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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the Quarter Ended September 30, 2003

 
 
 

Commission File Number:  0-19989

 
 
 

Stratus Properties Inc.

 
 
 

Incorporated in Delaware                  

72-1211572

 

(IRS Employer Identification No.)

 
 

98 San Jacinto Blvd., Suite 220, Austin, Texas  78701

 
 

Registrant's telephone number, including area code: (512) 478-5788

 
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X  No _

 

             Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities and Exchange Act of 1934) Yes _  No X

 

On September 30, 2003, there were issued and outstanding 7,123,278 shares of the registrant's Common Stock, par value $0.01 per share.  

 







  

STRATUS PROPERTIES INC.

TABLE OF CONTENTS

  
 

Page

  

Part I.  Financial Information

 
  

  Financial Statements:

 
  

Condensed Consolidated Balance Sheets

3

  

Consolidated Statements of Operations

4

  

Consolidated Statements of Cash Flows

5

  

 

Notes to Consolidated Financial Statements

6

  

  Report of Independent Accountants

11

  

  Management’s Discussion and Analysis

    of Financial Condition and Results of Operations


12

  

                            Quantitative and Qualitative Disclosures about Market Risks

18

  

                            Controls and Procedures

18

  

Part II.  Other Information

18

  

Signature

20

  

Exhibit Index

E-1

  







STRATUS PROPERTIES INC.

Part I.  FINANCIAL INFORMATION


Item 1.

Financial Statements.




STRATUS PROPERTIES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)


   

September 30,

  

December 31,

 
   

2003

  

2002

 
   

(In Thousands)

 

ASSETS

        

Current assets:

        

Cash and cash equivalents (including restricted cash

of $0.2 million at September 30, 2003 and $0.4 million at       December 31, 2002)

 

$

2,040

  

$

1,361

 

Accounts receivable

  

110

   

654

 

Current portion of notes receivable from property sales

  

503

   

60

 

Prepaid expenses

  

312

  

 

146

 

        Total current assets

  

2,965

   

2,221

 

Real estate and facilities, net

  

112,082

   

110,761

 

Rental properties, net

  

22,308

   

22,422

 

Other assets

  

1,944

   

1,742

 

Notes receivable from property sales, net of current portion

  

174

   

2,103

 

Investments in and advances to unconsolidated affiliates

  

-

   

191

 

Total assets

 

$

139,473

  

$

139,440

 
          

LIABILITIES AND STOCKHOLDERS’ EQUITY

        

Accounts payable and accrued liabilities

 

$

2,009

  

$

1,663

 

Accrued interest, property taxes and other

  

2,992

   

3,067

 

Current portion of borrowings outstanding

  

434

   

          2,316

 

Total current liabilities

  

5,435

   

7,046

 

Long-term debt

  

43,322

   

42,483

 

Other liabilities

  

3,294

   

3,292

 

Stockholders' equity

 

 

87,422

  

 

86,619

 

Total liabilities and stockholders' equity

 

$

139,473

  

$

139,440

 
          



The accompanying notes are an integral part of these financial statements.



 

STRATUS PROPERTIES INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)



 

Three Months Ended

 

Nine Months Ended

 
 

September 30,

 

September  30,

 
 

2003

 

2002

 

2003

 

2002

 
 

(In Thousands, Except Per Share Amounts)

 

Revenues:

            

Real estate

$

6,671

 

$

3,762

 

$

9,018

 

$

8,169

 

Rental income

 

951

  

  817

  

2,799

  

1,731

 

   Total revenues

 

7,622

  

4,579

  

11,817

  

9,900

 

Cost of sales:

            

Real estate, net

 

3,860

  

2,759

  

5,335

  

4,932

 

Rental

 

626

  

  606

 

 

1,775

  

1,159

 

Depreciation and amortization

 

329

  

244

 

 

978

  

571

 

   Total cost of sales

 

4,815

  

3,609

  

8,088

  

6,662

 

General and administrative expenses

 

952

  

1,058

  

3,067

  

3,414

 

   Total costs and expenses

 

5,767

 

 

4,667

 

 

11,155

 

 

10,076

 

Operating income (loss)

 

1,855

  

(88

)

 

662

  

(176

)

Interest expense, net

 

(202

)

 

(167

)

 

(674

)

 

(379

)

Interest income

 

567

 

 

166

 

 

702

 

 

550

 

Equity in unconsolidated affiliates’ income

 

   -

  

  -

  

29

  

372

 

Other income

 

   -

  

-    

  

   -

  

286

 

Net income (loss)

$

2,220

 

$

(89

)

$

719

 

$

653

 
             

Reconciliation of net income (loss) to net income (loss) applicable to common stock:

            

Net income (loss)

$

2,220

 

$

(89

)

$

719

 

$

653

 

Discount on purchase of mandatorily redeemable preferred stock

 

  -

  

-    

  

 -

  

2,367

 

Net income (loss) applicable to common stock

$

2,220

 

$

(89

)

$

719

 

$

3,020

 
             

Net income (loss) per share of common stock:

            

     Basic

 

$0.31

  

$(0.01

)

 

$0.10

  

$0.42

 

     Diluted

 

$0.30

  

$(0.01

)

 

$0.10

  

$0.41

 
             

Weighted average shares outstanding:

            

     Basic

 

7,123

  

7,116

  

7,123

  

7,116

 

     Diluted

 

7,346

  

7,116

  

7,297

  

7,442

 
             


The accompanying notes are an integral part of these financial statements.





STRATUS PROPERTIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)



  

Nine Months Ended

 
  

September 30,

 
  

2003

  

2002

 
  

(In Thousands)

 

Cash flow from operating activities:

        

Net income

 

$

719

  

$

653

 

Adjustments to reconcile net income to net cash provided by operating activities:

        

Depreciation and amortization

  

978

   

571

 

Cost of real estate sold

  

4,494

   

2,950

 

Equity in unconsolidated affiliates’ income

  

      (29

)

  

(372

)

Gain on sale of Stratus’ interest in Walden Partnership

  

     -

   

(286

)

Amortization of deferred compensation

  

88

   

32

 

(Increase) decrease in working capital:

        

Accounts receivable and other

  

383

   

2

 

Accounts payable and accrued liabilities

  

266

   

(400

)

Long-term receivable and other

  

1,280

   

3,362

 

Distribution of unconsolidated affiliates’ income

  

29

   

278

 

Net cash provided by operating activities

 

 

8,208

  

 

6,790

 
         

Cash flow from investing activities:

        

Real estate and facilities, net of municipal utility district reimbursements

  

(6,680

)

  

(9,845

)

Net cash acquired from Barton Creek and 7000 West Joint Ventures

  

     -

   

1,067

 

Proceeds from the sale of Stratus’ interest in the Walden Partnership

  

     -

   

3,141

 

Acquisition of Olympus’ interest in the Barton Creek and 7000 West Joint Ventures

  

     -

   

(3,858

)

Distributions from Lakeway Project

  

191

   

1,239

 

Net cash used in investing activities

 

 

(6,489

)

 

 

(8,256

)

         

Cash flow from financing activities:

        

Borrowings under revolving credit facility, net

  

1,145

   

1,453

 

Borrowings on term loan component of credit facility

  

-   

   

4,645

 

Payments on term loan portion of credit facility

  

(777

)

  

(1,497

)

(Payments on) proceeds from 7500 Rialto project loan

  

(693

)

  

1,966

 

Payments on 7000 West project loan

  

(719

)

  

(127

)

Repurchase of mandatorily redeemable preferred stock

  

-   

   

(7,633

)

Exercise of stock options and other

  

4

   

47

 

Net cash used in financing activities

 

 

(1,040

)

 

 

(1,146

)

Net increase (decrease) in cash and cash equivalents

  

679

   

(2,612

)

Cash and cash equivalents at beginning of year

 

 

1,361

  

 

3,705

 

Cash and cash equivalents at end of period

  

2,040

   

1,093

 

Less cash restricted as to use

  

(224

)

  

(234

)

Unrestricted cash and cash equivalents at end of period

 

$

1,816

  

$

859

 



The accompanying notes are an integral part of these financial statements.





STRATUS PROPERTIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2002, included in Stratus Properties Inc.’s (Stratus) Annual Report on Form 10-K, filed with the Securities and Exchange Commission.  In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (consisting only of normal recurring items) considered necessary to present fairly the financial position of Stratus at September 30, 2003 and December 31, 2002, and the results of operations for the three-month and nine-month periods ended September 30, 2003 and 2002, and cash flows for the nine-month periods ended September 30, 2003 and 2002.  Operating results for the three months and nine months ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.< /P>


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.


Certain prior year amounts have been reclassified to conform to the current year presentation.


2. EARNINGS PER SHARE

Below is a reconciliation of net income (loss) and weighted average common shares outstanding for purposes of calculating basic and diluted net income (loss) per share (in thousands, except per share amounts):


 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 
 

2003

 

2002

 

2003

 

2002

 

Net income (loss)

$

2,220

 

$

(89

)

$

719

 

$

653

 

Add: Discount on purchase of mandatorily

   redeemable preferred stock

 

 

-    

  

 

-    

  

 

   -

  

 

2,367

 

Net income (loss) applicable to common stock

$

2,220

 

$

(89

)

$

719

 

$

3,020

 
             

Weighted average common shares outstanding

 

7,123

  

7,116

  

7,123

  

7,116

 
             

Basic net income (loss) per share of common stock

 

$0.31

  

$(0.01

)

 

$0.10

  

$0.42

 
             

Weighted average common shares outstanding

 

7,123

  

7,116

  

7,123

  

7,116

 

Dilutive stock options

 

   213

  

   -    

a

 

   169

  

137

 

Restricted stock units

 

10

  

-    

  

5

  

-    

 

Assumed redemption of preferred stock

 

-    

  

-    

  

    -

  

189

 

Weighted average common shares outstanding

for purposes of calculating diluted net income (loss) per share

 


7,346

  


7,116

  


7,297

  


7,442

 
             

Diluted net income (loss) per share of common stock

 

$0.30

  

$(0.01

)

 

$0.10

  

$0.41

 


a.

Options representing approximately 149,000 shares of Stratus common stock in the third quarter of 2002 that otherwise would have been included in the diluted earnings per share calculation were excluded as anti-dilutive considering the net loss incurred during the period.


 There were no dividends accrued or paid on Stratus’ mandatorily redeemable preferred stock through February 27, 2002, the date Stratus purchased all the related outstanding shares held by Olympus Real Estate Corporation (Olympus).  For more information regarding Stratus’ purchase of its mandatorily redeemable preferred stock and other transactions associated with Stratus ending its business relationship with Olympus see Notes 2, 3 and 4 of Stratus’ 2002 Annual Report on Form 10-K.


Outstanding stock options excluded from the computation of diluted net income per share of common stock because their exercise prices were greater than the average market price of the common stock during the periods presented are as follows:


 

Third Quarter

 

Nine Months

 

2003

 

2002

 

2003

 

2002

Weighted average outstanding options

149,000

 

275,000

 

283,000

 

275,000

Weighted average exercise price

$12.28

 

$10.96

 

$10.95

 

$10.96


Stock-Based Compensation Plans.

As of September 30, 2003, Stratus has four stock-based employee and director compensation plans, which are described in Note 8 of Stratus’ 2002 Annual Report on Form 10-K.  Stratus accounts for those plans under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25 “Accounting for Stock Issued to Employees,” and related interpretations.  The following table illustrates the effect on net income (loss) and earnings per share if Stratus had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” to all stock-based employee compensation (in thousands, except per share amounts).


  

Three Months Ended September 30,

 

Nine Months Ended

September 30,

 
  

2003

 

2002

 

2003

 

2002

 

Net income (loss) applicable to common stock, as reported

 

$

2,220

 

$

(89

)

$

719

 

$

3,020

 

Add:  Stock-based employee compensation expense included in reported net income (loss) for restricted stock units

  

24

  

12

  


    71

  

32

 

Deduct:  Total stock-based employee compensation expense determined under fair value-based method for all awards

   

(177

)

 

(198

)

 

              

(561

)

 

              (584

)

Pro forma net income (loss) applicable to common stock

 

$

2,067

 

$

(275

)

$

 229

 

$

   2,468

 
                        

Earnings per share:

                   

Basic – as reported

 

$

0.31

 

$

(0.01

)

$

0.10

 

$

0.42

 

Basic – pro forma

 

$

0.29

 

$

(0.04

)

$

0.03

 

$

0.35

 
                    

Diluted – as reported

 

$

0.30

 

$

(0.01

)

$

0.10

 

$

0.41

 

Diluted – pro forma

 

$

0.28

 

$

(0.04

)

$

      0.03

 

$

       0.33

 


For the pro forma computations, the values of option grants were calculated on the dates of grant using the Black-Scholes option-pricing model.  The following table provides weighted average assumption information used to determine the fair value of Stratus’ stock option grants during the periods presented:



 

Third Quarter

  

Nine Months

 
 

2003

  

2002

  

2003

  

2002

 

Options granted

7,500

  

7,500

  

7,500

  

89,399

 

Weighted average fair value for stock option grants

$6.99

  

$5.84

  

$6.99

  

$5.92

 

Weighted average risk-free interest rate

4.57

%

 

4.80

%

 

4.57

%

 

5.21

%

Weighted average expected volatility rate

51.4

%

 

52.3

%

 

51.4

%

 

53.9

%


Stratus assumes an expected life of 10 years for all of its options and no annual dividends. The pro forma effects on net income are not representative of future years because of the potential changes in the factors used in calculating the Black-Scholes valuation and the number and timing of option grants.  No other discounts or restrictions related to vesting or the likelihood of vesting of stock options were applied.


3. RESTRICTED STOCK

On January 17, 2002, the Board of Directors authorized the issuance of 22,726 restricted stock units (RSUs) that are being converted into 22,726 shares of Stratus common stock ratably on the first four anniversary dates.  On December 17, 2002, the Board of Directors authorized the issuance of 20,000 additional RSUs that will be converted into 20,000 shares of Stratus common stock ratably on the first four anniversary dates. Under Stratus’ restricted stock program, shares of its common stock may be granted to certain officers of Stratus at no cost.  Upon issuance of the RSUs, unearned compensation equivalent to the market value at the date of grant totaling approximately $0.4 million ($0.2 million for each grant) was recorded as deferred compensation in stockholders’ equity and is being amortized to expense over each grant’s respective four-year vesting period.  As of September 30, 2003, Stratus has charged approximately $116,00 0 of this deferred compensation to expense, including approximately $24,000 during the third quarter of 2003 and $71,000 for the nine months ended September 30, 2003.  On January 17, 2003, Stratus issued 5,683 shares of its common stock in connection with the redemption of the first 25 percent of the January 2002 RSU grant.   In connection with this redemption, 900 of the issued shares were tendered to Stratus to pay the related income taxes associated with the shares granted.


4.  CIRCLE C SETTLEMENT

On August 1, 2002, the City of Austin (the City) granted final approval of a development agreement (the Circle C Settlement, previously referred to as the 2002 Circle C Development Agreement) and permanent zoning for Stratus’ 1,273 acres located within the Circle C community in southwest Austin.   The Circle C Settlement firmly establishes all essential municipal development regulations applicable to Stratus’ Circle C properties for thirty years.  These approvals permit development of one million square feet of commercial space and 1,730 residential units. The City also provided Stratus $15 million of development fee credits in connection with its future development of its Circle C and other Austin-area properties for waivers of fees and reimbursement for certain infrastructure costs.  In addition, Stratus can elect to sell up to $1.5 million of the incentives per year to other developers for their use in paying City fees related to their projects.  As of September 30, 2003, Stratus has used $3.0 million of its City-based development fee credits, including amounts sold to third parties totaling $0.8 million during the nine months ended September 30, 2003, ($0.2 million in the third quarter) which are included in Real Estate Operations revenues.  

5. DEBT OUTSTANDING

At September 30, 2003, Stratus had total debt of $43.8 million, including $0.4 million of current debt, compared to total debt of $44.8 million, including $2.3 million of current debt, at December 31, 2002.   On June 30, 2003, Stratus amended its $30.0 million Comerica Bank (Comerica) credit facility to extend the maturity of both the $25.0 million revolver and $5.0 million term loan, as discussed below.   Stratus was required to make payments of $1.4 million on its 7500 Rialto Drive project loan and $0.5 million on its 7000 West project loan upon entering amendments to each of the project loan agreements during the first quarter of 2003. Stratus’ debt outstanding at September 30, 2003 consisted of the following:


$10.0 million of borrowings outstanding under its two unsecured $5.0 million term loans, one of which will mature in December 2005 and the other in July 2006.


$14.6 million of net borrowings under its $25.0 million revolver component of the Comerica credit facility, which was amended in June 2003 to extend the maturity to May 2005.

 

$2.4 million of net borrowings under the $5.0 million term loan component of the Comerica facility, for which certain of the Mirador subdivision lots within the Barton Creek community are currently serving as collateral. Pursuant to the amendment of the Comerica facility discussed above, the maturity of the term loan component of the Comerica facility has been extended to November 2005.


$4.8 million of net borrowings under its 7500 Rialto Drive project loan, which was amended in January 2003 to extend the maturity of the project loan from June 2003 to January 31, 2004, with options to extend the loan for two additional one-year periods, under certain conditions.


$12.0 million of net borrowings under the 7000 West project loan that was scheduled to mature on August 24, 2003; however, in January 2003 Stratus amended the project loan to extend the maturity of the loan to January 31, 2004, with options to extend the loan’s maturity by two additional one-year periods, under certain conditions.  


Pursuant to the terms of the amendment of the Comerica facility in June 2003 , Stratus’ $25 million revolver is no longer subject to the interest reserve requirements.  For a discussion of Stratus’ bank credit facilities see Note 5 included in the “Notes To Consolidated Financial Statements” in its 2002 Annual Report on Form 10-K.

6. BUSINESS SEGMENTS

Following the completion of the transactions between Stratus and Olympus in February 2002 (see Note 2 of Stratus’ 2002 Annual Report on Form 10-K), Stratus now has two operating segments, “Real Estate Operations” and “Commercial Leasing.”  Stratus’ Commercial Leasing segment was established when Stratus acquired Olympus’ 50.1 percent interest in 7000 West in February 2002.  The Commercial Leasing segment currently consists of the 140,000-square foot Lantana Corporate Center office complex at 7000 West, which includes two 70,000-square foot office buildings that are fully leased, as well as Stratus’ 75,000 square-foot office building at 7500 Rialto Drive, where construction was substantially completed in the third quarter of 2002.  As of September 30, 2003, the Rialto Drive office building is approximately 40 percent leased.  Stratus’ Real Estate Operations segment is comprised of all its develo ped and undeveloped properties in Austin, Texas, which consist of its properties in the Barton Creek community, including those acquired from the Barton Creek Joint Venture; its Circle C community properties; and the properties in Lantana other than its office buildings until their sale in August 2003.    


The segment data presented below was prepared on the same basis as the Stratus consolidated condensed financial statements.  Real Estate Operations was Stratus’ only operating segment until February 27, 2002 as discussed above.


 

Real Estate Operationsa

 

Commercial Leasingb

 


Other

 


Total

 

Third Quarter 2003:

            

Revenues

$

6,671

 

$

951

 

$

         -   

 

$

7,622

 

Cost of sales

 

(3,860

)

 

(626

)

 

          -    

  

(4,486

)

Depreciation

 

(23

)

 

(306

)

 

          -    

  

(329

)

General and administrative expenses

 

(843

)

 

(109

)

 

          -    

  

(952

)

Operating income (loss)

$

1,945

 

$

(90

)

$

      -

 

$

1,855

 

Total assets at September 30

$

112,082

 

$

22,308

 

$

5,083

c

$

139,473

 
             

Third Quarter 2002:

            

Revenues

$

3,762

 

$

817

 

$

         -   

 

$

4,579

 

Cost of sales

 

(2,759

)

 

(606

)

 

          -    

  

(3,365

)

Depreciation

 

(28

)

 

(216

)

 

          -    

  

(244

)

General and administrative expenses

 

(947

)

 

(111

)

 

          -    

  

(1,058

)

Operating income (loss)

$

28

 

$

(116

)

$

      -

 

$

(88

)

Total assets at September 30

$

110,448

 

$

22,418

 

$

7,218

c

$

140,084

 



Nine Months Ended September 30, 2003:

            

Revenues

$

9,018

 

$

2,799

 

$

         -   

 

$

11,817

 

Cost of sales

 

(5,335

)

 

(1,775

)

 

          -    

  

(7,110

)

Depreciation

 

(74

)

 

(904

)

 

          -    

  

(978

)

General and administrative expenses

 

(2,717

)

 

(350

)

 

          -    

  

(3,067

)

Operating income (loss)

$

892

 

$

(230

)

$

      -

 

$

662

 
             

Nine Months Ended September 30, 2002:

            

Revenues

$

8,169

 

$

1,731

 

$

         -   

 

$

9,900

 

Cost of sales

 

(4,932

)

 

(1,159

)

 

          -    

  

(6,091

)

Depreciation

 

(87

)

 

(484

)

 

          -    

  

(571

)

General and administrative expenses

 

(3,056

)

 

(358

)

 

          -    

  

(3,414

)

Operating income (loss)

$

94

 

$

(270

)

$

      -

 

$

(176

)


a.

Includes sales commissions, management fees and other revenues together with related expenses.

b.

Although the office building at 7500 Rialto Drive opened during the third quarter of 2002, initial revenues from the building were not earned until the first quarter of 2003.

c.

Represents all the assets except for the real estate and facilities assets comprising the Real Estate Operations and Commercial Leasing segments.

 

7. RESTRICTED CASH AND INTEREST COST

Restricted Cash.  At September 30, 2003, Stratus had restricted cash deposits totaling $0.2 million, which reflect deposited funds being held to purchase the fractional shares of Stratus’ common stock resulting from its stock split transactions (see Note 8 of Stratus’ 2002 Annual Report on Form 10-K).  


Interest Costs.  Interest expense excludes capitalized interest of $0.5 million in the third quarter of 2003,  $0.5 million in the third quarter of 2002, $1.6 million for the first nine months of 2003 and $1.4 million for the first nine months of 2002.

 

 

 


 

REVIEW BY INDEPENDENT ACCOUNTANTS

The financial information as of September 30, 2003, and for the three-month and nine-month periods ended September 30, 2003 and 2002, included in Part I pursuant to Rule 10-01 of Regulation S-X has been reviewed by PricewaterhouseCoopers LLP (PricewaterhouseCoopers), Stratus' independent accountants, in accordance with standards established by the American Institute of Certified Public Accountants.  PricewaterhouseCoopers' report is included in this quarterly report.

PricewaterhouseCoopers does not carry out significant or additional procedures beyond those that would have been necessary if its report had not been included in this quarterly report.  Accordingly, such report is not a "report" or "part of a registration statement" within the meaning of Sections 7 and 11 of the Securities Act of 1933 and the liability provisions of Section 11 of such Act do not apply.

REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Stockholders

   of Stratus Properties Inc.:


We have reviewed the accompanying condensed consolidated balance sheet of Stratus Properties Inc. (a Delaware Corporation) as of September 30, 2003, and the related consolidated statements of operations for the three-month and nine-month periods ended September 30, 2003 and 2002, and the statements of cash flows for the nine-month periods ended September 30, 2003 and 2002.   These interim financial statements are the responsibility of management.


We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants.  A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.  


Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements to be in conformity with accounting principles generally accepted in the United States of America.


We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Stratus Properties Inc. as of December 31, 2002, and the related consolidated statements of income, of changes in stockholders’ equity and of cash flows for the year then ended (not presented herein), and in our report dated March 7, 2003, we expressed an unqualified opinion on those consolidated financial statements.  In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2002, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.


/s/ PricewaterhouseCoopers LLP


Austin, Texas

November 3, 2003  




Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.


OVERVIEW


Management’s discussion and analysis presented below should be read in conjunction with our discussion and analysis of financial results contained in our 2002 Annual Report on Form 10-K. The operating results summarized in this report are not necessarily indicative of our future operating results.


We are engaged in the acquisition, development, management and sale of commercial, multi-family and residential real estate properties located in the Austin, Texas area.  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 “Transactions with Olympus Real Estate Corporation” below), pursuant to a strategic alliance formed in May 1998.   


DEVELOPMENT ACTIVITIES


We have completed the major street and utility infrastructure construction for the “Calera Drive” subdivision within the Barton Creek Community.  During the third quarter of 2003, we began construction of four condominium units at Calera Court, the initial phase of Calera Drive.  Calera Court includes 17 courtyard homes on 19 acres. The second phase of Calera Drive, consisting of 53 single-family lots, has received final plat and construction permit approval.  The development of these lots, many of which adjoin the Fazio Canyons Golf Course, is expected to begin in 2004.  Development of the third and last phase of Calera Drive, which will include approximately 70 single-family lots, is not expected to commence until after 2004.  Funding for the construction of condominium units at Calera Court will be provided by a new $3.0 million project loan of which $2.0 million is currently available, which we finalized with Comerica Bank (Comerica) on September 22, 2003.  We have not made any borrowings under the project loan.  The project loan, which matures in November 2005, is secured by the condominium units at Calera Court.

We have also completed certain tenant improvements to the 75,000-square-foot Rialto Drive office building that allowed the first tenants to occupy their leased space.  The building is now approximately 40 percent leased, and we are continuing our efforts to lease the remaining available office space.  The two office buildings comprising our 140,000-square foot Lantana Corporate Center, known as 7000 West, are fully leased and occupied by a single tenant.

We have commenced development activities in the Circle C development based on the entitlements set forth in the Circle C Settlement with the City of Austin (the City) (Note 4).  The preliminary plan has been filed and approved for Meridian, an 800-lot residential development at Circle C.  We are processing a final plat and construction plan for the first phase of homesites at Meridian. In addition, several retail site plans at Circle C are currently proceeding through the approval process and some have already received final City approval.  The Circle C Settlement permits development of approximately one million square feet of commercial space, 900 multi-family units, and 830 single-family residential lots.

  


RESULTS OF OPERATIONS


 

Summary operating results follow (in thousands):  


 

Third Quarter

 

Nine Months

 

2003

 

2002

 

2003

 

2002

Revenues:

                

Real estate operations

$

6,671

 

$

3,762

 

$

9,018

 

$

8,169

Commercial leasing

 

951

   

817

   

2,799

   

1,731

  Total revenues

$

7,622

 

$

4,579

 

$

11,817

 

$

9,900

                 

Operating income (loss)

$

  1,855

 

$

(88

)

$

662

 

$

(176

 

)

 

                

Net income (loss)

$

2,220

 

$

(89

)

$

719

 

$

653


Following the February 2002 transactions between Olympus and us (see “Transactions With Olympus Real Estate Corporation” below), we have two operating segments, “ Real Estate Operations” and “Commercial Leasing”  (Note 6).  The following is a discussion of our operating results by segment.



Real Estate Operations


Summary real estate operating results follow (in thousands):  


 

Third Quarter

 

Nine Months

 

2003

 

2002

 

2003

 

2002

Revenues:

                

Undeveloped property sales

$

5,774

 

$

2,068

 

$

6,424

 

$

3,983

Developed property sales

 

531

  

1,558

  

1,216

  

3,283

Commissions, management fees and other

 

366

   

136

   

1,378

   

903

  Total revenues

 

6,671

  

3,762

  

9,018

  

8,169

                 

Cost of sales

 

(3,860

)

 

(2,759

)

 

(5,335

)

 

(4,932

)

Depreciation

 

(23

)

 

(28

)

 

(74

)

 

(87

)

General and administrative expenses

 

(843

)

 

(947

)

 

(2,717

)

 

(3,056

)

                 

Operating income

$

  1,945

 

$

28

 

$

892

 

$

94


During the third quarter of 2003, we sold to a single purchaser our entire 142 acres of undeveloped residential real estate within the Lantana development in southwest Austin for $4.6 million and we also sold a 1.5-acre undeveloped retail tract in our Circle C development for $1.2 million.  Undeveloped property sales of $6.4 million for the first nine months of 2003 also included the first-quarter sale of six acres of property located in southwest Austin.  In the 2002 third quarter, we sold a nine-acre undeveloped tract within the Circle C community to the City for the construction of a fire station for $0.7 million and we also sold 11 acres of undeveloped commercial real estate in Houston, Texas for $1.4 million.  In addition, undeveloped property sales of $4.0 million for the first nine months of 2002 included the second-quarter sale of 19 acres of multi-family real estate in San Antonio, Texas.  


Developed property sales of $0.5 million for the third quarter of 2003 included the sale of two residential estate lots at the Mirador subdivision, net of $0.3 million of deferred profits on one of the third-quarter sales which we will recognize as we receive payments.  The first nine months of 2003 also included the second-quarter sale of the last remaining Wimberly Lane subdivision residential lot and the first-quarter sale of two residential estate lots, one at the Escala Drive subdivision and one at the Mirador subdivision, all of which are located within the Barton Creek community in Austin.  Developed property sales of $3.3 million for the 2002 period included the sales of two residential estate lots at the Mirador subdivision and one at the Escala Drive subdivision during the third quarter; two residential estate lots at the Mirador subdivision during the second quarter and two residential estate lots at the Escala Drive su bdivision during the first quarter.     


Commissions, management fees and other revenues totaled $0.4 million during the third quarter of 2003 and $1.4 million for the nine months ended September 30, 2003 compared to $0.1 million and $0.9 million for the respective 2002 periods.  Commissions, management fees and other revenues included sales to third parties totaling $0.8 million for the nine months ended September 30, 2003, including $0.2 million in the third quarter of 2003, of our development fee credits, which were granted to us by the City in accordance with the Circle C Settlement (Note 4).  During 2003, commissions and management fees also included fees paid to us for our involvement in the Lakeway Project, near Austin, totaling $0.1 million for the third quarter and $0.3 million for the nine months ended September 30, 2003.  During the second quarter of 2003, we sold the remaining five-acre commercial tract at the Schramm Ranch property for $0.7 million, o f which we received 40 percent of the net sales proceeds (see “Capital Resources and Liquidity-Lakeway Project” below).  Commissions and management fees during the nine-month 2002 period also included $0.7 million of fees associated with our involvement in the Lakeway Project.  For more information regarding our involvement in the Lakeway Project (see Note 4 of our 2002 Annual Report on Form 10-K).


Cost of sales totaled $3.9 million during the third quarter of 2003 and $2.8 million for the third quarter of 2002.  The increase primarily reflects the costs associated with the third-quarter 2003 undeveloped property sale of 142 acres compared to the 2002 third-quarter undeveloped property sale of 20 acres.  Cost of sales totaled $5.3 million for the nine months ended September 30, 2003 compared with $4.9 million for the 2002 period.  Cost of sales during both the third quarter and nine months ended September 30, 2003, were reduced by $1.2 million of Municipal Utility District (MUD) reimbursements covering infrastructure costs charged to expense in prior years.


General and administrative expenses totaled $0.8 million for the third quarter 2003 and $2.7 million for the nine months ended September 30, 2003 compared with $0.9 million and $3.1 million for the respective 2002 periods.  Our general and administrative expenses during the first quarter of 2002 included certain costs associated with completing the transactions with Olympus.


Commercial Leasing


Summary commercial leasing operating results follow (in thousands):  


 

Third Quarter

 

Nine Months

 

2003

 

2002

 

2003

 

2002

Revenues:

                

Rental income

$

951

 

$

817

 

$

2,799

 

$

1,731

                   

Cost of sales

 

(626

)

 

(606

)

 

(1,775

)

 

(1,159

)

Depreciation

 

(306

)

 

(216

)

 

(904

)

 

(484

)

General and administrative expenses

 

(109

)

 

(111

)

 

(350

)

 

(358

)

                   

Operating loss

$

  (90

)

$

(116

)

$

(230

)

$

(270

)


Revenues from the Commercial Leasing segment totaled $1.0 million in the third quarter of 2003 and $2.8 million for the nine months ended September 30, 2003 compared to $0.8 million and $1.7 million for the respective 2002 periods.   The increase between the comparable third quarter periods reflects the revenues associated with the 75,000-square-foot Rialto Drive office building that were initially earned during the first quarter of 2003 (see “Development Activities” above).  The increase between the comparable nine-month periods reflects the 7500 Rialto Drive revenues in 2003 and the fact that we did not report a Commercial Leasing segment until February 27, 2002, following the completion of the transactions with Olympus.   


Cost of sales totaled $0.6 million during the third quarters of 2003 and 2002.  Cost of sales was $1.8 million for the first nine months of 2003 compared to $1.2 million for the first nine months of 2002.  The increase between the nine-month periods primarily reflects the incremental costs associated with the 7500 Rialto Drive office building, which did not open until the third quarter of 2002, and the 7000 West office building, which because we completed transactions with Olympus in February 2002, reported nine months of operations during 2003 compared to seven months of operations during 2002.   


Depreciation and amortization expense totaled $0.3 million during the third quarter of 2003 and $0.9 million for the nine months ended September 30, 2003 compared with $0.2 million and $0.5 million for the respective 2002 periods.  The increase for the 2003 periods reflects our having nine months of depreciation for both 7500 Rialto Drive and 7000 West during 2003, while during the nine-month period of 2002 we had only seven months of depreciation for 7000 West and two months of depreciation for 7500 Rialto Drive.


Non-Operating Results

Interest expense, net of capitalized interest, totaled $0.2 million in both the third quarter of 2003 and 2002 and $0.7 million during the nine months ended September 30, 2003 compared with $0.4 million during the nine months ended September 30, 2002.  Capitalized interest totaled $0.5 million in both the third quarter of 2003 and 2002, $1.6 million for the first nine months of 2003 and $1.4 million for the first nine months of 2002.  


Interest income totaled $0.6 million in the third quarter of 2003, $0.2 million in the third quarter of 2002, $0.7 million during the first nine months of 2003 and $0.6 million during the first nine months of 2002.  Interest income included interest on MUD reimbursements totaling $0.5 million in the third quarter of 2003, $0.1 million in the third quarter of 2002, $0.6 million during the first nine months of 2003 and $0.2 million during the first nine months of 2002.


Other income totaled $0.3 million for the nine months ended September 30, 2002, which represented the gain from the sale of our interest in the Walden Partnership (see “Transactions with Olympus Real Estate Corporation” below).

  

CAPITAL RESOURCES AND LIQUIDITY


Comparison of Nine Months 2003 and 2002 Cash Flows

Net cash provided by operating activities was $8.2 million for the first nine months of 2003 compared with $6.8 million for the first nine months of 2002.  In July 2003, Barton Creek Municipal Utility District No. 4 issued $5.0 million in revenue bonds, of which Stratus received approximately $3.8 million in the third quarter of 2003 as reimbursement for a portion of Stratus’ previous infrastructure work within the Barton Creek community.  Reimbursements totaling $1.7 million represent (1) a $1.2 million reimbursement of infrastructure costs charged to expense in prior years and are recorded as a reduction of cost of sales and (2) $0.5 million for interest on the reimbursements.  In addition, reimbursements of $2.1 million and fiscal deposit refunds of $0.6 million represent a reimbursement of our basis in real estate properties and are recorded as a reduction of capital expenditures.  The $1.4 million improvement i n operating cash flows primarily reflects the increase in sales activities during 2003 and the $1.2 million of MUD reimbursements for infrastructure costs previously expensed.


Cash used in investing activities, representing $6.5 million during the first nine months of 2003 compared with $8.3 million during the first nine months of 2002, reflect our net real estate and facilities expenditures, including the completion of certain tenant improvements to the 7500 Rialto Drive office building during 2003.  Our investing activities during the first nine months of 2002 include the receipt of $0.4 million of net cash proceeds received in connection with the closing of the Olympus transactions in February 2002 (see “Transactions with Olympus Real Estate Corporation” below).  During the first nine months of 2003 and 2002, we received investing proceeds from our involvement in the Lakeway project.  During 2003, we received $0.3 million of proceeds from the Lakeway project, including $0.2 million representing the final return of our investment in the project, while through the first nine months of 2002 we received a total of $1.5 million associated with our involvement in the Lakeway project, including the return of $1.2 million of our $2.0 million investment in the project (see “Lakeway Project” below).


Cash used in financing activities totaled $1.0 million during the first nine months of 2003 compared to $1.1 million during the first nine months of 2002.  During 2003, our financing activities included $1.1 million of net borrowings under our revolving line of credit partially offset by a $0.8 million payment on the term loan component of our bank credit facility with Comerica, which has been amended (see below), and payments totaling $1.4 million under our project construction loans, which were amended in January 2003 (see “Project Loan Amendments” below).  During the first nine months of 2002 our financing activities reflected $1.5 million of net borrowings under our revolving line of credit, which included the $7.3 million required to fund the closing of the transactions with Olympus in February 2002.  We also borrowed $4.6 million under the term loan component of the Comerica facility and $2.0 million under our 7500 Rialto Drive project loan during the first nine months of 2002.  &nb sp;During the first nine months of 2002, we purchased our mandatorily redeemable preferred stock held by Olympus for $7.6 million and made payments totaling $1.5 million on the term loan component of the Comerica facility and $0.1 million on the 7000 West project loan.     


Comerica Bank Facility

On June 30, 2003, we amended our $30.0 million bank credit facility with Comerica.   Under terms of the amendment, the maturity of both the $25 million revolver and $5.0 million term loan components of the facility were extended, from April 2004 to May 2005 for the revolver and to November 2005 for the term loan.  Also, the interest reserve requirement was eliminated.


Project Loan Amendments

In January 2003, we amended our project loans associated with the 75,000-square-foot office building at 7500 Rialto Drive and the 140,000-square-foot office complex at 7000 West, both of which are located in Lantana.  Under the terms of the project loan amendments, each project loan’s maturity was extended until January 31, 2004 from the original maturities of June 2003 (7500 Rialto Drive) and August 2003 (7000 West).  In addition, the amended project loans give us an option to extend the maturity of each loan by two additional one-year periods, subject to certain conditions.  We repaid $1.4 million of the 7500 Rialto Drive project loan and $0.5 million of the 7000 West project loan upon entering into the amendments. As of September 30, 2003, we had $2.4 million of remaining availability under the 7500 Rialto Drive project loan and had borrowed all amounts available under the 7000 West project loan.   

Credit Facilities and Other Financing Arrangements

At September 30, 2003, we had total debt of $43.8 million, including a current portion of $0.4 million, compared to total debt of $44.8 million, including a current portion of $2.3 million, at December 31, 2002.  Our long-term debt outstanding at September 30, 2003 consisted of the following:


$10.0 million of borrowings outstanding on our two unsecured $5.0 million term loans, one of which will mature in December 2005 and the other in July 2006.


$14.6 million of net borrowings under our $25.0 million revolver component of the Comerica credit facility, which matures in May 2005 (see “Comerica Bank Facility” above).


$2.4 million of net borrowings under the $5.0 million term loan component of the Comerica facility, for which certain of the Mirador subdivision lots are currently serving as collateral.  The maturity of the term loan component of the Comerica facility has been extended to November 2005 (see “Comerica Bank Facility” above).


$4.8 million of net borrowings under our 7500 Rialto Drive project loan, which matures in January 2004, with options to extend the loan for two additional one-year periods, under certain conditions (see “Project Loan Amendments” above).


$12.0 million of net borrowings under the 7000 West project loan, which is scheduled to mature in January 2004, with options to extend the loan’s maturity for two additional one-year periods, under certain conditions (see “Project Loan Amendments” above).


For a discussion of our bank credit facilities see Note 5 included in the “Notes To Consolidated Financial Statements” in our 2002 Annual Report on Form 10-K.  


Outlook

As discussed in “Risk Factors” located in our 2002 Annual Report on Form 10-K, our financial condition and results of operations are highly dependent upon market conditions in Austin.  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 Austin, Texas, development costs, interest rate levels and regulatory issues including our land use and development entitlements.  The Austin real estate market has experienced a slowdown during the past several years which has affected, and will likely in the near-term continue to affect, our operating results and liquidity.  We cannot at this time project how long or to what extent this current slowdown will persist.


We have made progress securing permitting for our Austin-area properties (see “Development Activities” above).   Significant development expenditures must be incurred and additional permits secured prior to the sale of certain properties.  Certain of our properties benefit from grandfathered entitlements that are not subject to the development requirements currently in effect.  We continue to engage in 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.  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.


LAKEWAY PROJECT


In January 200 1, we invested $2.0 million in the Lakeway project near Austin, Texas.  Since that time, we have been the manager and developer of the 552-acre Schramm Ranch tract, receiving both management fees and sales commissions for our services.  In the second quarter of 2001, we negotiated the sale of substantially all of the Schramm Ranch property to a single purchaser.  In return for our securing the required entitlements, the sale was to be completed in four planned phases.  We secured all the remaining necessary entitlements for the Schramm Ranch property in the fourth quarter of 2001 and received a $1.2 million distribution associated with the first two sale installments.  

In the first half of 2002, the purchaser closed the final two planned sale installments.  We received a total cash distribution of $1.5 million, which represents a $1.2 million return of our $2.0 million investment and $0.3 million of income.  During the second quarter of 2003 we sold the remaining 5-acre commercial site for $0.7 million and received $0.3 million representing our 40 percent share of the related net sales proceeds.  On a cumulative basis we have received a total of $2.9 million of cash distributions, not including sales commissions and management fees, from our involvement in the Lakeway Project, which represents the full return of our $2.0 million investment and $0.9 million of income.   See Note 4 of our 2002 Annual Report on Form 10-K for more information regarding our involvement in the Lakeway project.


TRANSACTIONS WITH OLYMPUS REAL ESTATE CORPORATION

 

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 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, the Oly Stratus Barton Creek I Joint Venture (Barton Creek Joint Venture), the Stratus 7000 West Joint Venture (7000 West) and the Oly Walden General Partnership (Walden Partnership).  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.


 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 7000 West for $1.5 million. In connection with this acquisition, we assumed $12.9 million of debt.  The borrowings outstanding under this facility are included in our accompanying consolidated condensed balance sheets.  

We sold our ownership interest in the Walden Partnership to Olympus for $3.1 million.  


We funded the $7.3 million net cash cost for these transactions, which is net of the approximate $1.1 million of cash we received by acquiring the Barton Creek Joint Venture and 7000 West, through borrowings available to us under our revolving credit facility agreement (see “Capital Resources and Liquidity” above).  


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 and 4  of our 2002 Annual Report on Form 10-K.


CAUTIONARY STATEMENT


Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements regarding anticipated sales, debt repayments, 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, that are described in more detail under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2002.


Item 3.  Quantitative and Qualitative Disclosures about Market Risks.

There have been no significant changes in our market risks since the year ended December 31, 2002.  For more information, please read the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2002.


Item 4.  Controls and Procedures.

Our chief executive officer and chief financial officer, with the participation of management, have evaluated the effectiveness of our disclosure controls and procedures as of a date within 90 days prior to the filing of this quarterly report on Form 10-Q.  Based on their evaluation, they have concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to Stratus (including our consolidated subsidiaries) required to be disclosed in our periodic Securities and Exchange Commission filings.   There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.



PART II. - OTHER INFORMATION

 

Item 1.  Legal Proceedings.  


SOS Lawsuit 1:  The Save Our Springs Alliance and Circle C Neighborhood Association v. The City of Austin, Circle C Land Corp., and Stratus Properties Inc. Cause No. GN-202018 (261st Judicial District Court of Travis County, Texas, filed June 24, 2002).  The Save Our Springs Alliance, a non-profit public-interest corporation (“SOSA”), and the Circle C Neighborhood Association, an unincorporated association (“CCNA”) opposed any settlement between the City and Stratus concerning the development of Circle C.  SOSA and CCNA worked diligently to oppose the proposed settlement in myriad ways, including public protests, mail and other media campaigns, lobbying efforts, and litigation.  In June 2002, in advance of the City Council’s consideration of the settlement proposal, SOSA and CCNA filed a lawsuit against the City of Austin, Circle C Land Corp., and Stratus Properties Inc.  In th eir petition, Plaintiffs assert the following primary claims:


1.

The City’s Save Our Springs Ordinance (“SOS Ordinance”) is exempt from Chapter 245 of the Texas Local Government Code (the “Grandfathering Statute”).

2.

The City has the authority and duty to apply the SOS Ordinance and its zoning authority to Stratus’ Circle C properties.

3.

Residents of the Circle C community, including Plaintiffs, are entitled to full application of the City’s current watershed protection ordinances, including the SOS Ordinance, and the City’s zoning powers.

Stratus’ Position.  As a result of the City’s approval of the settlement agreement, effective August 15, 2002, certain of Plaintiffs’ requests are now moot.  In order to amend or grant any variance to the SOS Ordinance, six of seven City Council members must approve the amendment or variance.  As a condition to entering into the settlement agreement with the City, Stratus insisted on six of seven Council members approving the proposal.  The proposal was approved by six of seven Council members and, as such, constitutes a valid amendment to the SOS Ordinance.  In addition, in connection with the approval of the settlement agreement, the City exercised its zoning authority and granted zoning for each of Stratus’ seventeen Circle C parcels.  As such, each of Plaintiffs’ requested judicial declarations concerning the applicability of current City watershed ordinances or City zo ning authority to Circle C have been fully satisfied and are now moot.  Stratus filed a motion for summary judgment, along with the City, to dismiss the claims as to the Circle C properties on the basis that they are now moot as a result of the settlement.  Stratus’ and the City’s summary judgment was heard on January 22 and granted, dismissing the lawsuit as to the Circle C properties.

The lawsuit remained pending as to Stratus’ non-Circle C properties.  Stratus and the City asserted that there is no live controversy and, as a result, the court has no jurisdiction and must dismiss the suit.  A hearing was held on May 7, 2003, at which the court agreed with the City’s and Stratus’ position and dismissed the suit.  On May 27, 2003, SOSA filed a notice to appeal with the Texas Third Court of Appeals.  All parties have submitted briefs and oral argument is scheduled for December 3, 2003.

SOS Lawsuit 2:  The Save Our Springs Alliance v. The City of Austin and Circle C Land Corp. Cause No. GN-300095 (126th Judicial District Court of Travis County, Texas, filed January 13, 2003).  SOSA filed a second lawsuit against both the City and Circle C Land Corp.  SOSA asserts two primary claims. First, the settlement agreement constitutes impermissible contract zoning and as such is void.  Second, the zoning ordinances and settlement agreement are invalid because the City failed to comply with requisite notice and hearing procedures.  SOSA further asserts that in the event it prevails on its two primary claims, then it will argue that the SOS Ordinance is exempt from Chapter 245 of the Texas Local Government Code, one of the same claims asserted in SOS Lawsuit 1.

Stratus’ Position.  With respect to the first claim, Stratus firmly believes that the settlement transaction does not constitute contract zoning or violate prohibitions against municipal government delegating legislative authority.  With respect to the second claim, Stratus firmly believes that all procedural requirements for enactment of the 14 zoning ordinances as well as the ordinance implementing the settlement agreement were satisfied.  The City and Stratus filed a motion for summary judgment asserting that SOSA’s claims are without merit and that the settlement agreement and related zoning ordinances are valid.  On August 6, 2003, SOSA filed a Notice of Non-Suit and the court dismissed the lawsuit without prejudice.

In addition to the litigation described above, 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 6.  Exhibits and Reports on Form 8-K.


(a)  The exhibits to this report are listed in the Exhibit Index beginning on page E-1 hereof.


(b)

During the quarter for which this report is filed, the registrant filed one Current Report on Form 8-K furnishing information under Item 12 dated August 5, 2003.


Subsequent to the end of the quarter for which this report is filed and prior to the date of this filing, the registrant filed one Current Report on Form 8-K furnishing information under Item 12 dated November 3, 2003.




SIGNATURE



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


STRATUS PROPERTIES INC.


By:  /s/ John E. Baker            

            John E. Baker

 

    Senior Vice President and

       Chief Financial Officer


       (authorized signatory)


Date:

November 14, 2003



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.  Incorporated by reference to Exhibit 3.2 to Stratus’ 2001 Form 10-K.

  

  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

Rights Agreement dated as of May 16, 2002, between Stratus and Mellon Investor Services LLP, as Rights Agent, which includes the Certificates of Designation of Series C Participating Preferred Stock; the Forms of Rights Certificate Assignment, and Election to Purchase; and the Summary of Rights to Purchase Preferred Shares.  Incorporated by reference to Exhibit 4.1 to Stratus’ Registration Statement on Form 8-A dated May 22, 2002.

  
 10.1The 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.
  

 10.2

Construction Loan Agreement dated April 9, 1999, by and between Stratus 7000 West Joint Venture and Comerica Bank-Texas.  Incorporated by Reference to Exhibit 10.13 to Stratus’ 2001 Form 10-K.

  

 10.3

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.  Incorporated by Reference to Exhibit 10.14 to Stratus’ 2001 Form 10-K.

  

 10.4

Construction Loan Agreement dated February 24, 2000, by and between Stratus 7000 West Joint Venture and Comerica Bank-Texas.  Incorporated by Reference to Exhibit 10.15 to Stratus’ 2001 Form 10-K.

  

 10.5

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.  Incorporated by Reference to Exhibit 10.16 to Stratus’ 2001 Form 10-K.

  

 10.6

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.  Incorporated by Reference to Exhibit 10.17 to Stratus’ 2001 Form 10-K.

  

 10.7

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.  Incorporated by Reference to Exhibit 10.18 to Stratus’ 2001 Form 10-K.

  

 10.8

Fourth Modification Agreement dated January 31, 2003, by and between Comerica Bank-Texas, as lender, Stratus 7000 West Joint Venture, as borrower and Stratus Properties Inc., as guarantor.  Incorporated by reference to Exhibit 10.9 to Stratus’ Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.

  

 10.9

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.

 


 10.10

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.

  

 10.11

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.

  

 10.12

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.

  

 10.13

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.  Incorporated by Reference to Exhibit 10.23 to Stratus’ 2001 Form 10-K.

  

 10.14

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.

  

 10.15

Loan Agreement dated June 14, 2001, 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 10.22 to Stratus’ Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.

  

 10.16

Construction Loan Agreement dated June 11, 2001, between 7500 Rialto Boulevard, L.P. and Comerica Bank-Texas.  Incorporated by Reference to Exhibit 10.26 to Stratus’ 2001 Form 10-K.

  

 10.17

Guaranty Agreement dated June 11, 2001, by Stratus Properties Inc. in favor of Comerica Bank-Texas.  Incorporated by Reference to Exhibit 10.27 to Stratus’ 2001 Form 10-K.

  

 10.18

Modification Agreement dated January 31, 2003, by and between Lantana Office Properties L.P., formerly 7500 Rialto Boulevard, L.P., and Comerica Bank-Texas.  Incorporated by reference to Exhibit 10.19 to Stratus’ Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.

  

 10.19

Development Agreement dated August 15, 2002, between Circle C Land Corp. and City of Austin Incorporated by reference to Exhibit 10.18 to Stratus’ Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.

  

 10.20

Stratus' Performance Incentive Awards Program, as amended effective February 11, 1999. Incorporated by reference to Exhibit 10.18 to Stratus’ 1998 Form 10-K.

  

 10.21

Stratus Stock Option Plan, as amended.  Incorporated by reference to Exhibit 10.9 to Stratus’ 1997 Form 10-K.

  

 10.22

Stratus 1996 Stock Option Plan for Non-Employee Directors, as amended.  Incorporated by reference to Exhibit 10.10 to Stratus’ 1997 Form 10-K.

  

 10.23

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.

  

 10.24

Stratus Properties Inc. 2002 Stock Incentive Plan.  Incorporated by reference to Exhibit 10.25 to Stratus’ Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.

  

 10.25

Third Modification and Extension Agreement dated June 30, 2003, by and between Comerica Bank, as lender, and Stratus Properties Inc., Stratus Properties Operating Co., L.P., Circle C Land Corp. and Austin 290 Properties Inc., individually and collectively as borrower.

   
 10.26 Loan Agreement dated September 22, 2003, by and between Calera Court, L.P., as borrower, and Comerica Bank, as lender.
   

 15.1

Letter dated November 14 , 2003, from PricewaterhouseCoopers LLP regarding the unaudited interim financial statements.

  

 31.1

Certification of Principal Executive Officer pursuant to Rule 13a–14(a)/15d-14(a).

  

 31.2

Certification of Principal Financial Officer pursuant to Rule 13a–14(a)/15d-14(a).

  

 32.1

Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350.

  

 32.2

Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350.