As of March 31, 2003, Stratus has four stock-based employee and director compensation plans, which are described in Note 8 of Stratus’ 2002 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 earning s
per share if Stratus had applied the fair value recognition provisions of SFAS No. 123 “Accounting for Stock-Based Compensation,” to all stock-based employee compensation (in thousands, except per share amounts).
|
Three Months Ended
|
|
| |
2003
|
|
2002 |
|
Basic net income (loss)
applicable to common shareholders, as reported
|
$
|
(340
|
)
|
$
|
2,733
|
|
Add: Stock-based employee compensation expense recorded
in net income for restricted stock units and stock appreciation rights
| |
30
| | |
8
|
|
Deduct: Total stock-based employee compensation expense determined under fair value -
based method for all awards
| |
(192
|
)
| |
(183
|
)
|
Pro forma basic and diluted net income (loss) applicable to
common stock
| |
(502
|
)
| |
2,558
|
|
| | | | | |
|
|
Earnings per share:
| | | | |
|
|
Basic – as reported
|
$
|
(0.05
|
)
|
$
|
0.38
|
|
Basic – pro forma
|
$
|
(0.07
|
)
|
$
|
0.36
|
|
| | | | | |
|
|
Diluted – as reported
|
$
|
(0.05
|
)
|
$
|
0.35
|
|
Diluted – pro forma
|
$
|
(0.07
|
)
|
$
|
0.33
|
|
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. There were no stock option grants during the first quarter of 2003. The weighted average fair value of the first-quarter 2002
stock option grants was $5.93 per option, which was calculated using a weighted average risk-free interest rate of 5.3 percent; an expected volatility rate of 54 percent; no annual dividends and expected lives of 10 years. These pro forma effects on net income (loss) are not necessarily representative of the impact on
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 fixed 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 will be converted into 22,726 shares of Stratus common stock ratably on the anniversary date over the next four years. 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 each
anniversary date over the next four years. 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 will be amortized to expense over each grant ’
s respective four-year vesting
period. Stratus has charged
approximately $74,000 of this deferred
7
compensation to expense, including approximately $ 24
,000 during the first quarter of 2003. On January 17, 2003, Stratus issued 5,68 3
shares of its common stock in connection with the redemption of the first 25 percent of the January 2002 RSU grants. 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 DEVELOPMENT PLAN AGREEMENT
On August 1, 2002, the City of Austin (the City) granted final approval of a development agreement and permanent zoning for Stratus’ 1,273 acres located within the Circle C community in southwest Austin. 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 incentives in connection with its future development of its Circle C and other Austin-area properties, including 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 March 31, 2003, Stratus has used $0.6 million of its City-based incentives , including $0.4 million sold to third parties during the first-quarter of 2003, which are included in Real Estate Operations revenues
.. This development agreement firmly establishes all essential municipal development regulations applicable to Stratus’ Circle C properties for thirty years.
5
.. DEBT OUTSTANDING
At March 31, 2003, Stratus had total
debt of $48.9 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. 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 March 31, 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.
•
$19.6 million of borrowings under its $25.0 million ($23. 9
million available at March 31, 2003
, see below) revolver component of the Comerica Bank-Texas (Comerica) credit facility, which matures in April 2004.
•
$3.1 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.
•
$12.1 million of 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.
•
$4.1 million of 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.
The total amount of availability under the $30 million Comerica credit facility was reduced to $28. 9
million to satisfy the $1. 1
million interest reserve account requirement at March 31, 2003. For a discussion of Stratus’ bank credit facilities see Note 5 included in the “Notes To Financial Statements” i n its 2002 Annual Report on Form 10-K.
6. RESTRICTED CASH ,
INTEREST COST AND RECLASSIFICATIONS
Restricted Cash. At March 31, 2003, Stratus had restricted cash deposits totaling $0.8 million, which includes
$0.2 million of deposited funds used 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). The r estricted amount at March 31, 200 3
also includes $0.6 million of funds deposited into a restricted account for the purpose of repaying a portion of Stratus’ outstanding debt (Note 5). The bank applied the funds against Stratus’ borrowings outstanding
in early-April 2003.
Interest Costs. Interest expense excludes capitalized interest of $0.5 million in the first quarter of 2003 and $0.4 million in the first quarter of 2002.
8
Reclassifications. Certain prior year amounts have been reclassified to confirm to the year 2003 presentation.
7. 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’ C ommercial Leasing segment was established when Stratus acquired Olympus’ 50.1 percent interest in 7000 West in February 2002. The C ommercial L easing segment currently consists of the 140,000-square foot Lantana Corporate Center office complex, which includes two 70,000-square foot office buildings that are fully leased, as well as Stratus’ 75,000 square-foot office building at Rialto Drive, where construction was substantially completed
in the third quarter of 2002. The Rialto Drive office building is approximately one-third leased. Stratus’ R eal E state O perations segment is comprised of all its developed 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.
The segment data presented below was prepared on the same basis as the Stratus consolidated condensed financial statements. Real E state Operations
was Stratus’ only operating segment until February 27, 2002 as discussed above.
| |
Real Estate Operationsa
| |
Commercial Leasing
| |
Other
| |
Total
| |
First Quarter 2003:
| | | | | | | | | | | | |
Revenues
|
$
|
1, 788
| |
$
|
908
| |
$
|
-
| |
$
|
2,696
| |
Cost of sales
| |
( 897
| )
| |
(571
| )
| |
-
| | |
(1, 468
| )
|
Depreciation
| |
(26
| )
| |
(291
| )
| |
-
| | |
(317
| )
|
General and administrative expense
| |
(94 1
| )
| |
(1 21
| )
| |
-
| | |
(1,062
| )
|
|