 15, 2001.
Olympus also agreed to make available up to $50 million
through May 22, 2001, of which it invested approximately $13.4
million, for its share of capital for direct investments in
Stratus/Olympus joint acquisition and development activities (Note
4). In return, Stratus 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 sought third-party equity
participation.
In February 2002, Olympus and Stratus concluded their
business relationship (Note 11).
26
3. Mandatorily Redeemable Preferred Stock
At December 31, 2001 and 2000, Stratus had outstanding 1,712,328
shares of mandatorily redeemable preferred stock, stated value of
$5.48 per share. The conversion price of the mandatorily
redeemable preferred stock was automatically adjusted to $11.75
per share in May 2001 as a result of the stock split transactions
(Note 8). Each share of preferred stock would share dividends
and distributions, if any, ratably with Stratus' common stock.
The preferred stock became 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 was required
to be redeemed no later than May 22, 2004. Stratus had the
option to satisfy the redemption with shares of its common stock
on a one-for-one share basis, subject to certain limitations.
In February 2002, Stratus purchased all of its outstanding
mandatorily redeemable preferred stock in connection with the
transactions that concluded Stratus' business relationship with
Olympus (Note 11).
4. Investment in Unconsolidated Affiliates
Until February 2002, Stratus had investments in three joint
ventures. Stratus owned an approximate 49.9 percent interest in
each joint venture and Olympus owned the remaining 50.1 percent
interest. Accordingly, Stratus has accounted for its investments
in the joint ventures using the equity method of accounting (Note
1). Stratus served as developer and manager for each project
undertaken by the joint ventures and received development fees,
sales commissions, and other management fees for its services.
In February 2002, Stratus and Olympus reached an agreement in
which Stratus purchased Olympus' ownership interests in the
jointly owned Austin, Texas, properties and Olympus purchased
Stratus' ownership interest in the jointly owned Houston, Texas,
property (see below and Note 11).
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 Wimberly Lane
subdivision located within the Barton Creek community in Austin,
Texas. 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 recognizing revenues
to the extent of its equity interest in the sale, or $1.6 million,
for financial accounting purposes, which was being recognized ratably
as the developed lots were 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 recognizing revenues on $5.5 million of the $11.0
million of sales proceeds and $3.0 million of the $6.0 million
related gain attributable to its ownership interest. Stratus
recognized a portion of these deferred amounts as the lots in the
fully developed Escala Drive project were sold to unrelated third
parties. Stratus, as manager of the project, sold two Wimberly
Lane lots and one Escala Drive lot during 2001, 30 Wimberly Lane
lots and 32 Escala Drive lots in 2000 and 42 Wimberly Lane lots
during 1999. Stratus recognized previously deferred gains
totaling $0.1 million in 2001, $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 $1.1 million at December
31, 2001 and are included in "Deferred revenues" on the
accompanying balance sheet (see Note 11 for disclosure of the
disposition of the deferred gain as part of the transaction that
concluded Stratus' business relationship with Olympus in February
2002).
In connection with its lot sales, the Barton Creek Joint
Venture has distributed a total of $17.1 million to the partners.
Stratus' portion of the distributions, approximately $8.6
million, have been recorded as a repayment of the Barton Creek
notes receivable and related accrued interest ($6.9 million) and
a reduction of its investment in the Barton Creek Joint Venture
($1.7 million). In February 2002, Stratus purchased Olympus' 50.01
percent interest in the Barton Creek Joint Venture and its future
operations will be consolidated in Stratus' financial statements.
The second transaction on September 30, 1998 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 49.9 percent interest in
the Walden Partnership with $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
27
capital contribution to the Walden Partnership. The Walden
Partnership had 404 developed lots and 80 acres of undeveloped
property remaining at December 31, 2001. Through December 31,
2001, the Walden Partnership had not made any distributions to
the partners. In February 2002, Stratus sold its 49.9 percent
interest in the Walden Partnership to Olympus (Note 11).
Stratus negotiated an $8.2 million project development loan
for the Walden Partnership, which was nonrecourse to the partners
and 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 permitted 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. The loan was repaid in full during 2001, and the
remaining restricted cash deposited with the bank was released to
Stratus.
At December 31, 2001, Stratus has $0.4 million in interest
receivable from the Walden Partnership related to compensation
for the collateral deposit (discussed above). Stratus also has
$1.3 million in accrued interest receivable on its $2.1 million
Walden Partnership note receivable. The $2.1 million note
receivable is included in "Investments and advances to
unconsolidated affiliates" in the accompanying balance sheets.
Stratus has recorded the $1.7 million of accrued interest due
from related parties in "Other assets" in the accompanying
balance sheet. In January 2002, Stratus received the $0.4
million of interest from the Walden Partnership, representing the
remaining amount due for providing the collateral deposit. For a
discussion of the settlement of these interest receivable
amounts, see Note 11.
On August 16, 1999, Stratus sold Olympus a 50.1 percent
interest in the Stratus 7000 West Joint Venture (7000 West) which
owned a 70,000-square-foot office building, which was the first
phase of the 140,000-square-foot Lantana Corporate Center located
in Austin, Texas. Stratus received $1.0 million upon closing and
recognized a $0.4 million gain relating to Olympus' ownership
interest in the building. Stratus deferred recogonizing revenues
on its retained interest of the sales proceeds ($0.5 million) and
related gain ($0.4 million) 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 for $1.1 million, 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 revenues ($0.5 million) and related gain ($0.4
million) associated with Olympus' ownership interest in 7000
West. Deferred gains from the sales of land for both phases totaled
$0.8 million and are included in "Deferred revenues" on the
accompanying balance sheets for both 2001 and 2000. The 7000
West Joint Venture has distributed approximately $0.6 million to
the partners, of which Stratus has recorded its $0.3 million
portion as a reduction of its 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 was scheduled to mature in August 24, 2001;
however, Stratus negotiated an extension of the term loan to
August 24, 2002 with an option to extend the maturity to August
24, 2003, subject to certain conditions. Stratus currently meets
these conditions and will exercise its option to extend the
maturity of the debt until at least August 2003. Borrowings
outstanding on the 7000 West development loan totaled $12.9
million at December 31, 2001 and $12.0 million at December 31,
2000. In February 2002, Stratus purchased Olympus' interest in
the 7000 West Joint Venture and will consolidate this debt on its
balance sheet prospectively (Note 11).
The summarized unaudited financial information of Stratus'
unconsolidated affiliates as of December 31, 2001 and 2000, and
for each of the three years in the period endind December 31, 2001
follows (in thousands):
28
Barton
Creek
Joint Walden 7000
Venture Partnership West Total
-------- ----------- ------- -------
(Unaudited)
Earnings data (year ended
December 31, 2001):
Revenues $ 973 $ 2,472 $ 3,275 $ 6,720
Operating loss (252) (751) (152) (1,155)
Net loss (244) (595) (75) (914)
Stratus' equity in net loss (121) (254)a (37) (412
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
Balance sheet data
(at December 31, 2001):
Current assets 363 313 1,960 4,608
Other long-term receivables 1,972 - - -
Real estate and facilities, net 4,957 6,166 14,783 25,906
Total assets 7,292 6,479 16,743 30,514
Current liabilities 5 2,984 856 3,845
Total liabilities 5 7,347 b 13,794 21,146
Net assets (liabilities) 7,287 (868) 2,949 9,368
Stratus' equity in net
assets (liabilities) 3,643 (433) 1,471 4,681
Balance sheet data
(at December 31, 2000):
Current assets 1,243 501 1,490 5,218
Other long-term receivables 1,984 - - -
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 8,124 b 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
a. Includes recognition of deferred income of $43,000 in 2001,
$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, 2001, Stratus had $185,000 of remaining
unrecognized Walden Partnership deferred income.
b. Includes a $2.1 million note payable to Stratus.
Lakeway Project
- ---------------
Since mid-1998, Stratus has provided development,
management, operating and marketing services for the Lakeway
development near Austin, Texas, which is owned by Commercial
Lakeway Limited Partnership, an affiliate of Credit Suisse First
Boston, for a fixed monthly fee. In January 2001, Stratus
entered into an expanded development management agreement with
Commercial Lakeway Limited Partnership covering a 552-acre
portion of the Lakeway development known as Schramm Ranch, and
29
Stratus contributed $2.0 million as an investment in this project
(Lakeway Project). Under the agreement, Stratus will receive
enhanced management and development fees and sales commissions,
as well as a net profits interest in the Lakeway project.
Lakeway Project distributions are made to Stratus as sales
installments close. Stratus is currently receiving a 28 percent
share in any Lakeway Project distributions and that rate will
continue until it receives proceeds totaling the initial
investment in the project ($2.0 million) plus a stated annual
rate of return, at which time, the share of the Lakeway Project
distributions will increase to 40 percent.
During the second quarter of 2001, Stratus negotiated an
agreement to sell the entire Schramm Ranch property to a single
purchaser for approximately $11.0 million, conditioned on
obtaining certain entitlements. As manager of the project,
Stratus obtained subdivision, annexation, zoning and other
entitlements for the first phase of the Schramm Ranch property.
Obtaining these entitlements allowed for the closing of the sale
for the first phase of the Schramm Ranch property for $1.5
million. The proceeds from this initial closing were used to
obtain the entitlements necessary for the purchaser to develop
the remaining 500-plus acres of the property. In the fourth
quarter of 2001, Stratus secured all the remaining necessary
entitlements for the Schramm Ranch property and the purchaser
closed and funded $3.5 million, representing the second of four
sale installments. In connection with this second sale
installment, the Lakeway Project distributed approximately
$1.2 million to Stratus. Stratus recorded approximately $0.6
million of the proceeds as a partial return of its original
investment in the project and $0.6 million as its equity earnings
in the project's income for the year, which was reflected in
"Equity in unconsolidated affiliates' income" in the accompanying
statements of income The remaining two Schramm Ranch property
sales installments (totaling $6.0 million) are scheduled to occur
in March 2002 and June 2002. At December 31, 2001, Stratus had
$0.6 million in accounts receivable related to expenditures made
on behalf of the Lakeway Project that are to be reimbursed by the
Commercial Lakeway Limited Partnership.
5. Long-Term Debt
December 31,
--------------------
2001 2000
-------- -------
(In Thousands)
Comerica facility, average rate 6.1% in
2001 and 9.5% in 2000 $ 12,080 $ 397
Unsecured term loans, average rate 9.25%
in 2001 and 2000 10,000 5,000
Construction loan facility, average rate
4.6% in 2001 13,496 -
Convertible debt facility with Olympus,
average rate 12.0% in 2001 and 2000 (Note 2) - 3,043
-------- -------
$ 25,576 $ 8,440
======== =======
In December 1999, Stratus negotiated a facility agreement
with Comerica Bank-Texas (Comerica). The 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. In December 2000,
Stratus repaid all remaining borrowings outstanding under the
existing Comerica facility and negotiated an expanded $30 million
facility arrangement, with a December 16, 2002 maturity. Under
terms of the amended agreement, Stratus' availability totaled $20
million under a revolving line of credit with 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). In December 2001,
Stratus established a new credit facility with Comerica. Under
terms of the new facility, Stratus has established an expanded
$25 million revolving line of credit available for general
corporate purposes and an additional $5 million loan specifically
designed to provide the funds for certain development costs.
This facility will mature in April 2004. At December 31, 2001,
Stratus had borrowed $12.1 million under its existing revolving
credit facility. See Note 11 for discussion of transactions that
required Stratus to borrow additional amounts under its revolving
credit facility.
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. As of December 31, 2001, Stratus was
in compliance with such covenants. Stratus also is required to
deposit funds into an interest reserve account with the bank. The
30
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 $1.6
million at December 31, 2001. The amount can be funded directly
by Stratus or by reducing Stratus' availability under the
revolving line of credit. At December 31, 2001, Stratus had no
amounts deposited in the interest reserve account, which reduced
its availability under its revolving credit facility to $23.4
million, of which Stratus had borrowed $12.1 million at December
31, 2001 (see above). The full amount of the facility can be re-
established if Stratus makes future deposits into the interest
reserve account. Stratus is able to withdraw any of the proceeds
it deposits into the interest reserve account at its discretion.
Stratus has also entered into two separate five-year $5.0
million unsecured term loans with First American Asset
Management. Interest accrues on the loans at an annual rate of
9.25 percent and is payable monthly. One loan will mature in
December 2005, the other $5.0 million term loan will mature in
July 2006. The proceeds from these term loans have been used to
fund Stratus' ongoing operations and for its general corporate
purposes.
In the second quarter of 2001, Stratus secured an $18.4
million project loan with Comerica for the construction of two
office buildings at the 7500 Rialto Drive project located within
the Lantana project in Austin, Texas. This variable-rate project
loan facility, secured by the land and buildings in the project,
matures in June 2003, with an option to extend its maturity by one
year. Currently, Stratus' availability under the project loan is
$9.2 million and is intended for the construction of the first
75,000-square-foot building and related parking garage. At
December 31, 2001, Stratus had borrowed $3.5 million under this
project loan facility.
As a result of the transactions with Olympus in February
2002, Stratus assumed $12.9 million of previously unconsolidated
debt associated with the construction of the 140,000-square-foot
office complex at 7000 West (see Notes 4 and 11).
6. Real Estate and Facilities, net
December 31,
----------------------
2001 2000
--------- --------
(In Thousands)
Land held for development or sale:
Austin, Texas area $ 100,735 $ 87,781
Other areas of Texas 1,590 4,875
--------- --------
Total land 102,325 92,656
Office building (7500 Rialto) 7,380 -
Furniture, fixtures and equipment, net
of accumulated depreciation of $322 in
2001 and $189 in 2000 337 349
--------- --------
$ 110,042 $ 93,005
========= ========
At December 2001, Stratus' investment in real estate includes
approximately 3,800 acres of land located in Austin, Houston and
San Antonio, Texas. The principal holdings of Stratus are
located in the Austin area and consist of 2,039 acres of
undeveloped residential, multi-family and commercial property and
34 developed real estate lots within the Barton Creek community.
Stratus' remaining Austin properties include 436 acres of
undeveloped residential, multi-family and commercial property in
an area 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. During 2001, Stratus commenced and
substantially completed the 75,000-square-foot office building at
7500 Rialto Drive within Lantana. The office building costs
reflected in the table above include both the construction and
land costs associated with 7500 Rialto.
Stratus also owns 13 acres of undeveloped commercial
property in Houston, Texas, and 21 acres of undeveloped multi-
family residential property located in San Antonio, Texas. The
San Antonio property is being managed and actively marketed by
an unaffiliated professional real estate developer. Under the
terms of the related development agreements the operating
expenses and development costs, net of revenues, are funded by
Stratus. The developer is 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, 2001, no amounts
have been paid in connection with this net profit arrangement.
31
Various regulatory matters and litigation involving Stratus'
development of its Austin-area properties were resolved during
2000 (Note 9).
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. Therefore, the final determination of the
gross deferred tax asset amounts had no impact to Stratus'
financial statements. The components of deferred taxes follow:
December 31,
---------------------
2001 2000
--------- --------
(In Thousands)
Deferred tax assets:
Net operating losses (expire 2001-2018) $ 11,599 $ 12,167
Real estate and facilities, net 9,360 10,518
Alternative minimum tax credits and 805 496
depletion allowance (no expiration)
Other future deduction carryforwards
(expire 2001-2003) 67 52
Valuation allowance (21,831) (23,233)
--------- --------
$ - $ -
========= ========
Income taxes charged to income follow:
Years Ended December 31,
-----------------------------
2001 2000 1999
------- -------- -------
(In Thousands)
Current income tax provision
Federal $ - $ (351) $ (60)
State - (45) (70)
------- -------- -------
(396) (130)
------- -------- -------
Income tax provision $ - $ (396) $ (130)
======= ======== =======
Reconciliations of the differences between the income tax
provision computed at the federal statutory tax rate and the
income tax provision recorded follow:
Years Ended December 31,
-------------------------------------------------
2001 2000 1999
--------------- -------------- ---------------
Amount Percent Amount Percent Amount Percent
------- ------- ------ ------- ------- -------
(Dollars In Thousands)
Income tax provision
computed at the federal
statutory income tax rate $(1,379) (35)% $(5,116) (35)% $(1,050) (35)%
(Increase) decrease
attributable to:
Change in valuation allowance 1,402 35 3,742 26 1,212 40
State taxes and other (23) - 978 6 (292) (9)
------- ------ ------- --- ------- ---
Income tax provision $ - - % $ (396) (3)% $ (130) (4)%
======= ====== ======= === ======= ===
8. Stock Options and Equity Transactions
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, adjusted for the
effects of the effective reverse stock split transactions (see
below), representing 975,000 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, 2001,
174,950 options were available for new grants under the Plans.
The 50,000 remaining stock appreciation rights were exercised
during 2001. A summary of stock options outstanding follows:
32
2001 2000 1999
----------------- ----------------- -----------------
Number Average Number Average Number Average
of Option of Option of Option
Options Price Options Price Options Price
------- ------- ------- ------- -------- -------
Beginning of year 836,625 $ 7.70 631,938 $ 7.00 533,813 $ 6.84
Granted 7,500 9.87 236,875 9.08 98,125 7.84
Exercised (56,250) 10.12 (30,000) 3.52 - -
Expired/forfeited (325) 12.38 (2,188) 9.00 - -
------- ------- ------- ------- -------- -------
End of year 787,550 8.01 836,625 7.70 631,938 7.00
======= ======= ======= ======= ======== =======
Summary information of fixed stock options outstanding at
December 31, 2001 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
- ------------------------ ------- --------- ------ ---------- -------
$3.00 to $3.63 135,000 3.9 years $ 3.12 135,000 $ 3.12
$5.25 to $7.81 254,063 6.2 years 7.08 208,129 6.93
$8.06 to $9.87 256,875 8.5 years 9.09 67,972 9.07
$12.38 141,612 6.1 years 12.38 106,375 12.38
-------- -------
787,550 517,476
======== =======
Stratus has adopted the disclosure-only provisions of SFAS
No. 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
$909,000 ($0.11 per share) in 2001, $828,000 ($0.10 per share) in
2000 and $752,000 ($0.09 per share) in 1999. 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 $7.02 in 2001, $6.55 in 2000 and
$5.50 in 1999. The weighted average assumptions used include a
risk-free interest rate of 5.4 percent in 2001, 6.0 percent in
2000 and 5.4 percent in 1999, expected lives of 10 years and
expected volatility of 55 percent in 2001, 55 percent in 2000 and
54 percent in 1999. 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.
Share Purchase Program. In February 2001, Stratus' Board of
Directors authorized an open market stock purchase program for
up to 0.7 million stock-split adjusted shares of Stratus' common
stock (see below). The purchases may occur over time depending
on many factors, including the market price of Stratus stock;
Stratus' operating results, cash flow and financial position; and
general economic and market conditions. No purchases have been
made under this program through February 4, 2002.
Stock Split Transactions. On May 10, 2001, the shareholders of
Stratus approved an amendment to Stratus' certificate of
incorporation to permit a reverse 1-for-50 common stock split
followed immediately by a forward 25-for-1 common stock split.
This transaction resulted in Stratus' shareholders owning fewer
than 50 shares of common stock having their shares converted into
less than one share in the reverse 1-for-50 split, for which they
received cash payments equal to the fair value of those
fractional interests. Stratus shareholders owning more than 50
shares of Stratus' common stock had their number of shares of
common stock reduced by one-half immediately after this
transaction. Shareholders owning an odd number of shares were
entitled to a cash payment equal to the fair value of the
resulting fractional share. The fair value of the fractional
shares was calculated by valuing each outstanding share of
Stratus common stock held at the close of business on the
effective date, May 25, 2001, at the average daily closing price
per share of Stratus' common stock for the ten trading days
immediately preceding the effective date. Stratus funded $0.5
million into a restricted cash account to purchase approximately
42,000 post-stock split shares of its common stock. As of
December 31, 2001, fractional shares
33
representing approximately
21,000 shares of Stratus' common stock had been purchased for
$0.25 million. The funding for the remaining 21,000 purchased
shares is shown as $0.2 million of restricted cash on the
accompanying December 31, 2001 balance sheet. The number of shares
outstanding of Stratus' mandatorily redeemable preferred stock
(see Note 3) is not affected by this transaction; however, the
conversion price in effect immediately prior to the transaction
was approximately doubled to reflect the effects of these
transactions.
9. Commitments and Contingencies.
Construction Contracts. Stratus had commitments under non-
cancelable open contracts totaling $4.8 million at December 31,
2001.
Environmental. 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 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 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 Income 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 in future periods, as additional information
becomes available.
Litigation. 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 (MUDs) 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.
Other. Stratus and the City were involved in various lawsuits from
January 1998 through June 2000, regarding the constitutionality
of certain legislation authorizing the creation of water quality
protection zones (WQPZs). The enabling legislation provided that
a duly formed WQPZ would be responsible for establishing and
monitoring the water quality standards for the development within
zones. The City argued that the enabling legislation authorizing
the formation of the WQPZs was unconstitutional, while Stratus
and other developers argued the WQPZ legislation was
constitutional. In June 2000, the Texas
34
Supreme Court ruled the
Texas WQPZ legislation was unconstitutional. This decision
primarily affects Stratus' properties within the southern portion
of its Barton Creek project. Significant portions of Stratus'
properties contain grandfathered entitlements providing an
exemption from certain current development regulations. Stratus
has initiated development plans for these areas that will meet
the grandfathered ordinance requirements or current ordinances,
as applicable.
10. Quarterly Financial Information (Unaudited)
Net Income
Operating Net (Loss) per Share
Income Income -----------------
Revenues (Loss) (Loss) Basic Diluted
-------- --------- --------- ------- --------
(In Thousands, Except Per Share Amounts)
2001
1st Quarter $ 1,426 $ (140) $ 20 $ - $ -
2nd Quarter 8,214 1,278 1,090 0.15 0.13
3rd Quarter 4,458 2,946 3,056 0.43 0.37
4th Quarter 731 (1,290) (226) (0.03) (0.03)
-------- --------- ---------
$ 14,829 $ 2,794 $ 3,940 0.55 0.48
======== ========= =========
2000
1st Quarter $ 2,113 $ (745) $ 7,278 a $ 1.02 $ 0.88
2nd Quarter 2,942 (2) 575 0.08 0.07
3rd Quarter 2,019 (918) 164 0.02 0.02
4th Quarter 3,025 (1,984) 6,205 b 0.86 0.76
-------- --------- ---------
$ 10,099 $ (3,649) $ 14,222 1.99 1.74
======== ========= =========
a. Includes $7.4 million gain recognition associated with the
partial settlement of the Circle C MUD reimbursement claim (Note 9).
b. Includes $6.9 million gain associated with the full and
final settlement of the Circle C MUD reimbursement claim (Note 9).
11. Subsequent Event
Since 1998, Stratus, through its subsidiaries, has been involved
in three joint ventures with Olympus (see Note 4). Each joint
venture was governed by a partnership agreement containing
similar provisions, including a "buy/sell option" which could be
exercised by either Stratus or Olympus.
In November 2001, Olympus triggered the buy/sell option by
offering to either sell its approximate 50 percent equity
interests in each of the three joint ventures or otherwise
purchase Stratus' approximate 50 percent equity interests in the
three joint ventures. In December 2001, Stratus notified Olympus
that it intended to purchase Olympus' interests. Subsequently,
Stratus and Olympus initiated discussions to conclude their
ongoing business relationship.
On February 12, 2002, Stratus and Olympus agreed to conclude
their business relationship, which occurred on February 27, 2002
in the following transactions:
* Stratus redeemed its $10.0 million of mandatorily redeemable
preferred stock held by Olympus for $7.6 million. Stratus will
record the $2.4 million discount as additional paid in capital.
* Stratus sold its 49.9 percent ownership interest in the
Walden Partnership to Olympus for $3.1 million.
* Stratus acquired Olympus' 50.01 percent ownership interest
in the Barton Creek Joint Venture for $2.4 million. At the time
of its acquisition, the Barton Creek Joint Venture's cash totaled
$0.3 million and the joint venture is scheduled to receive a
$1.0 million MUD reimbursement in June 2002.
35
* Stratus acquired Olympus' 50.1 percent ownership interest in
the 7000 West Joint Venture for $1.5 million. Stratus received
$0.7 million of cash from 7000 West upon its acquisition and also
assumed 7000 West's $12.9 million of previously unconsolidated
debt.
The net cash cost of the transactions for Stratus totaled
approximately $7.4 million, after considering the approximate
$1.0 million in cash it received from its acquisition of the
Barton Creek and 7000 West Joint Ventures. Stratus completed
these transactions using funds available to it under its $25
million revolving credit facility (see Note 5).
In connection with the completion of these transactions,
Stratus also announced the resignation of Mr. Robert L. Adair III
from its Board of Directors. Mr. Adair was appointed to the Board
in 1998 in connection with the original Olympus agreement that
provided for representation on Stratus' Board (Note 2).
The following unaudited pro forma consolidated balance sheet at
December 31, 2001 and income statement for the year ending December
31, 2001 show the effect of the Olympus transactions as if the event
had occurred on January 1, 2001 (in thousands).
Unadjusted Pro
Acquired Combined Pro Forma
Stratus Joint Balance Forma Balance
Historical Ventures Sheet Adjustments Sheet
--------- -------- --------- ----------- ---------
Assets
Cash and cash equivalents $ 3,705 $ 1,108 $ 4,813 $ (1,000)a $ 3,813
Accounts receivable 740 307 1,047 - 1,047
Prepaid expenses 73 6 79 - 79
--------- -------- --------- ----------- ---------
Total current assets 4,518 1,421 5,939 (1,000) 4,939
Real estate and facilities, net 110,042 19,741 129,783 (3,201)b 126,582
Investments in and advances
to unconsolidated affiliates 8,005 - 8,005 (6,575)c 1,430
Long-term receivable 4,083 - 4,083 - 4,083
Other assets 2,830 2,969 5,799 (1,321)d 4,478
--------- -------- --------- ----------- ---------
Total assets $ 129,478 $ 24,131 $ 153,609 $ (12,097) $ 141,512
========= ======== ========= =========== =========
Liabilities and
Stockholders' Equity
Accounts payable and
and accrued liabilities $ 2,482 $ 614 $ 3,096 $ - $ 3,096
Accrued interest, property
taxes and other 1,895 232 2,127 - 2,127
--------- -------- --------- ----------- ---------
Total current liabilities 4,377 846 5,223 - 5,223
Long-term debt 25,576 12,930 38,506 7,400 e 45,906
Other liabilities 4,866 - 4,866 (1,864)f 3,002
Mandatorily reedeemable
preferred stock 10,000 - 10,000 (10,000)g -
Total stockholders' equity 84,659 10,355 95,014 (7,633)h 87,381
--------- -------- --------- ----------- ---------
Total liabilities and
stockholders' equity $ 129,478 $ 24,131 $ 153,609 $ (12,097) $ 141,512
========= ======== ========= =========== =========
a. Cash paid in transactions using cash received from joint
ventures acquired and borrowings.
b. Basis reduction of properties acquired in acquisitions and
elimination of deferred costs.
c. Elimination of investments in and advances to unconsolidated
affiliates.
d. Elimination of long-term interest receivable from the Walden
Partnership.
e. Net borrowings to fund transactions excluding the cash
received from joint ventures acquired (see above).
f. Elimination of the remaining deferred gains associated with
the Barton Creek Joint Venture ($1.1 million) and 7000 West ($0.8
million).
g. Redemption of Stratus' mandatorily redeemable preferred
stock.
h. Elimination of the partnership equity of joint ventures
acquired offset in part by recording the $2.4 million discount
associated with the redemption of the mandatorily redeemable
preferred stock and the approximate $0.3 million gain from the
sale of the Walden partnership.
36
Unadjusted Pro
Acquired Combined Pro Forma
Stratus Joint Income Forma Income
Historical Ventures Statement Adjustments Statement
--------- -------- --------- ----------- ---------
Revenues $ 14,829 $ 4,249 $ 19,078 $ (549)a $ 18,529
Costs and expenses:
Cost of sales 9,110 2,911 12,021 (329)b 11,692
General and administrative
expenses 2,925 705 3,630 - 3,630
--------- -------- --------- ----------- ---------
Total cost and expenses 12,035 3,616 15,651 (329) 15,322
--------- -------- --------- ----------- ---------
Operating income (loss) 2,794 633 3,427 (220) 3,207
Interest expense, net (456) (1,057) (1,513) - (1,513)
Interest income 1,157 2 1,159 (532)c 627
Equity in unconsolidated
affiliates' income 207 - 207 254 d 461
Other income, net 238 82 320 - 320
--------- -------- --------- ----------- ---------
Income before income taxes
affiliates 3,940 (340) 3,600 (498) 3,102
Income tax provision - - - - -
--------- -------- --------- ----------- ---------
Net income (loss) $ 3,940 $ (340) $ 3,600 $ (498) $ 3,102
========= ======== ========= =========== =========
a. Elimination of recognition of previously deferred revenues
and sales commissions and management fee income received from the
joint ventures.
b. Elimination of previously deferred cost of sales and sales
commission and management fee expense at the joint venture level.
c. Elimination of accrued interest income associated with
Walden Partnership note.
d. Elimination of the Walden Partnership loss in 2001.
ITEM 9. CHANGES IN AND DISAGREEEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
- ---------------------------------------------------------------------
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 2002
annual meeting to be held on May 16, 2002, 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 2002 annual meeting to be held on May 16,
2002, 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 2002 annual meeting to be held on May 16,
2002, 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 2002 annual
meeting to be held on May 16, 2002, is incorporated herein by
reference.
37
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 for the 2002 period ending March 21, 2002,
the registrant filed two Current Reports on Form 8-K dated
December 20, 2001 and March 1, 2002 reporting events under
Item 5.
38
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 22, 2002.
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 22, 2002.
/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
- ------------------------------
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 Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of Stratus.
3.3 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.
10.1 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.
10.2 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.
10.3 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.
10.4 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.
10.5 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.
10.6 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.
E-1
STRATUS PROPERTIES INC.
EXHIBIT INDEX
Exhibit
Number
- -------
10.7 Amendment No. 1 to the Oly Stratus ABC West I Joint Venture
Agreement dated November 9, 1998. Incorporated by reference to
Exhibit 10.11 to the Stratus 1998 Third Quarter 10-Q.
10.8 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.
10.9 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.
10.10 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.
10.11 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.
10.12 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.
10.13 Construction Loan Agreement dated February 24, 2000 by and
between Stratus 7000 West Joint Venture and Comerica Bank-
Texas.
10.14 Modification Agreement dated August 16, 1999, by and between
Comerica Bank-Texas, as Lender, Stratus 7000 West Joint
Venture, as borrower and Stratus Properties Inc., as Guarantor.
10.15 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.
10.16 Second Amendment to Construction Loan Agreement dated December
31, 1999 by and between Stratus 7000 West Joint Venture, as
borrower, Stratus Properties Operating Co., L.P. and Stratus
Properties Inc., as Guarantors, and Comerica Bank-Texas.
10.17 Construction Loan Agreement dated April 9, 1999 by and between
Stratus 7000 West Joint Venture and Comerica Bank-Texas.
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 Second Modification Agreement dated February 24, 2000 by and
between Comerica Bank-Texas, as Lender, and Stratus 7000 West
Joint Venture, as borrower, and Stratus Properties Inc., as
Guarantor.
10.20 Third Modification Agreement dated August 23, 2001 by and
between Comerica Bank-Texas, as Lender, Stratus 7000 West Joint
Venture, as Borrower and Stratus Properties Inc., as Guarantor.
10.21 Development Management Agreement by and between Commercial
Lakeway Limited Partnership, as owner, and Stratus Properties
Inc., as development manager, dated January 26, 2001.
Incorporated by reference to Exhibit 10.18 to the Stratus 2001
First Quarter 10-Q.
10.22 Amended Loan Agreement dated December 27, 2000 by and between
Stratus Properties Inc. and Comerica-Bank Texas. Incorporated
by reference to Exhibit 10.19 to the Stratus 2000 Form 10-K.
E-2
STRATUS PROPERTIES INC.
EXHIBIT INDEX
Exhibit
Number
- ---------
10.23 Second Amendment to Loan Agreement dated December 18, 2001 by
and among Stratus Properties Inc., Stratus Properties Operating
Co., L.P., Circle C Land Corp. and Austin 290 Properties Inc.
collectively as borrower and Comerica Bank-Texas, as Lender.
10.24 Loan Agreement dated December 28, 2000 by and between Stratus
Properties Inc. and Holliday Fenoliglio Fowler, L.P.,
subsequently assigned to an affiliate of First American Asset
Management. Incorporated by reference to Exhibit 10.20 to the
Stratus 2000 Form 10-K.
10.25 Loan Agreement dated June 14, 2001, by and between Stratus
Properties Inc. and Holliday Feroliglio Fowler, L.P.,
subsequently assigned to an affiliate of First American Asset
Management.
10.26 Stratus' Performance Incentive Awards Program, as amended
effective February 11, 1999. Incorporated by reference to
Exhibit 10.18 to Stratus' 1998 Form 10-K.
10.27 Stratus Stock Option Plan, as amended. Incorporated by
reference to Exhibit 10.9 to Stratus' 1997 Form 10-K.
10.28 Stratus 1996 Stock Option Plan for Non-Employee Directors, as
amended. Incorporated by reference to Exhibit 10.10 to
Stratus' 1997 Form 10-K.
10.29 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.
23.2 Letter from Arthur Andersen LLP concerning audit quality controls.
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 haws been signed
on behalf of certain officers and directors of Stratus.
E-3
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
included in this Form 10-K, and have issued our report thereon
dated February 4, 2002 (except with respect to Note 11, as to
which the date is February 27, 2002). Our audits were made for
the purpose of forming an opinion on those 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, is fairly stated in all material
respects in relation to the basic financial statements taken as a
whole.
Arthur Andersen LLP
Austin, Texas
February 4, 2002 (except with respect to
Note 11, as to which the date is
February 27, 2002)
F-1
Stratus Properties Inc.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2001
(In Thousands)
SCHEDULE III
Cost Gross
Capitalized Amounts at
Subsequent to December 31,
Intial Cost Acquisitions 2001
---------------- ------------ ---------------
Building Building
and and
Improve- Improv-
Land ments Land Land ements
-------- ------- -------- ------- --------
Developed Lots a
Barton Creek, Austin, TX $ 3,160 $ - $ 4,754 $ 7,914 $ -
Undevloped Acerage b
Camino Real, San Antonio, TX 310 - 60 370 -
Copper Lakes, Houston, TX 591 - 630 1,221 -
Barton Creek, Austin, TX 6,372 - 989 7,361 -
Lantana, Austin, TX 1,261 - 11,832c 5,713 7,380
Longhorn Properties, Austin, TX 10,329 - 324 10,653 -
Developed Acerage e
Barton Creek, Austin, TX 18,047 - 36,981 55,028 -
Longhorn Properties, Austin, TX 5,299 - 4,336 9,635 -
Lantana, Austin, TX 3,067 - 1,363 4,430 -
Operating Properties
Corporate offices, Austin, TX - 659 - - 659
-------- ------- -------- --------- -------
$ 48,436 $ 659 $ 61,269 $ 102,325 $ 8,039
======== ======= ======== ========= =======
(continued from above)
Stratus Properties Inc.
REAL ESTATE AND ACCUMLATED DEPRECIATION (Continued)
December 31, 2001
Number of
Lot and
Acres
------------
Accumulated Year
Total Lots Acres Depreciation Acquired
--------- ----- ------ ------------- --------
Developed Acerage a
Barton Creek, Austin, TX $ 7,914 34 $ - -
Undevloped Acerage b
Camino Real, San Antonio, TX 370 - 21 - 1990
Copper Lakes, Houston, TX 1,221 - 13 - 1991
Barton Creek, Austin, TX 7,361 - 416 - 1988
Lantana, Austin, TX 13,093 - 148 - 1994
Longhorn Properties, Austin, TX d 10,653 - 740 - 1992
Developed Acerage e
Barton Creek, Austin, TX 55,028 - 1,623 - 1988
Longhorn Properties, Austin, TX d 9,635 - 537 - 1992
Lantana, Austin, TX 4,430 - 288 - 1994
Operating Properties
Corporate Offices, Austin, TX 659 - - 322 -
--------- ----- ------ -----
$ 110,364 34 3,786 $ 322
========= ===== ====== =====
a. Includes 34 developed lots in Mirador subdivision in the
Barton Creek community.
b. Undeveloped real estate that can be sold "as is" or will be
developed in the future as additional permitting is obtained.
c. Includes the costs associated with the construction of the
75,000-square-foot office building located at 7500 Rialto Drive.
Initial land costs associated with the building total $208,000.
d. Includes the Circle C community real estate.
e. Real estate that is currently being developed, has been
developed, or has received the necessary permits to be developed.
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, 2001 and 2000 are as follows:
2001 2000
--------- --------
(In Thousands)
Balance, beginning of year $ 93,194 $ 91,873
Acquisitions 121 82
Improvements and other 22,977 2,608
Cost of real estate sold (5,928) (1,369)
--------- --------
Balance, end of year $ 110,364 $ 93,194
========= ========
The aggregate net book value for federal income tax purposes as
of December 31, 2001 was $133,618,000.
(2) Reconciliation of Accumulated Depreciation:
The changes in accumulated depreciation for the years ended
December 31, 2001 and 2000 are as follows:
2001 2000
-------- --------
(In Thousands)
Balance, beginning of year $ 189 $ 209
Retirement of assets - (149)
Depreciation expense 133 129
-------- --------
Balance, end of year $ 322 $ 189
======== ========
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